MUNICIPAL INVESTMENT TR FD MULTISTATE SER 409 DEF ASSET FDS, 487, 1999-08-06

MUNICIPAL INVESTMENT TR FD MULTISTATE SER 409 DEF ASSET FDS
487, 1999-08-06

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<PAGE>

As filed with the Securities and Exchange Commission on August 6, 1999

Registration No. 333-81777
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- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

------------------------------------------

Amendment No. 1
to
Form S-6

------------------------------------------

FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2

------------------------------------------

A. Exact name of trust:
MUNICIPAL INVESTMENT TRUST FUND
MULTISTATE SERIES--409
DEFINED ASSET FUNDS

B. Name of depositor:

MERRILL LYNCH, PIERCE, FENNER & SMITH INC.
SALOMON SMITH BARNEY INC.
PAINEWEBBER INCORPORATED
DEAN WITTER REYNOLDS INC.

C. Complete addresses of depositors' principal executive offices:

MERRILL LYNCH, PIERCE,
FENNER &
SMITH INCORPORATED
Unit Investment Trust
Division
P.O. Box 9051
Princeton, NJ 08543-9051 PAINEWEBBER INCORPORATED
1285 Avenue of the
Americas
New York, NY 10019

SALOMON SMITH BARNEY INC.
388 Greenwich
Street--23rd Floor
New York, NY 10013
DEAN WITTER REYNOLDS INC.
Two World Trade
Center--59th Floor
New York, NY 10048

D. Names and complete addresses of agents for service:

TERESA KONCICK, ESQ.
P.O. Box 9051
Princeton, NJ 08543-9051 ROBERT E. HOLLEY
1200 Harbor Blvd.
Weehawken, NJ 07087

Copies to: DOUGLAS LOWE, ESQ.
PIERRE DE SAINT PHALLE, Dean Witter Reynolds Inc.
MICHAEL KOCHMANN ESQ. Two World Trade
388 Greenwich Street 450 Lexington Avenue Center--59th Floor
New York, NY 10013 New York, NY 10017 New York, NY 10048

E. Title of Securities Being Registered:

An indefinite number of Units of Beneficial Interest pursuant to Rule 24f-2
promulgated under the Investment Company Act of 1940, as amended.

F. Approximate date of proposed sale to public:

As soon as practicable after the effective date of the Registration Statement.

/ x / Check box if it is proposed that this filing will become effective upon
filing on August 6, 1999, pursuant to Rule 487.

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<PAGE>

Defined Asset FundsSM
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- --------------------------------------------------------------------------------

Municipal Investment Trust Fund
Multistate Series--409
(A Unit Investment Trust)
o California, New Jersey and New York Portfolios
o Portfolios of Insured Long-Term Municipal
Bonds
o Designed to be Free of Regular Federal Income
Tax
o Exempt from Some State Taxes
o Distributions Twice a Year

Sponsors: -------------------------------------------------
Merrill Lynch, The Securities and Exchange Commission has not
Pierce, Fenner & Smith approved or disapproved these Securities or
Incorporated passed upon the adequacy of this prospectus. Any
Salomon Smith Barney Inc. representation to the contrary is a criminal
PaineWebber Incorporated offense.
Dean Witter Reynolds Inc. Prospectus dated August 6, 1999.

<PAGE>
- --------------------------------------------------------------------------------

Defined Asset FundsSM
Defined Asset FundsSM is America's oldest and largest family of unit investment
trusts, with over $160 billion sponsored over the last 28 years. Defined Asset
Funds has been a leader in unit investment trust research and product
innovation. Our family of Funds helps investors work toward their financial
goals with a full range of quality investments, including municipal, corporate
and government bond portfolios, as well as domestic and international equity
portfolios.

Defined Asset Funds offer a number of advantages:
o Fixed portfolio: Defined Funds follow a buy and hold investment strategy;
funds are not managed and portfolio changes are limited.
o Defined Portfolios: We choose the stocks and bonds in advance, so you know
what you're investing in.
o Professional research: Our dedicated research team seeks out stocks or bonds
appropriate for a particular fund's objectives.
o Ongoing supervision: We monitor each portfolio on an ongoing basis.
No matter what your investment goals, tolerance for risk or time horizon,
there's probably a Defined Asset Fund that suits your investment style. Your
financial professional can help you select a Defined Asset Fund that works best
for your investment portfolio.

Contents
Page
-----------
California Insured Portfolio............................ 3
Risk/Return Summary and Portfolio.................... 3
New Jersey Insured Portfolio............................ 6
Risk/Return Summary and Portfolio.................... 6
New York Insured Portfolio.............................. 9
Risk/Return Summary and Portfolio.................... 9
What You Can Expect From Your Investment................ 13
Income Twice A Year.................................. 13
Return Figures....................................... 13
Records and Reports.................................. 13
The Risks You Face...................................... 14
Interest Rate Risk................................... 14
Call Risk............................................ 14
Reduced Diversification Risk......................... 14
Liquidity Risk....................................... 14
Concentration Risk................................... 14
State Concentration Risks............................ 15
Bond Quality Risk.................................... 17
Insurance Related Risk............................... 17
Litigation and Legislation Risks..................... 17
Selling or Exchanging Units............................. 18
Sponsors' Secondary Market........................... 18
Selling Units to the Trustee......................... 18
Exchange Option...................................... 19
How The Fund Works...................................... 19
Pricing.............................................. 19
Evaluations.......................................... 19
Income............................................... 20
Expenses............................................. 20
Portfolio Changes.................................... 20
Fund Termination..................................... 21
Certificates......................................... 21
Trust Indenture...................................... 21
Legal Opinion........................................ 22
Auditors............................................. 22
Sponsors............................................. 22
Trustee.............................................. 23
Underwriters' and Sponsors' Profits.................. 23
Public Distribution.................................. 23
Code of Ethics....................................... 23
Year 2000 Issues..................................... 23
Taxes................................................... 23
Supplemental Information................................ 25
Financial Statements.................................... 26
Report of Independent Accountants.................... 26
Statements of Condition.............................. 26

2
<PAGE>
- --------------------------------------------------------------------------------

California Insured Portfolio--Risk/Return Summary

3. What is the Fund's Investment Strategy?
o The Fund plans to hold to maturity 7 long-term tax-exempt
municipal bonds with an aggregate face amount of $4,500,000
and some short-term bonds reserved to pay the deferred
sales fee. The Fund is a unit investment trust which means
that, unlike a mutual fund, the Fund's portfolio is not
managed.
o The bonds are rated AAA or Aaa by Standard & Poor's,
Moody's or Fitch.
o Most of the bonds cannot be called for several years, and
after that they can be called at a premium declining over
time to par value. Some bonds may be called earlier at par
for extraordinary reasons.
o 100% of the bonds are insured by AAA-rated insurance
companies that guarantee timely payments of principal and
interest on the bonds (but not Fund units or the market
value of the bonds before they mature).

The Portfolio consists of municipal bonds of the following
types:

Approximate
Portfolio
Percentage

o Airports/Ports/Highways 31%
o General Obligation 1%
o Hospital/Health Care 31%
o Lease Rental 22%
o Municipal Water/Sewer Utilities 15%

4. What are the Significant Risks?
You can lose money by investing in the Fund. This can
happen for various reasons, including:
o Rising interest rates, an issuer's worsening financial
condition or a drop in bond ratings can reduce the price of
your units.
o Because the Portfolio is concentrated in
airport/port/highway bonds and hospital/health care bonds,
adverse developments in these sectors may affect the value
of your units. These risks are discussed later in this
prospectus under Concentration Risk.
o Assuming no changes in interest rates, when you sell your
units, they will generally be worth less than your cost
because your cost included a sales fee.
o The Fund will receive early returns of principal if bonds
are called or sold before they mature. If this happens your
income will decline and you may not be able to reinvest the
money you receive at as high a yield or as long a maturity.

Also, the Portfolio is concentrated in California bonds so
it is less diversified than a national fund and is subject
to risks particular to California, which are briefly
described later in this prospectus under State
Concentration Risks.

Defining Your Income
and Estimating Your Return

What You May Expect (Record Day: 10th day of
each February and August)
First payment per 1,000 units (2/25/00): $ 25.12
Regular Semi-Annual Income per 1,000 units
(each February and August beginning 8/25/00): $ 24.58
Annual Income per 1,000 units: $ 49.16
These figures are estimates on the business day before the
initial date of deposit; actual payments may vary.
Estimated Current Return 5.04%
Estimated Long Term Return 5.14%
Returns will vary (see page 13).

<PAGE>

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California Insured Portfolio
- --------------------------------------------------------------------------------

Multistate Series--409
<TABLE>
<CAPTION>

Rating Cost
Portfolio Title Coupon Maturity (1) of Issues (2) To Fund (3)
- --------------------------------------------------------------------------------------------------------------

Airports/Ports/Highways (31%):

<S> <C> <C> <C> <C>
1. $700,000 San Francisco, CA, Bay Area Rapid 5.00% 7/1/28 AAA $ 654,381.00
Transit Dist., Sales Tax Rev. Bonds, Ser.
1998 (AMBAC Ins.)
2. $700,000 San Joaquin Hills, CA, Trans. 5.25 1/15/30 AAA 679,280.00
Corridor Agy., Toll Rd. Rfdg. Rev. Bonds,
Ser. 1997 A (MBIA Ins.)

General Obligation (1%):

3. $35,000 State of California, G.O. Bonds, 5.10 8/1/01 AAA 35,964.95
Ser. 1998 (AMBAC Ins.)(4)

Hospital/Health Care (31%):

4. $700,000 California Hlth. Facs. Fin. 5.00 8/15/37 AAA 644,434.00
Auth., Ins. Rev. Bonds (Sutter Hlth.),
Ser. 1998 A (FSA Ins.)
5. $700,000 California Hlth. Facs. Fin. Auth. 5.00 11/15/28 AAA 654,115.00
Rev. Bonds (UCSF-Stanford Hlth. Care),
Ser. 1998 A (FSA Ins.)
6. $45,000 Loma Linda, CA. Hosp. Rev. Rfdg. 5.90 12/1/00 AAA 46,498.95
Bonds (Loma Linda Univ. Med. Ctr. Proj.),
Ser. 1992 A (AMBAC Ins.)(4)

Lease Rental (22%):

7. $300,000 Fullerton, CA, Sch. Dist. Certs. 5.00 6/1/29 AAA 280,188.00
of Part., Cap. Facs. Proj. (MBIA Ins.)
8. $700,000 Kern Cnty., CA, Bd. of Educ. 5.20 5/1/28 AAA 674,674.00
Rfdg. Certs. of Part., Ser. 1998 A (MBIA
Ins.)

Municipal Water/Sewer Utilities (15%):

9. $700,000 Olivenhain, CA, Muni. Wtr. Dist. Wtr. 5.125 6/1/28 AAA 667,058.00
Rev. Certs. of Part., Cap. Projs. and
Rfdg. Bonds (Olivenhain Muni. Wtr. Dist)
(Financial Guaranty Ins.)
--------------------
$ 4,336,593.90
--------------------
--------------------

</TABLE>

- ------------------------------------
(1) Approximately 16% of the long-term bonds are callable beginning in 2006 and
16% are callable in 2007; the remaining long-term bonds are callable in
2008 and later. Some bonds could be called earlier under extraordinary
circumstances.
(2) All ratings are by Standard & Poor's Ratings Group unless followed by
'(m)', which indiciates a Moody's Investors Service rating or by '(f)',
which indicates a Fitch IBCA, Inc. rating. An AAA rating indicates highest
quality bonds with a very strong capacity to pay interest and repay
principal.
(3) Approximately 2% of the bonds were deposited at a premium and 98% at a
discount from par. Sponsors' profit on deposit was $51,576.25.
(4) The interest and principal on these bonds will be used to pay the deferred
sales charge obligations of the investors, and these amounts are not
included in the calculation of Estimated Current and Long Term Returns.
------------------------------------

Please note that if this prospectus is used as a preliminary
prospectus
for a future fund in this Series, the Portfolio will contain
different
bonds from those described above.

<PAGE>

California Insured Portfolio (Continued)

6. What are the Fund's Fees and Expenses?
This table shows the costs and expenses you may pay,
directly or indirectly, when you invest in the Fund.
Investor Fees
Maximum Sales Fee (Load) on new
purchases (as a percentage of $1,000
invested) 2.90%
You will pay an up-front sales fee of 1.00%, as well as a
total deferred sales fee of $19.00 per 1,000 units ($2.38
per 1,000 units quarterly in the first year and $2.37 per
1,000 units quarterly in the second year). Employees of some
of the Sponsors and their affiliates may pay a reduced sales
fee of at least $5.00 per 1,000 units.
The maximum sales fee is reduced if you invest at least
$100,000, as follows:

Your maximum
sales fee
If you invest: will be:
----------------------------------- -----------------
Less than $100,000 2.90%
$100,000 to $249,999 2.65%
$250,000 to $499,999 2.40%
$500,000 to $999,999 2.15%
$1,000,000 and over 1.90%

Maximum Exchange Fee 1.90%

Estimated Annual Fund Operating Expenses

As a % of Amount
$1,000 Per 1,000
Invested Units
--------- -----------
.065% $ 0.63
Trustee's Fee
.047% $ 0.46
Portfolio Supervision,
Bookkeeping and
Administrative Fees
(including updating
expenses)
.030% $ 0.29
Evaluator's Fee
.037% $ 0.35
Other Operating Expenses
--------- -----------
.179% $ 1.73
Total

Amount
Per 1,000
Units
---------------------
$ 2.00
Organization Costs (deducted from
Fund assets at the close of the
initial offering period)

The Sponsors historically paid organization costs and
updating expenses.
Example
This example may help you compare the cost of investing in
the Fund to the cost of investing in other funds.
The example assumes that you invest $10,000 in the Fund for
the periods indicated and sell all your units at the end of
those periods. The example also assumes a 5% return on your
investment each year and that the Fund's operating expenses
stay the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years
$328 $367 $410 $536

You will pay the following expenses if you do not sell your
units:

1 Year 3 Years 5 Years 10 Years
$233 $367 $410 $536

7. How have Similar Funds Performed in the Past?
In the following chart we show past performance of prior
California Portfolios, which had investment objectives,
strategies and types of bonds substantially similar to this
Portfolio. These prior Series differed in that they charged
a higher sales fee. These prior California Series were
offered between June 22, 1988 and September 27, 1996 and
were outstanding on June 30, 1999. Of course, past
performance of prior Series is no guarantee of future
results of this Portfolio.
Average Annual Compound Total Returns
for Prior Series
Reflecting all expenses. For periods ended 6/30/99.

With Sales Fee No Sales Fee
1 Year 5 Years 10 Years 1 Year 5 Years 10 Years

- -------------------------------------------------------------------

High 3.61% 7.12% 6.00% 4.88% 8.32% 6.53%
Average -0.28 5.22 5.89 2.71 6.26 6.47
Low -3.02 3.57 5.74 -0.03 4.40 6.37

- -------------------------------------------------------------------

Average
Sales fee 3.05% 5.12% 5.67%

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Note: All returns represent changes in unit price with distributions reinvested
into the Municipal Fund Investment Accumulation Program.

4
<PAGE>
California Insured Portfolio (continued)

8. Is the Fund Managed?
Unlike a mutual fund, the Fund is not managed and bonds are
not sold because of market changes. Rather, experienced
Defined Asset Funds financial analysts regularly review the
bonds in the Fund. The Fund may sell a bond if certain
adverse credit or other conditions exist.
9. How do I Buy Units?
The minimum investment is $250.
You can buy units from any of the Sponsors and other
broker-dealers. The Sponsors are listed later in this
prospectus. Some banks may offer units for sale through
special arrangements with the Sponsors, although certain
legal restrictions may apply.
Unit Price per 1,000 Units $975.24
(as of August 5, 1999)
Unit price is based on the net asset value of the Fund plus
the up-front sales fee. An amount equal to any principal
cash, as well as net accrued but undistributed interest on
the unit, is added to the unit price. Unit price also
includes the estimated organization costs shown on page 4,
to which no sales fee has been applied. An independent
evaluator prices the bonds at 3:30 p.m. Eastern time every
business day. Unit price changes every day with changes in
the prices of the bonds in the Fund.
Unit Par Value $1.00
Unit par value means the total amount of money you should
generally receive on each unit by the termination of the
Fund (other than interest and premium on the bonds). This
total amount assumes that all bonds in the Fund are either
paid at maturity or called by the issuer at par or are sold
by the Fund at par. If you sell your units before the Fund
terminates, you may receive more or less than the unit par
value.

10. How do I Sell Units?
You may sell your units at any time to any Sponsor or the
Trustee for the net asset value determined at the close of
business on the date of sale, less any remaining deferred
sales fee. You will not pay any other fee when you sell your
units.

11. How are Distributions Made and Taxed?
The Fund pays income twice a year.
In the opinion of bond counsel when each bond was issued,
interest on the bonds in this Fund is generally 100% exempt
from regular federal income tax. Your income may also be
exempt from some California state and local personal income
taxes if you live in California.
You will also receive principal payments if bonds are sold
or called or mature, when the cash available is more than
$10.00 per 1,000 units. You will be subject to tax on any
gain realized by the Fund on the disposition of bonds.
12. What Other Services are Available?
Reinvestment
You will receive your income in cash unless you choose to
compound your income by reinvesting with no sales fee in the
Municipal Fund Investment Accumulation Program, Inc. This
program is an open-end mutual fund with a comparable
investment objective. Income from this program will
generally be subject to state and local income taxes. For
more complete information about the program, including
charges and fees, ask the Trustee for the program's
prospectus. Read it carefully before you invest. The Trustee
must receive your written election to reinvest at least 10
days before the record day of an income payment.
Exchange Privileges
You may exchange units of this Fund for units of certain
other Defined Asset Funds. You may also exchange into this
Fund from certain other funds. We charge a reduced sales fee
on exchanges.

5
<PAGE>
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New Jersey Insured Portfolio--Risk/Return Summary

1. What is the Fund's Objective?
The Fund seeks interest income that is exempt from regular
federal income taxes and some state and local taxes by
investing in a fixed portfolio consisting primarily of
long-term municipal revenue bonds.
2. What are Municipal Revenue Bonds?
Municipal revenue bonds are bonds issued by states,
municipalities and public authorities to finance the cost
of buying, building or improving various projects intended
to generate revenue, such as airports, health care
facilities, housing and municipal electric, water and sewer
utilities. Generally, payments on these bonds depend solely
on the revenues generated by the projects, excise taxes or
state appropriations, and are not backed by the
government's taxing power.
3. What is the Fund's Investment Strategy?
o The Fund plans to hold to maturity 7 long-term tax-exempt
municipal bonds with an aggregate face amount of
$3,500,000, and some short-term bonds reserved to pay the
deferred sales charge. The Fund is a unit investment trust
which means that, unlike a mutual fund, the Fund's
portfolio is not managed.
o The bonds are rated AAA or Aaa by Standard & Poor's,
Moody's or Fitch.
o Most of the bonds cannot be called for several years, and
after that they can be called at a premium declining over
time to par value. Some bonds may be called earlier at par
for extraordinary reasons.
o 100% of the bonds are insured by AAA-rated insurance
companies that guarantee timely payments of principal and
interest on the bonds (but not Fund units or the market
value of the bonds before they mature).

The Portfolio consists of municipal bonds of the following
types:

Approximate
Portfolio
Percentage

o General Obligation 44%
o Hospitals/Health Care 28%
o Municipal Electric Utilities 14%
o State/Local Government Supported 14%

4. What are the Significant Risks?
You can lose money by investing in the Fund. This can
happen for various reasons, including:
o Rising interest rates, an issuer's worsening financial
condition or a drop in bond ratings can reduce the price of
your units.
o Because the Portfolio is concentrated in general obligation
and hospital/health care bonds, adverse developments in
these sectors may affect the value of your units. These
risks are discussed later in this prospectus under
Concentration Risk.
o Assuming no changes in interest rates, when you sell your
units, they will generally be worth less than your cost
because your cost included a sales fee.
o The Fund will receive early returns of principal if bonds
are called or sold before they mature. If this happens your
income will decline and you may not be able to reinvest the
money you receive at as high a yield or as long a maturity.

Also, the Portfolio is concentrated in New Jersey bonds, so
it is less diversified than a national fund and is subject
to risks particular to New Jersey, which are briefly
described later in this prospectus under State
Concentration Risks.

Defining Your Income
and Estimating Your Return

What You May Expect (Record Day: 10th day of
each February and August)
First payment per 1,000 units (2/25/00): $ 25.05
Regular Semi-Annual Income per 1,000 units
(each February and August beginning 8/25/00): $ 24.50
Annual Income per 1,000 units: $ 49.01
These figures are estimates on the business day before the
initial date of deposit; actual payments may vary.
Estimated Current Return 4.96%
Estimated Long Term Return 5.04%
Returns will vary (see page 13).

<PAGE>

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New Jersey Insured Portfolio
- --------------------------------------------------------------------------------

Multistate Series--409
<TABLE>
<CAPTION>

Rating
of Issues Cost
Portfolio Title Coupon Maturity (1) (2) To Fund (3)
- -----------------------------------------------------------------------------------------------------------------

General Obligation (44%):

<S> <C> <C> <C> <C> <C>
1. $500,000 Township of Cherry Hill, Camden 5.25% 7/15/19 Aaa(m) $ 496,925.00
Cnty., NJ, G.O. Bonds, Ser. 1999 A
(Financial Guaranty Ins.)
2. $65,000 Borough of Westwood, Bergen Cnty., 5.20 8/1/00-01 Aaa(m) 66,254.25
NJ, Gen. Impt. Bonds. Ser. 1999 (FSA
Ins.)(4)
3. $500,000 The Board of Educ. of the Twp. of 5.40 8/1/18 AAA 501,760.00
Mt. Laurel, Burlington Cnty., NJ, Sch.
Bonds (Financial Guaranty Ins.)
4. $500,000 The Board of Educ. of the Twp. of 5.00 9/1/26 AAA 475,100.00
Sparta, Sussex Cnty., NJ, School Rfdg.
Bonds (MBIA Ins.)

Hospitals/Health Care (28%):

5. $500,000 New Jersey Hlth. Care Fac. Fin. 5.25 7/1/29 AAA 486,015.00
Auth., Rev. Bonds (Meridian Hlth. Sys.
Oblig. Grp. Iss.), Ser. 1999 (FSA Ins.)
6. $500,000 New Jersey Htlh. Care Fac. Fin. 4.75 7/1/28 AAA 449,325.00
Auth., Rev. and Rfdg. Bonds (St. Barnabas
Hlth. Care Sys. Issue), Ser. 1998 B
(MBIA Ins.)

Municipal Water/Sewer Utilities (14%):

7. $500,000 Bayonne Muni. Util. Auth., Hudson 5.00 1/1/28 Aaa(m) 474,565.00
Cnty., NJ Wtr. Sys. Rev. Bonds, Ser. 1997
(MBIA Ins.)

State/Local Government Supported (14%):

8. $500,000 Parking Auth. Of the City of New 5.00 1/1/29 AAA 470,665.00
Brunswick, Middlesex Cnty., NJ, Gtd.
Pkg. Rev. Bonds, Ser. 1999 (Financial
Guaranty Ins.)
--------------------
$ 3,420,609.25
--------------------
--------------------

</TABLE>

- ------------------------------------
(1) Approximately 29% of the long-term bonds are callable beginning in 2006 and
29% are callable in 2008; the remaining long-term bonds are callable in
2008 and later. Some bonds could be called earlier under extraordinary
circumstances.
(2) All ratings are by Standard & Poor's Ratings Group unless followed by
'(m)', which indicates a Moody's Investors Service rating or by '(f)',
which indicates a Fitch IBCA, Inc. rating. An AAA rating indicates highest
quality bonds with a very strong capacity to pay interest and repay
principal.
(3) Approximately 16% of the bonds were deposited at a premium and 84% at a
discount from par. Sponsors' profit on deposit was $32,515.85.
(4) The interest and principal on these bonds will be used to pay the deferred
sales charge obligations of the investors, and these amounts are not
included in the calculation of Estimated Current and Long Term Returns.

------------------------------------

Please note that if this prospectus is used as a preliminary
prospectus
for a future fund in this Series, the Portfolio will contain
different
bonds from those described above.

<PAGE>

New Jersey Insured Portfolio (Continued)

5. Is this Fund Appropriate for You?
Yes, if you want federally tax-free income. You will benefit
from a professionally selected and supervised portfolio
whose risk is reduced by investing in bonds of several
different issuers.
The Fund is not appropriate for you if you want a
speculative investment that changes to take advantage of
market movements, if you do not want a tax-advantaged
investment or if you cannot tolerate any risk.
6. What are the Fund's Fees and Expenses?
This table shows the costs and expenses you may pay,
directly or indirectly, when you invest in the Fund.
Investor Fees
Maximum Sales Fee (Load) on new
purchases (as a percentage of $1,000
invested) 2.90%
You will pay an up-front sales fee of 1.00%, as well as a
total deferred sales fee of $19.00 per 1,000 units ($2.38
per 1,000 units quarterly in the first year and $2.37 per
1,000 units quarterly in the second year). Employees of some
of the Sponsors and their affiliates may pay a reduced sales
fee of at least $5.00 per 1,000 units.
The maximum sales fee is reduced if you invest at least
$100,000, as follows:

Your maximum
sales fee
If you invest: will be:
----------------------------------- ---------------
Less than $100,000 2.90%
$100,000 to $249,999 2.65%
$250,000 to $499,999 2.40%
$500,000 to $999,999 2.15%
$1,000,000 and over 1.90%

Maximum Exchange Fee 1.90%

Estimated Annual Fund Operating Expenses

As a % of Amount
$1,000 Per 1,000
Invested Units
--------- -----------
.065% $ 0.63
Trustee's Fee
.046% $ 0.46
Portfolio Supervision,
Bookkeeping and
Administrative Fees (including
updating
expenses)
.038% $ 0.37
Evaluator's Fee
.046% $ 0.45
Other Operating Expenses
--------- -----------
.195% $ 1.91
Total

Amount
Per 1,000
Units
---------------------
$ 2.00
Organization Costs (deducted from
Fund assets at the close of the
initial offering period)

1 Year 3 Years 5 Years 10 Years
$330 $372 $419 $556

You will pay the following expenses if you do not sell your
units:

1 Year 3 Years 5 Years 10 Years
$235 $372 $419 $556

7. How have Similar Funds Performed in the Past?
In the following chart we show past performance of prior New
Jersey Portfolios, which had investment objectives,
strategies and types of bonds substantially similar to this
Portfolio. These prior Series differed in that they charged
a higher sales fee. These prior New Jersey Series were
offered between June 22, 1988 and September 19, 1996 and
were outstanding on June 30, 1999. Of course, past
performance of prior Series is no guarantee of future
results of this Portfolio.
Average Annual Compound Total Returns
for Prior Series
Reflecting all expenses. For periods ended 6/30/99.

With Sales Fee No Sales Fee
1 Year 5 Years 10 Years 1 Year 5 Years 10 Years

- -------------------------------------------------------------------

High 2.70% 6.69% 5.94% 4.12% 7.89% 6.45%
Average 0.20 5.03 5.77 3.03 6.08 6.35
Low -2.74 3.71 5.68 0.10 4.63 6.29

- -------------------------------------------------------------------

Average
Sales fee 2.89% 5.13% 5.75%

- -------------------------------------------------------------------

Note: All returns represent changes in unit price with distributions reinvested
into the Municipal Fund Investment Accumulation Program.

7
<PAGE>
New Jersey Insured Portfolio (continued)

8. Is the Fund Managed?
Unlike a mutual fund, the Fund is not managed and bonds
are not sold because of market changes. Rather,
experienced Defined Asset Funds financial analysts
regularly review the bonds in the Fund. The Fund may sell
a bond if certain adverse credit or other conditions
exist.
9. How do I Buy Units?
The minimum investment is $250.
You can buy units from any of the Sponsors and other
broker-dealers. The Sponsors are listed later in this
prospectus. Some banks may offer units for sale through
special arrangements with the Sponsors, although certain
legal restrictions may apply.
Unit Price per 1,000 Units $989.00
(as of August 5, 1999)
Unit price is based on the net asset value of the Fund
plus the up-front sales fee. An amount equal to any
principal cash, as well as net accrued but undistributed
interest on the unit, is added to the unit price. Unit
price also includes the estimated organization costs shown
on page 7, to which no sales fee has been applied. An
independent evaluator prices the bonds at 3:30 p.m.
Eastern time every business day. Unit price changes every
day with changes in the prices of the bonds in the Fund.
Unit Par Value $1.00
Unit par value means the total amount of money you should
generally receive on each unit by the termination of the
Fund (other than interest and premium on the bonds). This
total amount assumes that all bonds in the Fund are either
paid at maturity or called by the issuer at par or are
sold by the Fund at par. If you sell your units before the
Fund terminates, you may receive more or less than the
unit par value.

11. How are Distributions Made and Taxed?
The Fund pays income twice a year.
In the opinion of bond counsel when each bond was issued,
interest on the bonds in this Fund is generally 100% exempt
from regular federal income tax. Your income may also be
exempt from New Jersey state and local personal income taxes
if you live in New Jersey.
You will also receive principal payments if bonds are sold
or called or mature, when the cash available is more than
$10.00 per 1,000 units. You will be subject to tax on any
gain realized by the Fund on the disposition of bonds.
12. What Other Services are Available?
Reinvestment
You will receive your income in cash unless you choose to
compound your income by reinvesting at no sales fee in the
Municipal Fund Investment Accumulation Program, Inc. This
Program is an open-end mutual fund with a comparable
investment objective. Income from this Program will
generally be subject to state and local income taxes. For
more complete information about the Program, including
charges and fees, ask the Trustee for the Program's
prospectus. Read it carefully before you invest. The Trustee
must receive your written election to reinvest at least 10
days before the record day of an income payment.
Exchange Privileges
You may exchange units of this Fund for units of certain
other Defined Asset Funds. You may also exchange into this
Fund from certain other funds. We charge a reduced sales fee
on exchanges.

8
<PAGE>
- --------------------------------------------------------------------------------

New York Insured Portfolio--Risk/Return Summary

3. What is the Fund's Investment Strategy?
o The Fund plans to hold to maturity 7 long-term tax-exempt
municipal bonds with an aggregate face amount of
$4,500,000, and some short-term bonds reserved to pay the
deferred sales fee. The Fund is a unit investment trust
which means that, unlike a mutual fund, the Fund's
portfolio is not managed.
o The bonds are rated AAA or Aaa by Standard & Poor's,
Moody's or Fitch.
o Most of the bonds cannot be called for several years, and
after that they can be called at a premium declining over
time to par value. Some bonds may be called earlier at par
for extraordinary reasons.
o 100% of the bonds are insured by AAA-rated insurance
companies that guarantee timely payments of principal and
interest on the bonds (but not Fund units or the market
value of the bonds before they mature).

The Portfolio consists of municipal bonds of the following
types:

Approximate
Portfolio
Percentage

o General Obligation 8%
o Hospital/Health Care 31%
o Industrial Development Revenue 31%
o Municipal Water/Sewer Utilities 15%
o Miscellaneous 15%

4. What are the Significant Risks?
You can lose money by investing in the Fund. This can
happen for various reasons, including:
o Rising interest rates, an issuer's worsening financial
condition or a drop in bond ratings can reduce the price of
your units.
o Because the Portfolio is concentrated in hospital/health
care and industrial development revenue bonds, adverse
developments in these sectors may affect the value of your
units. These risks are discussed later in this prospectus
under Concentration Risk.
o Assuming no changes in interest rates, when you sell your
units, they will generally be worth less than your cost
because your cost included a sales fee.
o The Fund will receive early returns of principal if bonds
are called or sold before they mature. If this happens your
income will decline and you may not be able to reinvest the
money you receive at as high a yield or as long a maturity.

Also, the Portfolio is concentrated in New York bonds so it
is less diversified than a national fund and is subject to
risks particular to New York, which are briefly described
later in this prospectus under State Concentration Risks.

Defining Your Income
and Estimating Your Return

What You May Expect (Record Day: 10th day of
each February and August)
First payment per 1,000 units (2/25/00): $ 26.06
Regular Semi-Annual Income per 1,000 units
(each February and August beginning 8/25/00): $ 25.49
Annual Income per 1,000 units: $ 50.99
These figures are estimates on the business day before the
initial date of deposit; actual payments may vary.
Estimated Current Return 5.14%
Estimated Long Term Return 5.21%
Returns will vary (see page 13).

<PAGE>
- --------------------------------------------------------------------------------
New York Insured Portfolio
- --------------------------------------------------------------------------------

Multistate Series--409
<TABLE>
<CAPTION>

Rating
of Issues Cost
Portfolio Title Coupon Maturity (1) (2) To Fund (3)
- -----------------------------------------------------------------------------------------------------------

General Obligation (8%):

<S> <C> <C> <C> <C> <C>
1. $10,000 Eastchester Union Free Sch. 4.875% 8/15/02 Aaa(m) $ 10,247.00
Dist., Westchester Cnty., NY, Sch. Dist.
Serial Bonds, Ser. 1999 A (FSA Ins.)(4)
2. $40,000 County of Genesee, NY, G.O. Pub. 5.00 8/15/00 Aaa(m) 40,640.40
Impt. Bonds, Ser. 1999 (Financial Guaranty
Ins.)(4)
3. $300,000 City of New York, NY, G.O.Bonds, 5.00 4/15/24 AAA 279,843.00
Fiscal Ser. 1999 I (MBIA Ins.)
4. $30,000 Silver Creek Central Sch. Dist., 4.75 6/15/01 Aaa(m) 30,506.10
Chautauqua Cnty., NY, Sch. Dist. Serial
Bonds, Ser. 1999 (Financial Guaranty
Ins.)(4)

Hospitals/Health Care (31%):

5. $700,000 Dormitory Auth. of the State of 4.75 1/15/29 AAA 614,621.00
New York, Muni. Hlth. Fac. Imp. Prog.
Lease Rev. Bonds (New York City Iss.)
Ser. 1998-1 (FSA Ins.)
6. $700,000 Dormitory Auth. of the State of 5.60 2/15/39 AAA 700,000.00
New York, New York Hosp. Med. Ctr. of
Queens, FHA Ins. Mtge. Hosp. Rev. Bonds,
Ser. 1999 (AMBAC Ins.)

Municipal Water/Sewer Utilities (15%):

7. $700,000 New York City, NY, Muni. Wtr. 5.25 6/15/29 AAA 674,422.00
Fin. Auth., Wtr. and Swr. Sys. Rev. Bonds,
Fiscal 1999 Ser. B (Financial Guaranty
Ins.)

Industrial Development Revenue (31%):

8. $700,000 New York State Energy Research & 5.15 11/1/25 AAA 666,120.00
Dev. Auth., Poll. Ctl. Rfdg. Rev. Bonds
(Niagara Mohawk Pwr. Corp. Proj.), Ser.
1998 A (AMBAC Ins.)
9. $700,000 Long Island Pwer. Auth., NY, 5.25 12/1/26 AAA 675,346.00
Elec. Sys. Gen. Rev. Bonds, Ser. 1998 A
(MBIA Ins.)

Miscellaneous (15%):

10. $700,000 The Trust for Cultural Resources 5.75 7/1/29 AAA 717,052.00
of the City of New York, NY, Rev. Bonds
(American Museum of Natural History),
Ser. 1999 A (AMBAC Ins.)
------------------
$ 4,408,797.50
------------------
------------------

</TABLE>

- ------------------------------------
(1) Approximately 15% of the long-term bonds are callable beginning in 2007 and
31% are callable in 2008; the remaining long-term bonds are callable in
2009. Some bonds could be called earlier under extraordinary circumstances.
(2) All ratings are by Standard & Poor's Ratings Group unless followed by
'(m)', which indicates a Moody's Investors Service rating or by '(f)',
which indicates a Fitch IBCA, Inc. rating. An AAA rating indicates highest
quality bonds with a very strong capacity to pay interest and repay
principal.
(3) Approximately 17% of the bonds were deposited at a premium, 15% at par, and
68% at a discount from par. Sponsors' profit on deposit was $40,435.10.
(4) The interest and principal on these bonds will be used to pay the deferred
sales charge obligations of the investors, and these amounts are not
included in the calculation of Estimated Current and Long Term Returns.
------------------------------------

Please note that if this prospectus is used as a preliminary
prospectus
for a future fund in this Series, the Portfolio will contain
different
bonds from those described above.

<PAGE>
New York Insured Portfolio (Continued)

Maximum Exchange Fee 1.90%

Estimated Annual Fund Operating Expenses

As a % of Amount
$1,000 Per 1,000
Invested Units
--------- -----------
.064% $ 0.63
Trustee's Fee
.046% $ 0.46
Portfolio Supervision,
Bookkeeping and
Administrative Fees
(including updating
expenses)
.030% $ 0.29
Evaluator's Fee
.036% $ 0.35
Other Operating Expenses
--------- -----------
.176% $ 1.73
Total

Amount
Per 1,000
Units
---------------------
$ 2.00
Organization Costs (deducted from
Fund assets at the close of the
initial offering period)

1 Year 3 Years 5 Years 10 Years
$328 $366 $408 $533

You will pay the following expenses if you do not sell your
units:

1 Year 3 Years 5 Years 10 Years
$233 $366 $408 $533

7. How have Similar Funds Performed in the Past?
In the following chart we show past performance of prior New
York Portfolios, which had investment objectives, strategies
and types of bonds substantially similar to this Portfolio.
These prior Series differed in that they charged a higher
sales fee. These prior New York Series were offered between
January 14, 1988 and October 16, 1996 and were outstanding
on June 30, 1999. Of course, past performance of prior
Series is no guarantee of future results of this Portfolio.
Average Annual Compound Total Returns
for Prior Series
Reflecting all expenses. For periods ended 6/30/99.

With Sales Fee No Sales Fee
1 Year 5 Years 10 Years 1 Year 5 Years 10 Years

- -------------------------------------------------------------------

High 3.57% 6.80% 6.38% 5.48% 8.00% 6.98%
Average -0.08 4.94 6.08 2.91 5.94 6.67
Low -3.92 3.62 5.85 -0.57 4.51 6.44

- -------------------------------------------------------------------

Average
Sales fee 3.05% 4.94% 5.78%

- -------------------------------------------------------------------

Note: All returns represent changes in unit price with distributions reinvested
into the Municipal Fund Investment Accumulation Program.

10
<PAGE>
New York Insured Portfolio (continued)

8. Is the Fund Managed?
Unlike a mutual fund, the Fund is not managed and bonds are
not sold because of market changes. Rather, experienced
Defined Asset Funds financial analysts regularly review the
bonds in the Fund. The Fund may sell a bond if certain
adverse credit or other conditions exist.
9. How do I Buy Units?
The minimum investment is $250.
You can buy units from any of the Sponsors and other
broker-dealers. The Sponsors are listed later in this
prospectus. Some banks may offer units for sale through
special arrangements with the Sponsors, although certain
legal restrictions may apply.
Unit Price per 1,000 Units $991.45
(as of August 5, 1999)
Unit price is based on the net asset value of the Fund plus
the up-front sales fee. An amount equal to any principal
cash, as well as net accrued but undistributed interest on
the unit, is added to the unit price. Unit price also
includes the estimated organization costs shown on page 10,
to which no sales fee has been applied. An independent
evaluator prices the bonds at 3:30 p.m. Eastern time every
business day. Unit price changes every day with changes in
the prices of the bonds in the Fund.
Unit Par Value $1.00
Unit par value means the total amount of money you should
generally receive on each unit by the termination of the
Fund (other than interest and premium on the bonds). This
total amount assumes that all bonds in the Fund are either
paid at maturity or called by the issuer at par or are sold
by the Fund at par. If you sell your units before the Fund
terminates, you may receive more or less than the unit par
value.

11. How are Distributions Made and Taxed?
The Fund pays income twice a year.
In the opinion of bond counsel when each bond was issued,
interest on the bonds in this Fund is generally 100% exempt
from regular federal income tax. Your income may also be
exempt from some New York state and local personal income
taxes if you live in New York.
You will also receive principal payments if bonds are sold
or called or mature, when the cash available is more than
$10.00 per 1,000 units. You will be subject to tax on any
gain realized by the Fund on the disposition of bonds.
12. What Other Services are Available?
Reinvestment
You will receive your income in cash unless you choose to
compound your income by reinvesting with no sales fee in the
Municipal Fund Investment Accumulation Program, Inc. This
program is an open-end mutual fund with a comparable
investment objective. Income from this program will
generally be subject to state and local income taxes. For
more complete information about the program, including
charges and fees, ask the Trustee for the program's
prospectus. Read it carefully before you invest. The Trustee
must receive your written election to reinvest at least 10
days before the record day of an income payment.
Exchange Privileges
You may exchange units of this Fund for units of certain
other Defined Asset Funds. You may also exchange into this
Fund from certain other funds. We charge a reduced sales fee
on exchanges.

11
<PAGE>

- --------------------------------------------------------------------------------
Tax-Free vs. Taxable Income: A Comparison Of Taxable and Tax-Free Yields

FOR CALIFORNIA RESIDENTS
- --------------------------------------------------------------------------------

Combined
Effective
Taxable Income 1999* Tax Rate Tax-Free Yield of
Single Return Joint Return % 4% 4.5% 5% 5.5% 6% 6.5% 7% 7.5% 8%
Is Equivalent to a Taxable Yield of

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

FOR NEW JERSEY RESIDENTS
- --------------------------------------------------------------------------------

Combined
Effective
Taxable Income 1999* Tax Rate Tax-Free Yield of
Single Return Joint Return % 3% 3.5% 4% 4.5% 5% 5.5% 6% 6.5%
Is Equivalent to a Taxable Yield of

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

FOR NEW YORK CITY RESIDENTS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Combined
Effective
Taxable Income 1999* Tax Rate Tax-Free Yield of
Single Return Joint Return % 4% 4.5% 5% 5.5% 6% 6.5% 7% 7.5% 8%
Is Equivalent to a Taxable Yield of

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

FOR NEW YORK STATE RESIDENTS
- --------------------------------------------------------------------------------

Combined
Effective
Taxable Income 1999* Tax Rate Tax-Free Yield of
Single Return Joint Return % 4% 4.5% 5% 5.5% 6% 6.5% 7% 7.5% 8%
Is Equivalent to a Taxable Yield of

- --------------------------------------------------------------------------------

To compare the yield of a taxable security with the yield of a tax-free
security, find your taxable income and read across. The table incorporates 1999
federal and applicable State (and City) income tax rates and assumes that all
income would otherwise be taxed at the investor's highest tax rate. Yield
figures are for example only.

*Based upon net amount subject to federal income tax after deductions and
exemptions. This table does not reflect the possible effect of other tax
factors, such as alternative minimum tax, personal exemptions, the phase out of
exemptions, itemized deductions or the possible partial disallowance of
deductions. Consequently, investors are urged to consult their own tax advisers
in this regard.

12
<PAGE>
What You Can Expect From Your Investment

Income Twice A Year

The Fund will pay you regular income twice a year. Your income may vary because
of:
o elimination of one or more bonds from the Fund's portfolio because of
calls, redemptions or sales;
o a change in the Fund's expenses; or
o the failure by a bond's issuer to pay interest.

Changes in interest rates generally will not affect your income because the
portfolio is fixed.

Along with your income, you will receive your share of any available bond
principal.

Return Figures

We cannot predict your actual return, which will vary with unit price, how long
you hold your investment and changes in the portfolio, interest income and
expenses.

Estimated Current Return equals the estimated annual cash to be received from
the bonds in the Fund less estimated annual Fund expenses, divided by the Unit
Price (including the maximum sales fee):

Estimated Annual Estimated
Interest Income - Annual Expenses
- -------------------------------------------------
Unit Price

Estimated Long Term Return is a measure of the estimated return over the
estimated life of the Fund. Unlike Estimated Current Return, Estimated Long Term
Return reflects maturities, discounts and premiums of the bonds in the Fund. It
is an average of the yields to maturity (or in certain cases, to an earlier call
date) of the individual bonds in the portfolio, adjusted to reflect the Fund's
maximum sales fee and estimated expenses. We calculate the average yield for the
portfolio by weighting each bond's yield by its market value and the time
remaining to the call or maturity date.

Yields on individual bonds depend on many factors including general conditions
of the bond markets, the size of a particular offering and the maturity and
quality rating of the particular issues. Yields can vary among bonds with
similar maturities, coupons and ratings.

These return quotations are designed to be comparative rather than predictive.

Records and Reports

You will receive:
o a statement of income payments twice a year;
o a notice from the Trustee when new bonds are deposited in exchange or
substitution for bonds originally deposited;
o an annual report on Fund activity; and
o annual tax information. This will also be sent to the IRS. You must report the
amount of tax-exempt interest received during the year.

You may request:
o copies of bond evaluations to enable you to comply with federal and state tax
reporting requirements; and
o audited financial statements of the Fund.

You may inspect records of Fund transactions at the Trustee's office during
regular business hours.

13
<PAGE>

The Risks You Face

Interest Rate Risk

Investing involves risks, including the risk that your investment will decline
in value if interest rates rise. Generally, bonds with longer maturities will
change in value more than bonds with shorter maturities. Bonds in the Fund are
more likely to be called when interest rates decline. This would result in early
returns of principal to you and may result in early termination of the Fund. Of
course, we cannot predict how interest rates may change.

Call Risk

Many bonds can be prepaid or 'called' by the issuer before their stated
maturity. For example, some bonds may be required to be called pursuant to
mandatory sinking fund provisions.

Also, an issuer might call its bonds during periods of falling interest rates,
if the issuer's bonds have a coupon higher than current market rates.

An issuer might call its bonds in extraordinary cases, including if:
o it no longer needs the money for the original purpose;
o the project is condemned or sold;
o the project is destroyed and insurance proceeds are used to redeem the bonds;
o any related credit support expires and is not replaced; or
o interest on the bonds become taxable.

If the bonds are called, your income will decline and you may not be able to
reinvest the money you receive at as high a yield or as long a maturity. An
early call at par of a premium bond will reduce your return.

Reduced Diversification Risk

If many investors sell their units, the Fund will have to sell bonds. This could
reduce the diversification of your investment and increase your share of Fund
expenses.

Liquidity Risk

You can always sell back your units, but we cannot assure you that a liquid
trading market will always exist for the bonds in the portfolio, especially
since current law may restrict the Fund from selling bonds to any Sponsor. The
bonds will generally trade in the over-the-counter market. The value of the
bonds, and of your investment, may be reduced if trading in bonds is limited or
absent.

Concentration Risk

When a certain type of bond makes up 25% or more of a portfolio, it is said to
be 'concentrated' in that bond type, which makes the portfolio less diversified.

Here is what you should know about the California Portfolio's concentration in
airport, port and highway bonds. Airport, port and highway revenue bonds are
dependent for payment on revenues from financial projects including:
o user fees from ports and airports;
o tolls on turnpikes and bridges;
o rents from buildings; and
o additional financial resources including
--federal and state subsidies,
--lease rentals paid by state or local governments, or
--the pledge of a special tax such as a sales tax or a property tax.

Airport income is largely affected by:
o increased competition;
o excess capacity; and
o increased fuel costs.

14
<PAGE>

Here is what you should know about the California, New Jersey and New York
Portfolios' concentrations in hospital and health care bonds:
o payment for these bonds depends on revenues from private third-party payors
and government programs, including Medicare and Medicaid, which have
generally undertaken cost containment measures to limit payments to health
care providers;
o hospitals face increasing competition resulting from hospital mergers and
affiliations;
o hospitals need to reduce costs as HMOs increase market penetration and
hospital supply and drug companies raise prices; and
o hospitals and health care providers are subject to various legal claims by
patients and others and are adversely affected by increasing costs of
insurance.
o many hospitals are aggressively buying physician practices and assuming
risk contracts to gain market share. If revenues do not increase
accordingly, this practice could reduce profits.
o Medicare is changing its reimbursement system for nursing homes. Many
nursing home providers are not sure how they will be treated. In many
cases, the providers may receive lower reimbursements and these would have
to cut expenses to maintain profitability.
o most retirement/nursing home providers rely on entrance fees for operating
revenues. If people live longer than expected and turnover is lower than
budgeted, operating revenues would be adversely affected by less than
expected entrance fees.

Here is what you should know about the New Jersey Portfolio's concentration in
general obligation bonds:
o general obligation bonds are backed by the issuer's pledge of its full
faith, credit and taxing power;
o but the taxing power of any government issuer may be limited by provisions
of the state constitution or laws as well as political and economic
considerations; and
o an issuer's credit can be negatively affected by various factors, including
population decline that erodes the tax base, natural disasters, decline in
industry, limited access to capital markets or heavy reliance on state or
federal aid.

Here is what you should know about the New York Portfolio's concentration in
industrial development revenue bonds (IDRs). IDRs are issued to finance various
privately operated projects such as pollution control and manufacturing
facilities. Payment for these bonds depends on:
o creditworthiness of the corporate operator of the project being financed;
o economic factors relating to the particular industry; and,
o in some cases, creditworthiness of an affiliated or third-party guarantor.

State Concentration Risks

California Risks

Generally

From the late 1980s through the early 1990s, an economic recession eroded
California's revenue base. At the same time rapid population growth caused State
expenditures to exceed budget appropriations.

o As a result California experienced a period of sustained budget imbalance.

<PAGE>
o Since that time the California economy has improved markedly and the
extreme budgetary pressures have begun to lessen. However, the Asian
economic crisis is expected to continue to have some negative effect on the
State's economy.

State Government

The 1997-98 Budget Act allocated a State budget of approximately $66.9 Billion
and contains no tax increases or reductions. Despite this somewhat improved
state, California's budget is still subject to certain unforeseeable events. For
example:

o In December, 1994, Orange County and its investment pool filed for
bankruptcy. While a settlement has been reached, the full impact on the
State and Orange County is still unknown.

o California faces constant fluctuations in other expenses (including health
and welfare caseloads, property tax receipts, federal funding and natural
disaster relief) that will undoubtedly create new budgetary pressure and
reduce ability to pay their debts.

o California's general obligation bonds are currently rated AA3 by Moody's
and A+ by Standard & Poor's.

