MUNICIPAL INVT TR FD MULTISTATE SERIES 201 DEFINED ASSET FDS, 487, 1996-02-29

MUNICIPAL INVT TR FD MULTISTATE SERIES 201 DEFINED ASSET FDS
487, 1996-02-29

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 29, 1996
REGISTRATION NO. 33-64759

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------------
AMENDMENT NO. 1
TO
FORM S-6
------------------------------------------
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
------------------------------------------
A. EXACT NAME OF TRUST:

MUNICIPAL INVESTMENT TRUST FUND
MULTISTATE SERIES - 201
DEFINED ASSET FUNDS

B. NAMES OF DEPOSITORS:
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
SMITH BARNEY INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
DEAN WITTER REYNOLDS INC.
C. COMPLETE ADDRESSES OF DEPOSITORS' PRINCIPAL EXECUTIVE OFFICES:

MERRILL LYNCH, PIERCE, FENNER & SMITH SMITH BARNEY INC.
INCORPORATED 388 GREENWICH STREET--23RD FLOOR
DEFINED ASSET FUNDS NEW YORK, N.Y. 10013
P.O. BOX 9051
PRINCETON, N.J. 08543-9051

PAINEWEBBER INCORPORATED PRUDENTIAL SECURITIES DEAN WITTER REYNOLDS INC.
1285 AVENUE OF THE INCORPORATED TWO WORLD TRADE
AMERICAS ONE SEAPORT PLAZA CENTER--59TH FLOOR
NEW YORK, N.Y. 10019 199 WATER STREET NEW YORK, N.Y. 10048
NEW YORK, N.Y. 10292

D. NAMES AND COMPLETE ADDRESSES OF AGENTS FOR SERVICE:

TERESA KONCICK, ESQ. LAURIE A. HESSLEIN LEE B. SPENCER, JR.
P.O. BOX 9051 388 GREENWICH STREET ONE SEAPORT PLAZA
PRINCETON, N.J. 8543-9051 NEW YORK, NY 10013 199 WATER STREET
NEW YORK, N.Y. 10292
COPIES TO:
DOUGLAS LOWE, ESQ. ROBERT E. HOLLEY PIERRE DE SAINT PHALLE,
130 LIBERTY STREET--29TH 1200 HARBOR BLVD. ESQ.
FLOOR WEEHAWKEN, N.J. 07087 450 LEXINGTON AVENUE
NEW YORK, N.Y. 10019 NEW YORK, N.Y. 10017

E. TITLE AND AMOUNT OF SECURITIES BEING REGISTERED:
An indefinite number of Units of Beneficial Interest pursuant to Rule 24f-2
promulgated under the Investment Company Act of 1940, as amended.

F. PROPOSED MAXIMUM OFFERING PRICE TO THE PUBLIC OF THE SECURITIES BEING
REGISTERED: Indefinite

G. AMOUNT OF FILING FEE: $500 (as required by Rule 24f-2)

H. APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of the registration statement.

/ x / Check box if it is proposed that this filing will become effective at 9:30
a.m. on February 29, 1996 pursuant to Rule 487.

MUNICIPAL INVESTMENT ESTIMATED CURRENT RETURN shows the estimated
TRUST FUND annual cash to be received from interest-bearing
MULTISTATE SERIES 201 bonds in the Portfolio (net of estimated annual
(UNIT INVESTMENT expenses) divided by the Public Offering Price
TRUSTS) (including the maximum sales charge).
- ------------------------------ESTIMATED LONG TERM RETURN is a measure of the
/ / EXEMPT FROM REGULAR estimated return over the estimated life of the
FEDERAL INCOME TAX Fund. This represents an average of the yields to
AND SOME STATE TAXES maturity (or in certain cases, to an earlier call
/ / DEFINED PORTFOLIOS OF date) of the individual bonds in the Portfolio,
MUNICIPAL BONDS adjusted to reflect the maximum sales charge and
/ / MONTHLY INCOME estimated expenses. The average yield for the
CALIFORNIA INSURED TRUST Portfolio is derived by weighting each bond's
5.07% yield by its market value and the time remaining
ESTIMATED CURRENT RETURN to the call or maturity date, depending on how the
5.06% bond is priced. Unlike Estimated Current Return,
ESTIMATED LONG TERM RETURN Estimated Long Term Return takes into account
CONNECTICUT TRUST maturities, discounts and premiums of the
4.91% underlying bonds.
ESTIMATED CURRENT RETURN No return estimate can be predictive of your
4.95% actual return because returns will vary with
ESTIMATED LONG TERM RETURN purchase price (including sales charges), how long
FLORIDA INSURED TRUST units are held, changes in Portfolio composition,
4.94% changes in interest income and changes in fees and
ESTIMATED CURRENT RETURN expenses. Therefore, Estimated Current Return and
4.91% Estimated Long Term Return are designed to be
ESTIMATED LONG TERM RETURN comparative rather than predictive. A yield
VIRGINIA TRUST calculation which is more comparable to an
5.03% individual bond may be higher or lower than
ESTIMATED CURRENT RETURN Estimated Current Return or Estimated Long Term
5.06% Return which are more comparable to return
ESTIMATED LONG TERM RETURN calculations used by other investment products.
AS OF FEBRUARY 28, 1996

-------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
SPONSORS: HAS THE COMMISSION OR ANY STATE SECURITIES
Merrill Lynch, COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
Pierce, Fenner & Smith OF THIS DOCUMENT. ANY REPRESENTATION TO THE
Incorporated CONTRARY IS A CRIMINAL OFFENSE.
Smith Barney Inc. Inquiries should be directed to the Trustee at
PaineWebber Incorporated 1-800-221-7771.
Prudential Securities Prospectus dated February 29, 1996.
Incorporated INVESTORS SHOULD READ THIS PROSPECTUS CAREFULLY
Dean Witter Reynolds Inc. AND RETAIN IT FOR FUTURE REFERENCE.

<PAGE>
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Defined Asset FundsSM

Defined Asset Funds is America's oldest and largest family of unit investment
trusts, with over $100 billion sponsored in the last 25 years. Each Defined
Asset Fund is a portfolio of preselected securities. Each portfolio is divided
into 'units' representing equal shares of the underlying assets. Each unit
receives an equal share of income and principal distributions.

Defined Asset Funds offer several defined 'distinctives'. You know in advance
what you are investing in and that changes in the portfolio are limited - a
defined portfolio. Most defined bond funds pay interest monthly - defined
income. The portfolio offers a convenient and simple way to invest - simplicity
defined.

Your financial professional can help you select a Defined Asset Fund to meet
your personal investment objectives. Our size and market presence enable us to
offer a wide variety of investments. The Defined Asset Funds family offers:

o Municipal portfolios
o Corporate portfolios
o Government portfolios
o Equity portfolios
o International portfolios

The terms of Defined Funds are as short as one year or as long as 30 years.
Special defined funds are available including: insured funds, double and triple
tax-free funds and funds with 'laddered maturities' to help protect against
changing interest rates. Defined Asset Funds are offered by prospectus only.

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Defined Multistate Series
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Our defined portfolios of municipal bonds offers you a simple and convenient way
to earn tax-free monthly income. And by purchasing Defined Asset Funds, you not
only receive professional selection but also gain the advantage of reduced risk
by investing in bonds of several different issuers.

INVESTMENT OBJECTIVE

To provide interest income exempt from regular federal income taxes through
investment in a fixed portfolio consisting primarily of municipal bonds issued
by or on behalf of a single State and its local governments and authorities.
Units may also be exempt from certain state and local taxes for residents of the
State.

DIVERSIFICATION

Each Portfolio contains a number of different bond issues. Spreading your
investment among different issuers reduces your risk, but does not eliminate it,
especially since each Portfolio contains bonds of only one State. Because of
maturities, sales or other dispositions of bonds, the size, composition and
return of the Portfolio will change over time.

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Defining Your Portfolio
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PROFESSIONAL SELECTION AND SUPERVISION

Each Portfolio contains a variety of bonds selected by experienced buyers and
research analysts. The Fund is not actively managed; however, it is regularly
reviewed and a bond can be sold if retaining it is considered detrimental to
investors' interests.

MONTHLY FEDERALLY TAX-FREE INTEREST INCOME

Each Portfolio pays monthly income, even though the bonds generally pay interest
semi-annually.

INSURANCE

The bonds included in certain Trusts may be insured. This insurance guarantees
the timely payment of principal and interest of the bonds, but does not
guarantee the value of the bonds or the units. Insurance does not cover
accelerated payments of principal or any increase in interest payments or
premiums payable on mandatory redemptions, including if interest on a bond is
determined to be taxable. (See Bonds Backed by Letters of Credit or Insurance in
Part B).

BOND CALL FEATURES

It is possible that during periods of falling interest rates, a bond with a
coupon higher than current market rates will be prepaid or 'called', at the
option of the bond issuer, before its expected maturity. When bonds are
initially callable, the price is usually at a premium to par which then declines
to par over time. Bonds may also be subject to a mandatory sinking fund or have
extraordinary redemption provisions. For example, if the bond's proceeds are not
able to be used as intended the bond may be redeemed. This redemption and the
sinking fund are often at par.

CALL PROTECTION

Although many bonds are subject to optional refunding or call provisions, we
have selected bonds with call protection. This call protection means that any
bond in a Portfolio generally cannot be called for a number of years and
thereafter at a declining premium over par.

TAX INFORMATION

Based on the opinion of bond counsel, income from the bonds held by this Fund is
generally 100% exempt under existing laws from regular federal income tax and
certain state and local personal income taxes for residents of a particular
State. Any gain on a disposition of the underlying bonds or units will be
subject to tax.
A-2
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Defining Your Investment
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PUBLIC OFFERING PRICE

The Public Offering Price as of February 28, 1996, the business day prior to the
Initial Date of Deposit, is based on the aggregate offer side value of the
underlying bonds in the Portfolio, plus a sales charge on the value of the
underlying bonds, plus cash, divided by the number of units outstanding. The
Public Offering Price on any subsequent date will vary. An amount equal to
principal cash, if any, as well as net accrued but undistributed interest on the
unit is added to the Public Offering Price. The underlying bonds are evaluated
by an independent evaluator at 3:30 p.m. Eastern time on every business day.

UNIT PAR VALUE

The par value of your unit--the amount of money you will receive by termination
of the Trust, assuming all the bonds are paid at maturity or are redeemed by the
issuer at par or sold by the Fund at par to meet redemptions--is $1,000.

LOW MINIMUM INVESTMENT
You can get started with a minimum purchase of about $1,000.

REINVESTMENT OPTION
You can elect to automatically reinvest your distributions into a separate
portfolio of federally tax-exempt bonds. Most or all of the bonds in that
portfolio, however, will not be insured or exempt from state and local taxes.
Reinvesting helps to compound your income free of federal income taxes.

PRINCIPAL DISTRIBUTIONS
Principal from sales, redemptions and maturities of bonds in the Portfolios will
be distributed to investors periodically when the amount to be distributed is
more than $5.00 per unit.

TERMINATION DATE
The Portfolios will generally terminate no later than the maturity date of the
last maturing bond listed in the Portfolio. The Portfolios may be terminated if
the value is less than 40% of the face amount of bonds deposited.

SPONSORS' PROFIT OR LOSS
The Sponsors' profit or loss associated with each Portfolio will include the
receipt of applicable sales charges, any fees for underwriting or placing bonds,
fluctuations in the Public Offering Price or secondary market price of units and
a gain or loss on the deposit of the bonds (see Underwriters' and Sponsors'
Profit in Part B).

SELLING YOUR INVESTMENT
You may sell your units at any time. Your price is based on the then current net
asset value of the Portfolio (generally based on the lower, bid side evaluation
of the bonds, as determined by an independent evaluator, plus principal cash, if
any, as well as accrued interest). There is no fee for selling your units.

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Defining Your Risks
- ----------------------------------------------------------------

RISK FACTORS

Unit price fluctuates and could be adversely affected by increasing interest
rates as well as the financial condition of the issuers of the bonds and any
insurance companies backing certain of the bonds. Because of the possible
maturity, sale or other disposition of securities, the size, composition and
return of the portfolio may change at any time. Because of the sales charges,
returns of principal and fluctuations in unit price, among other reasons, the
sale price will generally be less than the cost of your units. Unit prices could
also be adversely affected if a limited trading market exists in any security to
be sold. There is no guarantee that the Fund will achieve its investment
objective.

In addition, each Portfolio has fewer bond issues than a national fund, and is
concentrated in bonds of issuers located in only one State. There may be
additional risk from decreased diversification as well as from factors
particular to that State.

UNDERWRITING ACCOUNT

One or more of the Sponsors has participated as sole underwriter, managing

underwriter or member of an underwriting syndicate from which approximately 30%
of the bonds in the Florida Trust were acquired.

MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
P.O. Box 9051,
Princeton, NJ 08543-9051 54.60%

SMITH BARNEY INC.
388 Greenwich Street--23rd Floor,
New York, NY 10013 15.85%

PAINEWEBBER INCORPORATED
1285 Avenue of the Americas,
New York, NY 10019 14.41%

PRUDENTIAL SECURITIES INCORPORATED
One Seaport Plaza--199 Water Street,
New York, NY 10292 6.49%

DEAN WITTER REYNOLDS INC.
Two World Trade Center--59th Floor,
New York, NY 10048 8.65%
-------
100.00%
-------

A-3
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Defined California Insured Trust
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PORTFOLIO DIVERSIFICATION

The Portfolio contains 7 California bond issues.

TYPES OF BONDS

The Portfolio consists of $4,000,000 face amount of municipal bonds of the
following types:
APPROXIMATE
PORTFOLIO PERCENTAGE
/ / Municipal Water/Sewer Utilities 15%
/ / Special Tax Issues 15%
/ / Lease Rental Appropriation 12%
/ / Hospitals/Health Care Facilities 28%
/ / Universities/Colleges 15%
/ / Housing 15%

AAA-RATED AND INSURED
As a result of insurance on the bonds, the units are rated AAA by Standard &
Poor's Ratings group.

The approximate percentage of the aggregate face amount insured by each
insurance company is:

MBIA Insurance Corporation 70%
Connie Lee Insurance Company 30%

PORTFOLIO CONCENTRATIONS

The Fund is concentrated in Hospital/Health Care Facility bonds and is therefore
dependent to a significant degree on revenues generated from those particular
activities (see Risk Factors in Part B). The Portfolio is also concentrated in
bonds of California issuers and is subject to additional risk from decreased
diversification as well as from factors that may be particular to California,
which are briefly described on page A-6.

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Defining Your Income
- ----------------------------------------------------------------

WHAT YOU MAY EXPECT
(PAYABLE ON THE 25TH DAY OF THE MONTH TO HOLDERS OF RECORD ON THE 10TH DAY OF
THE MONTH):

First Distribution per unit
(March 25, 1996): $ 1.61
Regular Monthly Income per unit
(Beginning on April 25, 1996): $ 4.39
Annual Income per unit: $ 52.70

These figures are estimates determined as of the business day prior to the
Initial Date of Deposit and actual payments may vary.
Estimated cash flows are available upon request from the Sponsors.

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Defining Your Costs
- ----------------------------------------------------------------

SALES CHARGE

Although the Trust is a unit investment trust rather than a mutual fund, the
following information is presented to permit a comparison of fees and an
understanding of the direct or indirect costs and expenses that you pay.

As a %
of Initial As a %
Offering Period of Secondary
Public Market Public
Offering Price Offering Price
----------------- -----------------
Maximum Sales Charges 4.50% 5.50%

The Trust (and therefore the investors) will bear all or a portion of its
organizational costs--including costs of preparing the registration statement,
the trust indenture and other closing documents, registering units with the SEC
and the states and the initial audit of the Portfolio--as is common for mutual
funds.

ESTIMATED ANNUAL FUND OPERATING EXPENSES

As a %
of Average
Net Assets* Per Unit
----------------- ---------------
Trustee's Fee .070% $ 0.69
Maximum Portfolio Supervision
and Bookkeeping Fees .045% 0.45
Evaluator's Fee .033% 0.33
Organizational Costs .020% 0.20
Other Operating Expenses .071% 0.70
----------------- ---------------
TOTAL .239% $ 2.37

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* Based on the mean of the bid and offer side evaluations.

COSTS OVER TIME

You would pay the following cumulative expenses on a $1,000 investment, assuming
a 5% annual return on the investment throughout the indicated periods:

1 Year 3 Years 5 Years 10 Years
$47 $52 $58 $74

The example assumes reinvestment of all distributions into additional units of
the Fund (a reinvestment option different from that offered by this Fund) and
uses a 5% annual rate of return as mandated by Securities and Exchange
Commission regulations applicable to mutual funds. The Costs Over Time above
reflect both sales charges and operating expenses on an increasing investment
(because the net annual return is reinvested). The example should not be
considered a representation of past or future expenses or annual rate of return;
the actual expenses and annual rate of return may be more or less than the
example.

As of February 28, 1996, the Public Offering Price was $1,039.42, based on the
aggregate offer side value of the bonds ($3,972,012.00), plus a maximum sales
charge of 4.712% on the value of the underlying bonds, plus cash ($38,000.00),
divided by the number of units outstanding (4,038). An amount equal to principal
cash, if any, as well as net accrued but undistributed interest on the unit is
added to the Public Offering Price. Sponsors' profit on deposit was $39,572.00.
The bid side redemption and secondary market repurchase price as of February 28,
1996 was $989.10 ($50.32 less than the Public Offering Price).

A-4
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<TABLE><CAPTION>
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Defined California Insured Portfolio
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Municipal Investment Trust Fund
Multistate Series--201
California Insured Trust February 29, 1996

- ------------------------------------
(1) All ratings are by Standard & Poor's Ratings Group. (See Appendix A to Part
B.)
(2) Bonds are first subject to optional redemptions (which may be exercised in
whole or in part) on the dates and at the prices indicated under the Optional
Refunding Redemptions column. In subsequent years, bonds are redeemable at
declining prices, but typically not below par value. Some issues may be subject
to sinking fund redemption or extraordinary redemption without premium prior to
the dates shown.
(3) Evaluation of the bonds by the Evaluator is made on the basis of current
offer side evaluation. On this basis, approximately 45% of the bonds were
deposited at a premium and 55% of the bonds were deposited at a discount from
par.
(4) Interest on these bonds will not begin accruing until March 1, 1996. As a
result of this lost income, the Trustee's fees and expenses will be reduced the
first year by $0.05 per unit to compensate for interest that would have accrued
on these bonds. (See Income, Distributions and Reinvestment--Income in Part B.)
A-5

<PAGE>

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California Taxes and Risks
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CALIFORNIA RISK FACTORS

The State of California continues to confront budgetary concerns. State
expenditures in recent years have exceeded projected amounts mainly because of
increased health and welfare caseloads, lower property taxes (requiring State
support for certain education expenses), lower than expected federal government
payments for immigration related costs, significant additional costs associated
with the construction and operation of correctional institutions and
extraordinary expenditures related to the January 1994 Los Angeles earthquake
and the recent severe flooding in various parts of the State. Also, in December
1994, Orange County, California and its Investment Pool filed for bankruptcy in
connection with substantial losses experienced by the Pool. The County has since
defaulted on certain of its obligations and substantial budget deficits may be
experienced by the County and other public agencies which participate in the
Pool. The ultimate financial impact of these events upon the County and other
Pool investors and the State of California, generally, or the liquidity or value
of their securities, cannot be predicted.

To balance the budget, the Governor of California has proposed, among other
things, a series of revenue shifts from local government, reliance on increased
federal aid and reductions in state spending. Major adjustments reflected in
recent budgets include a shift in property taxes from cities, counties, special
districts and redevelopment agencies to school and community college districts,
severe reductions in support for health and welfare programs and higher
education, and various other cuts in services, suspensions of tax credits and
payment deferrals.

Certain California constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives could have
adverse effects on the California economy. Among these are measures that have
established tax, spending or appropriations limits and prohibited the imposition
of certain new taxes, authorized the transfers of tax liabilities and
reallocations of tax receipts among governmental entities and provided for
minimum levels of funding.

Certain bonds in the Trust may be subject to provisions of California law
that could adversely affect payments on those bonds or limit the remedies
available to bondholders. Among these are bonds of health care institutions
which are subject to the strict rules and limits regarding reimbursement
payments of California's Medi-Cal Program for health care services to welfare
beneficiaries, and bonds secured by liens on real property.

General obligation bonds of the State of California are currently rated A1
by Moody's and A by Standard & Poor's.

CALIFORNIA TAXES

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

The Trust is neither a business trust nor an association taxable as a
corporation for California tax purposes. Each holder will be considered the
owner of a pro rata portion of the Trust Fund and will be deemed to receive his
pro rata portion of the income therefrom. To the extent interest on the Debt
Obligations is exempt from California personal income taxes, said interest is
similarly exempt from California personal income taxes in the hands of the
holders, except to the extent such holders are banks or corporations subject to
the California franchise tax. Holders will be subject to California income tax
on any gain on the disposition of all or part of his pro rata portion of a Debt
Obligation in the Trust Fund. A holder will be considered to have disposed of
all or part of his pro rata portion of each Debt Obligation when he sells or
redeems all or some of his Units. A holder will also be considered to have
disposed of all or part of his pro rata portion of a Debt Obligation when all or
part of the Debt Obligation is sold by the Trust Fund or is redeemed or paid at
maturity. The Debt Obligations and the Units are not taxable under the
California personal property tax law.
A-6
<PAGE>

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Defined Connecticut Trust
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PORTFOLIO DIVERSIFICATION

The Portfolio contains 6 Connecticut bond issues and 1 Puerto Rico bond issue.

TYPES OF BONDS

The Portfolio consists of $3,250,000 face amount of municipal bonds of the
following types:
APPROXIMATE
PORTFOLIO PERCENTAGE
/ / State/Local Municipal Electric
Utilities 11%
/ / Hospital/Health Care Facilities 28%
/ / General Obligation 31%
/ / Industrial Development Revenues 15%
/ / Lease Rental Appropriation 15%

PORTFOLIO CONCENTRATIONS

The Portfolio is considered to be concentrated in Hospital/Health Care Facility
bonds and is therefore dependent to a significant degree on revenues generated
from those particular activities. The Portfolio is also concentrated in General
Obligation bonds (see Risk Factors in Part B). The Portfolio is also
concentrated in bonds of Connecticut issuers and is subject to additional risk
from decreased diversification as well as from factors that may be particular to
Connecticut, which are briefly described on page A-9.

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Defining Your Income
- ----------------------------------------------------------------

WHAT YOU MAY EXPECT
(PAYABLE ON THE 25TH DAY OF THE MONTH TO HOLDERS OF RECORD ON THE 10TH DAY OF
THE MONTH):

First Distribution per unit
(March 25, 1996): $ 1.55
Regular Monthly Income per unit
(Beginning on April 25, 1996): $ 4.23
Annual Income per unit: $ 50.83

These figures are estimates determined as of the business day prior to the
Initial Date of Deposit and actual payments may vary.
Estimated cash flows are available upon request from the Sponsors.

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Defining Your Costs
- ----------------------------------------------------------------

SALES CHARGE

As a %
of Initial As a %
Offering Period of Secondary
Public Market Public
Offering Price Offering Price
----------------- -----------------
Maximum Sales Charges 4.50% 5.50%

As a %
of Average
Net Assets* Per Unit
----------------- --------------
Trustee's Fee .070% $ 0.69
Maximum Portfolio Supervision
and Bookkeeping Fees .045% 0.45
Evaluator's Fee .041% 0.40
Organizational Costs .020% 0.20
Other Operating Expenses .087% 0.86
----------------- --------------
TOTAL .263% $ 2.60

- ---------------
* Based on the mean of the bid and offer side evaluations.

COSTS OVER TIME

You would pay the following cumulative expenses on a $1,000 investment, assuming
a 5% annual return on the investment throughout the indicated periods:

1 Year 3 Years 5 Years 10 Years
$48 $53 $59 $77

As of February 28, 1996, the Public Offering Price was $1,035.58, based on the
aggregate offer side value of the bonds ($3,215,210.75), plus a maximum sales
charge of 4.712% on the value of the underlying bonds, plus cash ($30,000.00),
divided by the number of units outstanding (3,280). An amount equal to principal
cash, if any, as well as net accrued but undistributed interest on the unit is
added to the Public Offering Price. Sponsors' profit on deposit was $32,365.10.
The bid side redemption and secondary market repurchase price as of February 28,
1996 was $985.00 ($50.58 less than the Public Offering Price).

A-7
<PAGE>

<TABLE><CAPTION>
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Defined Connecticut Portfolio
- --------------------------------------------------------------------------------
Municipal Investment Trust Fund
Multistate Series--201
Connecticut Trust February 29, 1996

- ------------------------------------
(1) All ratings are by Standard & Poor's Ratings Group unless followed by
('m'), which indicates a Moody's Investors Service rating or by ('f'), which
indicates a Fitch Investors Service rating. Moody's and Fitch ratings have been
furnished by the Evaluator but not confirmed with Moody's or Fitch. (See
Appendix A to Part B.)
(2) Bonds are first subject to optional redemptions (which may be exercised in
whole or in part) on the dates and at the prices indicated under the Optional
Refunding Redemptions column. In subsequent years, bonds are redeemable at
declining prices, but typically not below par value. Some issues may be subject
to sinking fund redemption or extraordinary redemption without premium prior to
the dates shown.
(3) Evaluation of the bonds by the Evaluator is made on the basis of current
offer side evaluation. On this basis, approximately 31% of the bonds were
deposited at a premium, 15% at par and 54% at a discount from par.

A-8
<PAGE>

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Connecticut Taxes and Risks
- --------------------------------------------------------------------------------

CONNECTICUT RISK FACTORS

The State of Connecticut and various of its municipalities are challenged
by financial difficulties. Fiscal stress is reflected in the State's economic
and revenue forecasts, a rising debt burden that reflects a significant increase
in bond activity since 1987, a cumulative general fund deficit for the year
ending June 30, 1991, of over $965 million, and uncertainty concerning the
solutions for these imbalances. Accumulated surpluses in a budget stabilization
fund created in 1983 to protect against future deficit problems were exhausted
in 1990. The lack of a contingency fund balance, combined with reduced
revenue-raising flexibility in the near term, places additional constraints on
managing these financial problems and any others that may arise.

Manufacturing was historically the most important economic activity within
Connecticut but, in terms of number of persons employed, has steadily declined
in the last ten years. Defense-related business has typically represented a
relatively high proportion of the manufacturing sector, but reductions in
defense spending now underway threaten to have a substantial and permanent
adverse impact on Connecticut's economy. While unemployment in Connecticut as a
whole has generally remained below the national level, certain geographic areas
in the State have been affected by high unemployment and poverty.

The tax revenues of Connecticut municipalities are derived only from ad
valorem taxes on real and tangible personal property. Problems inherent with
these impose practical limitations on the ability of Connecticut municipalities
to raise additional tax revenues. Certain Connecticut municipalities have
experienced severe fiscal difficulties and have reported operating and
accumulated deficits. The most vulnerable of these has been the City of
Bridgeport, which filed a bankruptcy petition in 1991. Although the State
opposed the petition, the United States Bankruptcy Court for the District of
Connecticut held that Bridgeport does have the authority to file such a
petition. The U.S. Census Bureau reports that, at the time of the 1990 census,
Connecticut's capital city of Hartford was the eighth poorest city in the nation
based on the percentage of its residents living in poverty; the same report
indicates that four of Connecticut's largest cities ranked among the 130 poorest
cities in the nation by the same measure.

The State and various municipalities are dependent in part on federal aid,
and the municipalites are also dependent in part on State aid. The impact of
political decisions or of necessity on the continuing availability of such aid
could have an adverse effect on the State and its municipalities in the future.

General obligation bonds of Connecticut are rated AA-by Standard & Poor's,
Aa by Moody's, and AA by Fitch.

CONNECTICUT TAXES

In the opinion of Day, Berry & Howard, special counsel on Connecticut tax
matters, which is based explicitly on the opinion of Davis Polk & Wardwell
regarding Federal income tax matters, under existing Connecticut law:

1. The Connecticut Trust is not subject to any tax on or measured by net
income imposed by the State of Connecticut.

2. Interest income of the Connecticut Trust from Debt Obligations issued by
or on behalf of the State of Connecticut, any political subdivision thereof, or
public instrumentality, state or local authority, district, or similar public
entity created under the laws of the State of Connecticut ('Connecticut Debt
Obligations'), or from Debt Obligations issued by United States territories or
possessions the interest on which Federal law would prohibit Connecticut from
taxing if received directly by a Holder, is not taxable under the Connecticut
tax on the Connecticut taxable income of individuals, trusts, and estates (the
'Connecticut Income Tax'), when any such interest is received by the Connecticut
Trust or distributed by it to such a Holder.

3. Gains and losses recognized by a Holder for Federal income tax purposes
upon the maturity, redemption, sale, or other disposition by the Connecticut
Trust of a Debt Obligation held by the Connecticut Trust or upon the redemption,
sale, or other disposition of a Unit of the Connecticut Trust held by a Holder
are taken into account as gains or losses, respectively, for purposes of the
Connecticut Income Tax, except that, in the case of a Holder holding a Unit of
the Connecticut Trust as a capital asset, such gains and losses recognized upon
the maturity, redemption, sale, or exchange of a Connecticut Debt Obligation
held by the Connecticut Trust are excluded from gains and losses taken into
account for purposes of such tax and no opinion is expressed as to the treatment
for purposes of such tax of gains and losses recognized, to the extent
attributable to Connecticut Debt Obligations, upon the redemption, sale, or
other disposition by a Holder of a Unit of the Connecticut Trust held by him.

A-9
<PAGE>

4. The portion of any interest income or capital gain of the Connecticut
Trust that is allocable to a Holder that is subject to the Connecticut
corporation business tax is includable in the gross income of such Holder for
purposes of such tax.

5. An interest in a Unit of the Connecticut Trust that is owned by or
attributable to a Connecticut resident at the time of his death is includable in
his gross estate for purposes of the Connecticut succession tax and the
Connecticut estate tax.

The Connecticut Income Tax was enacted in August, 1991. Generally a Holder
recognizes gain or loss for purposes of this tax to the same extent as he
recognizes gain or loss for Federal income tax purposes. Ordinarily this would
mean that gain or loss would be recognized by a Holder upon the maturity,
redemption, sale, or other disposition by the Connecticut Trust of a Debt
Obligation held by it, or upon the redemption sale, or other disposition of a
Unit of the Connecticut Trust held by the Holder.

However, on June 19, 1992, Connecticut legislation was adopted that
provides that gains and losses from the sale or exchange of Connecticut Debt
Obligations held as capital assets will not be taken into account for purposes
of the Connecticut Income Tax for taxable years starting on or after January 1,
1992. Regulations effective for taxable years starting on or after January 1,
1994, clarify that this provision also applies to gain or loss recognized by a
Holder upon the maturity or redemption of a Connecticut Debt Obligation held by
the Connecticut Trust. However, it is not clear whether this provision would
apply, to the extent attributable to Connecticut Debt Obligations held by the
Connecticut Trust, to gain or loss recognized by a Holder upon the redemption,
sale, or other disposition of a Unit of the Connecticut Trust held by the
Holder.

By legislation adopted May 19, 1993, as amended by legislation adopted June
25, 1993 and June 9, 1994, Connecticut enacted the net Connecticut minimum tax,
retroactive to taxable years beginning on or after January 1, 1993, which is
applicable to individuals, trusts, and estates that are subject to the
Connecticut Income Tax and required to pay the Federal alternative minimum tax.
Income of the Connecticut Trust that is subject to the Federal alternative
minimum tax in the case of such a Holder, other than interest from Connecticut
Debt Obligations or from Debt Obligations of United States territories or
possessions that Federal law would prohibit Connecticut from taxing if received
directly by the Holder, could cause the Holder to be liable for the net
Connecticut minimum tax.

Holders are urged to consult their own tax advisors concerning these
matters.

A-10
<PAGE>

- --------------------------------------------------------------------------------
Defined Florida Insured Trust
- --------------------------------------------------------------------------------

PORTFOLIO DIVERSIFICATION

The Portfolio contains 7 Florida bond issues.

TYPES OF BONDS

The Portfolio consists of $3,250,000 face amount of municipal bonds of the
following types:

APPROXIMATE
PORTFOLIO PERCENTAGE
/ / Airports/Ports/Highway Revenue
Bonds 16%
/ / General Obligation 15%
/ / Hospitals/Health Care Facilities 39%
/ / Municipal Water and Sewer Utilities 15%
/ / Industrial Development Revenues 15%
AAA-RATED AND INSURED

As a result of insurance on the bonds, the units are rated AAA by Standard &
Poor's Ratings group.

The approximate percentage of the aggregate face amount insured by each
insurance company is:

MBIA Insurance Corporation 69%
Financial Guaranty Insurance Company 31%

PORTFOLIO CONCENTRATIONS

The Portfolio is considered to be concentrated in Hospital/Health Care Facility
bonds and is therefore dependent to a significant degree on revenues generated
from those particular activities (see Risk Factors in Part B). In addition, the
Portfolio is concentrated in bonds of Florida issuers and is subject to
additional risk from decreased diversification as well as from factors that may
be particular to Florida, which are briefly described on page A-13.

- ----------------------------------------------------------------
Defining Your Income
- ----------------------------------------------------------------

WHAT YOU MAY EXPECT
(PAYABLE ON THE 25TH DAY OF THE MONTH TO HOLDERS OF RECORD ON THE 10TH DAY OF
THE MONTH):

First Distribution per unit
(March 25, 1996): $ 1.56
Regular Monthly Income per unit
(Beginning on April 25, 1996): $ 4.26
Annual Income per unit: $ 51.15

These figures are estimates determined as of the business day prior to the
Initial Date of Deposit and actual payments may vary.
Estimated cash flows are available upon request from the Sponsors.

- ----------------------------------------------------------------
Defining Your Costs
- ----------------------------------------------------------------
SALES CHARGE

As a %
of Initial As a %
Offering Period of Secondary
Public Market Public
Offering Price Offering Price
----------------- -----------------
Maximum Sales Charges 4.50% 5.50%

ESTIMATED ANNUAL FUND OPERATING EXPENSES

- ---------------
* Based on the mean of the bid and offer side evaluations.

COSTS OVER TIME

You would pay the following cumulative expenses on a $1,000 investment, assuming
a 5% annual return on the investment throughout the indicated periods:

1 Year 3 Years 5 Years 10 Years
$48 $53 $59 $77

As of February 28, 1996, the Public Offering Price was $1,034.93, based on the
aggregate offer side value of the bonds ($3,213,137.50), plus a maximum sales
charge of 4.712% on the value of the underlying bonds, plus cash ($29,000),
divided by the number of units outstanding (3,279), An amount equal to principal
cash, if any, as well as net accrued but undistributed interest on the unit is
added to the Public Offering Price. Sponsors' profit on deposit was $37,132.50.
The bid side redemption and secondary market repurchase price as of February 28,
1996 was $984.78 ($50.15 less than the Public Offering Price).

A-11
<PAGE>

<TABLE><CAPTION>
- --------------------------------------------------------------------------------
Defined Florida Insured Portfolio
- --------------------------------------------------------------------------------
Municipal Investment Trust Fund
Multistate Series--201
Florida Insured Trust February 29, 1996

OPTIONAL SINKING
RATING REFUNDING FUND COST
PORTFOLIO TITLE OF ISSUES (1) REDEMPTIONS (2) REDEMPTIONS (2) TO FUND (3)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. $500,000 Dade Cnty., FL, Seaport
G.O. Rfdg. Bonds, Ser. 1996 (MBIA
Ins.), 5.125%, 10/1/26 AAA 10/1/06 @ 102 10/1/22 $ 475,910.00
2. $250,000 Dade Cnty., FL, Pub.
Fac. Rev. Bonds (Jackson Mem.
Hosp.), Ser. 1993 (MBIA Ins.),
5.25%, 6/1/23 AAA 6/1/03 @ 102 6/1/19 241,202.50
3. $500,000 Dade Cnty., FL, Wtr.
and Swr. Sys. Rev. Bonds, Ser. 1995
(Financial Guaranty Ins.), 5.50%,
10/1/25 AAA 10/1/05 @ 102 10/1/23 500,000.00
4. $500,000 State of Florida, State
Bd. of Educ., Pub. Ed. Cap. Outlay
Bonds, 1992 Ser. E (Financial
Guaranty Ins.), 5.25%, 6/1/23 AAA 6/1/03 @ 101 6/1/19 485,840.00
5. $500,000 Hillsborough Cnty., FL,
Indl. Dev. Auth., Poll. Ctl. Rev.
Rfdg. Bonds (Tampa Elec. Co.
Proj.), Ser. 1994 (MBIA Ins.),
6.25%, 12/1/34 AAA 12/1/04 @ 102 -- 538,515.00
6. $500,000 City of Lakeland, FL,
Hosp. Rev. Rfdg. Bonds (Lakeland
Reg. Med. Ctr. Proj.), Ser. 1996
(MBIA Ins.), 5.25%, 11/15/25 (4) AAA 11/15/06 @ 102 11/15/17 485,320.00
7. $500,000 South Broward, FL,
Hosp. Dist., Hosp. Rfdg. Rev.
Bonds, Ser. 1996 (MBIA Ins.),
5.25%, 5/1/21 (4) AAA 5/1/06 @ 102 5/1/17 486,350.00
------------------
$ 3,213,137.50
------------------
------------------
</TABLE>
- ------------------------------------
(1) All ratings are by Standard & Poor's Ratings Group. (See Appendix A to Part
B.)
(2) Bonds are first subject to optional redemptions (which may be exercised in
whole or in part) on the dates and at the prices indicated under the Optional
Refunding Redemptions column. In subsequent years, bonds are redeemable at
declining prices, but typically not below par value. Some issues may be subject
to sinking fund redemption or extraordinary redemption without premium prior to
the dates shown.
(3) Evaluation of the bonds by the Evaluator is made on the basis of current
offer side evaluation. On this basis, 15% of the bonds were deposited at a
premium, 15% at par and 70% at a discount from par.
(4) These bonds are expected to settle 2 to 14 days after the settlement date
for units. The Trustee's fees and expenses will be reduced during the first year
by $0.36 per unit to compensate for interest that would have accrued on the
bonds between the settlement date for the units and the actual date of delivery
of the bonds. (See Income, Distributions and Reinvestment--Income in Part B.)

A-12
<PAGE>

- --------------------------------------------------------------------------------
Florida Taxes and Risks
- --------------------------------------------------------------------------------
FLORIDA RISK FACTORS

The financial condition of the State of Florida is affected by various
national, economic, social and environmental policies and conditions.
Additionally, limitations placed by the State's Constitution on the State and
its local governments covering income taxes, ad valorem taxes, bond indebtedness
and other matters, as well as various statutory limitations, may constrain the
revenue-generating capacity of the State and its local governments and,
therefore, the ability of the issuers of the Bonds to satisfy their obligations.

The economic vitality of the State and its various regions and, therefore,
the ability of the State and its local govenments to satisfy the Bonds, are
affected by numerous factors. South Florida is susceptible to international
trade and currency imbalances and to economic problems in Central and South
America due to its geographical location and its involvement with foreign trade,
tourism and investment capital. The central and northern portions of the State,
on the other hand, could be impacted by problems in the agricultural sector,
including crop failures, severe weather conditions or other agriculture-related
problems, particularly with regard to the citrus and sugar industries. The
State's economy also has historically been somewhat dependent on the tourism and
construction industries and is sensitive to trends in those sectors.

General obligation bonds of the State are currently rated Aa by Moody's
Investors Service and AA by Standard & Poor's.

FLORIDA TAXES

In the opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel,
P.A., Miami, Florida, special counsel on Florida tax matters, under
existing Florida law:

1. The Fund will not be subject to income, franchise or other taxes of a
similar nature imposed by the State of Florida or its subdivisions,
agencies or instrumentalities.

2. Because Florida does not impose a personal income tax, non-corporate
investors in Units of the Fund will not be subject to any Florida income
taxes with respect to (i) amounts received by the Fund on the Bonds it
holds; (ii) amounts which are distributed by the Fund to non-corporate
investors in Units of the Fund or (iii) any gain realized on the sale or
redemption of Bonds by the Fund or of a Unit of the Fund by a non-corporate
investor. However, corporations as defined in Chapter 220, Florida Statutes
(1995), which are otherwise subject to Florida income taxation will be
subject to tax on their respective share of any income and gain realized by
the Fund and on any gain realized by a corporate investor on the sale or
redemption of Units of the Fund by the corporate investor.

3. The Units will be subject to Florida estate taxes only if held by
Florida residents, or if held by non-residents deemed to have business
sites in Florida. The Florida estate tax is limited to the amount of the
credit for state death taxes provided for in Section 2011 of the Internal
Revenue Code, as amended.

4. Bonds issued by the State of Florida or its political subdivisions
are exempt from Florida intangible personal property taxation under Chapter
199, Florida Statutes (1995), as amended. Bonds issued by the Government of
Puerto Rico or by the Government of Guam, or by their authority, are exempt
by Federal statute from taxes such as the Florida intangible personal
property tax. Thus, the Fund will not be subject to Florida intangible
personal property tax on any Bonds in the Fund issued by the State of
Florida or its political subdivisions, by the Government of Puerto Rico or
by its authority or by the Government of Guam or by its authority. In
addition, the Units of the Fund will not be subject to the Florida
intangible personal property tax if the Fund invests solely in such
Florida, Puerto Rico or Guam debt obligations.

A-13
<PAGE>

- --------------------------------------------------------------------------------
Defined Virginia Trust
- --------------------------------------------------------------------------------

PORTFOLIO DIVERSIFICATION

The Portfolio contains 6 Virginia bond issues and 1 Puerto Rico issue.
TYPES OF BONDS

The Portfolio consists of $3,250,000 face amount of municipal bonds of the
following types:

APPROXIMATE
PORTFOLIO PERCENTAGE
/ / Hospitals/Health Care Facilities 43%
/ / Lease Rental Appropriation 15%
/ / State/Local Municipal Utilities 11%
/ / Moral Obligations 15%
/ / State/Local Government Supported 15%

PORTFOLIO CONCENTRATIONS

The Portfolio is considered to be concentrated in Hospital/Health Care Facility
bonds and is therefore dependent to a significant degree on revenues generated
from those particular activities (see Risk Factors in Part B). In addition, the
Portfolio is concentrated in bonds of Virginia issuers and is subject to
additional risk from decreased diversification as well as from factors that may
be particular to Virginia, which are briefly described on page A-16.

- ----------------------------------------------------------------
Defining Your Income
- ----------------------------------------------------------------

WHAT YOU MAY EXPECT
(PAYABLE ON THE 25TH DAY OF THE MONTH TO HOLDERS OF RECORD ON THE 10TH DAY OF
THE MONTH):

First Distribution per unit
(March 25, 1996): $ 1.58
Regular Monthly Income per unit
(Beginning on April 25, 1996): $ 4.33
Annual Income per unit: $ 52.03

These figures are estimates determined as of the business day prior to the
Initial Date of Deposit and actual payments may vary.

Estimated cash flows are available upon request from the Sponsors.

- ----------------------------------------------------------------
Defining Your Costs
- ----------------------------------------------------------------
SALES CHARGE

As a %
of Initial As a %
Offering Period of Secondary
Public Market Public
Offering Price Offering Price
----------------- -----------------
Maximum Sales Charges 4.50% 5.50%

ESTIMATED ANNUAL FUND OPERATING EXPENSES

- ---------------
* Based on the mean of the bid and offer side evaluations.

COSTS OVER TIME
You would pay the following cumulative expenses on a $1,000 investment, assuming
a 5% annual return on the investment throughout the indicated periods:

1 Year 3 Years 5 Years 10 Years
$48 $53 $59 $77

As of February 28, 1996, the Public Offering Price was $1,033.97, based on the
aggregate offer side value of the bonds ($3,210,185.00), plus a maximum sales
charge of 4.712% on the value of the underlying bonds, plus cash ($31,000),
divided by the number of units outstanding (3,281), An amount equal to principal
cash, if any, as well as net accrued but undistributed interest on the unit is
added to the Public Offering Price. Sponsors' profit on deposit was $25,037.
The bid side redemption and secondary market repurchase price as of February 28,
1996 was $983.48 ($50.49 less than the Public Offering Price).

A-14
<PAGE>

<TABLE><CAPTION>
- --------------------------------------------------------------------------------
Defined Virginia Portfolio
- --------------------------------------------------------------------------------
Municipal Investment Trust Fund
Multistate Series--201
Virginia Trust February 29, 1996

- ------------------------------------
(1) All ratings are by Standard & Poor's Ratings Group unless followed by
('m'), which indicates a Moody's Investors Service rating or by ('f'), which
indicates a Fitch Investors Service rating. Moody's and Fitch ratings have been
furnished by the Evaluator but not confirmed with Moody's or Fitch. (See
Appendix A to Part B.)
(2) Bonds are first subject to optional redemptions (which may be exercised in
whole or in part) on the dates and at the prices indicated under the Optional
Refunding Redemptions column. In subsequent years, bonds are redeemable at
declining prices, but typically not below par value. Some issues may be subject
to sinking fund redemption or extraordinary redemption without premium prior to
the dates shown.
(3) Evaluation of the bonds by the Evaluator is made on the basis of current
offer side evaluation. On this basis, 15% of the bonds were deposited at a
premium, 15% at par and 70% at a discount from par.

A-15
<PAGE>

- --------------------------------------------------------------------------------
Virginia Taxes and Risks
- --------------------------------------------------------------------------------
VIRGINIA RISK FACTORS

The economy of the Commonwealth of Virginia is significantly dependent on
defense spending, with major concentrations of defense installations in both
Northern Virginia and the Hampton Roads area. Any substantial reductions in
military spending generally or in particular areas, including base closings,
could adversely affect the state and local economies.

Until 1989, Virginia taxed retirement benefits paid by the federal
government while exempting retirement benefits paid by the state or local
governments. In 1989, a substantially identical Michigan income tax scheme was
held unconstitutional by the United States Supreme Court. Several suits against
the Commonwealth for refunds were filed by federal pensioners after the decision
in the Michigan case. These suits have been settled through legislation and
through compliance by the Commonwealth with a judgment of the Virginia Supreme
Court ordering refunds with interest to pensioners who opted out of the
legislative settlement.

General obligation bonds of the Commonwealth of Virginia are currently
rated AAA by Standard & Poor's and Aaa by Moody's.

VIRGINIA TAXES

In the opinion of Hunton & Williams, Richmond, Virginia, special counsel on
Virginia tax matters, under existing Virginia law and assuming that the Virginia
Trust is a grantor trust under the grantor trust rules of Sections 671-679 of
the Code:
1. 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 Holders of Units 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.

2. Interest on the Debt Obligations 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 Holders of Units of the Virginia
Trust.

3. A Holder of Units of the Virginia Trust will realize a taxable event
when the Virginia Trust disposes of a Debt Obligation (whether by sale,
exchange, redemption or payment at maturity) or when the Holder of Units
redeems or sells his Units, and taxable gain for Federal income tax
purposes may result in taxable gain for Virginia income tax purposes.
Certain Debt Obligations, however, have been issued under Acts of the
Virginia General Assembly that provide that all income from such Debt
Obligations, including any profit from the sale thereof, shall be free from
all taxation by the Commonwealth of Virginia. To the extent 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
Holders of Units of the Virginia Trust.

4. The Virginia Trust will not be subject to any intangible personal
property tax in Virginia on any Debt Obligations in the Virginia Trust. In
addition, Units of the Virginia Trust held for investment purposes will not
be subject to any intangible personal property tax in Virginia.

5. The Units may be subject to Virginia estate tax if held by a Virginia
resident or, in certain cases, by an individual who at the time of his
death was not a resident of the United States.

