MUNICIPAL SECURITIES TRUST MULTI STATE SERIES 38, 497, 1996-12-05

MUNICIPAL SECURITIES TRUST MULTI STATE SERIES 38
497, 1996-12-05

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Rule 497(b)
Registration No. 33-29989

Note: Part A of This Prospectus May Not Be
Distributed Unless Accompanied by Part B.

MUNICIPAL SECURITIES TRUST

MULTI-STATE SERIES 38

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The Trust consists of 3 separate unit investment trusts designated
California Trust, New York Trust and Pennsylvania Trust (the "State Trusts").
Each State Trust contains an underlying portfolio of long-term tax-exempt bonds
issued by or on behalf of states, municipalities and public authorities and was
formed to preserve capital and to provide interest income (including, where
applicable, earned original issue discount) which, in the opinions of bond
counsel to the respective issuers, is, with certain exceptions, currently exempt
from regular Federal income tax (including where applicable earned original
discount) under existing law. In addition, in the opinion of counsel to the
Sponsor, the interest income of each State Trust is exempt, to the extent
indicated, from state and local taxes when held by residents of the state where
the issuers of bonds in such State Trust are located. Such interest income may,
however, be a specific preference item for purposes of Federal individual and/or
corporate alternative minimum tax. Investors may recognize taxable capital gain
or ordinary income, to the extent of accrued market discount, upon maturity or
earlier receipt of principal payments with respect to the bonds. (See "Tax
Status" and "The Portfolios--General.") The Sponsors are Reich & Tang
Distributors L.P. and Gruntal & Co., Incorporated (sometimes referred to as the
"Sponsor" or the "Sponsors"). The value of the Units of the Trust will fluctuate
with the value of the underlying bonds.
Minimum purchase: 1 Unit.

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This Prospectus consists of two parts. Part A contains the Summary
of Essential Information including descriptive material relating to each State
Trust as of June 30, 1996 (the "Evaluation Date"), a summary of certain specific
information regarding each State trust and audited financial statements of each
State Trust, including the related portfolio, as of the Evaluation Date. Part B
of this Prospectus contains a general summary of the State Trusts.

Investors Should Read and Retain Both Parts
of This Prospectus for Future Reference.

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Principal Secondary Market
Number of Amount of Offering Price
Units Bonds per Unit (6/30/96)

California Trust 1,871 $1,510,000 $823.37
New York Trust 4,826 $3,830,000 $834.02
Pennsylvania Trust 1,652 $1,540,000 $942.80
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

Prospectus Part A Dated October 31, 1996
81650.1

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THE TRUST. The Trust consists of three separate unit investment
trusts designated California Trust, New York Trust and Pennsylvania Trust (the
"State Trusts"). Each State Trust has been formed to preserve capital and to
provide interest income (including, where applicable, earned original issue
discount) which, in the opinions of bond counsel to the respective issuers, is,
with certain exceptions, currently exempt from regular federal income tax under
existing law through investment in a fixed, diversified portfolio of long-term
bonds (the "Bonds") issued by or on behalf of the State for which such Trust is
named and political subdivisions, municipalities and public authorities thereof
and of Puerto Rico and its public authorities. A Trust designated as a
short/intermediate-term trust must have a dollar-weighted average portfolio
maturity of more than two years but less than five years; a Trust designated as
an intermediate-term trust must have a dollar-weighted average portfolio
maturity of more than three years but not more than ten years; a Trust
designated as an intermediate/long-term trust must have a dollar-weighted
average portfolio maturity of more than ten years but less than fifteen years;
and a Trust designated as a long-term trust must have a dollar-weighted average
portfolio maturity of more than ten years. Although the Supreme Court has
determined that Congress has the authority to subject interest on bonds such as
the Bonds in the Trust to regular federal income taxation, existing law excludes
such interest from federal income tax. In addition, in the opinion of counsel to
the Sponsor, the interest income of each State Trust is exempt, to the extent
indicated, from state and local taxes when held by residents of the state where
the issuers of the Bonds in such State Trust are located. Such interest income
may, however, be subject to the federal corporate alternative minimum tax and to
state and local taxes in other jurisdictions. (See "Description of Portfolios"
in this Part A for a description of those Bonds which pay interest income
subject to the federal individual alternative minimum tax. See also "Tax Status"
in Part B of this Prospectus.) The State Trusts contain bonds that were acquired
at prices which resulted in the portfolios as a whole being purchased at a deep
discount from par value. The portfolio may also include bonds issued at a
substantial original issue discount, some of which may be Zero Coupon Bonds that
provide for payment at maturity at par value, but do not provide for the payment
of current interest. Gain on the disposition of a Bond or a Unit purchased at a
market discount generally will be treated as ordinary income, rather than
capital gain, to the extent of accrued market discount. Some of the Bonds in the
portfolio may have been purchased at an aggregate premium over par. (See "Tax
Status" in Part B of this Prospectus.) Some of the Bonds in the Trust have been
issued with optional refunding or refinancing provisions ("Refunded Bonds")
whereby the issuer of the Bond has the right to call such Bond prior to its
stated maturity date (and other than pursuant to sinking fund provisions) and to
issue new bonds ("Refunding Bonds") in order to finance the redemption. Issuers
typically utilize refunding calls in order to take advantage of lower interest
rates in the marketplace. Some of these Refunded Bonds may be called for
redemption pursuant to pre-refunding provisions ("Pre-Refunded Bonds") whereby
the proceeds from the issue of the Refunding Bonds are typically invested in
government securities in escrow for the benefit of the holders of the
Pre-Refunded Bonds until the refunding call date. Usually, Pre-Refunded Bonds
will bear a triple-A rating because of this escrow. The issuers of Pre-Refunded
Bonds must call such Bonds on their refunding call date. Therefore, as of such
date, the Trust will receive the call price for such bonds but will cease
receiving interest income with respect to them. For a list of those Bonds which
are Pre-Refunded Bonds, if any, as of the Evaluation Date, see "Notes to
Financial Statements" in this Part A. All of the Bonds in each State Trust were
rated "A" or better by Standard & Poor's Corporation or Moody's Investors
Service, Inc. at the time originally deposited in the State Trusts. For a
discussion of the significance of such ratings, see "Description of Bond
Ratings" in Part B of this Prospectus and for a list of ratings on the
Evaluation Date see the "Portfolio". The payment of interest and preservation of
capital are, of course, dependent upon the continuing ability of the issuers of
the Bonds to meet their obligations.

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There can be no assurance that the Trusts' investment objectives will be
achieved. Investment in the Trust should be made with an understanding of the
risks which an investment in long-term fixed rate debt obligations may entail,
including the risk that the value of the underlying portfolio will decline with
increases in interest rates, and that the value of Zero Coupon Bonds is subject
to greater fluctuation than coupon bonds in response to such changes in interest
rates. Each Unit represents a fractional undivided interest in the principal and
net income of each State Trust. The principal amount of Bonds deposited in such
State Trust per Unit is reflected in the Summary of Essential Information. Each
State Trust will be administered as a distinct entity with separate
certificates, expenses, books and records. (See "The Trust--Organization" in
Part B of this Prospectus.) The Units being offered hereby are issued and
outstanding Units which have been purchased by the Sponsor in the secondary
market.

PUBLIC OFFERING PRICE. The secondary market Public Offering Price of
each Unit is equal to the aggregate bid price of the Bonds in the Trust divided
by the number of Units outstanding, plus a sales charge of 4.82% for the
California Trust, 4.35% for the New York Trust and 2.29% for the Pennsylvania
Trust of the Public Offering Price, or 5.064% for the California Trust, 4.547%
for the New York Trust and 2.343% for the Pennsylvania Trust of the net amount
invested in Bonds per Unit. The sales charge for secondary market purchases is
based upon the number of years remaining to maturity of each bond in the Trust's
portfolio. (See "Public Offering" in Part B of this Prospectus.) In addition,
accrued interest to the expected date of settlement is added to the Public
Offering Price. If Units of the California Trust had been purchased on the
Evaluation Date, the Public Offering Price per Unit would have been $823.37 plus
accrued interest of $11.91 under the monthly distribution plan, $16.10 under the
semi-annual distribution plan and $40.38 under the annual distribution plan, for
a total of $835.28, $839.47 and $863.75, respectively. If Units of the New York
Trust had been purchased on the Evaluation Date, the Public Offering Price per
Unit would have been $834.02 plus accrued interest of $10.05 under the monthly
distribution plan, $14.40 under the semi-annual distribution plan and $43.14
under the annual distribution plan, for a total of $844.07, $848.42 and $877.16,
respectively. If Units of the Pennsylvania Trust had been purchased on the
Evaluation Date, the Public Offering Price per Unit would have been $942.80 plus
accrued interest of $10.22 under the monthly distribution plan, $15.33 under the
semi-annual distribution plan and $46.86 under the annual distribution plan, for
a total of $953.02, $958.13 and $989.66, respectively. The Public Offering Price
per Unit can vary on a daily basis in accordance with fluctuations in the
aggregate bid price of the Bonds. (See "Summary of Essential Information" and
"Public Offering--Offering Price" in Part B of this Prospectus.)

ESTIMATED LONG TERM RETURN AND ESTIMATED CURRENT RETURN. Units of
each Trust are offered to investors on a "dollar price" basis (using the
computation method previously described under "Public Offering Price") as
distinguished from a "yield price" basis often used in offerings of tax exempt
bonds (involving the lesser of the yield as computed to maturity of bonds or to
an earlier redemption date). Since they are offered on a dollar price basis, the
rate of return on an investment in Units of each Trust is measured in terms of
"Estimated Current Return" and "Estimated Long Term Return".

Estimated Long Term Return is calculated by: (1) computing the yield
to maturity or to an earlier call date (whichever results in a lower yield) for
each Bond in the Trust's portfolio in accordance with accepted bond practices,
which practices take into account not only the interest payable on the Bond but
also the amortization of premiums or accretion of discounts, if any; (2)
calculating the average of the yields for the Bonds in the Trust's portfolio by
weighing each Bond's yield by the market value of the Bond and by the amount of
time remaining to the date to which the Bond is priced (thus creating an average
yield for the portfolio of the Trust); and (3) reducing

81650.1
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the average yield for the portfolio of the Trust in order to reflect estimated
fees and expenses of the Trust and the maximum sales charge paid by investors.
The resulting Estimated Long Term Return represents a measure of the return to
investors earned over the estimated life of the Trust. (For the Estimated Long
Term Return to Certificateholders under the monthly, semi-annual and annual
distribution plans, see "Summary of Essential Information".)

Estimated Current Return is a measure of the Trust's cash flow.
Estimated Current Return is computed by dividing the Estimated Net Annual
Interest Income per Unit by the Public Offering Price per Unit. In contrast to
the Estimated Long Term Return, the Estimated Current Return does not take into
account the amortization of premium or accretion of discount, if any, on the
Bonds in the portfolio of the Trust. Moreover, because interest rates on Bonds
purchased at a premium are generally higher than current interest rates on newly
issued bonds of a similar type with comparable rating, the Estimated Current
Return per Unit may be affected adversely if such Bonds are redeemed prior to
their maturity.

The Estimated Net Annual Interest Income per Unit of the Trust will
vary with changes in the fees and expenses of the Trustee and the Evaluator
applicable to the Trust and with the redemption, maturity, sale or other
disposition of the Bonds in the Trust. The Public Offering Price will vary with
changes in the bid prices of the Bonds. Therefore, there is no assurance that
the present Estimated Current Return or Estimated Long Term Return will be
realized in the future. (For the Estimated Current Return to Certificateholders
under the monthly, semi-annual and annual distribution plans, see "Summary of
Essential Information". See "Estimated Long Term Return and Estimated Current
Return" in Part B of this Prospectus.)

A schedule of cash flow projections is available from the Sponsor
upon request.

DISTRIBUTIONS. Distributions of interest income, less expenses, will
be made by the Trust either monthly, semi-annually or annually depending upon
the plan of distribution applicable to the Unit purchased. A purchaser of a Unit
in the secondary market will actually receive distributions in accordance with
the distribution plan chosen by the prior owner of such Unit and may thereafter
change the plan as provided under "Interest and Principal Distributions" in Part
B of this Prospectus. Distributions of principal, if any, will be made
semi-annually on June 15 and December 15 of each year. (See "Rights of
Certificateholders--Interest and Principal Distributions" in Part B of this
Prospectus. For estimated monthly, semi-annual and annual interest
distributions, see "Summary of Essential Information.")

MARKET FOR UNITS. The Sponsors, although not obligated to do so,
intend to maintain a secondary market for the Units at prices based on the
aggregate bid price of the Bonds in the Trust portfolio. The secondary market
repurchase price is based on the aggregate bid price of the Bonds in the Trust
portfolio, and the reoffer price is based on the aggregate bid price of the
Bonds plus a sales charge of 4.82% for the California Trust, 4.35% for the New
York Trust and 2.29% for the Pennsylvania Trust of the Public Offering Price
(5.064% for the California Trust, 4.547% for the New York Trust and 2.343% for
the Pennsylvania Trust of the net amount invested) plus net accrued interest. If
a market is not maintained, a Certificateholder will be able to redeem his or
her Units with the Trustee at a price also based on the aggregate bid price of
the Bonds. (See "Sponsor Repurchase" and "Public Offering--Offering Price" in
Part B of this Prospectus.)

TOTAL REINVESTMENT PLAN. Certificateholders under the semi-annual
and annual plans of distribution have the opportunity to have all their regular
interest distributions, and principal distributions, if any, reinvested in
available series of "Insured Municipal Securities Trust" or

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"Municipal Securities Trust." (See "Total Reinvestment Plan" in Part B of
this Prospectus. Residents of Texas, see "Total Reinvestment Plan for Texas
Residents" in Part B of this Prospectus.) The Plan is not designed to be a
complete investment program.

For additional information regarding the Public Offering Price and
Estimated Current Return and Estimated Long Term Return for Units of each State
Trust, descriptions of interest and principal distributions, repurchase and
redemption of Units and other essential information regarding the Trusts, please
refer to the Summary of Essential Information for the particular State
Trust on one of the immediately succeeding pages.

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MUNICIPAL SECURITIES TRUST
MULTI-STATE SERIES 38

CALIFORNIA TRUST

SUMMARY OF ESSENTIAL INFORMATION AS OF JUNE 30, 1996

Date of Deposit*: August 24, 1989 Minimum Principal Distribution:
Principal Amount of Bonds . $1,510,000 $1.00 per Unit.
Number of Units ........... 1,871 Weighted Average Life
Fractional Undivided Inter- to Maturity: 17.0 Years.
est in Trust per Unit .... 1/1871 Minimum Value of Trust:
Principal Amount of Trust may be terminated if value
Bonds per Unit ........... $807.06 of Trust is less than $800,000
Secondary Market Public in principal amount of Bonds.
Offering Price** Mandatory Termination Date:
Aggregate Bid Price The earlier of December 31, 2038
of Bonds in Trust........ $1,469,694.29+++ or the disposition of the last
Divided by 1,871 Units ... $785.51 Bond in the Trust.
Plus Sales Charge of 4.82% Trustee***: The Chase Manhattan
of Public Offering Price $37.86 Bank.
Public Offering Price Trustee's Annual Fee: Monthly
per Unit ................ $823.37+ plan $1.05 per $1,000; semi-
Redemption and Sponsors' annual plan $.60 per $1,000; and
Repurchase Price annual plan is $.35 per $1,000.
per Unit ................. $785.51+ Evaluator: Kenny S&P Evaluation
+++ Services.
++++ Evaluator's Fee for Each
Excess of Secondary Market Evaluation: Minimum of $15 plus
Public Offering Price $.25 per each issue of Bonds in
over Redemption and excess of 50 issues (treating
Sponsors' Repurchase separate maturities as separate
Price per Unit ........... $37.86++++ issues).
Difference between Public Sponsors: Reich & Tang
Offering Price per Unit Distributors L.P. and Gruntal &
and Principal Amount per Co., Incorporated
Unit Premium/(Discount) .. $16.31 Sponsors' Annual Fee: Maximum of
Evaluation Time: 4:00 p.m. $.25 per $1,000 principal amount
New York Time. of Bonds (see "Trust Expenses
and Charges" in Part B of this
Prospectus).

PER UNIT INFORMATION BASED UPON INTEREST DISTRIBUTION PLAN ELECTED

Monthly Semi-Annual Annual
Option Option Option

Gross annual interest income# ......... $46.98 $46.98 $46.98
Less estimated annual fees and
expenses ............................ 2.04 1.75 2.69
Estimated net annual interest ______ ______ ______
income (cash)# ...................... $44.94 $45.23 $44.29
Estimated interest distribution# ...... 3.74 22.61 44.29
Estimated daily interest accrual# ..... .1248 .1256 .1230
Estimated current return#++ ........... 5.46% 5.49% 5.38%
Estimated long term return++ .......... 5.06% 5.10% 4.97%
Record dates .......................... 1st of Dec. 1 and Dec. 1
each month June 1
Interest distribution dates ........... 15th of Dec. 15 and Dec. 15
each month June 15

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MUNICIPAL SECURITIES TRUST
MULTI-STATE SERIES 38

NEW YORK TRUST

SUMMARY OF ESSENTIAL INFORMATION AS OF JUNE 30, 1996

Date of Deposit*: August 24, 1989 Minimum Principal Distribution:
Principal Amount of Bonds. $3,830,000 $1.00 per Unit.
Number of Units........... 4,826 Weighted Average Life
Fractional Undivided Inter- to Maturity: 14.5 Years.
est in Trust per Unit.... 1/4826 Minimum Value of Trust:
Principal Amount of Trust may be terminated if
Bonds per Unit........... $793.62 value of Trust is less than
Secondary Market Public $2,000,000 in principal amount
Offering Price** of Bonds.
Aggregate Bid Price Mandatory Termination Date:
of Bonds in Trust....... $3,857,136.00+++ The earlier of December 31,
Divided by 4,826 Units... $799.24 2038 or the disposition of the
Plus Sales Charge of 4.35% last Bond in the Trust.
of Public Offering Price. $34.78 Trustee***: The Chase Manhattan
Public Offering Price Bank.
per Unit................ $834.02+ Trustee's Annual Fee: Monthly
Redemption and Sponsors' plan $.96 per $1,000; semi-
Repurchase Price annual plan $.50 per $1,000;
per Unit................. $799.24+ and annual plan is $.32 per
+++ $1,000.
++++ Evaluator: Kenny S&P Evaluation
Excess of Secondary Market Services.
Public Offering Price Evaluator's Fee for Each
over Redemption and Evaluation: Minimum of $15
Sponsors' Repurchase plus $.25 per each issue of
Price per Unit........... $34.78++++ Bonds in excess of 50 issues
Difference between Public (treating separate maturities
Offering Price per Unit as separate issues).
and Principal Amount per Sponsors: Reich & Tang
Unit Premium/(Discount).. $40.40 Distributors L.P. and Gruntal &
Evaluation Time: 4:00 p.m. Co., Incorporated
New York Time. Sponsors' Annual Fee: Maximum of
$.25 per $1,000 principal amount
of Bonds (see "Trust Expenses and
Charges" in Part B of this
Prospectus).

PER UNIT INFORMATION BASED UPON INTEREST DISTRIBUTION PLAN ELECTED

Monthly Semi-Annual Annual
Option Option Option

Gross annual interest income# ......... $53.44 $53.44 $53.44
Less estimated annual fees and
expenses ............................ 1.77 1.25 .57
Estimated net annual interest ______ ______ ______
income (cash)# ...................... $51.67 $52.19 $52.87
Estimated interest distribution# ...... 4.31 26.09 52.87
Estimated daily interest accrual# ..... .1435 .1450 .1469
Estimated current return#++ ........... 6.19% 6.26% 6.34%
Estimated long term return ++ ......... 4.96% 5.02% 5.11%
Record dates .......................... 1st of Dec. 1 and Dec. 1
each month June 1
Interest distribution dates ........... 15th of Dec. 15 and Dec. 15
each month June 15

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MUNICIPAL SECURITIES TRUST
MULTI-STATE SERIES 38

PENNSYLVANIA TRUST

SUMMARY OF ESSENTIAL INFORMATION AS OF JUNE 30, 1996

Date of Deposit*: August 24, 1989 Minimum Principal Distribution:
Principal Amount of Bonds . $1,540,000 $1.00 per Unit.
Number of Units ........... 1,652 Weighted Average Life
Fractional Undivided Inter- to Maturity: 6.42 Years.
est in Trust per Unit .... 1/1652 Minimum Value of Trust:
Principal Amount of Trust may be terminated if value
Bonds per Unit ........... $932.20 of Trust is less than $800,000
Secondary Market Public in principal amount of Bonds.
Offering Price** Mandatory Termination Date:
Aggregate Bid Price The earlier of December 31, 2038
of Bonds in Trust ....... $1,522,697.73+++ or the disposition of the last
Divided by 1,652 Units ... $921.73 Bond in the Trust.
Plus Sales Charge of 2.29% Trustee***: The Chase Manhattan
of Public Offering Price. $21.07 Bank.
Public Offering Price Trustee's Annual Fee: Monthly
per Unit ................ $942.80 plan $1.05 per $1,000; semi-
Redemption and Sponsors' annual plan $.60 per $1,000; and
Repurchase Price annual plan is $.35 per $1,000.
per Unit ................. $921.73+ Evaluator: Kenny S&P Evaluation
+++ Services.
++++ Evaluator's Fee for Each
Excess of Secondary Market Evaluation: Minimum of $15 plus
Public Offering Price $.25 per each issue of Bonds in
over Redemption and excess of 50 issues (treating
Sponsors' Repurchase separate maturities as separate
Price per Unit ........... $21.07++++ issues).
Difference between Public Sponsors: Reich & Tang
Offering Price per Unit Distributors L.P. and Gruntal &
and Principal Amount per Co., Incorporated
Unit Premium/(Discount) .. $10.60 Sponsors' Annual Fee: Maximum of
Evaluation Time: 4:00 p.m. $.25 per $1,000 principal amount
New York Time. of Bonds (see "Trust Expenses
and Charges" in Part B of this
Prospectus).

PER UNIT INFORMATION BASED UPON INTEREST DISTRIBUTION PLAN ELECTED

Monthly Semi-Annual Annual
Option Option Option

Gross annual interest income# ......... $60.94 $60.94 $60.94
Less estimated annual fees and
expenses ............................ 2.41 1.99 -
Estimated net annual interest ______ ______ ______
income (cash)# ...................... $58.53 $58.95 $60.94
Estimated interest distribution# ...... 4.88 29.48 60.94
Estimated daily interest accrual# .1626 .1626 .1638 .1692
Estimated current return#++ ........... 6.21% 6.25% 6.46%
Estimated long term return ++ ......... 4.27% 4.31% 4.29%
Record dates .......................... 1st of Dec. 1 and Dec. 1
each month June 1
Interest distribution dates ........... 15th of Dec. 15 and Dec. 15
each month June 15

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Footnotes to Summary of Essential Information

* The Date of Deposit is the date on which the Trust Agreement was signed
and the deposit of the Bonds with the Trustee made.

** For information regarding offering price per unit and applicable sales
charge under the Total Reinvestment Plan, see "Total Reinvestment Plan" in
Part B of this Prospectus.

The proceeds from securities matured July 1, 1996 and certain amounts
distributable as of June 30, 1996 are reported in the summary of essential
information as if they had been distributed as of year-end.

*** The Trustee maintains its principal executive office at 270 Park Avenue,
New York, New York 10017 and its unit investment trust office at 770
Broadway, New York, New York 10003 (tel. no.: 1-800-882-9898). For
information regarding redemption by the Trustee, see "Trustee Redemption"
in Part B of this Prospectus.

+ Plus accrued interest to expected date of settlement (approximately three
business days after purchase) of $11.91 monthly, $16.10 semi-annually and
$40.38 annually for the California Trust, $10.05 monthly, $14.40
semi-annually and $43.14 annually for the New York Trust, and $10.22
monthly, $15.33 semi-annually and $46.86 annually for the Pennsylvania
Trust.

++ The estimated current return and estimated long term return are increased
for transactions entitled to a discount (see "Employee Discounts" in Part
B of this Prospectus), and are higher under the semi-annual and annual
options due to lower Trustee's fees and expenses.

+++ Based solely upon the bid side evaluation of the underlying Bonds
(including, where applicable, undistributed cash from the principal
account). Upon tender for redemption, the price to be paid will be
calculated as described under "Trustee Redemption" in Part B of this
Prospectus.

++++ See "Comparison of Public Offering Price, Sponsor's Repurchase Price and
Redemption Price" in Part B of this Prospectus.

# Does not include accrual from original issue discount bonds, if any.

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INFORMATION REGARDING THE TRUSTS
AS OF JUNE 30, 1996

DESCRIPTION OF PORTFOLIOS

California Trust*

Each Unit in the California Trust consists of a 1/1,871st undivided
interest in the principal and net income of the Trust in the ratio of one Unit
for each $823.37 of principal amount of the Bonds currently held in the Trust.
The Sponsor has not participated as a sole underwriter or manager, co-manager or
member of an underwriting syndicate from which any of the initial aggregate
principal amount of the Bonds were acquired. The portfolio of the California
Trust consists of 9 issues of 7 issuers located in California and 2 in Puerto
Rico. None of the Bonds are obligations of state and local housing authorities;
approximately 13.2% are hospital revenue bonds; and none were issued in
connection with the financing of nuclear generating facilities. None of the
Bonds are mortgage subsidy bonds. All of the Bonds are subject to redemption
prior to their stated maturity dates pursuant to sinking fund or call
provisions. The Bonds may also be subject to other calls, which may be permitted
or required by events which cannot be predicted (such as destruction,
condemnation, termination of a contract, or receipt of excess or unanticipated
revenues). None of the Bonds are general obligation bonds. Nine issues
representing $1,510,000 of the principal amount of the Bonds are payable from
the income of a specific project or authority and are not supported by the
issuer's power to levy taxes. The portfolio is divided for purpose of issue as
follows: Capital Improvement 1, Civic Center 1, Coal Power 1, Convention Center
1, Electric 1, Hospital 1, Nuclear Power 1 and Water 2. For an explanation of
the significance of these factors see "The State Trusts--Portfolios" in Part B
of this Prospectus.

As of June 30, 1996, $1,075,000 (approximately 71.2% of the
aggregate principal amount of the Bonds) were original issue discount bonds. Of
these original issue discount bonds, $100,000 (approximately 6.6% of the
aggregate principal amount of the Bonds) were Zero Coupon Bonds. Zero Coupon
Bonds do not provide for the payment of any current interest and provide for
payment at maturity at par value unless sooner sold or redeemed. The market
value of Zero Coupon Bonds is subject to greater fluctuations than coupon bonds
in response to changes in interest rates. Approximately 15.6% of the aggregate
principal amount of the Bonds in the Trust were purchased at a "market" discount
from par value at maturity, approximately 13.2% were purchased at a premium and
none were purchased at par. For an explanation of the significance of these
factors see "The Portfolios--Discount and Zero Coupon Bonds" in Part B of this
Prospectus.

None of the Bonds in the California Trust are subject to the Federal
individual alternative minimum tax under the Tax Reform Act of 1986.
See "Tax Status" in Part B of this Prospectus.

- --------

* Changes in the Trust Portfolio: From July 1, 1996 to September 15,
1996, the entire principal amounts of the Bonds in portfolio nos. 9a and
9b were called for redemption pursuant to pre-refunding provisions and
are no longer contained in the Trust. $5,000 of the principal amount of
the Bond in portfolio no. 6 was called and is no longer contained in the
Trust. $30,000 of the principal amount of the Bond in portfolio no. 4
was sold and is no longer contained in the Trust. 299 Units were
redeemed from the Trust.

81650.1
A-10

<PAGE>

New York Trust

Each Unit in the New York Trust consists of a 1/4,826th undivided
interest in the principal and net income of the Trust in the ratio of one Unit
for each $834.02 of principal amount of the Bonds currently held in the Trust.
The Sponsor has not participated as a sole underwriter or manager, co-manager or
member of an underwriting syndicate from which any of the initial aggregate
principal amount of the Bonds were acquired. The portfolio of the New York Trust
consists of 10 issues of 8 issuers located in New York and 2 in Puerto Rico.
None of the Bonds are obligations of state and local housing authorities;
approximately 35.3% are hospital revenue bonds; and none were issued in
connection with the financing of nuclear generating facilities. None are
mortgage subsidy bonds. All of the Bonds are subject to redemption prior to
their stated maturity dates pursuant to sinking fund or call provisions. The
Bonds may also be subject to other calls, which may be permitted or required by
events which cannot be predicted (such as destruction, condemnation, termination
of a contract, or receipt of excess or unanticipated revenues). None of the
Bonds are general obligation bonds. Ten issues representing $3,730,000 of the
principal amount of the Bonds are payable from the income of a specific project
or authority and are not supported by the issuer's power to levy taxes. The
portfolio is divided for purpose of issue as follows: Bridge and Tunnel 1,
Dormitory Authority 2, Electric 2, Hospital 3, Power Authority 1 and Water 1.
For an explanation of the significance of these factors see "The State
Trusts--Portfolios" in Part B of this Prospectus.

As of June 30, 1996, $745,000 (approximately 20% of the aggregate
principal amount of the Bonds) were original issue discount bonds. Of these
original issue discount bonds, $250,000 (approximately 6.7% of the aggregate
principal amount of the Bonds) were Zero Coupon Bonds. Zero Coupon Bonds do not
provide for the payment of any current interest and provide for payment at
maturity at par value unless sooner sold or redeemed. The market value of Zero
Coupon Bonds is subject to greater fluctuations than coupon bonds in response to
changes in interest rates. Approximately 44.8% of the aggregate principal amount
of the Bonds in the Trust were purchased at a "market" discount from par value
at maturity, approximately 22.2% were purchased at a premium and approximately
13% were purchased at par. For an explanation of the significance of these
factors see "The Portfolios--Discount and Zero Coupon Bonds" in Part B of this
Prospectus.

None of the Bonds in the New York Trust are subject to the federal
individual alternative minimum tax under the Tax Reform Act of 1986. See "Tax
Status" in Part B of this Prospectus.

81650.1
A-11

<PAGE>

Pennsylvania Trust*

Each Unit in the Pennsylvania Trust consists of a 1/1,652nd
undivided interest in the principal and net income of the Trust in the ratio of
one Unit for each $942.80 of principal amount of the Bonds currently held in the
Trust. The Sponsor has not participated as a sole underwriter or manager,
co-manager or member of an underwriting syndicate from which any of the initial
aggregate principal amount of the Bonds were acquired. The portfolio of the
Pennsylvania Trust consists of 10 issues of 9 issuers located in Pennsylvania
and 1 in Puerto Rico. None of the Bonds are obligations of state and local
housing authorities; approximately 30.8% are hospital revenue bonds; and none
were issued in connection with the financing of nuclear generating facilities.
None of the Bonds in the trust are mortgage subsidy bonds. All of the Bonds are
subject to redemption prior to their stated maturity dates pursuant to sinking
fund or call provisions. The Bonds may also be subject to other calls, which may
be permitted or required by events which cannot be predicted (such as
destruction, condemnation, termination of a contract, or receipt of excess or
unanticipated revenues). None of the issues of the principal amount of the Bonds
are general obligation bonds. Ten issues representing $1,540,000 of the
principal amount of the Bonds are payable from the income of a specific project
or authority and are not supported by the issuer's power to levy taxes. The
portfolio is divided for purpose of issue as follows: Electric 1, Higher
Education 1, Hospital 3, Waste Water 1, Water 2, and Water and Sewer 2. For an
explanation of the significance of these factors see "The State
Trusts--Portfolios" in Part B of this Prospectus.

As of June 30, 1996, $365,000 (approximately 23.7% of the aggregate
principal amount of the Bonds) were original issue discount bonds. Of these
original issue discount bonds, $100,000 (approximately 6.5% of the aggregate
principal amount of the Bonds) were Zero Coupon Bonds. Zero Coupon Bonds do not
provide for the payment of any current interest and provide for payment at
maturity at par value unless sooner sold or redeemed. The market value of Zero
Coupon Bonds is subject to greater fluctuations than coupon bonds in response to
changes in interest rates. Approximately 32.5% of the aggregate principal amount
of the Bonds in the Trust were purchased at a "market" discount from par value
at maturity, approximately 17.8% were purchased at a premium and approximately
26% were purchased at par. For an explanation of the significance of these
factors see "The Portfolios--Discount and Zero Coupon Bonds" in Part B of this
Prospectus.

None of the Bonds in the Pennsylvania Trust are subject to the
federal individual alternative minimum tax under the Tax Reform Act of 1986.
See "Tax Status" in Part B of this Prospectus.

- --------

* Changes in the Trust Portfolio: From July 1, 1996 to September 15, 1996,
the entire principal amount of the Bond in portfolio no. 9 was called for
redemption pursuant to pre-refunding provisions and is no longer contained
in the Trust. $55,000 of the principal amount of the Bond in portfolio no.
6 was sold and is no longer contained in the Trust. 75 Units were redeemed
from the Trust.

81650.1
A-12

<PAGE>

FINANCIAL AND STATISTICAL INFORMATION

Selected data for each Unit outstanding for the periods listed below:

California Trust

Distribu-
tions of
Distributions of Interest Principal
During the Period (per Unit) During
Net Asset** Semi- the
Units Out- Value Monthly Annual Annual Period
Period Ended standing Per Unit Option Option Option (Per Unit)

June 30, 1994 2,000 $1,013.55 $68.16 $68.79 $69.08 -0-
June 30, 1995 1,985 989.35 67.12 67.76 69.09 $ 25.50
June 30, 1996 1,871 801.11 55.16 64.09 55.59 181.03

New York Trust

Distribu-
tions of
Distributions of Interest Principal
During the Period (per Unit) During
Net Asset* Semi- the
Units Out- Value Monthly Annual Annual Period
Period Ended standing Per Unit Option Option Option (Per Unit)

June 30, 1994 5,000 $1,044.07 $70.44 $71.13 $71.35 -0-
June 30, 1995 4,985 1,041.33 70.51 71.20 71.35 -0-
June 30, 1996 4,826 813.54 62.61 63.19 70.55 $212.46

Pennsylvania Trust

June 30, 1994 2,000 $1,039.19 $68.52 $69.19 -0- -0-
June 30, 1995 1,834 1,031.85 67.91 68.58 -0- -0-
June 30, 1996 1,652 963.63 64.76 65.28 -0- $78.93

- --------
** Net Asset Value per Unit is calculated by dividing net assets as disclosed
in the "Statement of Net Assets" by the number of Units outstanding as of
the date of the Statement of Net Assets. See Note 5 of Notes to Financial
Statements for a description of the components of Net Assets.

81650.1
A-13

<PAGE>

Report of Independent Accountants

To the Sponsor, Trustee and Certificateholders of
Municipal Securities Trust, Multi-State Series 38

In our opinion, the accompanying statements of net assets, including the
portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the portfolios of
Municipal Securities Trust, Multi-State Series 38 (the "Trust") at June 30,
1996, the results of their operations, the changes in their net assets and the
financial highlights for the year then ended, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at June 30, 1996 by
correspondence with the Trustee, provide a reasonable basis for the opinion
expressed above. The financial statements for the prior periods presented were
audited by other independent accountants, whose report dated September 15,
1995, except as to Note 7 as to which the date is September 28, 1995, expressed
an unqualified opinion on those financial statements.

PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
October 16, 1996

<PAGE>

<TABLE>
Municipal Securities Trust, Multistate Series 38

California Trust
Portfolio of Investments
June 30, 1996
- ----------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
Redemption
Aggregate Coupon Rate/ Feature (2)(4)
Portfolio Principal Name of Issuer and Ratings Date(s) of S.F.-Sinking Fund Market
No. Amount Title of Bonds (1) Maturity (2) Ref.-Refunding Value (3)

<S> <C> <C> <C> <C> <C> <C>
1 $ 200,000 Calif. Hlth. Facs. Fin. NR 6.850% 6/01/08 @ 100 S.F. $ 199,894
Auth. Hosp. Rev. Bonds 6/01/2019 6/01/99 @ 102 Ref.
(Pacific Presbyterian
Med Centr.) Series 89-A
1989 A (MBIA)

2 185,000 Huntington Beach Calif. NR 7.000 8/01/04 @ 100 S.F. 201,369
Civic Imprvmt. Corp. 8/01/2019 8/01/99 @ 102 Ref.
Rev. Bonds Certs. of
Part. (1989 Pub. Prkg.
Prjt. Fincg.)