Other Risks

Issuers' ability to make payments on bonds (and the remedies available to
bondholders) could also be adversely affected by the following constraints:

o Certain provisions of California's Constitution, laws and regulatory system
contain tax, spending and appropriations limits and prohibit certain new
taxes.

o Certain other California laws subject the users of bond proceeds to strict
rules and limits regarding revenue repayment.

o Bonds of healthcare institutions which are subject to the strict rules and
limits regarding reimbursement payments of California's Medi-Cal program
for health care services to welfare recipients and bonds secured by liens
on real property are two of the types of bonds that could be affected by
these provisions.

New Jersey Risks

State and Local Government

Certain features of New Jersey law could affect the repayment of debt:

o the State of New Jersey and its agencies and public authorities issue
general obligation bonds, which are secured by the full faith and credit of
the state, backed by its taxing authority, without recourse to specific
sources of revenue, therefore, any liability to increase taxes could
impair the state's ability to repay debt; and

o the state is required by law to maintain a balanced budget, and state
spending for any given municipality or county cannot increase by more than
5% per year. This limit could make it harder for any particular county or
municipality to repay its debts.

In recent years the state budget's main expenditures have been

o elementary and secondary education, and

o state agencies and programs, including police and corrections facilities,
higher education, and environmental protection.

The state's general obligations are rated Aa1 by Moody's and AA+ by Standard &
Poor's.

New York Risks

Generally

16
<PAGE>

For decades, New York's economy has trailed the rest of the nation. Both the
state and New York City have experienced long-term structural imbalances between
revenues and expenses, and have repeatedly relied substantially on non-recurring
measures to achieve budget balance. The pressures that contribute to budgetary
problems at both the state and local level include:

o the high combined state and local tax burden;

o a decline in manufacturing jobs, leading to above-average unemployment;

o sensitivity to the financial services industry; and

o dependence on federal aid.

State Government

The State government frequently has difficulty approving budgets on time. Budget
gaps of $3 billion and $5 billion are projected for the next two years. The
State's general obligation bonds are rated A by Standard & Poor's and A2 by
Moody's. There is $37 billion of state-related debt outstanding.

New York City Government

Even though the City had budget surpluses each year from 1981, budget gaps of
about $2 billion are projected for the 2001 and 2002 fiscal years. New York City
faces fiscal pressures from:

o aging public facilities that need repair or replacement;

o welfare and medical costs;

o expiring labor contracts; and

o a high and increasing debt burden.

The City requires substantial state aid, and its fiscal strength depends heavily
on the securities industry. Its general obligation bonds are rated A-by Standard
& Poor's and A3 by Moody's. $31.2 billion of combined City, MAC and PBC debt is
outstanding, and the City proposes $25.3 billion of financing over fiscal
1999-2003.

Bond Quality Risk

A reduction in a bond's rating may decrease its value and, indirectly, the value
of your investment in the Fund.

Insurance Related Risk

All of the bonds are backed by insurance companies (as shown under Defined
Portfolios). Insurance policies generally make payments only according to a
bond's original payment schedule and do not make early payments when a bond
defaults or becomes taxable. Although the federal government does not regulate
the insurance business, various state laws and federal initiatives and tax law
changes could significantly affect the insurance business. The claims-paying
ability of the insurance companies is generally rated AAA by Standard & Poor's
or another nationally recognized rating organization. The insurance company
ratings are subject to change at any time at the discretion of the rating
agencies.

Litigation and Legislation Risks

We do not know of any pending litigation that might have a material adverse
effect upon the Fund.

Future tax legislation could affect the value of the portfolio by:
o limiting real property taxes,
o reducing tax rates,
o imposing a flat or other form of tax, or
o exempting investment income from tax.

Selling or Exchanging Units

You can sell your units at any time for a price based on net asset value. Your
net asset value is calculated each business day by:

17
<PAGE>
o adding the value of the bonds, net accrued interest, cash and any other
Fund assets;
o subtracting accrued but unpaid Fund expenses, unreimbursed Trustee
advances, cash held to buy back units or for distribution to investors and
any other Fund liabilities; and
o dividing the result by the number of outstanding units.

Your net asset value when you sell may be more or less than your cost because of
sales fees, market movements and changes in the portfolio.

As of the close of the initial offering period, the price you receive will be
reduced to reflect estimated organization costs.

If you sell your units before the final deferred sales fee installment, the
amount of any remaining installments will be deducted from your proceeds.

Sponsors' Secondary Market

While we are not obligated to do so, we will buy back units at net asset value
without any other fee or charge other than any remaining deferred sales charge.
We may resell the units to other buyers or to the Trustee. You should consult
your financial professional for current market prices to determine if other
broker-dealers or banks are offering higher prices.

We have maintained the secondary market continuously for over 28 years, but we
could discontinue it without prior notice for any business reason.

Selling Units to the Trustee

Regardless of whether we maintain a secondary market, you can sell your units to
the Trustee at any time by sending the Trustee a letter (with any outstanding
certificates if you hold Unit certificates). You must properly endorse your
certificates (or execute a written transfer instrument with signatures
guaranteed by an eligible institution). Sometimes, additional documents are
needed such as a trust document, certificate of corporate authority, certificate
of death or appointment as executor, administrator or guardian.

Within seven days after your request and the necessary documents are received,
the Trustee will mail a check to you. Contact the Trustee for additional
information.

As long as we are maintaining a secondary market, the Trustee will sell your
units to us at a price based on net asset value. If there is no secondary
market, the Trustee may sell your units in the over-the-counter market for a
higher price, but it is not obligated to do so. In that case, you will receive
the net proceeds of the sale.

If the Fund does not have cash available to pay you for units you are selling,
the agent for the Sponsors will select bonds to be sold. Bonds will be selected
based on market and credit factors. These sales could be made at times when the
bonds would not otherwise be sold and may result in your receiving less than the
unit par value and also reduce the size and diversity of the Fund.

If you acquire 25% or more of the outstanding units of the Fund and you sell
units with a value exceeding $250,000, the Trustee may choose to pay you 'in
kind' by distributing bonds and cash with a total value equal to the price of
those units. The Trustee will try to distribute bonds in the portfolio pro rata,
but it reserves the right to distribute only one or a few bonds. The Trustee
will act as your agent in an in kind distribution and will either hold the bonds
for your account or sell them as you instruct. You must pay any transaction
costs as well as transfer and ongoing custodial fees on sales of bonds
distributed in kind.

There could be a delay in paying you for your units:

18
<PAGE>
o if the New York Stock Exchange is closed (other than customary weekend and
holiday closings);
o if the SEC determines that trading on the New York Stock Exchange is
restricted or that an emergency exists making sale or evaluation of the
bonds not reasonably practicable; and
o for any other period permitted by SEC order.

Exchange Option

You may exchange units of certain Defined Asset Funds for units of this Fund at
a maximum exchange fee of 1.90%. You may exchange units of this Fund for units
of certain other Defined Asset Funds at a reduced sales fee if your investment
goals change. To exchange units, you should talk to your financial professional
about what funds are exchangeable, suitable and currently available.

Normally, an exchange is taxable and you must recognize any gain or loss on the
exchange. However, the IRS may try to disallow a loss if the portfolios of the
two funds are not materially different; you should consult your own tax adviser.

We may amend or terminate this exchange option at any time without notice.

How The Fund Works

Pricing

The price of a unit includes interest accrued on the bonds, less expenses, from
the initial date of deposit up to, but not including, the settlement date, which
is usually three business days after the purchase date of the unit.

Bonds also carry accrued but unpaid interest up to the initial date of deposit.
To avoid having you pay this additional accrued interest (which earns no return)
when you buy, the Trustee advances this amount to the Sponsors. The Trustee
recovers this advance from interest received on the bonds.

In addition, a portion of the price of a unit also consists of cash to pay all
or some of the costs of organizing the Fund including:
o cost of initial preparation of legal documents;
o federal and state registration fees;
o initial fees and expenses of the Trustee;
o initial audit; and
o legal expenses and other out-of-pocket expenses.

Evaluations

An independent Evaluator values the bonds on each business day (excluding
Saturdays, Sundays and the following holidays as observed by the New York Stock
Exchange: New Year's Day, Presidents' Day, Martin Luther King, Jr. Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas).
Bond values are based on current bid or offer prices for the bonds or comparable
bonds. In the past, the difference between bid and offer prices of publicly
offered tax-exempt bonds has ranged from 0.5% of face amount on actively traded
issues to 3.5% on inactively traded issues; the difference has averaged between
1 and 2%.

Income

Interest on any bonds purchased on a when-issued basis or for a delayed delivery
does not begin to accrue until the bonds are delivered to the Fund. The Trustee
may reduce its fee to provide you with tax-exempt income for this non-accrual
period. If a bond is not delivered on time and the Trustee's annual fee and
expenses do not cover the additional accrued interest, we will treat the
contract to buy the bond as failed.

19
<PAGE>
The Trustee credits interest to an Income Account and other receipts to a
Capital Account. The Trustee may establish a Reserve Account by withdrawing from
these accounts amounts it considers appropriate to pay any material liability.
These accounts do not bear interest.

Expenses

The Trustee is paid monthly. It also benefits when it holds cash for the Fund in
non-interest bearing accounts. The Trustee may also receive additional amounts:
o to reimburse the Trustee for the Fund's operating expenses;
o for extraordinary services and costs of indemnifying the Trustee and the
Sponsors;
o costs of actions taken to protect the Fund and other legal fees and
expenses;
o expenses for keeping the Fund's registration statement current; and
o Fund termination expenses and any governmental charges.

The Sponsors are currently reimbursed up to 55 cents per $1,000 face amount
annually for providing portfolio supervisory, bookkeeping and administrative
services and for any other expenses properly chargeable to the Fund. Legal,
typesetting, electronic filing and regulatory filing fees and expenses
associated with updating the Fund's registration statement yearly are also now
chargeable to the Fund. While this fee may exceed the amount of these costs and
expenses attributable to this Fund, the total of these fees for all Series of
Defined Asset Funds will not exceed the aggregate amount attributable to all of
these Series for any calendar year. Certain of these expenses were previously
paid for by the Sponsors. The Fund also pays the Evaluator's fees.

The Trustee's, Sponsors' and Evaluator's fees may be adjusted for inflation
without investors' approval.

Quarterly deferred sales fees you owe are paid with interest and principal from
certain bonds. If these amounts are not enough, the rest will be paid out of
distributitons to you from the Fund's Capital and Income Accounts.

The Sponsors will pay advertising and selling expenses at no charge to the Fund.
If Fund expenses exceed initial estimates, the Fund will owe the excess. The
Trustee has a lien on Fund assets to secure reimbursement of Fund expenses and
may sell bonds if cash is not available.

Portfolio Changes

The Sponsors and Trustee are not liable for any default or defect in a bond; if
a contract to buy any bond fails in the first 90 days of the Fund, we generally
will deposit a replacement tax-exempt bond with a similar yield, maturity,
rating and price.

Unlike a mutual fund, the portfolio is designed to remain intact and we may keep
bonds in the portfolio even if their credit quality declines or other adverse
financial circumstances occur. However, we may sell a bond in certain cases if
we believe that certain adverse credit conditions exist or if a bond becomes
taxable.

If we maintain a secondary market in units but are unable to sell the units that
we buy in the secondary market, we will redeem units, which will affect the size
and composition of the portfolio. Units offered in the secondary market may not
represent the same face amount of bonds that they did originally.

We decide whether or not to offer units for sale that we acquire in the
secondary market after reviewing:
o diversity of the portfolio;
o size of the Fund relative to its original size;
o ratio of Fund expenses to income;
o current and long-term returns;

20
<PAGE>
o degree to which units may be selling at a premium over par; and
o cost of maintaining a current prospectus.

Fund Termination

The Fund will terminate following the stated maturity or sale of the last bond
in the portfolio. The Fund may also terminate earlier with the consent of
investors holding 51% of the units or if total assets of the Fund have fallen
below 40% of the face amount of bonds deposited. We will decide whether to
terminate the Fund early based on the same factors used in deciding whether or
not to offer units in the secondary market.

When the Fund is about to terminate you will receive a notice, and you will be
unable to sell your units after that time. On or shortly before termination, we
will sell any remaining bonds, and you will receive your final distribution. Any
bond that cannot be sold at a reasonable price may continue to be held by the
Trustee in a liquidating trust pending its final sale.

You will pay your share of the expenses associated with termination, including
brokerage costs in selling bonds. This may reduce the amount you receive as your
final distribution.

Certificates

Certificates for units are issued on request. You may transfer certificates by
complying with the requirements for redeeming certificates, described above. You
can replace lost or mutilated certificates by delivering satisfactory indemnity
and paying the associated costs.

Trust Indenture

The Fund is a 'unit investment trust' governed by a Trust Indenture, a contract
among the Sponsors, the Trustee and the Evaluator, which sets forth their duties
and obligations and your rights. A copy of the Indenture is available to you on
request to the Trustee. The following summarizes certain provisions of the
Indenture.

The Sponsors and the Trustee may amend the Indenture without your consent:
o to cure ambiguities;
o to correct or supplement any defective or inconsistent provision;
o to make any amendment required by any governmental agency; or
o to make other changes determined not to be materially adverse to your best
interest (as determined by the Sponsors).

Investors holding 51% of the units may amend the Indenture. Every investor must
consent to any amendment that changes the 51% requirement. No amendment may
reduce your interest in the Fund without your written consent.

The Trustee may resign by notifying the Sponsors. The Sponsors may remove the
Trustee without your consent if:
o it fails to perform its duties and the Sponsors determine that its
replacement is in your best interest; or
o it becomes incapable of acting or bankrupt or its affairs are taken over by
public authorities.
Investors holding 51% of the units may remove the Trustee. The Evaluator may
resign or be removed by the Sponsors and the Trustee without the consent of
investors. The resignation or removal of either becomes effective when a
successor accepts appointment. The Sponsors will try to appoint a successor
promptly; however, if no successor has accepted within 30 days after notice of
resignation, the resigning Trustee or Evaluator may petition a court to appoint
a successor.

Any Sponsor may resign as long as one Sponsor with a net worth of $2 million
remains and agrees to the resignation. The remaining Sponsors and the Trustee
may appoint a replacement. If there is

21
<PAGE>
only one Sponsor and it fails to perform its duties or becomes bankrupt the
Trustee may:
o remove it and appoint a replacement Sponsor;
o liquidate the Fund; or
o continue to act as Trustee without a Sponsor.

Merrill Lynch, Pierce, Fenner & Smith Incorporated acts as agent for the
Sponsors.

The Trust Indenture contains customary provisions limiting the liability of the
Trustee, the Sponsors and the Evaluator.

Legal Opinion

Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York 10017, as
counsel for the Sponsors, has given an opinion that the units are validly
issued. Special counsel located in the relevant states have given state and
local tax opinions.

Auditors

Deloitte & Touche LLP, 2 World Financial Center, New York, New York 10281,
independent accountants, audited the Statements of Condition included in this
prospectus.

Sponsors

The Sponsors and their underwriting percentages are:
Merrill Lynch, Pierce, Fenner & Smith Incorporated (a wholly-owned subsidiary of
Merrill Lynch & Co., Inc.)
P.O. Box 9051,
Princeton, NJ 08543-9051 54.80%
Salomon Smith Barney Inc. (an indirectly wholly-owned subsidiary of Citigroup
Inc.)
388 Greenwich Street--23rd Floor,
New York, NY 10013 14.00%
Dean Witter Reynolds Inc. (a principal operating subsidiary of Morgan Stanley
Dean Witter & Co.)
Two World Trade Center--59th Floor,
New York, NY 10048 7.20%
PaineWebber Incorporated (a wholly-owned subsidiary of PaineWebber Group Inc.)
1285 Avenue of the Americas,
New York, NY 10019 24.00%

100.00%

Each Sponsor is a Delaware corporation and it, or its predecessor, has acted as
sponsor to many unit investment trusts. As a registered broker-dealer each
Sponsor buys and sells securities (including investment company shares) for
others (including investment companies) and participates as an underwriter in
various selling groups.

Trustee

The Chase Manhattan Bank, Customer Service Retail Department, P.O. Box 5187,
Bowling Green Station, New York, New York 10274-5187 is the Trustee. It is
supervised by the Federal Deposit Insurance Corporation, the Board of Governors
of the Federal Reserve System and New York State banking authorities.

Underwriters' and Sponsors' Profits

Underwriters receive sales charges when they sell units. Sponsors also realize a
profit or loss on deposit of the bonds shown under Defined Portfolios. Any cash
made available by you to the Sponsors before the settlement date for those units
may be used in the Sponsors' businesses to the extent permitted by federal law
and may benefit the Sponsors.

A Sponsor or Underwriter may realize profits or sustain losses on bonds in the
Fund which were acquired from underwriting syndicates of which it was a member.
None of the bonds in the Fund were purchased from any of the Sponsors.

During the initial offering period, the Sponsors also may realize profits or
sustain losses on units they hold. In maintaining a secondary market,

22
<PAGE>
the Sponsors will also realize profits or sustain losses in the amount of any
difference between the prices at which they buy units and the prices at which
they resell or redeem them.

Public Distribution

During the initial offering period, units will be distributed to the public by
the Sponsors and dealers who are members of the National Association of
Securities Dealers, Inc. This period is 30 days or less if all units are sold.
The Sponsors may extend the initial period up to 120 days.

The Sponsors do not intend to qualify units for sale in any foreign countries.
This prospectus does not constitute an offer to sell units in any country where
units cannot lawfully be sold.

In the initial offering period, the concession to dealers will be $21 per 1,000
units. We may change the concession at any time. Dealers may resell units to
other dealers with a concession not in excess of the original concession to
dealers.

Code of Ethics

Merrill Lynch, as agent for the Sponsors, has adopted a code of ethics requiring
preclearance and reporting of personal securities transactions by its employees
with access to information on portfolio transactions. The goal of the code is to
prevent fraud, deception or misconduct against the Fund and to provide
reasonable standards of conduct.

Year 2000 Issues

Many computer systems were designed in such a way that they may be unable to
distinguish between the year 2000 and the year 1900 (commonly known as the 'Year
2000 Problem'). We do not expect that the computer system changes necessary to
prepare for the Year 2000 will cause any major operational difficulties for the
Fund. The Year 2000 Problem may adversely affect the issuers of the securities
contained in a Portfolio, but we cannot predict whether any impact will be
material to the Fund as a whole.

Taxes

The following summary describes some of the important income tax consequences of
holding units. It assumes that you are not a dealer, financial institution,
insurance company or other investor with special circumstances. You should
consult your own tax adviser about your particular circumstances.

At the date of issue of each bond, counsel for the issuer delivered an opinion
to the effect that interest on the bond is exempt from regular federal income
tax. However, interest may be subject to state and local taxes and federal
alternative minimum tax. Neither we nor our counsel have reviewed the issuance
of the bonds, related proceedings or the basis for the opinions of counsel for
the issuers. We cannot assure you that the issuer (or other users of bond
proceeds) have complied or will comply with any requirements necessary for a
bond to be tax-exempt. If any of the bonds were determined not to be tax-exempt,
you could be required to pay income tax for current and prior years, and if the
Fund were to sell the bond, it might have to sell it at a substantial discount.

In the opinion of our counsel, under existing law:

General Treatment of the Fund and Your Investment

The Fund will not be taxed as a corporation for federal income tax purposes, and
you will be considered to own directly your share of each bond in the Fund.

Gain or Loss Upon Disposition

When all or part of your share of a bond is disposed of (for example, when the
Fund sells, exchanges or redeems a bond or when you sell or

23
<PAGE>

exchange your units), you will generally recognize capital gain or loss. Your
gain, however, will generally be ordinary income to the extent of any accrued
'market discount'. Generally you will have market discount to the extent that
your basis in a bond when you purchase a unit is less than its stated redemption
price at maturity (or, if it is an original issue discount bond, the issue price
increased by original issue discount that has accrued on the bond before your
purchase). You should consult your tax adviser in this regard.

If your net long-term capital gains exceed your net short-term capital losses,
the excess may be subject to tax at a lower rate than ordinary income. Any
capital gain from the Fund will be long-term if you are considered to have held
your investment on each bond for more than one year and short-term otherwise.
Because the deductibility of capital losses is subject to limitations, you may
not be able to deduct all of your capital losses.

Your Basis in the Bonds

Your aggregate basis in the bonds will be equal to the cost of your units,
including any sales charges and the organizational expenses you pay, adjusted to
reflect any accruals of 'original issue discount,' 'acquisition premium' and
'bond premium'. You should consult your tax adviser in this regard.

Expenses

If you are not a corporate investor, you will not be entitled to a deduction for
your share of fees and expenses of the Fund. Also, if you borrowed money in
order to purchase or carry your units, you will not be able to deduct the
interest on this borrowing for federal income tax purposes. The IRS may treat
your purchase of units as made with borrowed money even if the money is not
directly traceable to the purchase of units.

New York Taxes

Under the income tax laws of the State and City of New York, the Fund will not
be taxed as a corporation. If you are a New York taxpayer, your income from the
Fund will not be tax-exempt in New York except to the extent that the income is
earned on bonds that are tax-exempt for New York purposes. Depending on where
you live, your income from the Fund may be subject to state and local taxation.
You should consult your tax adviser in this regard.

California Taxes

In the opinion of O'Melveny & Myers LLP, Los Angeles, California, special
counsel on California tax matters:

Under the income tax laws of the State of California, the Trust will not be
taxed as a corporation and you will be considered to own directly your share of
each bond of the Trust. If you are a California taxpayer, your share of the
income from the bonds of the Trust will not be tax-exempt in California except
for California personal income tax purposes and only to the extent that the
income is earned on bonds that are exempt for such purposes. If you are a
California taxpayer and all or part of your share of a bond is disposed of (for
example, when a bond is sold, exchanged or redeemed at maturity or you sell or
exchange your units), you will recognize gain or loss for California tax
purposes. Depending on where you live, your income from the Trust may be subject
to state and local taxation. You should consult your tax advisor in this regard.

New Jersey Taxes

In the opinion of Drinker Biddle & Reath LLP, Philadelphia, Pennsylvania,
special counsel on New Jersey tax matters:

The Fund will not be taxed as a corporation under the current income tax laws of
the State of New Jersey. Your income from the Fund may be subject to taxation
depending on where you live. If you are a New Jersey taxpayer your income from
the Fund (including gains on sales of bonds by the Fund) and gains on sales of
units by you

24
<PAGE>
will be tax-exempt to the extent that income and gains are earned on bonds that
are tax-exempt for New Jersey purposes. You should consult your tax adviser as
to the consequences to you with respect to any investment you make in the Fund.

Supplemental Information

You can receive at no cost supplemental information about the Fund by calling
the Trustee. The supplemental information includes more detailed risk disclosure
about the types of bonds that may be in the Fund's portfolios, general risk
disclosure concerning any insurance securing certain bonds, and general
information about the structure and operation of the Fund. The supplemental
information is also available from the SEC.

25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

The Sponsors, Trustee and Holders of Municipal Investment Trust Fund, Multistate
Series--409, Defined Asset Funds (California, New Jersey and New York Insured
Trusts) (the 'Fund'):

We have audited the accompanying statements of condition and the related
portfolios included in the prospectus of the Fund as of August 6, 1999. These
financial statements are the responsibility of the Trustee. Our responsibility
is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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. Our procedures included
confirmation of cash, securities and an irrevocable letter of credit deposited
for the purchase of securities, as described in the statements of condition,
with the Trustee. An audit also includes assessing the accounting principles
used and significant estimates made by the Trustee, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Fund as of August 6, 1999
in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP
New York, N.Y.
August 6, 1999

Statements of Condition as of August 6, 1999

Trust Property
<TABLE>
<CAPTION>

California New Jersey New York
Portfolio Portfolio Portfolio
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Investments--Bonds and Contracts to purchase Bonds(1) $ 4,336,593.90 $ 3,420,609.25 $ 4,408,797.50
Cash 9,000.00 7,000.00 9,000.00
Accrued interest to initial date of deposit on underlying
Bonds 50,758.69 21,272.65 33,828.47
-------------------- -------------------- --------------------
Total $ 4,396,352.59 $ 3,448,881.90 $ 4,451,625.97
-------------------- -------------------- --------------------
-------------------- -------------------- --------------------
Liabilities and Interest of Holders
Liabilities:
Advance by Trustee for accrued interest(2) $ 50,758.69 $ 21,272.65 $ 33,828.47
Reimbursement of Sponsors for organization
expenses(3) 9,000.00 7,000.00 9,000.00
-------------------- -------------------- --------------------
Subtotal 59,758.69 28,272.65 42,828.47
-------------------- -------------------- --------------------
Interest of Holders of units of fractional undivided
interest outstanding
(California Portfolio--4,500,000; New Jersey
Portfolio--3,500,000;
New York Portfolio--4,500,000)
Cost to investors(3)(4)(5) 4,388,568.90 3,461,489.65 4,461,537.50
Organization expenses(3) and gross underwriting
commissions(4) (51,975.00) (40,880.00) (52,740.00)
-------------------- -------------------- --------------------
Subtotal 4,336,593.90 3,420,609.25 4,408,797.50
-------------------- -------------------- --------------------
Total $ 4,396,352.59 $ 3,448,881.90 $ 4,451,625.97
-------------------- -------------------- --------------------
-------------------- -------------------- --------------------

</TABLE>

- ---------------
(1) Aggregate cost to the Fund of the bonds listed under each portfolio is
based upon the offer side evaluation determined by the Evaluator at the
evaluation time on the business day prior to the initial date of deposit. The
contracts to purchase the bonds are collateralized by an irrevocable letter of
credit which has been issued by San Paolo Bank, New York Branch, in the amount
of $12,153,745.45 deposited with the Trustee. The amount of the letter of credit
includes $12,041,473.45 for the purchase of $12,725,000 face amount of the
bonds, plus $112,272.00 for accrued interest.
(2) Representing a special distribution to the Sponsors by the Trustee of an
amount equal to the accrued interest on the bonds.
(3) A portion of the Unit Price consists of cash in an amount sufficient to
pay for costs incurred in establishing the Fund. These costs have been estimated
at $2.00 per 1,000 Units. A distribution will be made at the close of the
initial offering period to an account maintained by the Trustee from which the
organizational expense obligation of the investors to the Sponsors will be
satisfied. If the actual organization costs exceed the estimated aggregate
amount shown above, the Sponsors will pay for this excess amount.
(4) Assumes the maximum up-front sales fee per 1,000 units of 1.00% of the
Public Offering Price. A deferred sales fee of $19.00 per 1,000 units is payable
over a two-year period ($2.38 per 1,000 units quarterly in the first year and
$2.37 per 1,000 units quarterly in the second year). Distributions will be made
to an account maintained by the Trustee from which the deferred sales fee
obligation of the investors will be satisfied. If units are redeemed prior to
the end of second anniversary of the Fund, the remaining portion of the deferred
sales fee applicable to such units will be transferred to the account on the
redemption date.
(5) Aggregate Unit Price (exclusive of interest) computed on the basis of
the offer side evaluation of the underlying bonds as of the evaluation time on
the business day prior to the Initial Date of Deposit.

26
<PAGE>

Defined
Asset FundsSM

Have questions ? Municipal Investment Trust Fund
Request the most Multistate Series--409
recent free Information (A Unit Investment Trust)
Supplement that gives more ---------------------------------------
details about the Fund, This Prospectus does not contain
by calling: complete information about the
The Chase Manhattan Bank investment company filed with the
1-800-323-1508 Securities and Exchange Commission in
Washington, D.C. under the:
o Securities Act of 1933 (file no.
333-81777) and
o Investment Company Act of 1940 (file
no. 811-1777).
To obtain copies at prescribed rates--
Write: Public Reference Section of the
Commission
450 Fifth Street, N.W., Washington,
D.C. 20549-6009
Call: 1-800-SEC-0330.
Visit: http://www.sec.gov.
---------------------------------------
No person is authorized to give any
information or representations about
this Fund not contained in this
Prospectus or the Information
Supplement, and you should not rely on
any other information.
---------------------------------------
When units of this Fund are no longer
available, this Prospectus may be used
as a preliminary prospectus for a
future series, but some of the
information in this Prospectus will be
changed for that series.
Units of any future series may not be
sold nor may offers to buy be accepted
until that series has become effective
with the Securities and Exchange
Commission. No units can be sold in any
State where a sale would be illegal.

100186RR--8/99

<PAGE>
PART II
Additional Information Not Included in the Prospectus

A. The following information relating to the Depositors is incorporated by
reference to the SEC filings indicated and made a part of this
Registration Statement.

I. Bonding arrangements of each of the Depositors are incorporated by reference
to Item A of Part II to the Registration Statement on Form S-6 under the
Securities Act of 1933 for Municipal Investment Trust Fund, Monthly Payment
Series--573 Defined Asset Funds (Reg. No. 333-08241).

II. The date of organization of each of the Depositors is set forth in Item B
of Part II to the Registration Statement on Form S-6 under the Securities Act of
1933 for Municipal Investment Trust Fund, Monthly Payment Series--573 Defined
Asset Funds (Reg. No. 333-08241) and is herein incorporated by reference
thereto.

III. The Charter and By-Laws of each of the Depositors are incorporated herein
by reference to Exhibits 1.3 through 1.12 to the Registration Statement on Form
S-6 under the Securities Act of 1933 for Municipal Investment Trust Fund,
Monthly Payment Series--573 Defined Asset Funds (Reg. No. 333-08241).

IV. Information as to Officers and Directors of the Depositors has been filed
pursuant to Schedules A and D of Form BD under Rules 15b1-1 and 15b3-1 of the
Securities Exchange Act of 1934 and is incorporated by reference to the SEC
filings indicated and made a part of this Registration Statement:

Merrill Lynch, Pierce, Fenner & Smith Incorporated 8-7221
Salomon Smith Barney Inc. ................................ 8-8177
PaineWebber Incorporated.................................. 8-16267
Dean Witter Reynolds Inc. ................................ 8-14172

------------------------------------

B. The Internal Revenue Service Employer Identification Numbers of the
Sponsors and Trustee are as follows:

Merrill Lynch, Pierce, Fenner & Smith Incorporated 13-5674085
Salomon Smith Barney Inc. ................................ 13-1912900
PaineWebber Incorporated.................................. 13-2638166
Dean Witter Reynolds Inc. ................................ 94-0899825
The Chase Manhattan Bank, Trustee......................... 13-4994650

UNDERTAKING
The Sponsors undertake that they will not instruct the Trustee to accept from
(i) Asset Guaranty Reinsurance Company, Municipal Bond Investors Assurance
Corporation or any other insurance company affiliated with any of the Sponsors,
in settlement of any claim, less than an amount sufficient to pay any principal
or interest (and, in the case of a taxability redemption, premium) then due on
any Security in accordance with the municipal bond guaranty insurance policy
attached to such Security or (ii) any affiliate of the Sponsors who has any
obligation with respect to any Security, less than the full amount due pursuant
to the obligation, unless such instructions have been approved by the Securities
and Exchange Commission pursuant to Rule 17d-1 under the Investment Company Act
of 1940.

II-1
<PAGE>
SERIES OF MUNICIPAL INVESTMENT TRUST FUND
DESIGNATED PURSUANT TO RULE 487 UNDER THE SECURITIES ACT OF 1933

SEC
Series Number File Number
- --------------------------------------------------------------------------------
Multistate Series 401....................................... 333-57375

CONTENTS OF REGISTRATION STATEMENT
The Registration Statement on Form S-6 comprises the following papers and
documents:

The facing sheet of Form S-6.

The Cross-Reference Sheet (incorporated by reference to the Cross-Reference
Sheet to the Registration Statement of Defined Asset Funds Municipal Series,
1933 Act File No. 33-54565).

The Prospectus.

Additional Information not included in the Prospectus (Part II).

The following exhibits:

1.1 --Form of Trust Indenture (incorporated by reference to Exhibit 1.1 to
the Registration Statement of Defined Asset Funds Municipal Defined
Fund Series 2, 1933 Act File No. 333-61285).
1.1.1 --Form of Standard Terms and Conditions of Trust Effective October 21,
1993 (incorporated by reference to Exhibit 1.1.1 to the Registration
Statement of Municipal Investment Trust Fund, Multistate Series-48,
1933 Act File No. 33-50247).
1.2 --Form of Master Agreement Among Underwriters (incorporated by reference
to Exhibit 1.2 to the Registration Statement of The Corporate Income
Fund, One Hundred Ninety-Fourth Monthly Payment Series, 1933 Act File
No. 2-90925).
2.1 --Form of Certificate of Beneficial Interest (included in Exhibit
1.1.1).
3.1 --Opinion of counsel as to the legality of the securities being issued
including their consent to the use of their name under the headings
'How The Fund Works--Legal Opinion' in the Prospectus.
4.1 --Consent of the Evaluator.
5.1 --Consent of independent accountants.
9.1 --Information Supplement

R-1
<PAGE>
DEFINED ASSET FUNDS
MUNICIPAL INVESTMENT TRUST FUND
MULTISTATE SERIES
SIGNATURES

The registrant hereby identifies the series number of Defined Asset Funds
listed on page R-1 for the purposes of the representations required by Rule 487
and represents the following:

1) That the portfolio securities deposited in the series as to which this
registration statement is being filed do not differ materially in type
or quality from those deposited in such previous series;

2) That, except to the extent necessary to identify the specific portfolio
securities deposited in, and to provide essential information for, the
series with respect to which this registration statement is being filed,
this registration statement does not contain disclosures that differ in
any material respect from those contained in the registration statements
for such previous series as to which the effective date was determined
by the Commission or the staff; and

3) That it has complied with Rule 460 under the Securities Act of 1933.

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement or Amendment to the Registration
Statement to be signed on its behalf by the undersigned thereunto duly
authorized in the City of New York and State of New York on the 6th day of
August, 1999.

Signatures appear on pages R-3, R-4, R-5 and R-6.

A majority of the members of the Board of Directors of Merrill Lynch,
Pierce, Fenner & Smith Incorporated has signed this Registration Statement or
Amendment to the Registration Statement pursuant to Powers of Attorney
authorizing the person signing this Registration Statement or Amendment to the
Registration Statement to do so on behalf of such members.

A majority of the members of the Board of Directors of Salomon Smith Barney
Inc. has signed this Registration Statement or Amendment to the Registration
Statement pursuant to Powers of Attorney authorizing the person signing this
Registration Statement or Amendment to the Registration Statement to do so on
behalf of such members.

A majority of the members of the Executive Committee of the Board of
Directors of PaineWebber Incorporated has signed this Registration Statement or
Amendment to the Registration Statement pursuant to Powers of Attorney
authorizing the person signing this Registration Statement or Amendment to the
Registration Statement to do so on behalf of such members.

A majority of the members of the Board of Directors of Dean Witter Reynolds
Inc. has signed this Registration Statement or Amendment to the Registration
Statement pursuant to Powers of Attorney authorizing the person signing this
Registration Statement or Amendment to the Registration Statement to do so on
behalf of such members.

R-2
<PAGE>
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
Depositor

By the following persons, who constitute Powers of Attorney have been filed
a majority of under
the Board of Directors of Merrill Form SE and the following 1933 Act
Lynch, Pierce, File
Fenner & Smith Incorporated: Number: 333-70593

GEORGE A. SCHIEREN
JOHN L. STEFFENS
By J. DAVID MEGLEN
(As authorized signatory for Merrill Lynch, Pierce,
Fenner & Smith Incorporated and
Attorney-in-fact for the persons listed above)

R-3
<PAGE>
SALOMON SMITH BARNEY INC.
Depositor

By the following persons, who constitute a majority of Powers of Attorney
the Board of Directors of Salomon Smith Barney Inc.: have been filed
under the 1933 Act
File Numbers:
333-63417 and
333-63033.

MICHAEL CARPENTER
DERYCK C. MAUGHAN

By GINA LEMON
(As authorized signatory for
Salomon Smith Barney Inc. and
Attorney-in-fact for the persons listed above)

R-4
<PAGE>
PAINEWEBBER INCORPORATED
Depositor

By the following persons, who constitute Powers of Attorney have been filed
the Board of Directors of PaineWebber under
Incorporated: the following 1933 Act File
Number: 2-61279

MARGO N. ALEXANDER
TERRY L. ATKINSON
BRIAN M. BAREFOOT
STEVEN P. BAUM
MICHAEL CULP
REGINA A. DOLAN
JOSEPH J. GRANO, JR.
EDWARD M. KERSCHNER
JAMES P. MacGILVRAY
DONALD B. MARRON
ROBERT H. SILVER
MARK B. SUTTON
By
ROBERT E. HOLLEY
(As authorized signatory for
PaineWebber Incorporated
and Attorney-in-fact for the persons listed above)

R-5
<PAGE>
DEAN WITTER REYNOLDS INC.
Depositor

By the following persons, who constitute Powers of Attorney have been filed
a majority of under Form SE and the following 1933
the Board of Directors of Dean Witter Act File Numbers: 33-17085 and
Reynolds Inc.: 333-13039 and 333-47553

RICHARD M. DeMARTINI
RAYMOND J. DROP
JAMES F. HIGGINS
MITCHELL M. MERIN
STEPHEN R. MILLER
PHILIP J. PURCELL
THOMAS C. SCHNEIDER
By
MICHAEL D. BROWNE
(As authorized signatory for
Dean Witter Reynolds Inc.
and Attorney-in-fact for the persons listed above)

R-6

<PAGE>
EXHIBIT 3.1
DAVIS POLK & WARDWELL
450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 450-4000
AUGUST 6, 1999

Municipal Investment Trust Fund,
Multistate Series--409
Defined Asset Funds

Merrill Lynch, Pierce, Fenner & Smith Incorporated
Salomon Smith Barney Inc.
PaineWebber Incorporated
Dean Witter Reynolds Inc.
c/o Merrill Lynch, Pierce, Fenner & Smith Incorporated
Defined Asset Funds
P.O. Box 9051
Princeton, NJ 08543-9051

Dear Sirs:

We have acted as special counsel for you, as sponsors (the 'Sponsors') of
Multistate Series--409 of Municipal Investment Trust Fund, Defined Asset Funds
(the 'Trusts'), in connection with the issuance of units of fractional undivided
interest in the Trusts (the 'Units') in accordance with the Trust Indenture
relating to the Trusts (the 'Indentures').

We have examined and are familiar with originals or copies, certified or
otherwise identified to our satisfaction, of such documents and instruments as
we have deemed necessary or advisable for the purpose of this opinion.

Based upon the foregoing, we are of the opinion that (i) the execution and
delivery of the Indenture and the issuance of the Units have been duly
authorized by the Sponsors and (ii) the Units, when duly issued and delivered by
the Sponsors and the Trustee in accordance with the applicable Indentures, will
be legally issued, fully paid and non-assessable.

We hereby consent to the use of this opinion as Exhibit 3.1 to the
Registration Statement relating to the Units filed under the Securities Act of
1933 and to the use of our name in such Registration Statement and in the
related prospectus under the heading 'How The Fund Works--Legal Opinion'.

Very truly yours,

DAVIS POLK & WARDWELL

<PAGE>
EXHIBIT 4.1

KENNY INFORMATION SYSTEMS,
A Division of J. J. Kenny Co., Inc.
65 Broadway
New York, New York 10006
Telephone: 212-770-4422
Fax: 212-797-8681
Frank A. Ciccotto, Jr.
Vice President

August 6, 1999

Merrill Lynch Pierce Fenner & Smith
Incorporated
Defined Asset Funds
P.O. Box 9051
Princeton, NJ 08543-9051
The Chase Manhattan Bank
Customer Service Retail Department
Bowling Green Station
P.O. Box 5187
New York, NY 10274-5187

Re: Municipal Investment Trust Fund, Multistate Series - 409, Defined Asset
Funds

Gentlemen:

We have examined the Registration Statement File No. 333-81777 for the
above-captioned fund. We hereby acknowledge that Kenny Information Systems, a
Division of J. J. Kenny Co., Inc. is currently acting as the evaluator for the
fund. We hereby consent to the use in the Registration Statement of the
reference to Kenny Information Systems, a Division of J. J. Kenny Co., Inc. as
evaluator.

In addition, we hereby confirm that the ratings indicated in the
Registration Statement for the respective bonds comprising the trust portfolio
are the ratings indicated in our KENNYBASE database as of the date of the
Evaluation Report.

You are hereby authorized to file a copy of this letter with the Securities
and Exchange Commission.

Sincerely,

FRANK A. CICCOTTO, JR.
VICE PRESIDENT

<PAGE>
Exhibit 5.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Sponsors and Trustee of Municipal Investment Trust Fund, Multistate
Series--409, Defined Asset Funds (California, New Jersey and New York Insured
Trusts):

We consent to the use in this Registration Statement No. 333-81777 of our report
dated August 6, 1999 relating to the Statements of Condition of Municipal
Investment Trust Fund, Multistate Series--409, Defined Asset Funds (California,
New Jersey and New York Insured Trusts) and to the reference to us under the
heading 'How the Fund Works--Auditors' in the Prospectus which is a part of this
Registration Statement.

DELOITTE & TOUCHE LLP
New York, N.Y.
August 6, 1999

<PAGE>
DEFINED ASSET FUNDS
MUNICIPAL INVESTMENT TRUST FUND
MUNICIPAL INSURED SERIES

INFORMATION SUPPLEMENT

This Information Supplement provides additional information concerning the
structure, operations and risks of municipal bond trusts (each, a "Fund") of
Defined Asset Funds not found in the prospectuses for the Funds. This
Information Supplement is not a prospectus and does not include all of the
information that a prospective investor should consider before investing in a
Fund. This Information Supplement should be read in conjunction with the
prospectus for the Fund in which an investor is considering investing
("Prospectus"). Copies of the Prospectus can be obtained by calling or writing
the Trustee at the telephone number and address indicated in the Prospectus.

This Information Supplement is dated September 16, 1998. Capitalized terms
have been defined in the Prospectus.
TABLE OF CONTENTS

Description of Fund Investments................................. 3
Fund Structure............................................. 3
Portfolio Supervision...................................... 3
Risk Factors.................................................... 5
Concentration.............................................. 5
General Obligation Bonds................................... 5
Moral Obligation Bonds..................................... 5
Refunded Bonds............................................. 6
Industrial Development Revenue Bonds....................... 6
Municipal Revenue Bonds.................................... 6
Municipal Utility Bonds................................ 6
Lease Rental Bonds..................................... 8
Housing Bonds.......................................... 9
Hospital and Health Care Bonds......................... 10
Facility Revenue Bonds................................. 11
Solid Waste Disposal Bonds............................. 11
Special Tax Bonds...................................... 11
Student Loan Revenue Bonds............................. 12
Transit Authority Bonds................................ 12
Municipal Water and Sewer Revenue Bonds................ 12
University and College Bonds........................... 12
Puerto Rico................................................ 13
Bonds Backed by Letters of Credit or Repurchase Commitments 13
Liquidity.................................................. 16
Bonds Backed by Insurance.................................. 17
State Risk Factors......................................... 21
Payment of Bonds and Life of a Fund........................ 21
Redemption................................................. 21
Tax Exemption.............................................. 21
Income and Returns.............................................. 22
Income................................................. 22
State Matters................................................... 23
Arizona................................................ 23
California............................................. 26
Colorado............................................... 35
Connecticut............................................ 37
Florida................................................ 40
Louisiana.............................................. 45
Maryland............................................... 46
Massachusetts.......................................... 50
Michigan............................................... 57
Missouri............................................... 60
New Jersey............................................. 61
New York............................................... 62
North Carolina......................................... 68
Ohio................................................... 73
Pennsylvania........................................... 77
Texas.................................................. 79
Virginia............................................... 84

<PAGE>
DESCRIPTION OF FUND INVESTMENTS

Fund Structure

The Portfolio contains different issues of Bonds with fixed final maturity
or disposition dates. In addition up to 10% of the initial value of the
Portfolio may have consisted of units ("Other Fund Units") of previously-issued
Series of Municipal Investment Trust Fund ("Other Funds") sponsored and
underwritten by certain of the Sponsors and acquired by the Sponsors in the
secondary market. The Other Fund Units are not bonds as such but represent
interests in the securities, primarily state, municipal and public authority
bonds, in the portfolios of the Other Funds. See Investment Summary in the
Prospectus for a summary of particular matters relating to the Portfolio.

The deposit of the Bonds in the Fund on the initial date of deposit
established a proportionate relationship among the face amounts of the Bonds.
During the 90-day period following the initial date of deposit, the Sponsors may
deposit additional Bonds in order to create new Units, maintaining to the extent
possible that original proportionate relationship. Deposits of additional Bonds
subsequent to the 90-day period must generally replicate exactly the
proportionate relationship among the face amounts of the Bonds at the end of the
initial 90-day period.

The portfolios underlying any Other Fund Units (the units of no one Other
Fund represented more than 5%, and all Other Fund Units represented less than
10%, of the aggregate offering side evaluation of the Portfolio on the Date of
Deposit) are substantially similar to that of the Fund. The percentage of the
Portfolio, if any, represented by Other Fund Units on the Evaluation Date is set
forth under Investment Summary in the Prospectus. On their respective dates of
deposit, the underlying bonds in any Other Funds were rated BBB or better by
Standard & Poor's or Baa or better by Moody's. While certain of those bonds may
not currently meet these criteria, they did not represent more than 0.5% of the
face amount of the Portfolio on the Date of Deposit. Bonds in each Other Fund
which do not mature according to their terms within 10 years after the Date of
Deposit had an aggregate bid side evaluation of at least 40% of the initial face
amount of the Other Fund. The investment objectives of the Other Funds are
similar to the investment objective of the Fund, and the Sponsors, Trustee and
Evaluator of the Other Funds have responsibilities and authority paralleling in
most important respects those described in this Prospectus and receive similar
fees. The names of any Other Funds represented in the Portfolio and the number
of units of each Other Fund in the Fund may be obtained without charge by
writing to the Trustee.

Portfolio Supervision

Each Fund is a unit investment trust which follows a buy and hold
investment strategy. Traditional methods of investment management for mutual
funds typically involve frequent changes in fund holdings based on economic,
financial and market analyses. Because a Fund is not actively managed, it may
retain an issuer's securities despite financial or economic developments
adversely affecting the market value of the securities held by a Fund. However,
Defined Asset Funds' financial analysts regularly review a Fund's Portfolio, and
the Sponsors may instruct a Trustee to sell securities in a Portfolio in the
following circumstances: (i) default in payment of amounts due on the security;
(ii) institution of certain legal proceedings; (iii) other legal questions or
impediments affecting the security or payments thereon; (iv) default under
certain documents adversely affecting debt service or in payments on other
securities of the same issuer or guarantor; (v) decline in projected income
pledged for debt service on a revenue bond; (vi) if a security becomes taxable
or otherwise inconsistent with a Fund's investment objectives; (vii) a right to
sell or redeem the security pursuant to a guarantee or other credit support; or
(viii) decline in security price or other market or credit factors (including
advance refunding) that, in the opinion of Defined Asset Funds research, makes
retention of the security detrimental to the interests of Holders. If there is a
payment default on any Bond and the Agent for the Sponsors fails to instruct the
Trustee within 30 days after notice of the default, the Trustee will sell the
Bond.

A Trustee must reject any offer by an issuer of a Bond to exchange another
security pursuant to a refunding or refinancing plan unless (a) the Bond is in
default or (b) in the written opinion of Defined Asset Funds research analysts,
a default is probable in the reasonably foreseeable future, and the Sponsors
instruct the Trustee to accept the offer or take any other action with respect
to the offer as the Sponsors consider appropriate.

Units offered in the secondary market may reflect redemptions or
prepayments, in whole or in part, or defaults on, certain of the Bonds
originally deposited in the Fund or the disposition of certain Bonds originally
deposited in the Fund to satisfy redemptions of Units (see Redemption) or
pursuant to the exercise by the Sponsors of their supervisory role over the Fund
(see Risk Factors - Payment of the Bonds and Life of the Fund). Accordingly, the
face amount of Units may be less than their original face amount at the time of
the creation of the Fund. A reduced value per Unit does not therefore mean that
a Unit is necessarily valued at a market discount; market discounts, as well as
market premiums, on Units are determined solely by a comparison of a Unit's
outstanding face amount and its evaluated price.

The Portfolio may contain debt obligations rated BBB by Standard & Poor's
and Baa by Moody's, which are the lowest "investment grade" ratings assigned by
the two rating agencies or debt obligations rated below investment grade. The
Portfolio may also contain debt obligations that have received investment grade
ratings from one agency but "junk Bond" ratings from the other agency. In
addition, the Portfolio may contain debt obligations which are not rated by
either agency but have in the opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Agent for the Sponsors, comparable credit characteristics to
debt obligations rated near or below investment grade. Investors should
therefore be aware that these debt obligations may have speculative
characteristics and that changes in economic conditions or other circumstances
are more likely to lead to a weakened capacity to make principal and interest
payments on these debt obligations than is the case with higher rated bonds.
Moreover, conditions may develop with respect to any of the issuers of debt
obligations in the Portfolio which may cause the rating agencies to lower their
ratings below investment grade on a given security or cause the Agent for the
Sponsors to determine that the credit characteristics of a given security are
comparable to debt obligations rated below investment grade. As a result of
timing lags or a lack of current information, there can be no assurance that the
rating currently assigned to a given debt obligation by either agency or the
credit assessment of the Agent for the Sponsors actually reflects all current
information about the issuer of that debt obligation.