A-16
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

The Sponsors, Trustee and Holders of Municipal Investment Trust Fund, Multistate
Series--201, Defined Asset Funds (California, Connecticut, Florida and Virginia
Trusts):

We have audited the accompanying statements of condition and the related defined
portfolios included in the prospectus of the Trusts as of February 29, 1996.
These financial statements are the responsibility of the Trustee. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the Trusts as of
February 29, 1996 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP
New York, N.Y.
February 29, 1996

STATEMENTS OF CONDITION AS OF FEBRUARY 29, 1996
TRUST PROPERTY
<TABLE><CAPTION>

CALIFORNIA CONNECTICUT FLORIDA
TRUST TRUST TRUST
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Investments--Bonds and Contracts to purchase Bonds(1) $ 3,972,012.00 $ 3,215,210.75 $ 3,213,137.50
Cash 38,000.00 30,000.00 29,000.00
Accrued interest to initial date of deposit on underlying
Bonds 31,890.83 41,824.77 34,739.57
Organizational Costs(2) 4,038.00 3,280.00 3,279.00
-------------------- -------------------- --------------------
Total $ 4,045,940.83 $ 3,290,315.52 $ 3,280,156.07
-------------------- -------------------- --------------------
-------------------- -------------------- --------------------
LIABILITIES AND INTEREST OF HOLDERS
Liabilities: Advance by the Trustee for accrued
interest(3) $ 31,890.83 $ 41,824.77 $ 34,739.57
Accrued Liability(2) 4,038.00 3,280.00 3,279.00
-------------------- -------------------- --------------------
Subtotal 35,928.83 45,104.77 38,018.57
-------------------- -------------------- --------------------
Interest of Holders of units of fractional undivided
interest outstanding
(California Trust--4,038; Connecticut Trust--3,280;
Florida Trust--3,279; Virginia Trust--3,281)
Cost to investors(4) 4,197,173.30 3,396,713.95 3,393,528.93
Gross underwriting commissions(5) (187,161.30) (151,503.20) (151,391.43)
-------------------- -------------------- --------------------
Subtotal 4,010,012.00 3,245,210.75 3,242,137.50
-------------------- -------------------- --------------------
Total $ 4,045,940.83 $ 3,290,315.52 $ 3,280,156.07
-------------------- -------------------- --------------------
-------------------- -------------------- --------------------
VIRGINIA
TRUST
--------------------
Investments--Bonds and Contracts to purchase Bonds(1) $ 3,210,185.00
Cash 31,000.00
Accrued interest to initial date of deposit on underlying
Bonds 50,829.17
Organizational Costs(2) 3,281.00
--------------------
Total $ 3,295,295.17
--------------------
--------------------
LIABILITIES AND INTEREST OF HOLDERS
Liabilities: Advance by the Trustee for accrued
interest(3) $ 50,829.17
Accrued Liability(2) 3,281.00
--------------------
Subtotal 54,110.17
--------------------
Interest of Holders of units of fractional undivided
interest outstanding
(California Trust--4,038; Connecticut Trust--3,280;
Florida Trust--3,279; Virginia Trust--3,281)
Cost to investors(4) 3,392,471.91
Gross underwriting commissions(5) (151,286.91)
--------------------
Subtotal 3,241,185.00
--------------------
Total $ 3,295,295.17
--------------------
--------------------
</TABLE>

- ---------------
(1) Aggregate cost to the Fund of the bonds listed under each Defined
Portfolio is based upon the offer side evaluation determined by the Evaluator at
the evaluation time on the business day prior to the initial date of deposit.
The contracts to purchase the bonds are collateralized by an irrevocable letter
of credit which has been issued by The Development Bank of Singapore Ltd., New
York Agency, in the amount of $12,581,251.03 deposited with the Trustee. The
amount of the letter of credit includes $12,437,948.65 for the purchase of
$12,750,000 face amount of the bonds, plus $143,302.38 for accrued interest.
(2) This represents a portion of the Trust's organizational costs,
which will be deferred and amortized over five years.
(3) Representing a special distribution to the Sponsors by the Trustee
of an amount equal to the accrued interest on the bonds as of the initial date
of deposit.
(4) Aggregate public offering price (exclusive of interest) computed
on the basis of the offer side evaluation of the underlying bonds as of the
evaluation time on the business day prior to the Initial Date of Deposit (3:30
p.m., Eastern time).
(5) Assumes the maximum sales charge of 4.50% of the Public Offering
Price (4.712% of the value of the bonds).

A-17
<PAGE>

<TABLE><CAPTION>
- --------------------------------------------------------------------------------
TAX-FREE VS. TAXABLE INCOME: A COMPARISON OF TAXABLE AND TAX-FREE YIELDS
FOR CALIFORNIA RESIDENTS
- --------------------------------------------------------------------------------
COMBINED
EFFECTIVE
TAXABLE INCOME 1996* TAX RATE TAX-FREE YIELD OF
SINGLE RETURN JOINT RETURN % 4% 4.5% 5% 5.5% 6% 6.5% 7% 7.5% 8%
IS EQUIVALENT TO A TAXABLE YIELD OF
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 $ 0- 40,100 20.10 5.01 5.63 6.26 6.88 7.51 8.14 8.76 9.39 10.01
$ 24,000- 58,150 $ 40,100- 96,900 34.70 6.13 6.89 7.66 8.42 9.19 9.95 10.72 11.48 12.25
$ 58,150-121,300 $ 96,900-147,700 37.42 6.39 7.19 7.99 8.79 9.59 10.39 11.19 11.98 12.78
$121,300-263,750 $147,700-263,750 41.95 6.89 7.75 8.61 9.47 10.34 11.20 12.06 12.92 13.78
OVER $263,750 OVER $263,750 45.22 7.30 8.21 9.13 10.04 10.95 11.87 12.78 13.69 14.60

<CAPTION>
FOR CONNECTICUT RESIDENTS
- --------------------------------------------------------------------------------
COMBINED
EFFECTIVE
TAXABLE INCOME 1996* TAX RATE TAX-FREE YIELD OF
SINGLE RETURN JOINT RETURN % 4% 4.5% 5% 5.5% 6% 6.5% 7% 7.5% 8%
IS EQUIVALENT TO A TAXABLE YIELD OF
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 $ 0- 40,100 18.83 4.93 5.54 6.16 6.78 7.39 8.01 8.62 9.24 9.86
$ 24,000- 58,150 $ 40,100- 96,900 31.24 5.82 6.54 7.27 8.00 8.73 9.45 10.18 10.91 11.63
$ 58,150-121,300 $ 96,900-147,700 34.11 6.07 6.83 7.59 8.35 9.11 9.86 10.62 11.38 12.14
$121,300-263,750 $147,700-263,750 38.88 6.54 7.36 8.18 9.00 9.82 10.63 11.45 12.27 13.09
OVER $263,750 OVER $263,750 42.32 6.93 7.80 8.67 9.54 10.40 11.27 12.14 13.00 13.87

<CAPTION>
FOR FLORIDA RESIDENTS
- --------------------------------------------------------------------------------
COMBINED
EFFECTIVE
TAXABLE INCOME 1996* TAX RATE TAX-FREE YIELD OF
SINGLE RETURN JOINT RETURN % 4% 4.5% 5% 5.5% 6% 6.5% 7% 7.5% 8%
IS EQUIVALENT TO A TAXABLE YIELD OF
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 $ 0- 40,100 15.00 4.71 5.29 5.88 6.47 7.06 7.65 8.24 8.82 9.41
$ 24,000- 58,150 $ 40,100- 96,900 28.00 5.56 6.25 6.94 7.64 8.33 9.03 9.72 10.42 11.11
$ 58,150-121,300 $ 96,900-147,700 31.00 5.80 6.52 7.25 7.97 8.70 9.42 10.14 10.87 11.59
$121,300-263,750 $147,700-263,750 36.00 6.25 7.03 7.81 8.59 9.38 10.16 10.94 11.72 12.50
OVER $263,750 OVER $263,750 39.60 6.62 7.45 8.28 9.11 9.93 10.76 11.59 12.42 13.25

<CAPTION>
FOR VIRGINIA RESIDENTS
- --------------------------------------------------------------------------------
COMBINED
EFFECTIVE
TAXABLE INCOME 1996* TAX RATE TAX-FREE YIELD OF
SINGLE RETURN JOINT RETURN % 4% 4.5% 5% 5.5% 6% 6.5% 7% 7.5% 8%
IS EQUIVALENT TO A TAXABLE YIELD OF
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24,000 $ 0- 40,100 19.89 4.99 5.62 6.24 6.87 7.49 8.11 8.74 9.36 9.99
$ 24,000- 58,150 $ 40,100- 96,900 32.14 5.89 6.63 7.37 8.10 8.84 9.58 10.32 11.05 11.79
$ 58,150-121,300 $ 96,900-147,700 34.97 6.15 6.92 7.69 8.46 9.23 10.00 10.76 11.53 12.30
$121,300-263,750 $147,700-263,750 39.68 6.63 7.46 8.29 9.12 9.95 10.78 11.60 12.43 13.26
OVER $263,750 OVER $263,750 43.07 7.03 7.90 8.78 9.66 10.54 11.42 12.30 13.17 14.05
</TABLE>

To compare the yield of a taxable security with the yield of a tax-free
security, find your taxable income and read across. Yield figures are for
example only. The tables incorporate projected 1996 federal and applicable State
income tax rates and assume that all income would otherwise be taxed at the
investor's highest tax rate.

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

A-18
<PAGE>
DEFINED ASSET FUNDSSM
PROSPECTUS--PART B
DEFINED ASSET FUNDS MUNICIPAL SERIES
MUNICIPAL INVESTMENT TRUST FUND
FURTHER DETAIL REGARDING ANY OF THE INFORMATION PROVIDED IN THE PROSPECTUS MAY
BE OBTAINED
WITHIN FIVE DAYS BY WRITING OR CALLING THE TRUSTEE, THE ADDRESS AND
TELEPHONE NUMBER OF WHICH ARE SET FORTH ON THE BACK COVER OF PART A OF THIS
PROSPECTUS.
Index

PAGE
---------
Fund Description...................................... 1
Risk Factors.......................................... 2
How to Buy Units...................................... 8
How to Sell Units..................................... 10
Income, Distributions and Reinvestment................ 10
Fund Expenses......................................... 12
Taxes................................................. 12
Records and Reports................................... 13

PAGE
---------
Trust Indenture....................................... 14
Miscellaneous......................................... 14
Exchange Option....................................... 16
Supplemental Information.............................. 17
Appendix A--Description of Ratings.................... a-1
Appendix B--Sales Charge Schedules for Defined Asset
Funds Municipal Series................................ b-1
Appendix C--Sales Charge Schedules for Municipal
Investment Trust Fund................................. c-1

FUND DESCRIPTION

BOND PORTFOLIO SELECTION

Professional buyers and research analysts for Defined Asset Funds, with
access to extensive research, selected the Bonds for the Portfolio after
considering the Fund's investment objective as well as the quality of the Bonds
(all Bonds in the Portfolio are initially rated in the category A or better by
at least one nationally recognized rating organization or have comparable credit
characteristics), the yield and price of the Bonds compared to similar
securities, the maturities of the Bonds and the diversification of the
Portfolio. Only issues meeting these stringent criteria of the Defined Asset
Funds team of dedicated research analysts are included in the Portfolio. No
leverage or borrowing is used nor does the Portfolio contain other kinds of
securities to enhance yield. A summary of the Bonds in the Portfolio appears in
Part A of the Prospectus. In a Fund that includes multiple Trusts or Portfolios,
the word Fund should be understood to mean each individual Trust or Portfolio.

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

Yields on bonds depend on many factors including general conditions of the
bond markets, the size of a particular offering and the maturity and quality
rating of the particular issues. Yields can vary among bonds with similar
maturities, coupons and ratings. Ratings represent opinions of the rating
organizations as to the quality of the bonds rated, based on the credit of the
issuer or any guarantor, insurer or other credit provider, but these ratings are
only general standards of quality (see Appendix A).

After the initial date of deposit, the ratings of some Bonds may be reduced
or withdrawn, or the credit characteristics of the Bonds may no longer be
comparable to bonds rated A or better. Bonds rated BBB or Baa (the lowest
investment grade rating) or lower may have speculative characteristics, and
changes in economic conditions or other
1
<PAGE>
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. Bonds rated
below investment grade or unrated bonds with similar credit characteristics are
often subject to greater market fluctuations and risk of loss of principal and
income than higher grade bonds and their value may decline precipitously in
response to rising interest rates.

Because each Defined Asset Fund is a preselected portfolio of bonds, you
know the securities, maturities, call dates and ratings before you invest. Of
course, the Portfolio will change somewhat over time, as Bonds mature, are
redeemed or are sold to meet Unit redemptions or in other limited circumstances.
Because the Portfolio is not actively managed and principal is returned as the
Bonds are disposed of, this principal should be relatively unaffected by changes
in interest rates.

BOND PORTFOLIO SUPERVISION

The Fund follows a buy and hold investment strategy in contrast to the
frequent portfolio changes of a managed fund based on economic, financial and
market analyses. The Fund may retain an issuer's bonds despite adverse financial
developments. Experienced financial analysts regularly review the Portfolio and
a Bond may be sold in certain circumstances including the occurrence of a
default in payment or other default on the Bond, a decline in the projected
income pledged for debt service on a revenue bond, institution of certain legal
proceedings, if the Bond becomes taxable or is otherwise inconsistent with the
Fund's investment objectives, a decline in the price of the Bond or the
occurrence of other market or credit factors (including advance refunding) that,
in the opinion of Defined Asset Funds research analysts, makes retention of the
Bond detrimental to the interests of investors. The Trustee must generally
reject any offer by an issuer of a Bond to exchange another security pursuant to
a refunding or refinancing plan.

The Sponsors and the Trustee are not liable for any default or defect in a
Bond. If a contract to purchase any Bond fails, the Sponsors may generally
deposit a replacement bond so long as it is a tax-exempt bond, has a fixed
maturity or disposition date substantially similar to the failed Bond and is
rated A or better by at least one nationally recognized rating organization or
has comparable credit characteristics. A replacement bond must be deposited
within 110 days after deposit of the failed contract, at a cost that does not
exceed the funds reserved for purchasing the failed Bond and at a yield to
maturity and current return substantially equivalent (considering then current
market conditions and relative creditworthiness) to those of the failed Bond, as
of the date the failed contract was deposited.

RISK FACTORS

An investment in the Fund entails certain risks, including the risk that
the value of your investment will decline with increases in interest rates.
Generally speaking, bonds with longer maturities will fluctuate in value more
than bonds with shorter maturities. In recent years there have been wide
fluctuations in interest rates and in the value of fixed-rate bonds generally.
The Sponsors cannot predict the direction or scope of any future fluctuations.

Certain of the Bonds may have been deposited at a market discount or
premium principally because their interest rates are lower or higher than
prevailing rates on comparable debt securities. The current returns of market
discount bonds are lower than comparably rated bonds selling at par because
discount bonds tend to increase in market value as they approach maturity. The
current returns of market premium bonds are higher than comparably rated bonds
selling at par because premium bonds tend to decrease in market value as they
approach maturity. Because part of the purchase price is returned through
current income payments and not at maturity, an early redemption at par of a
premium bond will result in a reduction in yield to the Fund. Market premium or
discount attributable to interest rate changes does not indicate market
confidence or lack of confidence in the issue.

Certain Bonds deposited into the Fund may have been acquired on a
when-issued or delayed delivery basis. The purchase price for these Bonds is
determined prior to their delivery to the Fund and a gain or loss may result
from fluctuations in the value of the Bonds. Additionally, in any Defined Asset
Funds Municipal Series, if the value of the Bonds reserved for payment of the
periodic deferred sales charge, together with the interest thereon, were to
become insufficient to pay these charges, additional bonds would be required to
be sold.

The Fund may be concentrated in one or more of types of bonds.
Concentration in a State may involve additional risk because of the decreased
diversification of economic, political, financial and market risks. Set forth
below is a brief description of certain risks associated with bonds which may be
2
<PAGE>
held by the Fund. Additional information is contained in the Information
Supplement which is available from the Trustee at no charge to the investor.

GENERAL OBLIGATION BONDS

Certain of the Bonds may be general obligations of a governmental entity.
General obligation bonds are backed by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. However, the
taxing power of any governmental entity may be limited by provisions of state
constitutions or laws and its credit will depend on many factors, including an
erosion of the tax base resulting from population declines, natural disasters,
declines in the state's industrial base or an inability to attract new
industries, economic limits on the ability to tax without eroding the tax base
and the extent to which the entity relies on federal or state aid, access to
capital markets or other factors beyond the entity's control. In addition,
political restrictions on the ability to tax and budgetary constraints affecting
state governmental aid may have an adverse impact on the creditworthiness of
cities, counties, school districts and other local governmental units.

As a result of the recent recession's adverse impact upon both revenues and
expenditures, as well as other factors, many state and local governments have
confronted deficits which were the most severe in recent years. Many issuers are
facing highly difficult choices about significant tax increases and spending
reductions in order to restore budgetary balance. The failure to implement these
actions on a timely basis could force these issuers to issue additional debt to
finance deficits or cash flow needs and could lead to a reduction of their bond
ratings and the value of their outstanding bonds.

MORAL OBLIGATION BONDS

The Portfolio may include 'moral obligation' bonds. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of the bonds
becomes a moral commitment but not a legal obligation of the state or local
government in question. Even though the state or local government may be called
on to restore any deficits in capital reserve funds of the agencies or
authorities which issued the bonds, any restoration generally requires
appropriation by the state or local legislature and does not constitute a
legally enforceable obligation or debt of the state or local government. The
agencies or authorities generally have no taxing power.

REFUNDED BONDS

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

MUNICIPAL REVENUE BONDS

Municipal revenue bonds are tax-exempt securities issued by states,
municipalities, public authorities or similar entities to finance the cost of
acquiring, constructing or improving various projects. Municipal revenue bonds
are not general obligations of governmental entities backed by their taxing
power and payment is generally solely dependent upon the creditworthiness of the
public issuer or the financed project or state appropriations. Examples of
municipal revenue bonds are:

Municipal utility bonds, including electrical, water and sewer revenue
bonds, whose payments are dependent on various factors, including the rates
the utilities may charge, the demand for their services and their operating
costs, including expenses to comply with environmental legislation and
other energy and licensing laws and regulations. Utilities are particularly
sensitive to, among other things, the effects of inflation on operating and
construction costs, the unpredictability of future usage requirements, the
costs and availability of fuel and, with certain electric utilities, the
risks associated with the nuclear industry;

Lease rental bonds which are generally issued by governmental financing
authorities with no direct taxing power for the purchase of equipment or
construction of buildings that will be used by a state or local government.
Lease rental bonds are generally subject to an annual risk that the lessee
government might not appropriate funds for the leasing rental payments to
service the bonds and may also be subject to the risk that rental
obligations may terminate in the event of damage to or destruction or
condemnation of the equipment or building;

3
<PAGE>
Multi-family housing revenue bonds and single family mortgage revenue
bonds which are issued to provide financing for various housing projects
and which are payable primarily from the revenues derived from mortgage
loans to housing projects for low to moderate income families or notes
secured by mortgages on residences; repayment of this type of bond is
therefore dependent upon, among other things, occupancy levels, rental
income, the rate of default on underlying mortgage loans, the ability of
mortgage insurers to pay claims, the continued availability of federal,
state or local housing subsidy programs, economic conditions in local
markets, construction costs, taxes, utility costs and other operating
expenses and the managerial ability of project managers. Housing bonds are
generally prepayable at any time and therefore their average life will
ordinarily be less than their stated maturities;

Hospital and health care facility bonds whose payments are dependent
upon revenues of hospitals and other health care facilities. These revenues
come from private third-party payors and government programs, including the
Medicare and Medicaid programs, which have generally undertaken cost
containment measures to limit payments to health care facilities. Hospitals
and health care facilities are subject to various legal claims by patients
and others and are adversely affected by increasing costs of insurance. The
Internal Revenue Service has been engaged in a program of intensive audits
of certain large tax-exempt hospital and health care facility
organizations. Although these audits have not yet been completed, it has
been reported that the tax-exempt status of some of these organizations may
be revoked;

Airport, port, highway and transit authority revenue bonds which are
dependent for payment on revenues from the financed projects, including
user fees from ports and airports, tolls on turnpikes and bridges, rents
from buildings, transit fare revenues and additional financial resources
including federal and state subsidies, lease rentals paid by state or local
governments or a pledge of a special tax such as a sales tax or a property
tax. In the case of the air travel industry, airport income is largely
affected by the airlines' ability to meet their obligations under use
agreements which in turn is affected by increased competition among
airlines, excess capacity and increased fuel costs, among other factors;

Solid waste disposal bonds which are generally payable from dumping and
user fees and from revenues that may be earned by the facility on the sale
of electrical energy generated in the combustion of waste products and
which are therefore dependent upon the ability of municipalities to fully
utilize the facilities, sufficient supply of waste for disposal, economic
or population growth, the level of construction and maintenance costs, the
existence of lower-cost alternative modes of waste processing and
increasing environmental regulation. A recent decision of the U.S. Supreme
Court limiting a municipality's ability to require use of its facilities
may have an adverse affect on the credit quality of various issues of these
bonds;

Special tax bonds which are not secured by general tax revenues but are
only payable from and secured by the revenues derived by a municipality
from a particular tax--for example, a tax on the rental of a hotel room, on
the purchase of food and beverages, on the rental of automobiles or on the
consumption of liquor and may therefore be adversely affected by a
reduction in revenues resulting from a decline in the local economy or
population or a decline in the consumption, use or cost of the goods and
services that are subject to taxation;

Student loan revenue bonds which are typically secured by pledges of new
or existing student loans. The loans, in turn, are generally either
guaranteed by eligible guarantors and reinsured by the Secretary of the
U.S. Department of Education, directly insured by the federal government,
or financed as part of supplemental or alternative loan programs within a
state (e.g., loan repayments are not guaranteed). These bonds often permit
the issuer to enter into interest rate swap agreements with eligible
counterparties in which event the bonds are subject to the additional risk
of the counterparty's ability to fulfill its swap obligation;

University and college bonds, the payments on which are dependent upon
various factors, including the size and diversity of their sources of
revenues, enrollment, reputation, the availability of endowments and other
funds and, in the case of public institutions, the financial condition of
the relevant state or other governmental entity and its policies with
respect to education; and

Tax increment and tax allocation bonds, which are secured by ad valorem
taxes imposed on the incremental increase of taxable assessed valuation of
property within a jurisdiction above an established base of assessed value.
4
<PAGE>
The issuers of these bonds do not have general taxing authority and the tax
assessments on which the taxes used to service the bonds are based may be
subject to devaluation due to market price declines or governmental action.

Puerto Rico. Certain Bonds may be affected by general economic conditions
in the Commonwealth of Puerto Rico. Puerto Rico's economy is largely dependent
for its development on federal programs, and current federal budgetary policies
suggest that an expansion of its programs is unlikely. Reductions in federal tax
benefits or incentives or curtailment of spending programs could adversely
affect the Puerto Rican economy.

Industrial Development Revenue Bonds. Industrial development revenue bonds
are municipal obligations issued to finance various privately operated projects
including pollution control and manufacturing facilities. Payment is generally
solely dependent upon the creditworthiness of the corporate operator of the
project and, in certain cases, an affiliated or third party guarantor and may be
affected by economic factors relating to the particular industry as well as
varying degrees of governmental regulation. In many cases industrial revenue
bonds do not have the benefit of covenants which would prevent the corporations
from engaging in capital restructurings or borrowing transactions which could
reduce their ability to meet their obligations and result in a reduction in the
value of the Portfolio.

BONDS BACKED BY REPURCHASE COMMITMENTS

Certain Funds contain Bonds that were purchased from commercial banks,
savings banks, savings and loan associations or other institutions (thrifts)
that had held the Bonds in their investment portfolios prior to selling the
Bonds to the Fund. These banks or thrifts (the Sellers) have committed to
repurchase the Bonds from the Fund in certain circumstances. In some cases a
Seller's Repurchase Commitments may be backed by a security interest in
collateral or by a letter of credit (see Bonds Backed by Letters of Credit or
Insurance below).

A Seller may have committed to repurchase any Bond sold by it if necessary
to satisfy investors' unit redemption requests (a Liquidity Repurchase). A
Seller may also have committed to repurchase any Bond sold by it if the issuer
of the Bond fails to make payments of interest or principal on the Bond (a
Default Repurchase) or if the issuer becomes or is deemed to be bankrupt or
insolvent (an Insolvency Repurchase). A Seller may have committed to repurchase
any Bond if the interest on that Bond becomes taxable (a Tax Repurchase).
Investors should realize that they are subject to having all or a portion of the
principal amount of their investment returned prior to termination of the Fund
if any of these situations occurs. A Seller may also have committed to
repurchase the Bonds sold by it on their scheduled disposition dates (as shown
under Portfolio in Part A) (a Disposition Repurchase). The price at which any of
these repurchases will occur (the Put Price) is shown in Part A of the
Prospectus. Any collateral securing any of the Repurchase Commitments may
consist of mortgage-backed securities issued by GNMA (Ginnie Maes), FNMA (Fannie
Maes) or FHLMC (Freddie Macs); mortgages; municipal obligations; corporate
obligations; U.S. government securities; and cash.

Investors in a Fund containing any of these credit-supported Bonds should
be aware that many thrifts have failed in recent years and that the thrift
industry generally has experienced severe strains. New federal legislation has
resulted that imposes many new limitations on the ways banks and thrifts may do
business and mandates aggressive, early intervention into unhealthy
institutions. One result of this legislation is an increased possibility of
early payment of the principal amount of an investment in Bonds backed by
collateralized letters of credit or repurchase commitments if a Seller becomes
or is deemed to be insolvent.

BONDS BACKED BY LETTERS OF CREDIT OR INSURANCE

Certain Bonds may be secured by letters of credit issued by commercial
banks or savings banks, savings and loan associations and similar thrift
institutions or are direct obligations of banks or thrifts. The letter of credit
may be drawn upon, and the Bonds redeemed, if an issuer fails to pay amounts due
on the Bonds or, in certain cases, if the interest on the Bond becomes taxable.
Letters of credit are irrevocable obligations of the issuing institutions. The
profitability of a financial institution is largely dependent upon the credit
quality of its loan portfolio which, in turn, is affected by the institution's
underwriting criteria, concentrations within the portfolio and specific industry
and general economic conditions. The operating performance of financial
institutions is also impacted by changes in interest rates, the availability and
cost of funds, the intensity of competition and the degree of governmental
regulation.

5
<PAGE>
Certain Bonds may be insured or guaranteed by insurance companies listed
below. The claims-paying ability of each of these companies, unless otherwise
indicated, was rated AAA by Standard & Poor's or another nationally recognized
rating organization at the time the insured Bonds were purchased by the Fund.
The ratings are subject to change at any time at the discretion of the rating
agencies. In the event that the rating of an Insured Fund is reduced, the
Sponsors are authorized to direct the Trustee to obtain other insurance on
behalf of the Fund. The insurance policies guarantee the timely payment of
principal and interest on the Bonds but do not guarantee their market value or
the value of the Units. The insurance policies generally do not provide for
accelerated payments of principal or cover redemptions resulting from events of
taxability.

The following summary information relating to the listed insurance
companies has been obtained from publicly available information:
<TABLE><CAPTION>

FINANCIAL INFORMATION
AS OF SEPTEMBER 30, 1995
(IN MILLIONS OF DOLLARS)
-------------------------------------
POLICYHOLDERS'
NAME DATE ESTABLISHED ADMITTED ASSETS SURPLUS
- ----------------------------------------------------- ----------------- --------------- --------------------
<S> <C> <C> <C>
AMBAC Indemnity Corporation.......................... 1970 $ 2,292 $ 815
Asset Guaranty Insurance Co. (AA by S&P)............. 1988 175 80
Financial Security Assurance of Maryland Inc. (FSAM)
(formerly Capital Guaranty Insurance Company)...... 1986 327 173
Capital Markets Assurance Corp. (CAPMAC) 1987 234 145
Connie Lee Insurance Company......................... 1987 204 110
Continental Casualty Company (A+ by S&P)............. 1948 20,409 3,850
Financial Guaranty Insurance Company................. 1984 2,264 994
Financial Security Assurance Inc. (FSA).............. 1984 818 352
Firemen's Insurance Company of Newark, NJ (A-by S&P) 1855 2,057 400
Industrial Indemnity Co. (HIBI)
(A+ by S&P)........................................ 1920 1,679 286
MBIA Insurance Corporation........................... 1986 3,678 1,194
</TABLE>

Insurance companies are subject to extensive regulation and supervision
where they do business by state insurance commissioners who regulate the
standards of solvency which must be maintained, the nature of and limitations on
investments, reports of financial condition, and requirements regarding reserves
for unearned premiums, losses and other matters. A significant portion of the
assets of insurance companies are required by law to be held in reserve against
potential claims on policies and is not available to general creditors. Although
the federal government does not regulate the business of insurance, federal
initiatives including pension regulation, controls on medical care costs,
minimum standards for no-fault automobile insurance, national health insurance,
tax law changes affecting life insurance companies and repeal of the antitrust
exemption for the insurance business can significantly impact the insurance
business.

STATE RISK FACTORS

Investment in a single State Trust, as opposed to a Fund which invests in
the obligations of several states, may involve some additional risk due to the
decreased diversification of economic, political, financial and market risks. A
brief description of the factors which may affect the financial condition of the
applicable State for any State Trust, together with a summary of tax
considerations relating to that State, appear in Part A (or for certain State
Trusts, Part C), of the Prospectus; further information is contained in the
Information Supplement.

LITIGATION AND LEGISLATION

The Sponsors do not know of any pending litigation as of the initial date
of deposit which might reasonably be expected to have a material adverse effect
upon the Fund. At any time after the initial date of deposit, litigation may be
initiated on a variety of grounds, or legislation may be enacted, affecting the
Bonds in the Fund. Litigation, for example, challenging the issuance of
pollution control revenue bonds under environmental protection statutes may
affect the validity of certain Bonds or the tax-free nature of their interest.
While the outcome of litigation of this nature can never be entirely predicted,
opinions of bond counsel are delivered on the date of issuance of each Bond to
the effect that it has been validly issued and that the interest thereon is

6
<PAGE>
exempt from federal income tax. From time to time, proposals are introduced in
Congress to, among other things, reduce federal income tax rates, impose a flat
tax, exempt investment income from tax or abolish the federal income tax and
replace it with another form of tax. Enactment of any such legislation could
adversely affect the value of the Units. The Fund, however, cannot predict what
legislation, if any, in respect of tax rates may be proposed, nor can it predict
which proposals, if any, might be enacted.

Also, certain proposals, in the form of state legislative proposals or
voter initiatives, seeking to limit real property taxes have been introduced in
various states, and an amendment to the constitution of the State of California,
providing for strict limitations on real property taxes, has had a significant
impact on the taxing powers of local governments and on the financial condition
of school districts and local governments in California. In addition, other
factors may arise from time to time which potentially may impair the ability of
issuers to make payments due on the Bonds. Under the Federal Bankruptcy Code,
for example, municipal bond issuers, as well as any underlying corporate
obligors or guarantors, may proceed to restructure or otherwise alter the terms
of their obligations.

From time to time Congress considers proposals to prospectively and
retroactively tax the interest on state and local obligations, such as the
Bonds. The Supreme Court clarified in South Carolina v. Baker (decided on April
20, 1988) that the U.S. Constitution does not prohibit Congress from passing a
nondiscriminatory tax on interest on state and local obligations. This type of
legislation, if enacted into law, could require investors to pay income tax on
interest from the Bonds and could adversely affect an investment in Units. See
Taxes.

PAYMENT OF THE BONDS AND LIFE OF THE FUND

The size and composition of the Portfolio will change over time. Most of
the Bonds are subject to redemption prior to their stated maturity dates
pursuant to optional refunding or sinking fund redemption provisions or
otherwise. In general, optional refunding redemption provisions are more likely
to be exercised when the value of a Bond is at a premium over par than when it
is at a discount from par. Some Bonds may be subject to sinking fund and
extraordinary redemption provisions which may commence early in the life of the
Fund. Additionally, the size and composition of the Fund will be affected by the
level of redemptions of Units that may occur from time to time. Principally,
this will depend upon the number of investors seeking to sell or redeem their
Units and whether or not the Sponsors are able to sell the Units acquired by
them in the secondary market. As a result, Units offered in the secondary market
may not represent the same face amount of Bonds as on the initial date of
deposit. Factors that the Sponsors will consider in determining whether or not
to sell Units acquired in the secondary market include the diversity of the
Portfolio, the size of the Fund relative to its original size, the ratio of Fund
expenses to income, the Fund's current and long-term returns, the degree to
which Units may be selling at a premium over par and the cost of maintaining a
current prospectus for the Fund. These factors may also lead the Sponsors to
seek to terminate the Fund earlier than its mandatory termination date.

FUND TERMINATION

The Fund will be terminated no later than the mandatory termination date
specified in Part A of the Prospectus. It will terminate earlier upon the
disposition of the last Bond or upon the consent of investors holding 51% of the
Units. The Fund may also be terminated earlier by the Sponsors once the total
assets of the Fund have fallen below the minimum value specified in Part A of
the Prospectus. A decision by the Sponsors to terminate the Fund early will be
based on factors similar to those considered by the Sponsors in determining
whether to continue the sale of Units in the secondary market.

Notice of impending termination will be provided to investors and
thereafter units will no longer be redeemable. On or shortly before termination,
the Fund will seek to dispose of any Bonds remaining in the Portfolio although
any Bond unable to be sold at a reasonable price may continue to be held by the
Trustee in a liquidating trust pending its final disposition. A proportional
share of the expenses associated with termination, including brokerage costs in
disposing of Bonds, will be borne by investors remaining at that time. This may
have the effect of reducing the amount of proceeds those investors are to
receive in any final distribution.

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LIQUIDITY

Up to 40% of the value of the Portfolio may be attributable to guarantees
or similar security provided by corporate entities. These guarantees or other
security may constitute restricted securities that cannot be sold publicly by
the Trustee without registration under the Securities Act of 1933, as amended.
The Sponsors nevertheless believe that, should a sale of the Bonds guaranteed or
secured be necessary in order to meet redemption of Units, the Trustee should be
able to consummate a sale with institutional investors.

The principal trading market for the Bonds will generally be in the
over-the-counter market and the existence of a liquid trading market for the
Bonds may depend on whether dealers will make a market in them. There can be no
assurance that a liquid trading market will exist for any of the Bonds,
especially since the Fund may be restricted under the Investment Company
Act of 1940 from selling Bonds to any Sponsor. The value of the Portfolio
will be adversely affected if trading markets for the Bonds are limited or
absent.

HOW TO BUY UNITS

Units are available from any of the Sponsors, Underwriters and other
broker-dealers at the Public Offering Price plus accrued interest on the Units.
The Public Offering Price varies each Business Day with changes in the value of
the Portfolio and other assets and liabilities of the Fund.

Net accrued interest and principal cash, if any, are added to the Public
Offering Price, the Sponsors' Repurchase Price and the Redemption Price per
Unit. This represents the interest accrued on the Bonds, net of Fund expenses,
from the initial date of deposit to, but not including, the settlement date for
Units (less any prior distributions of interest income to investors). Bonds
deposited also carry accrued but unpaid interest up to the initial date of
deposit. To avoid having investors pay this additional accrued interest (which
earns no return) when they purchase Units, the Trustee advances and distributes
this amount to the Sponsors; it recovers this advance from interest received on
the Bonds. Because of varying interest payment dates on the Bonds, accrued
interest at any time will exceed the interest actually received by the Fund.

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

The regular Monthly Income Distribution is stated in Part A of the
Prospectus and will change as the composition of the Portfolio changes over
time.

PUBLIC OFFERING PRICE--THE FOLLOWING SECTIONS APPLY TO TWO DIFFERENT TYPES OF
DEFINED MUNICIPAL FUNDS. INVESTORS SHOULD NOTE THE EXACT NAME OF THE FUND ON THE
COVER OF PART A OF THE PROSPECTUS TO MAKE SURE THEY REFER TO THE CORRECT SECTION
BELOW.

SECTION A--MUNICIPAL INVESTMENT TRUST FUND

In the initial offering period, the Public Offering Price is based on the
next offer side evaluation of the Bonds, and includes a sales charge based on
the number of Units of a single Fund or Trust purchased on the same or any
preceding day by a single purchaser. See Initial Offering sales charge schedule
in Appendix C. The purchaser or his dealer must notify the Sponsors at the time
of purchase of any previous purchase to be aggregated and supply sufficient
information to permit confirmation of eligibility; acceptance of the purchase
order is subject to confirmation. Purchases of Fund Units may not be aggregated
with purchases of any other unit trust. This procedure may be amended or
terminated at any time without notice.

In the secondary market (after the initial offering period), the Public
Offering Price is based on the bid side evaluation of the Bonds, and includes a
sales charge based (a) on the number of Units of the Fund and any other Series
of Municipal Investment Trust Fund purchased in the secondary market on the same
day by a single purchaser (see Secondary Market sales charge schedule in
Appendix C) and (b) the maturities of the underlying Bonds (see Effective Sales
Charge Schedule in Appendix C). To qualify for a reduced sales charge, the
dealer must confirm that the sale is to a single purchaser or is purchased for
8
<PAGE>

its own account and not for distribution. For these purposes, Units held in the
name of the purchaser's spouse or child under 21 years of age are deemed to be
purchased by a single purchaser. A trustee or other fiduciary purchasing
securities for a single trust estate or single fiduciary account is also
considered a single purchaser.

In the secondary market, the Public Offering Price is further reduced
depending on the maturities of the various Bonds in the Portfolio, by
determining a sales charge percentage for each Bond, as stated in Effective
Sales Charge in Appendix C. The sales charges so determined, multiplied by the
bid side evaluation of the Bonds, are aggregated and the total divided by the
number of Units outstanding to determine the Effective Sales Charge. On any
purchase, the Effective Sales Charge is multiplied by the applicable secondary
market sales charge percentage (depending on the number of Units purchased) in
order to determine the sales charge component of the Public Offering Price.

SECTION B--DEFINED ASSET FUNDS MUNICIPAL SERIES

During the initial offering period for at least the first three months of
the Fund, the Public Offering Price (and the Initial Repurchase Price) is based
on the higher, offer side evaluation of the Bonds at the next Evaluation Time
after the order is received. In the secondary market (after the initial offering
period), the Public Offering Price (and the Sponsors' Repurchase Price and the
Redemption Price) is based on the lower, bid side evaluation of the Bonds.

Investors will be subject to differing types and amounts of sales charge
depending upon the timing of their purchases and redemptions of Units. A
periodic deferred sales charge will be payable quarterly through about the fifth
anniversary of the Fund from a portion of the interest on and principal of Bonds
reserved for that purpose. Commencing on the first anniversary of the Fund, the
Public Offering Price will also include an up-front sales charge applied to the
value of the Bonds in the Portfolio. Lastly, investors redeeming their Units
prior to the fourth anniversary of the Fund will be charged a contingent
deferred sales charge payable out of the redemption proceeds of their Units.
These charges may be less than you would pay to buy and hold a comparable
managed fund. A complete schedule of sales charges appears in Appendix B. The
Sponsors have received an opinion of their counsel that the deferred sales
charge described in this Prospectus is consistent with an exemptive order
received from the SEC.

* * *

Employees of certain Sponsors and Sponsor affiliates and non-employee
directors of Merrill Lynch & Co. Inc. may purchase Units at any time at prices
including a sales charge of not less than $5 per Unit.

EVALUATIONS

Evaluations are determined by the independent Evaluator on each Business
Day. This excludes Saturdays, Sundays and the following holidays as observed by
the New York Stock Exchange: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. Bond
evaluations are based on closing sales prices (unless the Evaluator deems these
prices inappropriate). If closing sales prices are not available, the evaluation
is generally determined on the basis of current bid or offer prices for the
Bonds or comparable securities or by appraisal or by any combination of these
methods. In the past, the bid prices of publicly offered tax-exempt issues have
been lower than the offer prices by as much as 3 1/2% or more of face amount in
the case of inactively traded issues and as little as 1/2 of 1% in the case of
actively traded issues, but the difference between the offer and bid prices has
averaged between 1 and 2% of face amount. Neither the Sponsors, the Trustee or
the Evaluator will be liable for errors in the Evaluator's judgment. The fees of
the Evaluator will be borne by the Fund.

CERTIFICATES

Certificates for Units are issued upon request and may be transferred by
paying any taxes or governmental charges and by complying with the requirements
for redeeming Certificates (see How To Sell Units--Trustee's Redemption of
Units). Certain Sponsors collect additional charges for registering and shipping
Certificates to purchasers. Lost or mutilated Certificates can be replaced upon
delivery of satisfactory indemnity and payment of costs.

9
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HOW TO SELL UNITS

SPONSORS' MARKET FOR UNITS

You can sell your Units at any time without a fee. The Sponsors (although
not obligated to do so) will normally buy any Units offered for sale at the
repurchase price next computed after receipt of the order. The Sponsors have
maintained secondary markets in Defined Asset Funds for over 20 years. Primarily
because of the sales charge and fluctuations in the market value of the Bonds,
the sale price may be less than the cost of your Units. You should consult your
financial professional for current market prices to determine if other
broker-dealers or banks are offering higher prices for Units.

The Sponsors may discontinue this market without prior notice if the supply
of Units exceeds demand or for other business reasons; in that event, the
Sponsors may still purchase Units at the redemption price as a service to
investors. The Sponsors may reoffer or redeem Units repurchased.

TRUSTEE'S REDEMPTION OF UNITS

You may redeem your Units by sending the Trustee a redemption request
together with any certificates you hold. Certificates must be properly endorsed
or accompanied by a written transfer instrument with signatures guaranteed by an
eligible institution. In certain instances, additional documents may be required
such as a certificate of death, trust instrument, certificate of corporate
authority or appointment as executor, administrator or guardian. If the Sponsors
are maintaining a market for Units, they will purchase any Units tendered at the
repurchase price described above. While Defined Asset Funds Municipal Series
have a declining deferred sales charge payable on redemption (see Appendix B), a
Municipal Investment Trust Fund has no back-end load or 12b-1 fees, so there is
never a fee for cashing in your investment (see Appendix C). If they do not
purchase Units tendered, the Trustee is authorized in its discretion to sell
Units in the over-the-counter market if it believes it will obtain a higher net
price for the redeeming investor.

By the seventh calendar day after tender you will be mailed an amount equal
to the Redemption Price per Unit. Because of market movements or changes in the
Portfolio, this price may be more or less than the cost of your Units. The
Redemption Price per Unit is computed each Business Day by adding the value of
the Bonds, net accrued interest, cash and the value of any other Fund assets;
deducting unpaid taxes or other governmental charges, accrued but unpaid Fund
expenses, unreimbursed Trustee advances, cash held to redeem Units or for
distribution to investors and the value of any other Fund liabilities; and
dividing the result by the number of outstanding Units.

For Defined Asset Funds Municipal Series, Bonds are evaluated on the offer
side during the initial offering period and for at least the first three months
of the Fund (even in the secondary market) and on the bid side thereafter. For a
Municipal Investment Trust Fund, Bonds are evaluated on the offer side during
the initial offering period and on the bid side thereafter.

If cash is not available in the Fund's Income and Capital Accounts to pay
redemptions, the Trustee may sell Bonds selected by the Agent for the Sponsors
based on market and credit factors determined to be in the best interest of the
Fund. These sales are often made at times when the Bonds would not otherwise be
sold and may result in lower prices than might be realized otherwise and will
also reduce the size and diversity of the Fund.

Redemptions may be suspended or payment postponed if the New York Stock
Exchange is closed other than for customary weekend and holiday closings, if the
SEC determines that trading on that Exchange is restricted or that an emergency
exists making disposal or evaluation of the Bonds not reasonably practicable, or
for any other period permitted by the SEC.

INCOME, DISTRIBUTIONS AND REINVESTMENT

INCOME

Some of the Bonds may have been purchased on a when-issued basis or may
have a delayed delivery. Since interest on these Bonds does not begin to accrue
until the date of their delivery to the Fund, the Trustee's annual fee and
expenses may be reduced to provide tax-exempt income to investors for this
non-accrual period. If a when-issued Bond is not delivered until later than
expected and the amount of the Trustee's annual fee and expenses is insufficient
to cover the additional accrued interest, the Sponsors will treat the contracts
10
<PAGE>

as failed Bonds. The Trustee is compensated for its fee reduction by drawing on
the letter of credit deposited by the Sponsors before the settlement date for
these Bonds and depositing the proceeds in a non-interest bearing account for
the Fund.

Interest received is credited to an Income Account and other receipts to a
Capital Account. A Reserve Account may be created by withdrawing from the Income
and Capital Accounts amounts considered appropriate by the Trustee to reserve
for any material amount that may be payable out of the Fund.

DISTRIBUTIONS

Each Unit receives an equal share of monthly distributions of interest
income net of estimated expenses. Interest on the Bonds is generally received by
the Fund on a semi-annual or annual basis. Because interest on the Bonds is not
received at a constant rate throughout the year, any Monthly Income Distribution
may be more or less than the interest actually received. To eliminate
fluctuations in the Monthly Income Distribution, the Trustee will advance
amounts necessary to provide approximately equal interest distributions; it will
be reimbursed, without interest, from interest received on the Bonds, but the
Trustee is compensated, in part, by holding the Fund's cash balances in
non-interest bearing accounts. Along with the Monthly Income Distributions, the
Trustee will distribute the investor's pro rata share of principal received from
any disposition of a Bond to the extent available for distribution. In addition,
for Defined Asset Funds Municipal Series, distributions of amounts necessary to
pay the deferred portion of the sales charge will be made from the Capital and
Income Accounts to an account maintained by the Trustee for purposes of
satisfying investors' sales charge obligations.

The initial estimated annual income per Unit, after deducting estimated
annual Fund expenses (and, for Defined Asset Funds Municipal Series, the portion
of the deferred sales charge payable from interest income) as stated in Part A
of the Prospectus, will change as Bonds mature, are called or sold or otherwise
disposed of, as replacement bonds are deposited and as Fund expenses change.
Because the Portfolio is not actively managed, income distributions will
generally not be affected by changes in interest rates. Depending on the
financial conditions of the issuers of the Bonds, the amount of income should be
substantially maintained as long as the Portfolio remains unchanged; however,
optional bond redemptions or other Portfolio changes may occur more frequently
when interest rates decline, which would result in early returns of principal
and possibly earlier termination of the Fund.

RETURN CALCULATIONS

Estimated Current Return shows the estimated annual cash to be received
from interest-bearing bonds in a Portfolio (net of estimated annual expenses)
divided by the Public Offering Price (including the maximum sales charge).
Estimated Long Term Return is a measure of the estimated return over the
estimated life of the Trust. This represents an average of the yields to
maturity (or in certain cases, to an earlier call date) of the individual Bonds
in the Portfolio, adjusted to reflect the maximum sales charge and estimated
expenses. The average yield for the Portfolio is derived by weighting each
Bond's yield by its market value and the time remaining to the call or maturity
date, depending on how the Bond is priced. Unlike Estimated Current Return,
Estimated Long Term Return takes into account maturities, discounts and premiums
of the underlying Bonds.

No return estimate can be predictive of your actual return because returns
will vary with purchase price (including sales charges), how long units are
held, changes in Portfolio composition, changes in interest income and changes
in fees and expenses. Therefore, Estimated Current Return and Estimated Long
Term Return are designed to be comparative rather than predictive. A yield
calculation which is more comparable to an individual Bond may be higher or
lower than Estimated Current Return or Estimated Long Term Return which are more
comparable to return calculations used by other investment products.

REINVESTMENT

Distributions will be paid in cash unless the investor elects to have
distributions reinvested without sales charge in the Municipal Fund Accumulation
Program, Inc. The Program is an open-end management investment company whose
investment objective is to obtain income exempt from regular federal income
taxes by investing in a diversified portfolio of state, municipal and public
authority bonds rated A or better or with comparable credit characteristics.
Reinvesting compounds earnings free from federal tax. Investors participating in
the Program will be subject to state and local income taxes to the same extent
11
<PAGE>

as if the distributions had been received in cash, and most of the income on the
Program is subject to state and local income taxes. For more complete
information about the Program, including charges and expenses, request the
Program's prospectus from the Trustee. Read it carefully before you decide to
participate. Written notice of election to participate must be received by the
Trustee at least ten days before the Record Day for the first distribution to
which the election is to apply.