3 200,000 Irvine Ranch Calif. Wtr. A+* 8.250 8/15/09 @ 100 S.F. 212,922
Dstrct. Joint Pwrs. 8/15/2023 8/15/98 @ 100 Ref.
Agency (Local Agency
Pool) Rev. Bonds Issue
II 1988

4 200,000 Los Angeles Cnvntn. & AAA 6.500 No Sinking Fund 212,326
Exhib. Cntr. Auth. Rfdng. 8/15/2021 8/15/99 @ 100 Ref.
Bonds Certs. of Part.
1989 Series A

5 200,000 M-S-R Pub. Pwr. Agency A 6.875 7/01/20 @ 100 S.F. 205,932
Calif. San Juan Prjt. Rev. 7/01/2019 1/01/97 @ 102 Ref.
Bonds Series 1987C

6 190,000 City of San Buenaventura A- 6.850 8/01/96 @ 100 S.F. 197,174
Calif. Rev. Bonds Certs. 8/01/2016 8/01/97 @ 102 Ref.
of Part. (1986 Cap.
Imprvmt. Prjts.)

7 100,000 P.R. Elec. Pwr. Auth. BAA-1* 5.000 No Sinking Fund 88,952
Pwr. Rev. Bonds Series 7/01/2012 7/01/99 @ 100 Ref.
1989 0

8 100,000 P.R. Elec. Pwr. Auth. BAA-1* 0.000 No Sinking Fund 28,380
Pwr. Rev. Bonds Series 7/01/2017 None
1989 0
</TABLE>

See accompanying footnotes to portfolio and notes to financial statements.

<PAGE>

<TABLE>
Municipal Securities Trust, Multistate Series 38

California Trust
Portfolio of Investments
June 30, 1996
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C>
9a $ 65,000 Southern Calf Pub Pwr 6.875% 7/01/96 @ 102 S.F. $ 66,317
Issue maturity 7/01/2015 None

9b 70,000 Southern Calf Pub Pwr 6.875 7/01/96 @ 102 S.F. 71,418
Issue maturity 7/01/2015 None
--------------- --------------

$ 1,510,000 Total Investments (Cost (3) $1,373,598) $ 1,484,684
================ ==============

</TABLE>

See accompanying footnotes to portfolio and notes to financial statements.

<PAGE>

<TABLE>
Municipal Securities Trust, Multistate Series 38

New York Trust
Portfolio of Investments
June 30, 1996
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C>
1 $ 500,000 N.Y. State Dorm. Auth. AAA 7.375% 7/01/00 @ 100 S.F. $ 578,510
Judicial Facs. Lease Rev. 7/01/2016 None
Bonds Suffolk Cnty.
Issues Series 1986

2a 180,000 N.Y. State Dorm. Auth. AAA 7.125 5/15/10 @ 100 S.F. 196,350
State Univ. Ed. Facs. 5/15/2017 5/15/99 @ 102 Ref.
Rev. Bonds Series
1989A

2b 90,000 N.Y. State Dorm. Auth. AAA 7.125 5/15/10 @ 100 S.F. 98,175
State Univ. Ed. Facs. 5/15/2017 5/15/99 @ 102 Ref.
Rev. Bonds Series
1989A

3a 65,000 N.Y. State Med. Care AAA 8.875 2/15/00 @ 100 S.F. 69,931
Facs. Finc. Agency. 8/15/2007 8/15/97 @ 102 Ref.
Mental Hlth. Svs. Facs.
Imprvmt. Rev. Rfndg.
Bonds 1987 Series A

3b 265,000 N.Y. State Med. Care BBB+ 8.875 2/15/00 @ 100 S.F. 282,808
Facs. Finc. Agency 8/15/2007 8/15/97 @ 102 Ref.
Mental Hlth. Svs. Facs.
Imprvmt. Rev. Rfndg.
Bonds 1987 Series A

4 485,000 N.Y. State Med. Care BBB 7.400 2/15/10 @ 100 S.F. 506,733
Facs. Finc. Agency 2/15/2019 8/15/99 @ 102 Ref.
Secured Hosp. Rev.
Bonds 1989 Series A

5 500,000 N.Y. State Med. Care AA 7.250 No Sinking Fund 532,955
Facs. Finc. Agency 2/15/2024 2/15/99 @ 102 Ref.
(Montefiore Med. Cntr.)
Hosp. & Nrsg. Home
FHA-Insrd. Mtg. Rev.
Bonds 1989 Series A

6 500,000 Pwr. Auth. of the State of AA- 8.000 7/01/14 @ 100 S.F. 539,200
N.Y. Gen. Purp. Bonds 1/01/2017 1/01/98 @ 102 Ref.
Series 1988 V

</TABLE>

See accompanying footnotes to portfolio and notes to financial statements.

<PAGE>

<TABLE>
Municipal Securities Trust, Multistate Series 38

New York Trust
Portfolio of Investments
June 30, 1996
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C>
7 $ 500,000 Triborough Bridge & AAA 7.125% No Sinking Fund $ 544,735
Tunnel Auth. Mtg. 1/01/2019 1/01/00 @ 101 Ref.
Recording Tax Spec.
Oblig. Bonds Series
1989A

8 245,000 N.Y. City Munl. Wtr. A* 5.000 6/15/15 @ 100 S.F. 214,397
Finc. Auth. Wtr. & Swr. 6/15/2017 None
Sys. Rev. Bonds 1987
Series A

9 250,000 P.R. Elec. Pwr. Auth. BAA1* 5.000 No Sinking Fund 222,380
Pwr. Rev. Bonds Series 7/01/2012 7/01/99 @ 100 Ref.
1989 )

10 250,000 P.R. Elec. Pwr. Auth. BAA1* 0.000 No Sinking Fund 70,950
Rev. Bonds Series 1989 7/01/2017 None
0
---------------- ------------

$ 3,830,000 Total Investments (Cost (3) $3,553,079) $ 3,857,124
================ ============

</TABLE>

See accompanying footnotes to portfolio and notes to financial statements.

<PAGE>

<TABLE>
Municipal Securities Trust, Multistate Series 38

Pennsylvania Trust
Portfolio of Investments
June 30, 1996
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C>
1 $ 200,000 Penn. Hghr. Ed. Facs. A+ 6.000% 7/01/04 @ 100 S.F. $ 200,512
Auth. Rev. Bonds (Thomas 7/01/2019 7/01/99 @ 102 Ref.
Jefferson Univ. Life
Sciences Bldg. Prjt.) 1989
Series A

2 75,000 Allegheny Cnty. Penn. AAA 8.250 10/01/09 @ 100 S.F. 80,475
Hosp. Dev. Auth. Rev. 10/01/2013 10/01/97 @ 102 Ref.
Bonds (Magee-Womens
Hosp.) Series 1988A
(MBIA)

3 100,000 Delaware Cnty. Penn. Rgnl. AAA 7.000 5/01/05 @ 100 S.F. 105,418
Wtr. Qlty. Cntrl. Auth. 5/01/2012 5/01/99 @ 102 Ref.
(DELCORA) Swr. Rev.
Bonds Series 1989A
(MBIA)

4 200,000 Lehigh Cnty. Penn. Gen. AAA 7.250 1/01/04 @ 100 S.F. 213,352
Purp. Auth. Fac. Rev. 1/01/2010 1/01/98 @ 102 Ref.
Bonds Series 1984 (Lehigh
Pretreatment Plant Prjt.)
(Financial Guaranty)

5 200,000 Lehigh Cnty. Penn. Genl. A1* 9.000 7/01/06 @ 100 S.F. 214,120
Purp. Auth. Hosp. Rev. 7/01/2015 7/01/97 @ 102 Ref.
Bonds (Health-East Inc.)
Series C 1987

6 200,000 Allegheny Cnty. Penn. AAA 7.300 10/01/02 @ 100 S.F. 205,732
Monroeville Hosp. Auth. 10/01/2009 10/01/96 @ 102 Ref.
Hosp. Rev. Bonds (Forbes
Hlth. Sys.) 1985 Series C
(HIBI)

7 200,000 No. Penn. Wtr. Auth. Tax AAA 7.100 11/01/10 @ 100 S.F. 212,244
Exempt Adj. Mode Wtr. 11/01/2016 11/01/97 @ 102 Ref.
Rev. Bonds Series 1986
(Financial Guaranty)

</TABLE>
See accompanying footnotes to portfolio and notes to financial statements.

<PAGE>

<TABLE>
Municipal Securities Trust, Multistate Series 38

Pennsylvania Trust
Portfolio of Investments
June 30, 1996
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C>
8 $ 200,000 No. Wales Penn. Wtr. AAA 7.100% 11/01/10 @ 100 S.F. $ 212,244
Auth. Tax Exempt Adj. 11/01/2016 11/01/97 @ 102 Ref.
Mode Wtr. Rev. Bonds
Series 1986 (Financial
Guaranty)

9 65,000 Philadelphia Penn. Wtr. & 6.000 7/01/96 @ 100 65,000
Swr. Rev. Bonds Twelfth 7/01/2016 None
Series Maturity

10 100,000 P.R. Elec. Pwr. Auth. Pwr. BAA-1* 0.000 No Sinking Fund 28,380
Rev. Bonds. Series 1989O 7/01/2016 None
--------------- -----------

$ 1,540,000 Total Investments (Cost (3) $1,450,645) $ 1,537,477
================ ===========
</TABLE>
See accompanying footnotes to portfolio and notes to financial statements.

<PAGE>

Municipal Securities Trust, Multistate Series 38

Footnotes to Portfolios - June 30, 1996
- -------------------------------------------------------------------------------

(1) All ratings are by Kenny S&P Evaluation Services, a business unit of
J.J. Kenny Company, Inc., a subsidiary of The McGraw-Hill Companies,
Inc., except for those identified by an asterisk (*) which are by
Moody's Investors Service, Inc. A brief description of the ratings
symbols and their meanings is set forth under "Description of Bond
Ratings" in Part B of the Prospectus.

(2) See "The Trust - Portfolio" in Part B of the Prospectus for an
explanation of redemption features. See "Tax Status" in Part B of the
Prospectus for a statement of the Federal tax consequences to a
Certificateholder upon the sale, redemption or maturity of a bond.

(3) At June 30, 1996, the net unrealized appreciation of all the bonds was
comprised of the following.
<TABLE>
<CAPTION>

California New York Pennsylvania
Trust Trust Trust

<S> <C> <C> <C>
Gross Unrealized Appreciation $ 112,550 $ 321,365 $ 102,102

Gross Unrealized Depreciation (1,464) (17,320) (15,270)
------------- -------------- --------------

Net Unrealized Appreciation $ 111,086 $ 304,045 $ 86,832
============= ============== ==============
</TABLE>

(4) The Bonds may also be subject to other calls, which may be permitted
or required by events which cannot be predicted (such as destruction,
condemnation, termination of a contract, or receipt of excess or
unanticipated revenues).

The accompanying notes form an integral part of the financial statements.

<PAGE>

Municipal Securities Trust, Multistate Series 38

Statement of Net Assets
June 30, 1996
- -------------------------------------------------------------------------------

<TABLE>
California New York Pennsylvania
Trust Trust Trust

<S> <C> <C> <C>
Investments in Securities,
at Market Value (Cost
$1,373,598, $3,553,079 and
$1,450,645, Respectively) $ 1,484,684 $ 3,857,124 $ 1,537,477

Other Assets
Accrued Interest 36,263 103,204 34,860
------ ------- ------

Total Other Assets 36,263 103,204 34,860
------ ------- ------

Other Liabilities
Accrued Expenses 245 382 214
Advance from Trustee 21,831 33,761 24,813
------ ------ ------

Total Other Liabilities 22,076 34,143 25,027
------ ------ ------

Excess of Other Assets Over
Other Liabilities 14,187 69,061 9,833
------ ------ -----

Net Assets (1,871, 4,826
and 1,652 Units
of Fractional Undivided Interest
Outstanding, $801.11, $813.54 and
$936.63 per Unit, Respectively) $ 1,498,871 $ 3,926,185 $ 1,547,310
============== ============== =============
</TABLE>

The accompanying notes form an integral part of the financial statements.

<PAGE>

Municipal Securities Trust, Multistate Series 38

California Trust
Statement of Operations
June 30, 1996
- -------------------------------------------------------------------------------
<TABLE>

<CAPTION>
For the Years Ended June 30,
1996 1995 1994

<S> <C> <C> <C>
Investment Income
Interest $ 109,224 $ 140,386 $ 143,043
-------------- -------------- -------------

Expenses
Trustee's Fees 2,712 2,796 2,672
Evaluator's Fees 1,375 1,374 1,494
Sponsor's Fees 488 500 495
--- --- ---

Total Expenses 4,575 4,670 4,661
----- ----- -----

Net Investment Income 104,649 135,716 138,382
------- ------- -------

Realized and Unrealized Gain (Loss)
Realized Gain (Loss)
on Investments (43,305) (5,592) -
Change In Unrealized Appreciation
(Depreciation) on Investments 31,865 6,541 (92,978)
------ ----- -------

Net Gain (Loss) on Investments (11,440) 949 (92,978)
======= === =======

Net Increase in
Net Assets Resulting from
Operations $ 93,209 $ 136,665 $ 45,404
============== ============== =============

</TABLE>
The accompanying notes form an integral part of the financial statements.

<PAGE>

Municipal Securities Trust, Multistate Series 38

New York Trust
Statement of Operations
June 30, 1996
- -------------------------------------------------------------------------------

<TABLE>

<CAPTION>
For the Years Ended June 30,
1996 1995 1994

<S> <C> <C> <C>
Investment Income
Interest $ 302,768 $ 365,994 $ 365,749
-------------- -------------- -------------

Expenses
Trustee's Fees 6,189 6,529 6,046
Evaluator's Fees 1,375 1,374 1,494
Sponsor's Fees 1,250 1,250 1,260
----- ----- -----

Total Expenses 8,814 9,153 8,800
----- ----- -----

Net Investment Income 293,954 356,841 356,949
------- ------- -------

Realized and Unrealized Gain (Loss)
Realized Gain (Loss) (99,579) - -
on Investments
Change in Unrealized Appreciation
(Depreciation) on Investments 39,064 (17,265) (241,410)
------ ------- --------

Net Gain (Loss) on Investments (60,515) (17,265) (241,410)
======= ======= ========

Net Increase in Net Assets
Resulting from Operations $ 233,439 $ 339,576 $ 115,539
============== ============== =============

</TABLE>
The accompanying notes form an integral part of the financial statements.

<PAGE>

Municipal Securities Trust, Multi-state Series 38

Pennsylvania Trust
Statement of Operations
June 30, 1996
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
For the Years Ended June 30,
1996 1995 1994

<S> <C> <C> <C>
Investment Income
Interest $ 112,100 $ 139,423 $ 143,849
-------------- -------------- -------------

Expenses
Trustee's Fees 2,638 2,716 2,525
Evaluator's Fees 1,375 1,374 1,494
Sponsor's Fees 500 500 495
--- --- ---

Total Expenses 4,513 4,590 4,514
----- ----- -----

Net Investment Income 107,587 134,833 139,335
------- ------- -------

Realized and Unrealized Gain (Loss)
Realized Gain (Loss) on
Investments 696 (14,904)
Change in Unrealized Appreciation
(Depreciation) on Investments (23,742) (2,130) (72,031)
------- ------ -------

Net Gain (Loss) on Investments (23,046) (17,034) (72,031)
======= ======= =======

Net Increase in Net Assets
Resulting from Operations $ 84,541 $ 117,799 $ 67,304
============== ============== =============

</TABLE>
The accompanying notes form an integral part of the financial statements.

<PAGE>

Municipal Securities Trust, Multistate Series 38

California Trust
Statement of Changes in Net Assets
June 30, 1996
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
For the Years Ended June 30,
1996 1995 1994

<S> <C> <C> <C>
Operations
Net Investment Income $ 104,649 $ 135,716 $ 138,382
Realized Gain (Loss) on
Investments (43,305) (5,592) -
Change in Unrealized Appreciation
(Depreciation) on Investments 31,865 6,541 (92,978)
------ ----- -------

Net Increase in Net Assets
Resulting from Operations 93,209 136,665 45,404
------ ------- ------

Distributions to Certificateholders
Investment Income 106,500 134,306 136,721
Principal 347,588 51,000 -

Redemptions
Interest 1,848 227 -
Principal 102,266 14,361 -
------- ------ --------

Total Distributions
and Redemptions 558,202 199,894 136,721
------- ------- -------

Total Increase (Decrease) (464,993) (63,229) (91,317)

Net Assets
Beginning of Year 1,963,864 2,027,093 2,118,410
--------- --------- ---------

End of Year (Including
Undistributed net Investment
Income of $37,875, $41,574 and
$40,391, Respectively) $ 1,498,871 $ 1,963,864 $ 2,027,093
============== ============== =============

</TABLE>
The accompanying notes form an integral part of the financial statements.

<PAGE>

Municipal Securities Trust, Multistate Series 38

New York Trust
Statement of Changes in Net Assets
June 30, 1996
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
For the Years Ended June 30,
1996 1995 1994

<S> <C> <C> <C>
Operations
Net Investment Income $ 293,954 $ 356,841 $ 356,949
Realized Gain (Loss)
on Investments (99,579) - -
Change in Unrealized Appreciation
(Depreciation) for the Year 39,064 (17,265) (241,410)
------ ------- --------

Net Increase in Net Assets
Resulting From Operations 233,439 339,576 115,539
------- ------- -------

Distributions to Certificateholders
Investment Income 305,301 353,470 353,621
Principal 1,041,966 - -

Redemptions
Interest 4,755 260 -
Principal 146,275 15,128 -
------- ------

Total Distributions
and Redemptions 1,498,297 368,858 353,621
--------- ------- -------

Total Increase (Decrease) (1,264,858) (29,282) (238,082)

Net Assets
Beginning of Year 5,191,043 5,220,325 5,458,407
--------- --------- ---------

End of Year (Including
Undistributed Net Investment
Income of $90,902, $107,004 and
$103,893, Respectively) $ 3,926,185 $ 5,191,043 $ 5,220,325
============== ============== =============
</TABLE>

The accompanying notes form an integral part of the financial statements.

<PAGE>

Municipal Securities Trust, Multistate Series 38

Pennsylvania Trust
Statement of Changes in Net Assets
June 30, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>

For the Years Ended June 30,
1996 1995 1994

<S> <C> <C> <C>
Operations
Net Investment Income $ 107,587 $ 134,833 $ 139,335
Realized Gain (Loss) on
Investments 696 (14,904) -
Change in Unrealized Appreciation
(Depreciation) on Investments (23,742) (2,130) (72,031)
------- ------ -------

Net Increase in Net Assets
Resulting from Operations 84,541 117,799 67,304
------ ------- ------

Distributions to Certificateholders
Investment Income 110,257 130,945 137,728
Principal 131,655 - -

Redemptions
Interest 4,302 5,236 -
Principal 183,422 167,588 -
------- ------- -------

Total Distributions
and Redemptions 429,636 303,769 137,728
------- ------- -------

Total Increase (Decrease) (345,095) (185,970) (70,424)

Net Assets
Beginning of Year 1,892,405 2,078,375 2,148,799
--------- --------- ---------

End of Year (Including
Undistributed net Investment
Income of $31,806, $38,778 and
$40,126, Respectively) $ 1,547,310 $ 1,892,405 $ 2,078,375
============== ============== =============
</TABLE>

The accompanying notes form an integral part of the financial statements.

<PAGE>

Municipal Securities Trust, Multistate Series 38

Notes to Financial Statements
June 30, 1996, 1995 and 1994
- ------------------------------------------------------------------------------

1. Organization

Municipal Securities Trust, Multi-State Series 38 (Trust) was
organized on August 24, 1989 under the laws of the State of New York
by a Trust Indenture and Agreement, and its registered under the
Investment Company Act of 1940. The Trust was formed to preserve
capital and to provide interest income which, in the opinions of bond
counsel to the respective issuers, is, with certain exceptions,
currently exempt from regular Federal Income Tax under existing law
but may be subject to state and local tax.

Effective September 2, 1995, the United States Trust Company of New
York was merged into The Chase Manhattan Bank (the "Trustee").
Accordingly, Chase is the successor trustee of the Trust.

2. Summary of Significant Accounting Policies

The following is a summary of significant accounting policies
consistently followed by the Trust in preparation of its financial
statements. The policies are in conformity with generally accepted
accounting principles ("GAAP"). The preparation of financial
statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual amounts could differ
from those estimates.

Interest Income
The discount on the zero-coupon bonds is accreted by the interest
method over the respective lives of the bonds. The accretion of such
discount is included in interest income; however, it is not
distributed until realized in cash upon maturity or sale of the
respective bonds.

Security Valuation
Investments are carried at market value which is determined by Kenny
S&P Evaluation Services, a business unit of J.J. Kenny Company, Inc.,
a subsidiary of The McGraw-Hill Companies, Inc. The market value of
the investments is based upon the bid prices for the bonds at the end
of the period, which approximates the fair value of the security at
that date, except that the market value on the date of deposit
represents the cost to the Trust based on the offering prices for
investments at that date. The differences between cost (including
accumulated accretion of original issue discount on zero-coupon bonds)
and market is reflected as unrealized appreciation (depreciation) of
investments. Securities transactions are recorded on the trade date.
Realized gains (losses) from securities transactions are determined on
the basis of average cost of the securities sold or redeemed.

3. Income Taxes

No provision for federal income taxes has been made in the
accompanying financial statements because the Trust intends to
continue to qualify for the tax treatment applicable to Grantor Trusts
under the Internal Revenue Code. Under existing law, if the Trust so
qualifies, it will not

<PAGE>

2
Municipal Securities Trust, Multistate Series 38

Notes to Financial Statements
June 30, 1996, 1995 and 1994
- -------------------------------------------------------------------------------

be subject to federal income tax on net income and capital gains that
are distributed to unitholders.

4. Trust Administration

The Trustee has custody of assets and responsibility for the
accounting records and financial statements of the Trust and is
responsible for establishing and maintaining a system of internal
control related thereto.

The Trustee is also responsible for all estimates of expenses and
accruals reflected in the Trust's financial statements. The Trust
Indenture and Agreement provides for interest distributions as often
as monthly (depending upon the distribution plan elected by the
Certificateholders).

The Trust Indenture and Agreement further requires that principal
received from the disposition of bonds, other than those bonds sold in
connection with the redemption of units, be distributed to
Certificateholders.

The Trust Indenture and Agreement further requires that principal
received from the disposition of bonds, other than bonds sold in
connection with the redemption of units, be distributions during the
years ended June 30, 1995, 1994, and 1993.

The Trust Indenture and Agreement also requires each state Trust to
redeem units tendered. One hundred fourteen, one hundred fifty-nine
and one hundred eighty-two units were redeemed by California and New
York and Pennsylvania Trusts, respectively during the year ended June
30, 1996. Fifteen units were redeemed by the California and New York
Trusts, during the year ended June 30, 1995. One hundred sixty-six
units were redeemed by the Pennsylvania Trust during the year ended
June 30, 1995. No units were redeemed during the year ended June 30,
1994.

The Trust pays an annual fee for trustee services rendered by the
Trustee that ranges from $.35 to $1.05, for the California and
Pennsylvania Trust and $.32 to $.96 for the New York Trust per $1,000
of outstanding investment principal. In addition, a minimum fee of $15
is paid to a service bureau for each portfolio valuation. A maximum
fee of $.25 per $1,000 of outstanding investment principal is paid to
the Sponsor. For the year ended June 30, 1996, the "Trustee's Fees"
are comprised of Trustee fees of $1,105, $2,487, and $1,133 and other
expenses of $1,607, $3,702, and $1,505, for the California, New York
and Pennsylvania Trusts, respectively. The other expenses include
professional, printing and miscellaneous fees.

<PAGE>

3
Municipal Securities Trust, Multistate Series 38

Notes to Financial Statements
June 30, 1996, 1995 and 1994
- -------------------------------------------------------------------------------

5. Net Assets

At June 30, 1996, the net assets of the Trust represented the interest
of Certificateholders as follows:
<TABLE>
<CAPTION>
California New York Pennsylvania
Trust Trust Trust
<S> <C> <C> <C>
Original Cost to
Certificateholders $ 2,012,642 $ 5,083,268 $ 2,024,758
Less Initial Gross
Underwriting Commission (98,620) (249,080) (99,213)
------- -------- -------

1,914,022 4,834,188 1,925,545

Accumulated Cost of Bonds
Sold, Matured or Called (549,158) (1,302,963) (482,094)
Net Unrealized Appreciation 111,086 304,045 86,832
Undistributed Net
Investment Income 37,875 90,902 31,806
Distributions in Excess of
Proceeds from Investments (14,954) 13 (14,779)
------- -- -------

Total $ 1,498,871 $ 3,926,185 $ 1,547,310
============== ============== =============
</TABLE>

The original cost to Certificateholders, less the initial gross
underwriting commission, represents the aggregate initial public
offering price net of the applicable sales charge on 2,000, 5,000 and
2,000 units of fractional undivided interest of the California Trust,
New York Trust and Pennsylvania Trust, respectively, as of the date of
deposit.

Undistributed net investment income includes accumulated accretion of
original issue discount of $8,734, $21,852 and $7,194 for the
California Trust, New York Trust and Pennsylvania Trust, respectively.

6. Concentration of Credit Risk

Since the Trust invests a portion of its assets in issuers located in
a particular municipal bond, it may be affected by economic and
political developments in that municipality. Certain debt obligations
held by the Trust are entitled to the benefit of insurance, standby
letters of credit or other guarantees of banks or other financial
institutions.

7. Successor Sponsor

Effective September 28, 1995, Reich & Tang Distributors L.P. ("Reich &
Tang") has become the successor sponsor (the "Sponsor") to certain of
the unit investments trusts previously sponsored by Bear Stearns & Co.
Inc. As successor Sponsor, Reich & Tang has assumed all of the
obligations and rights of Bear Stearns & Co. Inc., the previous
sponsor.

<PAGE>

4
Municipal Securities Trust, Multistate Series 38

Notes to Financial Statements
June 30, 1996, 1995 and 1994
- -------------------------------------------------------------------------------

8. Financial Highlights (per unit) *

Selected data for a unit of the Trust outstanding for the year ended
June 30, 1996:
<TABLE>
<CAPTION>

California New York Pennsylvania
Trust Trust Trust

<S> <C> <C> <C>
Net Asset Value, Beginning of Period** $ 989.35 $ 1,041.33 $ 1,031.85
------------ ------------- ------------

Interest Income 56.65 61.72 64.31
Expenses (2.37) (1.80) (2.59)
----- ----- -----

Net Investment Income 54.28 59.92 61.72
----- ----- -----

Net Gain or Loss on Investments(1) 47.00 17.72 89.55
----- ----- -----

Total from Investment Operations 1,090.63 1,118.97 1,183.12
-------- -------- --------

Less Distributions
to Certificateholders
Income 55.24 62.23 63.26
Principal 180.28 212.41 75.53
for Redemptions
Interest .96 .97 2.47
Principal 53.04 29.82 105.23
----- ----- ------

Total Distributions 289.52 305.43 246.49
------ ------ ------

Net Asset Value, End of Period** $ 801.11 $ 813.54 $ 963.63
------------ ------------- ------------
</TABLE>

See "Financial and Statistical Information" in Part A of this
Prospectus for amounts of per unit distributions during the years
ended June 30, 1996, 1995 and 1994 based on actual units.

(1) Net gain or loss on investments is a result of changes in outstanding
units since July 1, 1995 and the dates of net gain and loss on
investments.

- --------
* Unless otherwise stated, based upon average units outstanding during
the year of 1928 ([1,985 + 1,871]/2) for California Trust.

Unless otherwise stated, based upon average units outstanding during
the year of 4,905.50([4,985+4,826]/2) for New York Trust.

Unless otherwise stated, based upon average units outstanding during
the year of 1,743([1,834+1,652]/2) for Pennsylvania Trust.

** Based upon actual units outstanding.

Note: Part B of This Prospectus May Not Be
Distributed Unless Accompanied by Part A.

Please Read and Retain Both Parts
of the Prospectus for Future Reference.

MUNICIPAL SECURITIES TRUST
MULTI-STATE SERIES
(Multiplier Portfolio)

Prospectus Part B

Dated: October 31, 1996

THE TRUST

Organization

"Municipal Securities Trust," Multi-State Series (the "Trust") consists of
several separate "unit investment trusts," which may include California Trust,
Michigan Trust, New York Trust, Pennsylvania Trust and/or Virginia Trust
(collectively, the "State Trusts") designated as set forth in Part A. The State
Trusts were created under the laws of the State of New York pursuant to the
Trust Indenture and Agreement* (collectively, the "Trust Agreement"), dated the
Date of Deposit, among Reich & Tang Distributors L.P., as Sponsor, or depending
on the particular Trust, among Reich & Tang Distributors L.P. and Gruntal &
Co., Incorporated, as Co-Sponsors (the Sponsors or Co-Sponsors, if applicable,
are referred to herein as the "Sponsor"), Kenny S&P Evaluation Services, a
business unit of J.J. Kenny Company, Inc., a subsidiary of The McGraw-Hill
Companies, as Evaluator, and, depending on the particular State Trust, either
The Bank of New York or The Chase Manhattan Bank, as Trustee. The name of the
Trustee for a particular State Trust is contained in the "Summary of Essential
Information" in Part A. For a description of the Trustee for a particular State
Trust, see "Trust Administration--The Trustee." Each State Trust will be
administered as a distinct entity with separate certificates, expenses, books
and records.

On the Date of Deposit the Sponsor deposited with the Trustee long-term
bonds, including delivery statements relating to contracts for the purchase of
certain such bonds (the "Bonds"), and cash or irrevocable letters of credit
issued by a major commercial bank in the amount required for such purchases.
Thereafter, the Trustee, in exchange for the Bonds so deposited, delivered to
the Sponsor the Certificates evidencing the ownership of all Units of the State
Trusts. The Trust consists of the interest-bearing bonds described under "The
Trust" in Part A of this Prospectus, the interest on which is, in the opinions
of bond counsel to the respective issuers given at the time of original
delivery of the Bonds, exempt from regular federal income tax under existing
law.

Each "Unit" outstanding on the Evaluation Date represented an undivided
interest or pro rata share in the principal and interest of each State Trust in
the ratio of one Unit to the principal amount of Bonds in such

- --------

* References in this Prospectus to the Trust Agreement are qualified in
their entirety by the respective Trust Indentures and Agreements which are
incorporated herein by reference.

C/M: 11939.0001 82600.5

<PAGE>

State Trust on such date as specified in Part A of this Prospectus. To the
extent that any Units of a State Trust are redeemed by the Trustee, the
fractional undivided interest or pro rata share in such State Trust represented
by each unredeemed Unit of such State Trust will increase, although the actual
interest in such State Trust represented by such fraction will remain
unchanged. Units will remain outstanding until redeemed upon tender to the
Trustee by Certificateholders, which may include the Sponsor, or until the
termination of the Trust Agreement.

Objectives

Each State Trust is one of a series of similar but separate unit
investment trusts formed by the Sponsor which offers investors the opportunity
to participate in a portfolio of long-term tax-exempt bonds, which may include
deep "market" discount and original issue discount bonds, with a greater
diversification than they might be able to acquire themselves. The objectives
of each State Trust are to preserve capital and to provide interest income
which, in the opinions of bond counsel to the respective issuers given at the
time of original delivery of the Bonds, is, with certain exceptions, currently
exempt from regular federal income tax and from present income taxes of the
State for which such Trust is named for residents thereof. Such interest income
may, however, be subject to the federal corporate alternative minimum tax and
to state and local taxes in other jurisdictions. Investors should be aware that
there is no assurance the State Trusts' objectives will be achieved because
these objectives are dependent on the continuing ability of the issuers of the
Bonds to meet their interest and principal payment requirements, on the
continuing satisfaction of the Bonds of the conditions required for the
exemptions of interest thereon from regular federal income tax and on the
market value of the Bonds, which can be affected by fluctuations in interest
rates and other factors.

Since disposition of Units prior to final liquidation of a State Trust may
result in an investor receiving less than the amount paid for such Units (see
"Comparison of Public Offering Price, Sponsor's Repurchase Price and Redemption
Price"), the purchase of a Unit should be looked upon as a long-term
investment. The State Trusts are not designed to be complete investment
programs.

The Portfolios--General

All of the Bonds in the State Trusts were rated "A" or better by Standard
& Poor's Ratings Services, A Division of The McGraw-Hill Companies ("Standard &
Poor's") or Moody's Investors Service, Inc. ("Moody's") at the time originally
deposited in the State Trust. For a list of the ratings of each Bond on the
Evaluation Date, see each "Portfolio" in Part A of this Prospectus.

For information regarding (i) the number of issues in each State Trust,
(ii) the range of fixed maturity of the Bonds, (iii) the number of issues
payable from the income of a specific project or authority and (iv) the number
of issues constituting general obligations of a government entity, see "The
Trust" and "Description of Portfolio" for each State Trust in Part A of this
Prospectus.

When selecting Bonds for the State Trusts, the following factors, among
others, were considered by the Sponsor on the Date of Deposit: (a) the quality
of the Bonds and whether such Bonds were rated "A" or better by Standard &
Poor's or Moody's, (b) the yield and price of the Bonds relative to other
tax-exempt securities of comparable quality and maturity, (c) income to the
Certificateholders of the State Trusts, (d) the diversification of each State
Trust's portfolio, as to purpose of issue and location of issuer, taking into
account the availability in the market of issues which meet such State

-2-
C/M: 11939.0001 82600.5

<PAGE>

Trust's quality, rating, yield and price criteria and (e) the existence of
"market" discount and original issue discount. Subsequent to the Evaluation
Date, a Bond may cease to be rated or its rating may be reduced below that
specified above. Neither event requires an elimination of such Bond from a
State Trust but may be considered in the Sponsor's determination to direct the
Trustee to dispose of the Bond. See "Portfolio Supervision." For an
interpretation of the bond ratings, see "Description of Bond Ratings."

Housing Bonds. Some of the aggregate principal amount of the Bonds may
consist of obligations of state and local housing authorities whose revenues
are primarily derived from mortgage loans to rental housing projects for low to
moderate income families. Since such obligations are usually not general
obligations of a particular state or municipality and are generally payable
primarily or solely from rents and other fees, adverse economic developments
including failure or inability to increase rentals, fluctuations of interest
rates and increasing construction and operating costs may reduce revenues
available to pay existing obligations. See "Description of Portfolio" in Part A
for the amount of housing bonds contained therein.

Hospital Revenue Bonds. Some of the aggregate principal amount of the
Bonds may consist of hospital revenue bonds. Ratings of hospital bonds are
often initially based on feasibility studies which contain projections of
occupancy levels, revenues and expenses. Actual experience may vary
considerably from such projections. A hospital's gross receipts and net income
will be affected by future events and conditions including, among other things,
demand for hospital services and the ability of the hospital to provide them,
physicians' confidence in hospital management capability, economic developments
in the service area, competition, actions by insurers and governmental agencies
and the increased cost and possible unavailability of malpractice insurance.
Additionally, a major portion of hospital revenue typically is derived from
third-party payors and government programs such as Medicare and Medicaid. Both
private third-party payors and government programs have undertaken cost
containment measures designed to limit payments. 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. 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 such
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 such programs.

The health care delivery system is undergoing considerable alteration and
consolidation. Consistent with that trend, the ownership or management of a
hospital or health care facility may change, which could result in (i) an early
redemption of bonds, (ii) alteration of the facilities financed by the Bonds or
which secure the Bonds, (iii) a change in the tax exempt status of the Bonds or
(iv) an inability to produce revenues sufficient to make timely payment of debt
service on the Bonds. Future legislation or changes in the areas noted above,
among other things, would affect all hospitals to varying degrees and,
accordingly, any adverse change in these areas may affect the ability of such
issuers to make payment of principal and interest on such bonds. See
"Description of Portfolio" in Part A for the amount of hospital revenue bonds
contained therein.

Nuclear Power Facility Bonds. Certain Bonds may have been issued in
connection with the financing of nuclear generating facilities. In view of
recent developments in connection with such facilities, legislative and
administrative actions have been taken and proposed relating to the development
and operation of nuclear generating facilities. The Sponsor is unable to
predict whether any such actions or whether any such proposals or

-3-
C/M: 11939.0001 82600.5

<PAGE>

litigation, if enacted or instituted, will have an adverse impact on the
revenues available to pay the debt service on the Bonds in the portfolio issued
to finance such nuclear projects. See "Description of Portfolio" in Part A for
the amount of bonds issued to finance nuclear generating facilities contained
therein.