Subsequent to the Date of Deposit, a Debt Obligation or other obligations
of the issuer or guarantor or bank or other entity issuing a letter of credit
related thereto may cease to be rated, its rating may be reduced or the credit
assessment of the Agent for the Sponsors may change. Because of the fixed nature
of the Portfolio, none of these events require an elimination of that Debt
Obligation from the Portfolio, but the lowered rating or changed credit
assessment may be considered in the Sponsors' determination to direct the
disposal of the Debt Obligation (see Administration of the Fund - Portfolio
Supervision).

Because ratings may be lowered or the credit assessment of the Agent for
the Sponsors may change, an investment in Units of the Trust should be made with
an understanding of the risks of investing in "junk bonds" (bonds rated below
investment grade or unrated bonds having similar credit characteristics),
including increased risk of loss of principal and interest on the underlying
debt obligations and the risk that the value of the Units may decline with
increases in interest rates. In recent years there have been wide fluctuations
in interest rates and thus in the value of fixed-rate debt obligations
generally. Debt obligations which are rated below investment grade or unrated
debt obligations having similar credit characteristics are often subject to
greater market fluctuations and risk of loss of income and principal than
securities rated investment grade, and their value may decline precipitously in
response to rising interest rates. This effect is so not only because increased
interest rates generally lead to decreased values for fixed-rate instruments,
but also because increased interest rates may indicate a slowdown in the economy
generally, which could result in defaults by less creditworthy issuers. Because
investors generally perceive that there are greater risks associated with
lower-rated securities, the yields and prices of these securities tend to
fluctuate more than higher-rated securities with changes in the perceived credit
quality of their issuers, whether these changes are short-term or structural,
and during periods of economic uncertainty. Moreover, issuers whose obligations
have been recently downgraded may be subject to claims by debtholders and
suppliers which, if sustained, would make it more difficult for these issuers to
meet payment obligations.

Debt rated below investment grade or having similar credit characteristics
also tends to be more thinly traded than investment-grade debt and held
primarily by institutions, and this lack of liquidity can negatively affect the
value of the debt. Debt which is not rated investment grade or having similar
credit characteristics may be subordinated to other obligations of the issuer.
Senior debtholders would be entitled to receive payment in full before
subordinated debtholders receive any payment at all in the event of a bankruptcy
or reorganization. Lower rated debt obligations and debt obligations having
similar credit characteristics may also present payment-expectation risks. For
example, these bonds may contain call or redemption provisions that would make
it attractive for the issuers to redeem them in periods of declining interest
rates, and investors would therefore not be able to take advantage of the higher
yield offered.

The value of Units reflects the value of the underlying debt obligations,
including the value (if any) of any issues which are in default. In the event of
a default in payment of principal or interest, the Trust may incur additional
expenses in seeking payment under the defaulted debt obligations. Because
amounts recovered (if any) in respect of a defaulted debt obligation may not be
reflected in the value of Units until actually received by the Trust, it is
possible that a Holder who sells Units would bear a portion of the expenses
without receiving a portion of the payments received. It is possible that new
laws could be enacted which could hurt the market for bonds which are not rated
investment grade. For example, federally regulated financial institutions could
be required to divest their holdings of these bonds, or proposals could be
enacted which might limit the use, or tax or other advantages, of these bonds.

RISK FACTORS

Concentration

A Portfolio may contain or be concentrated in one or more of the types of
Bonds discussed below. An investment in a Fund should be made with an
understanding of the risks that these bonds may entail, certain of which are
described below. Political restrictions on the ability to tax and budgetary
constraints affecting the state or local government may result in reductions of,
or delays in the payment of, state aid to cities, counties, school districts and
other local units of government which, in turn, may strain the financial
operations and have an adverse impact on the creditworthiness of these entities.
State agencies, colleges and universities and health care organizations, with
municipal debt outstanding, may also be negatively impacted by reductions in
state appropriations.

General Obligation Bonds

General obligation bonds are backed by the issuer's pledge of its full
faith and credit and are secured by its taxing power for the payment of
principal and interest. However, the taxing power of any governmental entity may
be limited by provisions of state constitutions or laws and an entity's credit
will depend on many factors, including an erosion of the tax base due to
population declines, natural disasters, declines in the state's industrial base
or inability to attract new industries, economic limits on the ability to tax
without eroding the tax base and the extent to which the entity relies on
Federal or state aid, access to capital markets or other factors beyond the
entity's control.

Over time, many state and local governments may confront deficits due to
economic or other factors. In addition, a Portfolio may contain obligations of
issuers who rely in whole or in part on ad valorem real property taxes as a
source of revenue. Certain proposals, in the form of state legislative proposals
or voter initiatives, to limit ad valorem real property taxes have been
introduced in various states, and an amendment to the constitution of the State
of California, providing for strict limitations on ad valorem real property
taxes, has had a significant impact on the taxing powers of local governments
and on the financial condition of school districts and local governments in
California. It is not possible at this time to predict the final impact of such
measures, or of similar future legislative or constitutional measures, on school
districts and local governments or on their abilities to make future payments on
their outstanding bonds.

Moral Obligation Bonds

The repayment of a "moral obligation" bond is only a moral commitment, and
not a legal obligation, of the state or municipality in question. Even though
the state may be called on to restore any deficits in capital reserve funds of
the agencies or authorities which issued the bonds, any restoration generally
requires appropriation by the state legislature and accordingly does not
constitute a legally enforceable obligation or debt of the state. The agencies
or authorities generally have no taxing power.

Refunded Bonds

Refunded Bonds are typically secured by direct obligations of the U.S.
Government, or in some cases obligations guaranteed by the U.S. Government,
placed in an escrow account maintained by an independent trustee until maturity
or a predetermined redemption date. These bonds are generally noncallable prior
to maturity or the predetermined redemption date. In a few isolated instances,
however, bonds which were thought to be escrowed to maturity have been called
for redemption prior to maturity.

Industrial Development Revenue Bonds

Industrial Development Revenue Bonds, or "IDRs", including pollution
control revenue bonds, are tax-exempt bonds issued by states, municipalities,
public authorities or similar entities to finance the cost of acquiring,
constructing or improving various projects, including pollution control
facilities and certain manufacturing facilities. These projects are usually
operated by private corporations. IDRs are not general obligations of
governmental entities backed by their taxing power. Municipal issuers are only
obligated to pay amounts due on the IDRs to the extent that funds are available
from the unexpended proceeds of the IDRs or from receipts or revenues under
arrangements between the municipal issuer and the corporate operator of the
project. These arrangements may be in the form of a lease, installment sale
agreement, conditional sale agreement or loan agreement, but in each case the
payments to the issuer are designed to be sufficient to meet the payments of
amounts due on the IDRs.

IDRs are generally issued under bond resolutions, agreements or trust
indentures pursuant to which the revenues and receipts payable to the issuer by
the corporate operator of the project have been assigned and pledged to the
holders of the IDRs or a trustee for the benefit of the holders of the IDRs. In
certain cases, a mortgage on the underlying project has been assigned to the
holders of the IDRs or a trustee as additional security for the IDRs. In
addition, IDRs are frequently directly guaranteed by the corporate operator of
the project or by an affiliated company. Regardless of the structure, payment of
IDRs is solely dependent upon the creditworthiness of the corporate operator of
the project, corporate guarantor and credit enhancer. Corporate operators or
guarantors that are industrial companies may be affected by many factors which
may have an adverse impact on the credit quality of the particular company or
industry. These include cyclicality of revenues and earnings, regulatory and
environmental restrictions, litigation resulting from accidents or
environmentally-caused illnesses, extensive competition (including that of
low-cost foreign companies), unfunded pension fund liabilities or off-balance
sheet items, and financial deterioration resulting from leveraged buy-outs or
takeovers. However, certain of the IDRs in the Portfolio may be additionally
insured or secured by letters of credit issued by banks or otherwise guaranteed
or secured to cover amounts due on the IDRs in the event of a default in
payment.

Municipal Revenue Bonds

Municipal Utility Bonds. The ability of utilities to meet their obligations
under revenue bonds issued on their behalf is dependent on various factors,
including the rates they may charge their customers, the demand for their
services and the cost of providing those services. Utilities, in particular
investor-owned utilities, are subject to extensive regulation relating to the
rates which they may charge customers. Utilities can experience regulatory,
political and consumer resistance to rate increases. Utilities engaged in
long-term capital projects are especially sensitive to regulatory lags in
granting rate increases. Any difficulty in obtaining timely and adequate rate
increases could adversely affect a utility's results of operations.

The demand for a utility's services is influenced by, among other factors,
competition, weather conditions and economic conditions. Electric utilities, for
example, have experienced increased competition as a result of the availability
of other energy sources, the effects of conservation on the use of electricity,
self-generation by industrial customers and the generation of electricity by
co-generators and other independent power producers. Also, increased competition
will result if federal regulators determine that utilities must open their
transmission lines to competitors. Utilities which distribute natural gas also
are subject to competition from alternative fuels, including fuel oil, propane
and coal.

The utility industry is an increasing cost business making the cost of
generating electricity more expensive and heightening its sensitivity to
regulation. A utility's costs are affected by its cost of capital, the
availability and cost of fuel and other factors. There can be no assurance that
a utility will be able to pass on these increased costs to customers through
increased rates. Utilities incur substantial capital expenditures for plant and
equipment. In the future they will also incur increasing capital and operating
expenses to comply with environmental legislation such as the Clean Air Act of
1990, and other energy, licensing and other laws and regulations relating to,
among other things, air emissions, the quality of drinking water, waste water
discharge, solid and hazardous substance handling and disposal, and citing and
licensing of facilities. Environmental legislation and regulations are changing
7rapidly and are the subject of current public policy debate and legislative
proposals. It is increasingly likely that many utilities will be subject to more
stringent environmental standards in the future that could result in significant
capital expenditures. Future legislation and regulation could include, among
other things, regulation of so-called electromagnetic fields associated with
electric transmission and distribution lines as well as emissions of carbon
dioxide and other so-called greenhouse gases associated with the burning of
fossil fuels. Compliance with these requirements may limit a utility's
operations or require substantial investments in new equipment and, as a result,
may adversely affect a utility's results of operations.

The electric utility industry in general is subject to various external
factors including (a) the effects of inflation upon the costs of operation and
construction, (b) substantially increased capital outlays and longer
construction periods for larger and more complex new generating units, (c)
uncertainties in predicting future load requirements, (d) increased financing
requirements coupled with limited availability of capital, (e) exposure to
cancellation and penalty charges on new generating units under construction, (f)
problems of cost and availability of fuel, (g) compliance with rapidly changing
and complex environmental, safety and licensing requirements, (h) litigation and
proposed legislation designed to delay or prevent construction of generating and
other facilities, (i) the uncertain effects of conservation on the use of
electric energy, (j) uncertainties associated with the development of a national
energy policy, (k) regulatory, political and consumer resistance to rate
increases and (l) increased competition as a result of the availability of other
energy sources. These factors may delay the construction and increase the cost
of new facilities, limit the use of, or necessitate costly modifications to,
existing facilities, impair the access of electric utilities to credit markets,
or substantially increase the cost of credit for electric generating facilities.

The National Energy Policy Act ("NEPA"), which became law in October, 1992,
makes it mandatory for a utility to permit non-utility generators of electricity
access to its transmission system for wholesale customers, thereby increasing
competition for electric utilities. NEPA also mandated demand-side management
policies to be considered by utilities. NEPA prohibits the Federal Energy
Regulatory Commission from mandating electric utilities to engage in retail
wheeling, which is competition among suppliers of electric generation to provide
electricity to retail customers (particularly industrial retail customers) of a
utility. However, under NEPA, a state can mandate retail wheeling under certain
conditions. California, Michigan, New Mexico and Ohio have instituted
investigations into the possible introduction of retail wheeling within their
respective states, which could foster competition among the utilities. Retail
wheeling might result in the issue of stranded investment (investment in assets
not being recovered in base rates), thus hampering a utility's ability to meet
its obligations.

There is concern by the public, the scientific community, and the U.S.
Congress regarding environmental damage resulting from the use of fossil fuels.
Congressional support for the increased regulation of air, water, and soil
contaminants is building and there are a number of pending or recently enacted
legislative proposals which may affect the electric utility industry. In
particular, on November 15, 1990, legislation was signed into law that
substantially revises the Clean Air Act (the "1990 Amendments"). The 1990
Amendments seek to improve the ambient air quality throughout the United States
by the year 2000. A main feature of the 1990 Amendments is the reduction of
sulphur dioxide and nitrogen oxide emissions caused by electric utility power
plants, particularly those fueled by coal. Under the 1990 Amendments the U.S.
Environmental Protection Agency ("EPA") must develop limits for nitrogen oxide
emissions by 1993. The sulphur dioxide reduction will be achieved in two phases.
Phase I addresses specific generating units named in the 1990 Amendments. In
Phase II the total U.S. emissions will be capped at 8.9 million tons by the year
2000. The 1990 Amendments contain provisions for allocating allowances to power
plants based on historical or calculated levels. An allowance is defined as the
authorization to emit one ton of sulphur dioxide.

The 1990 Amendments also provide for possible further regulation of toxic
air emissions from electric generating units pending the results of several
federal government studies to be presented to Congress by the end of 1995 with
respect to anticipated hazards to public health, available corrective
technologies, and mercury toxicity.

Electric utilities which own or operate nuclear power plants are exposed to
risks inherent in the nuclear industry. These risks include exposure to new
requirements resulting from extensive federal and state regulatory oversight,
public controversy, decommissioning costs, and spent fuel and radioactive waste
disposal issues. While nuclear power construction risks are no longer of
paramount concern, the emerging issue is radioactive waste disposal. In
addition, nuclear plants typically require substantial capital additions and
modifications throughout their operating lives to meet safety, environmental,
operational and regulatory requirements and to replace and upgrade various plant
systems. The high degree of regulatory monitoring and controls imposed on
nuclear plants could cause a plant to be out of service or on limited service
for long periods. When a nuclear facility owned by an investor-owned utility or
a state or local municipality is out of service or operating on a limited
service basis, the utility operator or its owners may be liable for the recovery
of replacement power costs. Risks of substantial liability also arise from the
operation of nuclear facilities and from the use, handling, and possible
radioactive emissions associated with nuclear fuel. Insurance may not cover all
types or amounts of loss which may be experienced in connection with the
ownership and operation of a nuclear plant and severe financial consequences
could result from a significant accident or occurrence. The Nuclear Regulatory
Commission has promulgated regulations mandating the establishment of funded
reserves to assure financial capability for the eventual decommissioning of
licensed nuclear facilities. These funds are to be accrued from revenues in
amounts currently estimated to be sufficient to pay for decommissioning costs.
Since there have been very few nuclear plants decommissioned to date, these
estimates may be unrealistic.

The ability of state and local joint action power agencies to make payments
on bonds they have issued is dependent in large part on payments made to them
pursuant to power supply or similar agreements. Courts in Washington, Oregon and
Idaho have held that certain agreements between the Washington Public Power
Supply System ("WPPSS") and the WPPSS participants are unenforceable because the
participants did not have the authority to enter into the agreements. While
these decisions are not specifically applicable to agreements entered into by
public entities in other states, they may cause a reexamination of the legal
structure and economic viability of certain projects financed by joint action
power agencies, which might exacerbate some of the problems referred to above
and possibly lead to legal proceedings questioning the enforceability of
agreements upon which payment of these bonds may depend.

Lease Rental Bonds. Lease rental bonds are issued for the most part by
governmental authorities that have no taxing power or other means of directly
raising revenues. Rather, the authorities are financing vehicles created solely
for the construction of buildings (administrative offices, convention centers
and prisons, for example) or the purchase of equipment (police cars and computer
systems, for example) that will be used by a state or local government (the
"lessee"). Thus, the bonds are subject to the ability and willingness of the
lessee government to meet its lease rental payments which include debt service
on the bonds. Willingness to pay may be subject to changes in the views of
citizens and government officials as to the essential nature of the finance
project. Lease rental bonds are subject, in almost all cases, to the annual
appropriation risk, i.e., the lessee government is not legally obligated to
budget and appropriate for the rental payments beyond the current fiscal year.
These bonds are also subject to the risk of abatement in many states-rental
obligations cease in the event that damage, destruction or condemnation of the
project prevents its use by the lessee. (In these cases, insurance provisions
and reserve funds designed to alleviate this risk become important credit
factors). In the event of default by the lessee government, there may be
significant legal and/or practical difficulties involved in the reletting or
sale of the project. Some of these issues, particularly those for equipment
purchase, contain the so-called "substitution safeguard", which bars the lessee
government, in the event it defaults on its rental payments, from the purchase
or use of similar equipment for a certain period of time. This safeguard is
designed to insure that the lessee government will appropriate the necessary
funds even though it is not legally obligated to do so, but its legality remains
untested in most, if not all, states.

Housing Bonds. Multi-family housing revenue bonds and single family
mortgage revenue bonds are state and local housing issues that have been issued
to provide financing for various housing projects. Multi-family housing revenue
bonds are payable primarily from the revenues derived from mortgage loans to
housing projects for low to moderate income families. Single-family mortgage
revenue bonds are issued for the purpose of acquiring from originating financial
institutions notes secured by mortgages on residences.

Housing bonds are not general obligations of the issuer although certain
obligations may be supported to some degree by Federal, state or local housing
subsidy programs. Budgetary constraints experienced by these programs as well as
the failure by a state or local housing issuer to satisfy the qualifications
required for coverage under these programs or any legal or administrative
determinations that the coverage of these programs is not available to a housing
issuer, probably will result in a decrease or elimination of subsidies available
for payment of amounts due on the issuer's bonds. The ability of housing issuers
to make debt service payments on their bonds will also be affected by various
economic and non-economic developments including, among other things, the
achievement and maintenance of sufficient occupancy levels and adequate rental
income in multi-family projects, the rate of default on mortgage loans
underlying single family issues and the ability of mortgage insurers to pay
claims, employment and income conditions prevailing in local markets, increases
in construction costs, taxes, utility costs and other operating expenses, the
managerial ability of project managers, changes in laws and governmental
regulations and economic trends generally in the localities in which the
projects are situated. Occupancy of multi-family housing financial projects may
also be adversely affected by high rent levels and income limitations imposed
under Federal, state or local programs.

All single family mortgage revenue bonds and certain multi-family housing
revenue bonds are prepayable over the life of the underlying mortgage or
mortgage pool, and therefore the average life of housing obligations cannot be
determined. However, the average life of these obligations will ordinarily be
less than their stated maturities. Single-family issues are subject to mandatory
redemption in whole or in part from prepayments on underlying mortgage loans;
mortgage loans are frequently partially or completely prepaid prior to their
final stated maturities as a result of events such as declining interest rates,
sale of the mortgaged premises, default, condemnation or casualty loss.
Multi-family issues are characterized by mandatory redemption at par upon the
occurrence of monetary defaults or breaches of covenants by the project
operator. Additionally, housing obligations are generally subject to mandatory
partial redemption at par to the extent that proceeds from the sale of the
obligations are not allocated within a stated period (which may be within a year
of the date of issue).

The tax exemption for certain housing revenue bonds depends on
qualification under Section 143 of the Internal Revenue Code of 1986, as amended
(the "Code"), in the case of single family mortgage revenue bonds or Section
142(a)(7) of the Code or other provisions of Federal law in the case of certain
multi-family housing revenue bonds (including Section 8 assisted bonds). These
sections of the Code or other provisions of Federal law contain certain ongoing
requirements, including requirements relating to the cost and location of the
residences financed with the proceeds of the single family mortgage revenue
bonds and the income levels of tenants of the rental projects financed with the
proceeds of the multi-family housing revenue bonds. While the issuers of the
bonds and other parties, including the originators and servicers of the
single-family mortgages and the owners of the rental projects financed with the
multi-family housing revenue bonds, generally covenant to meet these ongoing
requirements and generally agree to institute procedures designed to ensure that
these requirements are met, there can be no assurance that these ongoing
requirements will be consistently met. The failure to meet these requirements
could cause the interest on the bonds to become taxable, possibly retroactively
from the date of issuance, thereby reducing the value of the bonds, subjecting
Holders to unanticipated tax liabilities and possibly requiring a Trustee to
sell these bonds at reduced values. Furthermore, any failure to meet these
ongoing requirements might not constitute an event of default under the
applicable mortgage or permit the holder to accelerate payment of the bond or
require the issuer to redeem the bond. In any event, where the mortgage is
insured by the Federal Housing Administration, its consent may be required
before insurance proceeds would become payable to redeem the mortgage bonds.

Hospital and Health Care Bonds. The ability of hospitals and other health
care facilities to meet their obligations with respect to revenue bonds issued
on their behalf is dependent on various factors, including the level of payments
received from private third-party payors and government programs and the cost of
providing health care services.

A significant portion of the revenues of hospitals and other health care
facilities is derived from private third-party payors and government programs,
including the Medicare and Medicaid programs. Both private third-party payors
and government programs have undertaken cost containment measures designed to
limit payments made to health care facilities. Furthermore, government programs
are subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings and government funding restrictions, all of which may
materially decrease the rate of program payments for health care facilities.
Certain special revenue obligations (i.e., Medicare or Medicaid revenues) may be
payable subject to appropriations by state legislatures. There can be no
assurance that payments under governmental programs will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs allocable to patients participating in these programs. In addition, there
can be no assurance that a particular hospital or other health care facility
will continue to meet the requirements for participation in these programs.

The costs of providing health care services are subject to increase as a
result of, among other factors, changes in medical technology and increased
labor costs. In addition, health care facility construction and operation is
subject to federal, state and local regulation relating to the adequacy of
medical care, equipment, personnel, operating policies and procedures,
rate-setting, and compliance with building codes and environmental laws.
Facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with the various standards necessary
for licensing and accreditation. These regulatory requirements are subject to
change and, to comply, it may be necessary for a hospital or other health care
facility to incur substantial capital expenditures or increased operating
expenses to effect changes in its facilities, equipment, personnel and services.

Hospitals and other health care facilities are subject to claims and legal
actions by patients and others in the ordinary course of business. Although
these claims are generally covered by insurance, there can be no assurance that
a claim will not exceed the insurance coverage of a health care facility or that
insurance coverage will be available to a facility. In addition, a substantial
increase in the cost of insurance could adversely affect the results of
operations of a hospital or other health care facility. The Clinton
Administration may impose regulations which could limit price increases for
hospitals or the level of reimbursements for third-party payors or other
measures to reduce health care costs and make health care available to more
individuals, which would reduce profits for hospitals. Some states, such as New
Jersey, have significantly changed their reimbursement systems. If a hospital
cannot adjust to the new system by reducing expenses or raising rates, financial
difficulties may arise. Also, Blue Cross has denied reimbursement for some
hospitals for services other than emergency room services. The lost volume would
reduce revenues unless replacement patients were found.

Certain hospital bonds provide for redemption at par at any time upon the
sale by the issuer of the hospital facilities to a non-affiliated entity, if the
hospital becomes subject to ad valorem taxation, or in various other
circumstances. For example, certain hospitals may have the right to call bonds
at par if the hospital may be legally required because of the bonds to perform
procedures against specified religious principles or to disclose information
that is considered confidential or privileged. Certain FHA-insured bonds may
provide that all or a portion of those bonds, otherwise callable at a premium,
can be called at par in certain circumstances. If a hospital defaults upon a
bond, the realization of Medicare and Medicaid receivables may be uncertain and,
if the bond is secured by the hospital facilities, legal restrictions on the
ability to foreclose upon the facilities and the limited alternative uses to
which a hospital can be put may severely reduce its collateral value.

The Internal Revenue Service is currently engaged in a program of intensive
audits of certain large tax-exempt hospital and health care facility
organizations. Although these audits have not yet been completed, it has been
reported that the tax-exempt status of some of these organizations may be
revoked.
Facility Revenue Bonds. Facility revenue bonds are generally payable from
and secured by the revenues from the ownership and operation of particular
facilities such as airports (including airport terminals and maintenance
facilities), bridges, marine terminals, turnpikes and port authorities. For
example, the major portion of gross airport operating income is generally
derived from fees received from signatory airlines pursuant to use agreements
which consist of annual payments for airport use, occupancy of certain terminal
space, facilities, service fees, concessions and leases. Airport operating
income may therefore be affected by the ability of the airlines to meet their
obligations under the use agreements. The air transport industry is experiencing
significant variations in earnings and traffic, due to increased competition,
excess capacity, increased aviation fuel, deregulation, traffic constraints and
other factors. As a result, several airlines are experiencing severe financial
difficulties. Several airlines including America West Airlines have sought
protection from their creditors under Chapter 11 of the Bankruptcy Code. In
addition, other airlines such as Midway Airlines, Inc., Eastern Airlines, Inc.
and Pan American Corporation have been liquidated. However, Continental Airlines
and Trans World Airlines have emerged from bankruptcy. The Sponsors cannot
predict what effect these industry conditions may have on airport revenues which
are dependent for payment on the financial condition of the airlines and their
usage of the particular airport facility. Furthermore, proposed legislation
would provide the U.S. Secretary of Transportation with the temporary authority
to freeze airport fees upon the occurrence of disputes between a particular
airport facility and the airlines utilizing that facility.

Similarly, payment on bonds related to other facilities is dependent on
revenues from the projects, such as use fees from ports, tolls on turnpikes and
bridges and rents from buildings. Therefore, payment may be adversely affected
by reduction in revenues due to these factors and increased cost of maintenance
or decreased use of a facility, lower cost of alternative modes of
transportation or scarcity of fuel and reduction or loss of rents.

Solid Waste Disposal Bonds. Bonds issued for solid waste disposal
facilities are generally payable from dumping fees and from revenues that may be
earned by the facility on the sale of electrical energy generated in the
combustion of waste products. The ability of solid waste disposal facilities to
meet their obligations depends upon the continued use of the facility, the
successful and efficient operation of the facility and, in the case of
waste-to-energy facilities, the continued ability of the facility to generate
electricity on a commercial basis. All of these factors may be affected by a
failure of municipalities to fully utilize the facilities, an insufficient
supply of waste for disposal due to economic or population decline, rising
construction and maintenance costs, any delays in construction of facilities,
lower-cost alternative modes of waste processing and changes in environmental
regulations. Because of the relatively short history of this type of financing,
there may be technological risks involved in the satisfactory construction or
operation of the projects exceeding those associated with most municipal
enterprise projects. Increasing environmental regulation on the federal, state
and local level has a significant impact on waste disposal facilities. While
regulation requires more waste producers to use waste disposal facilities, it
also imposes significant costs on the facilities. These costs include compliance
with frequently changing and complex regulatory requirements, the cost of
obtaining construction and operating permits, the cost of conforming to
prescribed and changing equipment standards and required methods of operation
and, for incinerators or waste-to-energy facilities, the cost of disposing of
the waste residue that remains after the disposal process in an environmentally
safe manner. In addition, waste disposal facilities frequently face substantial
opposition by environmental groups and officials to their location and
operation, to the possible adverse effects upon the public health and the
environment that may be caused by wastes disposed of at the facilities and to
alleged improper operating procedures. Waste disposal facilities benefit from
laws which require waste to be disposed of in a certain manner but any
relaxation of these laws could cause a decline in demand for the facilities'
services. Finally, waste-to-energy facilities are concerned with many of the
same issues facing utilities insofar as they derive revenues from the sale of
energy to local power utilities.

Special Tax Bonds. Special tax bonds are payable from and secured by the
revenues derived by a municipality from a particular tax such as a tax on the
rental of a hotel room, on the purchase of food and beverages, on the rental of
automobiles or on the consumption of liquor. Special tax bonds are not secured
by the general tax revenues of the municipality, and they do not represent
general obligations of the municipality. Therefore, payment on special tax bonds
may be adversely affected by a reduction in revenues realized from the
underlying special tax due to a general decline in the local economy or
population or due to a decline in the consumption, use or cost of the goods and
services that are subject to taxation. Also, should spending on the particular
goods or services that are subject to the special tax decline, the municipality
may be under no obligation to increase the rate of the special tax to ensure
that sufficient revenues are raised from the shrinking taxable base.

Student Loan Revenue Bonds. Student loan revenue bonds are issued by
various authorities to finance the acquisition of student loan portfolios or to
originate new student loans. These bonds are typically secured by pledged
student loans, loan repayments and funds and accounts established under the
indenture. Student loans are generally either guaranteed by eligible guarantors
under the Higher Education Act of 1965, as amended, and reinsured by the
Secretary of the U.S. Department of Education, directly insured by the federal
government or financed as part of supplemental or alternative loan programs with
a state (e.g., loan repayment is not guaranteed).

Certain student loan revenue bonds may permit the issuer to enter into an
"interest rate swap agreement" with a counterparty obligating the issuer to pay
either a fixed or a floating rate on a notional principal amount of bonds and
obligating the counterparty to pay either a fixed or a floating interest rate on
the issuer's bonds. The payment obligations of the issuer and the counterparty
to each other will be netted on each interest payment date, and only one payment
will be made by one party to the other. Although the choice of counterparty
typically requires a determination from a rating agency that any rating of the
bonds will not be adversely affected by the swap, payment on the bonds may be
subject to the additional risk of the counterparty's ability to fulfill its swap
obligation.

Transit Authority Bonds. Mass transit is generally not self-supporting from
fare revenues. Therefore, additional financial resources must be made available
to ensure operation of mass transit systems as well as the timely payment of
debt service. Often these financial resources include Federal and state
subsidies, lease rentals paid by funds of the state or local government or a
pledge of a special tax such as a sales tax or a property tax. If fare revenues
or the additional financial resources do not increase appropriately to pay for
rising operating expenses, the ability of the issuer to adequately service the
debt may be adversely affected.

Municipal Water and Sewer Revenue Bonds. Water and sewer bonds are
generally payable from user fees. The ability of state and local water and sewer
authorities to meet their obligations may be affected by failure of
municipalities to utilize fully the facilities constructed by these authorities,
economic or population decline and resulting decline in revenue from user
charges, rising construction and maintenance costs and delays in construction of
facilities, impact of environmental requirements, failure or inability to raise
user charges in response to increased costs, the difficulty of obtaining or
discovering new supplies of fresh water, the effect of conservation programs and
the impact of "no growth" zoning ordinances. In some cases this ability may be
affected by the continued availability of Federal and state financial assistance
and of municipal bond insurance for future bond issues.

University and College Bonds. The ability of universities and colleges to
meet their obligations is dependent upon various factors, including the size and
diversity of their sources of revenues, enrollment, reputation, management
expertise, the availability and restrictions on the use of endowments and other
funds, the quality and maintenance costs of campus facilities, and, in the case
of public institutions, the financial condition of the relevant state or other
governmental entity and its policies with respect to education. The
institution's ability to maintain enrollment levels will depend on such factors
as tuition costs, demographic trends, geographic location, geographic diversity
and quality of the student body, quality of the faculty and the diversity of
program offerings.

Legislative or regulatory action in the future at the Federal, state or
local level may directly or indirectly affect eligibility standards or reduce or
eliminate the availability of funds for certain types of student loans or grant
programs, including student aid, research grants and work-study programs, and
may affect indirect assistance for education.

Puerto Rico

Various Bonds may be affected by general economic conditions in Puerto
Rico. Puerto Rico's unemployment rate remains significantly higher than the U.S.
unemployment rate. Furthermore, the Puerto Rican economy is largely dependent
for its development upon U.S. policies and programs that are being reviewed and
may be eliminated.

The Puerto Rican economy is affected by a number of Commonwealth and
Federal investment incentive programs. For example, Section 936 of the Code
provides for a credit against Federal income taxes for U.S. companies operating
on the island if certain requirements are met. The Omnibus Budget Reconciliation
Act of 1993 imposes limits on this credit, effective for tax years beginning
after 1993. In addition, from time to time proposals are introduced in Congress
which, if enacted into law, would eliminate some or all of the benefits of
Section 936. Although no assessment can be made at this time of the precise
effect of this limitation, it is expected that the limitation of Section 936
credits would have a negative impact on Puerto Rico's economy.

Aid for Puerto Rico's economy has traditionally depended heavily on Federal
programs, and current Federal budgetary policies suggest that an expansion of
aid to Puerto Rico is unlikely. An adverse effect on the Puerto Rican economy
could result from other U.S. policies, including a reduction of tax benefits for
distilled products, further reduction in transfer payment programs such as food
stamps, curtailment of military spending and policies which could lead to a
stronger dollar.

In a plebiscite held in November, 1993, the Puerto Rican electorate chose
to continue Puerto Rico's Commonwealth status. Previously proposed legislation,
which was not enacted, would have preserved the federal tax exempt status of the
outstanding debts of Puerto Rico and its public corporations regardless of the
outcome of the referendum, to the extent that similar obligations issued by
states are so treated and subject to the provisions of the Code currently in
effect. There can be no assurance that any pending or future legislation finally
enacted will include the same or similar protection against loss of tax
exemption. The November 1993 plebiscite can be expected to have both direct and
indirect consequences on such matters as the basic characteristics of future
Puerto Rico debt obligations, the markets for these obligations, and the types,
levels and quality of revenue sources pledged for the payment of existing and
future debt obligations. The possible consequences include legislative proposals
seeking restoration of the status of Section 936 benefits otherwise subject to
the limitations discussed above. However, no assessment can be made at this time
of the economic and other effects of a change in federal laws affecting Puerto
Rico as a result of the November 1993 plebiscite.

Bonds Backed by Letters of Credit or Repurchase Commitments

In the case of Bonds secured by letters of credit issued by commercial
banks or savings banks, savings and loan associations and similar institutions
("thrifts"), the letter of credit may be drawn upon, and the Bonds consequently
redeemed, if an issuer fails to pay amounts due on the Bonds or defaults under
its reimbursement agreement with the issuer of the letter of credit or, in
certain cases, if the interest on the Bonds is deemed to be taxable and full
payment of amounts due is not made by the issuer. The letters of credit are
irrevocable obligations of the issuing institutions, which are subject to
extensive governmental regulations which may limit both the amounts and types of
loans and other financial commitments which may be made and interest rates and
fees which may be charged.

Certain Intermediate Term and Put Series and certain other Series contain
Bonds purchased from one or more commercial banks or thrifts or other
institutions ("Sellers") which have committed under certain circumstances
specified below to repurchase the Bonds from the Fund ("Repurchase
Commitments"). The Bonds in these Funds may be secured by one or more Repurchase
Commitments (see Investment Summary in the Prospectus) which, in turn may be
backed by a letter of credit or secured by a security interest in collateral. A
Seller may have committed to repurchase from the Fund any Bonds sold by it,
within a specified period after receiving notice from the Trustee, to the extent
necessary to satisfy redemptions of Units despite the market-making activity of
the Sponsors (a "Liquidity Repurchase"). The required notice period may be 14
days (a "14 Day Repurchase") or, if a repurchase date is set forth under
Investment Summary in the Prospectus, the Trustee may at any time not later than
two hours after the Evaluation Time on the repurchase date (or if a repurchase
date is not a business day, on the first business day thereafter), deliver this
notice to the Seller. Additionally, if the Sponsors elect to remarket Units
which have been received at or before the Evaluation Time on any repurchase date
(the "Tendered Units"), a Seller may have committed to repurchase from the Fund
on the date 15 business days after that repurchase date, any Bonds sold by the
Seller to the Fund in order to satisfy any tenders for redemption by the
Sponsors made within 10 business days after the Evaluation Time. A Seller may
also have made any of the following commitments: (i) to repurchase at any time
on 14 calendar days' notice any Bonds if the issuer thereof shall fail to make
any payments of principal thereof and premium and interest thereon (a "Default
Repurchase"); (ii) to repurchase any Bond on a fixed disposition date (a
"Disposition Date") if the Trustee elects not to sell the Bond in the open
market (because a price in excess of its Put Price (as defined under Investment
Summary in the Prospectus) cannot be obtained) on this date (a "Disposition
Repurchase")); (iii) to repurchase at any time on 14 calendar days' notice any
Bond in the event that the interest thereon should be deemed to be taxable (a
"Tax Repurchase"); and (iv) to repurchase immediately all Bonds if the Seller
becomes or is deemed to be bankrupt or insolvent (an "Insolvency Repurchase").
(See Investment Summary in the Prospectus.) Any repurchase of a Bond will be at
a price no lower than its original purchase price to the Fund, plus accrued
interest to the date of repurchase, plus any further adjustments as described
under Investment Summary in the Prospectus.

Upon the sale of a Bond by the Fund to a third party prior to its
Disposition date, any related Liquidity and Disposition Repurchase commitments
will be transferable, together with an interest in any collateral or letter of
credit backing the repurchase commitments and the Liquidity Repurchase
commitments will be exercisable by the buyer free from the restriction that the
annual repurchase right may only be exercised to meet redemptions of Units. Any
Default Repurchase, Tax Repurchase and Insolvency Repurchase commitments also
will not terminate upon disposition of the Bond by the Fund but will be
transferable, together with an interest in the collateral or letter of credit
backing the Repurchase Commitments or both, as the case may be.

A Seller's Repurchase Commitments apply only to Bonds which it has sold to
the Fund; consequently, if a particular Seller fails to meet its commitments, no
recourse is available against any other Seller nor against the collateral or
letters of credit of any other Seller. Each Seller's Repurchase Commitments
relating to any Bond terminate (i) upon repurchase by the Seller of the Bond,
(ii) on the Disposition Date of the Bond if its holder does not elect to have
the Seller repurchase the Bond on that date and (iii) in the event notice of
redemption shall have been given on or prior to the Disposition Date for the
entire outstanding principal amount of the Bond and that redemption or maturity
of the Bond occurs on or prior to the Disposition Date. On the scheduled
Disposition Date of a Bond the Trustee will sell that Bond in the open market if
a price in excess of the Put Price as of the Disposition Date can be obtained.

An investment in Units of a Fund containing any of these types of
credit-supported Bonds should be made with an understanding of the
characteristics of the commercial banking and thrift industries and of the risks
which an investment in Units may entail. Banks and thrifts are subject to
extensive governmental regulations which may limit both the amounts and types of
loans and other financial commitments which may be made and interest rates and
fees which may be charged. The profitability of these industries is largely
dependent upon the availability and cost of funds for the purpose of financing
lending operations under prevailing money market conditions. Also, general
economic conditions play an important part in the operations of this industry
and exposure to credit losses arising from possible financial difficulties of
borrowers might affect an institution's ability to meet its obligations. These
factors also affect bank holding companies and other financial institutions,
which may not be as highly regulated as banks, and may be more able to expand
into other non-financial and non-traditional businesses.

In December 1991 Congress passed and the President signed into law the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the
Resolution Trust Corporation Refinancing, Restructuring, and Improvement Act of
1991. Those laws imposed many new limitations on the way in which banks, savings
banks, and thrifts may conduct their business and mandated early and aggressive
regulatory intervention for unhealthy institutions.

The thrift industry has experienced severe strains as demonstrated by the
failure of numerous savings banks and savings and loan associations. One
consequence of this was the insolvency of the deposit insurance fund of the
Federal Savings and Loan Insurance Corporation ("FSLIC"). As a result, in 1989
Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA") which significantly altered the legal rules and regulations governing
banks and thrifts. Among other things, FIRREA abolished the FSLIC and created a
new agency, the Resolution Trust Corporation ("RTC"), investing it with certain
of the FSLIC's powers. The balance of the FSLIC's powers were transferred to the
Federal Deposit Insurance Corporation ("FDIC"). Under FIRREA, as subsequently
amended, the RTC is normally appointed as receiver or conservator of thrifts
that fail between January 1, 1989 and a date that may occur as late as July 1,
1995 if their deposits, prior to FIRREA, were insured by the FSLIC. The FDIC is
normally appointed as receiver or conservator for all thrifts the deposits of
which, before FIRREA, were insured by the FDIC, and those thrifts the deposits
of which, prior to FIRREA, were insured by the FSLIC that fail on or after the
end of the RTC appointment period.

In certain cases, the Sponsors have agreed that the sole recourse in
connection with any default, including insolvency, by thrifts whose
collateralized letter of credit, guarantee or Repurchase Commitments may back
any of the Debt Obligations will be to exercise available remedies with respect
to the collateral pledged by the thrift; should the collateral be insufficient,
the Fund will, therefore, be unable to pursue any default judgment against that
thrift. Certain of these collateralized letters of credit, guarantees or
Repurchase Commitments may provide that they are to be called upon in the event
the thrift becomes or is deemed to be insolvent. Accordingly, investors should
recognize that they are subject to having the principal amount of their
investment represented by a Debt Obligation secured by a collateralized letter
of credit, guarantee or Repurchase Commitment returned prior to the termination
date of the Fund or the maturity or disposition dates of the Debt Obligations if
the thrift becomes or is deemed to be insolvent, as well as in any of the
situations outlined under Repurchase Commitments below.

Moreover, FIRREA generally permits the FDIC or the RTC, as the case may be,
to prevent the exercise of a Seller's Insolvency Repurchase commitment and
empowers that agency to repudiate a Seller's contracts, including a Seller's
other Repurchase Commitments. FIRREA also creates a risk that damages against
the FDIC or RTC would be limited and that investors could be left without the
full protections afforded by the Repurchase Commitments and the Collateral.
Policy statements adopted by the FDIC and the RTC concerning collateralized
repurchase commitments have partially ameliorated these risks for the Funds.
According to these policy statements, the FDIC or the RTC, as conservator or
receiver, will not assert the position that it can repudiate the repurchase
commitments without the payment of damages from the collateral, and will instead
either (i) accelerate the collateralized repurchase commitments, in which event
payment will be made under the repurchase commitments to the extent of available
collateral, or (ii) enforce the repurchase commitments, except that any
insolvency clause would not be enforceable against the FDIC and the RTC. Should
the FDIC choose to accelerate, however, there is some question whether the
payment made would include interest on the defaulted Debt Obligations for the
period after the appointment of the receiver or conservator through the payment
date.

The RTC has also given similar comfort with respect to collateralized
letters of credit, but the FDIC has not done so at this time. Consequently,
there can be no assurance that collateralized letters of credit issued by
thrifts for which the FDIC would be the receiver or conservator appointed, as
described three paragraphs earlier, will be available in the event of the
failure of any such thrift.

The possibility of early payment has been increased significantly by the
enactment of FDICIA, which requires federal regulators of insured banks, savings
banks and thrifts to act more quickly to address the problems of
undercapitalized institutions than previously, and specifies in more detail the
actions they must take. One requirement virtually compels the appointment of a
receiver for any institution when its ratio of tangible equity to total assets
declines to two percent. Others force aggressive intervention in the business of
an institution at even earlier stages of deterioration. Upon appointment of a
receiver, if the FDIC or RTC pays as provided, in the policy statements and
notwithstanding the possibility that the institution might not have deteriorated
to zero book net worth (and therefore might not satisfy traditional definitions
of "insolvent"), the payment could therefore come substantially earlier than
might have been the case prior to FDICIA.

Certain letters of credit or guarantees backing Bonds may have been issued
by a foreign bank or corporation or similar entity (a "Foreign Guarantee").
Foreign Guarantees are subject to the risk that exchange control regulations
might be adopted in the future which might affect adversely payments to the
Fund. Similarly, foreign withholding taxes could be imposed in the future
although provision is made in the instruments governing any Foreign Guarantee
that, in substance, to the extent permitted by applicable law, additional
payments will be made by the guarantor so that the total amount paid, after
deduction of any applicable tax, will not be less than the amount then due and
payable on the Foreign Guarantee. The adoption of exchange control regulations
and other legal restrictions could have an adverse impact on the marketability
of any Bonds backed by a Foreign Guarantee.

Liquidity

Certain of the Bonds may have been purchased by the Sponsors from various
banks and thrifts in large denominations and may not have been issued under bond
resolutions or trust indentures providing for issuance of bonds in small
denominations. These Bonds were generally directly placed with the banks or
thrifts and held in their portfolios prior to sale to the Sponsors. There is no
established secondary market for those Bonds. The Sponsors believe that there
should be a readily available market among institutional investors for the Bonds
which were purchased from these portfolios in the event it is necessary to sell
Bonds to meet redemptions of Units (should redemptions be made despite the
market making activity of the Sponsors) in light of the following
considerations: (i) the credit characteristics of the companies obligated to
make payments on the Bonds; (ii) the fact that these Bonds may be backed by
irrevocable letters of credit or guarantees of banks or thrifts; and (iii) the
fact that banks or thrifts selling these Bonds to the Sponsors for deposit in
the Fund or the placement agent acting in connection with their sale generally
have stated their intentions, although they are not legally obligated to do so,
to remarket or to repurchase, at the then-current bid side evaluation, any of
these Bonds proposed to be sold by the Trustee. The interest on these Bonds
received by the Fund is net of the fee for the related letter of credit or
guarantee charged by the bank or thrift issuing the letter of credit or
guarantee.

Any Bonds which were purchased from these portfolios are exempt from the
registration provisions of the Federal securities laws, and, therefore, can be
sold free of the registration requirements of the securities laws. Because there
is no established secondary market for these Bonds, however, there is no
assurance that the price realized on sale of these Bonds will not be adversely
affected. Consequently it is more likely that the sale of these Bonds may cause
a decline in the value of Units than a sale of debt obligations for which an
established secondary market exists. In addition, in certain Intermediate Term
and Put Series and certain other Series, liquidity of the Fund is additionally
augmented by the Sellers' collateralized or letter of credit-backed Liquidity
Repurchase commitment in the event it is necessary to sell any Bond to meet
redemptions of Units. If, upon the scheduled Disposition Date for any Bond, the
Trustee elects not to sell the Bond scheduled for disposition on this date in
the open market (because, for example, a price in excess of its Put Price cannot
be obtained), the Seller of the Bond is obligated to repurchase the Bond
pursuant to its collateralized or letter of credit-backed Disposition Repurchase
commitment. There can be no assurance that the prices that can be obtained for
the Bonds at any time in the open market will exceed the Put Price of the Bonds.
In addition, if any Seller should become unable to honor its repurchase
commitments and the Trustee is consequently forced to sell the Bonds in the open
market, there is no assurance that the price realized on this sale of the Bonds
would not be adversely affected by the absence of an established secondary
market for certain of the Bonds.

In some cases, the Sponsors have entered into an arrangement with the
Trustee whereby certain of the Bonds may be transferred to a trust (a
"Participation Trust") in exchange for certificates of participation in the
Participation Trust which could be sold in order to meet redemptions of Units.
The certificates of participation would be issued in readily marketable
denominations of $5,000 each or any greater multiple thereof and the holder
thereof would be fully entitled to the repayment protections afforded by
collateral arrangements to any holder of the underlying Bonds. These
certificates would be exempt from registration under the Securities Act of 1933
pursuant to Section 3(a)(2) thereof.

For Bonds that have been guaranteed or similarly secured by insurance
companies or other corporations or entities, the guarantee or similar commitment
may constitute a security (a "Restricted Security") that cannot, in the opinion
of counsel, be sold publicly by the Trustee without registration under the
Securities Act of 1933, as amended, or similar provisions of law subsequently
exacted. The Sponsors nevertheless believe that, should a sale of these Bonds be
necessary in order to meet redemptions, the Trustee should be able to consummate
a sale with institutional investors. Up to 40% of the Portfolio may initially
have consisted of Bonds purchased from various banks and thrifts and other Bonds
with guarantees which may constitute Restricted Securities.

The Fund may contain bonds purchased directly from issuers. These Bonds are
generally issued under bond resolutions or trust indentures providing for the
issuance of bonds in publicly saleable denominations (usually $5,000), may be
sold free of the registration requirements of the Securities Act of 1933 and are
otherwise structured in contemplation of ready marketability. In addition, the
Sponsors generally have obtained letters of intention to repurchase or to use
best efforts to remarket these Debt Obligations from the issuers, the placement
agents acting in connection with their sale or the entities providing the
additional credit support, if any. These letters do not express legal
obligations; however, in the opinion of the Sponsors, these Bonds should be
readily marketable.

Bonds Backed by Insurance

Municipal bond insurance may be provided by one or more of AMBAC Indemnity
Corporation ("AMBAC"), Asset Guaranty Reinsurance Co. ("Asset Guaranty"),
Capital Guaranty Insurance Company ("CGIC"), Capital Markets Assurance Corp.
("CAPMAC"), Connie Lee Insurance Company ("Connie Lee"), Continental Casualty
Company ("Continental"), Financial Guaranty Insurance Company ("Financial
Guaranty"), Financial Security Assurance Inc. ("FSA"), Firemen's Insurance
Company of Newark, New Jersey ("Firemen's"), Industrial Indemnity Insurance
Company ("IIC"), which operates the Health Industry Bond Insurance ("HIBI")
Program or Municipal Bond Investors Insurance Corporation ("MBIA")
(collectively, the "Insurance Companies"). The claims-paying ability of each of
these companies, unless otherwise indicated, is rated AAA by Standard & Poor's
or another acceptable national rating agency. The ratings are subject to change
at any time at the discretion of the rating agencies. In determining whether to
insure bonds, the Insurance Companies severally apply their own standards. The
cost of this insurance is borne either by the issuers or previous owners of the
bonds or by the Sponsors. The insurance policies are non-cancelable and will
continue in force so long as the insured Bonds are outstanding and the insurers
remain in business. The insurance policies guarantee the timely payment of
principal and interest on but do not guarantee the market value of the insured
Bonds or the value of the Units. The insurance policies generally do not provide
for accelerated payments of principal or cover redemptions resulting from events
of taxability. If the issuer of any insured Bond should fail to make an interest
or principal payment, the insurance policies generally provide that a Trustee or
its agent will give notice of nonpayment to the Insurance Company or its agent
and provide evidence of the Trustee's right to receive payment. The Insurance
Company is then required to disburse the amount of the failed payment to the
Trustee or its agent and is thereafter subrogated to the Trustee's right to
receive payment from the issuer.

Financial information relating to the Insurance Companies has been obtained
from publicly available information. No representation is made as to the
accuracy or adequacy of the information or as to the absence of material adverse
changes since the information was made available to the public. Standard &
Poor's has rated the Units of any Insured Fund AAA because the Insurance
Companies have insured the Bonds. The assignment of a AAA rating is due to
Standard & Poor's assessment of the creditworthiness of the Insurance Companies
and of their ability to pay claims on their policies of insurance. In the event
that Standard & Poor's reassesses the creditworthiness of any Insurance Company
which would result in the rating of an Insured Fund being reduced, the Sponsors
are authorized to direct the Trustee to obtain other insurance.