FUND EXPENSES

Estimated annual Fund expenses are listed in Part A of the Prospectus; if
actual expenses exceed the estimate, the excess will be borne by the Fund. The
Trustee's annual fee is payable in monthly installments. The Trustee also
benefits when it holds cash for the Fund in non-interest bearing accounts.
Possible additional charges include Trustee fees and expenses for maintaining
the Fund's registration statement current with Federal and State authorities,
extraordinary services, costs of indemnifying the Trustee and the Sponsors,
costs of action taken to protect the Fund and other legal fees and expenses,
Fund termination expenses and any governmental charges. The Trustee has a lien
on Fund assets to secure reimbursement of these amounts and may sell Bonds for
this purpose if cash is not available. The Sponsors receive an annual fee of a
maximum of $0.35 per $1,000 face amount to reimburse them for the cost of
providing Portfolio supervisory services to the Fund. While the fee may exceed
their costs of providing these services to the Fund, the total supervision fees
from all Defined Asset Funds Municipal Series will not exceed their costs for
these services to all of those Series during any calendar year; and the total
supervision fees from all Series of Municipal Investment Trust Fund will not
exceed their costs for these services to all of those Series during any calendar
year. The Sponsors may also be reimbursed for their costs of providing
bookkeeping and administrative services to the Fund, currently estimated at a
maximum of $0.10 per Unit. The Trustee's, Sponsors' and Evaluator's fees may be
adjusted for inflation without investors' approval.

All or a portion of expenses incurred in establishing the Fund, including
the cost of the initial preparation of documents relating to the Fund, Federal
and State registration fees, the initial fees and expenses of the Trustee, legal
expenses and any other out-of-pocket expenses will be paid by the Fund and
amortized over five years. Advertising and selling expenses will be paid from
the Underwriting Account at no charge to the Fund. Sales charges on Defined
Asset Funds range from under 1.0% to 5.5%. This may be less than you might pay
to buy and hold a comparable managed fund. Defined Asset Funds can be a
cost-effective way to purchase and hold investments. Annual operating expenses
are generally lower than for managed funds. Because Defined Asset Funds have no
management fees, limited transaction costs and no ongoing marketing expenses,
operating expenses are generally less than 0.25% a year. When compounded
annually, small differences in expense ratios can make a big difference in your
investment results. Because our portfolios rarely hold any significant amount of
cash, your money is more fully invested.

TAXES

The following discussion addresses only the U.S. federal and certain New
York State and City income tax consequences under current law of Units held as
capital assets and does not address the tax consequences of Units held by
dealers, financial institutions or insurance companies or other investors with
special circumstances.

In the opinion of Davis Polk & Wardwell, special counsel for the Sponsors,
under existing law:

The Fund is not an association taxable as a corporation for federal
income tax purposes. Each investor will be considered the owner of a pro
rata portion of each Bond in the Fund under the grantor trust rules of
Sections 671-679 of the Internal Revenue Code of 1986, as amended (the
'Code'). Each investor will be considered to have received the interest and
accrued the original issue discount, if any, on his pro rata portion of
each Bond when interest on the Bond is received or original issue discount
is accrued by the Fund. The investor's basis in his Units will be equal to
the cost of his Units, including any up-front sales charge and the
organizational expenses borne by the investor.

When an investor pays for accrued interest, the investor's confirmation
of purchase will report to him the amount of accrued interest for which he
paid. These investors will receive the accrued interest amount as part of
their first monthly distribution. Accordingly, these investors should
reduce their tax basis by the accrued interest amount after the first
monthly distribution.

An investor will recognize taxable gain or loss when all or part of his
pro rata portion of a Bond is disposed of by the Fund. An investor will
also be considered to have disposed of all or a portion of his pro rata
portion of each Bond when he sells or redeems all or some of his Units. An
investor who is treated as having acquired his pro rata portion of a Bond
at a premium will be required to amortize the premium over the term of the
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Bond. The amortization is only a reduction of basis for the investor's pro
rata portion of the Bond and does not result in any deduction against the
investor's income. Therefore, under some circumstances, an investor may
recognize taxable gain when his pro rata portion of a Bond is disposed of
for an amount equal to or less than his original tax basis therefor.

Under Section 265 of the Code, a non-corporate investor is not entitled
to a deduction for his pro rata share of fees and expenses of the Fund,
because the fees and expenses are incurred in connection with the
production of tax-exempt income. Further, if borrowed funds are used by an
investor to purchase or carry Units of the Fund, interest on this
indebtedness will not be deductible for federal income tax purposes. In
addition, under rules used by the Internal Revenue Service, 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.

Under the income tax laws of the State and City of New York, the Fund is
not an association taxable as a corporation and income received by the Fund
will be treated as the income of the investors in the same manner as for
federal income tax purposes, but will not be tax-exempt except to the
extent such income is earned by bonds in the Fund that are otherwise
tax-exempt for New York purposes.

The foregoing discussion relates only to U.S. federal and certain
aspects of New York State and City income taxes. Depending on their state
of residence, investors may be subject to state and local taxation and
should consult their own tax advisers in this regard.

* * *

In the opinion of bond counsel rendered on the date of issuance of each
Bond, the interest on each Bond is excludable from gross income under existing
law for regular federal income tax purposes (except in certain circumstances
depending on the investor) but may be subject to state and local taxes, and
interest on some or all of the Bonds may become subject to regular federal
income tax, perhaps retroactively to their date of issuance, as a result of
changes in federal law or as a result of the failure of issuers (or other users
of the proceeds of the Bonds) to comply with certain ongoing requirements. If
the interest on a Bond should be determined to be taxable, the Bond would
generally have to be sold at a substantial discount. In addition, investors
could be required to pay income tax on interest received prior to the date on
which the interest is determined to be taxable.

Neither the Sponsors nor Davis Polk & Wardwell have made or will make any
review of the proceedings relating to the issuance of the Bonds or the basis for
these opinions and there can be no assurance that the issuer (and other users)
will comply with any ongoing requirements necessary for a Bond to maintain its
tax-exempt character.

The Internal Revenue Service is currently engaged in a program of intensive
audits of certain tax-exempt hospital and health care facility organizations.
Although these audits have not yet been completed, it has been reported that the
tax-exempt status of some of these organizations may be revoked. At this time,
it is uncertain whether any of the hospital and health care facility obligations
held by the Fund will be affected by such audit proceedings.

RECORDS AND REPORTS

The Trustee keeps a register of the names, addresses and holdings of all
investors. The Trustee also keeps records of the transactions of the Fund,
including a current list of the Bonds and a copy of the Indenture, and
supplemental information on the operations of the Fund and the risks associated
with the Bonds held by the Fund, which may be inspected by investors at
reasonable times during business hours.

With each distribution, the Trustee includes a statement of the interest
and any other receipts being distributed. Within five days after deposit of
Bonds in exchange or substitution for Bonds (or contracts) previously deposited,
the Trustee will send a notice to each investor, identifying both the Bonds
removed and the replacement bonds deposited. The Trustee sends each investor of
record an annual report summarizing transactions in the Fund's accounts and
amounts distributed during the year and Bonds held, the number of Units
outstanding and the Redemption Price at year end, the interest received by the
Fund on the Bonds, the gross proceeds received by the Fund from the disposition
of any Bond (resulting from redemption or payment at maturity or sale of any
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<PAGE>

Bond), and the fees and expenses paid by the Fund, among other matters. The
Trustee will also furnish annual information returns to each investor and to the
Internal Revenue Service. Investors are required to report to the Internal
Revenue Service the amount of tax-exempt interest received during the year.
Investors may obtain copies of Bond evaluations from the Trustee to enable them
to comply with federal and state tax reporting requirements. Fund accounts are
audited annually by independent accountants selected by the Sponsors. Audited
financial statements are available from the Trustee on request.

TRUST INDENTURE

The Fund is a 'unit investment trust' created under New York law by a Trust
Indenture among the Sponsors, the Trustee and the Evaluator. This Prospectus
summarizes various provisions of the Indenture, but each statement is qualified
in its entirety by reference to the Indenture.

The Indenture may be amended by the Sponsors and the Trustee without
consent by investors to cure ambiguities or to correct or supplement any
defective or inconsistent provision, to make any amendment required by the SEC
or other governmental agency or to make any other change not materially adverse
to the interest of investors (as determined in good faith by the Sponsors). The
Indenture may also generally be amended upon consent of investors holding 51% of
the Units. No amendment may reduce the interest of any investor in the Fund
without the investor's consent or reduce the percentage of Units required to
consent to any amendment without unanimous consent of investors. Investors will
be notified on the substance of any amendment.

The Trustee may resign upon notice to the Sponsors. It may be removed by
investors holding 51% of the Units at any time or by the Sponsors without the
consent of investors if it becomes incapable of acting or bankrupt, its affairs
are taken over by public authorities, or if under certain conditions the
Sponsors determine in good faith that its replacement is in the best interest of
the investors. The Evaluator may resign or be removed by the Sponsors and the
Trustee without the investors' consent. The resignation or removal of either
becomes effective upon acceptance of appointment by a successor; in this case,
the Sponsors will use their best efforts to appoint a successor promptly;
however, if upon resignation no successor has accepted appointment within 30
days after notification, the resigning Trustee or Evaluator may apply to a court
of competent jurisdiction to appoint a successor.

Any Sponsor may resign so long as one Sponsor with a net worth of
$2,000,000 remains and is agreeable to the resignation. A new Sponsor may be
appointed by the remaining Sponsors and the Trustee to assume the duties of the
resigning Sponsor. If there is only one Sponsor and it fails to perform its
duties or becomes incapable of acting or bankrupt or its affairs are taken over
by public authorities, the Trustee may appoint a successor Sponsor at reasonable
rates of compensation, terminate the Indenture and liquidate the Fund or
continue to act as Trustee without a Sponsor. Merrill Lynch, Pierce, Fenner &
Smith Incorporated has been appointed as Agent for the Sponsors by the other
Sponsors.

The Sponsors, the Trustee and the Evaluator are not liable to investors or
any other party for any act or omission in the conduct of their responsibilities
absent bad faith, willful misfeasance, negligence (gross negligence in the case
of a Sponsor or the Evaluator) or reckless disregard of duty. The Indenture
contains customary provisions limiting the liability of the Trustee.

MISCELLANEOUS

LEGAL OPINION

The legality of the Units has been passed upon by Davis Polk & Wardwell,
450 Lexington Avenue, New York, New York 10017, as special counsel for the
Sponsors.

AUDITORS

The Statement of Condition in the Prospectus was audited by Deloitte &
Touche LLP, independent accountants, as stated in their opinion. It is included
in reliance upon that opinion given on the authority of that firm as experts in
accounting and auditing.

TRUSTEE

The Trustee and its address are stated on the back cover of the Prospectus.
The Trustee is subject to supervision by the Federal Deposit Insurance
Corporation, the Board of Governors of the Federal Reserve System and either the
Comptroller of the Currency or state banking authorities.

14
<PAGE>

SPONSORS

The Sponsors are listed on the back cover of the Prospectus. They may
include Merrill Lynch, Pierce, Fenner & Smith Incorporated, a wholly-owned
subsidiary of Merrill Lynch Co. Inc.; Smith Barney Inc., an indirect wholly-
owned subsidiary of The Travelers Inc.; Prudential Securities Incorporated, an
indirect wholly-owned subsidiary of the Prudential Insurance Company of America;
Dean Witter Reynolds, Inc., a principal operating subsidiary of Dean Witter
Discover & Co. and PaineWebber Incorporated, a wholly-owned subsidiary of
PaineWebber Group Inc. Each Sponsor, or one of its predecessor corporations, has
acted as Sponsor of a number of series of unit investment trusts. Each Sponsor
has acted as principal underwriter and managing underwriter of other investment
companies. The Sponsors, in addition to participating as members of various
selling groups or as agents of other investment companies, execute orders on
behalf of investment companies for the purchase and sale of securities of these
companies and sell securities to these companies in their capacities as brokers
or dealers in securities.

PUBLIC DISTRIBUTION

In the initial offering period Units will be distributed to the public
through the Underwriting Account and dealers who are members of the National
Association of Securities Dealers, Inc. The initial offering period is 30 days
or less if all Units are sold. If some Units initially offered have not been
sold, the Sponsors may extend the initial offering period for up to four
additional successive 30-day periods.

The Sponsors intend to qualify Units for sale in all states in which
qualification is deemed necessary through the Underwriting Account and by
dealers who are members of the National Association of Securities Dealers, Inc.;
however, Units of a State trust will be offered for sale only in the State for
which the trust is named, except that Units of a New Jersey trust will also be
offered in Connecticut, Units of a Florida trust will also be offered in New
York and Units of a New York trust will also be offered in Connecticut, Florida
and Puerto Rico. The Sponsors do not intend to qualify Units for sale in any
foreign countries and this Prospectus does not constitute an offer to sell Units
in any country where Units cannot lawfully be sold. Sales to dealers and to
introducing dealers, if any, will initially be made at prices which represent
a concession from the Public Offering Price, but the Agent for the Sponsors
reserves the right to change the rate of any concession from time to time. Any
dealer or introducing dealer may reallow a concession up to the concession to
dealers.

UNDERWRITERS' AND SPONSORS' PROFITS

Upon sale of the Units, the Underwriters will be entitled to receive sales
charges. The Sponsors also realize a profit or loss on deposit of the Bonds
equal to the difference between the cost of the Bonds to the Fund (based on the
offer side evaluation on the initial date of deposit) and the Sponsors' cost of
the Bonds. In addition, a Sponsor or Underwriter may realize profits or sustain
losses on Bonds it deposits in the Fund which were acquired from underwriting
syndicates of which it was a member. During the initial offering period, the
Underwriting Account also may realize profits or sustain losses as a result of
fluctuations after the initial date of deposit in the Public Offering Price of
the Units. In maintaining a secondary market for Units, the Sponsors will also
realize profits or sustain losses in the amount of any difference between the
prices at which they buy Units and the prices at which they resell these Units
(which include the sales charge) or the prices at which they redeem the Units.
Cash, if any, made available by buyers of Units to the Sponsors prior to a
settlement date for the purchase of Units may be used in the Sponsors'
businesses to the extent permitted by Rule 15c3-3 under the Securities Exchange
Act of 1934 and may be of benefit to the Sponsors.

FUND PERFORMANCE

Information on the performance of the Fund for various periods, on the
basis of changes in Unit price plus the amount of income and principal
distributions reinvested, may be included from time to time in advertisements,
sales literature, reports and other information furnished to current or
prospective investors. Total return figures are not averaged, and may not
reflect deduction of the sales charge, which would decrease the return. Average
annualized return figures reflect deduction of the maximum sales charge. No
provision is made for any income taxes payable.

Past performance may not be indicative of future results. The Fund is not
actively managed. Unit price and return fluctuate with the value of the Bonds in
the Portfolio, so there may be a gain or loss when Units are sold.

15
<PAGE>

Fund performance may be compared to performance on the same basis (with
distributions reinvested) of Moody's Municipal Bond Averages or performance data
from publications such as Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, The New York Times, U.S. News and World
Report, Barron's Business Week, CDA Investment Technology, Inc., Forbes Magazine
or Fortune Magazine. As with other performance data, performance comparisons
should not be considered representative of the Fund's relative performance for
any future period.

DEFINED ASSET FUNDS

Municipal Investment Trust Funds have provided investors with tax-free
income for more than 30 years. For decades informed investors have purchased
unit investment trusts for dependability and professional selection of
investments. Defined Asset Funds' philosophy is to allow investors to 'buy with
knowledge' (because, unlike managed funds, the portfolio of municipal bonds and
the return are relatively fixed) and 'hold with confidence' (because the
portfolio is professionally selected and regularly reviewed). Defined Asset
Funds offers an array of simple and convenient investment choices, suited to fit
a wide variety of personal financial goals--a buy and hold strategy for capital
accumulation, such as for children's education or retirement, or attractive,
regular current income consistent with the preservation of principal. Tax-exempt
income can help investors keep more today for a more secure financial future. It
can also be important in planning because tax brackets may increase with higher
earnings or changes in tax laws. Unit investment trusts are particularly suited
for the many investors who prefer to seek long-term income by purchasing sound
investments and holding them, rather than through active trading. Few
individuals have the knowledge, resources or capital to buy and hold a
diversified portfolio on their own; it would generally take a considerable sum
of money to obtain the breadth and diversity that Defined Asset Funds offer.
One's investment objectives may call for a combination of Defined Asset Funds.

Defined Asset Funds reflect a buy and hold strategy that the Sponsors
believe can be more effective and cheaper than active management. This strategy
is premised on selection criteria and procedures, diversification and regular
monitoring by investment professionals. Various advertisements and sales
literature may summarize the results of economic studies concerning how stock
market movement has tended to be concentrated and how longer-term investments
can tend to reduce risk.

One of the most important investment decisions you face may be how to
allocate your investments among asset classes. Diversification among different
kinds of investments can balance the risks and rewards of each one. Most
investment experts recommend stocks for long-term capital growth. Long-term
corporate bonds offer relatively high rates of interest income. By purchasing
both defined equity and defined bond funds, investors can receive attractive
current income, as well as growth potential, offering some protection against
inflation. From time to time various advertisements, sales literature, reports
and other information furnished to current or prospective investors may present
the average annual compounded rate of return of selected asset classes over
various periods of time, compared to the rate of inflation over the same
periods.

EXCHANGE OPTION--MUNICIPAL INVESTMENT TRUST FUND ONLY.

You may exchange Fund Units for units of certain other Defined Asset Funds
subject only to a reduced sales charge. You may exchange your units of any
Municipal Investment Trust Fund Intermediate Term Series with a regular maximum
sales charge of at least 3.25%, of any other Defined Asset Fund with a regular
maximum sales charge of at least 3.50%, or of any unaffiliated unit trust with a
regular maximum sales charge of at least 3.0%, for Units of this Fund at their
relative net asset values, subject only to a reduced sales charge, or to any
remaining Deferred Sales Charge, as applicable.

To make an exchange, you should contact your financial professional to find
out what suitable Exchange Funds are available and to obtain a prospectus. You
may acquire units of only those Exchange Funds in which the Sponsors are
maintaining a secondary market and which are lawfully for sale in the state
where you reside. Except for the reduced sales charge, an exchange is a taxable
event normally requiring recognition of any gain or loss on the units exchanged.
However, the Internal Revenue Service may seek to disallow a loss if the
portfolio of the units acquired is not materially different from the portfolio
of the units exchanged; you should consult your own tax advisor. If the proceeds
of units exchanged are insufficient to acquire a whole number of Exchange Fund
units, you may pay the difference in cash (not exceeding the price of a single
unit acquired).

As the Sponsors are not obligated to maintain a secondary market in any
series, there can be no assurance that units of a desired series will be
available for exchange. The Exchange Option may be amended or terminated at any
time without notice.

16
<PAGE>

SUPPLEMENTAL INFORMATION

Upon writing or calling the Trustee shown on the back cover of Part A of
this Prospectus, investors will receive at no cost to the investor supplemental
information about the Fund, which has been filed with the SEC. The supplemental
information includes more detailed risk factor disclosure about the types of
Bonds that may be part of the Fund's Portfolio, general risk disclosure
concerning any letters of credit or insurance securing certain Bonds, and
general information about the structure and operation of the Fund.

17
<PAGE>

APPENDIX A
DESCRIPTION OF RATINGS (AS DESCRIBED BY THE RATING COMPANIES THEMSELVES)
STANDARD & POOR'S RATINGS GROUP, A DIVISION OF MCGRAW-HILL, INC.

AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC--Debt rated BB, B, CCC and CC is regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
The ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
A provisional rating, indicated by 'p' following a rating, assumes the
successful completion of the project being financed by the issuance of the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of, or the risk of default
upon failure of, such completion.
* Continuance of the rating is contingent upon S&P's receipt of an executed
copy of the escrow agreement or closing documentation confirming investments and
cash flows.
NR--Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
MOODY'S INVESTORS SERVICE, INC.
Aaa--Bonds which are rated Aaa are judged to be 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 present
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.
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.
a-1
<PAGE>
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Rating symbols may include numerical modifiers 1, 2 or 3. The numerical
modifier 1 indicates that the security ranks at the high end, 2 in the
mid-range, and 3 nearer the low end, of the generic category. These modifiers of
rating symbols give investors a more precise indication of relative debt quality
in each of the historically defined categories.
Conditional ratings, indicated by 'Con.', are sometimes given when the
security for the bond depends upon the completion of some act or the fulfillment
of some condition. Such bonds are given a conditional rating that denotes their
probable credit stature upon completion of that act or fulfillment of that
condition.
NR--Should no rating be assigned, the reason may be one of the following:
(a) an application for rating was not received or accepted; (b) the issue or
issuer belongs to a group of securities that are not rated as a matter of
policy; (c) there is a lack of essential data pertaining to the issue or issuer
or (d) the issue was privately placed, in which case the rating is not published
in Moody's publications.
FITCH INVESTORS SERVICE, INC.
AAA--These bonds are considered to be investment grade and of the highest
quality. The obligor has an extraordinary ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--These bonds are considered to be investment grade and of high quality.
The obligor's ability to pay interest and repay principal, while very strong, is
somewhat less than for AAA rated securities or more subject to possible change
over the term of the issue.
A--These bonds are considered to be investment grade and of good quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--These bonds are considered to be investment grade and of satisfactory
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however are more likely to weaken this ability than bonds with higher ratings.
A '+' or a '-' sign after a rating symbol indicates relative standing in
its rating.
DUFF & PHELPS CREDIT RATING CO.
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic condtions.
A--Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
A '+' or a '-' sign after a rating symbol indicates relative standing in
its rating.
a-2
<PAGE>
APPENDIX B

SALES CHARGE SCHEDULES FOR DEFINED ASSET FUNDS, MUNICIPAL SERIES

DEFERRED AND UP-FRONT SALES CHARGES. Units purchased during the first year
of the Fund will be subject to periodic deferred and contingent deferred sales
charges. Units purchased in the second through fifth year will be subject to an
up-front sales charge as well as periodic deferred and contingent deferred sales
charges. Units purchased thereafter will be subject only to an up-front sales
charge. During the first five years of the Fund, a fixed periodic deferred sales
charge of $2.75 per Unit is payable on 20 quarterly payment dates occurring on
the 10th day of February, May, August and November, commencing no earlier than
45 days after the initial date of deposit. Investors purchasing Units on the
initial date of deposit and holding for at least five years, for example, would
incur total periodic deferred sales charges of $55.00 per Unit. Because of the
time value of money, however, as of the initial date of deposit this periodic
deferred sales charge obligation would, at current interest rates, equate to an
up-front sales charge of approximately 4.75%.

The Public Offering Price subsequent to the Initial Date of Deposit will
fluctuate. As the periodic deferred sales charge is a fixed dollar amount
irrespective of the Public Offering Price, it will represent a varying
percentage of the Public Offering Price. An up-front sales charge will be
imposed on all unit purchases after the first year of the Fund. The following
table illustrates the combined maximum up-front and periodic deferred sales
charges that would be incurred by an investor who purchases Units at the
beginning of each of the first five years of the Fund (based on a constant Unit
price) and holds them through the fifth year of the Fund:
<TABLE><CAPTION>

TOTAL
UP-FRONT AND
UP-FRONT SALES CHARGE MAXIMUM PERIODIC
AMOUNT DEFERRED SALES
DEFERRED PER CHARGES
$1,000 INVESTED PER $1,000 INVESTED
----------------------------------------------------------- --------------- --------------------
YEAR OF UNIT AS PERCENT OF PUBLIC AS PERCENT OF NET AMOUNT PER
PURCHASE OFFERING PRICE AMOUNT INVESTED $1,000 INVESTED
- ----------------- --------------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
1 None None None $ 55.00 $ 55.00
2 1.10% 1.11% $ 11.00 44.00 55.00
3 2.20 2.25 22.00 33.00 55.00
4 3.30 3.41 33.00 22.00 55.00
5 4.40 4.60 44.00 11.00 55.00
</TABLE>

CONTINGENT DEFERRED SALES CHARGE. Units redeemed or repurchased within 4
years after the Fund's initial date of deposit will not only incur the periodic
deferred sales charge until the quarter of redemption or repurchase but will
also be subject to a contingent deferred sales charge:

YEAR SINCE FUND'S CONTINGENT DEFERRED
INITIAL DATE OF SALES CHARGE PER
DEPOSIT UNIT
- -------------------- --------------------
1 $ 25.00
2 15.00
3 10.00
4 5.00
5 and thereafter None

The contingent deferred sales charge is waived on any redemption or
repurchase of Units after the death (including the death of a single joint
tenant with rights of survivorship) or disability (as defined in the Internal
Revenue Code) of an investor, provided the redemption or repurchase is requested
within one year of the death or initial determination of disability. The
Sponsors may require receipt of satisfactory proof of disability before
releasing the portion of the proceeds representing the amount of the contingent
deferred sales charge waived.

To assist investors in understanding the total costs of purchasing units
during the first four years of the Fund and disposing of those units by the
fifth year, the following tables set forth the maximum combined up-front,
periodic and contingent deferred sales charges that would be incurred (assuming
a constant Unit price) by an investor:

<TABLE><CAPTION>
UNITS PURCHASED ON INITIAL OFFERING DATE

YEAR OF UNIT DEFERRED SALES CONTINGENT DEFERRED
DISPOSITION UP-FRONT SALES CHARGE CHARGE SALES CHARGE TOTAL SALES CHARGES
- ------------------- --------------------- ---------------- ------------------- -------------------
<S> <C> <C> <C> <C>
1 None $ 11.00 $ 25.00 $ 36.00
2 None 22.00 15.00 37.00
3 None 33.00 10.00 43.00
4 None 44.00 5.00 49.00
5 None 55.00 0.00 55.00
</TABLE>

b-1
<PAGE>
<TABLE><CAPTION>
UNITS PURCHASED ON FIRST ANNIVERSARY OF FUND

YEAR OF UNIT DEFERRED SALES CONTINGENT DEFERRED
DISPOSITION UP-FRONT SALES CHARGE CHARGE SALES CHARGE TOTAL SALES CHARGES
- ----------------- --------------------- ---------------- ------------------- -------------------
<S> <C> <C> <C> <C>
2 $ 11.00 $ 11.00 $ 15.00 $ 37.00
3 11.00 22.00 10.00 43.00
4 11.00 33.00 5.00 49.00
5 11.00 44.00 0.00 55.00

<CAPTION>
UNITS PURCHASED ON SECOND ANNIVERSARY OF FUND

YEAR OF UNIT DEFERRED SALES CONTINGENT DEFERRED
DISPOSITION UP-FRONT SALES CHARGE CHARGE SALES CHARGE TOTAL SALES CHARGES
- ------------------- --------------------- ---------------- ------------------- -------------------
<S> <C> <C> <C> <C>
3 $ 22.00 $ 11.00 $ 10.00 $ 43.00
4 22.00 22.00 5.00 49.00
5 22.00 33.00 0.00 55.00

<CAPTION>
UNITS PURCHASED ON THIRD ANNIVERSARY OF FUND

YEAR OF UNIT DEFERRED SALES CONTINGENT DEFERRED
DISPOSITION UP-FRONT SALES CHARGE CHARGE SALES CHARGE TOTAL SALES CHARGES
- ----------------- --------------------- ---------------- ------------------- -------------------
<S> <C> <C> <C> <C>
4 $ 33.00 $ 11.00 $ 5.00 $ 49.00
5 33.00 22.00 0.00 55.00

<CAPTION>
UNITS PURCHASED ON FOURTH ANNIVERSARY OF FUND

YEAR OF UNIT DEFERRED SALES CONTINGENT DEFERRED
DISPOSITION UP-FRONT SALES CHARGE CHARGE SALES CHARGE TOTAL SALES CHARGES
- ----------------- --------------------- ---------------- ------------------- -------------------
<S> <C> <C> <C> <C>
5 $ 44.00 $ 11.00 $ 0.00 $ 55.00
</TABLE>

b-2
<PAGE>
APPENDIX C
<TABLE><CAPTION>

SALES CHARGE SCHEDULES FOR MUNICIPAL INVESTMENT TRUST FUND
INITIAL OFFERING

SALES CHARGE
(GROSS UNDERWRITING PROFIT)
----------------------------------
AS PERCENT OF AS PERCENT OF DEALER CONCESSION AS
OFFER SIDE PUBLIC NET AMOUNT PERCENT OF PUBLIC
NUMBER OF UNITS OFFERING PRICE INVESTED OFFERING PRICE
- ----------------------------------- ------------------- ------------- ---------------------

MONTHLY PAYMENT SERIES, MULTISTATE SERIES, INSURED SERIES
<S> <C> <C> <C>
Less than 250...................... 4.50% 4.712% 2.925%
250 - 499.......................... 3.50 3.627 2.275
500 - 749.......................... 3.00 3.093 1.950
750 - 999.......................... 2.50 2.564 1.625
1,000 or more...................... 2.00 2.041 1.300
<CAPTION>

INTERMEDIATE SERIES (TEN YEAR MATURITIES)
<S> <C> <C> <C>
Less than 250...................... 4.00% 4.167% 2.600%
250 - 499.......................... 3.00 3.093 1.950
500 - 749.......................... 2.50 2.564 1.625
750 - 999.......................... 2.00 2.041 1.300
1,000 or more...................... 1.50 1.523 0.975

<CAPTION>
INTERMEDIATE SERIES (SHORT INTERMEDIATE MATURITIES)

SECONDARY MARKET

ACTUAL SALES CHARGE AS DEALER CONCESSION AS
PERCENT OF EFFECTIVE PERCENT OF EFFECTIVE
NUMBER OF UNITS SALES CHARGE SALES CHARGE
- ---------------- ----------------------- -----------------------
1-249 100% 65%
250-499 80 52
500-749 60 39
750-999 45 29.25
1,000 or more 35 22.75

EFFECTIVE SALES CHARGE COMMENCING JANUARY 16, 1996

AS PERCENT AS PERCENT
TIME TO OF BID SIDE OF PUBLIC
MATURITY EVALUATION OFFERING PRICE
- -------------------------------- ----------- -----------------
Less than six months 0% 0%
Six months to less than 1 year 0.503 0.50
1 year to less than 2 years 1.010 1.00
2 years to less than 3 years 1.523 1.50
3 years to less than 4 years 2.302 2.25
4 years to less than 5 years 2.828 2.75
5 years to less than 6 years 3.093 3.00
6 years to less than 7 years 3.359 3.25
7 years to less than 8 years 3.627 3.50
8 years to less than 9 years 4.167 4.00
9 years to less than 12 years 4.439 4.25
12 years to less than 15 years 4.712 4.50
15 years or more 5.820 5.50

For this purpose, a Bond will be considered to mature on its stated
maturity date unless: it has been called for redemption; (although not called)
its yield to maturity is more than 40 basis points higher than its yield to any
call date; funds or securities have been placed in escrow to redeem it on an
earlier date; or the Bond is subject to a mandatory tender. In each of these
cases the earlier date will be considered the maturity date.

c-1
<PAGE>
MUNICIPAL INVESTMENT TRUST FUND
MULTISTATE SERIES
DEFINED ASSET FUNDS
I want to learn more about automatic reinvestment in the Investment Accumulation
Program. Please send me information about participation in the Municipal Fund
Accumulation Program, Inc. and a current Prospectus.
My name (please
print) _________________________________________________________________________
My address (please print):
Street and Apt.
No. ____________________________________________________________________________
City, State, Zip
Code ___________________________________________________________________________
This page is a self-mailer. Please complete the information above, cut along the
dotted line, fold along the lines on the reverse side, tape, and mail with the
Trustee's address displayed on the outside.
<PAGE>

BUSINESS REPLY MAIL NO POSTAGE
FIRST CLASS PERMIT NO. 1313 NEW YORK, NY NECESSARY
IF MAILED
POSTAGE WILL BE PAID BY ADDRESSEE IN THE
THE BANK OF NEW YORK UNITED STATES
UNIT INVESTMENT TRUST DEPARTMENT
P.O. BOX 974
WALL STREET STATION
NEW YORK, NY 10268-0974

- --------------------------------------------------------------------------------
(Fold along this line.)
- --------------------------------------------------------------------------------
(Fold along this line.)
<PAGE>

Defined
Asset FundsSM

SPONSORS: MUNICIPAL INVESTMENT
Merrill Lynch, TRUST FUND
Pierce, Fenner & Smith IncorporatedMultistate Series--201
Defined Asset Funds (Unit Investment Trusts)
P.O. Box 9051,
Princeton, NJ This Prospectus does not contain all of the
08543-9051 information with respect to the investment
(609) 282-8500 company set forth in its registration
Smith Barney Inc. statement and exhibits relating thereto which
388 Greenwich Street--23rd Floor, have been filed with the Securities and
New York, NY Exchange Commission, Washington, D.C. under
10013 the Securities Act of 1933 and the Investment
(800) 223-2532 Company Act of 1940, and to which reference
PaineWebber Incorporated is hereby made.
1285 Avenue of the Americas, ------------------------------
New York, NY No person is authorized to give any
10019 information or to make any representations
(201) 902-3000 with respect to this investment company not
Prudential Securities Incorporated contained in this Prospectus; and any
One Seaport Plaza--199 Water information or representation not contained
Street, herein must not be relied upon as having been
New York, NY authorized.
10292 ------------------------------
(212) 776-1000 When Units of this Fund are no longer
Dean Witter Reynolds Inc. available this Prospectus may be used as a
Two World Trade Center--59th Floor,preliminary prospectus for a future series,
New York, NY and investors should note the following:
10048 Information contained herein is subject to
(212) 392-2222 amendment. A registration statement relating
EVALUATOR: to securities of a future series has been
Kenny S&P Evaluation Services, filed with the Securities and Exchange
a division of J. J. Kenny Co., Inc.Commission. These securities may not be sold
65 Broadway, New York, NY 10019 nor may offers to buy be accepted prior to
TRUSTEE: the time the registration statement becomes
The Bank of New York effective.
(a New York Banking Corporation) This Prospectus shall not constitute an offer
Box 974--Wall Street Division to sell or the solicitation of an offer to
New York, NY 10268-0974 buy nor shall there be any sale of these
1-800-221-7771 securities in any State in which such offer
solicitation or sale would be unlawful prior
to registration or qualification under the
securities laws of any such State.

15183--2/96

<PAGE>
PART II
ADDITIONAL INFORMATION NOT INCLUDED IN THE PROSPECTUS

A. The following information relating to the Depositors is incorporated by
reference to the SEC filings indicated and made a part of this Registration
Statement.
<TABLE><CAPTION>
SEC FILE OR
IDENTIFICATION DATE
NUMBER FILED
----------------------------------------
<S> <C> <C>
I. Bonding Arrangements and Date of Organization of the
Depositors filed pursuant to Items A and B of
Part II of the Registration Statement on Form
S-6 under the Securities Act of 1933:
Merrill Lynch, Pierce, Fenner & Smith
Incorporated 2-52691 1/17/95
Smith Barney Inc. .............................. 33-29106 6/29/89
PaineWebber Incorporated........................ 2-87965 11/18/83
Prudential Securities Incorporated.............. 2-61418 4/26/78
Dean Witter Reynolds Inc. ...................... 2-60599 1/4/78
II. Information as to Officers and Directors of the
Depositors filed pursuant to Schedules A and D
of Form BD under Rules 15b1-1 and 15b3-1 of the
Securities Exchange Act of 1934:
Merrill Lynch, Pierce, Fenner & Smith
Incorporated 8-7221 5/26/94, 6/29/92
Smith Barney Inc. .............................. 8-8177 8/29/94, 8/2/93
PaineWebber Incorporated........................ 8-16267 4/20/94, 7/31/86
Prudential Securities Incorporated.............. 8-27154 6/30/94, 6/20/88
Dean Witter Reynolds Inc. ...................... 8-14172 2/23/94, 4/9/91
III. Charter documents of the Depositors filed as
Exhibits to the Registration Statement on Form
S-6 under the Securities Act of 1933 (Charter,
By-Laws):
Merrill Lynch, Pierce, Fenner & Smith
Incorporated 2-73866, 2-77549 9/22/81, 6/15/82
Smith Barney Inc. .............................. 33-20499 3/30/88
PaineWebber Incorporated........................ 2-87965 11/18/83
Prudential Securities Incorporated.............. 2-52947 3/4/75
Dean Witter Reynolds Inc. ...................... 2-60599 1/4/78
B. The Internal Revenue Service Employer Identification
Numbers of the Sponsors and Trustee are as follows:
Merrill Lynch, Pierce, Fenner & Smith
Incorporated 13-5674085
Smith Barney Inc. .............................. 13-1912900
PaineWebber Incorporated........................ 13-2638166
Prudential Securities Incorporated.............. 22-2347336
Dean Witter Reynolds Inc. ...................... 94-0899825

The Bank of New York, Trustee................... 13-4941102

UNDERTAKING

The Sponsors undertake that they will not instruct the Trustee to accept from
(i) Asset Guaranty Reinsurance Company, Municipal Bond Investors Assurance
Corporation or any other insurance company affiliated with any of the Sponsors,
in settlement of any claim, less than an amount sufficient to pay any principal
or interest (and, in the case of a taxability redemption, premium) then due on
any Security in accordance with the municipal bond guaranty insurance policy
attached to such Security or (ii) any affiliate of the Sponsors who has any
obligation with respect to any Security, less than the full amount due pursuant
to the obligation, unless such instructions have been approved by the Securities
and Exchange Commission pursuant to Rule 17d-1 under the Investment Company Act
of 1940.
II-1
<PAGE>
SERIES OF MUNICIPAL INVESTMENT TRUST FUND, EQUITY INCOME FUND
AND DEFINED ASSET FUNDS MUNICIPAL INSURED SERIES
DESIGNATED PURSUANT TO RULE 487 UNDER THE SECURITIES ACT OF 1933

SEC
SERIES NUMBER FILE NUMBER
- --------------------------------------------------------------------------------
Municipal Investment Trust Fund:
Thirty-Eighth Intermediate Term Series.................... 2-84267
Thirty-Eighth Insured Series.............................. 2-96953
Four Hundred Thirty-Eighth Monthly Payment Series......... 33-16561
Multistate Series 6E...................................... 33-29412
Multistate Series--48..................................... 33-50247
Multistate Series--83..................................... 33-57443
Defined Asset Funds Municipal Insured Series................ 33-54565
Equity Income Fund, Select Ten Portfolio--1995 Spring
Series...................................................... 33-55807

CONTENTS OF REGISTRATION STATEMENT
The Registration Statement on Form S-6 comprises the following papers and
documents:
The facing sheet of Form S-6.
The Cross-Reference Sheet (incorporated by reference to the Cross-Reference
Sheet to the Registration Statement of Defined Asset Funds Municipal Insured
Series, 1933 Act File No. 33-54565).
The Prospectus.
Additional Information not included in the Prospectus (Part II).
The following exhibits:

1.1 --Form of Trust Indenture (incorporated by reference to Exhibit
1.1 to the Registration Statement of Municipal Investment Trust
Fund, Multistate Series--89, 1933 Act File No. 33-58531.
1.1.1 --Form of Standard Terms and Conditions of Trust Effective
October 21, 1993 (incorporated by reference to Exhibit 1.1.1 to
the Registration Statement of Municipal Investment Trust Fund,
Multistate Series--48, 1933 Act File No. 33-50247).
1.2 --Form of Master Agreement Among Underwriters (incorporated by
reference to Exhibit 1.2 to the Registration Statement of The
Corporate Income Fund, One Hundred Ninety-Fourth Monthly
Payment Series, 1933 Act File No. 2-90925).
2.1 --Form of Certificate of Beneficial Interest (included in Exhibit
1.1.1).
3.1 --Opinion of counsel as to the legality of the securities being
issued including their consent to the use of their names under
the headings 'Taxes' and 'Miscellaneous--Legal Opinion' in the
Prospectus.
4.1.1 --Consent of the Evaluator.
4.1.2 --Consent of the Ratings Agency.
5.1 --Consent of independent accountants.

9.1 --Information Supplement.

R-1
<PAGE>

MUNICIPAL INVESTMENT TRUST FUND
MULTISTATE SERIES--201

DEFINED ASSET FUNDS

SIGNATURES

The registrant hereby identifies the series numbers of Municipal Investment
Trust Fund, Equity Income Fund and Defined Asset Funds Municipal Insured Series
listed on page R-1 for the purposes of the representations required by Rule 487
and represents the following:

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

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

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

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS
DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT TO THE REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY
AUTHORIZED IN THE CITY OF NEW YORK AND STATE OF NEW YORK ON THE 29TH DAY OF
FEBRUARY 1996.

SIGNATURES APPEAR ON PAGES R-3, R-4, R-5, R-6 AND R-7.

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

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

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

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

A majority of the members of the Board of Directors of Dean Witter Reynolds
Inc. has signed this Registration Statement or Amendment to the Registration
Statement pursuant to Powers of Attorney authorizing the person signing this
Registration Statement or Amendment to the Registration Statement to do so on
behalf of such members.
R-2
<PAGE>
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
DEPOSITOR

By the following persons, who constitute Powers of Attorney have been filed
a majority of under
the Board of Directors of Merrill Form SE and the following 1933 Act
Lynch, Pierce, File
Fenner & Smith Incorporated: Number: 33-43466 and 33-51607

HERBERT M. ALLISON, JR.
BARRY S. FREIDBERG
EDWARD L. GOLDBERG
STEPHEN L. HAMMERMAN
JEROME P. KENNEY
DAVID H. KOMANSKY
DANIEL T. NAPOLI
THOMAS H. PATRICK
JOHN L. STEFFENS
DANIEL P. TULLY
ROGER M. VASEY
ARTHUR H. ZEIKEL
By
ERNEST V. FABIO
(As authorized signatory for Merrill Lynch, Pierce,
Fenner & Smith Incorporated and
Attorney-in-fact for the persons listed above)
R-3
<PAGE>
SMITH BARNEY INC.
DEPOSITOR

By the following persons, who constitute a majority of Powers of Attorney
the Board of Directors of Smith Barney Inc.: have been filed
under the 1933 Act
File Number:
33-49753 and
33-51607

STEVEN D. BLACK
JAMES BOSHART III
ROBERT A. CASE
JAMES DIMON
ROBERT DRUSKIN
JEFFREY LANE
ROBERT H. LESSIN
By MICHAEL J. BROPHY
(As authorized signatory for
Smith Barney Inc. and
Attorney-in-fact for the persons listed above)
R-4
<PAGE>
PAINEWEBBER INCORPORATED
DEPOSITOR

By the following persons, who constitute Powers of Attorney have been filed
a majority of under
the Executive Committee of the Board the following 1933 Act File
of Directors of PaineWebber Number: 33-55073
Incorporated:

DONALD J. MARRON
JOSEPH J. GRANO, JR.
By
ROBERT E. HOLLEY
(As authorized signatory for
PaineWebber Incorporated
and Attorney-in-fact for the persons listed above)
R-5
<PAGE>
PRUDENTIAL SECURITIES INCORPORATED
DEPOSITOR

By the following persons, who constitute Powers of Attorney have been filed
a majority of under Form SE and the following 1933
the Executive Committee of the Board Act File Number: 33-41631
of Directors of
Prudential Securities Incorporated:

ALAN D. HOGAN
GEORGE A. MURRAY
LELAND B. PATON
HARDWICK SIMMONS
By
RICHARD R. HOFFMANN
(As authorized signatory for Prudential Securities
Incorporated and Attorney-in-fact for the persons listed above)
R-6
<PAGE>
DEAN WITTER REYNOLDS INC.
DEPOSITOR

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

NANCY DONOVAN
CHARLES A. FIUMEFREDDO
JAMES F. HIGGINS
STEPHEN R. MILLER
PHILIP J. PURCELL
THOMAS C. SCHNEIDER
WILLIAM B. SMITH
By
MICHAEL D. BROWNE
(As authorized signatory for Dean Witter Reynolds Inc.
and Attorney-in-fact for the persons listed above)
R-7

</TABLE>

EXHIBIT 3.1
DAVIS POLK & WARDWELL
450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 450-4000

FEBRUARY 29, 1996

Municipal Investment Trust Fund,
Multistate Series - 201
Defined Asset Funds

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

Dear Sirs:

We have acted as special counsel for you, as sponsors (the 'Sponsors') of
Multistate Series - 201 of Municipal Investment Trust Fund, Defined Asset Funds
(the 'Trusts'), in connection with the issuance of units of fractional undivided
interest in the Trusts (the 'Units') in accordance with the Trust Indentures
relating to the Trusts (the 'Indentures').

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

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

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

Very truly yours,

DAVIS POLK & WARDWELL

EXHIBIT 4.1.1

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

February 29, 1996

Merrill Lynch Pierce Fenner & Smith
Incorporated
Defined Asset Funds
P.O. Box 9051
Princeton, NJ 08543-9051

The Bank of New York
Unit Investment Trust Department
P.O. Box 974
Wall Street Division
New York, N.Y. 10268-0974

Re: Municipal Investment Trust Fund, Multistate Series - 201, Defined Asset
Funds

Gentlemen:

We have examined the Registration Statement File No. 33-64759 for the
above-captioned fund. We hereby acknowledge that Kenny Information Systems, a
Division of J. J. Kenny Co., Inc. is currently acting as the evaluator for the
fund. We hereby consent to the use in the Registration Statement of the
reference to Kenny Information Systems, a Division of J. J. Kenny Co., Inc. as
evaluator.

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

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

Sincerely,

FRANK A. CICCOTTO, JR.
VICE PRESIDENT

EXHIBIT 4.1.2
STANDARD & POOR'S RATINGS GROUP
BOND INSURANCE ADMINISTRATION
25 BROADWAY
NEW YORK, NEW YORK 10004
TELEPHONE (212) 208-1061

February 29, 1996

Merrill Lynch Pierce The Bank of New York
Fenner & Smith Incorporated Unit Investment Trust Department
Defined Asset Funds P.O. Box 974
P.O. Box 9051 Wall Street Division
Princeton, NJ 08543-9051 New York, NY 10268-0974

Re: Municipal Investment Trust Fund, Multistate Series - 201,
Defined Asset Funds (California and Florida Trusts)

Gentlemen:

Pursuant to your request for a Standard & Poor's rating on the units of the
above-captioned trusts, SEC No. 33-64759, we have reviewed the information
presented to us and have assigned a 'AAA' rating to the units of the trusts and
a 'AAA' rating to the securities contained in the trusts. The ratings are direct
reflections, of the portfolios of the trusts, which will be composed solely of
securities covered by bond insurance policies that insure against default in the
payment of principal and interest on the securities so long as they remain
outstanding. Since such policies have been issued by one or more insurance
companies which have been assigned 'AAA' claims paying ability ratings by S&P,
S&P has assigned a 'AAA' rating to the units of the trusts and to the securities
contained in the trust.

You have permission to use the name of Standard & Poor's Corporation and
the above-assigned ratings in connection with your dissemination of information
relating to these units, provided that it is understood that the ratings are not
'market' ratings nor recommendations to buy, hold, or sell the units of the
trusts or the securities contained in the trusts. Further, it should be
understood the rating on the units does not take into account the extent to
which trust expenses or portfolio asset sales for less than the trust's purchase
price will reduce payment to the unit holders of the interest and principal
required to be paid on the portfolio assets. S&P reserves the right to advise
its own clients, subscribers, and the public of the ratings. S&P relies on the
sponsor and its counsel, accountants, and other experts for the accuracy and
completeness of the information submitted in connection with the ratings. S&P
does not independently verify the truth or accuracy of any such information.

This letter evidences our consent to the use of the name of Standard &
Poor's Corporation in connection with the rating assigned to the units in the
registration statement or prospectus relating to the units or the trusts.
However, this letter should not be construed as a consent by us, within the
meaning of Section 7 of the Securities Act of 1933, to the use of the name of
Standard & Poor's Corporation in connection with the ratings assigned to the
securities contained in the trusts. You are hereby authorized to file a copy of
this letter with the Securities and Exchange Commission.