Mortgage Subsidy Bonds. Certain Bonds may be "mortgage subsidy bonds"
which are obligations of which all or a significant portion of the proceeds are
to be used directly or indirectly for mortgages on owner-occupied residences.
Section 103A of the Internal Revenue Code of 1954, as amended, provided as a
general rule that interest on "mortgage subsidy bonds" will not be exempt from
Federal income tax. An exception is provided for certain "qualified mortgage
bonds." Qualified mortgage bonds are bonds that are used to finance
owner-occupied residences and that meet numerous statutory requirements. These
requirements include certain residency, ownership, purchase price and target
area requirements, ceiling residency, ownership, purchase price and target area
requirements, ceiling amounts for state and local issuers, arbitrage
restrictions and (for bonds issued after December 31, 1984) certain information
reporting, certification, public hearing and policy statement requirements. In
the opinions of bond counsel to the issuing governmental authorities, interest
on all the Bonds in a Trust that might be deemed "mortgage subsidy bonds" will
be exempt from Federal income tax when issued. See "Description of Portfolio"
in Part A for the amount of mortgage subsidy Bonds contained therein.

Mortgage Revenue Bonds. Certain Bonds may be "mortgage revenue bonds."
Under the Internal Revenue Code of 1986, as amended (the "Code") (and under
similar provisions of the prior tax law) "mortgage revenue bonds" are
obligations the proceeds of which are used to finance owner-occupied residences
under programs which meet numerous statutory requirements relating to
residency, ownership, purchase price and target area requirements, ceiling
amounts for state and local issuers, arbitrage restrictions, and certain
information reporting certification, and public hearing requirements. There can
be no assurance that additional federal legislation will not be introduced or
that existing legislation will not be further amended, revised, or enacted
after delivery of these Bonds or that certain required future actions will be
taken by the issuing governmental authorities, which action or failure to act
could cause interest on the Bonds to be subject to federal income tax. If any
portion of the Bonds proceeds are not committed for the purpose of the issue,
Bonds in such amount could be subject to earlier mandatory redemption at par,
including issues of Zero Coupon Bonds (see "Discount and Zero Coupon Bonds").
See "Description of Portfolio" in Part A for the amount of mortgage revenue
bonds contained therein.

Private Activity Bonds. The portfolio of the Trust may contain other Bonds
which are "private activity bonds" (often called Industrial Revenue Bonds
("IRBs") if issued prior to 1987) which would be primarily of two types: (1)
Bonds for a publicly owned facility which a private entity may have a right to
use or manage to some degree, such as an airport, seaport facility or water
system and (2) facilities deemed owned or beneficially owned by a private
entity but which were financed with tax-exempt bonds of a public issuer, such
as a manufacturing facility or a pollution control facility. In the case of the
first type, bonds are generally payable from a designated source of revenues
derived from the facility and may further receive the benefit of the legal or
moral obligation of one or more political subdivisions or taxing jurisdictions.
In most cases of project financing of the first type, receipts or revenues of
the issuer are derived from the project or the operator or from the unexpended
proceeds of the bonds. Such revenues include user fees, service charges, rental
and lease payments, and mortgage and other loan payments.

-4-
C/M: 11939.0001 82600.5

<PAGE>

The second type of issue will generally finance projects which are owned
by or for the benefit of, and are operated by, corporate entities. Ordinarily,
such private activity bonds are not general obligations of governmental
entities and are not backed by the taxing power of such entities, and are
solely dependent upon the creditworthiness of the corporate user of the project
or corporate guarantor.

The private activity bonds in the Trust have generally been issued under
bond resolutions, agreements or trust indentures pursuant to which the revenues
and receipts payable under the issuer's arrangements with the users or the
corporate operator of a particular project have been assigned and pledged to
the holders of the private activity bonds. In certain cases a mortgage on the
underlying project has been assigned to the holders of the private activity
bonds or a trustee as additional security. In addition, private activity bonds
are frequently directly guaranteed by the corporate operator of the project or
by another affiliated company. See "Description of Portfolio" in Part A for the
amount of private activity bonds contained therein.

Litigation. Litigation challenging the validity under state constitutions
of present systems of financing public education has been initiated in a number
of states. Decisions in some states have been reached holding such school
financing in violation of state constitutions. In addition, legislation to
effect changes in public school financing has been introduced in a number of
states. The Sponsor is unable to predict the outcome of the pending litigation
and legislation in this area and what effect, if any, resulting change in the
sources of funds, including proceeds from property taxes applied to the support
of public schools, may have on the school bonds in the State Trusts.

Legal Proceedings Involving the Trusts. The Sponsor has not been notified
or made aware of any litigation pending with respect to any Bonds which might
reasonably be expected to have a material effect on the State Trusts other than
that which is discussed under "The State Trusts" herein. Such litigation as,
for example, suits challenging the issuance of pollution control revenue bonds
under recently enacted environmental protection statutes may affect the
validity of such Bonds or the tax-free nature of the interest thereon. At any
time after the date of this Prospectus, litigation may be instituted on a
variety of grounds with respect to the Bonds in the State Trusts. The Sponsor
is unable to predict whether any such litigation may be instituted or, if
instituted, whether it will have a material adverse effect on a State Trust.

Other Factors. The Bonds in the State Trusts, despite their optional
redemption provisions which generally do not take effect until 10 years after
the original issuance dates of such bonds (often referred to as "ten year call
protection"), do contain provisions which require the issuer to redeem such
obligations at par from unused proceeds of the issue within a stated period. In
recent periods of declining interest rates there have been increased
redemptions of bonds, particularly housing bonds, pursuant to such redemption
provisions. In addition, the Bonds in the State Trusts are also subject to
mandatory redemption in whole or in part at par at any time that voluntary or
involuntary prepayments of principal on the underlying collateral are made to
the trustee for such bonds or that the collateral is sold by the bond issuer.
Prepayments of principal tend to be greater in periods of declining interest
rates; it is possible that such prepayments could be sufficient to cause a bond
to be redeemed substantially prior to its stated maturity date, earliest call
date or sinking fund redemption date.

The Bonds may also be subject to other calls, which may be permitted or
required by events which cannot be predicted (such as destruction,
condemnation, or termination of a contract).

-5-
C/M: 11939.0001 82600.5

<PAGE>

In 1976 the federal bankruptcy laws were amended so that an authorized
municipal debtor could more easily seek federal court protection to assist in
reorganizing its debts so long as certain requirements were met. Historically,
very few financially troubled municipalities have sought court assistance for
reorganizing their debts; notwithstanding, the Sponsors are unable to predict
to what extent financially troubled municipalities may seek court assistance in
reorganizing their debts in the future and, therefore, what effect, if any, the
applicable federal bankruptcy law provisions will have on the state Trusts.

The State Trusts may also include "moral obligation" bonds. Under statutes
applicable to such bonds, if an issuer is unable to meet its obligations, the
repayment of such bonds becomes a moral commitment but not a legal obligation
of the state or municipality in question. See "Portfolio" and "Information
Regarding the State Trust" for each State Trust in Part A of this Prospectus
for the amount of moral obligation bonds contained in each State Trust's
portfolio.

Certain of the Bonds in the State Trusts are subject to redemption prior
to their stated maturity dates pursuant to sinking fund or call provisions. A
sinking fund is a reserve fund appropriated specifically toward the retirement
of a debt. A callable bond is one which is subject to redemption or refunding
prior to maturity at the option of the issuer. A refunding is a method by which
a bond is redeemed at or before maturity from the proceeds of a new issue of
bonds. In general, call provisions are more likely to be exercised when the
offering side evaluation of a bond is at a premium over par than when it is at
a discount from par. A listing of the sinking fund and call provisions, if any,
with respect to each of the Bonds in each State Trust is contained under the
"Portfolio" for such State Trust in Part A of this Prospectus.
Certificateholders will realize a gain or loss on the early redemption of such
Bonds, depending upon whether the price of such Bonds is at a discount from or
at a premium over par at the time the Certificateholders Purchase their Units.

Neither the Sponsor nor the Trustee shall be liable in any way for any
default, failure or defect in any of the Bonds. Because certain of the Bonds
from time to time may be redeemed or will mature in accordance with their terms
or may be sold under certain circumstances, no assurance can be given that the
State Trusts will retain their present size and composition for any length of
time. The proceeds from the sale of a Bond in a State Trust or from the
exercise of any redemption or call provision will be distributed to
Certificateholders of such State Trust, except to the extent such proceeds are
applied to meet redemptions of Units. See "Trustee Redemption."

Puerto Rico Bonds. Certain of the Bonds in the Trust may be general
obligations and/or revenue bonds of issuers located in Puerto Rico which will
be affected by general economic conditions in Puerto Rico. The economy of
Puerto Rico is closely integrated with that of the mainland United States.
During fiscal year 1995, approximately 89% of Puerto Rico's exports were to the
United States mainland, which was also the source of 65% of Puerto Rico's
imports. In fiscal 1995, Puerto Rico experienced a $4.6 billion positive
adjusted trade balance. The economy of Puerto Rico is dominated by the
manufacturing and service sectors. The manufacturing sector has experienced a
basic change over the years as a result of increased emphasis on higher wage,
high technology industries such as pharmaceuticals, electronics, computers,
microprocessors, professional and scientific instruments, and certain high
technology machinery and equipment. The service sector, including finance,
insurance and real estate, wholesale and retail trade, and hotel and related
services, also plays a major role in the economy. It ranks second only to
manufacturing in contribution to the gross domestic product and leads all
sectors in providing employment. In recent years, the service sector has
experienced significant growth in response to and paralleling the

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expansion of the manufacturing sector. Since fiscal 1985, personal income, both
aggregate and per capita, has increased consistently in each fiscal year. In
fiscal 1995, aggregate personal income was $27.0 billion ($22.5 billion in 1987
prices) and personal income per capita was $7,296 ($6,074 in 1987 prices).
Personal income includes transfer payments to individuals in Puerto Rico under
various social programs. Total federal payments to Puerto Rico, which include
many types in addition to federal transfer payments, are lower on a per capita
basis in Puerto Rico than in any state. Transfer payments to individuals in
fiscal 1995 were $5.9 billion, of which $4.0 billion, or 67.6%, represent
entitlement to individuals who had previously performed services or made
contributions under programs such as Social Security, Veterans Benefits and
Medicare. The number of persons employed in Puerto Rico during fiscal 1995
averaged 1,051,000, an increase of 4.0% over fiscal 1994. The unemployment rate
in Puerto Rico for fiscal 1995 decreased from 16.0% to 13.8%. The Puerto Rico
Planning Board's most recent gross product forecast for fiscal 1996, made in
February 1995, showed an increase of 2.7%. The Planning Board's Economic
Activity Index, a composite index for thirteen economic indicators, increased
2.7 % for the first seven months of fiscal 1995 compared to the same period of
fiscal 1994, which period showed an increase of 1.7% over the same period of
fiscal 1993. During the first four months of fiscal 1996 the Index increased
1.8% compared to the same period of fiscal 1995, which period showed an
increase of 2.7% over the same period of fiscal 1994. Growth in the Puerto Rico
economy in fiscal 1996 depends on several factors, including the state of the
United States economy and the relative stability in the price of oil imports,
the exchange value of the U.S. dollar, the level of federal transfers and the
cost of borrowing.

Discount and Zero Coupon Bonds

The State Trust portfolios may contain original issue discount bonds. The
original issue discount, which is the difference between the initial purchase
price of the Bonds and the face value, is deemed to accrue on a daily basis and
the accrued portion will be treated as tax-exempt interest income for regular
federal income tax purposes. Upon sale or redemption, any gain realized that is
in excess of the earned portion of original issue discount will be taxable as
capital gain. See "Tax Status." The current value of an original issue discount
bond reflects the present value of its face amount at maturity. The market
value tends to increase more slowly in early years and in greater increments as
the Bonds approach maturity. Of these original issue discount bonds, a portion
of the aggregate principal amount of the Bonds in each State Trust may be Zero
Coupon Bonds. Zero Coupon Bonds do not provide for the payment of any current
interest and provide for payment at maturity at face value unless sooner sold
or redeemed. The market value of Zero Coupon Bonds is subject to greater
fluctuations than coupon bonds in response to changes in interest rates. Zero
Coupon Bonds generally are subject to redemption at compound accredited value
based on par value at maturity. Because the issuer is not obligated to make
current interest payments, Zero Coupon Bonds may be less likely to be redeemed
than coupon bonds issued at a similar interest rate. See "Description of
Portfolios" in Part A for the aggregate principal amount of original issue
discount bonds in each State Trust's portfolio.

The State Trust portfolios may also contain Bonds that were purchased at
deep "market" discount from par value at maturity. This is because the coupon
interest rates on the discount Bonds at the time they were purchased and
deposited in the State Trusts were lower than the current market interest rates
for newly issued bonds of comparable rating and type. At the time of issuance
the discount Bonds were for the most part issued at then current coupon
interest rates. The current returns (coupon interest income as a percentage of
market price) of discount bonds will be lower than the current returns of
comparably rated bonds of similar type newly issued at current interest rates
because discount bonds tend to increase in market value as they

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approach maturity and the full principal amount becomes payable. A discount
bond held to maturity will have a larger portion of its total return in the
form of capital gain and less in the form of tax-exempt interest income than a
comparable bond newly issued at current market rates. Gain on the disposition
of a Bond purchased at a market discount generally will be treated as ordinary
income, rather than capital gain, to the extent of accrued market discount.
Discount bonds with a longer term to maturity tend to have a higher current
yield and a lower current market value than otherwise comparable bonds with a
shorter term to maturity. If interest rates rise, the value of the bonds will
decrease; and if interest rates decline, the value of the bonds will increase.
The discount does not necessarily indicate a lack of market confidence in the
issuer.

THE STATE TRUSTS

The Sponsor believes the information summarized below describes some of
the more significant events relating to the State Trusts. Sources of such
information are the official statements of the issuers located in the states of
the State Trusts which have been issued in connection with debt offerings by
such states, as well as other publicly available documents and information.
While the Sponsor has not independently verified such information, it has no
reason to believe it is not correct in all material respects.

California Trust

California Economy

California's economy is the largest among the 50 states and one of the
largest in the world. This diversified economy has major components in
agriculture, manufacturing, high technology, trade, entertainment, tourism,
construction and services. Total State gross domestic product of about $890
billion in 1995 was larger than all but six nations in the world.

After suffering through a severe recession, California's economy has been
on a steady recovery since the start of 1994. Employment has grown by over
500,000 in 1994 and 1995, and the prerecession level of total employment is
expected to be matched by early 1996. The strongest growth has been in
export-related industries, business services, electronics, entertainment and
tourism, all of which have offset the recession-related losses which were
heaviest in aerospace and defense-related industries (which accounted for
two-thirds of the job losses), finance and insurance. Residential housing
construction, with new permits for under 100,000 annual new units issued in
1994 and 1995, is weaker than in previous recoveries, but has been growing
slowly since 1993.

California's July 1, 1994 population of 32.1 million represented over 12%
of the United States' population and is concentrated in metropolitan areas. As
of the April 1, 1990 census, 96 percent resided in the 23 Metropolitan
Statistical Areas in the State. As of July 1, 1994, the 5-county Los Angeles
area accounted for 48 percent of the State's population with 15.6 million
residents, and the 10-county San Francisco Bay Area represented 21 percent,
with a population of 6.6 million.

California has a large and diverse labor force. The following table
presents civilian labor force data for the resident population, age 16 and
over, for the years 1989 to 1995.

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LABOR FORCE
1989-95

Labor Force Trends (thousands) Unemployment Rate
------------------------------------------------------------------- -----------------------------------

Labor United
Year Force Employment Unemployment California States

<C> <C> <C> <C> <C> <C>
1989................ 14,518 13,780 737 5.1 5.3

1990................ 15,136 14,286 850 5.6 5.5

1991................ 15,118 13,978 1,141 7.5 6.7

1992................ 15,335 13,939 1,396 9.1 7.4

1993................ 15,205 13,995 1,410 9.2 6.8

1994................ 15,462 14,133 1,329 8.6 6.1

1995................ 15,416 14,206 1,201 7.8 5.6

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

SOURCE: State of California, Employment Development Department.
</TABLE>

California's employment distribution among nonagricultural industries is
fairly similar to the distribution nationally. The following table shows
California's nonagricultural employment distribution and growth from 1980 to
1990 and from 1990 to 1995.

Payroll Employment By Major Sector
1980, 1990 and 1995

Employment % Distribution
(thousands) of Employment
----------------------------------------------- ----------------------------------------------

Industry Sector 1980 1990 1995 1980 1990 1995
--------------- ---- ---- ---- ---- ---- ----

<S> <C> <C> <C> <C> <C> <C>
Mining.................... 44 39 30 0.4 0.3 0.2

Construction.............. 428 605 486 4.3 4.8 3.9

Manufacturing
Nondurable goods...... 639 721 704 6.5 5.7 5.7
High Technology....... 615 686 476 6.2 5.4 3.8
Other Durable Goods... 764 690 612 7.8 5.5 4.9

Transportation and
Utilities............. 546 624 628 5.5 4.9 5.0

Wholesale and Retail
Trade................. 2,267 3,002 2,935 23.0 23.7 23.6

Finance, Insurance
and Real Estate....... 623 825 733 6.3 6.5 5.9

Services.................. 2,159 3,395 3,734 21.9 26.8 30.0

Government
Federal............... 334 362 314 3.4 2.9 2.5
State and Local....... 1,430 1,713 1,787 14.5 13.5 14.4
----- ----- ----- ---- ---- ----

TOTAL............ 9,849 12,662 12,439 100 100 100
===== ====== ====== === === ===
</TABLE>

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

SOURCE: State of California, Employment Development Department and State of
California, Department of Finance.

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The State.

Fiscal Years Prior to 1994-95.

The 1989-90 Fiscal Year ended with revenues below estimates, so that the
State's budget reserve (the Special Fund for Economic Uncertainties or "SFEU")
was fully depleted by June 30, 1990. A recession began in mid-1990, which
severely affected State General Fund revenues, and increased expenditures above
initial budget appropriations due to greater health and welfare costs. The
State's budget problems in recent years have also been caused by a structural
imbalance in that the largest General Fund Programs -- K-14 education, health,
welfare and corrections -- were increasing faster than the revenues base,
driven by the State's rapid population growth. These pressures are expected to
continue as population trends maintain strong demand for health and welfare
services, as the school age population continues 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.

As a result of these factors and others, from the late 1980's until
1992-93, the State had a period of budget imbalance. During this period,
expenditures exceeding revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the SFEU approaching $2.8 billion
at its peak at June 30, 1993. Starting in the 1990-91 Fiscal Year and for each
fiscal year thereafter, each budget required multibillion dollar actions to
bring projected revenues and expenditures into balance. The Legislature and
Governor agreed on the following principal steps to produce Budget Acts in the
years 1991-92 to 1993-94, including:

o significant cuts in health and welfare program expenditures;
o transfers of program responsibilities and funding from the State to
local governments (referred to as "realignment"), coupled with some reduction
in mandates on local government;
o transfer of about $3.6 billion in local property tax revenues from
cities, counties, redevelopment agencies and some other districts to local
school districts, thereby reducing State funding for schools under Proposition
98;
o reduction in growth of support for higher education programs, coupled
with increases in student fees;
o revenue increases (particularly in the 1991-92 Fiscal Year budget), most
of which were for a short duration;
o increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare services to
illegal immigrants; and
o various one-time adjustments and accounting changes.

Despite these budget actions, as noted, the effects of the recession led
to large, unanticipated deficits in the budget reserve, the SFEU, as compared
to projected positive balances. By the 1993-94 Fiscal Year, the accumulated
deficit wa so large that it was impractical to budget to retire it 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 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.

1994-95 Fiscal Year

The Governor's Budget Proposal for the 1994-95 Fiscal Year, as updated in
May and June 1994, recognized that the accumulated deficit could not be repaid
in one year, and proposed a two-year solution designed to eliminate the
accumulated budget deficit, estimated at about $1.8 billion at June 30, 1994,
by June 30, 1996.

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The 1994-95 Budget Act, signed by the Governor on July 8, 1994, projected
General Fund revenues and transfers of $41.9 billion, $2.1 billion more than
actual revenues received in 1993-94, and expenditures of $0.9 billion, an
increase of $1.6 billion from the prior year. As a result of the improving
economy, the Department of Finance's final estimates for the fiscal year showed
revenues and transfers of $42.7 billion and expenditures of $42.0 billion,
reducing the accumulated budget deficit to about $600 million.

The principal features of the 1994-95 Budget Act were the following:

1. Receipt of additional federal aid of about $760 million for costs of
refugee assistance and costs of incarceration and medical care for illegal
immigrants. Only about $33 million of this amount was received, with about
another $98 million scheduled to be received in the 1995-96 Fiscal Year.

2. Reduction of approximately $1.1 billion in health and welfare costs.
Certain of these actions were blocked by legal challenges.

3. A General Fund increase of approximately $38 million in support for the
University of California and $65 million for California State University,
accompanied by student fee increases for both the University of California and
California State University.

4. Proposition 98 funding for K-14 schools was increased by $526 million
from 1993-94 Fiscal Year levels, representing an increase for enrollment growth
and inflation. Consistent with previous budget agreements, Proposition 98
funding provided approximately $4,217 per student for K-12 schools, equal to
the level in the prior three years.

5. Additional miscellaneous cuts ($500 million), fund transfers ($255
million), and adjustment to prior years' legislation concerning property tax
shifts for local governments ($300 million).

The 1994-95 Budget Act contained no tax increases. Under legislation
enacted for the 1993-94 Budget Act, the renters' tax credit was suspended for
two years (1993 and 1994). A ballot proposition to permanently restore the
renters' tax credit after this year failed at the June 1994 election. the
Legislature enacted a further one-year suspension of the renters' tax credit,
for 1995, saving about $390 million in the 1995-96 Fiscal Year.

Budget Adjustment Law

The State's cash flow management plan for the 1994-95 Fiscal Year included
the issuance of $4.0 billion of Revenue Anticipation Warrants, Series C and D
(the "RAWs") on July 26, 1994, to mature on april 25, 1996, as part of a
two-year plan to retire the accumulated State budget deficit. To assure
repayment of the RAWs, the Legislature enacted a backup mechanism which could
result in automatic expenditure cuts if projected revenues did not meet certain
targets, the "Budget Adjustment Law").

The third and last step in the Budget Adjustment Law process occurred on
October 16, 1995, when the State Controller issued a report (the "October
Trigger Report") reviewing the estimated cash condition of the General Fund for
the 1995-96 Fiscal Year. The State Controller estimated that the General Fund
would have at least $1.4 billion in internal cash resources on June 30, 1996
(i.e, external borrowing would not be needed on June 30, 1996). As a result of
this finding, certain provisions of the Budget Adjustment Law, which could have
ultimately led to automatic, automatic, across-the-board cuts in the General
Fund budget, will not have to be implemented. (Likewise, an earlier report
issued on November 15, 1994, avoided implementation of any automatic budget
cuts in the 1994-95 fiscal year.)

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1995-96 Fiscal Year

With strengthening revenues and reduced caseload growth based on an
improving economy, the State entered the 1995-96 Fiscal Year budget
negotiations with the smallest nominal "budget gap" to be closed in many years.
Nonetheless, serious policy differences between the Governor and Legislature
prevented timely enactment of the budget. The 1995-96 Budget Act was signed by
the Governor on August 3, 1995, 34 days after the start of the fiscal year. The
Budget Act projected General Fund revenues and transfers of $44.1 billion, a
3.5 percent increase from the prior year. Expenditures were budgeted at $43.4
billion, a 4 percent increase. The Department of Finance projected that, after
repayment the last of the carryover budget deficit, there would be a positive
balance of $28 million in the budget reserve, the Special Fund for Economic
Uncertainties, at June 30, 1996. The Budget Act also projected Special Fund
revenues of $12.7 billion and appropriated Special Fund expenditures of $13.0
billion.

The Department of Finance's May Revision to the 1996-97 Governor's Budget,
released on May 21, 1996 (the "May Revision"), updated the projections for the
1995-96 Fiscal Year, so that revenues and transfers were estimated to be $46.1
billion, some $2 billion over the original fiscal year estimate, which was
attributed to the strong economic recovery. Expenditures also increased, to an
estimated $45.4 billion, as a result of the requirement to expend revenues for
schools under Proposition 98, and, among other things, failure of the federal
government to enact welfare reform and to budget new aid for illegal immigrant
costs, both of which the Administration had counted on to allow reductions in
State costs. The Special Fund for Economic Uncertainties was projected to have
a small negative balance of about $70 million at June 30, 1996, all but
eliminating the accumulated budget deficit from the early 1990's. The
Department also estimated that on June 30, 1996, available internal borrowable
resources (available cash, after payment of all obligations due) would be about
$4 billion, representing a significant improvement in the State's cash
position, and ending the need for deficit borrowing over the end of the fiscal
year. The State's improved cash position allowed it to repay the $4.0 billion
Revenue Anticipation Warrant issue on April 25, 1996, and to issue only $2.0
billion of revenue anticipation notes during the fiscal year, which matured on
June 28, 1996.

The following were the principal features of the 1995-96 Budget Act:

1. Proposition 98 funding for schools and community colleges was
originally budgeted to increase by about $1.0 billion (General Fund) and
$1.2 billion total above revised 1994-95 levels. Because of higher than
projected revenues in 1994-95, an additional $543 million (91 per K-12
ADA) was appropriated to the 1994-95 Proposition 98 entitlement. A large
part of this is a block grant of about $54 per pupil for any one-time
purpose. For the first time in several years, a full 2.7 percent cost of
living allowance was funded. The budget compromise anticipated a
settlement of the CTA v. Gould litigation as described below. The
Governor's Budget indicated that, with revenues even higher than
projected, Proposition 98 apportionments will exceed the amounts
originally budgeted, reaching a level of $4,500 per ADA.

2. Cuts in health and welfare costs totaling about $0.9 billion. Some
of these cuts (totaling about $500 million) require federal legislative or
administrative approval, which were still pending as of February, 1996.

3. A 3.5 percent increase in funding for the University of California
($90 million General Fund) and the California State University system ($24
million General Fund), with no increases in student fees.

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4. The Budget, as updated by the 1996-97 Governor's Budget dated
January 10, 1996, assumed receipt of $494 million in new federal aid for
incarceration and health care costs of illegal immigrants, above
commitments already made by the federal government.

5. General Fund support for the Department of Corrections is
increased by about 8 percent over the prior year, reflecting estimates of
increased prison population, but funding is less than proposed in the 1995
Governor's Budget.

1996-97 Fiscal Year

Background

The 1996-97 Governor's Budget, released January 10, 1996, projected
General Fund revenues and transfers of $45.6 billion, a 1.3% increase over
1995-96. Although an expected strong economy would generate larger revenue
growth, the Governor proposed two major initiatives, a 15% personal and
corporate income tax cut and a revision of the trial court funding program,
which would have the effect of reducing General Fund revenues. The Governor's
Budget proposed General Fund expenditures of $45.2 billion. The Governor's
Budget also proposed Special Fund revenues equal to expenditures, at a level of
$13.3 billion.

The May Revision of the Governor's Budget, released on May 21, 1996 ("May
Revision"), updated revenue estimates for the 1996-97 Fiscal Year, reflecting
stronger economic activity in the State and thus created revenue growth. The
revised estimate was for $47.1 billion of revenues, still assuming the
Governor's tax cut would be enacted, and $46.5 billion of expenditures.

1996-97 Budget Act

The 1996-97 Budget Act was signed by the Governor on July 15, 1996, along
with various implementing bills. The Governor vetoed about $82 million of
appropriations (both General Fund and Special fund). With signing of the Budget
Act, the State implemented its regular cash flow borrowing program with the
issuance of $3.0 billion of Revenue Anticipation Notes to mature on June 30,
1997. The Budget Act appropriates a modest budget reserve in the SFEU of $305
million, as of June 30, 1997. The Department of Finance projects that, on June
30, 1997, the State's available internal borrowable (cash) resources will be
$2.9 billion, after payment of all obligations due by that date, so that no
cross-fiscal year borrowing will be needed.

Revenues - The Legislature rejected the Governor's proposed 15% cut in
personal income taxes (to be phased over three years), but did approve a 5% cut
in bank and corporation taxes, to be effective for income years starting on
January 1, 1997. As a result, revenues for the Fiscal Year will be an estimated
$550 million higher than projected in the May Revision, and are now estimated
to total $47.643 billion, a 3.3 percent increase over the final estimated
1995-96 revenues. Special Fund revenues are estimated to be $13.3 billion.

Expenditures - The Budget Act contains General Fund appropriations
totaling $47.251 billion, a 4.0 percent increase over the final estimated
1995-96 expenditures. Special Fund expenditures are budgeted at $12.6 billion.

The following are principal features of the 1996-97 Budget Act:

1. Proposition 98 funding for schools and community college districts
increased by almost $1.6 billion (General fund) and $1.65 billion total above

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<PAGE>

revised 1995-96 levels. Almost half of this money was budgeted to fund
class-size reductions in kindergarten and grades 1-3. Also, for the second year
in a row, the full cost of living allowance (3.2 percent) was funded. The
Proposition 98 increases have brought K-12 expenditures to almost $4,800 per
pupil (also called per ADA, or Average Daily Attendance), an almost 15%
increase over the level prevailing during the recession years. Community
colleges will receive an increase in funding of $157 million for 1996-97 out of
this $1.6 billion total.

Because of the higher than projected revenues in 1995-96, an additional
$1.1 billion ($190 per K-12 ADA and $145 million for community colleges) was
appropriated and retroactively applied towards the 1995-96 Proposition 98
guarantee, bringing K-12 expenditures in that year to over $4,600 per ADA.
These new funds were appropriated for a variety of purposes, including block
grants, allocations for each school site, facilities for class size reduction,
and a reading initiative. Similar retroactive increases totaling $230 million,
based on final figures on revenues and State population growth, were made in
the 1991-92 and the 1994-95 Proposition 98 guarantees, most of which was
allocated to each school site.

2. Proposed cuts in health and welfare totaling $660 million. All of these
cuts require federal law changes (including welfare reform), federal waivers,
or federal budget appropriations in order to be achieved. The Budget Act
assumes approval/action by October, 1996, with the savings to be achieved
beginning in November, 1996. The Budget Act was based on continuation of
previously approved assistance levels for Aid to Families with Dependent
Children and other health and welfare programs, which had been reduced in prior
years, including suspension of State authorized cost of living increases. Part
of the federal actions referred to above is approval to maintain reduced
assistance levels in 1996-97. The Legislature did not approve the Governor's
proposal for further cuts in these assistance levels. The Budget Act does
include some $92 million for a variety of preventive programs in health and
social services areas such as the prevention of teenage pregnancy and domestic
violence.

3. A 4.9 percent increase in funding for the University of California
($130 million General Fund) and the California State University system ($101
million General Fund), with no increase in student fees, maintaining the second
year of the Governor's four-year "Compact" with the State's higher education
units.

4. The Budget Act assumed the federal government will provide
approximately $700 million in new aid for incarceration and health care costs
of illegal immigrants. These funds reduce appropriations in these categories
that would otherwise have to be paid from the General Fund. (For purposes of
cash flow projections, the Department of Finance expects $540 million of this
amount to be received during the 1996-97 fiscal year.)

5. General Fund support for the Department of Corrections was increased by
about 7 percent over the prior year, reflecting estimates of increased prison
population.

6. With respect to aid to local governments, the principal new programs
included in the Budget Act are $100 million in grants to cities and counties
for law enforcement purposes, and budget $50 million for competitive grants to
local governments for programs to combat juvenile crime. The Budget Act also
assumed that legislation will be adopted to revise the Trial Court funding
program, so that future increases in trial court costs will be funded by the
State; this change will not have a significant impact in 1996-97.

Federal Welfare Reform - Following enactment of the 1996-97 Budget Act,
Congress passed and the President signed a law (P.L. 104-193, the "Law")

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making a fundamental reform of the current welfare system. Among may
provisions, the most well-publicized include: (i) conversion of Aid to Families
with Dependent Children from an entitlement program to a block grant titled
Temporary Assistance for Needy Families (TANF), with lifetime time limits on
TANF recipients, work requirements and other changes; (ii) provisions denying
certain federal welfare and public benefits (including TANF) to legal
noncitizens, and generally denying almost all benefits to illegal immigrants;
and (iii) changes in the Food Stamp program, including reducing maximum
benefits and imposing work requirements.

The Legislative Analyst has released a preliminary analysis of the Law
which estimates that, making certain assumptions about the State's response,
federal funding to the State will decline by over $6.5 billion over 6 years
compared to existing programs. How these changes will affect the State's
General Fund will depend on many factors including how quickly the State
implements the Law; the degree to which the State elects to make up for cuts in
federal aid and/or provide more aid to counties; the extent to which the State
may cut some of its own existing programs for noncitizens; and the State's
ability to avoid certain penalties written into the Law. Thus, the ultimate
fiscal and policy effects of the Law will not be known for some time, as the
State makes these many decisions on how to implement it. However, one specific
fiscal effect which has been identified by the Department of Finance and the
Legislative Analyst is an increase in General Fund costs in 1996-97 of
approximately $277 million because the Law did not include a provision which
had been expected, and assumed in the Budget Act, to allow certain additional
reductions in State welfare payments.

Local Governments. The primary units of local government in California are
the counties, ranging in population from 1,300 (Alpine) to over 9,000,000 (Los
Angeles). Counties are responsible for the provision of many basic services,
including indigent health care, welfare, courts, jails and public safety in
unincorporated areas. There are also about 480 incorporated cities, and
thousands of other special districts formed for education, utility and other
services. The fiscal condition of local governments has been constrained since
the enactment of "Proposition 13" in 1978, which reduced and limited the future
growth of property taxes, and limited the ability of local governments to
impose other taxes. Counties, in particular, have had fewer options to raise
revenues than many other local government entities, and have been required to
maintain many services.

In the aftermath of Proposition 13, the State provided aid from the
General Fund to make up some of the loss of property tax moneys, including
taking over the principal responsibility for funding local K-12 schools and
community colleges. Under the pressure of the recent recession, the Legislature
has eliminated the remnants of this post-Proposition 13 aid to entities other
than K-14 education districts, although it has also provided additional funding
sources (such as sales taxes) and reduced mandates for local services. Many
counties continue to be under severe fiscal stress. While such stress has in
recent years most often been experienced by smaller, rural counties, larger
urban counties, such as Los Angeles, have also been affected.

On December 6, 1994, Orange County, California (the "County"), including
its pooled investment funds (the "Pools") filed for protection under Chapter 9
of the federal Bankruptcy Code, after reports that the Pools had suffered
significant market losses in their investments, causing a liquidity crisis for
the Pools and the County. More than 180 other public entities, most of which,
but not all, are located in the County, were also depositors in the Pools. The
County has reported the Pools' loss at about $1.69 billion, or about 23 percent
of their initial deposits of approximately $7.5 billion. Many of the entities
which deposited moneys in the Pools, including the County, faced

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interim and/or extended cash flow difficulties because of the bankruptcy filing
and may be required to reduce program or capital projects.

Orange County has embarked on a fiscal recovery plan based on sharp
reductions in services and personnel, and rescheduling of outstanding short
term debt using certain new revenues transferred to Orange County from other
local governments pursuant to special legislation enacted in October, 1995. The
termination of the bankruptcy was approved in June, 1996.

Constitutional and Statutory Limitations; Recent Initiatives; Pending
Litigation. Article XIIIA of the California Constitution (which resulted from
the voter-approved Proposition 13 in 1978) limits the taxing powers of
California public agencies. Article XIIIA provides that the maximum ad valorem
tax on real property cannot exceed 1% of the "full cash value" of the property,
and effectively prohibits the levying of any other ad valorem property tax for
general purposes. However, on May 3, 1986, Proposition 46, an amendment to
Article XIIIA, was approved by the voters of the State of California, creating
a new exemption under Article XIIIA permitting an increase in ad valorem taxes
on real property in excess of 1% for bonded indebtedness approved by two-thirds
of the voters voting on the proposed indebtedness. "Full cash value" is defined
as "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" is subject to annual
adjustment to reflect increases (not to exceed 2%) or decreases in the consumer
price index or comparable local data, or to reflect reductions in property
value caused by damage, destruction or other factors.

Article XIIIB of the California Constitution limits the amount of
appropriations of the State and of local governments to the amount of
appropriations of the entity for the prior year, adjusted for changes in the
cost of living, population and the services that the local government has
financial responsibility for providing. To the extent the revenues of the state
and/or local government exceed its appropriations, the excess revenues must be
rebated to the public either directly or through a tax decrease. Expenditures
for voter-approved debt services are not included in the appropriations limit.