Certain Bonds may be entitled to portfolio insurance ("Portfolio
Insurance") that guarantees the scheduled payment of the principal of and
interest on those Bonds ("Portfolio-Insured Bonds") while they are retained in
the Fund. Since the Portfolio Insurance applies to Bonds only while they are
retained in the Fund, the value of Portfolio-Insured Bonds (and hence the value
of the Units) may decline if the credit quality of any Portfolio-Insured Bonds
is reduced. Premiums for Portfolio Insurance are payable monthly in advance by
the Trustee on behalf of the Fund.

As Portfolio-Insured Bonds are redeemed by their respective issuers or are
sold by the Trustee, the amount of the premium payable for the Portfolio
Insurance will be correspondingly reduced. Nonpayment of premiums on any policy
obtained by the Fund will not result in the cancellation of insurance but will
permit the portfolio insurer to take action against the Trustee to recover
premium payments due it. Upon the sale of a Portfolio-Insured Bond from the
Fund, the Trustee has the right, pursuant to an irrevocable commitment obtained
from the portfolio insurer, to obtain insurance to maturity ("Permanent
Insurance") on the Bond upon the payment of a single predetermined insurance
premium from the proceeds of the sale. It is expected that the Trustee will
exercise the right to obtain Permanent Insurance only if the Fund would receive
net proceeds from the sale of the Bond (sale proceeds less the insurance premium
attributable to the Permanent Insurance) in excess of the sale proceeds that
would be received if the Bonds were sold on an uninsured basis. The premiums for
Permanent Insurance for each Portfolio-Insured Bond will decline over the life
of the Bond.

The Public Offering Price does not reflect any element of value for
Portfolio Insurance. The Evaluator will attribute a value to the Portfolio
Insurance (including the right to obtain Permanent Insurance) for the purpose of
computing the price or redemption value of Units only if the Portfolio-Insured
Bonds are in default in payment of principal or interest or, in the opinion of
the Agent for the Sponsors, in significant risk of default. In making this
determination the Agent for the Sponsors has established as a general standard
that a Portfolio-Insured Bond which is rated less than BB by Standard & Poor's
or Ba by Moody's will be deemed in significant risk of default although the
Agent for the Sponsors retains the discretion to conclude that a
Portfolio-Insured Bond is in significant risk of default even though at the time
it has a higher rating, or not to reach that conclusion even if it has a lower
rating. The value of the insurance will be equal to the difference between (i)
the market value of the Portfolio-Insured Bond assuming the exercise of the
right to obtain Permanent Insurance (less the insurance premium attributable to
the purchase of Permanent Insurance) and (ii) the market value of the
Portfolio-Insured Bond not covered by Permanent Insurance.

In addition, certain Funds may contain Bonds that are insured to maturity
as well as being Portfolio-Insured Bonds.

The following are brief descriptions of the Insurance Companies. The
financial information presented for each company has been determined on a
statutory basis and is unaudited.

AMBAC is a Wisconsin-domiciled stock insurance company, regulated by the
Insurance Department of the State of Wisconsin, and licensed to do business in
various states. AMBAC is a wholly-owned subsidiary of AMBAC Inc., a financial
holding company which is publicly owned following a complete divestiture by
Citibank during the first quarter of 1992.

Asset Guaranty is a New York State insurance company licensed to write
financial guarantee, credit, residual value and surety insurance. Asset Guaranty
commenced operations in mid-1988 by providing reinsurance to several major
monoline insurers. The parent holding company of Asset Guaranty, Asset Guarantee
Inc. (AGI), merged with Enhance Financial Services (EFS) in June, 1990 to form
Enhance Financial Services Group Inc. (EFSG). The two main, 100%-owned
subsidiaries of EFSG, Asset Guaranty and Enhance Reinsurance Company (ERC),
share common management and physical resources. After an initial public offering
completed in February 1992 and the sale by Merrill Lynch & Co. of its state,
EFSG is 49.8%-owned by the public, 29.9% by US West Financial Services, 14.1% by
Manufacturers Life Insurance Co. and 6.2% by senior management. Both ERC and
Asset Guaranty are rated "AAA" for claims paying ability by Duff & Phelps, and
ERC is rated triple-A for claims-paying-ability for both S&P and Moody's. Asset
Guaranty received a "AA" claims-paying-ability rating from S&P during August
1993, but remains unrated by Moody's.

CGIC, a monoline bond insurer headquartered in San Francisco, California,
was established in November 1986 to assume the financial guaranty business of
United States Fidelity and Guaranty Company ("USF&G"). It is a wholly-owned
subsidiary of Capital Guaranty Corporation ("CGC") whose stock is owned by:
Constellation Investments, Inc., an affiliate of Baltimore Gas & Electric,
Fleet/Norstar Financial Group, Inc., Safeco Corporation, Sibag Finance
Corporation, an affiliate of Siemens AG, USF&G, the eighth largest
property/casualty company in the U.S. as measured by net premiums written, and
CGC management.

CAPMAC commenced operations in December 1987, as the second mono-line
financial guaranty insurance company (after FSA) organized solely to insure
non-municipal obligations. CAPMAC, a New York corporation, is a wholly-owned
subsidiary of CAPMAC Holdings, Inc. (CHI), which was sold in 1992 by Citibank
(New York State) to a group of 12 investors led by the following: Dillon Read's
Saratoga Partners II, L.P., an acquisition fund; Caprock Management, Inc.,
representing Rockefeller family interests; Citigrowth Fund, a Citicorp venture
capital group; and CAPMAC senior management and staff. These groups control
approximately 70% of the stock of CHI. CAPMAC had traditionally specialized in
guaranteeing consumer loan and trade receivable asset-backed securities. Under
the new ownership group CAPMAC intends to become involved in the municipal bond
insurance business, as well as their traditional non-municipal business.

Connie Lee is a wholly owned subsidiary of College Construction Loan
Insurance Association ("CCLIA"), a government-sponsored enterprise established
by Congress to provide American academic institutions with greater access to
low-cost capital through credit enhancement. Connie Lee, the operating insurance
company, was incorporated in 1987 and began business as a reinsurer of
tax-exempt bonds of colleges, universities, and teaching hospitals with a
concentration on the hospital sector. During the fourth quarter of 1991 Connie
Lee began underwriting primary bond insurance which will focus largely on the
college and university sector. CCLIA's founding shareholders are the U.S.
Department of Education, which owns 14% of CCLIA, and the Student Loan Marketing
Association ("Sallie Mae"), which owns 36%. The other principal owners are:
Pennsylvania Public School Employees' Retirement System, Metropolitan Life
Insurance Company, Kemper Financial Services, Johnson family funds and trusts,
Northwestern University, Rockefeller & Co., Inc. administered trusts and funds,
and Stanford University. Connie Lee is domiciled in the state of Wisconsin and
has licenses to do business in 47 states and the District of Columbia.

Continental is a wholly-owned subsidiary of CNA Financial Corp. and was
incorporated under the laws of Illinois in 1948. Continental is the lead
property-casualty company of a fleet of carriers nationally known as "CNA
Insurance Companies". CNA is rated AA+ by Standard & Poor's.

Financial Guaranty is a wholly-owned subsidiary of FGIC Corporation
("Corporation"), a Delaware holding company. The Corporation is a subsidiary of
General Electric Capital Corporation ("Capital"). Neither the Corporation nor
Capital is obligated to pay the debts of or the claims against Financial
Guaranty. Financial Guaranty is a monoline financial guaranty insurer domiciled
in the State of New York and is subject to regulation by the State of New York
Insurance Department. As of December 31, 1998, the total capital and surplus of
Financial Guaranty was approximately $1,258,215,191. Financial Guaranty prepares
financial statements on the basis of statutory accounting principles and
generally accepted accounting principles. Copies of such financial statements
may be obtained by writing to Financial Guaranty at 115 Broadway, New York, New
York 10006, Attention: Communications Department (telephone number:
212-312-3000) or to the New York State Insurance Department at 25 Beaver Street,
New York, New York 10004-2319, Attention: Financial Condition Property/Casualty
Bureau (telephone number: 212-621-0389).

In addition, Financial Guaranty is currently licensed to write insurance in
all 50 states and the District of Columbia.

FSA is a monoline property and casualty insurance company incorporated in
New York in 1984. It is a wholly-owned subsidiary of Financial Security
Assurance Holdings Ltd., which was acquired in December 1989 by US West, Inc.,
the regional Bell Telephone Company serving the Rocky Mountain and Pacific
Northwestern states. U.S. West is currently seeking to sell FSA. FSA is licensed
to engage in the surety business in 42 states and the District of Columbia. FSA
is engaged exclusively in the business of writing financial guaranty insurance,
on both tax-exempt and non-municipal securities.

Firemen's, which was incorporated in New Jersey in 1855, is a wholly-owned
subsidiary of The Continental Corporation and a member of The Continental
Insurance Companies, a group of property and casualty insurance companies the
claims paying ability of which is rated AA- by Standard & Poor's. It provides
unconditional and non-cancelable insurance on industrial development revenue
bonds.

IIC, which was incorporated in California in 1920, is a wholly-owned
subsidiary of Crum and Forster, Inc., a New Jersey holding company and a
wholly-owned subsidiary of Xerox Corporation. IIC is a property and casualty
insurer which, together with certain other wholly-owned insurance subsidiaries
of Crum and Forster, Inc., operates under a Reinsurance Participation Agreement
whereby all insurance written by these companies is pooled among them. Standard
& Poor's has rated IIC's claims-paying ability A. Any IIC/HIBI-rated Debt
Obligations in an Insured Series are additionally insured for as long as they
remain in the Fund and as long as IIC/HIBI's rating is below AAA, in order to
maintain the AAA-rating of Fund Units. The cost of any additional insurance is
paid by the Fund and such insurance would expire on the sale or maturity of the
Debt Obligation.

MBIA is the principal operating subsidiary of MBIA Inc. The principal
shareholders of MBIA Inc. were originally Aetna Casualty and Surety Company, The
Fund American Companies, Inc., subsidiaries of CIGNA Corporation and Credit
Local de France, CAECL, S.A. These principal shareholders now own approximately
13% of the outstanding common stock of MBIA Inc. following a series of four
public equity offerings over a five-year period.

Insurance companies are subject to regulation and supervision in the
jurisdictions in which they do business under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. This regulation, supervision and administration relate, among
other things, to: the standards of solvency which must be met and maintained;
the licensing of insurers and their agents; the nature of and limitations on
investments; deposits of securities for the benefit of policyholders; approval
of policy forms and premium rates; periodic examinations of the affairs of
insurance companies; annual and other reports required to be filed on the
financial condition of insurers or for other purposes; and requirements
regarding reserves for unearned premiums, losses and other matters. Regulatory
agencies require that premium rates not be excessive, inadequate or unfairly
discriminatory. Insurance regulation in many states also includes "assigned
risk" plans, reinsurance facilities, and joint underwriting associations, under
which all insurers writing particular lines of insurance within the jurisdiction
must accept, for one or more of those lines, risks that are otherwise
uninsurable. A significant portion of the assets of insurance companies is
required by law to be held in reserve against potential claims on policies and
is not available to general creditors.

Although the Federal government does not regulate the business of
insurance, Federal initiatives can significantly impact the insurance business.
Current and proposed Federal measures which may significantly affect the
insurance business include pension regulation (ERISA), controls on medical care
costs, minimum standards for no-fault automobile insurance, national health
insurance, personal privacy protection, tax law changes affecting life insurance
companies or the relative desirability of various personal investment vehicles
and repeal of the current antitrust exemption for the insurance business. (If
this exemption is eliminated, it will substantially affect the way premium rates
are set by all property-liability insurers.) In addition, the Federal government
operates in some cases as a co-insurer with the private sector insurance
companies.

Insurance companies are also affected by a variety of state and Federal
regulatory measures and judicial decisions that define and extend the risks and
benefits for which insurance is sought and provided. These include judicial
redefinitions of risk exposure in areas such as products liability and state and
Federal extension and protection of employee benefits, including pension,
workers' compensation, and disability benefits. These developments may result in
short-term adverse effects on the profitability of various lines of insurance.
Longer-term adverse effects can often be minimized through prompt repricing of
coverages and revision of policy terms. In some instances these developments may
create new opportunities for business growth. All insurance companies write
policies and set premiums based on actuarial assumptions about mortality,
injury, the occurrence of accidents and other insured events. These assumptions,
while well supported by past experience, necessarily do not take account of
future events. The occurrence in the future of unforeseen circumstances could
affect the financial condition of one or more insurance companies. The insurance
business is highly competitive and with the deregulation of financial service
businesses, it should become more competitive. In addition, insurance companies
may expand into non-traditional lines of business which may involve different
types of risks.

State Risk Factors

Investment in a single State Trust, as opposed to a Fund which invests in
the obligations of several states, may involve some additional risk due to the
decreased diversification of economic, political, financial and market risks.
See"State Matters" for brief summaries of some of the factors which may affect
the financial condition of the States represented in various State Trusts of
Defined Asset Funds, together with summaries of tax considerations relating to
those States.

Payment of Bonds and Life of a Fund

Because Bonds from time to time may be redeemed or prepaid or will mature
in accordance with their terms or may be sold under certain circumstances
described herein, no assurance can be given that a Portfolio will retain for any
length of time its present size and composition. Bonds may be subject to
redemption prior to their stated maturity dates pursuant to optional refunding
or sinking fund redemption provisions or otherwise. In general, optional
refunding redemption provisions are more likely to be exercised when the offer
side evaluation is at a premium over par than when it is at a discount from par.
Generally, the offer side evaluation of Bonds will be at a premium over par when
market interest rates fall below the coupon rate on the Bonds. Bonds in a
Portfolio may be subject to sinking fund provisions early in the life of a Fund.
These provisions are designed to redeem a significant portion of an issue
gradually over the life of the issue; obligations to be redeemed are generally
chosen by lot. Additionally, the size and composition of a Portfolio will be
affected by the level of redemptions of Units that may occur from time to time
and the consequent sale of Bonds. Principally, this will depend upon the number
of Holders seeking to sell or redeem their Units and whether or not the Sponsors
continue to reoffer Units acquired by them in the secondary market. Factors that
the Sponsors will consider in the future in determining to cease offering Units
acquired in the secondary market include, among other things, the diversity of a
Portfolio remaining at that time, the size of a Portfolio relative to its
original size, the ratio of Fund expenses to income, a Fund's current and
long-term returns, the degree to which Units may be selling at a premium over
par relative to other funds sponsored by the Sponsors and the cost of
maintaining a current Prospectus for a Fund. These factors may also lead the
Sponsors to seek to terminate a Fund earlier than would otherwise be the case.

Redemption

The Trustee is empowered to sell Bonds in order to make funds available for
redemption if funds are not otherwise available in the Capital and Income
Accounts. The Bonds to be sold will be selected from a list supplied by the
Sponsors. Securities will be chosen for this list by the Sponsors on the basis
of those market and credit factors as they may determine are in the best
interests of the Fund. Provision is made under the Indenture for the Sponsors to
specify minimum face amounts in which blocks of Bonds are to be sold in order to
obtain the best price for the Fund. While these minimum amounts may vary from
time to time in accordance with market conditions, the Sponsors believe that the
minimum face amounts which would be specified would range from $25,000 for
readily marketable Bonds to $250,000 for certain Restricted Securities which can
be distributed on short notice only by private sale, usually to institutional
investors. Provision is also made that sales of Bonds may not be made so as to
(i) result in the Fund owning less than $250,000 of any Restricted Security or
(ii) result in more than 50% of the Fund consisting of Restricted Securities. In
addition, the Sponsors will use their best efforts to see that these sales of
Bonds are carried out in such a way that no more than 40% in face amount of the
Fund is invested in Restricted Securities, provided that sales of unrestricted
Securities may be made if the Sponsors' best efforts with regard to timely sales
of Restricted Securities at prices they deem reasonable are unsuccessful and if
as a result of these sales more than 50% of the Fund does not consist of
Restricted Securities. Thus the redemption of Units may require the sale of
larger amounts of Restricted Securities than of unrestricted Securities.

Tax Exemption

In the opinion of bond counsel rendered on the date of issuance of each
Bond, the interest on each Bond is excludable from gross income under existing
law for regular Federal income tax purposes (except in certain circumstances
depending on the Holder) but may be subject to state and local taxes and may be
a preference item for purposes of the Alternative Minimum Tax. Interest on Bonds
may become subject to regular Federal income tax, perhaps retroactively to their
date of issuance, as a result of changes in Federal law or as a result of the
failure of issuers (or other users of the proceeds of the Bonds) to comply with
certain ongoing requirements.

Moreover, the Internal Revenue Service has announced an expansion of its
examination program with respect to tax-exempt bonds. The expanded examination
program will consist of, among other measures, increased enforcement against
abusive transactions, broader audit coverage (including the expected issuance of
audit guidelines) and expanded compliance achieved by means of expected
revisions to the tax-exempt bond information return forms.

In certain cases, a Bond may provide that if the interest on the Bond
should ultimately be determined to be taxable, the Bond would become due and
payable by its issuer, and, in addition, may provide that any related letter of
credit or other security could be called upon if the issuer failed to satisfy
all or part of its obligation. In other cases, however, a Bond may not provide
for the acceleration or redemption of the Bond or a call upon the related letter
of credit or other security upon a determination of taxability. In those cases
in which a Bond does not provide for acceleration or redemption or in which both
the issuer and the bank or other entity issuing the letter of credit or other
security are unable to meet their obligations to pay the amounts due on the Bond
as a result of a determination of taxability, a Trustee would be obligated to
sell the Bond and, since it would be sold as a taxable security, it is expected
that it would have to be sold at a substantial discount from current market
price. In addition, as mentioned above, under certain circumstances Holders
could be required to pay income tax on interest received prior to the date on
which the interest is determined to be taxable.

INCOME AND RETURNS

Income

Because accrued interest on Bonds is not received by a Fund at a constant
rate throughout the year, any monthly income distribution may be more or less
than the interest actually received by the Fund. To eliminate fluctuations in
the monthly income distribution, a portion of the Public Offering Price consists
of an advance to the Trustee of an amount necessary to provide approximately
equal distributions. Upon the sale or redemption of Units, investors will
receive their proportionate share of the Trustee advance. In addition, if a Bond
is sold, redeemed or otherwise disposed of, a Fund will periodically distribute
the portion of the Trustee advance that is attributable to that Bond to
investors.

The regular monthly income distribution stated in the Prospectus is based
on a Public Offering Price of $1,000 per Unit after deducting estimated Fund
expenses, and will change as the composition of the Portfolio changes over time.

Income is received by a Fund upon semi-annual payments of interest on the
Bonds held in a Portfolio. Bonds may sometimes be purchased on a when, as and if
issued basis or may have a delayed delivery. Since interest on these Bonds does
not begin to accrue until the date of delivery to a Fund, in order to provide
tax-exempt income to Holders for this non-accrual period, the Trustee's Annual
Fee and Expenses is reduced by the interest that would have accrued on these
Bonds between the initial settlement date for Units and the delivery dates of
the Bonds. This eliminates reduction in Monthly Income Distributions. Should
when-issued Bonds be issued later than expected, the fee reduction will be
increased correspondingly. If the amount of the Trustee's Annual Fee and
Expenses is insufficient to cover the additional accrued interest, the Sponsors
will treat the contracts as Failed Bonds. As the Trustee is authorized to draw
on the letter of credit deposited by the Sponsors before the settlement date for
these Bonds and deposit the proceeds in an account for the Fund on which it pays
no interest, its use of these funds compensates the Trustee for the reduction
described above.
STATE MATTERS

ARIZONA

The following information is a brief summary of some of the factors
affecting the economy in the State and does not purport to be a complete
description of such factors. This summary is based on publicly available
information and forecasts which have not been independently verified by the
Sponsor or its legal counsel.

RISK FACTORS-The State Economy. The Arizona economy over the last several
decades has grown faster than in most other regions of the United States, as
measured by population, employment and personal income.

Historically, the State economy has been somewhat dependent on the
construction industry and is sensitive to trends in that sector. The
construction and real estate industries have rebounded from their substantial
declines experienced during the late 1980's and early 1990's and are
experiencing positive growth. Other principal economic sectors include services,
manufacturing, mining, tourism and the military.

A substantial amount of overbuilding occurred during the early 1980's while
the State's economy was flourishing, which adversely affected Arizona's
financial-based institutions and caused them to be placed under the control of
the Resolution Trust Corporation ("RTC"). In the aftermath of the savings and
loan crisis, which hit Arizona hard beginning in the late 1980's, the RTC sold
over $23 billion in Arizona assets, consisting mostly of real-estate secured
loans and real property, prior to December 31, 1995, when the RTC ceased to
exist with the FDIC taking over any remaining functions of the RTC.

The trend in the Arizona banking community for the past several years has
been one of consolidation. As financial institutions within the state
consolidate, many branch offices have been closed, displacing workers.

More than 1,700 jobs were lost by the closing of Williams Air Force Base in
Chandler, Arizona, on September 30, 1993, when Williams Air Force Base was
selected as one of the military installations to be closed as a cost-cutting
measure by the Defense Base Closure and Realignment Commission, whose
recommendations were subsequently approved by the President and the United
States House of Representatives. Williams Air Force Base injected an estimated
$300 million in the local economy annually and employed approximately 3,800
military and civilian personnel. The base has been converted into a regional
civilian airport, including an aviation, educational and business complex.
Further proposed reductions in federal military expenditures may adversely
affect the Arizona economy.

Few of Arizona's largest employers are based entirely in Arizona; many have
headquarters and operations in other states. Therefore, economic factors in
other states could affect the employment situation in Arizona.

Job growth in Arizona, defined as growth of total wage and salary
employment, was consistently in the range of 2.1% to 2.5% for the years 1988
through 1990, declined to 0.6% in 1991, then increased to 1.7% in 1992, 3.0% in
1993, and 6.7% in 1994. Job growth was 6.1% in 1995, 5.4% in 1996 and 4.5% in
1997, and is forecast at 4.0% for 1998 and 2.9% for 1999.

The unemployment rate in Arizona was 5.3% in 1990, 5.6% in 1991, 7.4% in
1992, 6.2% in 1993, 6.4% in 1994, 5.1% in 1995, 5.5% in 1996 and 4.7% in 1997.
Arizona's unemployment rate is forecast at 4.4% for 1998 and 4.7% for 1999.

Current personal income in Arizona has continued to rise, but at slower
rates than in the early to mid-1980's. Personal income grew at a rate of 5.8% in
1990 and dropped to 4.6% in 1991. Growth in personal income increased at a rate
of 6.7% in 1992, 7.3% in 1993, 8.7% in 1994, 9.0% in 1995, 8.0% in 1996 and 7.3%
in 1997. Growth in Arizona personal income is forecast at 7.0% for 1998 and 6.5%
for 1999.

Bankruptcy filings in the District of Arizona increased dramatically in the
mid-1980's, but percentage increases decreased during the early 1990's, with
1993 resulting in the first drop in bankruptcy filings since 1984. Bankruptcy
filings totaled 19,686 in 1991, 19,883 in 1992, 17,381 in 1993, 15,008 in 1994,
15,767 in 1995, and 19,989 in 1996 and 24, 686 in 1997. Bankruptcy filings
during 1998 totaled 23,721.

The inflation rate, as measured by the consumer price index in the Phoenix,
Arizona metropolitan area, including all of Maricopa County, hovered around the
national average during the late 1980's and early 1990's, but has been higher
than the national average since 1993. The Phoenix metropolitan area inflation
rate for 1996 was 5.1%, approximately 2% higher than the national average for
1996. The Phoenix metropolitan area inflation rate remained above the national
average during 1997, with a rate of 4.4% compared with 2.3%. The Phoenix
metropolitan area inflation rate forecast at 4.0% for 1998, compared to a
forecasted national average rate of 1.8%, and is forecast at 3.8% for 1999.

For several decades the population of the State of Arizona has grown at a
substantially higher rate than the population of the United States. Arizona's
population rose 35% between 1980 and 1990, according to the 1990 census, a rate
exceeded only in Nevada and Alaska. Nearly 950,000 residents were added during
this period. Population growth across Arizona between 1990 and 1996 greatly
outpaced the national average; Arizona's population rose more than three times
as fast as the national average during this period. Although significantly
greater than the national average population growth, it is lower than Arizona's
population growth in the mid-1980's. The rate of population growth in Arizona
slowed slightly in 1997. Census data show that in the 1990's, California has
been Arizona's largest source of in-migration. Out- migration from California
has now slowed, which could affect the level of Arizona's net in-migration.

The State Budget, Revenues and Expenditures. The state operates on a fiscal
year beginning July 1 and ending June 30. Fiscal year 1998 refers to the year
ending June 30, 1998. Fiscal year 1999 refers to the year ending June 30, 1999.

The General Fund revenues for fiscal year 1998 are estimated at $5.263
billion. Total General Fund revenues of $5.364 billion are expected during
fiscal year 1999. Approximately 45% of this expected revenue comes from sales
and use taxes, 48% from income taxes (both individual and corporate) and 2% from
other taxes. In addition to taxes, revenue includes non-tax items such as income
from the state lottery, licenses, fees and permits, and interest.

The General Fund expenditures for fiscal year 1998 are estimated at $5.255
billion. For fiscal year 1999, General Fund expenditures of $5.874 billion are
expected. Approximately 36% of major General Fund appropriations are for the
Department of Education for K-12, 12% is for higher education, 9% is for the
administration of the AHCCCS program (the State's alternative to Medicaid), 7%
is for the Department of Economic Security, 4% is for the Department of Health
Services and 9% is for the Department of Corrections.

Most or all of the Debt Obligations of the Arizona Trust are not
obligations of the State of Arizona, and are not supported by the State's taxing
powers. The particular source of payment and security for each of the Debt
Obligations is detailed in the instruments themselves and in related offering
materials. There can be no assurances, however, with respect to whether the
market value or marketability of any of the Debt Obligations issued by an entity
other than the State of Arizona will be affected by the financial or other
condition of the State or of any entity located within the State. In addition,
it should be noted that the State of Arizona, as well as counties,
municipalities, political subdivisions and other public authorities of the
state, are subject to limitations imposed by Arizona's constitution with respect
to ad valorem taxation, bonded indebtedness and other matters. For example, the
state legislature cannot appropriate revenues in excess of 7% of the total
personal income of the state in any fiscal year. These limitations may affect
the ability of the issuers to generate revenues to satisfy their debt
obligations.

The Arizona voters have passed a measure which requires a two-thirds vote
of the legislature to increase State taxes, which could make it more difficult
to reverse tax reduction measures which have been enacted in recent years. This
measure could adversely affect State fund balances and fiscal conditions. There
have also been periodic attempts in the form of voter initiatives and
legislative proposals to further limit the amount of annual increases in taxes
that can be levied by the various taxing jurisdictions without voter approval.
It is impossible to predict whether any such proposals will ever be enacted or
what the effect of any such proposals would be. However, if such proposals were
enacted, there could be an adverse impact on State or local government
financing.

In 1996, a lower court found unlawful the practice used by some localities
in Arizona pursuant to which so-called "Capital Appreciation Bonds" (which pay
no current interest) were issued. In 1996, the legislature enacted legislation
validating all bonds of this type outstanding on March 31, 1996. However, the
legislation contains restrictions which may have an adverse impact on the
overall financial condition of municipalities that have issued bonds of this
type and their ability to issue additional debt.

School Finance. In July of 1994, the Supreme Court of Arizona found that
the formulas for funding public schools in Arizona caused "gross disparities"
among school districts and therefore violated the Arizona Constitution. The
Arizona legislature recently adopted a new funding program in response to the
judgment, which provides extensive changes in the previous budget and
expenditure system, and among other things, provides state funds for
construction and maintenance of capital facilities and establishes minimum
standards for such facilities. The legislation also sets limits on the amount of
bonds school districts can issue after December 31, 1998. In July, 1998, the
Supreme Court of Arizona dismissed the lawsuit challenging the State's
educational financing system. It remains unclear what effect the 1998
legislation will have on state and county finances or school district budgets.

Health Care Facilities. Arizona does not participate in the federally
administered Medicaid program. Instead, the state administers an alternative
program, the Arizona Health Care Cost Containment System ("AHCCCS"), which
provides health care to indigent persons meeting certain financial eligibility
requirements, through managed care programs. AHCCCS is financed by a combination
of federal, state and county funds.

Under state law, hospitals retain the authority to raise rates with
notification and review by, but not approval from, the Department of Health
Services. Hospitals in Arizona have experienced profitability problems along
with those in other states.

Health care firms have been in the process of consolidating. Continuing
consolidation and merger activity in the health care industry is expected.

Utilities. Arizona's utilities are currently subject to regulation by the
Arizona Corporation Commission. This regulation extends to, among other things,
the issuance of certain debt obligations by regulated utilities and periodic
rate increases needed by utilities to cover operating costs and debt service.
The inability of any regulated public utility to secure necessary rate increases
could adversely affect the utility's ability to pay debt service. In May, 1998,
Arizona adopted the Electric Power Competition Act. This represents the initial
phase of deregulation of electric power utilities in Arizona, which is being
phased in beginning January, 1999.

This deregulation act affects Arizona's largest regulated utility, Arizona
Public Service Company ("APS"), which currently serves all or part of 11 of
Arizona's 15 counties and provides electric service to approximately 700,000
customers. APS is a significant part owner of Arizona's nuclear generator, the
Palo Verde Nuclear Generating Station. APS is owned by Pinnacle West Capital
Corporation ("Pinnacle West").

This deregulation act also affects the Salt River Project Agricultural
Improvement and Power District ("SRP"), even though as an agricultural
improvement district organized under state law, SRP is not subject to regulation
by the Arizona Corporation Commission. SRP, one of the nation's five largest
locally owned public power utilities, provides electric service to over 600,000
customers (consumer, commercial and industrial) within a 2,900 square mile area
in parts of Maricopa, Gila and Pinal Counties in Arizona. Under Arizona law,
SRP's board of directors has the exclusive authority to establish rates for
electricity. SRP must follow certain procedures, including certain public notice
requirements and a special board of directors meeting, before implementing any
changes in standard electric rates.

It remains unclear at this time how Arizona's electric utilities will
implement and respond to the changes required under the new deregulation act,
and what effects it may have on Arizona utility providers, consumers or the
Arizona economy in general.

Two special purpose irrigation districts formed for the purpose of issuing
bonds to finance the purchase of Colorado River water from the Central Arizona
Project filed for bankruptcy in 1994 under Chapter 9 of the United States
Bankruptcy Code as a result of the districts' inability to collect tax revenue
sufficient to service their bonded debt. The financial problems arose from a
combination of unexpectedly high costs of constructing the Central Arizona
Project, plummeting land values resulting in a need to increase property taxes
and refusal by many landowners in the districts to shoulder the increased tax
burden. In June 1995 a bankruptcy plan was confirmed for one district, which
returned to bondholders 57 cents on the dollar of their principal and placed an
additional 42 cents on the dollar in new 8% bonds maturing in seven years. The
proceedings with respect to the second district are continuing. Although a plan
of reorganization was confirmed for the second district, it has been appealed
and certain elements of the plan are subject to continuing litigation.

Other Factors. The uncertainty concerning the Mexico economy could have an
impact on Arizona's economy, as trade and tourism in the southern regions of the
state bordering Mexico could be affected by the condition of the Mexico economy.
It is also unclear the extent to which the weakness in other foreign markets may
have on the Arizona economy.

CALIFORNIA

The following information constitutes only a brief summary, does not
purport to be a complete description, and is based on information drawn from
official statements and Prospectuses relating to securities offerings of the
State of California and various local agencies in California, available as of
the date of this Prospectus. While the Sponsors have not independently verified
such information, they have no reason to believe that such information is not
correct in all material respects.

Economic Factors.

Fiscal Years Prior to 1995-96. Pressures on the State's budget in the late
1980's and early 1990's were caused by a combination of external economic
conditions and growth of the largest General Fund Programs - K-14 education,
health, welfare and corrections - at rates faster than the revenue base. These
pressures could continue as the State's overall population and school age
population continue to grow, and as the State's corrections program responds to
a "Three Strikes" law enacted in 1994, which requires mandatory life prison
terms for certain third-time felony offenders. In addition, the State's health
and welfare programs are in a transition period as a result of recent federal
and State welfare reform initiatives.

As a result of these factors and others, and especially because a severe
recession between 1990-94 reduced revenues and increased expenditures for social
welfare programs, from the late 1980's until 1992- 93, the State had periods of
significant budget imbalance. During this period, expenditures exceeded revenues
in four out of six years, and the State accumulated and sustained a budget
deficit in its budget reserve, the Special Fund for Economic Uncertainties
("SFEU") approaching $2.8 billion at its peak at June 30, 1993. Between the
1991-92 and 1994-95 Fiscal Years, each budget required multibillion dollar
actions to bring projected revenues and expenditures into balance, including
significant cuts in health and welfare program expenditures; transfers of
program responsibilities and funding from the State to local governments;
transfers of about $3.6 billion in annual local property tax revenues from other
local governments to local school districts, thereby reducing State funding for
schools under Proposition 98; and revenue increases (particularly in the 1991-92
Fiscal Year budget), most of which were for a short duration.

Despite these budget actions, the effects of the recession led to large,
unanticipated deficits in the SFEU, as compared to projected positive balances.
By the 1993-94 Fiscal Year, the accumulated deficit was so large that it was
impractical to budget to retire such deficits in one year, so a two-year program
was implemented, using the issuance of revenue anticipation warrants to carry a
portion of the deficit over to the end of the fiscal year. When the economy
failed to recover sufficiently in 1993-94, a second two-year plan was
implemented in 1994-95, again using cross-fiscal year revenue anticipation
warrants to partly finance the deficit into the 1995-96 fiscal year.

Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "borrowed" from
future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish cash reserves, the
State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.

For several fiscal years during the recession, the State was forced to rely
on external debt markets to meet its cash needs, as a succession of notes and
revenue anticipation warrants were issued in the period from June 1992 to July
1994, often needed to pay previously maturing notes or warrants. These
borrowings were used also in part to spread out the repayment of the accumulated
budget deficit over the end of a fiscal year, as noted earlier. The last and
largest of these borrowings was $4.0 billion of revenue anticipation warrants
which were issued in July, 1994 and matured on April 25, 1996.

1995-96 and 1996-97 Fiscal Years. With the end of the recession, and a
growing economy beginning in 1994, the State's financial condition improved
markedly in the last three fiscal years, with a combination of better than
expected revenues, slowdown in growth of social welfare programs, and continued
spending restraint based on the actions taken in earlier years. The last of the
recession-induced budget deficits was repaid, allowing the SFEU to post a
positive cash balance for only the second time in the 1990's, totaling $281
million as of June 30, 1997. The State's cash position also returned to health,
as cash flow borrowing was limited to $3 billion in 1996-97, and no deficit
borrowing has occurred over the end of these last three fiscal years.

The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (around $2.2 billion in
1995-96, $1.6 billion in 1996-97 and $2.4 billion in 1997-98) than were
initially planned when the budgets were enacted. These additional funds were
largely directed to school spending as mandated by Proposition 98, and to make
up shortfalls from reduced federal health and welfare aid in 1995-96 and
1996-97. The accumulated budget deficit from the recession years was finally
eliminated. The Department of Finance estimates that the State's Budget Reserve
(the SFEU) totaled $639.8 million as of June 30, 1997, and $1.782 billion at
June 30, 1998.

1998-99 Fiscal Year.

When the Governor released his proposed 1998-99 Fiscal Year Budget on
January 9, 1998, he projected General Fund revenues for the 1998-99 Fiscal Year
of $55.4 billion, and proposed expenditures in the same amount. By the time the
Governor released the May Revision to the 1998-99 Budget ("May Revision") on May
14, 1998, the Administration projected that revenues for the 1997-98 and 1998-99
Fiscal Years combined would be more than $4.2 billion higher than was projected
in January. The Governor proposed that most of this increased revenue be
dedicated to fund a 75% cut in the Vehicle License Fee ("VLF").

The Legislature passed the 1998-99 Budget Bill on August 11, 1998, and the
Governor signed it on August 21, 1998. Some 33 companion bills necessary to
implement the budget were also signed. In signing the Budget Bill, the Governor
used his line-item veto power to reduce expenditures by $1.360 billion from the
General Fund, and $160 million from Special Funds. Of this total, the Governor
indicated that about $250 million of vetoed funds were "set aside" to fund
programs for education. Vetoed items included education funds, salary increases
and many individual resources and capital projects.

The 1998-99 Budget Act is based on projected General Fund revenues and
transfers of $57.0 billion (after giving effect to various tax reductions
enacted in 1997 and 1998), a 4.2% increase from the revised 1997-98 figures.
Special Fund revenues were estimated at $14.3 billion. The revenue projections
were based on the May Revision. Economic problems overseas since that time may
affect the May Revision projections.

After giving effect to the Governor's vetoes, the Budget Act provided
authority for expenditures of $57.3 billion from the General Fund (a 7.3%
increase from 1997-98), $14.7 billion from Special Funds, and $3.4 billion from
bond funds. The Budget Act projected a balance in the SFEU at June 30, 1999 (but
without including the "set aside" veto amount), of $1.255 billion, a little more
than 2% of General Fund revenues. The Budget Act assumed the State will carry
out its normal intra-year cash flow borrowing in the amount of $1.7 billion of
revenue anticipation notes, which were issued on October 1, 1998.

The most significant feature of the 1998-99 Budget was agreement on a total
of $1.4 billion of tax cuts. The central element is a bill which provides for a
phased-in reduction of the VLF. Since the VLF is currently transferred to cities
and counties, the bill provides for the General Fund to replace the lost
revenues. Starting on January 1, 1999, the VLF will be reduced by 25%, at a cost
to the General Fund of approximately $500 million in the 1998-99 Fiscal Year and
about $1 billion annually thereafter.

In addition to the cut in VLF, the 1998-99 Budget includes both a temporary
and permanent increase in the personal income tax dependent credit ($612 million
General Fund cost in 1998-99 but less in future years), a nonrefundable renters
tax credit ($133 million), and various targeted business tax credits ($106
million).

Other significant elements of the 1998-99 Budget Act are as follows:

1. Proposition 98 funding for K-12 schools is increased by $1.7 billion in
General Fund moneys over revised 1997-98 levels, about $300 million higher than
the minimum Proposition 98 guaranty. An additional $600 million was appropriated
to "settle up" prior years' Proposition 98 entitlements, and was primarily
devoted to one-time uses such as block grants, deferred maintenance, and
computer and laboratory equipment. Of the 1998-99 funds, major news programs
include money for instructional and library materials, deferred maintenance,
support for increasing the school year to 180 days and reduction of class sizes
in Grade 9. The Governor held $250 million of education funds which were vetoed
as set-aside for enactment of additional reforms. Overall, per-pupil spending
for K-12 schools under Proposition 98 is increased to $5,696, more than
one-third higher than the level in the last recession year of 1993-94. The
Budget also includes $250 million as repayment of prior years' loans to schools,
as part of the settlement of the CTA v. Gould lawsuit.

2. Funding for higher education increased substantially above the level
called for in the Governor's four-year compact. General Fund support was
increased by $339 million (15.6%) for the University of California and $271
million (14.1%) for the California State University system. In addition,
Community Colleges received an increase of $183 million (9%).

3. The Budget includes increased funding for health, welfare and social
services programs. A 4.9% grant increase was included in the basic welfare
grants, the first increase in those grants in 9 years. Future increases will
depend on sufficient General Fund revenue to trigger the phased cuts in VLF
described above.

4. Funding for the judiciary and criminal justice programs increased by
about 15% over 1997- 98, primarily to reflect increased State support for local
trial courts and rising prison population.

5. Various other highlights of the Budget included new funding for
resources projects, dedication of $240 million of General Fund moneys for
capital outlay projects, funding of a State employee salary increase, funding of
2,000 new Department of Transportation positions to accelerate transportation
construction projects, and funding of the Infrastructure and Economic
Development Bank ($50 million).

6. The State of California received approximately $167 million of federal
reimbursements to offset costs related to the incarceration of undocumented
alien felons for federal fiscal year 1997. The State anticipates receiving
approximately $173 million in federal reimbursements for federal fiscal year
1998.

Proposed 1999-00 Budget

On January 8, 1999, Governor Davis released his proposed budget for Fiscal
Year 1999-2000 (the "Governor's Budget"). The Governor's Budget generally
reported that General Fund revenues for FY 1998- 99 and FY 1999-00 would be
lower than earlier projections (primarily due to the overseas economic
downturn), while some caseloads would be higher than earlier projections. The
Governor's Budget was designed to meet ongoing caseloads and basic inflation
adjustments, and included certain new programs.

The Governor's Budget projects General Fund revenues and transfers in
1999-00 of $60.3 billion. This includes anticipated initial payments from the
tobacco litigation settlement of about $560 million, and receipt of one-time
revenue from sale of assets. The Governor also assumes receipt of about $400
million of federal aid for certain health and welfare programs and reimbursement
for costs for incarceration of undocumented felons, above amount presently
received by California from the federal government. The Governor's Budget notes
that more accurate revenue estimates will be available in May and June before
adoption of the budget. Among other things, the amount of realized capital gains
for 1998 is still unknown, given the large fluctuations in the stock market last
year. The Governor has not proposed any tax cuts or increases.

The Governor's Budget proposes General Fund expenditures of $60.5 billion.
The Governor's Budget gives highest priority to education, with Proposition 98
funding increasing by almost 5 percent. The Governor proposed certain new
education initiatives focused on improving reading skills, teacher quality and
school accountability. The Governor proposed modest increase in funding for
higher education and an 8 percent increase in SSP payments (a State-funded
welfare program), while assuming decreases in Medi-Cal and CaIWORKs grant costs
due to lowering caseloads. The Governor also proposes to reduce expenditures by
deferring certain previously budgeted expenditures totaling about $170 million.

Based on the proposed revenues and expenditures, the Governor's Budget
projects the June 30, 2000, balance in the SFEU would drop to about $415
million.

The Governor's Budget includes a proposal to implement changes in law to
make "mid-course corrections" in the State's budget if ongoing revenues fall
short of projections during a fiscal year or expenditures increase
significantly. The proposals include two components: restoring authority for the
Director of Finance to reduce expenditures in certain circumstances, and an
automatic "trigger" mechanism which would produce spending cuts if certain
conditions were met. These proposals will require legislative action.

The Orange County Bankruptcy. On December 6, 1994, Orange County,
California and its Investment Pool (the "Pool") filed for bankruptcy under
Chapter 9 of the United States Bankruptcy Code. The subsequent restructuring led
to the sale of substantially all of the Pool's portfolio and resulted in losses
estimated to be approximately $1.7 billion (or approximately 22% of amounts
deposited by the Pool investors). Approximately 187 California public entities -
substantially all of which are public agencies within the county - had various
bonds, notes or other forms of indebtedness outstanding. In some instances the
proceeds of such indebtedness were invested in the Pool. In April, 1996, the
County emerged from bankruptcy after closing on a $900 million recovery bond
transaction. At that time, the County and its financial advisors stated that the
County had emerged from the bankruptcy without any structural fiscal problems
and assured that the County would not slip back into bankruptcy. However, for
many of the cities, schools and special districts that lost money in the County
portfolio, repayment remains contingent on the outcome of litigation which is
pending against investment firms and other finance professionals. Settlement
discussions involving a number of the defendants have occurred and a number of
agreements have been executed. However, until any such agreements become final
and any remaining litigation is resolved, it is impossible to determine the
ultimate impact of the bankruptcy and its aftermath on these various agencies
and their claims.

Constitutional, Legislative and Other Factors.

Certain California constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives could produce
the adverse effects described below.

Revenue Distribution. Certain Debt Obligations in the Portfolio may be
obligations of issuers which rely in whole or in part on California State
revenues for payment of these obligations. Property tax revenues and a portion
of the State's general fund surplus are distributed to counties, cities and
their various taxing entities and the State assumes certain obligations
theretofore paid out of local funds. Whether and to what extent a portion of the
State's general fund will be distributed in the future to counties, cities and
their various entities, is unclear.

Health Care Legislation. Certain Debt Obligations in the Portfolio may be
obligations which are payable solely from the revenues of health care
institutions. Certain provisions under California law may adversely affect these
revenues and, consequently, payment on those Debt Obligations.

The Federally sponsored Medicaid program for health care services to
eligible welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed on payment for services rendered to Medi-Cal beneficiaries in the
future.

Under this approach, in most geographical areas of California, only those
hospitals which enter into a Medi-Cal contract with the State of California will
be paid for non-emergency acute inpatient services rendered to Medi-Cal
beneficiaries. The State may also terminate these contracts without notice under
certain circumstances and is obligated to make contractual payments only to the
extent the California legislature appropriates adequate funding therefor.

California enacted legislation in 1982 that authorizes private health plans
and insurers to contract directly with hospitals for services to beneficiaries
on negotiated terms. Some insurers have introduced plans known as "preferred
provider organizations" ("PPOs"), which offer financial incentives for
subscribers who use only the hospitals which contract with the plan. Under an
exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.

These Debt Obligations may also be insured by the State of California
pursuant to an insurance program implemented by the Office of Statewide Health
Planning and Development for health facility construction loans. If a default
occurs on insured Debt Obligations, the State Treasurer will issue debentures
payable out of a reserve fund established under the insurance program or will
pay principal and interest on an unaccelerated basis from unappropriated State
funds. At the request of the Office of Statewide Health Planning and
Development, Arthur D. Little, Inc. prepared a study in December, 1983, to
evaluate the adequacy of the reserve fund established under the insurance
program and based on certain formulations and assumptions found the reserve fund
substantially underfunded. In September of 1986, Arthur D. Little, Inc. prepared
an update of the study and concluded that an additional 10% reserve be
established for "multi-level" facilities. For the balance of the reserve fund,
the update recommended maintaining the current reserve calculation method. In
March of 1990, Arthur D. Little, Inc. prepared a further review of the study and
recommended that separate reserves continue to be established for "multi-level"
facilities at a reserve level consistent with those that would be required by an
insurance company.

Mortgages and Deeds. Certain Debt Obligations in the Portfolio may be
obligations which are secured in whole or in part by a mortgage or deed of trust
on real property. California has five principal statutory provisions which limit
the remedies of a creditor secured by a mortgage or deed of trust. Two statutes
limit the creditor's right to obtain a deficiency judgment, one limitation being
based on the method of foreclosure and the other on the type of debt secured.
Under the former, a deficiency judgment is barred when the foreclosure is
accomplished by means of a nonjudicial trustee's sale. Under the latter, a
deficiency judgment is barred when the foreclosed mortgage or deed of trust
secures certain purchase money obligations. Another California statute, commonly
known as the "one form of action" rule, requires creditors secured by real
property to exhaust their real property security by foreclosure before bringing
a personal action against the debtor. The fourth statutory provision limits any
deficiency judgment obtained by a creditor secured by real property following a
judicial sale of such property to the excess of the outstanding debt over the
fair value of the property at the time of the sale, thus preventing the creditor
from obtaining a large deficiency judgment against the debtor as the result of
low bids at a judicial sale. The fifth statutory provision gives the debtor the
right to redeem the real property from any judicial foreclosure sale as to which
a deficiency judgment may be ordered against the debtor.

Upon the default of a mortgage or deed of trust with respect to California
real property, the creditor's nonjudicial foreclosure rights under the power of
sale contained in the mortgage or deed of trust are subject to the constraints
imposed by California law upon transfers of title to real property by private
power of sale. During the three-month period beginning with the filing of a
formal notice of default, the debtor is entitled to reinstate the mortgage by
making any overdue payments. Under standard loan servicing procedures, the
filing of the formal notice of default does not occur unless at least three full
monthly payments have become due and remain unpaid. The power of sale is
exercised by posting and publishing a notice of sale for at least 20 days after
expiration of the three-month reinstatement period. The debtor may reinstate the
mortgage in the manner described above, up to five business days prior to the
scheduled sale date. Therefore, the effective minimum period for foreclosing on
a mortgage could be in excess of seven months after the initial default. Such
time delays in collections could disrupt the flow of revenues available to an
issuer for the payment of debt service on the outstanding obligations if such
defaults occur with respect to a substantial number of mortgages or deeds of
trust securing an issuer's obligations.

In addition, a court could find that there is sufficient involvement of the
issuer in the nonjudicial sale of property securing a mortgage for such private
sale to constitute "state action," and could hold that the private-right-of-sale
proceedings violate the due process requirements of the Federal or State
Constitutions, consequently preventing an issuer from using the nonjudicial
foreclosure remedy described above.

Certain Debt Obligations in the Portfolio may be obligations which finance
the acquisition of single family home mortgages for low and moderate income
mortgagors. These obligations may be payable solely from revenues derived from
the home mortgages, and are subject to California's statutory limitations
described above applicable to obligations secured by real property. Under
California antideficiency legislation, there is no personal recourse against a
mortgagor of a single family residence purchased with the loan secured by the
mortgage, regardless of whether the creditor chooses judicial or nonjudicial
foreclosure.

Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan, and then only
if the borrower prepays an amount in excess of 20% of the original principal
amount of the mortgage loan in a 12-month period; a prepayment charge cannot in
any event exceed six months' advance interest on the amount prepaid during the
12-month period in excess of 20% of the original principal amount of the loan.
This limitation could affect the flow of revenues available to an issuer for
debt service on the outstanding debt obligations which financed such home
mortgages.

Proposition 13. Certain of the Debt Obligations may be obligations of
issuers who rely in whole or in part on ad valorem real property taxes as a
source of revenue. On June 6, 1978, California voters approved an amendment to
the California Constitution known as Proposition 13, which added Article XIIIA
to the California Constitution. The effect of Article XIIIA was to limit ad
valorem taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues.