<PAGE>
Please be certain to send us three copies of your final prospectus as soon
as it becomes available. Should we not receive them within a reasonable time
after the closing or should they not conform to the representations made to us,
we reserve the right to withdraw the rating.

We are pleased to have had the opportunity to be of service to you. If we
can be of further help, please do not hesitate to call upon us.

Very truly yours,

VINCENT S. ORGO
Standard & Poor's Corporation

EXHIBIT 5.1
CONSENT OF INDEPENDENT ACCOUNTANTS

The Sponsors and Trustee of Municipal Investment Trust Fund, Multistate
Series--201,

Defined Asset Funds (California, Connecticut, Florida and Virginia Trusts):
We consent to the use in this Registration Statement No. 33-64759 of our opinion
dated February 29, 1996, relating to the Statements of Condition of Municipal
Investment Trust Fund, Multistate Series--201, Defined Asset Funds (California,
Connecticut, Florida and Virginia Trusts) and to the reference to us under the
heading 'Miscellaneous-- Auditors' in the Prospectus which is a part of this
Registration Statement.

DELOITTE & TOUCHE LLP
New York, N.Y.
February 29, 1996

WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> CALIFORNIA TRUST
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 3,972,012
<INVESTMENTS-AT-VALUE> 3,972,012
<RECEIVABLES> 31,891
<ASSETS-OTHER> 4,038
<OTHER-ITEMS-ASSETS> 38,000
<TOTAL-ASSETS> 4,045,941
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 35,929
<TOTAL-LIABILITIES> 35,929
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,045,940
<SHARES-COMMON-STOCK> 4,038
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 4,045,940
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,038
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> CONNECTICUT TRUST
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 3,215,211
<INVESTMENTS-AT-VALUE> 3,215,211
<RECEIVABLES> 41,825
<ASSETS-OTHER> 3,280
<OTHER-ITEMS-ASSETS> 30,000
<TOTAL-ASSETS> 3,290,316
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 45,105
<TOTAL-LIABILITIES> 45,105
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,245,211
<SHARES-COMMON-STOCK> 3,280
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 3,245,211
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,280
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> FLORIDA TRUST
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 3,213,138
<INVESTMENTS-AT-VALUE> 3,213,138
<RECEIVABLES> 34,740
<ASSETS-OTHER> 3,279
<OTHER-ITEMS-ASSETS> 29,000
<TOTAL-ASSETS> 3,280,158
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 38,019
<TOTAL-LIABILITIES> 38,019
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,242,138
<SHARES-COMMON-STOCK> 3,279
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 3,242,138
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,279
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> VIRGINIA TRUST
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 3,210,185
<INVESTMENTS-AT-VALUE> 3,210,185
<RECEIVABLES> 50,289
<ASSETS-OTHER> 3,281
<OTHER-ITEMS-ASSETS> 31,000
<TOTAL-ASSETS> 3,295,295
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 54,110
<TOTAL-LIABILITIES> 54,110
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,241,185
<SHARES-COMMON-STOCK> 3,281
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 3,241,185
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,281
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

EXHIBIT 9.1

DEFINED ASSET FUNDS
-------------------

MUNICIPAL INVESTMENT TRUST FUND
MUNICIPAL INSURED SERIES

INFORMATION SUPPLEMENT

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

This Information Supplement is dated February 29, 1996. Capitalized terms have
been defined in the Prospectus.

TABLE OF CONTENTS
-----------------

Description of Fund Investments . . . . . . . . . . . . . . . . . 3
Fund Structure . . . . . . . . . . . . . . . . . . . . . . . 3
Portfolio Supervision . . . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . 5
Concentration . . . . . . . . . . . . . . . . . . . . . . . 5
General Obligation Bonds . . . . . . . . . . . . . . . . . . 5
Moral Obligation Bonds . . . . . . . . . . . . . . . . . . 6
Refunded Bonds . . . . . . . . . . . . . . . . . . . . . . . 6
Industrial Development Revenue Bonds . . . . . . . . . . . . . . 6
Municipal Revenue Bonds . . . . . . . . . . . . . . . . . . 6
Municipal Utility Bonds . . . . . . . . . . . . . . . . . 6
Lease Rental Bonds . . . . . . . . . . . . . . . . . 9
Housing Bonds . . . . . . . . . . . . . . . . . . . . . . . 9
Hospital and Health Care Bonds . . . . . . . . . . . . . . . . 10
Facility Revenue Bonds . . . . . . . . . . . . . . . . . 11
Solid Waste Disposal Bonds . . . . . . . . . . . . . . . . . 12
Special Tax Bonds . . . . . . . . . . . . . . . . . 12
Student Loan Revenue Bonds . . . . . . . . . . . . . . . . . 12
Transit Authority Bonds . . . . . . . . . . . . . . . . . 13
Municipal Water and Sewer Revenue Bonds . . . . . . . . . . . . 13
University and College Bonds . . . . . . . . . . . . . . . . . 13
Puerto Rico . . . . . . . . . . . . . . . . . . . . . . . 13
Bonds Backed by Letters of Credit or Repurchase Commitments . . 14
Liquidity . . . . . . . . . . . . . . . . . . . . . . . 17
Bonds Backed by Insurance . . . . . . . . . . . . . . . . . . . 18
State Risk Factors . . . . . . . . . . . . . . . . . . . . . . . 22
Payment of Bonds and Life of a Fund . . . . . . . . . . . . . . 22
Redemption . . . . . . . . . . . . . . . . . . . . . . . 22
Tax Exemption . . . . . . . . . . . . . . . . . . . . . . . 23
Income and Returns . . . . . . . . . . . . . . . . . . . . . . . 23

<PAGE>
Income . . . . . . . . . . . . . . . . . . . . . . . 23
State Matters . . . . . . . . . . . . . . . . . . . . . . . 24
Alabama . . . . . . . . . . . . . . . . . . . . . . . 24
Arizona . . . . . . . . . . . . . . . . . . . . . . . 27
California . . . . . . . . . . . . . . . . . . . . . . . 31
Colorado . . . . . . . . . . . . . . . . . . . . . . . 44
Connecticut . . . . . . . . . . . . . . . . . . . . . . . 47
Florida . . . . . . . . . . . . . . . . . . . . . . . 49
Georgia . . . . . . . . . . . . . . . . . . . . . . . 56
Illinois . . . . . . . . . . . . . . . . . . . . . . . 59
Louisiana . . . . . . . . . . . . . . . . . . . . . . . 61
Maine . . . . . . . . . . . . . . . . . . . . . . . 64
Maryland . . . . . . . . . . . . . . . . . . . . . . . 70
Massachusetts . . . . . . . . . . . . . . . . . . . . . . . 75
Michigan . . . . . . . . . . . . . . . . . . . . . . . 81
Minnesota . . . . . . . . . . . . . . . . . . . . . . . 84
Mississippi . . . . . . . . . . . . . . . . . . . . . . . 86
Missouri . . . . . . . . . . . . . . . . . . . . . . . 88
New Jersey . . . . . . . . . . . . . . . . . . . . . . . 89
New Mexico . . . . . . . . . . . . . . . . . . . . . . . 94
New York . . . . . . . . . . . . . . . . . . . . . . . 97
North Carolina . . . . . . . . . . . . . . . . . . . . . . . 103
Ohio . . . . . . . . . . . . . . . . . . . . . . . 109
Oregon . . . . . . . . . . . . . . . . . . . . . . . 113
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . 119
Tennessee . . . . . . . . . . . . . . . . . . . . . . . 120
Texas . . . . . . . . . . . . . . . . . . . . . . . 122
Virginia . . . . . . . . . . . . . . . . . . . . . . . 126

<PAGE>
DESCRIPTION OF FUND INVESTMENTS

Fund Structure

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

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

Portfolio Supervision

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

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

<PAGE>

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

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

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

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

<PAGE>

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

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

RISK FACTORS

Concentration

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

General Obligation Bonds

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

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

<PAGE>
on school districts and local governments or on their abilities to make future
payments on their outstanding bonds.

Moral Obligation Bonds

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

Refunded Bonds

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

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

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

Municipal Revenue Bonds

Municipal Utility Bonds. The ability of utilities to meet their obligations
under revenue bonds issued on their behalf is dependent on various factors,
including the rates they may charge their customers,

<PAGE>
the demand for their services and the cost of providing those services.
Utilities, in particular investor-owned utilities, are subject to extensive
regulation relating to the rates which they may charge customers. Utilities can
experience regulatory, political and consumer resistance to rate increases.
Utilities engaged in long-term capital projects are especially sensitive to
regulatory lags in granting rate increases. Any difficulty in obtaining timely
and adequate rate increases could adversely affect a utility's results of
operations.

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

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

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

The National Energy Policy Act ("NEPA"), which became law in October, 1992,
makes it mandatory for a utility to permit non-utility generators of electricity
access to its transmission system for wholesale customers, thereby increasing
competition for electric utilities. NEPA also mandated demand-side management
policies to be considered by utilities. NEPA prohibits the Federal Energy
Regulatory Commission from mandating electric utilities to engage in retail
wheeling, which is competition among suppliers of electric generation to provide
electricity to retail customers (particularly industrial retail

<PAGE>
customers) of a utility. However, under NEPA, a state can mandate retail
wheeling under certain conditions. California, Michigan, New Mexico and Ohio
have instituted investigations into the possible introduction of retail wheeling
within their respective states, which could foster competition among the
utilities. Retail wheeling might result in the issue of stranded investment
(investment in assets not being recovered in base rates), thus hampering a
utility's ability to meet its obligations.

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

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

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

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

<PAGE>
power agencies, which might exacerbate some of the problems referred to above
and possibly lead to legal proceedings questioning the enforceability of
agreements upon which payment of these bonds may depend.

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

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

All single family mortgage revenue bonds and certain multi-family housing
revenue bonds are prepayable over the life of the underlying mortgage or
mortgage pool, and therefore the average life of housing obligations cannot be
determined. However, the average life of these obligations will ordinarily be
less than their stated maturities. Single-family issues are subject to
mandatory redemption in whole or in part from prepayments on underlying mortgage
loans; mortgage loans are frequently partially or completely prepaid prior to
their final stated maturities as a result of events such as declining interest
rates, sale of the mortgaged premises, default, condemnation or casualty loss.
Multi-family issues are

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characterized by mandatory redemption at par upon the occurrence of monetary
defaults or breaches of covenants by the project operator. Additionally, housing
obligations are generally subject to mandatory partial redemption at par to the
extent that proceeds from the sale of the obligations are not allocated within a
stated period (which may be within a year of the date of issue).

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

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

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

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

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

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

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

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

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

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

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

Certain student loan revenue bonds may permit the issuer to enter into an
"interest rate swap agreement" with a counterparty obligating the issuer to pay
either a fixed or a floating rate on a notional principal amount of bonds and
obligating the counterparty to pay either a fixed or a floating interest rate on
the issuer's bonds. The payment obligations of the issuer and the counterparty
to each other will be netted on each interest payment date, and only one payment
will be made by one party to the other. Although the choice of counterparty
typically requires a determination from a rating agency that any rating

<PAGE>
of the bonds will not be adversely affected by the swap, payment on the bonds
may be subject to the additional risk of the counterparty's ability to fulfill
its swap obligation.

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

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

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

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

Puerto Rico

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

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

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

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

Bonds Backed by Letters of Credit or Repurchase Commitments

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

Certain Intermediate Term and Put Series and certain other Series contain
Bonds purchased from one or more commercial banks or thrifts or other
institutions ("Sellers") which have committed under certain circumstances
specified below to repurchase the Bonds from the Fund ("Repurchase
Commitments"). The Bonds in these Funds may be secured by one or more
Repurchase Commitments (see Investment Summary in Part A) which, in turn may be
backed by a letter of credit or secured by a security interest in collateral. A
Seller may have committed to repurchase from the Fund any Bonds sold by it,
within a specified period after receiving notice from the Trustee, to the extent
necessary to satisfy redemptions of Units despite the market-making activity of
the Sponsors (a "Liquidity Repurchase"). The required notice period may be 14
days (a "14 Day Repurchase") or, if a repurchase date is set forth under
Investment Summary in Part A, the Trustee may at any time not later than two
hours after the Evaluation Time on the repurchase date (or if a repurchase date
is not a business day, on the first business day thereafter), deliver this
notice to the Seller. Additionally, if the Sponsors elect to remarket Units
which have been received at or before the Evaluation Time on any repurchase date
(the "Tendered Units"), a Seller may have committed to repurchase from the Fund
on the date 15 business days after that repurchase date, any Bonds sold by the
Seller to the Fund in order to satisfy any tenders for redemption by the
Sponsors made within 10 business days after the Evaluation Time. A Seller may
also have made any of the following commitments: (i) to repurchase at any time
on 14 calendar days' notice any Bonds if the issuer thereof shall fail to make
any payments of principal thereof and premium and interest thereon (a "Default
Repurchase"); (ii) to repurchase any Bond on a fixed disposition date (a
"Disposition Date") if the Trustee elects not to sell the Bond in the open
market (because a price in excess of its Put Price (as defined under Investment
Summary in Part A) cannot be obtained) on this date (a "Disposition
Repurchase")); (iii) to repurchase at any time on 14 calendar days' notice any
Bond in the event that the

<PAGE>
interest thereon should be deemed to be taxable (a "Tax Repurchase"); and (iv)
to repurchase immediately all Bonds if the Seller becomes or is deemed to be
bankrupt or insolvent (an "Insolvency Repurchase"). (See Investment Summary in
Part A.) Any repurchase of a Bond will be at a price no lower than its original
purchase price to the Fund, plus accrued interest to the date of repurchase,
plus any further adjustments as described under Investment Summary in Part A.

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

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

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

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

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

<PAGE>
FDIC is normally appointed as receiver or conservator for all thrifts the
deposits of which, before FIRREA, were insured by the FDIC, and those thrifts
the deposits of which, prior to FIRREA, were insured by the FSLIC that fail on
or after the end of the RTC appointment period.

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

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

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

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

Certain letters of credit or guarantees backing Bonds may have been issued by
a foreign bank or corporation or similar entity (a "Foreign Guarantee").
Foreign Guarantees are subject to the risk that exchange control regulations
might be adopted in the future which might affect adversely payments to the
Fund. Similarly, foreign withholding taxes could be imposed in the future
although provision is made in the instruments governing any Foreign Guarantee
that, in substance, to the extent permitted by applicable law, additional
payments will be made by the guarantor so that the total amount paid, after
deduction of

<PAGE>

any applicable tax, will not be less than the amount then due and payable on the
Foreign Guarantee. The adoption of exchange control regulations and other legal
restrictions could have an adverse impact on the marketability of any Bonds
backed by a Foreign Guarantee.

Liquidity

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

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

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

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

<PAGE>

initially have consisted of Bonds purchased from various banks and thrifts and
other Bonds with guarantees which may constitute Restricted Securities.

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

Bonds Backed by Insurance

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

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

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

As Portfolio-Insured Bonds are redeemed by their respective issuers or are
sold by the Trustee, the amount of the premium payable for the Portfolio
Insurance will be correspondingly reduced.

<PAGE>

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

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

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

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

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

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

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

<PAGE>

USF&G, the eighth largest property/casualty company in the U.S. as measured by
net premiums written, and CGC management.

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

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

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

Financial Guaranty, a New York stock insurance company, is a wholly-owned
subsidiary of FGIC Corporation, which is wholly owned by General Electric
Capital Corporation. The investors in the FGIC Corporation are not obligated to
pay the debts of or the claims against Financial Guaranty. Financial Guaranty
commenced its business of providing insurance and financial guarantees for a
variety of investment instruments in January 1984 and is currently authorized to
provide insurance in 49 states and the District of Columbia. It files reports
with state regulatory agencies and is subject to audit and review by those
authorities.

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

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

IIC, which was incorporated in California in 1920, is a wholly-owned
subsidiary of Crum and Forster, Inc., a New Jersey holding company and a wholly-
owned subsidiary of Xerox Corporation. IIC is a property and casualty insurer
which, together with certain other wholly-owned insurance subsidiaries

<PAGE>

of Crum and Forster, Inc., operates under a Reinsurance Participation Agreement
whereby all insurance written by these companies is pooled among them. Standard
& Poor's has rated IIC's claims-paying ability A. Any IIC/HIBI-rated Debt
Obligations in an Insured Series are additionally insured for as long as they
remain in the Fund and as long as IIC/HIBI's rating is below AAA, in order to
maintain the AAA-rating of Fund Units. The cost of any additional insurance is
paid by the Fund and such insurance would expire on the sale or maturity of the
Debt Obligation.

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

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

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

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

<PAGE>

State Risk Factors

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

Payment of Bonds and Life of a Fund

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

Redemption

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

<PAGE>

Tax Exemption

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

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

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

INCOME AND RETURNS

Income

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

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

Income is received by a Fund upon semi-annual payments of interest on the
Bonds held in a Portfolio. Bonds may sometimes be purchased on a when, as and
if issued basis or may have a delayed delivery. Since interest on these Bonds
does not begin to accrue until the date of delivery to a Fund, in order to
provide tax-exempt income to Holders for this non-accrual period, the Trustee's
Annual Fee and Expenses is reduced by the interest that would have accrued on
these Bonds between the initial settlement date for Units and the delivery dates
of the Bonds. This eliminates reduction in Monthly Income Distributions.
Should when-issued Bonds be issued later than expected, the fee reduction will
be increased correspondingly. If the amount of the Trustee's Annual Fee and
Expenses is insufficient to cover the additional accrued interest, the Sponsors
will treat the contracts as Failed Bonds. As the Trustee is

<PAGE>

authorized to draw on the letter of credit deposited by the Sponsors before the
settlement date for these Bonds and deposit the proceeds in an account for the
Fund on which it pays no interest, its use of these funds compensates the
Trustee for the reduction described above.

STATE MATTERS

ALABAMA

RISK FACTORS--During recent years the economy of Alabama has grown at a
slower rate than that of the U.S. The State of Alabama, other governmental units
and agencies, school systems and entities dependent on government appropriations
or economic conditions have, in varying degrees, suffered budgetary
difficulties. These conditions and other factors described below could
adversely affect the Debt Obligations that the Trust acquires and the value of
Units in the Trust. The following information constitutes only a brief summary,
does not purport to be a complete description of potential adverse economic
effects and is based primarily on material presented in various government
documents, official statements, offering circulars and prospectuses. While the
Sponsors have not independently verified such information, they have no reason
to believe that such information is not correct in all material respects.

Limitations on State Indebtedness. Section 213 of the Constitution of
Alabama, as amended, requires that annual financial operations of Alabama must
be on a balanced budget and prohibits the State from incurring general
obligation debt unless authorized by an amendment to the Constitution. Although
conventions proposed by the Legislature and approved by the electorate may be
called for the purpose of amending the Alabama Constitution, amendments to the
Constitution have generally been adopted through a procedure that requires each
amendment to be proposed by a favorable vote of three-fifths of all the members
of each house of the Legislature and thereafter approved by a majority of the
voters of the State voting in a statewide election. The State has statutory
budget provisions which create a proration procedure in the event estimated
budget resources in a fiscal year are insufficient to pay in full all
appropriations for such fiscal year. Proration has a materially adverse effect
on public entities, such as boards of education, that are substantially
dependent on state funds.

Court decisions have indicated that certain State expenses necessary for
essential functions of government are not subject to proration under applicable
law. The Supreme Court of Alabama has held that the debt prohibition contained
in the constitutional amendment does not apply to obligations incurred for
current operating expenses payable during the current fiscal year, debts
incurred by separate public corporations, or state debt incurred to repel
invasion or suppress insurrection. The State may also make temporary loans not
exceeding $300,000 to cover deficits in the state treasury. Limited obligation
debt may be authorized by the legislature without amendment to the Constitution.
The State has followed the practice of financing certain capital improvement
programs--principally for highways, education and improvements to the State
Docks--through the issuance of limited obligation bonds payable solely out of
certain taxes and other revenues specifically pledged for their payment and not
from the general revenues of the State.

Medicaid. Because of Alabama's relatively high incidence of poverty, health
care providers in Alabama are more heavily dependent on Medicaid than are health
care providers in other states. Contributions to Medicaid by the State of
Alabama are financed through the General Fund of the State of Alabama. As
discussed above, because deficit spending is prohibited by the Constitution of
Alabama, allocations from the General Fund, including Medicaid payments, may be
subject to proration. In recent years the General Fund has been subject to
proration by virtue of insufficient tax revenues and excessive expenditures, and
there can be no assurance that proration of the General Fund budget will not
continue. If continued, such proration may have a materially adverse effect on
Alabama Medicaid payments.

The Alabama legislature has recently enacted legislation to increase the
State portion of Medicaid funding. Nevertheless, factors such as the increasing
pressure on sources of Medicaid funding, at both the State and the Federal
level, and the expanding number of people covered by this program, are likely to
cause future concern over the Alabama Medicaid budget. It is likely that
reductions in payments made

<PAGE>

under the Federal Medicaid program will occur in the future. If such reductions
occur, it is unlikely that the State of Alabama will be able to fund completely
any resulting short-falls.

A federal district court has held that Alabama's Medicaid program violates
Federal law because it fails to provide Medicaid recipients with adequate non-
emergency transportation for medical services. According to the court, the
State's program for providing non-emergency transportation recipients involved
the use of volunteer, unpaid drivers. The court found that this Alabama plan
failed to insure necessary transportation to Medicaid recipients. Therefore, the
State of Alabama is currently under a court order to submit a plan that will
provide every Medicaid recipient in Alabama with necessary transportation to and
from health care providers. In addition, in December 1995, an Alabama Circuit
Court held that the Alabama Medicaid program has underpaid providers and that
the program must reimburse those providers for such underpayment. Reports in
the media state that such reimbursement could cost the State of Alabama $72
million. The State plans to appeal this decision. Any increase in expenses
resulting from these holdings could have a materially adverse effect on other
Alabama Medicaid payments. Further, although some health care providers could
benefit from these holdings, many providers will receive no material benefit.
Nevertheless, the General Fund of the State may experience financial pressures
if legal fees and increased reimbursements are required.

According to reports in the news media, a study by a private consumer group
indicates that the level of benefits available are materially lower and the
eligibility standards significantly more stringent under the Alabama Medicaid
program than in most other states. Although, as stated above, Alabama health
care facilities are dependent on Medicaid payments, it should be expected that
health care facilities in Alabama will receive substantially less in Medicaid
payments than would health care facilities in most other states.

Health Care Services. In recent years, the importance of service industries
to Alabama's economy has increased significantly. One of the major service
industries in the State is general health care. Because of cost concerns,
health care providers and payors are restructuring and consolidating.
Consolidation resulting in a reduction of services in the health care industry
may have a material adverse effect on the economy of Alabama in general and, in
particular, on the issuers of Debt Obligations in the Trust secured by revenues
of health care facilities. Moreover, a recent study has concluded that, after
cost-of-living adjustments are made, Medicare payments per enrollee in Alabama
are among the highest in the nation. Changes in the Medicare program to reduce
such expenditures could have a materially adverse effect on health care
providers in Alabama. In addition, there are many possible financial effects
that could result from enactment of any federal or state legislation proposing
to regulate or reform the health care industry, and it is not possible at this
time to predict with assurance the effect of any health care reform proposals
that might be enacted.

Fob James, the Governor of Alabama, has imposed a moratorium on the Alabama
State Health Planning and Development Agency ("SHPDA") that affects all filings
with SHPDA. During the time that the moratorium remains in effect, health care
providers will be unable to obtain Certificates of Need for any new or expanded
health services. The moratorium may have a material adverse effect on the
revenues of such providers.

Dependence on Federal Education Funds. Alabama is disproportionately
dependent on federal funds for secondary and higher education, predominantly
because of insufficient state and local support. Recent federal cutbacks on
expenditures for education have had, and if continued will have, an adverse
impact on educational institutions in Alabama.

On December 30, 1991, the District Court for the Northern District of Alabama
issued an opinion holding Alabama's institutions of higher learning liable for
operating a racially discriminatory dual university system. The Court ordered
several remedies and has maintained jurisdiction for ten years to insure
compliance. The Circuit Court of Appeals upheld parts of this verdict and
maintained control over the institutions. On August 1, 1995, a new ruling was
issued in this case, requiring additional funding for certain universities and
colleges in Alabama. The new funding requirements may have an adverse impact

<PAGE>

on the State budget and could require that the current and upcoming fiscal year
budgets be prorated. Such proration would have a materially adverse effect on
public entities throughout the state. In addition, this change in funding could
adversely affect certain educational institutions in Alabama. However, if the
State and the universities fail to comply with the Court's orders, the Court may
rule that Federal funds for higher education be withheld. A ruling depriving
the State of Federal funds for higher education would have a materially adverse
effect on certain Alabama colleges and universities.

Challenge to School Funding Mechanism. On April 1, 1993, Montgomery Circuit
Court Judge Gene Reese ruled that an unconstitutional disparity exists among
Alabama's school districts because of inequitable distribution of tax funds.
Judge Reese issued an order calling for a new design for the distribution of
funds for educational purposes as well as a new system for funding public
education.

A new funding program has been enacted, which is designed to reduce the
funds available for two-year colleges and universities in order to increase the
funding available for elementary and secondary schools. In addition, the new law
provides more funds to school districts with lower property values by
withholding some funds from wealthier school districts. Any allocation of funds
away from school districts could impair the ability of such districts to service
debt. It is impossible to predict whether this new law will comply with Judge
Reese's ruling or whether future challenges will occur.

Alabama Industrial Characteristics. Alabama industrial capacity has
traditionally been concentrated in those areas sensitive to cyclical economic
trends, such as textiles and iron and steel production. To the extent that
American iron and steel and textile production continues to suffer from foreign
competition and other factors, the general economy of the State and the ability
of particular issuers, especially pollution-control and certain IDB issuers,
would be materially adversely affected. The State has recently taken steps to
diversify and increase its industrial capacity. Although these efforts have
been somewhat successful, they include significant tax and other benefits which
could have a mutually adverse effect on the state's tax revenues.

General Obligation Warrants. Municipalities and counties in Alabama
traditionally have issued general obligation warrants to finance various public
improvements. Alabama statutes authorizing the issuance of such
interest-bearing warrants do not require an election prior to issuance. On the
other hand, the Constitution of Alabama (Section 222) provides that general
obligation bonds may not be issued without an election.

The Supreme Court of Alabama has held that general obligation warrants do not
require an election under Section 222 of the Constitution of Alabama. In so
holding, the Court found that warrants are not "bonds" within the meaning of
Section 222. According to the Court, warrants are not negotiable instruments
and transferees of warrants cannot be holders in due course. Therefore, a
transferee of warrants is subject to all defenses that the issuer of such
warrants may have against the transferor.

Allocation of Local Taxes for Public Education. Under Alabama law, a city
with a population in excess of 5,000 is entitled to establish a separate public
school system within its jurisdiction with its own board of education, members
of which are elected by the governing body of such city. If a city school
system is established within a county, the county-wide taxes for general
educational purposes will, absent specific law to the contrary, be apportioned
among the county board of education and each city board of education within the
county according to a statutory formula based on the state's uniform minimum
educational program for public school systems. This formula has many factors,
but is based largely on the relative number of students within the boundaries of
each school system.

Local boards of education, whether city board or county board, may borrow
money by issuing interest-bearing warrants payable solely out of such board's
allocated or apportioned share of a specified tax. The county board's
apportioned share of such tax may be diminished upon the establishment of a city
school system, which could jeopardize the payment of the county board's
warrants.

<PAGE>

Limited Taxing Authority. Political subdivisions of the State have limited
taxing authority. Ad valorem taxes may be levied only as authorized by the
Alabama Constitution. In order to increase the rate at which any ad valorem tax
is levied above the limit otherwise provided in the Constitution, the increase
must be proposed by the governing body of the taxing authority after a public
hearing, approved by an act of the Alabama Legislature and approved at an
election within the taxing authority's jurisdiction. In addition, the Alabama
Constitution limits the total amount of state, county, municipal and other ad
valorem taxes that may be imposed on any class of property in any one tax year.
This limitation is expressed in terms of a specified percentage of the market
value of such property. In some jurisdictions in the State this limit has
already been exceeded for one or more classes of property.

Specific authorizing legislation is required for the levy of taxes by local
governments. In addition, the rate at which such taxes are levied may be
limited by the authorizing legislation or judicial precedent. For example, the
Alabama Supreme Court has held that sales and use taxes, which usually comprise
a significant portion of the revenues for local governments, may not be levied
at rates that are confiscatory or unreasonable. The total sales tax (state and
local) in some jurisdictions is 9%. In November 1995, the United States Supreme
Court agreed to hear an appeal of an Alabama Supreme Court ruling that denied
the right of taxpayers to challenge an occupational tax levied by Jefferson
Courty, Alabama, in which Birmingham is located. The tax generates approximately
$39 million annually and is imposed on the income of persons who work in
Jefferson County; however, certain professionals are exempt from paying the tax.
Non-exempt taxpayers sued the county on the basis that their due process and
equal protection rights had been violated. The Alabama Supreme Court rejected
this lawsuit based on an earlier, unsuccessful challenge of the tax. As a result
of the determination by the United States Supreme Court that it will hear an
appeal of the Alabama Supreme Court decision, Moody's Credit Perspectives has
placed the bond ratings of Jefferson County under review. Any downgrading of
Jefferson County's bond rating could have a material adverse effect on the
county's ability to borrow money, to provide services, and to service current
debt.

Dependence on Certain Taxes. State and local governments in Alabama are more
dependent on general and special sales taxes and user fees than are state and
local governments in many states, and less dependent on property taxes. Because
sales taxes and user fees are less stable sources of revenue than are property
taxes, state and local governments in Alabama may be subject to shortfalls in
revenue due to economic cycles. Such revenue shortfalls could have a materially
adverse effect on Alabama debt obligations in the Alabama Trust.

Priority for Essential Governmental Functions. Numerous decisions of the
Alabama Supreme Court hold that a governmental unit may first use its taxes and
other revenues to pay the expenses of providing necessary governmental services
before paying debt service on its bonds, warrants or other indebtedness.

ARIZONA

RISK FACTORS--The State Economy. The Arizona economy over the last several
years was one of subdued growth, but in 1994 portions of the economy rebounded
due in part to a strong single family home market, new business incorporation,
and tourism spending. Permits for new home construction increased by 23% from
1992 to 1993 and 17% from 1993 to 1994. The single-family sector remains strong,
with more than 26,600 single-family residential building permits issued in
Maricopa County during 1994 and more than 28,000 housing permits estimated
during 1995. Growth in the housing market is projected to continue in 1996. The
commercial real estate market, which has been lagging behind the housing market,
is also expected to improve in 1996.

Arizona's tourism industry is expected to fare well in the early part of
1996. Super Bowl XXX, held in January 1996, is expected to bring more than $200
million into the Arizona economy.

In the aftermath of the savings and loan crisis, which hit Arizona hard
beginning in the late 1980's, the RTC sold approximately $23.6 billion in
Arizona assets as of December 31, 1994, with $1.16

<PAGE>

billion in assets, mostly real-estate secured loans and real property, still to
be sold as of that date. The RTC ceased to exist on December 31, 1995, with the
FOIC taking over any remaining functions of the RTC.

The trend in the Arizona banking community for the past several years has
been one of consolidation. In the early 1980's, 56 banks operated in Arizona; as
of December 1995 there were 34. As financial institutions within the state
consolidate, many branch offices have been closed, displacing workers. Three
acquisitions were completed in 1995. Although more acquisitions are expected,
the pace has slowed.

America West Airlines, a Phoenix-based carrier, emerged from Chapter 11
reorganization on August 25, 1994. Prior to the reorganization, America West
was the sixth largest employer in Maricopa County, employing approximately
10,000 of its 15,000 employees within the county. Currently, America West
employs just under 6,000 in Maricopa County. America West presently serves 46
domestic and 6 international destinations with 93 aircraft. America West posted
operating income of $54.2 million and net income of $21.7 million for the third
quarter of 1995, reflecting eight consecutive quarters of profitability. The
continuation of America West's recovery and its effect on the state economy and,
more particularly, the Phoenix economy, is uncertain.

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

Of the state's 10 largest corporate employers, nine reduced their Arizona-
based staffs in 1994. Only one of the ten largest employers further reduced
employment in 1995. American Express Co., which had previously announced a
restructuring in 1994 in which 2,000 Arizona jobs would be cut over two years,
reduced the number of planned layoffs in 1995. A number of new high-tech
expansion projects have been announced and/or commenced in 1995. However, not
all high-tech operations are faring well. Honeywell Inc. decreased its Arizona
work force from 8,200 to less than 6,900 by the end of 1994 and laid off another
140 contract and full-time engineers in May 1995.

Job growth in Arizona, defined as growth of total wage and salary employment,
was consistently in the range of 2.1% to 2.5% for the years 1988 through 1990,
declined to 0.6% in 1991, then increased to 1.7% in 1992, 3.0% in 1993, and 5.9%
in 1994. Job growth was 5.8% in 1995 and is currently forecast at 3.9% for
1996.

The unemployment rate in Arizona was 5.3% in 1990, which was similar to the
national rate of 5.4%. Arizona's unemployment rate in 1991 was 5.6%, compared
to a national rate of 6.7%. Arizona's unemployment rate in 1992 increased to
7.4%, matching the national rate. The Arizona unemployment rate decreased in
1993, to 6.2%, compared with the national figure of 6.8%. In 1994, Arizona's
unemployment rate was 6.3%, compared to 6.1% nationally. In August 1995,
Arizona's unemployment rate was 5.4%.

Current personal income in Arizona has continued to rise, but at slower rates
than in the early to mid-1980's. Personal income grew at a rate of 5.8% in 1990
and dropped to 4.6% in 1991. Growth in personal income increased to 6.7% in
1992, 6.5% in 1993, 8.5% in 1994 and was forecast to increase at a rate of 8.2%
in 1995.

Bankruptcy filings in the District of Arizona increased dramatically in the
mid-1980's, but percentage increases have decreased over the last several years,
with 1993 resulting in the first drop in

<PAGE>

bankruptcy filings since 1984. Bankruptcy filings totalled 15,767 in 1995,
15,008 in 1994, 17,381 in 1993, 19,883 in 1992 and 19,686 in 1991.

The inflation rate, as measured by the consumer price index in the Phoenix,
Arizona area, including all of Maricopa County, has hovered around the national
average for the last several years, increasing from 4.1% in 1988 to 5.6% in
1990. The inflation rate decreased to 2.8% in 1991, compared to 4.2% on a
national level, and decreased slightly to 2.7% in 1992, compared to a national
rate of 3.0%. The inflation rate was 4.5% in 1993. In 1994, the Phoenix
metropolitan area inflation rate at 4.1% was higher than the national rate of
2.7%.

The population of Arizona grew consistently at a rate between 2.2% and 2.4%
annually during the years 1988 through 1993, increased slightly to 2.6% in 1994,
and was forecast to be 2.9% in 1995. Although significantly greater than the
national average population growth, it is lower than Arizona's population growth
in the mid-1980's. The 1990 census results indicate that the population of
Arizona rose 35% between 1980 and 1990, a rate exceeded only in Nevada and
Alaska. Nearly 950,000 residents were added during this period.

The State Budget, Revenues and Expenditures. The state operates on a fiscal
year beginning July 1 and ending June 30. Fiscal year 1996 refers to the year
ending June 30, 1996.

Total General Fund revenues of $4.359 billion are expected during fiscal year
1996. Approximately 47% of this expected revenue comes from sales and use
taxes, 35% from income taxes (both individual and corporate) and 4% from
property taxes. In addition to taxes, revenue includes non-tax items such as
income from the state lottery, licenses, fees and permits, and interest.

For fiscal year 1996, General Fund expenditures of $4.466 billion are
expected. Approximately 39.8% of major General Fund appropriations are for the
Department of Education for K-12, 15.9% is for higher education, 10.7% is for
the administration of the AHCCCS program (the State's alternative to Medicaid),
8.8% is for the Department of Economic Security, and 8.7% is for the Department
of Corrections. The expenditures for fiscal year 1995 are estimated at
approximately $4.472 billion.

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

School Finance. In 1991, the State of Arizona was sued by four school
districts within the state, claiming that the state's funding system for school
buildings, equipment and other capital expenses is unconstitutional. The
lawsuit was filed by the Arizona Center for Law in the Public Interest and
Southern Arizona Legal Aid Inc., but fifty other school districts helped finance
the lawsuit. A state judge rejected the lawsuit in September of 1992, and the
school districts appealed. In July of 1994, the Supreme Court of Arizona
reversed the lower court ruling and found that the formulas for funding public
schools in Arizona cause "gross disparities" among school districts and
therefore violate the Arizona Constitution. The lawsuit did not seek damages.
It remains unclear what effect the judgment will have on state finances or
school district budgets.

Health Care Facilities. Arizona does not participate in the federally
administered Medicaid program. Instead, the state administers an alternative
program, the Arizona Health Care Cost Containment

<PAGE>

System ("AHCCCS"), which provides health care to indigent persons meeting
certain financial eligibility requirements, through managed care programs.
AHCCCS is financed by a combination of federal, state and county funds.

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

Health care firms have been in the process of consolidating. Eli Lilly and
Co. bought prescription- benefits manager PCS Health Systems, Inc. of Scottsdale
for $4 billion in November 1994. Two other large Arizona health-care
organizations were purchased in 1994. Intergroup Healthcare Corp. of Tucson was
purchased by California-based Foundation Health Corp. for about $720 million in
stock, and St. Luke's Health System was bought by OrNda HealthCorp. for $122
million. Continuing consolidation and merger activity in the health care
industry is expected.

A number of health care organizations have announced plans to expand
facilities in Arizona, including Mayo Clinic, who announced plans to build a 132
bed hospital in North Scottsdale that could create as many as 700 jobs when the
hospital opens in 1998. Meanwhile, St. Joseph's Hospital and Medical Center
announced plans in May 1995 to lay off 250 workers at its Phoenix complex.

Utilities. Arizona's utilities are subject to regulation by the Arizona
Corporation Commission. This regulation extends to, among other things, the
issuance of certain debt obligations by regulated utilities and periodic rate
increases needed by utilities to cover operating costs and debt service. The
inability of any regulated public utility to secure necessary rate increases
could adversely affect the utility's ability to pay debt service.

Arizona's largest regulated utility, Arizona Public Service Company ("APS"),
serves all or part of 11 of Arizona's 15 counties. APS is a significant part
owner of Arizona's nuclear generator, the Palo Verde Nuclear Generating Station.
APS is owned by Pinnacle West Capital Corporation ("Pinnacle West"). APS and
Pacificorp, an Oregon utility, entered into a standstill agreement under which
Pacificorp agreed not to attempt a takeover of APS or Pinnacle West through
early 1995. Earlier offers by Pacificorp to purchase Pinnacle West had been
rejected. The agreement also provides for a seasonal swap of power, allowing
Pacificorp to purchase electricity from APS during the winter in exchange for
selling electricity to APS in the summer. In May 1994 APS entered into a rate
agreement with the Arizona Corporation Commission which decreased its electric
rate by an average of 2.2%. Under the agreement, neither APS nor the Arizona
Corporation Commission can propose new rates until December 31, 1996. Pinnacle
West, APS's parent company, had 1994 earnings of $173.8 million, compared with
$170 million in 1993. The company announced that it expects 1995 results to
decline in comparison to 1994 due to reductions in non-cash income in 1995 and
1994's hot summer, which bolstered 1994 earnings.

The Salt River Project Agricultural Improvement and Power District ("SRP") is
an agricultural improvement district organized under state law. For this
reason, SRP is not subject to regulation by the Arizona Corporation Commission.
SRP, one of the nation's five largest locally owned public power utilities,
provides electric service to approximately 600,000 customers (consumer,
commercial and industrial) within a 2,900 square mile area in parts of Maricopa,
Gila and Pinal Counties in Arizona.

Under Arizona law, SRP's board of directors has the exclusive authority to
establish rates for electricity. SRP must follow certain procedures, including
certain public notice requirements and a special board of directors meeting,
before implementing any changes in standard electric rates. SRP instituted an
average rate increase of 2.9% in January of 1992 (the actual increases ranged
from 2.4% to 3.4%, depending on the class of customer).

SRP reported increases in its net income for the fiscal years ended in both
1994 and 1995. The previous two fiscal years, which were also profitable,
followed two consecutive years of losses. In July 1993, SRP renegotiated two
key coal contracts, announcing that it expected the new contracts to cut its

<PAGE>

production costs by $40 million over the next five years. Due to increased
earnings and savings, SRP cancelled a planned 1994 rate increase, and has
indicated that it will seek to avoid another increase until 1999. SRP is
planning a rate decrease in mid-1996. SRP has laid off about 3,600 employees
over the last seven years. SRP has announced that it does not expect any growth
in its work force through 1996.

CALIFORNIA

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

Economic Factors. The Governor's 1993-1994 Budget, introduced on January 8,
1993, proposed general fund expenditures of $37.3 billion, with projected
revenues of $39.9 billion. To balance the budget in the face of declining
revenues, the Governor proposed a series of revenue shifts from local
government, reliance on increased federal aid, and reductions in state spending.

The Department of Finance of the State of California's May Revision of
General Fund Revenues and Expenditures (the "May Revision"), released on May 20,
1993, projected the State would have an accumulated deficit of about $2.75
billion by June 30, 1993, essentially unchanged from the prior year. The
Governor proposed to eliminate this deficit over an 18-month period. Unlike
previous years, the Governor's Budget and May Revision did not calculate a "gap"
to be closed, but rather set forth revenue and expenditure forecasts and
proposals designed to produce a balanced budget.

The 1993-1994 budget act (the "1993-94 Budget Act") was signed by the
Governor on June 30, 1993, along with implementing legislation. The Governor
vetoed approximately $71 million in spending.

The 1993-94 Budget Act was predicated on general fund revenues and transfers
estimated at $40.6 billion, $400 million below 1992-93 (and the second
consecutive year of actual decline). The principal reasons for declining revenue
were the continued weak economy and the expiration (or repeal) of three fiscal
steps taken in 1991--a half cent temporary sales tax, a deferral of operating
loss carryforwards, and repeal by initiative of a sales tax on candy and snack
foods.

The 1993-94 Budget Act also assumed special fund revenues of $11.9 billion,
an increase of 2.9 percent over 1992-93.

The 1993-94 Budget Act included general fund expenditures of $38.5 billion (a
6.3 percent reduction from projected 1992-93 expenditures of $41.1 billion), in
order to keep a balanced budget within the available revenues. The 1993-94
Budget Act also included special fund expenditures of $12.1 billion, a 4.2
percent increase. The 1993-94 Budget Act reflected the following major
adjustments:

1. Changes in local government financing to shift about $2.6 billion in
property taxes from cities, counties, special districts and redevelopment
agencies to school and community college districts, thereby reducing general
fund support by an equal amount. About $2.5 billion is permanent, reflecting
termination of the State's "bailout" of local governments following the property
tax cuts of Proposition 13 in 1978 (See "Constitutional, Legislative and Other
Factors" below).

The property tax revenue losses for cities and counties were offset in part
by additional sales tax revenues and mandate relief.

2. The 1993-94 Budget Act projected K-12 Proposition 98 funding on a cash
basis at the same per-pupil level as 1992-93 by providing schools a $609 million
loan payable from future years' Proposition 98 funds.

<PAGE>

3. The 1993-94 Budget Act assumed receipt of about $692 million of aid to
the State from the federal government to offset health and welfare costs
associated with foreign immigrants living in the State, which would reduce a
like amount of General Fund expenditures. About $411 million of this amount was
one-time funding. Congress ultimately appropriated only $450 million.

4. Reductions of $600 million in health and welfare programs and $400
million in support for higher education (partly offset by fee increases at all
three units of higher education) and various miscellaneous cuts (totalling
approximately $150 million) in State government services in many agencies, up to
15 percent.

5. A 2-year suspension of the renters' tax credit ($390 million expenditure
reduction in 1993-94).

6. Miscellaneous one-time items, including deferral of payment to the Public
Employees Retirement Fund ($339 million) and a change in accounting for debt
service from accrual to cash basis, saving $107 million.

The 1993-94 Budget Act contained no general fund tax/revenue increases other
than a two year suspension of the renters' tax credit. The 1993-94 Budget Act
suspended the 4 percent automatic budget reduction "trigger", as was done in
1992-93, so cuts could be focused.

Administration reports during the course of the 1993-94 Fiscal Year indicated
that while economic recovery appeared to have started in the second half of the
fiscal year, recessionary conditions continued longer than had been anticipated
when the 1993-94 Budget Act was adopted. Overall, revenues for the 1993-94
Fiscal Year were about $800 million lower than original projections, and
expenditures were about $780 million higher, primarily because of higher health
and welfare caseloads, lower property taxes which required greater State support
for K-14 education to make up the shortfall, and lower than anticipated federal
government payments for immigration-related costs. The reports in May and June,
1994, indicated that revenues in the second half of the 1993-94 Fiscal Year have
been very close to the projections made in the Governor's Budget of January 10,
1994, which is consistent with a slow turnaround in the economy.

The Department of Finance's July 1994 Bulletin, including the final June
receipts, reported that June revenues were $114 million (two and one half
percent) above projections, with final end-of-year results at $377 million
(about one percent) above the May Revision projections. Part of this result was
due to end-of-year adjustments and reconciliations. Personal income tax and
sales tax continued to track projections. The largest factor in the higher than
anticipated revenues was from bank and corporation taxes, which were $140
million (18.4 percent) above projections in June. While the higher June
receipts were reflected in the actual 1993-94 Fiscal Year cash flow results, and
helped the starting cash balance for the 1994-95 Fiscal Year, the Department of
Finance did not adjust any of its revenue projections for the 1994-95 or 1995-96
Fiscal Years.

During the 1993-94 Fiscal Year, the State implemented the deficit retirement
plan, which was part of the 1993-94 Budget Act, by issuing $1.2 billion of
revenue anticipation warrants in February 1994 maturing December 21, 1994. This
borrowing reduced the cash deficit at the end of the 1993-94 Fiscal Year.
Nevertheless, because of the $1.5 billion variance from the original 1993-94
Budget Act assumptions, the General Fund ended the fiscal year at June 30, 1994
carrying forward an accumulated deficit of approximately $2 billion.

Because of the revenue shortfall and the State's reduced internal borrowable
cash resources, in addition to the $1.2 billion of revenue anticipation warrants
issued as part of the deficit retirement plan, the State issued an additional
$2.0 billion of revenue anticipation warrants, maturing July 26, 1994, which
were needed to fund the State's obligations and expenses through the end of the
1993-94 Fiscal Year.

On January 17, 1994, a major earthquake measuring an estimated 6.8 on the
Richter Scale struck Los Angeles. Significant property damage to private and
public facilities occurred in a four-county area including northern Los Angeles
County, Ventura County, and parts of Orange and San Bernardino

<PAGE>

Counties, which were declared as State and federal disaster areas by January 18.
Current estimates of total property damage (private and public) are in the range
of $20 billion, but these estimates are still subject to change.

Despite such damage, on the whole, the vast majority of structures in the
areas, including large manufacturing and commercial buildings and all modern
high-rise offices, survived the earthquake with minimal or no damage, validating
the cumulative effect of strict building codes and thorough preparation for such
an emergency by the State and local agencies.

Damage to state-owned facilities included transportation corridors and
facilities such as Interstate Highways 5 and 10 and State Highways 14, 118 and
210. Major highways have now been reopened. The campus of California State
University at Northridge (very near the epicenter) suffered an estimated $350
million damage, resulting in temporary closure of the campus. It has now
reopened. There was also some damage to the University of California at Los
Angeles and to an office building in Van Nuys (now open after a temporary
closure). Overall, except for the temporary road and bridge closures, and
CSU-Northridge, the earthquake did not and is not expected to significantly
affect State government operations.