Proposition 62. On September 28, 1995, the California Supreme Court
affirmed the lower court decision in Santa Clara County Local Transportation
Authority v. Guardino (the "Santa Clara Case"). The action held invalid a
half-cent sales tax to be levied by the Santa Clara County Local Transportation
Authority because it was approved by a majority but not two-thirds of the
voters in Santa Clara County voting on the tax. The California Supreme Court
decided the tax was invalid under Proposition 62, a statutory initiative
adopted at the November 4, 1986 election that (a) requires that any new or
higher taxes for general governmental purposes imposed by local governmental
entities be approved by a majority vote of the voters of the governmental
entity voting in an election on the tax, (b) 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
of the governmental entity voting in an election on the tax, (c) restricts the
use of revenues from a special tax to the purposes or for the service for which
the special tax was imposed, (d) prohibits the imposition of ad valorem taxes
on real property by local governmental entities except as permitted by article
XIII A of the California Constitution, (e) prohibits the imposition of
transaction taxes and sales taxes on the sale of real property by local
governmental entities, (f) required that any tax imposed by a local
governmental entity on or after August 1, 1985 be ratified by a majority vote
of the voters voting in an election on the tax within two years of November 5,
1986 or be terminated by November 15, 1988 and (g)

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requires a reduction of ad valorem property taxes allocable to the jurisdiction
imposing a tax not in compliance with its provisions equal to one dollar for
each dollar of revenue attributable to the invalid tax, for each year that the
tax is collected.

In deciding the Santa Clara Case on Proposition 62 grounds, the Court
disapproved the 1991 decision in City of Woodlake v. Logan ("Woodlake"), where
the Court of Appeal had held portions of Proposition 62 unconstitutional as a
referendum on taxes prohibited by the California Constitution. The California
Supreme Court determined that the voter approval requirement of Proposition 62
is a condition precedent to the enactment of each tax statute to which it
applies, while referendum refers to a process invoked only after a statute has
been enacted. Numerous taxes to which Proposition 62 would apply were imposed
or increased without any voter approval in reliance on Woodlake. The Court
noted as apparently distinguishable, but did not confirm, the 1988 decision in
City of Westminster v. County of Orange, that held unconstitutional the section
of Proposition 62 requiring voter approval of taxes imposed during the "window
period" of August 1, 1985 until November 5, 1986. Proposition 62 as an
initiative statute does not have the same level of authority as a
constitutional initiative, but is akin to legislation adopted by the State
Legislature.

Proposition 98. In 1988, California voters approved an initiative known as
Proposition 98. This initiative amends Article XIIIB to require that (i) the
California legislature establish a prudent state reserve fund in an amount as
it shall deem reasonable and necessary and (ii) revenues in excess of amounts
permitted to be spent and which would otherwise be returned pursuant to Article
XIIIB by revision of tax rates or fee schedules, be transferred and allocated
(up to a maximum of 40%) to the State School Fund and be expended solely for
purposes of instructional improvement and accountability. Proposition 98 also
amends Article XVI to require that the State of California provide a minimum
level of funding for public schools and community colleges. Commencing with the
1988-89 fiscal year, money to be applied by the State for the support of school
districts and community college districts shall not be less than the greater
of: (i) the amount which, as a percentage of the State general fund revenues
which may be appropriated pursuant to Article XIIIB, equals the percentage of
such State general fund revenues appropriated for school districts and
community college districts, respectively, in fiscal year 1986-87 or (ii) the
amount required to ensure that the total allocations to school districts and
community college districts from the State general fund proceeds of taxes
appropriated pursuant to Article XIIIB and allocated local proceeds of taxes
shall not be less than the total amount from these sources in the prior year,
adjusted for increases in enrollment and adjusted for changes in the costs of
living pursuant to the provisions of Article XIIIB. The initiative permits the
enactment of legislation, by a two-thirds vote, to suspend the minimum funding
requirement for one year. As a result of Proposition 98, funds that the State
might otherwise make available to its political subdivisions may be allocated
instead to satisfy such minimum funding level.

During the recent recession, 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. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,220 from Fiscal Year
1991-92 to Fiscal Year 1993-94.

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In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. As part of the
negotiations leading to the 1995-96 Budget Act, an oral agreement was reached
to settle this case. The settlement required adoption of legislation
satisfactory to the parties to implement its terms, which has occurred. The
court gave final approval of the settlement in late July, 1996.

The settlement provides, among other things, that both the State and
K-14 schools share in the repayment of prior years' emergency loans to schools.
Of the total $1.76 billion in loans, the State will repay $935 million by
forgiveness of the amount owed, while schools will repay $825 million. The
State share of the repayment will be reflected as an appropriation above the
current Proposition 98 base calculation. The schools' share of the repayment
will count as appropriations that count toward satisfying the Proposition 98
guarantee, or from "below" the current base. Repayments are spread over the
eight-year period of 1994-95 through 2001-02 to mitigate any adverse fiscal
impact. The Director of Finance has certified that a settlement has occurred,
allowing approximately $377 million in appropriations from the 1995-96 Fiscal
Year to schools to be disbursed in Fall 1996.

Proposition 187. On November 8, 1994, the voters in California approved
Proposition 187, an initiative statute ("Proposition 187"). Proposition 187
specifically prohibits funding by the State of social service, health care
services and public school education for the benefit of any person not verified
as either a United States citizen or a person legally admitted to the Untied
States. Among the provisions in Proposition 187 pertaining to public school
education, the measure requires, commencing January 1, 1995, that every school
district in the State verify the legal status of every child enrolling in the
district for the first time. By January 1, 1996, each school district must also
verify the legal status of children already enrolled in the district and of all
parents or guardians of all students. If the district "reasonably suspects"
that a student, parent or guardian is not legally in the United States, that
district must report the student to the United States Immigration and
Naturalization Service and certain other parties. The measure also prohibits a
school district from providing education to a student it does not verify as
either a United States citizen or a person legally admitted to the United
States. The State Legislative Analyst estimates that verification costs could
be in the tens of millions of dollars on a statewide level (including
verification costs incurred by other local governments) with first-year costs
potentially in excess of $100 million.

The reporting requirements may violate the Family Educational Rights and
Privacy Act ("FERPA"), which generally prohibits schools that receive federal
funds from disclosing information in student records without parental consent.
Compliance with FERPA is a condition of receiving federal education funds,
which total $2.3 billion annually to California school districts. The Secretary
of the Untied States Department of Education has indicated that the reporting
requirement in Proposition 18 could jeopardize the ability of school districts
to receive these funds.

Opponents of Proposition 187 have filed at least eight lawsuits
challenging the constitutionality and validity of the measure. On November 2,
1995, a United States District Court judge struck down the central provision of
Proposition 187 by ruling that parts of Proposition 187 conflict with federal
power over immigration. The ruling concluded that states may not enact their
own schemes to "regulate immigration or devise immigration regulations which
run parallel or purport to supplement federal immigration law." As a
consequence of the ruling, students may not be denied public education and may
not be asked about their immigration status when enrolling in public schools.
Further, the ruling struck down the requirements of Proposition 187 that
teachers and district employees report information on the

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immigrant status of students, parents, and guardians. An appeal has been filed.
It cannot be predicted what the nature or outcome of such appeal will be or the
ultimate fiscal impact of Proposition 187.

Article XIIIA, Article XIIIB and a number of propositions have been
adopted pursuant to California's constitutional initiative process. From time
to time, other initiative measures could be adopted by California voters. The
adoption of any such initiatives may cause California issuers to receive
reduced revenues, or to increase expenditures, or both.

Pending Litigation. The State is involved in a lawsuit, Thomas Hayes v.
Commission on State Mandates, related to state-mandated costs. The action
involves an appeal by the Director of Finance from a 1984 decision by the State
Board of Control, (now succeeded by the Commission on State Mandates
(Commission)). The Board of Control decided in favor of local school districts'
claims for reimbursement for special education programs for handicapped
students. The case was then brought to the trial court by the State and later
remanded to the Commission for redetermination. The Commission has since
expanded the claim to include supplemental claims filed by seven other
educational institutions; the issuance of a final consolidated decision is
anticipated sometime after September 1996. To date, the Legislature has not
appropriated funds. The liability to the State, if all potentially eligible
school districts pursue timely claims, has been estimated by the Department of
Finance at over $1 billion.

In the Yuba River flood litigation in which the State is a defendant in a
coordinated action, the trial court has found liability in inverse condemnation
and awarded damages of $500,000 to 12 sample plaintiffs. Potential liability to
the remaining 3,000 plaintiffs, from claims filed, ranges from $800 million to
$1.5 billion. The appellate court affirmed the trial court finding and the
State is pursuing its remaining appellate remedies. Damages have yet to be
determined for all but the 12 sample plaintiffs.

In Parr v. State of California, the federal district court issued an order
on March 1, 1995, withdrawing its December 1992 order which found that payment
of wages with registered warrants violated the Fair Labor Standards Act. The
parties have agreed to the terms of a settlement which have been approved by
the trial court.

The State is involved in a lawsuit related to contamination at the
Stringfellow toxic waste site. In United States, People of the State of
California v. J.B. Stringfellow, Jr., et al., the State is seeking recovery for
past costs of cleanup of the site, a declaration that the defendants are
jointly and severally liable for future costs, and an injunction ordering
completion of the cleanup. However, the defendants have filed a counterclaim
against the State for alleged negligent acts. Because the State is the present
owner of the site, the State may be found liable. Present estimates of the
cleanup range from $200 million to $800 million.

In the consolidated state case of Malibu Video Systems, et al. v. Kathleen
Brown and Abramovitz, et al. v. Wilson, et al., a stipulated judgment has been
entered requiring return of $119 million plus interest or specified special
funds over a period of up to five years beginning in fiscal year 1995-97. The
related federal cases will be dismissed.

A federal Court of Appeals in the case of Deanna Beno, et al. v. Donna
Shalala, et al., reversing a trial court ruling in favor of the State, recently
determined that the Secretary of the United States Department of Health and
Human Services violated the federal Administrative Procedure Act when she
approved California's Assistance Payment Demonstration Project, which, in part,
granted California a waiver from complying with requirements

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for state participation in the federal program for medical assistance
(Medicaid). The waiver had allowed California to reduce payments under the Aid
to Families with Dependent Children program (AFDC) below 1988 payment levels
without jeopardizing Medicaid requirements relating to maintenance of AFDC
payment levels. The Court of Appeals remanded the case to the trial court with
instructions to remand the demonstration project to the Secretary for
additional consideration of objections raised by the plaintiffs. The State has
submitted a renewed waiver request to the Secretary, which was granted.

One of the features of the 1994-95 Budget Act is a 2.3 percent reduction
in AFDC payments. In Welch v. Anderson, on August 19, 1994, the San Francisco
Superior Court issued a preliminary injunction against the California Director
of Social Services to prevent the 2.3 percent AFDC cuts from becoming effective
September 1, 1994. The case has been appealed, and on August 16, 1995, the
appellate court upheld the issuance of the preliminary injunction. However, due
to the approved federal waiver noted in the previous paragraph, the preliminary
injunction has been lifted and the grant reduction implemented. The case on the
merits remains pending.

The State is a respondent/defendant in two consolidated cases (American
Lung Association of California v. Wilson; Americans for Nonsmokers' Rights v.
State of California). These cases challenge the amendment of statutes
prescribing specific percentages of tobacco tax revenues to be placed in
accounts to be used for health education and research programs, as well as the
appropriation of approximately $63 million in tobacco tax funds for medical
treatment programs, pursuant to legislation enacted in July 1995. In September
1995, the Sacramento County Superior Court issued preliminary injunctions,
confirming an earlier temporary restraining order, prohibiting the State from
issuing, negotiating or processing warrants from the challenged appropriations.
The State has appealed the Court's rulings. A hearing on the petition for writ
of mandate is anticipated to be scheduled, which the State will contest.

In the case of Board of Administration, California Public Employees'
Retirement System, et al. v. Pete Wilson, Governor, et al., plaintiffs
challenged the constitutionality of legislation which deferred payment of the
State's employer contribution to the Public Employees' Retirement System
beginning in fiscal year 1992-93. On January 11, 1995, the Sacramento County
Superior Court entered a judgment finding that the legislation
unconstitutionally impaired the vested contract rights of PERS members. The
judgment provides for issuance of a writ of mandate directing State defendants
to disregard the provisions of the legislation, to implement the statute
governing employer contributions that existed before the changes in the
legislation found to be constitutional, and to transfer to PERS the 1993-94 and
1994-95 contributions that are unpaid to date. The State defendant has
appealed.

In Jernigan & Burleson v. State, filed in federal district court, the
prison inmate plaintiffs claim they are entitled to minimum wages while working
for the Prison Industry Authority. The inmates claim the State has violated the
Fair Labor Standards Act. The district court has ruled that the inmates are not
employees and the Ninth Circuit Court of Appeals has affirmed that ruling. The
plaintiffs have petitioned for a rehearing.

The State is a defendant in a coordinate action involving 3,000 plaintiffs
seeking recovery for damages caused by the Yuba River flood of February 1986.
The trial court has found liability in inverse condemnation and awarded damages
of $500,000 to 12 sample plaintiffs. The State's potential liability to the
remaining 3,000 plaintiffs from claims filed ranges from $800 million to $1.5
billion. An appeal has been filed.

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The State was a defendant in three lawsuits and numerous administrative
proceedings involving the exclusion of small business stock gains from certain
taxes. The lead case is Pearce Investments, Ltd., et al. (Gordon P. Getty
Family Trust) v. Franchise Tax Board. The State has settled for $20 million
and this litigation has been dismissed.

Other California issuers are subject to litigation which may in the event
of an adverse ruling affect the finances of such issuer.

Michigan Trust

Due primarily to the fact that the leading sector of the State's economy
is the manufacturing of durable goods, economic activity tends 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 fell from 33.1 percent in
1960 to 15.8 percent in 1994, durable goods manufacturing still represents a
sizeable proportion of the State's economy. As a result, any substantial
economic downturn is likely to have an adverse effect on the State's economy
and on the revenues of the State and its municipalities and school districts.
These conditions and other factors described below could adversely affect the
Michigan debt obligations that the Michigan trust acquires and the value of the
Units of the Trust.

Historically, the average monthly unemployment rate in the State has been
higher than the average figures for the United States. More recently, the
State's unemployment rate has remained near the national average. During 1995
the average monthly unemployment rate in the State was 5.3% as compared to a
national average of 5.6% in the United States.

The State's economy could continue to be affected by changes in the auto
industry, notably consolidation, reduction in administrative staff and plant
closings resulting from competitive pressures and overcapacity. The financial
impact on the local units of government in the areas in which plants are closed
could be more severe than on the State as a whole and could adversely affect
State revenues. State appropriations and State economic conditions in varying
degrees affect the cash flow and budgets of local units and agencies of the
State, including school districts and municipalities, as well as the State of
Michigan itself.

The State 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 State personal income in 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 is
refunding 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. The State Constitution further
provides that the proportion of State spending paid to all units of local
government to total State spending may not be reduced below the proportion in
effect in the 1978-79 fiscal year. The State Constitution requires that if the
spending does not meet the required level in a given year, an additional
appropriation for local units is required by 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.

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The State Constitution limits the purposes for which State general
obligation debt may be issued. Such debt is limited to short-term debt for
State operating purposes, short and long term debt for the purposes of making
loans to school districts and long term debt for voter approved purposes. 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 these service payments. The State's Constitution also directs or
restricts the use of certain revenues.

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 58% from the payment of State taxes
and 42% 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 59% 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.

In recent years, the State of Michigan has reported its financial results
in accordance with generally accepted accounting principles. For the fiscal
years ended September 30, 1990 and 1991, the State reported negative year-end
General Fund balances of $310.3 million and $169.4 million, respectively, but
ended the 1992, 1993, 1994 and 1995 fiscal years with its General Fund in
balance after transfers in 1993, 1994 and 1995 from the General Fund to the
Budget Stabilization Fund of $283 million, $464 million and $67.4 million,
respectively. Those and certain other transfers into and out of the Fund raised
the balance in the Budget Stabilization Fund to $987.9 million as of September
30, 1995. A positive cash balance in the combined General Fund/School Aid Fund
was recorded at September 30, 1990. In each of the three fiscal years ending
with the fiscal year ended September 30, 1993, the State undertook mid-year
actions to address projected year-end budget deficits, including expenditure
cuts and deferrals and one-time expenditures or revenue recognition
adjustments. From 1991 through 1993, the State experienced deteriorating cash
balances which have necessitated short-term borrowings and the deferral of
certain scheduled cash payments to local units of government. The State
borrowed between $500 and $900 million for cash flow purposes in the 1991 to
1993 fiscal years, $500 million in the 1995 fiscal year and $900 million in the
1996 fiscal year. The State did not require any short-term cash flow borrowing
for the 1994 fiscal year due to improved cash balances.

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 the taxing unit) 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 Trust are for local
units and have been issued on or subsequent to December 23, 1978, the ability
of such 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

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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, the State reduced revenue sharing
payments to municipalities below the level provided under formulas by
increasing amounts in each of the last five fiscal years and budgeted a
reduction of $81.26 million in the fiscal year which ended September 30, 1996.

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 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 areas of corrections, highway maintenance,
social services, tax collection, commerce and budgetary reductions to school
districts and governmental units and court funding.

Currently, the State's general obligation bonds are rated "Aa" by Moody's
Investors Service, Inc., "AA" by Fitch Investor's Services, Inc., and "AA" by
Standard & Poor's Corporation.

New York Trust

Special Factors Affecting New York

The information set forth below is derived from the official statements
and/or preliminary drafts of official statements prepared in connection with
the issuance of New York State and New York City municipal bonds. The Sponsors
have not independently verified this information.

Economic Trends. Over the long term, the State of New York (the "State")
and the City of New York (the "City") face serious potential economic problems.
The City accounts for approximately 41% of the State's population and personal
income, and the City's financial health affects the State in numerous ways. The
State historically has been one of the wealthiest states in the nation. For
decades, however, the State has grown more slowly than the nation as a whole,
gradually eroding its relative economic affluence. Statewide, urban centers
have experienced significant changes involving migration of the more affluent
to the suburbs and an influx of generally less affluent residents. Regionally,
the older Northeast cities have suffered because of the relative success that
the South and the West have had in attracting people and business. The City has
also had to face greater competition as other major cities have developed
financial and business capabilities which make them less dependent on the
specialized services traditionally available almost exclusively in the City.

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The State has for many years had a very high State and local tax burden
relative to other states. The State and its localities have used these taxes to
develop and maintain their transportation networks, public schools and
colleges, public health systems, other social services and recreational
facilities. Despite these benefits, the burden of State and local taxation, in
combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.

Notwithstanding the numerous initiatives that the State and its localities
may take to encourage economic growth and achieve balanced budgets, reductions
in Federal spending could materially and adversely affect the financial
condition and budget projections of the State and its localities.

New York City. The City, with a population of approximately 7.3 million,
is an international center of business and culture. Its non-manufacturing
economy is broadly based, with the banking and securities, life insurance,
communications, publishing, fashion design, retailing and construction
industries accounting for a significant portion of the City's total employment
earnings. Additionally, the City is the nation's leading tourist destination.
The City's manufacturing activity is conducted primarily in apparel and
printing.

The national economic downturn which began in July 1990 adversely affected
the local economy, which had been declining since late 1989. As a result, the
City experienced job losses in 1990 and 1991 and real Gross City Product
("GCP") fell in those two years. Beginning in calendar year 1992, the
improvement in the national economy helped stabilize conditions in the City.
Employment losses moderated toward year-end and real GCP increased, boosted by
strong wage gains. After noticeable improvements in the City's economy during
calendar year 1994, economic growth slowed in calendar year 1995, and the
City's current four-year financial plan assumes that moderate economic growth
will continue through calendar year 2000.

For each of the 1981 through 1995 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP"). The City was required to close substantial budget gaps in
recent years in order to maintain balanced operating results. For fiscal year
1995, the City adopted a budget which halted the trend in recent years of
substantial increases in City-funded spending from one year to the next. There
can be no assurance that the City will continue to maintain a balanced budget
as required by State law without additional tax or other revenue increases or
reductions in City services, which could adversely affect the City's economic
base.

Pursuant to the laws of the State, the City prepares an annual four-year
financial plan, which is reviewed and revised on a quarterly basis and which
includes the City's capital, revenue and expense projections and outlines
proposed gap-closing programs for years with projected budget gaps. The City's
current four-year financial plan projects substantial budget gaps for each of
the 1998 through 2000 fiscal years. The City is required to submit its
financial plans to review bodies, including the New York State Financial
Control Board ("Control Board").

The fourth quarter modification to the City's financial plan for the 1996
fiscal year, submitted to the Control Board on June 21, 1996 (the "1996
Modification"), projects a balanced budget in accordance with GAAP for the 1996
fiscal year, after taking into account a discretionary transfer of $243
million. The 1996 Modification assumes $119 million of savings from a proposed
increase in the investment earnings assumptions for pension assets, $39 million
of which, relating to the police pension fund, the City currently does not
expect to be achieved. The Financial Plan for the 1997 through 2000

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fiscal years, submitted to the Control Board on June 21, 1996, which relates to
the City, the Board of Education ("BOE") and the City University of New York
("CUNY"), is based on the City's expense and capital budgets for the City's
1997 fiscal year, which were adopted on June 12, 1996, and includes proposed
actions by the City for the 1997 fiscal year to close substantial projected
budget gaps resulting from lower than projected tax receipts and other revenues
and greater than projected expenditures.

Although the City has maintained balanced budgets in each of its last
fifteen fiscal years, and is projected to achieve balanced operating results
for the 1996 fiscal year, there can be no assurance that the gap-closing
actions proposed in the Financial Plan can be successfully implemented or that
the City will maintain a balanced budget in future years without additional
State aid, revenue increases or expenditure reductions. Additional tax
increases and reductions in essential City services could adversely affect the
City's economic base.

The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. There can be no assurance
that there will not be reductions in State aid to the City from amounts
currently projected or that State budgets in future fiscal years will be
adopted by the April 1 statutory deadline and that such reductions or delays
will not have adverse effects on the City's cash flow or expenditures. In
addition, the Federal Budget negotiation process could result in a reduction in
or a delay in the receipt of Federal grants in the City's 1997 fiscal year
which could have additional adverse effects on the City's cash flow or
revenues.

The Mayor is responsible for preparing the City's four-year financial
plan, including the City's current financial plan for the 1997 through 2000
fiscal years (the "1997-2000 Financial Plan" or "Financial Plan"). The City's
projections set forth in the Financial Plan are based on various assumptions
and contingencies which are uncertain and which may not materialize. Changes in
major assumptions could significantly affect the City's ability to balance its
budget as required by State law and to meet its annual cash flow and financing
requirements. Such assumptions and contingencies include the condition of the
regional and local economies, the impact on real estate tax revenues of the
real estate market, wage increases for City employees consistent with those
assumed in the Financial Plan, employment growth, the results of a pending
actuarial audit of the City's pension system which is expected to significantly
increase the City's annual pension costs, the ability to implement proposed
reductions in City personnel and other cost reduction initiatives, which may
require in certain cases the cooperation of the City's municipal unions, the
ability of the New York City Health and Hospitals Corporation ("HHC") and BOE
to take actions to offset reduced revenues, the ability to complete revenue
generating transactions and provision of State and Federal aid and mandate
relief and the impact on City revenues of proposals for Federal and State
welfare reform.

Implementation of the Financial Plan is also dependent upon the City's
ability to market its securities successfully in the public credit markets. The
City's financing program for fiscal years 1997 through 2000 contemplates the
issuance of $5.7 billion of general obligation bonds and $4.5 billion of bonds
to be issued by the proposed New York City Infrastructure Finance Authority
("Infrastructure Finance Authority") primarily to reconstruct and rehabilitate
the City's infrastructure and physical assets and to make other capital
investments. The creation of Infrastructure Finance Authority, which is subject
to the enactment of State legislation, is being proposed by the City as part of
the City's effort to avoid conflict with the forecast level of the
constitutional restrictions on the amount of debt the City is authorized to
issue. In addition, the City issues revenue and tax anticipation notes to
finance its seasonal working capital requirements. The success of projected

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public sales of City bonds and notes and Infrastructure Finance Authority bonds
will be subject to prevailing market conditions, and no assurance can be given
that such sales will be completed. If the City were unable to sell its general
obligation bonds and notes or bonds of the proposed Infrastructure Finance
Authority, it would be prevented from meeting its planned capital and operating
expenditures. Future developments concerning the City and public discussion of
such developments, as well as prevailing market conditions, may affect the
market for outstanding City general obligation bonds and notes.

The 1997-2000 Financial Plan projects revenues and expenditures for the
1997 fiscal year balanced in accordance with GAAP. The projections for the 1997
fiscal year reflect proposed actions to close a previously projected gap of
approximately $2.6 billion for the 1997 fiscal year. The proposed actions for
the 1997 fiscal year include (i) additional agency actions totaling $1.2
billion; (ii) a revised tax reduction program which would increase projected
tax revenues by $385 million due to the four-year extension of the 12.5%
personal income tax surcharge and other actions; (iii) savings resulting from
cost containment in entitlement programs to reduce City expenditures and
additional proposed State aid of $75 million; (iv) the assumed receipt of
revenues relating to rent payments for the City's airports totaling $269
million, which are currently the subject of a dispute with the Port Authority;
(v) the sale of the City's television station for $207 million; and (vi)
pension cost savings totaling $134 million resulting from a proposed increase
in the earnings assumption for pension assets from 8.5% to 8.75%, $40 million
of which the City currently does not expect to be achieved.

The Financial Plan also sets forth projections for the 1998 through 2000
fiscal years and projects gaps of $1.7 billion, $2.7 billion and $3.4 billion
for the 1998, 1999 and 2000 fiscal years, respectively.

The 1997-2000 Financial Plan is based on numerous assumptions, including
the condition of the City's and the region's economy and a modest employment
recovery and the concomitant receipt of economically sensitive tax revenues in
the amounts projected. The 1997-2000 Financial Plan is subject to various other
uncertainties and contingencies relating to, among other factors, the extent,
if any, to which wage increases for City employees exceed the annual wage costs
assumed for the 1997 through 2000 fiscal years; continuation of projected
interest earnings assumptions for pension fund assets and current assumptions
with respect to wages for City employees affecting the City's required pension
fund contributions; the willingness and ability of the State, in the context of
the State's current financial condition, to provide the aid contemplated by the
Financial Plan and to take various other actions to assist the City; the
ability of HHC, BOE and other such agencies to maintain balanced budgets; the
willingness of the Federal government to provide the amount of Federal aid
contemplated in the Financial Plan; adoption of the City's budgets by the City
Council in substantially the forms submitted by the Mayor; the ability of the
City to implement proposed reductions in City personnel and other cost
reduction initiatives, and the success with which the City controls
expenditures; the impact of conditions in the real estate market on real estate
tax revenues; the City's ability to market its securities successfully in the
public credit markets; and unanticipated expenditures that may be incurred as a
result of the need to maintain the City's infrastructure. Certain of these
assumptions have been questioned by the City Comptroller and other public
officials.

The projections for the 1997 through 2000 fiscal years also assume (i)
approval by the Governor and the State Legislature of the extension of the
12.5% personal income tax surcharge, which is projected to provide revenue of
$171 million, $447 million, $478 million and $507 million in the 1997 through
2000 fiscal years, respectively; (ii) collection of the projected rent payments
for the City's airports, which may depend on the successful completion of
negotiations with the Port Authority or the enforcement of the

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City's rights under the existing leases thereto through pending legal actions;
(iii) the ability of HHC and BOE to identify actions to offset substantial City
and State revenue reductions and the receipt by BOE of additional State aid;
and (iv) State approval of the cost containment initiatives and State aid
proposed by the City. The Financial Plan does not reflect any increased costs
which the City might incur as a result of welfare legislation recently enacted
by Congress.

In connection with the Financial Plan, the City has outlined a gap-closing
program for the 1998 through 2000 fiscal years to substantially reduce the
remaining $1.7 billion, $2.7 billion and $3.4 billion projected budget gaps for
such fiscal years. This program, which is not specified in detail, assumes
additional agency programs to reduce expenditures or increase revenues by $674
million, $959 million and $1.1 billion in the 1998 through 2000 fiscal years,
respectively; additional reductions in entitlement cost of $400 million, $750
million and $1.0 billion in the 1998 through 2000 fiscal years, respectively;
additional savings of $250 million, $300 million and $500 million in the 1998
through 2000 fiscal years, respectively, resulting from restructuring City
government by consolidating operations, privatization and mandate management
and other initiatives; additional proposed Federal and State aid of $105
million, $200 million and $300 million in the 1998 through 2000 fiscal years,
respectively; additional revenue initiatives and asset sales of $155 million,
$350 million and $400 million in the 1998 through 2000 fiscal years,
respectively; and the availability in each of the 1998 through 2000 fiscal
years of $100 million of the General Reserve.

The City's projected budget gaps for the 1999 and 2000 fiscal years do not
reflect the savings expected to result from prior years' programs to close the
gaps set forth in the Financial Plan. Thus, for example, recurring savings
anticipated from the actions which the City proposes to take to balance the
fiscal year 1998 budget are not taken into account in projecting the budget
gaps for the 1999 and 2000 fiscal years.

The City's financial plans have been the subject of extensive public
comment and criticism. On July 16, 1996, the staff of the City Comptroller
issued a report on the Financial Plan. The report concluded that the City's
fiscal situation remains serious, and that the City faces budgetary risks of
approximately $787 million to $941 million for the 1997 fiscal year, which
increase to $4.16 billion to $4.31 billion for fiscal year 2000.

On July 10, 1995, Standard & Poor's revised downward its rating on City
general obligation bonds from A- to BBB+ and removed City bonds from
CreditWatch. Standard & Poor's stated that "structural budgetary balance
remains elusive because of persistent softness in the City's economy,
highlighted by weak job growth and a growing dependence on the historically
volatile financial services sector". Other factors identified by Standard &
Poor's in lowering its rating on City bonds included a trend of using one-time
measures, including debt refinancings, to close projected budget gaps,
dependence on unratified labor savings to help balance the Financial Plan,
optimistic projections of additional federal and State aid or mandate relief, a
history of cash flow difficulties caused by State budget delays and continued
high debt levels.

On March 1, 1996, Moody's stated that the rating for City general
obligation bonds remains under review pending the outcome of the adoption of
the City's budget for the 1997 fiscal year, and, in light of the status of the
debate on public assistance and Medicaid reform; the enactment of a State
budget, upon which major assumptions regarding State aid are dependent, which
may be extensively delayed; and the seasoning of the City's economy with regard
to its strength and direction in the face of a potential national economic
slowdown. Since July 15, 1993, Fitch Investors Service, L.P.

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("Fitch") has rated City bonds A-. On February 28, 1996, Fitch placed the
City's general obligation bonds on FitchAlert with negative implications.

New York State and its Authorities. The State's current fiscal year
commenced on April 1, 1996, and ends on March 31, 1997, and is referred to
herein as the State's 1996-97 fiscal year. The State's budget for the 1996-97
fiscal year was enacted by the Legislature on July 13, 1996, more than three
months after the start of the fiscal year. The State Financial Plan for the
1996-97 fiscal year was formulated on July 25, 1996 and is based on the State's
budget as enacted by the Legislature and signed into law by the Governor, as
well as actual results for the first quarter of the current fiscal year. The
State's prior fiscal year commenced on April 1, 1995, and ended on March 31,
1996, and is referred to herein as the State's 1995-96 fiscal year. The State's
budget for the 1995-96 fiscal year was enacted by the Legislature on June 7,
1995, more than two months after the start of the fiscal year. The State
Financial Plan for the 1995-96 fiscal year was formulated on June 20, 1995 and
is based on the State's budget as enacted by the Legislature and signed into
law by the Governor.

The State closed projected budget gaps of $5.0 billion and $3.9 billion
for its 1995-96 and 1996-97 fiscal years, respectively. The 1997-98 gap was
projected at $1.44 billion, based on the Governor's proposed budget of December
1995. As a result of changes made in the enacted budget, that gap is now
expected to be larger. However, the gap is not expected to be as large as those
faced in the prior two fiscal years. The Governor has indicated that he will
propose to close any potential imbalance primarily through General Fund
expenditure reductions and without increases in taxes or deferrals of scheduled
tax reductions.

The 1996-97 State Financial Plan is projected to be balanced on a cash
basis. As compared to the Governor's proposed budget as revised on March 20,
1996, the State's adopted budget for 1996-97 increases General Fund spending by
$842 million, primarily from increases for education, special education and
higher education ($563 million). The balance represents funding increases to a
variety of other programs, including community projects and increased
assistance to fiscally distressed cities. Resources used to fund these
additional expenditures include $540 million in increased revenues projected
for 1996-97 based on higher-than-projected tax collections during the first
half of calendar 1996, $110 million in projected receipts from a new State tax
amnesty program, and other resources including certain non-recurring resources.
The total amount of non-recurring resources included in the 1996-97 State
budget is projected by the State Division of the Budget ("DOB") to be $1.3
billion, or 3.9 percent of total General Fund receipts.

The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the State. Because of the uncertainty and
unpredictability of changes in these factors, their impact cannot be fully
included in the assumptions underlying the State's projections. There can be no
assurance that the State economy will not experience results that are worse
than predicted, with corresponding material and adverse effects on the State's
financial projections.

The DOB believes that its projections of receipts and disbursements
relating to the current State Financial Plan, and the assumptions on which they
are based, are reasonable. Actual results, however, could differ materially and
adversely from the projections set forth below, and those projections may be
changed materially and adversely from time to time.

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The State Financial Plan is based on a June 1996 projection by DOB of
national and State economic activity. The national economy has resumed a more
robust rate of growth after a "soft landing" in 1995, with over 11 million jobs
added nationally since early 1992. The State economy has continued to expand,
but growth remains somewhat slower than in the nation. Although the State has
added approximately 240,000 jobs since late 1992, employment growth in the
State has been hindered during recent years by significant cutbacks in the
computer and instrument manufacturing, utility, defense, and banking
industries. Government downsizing has also moderated these job gains. DOB
forecasts that national economic growth will be quite strong in the first half
of calendar 1996, but will moderate considerably as the year progresses. The
overall growth rate of the national economy during calendar year 1996 is
expected to be just slightly below the "consensus" of a widely followed survey
of national economic forecasters. Growth in real Gross Domestic Product during
1996 is projected to be moderate at 2.1 percent, with anticipated declines in
federal spending and net exports more than offset by increases in consumption
and investment. Inflation, as measured by the Consumer Price Index, is
projected to be contained at about 3 percent due to moderate wage growth and
foreign competition. Personal income and wages are projected to increase by
about 5 percent.

The forecast of the State's economy shows modest expansion during the
first half of calendar 1996, but some slowdown is projected during the second
half of the year. Although industries that export goods and services are
expected to continue to do well, growth is expected to be slowed by government
cutbacks at all levels and by tight fiscal constraints on health and social
services. On an average annual basis, employment growth in the State is
expected to be up slightly from the 1995 rate. Personal income is expected to
record moderate gains in 1996. Bonus payments in the securities industry are
expected to increase further from last year's record level.

The forecast for continued slow growth, and any resultant impact on the
State's 1996-97 Financial Plan, contains some uncertainties.
Stronger-than-expected gains in employment could lead to a significant
improvement in consumption spending. Investments could also remain robust.
Conversely, the prospect of a continuing deadlock on federal budget deficit
reduction or fears of excessively rapid economic growth could create upward
pressures on interest rates. In addition, the State economic forecast could
over- or underestimate the level of future bonus payments or inflation growth,
resulting in forecasted average wage growth that could differ significantly
from actual growth. Similarly, the State forecast could fail to correctly
account for expected declines in government and banking employment and the
direction of employment change that is likely to accompany telecommunications
deregulation.

The General Fund is the principal operating fund of the State and is used
to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular
purposes. In the State's 1996-97 fiscal year, the General Fund is expected to
account for approximately 47 percent of total governmental-fund receipts and 71
percent of total governmental-fund disbursements. General Fund moneys are also
transferred to other funds, primarily to support certain capital projects and
debt service payments in other fund types.

The General Fund is projected to be balanced on a cash basis for the
1996-97 fiscal year. Total receipts and transfers from other funds are
projected to be $33.17 billion, an increase of $365 million from the prior
fiscal year. Total General Fund disbursements and transfers to other funds are
projected to be $33.12 billion, an increase of $444 million from the total in
the prior fiscal year.

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The State reported a General Fund operating surplus of $380 million for
the 1995-96 fiscal year, as compared to an operating deficit of $1.43 billion
for the prior fiscal year. The 1995-96 fiscal year surplus reflects several
major factors, including the cash-basis surplus and the benefit of $529 million
in Local Government Assistance Corporation ("LGAC") bond proceeds which were
used to fund various local assistance programs. This was offset in part by a
$437 million increase in tax refund liability primarily resulting from the
effects of ongoing tax reductions and (to a lesser extent) changes in accrual
measurement policies, and increases in various other expenditure accruals.
Revenues increased $530 million (nearly 1.7 percent) over the prior fiscal year
with an increase in personal income taxes and miscellaneous revenues offset by
decreases in business and other taxes. Expenditures decreased $716 million (2.2
percent) from the prior fiscal year with the largest decrease occurring in
State aid for social services programs and State operations spending. Net other
financing sources nearly tripled, increasing $561 million, due primarily to an
increase in bonds issued by LGAC, a transfer from the Mass Transportation
Operating Assistance Fund and transfers from public benefit corporations.