Section 1 of Article XIIIA, as amended, limits the maximum ad valorem tax
on real property to 1% of full cash value, to be collected by the counties and
apportioned according to law. The 1% limitation does not apply to ad valorem
taxes or special assessments to pay the interest and redemption charges on any
bonded indebtedness for the acquisition or improvement of real property
approved, by two-thirds of the votes cast by the voters voting on the
proposition. Section 2 of Article XIIIA defines "full cash value" to mean "the
County Assessor's valuation of real property as shown on the 1975/76 tax bill
under "full cash value" or, thereafter, the appraised value of real property
when purchased, newly constructed, or a change in ownership has occurred after
the 1975 assessment." The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed 2% per year, or reduction in the consumer
price index or comparable local data, or reduced in the event of declining
property value caused by damage, destruction or other factors.

Legislation enacted by the California Legislature to implement Article
XIIIA provides that notwithstanding any other law, local agencies may not levy
any ad valorem property tax except to pay debt service on indebtedness approved
by the voters prior to July 1, 1978, and that each county will levy the maximum
tax permitted by Article XIIIA.

Proposition 9. On November 6, 1979, an initiative known as "Proposition 9"
or the "Gann Initiative" was approved by the California voters, which added
Article XIIIB to the California Constitution. Under Article XIIIB, State and
local governmental entities have an annual "appropriations limit" and are not
allowed to spend certain moneys called "appropriations subject to limitation" in
an amount higher than the "appropriations limit." Article XIIIB does not affect
the appropriation of moneys which are excluded from the definition of
"appropriations subject to limitation," including debt service on indebtedness
existing or authorized as of January 1, 1979, or bonded indebtedness
subsequently approved by the voters. In general terms, the "appropriations
limit" is required to be based on certain 1978/79 expenditures, and is to be
adjusted annually to reflect changes in consumer prices, population, and certain
services provided by these entities. Article XIIIB also provides that if these
entities' revenues in any year exceed the amounts permitted to be spent, the
excess is to be returned by revising tax rates or fee schedules over the
subsequent two years.

Proposition 98. On November 8, 1988, voters of the State approved
Proposition 98, a combined initiative constitutional amendment and statute
called the "Classroom Instructional Improvement and Accountability Act."
Proposition 98 changed State funding of public education below the university
level and the operation of the State Appropriations Limit, primarily by
guaranteeing K-14 schools a minimum share of General Fund revenues. Under
Proposition 98 (modified by Proposition 111 as discussed below), K-14 schools
are guaranteed the greater of (a) in general, a fixed percent of General Fund
revenues ("Test 1"), (b) the amount appropriated to K-14 schools in the prior
year, adjusted for changes in the cost of living (measured as in Article XIII B
by reference to State per capita personal income) and enrollment ("Test 2"), or
(c) a third test, which would replace Test 2 in any year when the percentage
growth in per capita General Fund revenues from the prior year plus one half of
one percent is less than the percentage growth in State per capita personal
income ("Test 3"). Under Test 3, schools would receive the amount appropriated
in the prior year adjusted for changes in enrollment and per capita General Fund
revenues, plus an additional small adjustment factor. If Test 3 is used in any
year, the difference between Test 3 and Test 2 would become a "credit" to
schools which would be the basis of payments in future years when per capita
General Fund revenue growth exceeds per capita personal income growth.

Proposition 98 permits the Legislature - by two-thirds vote of both houses,
with the Governor's concurrence - to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools.

During the recession years of the early l990s, General Fund revenues for
several years were less than originally projected, so that the original
Proposition 98 appropriations turned out to be higher than the minimum
percentage provided in the law. The Legislature responded to these developments
by designating the "extra" Proposition 98 payments in one year as a "loan" from
future years' Proposition 98 entitlements, and also intended that the "extra"
payments would not be included in the Proposition 98 "base" for calculating
future years' entitlements. In 1992, a lawsuit was filed, California Teachers'
Association v. Gould, which challenged the validity of these off-budget loans.
During the course of this litigation, a trial court determined that almost $2
billion in "loans" which had been provided to school districts during the
recession violated the constitutional protection of support for public
education. A settlement was reached on April 12, 1996 which ensures that future
school funding will not be in jeopardy over repayment of these so-called loans.

Proposition 111. On June 30, 1989, the California Legislature enacted
Senate Constitutional Amendment 1, a proposed modification of the California
Constitution to alter the spending limit and the education funding provisions of
Proposition 98. Senate Constitutional Amendment 1, on the June 5, 1990 ballot as
Proposition 111, was approved by the voters and took effect on July 1, 1990.
Among a number of important provisions, Proposition 111 recalculated spending
limits for the State and for local governments, allowed greater annual increases
in the limits, allowed the averaging of two years' tax revenues before requiring
action regarding excess tax revenues, reduced the amount of the funding
guarantee in recession years for school districts and community college
districts (but with a floor of 40.9 percent of State general fund tax revenues),
removed the provision of Proposition 98 which included excess moneys transferred
to school districts and community college districts in the base calculation for
the next year, limited the amount of State tax revenue over the limit which
would be transferred to school districts and community college districts, and
exempted increased gasoline taxes and truck weight fees from the State
appropriations limit. Additionally, Proposition 111 exempted from the State
appropriations limit funding for capital outlays.

Proposition 62. On November 4, 1986, California voters approved an
initiative statute known as Proposition 62. This initiative provided the
following: (i) requires that any tax for general governmental purposes imposed
by local governments be approved by resolution or ordinance adopted by a
two-thirds vote of the governmental entity's legislative body and by a majority
vote of the electorate of the governmental entity, (ii) requires that 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 within that jurisdiction, (iii) restricts the use of revenues
from a special tax to the purposes or for the service for which the special tax
was imposed, (iv) prohibits the imposition of ad valorem taxes on real property
by local governmental entities except as permitted by Article XIIIA, (v)
prohibits the imposition of transaction taxes and sales taxes on the sale of
real property by local governments, (vi) requires that any tax imposed by a
local government on or after August 1, 1985 be ratified by a majority vote of
the electorate within two years of the adoption of the initiative, (vii)
requires that, in the event a local government fails to comply with the
provisions of this measure, a reduction in the amount of property tax revenue
allocated to such local government occurs in an amount equal to the revenues
received by such entity attributable to the tax levied in violation of the
initiative, and (viii) permits these provisions to be amended exclusively by the
voters of the State of California.

In September 1988, the California Court of Appeal in City of Westminster v.
County of Orange, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal. Ct. App. 1988),
held that Proposition 62 is unconstitutional to the extent that it requires a
general tax by a general law city, enacted on or after August 1, 1985 and prior
to the effective date of Proposition 62, to be subject to approval by a majority
of voters. The Court held that the California Constitution prohibits the
imposition of a requirement that local tax measures be submitted to the
electorate by either referendum or initiative. It is not possible to predict the
impact of this decision on charter cities, on special taxes or on new taxes
imposed after the effective date of Proposition 62.

The California Court of Appeal in City of Woodlake v. Logan, (1991) 230
Cal.App.3d 1058, subsequently held that Proposition 62's popular vote
requirements for future local taxes also provided for an unconstitutional
referenda. The California Supreme Court declined to review both the City of
Westminster and the City of Woodlake decisions.

In Santa Clara Local Transportation Authority v. Guardino, (Sept. 28, 1995)
11 Cal.4th 220, reh'gdenied, modified (Dec. 14, 1995) 12 Cal.4th 344e, the
California Supreme Court upheld the constitutionality of Proposition 62's
popular vote requirements for future taxes, and specifically disapproved of the
City of Woodlake decision as erroneous. The Court did not determine the
correctness of the City of Westminster decision, because that case appeared
distinguishable, was not relied on by the parties in Guardino, and involved
taxes not likely to still be at issue. It is impossible to predict the impact of
the Supreme Court's decision on charter cities or on taxes imposed in reliance
on the City of Woodlake case.

In McBrearty v. City of Brawley, 59 Cal. App. 4th 1441, 69 Cal. Rptr. 2d
862 (Cal. Ct. App, 1997), the Court of Appeal held that the city of Brawley must
either hold an election or cease collection of utility taxes that were not
submitted to a vote. In 1991, the city of Brawley adopted an ordinance imposing
a utility tax on its residents and began collecting the tax without first
seeking voter approval. In 1996, the taxpayer petitioned for writ of mandate
contending that Proposition 62 required the city to submit its utility tax on
residents to vote of local electorate. The trial court issued a writ of mandamus
and the city appealed.

First, the Court of Appeal held that the taxpayer's cause of action accrued
for statute of limitation purposes at the time of the Guardino decision rather
than at the time when the city adopted the tax ordinance which was July, 1991.
Second, the Court held that the voter approval requirement in Proposition 62 was
not an invalid mechanism under the state constitution for the involvement of the
electorate in the legislative process. Third, the Court rejected the city's
argument that Guardino should only be applied on a prospective basis. Finally,
the Court held Proposition 218 (see discussion below) did not impliedly protect
any local general taxes imposed prior January 1, 1995, against challenge.

Assembly Bill 1362 (Mazzoni), introduced February 28, 1997, which would
have made the Guardino decision inapplicable to any tax first imposed or
increased by an ordinance or resolution adopted before December 14, 1995, was
vetoed by the Governor on October 11, 1997. The California State Senate had
passed the Bill on May 16, 1996, and the California State Assembly had passed
the bill on September 11, 1997. It is not clear whether the Bill, if enacted,
would have been constitutional as a non-voted amendment to Proposition 62 or as
a non-voted change to Proposition 62's operative date.

Proposition 218. On November 5, 1996, the voters of the State approved
Proposition 218, a constitutional initiative, entitled the "Right to Vote on
Taxes Act" ("Proposition 218"). Proposition 218 adds Articles XIII C and XIII D
to the California Constitution and contains a number of interrelated provisions
affecting the ability of local governments to levy and collect both existing and
future taxes, assessments, fees and charges. Proposition 218 became effective on
November 6, 1996. The Sponsors are unable to predict whether and to what extent
Proposition 218 may be held to be constitutional or how its terms will be
interpreted and applied by the courts. However, if upheld, Proposition 218 could
substantially restrict certain local governments' ability to raise future
revenues and could subject certain existing sources of revenue to reduction or
repeal, and increase local government costs to hold elections, calculate fees
and assessments, notify the public and defend local government fees and
assessments in court.

Article XIII C of Proposition 218 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, including special
taxes deposited into a local government's general fund. Proposition 218 also
provides that any general tax imposed, extended or increased without voter
approval by any local government on or after January 1, 1995 and prior to
November 6, 1996 shall continue to be imposed only if approved by a majority
vote in an election held within two years of November 6, 1996.

Article XIII C of Proposition 218 also expressly extends the initiative
power to give voters the power to reduce or repeal local taxes, assessments,
fees and charges, regardless of the date such taxes, assessments, fees or
charges were imposed. This extension of the initiative power to some extent
constitutionalizes the March 6, 1995 State Supreme Court decision in Rossi v.
Brown, which upheld an initiative that repealed a local tax and held that the
State constitution does not preclude the repeal, including the prospective
repeal, of a tax ordinance by an initiative, as contrasted with the State
constitutional prohibition on referendum powers regarding statutes and
ordinances which impose a tax. Generally, the initiative process enables
California voters to enact legislation upon obtaining requisite voter approval
at a general election. Proposition 218 extends the authority stated in Rossi v.
Brown by expanding the initiative power to include reducing or repealing
assessments, fees and charges, which had previously been considered
administrative rather than legislative matters and therefore beyond the
initiative power.

The initiative power granted under Article XIII C of Proposition 218, by
its terms, applies to all local taxes, assessments, fees and charges and is not
limited to local taxes, assessments, fees and charges that are property related.

Article XIII D of Proposition 218 adds several new requirements making it
generally more difficult for local agencies to levy and maintain "assessments"
for municipal services and programs. "Assessment" is defined to mean any levy or
charge upon real property for a special benefit conferred upon the real
property.

Article XIII D of Proposition 218 also adds several provisions affecting
"fees" and "charges" which are defined as "any levy other than an ad valorem
tax, a special tax, or an assessment, imposed by a local government upon a
parcel or upon a person as an incident of property ownership, including a user
fee or charge for a property related service." All new and, after June 30, 1997,
existing property related fees and charges must conform to requirements
prohibiting, among other things, fees and charges which (i) generate revenues
exceeding the funds required to provide the property related service, (ii) are
used for any purpose other than those for which the fees and charges are
imposed, (iii) are for a service not actually used by, or immediately available
to, the owner of the property in question, or (iv) are used for general
governmental services, including police, fire or library services, where the
service is available to the public at large in substantially the same manner as
it is to property owners. Further, before any property related fee or charge may
be imposed or increased, written notice must be given to the record owner of
each parcel of land affected by such fee or charges. The local government must
then hold a hearing upon the proposed imposition or increase of such property
based fee, and if written protests against the proposal are presented by a
majority of the owners of the identified parcels, the local government may not
impose or increase the fee or charge. Moreover, except for fees or charges for
sewer, water and refuse collection services, no property related fee or charge
may be imposed or increased without majority approval by the property owners
subject to the fee or charge or, at the option of the local agency, two-thirds
voter approval by the electorate residing in the affected area.

Proposition 87. On November 8, 1988, California voters approved Proposition
87. Proposition 87 amended Article XVI, Section 16, of the California
Constitution by authorizing the California Legislature to prohibit redevelopment
agencies from receiving any of the property tax revenue raised by increased
property tax rates levied to repay bonded indebtedness of local governments
which is approved by voters on or after January 1, 1989.

COLORADO

RISK FACTORS-Generally. The portfolio of the Colorado Trust consists
primarily of obligations issued by or on behalf of the State of Colorado and its
political subdivisions. The State's political subdivisions include approximately
1,600 units of local government in Colorado, including counties, statutory
cities and towns, home-rule cities and counties, school districts and a variety
of water, irrigation, and other special districts and special improvement
districts, all with various degrees of constitutional and statutory authority to
levy taxes and incur indebtedness.

Following is a brief summary of some of the factors which may affect the
financial condition of the State of Colorado and its political subdivisions. It
is not a complete or comprehensive description of these factors or analysis of
financial conditions and may not be indicative of the financial condition of
issuers of obligations contained in the portfolio of the Colorado Trust or any
particular projects financed by those obligations. Many factors not included in
the summary, such as the national economy, social and environmental policies and
conditions, and the national and international markets for petroleum, minerals
and metals, could have an adverse impact on the financial condition of the State
and its political subdivisions, including the issuers of obligations contained
in the portfolio of the Colorado Trust. It is not possible to predict whether
and to what extent those factors may affect the financial condition of the State
and its political subdivisions, including the issuers of obligations contained
in the portfolio of the Colorado Trust. Prospective investors should study with
care the issues contained in the portfolio of the Colorado Trust, review
carefully the information set out in the Prospectus under the caption "Colorado
Risk Factors" and consult with their investment advisors as to the merits of
particular issues in the portfolio.

The following summary is based on publicly available information which has
not been independently verified by the Sponsor or its legal counsel.

The State Economy. The State's economic growth continues to exceed that of
the nation. Since 1995, Colorado's growth rates have been higher than the
nation's in all of the following categories: income, population, employment,
inflation, retail trade sales, and housing starts. Existing home sales set a
record of $6.2 billion in 1997 that was shattered by $7.7 billion in sales in
1998. Personal income growth was the second fastest in the U.S.

Net migration into the State peaked in 1993 at 72,667 (an increase of
approximately 15.7% over 1992's net migration), with the overall State
population increasing 3.0% in 1993. Net migration into the State is estimated to
have been 45,216 in 1996 (a decrease of approximately 19.0% from 1995's net
migration of 55,854, but with the overall State population still increasing
approximately 2.0% in 1996). Population growth in 1998, holding at 2%, was
faster than all but two states. As of July, 1998, Colorado's population topped
3.971 million. The State's job growth rate was 3.7% in 1998, compared to 2.3% at
the national level, and 4.0% for 1997, compared to 2.6% at the national level.
Non-farm employment increased 3.5% in 1998. The State's unemployment rate of
3.3% in 1998 was the same as in 1997, but was 1.2% lower than the national
average of 4.5% in 1998.

State Revenues. The State operates on a fiscal year beginning July 1 and
ending June 30. Fiscal year 1997 refers to the year ended June 30, 1997, and
fiscal year 1998 refers to the year ended June 30, 1998.

The State derives substantially all of its General Fund revenues from
taxes. The two most important sources of these revenues are sales and use taxes
and individual income taxes, which accounted for approximately 28.6% and 56.4%,
respectively, of total net General Fund revenues during fiscal year 1998. Based
upon Office of State Planning and Budgeting figures it is estimated that, during
fiscal year 1999, sales and use taxes will account for approximately 28.9% of
total General Fund revenues and individual income taxes will account for
approximately 58.2% of total net General Fund revenues. The ending General Fund
balance, before statutory and constitutional reserve requirements, for fiscal
year 1997 was $514.1 million and for fiscal year 1998 was $904.0 million. After
allowances for such reserves, the net amounts of fund balance at such dates were
$347.4 million and $727.0 million respectively.

The Colorado Constitution contains strict limitations on the ability of the
State to create debt except under certain very limited circumstances. However,
the constitutional provisions have been interpreted not to limit the ability of
the State or its political subdivisions to issue certain obligations which do
not constitute debt in the constitutional sense, including short-term
obligations which do not extend beyond the fiscal year in which they are
incurred and lease purchase obligations which are made subject to annual
appropriation.

The State is authorized pursuant to State statute to issue short-term notes
to alleviate temporary cash flow shortfalls. The most recent issue of such
notes, issued on July 1, 1998 and maturing June 25, 1999, was given the highest
rating available for short-term obligations by Standard & Poor's Ratings Group a
division of The McGraw-Hill Companies, Inc. and Fitch Investors Service, Inc.
Because of the short-term nature of such notes, their ratings should not
necessarily be considered indicative of the State's general financial condition.
It is not known whether the State will issue similar short-term notes in 1999.
Tax and Spending Limitation Amendment. On November 3, 1992, Colorado voters
approved a State constitutional amendment ("TABOR") that restricts the ability
of the State and local governments to increase taxes, revenues, debt and
spending. TABOR provides that its provisions supersede conflicting State
constitutional, State statutory, charter or other State or local provisions.

The provisions of TABOR apply to "districts," which are defined in TABOR as
the State or any local government, with certain exclusions. Under the terms of
TABOR, districts must have prior voter approval to impose any new tax, tax rate
increase, mill levy increase, valuation for assessment ratio increase or
extension of an expiring tax. Prior voter approval is also required, except in
certain limited circumstances, for the creation of "any multiple-fiscal year
direct or indirect district debt or other financial obligation." TABOR
prescribes the timing and procedures for any elections required by it.

Colorado appellate court cases decided since the adoption of TABOR have
resolved a number of questions concerning the required methods for authorizing
new indebtedness, the treatment of tax levies for existing indebtedness and
other purposes, the procedures for conducting elections under TABOR, the ability
of local governments to obtain voter approval for the exclusion of certain
revenues from the limitations on revenues and spending, the ability of local
governments to enter into annually-appropriated lease purchase obligations
without voter approval, and other interpretive matters.

Because TABOR's voter approval requirements apply to any "multiple-fiscal
year" debt or financial obligation, short-term obligations which do not extend
beyond the fiscal year in which they are incurred are treated as exempt from the
voter approval requirements of TABOR. Case law both prior to and after the
adoption of TABOR held that obligations maturing in the current fiscal year, as
well as lease purchase obligations subject to annual appropriation, do not
constitute debt under the Colorado Constitution.

TABOR's voter approval requirements and other limitations (discussed in the
following paragraph) do not apply to "enterprises," which term is defined to
include government-owned businesses authorized to issue their own revenue bonds
and receiving under 10% of annual revenue in grants from all Colorado state and
local governments combined. Enterprise status under TABOR has been and is likely
to continue to be subject to legislative and judicial interpretation.

Among other provisions, TABOR requires the establishment of emergency
reserves, limits increases in district revenues and limits increases in district
fiscal year spending. As a general matter, annual State fiscal year spending may
change no more than inflation plus the percentage change in State population in
the prior calendar year. Annual local district fiscal year spending may change
no more than inflation in the prior calendar year plus annual local growth, as
defined in and subject to the adjustments provided in TABOR. TABOR provides that
annual district property tax revenues may change no more than inflation in the
prior calendar year plus annual local growth, as defined in and subject to the
adjustments provided in TABOR. District revenues in excess of the limits
prescribed by TABOR are required, absent voter approval, to be refunded by any
reasonable method, including temporary tax credits or rate reductions. In
addition, TABOR prohibits new or increased real property transfer taxes, new
State real property taxes and new local district income taxes. TABOR also
provides that a local district may reduce or end its subsidies to any program
(other than public education through grade 12 or as required by federal law)
delegated to it by the State General Assembly for administration.

The foregoing is not intended as a complete description of all of the
provisions of TABOR. Many provisions of TABOR are ambiguous and will require
judicial interpretation. Several statutes enacted or proposed in the State
General Assembly have attempted to clarify the application of TABOR with respect
to certain governmental entities and activities. However, many provisions of
TABOR are likely to continue to be the subject of further legislation or
judicial proceedings. The application of TABOR, particularly in periods of slow
or negative growth, may adversely affect the financial condition and operations
of the State and local governments in the State to an extent which cannot be
predicted.

CONNECTICUT

RISK FACTORS - The State Economy. Manufacturing has historically been of
prime economic importance to Connecticut (sometimes referred to as the State).
The manufacturing industry is diversified, with transportation equipment
(primarily aircraft engines, helicopters and submarines) the dominant industry,
followed by fabricated metals, non-electrical machinery, and electrical
machinery. As a result of a rise in employment in service-related industries and
a decline in manufacturing employment, manufacturing accounted for only 17.1% of
total non-agricultural employment in Connecticut in 1997. Defense-related
business represents a relatively high proportion of the manufacturing sector. On
a per capita basis, defense awards to Connecticut have traditionally been among
the highest in the nation, and reductions in defense spending have had a
substantial adverse impact on Connecticut's economy.

The annual average unemployment rate (seasonally adjusted) in Connecticut
increased from a low of 3.0% in 1988 to a high of 7.6% in 1992 and, after a
number of important changes in the method of calculation, was reported to be
5.8% in 1996. Average per-capita income of Connecticut residents increased in
every year from 1989 to 1997, rising from $25,443 to $36,434. However, pockets
of significant unemployment and poverty exist in some of Connecticut's cities
and towns.

State Revenues and Expenditures. At the end of the 1990-91 fiscal year, the
General Fund had an accumulated unappropriated deficit of $965,712,000. For the
seven fiscal years ended June 30, 1998, the General Fund recorded operating
surpluses, based on the State's budgetary method of accounting, of approximately
$110,200,000, $113,500,000, $19,700,000, $80,500,000, $250,000,000,
$262,600,000, and $312,900,000, respectively. General Fund budgets for the
biennium ending June 30, 1999, were adopted in 1997. General Fund expenditures
and revenues are expected to exceed budgeted amounts for the 1998-99 fiscal
year, and a surplus in excess of $170,000,000 is expected, but the Governor is
recommending spending modifications that would reduce the projected surplus to
$30,000,000.

State Debt. During 1991 the State issued a total of $965,710,000 Economic
Recovery Notes, of which $78,055,000 were outstanding as of December 1, 1998.
The notes were to be payable no later than June 30, 1996, but as part of the
budget adopted for the biennium ended June 30, 1997, payment of the notes
scheduled to be paid during the 1995-96 fiscal year was rescheduled to be made
over the four fiscal years ending June 30, 1999.

The primary method for financing capital projects by the State is through
the sale of the general obligation bonds of the State. These bonds are backed by
the full faith and credit of the State. As of December 1, 1998, there was a
total legislatively authorized bond indebtedness of $12,398,200,000, of which
$11,057,371,000 had been approved for issuance by the State Bond Commission and
$9,814,857,000 had been issued. As of December 1, 1998, State direct general
obligation indebtedness outstanding was $6,837,131,000.

In 1995, the State established the University of Connecticut as a separate
corporate entity to issue bonds and construct certain infrastructure
improvements. The improvements are to be financed by $18 million of general
obligation bonds of the State and $962 million bonds of the University. The
University's bonds will be secured by a State debt service commitment, the
aggregate amount of which is limited to $382 million for the four fiscal years
ending June 30, 1999, and $580 million for the six fiscal years ending June 30,
2005.

In addition, the State has limited or contingent liability on a significant
amount of other bonds. Such bonds have been issued by the following quasi-public
agencies: the Connecticut Housing Finance Authority, the Connecticut Development
Authority, the Connecticut Higher Education Supplemental Loan Authority, the
Connecticut Resources Recovery Authority and the Connecticut Health and
Educational Facilities Authority. Such bonds have also been issued by the cities
of Bridgeport and West Haven and the Southeastern Connecticut Water Authority.
As of December 1, 1998, the amount of bonds outstanding on which the State has
limited or contingent liability totaled $4,054,900,000.

To meet the need for reconstructing, repairing, rehabilitating and
improving the State transportation system (except Bradley International
Airport), the State adopted legislation which provides for, among other things,
the issuance of special tax obligation ("STO") bonds the proceeds of which will
be used to pay for improvements to the State's transportation system. The STO
bonds are special tax obligations of the State payable solely from specified
motor fuel taxes, motor vehicle receipts, and license, permit and fee revenues
pledged therefor and deposited in the special transportation fund, which was
established to budget and account for such revenues.

As of December 1, 1998, the General Assembly had authorized STO bonds for
the program in the aggregate amount of $4,489,200,000, of which $4,119,700,000
of new money borrowings had been issued. It is anticipated that additional STO
bonds will be authorized by the General Assembly annually in an amount necessary
to finance and to complete the infrastructure program. Such additional bonds may
have equal rank with the outstanding bonds provided certain pledged revenue
coverage requirements of the STO indenture controlling the issuance of such
bonds are met. The State expects to continue to offer bonds for this program.

The State's general obligation bonds are rated Aa3 by Moody's and AA by
Fitch. On October 8, 1998, Standard & Poor's upgraded its rating of the State's
general obligation bonds from AA- to AA.

Litigation. The State, its officers and its employees are defendants in
numerous lawsuits. Although it is not possible to determine the outcome of these
lawsuits, the Attorney General has opined that an adverse decision in any of the
following cases might have a significant impact on the State's financial
position: (i) a class action by the Connecticut Criminal Defense Lawyers
Association claiming a campaign of illegal surveillance activity and seeking
damages and injunctive relief; (ii) an action on behalf of all persons with
traumatic brain injury, claiming that their constitutional rights are violated
by placement in State hospitals alleged not to provide adequate treatment and
training, and seeking placement in community residential settings with
appropriate support services; (iii) litigation involving claims by Indian tribes
to portions of the State's land area; and (iv) an action by certain students and
municipalities claiming that the State's formula for financing public education
violates the State's Constitution and seeking a declaratory judgment and
injunctive relief.

As a result of litigation on behalf of black and Hispanic school children
in the City of Hartford seeking "integrated education" within the Greater
Hartford metropolitan area, on July 9, 1996, the State Supreme Court directed
the legislature to develop appropriate measures to remedy the racial and ethnic
segregation in the Hartford public schools. The Superior Court recently ordered
the State to show cause as to whether there has been compliance with the Supreme
Court's ruling. The fiscal impact of this decision might be significant but is
not determinable at this time.

The State's Department of Information Technology is reviewing the State's
Year 2000 exposure and developing plans for modification or replacement of
existing software that it believes will prevent significant operations problems.
There is a risk that the plan will not be completed on time, that planned
testing will not reveal all problems, or that systems of others on whom the
State relies will not be timely updated. If the necessary remediations are not
completed in a timely fashion, the Year 2000 problem may have a material impact
on the operations of the State.

Municipal Debt Obligations. General obligation bonds issued by
municipalities are usually payable from ad valorem taxes on property subject to
taxation by the municipality. A municipality's property tax base is subject to
many factors outside the control of the municipality, including the decline in
Connecticut's manufacturing industry. Certain Connecticut municipalities have
experienced severe fiscal difficulties and have reported operating and
accumulated deficits in recent years. The most notable of these is the City of
Bridgeport, which filed a bankruptcy petition on June 7, 1991. The State opposed
the petition. The United States Bankruptcy Court for the District of Connecticut
held that Bridgeport has authority to file such a petition but that its petition
should be dismissed on the grounds that Bridgeport was not insolvent when the
petition was filed. State legislation enacted in 1993 prohibits municipal
bankruptcy filings without the prior written consent of the Governor.

In addition to general obligation bonds backed by the full faith and credit
of the municipality, certain municipal authorities may issue bonds that are not
considered to be debts of the municipality. Such bonds may only be repaid from
the revenues of projects financed by the municipal authority, which revenues may
be insufficient to service the authority's debt obligations.

Regional economic difficulties, reductions in revenues, and increased
expenses could lead to further fiscal problems for the State and its political
subdivisions, authorities, and agencies. This could result in declines in the
value of their outstanding obligations, increases in their future borrowing
costs, and impairment of their ability to pay debt service on their obligations.

FLORIDA

The Portfolio of the Florida Trust contains different issues of long-term
debt obligations issued by or on behalf of the State of Florida (the "State")
and counties, municipalities and other political subdivisions and public
authorities thereof or by the Government of Puerto Rico or the Government of
Guam or by their respective authorities, all rated in the category A or better
by at least one national rating organization. Investment in the Florida Trust
should be made with an understanding that the value of the underlying Portfolio
may decline with increases in interest rates.

RISK FACTORS-The State Economy. In 1980 Florida ranked seventh among the
fifty states with a population of 9.7 million people. The State has grown
dramatically since then and, as of April 1, 1997, ranked fourth with an
estimated population of 14.7 million. Since the beginning of the eighties,
Florida has surpassed Ohio, Illinois and Pennsylvania in total population.
Because of the national recession, Florida's net migration declined to 138,000
in 1992, but migration has since recovered and reached 255,000 in 1996. In
recent years the prime working age population (18-64) has grown at an average
annual rate of more than 2.0%. The share of Florida's total working age
population (18-64) to total State population is about 60%. Non-farm employment
has grown by over 21.2% since 1991. Total non-farm employment in Florida is
expected to increase 3.4% in 1998-99 and rise 2.9% in 1999-00. By the end of
1999-00, non-farm employment in the State is expected to reach almost 7.0
million jobs. The State is gradually becoming less dependent on employment
related to construction, agriculture and manufacturing, and more dependent on
employment related to trade and services. Presently services constitute 34.9%
and trade 25.6% of the State's total non-farm jobs. Manufacturing jobs in
Florida are concentrated in the area of high-tech and value-added sectors, such
as electrical and electronic equipment, as well as printing and publishing.
While both the State and national proportion of manufacturing jobs has declined
over time, Florida's proportion of manufacturing jobs has been about half the
nation's for many years. Foreign trade has contributed significantly to
Florida's employment growth. Trade jobs are expected to grow 2.8% in 1998-99 and
2.8% in 1999-00. Florida's dependence on highly cyclical construction and
construction related manufacturing has declined. Total contract construction
employment as a share of total non-farm employment reached a peak of 10% in
1973. Before the recession of the early 1980's the share was 7.7%. In the late
eighties, construction's share was 7.5% and in 1997 it was 5.7%. The job
creation rate for the State of Florida is almost twice the rate for the nation
as a whole. Throughout most of the 1980's the unemployment rate for the State
tracked below that of the nation's. In the nineties, the trend was reversed
until 1995, when the state's unemployment rate again tracked below or about the
same as the U.S. In 1997, Florida's unemployment rate was 4.8% while the
nation's was 4.9%. Florida's unemployment rate is forecasted at 4.5% in 1998-99
and 4.6% in 1999-00. Because Florida has a proportionately greater retirement
age population, property income (dividends, interest and rent) and transfer
payments (Social Security and pension benefits) are a relatively more important
source of income. From 1992 to 1997, Florida's total nominal personal income
grew by 36.6% and per capita income expanded approximately 25.9%. For the
nation, total and per capita personal income increased by 30.2% and 24.1%
respectively. From 1992 through 1997, Florida's total nominal personal income
grew by 36.6% and per capita income expanded approximately 25.9%. For the
nation, total and per capita personal income increased by 30.2% and 24.1%
respectively. Real personal income in Florida is forecasted to increase 4.9% in
1998-99 and increase 3.5% in 1999-00. During this time real personal income per
capita is expected to grow at 3.1% in 1998-99 and 1.8% in 1999-00.

The ability of the State and its local units of government to satisfy the
Debt Obligations may be affected by numerous factors which impact on the
economic vitality of the State in general and the particular region of the State
in which the issuer of the Debt Obligation is located. South Florida is
particularly susceptible to international trade and currency imbalances and to
economic dislocations in Central and South America, due to its geographical
location and its involvement with foreign trade, tourism and investment capital.
The central and northern portions of the State are impacted by problems in the
agricultural sector, particularly with regard to the citrus and sugar
industries. Short-term adverse economic conditions may be created in these
areas, and in the State as a whole, due to crop failures, severe weather
conditions or other agriculture-related problems. The State economy also has
historically been somewhat dependent on the tourism and construction industries
and is sensitive to trends in those sectors.

Some of the computer hardware and software and embedded technology used by
the State, its agencies, bond registrars or paying agents may not have been
designed to recognize calendar years after 1999, the so-called "Year 2000
problem." Since the operations necessary to assure the uninterrupted flow of
funds to bondholders depend upon computer technologies, the failure of any such
system to become Year 2000 compliant on a timely basis could have an adverse
effect on the collection and payment of revenues to bondholders.

The State has established a Year 2000 Task Force, allocated funds and
expects to complete the remediation of all state agency computer systems by
June, 1999. The State Legislature has enacted legislation applying the State's
sovereign immunity provision to State and local government entities in the event
of Year 2000 computer system failures and granting the Governor the power to
transfer State resources if necessary to address Year 2000 problems in State
agencies.

There can be no assurance that Year 2000 compliance will be achieved in a
timely manner by State agencies, and there can be no assurance that any other
entity or governmental agency with which they interact electronically will be
Year 2000 compliant. At this time, the potential impact of such noncompliance is
not known.

The State Budget. Florida prepares an annual budget which is formulated
each year and presented to the Governor and Legislature. Under the State
Constitution and applicable statutes, the State budget as a whole, and each
separate fund within the State budget, must be kept in balance from currently
available revenues during each State fiscal year. (The State's fiscal year runs
from July 1 through June 30). The Governor and the Comptroller of the State are
charged with the responsibility of ensuring that sufficient revenues are
collected to meet appropriations and that no deficit occurs in any State fund.

The financial operations of the State covering all receipts and
expenditures are maintained through the use of four types of funds: the General
Revenue Fund, Trust Funds, the Working Capital Fund and the Budget Stabilization
Fund. The majority of the State's tax revenues are deposited in the General
Revenue Fund and monies for all funds are expended pursuant to appropriations
acts. In fiscal year 1996-97, expenditures for education, health and welfare and
public safety amounted to approximately 53%, 26% and 14%, respectively, of total
General Revenue Funds available. The Trust Funds consist of monies received by
the State which under law or trust agreement are segregated for a purpose
authorized by law. Revenues in the General Revenue Fund which are in excess of
the amount needed to meet appropriations may be transferred to the Working
Capital Fund.

State Revenues. For fiscal year 1998-99 the estimated General Revenue plus
Working Capital and Budget Stabilization Funds available total $19,463.7
million, a 5.1% increase over 1997-98. The $17,692.4 million in Estimated
Revenues represent an increase of 4.4% over the analogous figure in 1997- 98.
With combined General Revenue, Working Capital and Budget Stabilization Funds
appropriations at $18,185.0 million, unencumbered reserves at the end of 1998-99
are estimated at $1,379.6 million. For fiscal year 1999-00, the estimated
General Revenue plus Working Capital and Budget Stabilization Funds available
total $19,923.7 million, a 2.4% increase over 1998-99. The $18,386.1 million in
Estimated Revenues represent a 3.9% increase over the analogous figure in
1998-99.

In fiscal year 1996-97, the State derived approximately 67% of its total
direct revenues for deposit in the General Revenue Fund, Trust Funds, Working
Capital Fund and Budget Stabilization Fund from State taxes and fees. Federal
funds and other special revenues accounted for the remaining revenues. The
largest single source of tax receipts in the State is the 6% sales and use tax.
For the fiscal year ended June 30, 1997, receipts from the sales and use tax
totaled $12,089 million, an increase of 5.5% from the prior fiscal year. The
second largest source of State tax receipts is the tax on motor fuels including
the tax receipts distributed to local governments. Receipts from the taxes on
motor fuels are almost entirely dedicated to trust funds for specific purposes
or transferred to local governments and are not included in the General Revenue
Fund. Preliminary data for the fiscal year ended June 30, 1997, show collections
of this tax totaled $2,012.0 million.

The State currently does not impose a personal income tax. However, the
State does impose a corporate income tax on the net income of corporations,
organizations, associations and other artificial entities for the privilege of
conducting business, deriving income or existing within the State. For the
fiscal year ended June 30, 1997, receipts from the corporate income tax totaled
$1,362.3 million, an increase of 17.2% from fiscal year 1995-96. The Documentary
Stamp Tax collections totaled $844.2 million during fiscal year 1996-97, posting
an 8.9% increase from the previous fiscal year. The Alcoholic Beverage Tax, an
excise tax on beer, wine and liquor totaled $447.2 million in fiscal year ending
June 30, 1997. The Florida Lottery produced sales of $2.09 billion in fiscal
year 1996-97 of which $792.3 million was used for education purposes.

While the State does not levy ad valorem taxes on real property or tangible
personal property, counties, municipalities and school districts are authorized
by law, and special districts may be authorized by law, to levy ad valorem
taxes. Under the State Constitution, ad valorem taxes may not be levied by
counties, municipalities, school districts and water management districts in
excess of the following respective millages upon the assessed value of real
estate and tangible personal property: for all county, municipal or school
purposes, ten mills, and for water management districts no more than 0.05 mill
or 1.0 mill, depending upon geographic location. These millage limitations do
not apply to taxes levied for payment of bonds and taxes levied for periods not
longer than two years when authorized by a vote of the electors. (Note: one mill
equals one-tenth of one cent.)

The State Constitution and statutes provide for the exemption of homesteads
from certain taxes. The homestead exemption is an exemption from all taxation,
except for assessments for special benefits, up to a specific amount of the
assessed valuation of the homestead. This exemption is available to every person
who has the legal or equitable title to real estate and maintains thereon his or
her permanent home. All permanent residents of the State are currently entitled
to a $25,000 homestead exemption from levies by all taxing authorities, however,
such exemption is subject to change upon voter approval.

As of January 1, 1994, the property valuations for homestead property are
subject to a growth cap of the lesser of 3% or the change in the Consumer Price
Index during the relevant year, except in the event of a sale thereof during
such year, and except as to improvements thereto during such year. If the
property changes ownership or homestead status, it is to be re-valued at full
just value on the next tax roll.

Since municipalities, counties, school districts and other special purpose
units of local governments with power to issue general obligation bonds have
authority to increase the millage levy for voter approved general obligation
debt to the amount necessary to satisfy the related debt service requirements,
the property valuation growth cap is not expected to adversely affect the
ability of these entities to pay the principal of or interest on such general
obligation bonds. However, in periods of high inflation, those local government
units whose operating millage levies are approaching the constitutional cap and
whose tax base consists largely of residential real estate, may, as a result of
the above-described property valuation growth cap, need to place greater
reliance on non-ad valorem revenue sources to meet their operating budget needs.

At the November 1994 general election, voters approved an amendment to the
State Constitution that limits the amount of taxes, fees, licenses and charges
imposed by the Legislature and collected during any fiscal year to the amount of
revenues allowed for the prior fiscal year, plus an adjustment for growth. The
revenue limit is determined by multiplying the average annual rate of growth in
Florida personal income over the previous five years times the maximum amount of
revenues permitted under the cap for the prior fiscal year. The revenues allowed
for any fiscal year can be increased by a two-thirds vote of the Legislature.
The limit was effective starting with fiscal year 1995-96 based on actual
revenues from fiscal year 1994-95. Any excess revenues generated will be
deposited in the Budget Stabilization Fund. Included among the categories of
revenues which are exempt from the proposed revenue limitation, however, are
revenues pledged to state bonds.

State General Obligation Bonds and State Revenue Bonds. The State
Constitution does not permit the State to issue debt obligations to fund
governmental operations. Generally, the State Constitution authorizes the State
bonds pledging the full faith and credit of the State only to finance or
refinance the cost of State fixed capital outlay projects, upon approval by a
vote of the electors, and provided that the local outstanding principal amount
of such bonds does not exceed 50% of the total tax revenues of the State for the
two preceding fiscal years. Revenue bonds may be issued by the State or its
agencies without a vote of the electors only to finance or refinance the cost of
State fixed capital outlay projects which are payable solely from funds derived
directly from sources other than State tax revenues.

Exceptions to the general provisions regarding the full faith and credit
pledge of the State are contained in specific provisions of the State
Constitution which authorize the pledge of the full faith and credit of the
State, without electorate approval, but subject to specific coverage
requirements, for: certain road projects, county education projects, State
higher education projects, State system of Public Education and construction of
air and water pollution control and abatement facilities, solid waste disposal
facilities and certain other water facilities.

Local Bonds. The State Constitution provides that counties, school
districts, municipalities, special districts and local governmental bodies with
taxing powers may issue debt obligations payable from ad valorem taxation and
maturing more than 12 months after issuance, only (i) to finance or refinance
capital projects authorized by law, provided that electorate approval is
obtained, or (ii) to refund outstanding debt obligations and interest and
redemption premium thereon at a lower net average interest cost rate.

Counties, municipalities and special districts are authorized to issue
revenue bonds to finance a variety of self-liquidating projects pursuant to the
laws of the State, such revenue bonds to be secured by and payable from the
rates, fees, tolls, rentals and other charges for the services and facilities
furnished by the financed projects. Under State law, counties and municipalities
are permitted to issue bonds payable from special tax sources for a variety of
purposes, and municipalities and special districts may issue special assessment
bonds.

Bond Ratings. General obligation bonds of the State are currently rated Aa2
by Moody's, AA+ by Standard & Poor's, and AA by Fitch Investors Services, Inc.

Litigation. Due to its size and its broad range of activities, the State
(and its officers and employees) are involved in numerous routine lawsuits. The
managers of the departments of the State involved in such routine lawsuits
believe that the results of such pending litigation would not materially affect
the State's financial position. In addition to the routine litigation pending
against the State, its officers and employees, the following lawsuits and claims
are also pending:

A. In an inverse condemnation suit, plaintiff claims that the action of
State constitutes a taking of plaintiff's leases for which compensation is due.
The Circuit Judge granted the State's motion for summary judgment finding that
as a matter of law, the State had not deprived plaintiff of any royalty rights.
Plaintiff appealed to the First District Court of Appeals, but the case was
remanded to the Circuit Court for trial. Final judgment was made in favor of the
State. Although plaintiff filed for a review by the Florida Supreme Court, the
Supreme Court denied review and the petition for certiorari.

B. The Florida Department of Transportation has filed an action against
owners of property adjoining property that is subject to a claim by the U.S.
Environmental Protection Agency, seeking a declaratory judgment that the
Department is not the owner of such property. Although the case was dismissed
the EPA could file a claim against the FDOT for clean-up costs. These clean-up
costs could exceed $25 million.

C. In a class action suit on behalf of clients of residential placement for
the developmentally disabled seeking refunds for services where children were
entitled to free education under the Education for Handicapped Act, the District
court held that the State could not charge maintenance fees for children between
the ages of 5 and 17 based on the Act. All appeals have been exhausted. The
State's potential cost of refunding these charges could exceed $42 million.
However, attorneys are in the process of negotiating a settlement amount.

D. In an action challenging the constitutionality of the Public Medical
Assistance Trust Fund annual assessment on net operating revenue of
free-standing out-patient facilities offering sophisticated radiology services,
a trial has not been scheduled. If the State does not prevail, the potential
refund liability could be approximately $70 million.

E. In an action challenging whether Florida's statute for dealer
repossessions authorizes the Department of Revenue to grant a refund to a
financial institution as the assignee of numerous security agreements governing
the sale of automobiles and other property sold by dealers, the question turns
on whether the Legislature intended the statute only to provide a refund or
credit to the dealer who actually sold the tangible personal property and
collected and remitted the tax or intended that right to be assignable. Final
judgment has been issued against the Department; however, the Department plans
to appeal the decision. Several banks have applied for refunds; the potential
refund to financial institutions exceeds $30,000,000, annually.

F. In an action challenging whether the State of Florida and the Department
of Environmental Protection (DEP) breached contracts with the plaintiff by
"freezing" the process of reimbursement applications and then terminating the
petroleum contamination clean-up reimbursement process, the plaintiff alleges
the State's and DEP's actions constitute torts or impairment of contractual
obligations. Plaintiff also alleges that the termination of the petroleum
contamination clean-up reimbursement program constitutes a breach of contract.
In addition to damages, plaintiff seeks recovery of attorneys fees and costs. If
attorneys fees and costs are awarded, the potential liability could be as high
as $60 million.

G. In an action against the Florida Department of Transportation, plaintiff
claims the Department has been responsible for construction of roads and
attendant drainage facilities in Hillsborough County, and as a result of its
construction, has caused plaintiff's property to become subject to flooding,
thereby amounting to an uncompensated taking. The Court granted the State's
Motion for More Definite Statement as to certain portions of the plaintiff's
complaint. If the State is unsuccessful in its action, potential losses could
exceed $40 million.

H. In a case challenging the date of the imposition of interest on
additional amounts of corporate income tax due as a result of Federal audit
adjustments, the Florida Department of Revenue's historical position is that
interest is due from the due date of the return until payment of the additional
amount of tax is made. The taxpayer contends that interest should accrue from
the date the Federal audit adjustments were due to be reported to Florida. A
Final Order was issued adopting the Department's position; however, the taxpayer
filed an appeal of the Final Order. Based on the best available information, the
potential exposure for refunds or lost revenue is in the range of $12 to $20
million per year.

Summary. Many factors including national, economic, social and
environmental policies and conditions, most of which are not within the control
of the State or its local units of government, could affect or could have an
adverse impact on the financial condition of the State. Additionally, the
limitations placed by the State Constitution on the State and its local units of
government with respect to income taxation, ad valorem taxation, bond
indebtedness and other matters, discussed above, as well as other applicable
statutory limitations, may constrain the revenue-generating capacity of the
State and its local units of government and, therefore, the ability of the
issuers of the Debt Obligations to satisfy their obligations thereunder.

The Sponsors believe that the information summarized above describes some
of the more significant matters relating to the Florida Trust. For a discussion
of the particular risks with each of the Debt Obligations, and other factors to
be considered in connection therewith, reference should be made to the Official
Statement and other offering materials relating to each of the Debt Obligations
included in the portfolio of the Florida Trust. The foregoing information
regarding the State, its political subdivisions and its agencies and authorities
constitutes only a brief summary, does not purport to be a complete description
of the matters covered and is based solely upon information drawn from official
statements relating to offerings of certain bonds of the State. The Sponsors and
their counsel have not independently verified this information, and the Sponsors
have no reason to believe that such information is incorrect in any material
respect. None of the information presented in this summary is relevant to Puerto
Rico or Guam Debt Obligations which may be included in the Florida Trust.

For a general description of the risks associated with the various types of
Debt Obligations comprising the Florida Trust, see the discussion under "Risk
Factors", above.

LOUISIANA

RISK FACTORS. The following discussion regarding the financial condition of
the State government may not be relevant to general obligation or revenue bonds
issued by political subdivisions of and other issuers in the State of Louisiana
(the "State"). Such financial information is based upon information about
general financial conditions that may or may not affect issuers of the Louisiana
obligations. The Sponsors have not independently verified any of the information
contained in such publicly available documents, but are not aware of any facts
which would render such information inaccurate.

In July, 1995, Standard & Poor's downgraded the rating the State received
for its general obligation bonds from A to A-. Standard & Poor's cited problems
with the State's Medicaid program as the primary factor in its decision. The
current Moody's rating on the State's general obligation bonds was not
downgraded and remains at Baaa1. There can be no assurance that the economic
conditions on which these ratings were based will continue or that particular
bond issues may not be adversely affected by changes in economic or political
conditions.

The Revenue Estimating Conference (the "Conference") was established by Act
No. 814 of the 1987 Regular Session of the State Legislature. The Conference was
established by the Legislature to provide an official estimate of anticipated
State revenues upon which the executive budget shall be based, to provide for a
more stable and accurate method of financial planning and budgeting and to
facilitate the adoption of a balanced budget as is required by Article VII,
Section 10(E) of the State Constitution. Act No. 814 provides that the Governor
shall cause to be prepared an executive budget presenting a complete financial
and programmatic plan for the ensuing fiscal year based only upon the official
estimate of anticipated State revenues as determined by the Revenue Estimating
Conference. Act No. 814 further provides that at no time shall appropriations or
expenditures for any fiscal year exceed the official estimate of anticipated
State revenues for that fiscal year. An amendment to the Louisiana Constitution
was approved by the Louisiana Legislature in 1990 and enacted by the electorate
which granted constitutional status to the existence of the Revenue Estimating
Conference.

State General Fund: The State General Fund is the principal operating fund
of the State and was established administratively to provide for the
distribution of funds appropriated by the Louisiana Legislature for the ordinary
expenses of the State government. Revenue is provided from the direct deposit of
federal grants and the transfer of State revenues from the Bond Security and
Redemption Fund after general obligation debt requirements are met. The
beginning accumulated State General Fund balance for fiscal year 1996-1997 was
$586 million.