The State in conjunction with the federal government is committed to
providing assistance to local governments, individuals and businesses suffering
damage as a result of the earthquake, as well as to provide for the repair and
replacement of State-owned facilities. The federal government provided
substantial earthquake assistance totaling in excess of $9.5 billion.

The 1994-95 Fiscal Year represented the fourth consecutive year the Governor
and Legislature were faced with a very difficult budget environment to produce a
balanced budget. The Governor's Budget proposal, 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. The budget proposal projected revenue and
expenditure forecasts and revenue and expenditure proposals which resulted in
operating surpluses for the budget for both 1994-95 and 1995-96, and lead to the
elimination of the accumulated budget deficit, estimated at about $1.8 billion
at June 30, 1994, by June 30, 1996.

The 1994-95 Budget Act, signed by the Governor on July 8, 1994, projected
revenues and transfers of $41.9 billion, $2.1 billion higher than revenues in
1993-94, reflecting the Administration's forecast of an improving economy.

The 1994-95 Budget Act projected Special Fund revenues of $12.1 billion, a
decrease of 2.4% from 1993-94 estimated revenues.

The 1994-95 Budget Act projected General Fund expenditures of $40.9 billion,
an increase of $1.6 billion over 1993-94. The 1994-95 Budget Act also projected
Special Fund expenditures of $12.3 billion, a 4.7% decrease from 1993-94
estimated expenditures. The principal features of the 1994-95 Budget Act were
the following:

1. Receipt of additional federal aid in 1994-95 of about $760 million for
costs of refugee assistance and medical care for undocumented immigrants,
thereby offsetting a similar General Fund cost. These funds ultimately were not
budgeted by the Federal Government.

2. Reductions of approximately $1.1 billion in health and welfare costs. A
2.3% reduction in Aid to Family with Dependent Children payments (equal to about
$56 million for the entire fiscal year) has been temporarily suspended by court
order.

3. A General Fund increase of approximately $38 million in support for the
University of California and $65 million for California State University. It
anticipated that student fees for both the University of California and the
California State University would increase up to 10%.

<PAGE>

4. Proposition 98 funding for K-14 schools was increased by $526 million
from 1993-94 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 past three years.

5. Legislation enacted with the Budget clarifies laws passed in 1992 and
1993 which require counties and other local agencies to transfer funds to local
school districts, thereby reducing State aid. Some counties had implemented a
method of making such transfers which provided less money for schools if there
were redevelopment agency projects. The new legislation banned this method of
transfer. If all counties had implemented this method, General Fund aid to K-12
schools would have been $300 million higher in each of the 1994-95 and 1995-96
Fiscal Years.

6. The 1994-95 Budget Act provided funding for anticipated growth in the
State's prison inmate population, including provisions for implementing recent
legislation (the so-called "Three Strikes" law) which requires mandatory life
prison terms for certain third-time felony offenders.

7. Additional miscellaneous cuts ($500 million) and fund transfers ($255
million) totalling in the aggregate approximately $755 million.

The 1994-95 Budget Act contained no tax increases. Under legislation enacted
for the 1993-94 Budget, 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.

The 1994-95 Budget assumed that the State would use a cash flow borrowing
program in 1994-95 which combined one-year notes and two-year warrants, which
have now been issued. Issuance of warrants allowed the State to defer repayment
of approximately $1.0 billion of its accumulated budget deficit into the 1995-96
Fiscal Year.

The State's cash flow management plan for the 1994-95 fiscal year included
the issuance of $4.0 billion of revenue anticipation warrants on July 26, 1994,
to mature on April 25, 1996, as part of a two-year plan to retire the
accumulated State budget deficit.

Because preparation of cash flow estimates for the 1995-96 Fiscal Year
necessarily entails greater risks of variance from assumptions, and because the
Governor's two-year budget plan assumes receipt of a large amount of federal aid
in the 1995-96 Fiscal Year for immigration-related costs which is uncertain, the
Legislature enacted a backup budget adjustment mechanism to mitigate possible
deviations from projected revenues, expenditures or internal borrowable
resources which might reduce available cash resources during the two-year plan,
so as to assure repayment of the warrants.

Pursuant to Section 12467 of the California Government Code, enacted by
Chapter 135, Statutes of 1994 (the "Budget Adjustment Law"), the State
Controller was required to make a report by November 15, 1994 on whether the
projected cash resources for the General Fund as of June 30, 1995 would decrease
more than $430 million from the amount projected by the State in its Official
Statement in July, 1994 for the sale of $4,000,000,000 of Revenue Anticipation
Warrants. On November 15, 1994, the State Controller issued the report on the
State's cash position required by the Budget Adjustment Law. The report
indicated that the cash position of the General Fund on June 30, 1995 would be
$581 million better than was estimated in the July, 1994 cash flow projections
and therefore, no budget adjustment procedures would be invoked for the 1994-95
Fiscal Year. As explained earlier, the Law would only be implemented if the
State Controller estimated that borrowable resources on June 30, 1995 would be
at least $430 million lower than projected.

The State Controller's report identified a number of factors which have led
to the improved cash position of the State. Estimated revenues and transfers
for the 1994-95 Fiscal Year other than federal

<PAGE>

reimbursement for immigration costs were up about $650 million. The largest
portion of this was in higher bank and corporation tax receipts, but all major
tax sources were above original projections. However, most of the federal
immigration aid revenues projected in connection with the 1994-95 Budget Act and
in the July, 1994 cash flows will not be received, as indicated above, leaving a
net increase in revenues of $322 million.

On the expenditure side, the State Controller reported that estimated reduced
caseload growth in health and welfare programs, reduced school enrollment
growth, and an accounting adjustment reducing a transfer from the General Fund
to the Special Fund for Economic Uncertainties resulted in overall General Fund
expenditure reductions (again before adjusting for federal aid) of $672 million.
However, the July, 1994 cash flows projected that General Fund health and
welfare and education expenditures would be offset by the anticipated receipt of
$407 million in federal aid for illegal immigrant costs. The State Controller
now estimates that none of these funds will be received, so the net reduction in
General Fund expenditures is $265 million.

Finally, the State Controller indicated that a review of balances in special
funds available for internal borrowing resulted in an estimated reduction of
such borrowable resources of $6 million. The combination of these factors
results in the estimated improvement of the General Fund's cash position of $581
million. The State Controller's revised cash flow projections for 1994-95 have
allocated this improvement to two line items: an increase from $0 to $427
million in the estimated ending cash balance of the General Fund on June 30,
1995, and an increase in unused borrowable resources of $154 million.

The State Controller's report indicated that there was no anticipated cash
impact in the 1994-95 Fiscal Year for recent initiatives on "three strikes"
criminal penalties and illegal immigration which were approved by voters on
November 8, 1994. At a hearing before a committee of the Legislature on
November 15, 1994, both the Legislative Analyst and the Department of Finance
concurred in the reasonableness of the State Controller's report. (The
Legislative Analyst had issued a preliminary analysis on November 1, 1994 which
reached a conclusion very close to that of the State Controller.) The State
Controller's report makes no projections about whether the Law may have to be
implemented in 1995-96. However, both the State Controller and the Legislative
Analyst in the November 15 hearing noted that the July, 1994 cash flows for the
1995-96 Fiscal Year place continued reliance on large amounts of federal
assistance for immigration costs, which did not materialize this year,
indicating significant budget pressures for next year. The Department of
Finance indicated that the budgetary issues identified in the hearing would be
addressed in the Governor's Budget proposal for the 1995-96 Fiscal Year, which
will be released in early January, 1995.

The 1995-96 Governor's Budget, discussed below, contains a reforecast of
revenues and expenditures for the 1994-95 Fiscal Year. The Department of Finance
Bulletins for February and March 1995 report that combined General Fund revenues
for February, 1995 were about $356 million below forecast, but combined revenues
for January and February were only about $82 million (or 0.3 percent) below the
1995-96 Governor's Budget forecast. The largest component of the decrease is
attributable to personal income tax receipts, which were about $131 million (or
1.1 percent) below the two months' forecast. This decrease in personal income
tax receipts appears to be largely attributable to fourth quarter 1994 activity,
probably in the anticipation of tax reform, with some taxpayers shifting income
into 1995 to the extent possible. The withholding component comprised $77
million of this shortfall, but the Department of Finance does not yet view this
as significant. Additionally, sales and use tax receipts were very close to
forecast for the two-month period, while bank and corporation tax receipts were
about $42 million (or 1.5 percent) below the two months' forecast. Miscellaneous
revenues were about $117 million (or 6.2 percent) above forecast for the two
months, but the Department of Finance is not yet able to determine whether this
gain is real, or is instead attributable to cash flow factors.

Initial analysis of the federal Fiscal Year 1995 budget by the Department of
Finance indicates that about $98 million was appropriated for California to
offset costs of incarceration of undocumented and refugee immigrants, less than
the $356 million which was assumed in the State's 1994-95 Budget Act. Because of
timing considerations in applying for these federal funds, the Department
estimates that about

<PAGE>

$33 million of these funds will be received during the State's 1994-95 Fiscal
Year, with the balance received in the following fiscal year. It does not appear
that the federal budget contains any of the additional $400 million in funding
for refugee assistance and health costs which were also assumed in the 1994-95
Budget Act, but the Department expects the State to continue its efforts to
obtain some or all of these federal funds.

On January 10, 1995, the Governor presented his 1995-96 Fiscal Year Budget
Proposal (the "Proposed Budget"). The Proposed Budget estimates General Fund
revenues and transfers of $42.5 billion (an increase of 0.2 percent over 1994-
95). This increase from the 1994-95 Fiscal Year reflected the Governor's
realignment proposal (a proposal to shift various state obligations to local
government) and the first year of a tax cut proposal of personal income and
corporate taxes. Neither of such proposals was approved by the Legislature. The
1995-96 Budget was signed by the Governor on August 3, 1995, 34 days following
the commencement of the State's fiscal year, resulting in a revised projection
of General Fund revenues of approximately $44.1 billion, or an increase of 3.5
percent over 1994-95. Expenditures are budgeted at $43.4 billion (a four percent
increase over 1994-95). Special Fund revenues are estimated at $13.5 billion
(10.7 percent higher than 1994-95) and Special Fund expenditures are estimated
at $13.8 billion (12.2 percent higher than 1994-95). The Budget projects that
the General Fund will end the fiscal year at June 30, 1996 with a budget surplus
in the Special Fund for Economic Uncertainties of about $28 million, or less
than 1 percent of General Fund expenditures, and will have repaid all of the
accumulated budget deficits.

The Department of Finance projects cash flow borrowings in the 1995-96 Fiscal
Year will be the smallest in many years, comprising about $2 billion of notes to
be issued in April 1996, and maturing by June 30, 1996. With full payment of $4
billion of revenue anticipation warrants on April 25, 1996, the Department sees
no further need for borrowing over the end of the fiscal year. The available
internal borrowable cash resources of the General Fund at June 30, 1996 are
projected at almost $2 billion.

The following are the principal features of the Budget:

1. Proposition 98 funding for schools and community colleges will
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) is 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. Per-pupil expenditures are projected
to increase by another $126 in 1995-96 to $4,435. For the first time in
several years, a full 2.7 percent cost of living allowance is funded. The
Governor proposed to set aside about $514 million of the Proposition 98
funding increase to repay prior years' loans from the General Fund to
schools. As the legality of these loans is currently being challenged in a
lawsuit, the Governor proposed to set the amount aside in escrow until the
litigation is resolved. The Budget Committee anticipates a settlement of this
litigation.

2. Further cuts in health and welfare costs totaling about $0.9
billion. Some of these cuts (approximately $500 million) would require
federal legislative approval.

3. Increases in funding for the University of California ($90 million
General Fund) and the California State University system ($24 million General
Fund).

4. Assumed receipt of $473 million in new federal aid for costs of
undocumented and refugee immigrants, above commitments already made by the
federal government. This amount is substantially less than estimates made in
the summer of 1994 as part of the two-year budget proposal and less than
estimates in the January 1995 Governor's Budget.

5. General Fund support for the Department of Corrections was increased
approximately eight percent, reflecting estimates of increased prison
population; however, funding was less than proposed in the original budget.

<PAGE>

Subsequent Developments -- Reports from the Department of Finance indicate
that General Fund revenues through the first three months of the fiscal year
were about $525 million, or 5.3%, above projections made for the enactment of
the Budget Act. For the first quarter, personal income tax (primarily estimated
tax payments) were $224 million (5.1%) above projection; sales and use taxes
were $99 million (2.9%) above projection, and bank and corporation taxes (also
primarily estimated tax payments) were $154 million (12.5%) above projection.

The State Controller's "October Trigger Report," while finding no need to
impose automatic budget cuts, noted a number of areas where there was likely to
be a divergence from the original budget estimates. (See "STATE FINANCES--The
Budget Process--Budget Adjustment Law" above.) On the positive side, the State
Controller noted that improving economic conditions were leading to improved
cash receipts. On the negative side, the State Controller's Report estimated
that federal actions to allow health and welfare cuts and to reimburse the State
for illegal immigrant costs were not likely to provide as much money as had been
planned, and that Proposition 98 expenditures for K-14 schools had been
underestimated. In addition, the State Controller reported that an annual review
of internal borrowable resources resulted in a $705 million increase of
estimated available internal borrowable resources. In total, therefore, the
State Controller estimated that the State's cash position on June 30, 1996 would
be about $500 million worse than the estimate of $1.9 billion of available
internal cash resources included in the original budget, but still large enough
to avoid the Budget Adjustment Law cuts.

The Budget contains a cash flow projection (based on all the assumptions
described above) which shows approximately $1 billion of unused borrowable
resources at June 30, 1996, providing this amount of "cushion" before the budget
"trigger" would have to be invoked.

However, a report issued by the Legislative Analyst in February 1995 notes
that the Proposed Budget is subject to a number of major risks, including
receipt of the expected federal immigration aid and other federal actions to
allow health and welfare costs, and the outcome of several lawsuits concerning
previous budget actions which the State has lost at the trial court level, and
which are under appeal. This Analyst's Report also estimates that, despite more
favorable revenues, the two-year budget estimates made in July, 1994 are about
$2 billion out of balance, principally because federal immigration aid appears
likely to be much lower than previously estimated. This shortfall is much
smaller than the State has faced in recent years, and has been addressed in the
Governor's Budget.

The Director of Finance is required to include updated cash-flow statements
for the 1994-95 and 1995-96 Fiscal Years in the May revision to the 1995-96
Fiscal Year budget proposal. By June 1, 1995, the State Controller must concur
with these updated statements or provide a revised estimate of the cash
condition of the General Fund for the 1994-95 and the 1995-96 Fiscal Years. For
the 1995-96 Fiscal Year, Chapter 135 prohibits any external borrowing as of June
30, 1996, thereby requiring the State to rely solely on internal borrowable
resources, expenditure reductions or revenue increases to eliminate any
projected cash flow shortfall.

Commencing on October 15, 1995, the State Controller will, in conjunction
with the Legislative Analyst's Office, review the estimated cash condition of
the General Fund for the 1995-96 Fiscal Year. The "1996 cash shortfall" shall
be the amount necessary to bring the balance of unused borrowable resources on
June 30, 1996 to zero. On or before December 1, 1995, legislation must be
enacted providing for sufficient General Fund expenditure reductions, revenue
increases, or both, to offset any such 1996 cash shortfall identified by the
State Controller. If such legislation is not enacted, within five days
thereafter the Director of Finance must reduce all General Fund appropriations
for the 1995-96 Fiscal Year, except the Required Appropriations, by the
percentage equal to the ratio of the 1996 cash shortfall to total remaining
General Fund appropriations for the 1995-96 Fiscal Year, excluding the Required
Appropriations.

On December 6, 1994, Orange County, California and its Investment Pool (the
"Pool") filed for bankruptcy under Chapter 9 of the United States Bankruptcy
Code. Approximately 187 California public entities, substantially all of which
are public agencies within the County, invested funds in the Pool. Many

<PAGE>

of the agencies have various bonds, notes or other forms of indebtedness
outstanding, in some instances the proceeds of which were invested in the Pool.
Various investment advisors were employed by the County to restructure the Pool.
Such restructuring led to the sale of substantially all of the Pool's portfolio,
resulting in losses estimated to be approximately $1.7 billion or approximately
22% of amounts deposited by the Pool investors, including the County. It is
anticipated that such losses may result in delays or failures of the County as
well as investors in the Pool to make scheduled debt service payments. Further,
the County expects substantial budget deficits to occur in Fiscal Year 1995 with
possibly similar effects upon operations of investors in the Pool.

Investor access to monies in the Pool subsequent to the filing was pursuant
to Court order only and severely limited. On May 2, 1995, the Bankruptcy Court
approved a comprehensive settlement agreement (the "CSA") between the County and
Pool investors which, among other things, (i) established a formula for
distribution of all available cash and securities from the Pool to the Pool
investors, including the County, (ii) established formulas for distribution
among certain settling Pool investors of several tranches of new County
obligations to be payable from, and in some instances secured by, certain
designated sources of potential recoveries on Pool related claims, and (iii)
designated certain outstanding short term note obligations of the County to be
senior to or on a parity with certain of the new County obligations. By order
dated May 22, 1995, following distribution of all available cash and securities
from the Pool to the Pool investors, including the County, the Bankruptcy Court
dismissed the bankruptcy filing of the Pool based upon the Court's finding that
the Pool was not eligible for relief under Chapter 9 of the Bankruptcy Code
because it is not a municipality and it has not been specifically authorized to
file under Chapter 9 as required by the Bankruptcy Code. In negotiations
regarding a plan of arrangement for the County, many municipal investors in the
Pool have indicated a willingness to subordinate their remaining claims against
the County to those of other creditors and to make their further recovery
contingent on recovery by the County in litigation with brokerage houses,
investment advisors and other defendants regarding the Pool's investments.

On December 21, 1995, the County filed a proposed plan based on this premise,
pursuant to which most creditors other than municipal investors would be paid in
full or reinstated. On January 19, 1996, the County filed a disclosure statement
with regard to this plan. As of January 22, no hearing has been scheduled yet on
the disclosure statement.

Following its bankruptcy filing, the County has, with Bankruptcy Court
approval, made payments of scheduled principal and interest on its outstanding
obligations where no alternative source of payment (such as reserve funds on
deposit with indenture trustees, letters of credit, municipal bond insurance
policies or other alternative payment sources) were available. The County has
not replenished such reserve funds or reimbursed the issuers of such letters of
credit or municipal bond insurance policies. In addition, the County ceased
making set aside deposits for repayment of certain of its short term
indebtedness. The Bankruptcy Court subsequently ruled that the rights of the
holders of such short term indebtedness to require the set aside deposits from
County revenues received following the filing were cut off by operation of the
Bankruptcy Code. In the proposed plan the County proposes to cancel obligations
to make such set-asides for certain bonds, and to increase the applicable
interest rates in compensation. In addition, the County has failed to satisfy
its obligation to accept tenders of its $110,200,000 aggregate principal amount
of Taxable Pension Obligation Bonds, Series B, used to finance County pension
obligations. Interest at a rate set pursuant to the bond documents has been
timely paid on such Pension Bonds. The failure to satisfy the contractual
obligations discussed above may constitute defaults under the documents
governing such securities.

To June 30, 1995 there had been no default in payment of scheduled interest
and principal (excluding the tender payment described above and the Note Debt
hereinafter described) to holders of County securities, although certain
securities are scheduled to mature at various times thereafter and the Fund is
unable to predict whether or to what extent such securities will be timely paid
by the County. On June 27, 1995, the Bankruptcy Court approved a Stipulation and
an Extension Agreement that offered to holders of certain short term note
obligations of the County ("Note Debt") who elected to be treated thereunder:
(i) extension of maturity dates to June 30, 1996; (ii) payment of monthly
interest at a rate

<PAGE>

below existing contract rates; (iii) accrual of monthly interest equal to the
difference between the amount paid and the contract rate, plus a settlement
adjustment of 0.95%; (iv) waiver of post-bankruptcy interest recapture or
disallowance; (v) waiver of defenses to repayment of the Note Debt claims based
on California limitations on municipal indebtedness; and (vi) allowance of the
Note Debt claims, subject to certain reserved rights. The holders of in excess
of 90% of the outstanding aggregate principal amount of all Note Debt
obligations elected such treatment on July 7, 1995. Certain of the holders did
not approve the agreement and those notes, in the amount of $2.8 million, were
defaulted upon by the County on July 18, 1995.

Both Standard & Poor's and Moody's Investors Service have suspended or
downgraded ratings on various debt securities of the County and certain of the
investors in the Pool and, following the defeat of the proposition submitted to
the voters on June 27, announced their intention to downgrade the County's debt
to default status, regardless of whether the Stipulation and Extension Agreement
received approval by holders of the Note Debt. On July 18, 1995, Standard &
Poor's declared the Note Debt in default in spite of the approval of the
Stipulation and Extension Agreement. Standard & Poor's further stated that it
had no reason to believe that the County would be able to fulfill the terms of
the Stipulation and Extension Agreement on June 30, 1996. Such suspensions or
downgradings could affect both price and liquidity of the County's securities.
The Fund is unable to predict (i) the occurrence of covenant and/or payment
defaults with respect to obligations of the County and/or investors in the Pool
or (ii) the financial impact of any such defaults or credit rating suspensions
or downgradings upon the value of such securities.

Constitutional, Legislative and Other Factors. Certain California
constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives could result in the adverse
effects described below.

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

In 1988, California enacted legislation providing for a water's-edge combined
reporting method if an election fee was paid and other conditions met. On
October 6, 1993, the Governor signed Senate Bill 671 (Alquist) which modified
the unitary tax law by deleting the requirements that a taxpayer electing to
determine its income on a water's-edge basis pay a fee and file a domestic
disclosure spreadsheet and instead requiring an annual information return.
Significantly, the Franchise Tax Board can no longer disregard a taxpayer's
election. The Franchise Tax Board is reported to have estimated state revenue
losses from the Legislation as growing from $27 million in 1993-94 to $616
million in 1999-2000, but others, including Assembly Speaker Willie Brown,
disagreed with that estimate and assert that more revenue will be generated for
California, rather than less, because of an anticipated increase in economic
activity and additional revenue generated by the incentives in the Legislation.

Certain of the Debt Obligations may be obligations of issuers who rely in
whole or in part on ad valorem real property taxes as a source of revenue. On
June 6, 1978, California voters approved an amendment to the California
Constitution known as Proposition 13, which added Article XIIIA to the
California Constitution. The effect of Article XIIIA is to limit ad valorem
taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues. On November 7, 1978, California voters
approved Proposition 8, and on June 3, 1986, California voters approved
Proposition 46, both of which amended Article XIIIA.

Section 1 of Article XIIIA limits the maximum ad valorem tax on real property
to 1% of full cash value (as defined in Section 2), to be collected by the
counties and apportioned according to law; provided that the 1% limitation does
not apply to ad valorem taxes or special assessments to pay the interest and

<PAGE>

redemption charges on (i) any indebtedness approved by the voters prior to July
1, 1978, or (ii) any bonded indebtedness for the acquisition or improvement of
real property approved on or after July 1, 1978, by two-thirds of the votes cast
by the voters voting on the proposition. Section 2 of Article XIIIA defines
"full cash value" to mean "the County Assessor's valuation of real property as
shown on the 1975/76 tax bill under "full cash value" or, thereafter, the
appraised value of real property when purchased, newly constructed, or a change
in ownership has occurred after the 1975 assessment." The full cash value may
be adjusted annually to reflect inflation at a rate not to exceed 2% per year,
or reduction in the consumer price index or comparable local data, or reduced in
the event of declining property value caused by damage, destruction or other
factors. The California State Board of Equalization has adopted regulations,
binding on county assessors, interpreting the meaning of "change in ownership"
and "new construction" for purposes of determining full cash value of property
under Article XIIIA.

Legislation enacted by the California Legislature to implement Article XIIIA
(Statutes of 1978, Chapter 292, as amended) provides that notwithstanding any
other law, local agencies may not levy any ad valorem property tax except to pay
debt service on indebtedness approved by the voters prior to July 1, 1978, and
that each county will levy the maximum tax permitted by Article XIIIA of $4.00
per $100 assessed valuation (based on the former practice of using 25%, instead
of 100%, of full cash value as the assessed value for tax purposes). The
legislation further provided that, for the 1978/79 fiscal year only, the tax
levied by each county was to be apportioned among all taxing agencies within the
county in proportion to their average share of taxes levied in certain previous
years. The apportionment of property taxes for fiscal years after 1978/79 has
been revised pursuant to Statutes of 1979, Chapter 282 which provides relief
funds from State moneys beginning in fiscal year 1979/80 and is designed to
provide a permanent system for sharing State taxes and budget funds with local
agencies. Under Chapter 282, cities and counties receive more of the remaining
property tax revenues collected under Proposition 13 instead of direct State
aid. School districts receive a correspondingly reduced amount of property
taxes, but receive compensation directly from the State and are given additional
relief. Chapter 282 does not affect the derivation of the base levy ($4.00 per
$100 assessed valuation) and the bonded debt tax rate.

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

At the November 8, 1988 general election, 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 4%) to the State School Fund and
be expended solely for purposes of instructional improvement and accountability.
No such transfer or allocation of funds will be required if certain designated
state officials determine that annual student expenditures and class size meet
certain criteria as set forth in Proposition 98. Any funds allocated to the
State School Fund shall cause the appropriation limits established in Article
XIIIB to be annually increased for any such allocation made in the prior year.

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, state monies to support
school districts and community college districts were required to equal or
exceed

<PAGE>

the lesser of (i) an amount equalling the percentage of state general revenue
bonds for school and community college districts in fiscal year 1986-87, or (ii)
an amount equal to the prior year's state general fund proceeds of taxes
appropriated under Article XIIIB plus allocated proceeds of local taxes, after
adjustment under Article XIIIB. The initiative permits the enactment of
legislation, by a two-thirds vote, to suspend the minimum funding requirement
for one year.

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

Article XIIIB, like Article XIIIA, may require further interpretation by both
the Legislature and the courts to determine its applicability to specific
situations involving the State and local taxing authorities. Depending upon the
interpretation, Article XIIIB may limit significantly a governmental entity's
ability to budget sufficient funds to meet debt service on bonds and other
obligations.

On November 4, 1986, California voters approved an initiative statute known
as Proposition 62. This initiative (i) requires that any tax for general
governmental purposes imposed by local governments be approved by resolution or
ordinance adopted by a two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental entity, (ii)
requires that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction, (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed, (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by Article
XIIIA, (v) prohibits the imposition of transaction taxes and sales taxes on the
sale of real property by local governments, (vi) requires that any tax imposed
by a local government on or after August 1, 1985 be ratified by a majority vote
of the electorate within two years of the adoption of the initiative or be
terminated by November 15, 1988, (vii) requires that, in the event a local
government fails to comply with the provisions of this measure, a reduction in
the amount of property tax revenue allocated to such local government occurs in
an amount equal to the revenues received by such entity attributable to the tax
levied in violation of the initiative, and (viii) permits these provisions to be
amended exclusively by the voters of the State of California.

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

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

<PAGE>

January 1, 1989. It is not possible to predict whether the California
Legislature will enact such a prohibition nor is it possible to predict the
impact of Proposition 87 on redevelopment agencies and their ability to make
payments on outstanding debt obligations.

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

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

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

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

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

Certain Debt Obligations in the Portfolio may be obligations which are
secured in whole or in part by a mortgage or deed of trust on real property.
California has five principal statutory provisions which

<PAGE>

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

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

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

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

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

<PAGE>

COLORADO

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

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

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

The State Economy. The State's economic growth is estimated to have
surpassed that of the nation for the past eight consecutive years, including
1995. In recent years, above-average population growth and migration into the
State have helped the State to post better performance in income growth,
homebuilding and job creation. Per-capita income has increased 17.9% from 1991
through 1995. Retail trade sales has increased 40.1% from 1991 through 1995.

Net migration into the State peaked in 1993 at 70,308 (an increase of
approximately 15.9% over 1992's net migration), with the overall State
population increasing 2.9% in 1993. Net migration into the State is estimated
to be 48,306 in 1995 (a decrease of approximately 22.6% from 1994's net
migration of $62,412, but with the overall State population still increasing
approximately 2.2% in 1995. The State's job growth rate was 4.9% in 1994,
compared to 3.0% at the national level, and is estimated to be 3.3% in 1995,
compared to 2.3% at the national level. An estimated 57,900 net nonfarm new
jobs were generated in the State economy in 1995. The State's unemployment rate
remained below the national unemployment rate for 1995.

State Revenues. The State operates on a fiscal year beginning July 1 and
ending June 30. Fiscal year 1994 refers to the year ended June 30, 1994, and
fiscal year 1995 refers to the year ended June 30, 1995.

The State derives substantially all of its General Fund revenues from taxes.
The two most important sources of these revenues are sales and use taxes and
individual income taxes, which accounted for approximately 28.3% and 52.7%,
respectively, of total General Fund revenues during fiscal year 1995. The
Office of State Planning and Budgeting estimates that, during fiscal year 1996,
sales and use taxes will account for approximately 31.3% of total General Fund
revenues and individual income taxes will account for approximately 54.1% of
total General Fund revenues. The ending General Fund balance for fiscal year
1994 was $405.1 million and for fiscal year 1995 was 483.5 million. The
estimated ending General Fund balance for fiscal year 1996 is $502.8 million.

<PAGE>

The Colorado Constitution contains strict limitations on the ability of the
State to create debt except under certain very limited circumstances. However,
the constitutional provision has been interpreted not to limit the ability of
the State to issue certain obligations which do not constitute debt, including
short-term obligations which do not extend beyond the fiscal year in which they
are incurred and lease purchase obligations which are subject to annual
appropriation. Nevertheless, following passage by the voters of the State of a
tax and spending limitation amendment, described below, the General Assembly
adopted legislation prohibiting the State from entering into contracts for the
purchase or lease of real or personal property if such contract involves the
issuance of certificates of participation or other similar instruments, until a
court of competent jurisdiction renders a final decision as to the
constitutionality of such instruments. See the discussion below under "Tax and
Spending Limitation Amendment."

The State is authorized pursuant to State statute to issue short-term notes
to alleviate temporary cash flow shortfalls. The most recent issue of such
notes, issued on July 6, 1995 and maturing June 27, 1996, were given the highest
rating available for short-term obligations by Standard & Poor's Corporation and
Fitch Investors Service, Inc. Because of the short-term nature of such notes,
their ratings should not be considered necessarily indicative of the State's
general financial condition. It has not yet been determined whether the State
will issue similar short-term notes for the beginning of the State's 1997 fiscal
year.

Tax and Spending Limitation Amendment. On November 3, 1992, Colorado voters
approved a State constitutional amendment (the "Amendment") that restricts the
ability of the State and local governments to increase taxes, revenues, debt and
spending. The Amendment provides that its provisions supersede conflicting
State constitutional, State statutory, charter or other State or local
provisions.

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

On September 12, 1994, in Bickel v. City of Boulder (Case No. 94SA130), the
State Supreme Court, among other things, determined that (i) ballot questions
which authorized the issuance of bonds and the imposition of taxes to pay such
bonds in the same proposition did not violate the provisions of the Amendment,
and (ii) in approving the ballot questions, the voters could authorize property
tax rates to be adjusted as necessary to repay the specific debt incurred,
provided the tax rate increases are consistent with the "stated estimate of the
final fiscal year dollar amount of the tax increase" set forth in the ballot
questions.

On February 6, 1995, in City of Aurora v. Acosta (Case No. 945C250), the
State Supreme Court further determined that (i) a ballot question seeking a
voter-approved revenue change (i.e., an exception to the revenue and spending
limits of the Amendment) could describe the proposed revenue change to include
all revenue attributable to a stated tax rate to be imposed, instead of a stated
dollar amount, and (ii) in a mail ballot election, where all relevant
information was presented to the voters in the election ballot and related
election notice, the election materials substantially complied with the
Amendment, even though the ballot omitted certain information required under
Bickel. The State Supreme Court looked to three factors, first announced in
Bickel, to determine substantial compliance. These factors include (i) the
extent of a taxing district's noncompliance with the Amendment provisions with
respect to the challenged ballot issue, (ii) the purpose of the provision
violated and whether that purpose is substantially achieved despite the taxing
district's noncompliance, and (iii) whether it can be reasonably inferred that
the taxing district made a good faith effort to comply with the Amendment, or
attempted to mislead the electorate.

Other cases are expected to continue proceeding through the appeal process.

<PAGE>

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

On January 6, 1994, in Board of County Commissioners of County of Boulder v.
Dougherty, Dawkins, Strand & Bigelow Incorporated, the District Court for
Boulder County, Colorado held, among other things, that a lease obligation that
is expressly subject to annual appropriation cannot be characterized as a
multiple-fiscal year obligation, and therefore is not subject to the voter
approval requirements of the Amendment. This holding was affirmed by the State
Court of Appeals on November 3, 1993. The decision of the Court of Appeals was
not appealed to the State Supreme Court.

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

On May 15, 1995, the State Supreme Court held, in Nicholl v. E-470 Public
Highway Authority (Case No. 94SC307) that the remarketing of bonds outstanding
prior to the adoption of the Amendment according to procedures specified in the
original pre-Amendment bond documents did not constitute a new debt issuance
requiring electoral approval. In the same case it held that a toll road has the
character of a "business" for purposes of the enterprise provisions of the
Amendment even though it held that the particular entity operating it was not an
enterprise because it had access to, and had pledged, taxes.

In Bolt v. Arapahoe County School District No. Six, (Case No. 94SC364),
decided June 19, 1995, the Colorado Supreme Court held, among other things, that
it was permissible to increase a school district's debt service mill levy
without new voter approval to pay pre-Amendment bonds originally authorized
under a very general bond question typical of pre-Amendment practices. This
resolved a question as to whether the Amendment required specific voter approval
of each individual increase in debt service mill levies for voted general
obligation bonds.

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

The foregoing is not intended as a complete description of all of the
provisions of the Amendment. Many provisions of the Amendment are ambiguous and
will require judicial interpretation. Several statutes enacted or proposed
during the 1993 and 1994 legislative sessions attempt to clarify the application
of the Amendment with respect to certain governmental entities and activities.
However, many provisions of the Amendment are likely to continue to be the
subject of further legislation or judicial proceedings. The application of the
Amendment may adversely affect the financial condition and operations of the
State and local governments in the State to an extent which cannot be predicted.

<PAGE>

CONNECTICUT

RISK FACTORS--The State Economy. Manufacturing has historically been of
prime economic importance to Connecticut. The manufacturing industry is
diversified, with transportation equipment (primarily aircraft engines,
helicopters and submarines) the dominant industry, followed by non-electrical
machinery, fabricated metal products, and electrical machinery. From 1970 to
1994, however, there was a rise in employment in service-related industries.
During this period, manufacturing employment declined 35.5%, while the number of
persons employed in other non-agricultural establishments (including government)
increased 66.3%, particularly in the service, trade and finance categories. In
1994, manufacturing accounted for only 18.5% of total non-agricultural
employment in Connecticut. Defense-related business represents a relatively
high proportion of the manufacturing sector. On a per capita basis, defense
awards to Connecticut have traditionally been among the highest in the nation,
and reductions in defense spending have had a substantial adverse impact on
Connecticut's economy. Moreover, the State's largest defense contractors have
announced substantial planned labor force reductions scheduled to occur over the
next four years.

The annual average unemployment rate (seasonally adjusted) in Connecticut
decreased from 6.9% in 1982 to a low of 3.0% in 1988 but rose to 6.6% in 1993.
While these rates were lower than those recorded for the U.S. as a whole for the
same periods, as of May, 1993, the estimated rate of unemployment in Connecticut
on a seasonably adjusted basis reached 7.4%, compared to 6.0% for the nation as
a whole, and pockets of significant unemployment and poverty exist in some of
Connecticut's cities and towns. Moreover, Connecticut is now in a recession,
the depth and duration of which are uncertain.

State Revenues and Expenditures. In 1991, to address a growing deficit in
the State's General Fund, legislation was enacted by which the State imposed an
income tax on individuals, trusts and estates for taxable years generally
commencing in 1992. For each fiscal year starting with the 1991-92 fiscal year,
the General Fund has operated at a surplus, with more than 60% of the State's
tax revenues being generated by the income tax and the sales and use tax, each
of which is sensitive to changes in the level of economic activity in
Connecticut. The State's budgeted expenditures have more than doubled from
approximately $4,300,000,000 for the 1986-87 fiscal year to approximately
$9,800,000,000 for the 1995-96 fiscal year.

For the four fiscal years ended June 30, 1991, the General Fund experienced
operating deficits of approximately $115,600,000, $28,000,000, $259,000,000, and
$808,500,000, respectively. At the end of the 1990-91 fiscal year, the General
Fund had an accumulated unappropriated deficit of $965,712,000. For the four
fiscal years ended June 30, 1995, the General Fund ran operating surpluses of
approximately $110,200,000, $113,500,000, $19,700,000, and $80,500,000,
respectively. General Fund budgets for the biennium ending June 30, 1997, were
adopted in 1995. General Fund expenditures and revenues are budgeted to be
approximately $9,800,000,000 and $10,150,000,000, for the 1995-96 and 1996-97
fiscal years, respectively.

State Debt. The primary method for financing capital projects by the State
is through the sale of the general obligation bonds of the State. These bonds
are backed by the full faith and credit of the State. As of September 15, 1995,
there was a total legislatively authorized bond indebtedness of $10,513,394,000,
of which $9,068,876,000 had been approved for issuance by the State Bond
Commission and $7,715,675,000 had been issued.

To fund operating cash requirements, prior to the 1991-92 fiscal year the
State borrowed up to $750,000,000 pursuant to authorization to issue commercial
paper and on July 29, 1991, it issued $200,000,000 General Obligation Temporary
Notes, none of which temporary borrowings were outstanding as of December 1,
1994. To fund the cumulative General Fund deficit for the 1989-90 and 1990-91
fiscal years, the legislation enacted August 22, 1991, authorized the State
Treasurer to issue Economic Recovery Notes up to the aggregate amount of such
deficit, which were to be payable no later than June 30, 1996.

<PAGE>

However, as part of the budget for the biennium ending June 30, 1997, the
scheduled payment of the remaining Notes in the 1995-96 fiscal year was
rescheduled over the four fiscal years ending June 30, 1999. At least
$50,000,000 of such Notes, but not more than a cap amount, is to be retired each
fiscal year commencing with the 1991-92 fiscal year, and any unappropriated
surplus up to $205,000,000 in the General Fund at the end of each of the three
fiscal years commencing with the 1991-92 fiscal year must be applied to retire
such Notes as may remain outstanding at those times. On September 25, 1991 and
October 24, 1991, the State issued $640,710,000 and $325,000,000 respectively,
of such Economic Recovery Notes, of which $315,710,000 were outstanding as of
September 15, 1995.

To meet the need for reconstructing, repairing, rehabilitating and improving
the State transportation system (except Bradley International Airport), the
State adopted legislation which provides for, among other things, the issuance
of special tax obligation ("STO") bonds the proceeds of which will be used to
pay for improvements to the State's transportation system. The STO bonds are
special tax obligations of the State payable solely from specified motor fuel
taxes, motor vehicle receipts, and license, permit and fee revenues pledged
therefor and deposited in the special transportation fund. The cost of the
infrastructure program for the twelve years beginning in 1984, to be met from
federal, state, and local funds, was recently estimated at $11.2 billion. To
finance a portion of the State's $4.7 billion share of such cost, the State
expects to issue $4.2 billion of STO bonds over the twelve-year period.

As of September 15, 1995, the General Assembly has authorized STO bonds for
the program in the aggregate amount of $4,157,900,000, of which $3,269,700,000
had been issued. It is anticipated that additional STO bonds will be authorized
by the General Assembly annually in an amount necessary to finance and to
complete the infrastructure program. Such additional bonds may have equal rank
with the outstanding bonds provided certain pledged revenue coverage
requirements of the STO indenture controlling the issuance of such bonds are
met. The State expects to continue to offer bonds for this program.

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

The State's budget problems led to the ratings of its general obligation
bonds being reduced by Standard & Poor's from AA+ to AA on March 29, 1990, and
by Moody's from Aa1 to Aa on April 9, 1990. Because of concerns over
Connecticut's lack of a plan to deal during the current fiscal year with the
accumulated projected deficits in its General Fund, on September 13, 1991,
Standard & Poor's further reduced its ratings of the State's general obligation
bonds and certain other obligations that depend in part on the creditworthiness
of the State to AA-. On March 7, 1995, Fitch reduced its rating of the State's
general obligation bonds from AA+ to AA.

Litigation. The State, its officers and employees are defendants in numerous
lawsuits. According to the Attorney General's Office, an adverse decision in
any of the cases summarized herein could materially affect the State's financial
position: (i) litigation on behalf of black and Hispanic school children in the
City of Hartford seeking "integrated education" and a declaratory judgment that
the public schools within the greater Hartford metropolitan area are segregated
and inherently unequal; (ii) litigation involving claims by Indian tribes to
monetary recovery and ownership of portions of the State's land area; (iii)
litigation challenging the State's method of financing elementary and secondary
public schools on the ground that it denies equal access to education; (iv) an
action on behalf of all persons with retardation or traumatic brain injury,
claiming that their constitutional rights are violated by placement in State
hospitals alleged not to provide adequate treatment and training, and seeking
placement in community residential settings with appropriate support services;
(v) an action by the Connecticut Hospital Association and 33 hospitals seeking
to require the State to reimburse hospitals for in-patient medical services on a
basis more favorable to them; (vi) a class action by the Connecticut Criminal
Defense Lawyers Association claiming a campaign of illegal surveillance activity
over a period of years and seeking damages and injunctive relief;

<PAGE>

(vii) an action to enforce the spending cap provision of the State's
constitution by seeking to require that the General Assembly define certain
terms used therein and to enjoin certain increases in "general budget
expenditures" until this is done; (viii) an action challenging the validity of
the State's imposition of gross earnings taxes on hospital revenues to finance
certain uncompensated care costs incurred by hospitals; (xiii) an action by
inmates of the Department of Correction seeking damages and injunctive relief
with respect to alleged violations of statutory and constitutional rights as a
result of the monitoring and recording of their telephones from the State's
correctional institutions. In addition, a number of corporate taxpayers have
filed requests for refund of corporation business tax asserting that interest on
federal obligations may not be included in the measure of that tax, alleging
that to do so violates federal law because interest on certain State of
Connecticut obligations is not included in the measure of the tax. The State
has attempted to eliminate the basis for these refund requests by enacting
legislation that takes by eminent domain rights of corporate holders to exclude
the interest on such State obligations. The State will compensate the holders
of such obligations.

Municipal Debt Obligations. General obligation bonds issued by
municipalities are usually payable from ad valorem taxes on property subject to
taxation by the municipality. Certain Connecticut municipalities have
experienced severe fiscal difficulties and have reported operating and
accumulated deficits in recent years. The most notable of these is the City of
Bridgeport, which filed a bankruptcy petition on June 7, 1991. The State
opposed the petition. The United States Bankruptcy Court for the District of
Connecticut has held that Bridgeport has authority to file such a petition but
that its petition should be dismissed on the grounds that Bridgeport was not
insolvent when the petition was filed.

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

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

FLORIDA

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

RISK FACTORS--The State Economy. In 1980 Florida ranked seventh among the
fifty states with a population of 9.7 million people. The State has grown
dramatically since then and, as of April 1, 1994, ranked fourth with an
estimated population of 13.9 million. Since the beginning of the eighties,
Florida has surpassed Ohio, Illinois and Pennsylvania in total population.
Florida's attraction, as both a growth and retirement state, has kept net
migration fairly steady with an average of 235,600 new residents each year, from
1985 through 1994. Since 1985 the prime working age population (18-44) has
grown at an average annual rate of 2.2%. The share of Florida's total working
age population (18-59) to total State population is approximately 54%. Non-farm
employment has grown by approximately 37.9% since 1985. Total non-farm
employment in Florida is expected to increase 3.2% in 1995-96 and rise 3.0% in
1996-97. By the end of 1996-97, non-farm employment in the State is expected to
reach an average of 6.1 million. The service sector is Florida's largest
employment sector, presently accounting for 86.4% of total non-farm employment.
Employment in the service sector should experience an increase of 5.3% in 1995-
96, while

<PAGE>

growing 4.5% in 1996-97. Manufacturing jobs in Florida are concentrated in the
area of high-tech and value-added sectors, such as electrical and electronic
equipment, as well as printing and publishing. Florida's manufacturing sector
has kept pace with the U.S., at about 2.7% of total U.S. manufacturing
employment since the eighties. Foreign Trade has contributed significantly to
Florida's employment growth. Trade is expected to expand 3.0% this year and
3.0% next year. Florida's dependence on highly cyclical construction and
construction related manufacturing has declined. Total contract construction
employment as a share of total non-farm employment has fallen from 10% in 1973,
to 7.5% in 1980, and down to nearly 5% in 1994. Although the job creation rate
for the State of Florida is almost twice the rate for the nation as a whole, in
recent years the unemployment rate for the State has risen faster than the
national average. The average rate of unemployment in Florida since 1985 is
6.3%, while the national average is 6.4%. Florida's unemployment rate is
forecasted at 5.6% in 1995-96 and 5.7% in 1996-97. Because Florida has a
proportionately greater retirement age population, property income (dividends,
interest and rent) and transfer payments (Social Security and pension benefits)
are a relatively more important source of income. In 1994, Florida employment
income represented 61.5% of total personal income, while nationally, employment
income represented 72.6% of total personal income. In the ten years ending in
1994, Florida's total nominal personal income grew by nearly 107% and per capita
income by approximately 64.6%. For the nation, total and per capita personal
income increased by roughly 80.7% and 63.7%, respectively. Real personal income
in Florida is estimated to increase 4.6% in 1995-96 and increase 3.8% in 1996-
97, while real personal income per capita in the State is projected to grow at
2.7% in 1995-96 and 1.1% in 1996-97.

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

The State Budget. The State operates under a biennial budget which is
formulated in even numbered years and presented for approval to the Legislature
in odd numbered years. A supplemental budget request process is utilized in the
even numbered years for refining and modifying the primary budget. Under the
State Constitution and applicable statutes, the State budget as a whole, and
each separate fund within the State budget, must be kept in balance from
currently available revenues during each State fiscal year. (The State's fiscal
year runs from July 1 through June 30). The Governor and the Comptroller of the
State are charged with the responsibility of ensuring that sufficient revenues
are collected to meet appropriations and that no deficit occurs in any State
fund.

The financial operations of the State covering all receipts and expenditures
are maintained through the use of three types of funds: the General Revenue
Fund, Trust Funds and Working Capital Fund. The majority of the State's tax
revenues are deposited in the General Revenue Fund and moneys in the General
Revenue Fund are expended pursuant to appropriations acts. In fiscal year
1994-95, expenditures for education, health and welfare and public safety
represented approximately 49%, 32% and 11%, respectively, of expenditures from
the General Revenue Fund. The Trust Funds consist of moneys received by the
State which under law or trust agreement are segregated for a purpose authorized
by law. Revenues in the General Revenue Fund which are in excess of the amount
needed to meet appropriations may be transferred to the Working Capital Fund.

State Revenues. For fiscal year 1995-96 the estimated General Revenue plus
Working Capital Fund and Budget Stabilization funds total $15,286.2 million, a
3.1% increase over 1994-95. The $14,577.7 million in Estimated Revenues
(including revenue revisions) represent an increase of 6.8% over revenues for
1994-95. With combined General Revenue, Working Capital Fund and Budget
Stabilization Fund

<PAGE>

appropriations at $14,808.2 million, unencumbered reserves at the end of 1995-96
are estimated at $478.0 million. For fiscal year 1995-96, the estimated General
Revenue plus Working Capital and Budget Stabilization funds available total
$15,922.0 million, a 4.2% increase over 1994-95. The $15,310.7 million in
Estimated Revenues represent a 5.0% increase over the analogous figure in
1994-95.