On January 13, 1992, Standard & Poor's reduced its ratings on the State's
general obligation bonds from A to A- and, in addition, reduced its ratings on
the State's moral obligation, lease purchase, guaranteed and contractual
obligation debt. Standard & Poor's also continued its negative rating outlook
assessment on State general obligation debt. On April 26, 1993, Standard &
Poor's revised the rating outlook assessment to stable. On February 14, 1994,
Standard & Poor's raised its outlook to positive and, on October 3, 1995,
confirmed its A- rating. On January 6, 1992, Moody's reduced its ratings on
outstanding limited-liability State lease purchase and contractual obligations
from A to Baa1. On October 2, 1995, Moody's reconfirmed its A rating on the
State's general obligation long-term indebtedness.

Litigation. The court actions in which the State is a defendant generally
involve State programs and miscellaneous tort, real property, and contract
claims. While the ultimate outcome and fiscal impact, if any, on the State of
those proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon the
State's ability to maintain a balanced 1996-97 State Financial Plan.

The claims involving the City other than routine litigation incidental to
the performance of their governmental and other functions and certain other
litigation arise out of alleged constitutional violations, torts, breaches of
contract and other violations of law and condemnation proceedings. While the
ultimate outcome and fiscal impact, if any, on the City of those proceedings
and claims are not currently predictable, adverse determinations in certain of
them might have a material adverse effect upon the City's ability to carry out
the 1997-2000 Financial Plan. The City has estimated that its potential future
liability on account of outstanding claims against it as of June 30, 1995
amounted to approximately $2.5 billion.

Pennsylvania Trust

The following information constitutes only a brief summary of a number of
the complex factors which may impact issuers of Pennsylvania municipal
securities and does not purport to be a complete or exhaustive description of
all conditions to which issuers of Pennsylvania municipal securities may be
subject. Additionally, many factors, including national, economic, social and
environmental policies and conditions, which are not within the control of such
issuers, could have an adverse impact on the financial condition of such
issuers. The Pennsylvania Trust cannot predict whether or to what extent such
factors or other factors may affect the issuers of Pennsylvania municipal

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securities, the market value or marketability of such securities or the ability
of the respective issuers of such securities held by the Pennsylvania Trust to
pay interest on or principal of such securities. The creditworthiness of
obligations issued by local Pennsylvania issuers may be unrelated to the
creditworthiness of obligations issued by the Commonwealth of Pennsylvania, and
there is no obligation on the part of the Commonwealth of Pennsylvania to make
payments on such local obligations. There may be specific factors that are
applicable in connection with investment in the obligations of particular
issuers located within Pennsylvania, and it is possible the Pennsylvania Trust
has invested in obligations of particular issuers as to which such specific
factors are applicable. However, the information set forth below is intended
only as a general summary and not as a discussion of any specific factors that
may affect any particular issuer of Pennsylvania municipal securities.

State Finance

State Economy. The Commonwealth of Pennsylvania is one of the most
populous states, ranking fifth behind California, New York, Texas and Florida.
Pennsylvania is an established yet growing state with a diversified economy. It
is the headquarters for 58 major corporations. Pennsylvania historically has
been identified as a heavy industry state although that reputation has changed
over the last thirty years as the industrial composition of the Commonwealth
diversified when the coal, steel and railroad industries began to decline. A
more diversified economy was necessary as the traditionally strong industries
in the Commonwealth declined due to a long-term shift in jobs, investment and
workers away from the northeast part of the nation. The major sources of growth
in Pennsylvania are in the service sector, including trade, medical and the
health services, education and financial institutions. Pennsylvania's
agricultural industries are also an important component of the Commonwealth's
economic structure, accounting for more than $3.6 billion in crop and livestock
products annually, while agribusiness and food related industries support $39
billion in economic activity annually.

Non-agricultural employment in Pennsylvania over the last ten years
increased at an annual rate of 1.02 percent. This rate compares to a 0.36
percent rate for the Middle Atlantic region and 1.78 percent for the U.S.
during the period 1990 through 1992. Non-agricultural employment declined by
94,000 jobs. By 1994 employment exceeded the pre-recession level. For the last
three years, employment in the Commonwealth has increased 3.4 percent. The
growth in employment experienced in Pennsylvania during this period is higher
than the 2.9 percent growth in the Middle Atlantic region. Non-manufacturing
employment has increased in recent years to its 1995 level of 82.1 percent of
total employment in Pennsylvania. Consequently, manufacturing employment
constitutes a diminished share of total employment within Pennsylvania.
Manufacturing, contributing 17.9 percent of 1995 non-agricultural employment,
has fallen behind both the services sector and the trade sector as the largest
single source of employment within the Commonwealth. In 1993 the services
sector accounted for 30.4 percent of all non-agricultural employment while the
trade sector accounted for 22.8 percent.

Pennsylvania's annual average unemployment rate was below the national
average from 1986 until 1990. Slower economic growth caused the unemployment
rate in the Commonwealth to rise to 6.9 percent in 1991 and 7.5 percent in
1992. The resumption of faster economic growth resulted in a decrease in the
Commonwealth's unemployment rate to 7.0 percent in 1993. As of March 1996, the
most recent month for which data is available, the seasonally adjusted
unemployment rate for the Commonwealth was 5.6 percent, the same rate as that
for the United States.

The Commonwealth operates under an annual budget which is formulated and
submitted for legislative approval by the Governor each February. The

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Pennsylvania Constitution requires that the Governor's budget proposal consist
of three parts: (i) a balanced operating budget setting forth proposed
expenditures and estimated revenues from all sources and, if estimated revenues
and available surplus are less than proposed expenditures, recommending
specific additional sources of revenue sufficient to pay the deficiency; (ii) a
capital budget setting forth proposed expenditures to be financed from the
proceeds of obligations of the Commonwealth or its agencies or from operating
funds; and (iii) a financial plan for not less than the succeeding five fiscal
years, which includes for each year projected operating expenditures and
estimated revenues and projected expenditures for capital projects. The General
Assembly may add, change or delete any items in the budget prepared by the
Governor, but the Governor retains veto power over the individual
appropriations passed by the legislature. A gubernatorial veto can be
overridden only by a two-thirds majority of all members of each house. The
Commonwealth's fiscal year begins on July 1 and ends on June 30.

The Constitution and the laws of the Commonwealth require all payments
from the treasury, with the exception of refunds of taxes, licenses, fees and
other charges, to be made only by duly enacted appropriations. Amounts
appropriated from a fund may not exceed its actual and estimated revenues for
the fiscal year plus any surplus available. Appropriations from the principal
operating funds of the Commonwealth (the General Fund, the Motor License Fund
and the State Lottery Fund) are generally made for one fiscal year and are
returned to the unappropriated surplus of the fund (a lapse) if not spent or
encumbered by the end of the fiscal year.

Pennsylvania uses the "fund" method of accounting for receipts and
disbursements. For purposes of government accounting, a "fund" is an
independent fiscal and accounting entity with a self-balancing set of accounts,
recording cash and/or other resources together with all related liabilities and
equities which are segregated for the purpose of carrying on specific
activities or attaining certain objectives in accordance with the fund's
special regulations, restrictions or limitations. In the Commonwealth, funds
are established by legislative enactment or in certain cases by administrative
action. Over 150 funds have been established for the purpose of recording the
receipts and disbursements of monies received by the Commonwealth. Annual
budgets are adopted each fiscal year for the principal operating funds of the
Commonwealth and several other special revenue funds. Expenditures and
encumbrances against these funds may only be made pursuant to appropriation
measures enacted by the General Assembly and approved by the Governor. The
General Fund, the Commonwealth's largest fund, receives all tax revenues,
non-tax revenues and federal grants and entitlements that are not specified by
law to be deposited elsewhere. The majority of the Commonwealth's operating and
administrative expenses are payable from the General Fund. Debt service on all
bond indebtedness of the Commonwealth, except that issued for highway purposes
or for the benefit of other special revenue funds, is payable from the General
Fund.

Financial information for the principal operating funds of the
Commonwealth is maintained on a budgetary basis of accounting. Since 1984, the
Commonwealth has also prepared annual financial statements in accordance with
generally accepted accounting principles ("GAAP"). Financial statements
prepared in accordance with GAAP have been audited jointly by the Auditor
General of the Commonwealth and an independent public accounting firm each year
since 1984. Budgetary basis financial reports are based on a modified cash
basis of accounting as opposed to a modified accrual basis of accounting
prescribed by GAAP. The budgetary basis financial information maintained by the
Commonwealth to monitor and enforce budgetary control is adjusted at fiscal
year-end to reflect appropriate accruals for financial reporting in conformity
with GAAP.

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Financial Results for Recent Fiscal Years (GAAP Basis). For the five year
period fiscal 1991 through fiscal 1995, total revenues and other sources rose
at a 9.1 percent average annual rate while total expenditures and other uses
grew by 7.4 percent annually. Over two-thirds of the increase in total revenues
and other sources during this period occurred during fiscal 1992 when a $2.7
billion tax increase was enacted to address a fiscal 1991 budget deficit and to
fund increased expenditures for fiscal 1992. For the four year period fiscal
1992 through fiscal 1995, total revenues and other sources increased at an
annual average of 3.3 percent, less than one-half the rate of increase for the
five year period beginning with fiscal 1991. This slower rate of growth was
due, in part, to tax rate reductions and other tax law revisions that
restrained the growth of tax receipts for fiscal years 1993, 1994 and 1995.

Expenditures and other uses followed a pattern similar to that for
revenues, although with smaller growth rates, during the fiscal 1991 through
fiscal 1995 period. Program areas having the largest increase in costs for the
fiscal 1991 to fiscal 1995 period were for protection of persons and property,
due to an expansion of state prisons, and for public health and welfare, due to
rising caseloads, program utilization and increased prices. Recently, efforts
to restrain the rapid expansion of public health and welfare program costs have
resulted in expenditure increases at or below the total rate of increase for
total expenditures in each fiscal year. For the period fiscal 1992 through
fiscal 1995, public health and welfare costs increased by an average annual
rate of 3.5 percent, well below the 5.2 percent average for total expenditures
and other uses during the same period.

Fiscal 1994 Financial Results (GAAP Basis). The fund balance increased
$194.0 million over the prior year's fund balance due largely to an increased
reserve for encumbrances and an increase in other designated funds. The
unreserved-undesignated balance increased by $14.8 million to $79.2 million.
Revenues and other sources increased by 1.8 percent over the prior fiscal year
while expenditures and other uses increased by 4.3 percent. Consequently, the
operating surplus declined to $179.4 million for fiscal 1994 from $686.3
million for fiscal 1993.

Budgetary Basis. Commonwealth revenues during the fiscal year totaled
$15,210.7 million, $38.6 million above the fiscal year estimate, and 3.9
percent over Commonwealth revenues during the previous fiscal year. The sales
tax was an important contributor to the higher than estimated revenues.
Collections from the sales tax were $5.124 billion, a 6.1 percent increase from
the prior fiscal year and $81.3 million above estimate. The strength of
collections from the sales tax offset the lower than budgeted performance of
the personal income tax which ended the fiscal year $74.4 million below
estimate. The shortfall in the personal income tax was largely due to
shortfalls in income not subject to withholding such as interest, dividends and
other income. Tax refunds in fiscal 1994 were reduced substantially below the
$530 million amount provided in fiscal 1993. The higher fiscal 1993 amount and
the reduced fiscal 1994 amount occurred because reserves of approximately $160
million were added to fiscal 1993 tax refunds to cover potential payments if
the Commonwealth lost litigation known as Philadelphia Suburban Corp. v.
Commonwealth. Those reserves were carried into fiscal 1994 until the litigation
was decided in the Commonwealth's favor in December 1993 and $147.3 million of
reserves for tax refunds were released.

Expenditures, excluding pooled financing expenditures and net of all
fiscal 1994 appropriation lapses, totaled $14,934.4 million representing a 7.2
percent increase over fiscal 1993 expenditures. Medical assistance and
corrections spending contributed to the rate of spending growth for the fiscal
year.

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The Commonwealth maintained an operating balance on a budgetary basis for
fiscal 1994 producing a fiscal year ending unappropriated surplus of $335.8
million. By state statute, ten percent ($33.6 million) of that surplus was
transferred to the Tax Stabilization Reserve Fund and the remaining balance was
carried over into the 1995 fiscal year.

Fiscal 1995 Fiscal Results (GAAP Basis). Revenues and other sources
totaled $23,771.6 million, an increase of $1,135.0 million (0.5 percent) over
the prior fiscal year. The largest increase was $817.9 million in taxes which
represents a 5.6 percent increase over taxes in the prior fiscal year.
Expenditures and other uses rose by $1,364.1 million to $23,821.4 million, an
increase over the prior fiscal year of 6.1 percent. Consequently, an operating
deficit of $49.8 million was recorded for the fiscal year and led to a decline
in fund balance to $688.3 million at June 30, 1995. Two items predominantly
contributed to the fund balance decline. First, a more comprehensive procedure
was used for fiscal 1995 to compute the liabilities for certain public welfare
programs leading to an increase for the year-end accruals. Second, a change to
the methodology to calculate the year-end accrual for corporate tax payables
increased the tax refund liability by $72 million for the 1995 fiscal year when
compared to the previous fiscal year.

The fund balance for June 30, 1994, was restated for the fiscal 1995
financial statements. That restatement totaled $116.7 million to recognize
previously unreported revenues and expenditures for fiscal 1994. The fund
balance for June 30, 1994, as restated, was $776.3 million.

Budgetary Basis. Commonwealth revenues for the fiscal year were above
estimate and exceeded fiscal year expenditures and encumbrances. Fiscal 1995
was the fourth consecutive fiscal year the Commonwealth reported an increase in
the fiscal year-end unappropriated balance. Prior to reserves for transfer to
the Tax Stabilization Reserve Fund, the fiscal 1995 closing unappropriated
surplus was $540.0 million, an increase of $204.2 million over the fiscal 1994
closing unappropriated surplus prior to transfers.

Commonwealth revenues were $459.4 million, 2.9 percent, above the estimate
of revenues used at the time the budget was enacted. Corporation taxes
contributed $329.4 million of the additional receipts largely due to higher
receipts from the corporate net income tax. Fiscal 1995 revenues from the
corporate net income tax were 22.6 percent over collections in fiscal 1994 and
include the effects of the reduction of the tax rate from 12.25 percent to
11.99 percent that became effective with tax years beginning on and after
January 1, 1994. The sales and use tax and miscellaneous revenues also showed
strong year-over-year growth that produced above-estimate revenue collections.
Sales and use tax revenues were $5.526.9 million, $128.8 million above the
enacted budget estimate and 7.9 percent over fiscal 1994 collections. Tax
receipts from both motor vehicle and non-motor vehicle sales contributed to the
higher collections. Miscellaneous revenue collections for fiscal 1995 were
$183.5 million, $44.9 million above estimate and were largely due to additional
investment earnings, escheat revenues and other miscellaneous revenues.
Personal income tax receipts for fiscal 1995 were slightly above the budgeted
estimate. Receipts totaled $5,083.2 million, $5.1 million above the estimate
and 4.3 percent over collections for fiscal 1994. The higher than estimated
revenues from tax sources were due to faster economic growth in the national
and state economy than had been projected when the budget was adopted. The
higher rate of economic growth for the nation and the state gave rise to
increases in employment, income and sales higher than expected which translated
into above-estimate tax revenues.

Tax revenue refunds were also higher than estimated in the budget. The
reserve for tax refunds was increased during the fiscal year from $410 million
to $460 million, a 110 percent increase over refunds budgeted in fiscal 1994
which were unusually low due to a carryover of $160 million of reserves for

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tax refunds from fiscal 1993. An acceleration of the tax refund process for
corporation taxes, litigation settlements, and an increase in the personal
income tax poverty exemption contributed to tax refunds being higher than
initially budgeted.

Expenditures from Commonwealth revenues (excluding pooled financing
expenditures), including $65.5 million of supplemental appropriations enacted
at the close of the 1995 fiscal year, totaled $15,674.7 million, representing
an increase of 5 percent over spending during fiscal 1994.

Funds held in reserve at the end of fiscal 1995 for transfer to the Tax
Stabilization Reserve Fund totaled $111.0 million. Of this total, $54.0 million
represents the 10 percent transfer of the fiscal year-end balance prescribed in
prior state law. The remaining $57.0 million represents an additional 5 percent
of the year-end balance and an additional $30 million proposed by the Governor
to be transferred to the Tax Stabilization Reserve Fund. These additional
reserves for transfer were authorized in legislation recently enacted by the
General Assembly. The Tax Stabilization Reserve Fund is anticipated to have an
available balance of $182.8 million at June 30, 1996, representing
approximately 1.1 percent of general fund annual commonwealth revenues.

Fiscal 1996 Budget: The enacted fiscal 1996 budget provides for
expenditures from commonwealth revenues of $16,165.7 million, a 2.7 percent
increase over total appropriations from commonwealth revenues in fiscal 1995.
The appropriations increase for fiscal 1996 is one of the lowest rates in
recent years. The fiscal 1996 budget is based on anticipated commonwealth
revenues, net of enacted tax changes, of $16,268.7 million, an increase over
actual fiscal 1995 commonwealth revenues of 0.3 percent. Excluding the
estimated effects of the tax changes enacted in 1994 and 1995, commonwealth
revenues for fiscal 1996 are estimated to increase by approximately 2.9
percent. The fiscal 1996 revenue estimate is based on a forecast of the
national economy for gross domestic product growth to slow from 4.1 percent in
1994 to an average annual rate for 1995 of 2.4 percent and then to 1.3 percent
in 1996. The lower rate of growth is a consequence of anticipated smaller rates
of increases for consumer spending, business fixed investment and exports. The
anticipated decline in the rate of economic growth is also expected to lead to
an increase in the national unemployment rate to a rate above 6 percent by the
end of 1995 and above a rate of 6.5 percent by the end of fiscal 1996. The U.S.
Department of Labor reported the national unemployment rate for 1995 to be 5.6
percent.

Tax changes enacted with the fiscal 1996 budget totaled $282.9 million,
representing an approximate 1.7 percent of base revenues. The largest dollar
value changes were in the corporate net income tax where the scheduled 1997
reduction of the tax rate to 9.99 percent was accelerated to the 1995 tax year;
a double-weighting was provided for the sales factor of the corporate net
income apportionment calculation; and the maximum annual allowance for the net
operating loss deduction was increased from $500 thousand to $1 million. The
fiscal 1996 cost of these corporate income tax changes is estimated to be
$210.8 million representing approximately 75 percent of the fiscal year's tax
reduction. Other major components of the tax reduction include a $12.1 million
decrease for the capital stock and franchise tax from an increase in the basic
exemption; $24.7 million from the repeal of the tax on annuities; and $27.9
million from an acceleration of the scheduled phase-out of the inheritance tax
on transfers of certain property to a surviving spouse. A 90- day amnesty
program was also authorized in the tax bill. The amnesty program was available
to taxpayers from October 1995 through January 1996. Tax and interest revenues
received from the tax amnesty program after payment of administration costs
were credited to the appropriate fund. Receipts credited to the General Fund in
excess of $67 million, plus any shortfall in delinquent

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tax collection below those in fiscal 1995, will be deposited into a restricted
account in the General Fund for later distribution.

Increases in authorized spending for fiscal 1996 emphasize education.
Appropriations for the basic subsidy for public schools were increased $143
million, representing a 4.4 percent increase. This increase reversed a
four-year trend of a declining budget share for education. A limited program to
permit certain residents to choose the school district or private school to
provide their children's education was funded in the budget, but enabling
legislation for the program has yet to be enacted. The budget also contemplates
several changes to certain public welfare programs. Changes made by the General
Assembly include the termination of the category of transitionally needy for
cash assistance after June 30, 1995. Newly qualifying members of this category
no longer are eligible for cash payments for up to two months every two years,
but will continue to be eligible for food stamps and medical assistance
benefits. The legislation also eliminated cash assistance payments for certain
other limited recipients. Estimated savings are approximately $27 million based
on a caseload of approximately 90,000 persons per year. The enacted budget also
included most of the Governor's proposed consolidation and elimination of
several organizations and or appropriations. The consolidated programs were
absorbed within existing organizations. Savings of $5.2 million are anticipated
to result from these consolidations and eliminations.

Revised estimates for the fiscal 1996 budget were included in the
Governor's February 1996 submission of his fiscal 1997 budget proposal.
Supplemental appropriation funding needs were recommended totaling $54.2
million, representing 0.3 percent of approved appropriations for fiscal 1996.
The majority of the supplemental appropriations are for the Department of
Corrections to meet the additional operational costs arising from a larger
inmate population than budgeted, and for the Department of Education to meet
local school subsidy costs which were underestimated in the adopted budget. All
anticipated supplemental appropriation needs for the Department of Public
Welfare are expected to be met from a reallocation of appropriation authority
within the Department. Funding for the requested supplemental appropriations
will be provided by appropriation lapses anticipated during the fiscal year.
Appropriation lapses totaling $50 million from prior fiscal years'
appropriations and $90 million from current fiscal year appropriations are
expected. The $140 million total appropriation lapses estimated for fiscal 1996
compares to actual appropriation lapses totaling $205 million and $194 million
during fiscal 1995 and fiscal 1994 respectively. The General Assembly has not
yet approved the requested supplemental appropriations.

Commonwealth revenues for fiscal 1996 are anticipated to be $2.5 million
(less than 0.1 percent) over the official estimate of revenues for the fiscal
year. Within the revised estimate, receipts from the corporate net income tax
and interest earnings are anticipated to exceed the official estimate while
receipts from the sales and use tax, the personal income tax and the gross
receipts tax are anticipated to fall below their official estimate levels.

The fiscal year ending unappropriated surplus (prior to any transfer to
the Tax Stabilization Reserve Fund) is estimated to be $118.3 million, an
increase of $105.6 million over the enacted budget estimate. The increase is
primarily due to the amount of appropriation lapses now anticipated in excess
of supplemental appropriation needs and to a lower estimate of tax refunds.

For the current fiscal year through April 1996, Commonwealth revenue
receipts have totaled $11.9 million (less than one-tenth percent) above the
estimate for the period. Higher than estimated receipts for non-tax revenues
have helped offset revenue shortfalls in tax collections. Receipts from both
the corporate taxes and the sales and use tax are lagging behind estimates for

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the fiscal year-to-date period, while receipts from the personal income tax and
non-tax revenue have exceeded their estimates to-date.

Fiscal 1997 Proposed Budget. In February 1996, the Governor presented his
proposed fiscal 1997 budget to the General Assembly. Proposed appropriations
from General Fund Commonwealth revenues totals $16,189.9 million, a reduction
from the estimated $16,219.9 million (including proposed supplemental
appropriations) for fiscal 1996. The proposed reduction represents a decline of
approximately 0.2 percent in appropriations from the prior fiscal year. Revenue
receipts are estimated to increase by $403.9 million, or 2.5 percent, over
anticipated receipts for fiscal 1996. The anticipated increased revenues,
together with the projected $140 million of appropriation lapses during fiscal
1996 and the proposed draw-down of approximately $95 million of surplus provide
the funding sources for the proposed budget. The proposed drawdown of the
fiscal 1996 unappropriated surplus produces a projected 1997 fiscal year end
surplus of under $5 million, without any consideration of possible
appropriation lapses for fiscal 1997.

The decline in appropriation authority over the prior fiscal year in the
proposed budget relies on several program changes. The largest changes proposed
are $329 million of cost containment efforts in public health and welfare
programs. The largest savings are generated by proposed changes in eligibility
criteria. Savings of $249 million are projected from the elimination of medical
assistance benefits for able-bodied adults without children and $40 million
from tightened standards of employability for those collecting benefits. Other
proposed changes, including changes contained in proposed federal welfare
reform measures, provide an additional $39 million of budgetary savings.
Program reductions are also planned for the residential portion of the mental
health/mental retardation program that could involve a limited number of staff
cuts at state institutions. The budget also relies on certain provisions of
proposed federal welfare reforms. In particular, an increase in the proportion
of federal funding for medical assistance is assumed which is anticipated to
provide $261.8 million of additional federal funds and a commensurate reduction
in required state funds. Other significant cost restraints include reductions
to appropriations for the state-aided colleges and universities and no
increases for the state-related colleges and universities. Funds for basic
education programs to local school districts are proposed to increase slightly.
The largest increase, $33.3 million, is proposed for an initiative to improve
the use of technology in learning. A restructuring of the economic development
programs and incentives of the Commonwealth are also proposed to combine and
improve the delivery of such programs. A proposed securitization of current
loans held by the Sunny Day Fund is budgeted to provide a portion of the
initial capitalization for the realigned programs. The current trend of
escalating costs of the corrections program continues in this budget. An amount
of $80.3 million is included to meet the increased costs of the rising prison
population.

The proposed fiscal 1997 budget includes tax reductions totaling $60.2
million. Included in the proposed reductions are a 0.25 mill reduction to the
tax rate for the capital stock and franchise taxes, an exemption of certain
computer services from the sales and use tax, and a $1,000 per job tax credit
for newly created jobs. All require legislative enactment.

The General Assembly is considering the Governor's proposed budget in
committee deliberations and floor action on implementing legislation. The
various legislative bills required to implement the proposed budget have begun
to move through the legislative process. However, legislation enacting medical
assistance program changes estimated in the proposed budget to produce
approximately $249 million in savings was approved by the Senate but rejected
by the House of Representatives. Delay in the enactment of the proposed changes
beyond March 1996 will impede timely implementation of the proposed changes
and, in the absence of other budgetary measures, result in higher

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spending than anticipated in the proposed fiscal 1997 budget. Appropriations
committees of the General Assembly are considering 1997 fiscal year budget
appropriations, and upon committee approval of appropriation bills, will be
considered by each house. The General Assembly may change, eliminate or add
amounts and items to the proposed budget submitted by the Governor and there
can be no assurance that the budget, as proposed by the Governor, will be
enacted into law.

Disaster Declaration. A disaster emergency was declared by the Governor
and a federal major disaster declaration was made by the President of the
United States for certain counties in the Commonwealth for a blizzard and
subsequent flooding in January 1996. Substantial damage to public and private
facilities occurred and many municipalities' financial resources have been
strained by the costs of responding to these weather related conditions. A
special session of the General Assembly has been convened by the Governor to
consider legislation to respond to those needs. No provision for funding of any
legislation to be considered in this special session has been provided in the
fiscal 1996 budget estimate or in the proposed fiscal 1997 budget. While
legislation to be considered during this special session may only cover items
included in the Governor's proclamation, legislation to be considered may
include additional or increased taxes and fees, redirection of current revenues
to disaster relief programs, additional debt financing, and other financing
arrangements.

Tax Structure. The Commonwealth, through its principal operating funds --
the General Fund, the Motor License Fund and the State Lottery Fund -- receives
over 57 percent of its revenues from taxes levied by the Commonwealth. Interest
earnings, licenses and fees, lottery ticket sales, liquor store profits,
miscellaneous revenues, augmentations and federal government grants supply the
balance of receipts to these funds.

Tax and fee proceeds relating to motor fuels and vehicles are
constitutionally dedicated for highway purposes and are deposited into the
Motor License Fund. Lottery ticket sale revenues are deposited into the State
Lottery Fund and are reserved by statute for programs to benefit senior
citizens. Revenues, other than those specified to be deposited in a particular
fund, are deposited into the General Fund.

The major tax sources for the General Fund of the Commonwealth are the
sales tax enacted in 1953, the personal income tax enacted in 1971, and the
corporate net income tax which in its present form dates back to 1935. The last
restructuring of the Commonwealth's tax system occurred with the enactment of
the Tax Reform Code of 1971 that codified many of the taxes levied by the
Commonwealth.

The major tax sources for the Motor License Fund are the liquid fuels
taxes and the oil company franchise tax. The Motor License Fund also receives
revenues from fees levied on heavy trucks and from taxes on fuels used for
aviation purposes. Use of these revenues is restricted to the repair and
construction of highway bridges and aviation programs respectively.

The Tax Stabilization Reserve Fund was established in 1986 to provide a
source of funds that can be used to alleviate emergencies threatening the
health, safety or welfare of the Commonwealth's citizens or to offset
unanticipated revenue shortfalls due to economic downturns. Income to the fund
is provided by specific appropriation from available balances by the General
Assembly, from investment income and by the transfer to the Tax Stabilization
Reserve Fund of 15 percent of the budgetary basis operating surplus in the
General Fund at the close of any fiscal year. In addition, the proceeds
received from the disposition of assets of the Commonwealth not specified to be
deposited elsewhere are also to be deposited into the Tax

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Stabilization Reserve Fund. The Commonwealth has not prepared estimates of such
sales.

Assets of the Tax Stabilization Reserve Fund may be used only upon the
recommendation by the Governor and approval by the vote of two-thirds of the
members of each house of the General Assembly. In February 1991, in response to
a projected fiscal 1991 General Fund budgetary deficit caused by lower revenues
and higher expenditures than budgeted, the Governor recommended, and the
General Assembly authorized, the available balance of $133.8 million in the Tax
Stabilization Reserve Fund be used to pay medical assistance and special
education costs not covered by budgeted funds. On December 31, 1995, the
balance in the Tax Stabilization Reserve Fund was $122.9 million and $57.0
million is in the General Fund pending transfer to the Tax Stabilization
Reserve Fund in fiscal 1996.

Debt Limits and Outstanding Debt. The Pennsylvania Constitution permits
the Commonwealth to issue the following types of debt: (i) debt to suppress
insurrection or rehabilitate areas affected by disaster, (ii) electorate
approved debt, (iii) debt for capital projects subject to an aggregate debt
limit of 1.75 times the annual average tax revenues of the preceding five
fiscal years, and (iv) tax anticipation notes payable in the fiscal year of
issuance. All debt except tax anticipation notes must be amortized in
substantial and regular amounts.

Outstanding general obligation debt totalled $5,045.4 million on June 30,
1995, a decrease of $30.4 million from June 30, 1994. Over the 10-year period
ending June 30, 1995, total outstanding general obligation debt increased at an
annual rate of 1.1 percent. Within the most recent 5-year period, outstanding
general obligation debt has grown at an annual rate of 1.7 percent.

General obligation debt for non-highway purposes of $4,068.7 million was
outstanding on June 30, 1995. Outstanding debt for these purposes increased
$63.1 million since June 30, 1994, in large part due to the recent emphasis the
Commonwealth has placed on infrastructure investment as a means to spur
economic growth and to provide a higher quality of life for Commonwealth
residents. For the period ending June 30, 1995, the 10-year and 5-year average
annual compounded growth rate for total outstanding debt for non-highway
purposes has been 3.8 percent and 6.2 percent, respectively. In its current
debt financing plan, Commonwealth infrastructure investment projects include
improvement and rehabilitation of existing capital facilities, such as water
supply systems and construction of new facilities, such as roads, prisons and
public buildings.

Outstanding general obligation debt for highway purposes was $976.7
million on June 30, 1995, a decrease of $93.5 million from June 30, 1994.
Highway outstanding debt has declined over the most recent 10-year and 5-year
periods ending June 30, 1995 by the annual average rates of 5.5 percent and 9.6
percent, respectively.

During the period from 1980 through 1986, all of the Commonwealth's
highway investment was funded from current year revenues. From 1987 through
1994, a limited return to the issuance of long-term bonds was required to
finance immediately needed repairs to highway bridges. The highway bridge
bonding program is funded from the Highway Bridge Improvement Restricted
Account within the Motor License Fund. Revenues in this restricted account are
derived from a six cent per gallon surtax on motor fuel used on Commonwealth
highways by motor carriers and increased registration fees for trucks and truck
tractors weighing above 26,000 pounds. The two funding sources for the Highway
Bridge Improvement Restricted Account were enacted on July 13, 1987 to replace
revenues from an axle tax on heavy trucks which was declared unconstitutional
by the United States Supreme Court.

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The Commonwealth may incur debt to fund capital projects for community
colleges, highways, public improvements, transportation assistance, flood
control, redevelopment assistance, site development and the Pennsylvania
Industrial Development Authority. Before a project may be funded, it must be
itemized in a capital budget bill adopted by the General Assembly. An annual
capital budget bill states the maximum amount of debt for capital projects that
may be incurred during the current fiscal year for projects authorized in the
current or previous years' capital budget bills. Capital projects debt is
subject to a constitutional limit on debt. As of December 31, 1995, $3,857.1
million of capital projects debt was outstanding.

The issuance of electorate approved debt is subject to the enactment of
legislation which places on the ballot the question of whether debt shall be
incurred. Such legislation must state the purposes for which the debt is to be
authorized and, as a matter of practice, includes a maximum amount of funds to
be borrowed. Upon electorate approval and enactment of legislation implementing
the proposed debt-funded program, bonds may be issued. As of December 31, 1995,
the Commonwealth had $883.4 million of electorate approved debt outstanding.

Debt issued to rehabilitate areas affected by disasters is authorized by
specific legislation. The Commonwealth had $43.8 million of disaster relief
debt outstanding as of December 31, 1995.

Due to the timing of major tax payment dates, the Commonwealth's cash
receipts are generally concentrated in the last four months of the fiscal year,
from March through June. Disbursements are distributed more evenly throughout
the fiscal year. As a result, operating cash shortages can occur during certain
months of the fiscal year. The Commonwealth engages in short-term borrowing to
fund expenses within the fiscal year through the sale of tax anticipation
notes. The Commonwealth has issued a total of $500.0 million of tax
anticipation notes for the account of the General Fund in fiscal 1996. All such
notes will mature on June 28, 1996 and will be paid from fiscal 1996 General
Fund receipts.

Pending the issuance of bonds, the Commonwealth may issue bond
anticipation notes subject to the applicable statutory and constitutional
limitations generally imposed on bonds. The term of such borrowings may not
exceed three years. Currently, there are no bond anticipation notes
outstanding.

Certain state-created organizations have statutory authority to issue debt
for which state appropriations to pay debt service thereon are not required.
The debt of these organizations is supported by assets of, or revenues derived
from, the various projects financed and is not an obligation of the
Commonwealth. Some of these agencies, however, are indirectly dependent on
Commonwealth appropriations. These entities include: Delaware River Joint Toll
Bridge Commission, Delaware River Port Authority, Pennsylvania Energy
Development Authority, Pennsylvania Higher Education Assistance Agency,
Pennsylvania Higher Educational Facilities Authority, Pennsylvania Industrial
Development Authority, Pennsylvania Infrastructure Investment Authority,
Pennsylvania State Public School Building Authority, Pennsylvania Turnpike
Commission, the Philadelphia Regional Port Authority and the Pennsylvania
Economic Development Financing Authority. As of December 31, 1993, the
aggregate outstanding indebtedness of these entities was $5,767.7 million.

The Pennsylvania Housing Finance Agency ("PHFA"), as of December 31, 1995,
had $2,164.8 million of revenue bonds outstanding. The statute creating PHFA
provides that if there is a potential deficiency in the capital reserve fund or
if funds are necessary to avoid default on interest, principal or sinking fund
payments on bonds or notes of PHFA, the Governor, upon

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notification from the PHFA, shall place in the budget of the Commonwealth for
the next succeeding year an amount sufficient to make up any such deficiency or
to avoid any such default. The budget as finally adopted by the General
Assembly may or may not include the amount so placed therein by the Governor.
PHFA is not permitted to borrow additional funds so long as any deficiency
exists in the capital reserve fund.

The Hospitals and Higher Education Facilities Authority of Philadelphia,
as of June 30, 1995, had $21.1 million of bonds outstanding which benefit from
a moral obligation of the Commonwealth's Department of Public Welfare to
request a budget appropriation to make up any deficiency in the debt service
reserve fund for said bonds. The budget as finally adopted may or may not
include the amount requested.

The Commonwealth, through several of its departments and agencies, has
entered into various agreements to lease, as lessee, certain real property and
equipment and to make lease rental payments. Some of those lease payments are
pledged as security for various outstanding debt obligations issued by certain
public authorities or other entities within the state. All lease payments due
from Commonwealth departments and agencies are subject to and dependent upon an
annual spending authorization approved through the Commonwealth's annual budget
process. The Commonwealth is not required by law to appropriate or otherwise
provide moneys from which the lease payments are to be paid. The obligations to
be paid from such lease payments are not bonded debt of the Commonwealth.

The Commonwealth maintains contributory benefit pension plans covering all
state employees, public school employees and employees of certain other
state-related organizations. Unfunded actuarial accrued liabilities for the
Public School Employees' Retirement Fund as of June 30, 1994 were $3,797
million, and for the State Employees' Retirement Fund were negative $249
million as of December 31, 1994.