On January 29, 1997, the Revenue Estimating Conference (the "Conference")
adopted its official forecast of revenues for Fiscal Year 1997-98 at $5.489
billion of state general fund monies plus $94.9 million in Lottery Proceeds, or
a total of $5.584 billion, as the basis for legislative enactment of the
operating budget during the 1997 regular session, which commences March 31,
1997. Based upon that estimate, forecasted revenues would be approximately
$192.9 million short of the amount needed to continue state operations in the
fiscal year 1997-1998 at a level equivalent to Fiscal Year 1996-1997. The state
believes it may be possible to close this gap by providing stand-still dollar
recommendations in a number of expenditure categories.

Transportation Trust Fund: The Transportation Trust Fund was established
pursuant to (i) Section 27 of Article VII of the State Constitution and (ii) Act
No. 16 of the First Extraordinary Session of the Louisiana Legislature for the
year 1989 (collectively the "Act") for the purpose of funding construction and
maintenance of state and federal roads and bridges, the statewide flood-control
program, ports, airports, transit and state police traffic control projects and
to fund the Parish Transportation Fund. The Transportation Trust Fund is funded
by a levy of $0.20 per gallon on gasoline and motor fuels and on special fuels
(diesel, propane, butane and compressed natural gas) used, sold or consumed in
the state (the "Gasoline and Motor Fuels Taxes and Special Fuels Taxes"). This
levy was increased from $0.16 per gallon (the "Existing Taxes") to the current
$0.20 per gallon pursuant to Act No. 16 of the First Extraordinary Session of
the Louisiana Legislature for the year 1989, as amended. The additional tax of
$0.04 per gallon (the "Act 16 Taxes") became effective January 1, 1990, and will
expire on the earlier of January 1, 2005, or the date on which obligations
secured by the Act No. 16 taxes are no longer outstanding. The Transportation
Infrastructure Model for Economic Development Account (the "TIME Account") was
established in the Transportation Trust Fund. Moneys in the TIME account will be
expended for certain projects identified in the Act aggregating $1.4 billion and
to fund not exceeding $160 million of additional capital transportation
projects. The State issued $263,902,639.95 of Gasoline and Fuels Tax Revenue
Bonds, 1990 Series A, dated April 15, 1990, payable from the (i) Act No. 16
Taxes, (ii) any Act No. 16 Taxes and Existing Taxes deposited in the
Transportation Trust Fund, and (iii) any additional taxes on gasoline and motor
fuels and special fuels pledged for the payment of said Bonds. As of December
31, 1995, the outstanding principal amount of said Bonds was $193,323,000.00.

Ad Valorem Taxation: Only local governmental units presently levy ad
valorem taxes. Under the 1921 State Constitution a $5.75 mills ad valorem tax
was being levied by the State until January 1, 1973, at which time a
constitutional amendment to the 1921 Constitution abolished the ad valorem tax.
Under the 1974 State Constitution a State ad valorem tax of up to $5.75 mills
was provided for but is not presently being levied. The property tax is
underutilized at the parish level due to a constitutional homestead exemption
from the property tax applicable to the first $75,000 of the full market value
of single family residences. Homestead exemptions do not apply to ad valorem
property taxes levied by municipalities, with the exception of the City of New
Orleans. Because local governments also are prohibited from levying an
individual income tax by the constitution, their reliance on State government is
increased under the existing tax structure.

Litigation: In 1988, the Louisiana legislature created a Self-Insurance
Fund within the Department of Treasury. That Fund consists of all premiums paid
by State agencies under the State's Risk Management program, the investment
earnings on those premiums and commissions retained. The Self-Insurance Fund may
only be used for payment of losses incurred by State agencies under the
Self-Insurance program, together with insurance premiums, legal expenses and
administration costs. For fiscal year 1995-1996, the sum of $119,946,754.00 was
paid from the Self-Insurance Fund to satisfy claims and judgments. It is the
opinion of the Attorney General for the State of Louisiana that only a portion
of the dollar amount of potential liability of the State resulting from
litigation which is pending against the State and is not being handled through
the Office of Risk Management ultimately will be recovered by plaintiffs. It is
the opinion of the Attorney General that the estimated future liability for
existing claims is in excess of $31 million. However, there are other claims
with future possible liabilities for which the Attorney General cannot make a
reasonable estimate.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions to
which the issuers of the Louisiana Trust are subject. Additionally, many factors
including national economic, social and environmental policies and conditions,
which are not within the control of the issuers of Bonds, could affect or could
have an adverse impact on the financial condition of the State and various
agencies and political subdivisions located in the State. The Sponsors are
unable to predict whether or to what extent such factors may affect the issuers
of Bonds, the market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the Louisiana Trust to pay interest
on or principal of the Bonds.

Prospective investors should study with care the Portfolio of Bonds in the
Louisiana Trust and should consult with their investment advisors as to the
merits of particular issues in that Trust's Portfolio.

MARYLAND

RISK FACTORS-State Debt. The Public indebtedness of the State of Maryland
and its instrumentalities is divided into three general types. The State issues
general obligation bonds for capital improvements and for various State projects
to the payment of which the State ad valorem property tax is exclusively
pledged. In addition, the Maryland Department of Transportation issues for
transportation purposes its limited, special obligation bonds payable primarily
from specific, fixed-rate excise taxes and other revenues related mainly to
highway use. Certain authorities issue obligations payable solely from specific
non-tax, enterprise fund revenues and for which the State has no liability and
has given no moral obligation assurance. The State and certain of its agencies
also have entered into a variety of lease purchase agreements to finance the
acquisition of capital assets. These lease agreements specify that payments
thereunder are subject to annual appropriation by the General Assembly.

General Obligation Bonds. General obligation bonds of the State are
authorized and issued primarily to provide funds for State-owned capital
improvements, including institutions of higher learning, and the construction of
locally owned public schools. Bonds have also been issued for local government
improvements, including grants and loans for water quality improvement projects
and correctional facilities, and to provide funds for repayable loans or
outright grants to private, non-profit cultural or educational institutions.

The Maryland Constitution prohibits the contracting of State debt unless it
is authorized by a law levying an annual tax or taxes sufficient to pay the debt
service within 15 years and prohibiting the repeal of the tax or taxes or their
use for another purpose until the debt is paid. As a uniform practice, each
separate enabling act which authorizes the issuance of general obligation bonds
for a given object or purpose has specifically levied and directed the
collection of an ad valorem property tax on all taxable property in the State.
The Board of Public Works is directed by law to fix by May 1 of each year the
precise rate of such tax necessary to produce revenue sufficient for debt
service requirements of the next fiscal year, which begins July 1. However, the
taxes levied need not be collected if or to the extent that funds sufficient for
debt service requirements in the next fiscal year have been appropriated in the
annual State budget. Accordingly, the Board, in annually fixing the rate of
property tax after the end of the regular legislative session in April, takes
account of appropriations of general funds for debt service.

In the opinion of counsel, the courts of Maryland have jurisdiction to
entertain proceedings and power to grant mandatory injunctive relief to (i)
require the Governor to include in the annual budget a sufficient appropriation
to pay all general obligation bond debt service for the ensuing fiscal year;
(ii) prohibit the General Assembly from taking action to reduce any such
appropriation below the level required for that debt service; (iii) require the
Board of Public Works to fix and collect a tax on all property in the State
subject to assessment for State tax purposes at a rate and in an amount
sufficient to make such payments to the extent that adequate funds are not
provided in the annual budget; and (iv) provide such other relief as might be
necessary to enforce the collection of such taxes and payment of the proceeds of
the tax collection to the holders of general obligation bonds, pari passu,
subject to the inherent constitutional limitations referred to below.

It is also the opinion of counsel that, while the mandatory injunctive
remedies would be available and while the general obligation bonds of the State
are entitled to constitutional protection against the impairment of the
obligation of contracts, such constitutional protection and the enforcement of
such remedies would not be absolute. Enforcement of a claim for payment of the
principal of or interest on the bonds could be subject to the provisions of any
statutes that may be constitutionally enacted by the United States Congress or
the Maryland General Assembly extending the time for payment or imposing other
constraints upon enforcement.

There is no general debt limit imposed by the Maryland Constitution or
public general laws, but a special committee created by statute annually submits
to the Governor an estimate of the maximum amount of new general obligation debt
that prudently may be authorized. Although the committee's responsibilities are
advisory only, the Governor is required to give due consideration to the
committee's findings in preparing a preliminary allocation of new general debt
authorization for the next ensuing fiscal year.

Department of Transportation Bonds. Consolidated Transportation Bonds are
limited obligations issued by the Maryland Department of Transportation, the
principal of which must be paid within 15 years from the date of issue, for
highway, port, transit, rail or aviation facilities or any combination of such
facilities. Debt service on Consolidated Transportation Bonds is payable from
those portions of the excise tax on each gallon of motor vehicle fuel and the
motor vehicle titling tax, all mandatory motor vehicle registration fees, motor
carrier fees, and the corporate income tax as are credited to the Maryland
Department of Transportation, plus all departmental operating revenues and
receipts. Holders of such bonds are not entitled to look to other sources for
payment.

The Maryland Department of Transportation also issues its bonds to provide
financing of local road construction and various other county transportation
projects and facilities. Debt service on these bonds is payable from the
subdivisions' share of highway user revenues held to their credit in a special
State fund.

The Maryland Transportation Authority operates certain highway, bridge and
tunnel toll facilities in the State. The tolls and other revenues received from
these facilities are pledged as security for revenue bonds of the Authority
issued under and secured by a trust agreement between the authority and a
corporate trustee. As of December 31, 1998, $340.8 million of the Transportation
Authority's revenue bonds were outstanding.

Maryland Stadium Authority Bonds. The Maryland Stadium Authority is
responsible for financing and directing the acquisition and construction of one
or more new professional sports facilities in Maryland. Currently, the Stadium
Authority operates Oriole Park at Camden Yards which opened in 1992. In
connection with the construction of that facility, the Authority issued $155
million in notes and bonds. These notes and bonds are lease-backed revenue
obligations, the payment of which is secured by, among other things, an
assignment of revenues received under a lease of the sports facilities from the
Stadium Authority to the State.

The Stadium Authority also has been assigned responsibility for
constructing an expansion of the Convention Centers in Baltimore and Ocean City
and construction of a conference center in Montgomery County. The Baltimore
Convention Center expansion cost $167 million and is being financed through a
combination of funding from Baltimore City, Stadium Authority revenue bonds,
State general obligation bonds and other state appropriations. The Ocean City
Convention Center expansion cost $33.2 million and is being financed through a
matching grant from the State and a combination of funding from Ocean City and
the Stadium Authority. The Montgomery County conference center is expected to
cost $27.5 million and is being financed through a combination of funding from
Montgomery County and the Stadium Authority.

In October, 1995, the Stadium Authority and the Baltimore Ravens (formally
known as the Cleveland Browns) executed a Memorandum of Agreement which commits
the Ravens to occupy a to be constructed football stadium in Baltimore City. The
Agreement was approved by the Board of Public Works and constitutes a "long-term
lease with a National Football League team" as required by statute for the
issuance of Stadium Authority bonds. The Stadium Authority sold $87.565 million
in lease-backed revenue bonds on May 1, 1996. The proceeds from the bonds, along
with cash available from State lottery proceeds, investment earnings, and other
sources will be used to pay project design and construction expenses of
approximately $220 million. The bonds are solely secured by an assignment of
revenues received under a lease of the project from the Stadium Authority to the
State.

Miscellaneous Revenue and Enterprise Financings. Certain other
instrumentalities of the State government are authorized to borrow money under
legislation which expressly provides that the loan obligations shall not be
deemed to constitute a debt or a pledge of the faith and credit of the State.
The Community Development Administration of the Department of Housing and
Community Development ("CDA"), higher educational institutions (including St.
Mary's College of Maryland, the University of Maryland System, and Morgan State
University), the Maryland Water Quality Financing Administration and the
Maryland Environmental Service ("MES") have issued and have outstanding bonds of
this type. The principal of and interest on bonds issued by these bodies are
payable solely from various sources, principally fees generated from use of the
facilities or enterprises financed by the bonds.

The Water Quality Revolving Loan Fund is administered by the Water Quality
Financing Administration in the Department of the Environment. The Fund may be
used to provide loans, subsidies and other forms of financial assistance to
local government units for wastewater treatment projects as contemplated by the
1987 amendments to the federal Water Pollution Control Act. The Administration
is authorized to issue bonds secured by revenues of the Fund, including loan
repayments, federal capitalization grants, and matching State grants.

The University of Maryland System, Morgan State University, and St. Mary's
College of Maryland are authorized to issue revenue bonds for the purpose of
financing academic and auxiliary facilities. Auxiliary facilities are any
facilities that furnish a service to students, faculty, or staff, and that
generate income. Auxiliary facilities include housing, eating, recreational,
campus, infirmary, parking, athletic, student union or activity, research
laboratory, testing, and any related facilities.

CDA is responsible for housing finance and assistance programs. CDA issues
bonds and notes to provide funding for various home ownership and rental housing
loan programs. The debt service on CDA's revenue bonds and notes generally is
paid from mortgage repayments.

MES was established to provide water supply, waste water treatment, and
waste management services to state agencies, local governments, and private
entities. MES is authorized to issue revenue bonds secured by the revenue
derived from its various facilities and projects. MES plans to issue additional
revenue bonds in fiscal year 1999.

Although the State has authority to make short-term borrowings in
anticipation of taxes and other receipts up to a maximum of $100 million, in the
past it has not issued short-term tax anticipation and bond anticipation notes
or made any other similar short-term borrowings. However, the State has issued
certain obligations in the nature of bond anticipation notes for the purpose of
assisting several savings and loan associations in qualifying for Federal
insurance and in connection with the assumption by a bank of the deposit
liabilities of an insolvent savings and loan association.

Lease and Conditional Purchase Financings. The State has financed and
expects to continue to finance the construction and acquisition of various
facilities through conditional purchase, sale-leaseback, and similar
transactions. All of the lease payments under these arrangements are subject to
annual appropriation by the Maryland General Assembly. In the event that
appropriations are not made, the State may not be held contractually liable for
the payments.

Ratings. The general obligation bonds of the State of Maryland have been
rated by Moody's Investors Service, Inc. as Aaa, by Standard & Poor's
Corporation as AAA, and by Fitch Investors Service, Inc. as AAA.

Local Subdivision Debt. The counties and incorporated municipalities in
Maryland issue general obligation debt for general governmental purposes. The
general obligation debt of the counties and incorporated municipalities is
generally supported by ad valorem taxes on real estate, tangible personal
property and intangible personal property subject to taxation. The issuer
typically pledges its full faith and credit and unlimited taxing power to the
prompt payment of the maturing principal and interest on the general obligation
debt and to the levy and collection of the ad valorem taxes as and when such
taxes become necessary in order to provide sufficient funds to meet the debt
service requirements. The amount of debt which may be authorized may in some
cases be limited by the requirement that it not exceed a stated percentage of
the assessable base upon which such taxes are levied.

In the opinion of counsel, the issuer may be sued in the event that it
fails to perform its obligations under the general obligation debt to the
holders of the debt, and any judgments resulting from such suits would be
enforceable against the issuer. Nevertheless, a holder of the debt who has
obtained any such judgment may be required to seek additional relief to compel
the issuer to levy and collect such taxes as may be necessary to provide the
funds from which a judgment may be paid. Although there is no Maryland law on
this point, it is the opinion of counsel that the appropriate courts of Maryland
have jurisdiction to entertain proceedings and power to grant additional relief,
such as a mandatory injunction, if necessary, to enforce the levy and collection
of such taxes and payment of the proceeds of the collection of the taxes to the
holders of general obligation debt, pari passu, subject to the same
constitutional limitations on enforcement, as described above, as apply to the
enforcement of judgments against the State.

Local subdivisions, including counties and municipal corporations, are also
authorized by law to issue special and limited obligation debt for certain
purposes other than general governmental purposes. The source of payment of that
debt is limited to certain revenues of the issuer derived from commercial
activities operated by the issuer, payments made with respect to certain
facilities or loans, and any funds pledged for the benefit of the holders of the
debt. That special and limited obligation debt does not constitute a debt of the
State, the issuer or any other political subdivision of either within the
meaning of any constitutional or statutory limitation. Neither the State nor the
issuer or any other political subdivision of either is obligated to pay the debt
or the interest on the debt except from the revenues of the issuer specifically
pledged to the payment of the debt. Neither the faith and credit nor the taxing
power of the State, the issuer or any other political subdivision of either is
pledged to the payment of the debt. The issuance of the debt is not directly or
indirectly or contingently an obligation, moral or other, of the State, the
issuer or any other political subdivision of either to levy any tax for its
payment.

Special Authority Debt. The State and local governments have created
several special authorities with the power to issue debt on behalf of the State
or local government for specific purposes, such as providing facilities for
non-profit health care and higher educational institutions, facilities for the
disposal of solid waste, funds to finance single family and low-to-moderate
income housing, and similar purposes. The Maryland Health and Higher Educational
Facilities Authority, the Northeast Maryland Waste Disposal Authority, the
Housing Opportunities Commission of Montgomery County, and the Housing Authority
of Prince George's County are some of the special authorities which have issued
and have outstanding debt of this type.

The debts of the authorities issuing debt on behalf of the State and the
local governments are limited obligations of the authorities payable solely from
and secured by a pledge of the revenues derived from the facilities or loans
financed with the proceeds of the debt and from any other funds and receipts
pledged under an indenture with a corporate trustee. The debt does not
constitute a debt, liability or pledge of the faith and credit of the State or
of any political subdivision or of the authorities. Neither the State nor any
political subdivision thereof nor the authorities shall be obligated to pay the
debt or the interest on the debt except from such revenues, funds and receipts.
Neither the faith and credit nor the taxing power of the State or of any
political subdivision of the State or the authorities is pledged to the payment
of the principal of or the interest on such debt. The issuance of the debt is
not directly or indirectly an obligation, moral or other, of the State or of any
political subdivision of the State or of the authority to levy or to pledge any
form of taxation whatsoever, or to make any appropriation, for their payment.
The authorities have no taxing power.

Other Risk Factors. The manufacturing sector of Maryland's economy, which
historically has been a significant element of the State's economic health, has
experienced severe financial pressures and an overall contraction in recent
years. This is due in part to the reduction in defense-related contracts and
grants, which has had an adverse impact that is substantial and is believed to
be disproportionately large compared with the impact on most other states. The
State has endeavored to promote economic growth in other areas, such as
financial services, health care and high technology. Whether the State can
successfully make the transition from an economy reliant on heavy industries to
one based on service-and science-oriented businesses is uncertain. Moreover,
future economic difficulties in the service sector and high technology
industries could have an adverse impact on the finances of the State and its
subdivisions, and could adversely affect the market value of the Bonds in the
Maryland Trust or the ability of the respective obligors to make payments of
interest and principal due on such Bonds.

The State and its subdivisions, and their respective officers and
employees, are defendants in numerous legal proceedings, including alleged torts
and breaches of contract and other alleged violations of laws. Adverse decisions
in these matters could require extraordinary appropriations not budgeted for,
which could adversely affect the ability to pay obligations on indebtedness.

MASSACHUSETTS

RISK FACTORS- GENERAL. The following description highlights some of the
more significant financial information regarding the Commonwealth of
Massachusetts.

STATE BUDGET AND REVENUES. The Commonwealth's operating fund structure
satisfies the requirements of state finance law and is in accordance with GAAP.
The General Fund and those special revenue funds which are appropriated in the
annual state budget receive most of the non-bond and non- federal grant revenues
of the Commonwealth. They do no include the Capital Projects Fund of the
Commonwealth, into which the proceeds of commonwealth bonds are deposited. The
three principal budgeted operating funds are the General Fund, the Highway Fund
and the Local Aid Fund. Expenditures from these three funds generally account
for approximately 93% of total expenditures of the budgeted operating funds.

Generally, funds for the Commonwealth's programs and services must be
appropriated by the Legislature. The process of preparing a budget at the
administrative level begins early in the fiscal year preceding the fiscal year
for which the budget will take effect. The Commonwealth's fiscal year ends June
30. The legislative budgetary process begins in late January (or, in the case of
a newly elected Governor, not later than March) with the Governor's submission
to the Legislature of a budget recommendation for the fiscal year commencing in
the ensuing July. The Massachusetts Constitution requires that the Governor
recommend to the Legislature a budget which contains a statement of all proposed
expenditures of the Commonwealth for the fiscal year, including those already
authorized by law, and of all taxes, revenues, loans and other means by which
such expenditures are to be defrayed. By statue, the Legislature and the
Governor must approve a balanced budget for each fiscal year, and no
supplementary appropriation bill may be approved by the Governor if it will
result in an unbalanced budget. However, this is a statutory requirement that
may be superseded by an appropriation act.

It should be noted that by statute, the Commonwealth maintains a tax
revenue growth limit for each fiscal year equal to the average positive rate of
growth in total wages and salaries in the Commonwealth, as reported by the
federal government, during the three calendar years immediately preceding the
end of such fiscal year. The limit could affect the Commonwealth's ability to
pay principal and interest on its debt obligations. It is possible that other
measures affecting the taxing or spending authority of Massachusetts or its
political subdivisions may be approved or enacted in the future. State tax
revenues in fiscal 1994 through fiscal 1998 were lower than the limits. The
Executive Office for Administration and Finance currently estimates that state
tax revenues in fiscal 1998 will not reach the limit imposed by either the
initiative petition or the legislative enactment.

State finance law provides for a Stabilization Fund, a Capital Projects
Fund and a Tax Reduction Fund relating to the use of fiscal year-end surpluses.
A limitation equal to 0.5% of total tax revenues is imposed on the amount of any
aggregate surplus which may be carried forward as a beginning balance for the
next fiscal year. For any fiscal year for which the Comptroller determines on or
before October 31 of the succeeding fiscal year that there is a negative balance
in the state's capital projects funds, the Comptroller may transfer up to 40% of
the remaining year-end surplus to a separate Capital Projects Fund to be used in
lieu of bonds to finance capital expenditures. The remainder of any such
aggregate year-end surplus is reserved in the Stabilization Fund, from which
funds can be appropriated (i) to make up any difference between actual state
revenues and allowable state revenues in any fiscal year in which actual
revenues fall below the allowable amount, (ii) to replace state and local losses
of federal funds or (iii) for any event, as determined by the Legislature, which
threatens the health, safety or welfare of the people or the fiscal stability of
the Commonwealth or any of its political subdivisions. Up to 7.5% of budgeted
revenues and other financial resources pertaining to the budgeted funds may be
accumulated in the Stabilization Fund. Amounts in excess of that limit are to be
transferred to a Tax Reduction Fund, from which they are to be applied to the
reduction of personal income taxes. For fiscal 1997, the statutory ceiling on
the Stabilization Fund was 5% of budgeted revenues and other financial resources
pertaining to the budgeted funds, and prior to fiscal 1997, the statutory
ceiling on the Stabilization Fund was 5% of total tax revenues less the amount
of annual debt service costs.

At the end of fiscal 1997 and fiscal 1998, the Legislature mandated several
extraordinary fund transfers which had the effect of using revenues collected in
those years that would otherwise have been surplus. In addition, the Legislature
increased in each such year the amount that could be held in the Stabilization
Fund. The effect of those changes was to increase the ceiling for fiscal 1997 to
approximately $908.5 million and for fiscal 1998 to approximately $1.485
billion.

After accounting for the value of vetoes and subsequent overrides, the
fiscal 1999 budget provided for appropriations of approximately $19.5 billion.
The Executive Office for Administration and Finance projects total fiscal 1999
spending of $21.151 billion, a 6.0% increase over total fiscal 1998 spending.
The fiscal 1999 budget is based on a consensus tax revenue forecast of $14.4
billion, as agreed by both houses of the Legislature and the Secretary of
Administration and Finance in May, 1998. The tax cuts incorporated into the
budget had the effect of reducing the consensus forecast to $13.41 billion.
Year-to-date tax collections through January, 1999 totaled $8.251 billion, a
9.1% increase over the same period in fiscal 1998. The fiscal 1999 tax estimate
was raised to $14.0 billion in the Governor's budget submission filed on January
27, 1999.

Fiscal 1998 ended with a cash balance of approximately $1.579 billion,
without regard to any fiscal 1998 activity that occurred after June 30, 1998 and
excluding the balance in the Stabilization Fund. The ending balance does reflect
that $234.0 million was transferred to that Stabilization Fund in June, 1998 on
account of fiscal 1997. Fiscal 1999 is projected to end with a cash balance of
$975.9 million, without regard to any fiscal 1999 activity that occurs after
June 30, 1999 and excluding the balance in the Stabilization Fund. The cash flow
statement issued by the State Treasurer and Secretary of Administration and
Finance projects that $150 million will be transferred to the Stabilization Fund
in June, 1999 on account of fiscal 1998. The Comptroller has since certified
that an additional $167.4 million will be required to be transferred. The cash
flow statement projects the issuance during fiscal 1999 of $1.250 billion of
general obligation bonds (of which $250 million are for fiscal 1998
expenditures) and $315 million of grant anticipation notes. The statement
projects the receipt of $597 million from the Massachusetts Turnpike Authority
and the Massachusetts Port Authority in fiscal 1999 on account of the Central
Artery/Ted Williams Tunnel project, and the issuance during fiscal 1999 of $306
million of Commonwealth notes in anticipation of future payments from such
authorities for the project. However, both the Sate Auditor and the Federal
Aviation Administration have questioned the legality of the Massachusetts Port
Authority contribution.

On January 27, 1999, the Governor filed his fiscal 2000 budget
recommendations calling for budgeted expenditures of approximately $20.391
billion and total fiscal 2000 spending of $20.556 billion after adjusting to
shifts to and from off-budget accounts. Budgeted revenues for fiscal 2000 are
projected to be $20.241 billion, or $20.332 billion after adjusting to shifts to
and from off-budget accounts. The Governor's proposal projects a fiscal 2000
ending balance in the budgeted funds of approximately $1.625 billion, including
a Stabilization Fund balance of approximately $1.390 billion. The Governor's
budget recommendation is based on a tax revenue estimate of $14.459 billion. The
Governor's fiscal 2000 budget recommendations are now being evaluated by the
House Committee on Ways and Means, the first legislative step in the process of
approving a budget for fiscal 2000.

PENSION LIABILITIES. Comprehensive pension funding legislation approved in
January, 1988 requires the Commonwealth to fund future pension liabilities
currently and to amortize the Commonwealth's accumulated unfunded liabilities to
zero by June 30, 2028. The legislation was revised July 1, 1997 as part of the
fiscal 1998 budget to require the amortization of such liabilities by June 30,
2018.

On October 26, 1998, the Public Employee Retirement Administration
Commission completed an actuarial valuation that is based on data as of January
1, 1998. The unfunded actuarial liability based on this valuation is $4.371
billion for state employees and state teachers, $519.9 million for Boston
teachers and $912 million for cost-of-living increases granted for local systems
prior to July, 1997, for a total unfunded liability of $5.803 billion. The
funding schedules prepared in conjunction with the fiscal 1998 budget and fiscal
1999 budget estimate payments of $1.046 billion and $945 million, respectively.
Assuming approval of a revised funding schedule expected to be filed in the
spring of 1999, the Governor's fiscal 2000 budget recommendations call for a
pension funding appropriation of $910 million.

MEDICAID EXPENDITURES. During fiscal years 1994, 1995, 1996, 1997 and 1998,
Medicaid expenditures were $3.313 billion, $3.398 billion, $3.416 billion,
$3.456 billion and $3.666 billion, respectively. The average annual growth rate
from fiscal 1994 to fiscal 1998 was 2%. The moderate rate of growth is due to a
number of savings and cost control initiatives that the Division of Medical
Assistance continues to implement and refine, including managed care,
utilization review and the identification of third party liabilities. Fiscal
1999 spending for the current Medicaid program is projected to total $3.893
billion, an increase of 6.2% from fiscal 1998.

CITIES AND TOWNS. Proposition 2 1/2, passed by the voters in 1980, led to
large reductions in property taxes, the major source of income for cities and
towns. Between fiscal 1981 and fiscal 1998, the aggregate property tax levy grew
from $3.346 billion to $6.456 billion, representing an increase of approximately
93%. By contrast, according to federal Bureau of Labor Statistics, the Consumer
price index for all urban consumers in Boston grew during the same period by
approximately 103%.

During the 1980's, the Commonwealth increased payments to its cities, towns
and regional school districts to mitigate the impact of Proposition 2 1/2 on
local programs and services. In fiscal 1999, approximately 21.5% of the
Commonwealth's budget is estimated to be allocated to direct Local Aid. In
addition to direct Local Aid, the Commonwealth has provided substantial indirect
aid to local governments, including, for example, payments for MBTA assistance
and debt service, pensions for teachers, pension cost- of-living allowances for
municipal retirees, housing subsidies and the costs of courts and district
attorneys that formerly had been paid by the counties.

Many communities have responded to the limitations imposed by Proposition 2
1/2 through statutorily permitted overrides and exclusions. Override activity
steadily increased throughout the 1980's before peaking in fiscal 1991 and
decreasing thereafter. In fiscal 1997, 17 communities had successful override
referenda which added an aggregate of $5.4 million to their levy limits. In
fiscal 1998, the impact of successful override referenda, going back as far as
fiscal 1993, was to raise the levy limits of 117 communities by $56.9 million.
Although Proposition 21/2 will continue to constrain local property tax
revenues, significant capacity exists for overrides in nearly all cities and
towns.

In addition to overrides, Proposition 21/2 allows a community, through
voter approval, to assess taxes in excess of its levy limit for the payment of
certain capital projects (capital outlay expenditure exclusions) and for the
payment of specified debt service costs (debt exclusions). Capital exclusions
were passed by 22 communities in fiscal 1998 and totaled $4.0 million. In fiscal
1998, the impact of successful debt exclusion votes going back as far as fiscal
1993, was to raise the levy limits of 250 communities by $769.4 million.

A statute adopted by voter initiative petition at the November, 1990
statewide election regulates the distribution of local aid to cities and towns.
This statute requires that, subject to annual appropriation, no less than 40% of
collections from personal income taxes, sales and use taxes, corporate excise
taxes and lottery fund proceeds be distributed to cities and towns. Under the
law, the local aid distribution to each city or town would equal no less than
100% of the total local aid received for fiscal 1989. Distributions in excess of
fiscal 1989 levels would be based on new formulas that would replace the current
local aid distribution formulas. By its terms, the new formula would have called
for a substantial increase in direct local aid in fiscal 1992 and in subsequent
years. However, local aid payments expressly remain subject to annual
appropriation by Legislature, and the appropriations for Local Aid since the
enactment of the initiative law have not met the levels set forth in the
initiative law.

CAPITAL SPENDING. Expenditures on capital projects have increased from
approximately $1.9 billion in fiscal year 1994 to approximately $3.1 billion in
fiscal year 1998. Transportation related spending constitutes the bulk of the
Commonwealth's capital expenditures, accounting for 81% of all expenditures over
the last five years. The Central Artery/Ted Williams Tunnel project has become
the single largest part of the Commonwealth's capital spending, totaling some
$4.896 billion over the last five years, increasing from $817 million in fiscal
year 1994 to $1.428 billion in fiscal year 1998.

Since fiscal 1992 the Executive Office for Administration and Finance has
maintained a five-year capital spending plan, including an administrative limit
on the amount of capital spending to be financed by bonds issued by the
Commonwealth. The policy objective of the Five-Year Capital Spending Plan is to
limit the debt burden of the Commonwealth by controlling the relationship
between current capital spending and the issuance of bonds by the Commonwealth.
In fiscal 1992, the annual limit was set at approximately $825 million. During
fiscal 1995, the limit was raised to approximately $900 million and during
fiscal 1998 to approximately $1.0 billion. Actual bond-financed capital
expenditures during fiscal years 1994, 1995, 1996, 1997 and 1998 were
approximately $761 million, $902 million, $909 million, $995 million and $1.0
billion, respectively. For fiscal 1999 through 2003, the plan forecasts total
capital spending to be financed by Commonwealth debt of approximately $5 billion
in the aggregate, which is significantly below legislatively authorized capital
spending levels. The current plan assumes that the projected level of capital
spending will leverage additional federal transportation aid of approximately
$3.647 billion for this period and also projects the issuance of $1.205 billion
in grant anticipation notes in anticipation of future federal aid to be received
during fiscal years 2003 and beyond. The plan also anticipates the issuance of
$1.5 billion in bonds by the MBTA . Although the MBTA undertakes its own capital
spending, which is funded by MBTA bonds and federal grants, such spending has
been included here for comparison purposes. MBTA bonds are paid from
Commonwealth contract assistance payments, and the state's obligation to make
such payments is considered to be a general obligation of the state, for which
its full faith and credit are pledged.

As previously mentioned, the largest component of the Commonwealth's
capital program currently is the Central Artery/Ted Williams Tunnel project. By
the time of its completion, the project is expected to have required
expenditures totaling $11.7 billion, excluding insurance reimbursements and
proceeds from real estate dispositions which are anticipated to be no less than
$900 million, resulting in a net project cost of $10.8 billion. The magnitude of
this project has resulted in the realignment of certain transportation assets in
the Commonwealth and the development of additional financing mechanisms to
support its completion.

An omnibus transportation bond bill including new capital funding
authorizations for the MBTA and highway construction projects, including the
Central Artery/Ted Williams Tunnel project, is also expected to be submitted to
the Legislature by the Governor for consideration in early 1999. The bill is
expected to call for approximately $4.5 billion of transportation-related
capital spending to occur over several years, including approximately $1.6
billion to be funded by federal reimbursements, approximately $1.8 billion to be
funded by Commonwealth general obligation bonds and approximately $1.1 billion
to be funded by MBTA bonds.

COMMONWEALTH DEBT. The Commonwealth is authorized to issue three types of
debt: general obligation debt, special obligation debt and federal grant
anticipation notes. General obligation debt is secured by a pledge of full faith
and credit of the Commonwealth. Special obligation debt may be secured either
with a pledge of receipts credited to the Highway Fund or with a pledge of
receipts credited to the Boston Convention and Exhibition Center Fund. Federal
grant anticipation notes are secured by a pledge of federal highway construction
reimbursements. In addition, certain independent authorities and agencies within
the Commonwealth are statutorily authorized to issue bonds and notes for which
the Commonwealth is either directly, in whole or in part, or indirectly liable.
The Commonwealth's liabilities with respect to these bonds and notes are
classified as either (a) Commonwealth-supported debt, (b) Commonwealth-
guaranteed debt or (c) indirect obligations.

The liabilities of the Commonwealth with respect to outstanding bonds and
notes payable as of January 1, 1999 totaled $15.924 billion. These liabilities
consisted of $10.060 billion of general obligation debt, $606 million of special
obligation debt, $922 million of federal grant anticipation notes, $4.057
billion of supported debt, and $279 million of guaranteed debt.

In January, 1990 legislation was enacted to impose a limit on debt service
in Commonwealth budgets beginning in fiscal 1991. The law provides that no more
than 10% of the total appropriations in any fiscal year may be expended for
payment of interest and principal on general obligation debt of the
Commonwealth. This law may be amended or appealed by the legislature or may be
superseded in the General Appropriation Act for any year. From fiscal year 1994
through fiscal year 1998, this percentage has been below the limits established
by this law. The estimated debt service for fiscal 1999 is estimated to fall
below the limit as well.

Legislation enacted in December, 1989 imposes a limit on the amount of
outstanding direct bonds of the Commonwealth. The limit for fiscal 1999 is
$10.047 billion; as of January 1, 1999 there were $9.248 billion of outstanding
direct bonds. The law provides that the limit for each subsequent fiscal year
shall be 105% of the previous fiscal year's limit. Since this law's inception,
the limit has never been reached.

The Commonwealth has waived its sovereign immunity and consented to be sued
under contractual obligations including bonds and notes issued by it. However,
the property of the Commonwealth is not subject to attachment or levy to pay a
judgment, and the satisfaction of any judgment generally requires legislative
appropriation. Enforcement of a claim for payment of principal or interest on
bonds and notes of the Commonwealth may also be subject to provisions of federal
or Commonwealth statutes, if any, hereafter enacted extending the time for
payment or imposing other constraints upon enforcement, insofar as the same may
be constitutionally applied. The United States Bankruptcy Code is not applicable
to states.

UNEMPLOYMENT. The Massachusetts unemployment rate averaged 4.5%, 4.0% and
3.3% in calendar years 1996, 1997 and 1998, respectively. The Massachusetts
unemployment rate in both January, 1999 and December, 1998 was 3.1% as compared
to 3.6% in January, 1998.

The assets and liabilities of the Commonwealth Unemployment Compensation
Trust Fund are not assets and liabilities of the Commonwealth. As of December
31, 1998 the private contributory sector of the Massachusetts Unemployment Trust
Fund had a surplus of $1.694 billion. The Division of Employment and Training's
October 1998 quarterly report indicates that the contributions provided by
current law should build reserves in the system to $2.411 billion by the end of
2002.

LITIGATION. The Attorney General of the Commonwealth is not aware of any
cases involving the Commonwealth which in his opinion would affect materially
its financial condition. However, certain cases exist containing substantial
claims, among which are the following.

Former residents of a state facility commenced an action against the
Commonwealth alleging that in the 1950's they were fed radioactive isotopes
without their informed consent. A settlement agreement for $680,000 was executed
on October 2, 1998.

The United States has brought an action on behalf of the U.S. Environmental
Protection Agency alleging violations of the Clean Water Act and seeking to
enforce the clean-up of Boston Harbor. The Massachusetts Water Resources
Authority (the "MWRA") has assumed primary responsibility for developing and
implementing a court approved plan and time table for the construction of the
treatment facilities necessary to achieve compliance with the federal
requirements. The MWRA currently projects the total cost of construction of the
wastewater facilities required under the court's order not including costs
pursuant to the draft combined sewer outflow plan ("CSO"), will be approximately
$3.142 billion in current dollars, with approximately $601 million to be spent
after June 30, 1997. With CSO costs, the MWRA anticipates spending approximately
$901 million after that date. Under the Clean Water Act, the Commonwealth may be
liable for any costs of complying with any judgment in this case to the extent
that the MWRA or a municipality is prevented by state law from raising revenues
necessary to comply with such a judgment.

On February 12, 1998, the U.S. Department of Justice filed a complaint
seeking to compel the MWRA to construct a water filtration plant for water drawn
from the Wachusett Reservoir and, together with the Metropolitan District
Commission, to take certain watershed protection measures. It is too early to
predict what remedy the court will order if it decides adversely to the MWRA.

A suit was brought by associations of bottlers challenging the 1990
amendments to the bottle bill which escheat abandoned deposits to the
Commonwealth. In March of 1993, the Supreme Judicial Court upheld the amendments
except for the initial funding requirement, which the Court held severable. The
Superior Court has ruled that the Commonwealth is liable for a certain amount,
including interest, as a result of the Supreme Judicial Court's decision, such
amount to be determined in further proceedings. The Commonwealth in February,
1996, settled with one group of plaintiffs with settlement payments totaling $7
million. Litigation with the other group of plaintiffs is still pending. The
remaining potential liability is approximately $50 million.

In a suit filed against the Department of Public Welfare, plaintiffs allege
that the Department has unlawfully denied personal care attendant services to
severely disabled Medicaid recipients. The Court has denied plaintiffs' motion
for a preliminary injunction and class certification. If plaintiffs were to
prevail on their claims, the suit could cost the Commonwealth as much as $200
million per year. In September 1995, the parties argued cross motions for
summary judgment, which are now under advisement.

There are several large eminent domain cases pending against the
Commonwealth.

The constitutionality of the former version of the Commonwealth's bank
excise tax has been challenged by a Massachusetts bank. In 1992, several
pre-1992 petitions, which raised the same issues, were settled prior to a board
decision. The petitioner has now filed claims with respect to 1993 and 1994
claiming the tax violated the Commerce Clause of the United States Constitution
by including the bank's worldwide income without apportionment. The
Commonwealth's potential liability is $135 million.

In March 1995, the Supreme Judicial Court held that certain deductions from
the net worth measure of the Massachusetts corporate excise tax violate the
Commerce Clause of the United States Constitution. In October 1995, the United
States Supreme Court denied the Commonwealth's petition for a writ of
certiorari. A partial final judgment for tax years ending prior to January 1,
1995 was subsequently entered by the Supreme Judicial Court. The Department of
Revenue estimates that tax revenues in the amount of $40 million to $55 million
may be abated as a result of this decision. On May 13, 1996, the Supreme
Judicial Court entered an order for judgment for tax years ending on or after
January 1, 1996. A final judgment was entered on June 6, 1996. The Department of
Revenue is estimating the fiscal impact of that ruling; to date it has paid
approximately $17 million in abatements in accordance with the judgement. To
date, the total amount of abatements requested, including those that have been
paid, and that are in the process of being evaluated, is $35 million.

The Commonwealth has commenced an action and has been named a defendant in
another action brought as a result of indoor air quality problems in a building
previously leased by the Commonwealth. Potential liability to the Commonwealth
in each case is approximately $25 million.

A putative class action has been brought against the Commonwealth seeking
to invalidate the savings bank life insurance statute. Potential liability to
the Commonwealth is $71 million. On October 16, 1997, the court dismissed the
case on statute-of-limitations grounds. The plaintiff appealed. On February 1,
1999, the Supreme Judicial Court affirmed the judgment of the lower court.

In a suit filed against the Department of Transitional Assistance,
plaintiffs allege that the Department violated state and federal law, by failing
to accommodate welfare recipients with learning disabilities in its Employment
Services Program. The court has denied plaintiff's motion for class
certification and injunctive relief. If the case remains limited to the two
plaintiffs, potential liability will likely be under $50,000. However, if the
court at some point allows a motion for class certification, potential liability
could increase to $33.5 million.

Two pending cases challenge decisions of the Division of Medical
Assistance, which denied deductions for court-ordered attorney and guardian fees
in the calculation of Medicaid benefits for two nursing home residents. The
Superior Court has held the fees are deductible. The DNA has appealed and the
Supreme Judicial Court has granted direct appellate review. While the appeal
involves only two residents, if the Superior Court's reasoning were extended to
other Medicaid recipients, additional expenditures of up to $56 million per year
may be required.

There are also several other tax matters in litigation which may result in
an aggregate liability in excess of approximately $80 million.

RATINGS. The Commonwealth's general obligation debt is rated at AA-, Aa3
and AA- by Standard & Poor's Rating Service, Moody's Investors Service, Inc. and
Fitch IBCA, Inc., respectively.

Ratings may be changed at any time and no assurance can be given that they
will not be revised or withdrawn by the rating agencies, if in their respective
judgments, circumstances should warrant such action. Any downward revision or
withdrawal of a rating could have an adverse effect on market prices of the
bonds.

YEAR 2000. The "year 2000 problem" is the result of shortcomings in many
electronic data processing systems and other equipment that make operations
beyond the year 1999 troublesome. These problems have the potential for causing
a disruption of government services. In June, 1997, the Executive Office for
Administration and Finance established a Year 2000 Program Management Office
within its Information Technology Division. The purpose of the office is to
ensure accurate monitoring of the Commonwealth's progress in achieving "year
2000 compliance," ie., remediating or replacing and redeploying affected
systems, as well as to identify risk areas and risk mitigation activities and
serve as a resource for all state agencies and departments. The most recent
report issued by the program management office on February 3, 1999 for the
October-December, 1998 quarter indicates that the office is currently monitoring
year 2000 compliance efforts for 170 state agencies. Agencies with significant
exposure in this area made good progress in the October-December, 1998 quarter.
This exposure affects only a few agencies, but the impact of failures would be
significant. Legislation approved by the Acting Governor on August 10, 1998,
appropriated $20.4 million, subsequently increased, for expenditure by the
Information Technology Division to achieve year 2000 compliance for the six
Executive Offices and other departments which report directly to the Governor.
The Secretary of Administration and Finance is to report quarterly to the
Legislature on the progress being made to address the year 2000 compliance
efforts, and to assess the sufficiency of funding levels.

MICHIGAN

RISK FACTORS-Due primarily to the fact that the leading sector of the
State's economy is the manufacturing of durable goods, economic activity in the
State has tended to be more cyclical than in the nation as a whole. While the
State's efforts to diversify its economy have proven successful, as reflected by
the fact that the share of employment in the State in the durable goods sector
has fallen from 33.1 percent in 1960 to 15.2 percent in 1997, durable goods
manufacturing still represents a sizable portion of the State's economy. As a
result, any substantial national economic downturn is likely to have an adverse
effect on the economy of the State and on the revenues of the State and some of
its local governmental units. Although historically, the average monthly
unemployment rate in the State has been higher than the average figures for the
United States, for the last four years, the State's unemployment rate has been
at or below the national average. During 1998, the average monthly unemployment
rate in this State was 3.8% as compared to a national average of 4.5% in the
United States.

The State's economy could be affected by changes in the auto industry,
notably consolidation and plant closings resulting from competitive pressures,
over-capacity and labor disputes. Such actions could adversely affect Sate
revenues, and the financial impact on the local units of government in the areas
in which plants are or have been closed could be more severe.

The Michigan Constitution limits the amount of total revenues of the State
raised from taxes and certain other sources to a level for each fiscal year
equal to a percentage of the State's personal income for the prior calendar
year. In the event the State's total revenues exceed the limit by 1% or more,
the Constitution requires that the excess be refunded to taxpayers. To avoid
exceeding the revenue limit in the State's 1994-95 fiscal year the State
refunded approximately $113 million through income tax credits for the 1995
calendar year. The State Constitution does not prohibit the increasing of taxes
so long as revenues are expected to amount to less than the revenue limit and
authorizes exceeding the limit for emergencies when deemed necessary by the
governor and a two-thirds vote of the members of each house of the legislature.
The State Constitution further provides that the proportion of State spending
paid to all local units to total spending may not be reduced below the
proportion in effect in the 1978-79 fiscal year. The Constitution requires that
if the spending does not meet the required level in a given year an additional
appropriation for local units is required for the following fiscal year. The
State Constitution also requires the State to finance any new or expanded
activity of local units mandated by State law. Any expenditures required by this
provision would be counted as State spending for local units for purposes of
determining compliance with the provisions cited above.

The State Constitution limits State general obligation debt to (i)
short-term debt for State operating purposes; (ii) short-and long-term debt for
purposes of making loans to school districts; and (iii) long-term debt for a
voter-approved purpose. Short-term debt for operating purposes is limited to an
amount not in excess of fifteen (15%) percent of undedicated revenues received
by the State during the preceding fiscal year and must mature in the same fiscal
year in which it is issued. Debt incurred by the State for purposes of making
loans to school districts is recommended by the Superintendent of Public
Instruction who certifies the amounts necessary for loans to school districts
for the ensuing two (2) calendar years. These bonds may be issued without vote
of the electors of the State and in whatever amount required. There is no limit
on the amount of long-term voter-approved State general obligation debt. In
addition to the foregoing, the State authorizes special purpose agencies and
authorities to issue revenue bonds payable from designated revenues and fees.
Revenue bonds are not obligations of the State and in the event of shortfalls in
self-supporting revenues, the State has no legal obligation to appropriate money
to meet debt service payments. The Michigan State Housing Development Authority
has a capital reserve fund pledged for the payment of debt service on its bonds
derived from State appropriation. The act creating this Authority provides that
the Governor's proposed budget include an amount sufficient to replenish any
deficiency in the capital reserve fund. The legislature, however, is not
obligated to appropriate such moneys and any such appropriation would require a
two-thirds vote of the members of the legislature. Obligations of all other
authorities and agencies of the State are payable solely from designated
revenues or fees and no right to certify to the legislature exists with respect
to those authorities or agencies.

The State finances its operations through the State's General Fund and
special revenue funds. The General Fund receives revenues of the State that are
not specifically required to be included in the Special Revenue Fund. General
Fund revenues are obtained approximately 56% from the payment of State taxes and
44% from federal and non-tax revenue sources. The majority of the revenues from
State taxes are from the State's personal income tax, single business tax, use
tax, sales tax and various other taxes. Approximately two-thirds of total
General Fund expenditures have been for State support of public education and
for social services programs. Other significant expenditures from the General
Fund provide funds for law enforcement, general State government, debt service
and capital outlay. The State Constitution requires that any prior year's
surplus or deficit in any fund must be included in the next succeeding year's
budget for that fund.

The State ended the five fiscal years 1992-1996 with its general fund in
balance after substantial transfers from the General Fund to the Budget
Stabilization Fund. For the 1997 fiscal year, the State closed its books with
its general fund in balance. During the 1997-98 fiscal year, an error was
identified pertaining to the Medicaid program administered by the Department of
Community Health ("DCH"). Over a ten-year period, DCH did not properly record
all Medicaid expenditures and revenues on a modified accrual basis as required
by GAAP. For the fiscal year ended September 30, 1997, the General Fund did not
reflect Medicaid expenditures of $178.7 million and federal revenue of $24.6
million. As a result, the total ending fund balance and unreserved fund balance
for the fiscal year ended September 30, 1997, were reduced by $154.1 million to
account for the correction of the prior period error. The preliminary book
closing for the 1998 fiscal year indicates at a minimum a general fund in
balance as of September 30, 1998. The balance in the Budget Stabilization Fund
as of September 30, 1997, was $1.15 billion, including reserves of $572.6
million for educational expenses. In all but one of the last six fiscal years
the State has borrowed between $500 million and $900 million for cash flow
purposes. It borrowed $900 million in each of the 1996, 1997 and 1998 fiscal
years.

In January, 1998, Standard & Poor's raised its rating on the State's
general obligation bonds to AA+. In March, 1998, Moody's raised the State's
general obligation credit rating to Aa1. Fitch Investor's Service has issued a
rating of Aa+ on the State's general obligation bonds.

Amendments to the Michigan Constitution which place limitations on
increases in State taxes and local ad valorem taxes (including taxes used to
meet debt service commitments on obligations of taxing units) were approved by
the voters of the State of Michigan in November 1978 and became effective on
December 23, 1978. To the extent that obligations in the Portfolio are
tax-supported and are for local units and have not been voted by the taxing
unit's electors and have been issued on or subsequent to December 23, 1978, the
ability of the local units to levy debt service taxes might be affected.