In fiscal year 1994-1995, the State derived approximately 66% of its total
direct revenues for deposit in the General Revenue Fund, Trust Funds and Working
Capital Fund from State taxes. Federal funds and other special revenues
accounted for the remaining revenues. The greatest single source of tax
receipts in the State is the 6% sales and use tax. For the fiscal year ended
June 30, 1995, receipts from the sales and use tax totalled $10,672.0 million,
an increase of approximately 6.0% over fiscal year 1993-94. The second largest
source of State tax receipts is the tax on motor fuels including the tax
receipts distributed to local governments. Receipts from the taxes on motor
fuels are almost entirely dedicated to trust funds for specific purposes or
transferred to local governments and are not included in the General Revenue
Fund. Preliminary data for the fiscal year ended June 30, 1994, show
collections of this tax totalled $1,733.4 million.

The State currently does not impose a personal income tax. However, the
State does impose a corporate income tax on the net income of corporations,
organizations, associations and other artificial entities for the privilege of
conducting business, deriving income or existing within the State. For the
fiscal year ended June 30, 1994, receipts from the corporate income tax totalled
$1,063.5 million, an increase of 1.5% from fiscal year 1992-93. The Documentary
Stamp Tax collections totalled $695.3 million during fiscal year 1994-95,
posting a 11.4% increase over fiscal year 1993-94. The Alcoholic Beverage Tax,
an excise tax on beer, wine and liquor totalled $437.3 million in fiscal year
1994-95. The Florida lottery produced sales of $2.19 billion in fiscal year
1994-95 of which $853.2 million was used for education purposes.

While the State does not levy ad valorem taxes on real property or tangible
personal property, counties, municipalities and school districts are authorized
by law, and special districts may be authorized by law, to levy ad valorem
taxes. Under the State Constitution, ad valorem taxes may not be levied by
counties, municipalities, school districts and water management districts in
excess of the following respective millages upon the assessed value of real
estate and tangible personal property: for all county purposes, ten mills; for
all municipal purposes, ten mills; for all school purposes, ten mills; and for
water management purposes, either 0.05 mill or 1.0 mill, depending upon
geographic location. These millage limitations do not apply to taxes levied for
payment of bonds and taxes levied for periods not longer than two years when
authorized by a vote of the electors. (Note: one mill equals one-tenth of one
cent.)

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

On November 3, 1992, the voters of the State of Florida passed an amendment
to the Florida Constitution establishing a limitation on the annual increase in
assessed valuation of homestead property commencing January 1, 1994, of the
lesser of 3% or the increase in the Consumer Price Index during the relevant
year, except in the event of a sale thereof during such year, and except as to
improvements thereto during such year. The amendment did not alter any of the
millage rates described above.

Since municipalities, counties, school districts and other special purpose
units of local governments with power to issue general obligation bonds have
authority to increase the millage levy for voter approved general obligation
debt to the amount necessary to satisfy the related debt service requirements,
the amendment is not expected to adversely affect the ability of these entities
to pay the principal of or interest on such general obligation bonds. However,
in periods of high inflation, those local government units whose operating
millage levies are approaching the constitutional cap and whose tax base
consists largely

<PAGE>

of residential real estate, may, as a result of the above-described amendment,
need to place greater reliance on non-ad valorem revenue sources to meet their
operating budget needs.

At the November 1994 general election, voters approved an amendment to the
State Constitution that limits the amount of taxes, fees, licenses and charges
imposed by the Legislature and collected during any fiscal year to the amount of
revenues allowed for the prior fiscal year, plus an adjustment for growth.
Growth is defined as the amount equal to the average annual rate of growth in
Florida personal income over the most recent twenty quarters times the state
revenues allowed for the prior fiscal year. The revenues allowed for any fiscal
year can be increased by a two-thirds vote of the Legislature. The limit is
effective starting with fiscal year 1995-96 based on actual revenues from fiscal
year 1994-95. Any excess revenues generated will be deposited in the budget
stabilization fund until it is fully funded and then refunded to taxpayers.
Included among the categories of revenues which are exempt from the proposed
revenue limitation, however, are revenues pledged to state bonds.

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

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

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

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

Bond Ratings. General obligation bonds of the State are currently rated Aa
by Moody's and AA by Standard & Poor's.

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

A. In a suit, plaintiff has sought title to Hugh Taylor Birch State
Recreation Area by virtue of a reverter clause in the deed from Hugh Taylor
Birch to the State. A final judgment at trial was entered in favor of the State
on August 2, 1993, when the judge denied a request for a new trial. The case
was

<PAGE>

appealed to the Fourth District Court of Appeal and on November 30, 1994, the
court affirmed the lower court decision. The loss exposure, therefore, has been
eliminated in favor of the State.

B. A class action suit brought against the Department of Corrections,
alleging race discrimination in hiring and employment practices, originally went
to trial in 1982 with the Department prevailing on all claims except a partial
summary judgment to a plaintiff sub-class claiming a discriminatory impact on
hiring caused by an examination requirement. Jurisdictional aspects of the
testing issue were appealed to the Eleventh Circuit Court of Appeals which
vacated the trial court's order and was upheld by the United States Supreme
Court. The district court consolidated three successor lawsuits with this case
and entered a final judgment in favor of the State. The judgment, however, was
appealed to the Eleventh Circuit Court of Appeals which affirmed all but one
issue in favor of the State. The remaining issue is pending appeal to the
United States Supreme Court by the State. Should the State fail in such appeal,
the liability of the State for back pay and other monetary relief could exceed
$40 million.

C. Complaints were filed in the Second Judicial Circuit seeking a
declaration that Sections 624.509, 624.512 and 624.514, F.S. (1988) violate
various U.S. and Florida Constitutional provisions. Relief was sought in the
form of a tax refund. The Florida Supreme Court reversed the trial court in
favor of the State. Plaintiffs have petitioned for certiorari with the United
States Supreme Court. The State has settled all outstanding litigation in this
area. Similar issues had been raised in the following cases which were part of
the settlement: Ford Motor Company v. Bill Gunter, Case No. 86-3714, 2nd
---------------------------------
Judicial Circuit, and General Motors Corporation v. Tom Gallagher, Case Nos.
-------------------------------------------
90-2045 and 88-2925, 2nd Judicial Circuit, where the plaintiffs are challenging
Section 634.131, F.S., which imposes taxes on the premiums received for certain
motor vehicle service agreements. Current estimates indicate that the State's
potential refund exposure under the remaining refund application yet to be
denied is approximately $150 million. However, the State hopes that refund
exposure will be reduced as these refund requests begin to be denied based upon
the Florida Supreme Court decision in the instant case.

D. In two cases, plaintiffs have sought approximately $25 million in
intangible tax refunds based partly upon claims that Florida's intangible tax
statutes are unconstitutional. These cases are currently involved in ongoing
discovery. A settlement offer is anticipated being made by the plaintiffs,
which would result in a significant reduction in the refund claim.

E. A lawsuit was filed against the Department of Health and Rehabilitative
Services (DHRS) and the Comptroller of the State of Florida involving a number
of issues arising out of the implementation of a DHRS computer system and
seeking declaratory relief and money damages. The parties involved have agreed
to be heard in one proceeding. The trial began January 9, 1995, in Circuit Court
before a Special Master. The estimated potential liability to the State is in
excess of $40 million.

F. Plaintiffs in a case have sought a declaration that statutory assessments
on certain hospital net revenues are invalid, unconstitutional, and
unenforceable and request temporary and permanent injunctive relief be granted
prohibiting the enforcement or collection of the assessment and that all monies
paid to the State by the plaintiffs and the class members within the four years
preceding the filing of the action be reimbursed by the defendants with
interest. In a trial hearing on December 19, 1994, the court ordered that a
final judgement be entered in favor of the State. An appeal was filed by the
plaintiffs with the First District Court of Appeals on June 15, 1995 and is
being briefed. An unfavorable outcome to this case could result in the
possibility of refunds exceeding $100 million.

G. In an inverse condemnation suit claiming that the actions of the State
constitute a taking of certain leases for which compensation is due, the Circuit
judge granted the State's motion for summary judgment finding that the State had
not deprived plaintiff of any royalty rights they might have. Plaintiff has
appealed. Additionally, plaintiff's request for a drilling permit was rejected
after administrative proceedings before the Department of Environmental
Protection. Plaintiff has appealed the decision.

H. In an inverse condemnation suit alleging the regulatory taking of
property without compensation in the Green Swamp Area of Critical State Concern,
a motion for the plaintiff was denied

<PAGE>

and the State's motion for dismissal for failure to prosecute is pending. As a
result of the proceedings in this case, the loss exposure to the State has been
greatly reduced.

I. In 1990, the Florida Legislature passed an act imposing a $295 impact fee
on cars purchased or titled in other states that are then registered in the
State by persons having or establishing permanent residency in the State. Two
separate groups filed suit challenging the fee. The circuit court consolidated
the various cases and entered final summary judgment finding the fee
unconstitutional under the Commerce Clause of the United States Constitution and
ordered an immediate refund to all persons having paid the fee since the statute
came into existence. The State noticed an appeal of the circuit court ruling
which entitled the State to a stay of the effectiveness of such ruling, thus,
the fee continued to be collected during the period of the pending appeal. On
September 29, 1994, the Supreme Court of Florida reaffirmed the circuit court's
decision by concluding that the statute results in discrimination against out of
state economic interests in contravention of the Commerce Clause and that the
proper remedy for such violation is a full refund to all persons who have paid
the illegal fee. The case was directed to and is currently with the Orange
County Circuit Court to oversee refund procedures. The State's refund exposure
may be in excess of $188 million. Additionally, in a new suit, St. Lucie County
alleges that those who were required to pay the $295 impact fee under the
predecessor statute to the act described above are also due a refund, inasmuch
as that statute too violates the Commerce Clause of the U.S. Constitution. The
State has moved to dismiss this lawsuit, arguing that the plaintiffs have no
standing; have failed to properly exhaust their administrative remedies; and
have filed their suit beyond the statute of limitations. The trial court
dismissed plaintiffs suit in August, 1995. Plaintiffs have appealed the trial
court's order to the Fourth District Court of Appeals. Approximately $29 million
was collected under this statute.

J. Santa Rosa County has filed a complaint for declaratory relief against
the State Department of Revenue requesting the Circuit Court to: (1) find that
Section 206.60(2)(a), F.S., does not allow the Department to deduct
administrative expenses unrelated to the collection, administration, and
distribution of the county gas tax; and (2) order the Department to pay Santa
Rosa County all moneys shown to have been unlawfully deducted from the motor
fuel tax revenues plus interest. A final judgment issued on February 18, 1994,
enjoined the Department from deducting administrative expenses unrelated to the
collection of the county motor fuel tax, beginning with the 1994-95 fiscal year
and denied Santa Rosa County's request for the return of the amounts previously
deducted with interest. There has been no appeal by either party. The
Legislature changed the statute in accordance with the Court's decision.

K. Lee Memorial Hospital has contested the calculation of its
disproportionate share payment for the 1992-93 State fiscal year. The Division
of Administrative Hearings has relinquished this case and ordered it back to the
Agency for Health Care Administration for informal hearing procedures. An
unfavorable outcome to this case could result in a possible settlement of $20 to
$30 million.

L. A lawsuit has challenged the freezing of nursing home reimbursement rates
for the period January 1, 1990 through July 1, 1990. The First District Court
of Appeal ruled against the Agency for Health Care Administration (AHCA). The
AHCA petitioned the Florida Supreme Court for review of this decision which the
court denied certiorari. This action affirmed the decision of the District
Court of Appeals concluding this case with a loss to AHCA of approximately $40
million. In a related case, the plaintiffs seek class action certification for
all nursing homes which were not plaintiffs in the above described case for the
recovery of alleged underpayment for Medicaid care in nursing homes. If
unfavorable, the potential liability for AHCA could be $29 million with the
State responsible for $13 million and the federal government responsible for the
balance. Management intends to fully litigate this matter.

M. The Environmental Protection Agency (EPA) is seeking clean-up costs,
regarding property which the EPA alleges is owned by the Florida Department of
Transportation (FDOT). The FDOT has filed an action against the adjoining
property owners seeking a declaratory judgement from the Dade County Circuit
Court that the FDOT is not the owner of the property that is subject to such
claim by the EPA. The case is in the preliminary pleading stage. The EPA has
agreed to await the outcome of the

<PAGE>

FDOT's declaratory action before proceeding further. If the FDOT is
unsuccessful in its actions, the possible clean-up costs could exceed $25
million.

N. A class action suit against the Florida Department of Health and
Rehabilitative Services on behalf of clients of residential placement for the
developmentally disabled seeks refunds for services where children were entitled
to free education under the Education for Handicapped Act. The district court
held that the State could not charge maintenance fees for children between the
ages of 5 and 17 based on the Education for Handicapped Act. If unfavorable,
the State's potential cost of refunding these charges could exceed $42 million.

O. Plaintiff has brought a challenge against the $15.00 fee imposed pursuant
to Florida law for securing a handicapped parking decal for a motor vehicle.
Plaintiff seeks a declaration that the fee is unlawful as being in violation of
the Americans with Disabilities Act. Plaintiff also seeks approximately $12
million in refunds. The State has filed a motion to dismiss this action based on
the federal Tax Injunction Act which states that federal courts do not have
jurisdiction in state tax cases.

P. In a documentary stamp tax class action case, the potential exposure to
the State has been estimated to be approximately $12 to $20 million. At issue in
this case is whether Plaintiff and the class are entitled to a refund of
documentary stamp taxes paid on transfers of real property as a result of
marriage dissolutions where the parties claimed the property as an estate by the
entireties and were jointly and severally liable on a mortgage encumbering the
property. Final hearing was set for November 28, 1995. The Department of Revenue
does not have an exact figure as to the potential exposure to the State.

Q. In a class action brought against GTE Florida, Inc. and the State
Department of Revenue, the plaintiff class and other telephone company customers
allege that GTE and other telephone companies are collecting a 7%, instead of
6%, Florida sales tax on intrastate long distance calls. The Plaintiffs are
seeking a refund of these taxes. The Department of Revenue does not have an
exact figure as to the potential exposure of the State.

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

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

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

<PAGE>

GEORGIA

RISK FACTORS--The following discussion regarding the financial condition of
the State government may not be relevant to general obligation or revenue bonds
issued by political subdivisions of and other issuers in the State of Georgia
(the "State"). Such financial information is based upon information about
general financial conditions that may or may not affect individual issuers of
obligations within the State. Since 1973 the State's long-term debt obligations
have been issued in the form of general obligation debt or guaranteed revenue
debt. Prior to 1973 all of the State's long-term debt obligations were issued
by ten separate State authorities and secured by lease rental agreements between
such authorities and various State departments and agencies. Currently, Moody's
Investors Service, Inc. and Fitch Investors Service, Inc. rate Georgia general
obligation bonds AAA and Standard & Poor's Corporation rates such bonds AA+.
There can be no assurance that the economic and political conditions on which
these ratings are based will continue or that particular bond issues may not be
adversely affected by changes in economic, political or other conditions that do
not affect the above ratings.

In addition to general obligation debt, the Georgia Constitution permits the
issuance by the State of certain guaranteed revenue debt. The State may incur
guaranteed revenue debt by guaranteeing the payment of certain revenue
obligations issued by an instrumentality of the State. The Georgia Constitution
prohibits the incurring of any proposed general obligation debt or guaranteed
revenue debt if the highest aggregate annual debt service requirement for the
then current year or any subsequent fiscal year for outstanding authority debt,
guaranteed revenue debt, and general obligation debt, including the proposed
debt, exceed 10% of the total revenue receipts, less refunds, of the State
treasury in the fiscal year immediately preceding the year in which any proposed
debt is to be incurred. As of July 1995, the total indebtedness of the State of
Georgia consisting of general obligation debt, guaranteed revenue debt and
remaining authority debt totalled $4,692,620,000 and the highest aggregate
annual payment for such debt equalled 5.32% of fiscal year 1995 State estimated
treasury receipts.

The Georgia Constitution also permits the State to incur public debt to
supply a temporary deficit in the State treasury in any fiscal year created by a
delay in collecting the taxes of that year. Such debt must not exceed, in the
aggregate, 5% of the total revenue receipts, less refunds, of the State treasury
in the fiscal year immediately preceding the year in which such debt is
incurred. The debt incurred must be repaid on or before the last day of the
fiscal year in which it is to be incurred out of the taxes levied for that
fiscal year. No such debt may be incurred in any fiscal year if there is then
outstanding unpaid debt from any previous fiscal year which was incurred to
supply a temporary deficit in the State treasury. No such short-term debt has
been incurred under this provision since the inception of the constitutional
authority referred to in this paragraph.

The State operates on a fiscal year beginning July 1 and ending June 30. For
example, "fiscal 1995" refers to the year ended June 30, 1995. Revenue
collections of $9,409,526,943 for the fiscal 1994 showed an increase of 12.74%
over collections for the previous fiscal year. In July 1995, the State
estimated that fiscal 1995 revenue collections would be $9,997,715,177 with an
estimated increase of 6.25% over collections for the previous fiscal year.

Virtually all of the issues of long-term debt obligations issued by or on
behalf of the State of Georgia and counties, municipalities and other political
subdivisions and public authorities thereof are required by law to be validated
and confirmed in a judicial proceeding prior to issuance. The legal effect of
an approved validation in Georgia is to render incontestable the validity of the
pertinent bond issue and the security therefor.

Based on data of the Georgia Department of Revenue for fiscal 1994, income
tax receipts and sales tax receipts of the State for fiscal 1994 comprised
approximately 43.8% and 34.5%, respectively, of the total State tax revenues.

The unemployment rate of the civilian labor force in the State as of May 1995
was 4.4% according to data provided by the Georgia Department of Labor. The
Metropolitan Atlanta area, which is the largest

<PAGE>

employment center in the area comprised of Georgia and its five bordering states
and which accounts for approximately 42% of the State's population, has for some
time enjoyed a lower rate of unemployment than the State considered as a whole.
In descending order, wholesale and retail trade, services, manufacturing,
government and transportation comprise the largest sources of employment within
the State.

The State from time to time is named as a party in certain lawsuits, which
may or may not have a material adverse impact on the financial position of the
State if decided in a manner adverse to the State's interests. Certain of such
lawsuits which could have a significant impact on the State's financial position
are summarized below.

Reich v. Collins. On December 6, 1994, the U.S. Supreme Court reversed the
Georgia Supreme Court's decision in Reich v. Collins, 263 Ga. 602 (1993), which
had determined that the plaintiff federal retiree was not entitled to a refund
of taxes on federal retirement pension benefits for tax years before 1989. The
plaintiff had sought refunds under the U.S. Supreme Court's decision in Davis v.
Michigan Department of Treasury, 489 U.S. 803 (1989). The U.S. Supreme Court in
Reich remanded the case to the Georgia Supreme Court for "the provision of
meaningful backward-looking relief consistent with due process and the McKesson
line of cases." On February 1, 1995, the Governor signed H.B. 90 into law,
which provides for the payment of refunds to federal retirees who timely filed
claims for any of the tax years 1985 through 1988, inclusive. The total amount
payable is estimated at approximately $110 million, to be paid in four roughly
equal annual installments beginning on or before October 15, 1995. Based on
this legislation, Reich has been dismissed.

James B. Beam Distilling Co. v. State; Heublein, Inc. v. State; Joseph E.
Seagram & Sons, Inc. v. State. Three suits have been filed against the State of
Georgia seeking refunds of liquor taxes under O.C.G.A. Sec. 48-2-35, in light of
Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984) under Georgia's pre-Bacchus
statute. In the Beam case, 501 U.S. 529 the Supreme Court indicated that
Bacchus was retroactive, but only within the bounds of State statutes of
limitations and procedural bars, and left State courts to determine any remedy
in light of reliance interests, equitable considerations, and other defenses.
Georgia's statute of limitations in O.C.G.A. Sec. 48-2-35 has run on all
pre-Bacchus claims for refund except five pending claims seeking 31.7 million
dollars in tax plus interest. On remand, the Fulton County Superior Court ruled
that procedural bars and other defenses bar any recovery by taxpayers on Beam's
claims for refund. The Georgia Supreme Court affirmed, and Beam's petition to
the United States Supreme Court for a writ of certiorari was denied. Thus, the
Beam case is now concluded. The State has filed a Motion for Summary Judgment,
based upon Beam, in the remaining two suits for refund, i.e., Joseph E. Seagram
& Sons, Inc. v. State and Heublein, Inc. v. State in DeKalb County Superior
Court.

Age International, Inc. v. State (two cases) and Age International, Inc. v.
Miller. Three suits (two for refund and one for declaratory and injunctive
relief) have been filed against the State of Georgia by out-of-state producers
of alcoholic beverages. The first suit for refund seeks 96 million dollars in
refunds of alcohol taxes imposed under Georgia's post-Bacchus (see previous
note) statute, O.C.G.A. Sec. 3-4-60. These claims constitute 99% of all such
taxes paid during the 3 years preceding these claims. In addition, the
claimants have filed a second suit for refund for an additional 23 million
dollars for later time periods. These two cases encompass all known or
anticipated claims for refund of such type within the apparently applicable
statutes of limitations. The two Age refund cases are still pending in the
trial court. The Age declaratory/injunctive relief case was dismissed by
the federal District Court. That dismissal was affirmed by the Eleventh
Circuit Court of Appeals, and plaintiffs have filed a petition for rehearing
which is pending.
Board of Public Education for Savannah/Chatham County v. State of Georgia.
This case is based on the local school board's claim that the State finance the
major portion of the costs of its desegregation program. The Savannah Board
originally requested restitution in the amount of $30,000,000 but the Federal
District Court set forth a formula which would require a State payment in the
amount of approximately $8,900,000 computed through June 30, 1994. Plaintiffs,
dissatisfied with the apportionment of desegregation costs between state and
county, and an adverse ruling on the state funding formula for

<PAGE>

transportation costs, have appealed to the Eleventh Circuit Court of Appeals.
The State has filed a responsive cross-appeal on the ground that there is no
basis for any liability. Subsequently, the parties agreed to a settlement,
which has been submitted to the Court for approval. The proposed settlement
calls for the State to pay the amount awarded to the plaintiff and to offer an
option regarding future funding methodology for pupil transportation. Because
interest was accruing in the settlement, in March 1995, the State paid to the
Plaintiffs $8,925,000 in partial satisfaction of the settlement agreement.

DeKalb County v. State of Georgia. A similar complaint has been filed by
DeKalb County. The Plaintiffs sought approximately $67,500,000 in restitution.
The Federal District Court ruled that the State's funding formula for pupil
transportation (which the District Court in the Savannah/Chatham County case
upheld) was contrary to state law. This ruling would require a State payment of
a state law funding entitlement in the amount of approximately $34,000,000
computed through June 30, 1994. Motions to reconsider and amend the Court's
judgment were filed by both parties. The State's motion was granted, in part,
which reduced the required state payment to approximately $28,000,000. Notices
of appeal to the Eleventh Circuit Court of Appeals have been filed. There are
approximately five other school districts which might file similar claims.

Edgar Mueller v. Collins. Plaintiff in this case has filed suit in Superior
Court of Fulton County, Georgia. Plaintiff challenges the constitutionality of
Georgia's transfer fee provided by O.C.G.A. Sec. 40-3-21.1 (often referred to as
"impact fee") by asserting that the fee violates the Commerce, Due Process,
Equal Protection, and Privilege and Immunities Clauses of the United States
Constitution. Plaintiff seeks to prohibit the State from further collections
and to require the State to return to her and those similarly situated all fees
previously collected. A similar lawsuit previously filed in the Superior Court
of Chatham County, Georgia, Johnsen v. Collins, has been voluntarily dismissed
and will likely be joined with the action currently pending in Fulton County.
From May of 1992 to June 7, 1995, the State collected $24,168,202.72 under the
transfer fee provision. All amounts collected after June 7, 1995, are being
paid into an escrow account. As of July 25, 1995, the escrow account contains
$46,070.00. The State continues to collect approximately $500,000 to $600,000
per month.

Buskirk and Estill v. State of Georgia, et al. On September 1, 1994,
plaintiffs in this case filed a civil action in the Superior Court of Fulton
County, Georgia, (No. E-31547) on behalf of all "classified employees of the
State of Georgia or its agencies and departments during all or part of fiscal
years 1992 through 1995 who were eligible to receive within grade pay increases
and who would have received same were it not for a freeze of within grade pay
increases." Presently pending before the court is the plaintiffs' motion for
class certification, which is not opposed by the State. Discovery as to
liability issues has been completed, and, once the class has been certified and
various local defendants have been added, the parties will likely file cross
motions for summary judgment on liability issues. If the plaintiff prevail, the
parties will conduct separate discovery on the issue of damages. The State
believes that it has good and adequate defenses to the claims made, but, should
the plaintiffs prevail in every aspect of their claims, the liability of the
State in this matter could be as much as $295,000,000, based on best estimates
currently available.

The Sponsors believe that the information summarized above describes some of
the more significant matters relating to the Georgia Trust. The sources of the
information are the official statements of issuers located in Georgia, other
publicly available documents and oral statements from various federal and State
agencies. The Sponsors and their counsel have not independently verified any of
the information contained in the official statements, other publicly available
documents or oral statements from various State agencies and counsel have not
expressed any opinion regarding the completeness or materiality of any matters
contained in this Prospectus other than the tax opinions set forth below
relating to the status of certain tax matters in Georgia.

<PAGE>

ILLINOIS

RISK FACTORS--Generally following is a brief summary of some of the factors
which may affect the financial condition of the State of Illinois. It is not a
complete or comprehensive description of these factors or an analysis of its
financial condition and may not be indicative of the financial condition of
issuers of obligations contained in the portfolio of the Illionis Trust or any
particular projects financed by those obligations. Many factors not included in
the summary, such as the national economy, social and environmental policies and
conditions, and the national and international markets for agricultural and
industrial products, could have an adverse impact on the financial conditions of
the State and its political subdivisions. The following is based on publicly
available information which has not been independently verified by the Sponsor
or its legal counsel.

Recent Proposed Legislation. In 1988, the Illinois General Assembly approved
the Retail Rate Act which provided a state subsidy for Illinois waste-to-power
incinerators. Bonds issued to finance certain of those facilities were expected
to be repaid from the revenue of the state subsidized electricity sales. On
January 11, 1996, the Illinois General Assembly passed legislation to repeal the
Retail Rate Act. If the repeal of the Retail Rate Act is signed by the governor
of Illinois without transition rules to preserve the state subsidy for
outstanding bond issues, there may not be sufficient revenues to repay the bonds
issued to finance the waste-to-power incinerators. Moreover, the recent failed
sale of insured State of Illinois certificates of participation indicates that
this proposed legislation may adversely affect the value of other Illinois
bonds.

The State Economy. The State operates on a fiscal year beginning July 1 and
ending June 30. For example, "fiscal year 1994" refers to the year ended June
30, 1994.

Much of the following information is based on the State's comprehensive
annual financial report for fiscal year 1994 and the "Comptroller's Message"
accompanying such annual report. A copy of the State's annual report for fiscal
year 1994 may be obtained by contacting the State of Illinois Office of the
Comptroller.

In fiscal year 1994, there was GAAP basis excess of revenues over
expenditures and net other sources (uses) of $321 million in the General Fund.
The State's GAAP basis General Fund deficit was $1.6 billion at June 30, 1994,
compared to a deficit of $1.9 billion at June 30, 1993.

Using the budgetary basis of accounting, there was a fund deficit of $422
million in the General Fund at June 30, 1994. However, on a cash basis, end-of-
year balances were higher than one year ago ($230 million at June 30, 1994 and
$172 million at June 30, 1993). Fiscal year 1994 lapse period spending of $652
million was down from $802 million in fiscal year 1993. In each of the last
three fiscal years, the budgetary fund deficit has meant that the State has had
to use at least $600 million of the new fiscal year's resources to pay off the
last of the expiring fiscal year's bills.

In fiscal year 1994, Illinois experienced a reduction in its unemployment
rate as the rate decreased from 7.4% for fiscal year 1993 to 6.5% for fiscal
year 1994. The average number of unemployed decreased 51,675 or 11.7% from
440,908 (prior to revisions in the unemployment survey) during fiscal year 1993
to 389,233 during fiscal year 1994.

Personal income by industrial source in Illinois is similar to that of the
United States as a whole. Measured by per capita income, Illinois ranks ninth
among the states. In 1993, Illinois ranked first in soybean and corn production,
second in hog production and third among all states in agricultural exports.
Also, Illinois ranks among the top five states in several measures of
manufacturing activity. Chicago, the state's largest city, serves as the
transportation center of the Midwest, is the second largest financial center in
the country behind New York, and is the corporate headquarters of many of the
world's leading corporations. Illinois ranks second (behind California) as
headquarters for Fortune 500 companies with corporate headquarters of Amoco,
Sara Lee, Caterpillar, Motorola, Archer Daniels Midland, and others

<PAGE>

located in Illinois. Employment characteristics in Illinois are similar to
those of the United States in terms of work force composition.

Bonds. The State, authorities, counties, municipalities and other political
subdivisions of the State are in certain instances authorized to issue bonds for
certain purposes. Illinois bond issues generally are of one of three types of
bonds: general obligation, revenue and special obligation.

General Obligation Bonds. General obligation bonds have been authorized and
issued by the State primarily to provide funds for acquisition and construction
of capital facilities for higher education, public and mental health, correction
and conservation purposes and for maintenance and construction of highway and
waterway facilities. Bonds also have been issued to provide assistance to
municipalities for construction of sewage treatment facilities, port districts,
aquarium facilities, local schools, mass transportation and aviation purposes,
and to fund research and development of coal as an energy source. In addition,
bonds have been authorized to refund any general obligation bonds outstanding.

The State Constitution provides that the State may issue general obligation
bonds for specific purposes in such amounts as provided either by the General
Assembly with a three-fifths vote of each house or by a majority of voters in a
general election. The enabling acts pursuant to which the bonds are issued
provide that all bonds issued thereunder shall be direct obligations of the
State of Illionis and pledge the full faith and credit of the State. General
obligation bonds are redeemed over a period not to exceed 30 years, from
available resources in the debt service funds. However, the State of Illinois
has generally issued 25 year serial bonds with equal amounts of principal
maturing each year except for capital appreciation and refunding bonds which
mature in varying amounts. Additionally, Illinois offerings, with the exception
of antipollution bonds, have call provisions providing for early redemption at
the option of the State, beginning 10 years following the date of issuance, in
whole or in part, in such order as the State shall determine and at a redemption
price not to exceed 103% of par value.

The general obligation bonds of the State are currently rated "Aa1" by
Moody's Investor Services, Inc. ("Moody's") and "AA-minus" by Standard & Poor's
Corporation. There can be no assurance that the conditions on which such
ratings are based will continue or that such ratings will not be revised
downward or withdrawn entirely by either or both agencies.

General obligation bonds of the State outstanding at June 30, 1994 totaled
approximately $4.94 billion.

Special Obligation Bonds. Special obligation bonds have been authorized and
issued by the State to provide funds for the Build Illinois Program, the State's
Metropolitan Civic Center Support Program, and to refund any bonds previously
issued under these programs.

The Build Illinois Program was implemented to expand the State's efforts in
economic development by providing financing in certain areas. These areas
include construction, reconstruction, modernization, and extension of the
State's infrastructure; development and improvement of educational, scientific,
technical and vocational programs and facilities; expansion of health and human
services in the State; protection, preservation, restoration, and conservation
of the State's environmental and natural resources; and provision of incentives
for the location and expansion of businesses in Illinois resulting in increased
employment. In June 1992, the State authorized the transfer of money from the
Build Illinois General Reserve into the Common School Fund.

In July 1984, and November 1985, the State amended the "Metropolitan Fair and
Exposition Authority Act" (the "Exposition Act") to authorize the issuance of
$265 million and $47.5 million, respectively, for a total authorization of
$312.5 million, in additional bonds. Bond proceeds were used (1) to pay
construction costs of completing the McCormick Place expansion, (2) to pay the
construction costs of projects authorized by the Illinois General Assembly in
the future, and (3) to refund any outstanding bonds of McCormick Place that were
issued prior to July 1, 1984. The Exposition Act was further

<PAGE>

amended in July and August 1986 to authorize the issuance of refunding bonds
either on a parity with or subordinated to the 1984 and 1985 bonds. In addition,
in July 1989 the Exposition Act was amended to change the name to Metropolitan
Pier and Exposition Authority and to expand its purposes to provide for the
acquisition and improvement of the Navy Pier in Chicago.

The Illinois General Assembly also amended certain tax laws in July 1984 and
November 1985 to provide for 1.75% of total State sales tax revenues, 3% of 94%
of total hotel room rental receipts, and $1.7 million per year out of 7% of
State racing tax revenues to be deposited into the Build Illinois Fund, which
replaced the Tourism Fund, as collected. The legislation provides for credits
to separate accounts within the Build Illinois Fund of which the "McCormick
Place Account" is one and has first priority credit of the amounts collected.

Effective July 1, 1992, the Exposition Act was amended to authorize the
issuance of $937 million in additional bonds to provide for the construction of
a new McCormick Place Exhibition Hall, the renovation of existing McCormick
Place facilities and the construction of related infrastructure projects. In
order to fund the bonds, as so amended, the Exposition Act directs the
Metropolitan Pier and Exposition Authority to impose by ordinance certain
retailers' occupation taxes in certain taxes subdistricts. The constitutional
validity of such tax was recently upheld by the Supreme Court of Illinois in
Geja's Cafe v. The Metropolitan Pier and Exposition Authority.
- --------------------------------------------------------------

The State's Metropolitan Civic Center Support Act (Support Act) was amended
on September 3, 1985, to allow the issuance of bonds to refinance the State's
Metropolitan Civic Center Support Program and to provide additional capital for
new projects to be financed under the Support Act. The Support Act was amended
further on September 11, 1990 to allow the issuance of bonds for making
construction and improvement grants by the Secretary of State, as State
Librarian, to public libraries and library systems.

Special obligation bonds are payable primarily from dedicated portions of the
State's sales tax and the horse racing privilege tax and are redeemed over a
period of not more than 30 years. Additionally, these bonds have call
provisions providing for early redemption at the option of the State, beginning
10 years following the date of issuance, in whole or in part, in such order as
the State shall determine and within any maturity by lot at varying premiums
which decrease periodically.

Special obligation bonds of the State outstanding at June 30, 1994 totaled
approximately $1.76 billion.

Revenue Bonds. The State Constitution empowers certain State agencies and
authorities to issue bonds that are not supported by the full faith and credit
of the State. These bonds pledge that income derived from acquired or
constructed assets be used to retire the debt and service related interest. In
addition, certain authorities have issued debt which is classified as "no
commitment" debt of the State.

Revenue bonds issued by individual agencies are supported by fees, rentals,
tolls assessed to users and loan repayments. Issuing agencies include the
Illinois Housing Development Authority, Illinois Development Finance Authority,
Illinois Educational Facilities Authority, Illinois Student Assistance
Commission, Illinois State Toll Highway Authority, Illinois Export Development
Authority, Illinois Rural Bond Bank, State Universities Retirement System of
Illinois and Board of Governors, Board of Regents, Southern Illinois University
and the University of Illinois.

LOUISIANA

RISK FACTORS. The following discussion regarding the financial condition of
the State government may not be relevant to general obligation or revenue bonds
issued by political subdivisions of and other issuers in the State of Louisiana
(the "State"). Such financial information is based upon information about
general financial conditions that may or may not affect issuers of the Louisiana

<PAGE>

obligations. The Sponsors have not independently verified any of the
information contained in such publicly available documents, but are not aware of
any facts which would render such information inaccurate.

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

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

State General Fund: The State General Fund is the principal operating fund
of the State and was established administratively to provide for the
distribution of funds appropriated by the Louisiana Legislature for the ordinary
expenses of the State government. Revenue is provided from the direct deposit
of federal grants and the transfer of State revenues from the Bond Security and
Redemption Fund after general obligation debt requirements are met. The
beginning accumulated State General Fund balance for fiscal year 1994-1995 was
$212 million.

The Revenue Estimating Conference's official forecast of recurring State
General Fund revenues for the fiscal year ending June 30, 1993 (Revenue
Estimating Conference October 1994 is $4.626 billion. The Revenue Estimating
Conference adopted on October 27, 1994 its official forecast for Fiscal Year
1995-1996 to be $4.758 billion. Based upon that estimate, and assuring federal
government approval of a Medicaid waiver request submitted by the State, the
State Office of Planning and Budget has estimated a $192 million short fall in
the amount needed to maintain State operations at a level of those for Fiscal
Year 1994-95.

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

<PAGE>

Fuels Tax Revenue Bonds, 1990 Series A, dated April 15, 1990 payable from the
(i) Act No. 16 Taxes, (ii) any Act No. 16 Taxes and Existing Taxes deposited in
the Transportation Trust Fund, and (iii) any additional taxes on gasoline and
motor fuels and special fuels pledged for the payment of said Bonds. As of
December 31, 1994 the outstanding principal amount of said Bonds was
$235,703,000.

Louisiana Recovery District: The Louisiana Recovery District (the "Recovery
District") was created pursuant to Act No. 15 of the First Extraordinary Session
of the Legislature of Louisiana of 1988 to assist the State in the reduction and
elimination of a deficit existing at that time and the delivery of essential
services to its citizens and to assist parishes, cities and other units of local
government experiencing cash flow difficulties. The Recovery District is a
special taxing district the boundaries of which are coterminous with the State
and is a body politic and corporate and a political subdivision of the State.
The Recovery District issued $979,125,000 of Louisiana Recovery District Sales
Tax Bonds, Series 1988, dated July 1, 1988 ("Series 1988 Bonds"), secured by (i)
the revenues derived from the District's 1% statewide sales and use tax
remaining after the costs of collection and (ii) all funds and accounts held
under the Recovery District's General Bond Resolution and all investment
earnings on such funds and accounts. The Recovery District issued 80,920,000 of
Sales Tax Refunding Bonds, Series 1992 dated June 1, 1992 and 86,130,000 of
Sales Tax Junior Lien Refunding Bonds, Series 1992, dated June 1, 1992 to refund
a portion of the Recovery District's Series 1988 Bonds for the purpose of
increasing cash flow available to the Recovery District and creating debt
service savings. On December 31, 1994 the aggregate principal balance of the
1988 Series Bonds and the Series 1992 Bonds was $348,970,000 and $137,825,000,
respectively.

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

Litigation: In 1988 the Louisiana legislature created a Self-Insurance Fund
within the Department of Treasury. That Fund consists of all premiums paid by
State agencies under the State's Risk Management program, the investment
earnings on those premiums and commissions retained. The Self-Insurance Fund
may only be used for payment of losses incurred by State agencies under the
Self-Insurance program, together with insurance premiums, legal expenses and
administration costs. For fiscal year 1991-1992, the sum of $79,744,126.00 was
paid from the Self-Insurance Fund as of December 31, 1991 to satisfy claims and
judgments. Because of deletion of agency premium allocations from the State
General Appropriations Bill for Fiscal Year 1991-1992 and 1992-1993, the
Self-Insurance Fund did not receive full funding in those years. In Fiscal Year
1993-94, a partial funding (153,000,000) was provided to the Self Insurance
Fund. However, due to the inadequacy of funding, virtually all claimants'
payments, other than workers compensation payments, were eliminated and claimant
payments were sent to the legislature for direct appropriation from the General
Fund. It is the opinion of the Attorney General for the State of Louisiana that
only a small portion of the dollar amount of potential liability of the State
resulting from litigation which is pending against the State and is not being
handled through the Office of Risk Management ultimately will be recovered by
plaintiffs. It is the opinion of the Attorney General that the estimated future
liability for existing claims is in excess of $81 million. However, there are
other claims with future possible liabilities for which the Attorney General
cannot make a reasonable estimate.

The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions to
which the issuers of the Louisiana Trust are subject. Additionally, many
factors including national economic, social and environmental policies and
conditions, which are not within

<PAGE>

the control of the issuers of Bonds, could affect or could have an adverse
impact on the financial condition of the State and various agencies and
political subdivisions located in the State. The Sponsors are unable to predict
whether or to what extent such factors may affect the issuers of Bonds, the
market value or marketability of the Bonds or the ability of the respective
issuers of the Bonds acquired by the Louisiana Trust to pay interest on or
principal of the Bonds.

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

MAINE

RISK FACTORS--Prospective investors should consider the financial condition
of the State of Maine and the public authorities and municipal subdivisions
issuing the obligations to be purchased with the proceeds of the sale of units.
Certain of the debt obligations to be purchased by and held in the Maine Trust
are not obligations of the State of Maine and are not supported by its full
faith and credit or taxing power. The type of debt obligation, source of
payment and security for such obligations are detailed in the official
statements produced by the issuers thereof in connection with the offering of
such obligations. Reference should be made to such official statements for
detailed information regarding each of the obligations and the specific risks
associated with such obligations. This summary of risk factors relates to
factors generally applicable to Maine obligations and does not address the
specific risks involved in each of the obligations acquired by the Maine Trust.

The Maine Economy. The State's economy continues to be based on natural
-----------------
resources, manufacturing related to natural resources, and tourism. Gradually
the economy has begun to diversify with growth in relatively new industries such
as health and business services and electronics manufacturing.

Although some of the State's industries are independent from the regional
economy, Maine's economy is, in large part, dependent upon overall improvements
in both the regional and national economy. The northeast continues to be one of
the nation's weaker economic regions, receiving little solace from the growth of
the national economy. Following three years of severe economic contraction,
however, the New England Region continues to pick up the pieces. Through the
first 10 months of 1995, the Region returned to 95% of peak employment levels.
Fortunately for Maine, the northern tier states of Maine, New Hampshire and
Vermont have fared much better than Massachusetts and Connecticut to the south,
actually recouping the jobs lost in the downturn. According to the New England
Economic Project, employment growth in the region should average 1% over the
next several years.

As is the case throughout the northeast, Maine's economy weakened
significantly from 1989 through 1991. By most measures, however, the State
economy reached bottom by the first quarter of 1992, at the latest, and has been
in a steady, if slow, recovery for the past 4 years. Despite the fact that
Maine has enjoyed a much healthier recovery than the New England region as a
whole, current economic growth would hardly be described as robust. Through the
first 10 months of 1995, the Maine economy struggled to maintain forward
momentum. After experiencing an economic slide that lasted through much of 1990
and 1991 and eliminated 6% of the employment base, Maine has been on a fairly
fragile growth path. While typical recoveries are marked by a resurgence in
economic activity over the 4-6 quarters following the downturn, this recovery
has been painfully slow and sporadic. After 4 full years, the jobs that had
been lost earlier this decade have finally been recouped. There is, however,
growing concern over the quality of the jobs that have replaced those that had
been lost.

Consistent with the trends experienced over the past several decades,
virtually all job growth will be in the nonmanufacturing sector, led by business
and health services, retail trade and construction. Ongoing restructuring of
Maine's 3 investor-owned utilities and state government will dampen the service
sector job growth. In the manufacturing sector, only the fabricated metals,
food, and instrument industries

<PAGE>

are projected to see any job gains while the other goods-producing industries
will experience stable employment or minor declines.

As a result of the slow expansion of the Maine economy, the economic
indicators present a mixed bag, with some increasing and others decreasing. The
Maine Economic Growth Index (the "EGI") is a seasonally adjusted composite of
resident employment, real taxable consumer retail sales, production hours worked
in manufacturing, and services employment designed to measure real (inflation-
adjusted) growth in the overall economy. The EGI reached 110.3 at the end of
November 1995. Unfortunately, the EGI is of marginal utility this year. The
Index is comprised of four components, one of which, resident employment, the
State Planning Office expects to revise downward significantly for the months of
1995. Unfortunately, the revised data will not be available until March or
April of 1996. The Maine EGI through September was up 2.6% over the same period
of last year. After the spring 1996 data revisions, the EGI is likely to show a
growth rate closer to 2% for the period. The Maine economic outlook calls for
continued slow recovery, yielding payroll employment growth for 1996 through
1998 of 1.3% to 1.5% and personal income growth of about 5%. Major dampers to
Maine economic growth over the near term are expected to include slow income
growth and high family debt loads.

Over the past few years, it has been difficult to gauge Maine's employment
situation as the two major measures have been telling different stories. The
number of Maine residents employed (includes the self-employed, commission
workers and others, as well as people on payrolls) declined steadily from mid-
1992 until late in 1994, while the number of persons on Maine payrolls was
steadily increasing. Then, as the count of employed residents increased sharply
in 1995, the payroll count nearly levelled off. As yet, these apparent
discrepancies have not been adequately explained. The payroll employment data,
however, is widely acknowledged to be the more accurate, thus it appears safe to
say that Maine's job market improved very, very slowly during the first ten
months of 1995.

Thejobless rate in Maine fell from 7% in October 1994 to 6% in October 1995.
As of October 1995, jobless rates among Maine counties ranged from 3.1% in Knox
County to 7.7% in Aroostook, Somerset, and Washington Counties, with all
counties showing improvement over the year except Franklin. The lowest jobless
rates were found among the south-coast and mid-coast counties, with higher rates
in the central counties, and the highest rates in the western mountains and
northern and downeast coastal counties. Only 6 of Maine's 16 counties had rates
below the 5.2% national average.

Despite the continued weakness in the labor market, Maine taxable retail
sales for the first three-quarters of 1995 were up 2.4% from the same period of
last year. However, since retail inflation was about 2%, the actual change in
the volume of goods passed over Maine counters was virtually nil. Further, there
would have been no increase at all had Maine not enjoyed a strong summer tourism
season in 1995. The strong increase in restaurant and lodging sales, with only
modest growth in general merchandise and other retail, suggest that, for the
most part, tourists came in substantial numbers but did not match their
appearance with commensurate spending. This is in part attributed to the good
weather during the summer season. The table below summarizes retail growth in
by store-type group, comparing the first 3 quarters of 1995 with the same period
of 1994:

<PAGE>

SALES
CHG. PCT.
(mil.$) CHG.
------- ------
TOTAL CONSUMER SALES . . . . . . .. $158 2.4%
RESTAURANT/LODGING . . . . . . . . $70 6.1%
GENERAL MERCHANDISE . . . . . . . . $41 3.2%
FOOD STORES . . . . . . . . . . . . $23 2.8%
BUILDING SUPPLY . . . . . . . . . . $18 2.2%
OTHER RETAIL . . . . . . . . . . . $6 0.8%
AUTO TRANSPORTATION . . . . . . . . . $1 0.1%

Construction contract awards were up only 2.6% for the first three quarters
of 1995.The principal drag has been the extremely weak residential construction
sector, which was down nearly 17%. In contrast, the non-building (roads,
bridges, etc.) and non-residential building sectors increased 9.5% and 28.9%
over the same period in 1994. One weak spot noted in the Maine economy over
recent months, however, is a declining trend in housing permits. According to
the Institute for Real Estate Research and Education, the number of housing
units sold through the first three-quarters of 1995 were down about 10% from the
same period of 1994. The fourth quarter is expected to be very weak, but sale
prices appear to have stabilized near the 1994 average of $104,000 and the
average time on market has declined slightly.

Among other weak spots noted in the Maine economy over recent months are
rising bankruptcy rates since December 1994, a flattening trend of building
supply sales since the end of 1994, and the fact that Maine payroll employment
(seasonally adjusted) has nearly leveled off in 1995.

In summary, the Maine economy has been quite weak in 1995, with real growth
expected to be in the neighborhood of 2% as compared to 2.6% growth in 1994.
Even more troubling than slow growth are the trends of declining housing permits
and increasing bankruptcies and non-performing bank loans as the year has
progressed. In short, by October, the State's economy appeared weaker than at
the beginning of the year.