Municipal Finance

Local Finance. The Local Government Unit Debt Act (Act 52 of 1978) (the
"Debt Act") establishes debt limits for local government units. Local
government units include municipalities (except a first class city or county),
school districts and intermediate units. The Act establishes three classes of
debt for a local government unit: (i) electoral debt (debt incurred with the
approval of the electors of the municipality for which there is no limitation
on the amount that may be incurred); (ii) nonelectoral debt (debt of a local
government unit not being electoral or lease rental debt); (iii) lease rental
debt (the principal amount of debt of an authority organized by a municipality
or debt of another local government unit, which debt is to be repaid by the
local government unit through a lease, subsidy contract, guarantee or other
form of agreement evidencing acquisition of a capital asset, payable or which
may be payable out of tax revenues and other general revenues. Each local
government unit is subject to a limitation as to the amount of class "ii" and
class "iii" debt which may be issued which is based upon such local government
unit's Borrowing Base.

Borrowing Base is defined in the Debt Act as the annual arithmetic average
of the total revenues for the three full fiscal years ended next preceding the
date of the incurring of nonelectoral debt or lease rental debt. Total revenues
for the purposes of the Debt Act excludes, inter alia, certain state and
federal subsidies and reimbursements, certain pledged revenues, interest on
pledged funds and nonrecurring items.

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The debt limitations applicable to the various local government units are
set forth below:

Nonelectoral plus
Nonelectoral Lease Rental
First Class
School District 100% of Borrowing Base 200% of Borrowing Base

County 300% of Borrowing Base 400% of Borrowing Base

Other 250% of Borrowing Base 350% of Borrowing Base

A county may utilize an additional debt limit of 100% of its Borrowing
Base for additional nonelectoral or additional lease rental debt, or both, if
such county has assumed countywide responsibility for hospitals and other
public health services, air and water pollution control, flood control,
environmental protection, water distribution and supply systems, sewage and
refuse collection and disposal systems, education at any level, highways,
public transportation, or port operations, but such additional debt limit may
be so utilized only to provide funds for and towards the costs of capital
facilities for any or any combination of the foregoing purposes.

City of Philadelphia. The City of Philadelphia ("Philadelphia") is the
largest city in the Commonwealth, with an estimated population of 1,585,577
according to the 1990 Census. Philadelphia functions both as a city of the
first class and a county for the purpose of administering various governmental
programs.

Legislation providing for the establishment of the Pennsylvania
Intergovernmental Cooperation Authority ("PICA") to assist first class cities
in remedying fiscal emergencies was enacted by the General Assembly and
approved by the Governor in June 1991. PICA is designed to provide assistance
through the issuance of funding debt to liquidate budget deficits and to make
factual findings and recommendations to the assisted city concerning its
budgetary and fiscal affairs. Philadelphia is operating under a five year
fiscal plan approved by PICA on April 17, 1995, with the latest update approved
July 18, 1995.

PICA has issued $1,418,680,000 of its Special Tax Revenue Bonds in the
following series: Series of 1992 in the amount of $474,555,000; Series of 1993
in the amount of $643,430,000; and Series of 1993A in the amount of
$178,675,000 (issued to advance refund a portion of the Series of 1992); and
Series of 1994 in the amount of $122,020,000. This financial assistance has
included the refunding of certain city general obligation bonds, the funding of
capital projects and the liquidation of the Cumulative General Fund balance
deficit as of June 30, 1992 of $224.9 million. The audited General Fund balance
of the city as of June 30, 1995, showed a surplus of approximately $80.5
million, up from approximately $1.54 million as of June 30, 1994.

No further bonds are to be issued by PICA for the purpose of financing a
capital project or deficit as the authority for such bond sales expired
December 31, 1994. PICA's authority to issue debt for the purpose of financing
a cash flow deficit expires on December 31, 1996. Its ability to refund
existing outstanding debt is unrestricted. PICA had $1,237.5 million in special
revenue bonds outstanding as of December 31, 1995.

Litigation. According to the Official Statement dated May 15, 1996
describing General Obligation Bonds of the Commonwealth of Pennsylvania, the
Office of Attorney General and the Office of General Counsel have reviewed the
status of pending litigation against the Commonwealth, its officers and
employees, and have identified the following cases as ones where an adverse
decision could materially affect the Commonwealth's governmental operations.

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Listed below are all litigation items so identified that may have a material
effect on government operations of the Commonwealth and consequently, the
Commonwealth's ability to pay debt service on its obligations.

Under Act No. 1978-152 approved September 28, 1978, as amended, the
General Assembly approved a limited waiver of sovereign immunity. Damages for
any loss are limited to $250,000 for each person and $1,000,000 for each
accident. The Supreme Court of Pennsylvania has held that this limitation is
constitutional. Approximately 3,500 suits against the Commonwealth remain open.
Tort claim payments for the departments and agencies, other than the Department
of Transportation, are paid from departmental and agency operating and program
appropriations. Tort claim payments for the Department of Transportation are
paid from an appropriation from the Motor License Fund. The Motor License Fund
tort claim appropriation for fiscal 1996 is $27.0 million.

Baby Neal v. Commonwealth

In April of 1990, the American Civil Liberties Union ("ACLU") and various
named plaintiffs filed a lawsuit against the Commonwealth in federal court
seeking an order requiring the Commonwealth to provide additional funding for
child welfare services. No figures for the amount of funding sought are
available. A similar lawsuit filed in the Commonwealth Court, captioned as The
City of Philadelphia, Hon. Wilson Goode v. Commonwealth of Pennsylvania, Hon.
Robert P. Casey et al., was resolved through a court approved settlement
providing, inter alia, for more Commonwealth funding for these services for
fiscal year 1991 as well as a commitment to pay to counties $30.0 million over
five years. The Commonwealth then sought dismissal of the federal action based
on, among other things, the settlement of the Commonwealth Court case.

In January of 1992, the U.S. District Court, per Judge Kelly, denied the
ACLU's motion for class certification and held that the "next friends" seeking
to represent the interests of the 16 minor plaintiffs in the case were
inadequate representatives. The Commonwealth filed a motion for summary
judgment on most of the counts in the ACLU's complaint on the basis of, among
other things, Suter v. Artist M.. After the motion for summary judgment was
filed, the ACLU filed a renewed motion to certify sub-classes.

In December of 1994, the Third Circuit reversed Judge Kelly's ruling,
finding that he erred in refusing to certify the class. Consistent with the
Third Circuit's ruling, the District Court certified the class, and the parties
have resumed discovery.

County of Allegheny v. Commonwealth of Pennsylvania

On December 7, 1987, the Supreme Court of Pennsylvania held in County of
Allegheny v. Commonwealth of Pennsylvania, that the statutory scheme for county
funding of the judicial system is in conflict with the Pennsylvania
Constitution. However, the Supreme Court of Pennsylvania stayed its judgment to
afford the General Assembly an opportunity to enact appropriate funding
legislation consistent with its opinion and ordered that the prior system of
county funding shall remain in place until this is done. Allegheny County, on
February 12, 1991, filed a motion in the Supreme Court of Pennsylvania to lift
the stay and enforce the judgment. The Supreme Court subsequently denied the
motion.

On March 3, 1989, the City of Philadelphia, Allegheny County, and the
state County Commissioner's Association filed suit in the Supreme Court of
Pennsylvania to require the General Assembly to appropriate the funds required
by the Supreme Court of Pennsylvania. That suit was summarily dismissed on
March 31, 1989. On February 14, 1991, the Pennsylvania State Association of

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County Commissioners and the Counties of Blair, Bucks, Erie, Huntington and
Perry filed in the Commonwealth Court of Pennsylvania an action for declaratory
judgment requesting an order that the Commonwealth be required to provide funds
for the operation of the courts of common pleas in accordance with the County
of Allegheny decision. These parties also requested the Supreme Court of
Pennsylvania to assume plenary jurisdiction over their case. The Supreme Court
of Pennsylvania refused to do so, and these parties have withdrawn the
Commonwealth Court action.

On October 5, 1992, the Pennsylvania State Association of County
Commissioners, along with Allegheny, Beaver, Clarion, Forest, Tioga and
Washington counties, filed in the Supreme Court of Pennsylvania a motion to
enforce judgment seeking an order that would direct the Commonwealth to restore
funding for local courts and district justices to levels existing in 1987. By
order dated May 26, 1993, the motion to enforce judgment was denied.

On December 7, 1992, the State Association of County Commissioners filed a
new action in mandamus seeking to compel the Commonwealth to comply with the
decision in County of Allegheny. The Commonwealth has filed a response in
opposition to the new action. The counties requested a continuance until April
30, 1995. The Court has not acted on the new action.

The General Assembly has yet to consider legislation implementing the
Supreme Court of Pennsylvania's judgment.

Fidelity Bank v. Commonwealth of Pennsylvania

On November 30, 1989, Fidelity Bank, N.A. ("Fidelity") filed a declaratory
judgment action in the Commonwealth Court of Pennsylvania in which Fidelity
raised various challenges to the constitutional validity of the Amended Bank
Shares Act (Act No. 1989-21) and related legislation. After the Commonwealth
Court ruled in favor of the Commonwealth, finding no constitutional
deficiencies, Fidelity, the Commonwealth, and certain intervenor banks filed
Notices of Appeal to the Pennsylvania Supreme Court on August 5, 1994.

Pursuant to a Settlement Agreement dated as of April 21, 1995, the
Commonwealth agreed to enter a credit in favor of Fidelity in the amount of
$4,100,000 in settlement of the constitutional and non-constitutional issues,
including interest. This credit represents a credit of approximately five
percent (5%) of the potential claim of Fidelity, had the constitutional issues
been resolved in favor of Fidelity.

Pursuant to a separate Settlement Agreement dated as of April 21, 1995,
the Commonwealth settled with the intervening banks, referred to as "New
Banks," in connection with issues concerning the New Bank Tax Credit law which
were raised in the above-referenced Pennsylvania Supreme Court appeal. As part
of the settlement, the Commonwealth agreed neither to assess nor attempt to
recoup any new bank tax credits which had been granted or taken by any of the
intervening banks. No expenditure of Commonwealth funds is required in order to
implement this aspect of the settlement with the intervening banks, since the
credits have already been claimed by said banks.

Although the described settlements have quantified the Commonwealth's
exposure to Fidelity and the intervening banks, other banks have filed
protective Petitions which are currently pending with the Board of Appeals or
Board of Finance and Revenue. Depending upon the outcomes of these
administrative appeals, one or more of these banks may seek to raise a new
constitutional challenge in the Commonwealth Court. However, as set forth
above, the Commonwealth Court has previously examined and confirmed the Act's
constitutionality.

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Pennsylvania Association of Rural and Small Schools (PARSS) v. Casey

This action was filed in January, 1991 by an association of rural and
small schools, several individual school districts, and a group of parents and
students, against Governor Robert P. Casey and Secretary of Education Donald M.
Carroll, Jr. The action challenges the constitutionality of the Commonwealth's
system for funding local school districts. The action consists of two parallel
cases, one in the Commonwealth Court of Pennsylvania, and one in the United
States District Court for the Middle District of Pennsylvania. The federal
court case has been indefinitely stayed, pending resolution of the state court
case. The state court case has been assigned to Judge Pellegrini, and is in the
pre-trial discovery stage. The trial has not yet been scheduled. Following a
status conference among counsel, Judge Pellegrini issued an Order, dated May
30, 1996, to consider inter alia, the report of the Governor's Commission on
Public School Finance and the course of future proceedings, including trial.

Austin v. Department of Corrections, et al.

In November 1990, the American Civil Liberties Union ("ACLU") brought a
class action lawsuit on behalf of the inmate populations in thirteen
Commonwealth correctional institutions.

The lawsuit challenged the conditions of confinement at each institution
and included specified allegations of overcrowding, deficiencies in medical and
mental health services, inadequate environmental conditions, disparate
treatment of HIV positive prisoners and other assorted claims.

No damages are sought. The ACLU sought injunctive relief which would
modify conditions, change practices and procedures and increase the number of
staff deployment. On August 1, 1994, the parties submitted a proposed
settlement agreement to the Court for its review. The Court held hearings on
the proposed Settlement Agreement in December 1994. The Court approved the
Settlement Agreement with a January 17, 1995 Memorandum. On February 3, 1995,
the Commonwealth paid $1.3 million in attorneys' fees to the plaintiffs'
attorneys in accordance with the Agreement. The remaining $100,000 in
attorneys' fees will be paid upon dismissal of the preliminary injunction
relating to certain health issues.

The parties are currently complying with monitoring provisions outlined in
the Agreement. The monitoring phase will expire on January 6, 1998. The
attorneys' fees for the 3-year monitoring period will not exceed $60,000 in any
one year.

Envirotest/Synterra Partners

On November 11, 1993, the Commonwealth of Pennsylvania, Department of
Transportation and Envirotest/Synterra Partners ("Envirotest"), a partnership,
entered into a "Contract for Centralized Emissions Inspection Facilities."
Thereafter, Envirotest acquired certain land and constructed approximately 85
automobile emissions inspection facilities throughout various regions of the
Commonwealth.

By Act of the General Assembly in October 1994 (Act No. 1994-95), the
emissions testing program was suspended and the Department of Transportation
was directed to consider other alternatives to the centralized testing program.
Former Governor Robert P. Casey vetoed the legislation and the General Assembly
overrode the veto in November 1994. As a result, the program was suspended and
the Department of Transportation was prohibited from expending funds to
implement the program.

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On December 15, 1995, Envirotest Systems Corporation, Envirotest Partners
(successor to Envirotest/Synterra Partners) and the Commonwealth of
Pennsylvania entered into a Settlement Agreement ("Agreement") pursuant to
which the parties settled all claims which Envirotest might have had against
the Commonwealth arising from the suspension of the emissions testing program.
Under the Agreement, Envirotest is to receive $145 million, with interest at 6
percent per annum, payable $25 million in 1995, $40 million each in 1996, 1997,
and 1998. An additional $15 million may be required to be paid in 1998,
depending upon the results of property liquidations by Envirotest.

Pennsylvania Human Relations Commission v. School District of Philadelphia, et
al. v. Commonwealth of Pennsylvania, et al.

On November 3, 1995, the Commonwealth of Pennsylvania and the Governor of
Pennsylvania, along with the City of Philadelphia and the Mayor of
Philadelphia, were joined as additional respondents in an enforcement action
commenced in Commonwealth Court in 1973 by the Pennsylvania Human Relations
Commission against the School District of Philadelphia pursuant to the
Pennsylvania Human Relations Act. The enforcement action was pursued to remedy
unintentional conditions of segregation in the public schools of Philadelphia.
The Commonwealth and the City were joined in the "remedial phase" of the
proceeding "to determine their liability, if any, to pay additional costs
necessary to remedy the unlawful conditions found to exist in the Philadelphia
public schools." The Commonwealth and the City sought to appeal their joinders
to the Supreme Court of Pennsylvania, but the Court denied the petitions
without comment.

On February 28, 1996, the School District of Philadelphia filed a
third-party complaint against the Commonwealth of Pennsylvania asking
Commonwealth Court to require the Commonwealth to "supply such funding as is
necessary for full compliance with the November 28, 1994 and other remedial
Orders of the Commonwealth Court." In addition, a group of intervenors on March
4, 1996 filed a third party complaint against the Commonwealth of Pennsylvania
and the City of Philadelphia requesting Commonwealth Court to declare that "it
is the obligation of the Commonwealth and the City to supply the additional
funds identified as necessary for the District to fully comply with the orders
of the Commonwealth Court," and to require the Commonwealth and the City to
supply such additional funding as is necessary for the District to comply with
the orders.

By order dated April 30, 1996, Judge Doris A. Smith of Commonwealth Court
overruled the Commonwealth's and the City's preliminary objections seeking
dismissal of the claims against them. The Commonwealth and the City are
required to file answers to the complaints by May 10, 1996. April 30, 1996 was
the court's deadline to conclude discovery. The court has scheduled trial to
commence May 30, 1996.

Virginia Trust

Virginia Risk Factors. Investors should be aware of certain factors that
might affect the financial condition of issuers of Virginia municipal
securities.

Bonds in the Virginia Trust may include primarily debt obligations of the
subdivisions of the Commonwealth of Virginia issued to obtain funds for various
public purposes, including the construction of a wide range of public
facilities such as airports, bridges, highways, schools, streets and water and
sewer works. Other purposes for which bonds may be issued include the obtaining
of funds to lend to public or private institutions for the construction of
facilities such as educational, hospital, housing, and solid waste disposal
facilities. The latter are generally payable from private

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sources which, in varying degrees, may depend on local economic conditions, but
are not necessarily affected by the ability of the Commonwealth of Virginia and
its political subdivisions to pay their debts. Therefore, the general risk
factors as to the credit of the State or its political subdivision discussed
herein may not be relevant to the Virginia Trust.

To the extent bonds of the Commonwealth of Virginia are included in the
Virginia Issues, information on the financial condition of the Commonwealth is
noted. The Constitution of Virginia limits the ability of the Commonwealth to
create debt. The Constitution requires a balanced budget. 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 economy
of the Commonwealth of Virginia is based primarily on manufacturing, the
government sector (including defense), agriculture, mining and tourism. The
Federal Base Closing Commission has ordered that a number of military
facilities in Virginia be closed or reduced. As a result of recessionary
conditions. In 1995 Motorola and IBM each announced the location of major
manufacturing facilities in Virginia. The Commonwealth ended the fiscal year on
June 30, 1995, with general fund revenues exceeding budget projections by $64.9
million. The preliminary unaudited results for the fiscal year 1995 show a
general fund balance of $350.7 million.

In Davis v. Michigan (decided March 28, 1989), the United States Supreme
Court ruled unconstitutional Michigan's statute exempting from state income tax
the retirement benefits paid by the state and local governments and not
exempting retirement benefits paid by the federal government. In Harper v.
Virginia Department of Taxation (decided June 18, 1993), the United States
Supreme Court held, in a suit involving claims for refunds by Federal retirees
living in Virginia that Virginia State income tax Statutes violated the
principles of Davis v. Michigan, but remanded for further relief so long as the
relief was consistent with Federal due process. If the courts ultimately rule
that the Commonwealth must make full refunds of taxes imposed prior to Davis v.
Michigan, the State has estimated that the potential financial impact on the
Commonwealth based on its review of claims for refunds by federal pensioners
(including interest payable calculated as of December 31, 1993) would be
approximately $700 million. The Governor and General Assembly of Virginia
authorized a settlement of $340 million, plus interest, payable into a special
trust fund in amounts of $60 million in 1994 and $70 million in each of the
years 1995 through 1998. Approximately 91% of the retirees accepted the
settlement. during the 1995 session of the General Assembly, legislation was
passed authorizing participating in the settlement for certain retirees who
failed to meet the original deadline. The original principal amount of the
claims of the retirees opting out of the settlement has been estimated by the
Commonwealth to be in excess of $47,000.000. On September 15, 1995, the Supreme
court of virginia entered its final judgment in the Harper case and ordered
full refunds with statutory interest. The Commonwealth has estimated that the
potential cost of refunding all virginia income taxes paid on federal
government pensions for taxable years 1985, 1986, 1987 and 1988 to federal
government pensioners who opted out of the settlement is approximately $78.4
million, including interest earnings, as of September 18, 1995.

The Governor proposed a plan to the General Assembly to eliminate or
reduce parole for persons convicted of violent crime. In that connection he
proposed the issuance of bonds to finance part of the cost of additional
prisons that would result from the program. The General Assembly approved part
of the plan, with bonds to be issued by the Virginia Public Building Authority
or other entities and leased to the Commonwealth.

The Commonwealth currently 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

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continue or that particular bond issues may not be adversely affected by
changes in economic or political conditions. Further, the credit of the
Commonwealth is not material to the ability of political subdivisions and
private entities to make payments on the obligations described below.

General obligations of cities, towns and 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 of 1950, as amended,
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 which allow the municipality, or other
public entity, to terminate its lease obligations if moneys to make the lease
payments are not appropriated for that purpose. See "Objectives". 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.

Recent amendments to Chapter 9 of the United States Bankruptcy Code, which
applies to bankruptcies by political subdivision, limit the filing under that
chapter to political subdivisions that have been specifically authorized to do
so under applicable state law. The Sponsors are not aware of any statute in
virginia that gives any such authorization to political subdivisions in
Virginia. Bonds payable exclusively by private entities may be subject to the
provisions of the United States Bankruptcy Code other than Chapter 9.

Virginia municipal issuers have generally not been required to provide
ongoing information about their finances and operations to holders of their
debt obligations, although a number of cities, counties and other issuers
prepare annual reports. Virginia political subdivisions that sell bonds after
July 3, 1995, will be subject to Rule 15c2-12 of the Securities and Exchange
Commission that requires continuing disclosure, including annual audited
financial statements, with respect to those obligations, unless exempted by the
Rule.

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 portfolio of the Fund or the ability

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of the respective obligors to make timely payments of principal and interest on
such obligations.

The Sponsors believe the information summarized above describes some of
the more significant events relating to the Virginia Trust. Sources of such
information are the official statements of the issuers located in the
Commonwealth of Virginia, as well as other publicly available documents and
information. While the Sponsors have not independently verified such
information, they have no reason to believe it is not correct in all material
respects.

PUBLIC OFFERING

Offering Price

The secondary market Public Offering Price per Unit of each Trust is
computed by adding a sales charge to the aggregate bid price of the Bonds in
such Trust divided by the number of Units thereof outstanding. The method used
by the Evaluator for computing the sales charge for secondary market purchases
shall be based upon the number of years remaining to maturity of each Bond in
the portfolio. Bonds will be deemed to mature on their stated maturity dates
unless bonds have been called for redemption, funds have been placed in escrow
to redeem them on an earlier call date or are subject to a "mandatory put," in
which case the maturity will be deemed to be such other date.

The table below sets forth the various sales charges based on the length
of maturity of each Bond.

As Percent of Public
Time to Maturity Offering Price

less than 6 months 0%

6 mos. to 1 year 1%

over 1 yr. to 2 yrs. 1 1/2%

over 2 yrs. to 4 yrs. 2 1/2%

over 4 yrs. to 8 yrs. 3 1/2%

over 8 yrs. to 15 yrs. 4 1/2%

over 15 years 5 1/2%

A proportionate share of accrued interest on the Bonds to the expected
date of settlement for the Units is added to the Public Offering Price. Accrued
interest is the accumulated and unpaid interest on Bonds from the last day on
which interest was paid and is initially accounted for daily by each Trust at
the daily rate set forth under "Summary of Essential Information" for each
Trust in Part A of this Prospectus. This daily rate is net of estimated fees
and expenses. The secondary market Public Offering Price can vary on a daily
basis from the amount stated on the cover of Part A of this Prospectus in
accordance with fluctuations in the prices of the Bonds. The price to be paid
by each investor will be computed on the basis of an evaluation made as of the
day the Units are purchased. The aggregate bid price evaluation of the Bonds is
determined in the manner set forth under "Trustee Redemption."

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The Evaluator may obtain current prices for the Bonds from investment
dealers or brokers (including the Sponsors) that customarily deal in tax-exempt
obligations or from any other reporting service or source of information which
the Evaluator deems appropriate.

Accrued Interest

An amount of accrued interest which represents accumulated unpaid or
uncollected interest on a bond from the last day on which interest was paid
thereon will be added to the Public Offering Price and paid by the
Certificateholder at the time Units are purchased. Since each Trust normally
receives the interest on the Bonds twice a year and the interest on the Bonds
is accrued on a daily basis (this daily rate is net of estimated fees and
expenses), each Trust will always have an amount of interest earned but
uncollected by, or unpaid to, the Trustee. A Certificateholder will not recover
his proportionate share of accrued interest until the Units of a Trust are sold
or redeemed, or such Trust is terminated. At that time, the Certificateholder
will receive his proportionate share of the accrued interest computed to the
settlement date in the case of sale or termination and to the date of tender in
the case of redemption.

Employee Discounts

Employees (and their families) of Reich & Tang Distributors L.P. (and its
affiliates) and of any underwriter of any Trust, pursuant to employee benefit
arrangements, may purchase Units of a State Trust at a price equal to the bid
side evaluation of the underlying securities in such State Trust divided by the
number of Units outstanding plus a reduced sales charge. Such arrangements
result in less selling effort and selling expenses than sales to employee
groups of other companies. Resales or transfers of Units purchased under the
employee benefit arrangements may only be made through the Sponsor's secondary
market, so long as it is being maintained.

Distribution of Units

Certain banks and thrifts will make Units of the Trust available to their
customers on an agency basis. A portion of the sales charge paid by their
customers is retained by or remitted to the banks. Under the Glass-Steagall
Act, banks are prohibited from underwriting Units; however, the Glass-Steagall
Act does permit certain agency transactions and the banking regulators have
indicated that these particular agency transactions are permitted under such
Act. In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.

The Sponsor intends to qualify the Units of each State Trust for sale in
only the State for which such Trust is named and certain other states through
dealers who are members of the National Association of Securities Dealers, Inc.
Units may be sold to dealers at prices which represent a concession of up to
$33.00 per Unit, subject to the Sponsor's right to change the dealers'
concession from time to time. In addition, for transactions of 1,000,000 Units
or more, the Sponsor intends to negotiate the applicable sales charge and such
charge will be disclosed to any such purchaser. Such Units may then be
distributed to the public by the dealers at the Public Offering Price then in
effect. The Sponsor reserves the right to reject, in whole or in part, any
order for the purchase of Units. The Sponsor reserves the right to change the
discounts from time to time.

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Sponsor's Profits

The Sponsor will receive a gross commission on all Units sold in the
secondary market equal to the applicable sales charge in each transaction (see
"Offering Price"). In addition, in maintaining a market for the Units (see
"Sponsor Repurchase"), the Sponsor will realize profits or sustain losses in
the amount of any difference between the price at which it buys Units and the
price at which it resells such Units.

Participants in the "Total Reinvestment Plan" can designate a broker as
the recipient of a dealer concession (see "Total Reinvestment Plan").

Comparison of Public Offering Price, Sponsor's Repurchase Price and
Redemption Price

The secondary market Public Offering Price of Units of each State Trust
will be determined on the basis of the current bid prices of the Bonds in such
State Trust plus the applicable sales charge. Value at which Units may be
resold in the secondary market or redeemed will be determined on the basis of
the current bid prices of such Bonds without any sales charge. On the
Evaluation Date, the Public Offering Price per Unit of each State Trust (based
on the bid price of the Bonds in such State Trust plus the sales charge) each
exceeded the Repurchase and Redemption Price per Unit (based upon the bid price
of the Bonds in each State Trust without the sales charge) by the amounts shown
under "Summary of Essential Information" for each State Trust in Part A of this
Prospectus. For this reason, among others (including fluctuations in the market
prices of such Bonds and the fact that the Public Offering Price includes the
5-1/2% sales charge), the amount realized by a Certificateholder upon any
redemption of Units may be less than the price paid for such Units.

ESTIMATED LONG TERM RETURN AND ESTIMATED CURRENT RETURN

Units of each Trust are offered to investors on a "dollar price" basis
(using the computation method previously described under "Public Offering
Price") as distinguished from a "yield price" basis often used in offerings of
tax exempt bonds (involving the lesser of the yield as computed to maturity of
bonds or to an earlier redemption date). Since they are offered on a dollar
price basis, the rate of return on an investment in Units of each Trust is
measured in terms of "Estimated Current Return" and "Estimated Long Term
Return".

Estimated Long Term Return is calculated by: (1) computing the yield to
maturity or to an earlier call date (whichever results in a lower yield) for
each Bond in a Trust's portfolio in accordance with accepted bond practices,
which practices take into account not only the interest payable on the Bond but
also the amortization of premiums or accretion of discounts, if any; (2)
calculating the average of the yields for the Bonds in each Trust's portfolio
by weighing each Bond's yield by the market value of the Bond and by the amount
of time remaining to the date to which the Bond is priced (thus creating an
average yield for the portfolio of each Trust); and (3) reducing the average
yield for the portfolio of each Trust in order to reflect estimated fees and
expenses of that Trust and the maximum sales charge paid by Certificateholders.
The resulting Estimated Long Term Return represents a measure of the return to
Certificateholders earned over the estimated life of each Trust. The Estimated
Long Term Return as of the day prior to the Evaluation Date is stated for each
Trust under "Summary of Essential Information" in Part A.

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Estimated Current Return is computed by dividing the Estimated Net Annual
Interest Income per Unit by the Public Offering Price per Unit. In contrast to
the Estimated Long Term Return, the Estimated Current Return does not take into
account the amortization of premium or accretion of discount, if any, on the
Bonds in the portfolios of each Trust. Moreover, because interest rates on
Bonds purchased at a premium are generally higher than current interest rates
on newly issued bonds of a similar type with comparable rating, the Estimated
Current Return per Unit may be affected adversely if such Bonds are redeemed
prior to their maturity. On the day prior to the Evaluation Date, the Estimated
Net Annual Interest Income per Unit divided by the Public Offering Price
resulted in the Estimated Current Return stated for each Trust under "Summary
of Essential Information" in Part A.

The Estimated Net Annual Interest Income per Unit of each Trust will vary
with changes in the fees and expenses of the Trustee and the Evaluator
applicable to each Trust and with the redemption, maturity, sale or other
disposition of the Bonds in each Trust. The Public Offering Price will vary
with changes in the bid prices of the Bonds. Therefore, there is no assurance
that the present Estimated Current Return or Estimated Long Term Return will be
realized in the future.

A schedule of cash flow projections is available from the Sponsor upon
request.

RIGHTS OF CERTIFICATEHOLDERS

Certificates

Ownership of Units of each State Trust is evidenced by registered
Certificates executed by the Trustee and the Sponsor. Certificates may be
issued in denominations of one or more Units and will bear appropriate
notations on their faces indicating which plan of distribution has been
selected by the Certificateholder. Certificates are transferable by
presentation and surrender to the Trustee properly endorsed and/or accompanied
by a written instrument or instrument of transfer. Although no such charge is
presently made or contemplated, the Trustee may require a Certificateholder to
pay $2.00 for each Certificate reissued or transferred and any governmental
charge that may be imposed in connection with each such transfer or
interchange. Mutilated, destroyed, stolen or lost Certificates will be replaced
upon delivery of satisfactory indemnity and payment of expenses incurred.

Interest and Principal Distributions

Interest received by each State Trust is credited by the Trustee to the
Interest Account of such Trust and a deduction is made to reimburse the Trustee
without interest for any amounts previously advanced. Proceeds representing
principal received by each State Trust from the maturity, redemption, sale or
other disposition of Bonds are credited to the Principal Account of such State
Trust.

Distributions to each Certificateholder of each State Trust from the
Interest Account of such State Trust are computed as of the close of business
on each Record Date for the following Payment Date and consist of an amount
substantially equal to one-twelfth, one-half or all of such Certificateholder's
pro rata share of the Estimated Net Annual Interest Income in such Interest
Account, depending upon the applicable plan of distribution. Distributions from
the Principal Account of each State Trust will be computed as of each
semi-annual Record Date, and will be made to the Certificateholders of such
State Trust on or shortly after the next semi-annual Payment Date. Proceeds
representing principal received from the disposition of any of the

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Bonds between a Record Date and a Payment Date which are not used for
redemptions of Units will be held in the appropriate Principal Account and not
distributed until the second succeeding semi-annual Payment Date. No
distributions will be made to Certificateholders electing to participate in the
Total Reinvestment Plan, except as provided thereunder. Persons who purchase
Units between a Record Date and a Payment Date will receive their first
distribution on the second Payment Date after such purchase.

Because interest payments are not received by the State Trust at a
constant rate throughout the year, interest distributions may be more or less
than the amount credited to the Interest Account as of a given Record Date. For
the purpose of minimizing fluctuations in the distributions from the Interest
Account, the Trustee will advance sufficient funds as may be necessary to
provide interest distributions of approximately equal amounts. The Trustee
shall be reimbursed, without interest, for these advances to the Interest
Account. Funds which are available for future distributions, investment in the
Total Reinvestment Plan, payments of expenses and redemptions are in accounts
which are non-interest bearing to Certificateholders and are available for use
by the Trustee pursuant to normal banking procedures.

As of the first day of each month, the Trustee will deduct from the
Interest Account and, to the extent funds are not sufficient therein, from the
Principal Account, amounts necessary to pay the expenses of the Trust (as
determined on the basis set forth under "Trust Expenses and Charges"). The
Trustee also may withdraw from said accounts such amounts, if any, as it deems
necessary to establish a reserve for any applicable taxes or other governmental
charges that may be payable out of the Trust. Amounts so withdrawn shall not be
considered a part of the Trust's assets until such time as the Trustee shall
return all or any part of such amounts to the appropriate accounts. In
addition, the Trustee may withdraw from the Interest and Principal Accounts
such amounts as may be necessary to cover redemptions of Units by the Trustee.

The estimated monthly, semi-annual or annual interest distribution per
Unit of each State Trust initially will be in the amounts shown under "Summary
of Essential Information" in Part A and will change and be reduced as Bonds
mature or are redeemed, exchanged or sold, or as expenses of each State Trust
fluctuate. No distribution need be made from a Principal Account until the
balance therein is an amount sufficient to distribute $1.00 per Unit.

Distribution Elections

Interest is distributed monthly, semi-annually or annually, depending upon
the distribution applicable to the Unit Purchased. Record Dates for interest
distributions will be the first day of each month for monthly distributions,
the first day of each June and December for semi-annual distributions and the
first day of each December for annual distributions. Payment Dates will be the
fifteenth day of each month following the respective Record Dates.
Certificateholders purchasing Units in the secondary market will initially
receive distributions in accordance with the election of the prior owner. Every
October each Certificateholder may change his distribution election by
notifying the Trustee in writing of such change between October 1 and November
1 of each year. (Certificateholders deciding to change their election should
contact the Trustee by calling the number listed on the back cover hereof for
information regarding the procedures that must be followed in connection with
this written notification of the change of election.) Failure to notify the
Trustee on or before November 1 of each year will result in a continuation of
the plan for the following 12 months.

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Records

The Trustee shall furnish Certificateholders in connection with each
distribution a statement of the amount of interest, if any, and the amount of
other receipts, if any, which are being distributed, expressed in each case as
a dollar amount per Unit. Within a reasonable time after the end of each
calendar year, the Trustee will furnish to each person who at any time during
the calendar year was a Certificateholder of record of a State Trust, a
statement showing (a) as to the Interest Account of such State Trust: interest
received (including any earned original issue discount and amounts representing
interest received upon any disposition of Bonds and earned original discount,
if any), amounts paid for redemption of Units, if any, deductions for
applicable taxes and fees and expenses of such State Trust, and the balance
remaining after such distributions and deductions, expressed both as a total
dollar amount and as a dollar amount representing the pro rata share of each
Unit outstanding on the last business day of such calendar year; (b) as to such
State Trust's Principal Account: the dates of disposition of any Bonds and the
net proceeds received therefrom (including any unearned original issue discount
but excluding any portion representing accrued interest), deductions for
payments of applicable taxes and fees and expenses of such State Trust, amounts
paid for redemption of Units, if any, and the balance remaining after such
distributions and deductions, expressed both as a total dollar amount and as a
dollar amount representing the pro rata share of each Unit outstanding on the
last business day of such calendar year; (c) a list of the Bonds held in such
State Trust and the number of Units thereof outstanding on the last business
day of such calendar year; (d) the Redemption Price per Unit of such State
Trust based upon the last computation thereof made during such calendar year;
and (e) amounts actually distributed to Certificateholders of such State Trust
during such calendar year from the Interest and Principal Accounts, separately
stated, expressed both as total dollar amounts and as dollar amounts
representing the pro rata share of each Unit outstanding on the last business
day of such calendar year.

The Trustee shall keep available for inspection by Certificateholders, at
all reasonable times during usual business hours, books of record and account
of its transactions as Trustee, including records of the names and addresses of
Certificateholders, Certificates issued or held, a current list of Bonds in the
portfolio and a copy of the Trust Agreement.

TAX STATUS

All Bonds acquired by the State Trusts were accompanied by copies of
opinions of bond counsel to the issuing governmental authorities given at the
time of original delivery of the Bonds to the effect that the interest thereon
is exempt from regular federal income tax and from the respective State income
taxes. Such interest may, however, be subject to the federal corporate
alternative minimum tax and to state and local taxes in other jurisdictions.
Neither the Sponsor nor the Trustee nor their respective counsel have made any
review of the proceedings relating to the issuance of the Bonds or the bases
for such opinions and express no opinion as to these matters, and neither the
Trustee nor the Sponsor nor their respective counsel have made an independent
examination or verification that the federal income tax status of the Bonds has
not been altered since the time of the original delivery of those opinions.

In rendering the opinion set forth below, counsel has examined the
Agreement, the final form of Prospectus dated the date hereof (the
"Prospectus") and the documents referred to therein, among others, and has
relied on the validity of said documents and the accuracy and completeness of
the facts set forth therein.