State law provides for distributions of certain State collected taxes or
portions thereof to local units based in part on population as shown by census
figures and authorizes levy of certain local taxes by local units having a
certain level of population as determined by census figures. Reductions in
population in local units resulting from periodic census could result in a
reduction in the amount of State collected taxes returned to those local units
and in reductions in levels of local tax collections for such local units unless
the impact of the census is changed by State law. No assurance can be given that
any such State law will be enacted. In the 1991 fiscal year, the State deferred
certain scheduled payments to municipalities, school districts, universities and
community colleges. While such deferrals were made up at later dates, similar
future deferrals could have an adverse impact on the cash position of some local
units. Additionally, while total State revenue sharing payments have increased
in each of the last five years, the State reduced revenue sharing payments to
municipalities below that level otherwise provided under formulas in each of
those fiscal years.

On March 15, 1994, the electors of the State voted to amend the State's
Constitution to increase the State sales tax rate from 4% to 6% and to place an
annual cap on property assessment increases for all property taxes. Companion
legislation also cut the State's income tax rate from 4.6% to 4.4%, reduced some
property taxes for school operating purposes and shifted the balance of school
funding sources among property taxes and state revenues, some of which are being
provided from new or increased State taxes. The legislation also contains other
provisions that may reduce or alter the revenues of local units of government
and tax increment bonds could be particularly affected. While the ultimate
impact of the constitutional amendment and related legislation cannot yet be
accurately predicted, investors should be alert to the potential effect of such
measures upon the operations and revenues of Michigan local units of government.

The State is a party to various legal proceedings seeking damages or
injunctive or other relief. In addition to routine litigation, certain of these
proceedings could, if unfavorably resolved from the point of view of the State,
substantially affect State or local programs or finances. These lawsuits involve
programs generally in the area of corrections, highway maintenance, social
services, tax collection, commerce and budgetary reductions to school districts
and governmental units and court funding.

In November of 1997, the State Legislature adopted legislation to provide
for the funding of claims of local schools districts, some of whom had alleged
in a lawsuit, Durant v State of Michigan, that the State had, over a period of
years, paid less in school aid than required by the State's Constitution. Under
this legislation, the State paid or is required to pay to school districts which
were plaintiffs in the suit approximately $212 million from the Budget
Stabilization Fund on April 15, 1998, and to or on behalf of other school
districts from the Budget Stabilization Fund (i) an additional $32 million per
year in the fiscal years 1998-99 through 2007-08, and (ii) up to an additional
$40 million per year in the fiscal years 1998-99 through 2012-13.

The foregoing financial conditions and constitutional provisions could
adversely affect the State's or local unit's ability to continue existing
services or facilities or finance new services or facilities, and, as a result,
could adversely affect the market value or marketability of the Michigan
obligations in the Portfolio and indirectly affect the ability of local units to
pay debt service on their obligations, particularly in view of the dependency of
local units upon State aid and reimbursement programs.

The Portfolio may contain obligations of the Michigan State Building
Authority. These obligations are payable from rentals to be paid by the State as
part of the State's general operating budget. The foregoing financial conditions
and constitutional provisions could affect the ability of the State to pay
rentals to the Authority and thus adversely affect payment of the State Building
Authority Bonds.

The Portfolio may contain obligations issued by various school districts
pledging the full faith and credit of the school district. The ability of the
school district to pay debt service may be adversely affected by those factors
described above for general obligation bonds and, if the obligations were not
voted by that schools' district's electors, by the restructuring of school
operating funding as described above. The school district obligations also may
be qualified for participation in the Michigan School Bond Loan Fund. If the
bonds are so qualified, then in the event the school district is for any reason
unable to pay its debt service commitments when due, the school district is
required to borrow the deficiency from the School Bond Loan Fund and the State
is required to make the loan. The School Bond Loan Fund is funded by means of
debt obligations issued by the State. In the event of fiscal and cash flow
difficulties of the State the availability of sufficient cash or the ability of
the State to sell debt obligations to fund the School Bond Loan Fund may be
adversely affected and this could adversely affect the ability of the State to
make loans it is required to make to school districts issuing qualified school
bonds in the event the school district's tax levies are insufficient therefor.

MISSOURI

RISK FACTORS-Revenue and Limitations Thereon. Article X, Sections 16-24 of
the Constitution of Missouri (the "Hancock Amendment"), imposes limitations on
the amount of State taxes which may be imposed by the General Assembly of
Missouri (the "General Assembly") as well as on the amount of local taxes,
licenses and fees (including taxes, licenses and fees used to meet debt service
commitments on debt obligations) which may be imposed by local governmental
units (such as cities, counties, school districts, fire protection districts and
other similar bodies) in the State of Missouri in any fiscal year.

The State limit on taxes is tied to total State revenues for fiscal year
1980-81, as defined in the Hancock Amendment, adjusted annually in accordance
with the formula set forth in the amendment, which adjusts the limit based on
increases in the average personal income of Missouri for certain designated
periods. The details of the amendment are complex and clarification from
subsequent legislation and further judicial decisions may be necessary.
Generally, if the total State revenues exceed the State revenue limit imposed by
Section 18 of Article X by more than one percent, the State is required to
refund the excess. The State revenue limitation imposed by the Hancock Amendment
does not apply to taxes imposed for the payment of principal and interest on
bonds, approved by the voters and authorized by the Missouri Constitution. The
revenue limit also can be exceeded by a constitutional amendment authorizing new
or increased taxes or revenue adopted by the voters of the State of Missouri.

The Hancock Amendment also limits new taxes, licenses and fees and
increases in taxes, licenses and fees by local governmental units in Missouri.
It prohibits counties and other political subdivisions (essentially all local
governmental units) from levying new taxes, licenses and fees or increasing the
current levy of an existing tax, license or fee without the approval of the
required majority of the qualified voters of that county or other political
subdivision voting thereon.

When a local government unit's tax base with respect to certain fees or
taxes is broadened, the Hancock Amendment requires the tax levy or fees to be
reduced to yield the same estimated gross revenue as on the prior base. It also
effectively limits any percentage increase in property tax revenues to the
percentage increase in the general price level (plus the value of new
construction and improvements), even if the assessed valuation of property in
the local governmental unit, excluding the value of new construction and
improvements, increases at a rate exceeding the increase in the general price
level.

School Desegregation Lawsuits. Desegregation lawsuits in St. Louis and
Kansas City continue to require significant levels of state funding and are
sources of uncertainty; litigation continues on many issues, notwithstanding a
1995 U.S. Supreme Court decision favorable to the State in the Kansas City
desegregation litigation, court orders are unpredictable, and school district
spending patterns have proven difficult to predict. The State paid $282 million
for desegregation costs in fiscal 1994, $315 million for fiscal 1995, $274
million for fiscal 1996 and $227 million for fiscal 1997. This expense accounted
for approximately 7% of total state General Revenue Fund spending in fiscal 1994
and 1995, approximately 5% in fiscal 1996 and approximately 6% for fiscal 1997.
The State has entered into a settlement agreement with respect to the Kansas
City desegregation lawsuit, pursuant to which the State will cease additional
desegregation payments to the Kansas City Missouri School District after fiscal
2000.

Industry and Employment. While Missouri has a diverse economy with a
distribution of earnings and employment among manufacturing, trade and service
sectors closely approximating the average national distribution, the national
economic recession of the early 1980's had a disproportionately adverse impact
on the economy of Missouri. During the 1970's, Missouri characteristically had a
pattern of unemployment levels well below the national averages. Since the 1980
to 1983 recession periods Missouri unemployment levels generally approximated or
slightly exceeded the national average; however, in the second half of the
1990's, Missouri unemployment levels have returned to generally being equal to
or lower than the national average. A return to a pattern of high unemployment
could adversely affect the Missouri debt obligations acquired by the Missouri
Trust and, consequently, the value of the Units in the Trust.

The Missouri portions of the St. Louis and Kansas City metropolitan areas
collectively contain over fifty percent of Missouri's 1997 population census of
approximately 5,402,058. Economic reversals in either of these two areas would
have a major impact on the overall economic condition of the State of Missouri.
Additionally, the State of Missouri has a significant agricultural sector which
is experiencing farm-related problems comparable to those which are occurring in
other states. To the extent that these problems were to intensify, there could
possibly be an adverse impact on the overall economic condition of the State of
Missouri.

Defense related business plays an important role in Missouri's economy.
There are a large number of civilians employed at the various military
installations and training bases in the State. In addition, aircraft and related
businesses in Missouri are the recipients of substantial annual dollar volumes
of defense contract awards. There can be no assurances there will not be further
changes in the levels of military appropriations, and, to the extent that
further changes in military appropriations are enacted by the United States
Congress, Missouri could be disproportionately affected. It is impossible to
determine what effect, if any, continued consolidation in defense-related
industries, including the acquisition of McDonnell Douglas Corporation by The
Boeing Company, will have on the economy of the State. However, any shift or
loss of production operations now conducted in Missouri would have a negative
impact on the economy of the State.

NEW JERSEY

RISK FACTORS-Potential purchasers of Units of the New Jersey Trust should
consider the fact that the Trust's portfolio consists primarily of securities
issued by the State of New Jersey, its municipalities and authorities and should
realize the substantial risks associated with an investment in such securities.
The State's General Fund (the fund into which all State revenues not otherwise
restricted by statute are deposited) experienced surpluses for fiscal years 1994
through 1996, and surpluses are preliminarily estimated for 1997 and 1998. As of
June 30, 1996, the General Fund had a surplus of $442.0 million.

The State's diverse economic base consists of a variety of manufacturing,
construction and service industries supplemented by recreational and tourist
attractions and commercial agriculture. The State's overall economy has slowly
improved since the end of the nationwide recession in 1992. Business investment
expenditures and consumer spending have also increased substantially in the
State as well as in the nation. Although employment remains low in the
manufacturing sector, employment gains have been recorded in business services,
construction, and retail sectors. Future economic difficulties in any of these
industries could have an adverse impact on the finances of the State or its
municipalities and could adversely affect the market value of the Bonds in the
New Jersey Trust or the ability of the respective obligors to make payments of
interest and principal due on such Bonds.

Certain litigation is pending against the State that could adversely affect
the ability of the State to pay debt service on its obligations including suit
relating to the following matters: (i) several labor unions have challenged 1994
legislation mandating a revaluation of several public employee pension funds
which resulted in a refund of millions of dollars in public employer
contributions to the State and significant ongoing annual savings to the State;
(ii) several cases filed in the State courts have challenged the basis on which
recoveries of certain costs for residents in State psychiatric hospitals and
other facilities are shared between the State Department of Human Services and
the State's county governments, and certain counties are seeking the recovery
from the Department of costs they have incurred for the maintenance of such
residents; (iii) the County of Passaic and other parties have filed suit
alleging the State violated a 1984 consent order concerning the construction of
a resource recovery facility in that county; (iv) several Medicaid eligible
children and the Association for Children of New Jersey have filed suit claiming
the Medicaid reimbursement rates for services rendered to such children are
inadequate under federal law; (v) a coalition of churches and church leaders in
Hudson County have filed suit asserting the State-owned Liberty State Park in
Jersey City violates environmental standards; (vi) representatives of the
trucking industry have filed a constitutional challenge to annual hazardous and
solid waste licensure renewal fees; (vii) the New Jersey Hospital Association
has filed a constitutional challenge to the State's failure to provide funding
for charity care costs, while requiring hospitals to treat all patients
regardless of ability to pay; (viii) the Education Law Center filed a motion
compelling the State to close the spending gap between poor urban school
districts and wealthy rural school districts; (ix) a group of insurance
companies have filed a constitutional challenge to the State's assessment of
monies pursuant to the Fair Automobile Insurance Reform Act of 1990; (x) a class
action consisting of prisoners with serious mental disorders has been filed
against officers of the Department of Corrections, alleging sex discrimination,
violation of the Americans with Disabilities Act of 1990, and constitutional
violations; (xi) a class action has been brought in federal court challenging
the State's method of determining the monthly needs of a spouse of an
institutionalized person under the Medicare Catastrophic Act; (xii) several
suits have been filed against the State in federal court alleging that the State
committed securities fraud and environmental violations in the financing of a
new Atlantic City highway and tunnel; (xiii) a class action has been filed
against the State alleging the State's breach of contract for not paying certain
Medicare co-insurance and deductibles; and (xiv) an action has been filed
challenging the State's issuance of bonds to fund the accrued liability in its
pension funds under the Pension Bond Financing Act of 1997.

Although there can be no assurance that such conditions will continue, the
State's general obligation bonds are currently rated Aa1 by Moody's and AA+ by
Standard and Poor's.

NEW YORK

RISK FACTORS-Prospective investors should consider the financial
difficulties and pressures which the State of New York and several of its public
authorities and municipal subdivisions have undergone. The following briefly
summarizes some of these difficulties and the current financial situation, based
principally on certain official statements currently available; copies may be
obtained without charge from the issuing entity, or through the Agent for the
Sponsors upon payment of a nominal fee. While the Sponsors have not
independently verified this information, they have no reason to believe that it
is not correct in all material respects.

New York State. For many years, there have been extended delays in adopting
the State's budget, repeated revisions of budget projections and often
significant revenue shortfalls (as well as increased expenses). These
developments reflect faster long-term growth in State spending than revenues and
the sensitivity of State revenues to economic factors, as well as its
substantial reliance on non-recurring revenue sources. The State's general fund
incurred significant cash basis deficits for the 1990 through 1992 and 1995
fiscal years. Measures to deal with deteriorating financial conditions included
transfers from reserve funds, recalculating the State's pension fund obligations
(subsequently ruled illegal), hiring freezes and layoffs, reduced aid to
localities, sales of State property to State authorities, and additional
borrowings (including until 1993 issuance of additional short-term tax and
revenue anticipation notes payable out of impounded revenues in the next fiscal
year).

Approximately $4.7 billion of State general obligation debt was outstanding
at March 31, 1998, State supported debt (restated to reflect LGAC's assumption
of $4.7 billion obligations previously funded through issuance of short-term
debt) was $36 billion at March 31, 1998, up from $9.8 billion in 1986. The
Governor in January, 1999, proposed a 5-year plan to limit additional debt to
$1.3 billion (from $6 billion previously proposed). Standard & Poor's rates the
State's general obligation bonds A (raised from A- in August 1997 but still the
second lowest for any state). Moody's rates State general obligation bonds A2.

More than two months after the beginning of the 1996 fiscal year, the State
adopted a budget to close a projected gap of approximately $5 billion, including
a reduction in income and business taxes. The financial plan projected nearly
$1.6 billion in savings from cost containment, disbursement reestimates and
reduced funding for social welfare programs and $2.2 billion from State agency
actions. Approximately $1 billion of the gap-closing measures were
non-recurring. The State Comptroller sued to prevent reallocation of $110
million of reserves from a special pension fund. In October 1995, the Governor
released a plan to reduce State spending by $148 million to offset risks that
developed, including proposed reductions in Federal aid and possible adverse
court decisions. A $445 million surplus was realized.

To address a $3.9 billion projected budget gap for the 1997 fiscal year, in
July, 1996, the State adopted a budget that included $1.3 billion of
non-recurring measures. A surplus of $1.4 billion was realized, due primarily to
higher than expected revenue and reduced social service spending.

The financial plan for the 1998 fiscal year, adopted 126 days after it
began, used most of the 1997 surplus to close a budget gap estimated at $2.3
billion. $11 billion of spending increases (5.4% or twice the rate of
inflation), primarily for local assistance including $2.3 billion for education,
and $4.75 billion of tax cuts will be phased in over the next five years, most
after 1998. Use of non-recurring resources was estimated at $270 million. The
State achieved a surplus of $2.1 billion for the year, resulting in a positive
balance of $600 million in the General Fund, for the first time in many years.

A substantial projected increase, principally in personal income tax
collections, was used in the financial plan for fiscal 1999 to provide for $1.2
billion increase in education (totalling $9.65 billion), and smaller increases
for Medicaid, mental hygiene and other health and social welfare programs. The
budget also includes several multi-year tax reduction initiatives including for
senior citizens, expansion of a child care credit and a phased-in reduction of
the general business tax. State spending increased $5 billion in the budget for
the 1999 fiscal year even after the Governor vetoed $1.6 billion of spending
measures (including $500 million for school construction). $567 million of the
prior year's surplus was used toward this fiscal year. A $2.5 billion surplus is
forecast.

The State continues to receive personal income tax revenues substantially
above projections, reflecting the current growth of the national economy. In
January, 1999, the Governor proposed a $72.7 billion budget for the current
fiscal year, which would increase spending by 1.8%. This reflects a $266 million
reduction in health care (with a total impact of $727 million when matching
grants are added) and a 1.3% increase in school aid (but only 1/8 to New York
City). He proposes to spend $1 billion in surplus Federal welfare money on
programs to encourage transition to the workforce. State welfare rolls have been
reduced by 500,000 persons over the last four years. In March, the State
Assembly and Senate each passed separate versions of a budget, with expenditures
increases of 4.6% and 2.7%, respectively. The Governor has threatened to veto
most of this increase if not cut back.

The Governor proposes using $1.79 billion of the 1998-99 surplus toward
gaps for the 2001 and 2002 fiscal years. Together with unspecified actions of
$500 million a year, he projects this would reduce the gaps for those years to
$1.14 billion and $2.07 billion, respectively. Disputes have also arisen over
how to spend State receipts under the tobacco fund settlement (initially $800
million a year, growing to $1.2 billion yearly). Half would be allocated to
State localities. It has been reported that failure of the States to agree on
legislation limiting future liability may delay these distributions. The
Governor proposes over the next 5 years to use $300 million a year toward annual
spending and only $100 million a year for health care programs.

The State normally adjusts its cash basis balance by deferring until the
first quarter of the succeeding fiscal year substantial amounts of tax refunds
and other disbursements. For many years, it also paid in that quarter more than
40% of its annual assistance to local governments. Payment of these annual
deferred obligations and the State's accumulated deficit was substantially
financed by issuance of short-term tax and revenue anticipation notes shortly
after the beginning of each fiscal year. The New York Local Government
Assistance Corporation ("LGAC") was established in 1990 to issue $4.7 billion of
long-term bonds over several years, payable from a portion of the State sales
tax, to fund certain payments to local governments traditionally funded through
the State's annual seasonal borrowing. The legislation will normally prevent
State seasonal borrowing until an equal amount of LGAC bonds are retired. The
State's last seasonal borrowing was in May, 1993.

Generally accepted accounting principles ("GAAP") for municipal entities
apply modified accrual accounting and give no effect to payment deferrals. On an
audited GAAP basis, reflecting payments by LGAC to local governments out of
proceeds from bond sales, the general fund realized surpluses of $0.4 billion,
$1.9 billion and $1.8 billion for the 1996, 1997 and 1998 fiscal years and a
deficit of $1.4 billion for the 1995 fiscal year.

For decades, the State's economy has grown more slowly than that of the
rest of the nation as a whole. Part of the reason for this decline has been
attributed to the combined State and local tax burden, which is among the
highest in the nation. The State's dependence on Federal funds and sensitivity
to changes in economic cycles, as well as the high level of taxes, may continue
to make it difficult to balance State and local budgets in the future. The total
employment growth rate in the State has been below the national average since
1984. The State lost 524,000 jobs in 1990-1992. Only in the last year have the
State's total jobs reached the levels of before the recession of the early
1990s.

Despite recent budgetary surpluses, actions affecting the level of receipts
and disbursements, the relative strength of the State economy and actions by the
federal government have helped to create projected structural budget gaps for
the State. These gaps result from a significant disparity between recurring
revenues and costs of maintaining or increasing the level of support for State
programs. There can be no assurance that the Legislature will enact the
Governor's proposals or that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements for future fiscal years. The fiscal effects of tax reductions
adopted in recent years are projected to grow more substantially in future
years, to over $4 billion a year by the State's 2002-03 fiscal year.

New York City (the "City"). The City is the State's major political
subdivision. In 1975, the City encountered severe financial difficulties,
including inability to refinance $6 billion of short-term debt incurred to meet
prior annual operating deficits. The City lost access to the public credit
markets for several years and depended on a variety of fiscal rescue measures
including commitments by certain institutions to postpone demands for payment, a
moratorium on note payment (later declared unconstitutional), seasonal loans
from the Federal government under emergency congressional legislation, Federal
guarantees of certain City bonds, and sales and exchanges of bonds by The
Municipal Assistance Corporation for the City of New York ("MAC") to fund the
City's debt.

MAC has no taxing power and pays its obligations out of sales taxes imposed
within the City and per capita State aid to the City. The State has no legal
obligation to back the MAC bonds, although it has a "moral obligation" to do so.
MAC is now authorized to issue bonds only for refunding outstanding issues and
up to $1.5 billion should the City fail to fund specified transit and school
capital programs. S&P increased its rating of MAC bonds to AA in January 1998.
MAC plans to covenant not to issue additional parity or prior lien debt in the
future other than refunding bonds. The State also established the Financial
Control Board ("FCB") to review the City's budget, four-year financial plans,
borrowings and major contracts. The FCB is required to impose a review and
approval process of the proposals if the City were to experience certain adverse
financial circumstances. The City's fiscal condition is also monitored by a
Deputy State Comptroller and by the City's Independent Budget Office.

From 1989 through 1993, the gross city product declined by 10.1% and
employment, by almost 11%, while the public assistance caseload grew by over
25%. The City's unemployment declined from 10.8% in 1992 to 8.1% in 1995. This
is well above the rest of the State and the nation as a whole. Although the City
added more jobs in 1997 than any year since 1987, unemployment averaged 9.4% for
the year. Unemployment fell to 7.6% in January, 1999. Even with new fraud
detection procedures (including fingerprinting) since January, 1995, public
assistance recipients still averaged 760,000 in 1998.

While the City, as required by State law, has balanced its budgets in
accordance with GAAP since 1981, this has required exceptional measures in
recent years. City expenditures grew faster than revenues each year since 1986,
masked in part by a large number of non-recurring gap closing actions. To
eliminate potential budget gaps of $1-$3 billion each year since 1988 the City
has taken a wide variety of measures. In addition to increased taxes and
productivity increases, these have included hiring freezes and layoffs,
reductions in services, reduced pension contributions, and a number of
nonrecurring measures such as bond refundings, transfers of surplus funds from
MAC, sales of City property and tax receivables. The FCB concluded that the City
has neither the economy nor the revenues to do everything its citizens have been
accustomed to expect.

The City's original Financial Plan for the 1995 fiscal year proposed to
eliminate a projected $2.3 billion budget gap through measures including
reduction of the City's workforce (achieved in substantial part through
voluntary severance packages funded by MAC), increased State and Federal aid, a
bond refinancing, reduced contributions to City pension funds and sale of
certain City assets. The Mayor's proposals include efforts toward privatization
of certain City services and agencies, greater control of independent
authorities and agencies, and reducing social service expenditures. He also
sought concessions from labor unions representing City employees. As several of
these measures failed to be implemented, the City experienced lower than
anticipated tax collections and higher than budgeted costs (particularly
overtime and liability claims) during the year, various alternative measures
were implemented, for an aggregate of nearly $3.5 billion of gap closing
measures. $1.9 billion of these were non-recurring and, in the case of a second
bond refinancing, will increase City expenses for future years. Reduced
maintenance of City infrastructure could also lead to increased future expenses.
In December 1994, the City Council rejected the Mayor's recommendations, adopted
its own budget revisions and sued to enforce them; the suit was dismissed and
the Mayor impounded funds to achieve his proposed expense reductions.

The City closed a projected $3.1 billion budget gap for the 1996 fiscal
year. The Financial Plan reduced a wide range of City services. City agency and
labor savings were projected at $1.2 billion and $600 million respectively.
During the fiscal year, the Major implemented several additional spending
reductions as various proposals (including projected State and Federal aid
increases) failed to be implemented. An additional debt refinancing was also
made. Non-recurring measures (including a $250 million payment from the MTA in
exchange for an agreement to issue $500 million in bonds over the next four
years for transit improvements and a $300 million sale of tax liens) rose to
$1.3 billion. One of the Mayor's privatization proposals has been to sell or
lease City hospitals. In October, 1995, S&P reduced its rating on Health and
Hospitals Corporation debt to BBB- (its lowest investment-grade rating), citing
City failure to articulate a coherent strategy for the hospital system. Other
proposals including mandatory managed care programs for Medicaid recipients have
been blocked. The City Comptroller predicted that certain reductions in Medicaid
and welfare expenditures may lead to job reductions and higher costs for other
programs. The Board of Education also faced reductions of $265 million in State
aid and $189 million in Federal aid.

For the 1997 fiscal year, the City faced a projected $2.6 billion gap
including $1.7 billion of increased operating expenditures, $800 million of
increased debt service and a $150 million decline in revenues. Gap-closing
measures in the Financial Plan included $1.2 billion of agency spending
reductions and extension of the personal income tax surcharge. In August, 1996,
the Major directed City agencies to plan for $500 million in further spending
reductions. A surplus of $1.4 billion, in large part because of the boom in the
financial sector, was used to prepay debt service due during the 1998 and 1999
fiscal years.

For the fiscal year ended June 30, 1998, the City adopted a budget to close
a projected $1.6 billion gap, including $2.0 billion of non-recurring measures.
A surplus of over $2 billion was realized.

The City transferred $920 million from fiscal 1998 for payment of 1999 debt
service and $210 million for 2000 debt service. The City proposes a tax
reduction program totaling $237-$774 million a year for 1999-03, which is
subject to State legislative approval. A $1.6 billion surplus is expected.

Rolling over this surplus would reduce the gap for 1999-2000 to $738
million. This estimate includes the effect of other substantial non-recurring
resources including $345 million from sale of the Coliseum and initial receipts
under the tobacco settlement. The Mayor has proposed issuing $2.5 billion of
bonds payable from these receipts to raise money for school construction (and
avoid using up the City's remaining debt limit cap). The City Council has
proposed a program of $700 million of additional tax cuts. All major categories
of expenditures are proposed to grow substantially faster than revenues
(particularly debt service, at 7.2% annually), and it is estimated that the 1998
surplus will be exhausted in the 2001 fiscal year. Board of Education
expenditures represented 28% of the City's total budget in the 1998 fiscal year;
the Stavisky-Goodman Act requires Board agreement to reduce the allocations
below the average for the three preceding fiscal years.

Spending is projected to increase faster than revenue for the next three
years, leaving City- projected future budget gaps of $1.9 billion, $2.0 billion
and $1.5 billion, respectively, for the 2001, 2002 and 2003 fiscal years; fiscal
monitors have higher estimates, commenting that the City needs to take
significant additional actions to work toward structural balance.

A major uncertainty is the City's labor costs, which represent about 50% of
its total expenditures. Although the City workforce was reduced by over 12,000
workers since January 1994, with wage and benefit increases and overtime, wage
costs continue to grow. Contracts with virtually all of the City's labor unions
expire beginning in 2000.

Budget balance may also be adversely affected by the effect of the economy
on economically sensitive taxes, should the current national expansion slow or
reverse. The City also faces uncertainty in its dependence on Federal and State
aid. Federal and State welfare reform provisions may require additional training
programs to satisfy workfare guidelines and also additional City expenditures
for immigrants disqualified. A Federal judge barred the City from expanding
welfare qualification requirements until the City assures prompt access to food
stamps and Medicaid applications. There can be no assurance that City pension
contributions will continue to be reduced by investment performance exceeding
assumptions. Other uncertainties include additional expenditures to combat
deterioration in the City's infrastructure (such as bridges, schools and water
supply), the costs of closing the Fresh Kills landfill (the City has yet to
devise a feasible plan for alternative disposition as several other States have
rejected City proposals to take the trash), cost of the AIDS epidemic and
problems of drug addiction and homelessness. Elimination of any additional
budget gaps will require various actions, including by the State, a number of
which are beyond the City's control.

City hospitals are struggling with increasing numbers of uninsured
patients, while the Governor vetoed a bill that would have lifted a cap on
Federal Medicaid grant requests by these hospitals. The State's highest court in
March ruled that the City is not authorized to lease or sell its hospitals
without enabling legislation from the State. The courts have also ordered the
Mayor to cooperate with audits by the State Comptroller and to provide
information requested by the Independent Budget Office. The Mayor continues to
encounter opposition from the City council, including on his plan to increase
the police force, to build a new stadium for the Yankees, and to locate homeless
shelters. And the City has failed thus far in several years' efforts to force
the Port Authority to increase its lease payments on the City's two airports.

The City sold $2.4 billion, $1.1 billion and $500 million of short-term
notes, respectively, during the 1997, 1998 and 1999 fiscal years. At December
31, 1998, there were outstanding $26.3 billion of City bonds (not including City
debt held by MAC), $3.2 billion of MAC bonds and $1.1 billion of City-related
public benefit corporation indebtedness, each net of assets held for debt
service. Standard & Poor's and Moody's during the 1975-80 period either withdrew
or reduced their ratings of the City's bonds. Standard & Poor's increased its
rating of the City's general obligation debt to A- on July 16, 1998. Moody's
increased its rating of City bonds to A3 on February 24, 1998. City-related debt
doubled since 1987, although total debt declined as a percentage of estimated
full value of real property. The City also anticipates spending about $1 billion
over the next ten years on its upstate watershed area in an effort to avoid
building a filtration plant, estimated to cost $7 billion. An environmental
group reported that the City is falling behind in its efforts to acquire land in
upstate watersheds. There can be no assurance that these measures will satisfy
Environmental Protection Agency water purity standards. The Board of Education
has proposed a $10.9 billion capital budget for the next five years. The City
Comptroller plans to block a new authority to issue additional bonds to finance
the Board of Education's capital spending. The Mayor's plan for school vouchers
must be approved by the City Council and the State Legislature, which is by no
means certain. To prevent the City from reaching the constitutional limit on its
general obligation debt (based on real estate values), the State in 1997
authorized creation of the New York City Transitional Finance Authority, to sell
up to $7.5 billion of additional bonds. Bonds are backed by City personal income
and sales tax revenues, to fund capital projects. The bonds are rated Aa3 by
Moody's and AA by S&P. Despite the new authority, City bond issuances may reach
the debt limit in the 2000 fiscal year. The City's financing program projects
long-term financing during fiscal years 1999-2003 to aggregate $23.5 billion,
including $5.4 billion from the Transitional Finance Authority and $5.7 billion
of Water Authority financing. Debt service is expected to reach 19% of City tax
revenues by 2002, up from 12.3% in 1990. The City's Ten Year Capital Strategy
plans capital expenditures of $45.0 billion during 1998-2007 (94% to be City
funded). This plan assumes State repeal of the Wicks law governing City
contracting, for a saving of $1.6 billion in construction costs over the 10-year
period.

Other New York Localities. In 1995, other localities had an aggregate of
approximately $19.0 billion of indebtedness outstanding. $102.3 million was for
deficit financing. In recent years, several experienced financial difficulties.
A Financial Control Board was established for Yonkers in 1984 and a Municipal
Assistance Corporation for Troy in 1995. In 1996, the State purchased debt
issued by Troy and Utica to avert defaults when those bonds were not bought by
others. Troy, Utica, Newburgh, Cohoes and Niagara Falls general obligations are
rated below investment grade. Buffalo, with a minimum investment grade rating,
is on CreditWatch with negative implications. Pending proposals to increase
State fiscal oversight of local government finances, tax lien securitization and
cash management were not adopted in the 1997 State legislative session. A March
1993 report by Moody's Investors Service concluded that the decline in ratings
of most of the State's largest cities in recent years resulted from the decline
in the State's manufacturing economy. Any reductions in State aid to localities
may cause additional localities to experience difficulty in achieving balanced
budgets. County executives have warned that reductions in State aid to
localities to fund future State tax reductions are likely to require increased
local taxes. If special local assistance were needed from the State in the
future, this could adversely affect the State's as well as the localities'
financial condition. Most localities depend on substantial annual State
appropriations. Legal actions by utilities to reduce the valuation of their
municipal franchises, if successful, could result in localities becoming liable
for substantial tax refunds.

State Public Authorities. In 1975, after the Urban Development Corporation
("UDC"), with $1 billion of outstanding debt, defaulted on certain short-term
notes, it and several other State authorities became unable to market their
securities. From 1975 through 1987 the State provided substantial direct and
indirect financial assistance to UDC, the Housing Finance Agency ("HFA"), the
Project Finance Agency, the Environmental Facilities Corporation and other
authorities. Practical and legal limitations on these agencies' ability to pass
on rising costs through rents and fees could require further State
appropriations. In July 1996, the Public Authorities Control Board approved a
$650 million refinancing by the Empire State Development Corp. (formerly the
UDC) to bail out the deficit-ridden Job Development Authority. 17 State
authorities had an aggregate of $73.5 billion of debt outstanding at September
30, 1996, of which approximately $25.7 billion was State-supported. At March 31,
1997, approximately $0.3 billion of State public authority obligations was
State-guaranteed, $3.3 billion was moral obligation debt and $22.5 billion was
financed under lease-purchase or contractual obligation financing arrangements
with the State. Various authorities continue to depend on State appropriations
or special legislation to meet their budgets.

The Metropolitan Transportation Authority ("M.T.A."), which oversees
operation of the City's subway and bus system by the City Transit Authority (the
"TA") and operates certain commuter rail lines, has required substantial State
and City subsidies, as well as assistance from several special State taxes. The
TA $186.3 million surplus for 1997 was used to balance the 1998 budget. The
M.T.A. realized a $379 million surplus. The Financial Plan forecasts cash-basis
gaps of $257 million in 2000, $279 million in 2001 and $303 million in 2002.

Substantial claims have been made against the TA and the City for damages
from a 1990 subway fire and a 1991 derailment. The M.A. infrastructure,
especially in the City, needs substantial rehabilitation. In July 1996 the State
Legislature approved a $7.3 billion capital plan for 1997-1999, which includes
$3.5 billion to be raised by bonds backed by fares. The plan does not
contemplate further fare increases until 2000. The plan also projects $2.85
billion in expense reductions over the five years. Critics have questioned
whether many of the projected labor and other savings can be achieved. It is
anticipated that the M.A. and the TA will continue to require significant State
and City support.

Litigation. The State and the City are defendants in numerous legal
proceedings, including challenges to the constitutionality and effectiveness of
various welfare programs, alleged torts and breaches of contract, condemnation
proceedings and other alleged violations of laws. Adverse judgments in these
matters could require substantial financing not currently budgeted. The State
estimates unfavorable judgments of $364 million, of which $134 million is
expected to be paid during the current fiscal year. Claims in excess of $472
billion were outstanding against the City at June 30, 1998, for which it
estimated its potential future liability at $3.5 billion, in addition to real
estate certiorari proceedings with an estimated liability of $406 million. City
settlements were $327 million in fiscal 1997, up from $175 million in fiscal
1990. Several actions seek judgments that, as a result of an overestimate by the
State Board of Equalization and Assessment, the City's real estate tax levy in
1993-1996 exceeded constitutional limits; if upheld, substantial tax refunds
would be due and this could also adversely affect the City's constitutional debt
limit.

Final adverse decisions in any of these cases could require extraordinary
appropriations at either the State or City level or both.

Year 2000 Compliance. Both the State and City have programs under way to
address compliance of mission-critical and high priority computer systems. The
State, in March, 1998, estimated that work had been completed on 20% of these
systems, with at least 40% of the work completed on the remaining systems. The
City recently stated that remediation and testing had been completed on 54% of
its mission critical and high priority systems.

NORTH CAROLINA

RISK FACTORS-See Portfolio for a list of the Debt Obligations included in
the North Carolina Trust. The portions of the following discussion regarding the
financial condition of the State government may not be relevant to general
obligation or revenue bonds issued by political subdivisions of the State. Those
portions and the sections which follow regarding the economy of the State are
included for the purpose of providing information about general economic
conditions that may or may not affect issuers of the North Carolina Debt
Obligations. None of the information is relevant to any Puerto Rico or Guam Debt
Obligations which may be included in the portfolio of the North Carolina Trust.

General obligations of a city, town or county in North Carolina are payable
from the general revenues of the entity, including ad valorem tax revenues on
property within the jurisdiction. Revenue bonds issued by North Carolina
political subdivisions include (1) revenue bonds payable exclusively from
revenue-producing governmental enterprises and (2) industrial revenue bonds,
college and hospital revenue bonds and other "private activity bonds" which are
essentially non-governmental debt issues and which are payable exclusively by
private entities such as non-profit organizations and business concerns of all
sizes. State and local governments have no obligation to provide for payment of
such private activity bonds and in many cases would be legally prohibited from
doing so. The value of such private activity bonds may be affected by a wide
variety of factors relevant to particular localities or industries, including
economic developments outside of North Carolina. In addition, the Trust is
concentrated on Debt Obligations of North Carolina issuers and is subject to
additional risk from decreased diversification as well as factors that may be
particular to North Carolina or, in the case of revenue bonds payable
exclusively from private party revenues or from specific state non-tax revenue,
factors that may be particular to the related activity or payment party.

Section 23-48 of the North Carolina General Statutes appears to permit any
city, town, school district, county or other taxing district to avail itself of
the provisions of Chapter 9 of the United States Bankruptcy Code, but only with
the consent of the Local Government Commission of the State and of the holders
of such percentage or percentages of the indebtedness of the issuer as may be
required by the Bankruptcy Code (if any such consent is required). Thus,
although limitations apply, in certain circumstances political subdivisions
might be able to seek the protection of the Bankruptcy Code.

State Budget and Revenues. The North Carolina State Constitution requires
that the total expenditures of the State for the fiscal period covered by each
budget not exceed the total of receipts during the fiscal period and the surplus
remaining in the State Treasury at the beginning of the period. In November,
1996, the voters of the State approved a constitutional amendment giving the
Governor the power to veto certain legislative matters, including budgetary
matters.

Since 1994, the State has had a budget surplus, in part as a result of new
taxes and fees and spending reductions put into place in the early 1990s. In
addition, the State, like the nation, has experienced economic recovery during
the 1990s. The State budget is based upon estimated revenues and a multitude of
existing and assumed State and non-State factors, including State and national
economic conditions, international activity and federal government policies and
legislation. The unreserved General Fund balance at June 30, 1998, the end of
the 1997-98 fiscal year, was approximately $115.2 million, and the reserved
balance of the General Fund was approximately $1.15 billion.

In 1995, the North Carolina General Assembly repealed, effective for
taxable years beginning January 1, 1995, the tax levied on various forms of
intangible personal property. The legislature provided specific appropriations
to counties and municipalities from state revenues to replace the revenues those
political subdivisions previously received from intangibles tax revenue. In
addition, in the 1996 session the legislature reduced the corporate income tax
rate from 7.75% to 6.9% (phased in over four years), reduced the food tax from
4% to 3%, and eliminated most privilege license taxes as of January 1, 1997. As
a result of the comprehensive tax reductions, General Fund tax collections for
1995-96 grew by only 1.0% over 1994-95, as opposed to the 6.4% growth that would
have occurred if such measures had not been taken.

In the 1996-97 Budget prepared by the Office of State Budget and
Management, it was projected that General Fund net revenues would increase 3%
over 1995-96. In fact, actual General Fund net revenues for 1996-97 increased
8.3% over 1995-96. This increase resulted primarily from growth in the North
Carolina economy, which resulted in increased personal and corporate income tax
receipts.

In the 1998 session the General Assembly eliminated the sales tax on food
and the inheritance tax. In addition, the budget for the 1998-99 year of $12.5
billion calls for significant increases in spending. The tax reductions and
increase of almost $1 billion over the 1997-98 budget are expected to be offset
by strong projected tax revenue growth and the conservative nature of the
State's expenditures which historically have come in under budget. The main
areas of emphasis for spending include reform to the juvenile justice system,
Smart Start, an early childhood program, and education, including a 6.5%
increase in teacher salaries.

It is unclear what effect these developments at the State level may have on
the value of the Debt Obligations in the North Carolina Trust.

Litigation. The following are cases pending in which the State faces the
risk of either a loss of revenue or an unanticipated expenditure. In the opinion
of the Department of State Treasurer, an adverse decision in any of these cases
would not materially adversely affect the State's ability to meet its financial
obligations.

Leandro, et al. v. State of North Carolina and State Board of Education-In
May, 1994, students and boards of education in five counties in the State filed
suit in state Superior Court requesting a declaration that the public education
system of North Carolina, including its system of funding, violates the North
Carolina Constitution by failing to provide adequate or substantially equal
educational opportunities and denying due process of law, and violates various
statutes relating to public education.

On July 24, 1997, the North Carolina Supreme Court issued a decision in the
case. The Court upheld the present funding system against the claim that it
unlawfully discriminated against low wealth counties on the basis that the
Constitution does not require substantially equal funding and educational
advantages in all school districts. The Court remanded the case for trial on the
claim for relief based on the Court's conclusion that the Constitution
guarantees every child of the state an opportunity to receive a sound basic
education in North Carolina public schools. Five other counties intervened and
now allege claims for relief on behalf of their students' rights to a sound
basic education on the basis of the high proportion of at- risk students in
their counties' systems. Trial on one of the claims with respect to one
plaintiff's County is set for August, 1999. The North Carolina Attorney
General's Office believes that sound legal arguments support the State's
position on the outstanding claims.

Faulkenbury v. Teachers' and State Employees' Retirement System; Peele v.
Teachers' and State Employees' Retirement System; Woodard v. Local Government
Employees' Retirement System - Plaintiffs are disability retirees who brought
class actions in state court challenging changes in the formula for payment of
disability retirement benefits and claiming impairment of contract rights,
breach of fiduciary duty, violation of other federal constitutional rights, and
violation of state constitutional and statutory rights. The Superior Court
issued an order ruling in favor of plaintiffs. The Order was affirmed by the
North Carolina Supreme Court. The case went back to the Superior Court for
calculations of benefits and payment of retroactive benefits, along with
determination of various remedial issues. As a result of the remedial
proceedings, there are now two appeals pending in the appellate courts
concerning calculation of the retroactive benefits. The plaintiffs have
submitted documentation to the court asserting that the cost in damages and
higher prospective benefit payments to the plaintiffs and class members would
amount to $407 million. These amounts would be payable from the funds of the
Retirement systems. Calculations and payments so far indicate that retroactive
benefits will be significantly less than estimated, depending in part on the
pending appeals. Payments have been made by the State of approximately $73
million. The remaining liability for retroactive benefits is estimated by the
State not to exceed $42 million. All retroactive payments and future benefit
payments are payable from the funds of the Retirement systems.

Bailey/Emory/Patton Cases - State Tax Refunds - State and Federal Retirees.
In 1992, State and local government retirees filed Bailey, et al. v. North
Carolina et al., a class action lawsuit challenging repeal of the income tax
exemptions for State and local government retirement benefits as a breach of
contract and an unconstitutional impairment of their contract rights and seeking
tax refunds for taxes paid in tax years 1989 through 1991. The Bailey plaintiffs
obtained judgment in May, 1995, in the Superior Court for Wake County, and on
May 8, 1998, the Supreme Court of North Carolina upheld the Superior Court's
decision. Several additional cases, also named Bailey, et al. v. North Carolina,
et al., and one named Emory, et al. v. North Carolina, et al., were filed by
State and local government retirees to preserve their refund claims for
subsequent tax years through tax year 1997. The outcome of these cases was
controlled by the outcome of the initial Bailey case.

In 1995, a group of federal government retirees filed Patton, et al. v.
North Carolina, et al., a class action tax refund lawsuit seeking refunds of
State taxes paid on federal pension income since tax year 1989. The Patton
plaintiffs claimed that if the Bailey plaintiffs prevailed on their refund
claims, then the disparity of tax treatment accorded state and federal pension
income held unconstitutional in Davis v. Michigan (1989) would be reestablished.
In Davis, the United States Supreme Court ruled that a Michigan income tax
statute that taxed federal retirement benefits while exempting those paid by
state and local governments violated the constitutional doctrine of
intergovernmental tax immunity. At the time of the Davis decision, North
Carolina law contained similar exemptions in favor of State and local government
retirees. The repeal of those exemptions in 1989 resulted in the Bailey case.

On June 10, 1998, the General assembly reached an agreement settling the
Bailey, Emory, and Patton cases. The agreement, embodied in a consent order,
provided that the State would pay $799,000,000 in two installments, one in 1998
and the other in 1999, to extinguish all liability for refunds for tax years
1989 through 1997 of taxes paid by federal, State and local government retirees
who had five years creditable service in their retirement system prior to August
12, 1989, the date of enactment of the statute repealing the exemptions from
taxation of State and local government retirement benefits, or who have "vested"
by that date in certain "defined contribution" plans such as the State's 401(k)
and deferred compensation plans. The consent order was conditioned upon the
General Assembly appropriating the funds to make the payments set forth in the
consent order and court approval of the settlement following notice to class
members. The appropriation of the first installment of $400,000,000 was made,
and the Superior Court approved the settlement on October 7, 1998.

N.C. School Boards Association, et al. v. Harlan E. Boyles, State
Treasurer, et al. - Use of Administrative Payments. On December 14, 1998,
plaintiffs, including county school boards for Wake, Durham, Johnston, Buncombe,
Edgecombe and Lenoir Counties, filed suit in Superior Court requesting a
declaration that certain payments to State administrative agencies must be
distributed to the public schools on the theory that such amounts are fines
which under the North Carolina Constitution must be paid to the schools.

Smith/Shaver Cases - State Tax Refunds - Intangibles Tax. The Smith case is
a class action tax refund lawsuit related to litigation in Fulton Corporation v.
Faulkner, a case filed by a single taxpayer and decided by the United States
Supreme Court in 1996 regarding the constitutionality of intangibles taxes
previously collected by the State on shares of stock. On July 7, 1995, while the
Fulton case was pending before the United States Supreme Court, the Smith class
action was commenced in North Carolina Superior Court on behalf of all taxpayers
who paid the tax and complied with the requirements of the applicable tax refund
statute, N.C. Gen. Stat. 105-267, including its 30-day demand requirements.
These original plaintiffs were later designated Class A when a second group of
taxpayers were added. The new class, designated Class B, consisted of taxpayers
who had paid the tax but failed to comply with the refund statute's 30 day
demand requirement. On June 11, 1997, judgment was entered awarding refunds
totalling $120,000,000, with interest, and these refunds have been paid. In a
separate order also entered on June 11, 1997, Class B was decertified and the
refund claims of Class B taxpayers were dismissed. Class counsel appealed the
Class B decertification/dismissal order, and on December 4, 1998, the North
Carolina Supreme Court reversed the dismissal. As a result of the Smith
decision, the State will be required to pay refunds to Class B intangible
taxpayers. The State estimates that its liability for tax refunds, with interest
through June 30, 1999, will be approximately $350,000,000.

A second class action tax refund lawsuit, Shaver, et al. v. North Carolina,
et al., was filed on January 16, 1998, by the same taxpayers as Class B
plaintiffs in Smith under alternative theories of recovery for tax years 1991
through 1994 and for refunds for one additional tax year, 1990. Their additional
claim for 1990 totals approximately $100,000,000. Given the outcome of the Smith
case, the North Carolina Attorney General's Office believes that sound legal
arguments support dismissal as moot of the Shaver refund claims for tax years
1991 through 1994 and dismissal of the refund claims for tax year 1990 as barred
by the statute of limitations.

The State is involved in numerous other claims and legal proceedings, many
of which normally occur in governmental operations; however, the North Carolina
Attorney General does not expect any of the other outstanding lawsuits to
materially adversely affect the State's ability to meet its financial
obligations.

General. The population of the State has increased 13% from 1980, from
5,895,195 to 6,656,810 as reported by the 1990 federal census, and the State
rose from twelfth to tenth in population. The State's estimate of population as
of July, 1997, is 7,436,690. Notwithstanding its rank in population size, North
Carolina is primarily a rural state, having only six municipalities with
populations in excess of 100,000.
The labor force has undergone significant change during recent years as the
State has moved from an agricultural to a service and goods producing economy.
Those persons displaced by farm mechanization and farm consolidations have, in
large measure, sought and found employment in other pursuits. Due to the wide
dispersion of non-agricultural employment, the people have been able to
maintain, to a large extent, their rural habitation practices. During the period
1980 to 1996, the State labor force grew about 33% (from 2,855,200 to
3,796,200). Per capita income during the period 1985 to 1997 grew from $11,870
to $23,174, an increase of 95.2%.

The current economic profile of the State consists of a combination of
industry, agriculture and tourism. As of December, 1998, the State was reported
to rank eleventh among the states in non-agricultural employment and eighth in
manufacturing employment. Employment indicators have varied somewhat in the
annual periods since June of 1990, but have demonstrated an upward trend since
1991. The following table reflects the fluctuations in certain key employment
categories.
<TABLE>
<CAPTION>

Category June 1994 June 1995 June 1996 June 1997 June 1998
(all seasonally adjusted)
<S> <C> <C> <C> <C> <C>
Civilian Labor Force 3,560,000 3,578,000 3,704,000 3,797,000 3,776,000
Nonagricultural Employment 3,358,700 3,419,100 3,506,000 3,620,300 3,758,800
Goods Producing Occupations 1,021,500 1,036,700 1,023,800 1,041,000 1,045,400
(mining, construction and
manufacturing)
Service Occupations 2,337,200 2,382,400 2,482,400 2,579,300 2,713,400
Wholesale/Retail Occupations 749,000 776,900 809,100 813,500 848,300
Government Employees 554,600 555,300 570,800 579,600 594,800
Miscellaneous Services 731,900 742,200 786,100 852,500 923,100
Agricultural Employment 53,000 53,000 53,000 [not [not
available] available]
</TABLE>

The seasonally adjusted unemployment rate in July 1998 was estimated to be
3.2% of the labor force, as compared with 4.5% nationwide.