An important unresolved question concerning the State's economy continues to
be how the restructuring of the United States military will affect defense
related industries in Maine. Loring Air Force Base ("LAFB") officially closed
its doors as a military base on September 30, 1994, although most of the planes
and personnel had been reassigned as much as a year earlier. The Loring
Development Authority has begun the task of attracting public and private
business to the facility. Base clean-up operations have begun and are expected
to take several years to complete. The base closing, coupled with the shutdown
of the Backscatter radar system in Bangor, will mean the loss of a substantial
amount of military and civilian jobs in the region. Recent news has been more
favorable. The selection of LAFB as a Defense Finance and Administration State
and a JOBS Corps site mitigate the employment loss. In addition, although it
will continue to downsize through 1995, Bath Iron Works, the State's largest
employer, landed a major ship building contract for the construction of three
Aegis Class Destroyers by 1998, bringing the yard's construction backlog to $2.4
billion. BIW was also recently awarded a $33 million contract to provide
engineering, design and maintenance on the Navy's Arliegh Burke destroyer fleet.
In addition, in August 1995, BIW was acquired for $300 million by General
Dynamics Corp. a larger supplier of both defense and commercial products. The
sale is seen as a stabilizing force for BIW and assures that BIW will continue
to concentrate on the construction of ships for military use. Another major
employer, the Portsmouth Naval Shipyard in Kittery, Maine staffed almost
completely be a civilian work force, has taken drastic steps over the past year
to become more competitive and efficient, and is considering re-focussing its
mission and role in submarine repair. The shipyard laid off nearly one thousand
workers in 1994,

<PAGE>

helping to shrink its staffing level by half from the eight thousand workers
employed in the 1980s. It is now considering additional layoffs of
approximately 450 additional employees. These measures paid off recently when
the U.S. Base Closure Commission announced in mid-1995 that the Shipyard would
not be on its base closing list. Thus, though trimmer today, the shipyard is
assured stability over the next few years.

There can be no assurances that the economic conditions discussed above will
not have an adverse effect upon the market value or marketability of any of the
debt obligations acquired by the Maine Trust or the financial or other condition
of any of the issuers of such obligations.

State Finances and Budget. On November 8, 1994, Maine citizens elected an
-------------------------
Independent candidate to be Governor of the State. The voters also elected a
Republican controlled Senate and a Democrat controlled House of Representatives.
Due to changes in party affiliation and mid-term special elections, however, the
House is now evenly divided between Democrats and Republicans. The most
immediate issue confronting the new Government is a preliminary 1996-97 biannual
budget that exceeds expected revenues by nearly four hundred million dollars.
The State operates under a biennial budget which is formulated by the Governor
and the State Budget Office in even-numbered years and presented for approval to
the Legislature in odd-numbered years.

The budget passed during the summer of 1993 for the 1994-95 biennium included
additional budget balancing measures, including making permanent the previously
temporary 6% sales tax, deferring $102,000,000 in payments to the Maine State
Retirement System, and assorted program cutting and cost shifting. With little
growth projected for the Maine economy in the next few years, additional
measures may become necessary to maintain a balanced budget.

A recent decision of a State Superior Court holding that the State could not
tax chemicals used to control pollution, means that the State no longer can
count on collecting approximately $75 million in taxes that it had expected to
collect from Champion International. That decision is on appeal to the State
Supreme Court but the State Budget Office has advised against booking the money
as revenue.

On June 30, 1995, the Legislature approved and the Governor signed a budget
for the 1996-97 biennium. The budget proposes, for fiscal year 1996, General
Fund expenditures of $1,713,573,026 and Highway Fund expenditures of
$224,514,277 and, for fiscal year 1997, General Fund expenditures of
$1,785,543,156 and Highway Fund expenditures of $220,551,295. The Governor has
proposed the establishment of a task force to make recommendations for
effectively reducing the number of State employees and for reducing the size of
the budget by $45 million. In addition, the Legislature adopted an income tax
cap, effective in 1998, as part of the budget bill. The Governor has also
proposed the creation, within the General Fund, of a budget stabilization fund
to set aside revenues in excess of an index of real economic growth to be used
only during periods of economic downturn. The budget leaves responsibility for
the $110 million Medicaid reimbursement shortfall on the hospitals involved.
The budget also requires that the court ordered payments for the mentally ill be
made within existing resources.

Just 6 months into the biennium, however, State revenues are running
approximately $16.2 million below projections while spending is running
approximately $19.4 million above budgeted targets. The Governor currently
anticipates submitting a $35.6 million budget balancing bill to the Legislature
sometime in 1996. In addition, accounting changes may result in an additional
$7 million shortfall. These deficit numbers are based on current projections
and assumptions.

The projection also does not include $465 million in new spending sought by
the State for expanded service, such as new programs for the mentally ill
required by a court order issued by the United States District Court for the
district of Maine. The projection also does not include any money to fund a
State employee pact when the current contract expires on June 30, 1995.

<PAGE>

The State Auditor had taken the position that significant adjusting entries
necessary to report the financial condition of the State and the results of
operations of the State in accordance with generally accepted accounting
principles have not been included in the State Controller's annual financial
reports. The Department of Audit has included those adjusting entries approved
by the Department of Administrative and Financial Services and the State
Controller in the audited financial statements that are part of the single audit
report prepared by the Department of Audit. Therefore, amounts set forth in the
State controller's annual financial reports may not agree with amounts reported
in the single audit reports of the Department of Audit.

In addition, the Department of Audit has qualified its most recent audit
opinion on the adjusted financial statements of the State because of certain
departures from generally accepted accounting principles. The most recent
single audit report prepared by the Department of Audit is for the fiscal year
ended June 30, 1993. Without limiting the generality of the foregoing, the
Department of Audit has determined that there was a deficit balance in the
General Fund at June 30, 1993 equal to $146,945,000, on the basis of generally
accepted accounting principles. The Department of Audit also determined, on the
basis of generally accepted accounting principles, that there were deficit
balances in the General Fund at June 30, 1991 equal to $69,582,000 and at June
30, 1992 equal to $103,559,000. There can be no assurance that there will not
be deficit balances in the General Fund in future fiscal years greater than the
deficit balance in the General Fund at June 30, 1993. The State Auditor's
report for the fiscal year ending June 30, 1994 has not been commenced. As of
the date hereof, there are no plans to audit the financial statements of the
General Fund for the fiscal year ended June 30, 1994.

The financial condition of the State is, in large measure, a function of the
state's and the region's economy and no assurances can be given regarding the
future economy or financial condition of the State.

The State of Maine's outstanding general obligations continues to be rated
AA+ by Standard & Poor's and Aa by Moody's.

As of May 31, 1995, there was outstanding approximately $516,355,000 general
obligation bonds of the State and $31,900,000 bond anticipation notes. Such
notes were selected to mature on June 1, 1995. As of May 1, 1995, there were
outstanding $182,000,000 of tax anticipation notes of the State, to mature June
28, 1996. As of May 31, 1995, there were authorized by the voters of the State
for certain purposes, but unissued, bonds in the aggregate principal amount of
$36,800,600. As of March 31, 1995, the aggregate principal amount of bonds of
the State authorized by the Constitution and implementing legislation for
certain purposes, but unissued, was $99,000,000. In addition, on November 7,
1995, the voters of the State of Maine approved an additional $93 million in
bonds for various purposes. Although increasing, the major rating agencies still
consider debt to be at manageable levels.

Lease-Purchase Agreements. From time to time, the State enters into lease-
-------------------------
purchase agreements for the purpose of acquiring capital equipment and
buildings. A lease-purchase agreement is secured solely by the equipment or
building which is the subject of such agreement. It is not a pledge of the full
faith and credit of the State. Lease payment and obligations are subject to
appropriation by the Legislature. In certain instances, the State has issued
certificates of participation in the lease payments to be made pursuant to
certain lease-purchase agreements. As of March 31, 1995, the aggregate
principal amount of certificates of participation outstanding was $38,460,000.

Litigation. The State is a party to numerous lawsuits. Such lawsuits
----------
include actions to recover monetary damages from the State, disputes over
individual or corporate income taxes, disputes over sales or use taxes, and
actions to alter the regulations or administrative practices of the State in
such manner as to cause additional costs to the State. The Department of the
Attorney General is not aware of any pending or threatened litigation of claim
against the State, the outcome of which will, in his opinion, have a material
adverse effect on the financial condition of the State.

In 1994, as part of its plan to comply with the federal Clean Air Act, the
State entered into an agreement with a company pursuant to which the company
agreed to acquire, construct and operate, for

<PAGE>

seven years, facilities at which automobiles licensed by the State would be
tested for compliance with federal air emission standards and the State agreed
that the company could collect from the automobile owners fees for performing
the tests. The facilities began operation on a trial basis in late 1994. The
Governor then postponed the effective date for commencement of mandatory testing
and asked interested persons to propose modifications to the State's Clean Air
Act compliance plan. On April 13, 1995, the Governor announced that he would,
after approval by appropriate state authorities, file with the U.S.
Environmental Protection Agency (the "USEPA") a modified Clean Air Act
compliance plan which would not require automobile emission testing. The
modified plan, after approval by appropriate state authorities, is subject to
immediate review by a court of competent jurisdiction for failure to comply with
the federal Clean Air Act. The modified plan has not been approved by the USEPA
and any action by the USEPA on the plan is subject to modification by a court of
competent jurisdiction. The company has stated that, if it is not permitted to
operate its testing facilities for the seven-year term of its agreement with the
State, it will sue the State for breach of contract and seek recovery of its
damages which the company believes are approximately $40,000,000. In the
opinion of the Department of the Attorney General of the State, the State has
substantial defenses to the threatened claim of the company and the outcome of
any such claim would not have a material adverse effect of the financial
condition of the State.

Maine Municipal Bond Bank. The Portfolio may contain obligations of the
-------------------------
Maine Municipal Bond Bank. All Bond Bank debt is secured by loan repayments of
borrowing municipalities and the State's moral obligation pledge. The state of
the economy in Maine could impact the ability of municipalities to pay debt
service on their obligations. Maine Bond Bank debt is rated A+ by Standard &
Poor's and Aa by Moody's.

Solid Waste Disposal Facilities. The Portfolio may contain obligations
-------------------------------
issued by Regional Waste Systems, Inc., a quasi-municipal corporation organized
pursuant to an interlocal agreement among approximately 20 Southern Maine
communities ("RWS") or other quasi-municipal solid waste disposal facilities.
RWS and other similar solid waste disposal projects operate regional solid waste
disposal facilities and process the solid waste of the participating
municipalities as well as the solid waste of other non-municipal users. The
continued viability of such facilities is dependent, in part, upon the approach
taken by the State of Maine with respect to solid waste disposal generally.
Pursuant to a Public Law 1989 Chapter 585, the Maine Waste Management Agency is
charged with preparation and adoption by rule of an analysis and a plan for the
management, reduction and recycling of solid waste for the State of Maine. The
plan developed by the Maine Waste Management Agency is based on the waste
management priorities and recycling goals established by State law. Pursuant to
State law, Maine has established minimum goals for recycling and composting
requiring that a minimum of 50% of the municipal solid waste stream be recycled
or composted by 1994. Although RWS may participate in the mandated recycling
activities, its principal existing facility consists of a mass burn 250 ton per
day furnace boiler with associated equipment for production of electric energy.
Thus, the source material for RWS' primary facility could be substantially
reduced as a result of implementation of the State's recycling goals. Other
mass burn solid waste disposal facilities in the State have experienced seasonal
shortages in waste fuel.

Health Care Facilities. Revenue bonds are issued by the Maine Health and
----------------------
Higher Education Facilities Authority to finance hospitals and other health care
facilities. The revenues of such facilities consists, in varying but typically
material amounts, of payment from insurers and third-party reimbursement
programs, including Medicaid, Medicare and Blue Cross. The health care industry
in Maine is becoming increasingly competitive. The utilization of new programs
and modified benefits by third-party reimbursement programs and the advent of
alternative health care delivery systems such as health maintenance
organizations contribute to the increasingly competitive nature of the health
care industry. This increase in competition could adversely impact the ability
of health care facilities in Maine to satisfy their financial obligations.

Further, health care providers are subject to regulatory actions, changes in
law and policy changes by agencies that administer third-party reimbursement
programs and regulate the health care industry. Any such changes could
adversely impact the financial condition of such facilities.

<PAGE>

MARYLAND

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

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

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

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

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

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

<PAGE>

findings in preparing a preliminary allocation of new general debt authorization
for the next ensuing fiscal year.

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

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

The Maryland Transportation Authority operates certain highway, bridge and
tunnel toll facilities in the State. The tolls and other revenues received from
these facilities are pledged as security for revenue bonds of the Authority
issued under and secured by a trust agreement between the authority and a
corporate trustee.

Maryland Stadium Authority Bonds. The Maryland Stadium Authority is
responsible for financing and directing the acquisition and construction of one
or more new professional sports facilities in Maryland. Currently, the Stadium
Authority operates the newly opened Oriole Park at Camden Yards which opened in
1992.

In connection with the construction of that facility, the Authority issued
$155 million in notes and bonds. These notes and bonds, as well as any future
financing for a football stadium, are lease-backed revenue obligations, the
payment of which is secured by, among other things, an assignment of revenues
received under a lease of the sports facilities from the Stadium Authority to
the State. The Stadium Authority also has been assigned responsibility for
constructing an expansion of the Convention Center in Baltimore. The Convention
Center expansion is expected to cost $155 million and will be financed through a
combination of funding from Baltimore City, Stadium Authority revenue bonds, and
State general obligation bonds.

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

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

The University of Maryland System, Morgan State University, and St. Mary's
College of Maryland are authorized to issue revenue bonds for the purpose of
financing academic and auxiliary

<PAGE>

facilities. Auxiliary facilities are any facilities that furnish a service to
students, faculty, or staff, and that generate income. Auxiliary facilities
include housing, eating, recreational, campus, infirmary, parking, athletic,
student union or activity, research laboratory, testing, and any related
facilities.

On August 7, 1989, the Governor issued an Executive Order assigning to the
Department of Budget and Fiscal Planning responsibility to review certain
proposed issuances of revenue and enterprise debt other than private activity
bonds. The Executive Order also provides that the Governor may establish a
ceiling of such debt to be issued during the fiscal year, which ceiling may be
amended by the Governor.

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

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

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

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

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

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

<PAGE>

specifically pledged to the payment of the debt. Neither the faith and credit
nor the taxing power of the State, the issuer or any other political subdivision
of either is pledged to the payment of the debt. The issuance of the debt is
not directly or indirectly or contingently an obligation, moral or other, of the
State, the issuer or any other political subdivision of either to levy any tax
for its payment.

Washington Suburban Sanitary District Debt. The Washington Suburban Sanitary
District operates as a public corporation of the State to provide, as
authorized, water, sewerage and drainage systems, including water supply, sewage
disposal, and storm water drainage facilities for Montgomery County, Maryland
and Prince George's County, Maryland. For the purpose of paying the principal
of and interest on bonds of the District, Maryland law provides for the levy,
annually, against all the assessable property within the District by the County
Council of Montgomery County and the County Council of Prince George's County of
ad valorem taxes sufficient to pay such principal and interest when due and
payable.

Storm water drainage bonds for specific projects are payable from an ad
valorem tax upon all of the property assessed for county tax purposes within the
portion of the District situated in the county in which the storm water project
was, or is to be, constructed. Storm water drainage bonds of the District are
also guaranteed by such county, which guaranty operates as a pledge of the full
faith and credit of the county to the payment of the bonds and obligates the
county council, to the extent that the tax revenues referred to above and any
other money available or to become available are inadequate to provide the funds
necessary to pay the principal of and the interest on the bonds, to levy upon
all property subject to taxation within the county ad valorem taxes in rate and
in amount sufficient to make up any such deficiency.

Substantially all of the debt service on the bonds, except storm water
drainage bonds, is being paid from revenues derived by the District from water
consumption charges, front foot benefit charges, and sewage usage charges.
Notwithstanding the payment of principal of and interest on those bonds from
those charges, the underlying security of all bonds of the District is the levy
of ad valorem taxes on the assessable property as stated above.

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

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

Hospital Bonds. The rates charged by non-governmental Maryland hospitals are
subject to review and approval by the Maryland Health Services Cost Review
Commission. Maryland hospitals subject to regulation by the Commission are not
permitted to charge for services at rates other than those established by the
Commission. In addition, the Commission is required to permit any nonprofit
institution subject

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to its jurisdiction to charge reasonable rates which will permit the institution
to provide, on a solvent basis, effective and efficient service in the public
interest.

Under an agreement between Medicare and the Commission, Medicare agrees to
pay Maryland hospitals on the basis of Commission-approved rates, less a 6%
differential. Under this so-called "Medicare Waiver", Maryland hospitals are
exempt from the Medicare Prospective Payment System which pays hospitals fixed
amounts for specific services based upon patient diagnosis. No assurance can be
given that Maryland will continue to meet any current or future tests for the
continuation of the Medicare Waiver.

In setting hospital rates, the Commission takes into account each hospital's
budgeted volume of services and cash financial requirements for the succeeding
year. It then establishes the rates of the hospital for the succeeding year
based upon the projected volume and those financial requirements of the
institution which the Commission has deemed to be reasonable. Financial
requirements allowable for inclusion in rates generally include budgeted
operating costs, a "capital facilities allowance", other financial
considerations (such as charity care and bad debts) and discounts allowed
certain payors for prompt payment. Variations from projected volumes of
services are reflected in the rates for the succeeding year. The Commission, on
a selective basis by the application of established review criteria, grants
Maryland hospitals increases in rates to compensate for inflation experienced by
hospitals and for other factors beyond the hospitals' control.

Regulations of the Commission provide that overcharges will in certain
circumstances be deducted from prospective rates. Similarly, undercharges will
in certain circumstances not be recoverable through prospective rates.

The Commission has entered into agreements with certain hospitals to adjust
rates in accordance with a prospectively approved, guaranteed inpatient revenue
per admission program. Those agreements are in addition to the rate adjustment
methodology discussed above. Under the program, a hospital's revenue per
admission is compared to the revenue per admission, as adjusted, for a base
year. Variations from the adjusted base year revenues per admission are added
or deducted, as the case may be, from the hospital's gross revenue and rates for
the following year.

There can be no assurance that the Commission will continue to utilize its
present rate-setting methodology or approve rates which will be sufficient to
ensure payment on an individual hospital's obligations. Future actions by the
Commission or the loss of the Medicare Waiver may adversely affect the
operations of individual hospitals.

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

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

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MASSACHUSETTS

RISK FACTORS--The Commonwealth of Massachusetts and certain of its cities and
towns have at certain times in the recent past undergone serious financial
difficulties which have adversely affected and, to some degree, continue to
adversely affect their credit standing. These financial difficulties could
adversely affect the market values and marketability of, or result in default in
payment on, outstanding bonds issued by the Commonwealth or its public
authorities or municipalities, including the Debt Obligations deposited in the
Trust. The following description highlights some of the more significant
financial problems of the Commonwealth and the steps taken to strengthen its
financial condition. Generally, the amounts provided herein are calculated on a
statutory basis which may sometimes differ materially from that reported on a
GAAP basis.

The effect of the factors discussed below upon the ability of Massachusetts
issuers to pay interest and principal on their obligations remains unclear and
in any event may depend on whether the obligation is a general or revenue
obligation bond (revenue obligation bonds being payable from specific sources
and therefore generally less affected by such factors) and on what type of
security, if any, is provided for the bond. In order to constrain future debt
service costs, the Executive Office for Administration and Finance established
in November, 1988 an annual fiscal year limit on capital spending of $925
million, effective fiscal 1990. In January, 1990, legislation was enacted to
impose a limit on debt service in Commonwealth budgets beginning in fiscal 1991.
The law provides that no more than 10% of the total appropriations in any fiscal
year may be expended for payment of interest and principal on general obligation
debt of the Commonwealth (excluding the Fiscal Recovery Bonds discussed below).
It should also be noted that Chapter 62F of the Massachusetts General Laws
establishes a state tax revenue growth limit for each fiscal year equal to the
average positive rate of growth in total wages and salaries in the Commonwealth,
as reported by the federal government, during the three calendar years
immediately preceding the end of such fiscal year. The limit could affect the
Commonwealth's ability to pay principal and interest on its debt obligations.
It is possible that other measures affecting the taxing or spending authority of
Massachusetts or its political subdivisions may be approved or enacted in the
future.

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

Cities and Towns. During recent years limitations were placed on the taxing
authority of certain Massachusetts governmental entities that may impair the
ability of the issuers of some of the Debt Obligations in the Massachusetts
Trust to maintain debt service on their obligations. Proposition 2 1/2, passed
by the voters in 1980, led to large reductions in property taxes, the major
source of income for cities and towns. Between fiscal 1981 and fiscal 1995, the
aggregate property tax levy grew from $3.347 billion to $5.702 billion,
representing an increase of approximately 70%. By contrast, according to
federal Bureau of Labor Statistics, the Consumer price index for all urban
consumers in Boston grew during the same period by approximately 88%.

During the 1980's, the Commonwealth increased payments to its cities, towns
and regional school districts to mitigate the import of Proposition 2 1/2 on
local programs and services. Direct local aid decreased from $2.608 billion in
fiscal 1991 to $2.359 billion in 1992, increased to $2.547 billion in 1993 and
increased to $2.727 billion in fiscal 1994. Fiscal 1995 expenditures for direct
local aid were $2.976 billion, which is an increase of approximately 9.1% above
the fiscal 1994 level. It is estimated that fiscal 1996 expenditures for direct
local aid will be $3.242 billion, which is an increase of approximately 8.9%
above the 1995 level. In addition to direct Local Aid, the Commonwealth has
provided substantial indirect aid to local governments, including, for example,
payments for MBTA assistance and debt service,

<PAGE>

pensions for teachers, pension cost-of-living allowances for municipal retirees,
housing subsidies and the costs of courts and district attorneys that formerly
had been paid by the counties.

Many communities have responded to the limitations imposed by Proposition 2
1/2 through statutorily permitted overrides and exclusions. Override activity
peaked in fiscal 1991, when 182 communities attempted votes on one of the three
types of referenda questions (override of levy limit, exclusion of debt service,
or exclusion of capital expenditures) and 100 passed at least one question,
adding $58.5 million to their levy limits. In fiscal 1992, 65 communities had
successful votes totalling $31.0 million. In fiscal 1993, 59 communities added
$16.3 million through override votes and in fiscal 1994, only 48 communities had
successful override referenda which added $8.4 million to their levy limits. In
fiscal 1995, 32 communities added $8.8 million. Capital exclusions were passed
by 24 communities in 1995 and totalled $3.7 million. In fiscal 1995, the impact
of successful debt exclusion votes going back as far as fiscal 1983, was to
raise the levy limits of 217 communities by $119 million.

A statewide voter initiative petition which would effectively mandate that,
commencing with fiscal 1992, no less than 40% of receipts from personal income
taxes, sales and use taxes, corporate excise taxes and lottery fund proceeds be
distributed to certain cities and towns in local aid was approved in the general
election held November 6, 1990. Pursuant to this petition, the local aid
distribution to each city or town was to equal no less than 100% of the total
local aid received for fiscal 1989. Distributions in excess of fiscal 1989
levels were to be based on new formulas that would replace the current local
aide distribution formulas. If implemented in accordance with its terms
(including appropriation of the necessary funds), the petition as approved would
shift several hundred million dollars to direct local aid. However, local aid
payments expressly remain subject to annual appropriation, and fiscal 1992,
fiscal 1993, fiscal 1994 and fiscal 1995 appropriations for local aid did not
meet, and fiscal 1996 appropriations for local aid do not meet, the levels set
forth in the initiative law.

Pension Liabilities. Comprehensive pension funding legislation approved in
January, 1988 requires the Commonwealth to fund future pension liabilities
currently and to amortize the Commonwealth's accumulated unfunded liabilities
over 40 years. The unfunded actuarial accrued liability, as of January 1, 1993,
relative to the state employees' and teachers' systems and the State-Boston
retirement system, to Boston teachers and to the cost-of-living allowances for
local systems, is reported in the schedule to be approximately $7.445 billion,
$372.6 million and $1.833 billion, respectively, for a total unfunded actuarial
liability of $9.651 billion. As of December 31, 1994 the Commonwealth's pension
reserves had grown to approximately $4.925 billion.

Annual payments under the funding schedule through fiscal 1998 must be at
least equal to the total estimated pay-as-you-go benefit cost in such year. As
a result of this requirement, the funding requirements for fiscal 1995, 1996,
1997 and 1998 are estimated to be increased to approximately $959.9 million,
$1.007 billion, $1.061 billion and $1.128 billion, respectively. Total pension
expenditures increased from $703.9 million in fiscal 1991 to $969.2 million in
1995. The estimated pension expenditures for fiscal 1996 are approximately
$1.032 billion.

State Budget and Revenues. The Commonwealth's Constitution requires, in
effect, that its budget be balanced each year. The Commonwealth's fiscal year
ends June 30. The General Fund is the Commonwealth's primary operating fund; it
also functions as a residuary fund to receive otherwise unallocated revenues and
to provide monies for transfers to other funds as required. The condition of
the General Fund is generally regarded as the principal indication of whether
the Commonwealth's operating revenues and expenses are in balance; the other
principal operating funds (the Local Aid Fund and the Highway Fund) are
customarily funded to at least a zero balance.

Limitations on Commonwealth tax revenues have been established by enacted
legislation and by public approval of an initiative petition which has become
law. The two measures are inconsistent in several respects, including the
methods of calculating the limits and the exclusions from the limits. The
initiative petition does not exclude debt service on the Commonwealth's notes
and bonds from the limits. State tax revenues in fiscal 1991 through fiscal
1995 were lower than the limits. The Executive Office for

<PAGE>

Administration and Finance currently estimates that state tax revenues will
not reach the limit imposed by either the initiative petition or the legislative
enactment in fiscal 1996.

On July 28, 1990, the legislature enacted Chapter 151 which provides, among
other matters, for the Commonwealth Fiscal Recovery Loan Act of 1990 and grants
authorization for the Commonwealth to issue bonds in an aggregate amount up to
$1.42 billion for purposes of funding the Commonwealth's fiscal 1990 deficit and
certain prior year Medicaid reimbursement payments. Chapter 151 also provides
for the establishment of the Commonwealth Fiscal Recovery Fund, deposits for
which are derived from a portion of the Commonwealth's personal income tax
receipts, are dedicated for this purpose and are to be deposited in trust and
pledged to pay the debt service on these bonds.

Fiscal 1991 budgeted expenditures were approximately $13.659 billion. Total
budgeted revenues and other sources for fiscal 1991 were $13.634 billion,
resulting in an estimated $21.2 million operating loss. Application of the
adjusted fiscal 1990 fund balances of $258.3 million resulted in a final fiscal
1991 budgetary surplus of $237.1 million. State finance law required that
approximately $59.2 million of the fiscal year surplus be placed in the
Stabilization Fund. This Fund limits the fiscal year-end surpluses in the
Commonwealth's three principal budgeted operating funds which may be carried
forward as a beginning balance for the next fiscal year and creates a reserve of
such excess amounts to be used for specific purposes. Amounts credited to the
Stabilization Fund are not generally available to defray current year expenses
without subsequent specific legislative authorization.

In fiscal 1992 budgeted revenues and other sources were $13.728 billion, an
increase over fiscal 1991 revenues of .7%. (Actual fiscal 1992 tax revenues
exceeded original estimates and totalled $9.484 billion, an increase over fiscal
1991 collections of 5.4%). Fiscal 1992 budgeted expenditures were approximately
$13.420 billion, a decrease from fiscal 1991 expenditures by 1.7%. Fiscal year
1992 revenues and expenditures resulted in an operating gain of $312.3 million
and with positive fund balances of $549.4 million. Total fiscal 1992 spending
authority continued into fiscal 1993 amounted to $231.0 million.

The budgeted operating funds of the Commonwealth ended fiscal 1993 with a
surplus of revenues and other sources over expenditures and other uses of $13.1
million and aggregate ending fund balances in the budgeted operating funds of
the Commonwealth of approximately $562.5 million. Budgeted revenues and other
sources for fiscal 1993 totalled approximately $14.710 billion, including tax
revenues of $9.940 billion. Total revenues and other sources increased by
approximately 6.9% from fiscal 1992 to fiscal 1993, while tax revenues increased
by 4.7% for the same period. Commonwealth budgeted expenditures and other uses
in fiscal 1993 totalled approximately $14.696 billion, which is $1.280 billion
or approximately 9.6% higher than fiscal 1992 expenditures and other uses.

Fiscal year 1994 tax revenue collections were $10.607 billion, $87 million
below the Department of Revenue's fiscal year 1994 tax revenue estimate of
$10.694 billion. Budgeted revenues and other sources, including non-tax
revenues, collected in fiscal 1994 totalled approximately $15.55 billion.
Budgeted expenditures and other uses of funds in fiscal 1994 were $15.523
billion.

In June, 1993, the Legislature adopted and the Governor signed in to law
comprehensive education reform legislation. This legislation required an
increase in expenditures for education purposes above fiscal 1993 base spending
of $1.288 billion of approximately $175 million in fiscal 1994. The Executive
Office for Administration and Finance expects the annual increases in
expenditures above the fiscal 1993 base spending of $1.288 billion to be
approximately $397 million in fiscal 1995, $629 million in fiscal 1996 and $872
million in fiscal 1997. Additional annual increases are also expected in later
fiscal years.

The Commonwealth has closed the fiscal 1995 financial records and published
its audited 1995 Combined Financial Statements. Fiscal 1995 tax revenue
collections were approximately $11.163 billion, approximately $12 million above
the Department of Revenue's revised fiscal year 1995 tax revenue estimate of
$11.151 billion, approximately $556 million, or 5.2%, above fiscal 1994 tax
revenues of $10.607 billion. Budgeted revenues and other sources, including
non-tax revenues, collected in fiscal 1995 were

<PAGE>

approximately $16.387 billion, approximately $837 million, or 5.4%, above fiscal
1994 budgeted revenues of $15.550 billion. Budgeted expenditures and other uses
of funds in fiscal 1995 were approximately $16.251 billion, approximately $728
million, or 4.7%, above fiscal 1994 budgeted expenditures and uses of $15.523
billion. The Commonwealth ended fiscal 1995 with an operating gain of $137
million and an ending fund balance of $726 million.

The fiscal 1996 budget is based on numerous spending and revenue estimates,
the achievement of which cannot be assured. The budget was enacted by the
Legislature on June 12, 1995 and signed by the Governor on June 21, 1995.
Fiscal 1996 appropriations in the Annual Appropriations Act total approximately
$16.847 billion, including approximately $25 million in gubernatorial vetoes
overridden by the legislature. In the final supplemental budget for 1995,
approved on August 24, 1995, another $71.1 million of appropriations were
continued for use in fiscal 1996. The Executive Office for Administration and
Finance projects that fiscal 1996 spending will total approximately $16.935
billion, a $684 million, or 4.2%, increase over fiscal 1995 spending. The
largest spending increase in the fiscal 1996 budget is approximately $232
million to continue funding the comprehensive education reform legislation
enacted in 1993. Budgeted revenues and other sources to be collected in fiscal
1996 are estimated by the Executive Office for Administration of Finance to be
approximately $16.762 billion. This amount includes estimated fiscal 1996 tax
revenues of $11.604 billion, which is approximately $441 million, or 4.0%,
higher than fiscal 1995 tax revenues. Fiscal 1996 non-tax revenues are
projected to total approximately $5.158 billion, approximately $66 million, or
1.3%, less than fiscal 1995. The total revenues and other sources for fiscal
1996 are estimated to be $17.226 billion while total expenditures and other uses
are estimated to be $17.399 billion.

On January 23, 1996, the Governor submitted his fiscal 1997 budget
recommendations to the Legislature. The proposal calls for budgeted
expenditures of approximately $17.36 billion in fiscal year 1997, a $425
million, or 2.5% increase over anticipated fiscal year 1996 spending.
Proposed budgeted revenues for fiscal 1997 are approximately $17.429 billion, an
increase of approximately $667 million, or 4.0%, over currently projected fiscal
1996 revenues. The Governor's budget recommendations are based on a fiscal 1997
tax revenue estimate of $11.968 billion. The Governor's fiscal 1997 tax revenue
estimate of $11.968 billion. The Governor's fiscal 1997 budget recommendations
will now be taken up by the House Ways and Means Committee as the first step in
the legislative consideration of the fiscal 1997 budget.

As of June 30, 1992, the Commonwealth showed a year-end cash position of
approximately $731 million for fiscal year 1992. The ending balance compares
favorably with the cash balance of $182.3 million at the end of fiscal 1991.
The Commonwealth showed a year-end cash position of $622.2 million and
approximately $757 million for fiscal year 1993 and fiscal year 1994,
respectively. As of June 30, 1995, the Commonwealth showed a year-end cash
position of approximately $372.5 million, based on unaudited figures, not
including the Stabilization Fund. The current cash flow projection prepared by
the office of the State Treasurer estimates that the fiscal 1996 year-end cash
position will be approximately $453.7 million.

During fiscal years 1991, 1992, 1993 and 1994, Medicaid expenditures were
$2.765 billion, $2.818 billion, $3.151 billion and $3.313 billion, respectively.
The Comptroller's Preliminary Financial Report for fiscal 1995 indicates that
fiscal 1995 Medicaid expenditures were $3.399 billion. The average annual
growth rate from fiscal 1991 to fiscal 1995 was 5.1% compared to an average
annual growth of approximately 17% between fiscal 1987 and fiscal 1991. The
growth rate from fiscal 1994 to fiscal 1995 was 2.6%. The Executive Office for
Administration and Finance estimates that fiscal 1996 Medicaid expenditures will
be approximately $3.388 billion. Factoring out one-time payments in fiscal 1995
and fiscal 1996 to settle bills from hospitals and nursing homes dating back to
the 1980's, and adjusting for a change in the account structure of the Medicaid
program, this represents an increase from fiscal 1995 to fiscal 1996 of 2.6%.
The decrease in the rate of growth is due to a number of savings and cost
control initiatives that the Division of Medical Assistance continues to
implement and refine, including managed care, utilization review and the
identification of third party liabilities.

<PAGE>

The liabilities of the Commonwealth with respect to outstanding bonds and
notes payable as of January 1, 1996 totalled $13.884 billion. These liabilities
consisted of $9.305 billion of general obligation debt, $619 million of
dedicated income tax debt (the Fiscal Recovery Bonds), $395 million of special
obligation debt, $3.313 billion of supported debt, and $252 million of
guaranteed debt.

Capital spending by the Commonwealth rose from approximately $600 million in
fiscal 1987 to $971 million in fiscal 1989. In November 1988, the Executive
Office for Administration and Finance established an administrative limit on
state financed capital spending in the Capital Projects Funds of $925.0 million
per fiscal year. Capital expenditures were $847 million, $694.1 million, $575.9
million, $760.6 million and $902.2 million in fiscal 1991, 1992, 1993, 1994 and
fiscal 1995, respectively. Commonwealth financed capital expenditures are
projected to be approximately $894 million in fiscal 1996. The growth in capital
spending in the 1980's accounts for a significant rise in debt service
expenditures since fiscal 1989. Payments for the debt service on Commonwealth
general obligation bonds and notes in fiscal 1992 were $898.3 million,
representing a 4.7% decrease from $942.3 million in fiscal 1991. This decrease
resulted from a $261 million one-time reduction achieved through the issuance of
refunding bonds in September and October of 1991. Debt service expenditures
were $1.140 billion, $1.149 billion, and $1.230 billion for fiscal 1993, fiscal
1994 and fiscal 1995, respectively, and are projected to be $1.196 billion for
fiscal 1996. These amounts represent debt service payments on direct
Commonwealth debt and do not include debt service on notes issued to finance the
fiscal 1989 deficit and certain Medicaid-related liabilities, which were paid in
full from non-budgeted funds. Also excluded are debt service contract
assistance to certain state agencies and the municipal school building
assistance program. In addition to debt service on bonds issued for capital
purposes, the Commonwealth is obligated to pay the principal of and interest on
the Fiscal Recovery Bonds described above. The estimated annual debt service on
such Bonds currently outstanding (a portion of which were issued as variable
rate bonds) is approximately $278 million per year in fiscal 1996 and fiscal
1997 and approximately $130 million in fiscal 1998, at which time the entire
amount of the Fiscal Recovery Bonds will be paid.

In January, 1990 legislation was enacted to impose a limit on debt service in
Commonwealth budgets beginning in fiscal 1991. The law provides that no more
than 10% of the total appropriations in any fiscal year may be expended for
payment of interest and principal on general obligation debt (excluding the
Fiscal Recovery Bonds) of the Commonwealth. This law may be amended or appealed
by the legislature or may be superseded in the General Appropriation Act for any
year. From fiscal year 1991 through fiscal year 1996 estimated, this percentage
has been substantially below the limited established by this law.

Legislation enacted in December, 1989 imposes a limit on the amount of
outstanding direct bonds of the Commonwealth. The limit for fiscal 1996 is
$8.679 billion; as of July 1, 1995, there were $7.584 billion of outstanding
direct bonds. The law provides that the limit for each subsequent fiscal year
shall be 105% of the previous fiscal year's limit. The Fiscal Recovery Bonds
will not be included in computing the amount of bonds subject to this limit.
Since this law's inception, the limit has never been reached.

In August, 1991, the Governor announced a five-year capital spending plan.
The policy objective of the Five-Year Capital Spending Plan is to limit the debt
burden of the Commonwealth by controlling the relationship between current
capital spending and the issuance of bonds by the Commonwealth. For fiscal 1996
through 2000, the plan forecasts total capital spending for the Commonwealth of
$4.498 billion, which is significantly below legislatively authorized spending
levels.

Unemployment. The Massachusetts unemployment rate averaged 9.0%, 8.5%, 6.9%,
6.0% and 5.4% in calendar year 1991, 1992, 1993, 1994 and 1995, respectively.
The Massachusetts unemployment rate in December, 1995 was 5.2% as compared to
5.1% in November, 1995 and 5.7% in December, 1994, although the rate has been
volatile throughout this period. The Massachusetts unemployment rates from and
after 1994 are not comparable to prior rates due to a new procedure for
computation which became effective in 1994.

<PAGE>

In September 1991 the reserves in the Commonwealth's Unemployment
Compensation Trust fund were exhausted due to the continued high level of
unemployment. Between September 1991 and May 1994, benefit payments in excess
of contributions were financed through repayable advances from the federal
unemployment loan account. Legislation enacted in 1992 significantly increased
employer contributions in order to reduce advances from the federal loan account
and 1993 contributions exceeded benefit outlays by more than $200 million. All
federal advances were paid in May 1994 and since that time, the trust fund has
been solvent. As of December 31, 1995, the Massachusetts Unemployment Trust
Fund was running a surplus of $514 million.

The Department of Employment and Training's January 1996 quarterly report
indicates that the additional increases in contributions provided by the 1992
legislation should result in a private contributory account balance of $704
million in the Unemployment Compensation Trust Fund by December, 1996 and
rebuild reserves in the system to $1.593 billion by the end of 2000.

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

The United States has brought an action on behalf of the U.S. Environmental
Protection Agency alleging violations of the Clean Water Act and seeking to
enforce the clean-up of Boston Harbor. The Massachusetts Water Resources
Authority (the "MWRA") has assumed primary responsibility for developing and
implementing a court approved plan and time table for the construction of the
treatment facilities necessary to achieve compliance with the federal
requirements. The MWRA currently projects the total cost of construction of the
waste water facilities required under the court's order as approximately $3.551
billion in current dollars, with approximately $1.046 billion to be spent after
June 1, 1995. Under the Clean Water Act, the Commonwealth may be liable for any
costs of complying with any judgment in this case to the extent that the MWRA or
a municipality is prevented by state law from raising revenues necessary to
comply with such a judgment. On October 18, 1995, the court entered an order
which reduced the MWRA's obligation to build certain additional secondary
treatment facilities which could save rate payers approximately $165 million.

A suit was brought by associations of bottlers challenging the 1990
amendments to the bottle bill which escheat abandoned deposits to the
Commonwealth, a case involving approximately $120 million. In March of 1993,
the Supreme Judicial Court upheld the amendments except for the initial funding
requirement, which the Court held severable. The Superior Court recently ruled
that the Commonwealth is liable for a certain amount, including interest, as a
result of the Supreme Judicial Court's decision, such amount to be determined in
further proceedings.

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

There are currently two eminent domain cases pending against the Commonwealth
with potential liability aggregating $90 million.

The Commonwealth has appealed a decision of the Appellate Tax Board which
granted abatements to 12 Massachusetts banks in 102 consolidated appeals for tax
years from 1984 to 1990. The Appellate Tax Board decision held that the measure
of the bank excise tax did not include the amounts paid by the banks in excess
of face value to acquire federally exempt bonds. The Commissioner of Revenue
contends that these payments to not qualify for any deductions allowable under
the Internal Revenue Code and, accordingly, cannot be deducted from gross income
subject to the bank excise. The Supreme Judicial Court will hear oral arguments
in the appeal in October, 1995. The potential liability is approximately $55
million.

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In March 1995, the Supreme Judicial Court held that certain deductions from
the net worth measure of the Massachusetts corporate excise tax violate the
Commerce Clause of the United States Constitution. In October 1995, the United
States Supreme Court denied the Commonwealth's petition for a writ of
certiorari. The Department of Revenue estimates that tax revenues in the amount
of $40 million to $55 million may be abated as a result of this decision.

There are also several other tax matters in litigation which may result in an
aggregate liability in excess of $70 million.

Ratings. Beginning on May 17, 1989, Standard & Poor's downgraded its ratings
on Massachusetts general obligation bonds and certain agency issues from AA+ to
AA. The ratings were downgraded three additional times to a low of BBB on
December 31, 1989. On July 14, 1989, Standard & Poor's also downgraded its
rating on temporary general obligation notes and various agency notes from SP-1+
to SP-1 and on general obligation short-term notes and on short-term agency debt
from SP-1 to SP-2. Bonds rated BBB may have speculative characteristics. The
rating remained at BBB until September 9, 1992 when Standard & Poor's raised its
rating to A. At this same time, such bonds were removed from CreditWatch. On
October 14, 1993, Standard & Poor's raised its rating from A to A+.

On June 21, 1989, Moody's Investors Service downgraded its rating on
Massachusetts general obligation bonds from Aa to A. The ratings were further
reduced on two occasions to a low on March 19, 1990 of Baa where it remained
until September 10, 1992 when Moody's increased its rating to A. On November
14, 1994, Moody's again increased its rating to A1.

Fitch Investors Service, Inc. lowered its rating on the Commonwealth's bonds
from AA to A on September 29, 1989. As of December 5, 1991, its qualification
of the bonds changed from Uncertain Trends to Stabilizing Credit Trend. On
October 13, 1993, Fitch Investors raised its rating from A to A+.
Ratings may be changed at any time and no assurance can be given that they
will not be revised or withdrawn by the rating agencies, if in their respective
judgments, circumstances should warrant such action. Any downward revision or
withdrawal of a rating could have an adverse effect on market prices of the
bonds.

MICHIGAN

RISK FACTORS--Due primarily to the fact that the leading sector of the
State's economy is the manufacturing of durable goods, economic activity in the
State has tended to be more cyclical than in the nation as a whole. While the
State's efforts to diversify its economy have proven successful, as reflected by
the fact that the share of employment in the State in the durable goods sector
has fallen from 33.1 percent in 1960 to 15.8 percent in 1994, durable goods
manufacturing still represents a sizable portion of the State's economy. As a
result, any substantial national economic downturn is likely to have an adverse
effect on the economy of the State and on the revenues of the State and some of
its local governmental units. 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 1994, the average monthly unemployment rate in this
State was 5.9% as compared to a national average of 6.1% in the United States.

The State's economy could be affected by changes in the auto industry,
notably consolidation and plant closings resulting from competitive pressures
and over-capacity. The financial impact on the local units of government in the
areas in which plants are or have been closed could be more severe than on the
State as a whole. 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.

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

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

The State finances its operations through the State's General Fund and
special revenue funds. The General Fund receives revenues of the State that are
not specifically required to be included in the Special Revenue Fund. General
Fund revenues are obtained approximately 59% from the payment of State taxes and
41% 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 60% 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 and 1994 fiscal years with its General Fund in balance after
transfers in 1993 and 1994 from the General Fund to the Budget Stabilization
Fund of $283 million and $464 million, respectively. Those transfers raised the
balances in the Budget Stabilization fund to $779 million as of September 30,
1994. A positive cash balance in the combined General Fund/School Aid Fund was
recorded at September 30, 1990. In each of the three prior fiscal years the
State had undertaken 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

<PAGE>

deteriorating cash balances which necessitated short-term borrowings and the
deferral of certain scheduled cash payments to local units of government. The
State borrowed between $500 million 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.

In 1992, Standard & Poor's confirmed its AA rating on the State's general
obligation bonds. In July 1995, Moody's raised the State's general obligation
credit rating to AA. Fitch Investor's Service has issued a rating of AA on the
State's general obligation bonds.

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

State law provides for distributions of certain State collected taxes or
portions thereof to local units based in part on population as shown by census
figures and authorizes levy of certain local taxes by local units having a
certain level of population as determined by census figures. Reductions in
population in local units resulting from periodic census could result in a
reduction in the amount of State collected taxes returned to those local units
and in reductions in levels of local tax collections for such local units unless
the impact of the census is changed by State law. No assurance can be given
that any such State law will be enacted. In the 1991 fiscal year, the State
deferred certain scheduled payments to municipalities, school districts,
universities and community colleges. While such deferrals were made up at later
dates, similar future deferrals could have an adverse impact on the cash
position of some local units. Additionally, the State reduced revenue sharing
payments to municipalities below that level provided under formulas by $10.9
million in the 1991 fiscal year, $34.4 million in the 1992 fiscal year, $45.5
million in the 1993 fiscal year, $54.5 million in the 1994 fiscal year and $67.0
million (budgeted) in the 1995 fiscal year.

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

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

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

The Portfolio may contain obligations of the Michigan State Building
Authority. These obligations are payable from rentals to be paid by the State
as part of the State's general operating budget. The

<PAGE>

foregoing financial conditions and constitutional provisions could affect the
ability of the State to pay rentals to the Authority and thus adversely affect
payment of the State Building Authority Bonds.

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

MINNESOTA

RISK FACTORS--The State of Minnesota and other governmental units and
agencies, school systems and entities dependent on government appropriations or
economic activity in Minnesota have, in recent years, suffered cash deficiencies
and budgetary difficulties due to changing economic conditions. Unfavorable
economic trends, such as a decline in economic activity or recession, and other
factors described below could adversely affect the Debt Obligations and the
value of the Portfolio.

Recessions in the national economy and other factors have had an adverse
impact on the economy of Minnesota and State budgetary balances. As a
consequence, during the budgetary bienniums ended in 1981, 1983, 1987, 1991 and
1993, the State found it necessary to revise revenue forecasts downward and the
State legislature was required to take remedial action to bring the State's
budget into balance on a number of occasions. The State is constitutionally
required to maintain a balanced budget.

Addressing the 1993-1995 biennium, the 1993 legislative session, including a
special session called to resolve budgetary differences between the Governor and
legislature following appropriation vetoes, enacted revenue and expenditure
proposals which provided for revenues of $16.2 billion, expenditures of $16.5
billion and maintenance of the budgetary reserve at $360 million. The major
revenue increase was in the health care provider tax. The principal expenditure
increases were for elementary and secondary education and health and human
services. During the biennium, increased income tax receipts and lower spending
resulted in an improvement in estimates used for budgetary purposes. The State
completed the biennium on June 30, 1995 with a budgetary reserve of $500 million
and an unrestricted balance of $458 million.

In May 1995, the legislature adopted the budget for the 1995-1997 biennium
which attempted to anticipate federal budget reductions and the likelihood of
decreased federal aid for programs maintained by the State. The general fund
budget provided for revenues of $17.9 billion, expenditures of $18.2 billion and
maintenance of cash flow and budgetary reserve accounts at $350 million and $204
million, respectively. Spending increases focused on education, health and
human services and criminal justice.

In January 1996 the State Department of Finance reported that strong economic
growth and health care cost savings have resulted in an $824 million interim
surplus in the budget for the 1995-1997 biennium. The Governor proposed that
the legislature allocate the surplus by reducing taxes by $24 million, making a
variety of appropriations amounting to $160 million, increasing the budget
reserve by $140 million and establishing a $500 million school cash flow account
to provide school districts with a source of short-term interest-free funding.