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In the opinion of Battle Fowler LLP, counsel for the Sponsor, under
existing law:

The State Trusts are not associations taxable as corporations for
federal income tax purposes under the Internal Revenue Code of 1986 (the
"Code"), and income received by each State Trust that consists of interest
excludable from federal gross income under the Code will be excludable
from the federal gross income of the Certificateholders of such State
Trust.

Each Certificateholder of a State Trust will be considered the owner
of a pro rata portion of that State Trust under Section 676(a) of the
Code. Thus, each Certificateholder of a State Trust will be considered to
have received his pro rata share of Bond interest when it is received by
the State Trust, and the entire amount of net income distributable to
Certificateholders of a State Trust that is exempt from federal income tax
when received by that State Trust will constitute tax-exempt income when
received by the Certificateholders.

Gain (other than any earned original issue discount) realized on sale
or redemption of the Bonds or on sale of a Unit is, however, includible in
gross income for federal income tax purposes, generally as capital gain,
although gain on the disposition of a Bond or a Unit purchased at a market
discount generally will be treated as ordinary income, rather than capital
gain, to the extent of accrued market discount. (It should be noted in
this connection that such gain does not include any amounts received in
respect of accrued interest.) Such gain may be long or short-term gain
depending on the facts and circumstances. Capital losses are deductible to
the extent of capital gains; in addition, up to $3,000 of capital losses
of non-corporate Certificateholders may be deducted against ordinary
income. Capital assets acquired on or after January 1, 1988 must be held
for more than one year to qualify for long-term capital gain treatment.
Individuals who realize long-term capital gains will be subject to a
maximum tax rate of 28% on such gain.

Each Certificateholder of a State Trust will realize taxable gain or
loss when that State Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity), as if the Certificateholder had
directly disposed of his pro rata share of such Bond. The gain or loss is
measured by the difference between (i) the tax cost of such pro rata share
and (ii) the amount received therefor. The Certificateholder's tax cost
for each Bond is determined by allocating the total tax cost of each Unit
among all the Bonds held in the State Trust (in accordance with the
portion of the State Trust comprised by each Bond). In order to determine
the amount of taxable gain or loss, the Certificateholder's amount
received is similarly allocated at that time. The Certificateholder may
exclude from the amount received any amounts that represent accrued
interest or the earned portion of any original issue discount but may not
exclude amounts attributable to market discount. Thus, when a Bond is
disposed of by State Trust at a gain, taxable gain will equal the
difference between (i) the amount received and (ii) the amount paid plus
any original issue discount (limited, in the case of Bonds issued after
June 8, 1980, to the portion earned from the date of acquisition to the
date of disposition). Gain on the disposition of a Bond purchased at a
market discount generally will be treated as ordinary income, rather than
capital gain, to the extent of accrued market discount. No deduction is
allowed for the amortization of bond premium on tax-exempt bonds, such as
the Bonds, in computing regular federal income tax.

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Discount generally accrues based on the principle of compounding of
accrued interest, not on a straight-line or ratable method, with the
result that the amount of earned original issue discount is less in the
earlier years and more in the later years of a bond term. The tax basis of
a discount bond is increased by the amount of accrued, tax-exempt original
issue discount thus determined. This method of calculation will produce
higher capital gains (or lower losses) to a Certificateholder, as compared
to the results produced by the straight-line method of accounting for
original issue discount, upon an early disposition of a Bond by a State
Trust or of a Unit by a Certificateholder.

A Certificateholder may also realize taxable income or loss when a
Unit of a State Trust is sold or redeemed. The amount received is
allocated among all the Bonds in that State Trust in the same manner as
when the State Trust disposes of Bonds and the Certificateholder may
exclude accrued interest and the earned portion of any original issue
discount (but not amounts attributable to market discount). The return of
a Certificateholder's tax cost is otherwise a tax-free return of capital.

A portion of Social Security benefits is includible in gross income
for taxpayers whose "modified adjusted gross income" combined with a
portion of their benefits exceeds a base amount. The base amount is
$25,000 for an individual, $32,000 for a married couple filing a joint
return and zero for married persons filing separate returns. Interest on
tax-exempt bonds is to be added to adjusted gross income for purposes of
computing the amount of Social Security benefits that are includible in
gross income and determining whether an individual's income exceeds the
base amount above which a portion of the benefits would be subject to tax.

Corporate Certificateholders are required to include in federal
corporate alternative minimum taxable income 75 percent of the amount by
which the adjusted current earnings (which will include tax-exempt
interest) of the corporation exceeds alternative minimum taxable income
(determined without regard to this item). In addition, in certain cases,
Subchapter S corporations with accumulated earnings and profits from
Subchapter C years will be subject to a minimum tax on excess "passive
investment income" which includes tax-exempt interest.

Under federal law, interest on Bonds in each State Trust issued by
authority of the Government of Puerto Rico is exempt from regular federal
income tax and state and local income taxes in the United States and
Puerto Rico.

The State Trusts are not subject to the New York State Franchise Tax
on Business Corporations or the New York City General Corporation Tax.

Messrs. Battle Fowler LLP are also of the opinion that under the personal
income tax laws of the State and City of New York, the income of each State
Trust will be treated as the income of the Certificateholders. Interest on the
Bonds that is exempt from tax under the laws of the State and City of New York
when received by the New York Trust will retain its status as tax-exempt
interest of the Certificateholders. In addition, non-residents of New York City
will not be subject to the City personal income tax on gains derived with
respect to their Units. Non-residents of New York State will not be subject to
New York State personal income tax on such gains unless the Units are employed
in a business, trade or occupation carried on in New York State. A New York
State or New York City resident should determine his basis and holding period
for his Units in the same manner for New York State and New

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York City tax purposes as for federal tax purposes. For corporations doing
business in New York State, interest earned on state and municipal obligations
that are exempt from federal income tax, including obligations of New York
State, its political subdivisions and instrumentalities, must be included in
calculating New York State and New York City entire net income for purposes of
computing New York State and New York City franchise (income) tax.

The exemption of interest on municipal obligations for federal income tax
purposes does not necessarily result in exemption under the income tax laws of
any state or local government. The laws of such states and local governments
vary with respect to the taxation of such obligations. See "Rights of
Certificateholders" in this Part B.

In the opinion of Brown & Wood, special counsel to the Sponsor for
California tax matters, under existing California law applicable to individuals
who are California residents:

The California Trust will not be treated as an association taxable as
a corporation, and the income of the California Trust will be treated as
the income of the Certificateholders. Accordingly, interest on Bonds
received by the California Trust that is exempt from personal income taxes
imposed by or under the authority of the State of California will be
treated for California income tax purposes in the same manner as if
received directly by the Certificateholders.

Each Certificateholder of the California Trust will recognize gain or
loss when the California Trust disposes of a Bond (whether by sale,
exchange, redemption or payment at maturity) or upon the
Certificateholder's sale or other disposition of a Unit. The amount of
gain or loss for California income tax purposes will generally be
calculated pursuant to the Internal Revenue Code of 1986, as amended,
certain provisions of which are incorporated by reference under California
law.

In the opinion of Messrs. Miller, Canfield, Paddock and Stone, special
counsel to the Sponsor on Michigan tax matters, under existing law:

Under the income tax laws of the State of Michigan, the Michigan
Trust is not an association taxable as a corporation; the income of the
Michigan Trust will be treated as the income of the Certificateholders of
the Michigan Trust and be deemed to have been received by them when
received by the Michigan Trust. Interest on the Bonds in the Michigan
Trust which is exempt from tax under the Michigan income tax laws when
received by the Michigan Trust will retain its status as tax-exempt
interest to the Certificateholders of the Michigan Trust.

For purposes of the Michigan income tax laws, each Certificate-holder
of the Michigan Trust will be considered to have received his pro rata
share of interest on each Bond in the Michigan Trust when it is received
by the Michigan Trust, and each Certificateholder will have a taxable
event when the Michigan Trust disposes of a Bond (whether by sale,
exchange, redemption or payment at maturity) or when the Certificateholder
redeems or sells his Certificate, to the extent the transaction
constitutes a taxable event for Federal income tax purposes. The tax cost
of each Unit to a Certificateholder will be established and allocated for
purposes of the Michigan income tax laws in the same manner as such cost
is established and allocated for Federal income tax purposes.

Under the Michigan intangibles tax, the Michigan Trust is not taxable
and the pro rata ownership of the underlying Bonds, as well as the
interest thereon, will be exempt to the Certificateholders to the

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extent the Michigan Trust consists of obligations of the State of Michigan
or its political subdivisions or municipalities, or obligations of the
Government of Puerto Rico, or any other possession of the United States.
The Intangibles Tax is being phased out, with reductions of twenty-five
percent (25%) in 1994 and 1995, fifty percent (50%) in 1996, and
seventy-five percent (75%) in 1997, with total repeal effective January 1,
1998.

The Michigan Single Business Tax replaced the tax on corporate and
financial institution income under the Michigan Income Tax, and the
intangible tax with respect to those intangibles of persons subject to the
Single Business Tax, the income from which would be considered in
computing the Single Business Tax. Persons are subject to the Single
Business Tax only if they are engaged in "business activity," as defined
in the Act. Under the Single Business Tax, both interest received by the
Michigan Trust on the underlying Bonds and any amount distributed from the
Michigan Trust to a Certificateholder, if not included in determining
taxable income for Federal income tax purposes, is also not included in
the adjusted tax base upon which the Single Business Tax is computed, of
either the Michigan Trust or the Certificateholders. If the Michigan Trust
or the Certificateholders have a taxable event for Federal income tax
purposes when the Michigan Trust disposes of a Bond (whether by sale,
exchange, redemption or payment at maturity) or the Certificateholder
redeems or sells his Certificate, an amount equal to any gain realized
from such taxable event which was included in the computation of taxable
income for Federal income tax purposes (plus an amount equal to any
capital gain of an individual realized in connection with such event but
excluded in computing that individual's Federal taxable income) will be
included in the tax base against which, after allocation, apportionment
and other adjustments, the Single Business Tax is computed. The tax base
will be reduced by an amount equal to any capital loss realized from such
a taxable event, whether or not the capital loss was deducted in computing
Federal taxable income in the year the loss occurred. Certificateholders
should consult their tax advisors as to their "business activity" status
under Michigan law.

In the opinion of Saul, Ewing, Remick & Saul, special counsel to the
Sponsor on Pennsylvania tax matters, under existing law:

(1) Units evidencing fractional undivided interests in the Trust, to
the extent represented by obligations issued by the Commonwealth of
Pennsylvania, any public authority, commission, board or other agency
created by the Commonwealth of Pennsylvania, any political subdivision of
the Commonwealth of Pennsylvania or any public authority created by any
such political subdivision, or by the Government of Puerto Rico or its
public authorities, are not taxable under any of the personal property
taxes presently in effect in Pennsylvania;

(2) Distributions of interest income to Certificateholders that would
not be taxable if received directly by a Pennsylvania resident are not
subject to personal income tax under the Pennsylvania Tax Reform Code of
1971; nor will such interest be taxable under Philadelphia School District
Investment Income Tax imposed on Philadelphia resident individuals;

(3) A Certificateholder which is an individual, estate or trust will
have a taxable event under the Pennsylvania state and local income tax
referred to in the preceding paragraph upon the redemption or sale of
Units;

(4) A Certificateholder which is a corporation will have a taxable
event under the Pennsylvania Corporate Net Income Tax or, if

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applicable, the Mutual Thrift Institutions Tax, upon the redemption or
sale of its Units. Interest income distributed to Certificateholders which
are corporations is not subject to Pennsylvania Corporate Net Income Tax
or Mutual Thrift Institutions Tax. However, banks, title insurance
companies and trust companies may be required to take the value of Units
into account in determining the taxable value of their shares subject to
Shares Tax;

(5) Under Act No. 68 of December 3, 1993, gains derived by the Trust
from the sale, exchange or other disposition of Pennsylvania Bonds may be
subject to Pennsylvania personal or corporate income taxes. Those gains
which are distributed by the Trust to Certificateholders who are
individuals will be subject to Pennsylvania Personal Income Tax and, for
residents of Philadelphia, to Philadelphia School District Investment
Income Tax. For Certificateholders which are corporations, the distributed
gains will be subject to Corporate Net Income Tax or Mutual Thrift
Institutions Tax.

(6) For Pennsylvania Bonds, gains which are not distributed by the
Trust will nevertheless be taxable to Certificateholders if derived by the
Trust from the sale, exchange or other disposition of these Bonds issued
on or after February 1, 1994. Such gains which are not distributed by the
Trust will remain nontaxable to Certificateholders if derived by the Trust
from the sale, exchange or other disposition of Bonds issued prior to
February 1, 1994. However, for gains from the sale, exchange or other
disposition of these Bonds to be taxable under the Philadelphia School
District Investment Income Tax, the Bonds must be held for six months or
less;

(7) Gains from the sale, exchange or other disposition of Puerto Rico
Bonds will be taxable to Certificateholders if distributed or retained by
the Trust. However, for gains from the sale, exchange or other disposition
of these Bonds to be taxable under the Philadelphia School District
Investment Income Tax, the Bonds must be held for six months or less;

(8) Units are subject to Pennsylvania inheritance and estate taxes;

(9) Any proceeds paid under insurance policies issued to the Trustee
or obtained by issuers or the underwriters of the Bonds, the Sponsor or
others which represent interest on defaulted obligations held by the
Trustee will be excludable from Pennsylvania gross income if, and to the
same extent as, such interest would have been so excludable if paid in the
normal course by the issuer of the defaulted obligations; and

(10) The Trust is not taxable as a corporation under Pennsylvania tax
laws applicable to corporations.

In the opinion of Hunton & Williams, special counsel to the Sponsors for
Virginia tax matters, under existing Virginia law applicable to individuals who
are Virginia residents and assuming that the Virginia Trust is a grantor trust
under the grantor trust rules of Sections 671-679 of the Code:

The Virginia Trust will be taxable as a grantor trust for Virginia
income tax purposes with the result that income of the Virginia Trust will
be treated as income of the Certificateholders of the Virginia Trust.
Consequently, the Virginia Trust will not be subject to any income or
corporate franchise tax imposed by the Commonwealth of Virginia, or its
subdivisions, agencies or instrumentalities.

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Interest on the Bonds in the Virginia Trust that is exempt from
Virginia income tax when received by the Virginia Trust will retain its
tax exempt status in the hands of the Certificateholders of the Virginia
Trust.

A Certificateholder of the Virginia Trust will realize a taxable
event when the Virginia Trust disposes of a Bond (whether by sale,
exchange, redemption or payment at maturity) or when the Certificateholder
redeems or sells his Units, and taxable gain for Federal income tax
purposes may result in taxable gain for Virginia income tax purposes.
Certain Bonds, however, may have been issued under Acts of the Virginia
General Assembly which provide that all income from such Bond, including
any profit from the sale thereof, shall be free from all taxation by the
Commonwealth of Virginia. To the extent that any such profit is exempt
from Virginia income tax, any such profit received by the Virginia Trust
will retain its tax exempt status in the hands of the Certificateholders
of the Virginia Trust.

In the case of Bonds that are industrial revenue bonds ("IRBs") or certain
types of private activity bonds, the opinions of bond counsel to the respective
issuing authorities indicate that interest on such Bonds is exempt from regular
federal income tax. However, interest on such Bonds will not be exempt from
regular federal income tax for any period during which such Bonds are held by a
"substantial user" of the facilities financed by the proceeds of such Bonds or
by a "related person" thereof within the meaning of the Code. Therefore,
interest on any such Bonds allocable to a Certificateholder who is such a
"substantial user" or "related person" thereof will not be tax-exempt.
Furthermore, in the case of IRBs that qualify for the "small issue" exemption,
the "small issue" exemption will not be available or will be lost if, at any
time during the three-year period beginning on the later of the date the
facilities are placed in service or the date of issue, all outstanding
tax-exempt IRBs, together with a proportionate share of any present issue, of
an owner or principal user (or related person) of the facilities exceeds
$40,000,000. In the case of IRBs issued under the $10,000,000 "small issue"
exemption, interest on such IRBs will become taxable if the face amount of such
IRBs plus certain capital expenditures exceeds $10,000,000.

In addition, a Bond can lose its tax-exempt status as a result of other
subsequent but unforeseeable events such as prohibited "arbitrage" activities
by the issuer of the Bond or the failure of the Bond to continue to satisfy the
conditions required for the exemption of interest thereon from regular federal
income tax. No investigation has been made as to the current or future owners
or users of the facilities financed by the Bonds, the amount of such persons'
outstanding tax-exempt IRBs, or the facilities themselves, and no assurance can
be given that future events will not affect the tax-exempt status of the Bonds.
Investors should consult their tax advisors for advice with respect to the
effect of these provisions on their particular tax situation.

Interest on indebtedness incurred or continued to purchase or carry the
Units is not deductible for regular federal income tax purposes. In addition,
under rules used by the Internal Revenue Service for determining when borrowed
funds are considered used for the purpose of purchasing or carrying particular
assets, the purchase of Units may be considered to have been made with borrowed
funds even though the borrowed funds are not directly traceable to the purchase
of Units. Also, in the case of certain financial institutions that acquire
Units, in general no deduction is allowed for interest expense allocable to the
Units.

From time to time proposals have been introduced before Congress to
restrict or eliminate the federal income tax exemption for interest on debt

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obligations similar to the Bonds in the State Trusts, and it can be expected
that similar proposals may be introduced in the future.

In South Carolina v. Baker, the U.S. Supreme Court held that the federal
government may constitutionally require states to register bonds they issue and
subject the interest on such bonds to federal income tax if not registered, and
that there is no constitutional prohibition against the federal government's
taxing the interest earned on state or other municipal bonds. The Supreme Court
decision affirms the authority of the federal government to regulate and
control bonds such as the Bonds in the Trust and to tax interest on such bonds
in the future. The decision does not, however, affect the current exemption
from taxation of the interest earned on the Bonds in the Trust in accordance
with Section 103 of the Code.

The opinions of bond counsel to the issuing governmental authorities to
the effect that interest on the Bonds is exempt from regular federal income tax
may be limited to law existing at the time the Bonds were issued, and may not
apply to the extent that future changes in law, regulations or interpretations
affect such Bonds. Investors are advised to consult their own tax advisors for
advice with respect to the effect of any legislative changes.

LIQUIDITY

Sponsor Repurchase

The Sponsor, although not obligated to do so, intends to maintain a
secondary market for the Units of each State Trust and continuously to offer to
repurchase the Units of the Trusts. The Sponsor's secondary market repurchase
price will be based on the aggregate bid price of the Bonds in each State Trust
portfolio, determined by the Evaluator on a daily basis, and will be the same
as the redemption price. (See "Trustee Redemption.") Certificateholders who
wish to dispose of their Units should inquire of the Sponsor as to current
market prices prior to making a tender for redemption. The Sponsor may
discontinue repurchases of Units of a State Trust if the supply of Units
exceeds demand, or for other business reasons. The date of repurchase is deemed
to be the date on which Certificates representing Units of a State Trust are
physically received in proper form by the Sponsor, Reich & Tang Distributors
L.P., 600 Fifth Avenue, New York, N.Y. 10020. Units received after 4:00 p.m.,
New York Time, will be deemed to have been repurchased on the next business
day. In the event a market is not maintained for the Units of a State Trust, a
Certificateholder may be able to dispose of Units only by tendering them to the
Trustee for redemption.

Prospectuses relating to certain other bond trusts indicate an intention
by the Sponsor, subject to change, to repurchase units of those funds on the
basis of a price higher than the bid prices of the Bonds in the Trusts.
Consequently, depending upon the prices actually paid, the secondary market
repurchase price of other trusts may be computed on a somewhat more favorable
basis than the repurchase price offered by the Sponsor for Units of these State
Trusts, although in all bond trusts, the purchase price per unit depends
primarily on the value of the bonds in the trust portfolio.

Units purchased by the Sponsor in the secondary market may be re-offered
for sale by the Sponsor at a price based on the aggregate bid price of the
Bonds in a State Trust plus a 5-1/2% sales charge (5.820% of the net amount
invested) plus net accrued interest. Any Units that are purchased by the
Sponsor in the secondary market also may be redeemed by the Sponsor if it
determines such redemption to be in its best interest.

The Sponsor may, under certain circumstances, as a service to
Certificateholders, elect to purchase any Units tendered to the Trustee for

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redemption (see "Trustee Redemption"). For example, if in order to meet
redemptions of Units the Trustee must dispose of Bonds, and if such disposition
cannot be made by the redemption date (seven calendar days after tender), the
Sponsor may elect to purchase such Units. Such purchase shall be made by
payment to the Certificateholder not later than the close of business on the
redemption date of an amount equal to the Redemption Price on the date of
tender.

Trustee Redemption

Units may also be tendered to the Trustee for redemption at its corporate
trust office as set forth in Part A of this Prospectus, upon proper delivery of
Certificates representing such Units and payment of any relevant tax. At the
present time there are no specific taxes related to the redemption of Units. No
redemption fee will be charged by the Sponsor or the Trustee. Units redeemed by
the Trustee will be cancelled.

Certificates representing Units to be redeemed must be delivered to the
Trustee and must be properly endorsed or accompanied by proper instruments of
transfer with signature guaranteed (or by providing satisfactory indemnity, as
in the case of lost, stolen or mutilated Certificates). Thus, redemptions of
Units cannot be effected until Certificates representing such Units have been
delivered by the person seeking redemption. (See "Certificates.")
Certificateholders must sign exactly as their names appear on the faces of
their Certificates. In certain instances the Trustee may require additional
documents such as, but not limited to, trust instruments, certificates of
death, appointments as executor or administrator or certificates of corporate
authority.

Within three calendar days following a tender for redemption, or, if such
third day is not a business day, on the first business day prior thereto, the
Certificateholder will be entitled to receive in cash an amount for each Unit
tendered equal to the Redemption Price per Unit computed as of the Evaluation
Time on the date of tender. The "date of tender" is deemed to be the date on
which Units are received by the Trustee, except that, with respect to Units
received after the close of trading on the New York Stock Exchange, the date of
tender is the next day on which such Exchange is open for trading, and such
Units will be deemed to have been tendered to the Trustee on such day for
redemption at the Redemption Price computed on that day.

Accrued interest paid on redemption shall be withdrawn from the
appropriate Interest Account, or, if the balance therein is insufficient, from
the appropriate Principal Account. All other amounts paid on redemption shall
be withdrawn from the appropriate Principal Account. The Trustee is empowered
to sell Bonds in order to make funds available for redemptions. Such sales, if
required, could result in a sale of Bonds by the Trustee at a loss. To the
extent Bonds in a State Trust are sold, the size and diversity of such Trust
will be reduced.

The Redemption Price per Unit of a State Trust is the pro rata share of
each Unit in such State Trust determined by the Trustee on the basis of (i) the
cash on hand in such Trust or monies in the process of being collected, (ii)
the value of the Bonds in such State Trust based on the bid prices of such
Bonds and (iii) interest accrued thereon, less (a) amounts representing taxes
or other governmental charges payable out of such State Trust, (b) the accrued
expenses of such State Trust and (c) cash allocated for distribution to
Certificateholders of record of such State Trust as of the business day prior
to the evaluation being made. The Evaluator may determine the value of the
Bonds in such State Trust for purposes of redemption (1) on the basis of
current bid prices of the Bonds obtained from dealers or brokers who
customarily deal in bonds comparable to those held by such State Trust,

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(2) on the basis of bid prices for bonds comparable to any Bonds for which bid
prices are not available, (3) by determining the value of the Bonds by
appraisal, or (4) by any combination of the above.

The Trustee is irrevocably authorized in its discretion, if the Sponsor
does not elect to purchase a Unit tendered for redemption or if the Sponsor
tenders a Unit for redemption, in lieu of redeeming such Unit, to sell such
Unit in the over-the-counter market for the account of the tendering
Certificateholder at prices which will return to the Certificateholder an
amount in cash, net after deducting brokerage commissions, transfer taxes and
other charges, equal to or in excess of the Redemption Price for such Unit. The
Trustee will pay the net proceeds of any such sale to the Certificateholder on
the day he would otherwise be entitled to receive payment of the Redemption
Price.

The Trustee reserves the right to suspend the right of redemption and to
postpone the date of payment of the Redemption Price per Unit for any period
during which the New York Stock Exchange is closed, other than customary
weekend and holiday closings, or trading on that Exchange is restricted or
during which (as determined by the Securities and Exchange Commission) an
emergency exists as a result of which disposal or evaluation of the Bonds is
not reasonably practicable, or for such other periods as the Securities and
Exchange Commission may by order permit. The Trustee and the Sponsor are not
liable to any person or in any way for any loss or damage which may result from
any such suspension or postponement.

A Certificateholder who wishes to dispose of his Units should inquire of
his bank or broker in order to determine if there is a current secondary market
price in excess of the Redemption Price.

TOTAL REINVESTMENT PLAN

Under the Total Reinvestment Plan (the "Plan"), semi-annual and annual
Certificateholders may elect to have all interest and principal distributions,
if any, with respect to their Units reinvested either in units of various
series of "Municipal Securities Trust"* which will have been created shortly
before each semi-annual or annual Payment Date (a "Primary Series") or, if
units of a Primary Series are not available, in units of a previously formed
series of the Trust which have been repurchased by the Sponsor in the secondary
market, including the Units being offered hereby (a "Secondary Series")
(Primary Series and Secondary Series are hereafter collectively referred to as
"Available Series"). June 15 and December 15 of each year in the case of
semi-annual Certificateholders and December 15 of each year in the case of
annual Certificateholders are "Plan Reinvestment Dates."

Under the Plan (subject to compliance with applicable blue sky laws),
fractional units ("Plan Units") will be purchased from the Sponsor at a price
equal to the aggregate offering price per Unit of the bonds in the Available
Series portfolio during the initial offering of the Available Series -------- *
Certificateholders of a particular State Trust of the Multi-State Trust who
participate in the Plan will have reinvestments made in Units from the same
State Trust of a similar Multi-State Trust if such Units are available. If no
such Units are available for reinvestment, distributions to Certificateholders
will be reinvested in Units of regular series of Municipal Securities Trust,
the income earned on which may not be exempt from state and local income taxes.

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or at the aggregate bid price per Unit of the Available Series if its initial
offering has been completed, plus a sales charge equal to 3.627% of the net
amount invested in such bonds or 3-1/2% of the Reinvestment Price per Plan
Unit, plus accrued interest, divided by one hundred (the "Reinvestment Price
per Plan Unit"). All Plan Units will be sold at this reduced sales charge of
3-1/2% in comparison to the regular sales charge levied on primary and
secondary market sales of Units in any series of "Municipal Securities Trust."
Participants in the Plan will have the opportunity to designate, in the
Authorization Form for the Plan, the name of a broker to whom the Sponsor will
allocate a sales commission of 1-1/2% of the Reinvestment Price per Plan Unit,
payable out of the 3-1/2% sales charge. If no such designation is made, the
Sponsor will retain the sales commission.

Under the Plan, the entire amount of a participant's income and principal
distributions will be reinvested. For example, a Certificateholder who is
entitled to receive $130.50 interest income from the Trust would acquire 13.05
Plan Units assuming that the Reinvestment Price per Plan Unit, plus accrued
interest, approximated $10 (Ten Dollars).

A semi-annual or annual Certificateholder may join the Plan at the time he
invests in Units of the State Trust or any time thereafter by delivering to the
Trustee an Authorization Form which is available from brokers or the Sponsor.
In order that distributions may be reinvested on a particular Plan Reinvestment
Date, the Authorization Form must be received by the Trustee not later than the
15th day of the month preceding such date. Authorization Forms not received in
time for a particular Plan Reinvestment Date will be valid only for the second
succeeding Plan Reinvestment Date. Similarly, a participant may withdraw from
the program at any time by notifying the Trustee (see below). However, if
written confirmation of withdrawal is not given to the Trustee prior to a
particular distribution, the participant will be deemed to have elected to
participate in the Plan with respect to that particular distribution and his
withdrawal would become effective for the next succeeding distribution.

Once delivered to the Trustee, an Authorization Form will constitute a
valid election to participate in the Plan with respect to Units purchased in
the Trust (and with respect to Plan Units purchased with the distributions from
the Units purchased in the State Trust) for each subsequent distribution as
long as the Certificateholder continues to participate in the Plan. However, if
an Available Series should materially differ from the Trust in the opinion of
the Sponsor, the authorization will be voided and participants will be provided
with both a notice of the material change and a new Authorization Form which
would have to be returned to the Trustee before the Certificateholder would
again be able to participate in the Plan. The Sponsor anticipates that a
material difference which would result in a voided authorization would include
such facts as the inclusion of bonds in the Available Series portfolio, the
interest income on which was not exempt from all Federal income tax, or the
inclusion of bonds which were not rated "A" or better by either Standard &
Poor's Corporation or Moody's Investors Service, Inc. on the date such bonds
were initially deposited in the Available Series portfolio.

The Sponsor has the option at any time to use units of a Secondary Series
to fulfill the requirements of the Plan in the event units of a Primary Series
are not available either because a Primary Series is not then in existence or
because the registration statement relating thereto is not declared effective
in sufficient time to distribute final prospectuses to Plan participants (see
below). It should be noted that there is no assurance that the quality and
diversification of the Bonds in any Available Series or the estimated current
return thereon will be similar to that of this Trust.

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It is the Sponsor's intention that Plan Units will be offered on or about
each semi-annual and annual Record Date for determining who is eligible to
receive distributions on the related Payment Date. Such Record Dates are June 1
and December 1 of each year for semi-annual Certificateholders, and December 1
of each year for annual Certificateholders. On each Record Date the Sponsor
will send a current Prospectus relating to the Available Series being offered
for the next Plan Reinvestment Date along with a letter which reminds each
participant that Plan Units are being purchased for him as part of the Plan
unless he notifies the Trustee in writing by that Plan Reinvestment Date that
he no longer wishes to participate in the Plan. In the event a Primary Series
has not been declared effective in sufficient time to distribute a final
Prospectus relating thereto and there is no Secondary Series as to which a
registration statement is currently effective, it is the Sponsor's intention to
suspend the Plan and distribute to each participant his regular semi-annual or
annual distribution. If the Plan is so suspended, it will resume in effect with
the next Plan Reinvestment Date, assuming units of an Available Series are then
being offered.

To aid a participant who might desire to withdraw either from the Plan or
from a particular distribution, the Trustee has established a toll free number
(see below) for participants to use for notification of withdrawal, which must
be confirmed in writing prior to the Plan Reinvestment Date. Should the Trustee
be so notified, it will make the appropriate cash disbursement. Unless the
withdrawing participant specifically indicates in his written confirmation that
(a) he wishes to withdraw from the Plan for that particular distribution only,
or (b) he wishes to withdraw from the Plan for less than all units of each
series of "Municipal Securities Trust" which he might then own (and
specifically identifies which series are to continue in the Plan), he will be
deemed to have withdrawn completely from the Plan in all respects. Once a
participant withdraws completely, he will only be allowed to again participate
in the Plan by submitting a new Authorization Form. A sale or redemption of a
portion of a participant's Plan Units will not constitute a withdrawal from the
Plan with respect to the remaining Plan Units owned by such participant.

Unless a Certificateholder notifies the Trustee in writing to the
contrary, each semi-annual and annual Certificateholder who has acquired Plan
Units will be deemed to have elected the semi-annual and annual plan of
distribution, respectively, and to participate in the Plan with respect to
distributions made in connection with such Plan Units. (Should the Available
Series from which Plan Units are purchased for the account of an annual
Certificateholder fail to have an annual distribution plan, such
Certificateholder will be deemed to have elected the semi-annual plan of
distribution, and to participate in the Plan with respect to distributions
made, in connection with such Plan Units.) A participant who subsequently
desires to have distributions made with respect to Plan Units delivered to him
in cash may withdraw from the Plan with respect to such Plan Units and remain
in the Plan with respect to units acquired other than through the Plan.
Assuming a participant has his distributions made with respect to Plan Units
reinvested, all such distributions will be accumulated with distributions
generated from the Units of the Trust used to purchase such additional Plan
Units. However, distributions related to units in other series of "Municipal
Securities Trust" will not be accumulated with the foregoing distributions for
Plan purchases. Thus, if a person owns units in more than one series of
"Municipal Securities Trust" (which are not the result of purchases under the
Plan), distributions with respect thereto will not be aggregated for purchases
under the Plan.

Although not obligated to do so, the Sponsor intends to maintain a market
for the Plan Units and continuously to offer to purchase Plan Units at prices
based upon the aggregate offering price of the Bonds in the Available Series
portfolio during the initial offering of the Available Series, or at

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the aggregate bid price of the Bonds of the Available Series of its initial
offering has been completed. The Sponsor may discontinue such purchases at any
time. The aggregate bid price of the underlying bonds may be expected to be
less than the aggregate offering price. In the event that a market is not
maintained for Plan Units, a participant desiring to dispose of his Plan Units
may be able to do so only by tendering such Plan Units to the Trustee for
redemption at the Redemption Price of the full units in the Available Series
corresponding to such Plan Units, which is based upon the aggregate bid price
of the underlying bonds as described in the "Municipal Securities Trust"
Prospectus for the Available Series in question. If a participant wishes to
dispose of his Plan Units, he should inquire of the Sponsor as to current
market prices prior to making a tender for redemption to the Trustee.

Any participant may tender his Plan Units for redemption to the Available
Series Trust. Participants may redeem Plan Units by making a written request to
the Trustee at the address set forth in Part A, on the Redemption Form supplied
by the Trustee. The redemption price per Plan Unit will be determined as set
forth in the "Municipal Securities Trust" Prospectus of the Available Series
from which such Plan Unit was purchased following receipt of the request and
adjusted to reflect the fact that it relates to a Plan Unit. There is no charge
for the redemption of Plan Units.

The Trust Agreement requires that the Trustee notify the Sponsor of any
tender of Plan Units for redemption. So long as the Sponsor is maintaining a
bid in the secondary market, the Sponsor will purchase any Plan Units tendered
to the Trustee for redemption by making payment therefor to the
Certificateholder in an amount not less than the redemption price for such Plan
Units on the date of tender not later than the day on which such Plan Units
otherwise would have been redeemed by the Trustee.

Participants in the Plan will not receive individual certificates for
their Plan Units unless the amount of Plan Units accumulated represents the
principal amount of bonds per Unit for the Available Series and, in such case,
a written request for certificates is made to the Trustee. All Plan Units will
be accounted for by the Trustee on a book entry system. Each time Plan Units
are purchased under the Plan, a participant will receive a confirmation stating
his cost, number of Units purchased and estimated current return. Questions
regarding a participant's statements should be directed to the Trustee by
calling the Trustee at the number set forth under "Summary of Essential
Information" in Part A of this Prospectus.

All expenses relating to the operation of the Plan are borne by the
Sponsor. Both the Sponsor and the Trustee reserve the right to suspend, modify
or terminate the Plan at any time for any reason, including the right to
suspend the Plan if the Sponsor is unable or unwilling to establish a Primary
Series or is unable to provide Secondary Series Units. All participants will
receive notice of any such suspension, modification or termination.

TRUST ADMINISTRATION

Portfolio Supervision

The Sponsor may direct the Trustee to dispose of Bonds in a State Trust
upon (i) default in payment of principal or interest on such Bonds, (ii)
institution of certain legal proceedings with respect to the issuers of such
Bonds, (iii) default under other documents adversely affecting debt service on
such Bonds, (iv) default in payment of principal or interest on other
obligations of the same issuer or guarantor, (v) with respect to revenue Bonds,
decline in revenues and income of any facility or project below the estimated
levels calculated by proper officials charged with the construction

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or operation of such facility or project, or (vi) decline in price or the
occurrence of other market or credit factors that in the opinion of the Sponsor
would make the retention of such Bonds in such State Trust detrimental to the
interests of the Certificateholders. If a default in the payment of principal
or interest on any of the Bonds occurs and if the Sponsor fails to instruct the
Trustee to sell or hold such Bonds, the Trust Agreement provides that the
Trustee may sell such Bonds.

The Sponsor is authorized by the Trust Agreement to direct the Trustee to
accept or reject certain plans for the refunding or refinancing of any of the
Bonds. Any bonds received in exchange or substitution will be held by the
Trustee subject to the terms and conditions of the Trust Agreement to the same
extent as the Bonds originally deposited. Within five days after such deposit
in a State Trust, notice of such exchange and deposit shall be given by the
Trustee to each Certificateholder of such Trust registered on the books of the
Trustee, including an identification of the Bonds eliminated and the Bonds
substituted therefor. Except as previously stated in the discussion regarding
Failed Bonds, the acquisition by a State Trust of any securities other than the
Bonds initially deposited is prohibited.