North Carolina's economy continues to benefit from a vibrant manufacturing
sector. Manufacturing firms employ approximately 22% of the total
non-agricultural workforce. North Carolina has the second highest percentage of
manufacturing workers in the nation. The State's annual value of manufacturing
shipments totals $142 billion, ranking the State eighth in the nation. The State
leads the nation in the production of textiles, tobacco products, furniture and
fiberoptic cable, and is among the largest producers of pharmaceuticals,
electronics and telecommunications equipment. More than 700 international firms
have established a presence in the State. Charlotte is now the second largest
financial center in the country, based on assets of banks headquartered there.
The strength of the State's manufacturing sector also supports the growth in
exports; the latest annual statistics show $8.76 billion in exports, making
North Carolina one of the few states with an export trade surplus.

In 1997, the State's gross agricultural income of nearly $8.3 billion
placed it seventh in the nation in gross agricultural income. According to the
State Commissioner of Agriculture, in 1997, the State ranked first in the nation
in the production of flue-cured tobacco, total tobacco, turkeys and sweet
potatoes; second in hog production, trout sold, and hog and pig income; third in
poultry and egg products income, greenhouse and nursery income, and the
production of cucumbers for pickles; fourth in the value of net farm income,
commercial broilers, peanuts, and strawberries; and fifth in burley tobacco and
blueberries.

The diversity of agriculture in North Carolina and a continuing push in
marketing efforts have protected farm income from some of the wide variations
that have been experienced in other states where most of the agricultural
economy is dependent on a small number of agricultural commodities. North
Carolina is the third most diversified agricultural state in the nation.

Tobacco production, which had been the leading source of agricultural
income in the State, declined in 1995. The poultry industry is now the leading
source of gross agricultural income, at 26.6%, and the pork industry provides
24% of the total agricultural income. Tobacco farming in North Carolina has been
and is expected to continue to be affected by major Federal legislation and
regulatory measures regarding tobacco production and marketing, federal and
state litigation and settlements regarding tobacco industry liability, and by
international competition. The tobacco industry remains important to North
Carolina providing approximately 14.4% of gross agricultural income.

The number of farms has been decreasing; in 1997 there were approximately
57,000 farms in the State down from approximately 72,000 in 1987 (a decrease of
about 21% in ten years). However, a strong agribusiness sector supports farmers
with farm inputs (agricultural chemicals and fertilizer, farm machinery, and
building supplies) and processing of commodities produced by farmers (vegetable
canning and cigarette manufacturing). North Carolina's agriculture industry,
including food, fiber and forest products, contributes over $45 billion annually
to the State's economy.

The North Carolina Department of Commerce, Travel and Tourism Division,
indicates that travel and tourism is increasingly important to the State's
economy. Travel and tourism's $10.1 billion economic impact in 1997 represents a
4.1% increase over 1996. The North Carolina travel and tourism industry directly
supports 171,000 jobs.

Bond Ratings. Currently, Moody's rates North Carolina general obligation
bonds as Aaa and Standard & Poor's rates such bonds as AAA. Standard & Poor's
also reaffirmed its stable outlook for the State in July, 1998. Standard &
Poor's reports that North Carolina's rating reflects the State's strong economic
characteristics, sound financial performances, and low debt levels.

The Sponsor believe the information summarized above describes some of the
more significant events relating to the North Carolina Trust. The sources of
this information are the official statements of issuers located in North
Carolina, State agencies, publicly available documents, publications of rating
agencies and statements by, or news reports of statements by State officials and
employees and by rating agencies. The Sponsor and its counsel have not
independently verified any of the information contained in the official
statements and other sources, and counsel have not expressed any opinion
regarding the completeness or materiality of any matters contained in this
Prospectus other than the tax opinions set forth below under North Carolina
Taxes.

OHIO

RISK FACTORS-The following summary is based on publicly available
information which has not been independently verified by the Sponsors or their
legal counsel.

Employment and Economy. Economic activity in Ohio, as in many other
industrially developed states, tends to be more cyclical than in some other
states and in the nation as a whole. In 1996, Ohio ranked seventh in the nation
with $304.4 billion in gross state products, and was third in manufacturing and
second in durable goods. Although manufacturing (including auto-related
manufacturing) remains an important part of Ohio's economy, the greatest growth
in employment in Ohio in recent years, consistent with national trends, has been
in the non-manufacturing area. Payroll employment in Ohio peaked in the summer
of 1993, decreased slightly but then reached a new high in 1998. Growth in
recent years has been concentrated among non-manufacturing industries, with
manufacturing tapering off since its 1969 peak. Approximately 80% of the payroll
workers in Ohio are employed by non-manufacturing industries.

The average monthly unemployment rate in Ohio was 3.8% in December, 1998.

With 15 million acres in farm land, agriculture and related sectors are a
very important segment of the economy in Ohio, providing an estimated 935,000
jobs or approximately 15.9% of total Ohio employment.
Ohio continues to be a major "headquarters" state. Of the top 500
corporations (industrial, commercial and service) based on 1997 revenues as
reported in 1998 by Fortune magazine, 30 had headquarters in Ohio, placing Ohio
fifth as a "headquarters" state for corporations.

The State Budget, Revenues and Expenditures and Cash Flow. Ohio law
effectively precludes the State from ending a fiscal year or a biennium with a
deficit. The State Constitution provides that no appropriation may be made for
more than two years and consistent with that provision the State operates on a
fiscal biennium basis. The current fiscal biennium runs from July 1, 1997
through June 30, 1999.

Under Ohio law, if the Governor ascertains that the available revenue
receipts and balances for the general revenue fund ("GRF") or other funds for
the then current fiscal year will probably be less than the appropriations for
the year, he must issue orders to State agencies to prevent their expenditures
and obligations from exceeding the anticipated receipts and balances.

State and national fiscal uncertainties during the 1992-93 biennium
required several actions to achieve the ultimate positive GRF ending balances.
As an initial action, to address a subsequently projected fiscal year 1992
imbalance, the Governor ordered most state agencies to reduce GRF appropriation
spending in the final six months of that year by a total of approximately $184
million. Debt service obligations were not affected by this order. Then in June
1992, $100.4 million was transferred to the GRF from the budget stabilization
fund and certain other funds. Other revenue and spending actions, legislative
and administrative, resolved the remaining GRF imbalance for fiscal year 1992.

As a first step toward addressing a then estimated $520 million GRF
shortfall for fiscal year 1993, the Governor ordered, effective July 1, 1992,
selected GRF appropriations reductions totalling $300 million (but such
reductions did not include debt service). Subsequent executive and legislative
actions provided for positive biennium-ending GRF balances. The GRF ended the
1992-93 biennium with a balance of approximately $111 million and a cash balance
of approximately $394 million.

The GRF appropriations act for the 1994-95 biennium provided for total GRF
biennial expenditures of approximately $30.7 billion. The 1994-95 biennium
ending GRF balance was $928 million.

The GRF appropriations act for the 1996-1997 biennium provided for total
GRF biennial expenditures of approximately $33.5 billion. The 1996-1997 biennium
GRF ending balance was over $834 million.

The GRF appropriations act for the current biennium provides for total GRF
biennial expenditures of over $36 billion. Necessary GRF debt service was
provided for in the act. Litigation pending in federal District Court and in the
Ohio Court of Claims contests the Ohio Department of Human Services ("ODHS")
prior Medicaid financial eligibility rules for married couples where one spouse
is living in a nursing facility and the other spouse resides in the community.
ODHS promulgated new eligibility rules effective January 1, 1996. ODHS appealed
an order of the federal court directing it to provide notice to persons
potentially affected by the former rules from 1990 to 1995, and the Court of
Appeals ruled in its favor. Plaintiffs' petition for certiorari was not granted
by the U.S. Supreme Court. As to the Court of Claims case, it is not possible to
state the period (beyond the current fiscal year) during which necessary
additional Medicaid expenditures would have to be made. Plaintiffs have
estimated total additional Medicaid expenditures at $600,000,000 for the
retroactive period and, based on current law, it is estimated that the State's
share of those additional expenditures is approximately $240,000,000. The Court
of Claims has certified the action as a class action.

Because GRF cash receipts and disbursements do not precisely coincide,
temporary GRF cash flow deficiencies often occur in some months of a fiscal
year, particularly in the middle months. Statutory provisions provide for
effective management of these temporary cash flow deficiencies by permitting
adjustment of payment schedules and the use of total operating funds. In fiscal
year 1998, a GRF cash flow deficiency occurred in five months with the highest
being approximately $742 million. The OBM projects GRF cash flow deficiencies
will occur in five months in fiscal year 1999.

State and State Agency Debt. The Ohio Constitution prohibits the incurrence
or assumption of debt by the State without a popular vote except for the
incurrence of debt to cover causal deficits or failures in revenue or to meet
expenses not otherwise provided for, but which are limited to $750,000 or to
repel invasions, suppress insurrection or defend the State in war. Under
interpretations by Ohio courts, revenue bonds of the State and State agencies
that are payable from net revenues of or related to revenue producing facilities
or categories of such facilities are not considered "debt" within the meaning of
these constitutional provisions.

From 1921 to date, Ohio voters approved fifteen constitutional amendments
authorizing the incurrence of State debt to which taxes or excises were pledged
for payment. The only such tax-supported debt still authorized to be incurred
are highway, coal development, local infrastructure and natural resources
general obligation bonds.

Not more than $1.2 billion in certain state highway obligations may be
outstanding at any time and not more than $220 million can be issued in a fiscal
year. As of February 3, 1999, approximately $352.5 million of such highway
obligations were outstanding. The authority to issue certain other highway
obligations expired in December, 1996; however, as of February 3, 1999,
approximately $275.2 million of such highway obligations were outstanding. Not
more than $100 million in State obligations for coal development may be
outstanding at any one time. As of February 3, 1999, approximately $23.9 million
of such coal obligations were outstanding. Not more than $2.4 billion of State
general obligation bonds to finance local capital infrastructure improvements
may be issued at any one time, and no more than $120 million can be issued in a
calendar year. As of February 3, 1999, approximately $1 billion of those bonds
were outstanding. Not more than $200 million of natural resources bonds may be
outstanding at any time, and no more than $50 million can be issued in any year.
As of February 3, 1999, approximately $85.1 million of those bonds were
outstanding.

The Ohio Constitution authorizes State bonds for certain housing purposes,
but tax moneys may not be obligated or pledged to those bonds. In addition, the
Ohio Constitution authorizes the issuance of obligations of the State for
certain purposes, the owners or holders of which are not given the right to have
excises or taxes levied by the State legislature to pay principal and interest.
Such debt obligations include the bonds and notes issued by the Ohio Public
Facilities Commission, the Ohio Building Authority and the Treasurer of State.

The Treasurer of State has been authorized to issue bonds to finance
approximately $355 million of capital improvements for local elementary and
secondary public school facilities. Debt service on the obligations is payable
from State resources.

A statewide economic development program assists with loans and loan
guarantees, and the financing of facilities for industry, commerce, research and
distribution. The law authorizes the issuance of State bonds and loan guarantees
secured by a pledge of portions of the State profits from liquor sales. The
General Assembly has authorized the issuance of these bonds by the State
Treasurer, with a maximum amount of $300 million, subject to certain
adjustments, currently authorized to be outstanding at any one time. A 1996
issue of approximately $168.7 million of taxable bonds refunded previously
outstanding bonds. A 1998 issue of $101,980,000 of taxable forward purchase
refunding bonds were issued to refund certain term bonds of the 1996 issue. The
highest future fiscal year debt service on the outstanding bonds of these
issues, which are payable through 2021, is approximately $16.2 million.

An amendment to the Ohio Constitution authorizes revenue bond financing for
certain single and multifamily housing. No State resources are to be used for
the financing. As of March 8, 1999, the Ohio Housing Financing Agency, pursuant
to that constitutional amendment and implementing legislation, had sold revenue
bonds in the aggregate principal amount of approximately $340.5 million for
multifamily housing and approximately $5.47 billion for single family housing. A
constitutional amendment adopted in 1990 authorizes greater State and political
subdivision participation in the provision of housing for individuals and
families. The General Assembly could authorize State borrowing for this purpose
by the issuance of State obligations secured by a pledge of all or a portion of
State revenues or receipts, although the obligations may not be supported by the
State's full faith and credit.

A constitutional amendment approved in 1994 pledges the full faith and
credit and taxing power of the State to meet certain guarantees under the
State's tuition credit program. Under the amendment, to secure the tuition
guarantees, the General Assembly is required to appropriate moneys sufficient to
offset any deficiency that may occur from time to time in the trust fund that
provides for the guarantee and at any time necessary to make payment of the full
amount of any tuition payment or refund required by a tuition payment contract.

Major offices of the State have had under way extensive efforts and
programs to identify and assess, and remediate when necessary, year 2000
problems involving data processing systems and other systems and equipment
critical to continued and uninterrupted State agency operations. Various
remediation efforts are under way. In addition to significant review and
activity undertaken by OBM (State accounting system), and the State Treasurer
and State Auditor offices, a Year 2000 Competency Center has been operating in
the Division of Computer Services in the Department of Administrative Services
(the "DAS"), serving cabinet- level agencies.

June 30, 1999, has been identified as a general target for material
compliance. The aim is for the State to enter, prepared, the biennium that
crosses January 1, 2000.

Among the areas addressed by the State Treasurer's office are the paying
agent and trustee relationships with respect to State bonds and investments. The
State Auditor's efforts have in large part involved the State system of
payments, compliance with various grant contracts and efforts by local
subdivisions to achieve a level of satisfactory compliance. The Treasurer's
office and the Department of Taxation are directly involved in the collection
and processing of State taxes, and particular emphasis has been placed in those
areas.
The DAS Year 2000 Competency Center has been reviewing detailed written
plans, and reporting on remediation project completion percentages and scheduled
completion dates.

Overall, those involved State offices and agencies are satisfied that
material areas for which they are responsible and that may require remediation
have been and are being identified and will timely be addressed, and that the
cost of that remediation will be within moneys available and appropriated. The
State's remediation efforts have been aimed primarily at ensuring the unimpeded
and uninterrupted operation of State government, including tax collections and
investment and timely payment of State obligations. There are agencies outside
the purview of these reviews and efforts, including the State universities and
retirement systems, that are pursuing their own assessment and remediation
activities. Efforts are also being made to address "imbedded chip" situations
generally. Obviously, the success of remediation efforts, by the State and by
pertinent outside parties, will not be fully determined until the year 2000 and
thereafter.

Schools and Municipalities. The 612 public school districts and 49 joint
vocational school districts in the State receive a major portion (approximately
44%) of their operating funds from State subsidy appropriations, the primary
portion known as the Foundation Program. They also must rely heavily upon
receipts from locally-voted taxes. Some school districts in recent years have
experienced varying degrees of difficulty in meeting mandatory and discretionary
increased costs. Current law prohibits school closings for financial reasons.

Original State basic aid appropriations for the 1992-93 biennium provided
for an increase in school funding compared to the preceding biennium. The
reduction in appropriations spending for fiscal year 1992 included a 2.5%
overall reduction in the annual Foundation Program appropriations and a 6%
reduction in other primary and secondary education programs. The reductions were
in varying amounts, and had varying effects, with respect to individual school
districts. State appropriations for primary and secondary education for the
1994-95 biennium provided for 2.4% and 4.6% increases in basic aid for the two
fiscal years of the biennium. State appropriations for primary and secondary
education for the 1996-97 biennium provided for a 13.6% increase in school
funding appropriations over those in the preceding biennium. State
appropriations for the current 1998-99 biennium provide for a 18.3% increase
over the previous biennium.

In years prior to fiscal year 1990, school districts facing deficits at
year end had to apply to the State for a loan from the Emergency School
Advancement Fund. Legislation replaced the Fund with enhanced provisions for
individual district local borrowing, including direct application of Foundation
Program distributions to repayment if needed. In fiscal year 1995, 29 school
districts received loans totaling approximately $71.1 million. In fiscal year
1996, 20 school districts have received loans totaling approximately $87.2
million. In fiscal year 1997, 12 school districts have received loans totaling
approximately $113 million, and in fiscal year 1998, 10 school districts
received loans totaling approximately $23.4 million.

The Ohio Supreme Court concluded, in a 1997 decision, that major aspects of
the State's system of school funding are unconstitutional. The Court ordered the
State to provide for and fund sufficiently a system complying with the Ohio
Constitution, staying its order for a year to permit time for responsive
corrective actions by the Ohio General Assembly. In response to a State motion
for reconsideration and clarification of its opinion, the Court indicated that
property taxes may still play a role in, but can no longer by the primary means
of, school funding. The Court also confirmed that contractual repayment
provisions of certain debt obligations issued for school funding will remain
valid until the stay terminates. As of February 3, 1999, hearings have taken
place at the trial court level and the parties await the trial court decision on
the adequacy of the steps taken by the State.

Various Ohio municipalities have experienced fiscal difficulties. Due to
these difficulties, the State established procedures to identify and assist
cities and villages experiencing defined "fiscal emergencies". A commission
appointed by the Governor monitors the fiscal affairs of municipalities facing
substantial financial problems. As of February 3, 1999, this act has been
applied to twelve (12) cities and fourteen (14) villages. The situations in ten
(10) cities and ten (10) villages have been resolved and their commissions
terminated.

State Employees and Retirement Systems. The State has established five
public retirement systems which provide retirement, disability retirement and
survivor benefits. Federal law requires newly-hired State employees to
participate in the federal Medicare program, requiring matching employer and
employee contributions, each now 1.45% of the wage base. Otherwise, State
employees covered by a State retirement system are not currently covered under
the federal Social Security Act. The actuarial evaluations reported by these
five systems showed aggregate unfunded accrued liabilities of approximately
$12,398.4 billion covering both State and local employees.

The State engages in employee collective bargaining and currently operates
under staggered two-year agreements with all of its 21 bargaining units. The
bargaining unit agreements with the State expire at various times in calendar
year 1999.

Health Care Facilities Debt. Revenue bonds are issued by Ohio counties and
other agencies to finance hospitals and other health care facilities. The
revenues of such facilities consist, in varying but typically material amounts,
of payment from insurers and third-party reimbursement programs, such as
Medicaid, Medicare and Blue Cross. Consistent with the national trend,
third-party reimbursement programs in Ohio have begun new programs, and modified
benefits, with a goal of reducing usage of health care facilities. In addition,
the number of alternative health care delivery systems in Ohio has increased
over the past several years. For example, the number of health insuring
corporations licensed by the Ohio Department of Insurance increased from 12 in
1983 to 37 as of March 8, 1999. Due in part to changes in the third-party
reimbursement programs and an increase in alternative delivery systems, the
health care industry in Ohio has become more competitive. This increased
competition may adversely affect the ability of health care facilities in Ohio
to make timely payments of interest and principal on the indebtedness.

PENNSYLVANIA

RISK FACTORS-Potential purchasers of Units of the Pennsylvania Trust should
consider the fact that the Trust's portfolio consists primarily of securities
issued by the Commonwealth of Pennsylvania (the "Commonwealth"), its
municipalities and authorities and should realize the substantial risks
associated with an investment in such securities. Although the General Fund of
the Commonwealth (the principal operating fund of the Commonwealth) experienced
deficits in fiscal 1990 and 1991, tax increases and spending decreases have
resulted in surpluses the last five years; as of June 30, 1997, the General Fund
had a surplus of $1,364.9 million.

Pennsylvania's economy historically has been dependent upon heavy industry,
but has diversified recently into various services, particularly into medical
and health services, education and financial services. Agricultural industries
continue to be an important part of the economy, including not only the
production of diversified food and livestock products, but substantial economic
activity in agribusiness and food-related industries. Service industries
currently employ the greatest share of nonagricultural workers, followed by the
categories of trade and manufacturing. Future economic difficulties in any of
these industries could have an adverse impact on the finances of the
Commonwealth or its municipalities and could adversely affect the market value
of the Bonds in the Pennsylvania Trust or the ability of the respective obligors
to make payments of interest and principal due on such Bonds.

Certain litigation is pending against the Commonwealth that could adversely
affect the ability of the Commonwealth to pay debt service on its obligations
including suit relating to the following matters: (i) the ACLU has filed suit in
federal court demanding additional funding for child welfare services; the
Commonwealth settled a similar suit in the Commonwealth Court of Pennsylvania
and is seeking the dismissal of the federal suit, inter alia because of that
settlement; after its earlier denial of class certification was reversed by the
Third Circuit Court of Appeals, the district court granted class certification
to the ACLU; in July, 1998, the plaintiffs reached a settlement agreement with
the City of Philadelphia and related parties, subject to approval by the
district court; the Commonwealth and certain other parties are continuing
settlement negotiations (no available estimate of potential liability); (ii) in
1987, the Supreme Court of Pennsylvania held the statutory scheme for county
funding of the judicial system to be in conflict with the constitution of the
Commonwealth, but stayed judgment pending enactment by the legislature of
funding consistent with the opinion; a special master appointed by the Court
submitted an implementation plan in 1997, recommending a four phase transition
to state funding of a unified judicial system; the special master recommended
that the implementation of the phase should be effective July 1, 1998, with the
completion of the final phase early next century; objections to the Special
Master's report were due by September 1, 1997; the General Assembly has yet to
consider legislation implementing the Court's judgment; (iii) litigation has
been filed in both state and federal court by an association of rural and small
schools and several individual school districts and parents challenging the
constitutionality of the Commonwealth's system for funding local school
districts-the federal case has been stayed pending the resolution of the state
case; on July 9, 1998, the Judge dismissed the petitioners' claim in its
entirety; on July 20, 1998, the petitioners filed a timely motion for post trial
relief; also on July 21, 1998, the petitioners filed an application asking the
Supreme Court to assume jurisdiction over the case to decide whether the
petitioners' constitutional claims are justiciable in the courts of the
Commonwealth; on September 2, 1998, the Supreme Court granted the petitioners'
application and directed the filing of briefs (no available estimate of
potential liability); (iv) Envirotest/Synterra Partners ("Envirotest") filed
suit against the Commonwealth asserting that it sustained damages in excess of
$350 million as a result of investments it made in reliance on a contract to
conduct emissions testing before the emission testing program was suspended;
Envirotest has entered into a Settlement Agreement to resolve Envirotest's
claims that will pay Envirotest a conditional sum of $195 million over four
years; (v) in litigation brought by the Pennsylvania Human Relations Commission
to remedy unintentional conditions of segregation in the Philadelphia public
schools, the School District of Philadelphia filed a third-party complaint
against the Commonwealth asking the Commonwealth Court to require the
Commonwealth to supply funding necessary for the District to comply with orders
of the court; the Commonwealth Court found that the School District was entitled
to receive an additional $45.1 million for the 1996-97 school year, but the
Pennsylvania Supreme Court vacated this decision in September 1996; pursuant to
the Court's orders, the parties have briefed certain issues; the Supreme Court
heard oral argument in February, 1998, and took the matter under advisement (no
available estimate of potential liability); (vi) in February, 1997, five
residents of the City of Philadelphia, joined by the City, the School District
and others, filed a civil action in the Commonwealth Court for declaratory
judgment against the Commonwealth and certain Commonwealth officers and
officials that the defendants had failed to provide an adequate quality of
education in Philadelphia, as required by the Pennsylvania Constitution; after
preliminary objections and briefs were filed, the Court heard oral argument in
September, 1997; on March 2, 1998, the Commonwealth Court sustained the
respondents' preliminary objections and dismissed the case on the grounds that
the issues presented are not justiciable; an appeal to the Supreme Court of
Pennsylvania is pending (no available estimate of potential liability); (vii) in
April 1995, the Commonwealth reached a settlement agreement with Fidelity Bank
and certain other banks with respect to the constitutional validity of the
Amended Bank Shares Act and related legislation; although this settlement
agreement did not require expenditure of Commonwealth funds, the petitions of
other banks are currently pending with the Commonwealth Court (no available
estimate of potential liability); and (viii) suit has been filed in state court
against the State Employees' Retirement Board claiming that the use of gender
distinct actuarial factors to compute benefits received before August 1, 1983,
violates the Pennsylvania Constitution (gender-neutral factors have been used
since August 1, 1983, the date on which the U.S. Supreme Court held in Arizona
Governing Committee v. Norris that the use of such factors violated the Federal
Constitution); in 1996, the Commonwealth Court heard oral argument en banc, and
in 1997 denied the plaintiff's motion for judgement on the pleadings (no
available estimate of potential liability); (ix) in March, 1998, several
residents of the City of Philadelphia joined by the School District and others
filed a civil action in the United States District Court for the Eastern
District of Pennsylvania against the Governor, the Secretary of Education and
others; in their suit the plaintiffs claim that the defendants are violating a
regulation of the U.S. Department of Education promulgated under Title VI of the
Civil Rights Act of 1964 in that the Commonwealth's system for funding public
schools has the effect of discriminating on the basis of race. Briefing on the
various motions is expected to be completed by the end of November, 1998. All
motion would then be before the district court for disposition (no available
estimate of potential liability).

Although there can be no assurance that such conditions will continue, the
Commonwealth's general obligation bonds are currently rated AA by Standard &
Poor's and Aa3 by Moody's, and Philadelphia's general obligation bonds are
currently rated BBB by Standard & Poor's and Aaa by Moody's.

The City of Philadelphia (the "City") experienced a series of General Fund
deficits for Fiscal Years 1988 through 1992 and, while its general financial
situation has improved, the City is still seeking a long-term solution for its
economic difficulties. The audited balance of the City's General Fund as of June
30, 1997, was a surplus of approximately $128.8 million up from approximately
$118.5 million as of June 30, 1996.

In recent years an authority of the Commonwealth, the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), has issued approximately $1.76
billion of Special Revenue Bonds on behalf of the City to cover budget
shortfalls, to eliminate projected deficits and to fund capital spending. As one
of the conditions of issuing bonds on behalf of the City, PICA exercises
oversight of the City's finances. The City is currently operating under a five
year plan approved by PICA in 1996. PICA's power to issue further bonds to
finance capital projects expired on December 31, 1994. PICA's power to issue
bonds to finance cash flow deficits expired on December 31, 1996, but its
authority to refund outstanding debt is unrestricted. PICA had approximately
$1.1 billion in special revenue bonds outstanding as of June 30, 1998.

TEXAS

RISK FACTORS-The State Economy. As with most of the United States, Texas
has experienced significant economic growth during recent years. However, state
officials see indications that such economic growth has slowed and may continue
to slow for the foreseeable future. For the state's fiscal year ended August 31,
1998, such officials estimate that the Texas economy grew at an annual rate of
5.4%, but project that the growth will be only 3.6% in fiscal 1999. A number of
factors now exist that indicate that such projections may be appropriate.

The petroleum industry has declined in its relative importance to the Texas
economy over the past several decades, but it remains an important segment of
the Texas economy. Recently, depressed oil prices have had a significant adverse
affect on the industry and, consequently, on the Texas economy. The drilling rig
count, historically an indicator of the fortunes of the petroleum industry,
recently hit historic lows. In addition, the industry continues to undergo a
consolidation as numerous oil companies with significant workforces in Texas
have been acquired by other oil companies. All of such factors have led to the
loss of jobs in the petroleum industry, As a consequence of this situation,
Texas has suffered the loss of revenues as a result of reduced severance taxes
relating to continuing declines in production of oil and gas and lower oil
prices and related declines in property values. State officials estimate that
school tax collections will be down by $154 million in fiscal 1998 alone as a
result of such factors. Those officials have also indicated that some
communities in Texas for which the petroleum industry has particular importance
have experienced financial crises that may result in the increase of local
property tax rates so the local governments and school district may continue to
meet their obligations, including debt service. However, in mid-March, 1999, oil
prices started to move upward in anticipation of proposed production cutbacks by
the Organization of Petroleum Exporting Countries. Improvement of worldwide oil
prices could alleviate, at least to some degree, the shortfalls in tax revenues
in Texas.

Over the past decade, the Texas economy has become more diverse and more
similar to the national economy. As a result of these changes, the Texas
workforce has now become more concentrated in the service and trade industries
as the concentration of workers in the petroleum industry has lessened. Although
the Texas economy has become more diverse, that diversity has made the economy
vulnerable to additional forces in the global and national economies. As
segments of the Texas economy, such as the computer, communications and
electronics industries, grow, the state's economy has also become subject to the
effects of downturns in those industries.

Exports of goods and services to Central and South America, as well as
elsewhere in the world, are becoming an increasingly important factor in the
Texas economy. State officials estimate that Texas exports reached approximately
$87 billion in 1998, or approximately 14% of the gross state product of Texas
for the year, up from approximately 6% in fiscal 1985. However, this level of
exports marks a substantial slow-down in the growth of exports when compared to
the year-to-year growth rate in most recent years. A continuing slowdown or a
lack of growth in exports would have a negative effect on the Texas economy. As
is shown by the effect of the economic crisis in Mexico in the mid-1990's,
international economic events and trade policies now have a heightened effect on
the economic activity in Texas. State officials have estimated that in 1995
trade with Mexico supported directly and indirectly more than 464,000 jobs in
Texas, about 6% of the total Texas employment. Texas exports to Mexico in 1995,
in fact, are estimated to have dropped to $21.9 billion, a decrease of $2
billion from the level of exports to Mexico in 1994. Retail sales and trade in
the region along the Texas-Mexico border were also adversely affected. In
response to improvement in the Mexican economy after the crisis in the
mid-1990's, Texas' exports to Mexico rebounded to $27.4 billion in 1996. In
addition, the North American Free Trade Agreement (NAFTA) appears to enhanced
Texas' exports situation as officials estimate that exports to Mexico and Canada
accounted for 53.7% of all Texas exports in 1998. Any economic problems that
Mexico encounters in the future, however, could result in reductions of Texas'
exports to Mexico and cross-border trade with Mexico, as well as increased
unemployment, a reduced gross state product and reduced tax revenue for the
state.

The economic difficulties in Asia during 1997 and 1998 also had an adverse
impact on the Texas economy as Japan, Singapore, South Korea and Taiwan have
recently been among the top ten destinations for Texas exports. However, as
trade with Pacific Basin countries currently accounts for only approximately 15%
of Texas' total exports, substantial economic crises in that area do not have
the potential for harm to the Texas economy as do economic crises in Mexico.

In the recent past, the federal Base Closure and Realignment Commission has
made decisions to close military bases in Texas, and such closures may affect
certain regions in Texas significantly. As the base closures occur, reduced
spending by the military and military personnel in the local economies and the
loss of civilian jobs on the closed bases and related job losses in the general
economy affect the state and local economies adversely. Most notably, Kelly Air
Force Base in San Antonio, Texas, is slated for closure over the next several
years with the resulting direct civilian job loss estimated to be between 10,000
and 18,000 jobs. Local officials in San Antonio have asserted that loss of those
jobs would increase unemployment in the significant Hispanic population of
metropolitan San Antonio by 73%. In addition, three other metropolitan areas in
Texas may be affected by the actions of the commission. State officials and
members of the Texas Congressional delegation have been working to reduce the
adverse effect of the Commission's actions, both through attempts to save jobs
by redeveloping the closed bases for industrial or municipal uses and by
otherwise reducing community dependence on defense establishments. There is no
way to predict accurately at this time the effect these closures may ultimately
have on the Texas economy generally and economy of the San Antonio metropolitan
region in particular.

The state government of Texas still faces significant financial challenges
as demands for state and social services increase and spending of state funds
for certain purposes is mandated by the courts and federal law and is required
by growing social services caseloads. The population of Texas has grown
significantly in the recent past and is estimated now to be approximately 19
million persons. Illegal immigration into Texas continues to be problematic for
the state, creating additional demand for governmentally provided social
services. In addition, among the ten most populous states, Texas has had the
highest percentage of its population living below the poverty line, with almost
18% of its populace living below that line. Some state officials are concerned
that Texas' growth pattern and the number of persons living in poverty in Texas
are not and will not be recognized properly by programs distributing federal
funds available for social assistance programs to the states, resulting in Texas
having fewer funds than a fair allocation of federal funding would otherwise
provide to Texas. As a result, unless funding is appropriately allocated or
additional sources of funding can be found, the growing need for social services
will further strain the limited state and local resources for these programs.

Texas potentially faces issues related to its long-term population growth.
The Texas State Data Center estimates that the population of Texas will reach
33.9 million by 2030, almost doubling the 1990 population of the state. State
officials anticipate that minorities will account for at least two-thirds of
this growth. A significant portion of such growth may occur in the region along
the Texas-Mexico border, an area that has traditionally had significantly
greater social problems than has the rest of Texas. Poverty rates, birth rates,
unemployment rates and crime rates in that region exceed those rates in the
remainder of the state. Consequently, to the extent the projected population
growth occurs and is concentrated in the border region, the state government may
have to devote an increasing portion of its resources to social services in the
region. In addition, local governments, hospital districts and school districts
may be expected to expend substantial additional amounts to provide the new and
expanded infrastructure necessary to cope with the additional population. All of
these factors could raise the total public debt incurred by various Texas debt
issuers. If the resulting tax revenues from the increased population do not rise
to an adequate level, the Texas issuers may find their debt ratings adversely
affected and encounter difficulty when attempting to sell their debt instruments
at interest rates acceptable to those issuers. Moreover, to the extent the
federal government reduces federal funding of the social services provided by
state and local governments, Texas and its local governments will be faced with
additional challenges to provide social services at acceptable levels and to
finance those services.

During Texas' fiscal year ended August 31, 1998, Texas expended almost
$14.7 billion on health and human services compared with spending on health and
human services of approximately $15.0 billion in fiscal 1997. Texas' improved
economic climate during 1998 and the workforce programs previously adopted
account in some measure for the reduction in Texas' health and human services
spending in 1998. In fiscal 1998, Texas received over $12.6 billion in federal
funding for all purposes, which constituted 28.4% of all state revenues for that
fiscal year, as compared with federal funding of $12.1 billion in fiscal 1997,
which was also 28.4% of all state revenues in that fiscal year. The federal
government reduced Texas' allocation of the Social Services Block Grant (Title
XX) by $12.6 million in fiscal 1998, and state officials expect another
reduction of $26.0 million in fiscal 1999.

The percentage that the total federal funds received by Texas was of Texas'
total health and human services spending actually increased by 1.6% from fiscal
1997 to fiscal 1998. Generally, over half of the federal funding received by
Texas in any fiscal year is allocated to health and human services programs
provided and administered by Texas. The federal welfare reform law enacted in
August, 1996, provides for limits on Aid to Dependent Children benefits, reduces
food stamp benefits and prohibits the provision of food stamps and Supplemental
Security Income to legal immigrants. In addition, certain limits are imposed on
the amount of lifetime benefits that can be paid to any recipients of welfare
benefits. The legislation also provides for block grants of funds from the
federal government and for the states to be able to fashion programs for the use
of those funds. Although the ultimate and full effect of the federal welfare
reform law on Texas' public assistance programs remains unclear, with its high
number of legal immigrants and dependence of poorer Texans on food stamps rather
than other types of assistance, the law may have a disproportionate effect on
Texas' public assistance programs. Formulas for the allocation of block grant
funds have typically favored states with demographics different from those of
Texas with its rapidly increasing population and high incidence of poverty among
its population. Texas has typically provided low levels of assistance for the
working poor, with the assistance given being centered on the provision of food
stamps to this group. If Texas continues to provide assistance to these groups
at current levels of spending, even with block grants from the federal
government, such public assistance programs could adversely affect state
finances. The welfare reform initiatives are also expected to result in
additional requirements that Texas provide additional job training to its
residents, while the federal government will provide less aid to subsidize that
job training. The Texas Workforce Commission estimated that in 1997 Texas would
be required to provide work activities for an additional 29,000 clients (who are
public assistance recipients) beyond the prior federal requirements. Under the
welfare reform law, within five years of the program's commencement, Texas must
have 50 percent of its welfare recipients working at least 30 hours per week or
lose up to five percent of its federal funds that are used to fund public
assistance programs. Such loss of funds would be required to be made up out of
the state's general revenues. Under the federal welfare law, Texas could lose
substantial amounts of federal funding of its public assistance programs,
placing even greater strains on Texas' state and local finances if public
assistance is to continue at current levels. However, it is impossible to
predict at this time what the long term effect of this welfare reform
legislation will be on the Texas economy.

Observers expect that the deregulation of the retail electric industry will
again be considered by the Texas legislature during the session that started in
January, 1999. As high volume users, Texans spend more for electricity than
residents of many other states. In addition, state officials believe that
generating capacity within the state is not keeping up with the population
growth in the state, creating the potential for power shortages in the future.
Any such shortages could result in the slowdown of new job creation, the loss of
employers to other states and an adverse effect on the Texas economy. The Energy
Reliability Council of Texas requires a 15% reserve margin for generating
capacity versus demand. In 1998, the reserve dropped to less than 6%. Electric
utilities, which have had a monopoly in their business areas in Texas, may
oppose deregulation or seek concessions to ease the financial impact of
deregulation on their operations and finances. Although the deregulation of
electric utilities would likely lower the cost of electricity to consumers
ultimately, consumers are expected to bear a substantial portion of the costs of
any transition to a deregulated industry. Such costs could have a short term
adverse effect on the ability of Texas to attract new businesses to locate in
Texas and to create the new jobs needed to provide work for the growing Texas
workforce. Although the Texas legislature will likely consider the matter during
the current session, it may not adopt any measures to deregulate electric
utilities in Texas or address the shortages in generating capacity. Their
failure to do so could slow economic growth In Texas and cause customers of the
existing utilities to pay higher rates if the existing utilities build
additional generating capacity.

Bond Ratings. The state's credit ratings have been unchanged over recent
periods, although such ratings have caused the state to pay higher interest
rates on state bonds than those historically enjoyed by the state. As of January
31, 1999, general obligation bonds issued by the State of Texas were rated AA by
Standard & Poor's, Aa2 by Moody's and AA+ by Fitch's Investor Services.

State Finances. In its 1998 fiscal year, the Texas state government's total
net revenue exceeded its total net expenditures by approximately $1.3 billion.
With prior surpluses, Texas ended fiscal 1998 with a surplus of $4.4 billion in
its general revenue fund. That amount included $1.1 billion in settlement
proceeds from the state's tobacco litigation. The Comptroller of Public Accounts
has projected that the State will have revenues of approximately $94.0 billion
for the 2000-01 biennium, while the state's Legislative Budget Board is
recommending to the Texas legislature that it adopt a budget for the biennium
that authorizes expenditures of approximately $93.5 billion. This recommendation
includes spending of approximately $26.9 billion on health and human services
during the two-year period and expenditures of approximately $41.8 billion on
education during that period. The budget recommendation does not include the
anticipated expenditures of local governments, school districts and hospital
districts and special governmental districts during the biennium. While state
government officials have based their estimates on historical revenues, expected
tax collections and expectations of receipts from sources other than taxes,
revenues in the estimated amounts may not be received by the State of Texas
during that period and the state could suffer a budget deficit for that two-
year period. The revenue estimates for the 2000-01 biennium assume aggregate
receipts of approximately $27.7 billion from the federal government during the
biennium. As noted above, changes in federal law could result in the amounts of
federal funding being less than those assumed by the state government for
budgeting purposes.

The two major sources of state revenue are state taxes and federal funds.
Other revenue sources include income from licenses, fees and permits, interest
and investment income, the state lottery, income from sales of goods and
services and land income (which includes income from oil, gas and other mineral
royalties as well as from leases on state lands). The major sources of state
government tax collection are the sales tax, the sales and rentals taxes on
motor vehicles and interstate carriers, and the franchise tax. Texas does not
impose a state income tax, although the state's franchise tax on corporations,
limited liability companies and certain other entities functions as an income
tax on those entities' incomes.

Texas currently has a relatively low state debt burden compared to other
states, ranking thirty-sixth among all states and tenth among the ten most
populous states in net tax-supported debt per capita, according to state
officials. The State of Texas and all of its political subdivisions and public
agencies, including municipalities, counties, public school districts and other
special districts, had estimated total tax-supported debt of $39.4 billion as of
August 31, 1998, including $33.59 billion of local government debt. In addition,
the State of Texas and all of its political subdivisions and public agencies had
an estimated additional $38.97 billion of revenue debt as of that date including
$33.06 billion of local government debt. The long-term debt of Texas local
governments has grown significantly. During fiscal 1998, the long-term debt of
local governments in Texas grew to approximately $66.7 billion, a net increase
of approximately $6 billion over the prior year's level. In fiscal 1997, the net
increase of that long-term debt approximated $4 billion. Of that debt, tax
supported debt constituted approximately $33.6 billion and revenue supported
debt constituted approximately $33.1 billion. Of such debt, cities and towns
were the issuers of approximately $27.17 billion (of which approximately $10.1
billion was tax supported), public school districts were issuers of
approximately $15.6 billion (almost all of which was tax supported) and water
districts and authorities were the issuers of approximately $14.7 billion (of
which $11.0 billion was revenue supported).

The total long-term debt of the state governments and its instrumentalities
grew only modestly during fiscal 1998 to approximately $11.8 billion at the end
of fiscal 1998, up by approximately $115 million over the fiscal 1997 year-end
level. However, the mix of bonds changed during that period with general
obligation debt increasing by over $900 million to approximately $5.9 billion
and total state revenue bonds decreasing by approximately $900 million to
approximately $5.9 billion. Of the outstanding state general obligation bonds,
approximately $3.2 billion of such bonds were not self-supporting. The state
government's total debt service for fiscal 1998 amounted to $529 million.

The state government has the potential to substantially increase its debt
burden, considering only the bond authorization that was unused in August, 1998.
At August 31, 1998, approximately $838.1 million in bonds payable from general
revenue had been authorized by the state legislature, but not issued. While
Texas law limits the amount of tax-supported debt that the state government and
its instrumentalities may incur to five percent of average annual general
revenue fund revenues, as of August 31, 1998, the outstanding debt-to- limit
ratio was only 1.6 percent. If all authorized bonds had been issued as of that
date, the debt-to-limit ratio would have increased to 2.4 percent. The Texas
Constitution limits the amount of state debt payable from the state's general
revenue fund. The maximum annual debt service in any fiscal year on state debt
payable from the general revenue fund may not exceed five percent of an amount
equal to the average of the amount of general revenue fund revenues, excluding
revenues constitutionally dedicated for purposes other than payment of state
debt, for the three preceding fiscal years and the legislature may not authorize
additional state debt if the resulting annual debt service exceeds this
limitation.

The state government expects the Texas Economic Stabilization Fund to top
$80 million by August 31, 1999, and that the fund may exceed $600 million by the
end of the 2000-01 biennium. The statute establishing the fund sets the maximum
amount that can be held in the fund at 10% of the general revenue income from
the previous biennium. Accordingly, even with a fund balance of $600 million,
the fund would not come close to exceeding the maximum. The state will use the
fund as a reserve to meet revenue shortfalls in times of economic downturns. At
its current and projected levels and in view of the projected total state
expenditures in the upcoming biennium, the amount of the fund would likely prove
to be insufficient to offset a substantial downturn in the Texas economy.

Limitations on Bond Issuances and Ad Valorem Taxation. Although Texas has
few debt limits on the incurrence of public debt, certain tax limitations
imposed on counties and cities are in effect debt limitations. The requirement
that counties and cities in Texas provide for the collection of an annual tax
sufficient to retire any bonded indebtedness they create operates as a
limitation on the amount of indebtedness which may be incurred as counties and
cities may never incur indebtedness which cannot be satisfied by revenue
received from taxes imposed within the tax limits. The same requirement is
generally applicable to indebtedness of the State of Texas. However, voters have
authorized from time to time, by constitutional amendment, the issuance of
general obligation bonds of the state for various purposes.

The State of Texas cannot itself impose ad valorem taxes. Although the
state franchise tax system does function as an income tax on corporations,
limited liability companies and certain banks, the State of Texas does not
impose an income tax on personal income. Consequently, the state government must
look to sources of revenue other than state ad valorem taxes and personal income
taxes to fund the operations of the state government and to pay interest and
principal on outstanding obligations of the state and its various agencies.

To the extent the Texas Debt Obligations in the Portfolio are payable,
either in whole or in part, from ad valorem taxes levied on taxable property,
the limitations described below may be applicable. The Texas Constitution limits
the rate of growth of appropriations from tax revenues not dedicated to a
particular purpose by the Constitution during any biennium to the estimated rate
of growth for the Texas economy, unless both houses of the Texas Legislature, by
a majority vote in each, find that an emergency exists. In addition, the Texas
Constitution authorizes cities having more than 5,000 inhabitants to provide
further limitations in their city charters regarding the amount of ad valorem
taxes which can be assessed. Furthermore, certain provisions of the Texas
Constitution provide for exemptions from ad valorem taxes, of which some are
mandatory and others are available at the option of the particular county, city,
town, school district or other political subdivision of the state. The following
is only a summary of certain laws which may be applicable to an issuer of the
Texas Debt Obligations regarding ad valorem taxation.

Counties and political subdivisions are limited in their issuance of bonds
for certain purposes (including construction, maintenance and improvement of
roads, reservoirs, dams, waterways and irrigation works) to an amount up to
one-fourth of the assessed valuation of real property. No county, city or town
may levy a tax in any one year for general fund, permanent improvement fund,
road and bridge fund or jury fund purposes in excess of $.80 on each $100
assessed valuation. Cities and towns having a population of 5,000 or less may
not levy a tax for any one year for any purpose in excess of 1-1/2% of the
taxable property ($1.50 on each $100 assessed valuation), and a limit of 2 1/2%
($2.50 on each $100 assessed valuation) is imposed on cities having a population
of more than 5,000. Hospital districts may levy taxes up to $.75 on each $100
assessed valuation. School districts are subject to certain restrictions
affecting the issuance of bonds and the imposition of taxes.

Governing bodies of taxing units may not adopt tax rates that exceed
certain specified rates until certain procedural requirements are met
(including, in certain cases, holding a public hearing preceded by a published
notice thereof). Certain statutory requirements exist which set forth the
procedures necessary for the appropriate governmental body to issue and approve
bonds and to levy taxes. To the extent that such procedural requirements are not
followed correctly, the actions taken by such governmental bodies could be
subject to attack and their validity and the validity of the bonds issued
questioned.

Property tax revenues are a major source of funding for public education in
Texas. Texas law now attempts to reduce the disparity of revenues per student
between low-wealth school districts and high-wealth school districts by causing
the high-wealth school districts to share their ad valorem tax revenues with the
low- wealth school districts. State law also provides for school districts to
receive state aid to help pay principal and interest on eligible new bonds whose
proceeds are used to construct instructional facilities. Moreover, all revenue
from the state lottery will now be dedicated to a school fund.

VIRGINIA

RISK FACTORS-The Constitution of Virginia limits the ability of the
Commonwealth to create debt. An amendment to the Constitution requiring a
balanced budget was approved by the voters on November 6, 1984.

General obligations of cities, towns or counties in Virginia are payable
from the general revenues of the entity, including ad valorem tax revenues on
property within the jurisdiction. The obligation to levy taxes could be enforced
by mandamus, but such a remedy may be impracticable and difficult to enforce.
Under section 15.1-227.61 of the Code of Virginia, a holder of any general
obligation bond in default may file an affidavit setting forth such default with
the Governor. If, after investigating, the Governor determines that such default
exists, he is directed to order the State Comptroller to withhold State funds
appropriated and payable to the entity and apply the amount so withheld to
unpaid principal and interest. The Commonwealth, however, has no obligation to
provide any additional funds necessary to pay such principal and interest.

Revenue bonds issued by Virginia political subdivisions include (1) revenue
bonds payable exclusively from revenue producing governmental enterprises and
(2) industrial revenue bonds, college and hospital revenue bonds and other
"private activity bonds" which are essentially non-governmental debt issues and
which are payable exclusively by private entities such as non-profit
organizations and business concerns of all sizes. State and local governments
have no obligation to provide for payment of such private activity bonds and in
many cases would be legally prohibited from doing so. The value of such private
activity bonds may be affected by a wide variety of factors relevant to
particular localities or industries, including economic developments outside of
Virginia.

Virginia municipal securities that are lease obligations are customarily
subject to "non-appropriation" clauses. See "Municipal Revenue Bonds - Lease
Rental Bonds." Legal principles may restrict the enforcement of provisions in
lease financing limiting the municipal issuer's ability to utilize property
similar to that leased in the event that debt service is not appropriated.

No Virginia law expressly authorizes Virginia political subdivisions to
file under Chapter 9 of the United States Bankruptcy Code, but recent case law
suggests that the granting of general powers to such subdivisions may be
sufficient to permit them to file voluntary petitions under Chapter 9.

Virginia municipal issuers are generally not required to provide ongoing
information about their finances and operations, although a number of cities,
counties and other issuers prepare annual reports.

Although revenue obligations of the Commonwealth or its political
subdivisions may be payable from a specific project or source, including lease
rentals, there can be no assurance that future economic difficulties and the
resulting impact on Commonwealth and local government finances will not
adversely affect the market value of the Virginia Series portfolio or the
ability of the respective obligors to make timely payments of principal and
interest on such obligations.

The Commonwealth has maintained a high level of fiscal stability for many
years due in large part to conservative financial operations and diverse sources
of revenue. The budget for the 1998-2000 biennium does not contemplate any
significant new taxes or increases in the scope or amount of existing taxes.

The economy of the Commonwealth is based primarily on manufacturing, the
government sector (including defense), agriculture, mining and tourism. Defense
spending is a major component. Defense installations are concentrated in
Northern Virginia, the location of the Pentagon, and the Hampton Roads area,
including the Cities of Newport News, Hampton, Norfolk and Virginia Beach, the
locations of, among other installations, the Army Transportation Center (Ft.
Eustis), the Langley Air Force Base, Norfolk Naval Base and the Oceana Naval Air
Station, respectively. Any substantial reductions in defense spending generally
or in particular areas, including base closings, could adversely affect the
state and local economies.

The Commonwealth has a Standard & Poor's rating of AAA and a Moody's rating
of Aaa on its general obligation bonds. There can be no assurance that the
economic conditions on which these ratings are based will continue or that
particular bond issues may not be adversely affected by changes in economic or
political conditions.