Trust Agreement, Amendment and Termination

The Trust Agreement may be amended by the Trustee, the Sponsor and the
Evaluator without the consent of any of the Certificateholders: (1) to cure any
ambiguity or to correct or supplement any provision which may be defective or
inconsistent; (2) to change any provision thereof as may be required by the
Securities and Exchange Commission or any successor governmental agency; or (3)
to make such other provisions in regard to matters arising thereunder as shall
not adversely affect the interests of the Certificateholders.

The Trust Agreement may also be amended in any respect, or performance of
any of the provisions thereof may be waived, with the consent of the holders of
Certificates evidencing 66-2/3% of the Units then outstanding of each State
Trust affected by such amendment for the purpose of modifying the rights of
Certificateholders; provided that no such amendment or waiver shall reduce any
Certificateholder's interest in a State Trust without his consent or reduce the
percentage of Units required to consent to any such amendment or waiver without
the consent of the holders of all Certificates. The Trust Certificates in a
State Trust then outstanding, to increase the number of Units issuable by such
State Trust or to permit the acquisition of any bonds in addition to or in
substitution for those initially deposited in such State Trust, except in
accordance with the provisions of the Trust Agreement. The Trustee shall
promptly notify Certificateholders, in writing, of the substance of any such
amendment.

The Trust Agreement provides that each State Trust shall terminate upon
the maturity, redemption or other disposition, as the case may be, of the last
of the Bonds held in such State Trust, but in no event is it to continue beyond
the end of the calendar year preceding the fiftieth anniversary of the
execution of the Trust Agreement. If the value of a State Trust shall be less
than the minimum amount set forth under "Summary of Essential Information in
Part A" for such State Trust, the Trustee may, in its discretion, and shall
when so directed by the Sponsor, terminate such State Trust. Each State Trust
may also be terminated at any time with the consent of the holders of
Certificates representing 100% of the Units of such State Trust then
outstanding. In the event of termination of a State Trust, written notice
thereof will be sent by the Trustee to all Certificateholders of such State
Trust. Within a reasonable period after termination, the Trustee must sell any
Bonds remaining in the terminated State Trust, and, after paying all expenses
and charges incurred by such State Trust, distribute to each Certificateholder
thereof, upon surrender for cancellation of his Certificate

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for Units, his pro rata share of the Interest and Principal Accounts of such
State Trust.

The Sponsors

The Sponsor, Reich & Tang Distributors L.P. ("Reich & Tang") (successor to
the Unit Investment Trust Division of Bear, Stearns & Co., Inc.), a Delaware
limited partnership, is engaged in the brokerage business and is a member of
the National Association of Securities Dealers, Inc. Reich & Tang is also a
registered investment adviser. Reich & Tang maintains its principal business
offices at 600 Fifth Avenue, New York, New York 10020. Reich & Tang Asset
Management L.P. ("RTAM LP"), a registered investment adviser, having its
principal place of business at 399 Boylston Street, Boston, MA 02116, is the
99% limited partner of the Sponsor. RTAM LP is 99.5% owned by New England
Investment Companies, LP ("NEIC LP") and Reich & Tang Asset Management, Inc., a
wholly owned subsidiary of NEIC LP, owns the remaining .5% interest of RTAM LP
and is its general partner.

NEIC LP's general partner is New England Investment Companies, Inc.
("NEIC"), a holding company offering a broad array of investment styles across
a wide range of asset categories through ten investment advisory/management
affiliates and two distribution affiliates. These affiliates in the aggregate
are investment advisers or managers to over 57 registered investment companies.
Reich & Tang is the successor sponsor for numerous series of unit investment
trusts, including: New York Municipal Trust, Series 1 (and Subsequent Series);
Municipal Securities Trust, Series 1 (and Subsequent Series), 1st Discount
Series (and Subsequent Series), Multi-State Series 1 (and Subsequent Series);
Mortgage Securities Trust, Series 1 (and Subsequent Series), Insured Municipal
Securities Trust, Series 1 (and Subsequent Series), 5th Discount Series (and
Subsequent Series), and Equity Securities Trust, Series 1, Signature Series,
Gabelli Communications Income Trust (and Subsequent Series). The information
included herein is only for the purpose of informing investors as to the
financial responsibility of the Sponsor and its ability to carry out its
contractual obligations.

On August 30, 1996, the merger of New England Mutual Life Insurance
Company and Metropolitan Life Insurance Company ("MetLife") became effective,
with MetLife being the continuing company. RTAM LP remains a wholly-owned
subsidiary of NEIC LP, a New York Stock Exchange listed company, but its sole
general partner is now an indirect subsidiary of MetLife. MetLife also
indirectly owns a majority of the outstanding limited partnership interest of
NEIC LP.

MetLife is a mutual life insurance company with assets of $142.2 billion
at March 31, 1996. It is the second largest life insurance company in the
United States in terms of total assets. MetLife provides a wide range of
insurance and investment products and services to individuals and groups and is
the leader among United States life insurance companies in terms of total life
insurance in force, which exceeded $1.2 trillion at March 31, 1996 for MetLife
and its insurance affiliates. MetLife and its affiliates provide insurance or
other financial services to approximately 36 million people worldwide.

For certain other Trusts as set forth in the "Summary of Essential
Information" in Part A, the Sponsors are Reich & Tang and Gruntal & Co.,
Incorporated, both of whom have entered into an Agreement Among Co-Sponsors
pursuant to which both parties have agreed to act as Co-Sponsors for the Trust.
Reich & Tang has been appointed by Gruntal & Co., Incorporated as agent for
purposes of taking any action required or permitted to be taken by the Sponsor
under the Trust Agreement. If the Sponsors are unable to agree with respect to
action to be taken jointly by them under the Trust Agreement and they cannot
agree as to which Sponsor shall act as sole Sponsor, then Reich & Tang shall
act as sole Sponsor. If one of the Sponsors fails to perform its duties under
the Trust Agreement or becomes incapable of acting or

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becomes bankrupt or its affairs are taken over by public authorities, that
Sponsor may be discharged under the Trust Agreement and a new Sponsor may be
appointed or the remaining Sponsor may continue to act as Sponsor.

Gruntal & Co., Incorporated, a Delaware corporation, operates a regional
securities broker/dealer from its main office in New York City and branch
offices in nine states. The firm is very active in the marketing of investment
companies and has signed dealer agreements with many mutual fund groups.
Further, through its Syndicate Department, Gruntal & Co. Incorporated has
underwritten a large number of Closed-End Funds and has been Co-Manager on the
following offerings: Cigna High Income Shares; Dreyfus New York Municipal
Income, Inc.; Franklin Principal Maturity Trust and Van Kampen Merritt Limited
Term High Income Trust. The Sponsor is liable for the performance of its
obligations arising from its responsibilities under the Trust Agreement, but
will be under no liability to Certificateholders for taking any action, or
refraining from taking any action, in good faith pursuant to the Trust
Agreement, or for errors in judgment except in cases of its own willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties.

The Sponsor may resign at any time by delivering to the Trustee an
instrument of resignation executed by the Sponsor.

If at any time the Sponsor shall resign or fail to perform any of its
duties under the Trust Agreement or becomes incapable of acting or becomes
bankrupt or its affairs are taken over by public authorities, then the Trustee
may either (a) appoint a successor Sponsor; (b) terminate the Trust Agreement
and liquidate the Trust; or (c) continue to act as Trustee without terminating
the Trust Agreement. Any successor Sponsor appointed by the Trustee shall be
satisfactory to the Trustee and, at the time of appointment, shall have a net
worth of at least $1,000,000.

The Trustee

For certain of the State Trusts, as set forth in the "Summary of Essential
Information" in Part A, the Trustee is The Chase Manhattan Bank with its
principal executive office located at 270 Park Avenue, New York, New York 10017
(800) 428-8890 and its unit investment trust office at 770 Broadway, New York,
New York 10003. Effective on or after November 15, 1996 the address of the
Trustee's unit investment trust office will be 4 New York Plaza, New York, New
York 10004. The Trustee is subject to supervision by the Superintendent of
Banks of the State of New York, the Federal Deposit Insurance Corporation and
the Board of Governors of the Federal Reserve System.

For certain other State Trusts as set forth in the "Summary of Essential
Information" in Part A, the Trustee is The Bank of New York, a trust company
organized under the laws of New York, having its offices at 101 Barclay Street,
New York, New York 10286. The Bank of New York is subject to supervision and
examination by the Superintendent of Banks of the State of New York and the
Board of Governors of the Federal Reserve System, and its deposits are insured
by the Federal Deposit Insurance Corporation to the extent permitted by law.
The Trustee must be a banking corporation organized under the laws of the
United States or any state which is authorized under such laws to exercise
corporate trust powers and must have at all times an aggregate capital, surplus
and undivided profits of not less than $5,000,000. The duties of the Trustee
are primarily ministerial in nature. The Trustee did not participate in the
selection of Securities for the portfolio of the Trust.

The Trustee shall not be liable or responsible in any way for taking any
action, or for refraining from taking any action, in good faith pursuant to the
Trust Agreement, or for errors in judgment; or for any disposition of any
moneys, Bonds or Certificates in accordance with the Trust

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Agreement, except in cases of its own willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties; provided,
however, that the Trustee shall not in any event be liable or responsible for
any evaluation made by the Evaluator. In addition, the Trustee shall not be
liable for any taxes or other governmental charges imposed upon or in respect
of the Bonds or the Trusts which it may be required to pay under current or
future law of the United States or any other taxing authority having
jurisdiction. The Trustee shall not be liable for depreciation or loss incurred
by reason of the sale by the Trustee of any of the Bonds pursuant to the Trust
Agreement.

For further information relating to the responsibilities of the Trustee
under the Trust Agreement, reference is made to the material set forth under
"Rights of Certificateholders."

The Trustee may resign by executing an instrument in writing and filing
the same with the Sponsor, and mailing a copy of a notice of resignation to all
Certificateholders. In such an event the Sponsor is obligated to appoint a
successor Trustee as soon as possible. In addition, if the Trustee becomes
incapable of acting or becomes bankrupt or its affairs are taken over by public
authorities, the Sponsor may remove the Trustee and appoint a successor as
provided in the Trust Agreement. Notice of such removal and appointment shall
be mailed to each Certificateholder by the Sponsor. If upon resignation of the
Trustee no successor has been appointed and has accepted the appointment within
thirty days after notification, the retiring Trustee may apply to a court of
competent jurisdiction for the appointment of a successor. The resignation or
removal of the Trustee becomes effective only when the successor Trustee
accepts its appointment as such or when a court of competent jurisdiction
appoints a successor Trustee. Upon execution of a written acceptance of such
appointment by such successor Trustee, all the rights, powers, duties and
obligations of the original Trustee shall vest in the successor.

Any corporation into which the Trustee may be merged or with which it may
be consolidated, or any corporation resulting from any merger or consolidation
to which the Trustee shall be a party, shall be the successor Trustee. The
Trustee must always be a banking corporation organized under the laws of the
United States or any state and have at all times an aggregate capital, surplus
and undivided profits of not less than $2,500,000.

The Evaluator

The Evaluator is Kenny S&P Evaluation Services, a business unit of J. J.
Kenny Company, Inc., a subsidiary of The McGraw-Hill Companies, Inc. with main
offices located at 65 Broadway, New York, New York 10006. The Evaluator is a
wholly-owned subsidiary of McGraw-Hill, Inc. The Evaluator is a registered
investment advisor and also provides financial information services.

The Trustee, the Sponsor and Certificateholders may rely on any evaluation
furnished by the Evaluator and shall have no responsibility for the accuracy
thereof. Determinations by the Evaluator under the Trust Agreement shall be
made in good faith upon the basis of the best information available to it,
provided, however, that the Evaluator shall be under no liability to the
Trustee, the Sponsor, or Certificateholders for errors in judgment, except in
cases of its own willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.

The Evaluator may resign or may be removed by the Sponsor and Trustee, and
the Sponsor and the Trustee are to use their best efforts to appoint a
satisfactory successor. Such resignation or removal shall become effective upon
the acceptance of appointment by the successor Evaluator. If

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upon resignation of the Evaluator no successor has accepted appointment within
thirty days after notice of resignation, the retiring Evaluator may apply to a
court of competent jurisdiction for the appointment of a successor.

TRUST EXPENSES AND CHARGES

At no cost to the State Trusts, the Sponsor has borne the expenses of
creating and establishing the State Trusts, including the cost of initial
preparation and execution of the Trust Agreement, registration of the State
Trusts and the Units under the Investment Company Act of 1940 and the
Securities Act of 1933, preparation and printing of the Certificates, legal and
auditing expenses, advertising and selling expenses, initial fees and expenses
of the Trustee and other out-of-pocket expenses. The fees of the Evaluator,
however, incurred during the initial public offering are paid directly by the
Trustee.

The Sponsor will not charge the State Trust a fee for its services as
such. See "Sponsor's Profits."

The Trustee will receive for its ordinary recurring services to each State
Trust an annual fee in the amount set forth under "Summary of Essential
Information" in Part A. For a discussion of the services performed by the
Trustee pursuant to its obligations under the Trust Agreement, see "Trust
Administration" and "Rights of Certificateholders."

The Evaluator will receive for each daily evaluation of the Bonds in the
Trust a fee in the amount set forth under "Summary of Essential Information" in
Part A, which fee shall be allocated pro rata among each State Trust.

The Trustee's and Evaluator's fees applicable to a State Trust are payable
monthly as of the Record Date from such State Trust's Interest Account to the
extent funds are available and then from such Trust's Principal Account. Both
fees may be increased without approval of the Certificateholders by amounts not
exceeding proportionate increases in consumer prices for services as measured
by the United States Department of Labor's Consumer Price Index entitled "All
Services Less Rent."

The following additional charges are or may be incurred by any or all of
the State Trusts: all expenses (including counsel and auditing fees) of the
Trustee incurred in connection with its activities under the Trust Agreement,
including the expenses and costs of any action undertaken by the Trustee to
protect a State Trust and the rights and interests of the Certificateholders;
fees of the Trustee for any extraordinary services performed under the Trust
Agreement; indemnification of the Trustee for any loss or liability accruing to
it without gross negligence, bad faith or willful misconduct on its part,
arising out of or in connection with its acceptance or administration of a
State Trust; indemnification of the Sponsor for any loss, liabilities and
expenses incurred in acting as Sponsor of a State Trust without gross
negligence, bad faith or willful misconduct on its part; and all taxes and
other governmental charges imposed upon the Bonds or any part of a State Trust
(no such taxes or charges are being levied, made or, to the knowledge of the
Sponsor, contemplated). The above expenses, including the Trustee's fees, when
paid by or owing to the Trustee are secured by a first lien on the State Trust
to which such expenses are allocable. In addition, the Trustee is empowered to
sell Bonds of a State Trust in order to make funds available to pay all
expenses of such State Trust.

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EXCHANGE PRIVILEGE AND CONVERSION OFFER

Exchange Privilege

Certificateholders may elect to exchange any or all of their Units of
these Trusts for Units of one or more of any available series of Insured
Municipal Securities Trust, Municipal Securities Trust, New York Municipal
Trust, Mortgage Securities Trust or Equity Securities Trust (the "Exchange
Trusts") at a reduced sales charge as set forth below. Under the Exchange
Privilege, the Sponsor's repurchase price during the initial offering period of
the Units being surrendered will be based on the market value of the Securities
in the Trust portfolio or on the aggregate offer price of the Bonds in the
other Trust Portfolios; and, after the initial offering period has been
completed, will be based on the aggregate bid price of the Bonds in the
particular Trust portfolio. Units in an Exchange Trust will be sold to
Certificateholders at a price based on the aggregate offer price of the Bonds
in the Exchange Trust portfolio during the initial public offering period of
the Exchange Trust; and after the initial public offering period has been
completed, based on the aggregate bid price of the Bonds in the Exchange Trust
portfolio if its initial offering has been completed, plus accrued interest (or
for units of the Equity Securities Trust, based on the market value of the
underlying securities in the Equity Trust portfolio), and a reduced sales
charge as set forth below.

Except for Certificateholders who wish to exercise the Exchange Privilege
within the first five months of their purchase of Units of Trust, the sales
charge applicable to the purchase of units of an Exchange Trust shall be
approximately 1.5% of the price of each Exchange Trust unit (or 1,000 Units for
the Mortgage Securities Trust or 100 Units for the Equity Securities Trust).
For Certificateholders who wish to exercise the Exchange Privilege within the
first five months of their purchase of Units of Trust, the sales charge
applicable to the purchase of units of an Exchange Trust shall be the greater
of (i) 1.5% of the price of each Exchange Trust unit (or 1,000 Units for the
Mortgage Securities Trust or 100 Units for the Equity Securities Trust), or
(ii) an amount which when coupled with the sales charge paid by the unitholder
upon his original purchase of Units of the Trust at least equals the sales
charge applicable in the direct purchase of units of an Exchange Trust. The
Exchange Privilege is subject to the following conditions:

(1) The Sponsor must be maintaining a secondary market in both the
Units of the Trust held by the Certificateholder and the Units of the
available Exchange Trust. While the Sponsor has indicated its intention to
maintain a market in the Units of all Trusts sponsored by it, the Sponsor
is under no obligation to continue to maintain a secondary market and
therefore there is no assurance that the Exchange Privilege will be
available to a Certificateholder at any specific time in the future. At
the time of the Certificateholder's election to participate in the
Exchange Privilege, there also must be Units of the Exchange Trust
available for sale, either under the initial primary distribution or in
the Sponsor's secondary market.

(2) Exchanges will be effected in whole units only. Any excess
proceeds from the Units surrendered for exchange will be remitted and the
selling Certificateholder will not be permitted to advance any new funds
in order to complete an exchange. Units of the Mortgage Securities Trust
may only be acquired in blocks of 1,000 Units. Units of the Equity
Securities Trust may only be acquired in blocks of 100 units.

(3) The Sponsor reserves the right to suspend, modify or terminate
the Exchange Privilege. The Sponsor will provide Certificateholders of the
Trust with 60 days' prior written notice of

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any termination or material amendment to the Exchange Privilege, provided
that, no notice need be given if (i) the only material effect of an
amendment is to reduce or eliminate the sales charge payable at the time
of the exchange, to add one or more series of the Trust eligible for the
Exchange Privilege or to delete a series which has been terminated from
eligibility for the Exchange Privilege, (ii) there is a suspension of the
redemption of units of an Exchange Trust under Section 22(e) of the
Investment Company Act of 1940, or (iii) an Exchange Trust temporarily
delays or ceases the sale of its units because it is unable to invest
amounts effectively in accordance with its investment objectives, policies
and restrictions. During the 60 day notice period prior to the termination
or material amendment of the Exchange Privilege described above, the
Sponsor will continue to maintain a secondary market in the units of all
Exchange Trusts that could be acquired by the affected Certificateholders.
Certificateholders may, during this 60 day period, exercise the Exchange
Privilege in accordance with its terms then in effect. In the event the
Exchange Privilege is not available to a Certificateholder at the time he
wishes to exercise it, the Certificateholder will immediately be notified
and no action will be taken with respect to his Units without further
instructions from the Certificateholder.

To exercise the Exchange Privilege, a Certificateholder should notify the
Sponsor of his desire to exercise his Exchange Privilege. If Units of a
designated, outstanding series of an Exchange Trust are at the time available
for sale and such Units may lawfully be sold in the state in which the
Certificateholder is a resident, the Certificateholder will be provided with a
current prospectus or prospectuses relating to each Exchange Trust in which he
indicates an interest. He may then select the Trust or Trusts into which he
desires to invest the proceeds from his sale of Units. The exchange transaction
will operate in a manner essentially identical to a secondary market
transaction except that units may be purchased at a reduced sales charge.

Example: Assume that after the initial public offering has been completed,
a Certificateholder has five units of a Trust with a current value of $700 per
unit which he has held for more than 5 months and the Certificateholder wishes
to exchange the proceeds for units of a secondary market Exchange Trust with a
current price of $725 per unit. The proceeds from the Certificateholder's
original units will aggregate $3,500. Since only whole units of an Exchange
Trust may be purchased under the Exchange Privilege, the Certificateholder
would be able to acquire four units (or 4,000 Units of the Mortgage Securities
Trust or 400 Units of the Equity Securities Trust) for a total cost of
$2,943.50 ($2,900 for unit and $43.50 for the sales charge). The remaining
$556.50 would be remitted to the Certificateholder in cash. If the
Certificateholder acquired the same number of units at the same time in a
regular secondary market transaction, the price would have been $3,059.80
($2,900 for units and $159.50 for the sales charge, assuming a 5 1/2% sales
charge times the public offering price).

The Conversion Offer

Certificateholders of any registered unit investment trust for which there
is no active secondary market in the units of such trust (a "Redemption Trust")
may elect to redeem such units and apply the proceeds of the redemption to the
purchase of available Units of one or more series of Municipal Securities
Trust, Insured Municipal Securities Trust, Mortgage Securities Trust, New York
Municipal Trust or Equity Securities Trust (the "Conversion Trusts") at the
Public Offering Price for units of the Conversion Trust based on a reduced
sales charge as set forth below. Under the Conversion Offer, units of the
Redemption Trust must be tendered to the trustee of such trust for redemption
at the redemption price, which is based

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upon the market value of the underlying securities in the Trust portfolio or
the aggregate bid side evaluation of the underlying bonds in such trust and is
generally about 1 1/2% to 2% lower than the offering price for such bonds. The
purchase price of the units will be based on the aggregate offer price of bonds
in the Conversion Trust portfolio during its initial offering period; or, at a
price based on the aggregate bid price of the underlying bonds if the initial
public offering of the Conversion Trust has been completed, plus accrued
interest, and a sales charge as set forth below. If the participant elects to
purchase units of the Equity Securities Trust under the Conversion Offer, the
purchase price of the units will be based, at all times, on the market value of
the underlying securities in the Trust portfolio plus a sales charge.

Except for Certificateholders who wish to exercise the Conversion Offer
within the first five months of their purchase of units of a Redemption Trust,
the sales charge applicable to the purchase of Units of the Conversion Trust
shall be 1.5% per Unit (or per 1,000 Units for the Mortgage Securities Trust or
per 100 Units for the Equity Securities Trust). For Certificateholders who wish
to exercise the Conversion Offer within the first five months of their purchase
of units of a Redemption Trust, the sales charge applicable to the purchase of
Units of a Conversion Trust shall be the greater of (i) 1.5% per Unit (or per
1,000 Units for the Mortgage Securities Trust or per 100 Units for the Equity
Securities Trust) or (ii) an amount which when coupled with the sales charge
paid by the unitholder upon his original purchase of units of the Redemption
Trust at least equals the sales charge applicable in the direct purchase of
Units of a Conversion Trust. The Conversion Offer is subject to the following
limitations:

(1) The Conversion Offer is limited only to Certificateholders of any
Redemption Trust, defined as a unit investment trust for which there is no
active secondary market at the time the Certificateholder elects to
participate in the Conversion Offer. At the time of the unit owner's
election to participate in the Conversion Offer, there also must be
available units of a Conversion Trust, either under a primary distribution
or in the Sponsor's secondary market.

(2) Exchanges under the Conversion Offer will be effected in whole
units only. Certificateholders will not be permitted to advance any new
funds in order to complete an exchange under the Conversion Offer. Any
excess proceeds from units being redeemed will be returned to the unit
owner. Units of the Mortgage Securities Trust may only be acquired in
blocks of 1,000 units. Units of the Equity Securities Trust may only be
acquired in blocks of 100 units.

(3) The Sponsor reserves the right to modify, suspend or terminate
the Conversion Offer at any time without notice to Certificateholders of
Redemption Trusts. In the event the Conversion Offer is not available to a
unit owner at the time he wishes to exercise it, the unit owner will be
notified immediately and no action will be taken with respect to his units
without further instruction from the unit owner. The Sponsor also reserves
the right to raise the sales charge based on actual increases in the
Sponsor's costs and expenses in connection with administering the program,
up to a maximum sales charge of $20 per unit (or per 1,000 units for the
Mortgage Securities Trust or per 100 units for the Equity Securities
Trust).

To exercise the Conversion Offer, a unit owner of a Redemption Trust
should notify his retail broker of his desire to redeem his Redemption Trust
Units and use the proceeds from the redemption to purchase Units of one or more
of the Conversion Trusts. If Units of a designated, outstanding series of a
Conversion Trust are at that time available for sale and if such Units may
lawfully be sold in the state in which the unit owner is a resident,

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<PAGE>

the unit owner will be provided with a current prospectus or prospectuses
relating to each Conversion Trust in which he indicates an interest. He then
may select the Trust or Trusts into which he decides to invest the proceeds
from the sale of his Units. The transaction will be handled entirely through
the unit owner's retail broker. The retail broker must tender the units to the
trustee of the Redemption Trust for redemption and then apply the proceeds to
the redemption toward the purchase of units of a Conversion Trust at a price
based on the aggregate offer or bid side evaluation per Unit of the Conversion
Trust, depending on which price is applicable, plus accrued interest and the
applicable sales charge. The certificates must be surrendered to the broker at
the time the redemption order is placed and the broker must specify to the
Sponsor that the purchase of Conversion Trust Units is being made pursuant to
the Conversion Offer. The unit owner's broker will be entitled to retain $5 of
the applicable sales charge.

Example: Assume a unit owner has five units of a Redemption Trust which
has held for more than 5 months with a current redemption price of $675 per
unit based on the aggregate bid price of the underlying bonds and the unit
owner wishes to participate in the Conversion Offer and exchange the proceeds
for units of a secondary market Conversion Trust with a current price of $750
per Unit. The proceeds from the unit owner's redemption of units will aggregate
$3,375. Since only whole units of a Redemption Trust may be purchased under the
Conversion Offer, the unit owner will be able to acquire four units of the
Conversion Trust (or 4,000 units of the Mortgage Securities Trust or 400 units
of the Equity Securities Trust) for a total cost of $3,045 ($3,000 for units
and $45 for the sales charge). The remaining $330 would be remitted to the unit
owner in cash. If the unit owner acquired the same number of Conversion Trust
units at the same time in a regular secondary market transaction, the price
would have been $3,165.00 ($3,000 for units and $165.00 sales charge, assuming
a 5 1/2% sales charge times the public offering price).

Description of the Exchange Trusts and the Conversion Trusts

Municipal Securities Trust and New York Municipal Trust may be appropriate
investment vehicles for an investor who is more interested in tax-exempt
income. The interest income from New York Municipal Trust is, in general, also
exempt from New York State and local New York income taxes, while the interest
income from Municipal Securities Trust is subject to applicable New York State
and local New York taxes, except for that portion of the income which is
attributable to New York and Puerto Rico obligations in the Trust portfolio, if
any. The interest income from each State Trust of the Municipal Securities
Trust, Multi-State Series is, in general, exempt from state and local taxes
when held by residents of the state where the issuers of bonds in such State
Trusts are located. The Insured Municipal Securities Trust combines the
advantages of providing interest income free from regular federal income tax
under existing law with the added safety of irrevocable insurance. Insured
Navigator Series further combines the advantages of providing interest income
free from regular federal income tax and state and local taxes when held by
residents of the state where issuers of bonds in such state trusts are located
with the added safety of irrevocable insurance. Mortgage Securities Trust
offers an investment vehicle for investors who are interested in obtaining
safety of capital and a high level of current distributions of interest income
through investment in a fixed portfolio of collateralized mortgage obligations.
Equity Securities Trust offers investors an opportunity to achieve capital
appreciation together with a high level of income.

Tax Consequences of the Exchange Privilege and the Conversion Offer

A surrender of units pursuant to the Exchange Privilege or the Conversion
Offer will constitute a "taxable event" to the Certificateholder

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<PAGE>

under the Code. The Certificateholder will recognize a tax gain or loss that
will be of a long or short-term capital or ordinary income nature depending on
the length of time the units have been held and other factors. A
Certificateholder's tax basis in the Units acquired pursuant to the Exchange
Privilege or Conversion Offer will be equal to the purchase price of such
Units. Investors should consult their own tax advisors as to the tax
consequences to them of exchanging or redeeming units and participating in the
Exchange Privilege or Conversion Offer.

OTHER MATTERS

Legal Opinions

The legality of the Units originally offered and certain matters relating
to federal and New York tax law have been passed upon by Battle Fowler LLP, 75
East 55th Street, New York, New York 10022, or Berger Steingut Tarnoff & Stern,
600 Madison Avenue, New York, New York 10022, as counsel for the Sponsor.
Certain matters relating to California tax law have been passed upon by Brown &
Wood, as special California counsel to the Sponsor. Certain matters relating to
Michigan tax law have been passed upon by Miller, Canfield, Paddock and Stone,
as special Michigan counsel to the Sponsor. Certain matters relating to
Pennsylvania tax law have been passed upon by Saul, Ewing, Remick & Saul, as
special Pennsylvania counsel to the Sponsor. Certain matters relating to
Virginia tax law have been passed upon by Hunton & Williams, as special
Virginia counsel to the Sponsor. Carter, Ledyard & Milburn, Two Wall Street,
New York, New York 10005 have acted as counsel for The Chase Manhattan Bank.
Messrs. Booth & Baron, 122 East 42nd Street, New York, New York 10168, have
acted as counsel for The Bank of New York.

Independent Accountants

The financial statements of the Trusts for the year ended June 30, 1996
included in Part A of this Prospectus have been examined by Price Waterhouse
LLP, independent accountants. The financial statements have been so included
in reliance on their report given upon the authority of said firm as experts
in accounting and auditing. KPMG Peat Marwick LLP has consented to the
incorporation by reference of their report on the statements of operations and
changes in net assets for the Trusts included in Part A of this Prospectus for
the periods ended June 30, 1994 and June 30, 1995, respectively.

DESCRIPTION OF BOND RATINGS*

Standard & Poor's Ratings Services

A brief description of the applicable Standard & Poor's Corporation rating
symbols and their meanings is as follows:

A Standard & Poor's corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
debt obligation. This assessment of creditworthiness may take into
consideration obligors such as guarantors, insurers, or lessees.

The bond rating is not a recommendation to purchase or sell a security,
inasmuch as it does not comment as to market price.

The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information.

- --------
* As described by the rating agencies.

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<PAGE>

The ratings are based, in varying degrees, on the following
considerations:

(a) Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.

(b) Nature of and provisions of the obligation.

(c) Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.

AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.

AA -- Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and they differ from AAA
issues only in small degrees.

A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.

BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.

Plus (+) or Minus (-): To provide more detailed indications of credit
quality, the ratings from "AA" to "BB" may be modified by the addition of a
plus or minus sign to show relative standing within the major rating
categories.

Moody's Investors Service

A brief description of the applicable Moody's Investors Service, Inc.'s
rating symbols and their meanings is as follows:

Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.

Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
which make the long term risks appear somewhat larger than in Aaa securities.

A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.

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<PAGE>

Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.

Those bonds in the A and Baa group which Moody's believes possess the
strongest investment attributes are designated by the symbol A 1 and Baa 1.
Other A bonds comprise the balance of the group. These rankings (1) designate
the bonds which offer the maximum in security within their quality group, (2)
designate bonds which can be bought for possible upgrading in quality and (3)
additionally afford the investor an opportunity to gauge more precisely the
relative attractiveness of offerings in the market place.

Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.

Con-Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These are debt
obligations secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operating experience, (c) rentals which
begin when facilities are completed, or (d) payments to which some other
limiting condition attaches. Rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.

* * *

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FOR USE WITH MUNICIPAL SECURITIES TRUST

MULTISTATE SERIES 1-11

===============================================================================

AUTHORIZATION FOR INVESTMENT IN MUNICIPAL SECURITIES TRUST,
MULTI-STATE SERIES ____

TRP PLAN - TOTAL REINVESTMENT PLAN

I hereby elect to participate in the TRP Plan and am the owner of ____ units of
__________ Trust.

I hereby authorize The Bank of New York, Trustee, to pay all semi-annual or
annual distributions of interest and principal (if any) with respect to such
units to The Bank of New York, Wall Street Trust Division, as TRP Plan Agent,
who shall immediately invest the distributions in units of the available series
of The State Trust above or, if unavailable, of other available series of
regular Municipal Securities Trust.

The foregoing authorization is subject in Date ____________, 19__
all respects to the terms and conditions of
participation set forth in the prospectus
relating to such available series.

- ------------------------------------ ------------------------------------
Registered Holder (print) Registered Holder (print)

- ------------------------------------ ------------------------------------
Registered Holder Signature Registered Holder Signature
(Two signatures if joint tenancy)

My Brokerage Firm's Name

Street Address

City, State and Zipcode

Salesman's Name ___________________ Salesman's No.

===============================================================================

UNIT HOLDERS NEED ONLY DATE AND SIGN THIS FORM.

MAIL TO YOUR BROKER
OR
THE BANK OF NEW YORK
ATTN: UNIT INVESTMENT TRUST DIVISION
101 BARCLAY STREET
NEW YORK, NEW YORK 10286

C/M: 11939.0001 82600.5

<PAGE>

FOR USE WITH MUNICIPAL SECURITIES TRUST

MULTISTATE SERIES 12-46

===============================================================================

AUTHORIZATION FOR INVESTMENT IN MUNICIPAL SECURITIES TRUST,
MULTI-STATE SERIES ____

TRP PLAN - TOTAL REINVESTMENT PLAN

I hereby elect to participate in the TRP Plan and am the owner of ____ units of
__________ Trust.

I hereby authorize The Chase Manhattan Bank, Trustee, to pay all semi-annual or
annual distributions of interest and principal (if any) with respect to such
units to The Chase Manhattan Bank, as TRP Plan Agent, who shall immediately
invest the distributions in units of the available series of The State Trust
above or, if unavailable, of other available series of regular Municipal
Securities Trust.

The foregoing authorization is subject in Date ____________, 19__
all respects to the terms and conditions of
participation set forth in the prospectus
relating to such available series.

- ------------------------------------ ------------------------------------
Registered Holder (print) Registered Holder (print)

- ------------------------------------ ------------------------------------
Registered Holder Signature Registered Holder Signature
(Two signatures if joint tenancy)

My Brokerage Firm's Name

Street Address

City, State and Zip Code

Salesman's Name ___________________ Salesman's No.

===============================================================================

UNIT HOLDERS NEED ONLY DATE AND SIGN THIS FORM.

MAIL TO YOUR BROKER
OR
THE CHASE MANHATTAN BANK
ATTN: THE UIT REINVESTMENT UNIT A
770 BROADWAY
NEW YORK, NEW YORK 10003

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<PAGE>

INDEX

Title Page * * *
<S> <C> <C>
MUNICIPAL SECURITIES TRUST
Summary of Essential Information.................................... A-5 MULTI-STATE SERIES
Information Regarding the Trust..................................... A-9
Financial and Statistical Information............................... A-12 (A Unit Investment Trust)
Audit and Financial Information
Prospectus
Report of Independent Accountants................................. F-1
Statement of Net Assets........................................... F-2 Dated: October 1 , 1996
Statement of Operations........................................... F-3
Statement of Changes in Net Assets................................ F-6 Sponsor:
Notes to Financial Statements..................................... F-10
Portfolio......................................................... F-13 Reich & Tang Distributors L.P.
600 Fifth Avenue
The Trust........................................................... 1 New York, N.Y. 10020
The State Trusts.................................................... 8 212-830-5200
Public Offering..................................................... 49
Estimated Long Term Return and Estimated (and for certain Trusts:)
Current Return.................................................... 51 Gruntal & Co. Incorporated
Rights of Certificateholders........................................ 52 14 Wall Street
Tax Status.......................................................... 54 New York, New York 10005
Liquidity........................................................... 61 (212) 267-8800
Total Reinvestment Plan............................................. 63
Trust Administration................................................ 66 Trustee:
Trust Expenses and Charges.......................................... 71
Exchange Privilege and Conversion Offer............................. 72 The Chase Manhattan Bank
Other Matters....................................................... 76 770 Broadway
Description of Bond Ratings......................................... 76 New York, N.Y. 10003
800-882-9898
Parts A and B of this Prospectus do not contain all of the or
information set forth in the registration statement and exhibits relating thereto, The Bank of New York
filed with the Securities and Exchange Commission, Washington, D.C., under 101 Barclay Street
the Securities Act of 1933, and to which reference is made. New York, N.Y. 10286
800-431-8002

Evaluator:

Kenny S&P Evaluation Services,
65 Broadway
New York, N.Y. 10006
</TABLE>

This Prospectus does not constitute an offer to sell, or a solicitation of
any offer to buy, securities in any state to any person to whom it is not
lawful to make such offer in such state.

* * *

No person is authorized to give any information or to make any
representations not contained in Parts A and B of this Prospectus; and any
information or representation not contained herein must not be relied upon as
having been authorized by the Trust, the Trustee, the Evaluator, or the
Sponsor. The Trust is registered as a unit investment trust under the
Investment Company Act of 1940. Such registration does not imply that the Trust
or any of its Units have been guaranteed, sponsored, recommended or approved by
the United States or any state or any agency or officer thereof.

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