<PAGE>

A final decision in a case which held the Minnesota excise tax on banks to be
unconstitutional resulted in an estimated judgment, including interest to the
date of judgment in 1994, of $327 million. The legislature authorized the
Commissioner of Finance to issue up to $400 million in State revenue bonds to
pay this obligation. The debt service on the bonds would be secured by and
payable from a portion of State lottery proceeds, federal and third party
reimbursements for medical expenses, and non-dedicated departmental receipts,
all of which have previously been credited to the State general fund. Receipts
from these sources would be held in a special reserve fund with the expected
excess over debt service requirements being transferred to the general fund.
Bonds issued for this purpose would not be general obligations of the State and
the revenue sources supporting the bonds would be subject to risks of adverse
legislative, executive or judicial action and economic conditions. The State
planned to sell $155 million of the bonds in January 1996. However, bills
proposed in the legislature to withdraw the collateral securing the bonds caused
the cancellation of the bond sale. It is not presently clear whether or when
the bonds might be sold or the manner in which the obligation will be funded if
the bonds are not sold.

Authorizations for bonding to support capital expenditures have raised
concern about the cost of debt service and the capacity of the State to
authorize additional major bonding. The legislature has directed a portion of
receipts from the State's lottery to assist in servicing bonded debt. As of
August 1, 1995, the total of State general obligation bonds outstanding was
approximately $1.8 billion and the total authorized but unissued was $764
million.

Economic and budgetary difficulties could require the State, its agencies,
local units of government, schools and other instrumentalities which depend for
operating funds and debt service on State revenues or appropriations or on other
sources of revenue which may be affected by economic conditions to expand
revenue sources or curtail services or operations in order to meet payments on
their obligations. The Sponsors are unable to predict whether or to what extent
adverse economic conditions may affect the State, other units of government,
State agencies, school districts and other affected entities and the impact
thereof on the ability of issuers of Debt Obligations in the Portfolio to meet
payment obligations. To the extent any difficulties in making payment are
perceived, the market value and marketability of Debt Obligations in the
Portfolio, the asset value of the Minnesota Trust and interest income to the
Minnesota Trust could be adversely affected.

In action related to the budgetary and funding difficulties experienced by
the State during the 1980-1983 recession, Standard & Poor's reduced its rating
on the State's outstanding general obligation bonds from AAA to AA+ in August
1981 and to AA in March 1982. Moody's lowered its rating on the State's
outstanding general obligation bonds from Aaa to Aa in April 1982. In January
1985, Standard & Poor's announced an upgrading in its rating for the State's
outstanding general obligation bonds from AA to AA+. In July 1993, Fitch raised
its rating for the State's bonds from AA+ to AAA. In March 1994, Moody's
announced an upgrading in its rating from Aa to Aa1. These improved ratings
were applied to the State's issuance of $215 million in general obligation bonds
dated August 1, 1995.

Certain issuers of obligations in the State, such as counties, cities and
school districts, rely in part on distribution, aid and reimbursement programs
allocated from State revenues and other governmental sources for the funds with
which to provide services and pay those obligations. Accordingly, legislative
decisions and appropriations have a major impact on the ability of such
governmental units to make payments on any obligations issued by them. In
addition, certain State agencies, such as the Minnesota Housing Finance Agency,
University of Minnesota, Minnesota Higher Education Coordinating Board,
Minnesota State University Board, Minnesota Higher Education Facilities
Authority, Minnesota State Armory Building Commission, Minnesota State
Zoological Board, Minnesota Rural Finance Authority, Minnesota Public Facilities
Authority, Minnesota Agricultural and Economic Development Board and Iron Range
Resources and Rehabilitation Board, also issue bonds which generally are not
debts of the State. The payment of these obligations is generally subject to
revenues generated by the agencies themselves, the projects funded or
discretionary appropriations of the legislature. The particular source of
payment and security is detailed in the instruments themselves and related
offering materials. In one instance, after default by the Minnesota State
Zoological Society in installment payments supporting tax-exempt certificates of
participation issued to construct a monorail system, the legislature refused to
appropriate funds to supply

<PAGE>

the deficiency. A subsequent decision of the Minnesota Supreme Court sustained
the legislature's position that no State obligation had been created.

The State is also a party to other litigation in which a contrary decision
could adversely affect the State's tax revenues or fund balances, the most
significant of which are as follows. First, the State's corporate alternative
minimum tax in effect from 1987 to 1989 has been challenged on constitutional
grounds. An initial decision in favor of the State was issued by a State
District Court in June 1995. Taxes collected under the law amounted to
approximately $160 million. Second, thirteen union-based self-insured ERISA
health plans have sued certain State agencies for declaratory and injunctive
relief to the effect that the 2% gross revenues tax on health providers under
the Minnesota Care law may not be passed on to such plans due to preemption of
the Minnesota law by ERISA and the Federal Labor-Management Relations Act. The
United States District Court granted summary judgment to the State agencies and
the plaintiffs have appealed to the Eighth Circuit Court of Appeals. The
potential fiscal impact of the suit is unclear but the portion of the tax that
is estimated to come from self-insured ERISA plans is in excess of $50 million
per year. Adverse decisions in the foregoing and other cases which individually
or collectively may exceed several million dollars in amount could require
extraordinary appropriations or expenditure reductions and could have a material
adverse effect on the financial condition of the State, its agencies or
subdivisions. The Sponsors are unable to make any prediction concerning the
ultimate outcome or impact of decisions in these cases.

MISSISSIPPI

RISK FACTORS--The financial condition of the State may be affected by
international, national and regional economic, political and environmental
conditions beyond the State's control, which in turn could affect the market
value and income of the obligations of the Mississippi Trust and could result in
a default with respect to such obligations. The following information
constitutes a brief summary of certain legal, governmental, budgetary and
economic matters which may or may not affect the financial condition of the
State, but does not purport to be a complete listing or description of all such
factors. None of the following information is relevant to Puerto Rico or Guam
Debt Obligations which may be included in the Mississippi Trust. Such
information was compiled from publicly available information as well as from
oral statements from various State agencies. Although the Sponsors and their
counsel have not verified the accuracy of the information, they have no reason
to believe that such information is not correct.

Budgetary and Economic Matters. The State operates on a fiscal year
beginning July 1 and ending June 30, with budget preparations beginning on
approximately August 1, when all agencies requesting funds submit budget
requests to the Governor's Budget Office and the Legislative Budget Office. The
budgets, in the form adopted by the legislature, are implemented by the
Department of Finance and Administration.

State operations are funded by General Fund revenues, Educational Enhancement
Fund revenues and Special Fund receipts. For the fiscal year ending June 30,
1995, approximately $4.85 billion in revenues were collected by the Special
Fund. The major source of such receipts was $2.24 billion from federal
grants-in-aid, including $1.44 billion for public health and welfare and $387.6
million for public education.

The General Fund revenues are derived principally from sales, income,
corporate and excise taxes, profits from wholesale sales of alcoholic beverages,
interest earned on investments, proceeds from sales of various supplies and
services, and license fees. For the fiscal year ending June 30, 1995, of the
$2.62 billion in General Fund receipts, sales taxes accounted for 40.5%,
individual income taxes for 26.1%, and corporate income taxes for 10.0%. Sales
taxes, the largest source of General Fund revenues, can be adversely affected by
downturns in the economy.

Mississippi's recent legalization of dockside gaming is having a substantial
impact on the State's revenues. With 28 casinos operating in the State as of
June 30, 1995, fiscal year 1995 gaming license fees

<PAGE>

and gaming tax revenues transferred to the General Fund for the State amounted
to $128.8 million as compared to $94.9 million in fiscal year 1994.

Each year the legislature appropriates all General Fund, Educational
Enhancement Fund and most Special Fund expenditures. Those Special Funds that
are not appropriated by the legislature are subject to the approval of the
Department of Finance and Administration. In the fiscal year ending June 30,
1995, approximately 57.2% of the General Fund was expended on public and higher
education. The areas of public health and public works were the two largest
areas of expenditures from the Special Fund. The Education Enhancement Fund
collections (funded from a 1% increase in sales and use taxes enacted in 1992)
totalled approximately $152.05 million in fiscal year 1995. These funds are
appropriated by the Legislature for the purpose of providing additional funding
for grades K-12, community colleges and institutions of higher learning.

The Department of Finance and Administration has the authority to reduce
allocations to agencies if revenues fall below the amounts projected during the
budgeting phase and may also, in its discretion, restrict a particular agency's
monthly allotment if it appears that an agency may deplete its appropriations
prior to the close of the fiscal year. Despite budgetary controls, the State
has experienced cash flow problems in the past. In the 1991 fiscal year,
because State revenue collections fell below projections and due to a General
Fund cash balance on July 1, 1991 below expectations, across-the-board budget
reductions totaling approximately $85.1 million were suffered by State agencies
to avoid a year-end deficit. In fiscal year 1992, total revenue collections
were nearly $48 million below projections. As a result of this shortfall, State
agencies were forced to implement an estimated 3.5% cut in their respective
budgets. However, fiscal year 1994 revenue collections were nearly $259.2
million or 12.15% above projections. For 1995, revenue collections nearly
matched the estimated revenues with a 0.01% shortfall. In an effort to prevent
agencies from being forced to implement budget cuts, the Mississippi legislature
authorized the Working Cash-Stabilization Fund in order to provide a safeguard
during stressed economic times. The Working Cash-Stabilization Fund which
reached its maximum balance of $201.0 million or 7.5% of the General Fund
appropriations for fiscal year 1996 can be used to meet revenue and cash flow
shortfalls as well as provide funds during times of national disasters in the
State.

Despite this growth, Mississippi ranks 31st among the 50 states, with a
population of 2.67 million people for 1995. As of November 1995, Mississippi's
unemployment rate was 5.5%, slightly below the State's 1994 level of 6.5%. The
nation's unemployment rate for 1995 was 5.6%.

As of November 1995 the manufacturing sector of the economy, the largest
employer in the State, employed approximately 247,000 persons or 23.3% of the
total nonagricultural employment. Within the manufacturing sector, the four
leading employers by product category were the lumber industry, the apparel
industry, the food products industry, and the furniture industry. For 1995, the
average employment for these industries was 27,700, 27,000, 30,000, and 29,000,
respectively. Agriculture contributes significantly to the State's economy as
agriculture-related cash receipts amounted to $3.15 billion for 1994. The
average number of persons employed by the agricultural sector of the State's
labor force was 30,300 for 1995. The State continues to be a large producer of
cotton and timber and, as a result of research and promotion, the agricultural
sector has diversified into the production of poultry, catfish, rice,
blueberries and muscadines.

Mississippi has not been without its setbacks; for instance, the NASA solid
fuel rocket motor plant in Tishomingo County, which was originally scheduled to
open in 1995 and expected to result in approximately 3,500 jobs, was closed due
to recent federal budget cuts. Additionally, since the inception of legalized
dockside gambling, six casinos located in Mississippi have sought protection
under federal bankruptcy laws.

Total personal income in Mississippi increased 6.3% in 1994 as compared to a
6.1% increase for the United States. However, Mississippi's per capita income
of $15,793 in 1994 was well below the national average of $21,699. The number
of bankruptcies filed in Mississippi for 1995 was 11,831, a 19.6% increase over
the 1994 level of 9,892.

<PAGE>

Bonds. The State, counties, municipalities, school districts, and various
other districts are authorized to issue bonds for certain purposes. Mississippi
has historically issued four types of bonds: general obligation, revenue,
refunding and self-supporting general obligation. In the 1993 and 1994 fiscal
years, the State issued general obligation and revenue bonds in amounts totaling
$217.0 million and $279.6 million, respectively. In fiscal year 1995, the State
issued bonds totalling approximately $311.9 million. The total bond
indebtedness of the State has increased from a level of $432.5 million on July
1, 1987 to $1.03 billion as of July 1, 1995.

The issuance of bonds must be authorized by legislation governing the
particular project to be financed. Such legislation provides the State Bond
Commission, comprised of the Governor as Chairman, the State Attorney General as
Secretary and the State Treasurer as a member, with the authority to approve and
authorize the issuance of bonds.

The general obligation bonds of the State are currently rated Aa by Moody's
Investors Service, Inc. and AA-by Standard and Poor's Ratings Group. There can
be no assurance that the conditions such ratings are based upon will continue or
that such ratings will not be revised downward or withdrawn entirely by either
or both agencies.

Litigation. The Attorney General's Office has reviewed the status of cases
in which the State is a defendant wherein the obligations of the State's
financial resources may be materially adversely affected. The following cases,
though not an entire list, are a representative sampling of the most significant
cases which could materially affect the State's financial position: (1) a suit
against the State regarding conditions at its penal institutions; and (2) an
action against the State Tax Commission challenging the apportionment formula
for taxation of multi-state corporations.

Summary. The financial condition of the State of Mississippi may be affected
by numerous factors, most of which are not within the control of the State or
its subdivisions. The Sponsors are unable to predict to what extent, if any,
such factors would affect the ability of the issuers of the Debt Obligations to
meet payment requirements.

MISSOURI

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

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

The Hancock Amendment also limits new taxes, licenses and fees and increases
in taxes, licenses and fees by local governmental units in Missouri. It
prohibits counties and other political subdivisions (essentially all local
governmental units) from levying new taxes, licenses and fees or increasing the
current

<PAGE>

levy of an existing tax, license or fee without the approval of the required
majority of the qualified voters of that county or other political subdivision
voting thereon.

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

School Desegregation Lawsuits. Desegregation lawsuits in St. Louis and
Kansas City continue to require significant levels of state funding and are
sources of uncertainty; litigation continues on many issues, notwithstanding a
1995 U.S. Supreme Court decision favorable to the State in the Kansas City
desegregation litigation, court orders are unpredictable, and school district
spending patterns have proven difficult to predict. The State paid $282 million
for desegregation costs in fiscal 1994 and for fiscal 1995 provided $315
million. This expense accounts for close to 7% of total state General Revenue
Fund spending.

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

The Missouri portions of the St. Louis and Kansas City metropolitan areas
contain approximately 1,938,400 and 1,007,000 residents, respectively,
constituting over fifty percent of Missouri's 1995 population census of
approximately 5,237,825. St. Louis is an important site for banking and
manufacturing activity, as well as a distribution and transportation center,
with eight Fortune 500 industrial companies (as well as other major educational,
financial, insurance, retail, wholesale and transportation companies and
institutions) headquartered there. Kansas City is a major agribusiness center
and an important center for finance and industry. Economic reversals in either
of these two areas would have a major impact on the overall economic condition
of the State of Missouri. Additionally, the State of Missouri has a significant
agricultural sector which is experiencing farm-related problems comparable to
those which are occurring in other states. To the extent that these problems
were to intensify, there could possibly be an adverse impact on the overall
economic condition of the State of Missouri.

Defense related business plays an important role in Missouri's economy.
There are a large number of civilians employed at the various military
installations and training bases in the State and recent action by the Defense
Base Closure and Realignment Commission will result in the loss of a substantial
number of civilian jobs in the St. Louis Metropolitan Area. Further, aircraft
and related businesses in Missouri are the recipients of substantial annual
dollar volumes of defense contract awards. The contractor receiving the largest
dollar volume of defense contracts in the United States in 1994 was McDonnell
Douglas Corporation. McDonnell Douglas Corporation is the State's largest
employer, currently employing approximately 24,000 employees in Missouri.
Recent changes in the levels of military appropriations and the cancellation of
the A-12 program has affected McDonnell Douglas Corporation in Missouri and over
the last four years it has reduced its Missouri work force by approximately 30%.
There can be no assurances there will not be further changes in the levels of
military appropriations, and, to the extent that further changes in military
appropriations are enacted by the United States Congress, Missouri could be
disproportionately affected.

NEW JERSEY

<PAGE>

RISK FACTORS--Prospective investors should consider the recent financial
difficulties and pressures which the State of New Jersey and certain of its
public authorities have undergone.

The State's 1996 Fiscal Year budget became law on June 30, 1995.

Effective January 1, 1994, New Jersey personal income tax rates were cut 5%
for all taxpayers. Effective January 1, 1995, the personal income tax rates
were cut by an additional 10% for most taxpayers. By a bill signed into law on
July 4, 1995, New Jersey personal income tax rates have been further reduced so
that coupled with prior rate reductions, beginning with tax year 1996, personal
income tax rates will be, depending on a taxpayer's level of income and filing
status, 30%, 15% or 9% lower than 1993 rates. At this time, the effect of the
tax reductions cannot be evaluated.

The New Jersey State Constitution prohibits the legislature from making
appropriations in any fiscal year in excess of the total revenue on hand and
anticipated, as certified by the Governor. It additionally prohibits a debt or
liability that exceeds 1% of total appropriations for the year, unless it is in
connection with a refinancing to produce a debt service savings or it is
approved at a general election. Such debt must be authorized by law and applied
to a single specified object or work. Laws authorizing such debt provide the
ways and means, exclusive of loans, to pay as it becomes due and the principal
within 35 years from the time the debt is contracted. These laws may not be
repealed until the principal and interest are fully paid. These Constitutional
provisions do not apply to debt incurred because of war, insurrection or
emergencies caused by disaster.

Pursuant to Article VIII, Section II, par. 2 of the New Jersey Constitution,
no monies may be drawn from the State Treasury except for appropriations made by
law. In addition, the monies for the support of State government and all State
purposes, as far as can be ascertained, must be provided for in one general
appropriation law covering one and the same fiscal year. The State operates on
a fiscal year beginning July 1 and ending June 30. For example, "fiscal 1996"
refers to the year ending June 30, 1996.
In addition to the Constitutional provisions, the New Jersey statutes contain
provisions concerning the budget and appropriation system. Under these
provisions, each unit of the State requests an appropriation from the Director
of the Division of Budget and Accounting, who reviews the budget requests and
forwards them with his recommendations to the Governor. The Governor then
transmits his recommended expenditures and sources of anticipated revenue to the
legislature, which reviews the Governor's Budget Message and submits an
appropriations bill to the Governor for his signature by July 1 of each year.
At the time of signing the bill, the Governor may revise appropriations or
anticipated revenues. That action can be reversed by a two-thirds vote of each
House. No supplemental appropriation may be enacted after adoption of the act,
except where there are sufficient revenues on hand or anticipated, as certified
by the Governor, to meet the appropriation. Finally, the Governor may, during
the course of the year, prevent the expenditure of various appropriations when
revenues are below those anticipated or when he determines that such expenditure
is not in the best interest of the State.

Reflecting the downturn in the National and State economy, the rate of
unemployment in the State rose from a low of 3.6 percent during the first
quarter of 1989 to a recessionary peak of 8.4% during 1992. Since then, the
unemployment rate fell to 6.4% during the first ten months of 1995.

For the recovery period as a whole, May 1992 to October 1995, (latest
available), service-producing employment in New Jersey has expanded by 188,300
jobs. Hiring has been reported by food stores, autodealers, wholesale
distributors, trucking and warehousing firms, utilities, business and
engineering/management service firms, hotels/hotel-casinos, social service
agencies and health care providers other than hospitals. Employment growth was
particularly stong in business services and its personnel supply component with
increases of 14,400 and 5,800, respectively, in the 12-month period ending
October 1995.

The manufacturing sector showed evidence of improvement through 1994.
Factory employment losses slowed between 1992 and 1994, as the plant closings
and layoffs of the recessionary period tapered

<PAGE>

off and were increasingly counterbalanced by the expansionary impact of rising
industrial demand. After totaling about 134,000 over the four-year period
through the end of 1992 (an average of 33,500 per year), New Jersey's factory
job losses tapered off to 11,100 during 1993 and 5,400 during 1994. During
1995, however, manufacturing job losses appeared to have accelerated, reflecting
a slowdown in nationial manufacturing production activity, with an employment
loss of 16,600 for the 112-month period ending October 1995. After having
enjoyed actual growth in the number of production workers in 1994, the number of
blue-collar workers resumed their decline in 1995 at the same time that
managerial and office staff were also reduced as part of nationwide downsizing.

Conditions have slowly improved in the construction industry, where
employment has risen by 21,200 since its low in May 1992. When it began during
the late spring of 1992, this sector's hiring rebound was driven primarily by
increased homebuilding and public work projects. Nonresidential construction
activity has begun to increase in the last two years. Contract awards in this
sector posted a 9.7% gain in 1993 and 19.8% in 1994. More recently,
nonresidential building construction contracts increased by 9.0% in the first
three quarters of 1995 compared with the same period in 1994.

Residential construction contracts throutgh September 1995, despite monthly
fluctuations, stayed almost even with 1994 ($1,671 million in the first three
quarters of 1995 versus $1,677 million in the same period of 1994). Despite a
7.2% decline in nonbuilding or infrastructure construction, largely due to a
slowing in public construction projects, total construction contracts rose by
1.6% when comparing the first nine months of 1994 and 1995.

Another indicator of economic improvement is increased consumer spending as
evidenced by rising retail sales. While overall retail sales in New Jersey grew
by only 1.5% during 1993, they performed much better in 1994 and continued to
increase, despite some fall off in the winter of 1995. Sales advanced briskly
with retail receipts up 8.1% during 1994 compared with 1993, which was somewhat
higher than the 7.8% growth registered nationwide. Consumer spending was
sluggish during the winter months of 1995 both nationally and in the State.
Statewide sales of retail stores regained momentum in May 1995 and were on a
moderately upward trend through August 1995, resulting in sales growth of 3.1%
when comparing the first eight months of 1994 with those of 1995. The rising
trend in retail sales has translated into steady increases in retail trade jobs
(both full and part-time) and, in September and October 1995, retail employment
rose by a total of 5,600 jobs.

Total new vehicle registrations (new passenger cars and light trucks and
vans) rose robustly in 1993 by more than 18%, and in 1994 by 5.5%. Through
August 1995 however, total new vehicle registrations were down by 2.3% compared
to the same time period in 1994.

The insured unemployment rate, i.e., the number of individuals claiming
benefits as a percentage of the number or workers covered by unemployment
insurance, peaked at 4.2% in October 1991 and remained stable at about 4.0%
through June 1992. It then began a gradual decline, reaching 3.0% in December
1994 and has since stabilized in the range of 3.0% to 3.2%.

Just as New Jersey was hurt by the national recession, the State is now in
its fourth year of recovery which appears to be sustainable. The economy is in
a period of steady, moderate growth, having slowed enough during the second
quarter of 1995 to avoid inflation, but not enough to slip into a recession.
Reasons for cautious optimism in New Jersey are increasing employment levels, a
declingin jobless rate, and a higher than antional level of per capita personal
income.

If the nation's economic growth rate slows from the relatively robust 4.2% in
the third quarter of 1995 as expected by most forecasters, business expansion
could become somewhat subdued in New Jersey. In addition, both the nation and
the State will continue to be impacted by downsizing and other cost-cutting
measures, which at least in the short run will dampen growth. However, the
State's economy should have enough momentum to keep its trend line pointing
upwards. Although it may fall a bit short of its pace of the past year,
economic recovery should continue.

<PAGE>

Of the $16,109.1 million appropriated in Fiscal Year 1996 from the General
Fund, the Property Tax Relief Fund, the Gubernatorial Elections Fund, the Casino
Control Fund and the Casino Revenue Fund, $6,446.8 million (40.0%) was
appropriated for State Aid to Local Governments, $3,745.6 million (23.3%) is
appropriated for Grants-in-Aid, $5,233.3 million (32.5%) for Direct State
Services, $466.3 million (2.9%) for Debt Service on State general obligation
bonds and $217.1 million (1.3%) for Capital Construction.

State Aid to Local Governments is the largest portion of Fiscal Year 1996
appropriations. In Fiscal Year 1996, $6,446.8 million of the State's
appropriations consisted of funds which are distributed to municipalities,
counties and school districts. The largest State Aid appropriation, in the
amount of $4,772.8 million, is provided for local elementary and secondary
education programs. Of this amount, $2,713.1 million is provided as foundation
aid to school districts by formula based upon the number of students and the
ability of a school district to raise taxes from its own base. In addition, the
State provides
$601.0 million for special education programs for children with disabilities. A
$292.9 million program is also funded for pupils at risk of educational
failure, including basic skills improvement. The State appropriated $612.9
million on behalf of school districts as the employer share of the teachers'
pension and benefits programs, $249.4 million to pay for the cost of pupil
transportation and $38.2 million for transition aid, which guaranteed school
districts a 6.5% increase over the aid received in Fiscal Year 1991 and is being
phased out over six years, $69.9 million for debt on school districts and $69.9
million for aid to non-public schools.

Appropriations to the State Department of Community Affairs ("DCA") total
$840.2 million in State Aid monies for Fiscal Year 1996. Many of the DCA State
Aid programs and many Treasury State Aid programs are consolidated into a single
appropriation, Consolidated Municipal Property Tax Relief Act in the amount of
$857.6 million. In addition, there is $16.7 million for housing programs, $33.0
million for a block grant program, $30 million for discretionary aid and $3.6
million in other aid. These appropriations are offset by $103.0 million in
pension funding savings, resulting in a net appropriation for DCA State Aid of
$840.2 million.

Appropriations to the State Department of the Treasury total $69.3 million in
State Aid monies for Fiscal Year 1996. The principal programs funded by these
appropriations are the cost of senior citizens, disabled and veterans property
tax deductions and exemptions ($40.7 million); and aid to densely populated
municipalities ($17.0 million) and the State contribution to the Consolidated
Police and Fireman's Pension Fund ($9.2 million).

Other appropriations of State Aid in Fiscal Year 1996 include welfare
programs ($467.6 million); aid to county colleges ($128.0 million); and aid to
county mental hospitals ($78.3 million).

The second largest portion of appropriations in Fiscal Year 1996 is applied
to Direct State Services: which supprorts the operation of State government's 17
departments, the Executive Office, several commissions, the State Legislature
and the Judiciary. In Fiscal Year 1996, appropriations for Direct State
Services aggregate $5,233.3 million. Some of the major appropriations for
Direct State Services during Fiscal Year 1996 are detailed below.

$591.4 million is appropriated for programs administered by the State
Department of Human Services. Of that amount, $456.9 million is appropriated
for mental health and mental retardation programs, including the operation of
seven psychiatric institutions and nine schools for the retarded.

$29.3 million is appropriated for administration of the Medicaid, the
pharmaceutical assistance to the aged and disabled and the Lifeline programs;
$13.4 million for administration of the various income maintenance programs,
including Aid to Families with Dependent Children (AFDC); and $73.6 million for
the Division of Youth and Family Services, which protect the children of the
State from abuse and neglect.

<PAGE>

The State Department of Labor is appropriated $58.3 million for the
administration of programs for workers' compensation, unemployment and
disability insurance, manpower development, and health safety inspection.

The State Department of Health is appropriated $33.6 million for the
prevention and treatment of diseases, alcohol and drug abuse programs,
regulation of health care facilities and the uncompensated care program.

$771.2 million is appropriated for the support of nine State colleges,
Rutgers University, the New Jersey Institute of Technology, and the University
of Medicine and Dentistry of New Jersey.

$848.4 million is appropriated to the State Department of Law and Public
Safety (excluding the Division of Juvenile Service) and the State Department of
Corrections. Among the programs funded by this appropriation are the
administration of the State's correctional facilities and parole activities,
and the investigative and enforcement activities of the State Police.

$50.2 million is appropriated for the programs operated by the Division of
Juvenile Services, including $18.1 million for the New Jersey Training School
for Boys and $11.7 million for the Juvenile Medium Security Center.

$189.6 million is appropriated to the State Department of Transportation for
the various programs it administers, such as the maintenance and improvement of
the State highway system and the registration and regulation of motor vehicles
and licensed drivers.

$185.7 million is appropriated to the State Department of Environmental
Protection for the protection of air, land, water, forest, wildlife and
shellfish resources and for the provision of outdoor recreational facilities.

The primary method for State financing of capital projects is through the
sale of the general obligation bonds of the State. These bonds are backed by
the full faith and credit of the State. State tax revenues and certain other
fees are pledged to meet the principal and interest payments and if provided,
redemption premium payments required to pay the debt fully. No general
obligation debt can be issued by the State without prior voter approval, except
that no voter approval is required for any law authorizing the creation of a
debt for the purpose of refinancing all or a portion of outstanding debt of the
State, so long as such law requires that the refinancing provide a debt service
savings.

In addition to payment from bond proceeds, capital construction can also be
funded by appropriation of current revenues on a pay-as-you-go basis. This
amount represents 1.3 percent of the total budget for fiscal year 1996. In
fiscal year 1996, the amount appropriated to this purpose is $217.1 million.

The aggregate outstanding general obligation bonded indebtedness of the State
as of June 30, 1995 was $3.65 billion. The appropriation for the service
obligation on outstanding indebtedness is $466.3 million for fiscal year 1996.

All appropriations for capital projects and all proposals for State bond
authorizations are subject to the review and recommendation of the New Jersey
Commission on Capital Budgeting and Planning. This permanent commission was
established in November 1975, and is charged with the preparation of the State
Capital Improvement Plan, which contains proposals for State spending for
capital projects.

At any given time, there are various numbers of claims and cases pending
against the State, State agencies and employees, seeking revovery of monetary
damages that are primarily paid out of the fund created pursuant to the New
Jersey Tort Claims Act (N.J.S.A. 59:1-1, ET SEQ.). The State does not formally
estimate its reserve representing potential exposure for these claims and cases.
The State is unable to estimate its exposure for these claims and cases.

<PAGE>

The State routinely receives notices of claims seeking substantial sums of
money. The majority of those claims have historically proven to be of
substantially less value than the amount originally claimed. Under the New
Jersey Tort Claims Act, any tort litigation against the State must be preceded
by a notice of claim, which affords the State the opportunity for a six-month
investigation prior to the filing of any suit against it.

In addition, at any given time, there are various numbers of contract and
other claims against the State and State Agencies, including environmental
claims asserted against the State, among other parties, arising from the alleged
disposal of hazardous waste. Claimants in such matters are seeking recovery of
monetary damages or other relief which, if granted, would require the
expenditure of funds. The State is unable to estimate its exposure for these
claims.

New Jersey is involved in a number of other lawsuits in which adverse
decisions could materially affect revenue or expenditures. Such cases include
challenges to the constitutionality of certain hazardous and solid waste license
renewal fees and the methods by which the State Department of Human Services
shares with county governments the maintenance recoveries and costs for
residents in state psychiatric hospitals and residential facilities for the
developmentally disabled and a suit alleging violations of laws allegedly
resulting from the existence of chromium contamination in the State owned
Liberty State Park.
Other lawsuits, that could materially affect revenue or expenditures, include
a challenge to amendments to the pension laws enacted on June 30, 1994, a
challenge by certain hospitals of the adequacy of Medicaid reimbursement for
hospital services and a challenge by certain hospitals to certain hospital
assessments authorized by the Health Care Reform Act of 1992.

Bond Ratings--Moody's rates new Jersey general obligation bonds Aa-1. The
Aa-1 rating from Moody's is equivalent to Standard & Poor's AA rating. On
November 9, 1994, Standard & Poor's affirmed its AA+ ratings on New Jersey's
general obligation and various lease and appropriation backed debt. Its ratings
outlook was revised to stable for the longer term horizon (beyond four months).

NEW MEXICO

RISK FACTORS--Driven by its private sector, the New Mexico state economy and
the economy of Albuquerque and its metropolitan area have enjoyed vigorous
growth. The short term outlook continues to be good. However, the strong job
growth of recent years has slowed and future spending cuts by the federal
government are expected, which will further dampen the rate of economic growth.

The State Economy. The Debt Obligations included in the Portfolio of the New
-----------------
Mexico Trust may include special or general obligations of the State or of the
municipality or authority which is the issuer. Special obligations are not
supported by taxing powers. The risks, particular source of payment and
security for each of the Debt Obligations are detailed in the instruments
themselves and in related offering materials. There can be no assurance
concerning the extent to which the market value or marketability of any of the
Debt Obligations will be affected by the financial or other condition of the
State, or by changes in the financial condition or operating results of
underlying obligors. Further, there can be no assurance that the discussion of
risks disclosed in related offering materials will not become incomplete or
inaccurate as a result of subsequent events.

According to reports of the Bureau of Business and Economic Research of the
University of New Mexico ("BBER") through November 1995 and covering reports of
economic results for 1994 and estimated results for the first two quarters of
1995, New Mexico's economy continued to perform well during the period, with
diversified growth by sector and region throughout the state. However, the rate
of growth in the economies of the State of New Mexico and the Albuquerque
metropolitan area has slowed. Although each remains healthy, and personal income
continued to increase, as well, further growth in employment and personal income
is expected to be below the levels of the recent past.

<PAGE>

New Mexico is benefitting from an influx of new manufacturing and business
services firms into the Rocky Mountain states, drawn by the region's low wages,
productive work force, relatively low tax burden and quality of life. Although
New Mexico is highly dependent on defense spending, the State has so far escaped
any major defense cuts. Indeed, U.S. Air Force facilities have seen a limited
expansion, and the two national laboratories have gained additional funds for
environmental, arms control and technology transfer research. Job losses in
defense related activities which have occurred to date have been fairly minor
from an overall state perspective. Employment in the federal government sector
has declined, however, and over the longer term, further job losses are expected
as a result of anticipated spending cutbacks by the Department of Energy which
will impact the national laboratories at Sandia in Albuquerque and at Los
Alamos.

Growth in New Mexico's construction sector continued through the second
quarter of 1995. At the same time, housing construction continued to slow, with
authorizations for single-family units and multi-family units, as well,
declining from the levels of the second quarter of 1994. Nevertheless,
construction employment overall grew by 7.7%.

Manufacturing has seen robust growth recently, and this sector continued to
show rapid growth during 1995's second quarter. About 5,000 new jobs have been
added by the manufacturing sector since 1990, led by expansion of the Intel
plant, Motorola, Sumitomo, Philips Semiconductor and Sumitomo in the Albuquerque
MSA and numerous new food processing operations in the eastern part of the
State.

Mining employment increased during the second quarter of 1995, after a year
of declines, and services and trade also saw increases in employment. The
sector with slowest growth was government.

The Economy of Albuquerque and its Metropolitan Area. A significant
----------------------------------------------------
proportion of the New Mexico Trust's Portfolio may consist of Debt Obligations
of issuers located in, or whose activities may be affected by economic
conditions in, the Albuquerque MSA. (As of January 1, 1994, the Albuquerque
Metropolitan Statistical Area ("MSA") was redefined to include Sandoval County,
the location of Rio Rancho, as well as Valencia County and Bernalillo County).
Albuquerque is the largest city in the State of New Mexico, accounting for
roughly one-quarter of the State's population. Located in the center of the
State at the intersection of two major interstate highways and served by both
rail and air, Albuquerque is the major trade, commercial and financial center of
the State.

According to BBER reports, although its rate of growth appears to have
peaked, the economy of the Albuquerque MSA continues to expand at a "brisk"
pace. The Albuquerque MSA accounts for almost 47% of the jobs in New Mexico, and
in 1993 accounted for 55% of all new jobs statewide.

Non-agricultural employment in the Albuquerque MSA has seen quarter-to-
quarter gains for sixteen consecutive quarters through the second quarter of
1995. Over half of nonagricultural civilian employment in the Albuquerque MSA
is in the trade and service sectors. Historically, the service sector has grown
at roughly twice the rate of growth of the trade sector. During 1993, the
services sector rate of growth slowed from historical levels, reflecting the
influence of a reduction in the rate of growth in the health services sector and
a decrease in hotel/lodging employment. Both sectors grew during 1995's second
quarter. The importance of trade and services reflects Albuquerque's continuing
role as the trade and service center for the State and the larger region, which
includes southern Colorado and parts of eastern Arizona. People from these
areas continue to come to Albuquerque for major purchases and to shop at retail
and warehouse stores. Albuquerque's concentration of health care facilities and
medical personnel has made it a regional medical center, and despite the
uncertainty about future healthcare reforms, employment in the health services
industry has continued to grow. The significance of trade and service also
reflects the continued importance of tourism to the Albuquerque economy.
Albuquerque has benefitted from the recent fascination with the Southwest and
from efforts to promote the City and to attract major conventions to the
expanded Convention Center.

While it has declined in importance as a direct employer, the government
sector still accounts for 20 percent of the Albuquerque MSA's total
nonagricultural employment. Not included in this calculation

<PAGE>

are the 7,500 jobs at Sandia National Laboratories and about 6,200 military jobs
at Kirtland Air Force Base. As of June 1995, the University of New Mexico, the
Albuquerque Public Schools system, Sandia and Kirtland are the largest employers
in the Albuquerque area. However, there is considerable uncertainty over future
funding for operations at Kirtland and Sandia. At Sandia, employment has
remained steady. However, potential future cuts in spending cast a cloud over
the outlook. Many Sandia employees are at or near retirement age and are
believed to be likely to remain in the Albuquerque area after retirement.

The Albuquerque economy experienced a construction boom during the
mid-1980's, but construction employment decreased in every year from 1985 to
1991. A major increase in jobs occurred during 1992 and the construction sector
led the Albuquerque economy in 1993 and 1994, spurred by low interest rates,
pent up demand for housing and retail and public works construction projects.
During the second quarter of 1995, construction employment continued to
increase, at a rate of approximately 14%, to almost 24,000 jobs. However,
residential construction results were mixed in the Albuquerque MSA, with housing
authorizations down in the City of Albuquerque, but strong in other areas. For
the MSA overall, the dollar value of residential contracts fell more than 20%
during the second quarter of 1995.

The manufacturing employment sector within the Albuquerque MSA has added more
than 5,000 jobs since the first quarter of 1992, a significant portion of which
related to high-tech and electronics manufacturing at Intel, Motorola, Semitomo
and Philips Semiconductors. Employment in the manufacturing sector continued to
increase during the second quarter of 1995. Rio Rancho, which is located
approximately 20 miles northwest of downtown Albuquerque in Sandoval County, has
had considerable success in attracting new manufacturing facilities. Employment
at Intel Corporation's Rio Rancho plant has seen steady, significant increases
since 1988, and the current expansion is expected to add 2,400 new manufacturing
jobs.

Income. According to U.S. Department of Commerce data, Albuquerque MSA
personal income grew at an annual rate of not less than 6.5% from 1986 through
1993, the most recent year for which the statistic is available. In 1993,
annual per capita personal income for the Albuquerque MSA, the State of New
Mexico and the United States was $18,899, $16,295 and $20,809, respectively.
According to BBER, New Mexico's average wage in 1993 was 83.9 percent of the
average U.S. wage ($21,703 versus $23,866) a fall from the 93.1 percent level
which existed in 1981. This trend shows that with the exception of the new jobs
in the durable manufacturing sector, the new jobs generated in recent periods
have in many cases been low paying ones and even in sectors such as retail trade
and state and local government, average wages have not kept pace with national
averages.

Population. Population in the Albuquerque MSA is estimated at 645,525 for
1994. (The population of the State is estimated at 1,653,521.)

Outlook. As of November 1995, BBER projected a good near-term outlook for
-------
the New Mexico state economy and very good prospects for the Albuquerque MSA.
Further increases in employment and personal income were expected for the
balance of 1995, although at lesser rates than during the recent past. Weakness
in the federal sector was expected, however, both with regard to civilian
(Department of Energy) employment levels at the national laboratories at Sandia
and Los Alamos, and the military sector as well. With strong growth in personal
income and disposable income, in a low inflation environment, retail trade and
consumer services businesses are expected to do well.

A variety of public and private sector construction projects in the
Albuquerque MSA, coupled with moderate expansion in the manufacturing and
services sectors, is expected to support a continuation of economic growth into
early 1996.

According to BBER's analysis, New Mexico has enjoyed a competitive advantage
over other states in attracting manufacturing, business services and retail
trade jobs since 1981, although the sharp declines in mining throughout the
1980's and construction's bust in the second half of the 1980's tended to
obscure this phenomenon. The State's recent economic performance in the face of
weakness in important sectors was impressive.

<PAGE>

The Sponsors believe that the information summarized above describes some of
the more significant general considerations relating to Debt Obligations
included in the New Mexico Trust. For a discussion of the particular risks
associated with each of the Debt Obligations and other factors to be considered
in connection therewith, reference should be made to the Official Statements and
other offering materials relating to each of the Debt Obligations which are
included in the portfolio of the New Mexico Trust. The sources of the
information set forth herein are official statements, other publicly available
documents, and statements of public officials and representatives of the issuers
of certain of the Debt Obligations. While the Sponsors have not independently
verified this information, they have no reason to believe that such information
is incorrect in any material respect.

NEW YORK

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

New York State. In recent fiscal years, there have been extended delays in
adopting the State's budget, repeated revisions of budget projections,
significant revenue shortfalls (as well as increased expenses) and year-end
borrowing to finance deficits. These developments reflect faster long-term
growth in State spending than revenues and that the State was earlier and more
severely affected by the recent economic recession than most of the rest of the
country, as well as its substantial reliance on non-recurring revenue sources.
The State's general fund incurred cash basis deficits of $775 million, $1,081
million and $575 million, respectively, for the 1990-1992 fiscal years.
Measures to deal with deteriorating financial conditions included transfers from
reserve funds, recalculating the State's pension fund obligations (subsequently
ruled illegal), hiring freezes and layoffs, reduced aid to localities, sales of
State property to State authorities, and additional borrowings (including
issuance of additional short-term tax and revenue anticipation notes payable out
of impounded revenues in the next fiscal year). The general fund realized a
$671 million surplus for the fiscal year ended March 31, 1993, and a $1.54
billion surplus for the fiscal year ended March 31, 1994. Disbursements exceeded
receipts by $241 million for the fiscal year ended March 31, 1995.

Approximately $5.2 billion of State general obligation debt was outstanding
at March 31, 1995. State supported debt (restated to reflect LGAC's assumption
of certain obligations previously funded through issuance of short-term debt)
was $27.9 billion at March 31, 1995, up from $9.8 billion in 1986. Standard &
Poor's reduced its rating of the State's general obligation bonds on January 13,
1992 to A- (its lowest rating for any state). Moody's reduced its ratings of
State general obligation bonds from A1 to A on June 6, 1990 and to Baa1, its
rating of $14.2 billion of appropriation-backed debt of the State and State
agencies (over two-thirds of the total debt) on January 6, 1992.

In May 1991 (nearly 2 months after the beginning of the 1992 fiscal year),
the State Legislature adopted a budget to close a projected $6.5 billion gap
(including repayment of $905 million of fiscal 1991 deficit notes). Measures
included $1.2 billion in new taxes and fees, $0.9 billion in non-recurring
measures and about $4.5 billion of reduced spending by State agencies (including
layoffs), reduced aid to localities and school districts, and Medicaid cost
containment measures. After the Governor vetoed $0.9 billion in spending, the
State adopted $0.7 billion in additional spending, together with various
measures including a $100 million increase in personal income taxes and $180
million of additional non-recurring measures. Due primarily to declining
revenues and escalating Medicaid and social service expenditures, $0.4 billion
of administrative actions, $531 million of year-end short-term borrowing and a
$44 million withdrawal from the Tax Stabilization Reserve Fund were required to
meet the State's cash flow needs.

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The State budget to close a projected $4.8 billion gap for the State's 1993
fiscal year (including repayment of the fiscal 1992 short-term borrowing)
contained a combination of $3.5 billion of spending reductions (including
measures to reduce Medicaid and social service spending, as well as further
employee layoffs, reduced aid to municipalities and schools and reduced support
for capital programs), deferral of scheduled tax reductions, and some new and
increased fees. Nonrecurring measures aggregated $1.18 billion.

To close a projected budget gap of nearly $3 billion for the fiscal year
ended March 31, 1994, the State budget contained various measures including
further deferral of scheduled income tax reductions, some tax increases, $1.6
billion in spending cuts, especially for Medicaid, and further reduction of the
State's work force. The budget increased aid to schools, and included a formula
to channel more aid to districts with lower-income students and high property
tax burdens. State legislation requires deposit of receipts from the petroleum
business tax and certain other transportation-related taxes into funds dedicated
to transportation purposes. Nevertheless, $516 million of these monies were
retained in the general fund during this fiscal year. The Division of the
Budget has estimated that non-recurring income items other than the $671 million
surplus from the 1993 fiscal year aggregated $318 million.

The budget for the fiscal year ended March 31, 1995, increased spending by
3.8% (greater than inflation for the first time in six years). It provided a
tax credit for low income families and increased aid to education, especially in
the poorer districts. The State reduced coverage and placed additional
restrictions on certain health care services. Over $1 billion savings resulted
from postponement of scheduled reductions in personal income taxes for a fifth
year and in taxes on hospital income; another $1.5 billion came from non-
recurring measures. The Governor in January 1995 instituted $188 million in
spending reductions (including a hiring freeze) and $71 million of other
measures to address a widening gap.

More than two months after the fiscal year that began April 1, 1995, the
State adopted a budget to close a projected gap of approximately $5 billion,
including a reduction in income and business taxes. The financial plan projects
nearly $1.6 billion in savings from cost containment, disbursement reestimates
and reduced funding for social welfare programs and $2.2 billion from State
agency actions. Approximately $1 billion of the gap-closing measures are non-
recurring and some of the revenue and cost-cutting estimates are considered
optimistic. The State Comptroller sued to prevent reallocation of $110 million
of reserves from a special pension fund. State and other estimates are subject
to uncertainties including the effects of Federal tax legislation and economic
developments. In October 1995, the Governor released a plan to reduce State
spending by $148 million to offset risks that have developed, including proposed
reductions in Federal aid and possible adverse court decisions. A $290 million
surplus was projected in December.

The Governor has proposed a budget for the State's fiscal year commencing
April 1, 1996 to address a projected $3.9 billion budget gap. It would eliminate
7,400 State jobs (largely through buyouts) to save $250 million annually and
reduce Medicaid ($1.1 billion), welfare ($240 million) and higher education
($265 million) spending, but would reduce taxes by $2.1 billion, increase
prison, road and bridge construction and divert $100 million of State lottery
proceeds from education to reduce property taxes. The proposal assumes receipt
of $1.3 billion from Federal Medicaid revisions presently pending in Congress
and could also be adversely affected by pending Federal legislation to reduce
tax rates on capital gains. Non-recurring savings are estimated at $123 million.
The proposed reductions are likely to add financial pressure to State
municipalities. The proposed budget would also move the State to cash accounting
but would increase use of appropriation-backed debt.

The State normally adjusts its cash basis balance by deferring until the
first quarter of the succeeding fiscal year substantial amounts of tax refunds
and other disbursements. For many years, it also paid in that quarter more than
40% of its annual assistance to local governments. Payment of these annual
deferred obligations and the State's accumulated deficit was substantially
financed by issuance of short-term tax and revenue anticipation notes shortly
after the beginning of each fiscal year. The New York Local Government
Assistance Corporation ("LGAC") was established in 1990 to issue $4.7 billion of
long-term

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bonds over several years, payable from a portion of the State sales tax, to fund
certain payments to local governments traditionally funded through the State's
annual seasonal borrowing. The legislation will normally prevent State seasonal
borrowing until an equal amount of LGAC bonds are retired. The State's last
seasonal borrowing, in May 1993, was $850 million. Voters in November 1995
failed to ratify a proposed constitutional amendment which would have eliminated
lease-purchase and contractual financing. The Governor has proposed a
constitutional amendment to require the State to adopt balanced budgets.

Generally accepted accounting principles ("GAAP") for municipal entities
apply modified accrual accounting and give no effect to payment deferrals. On
an audited GAAP basis, the State's government funds group recorded operating
deficits of $1.2 billion and $1.4 billion for the 1990 and 1991 fiscal years.
For the same periods the general fund recorded deficits (net of transfers from
other funds) of $0.7 billion and $1.0 billion. Reflecting $1.6 billion, $881
million and $875 million of payments by LGAC to local governments out of
proceeds from bond sales, the general fund surpluses of $1.7 billion, $2.1
billion and $0.9 billion for the 1992, 1993 and 1994 fiscal years and a deficit
of $1.4 billion for the fiscal year ended March 31, 1995, for an accumulated
deficit of $3.3 billion. The Governor projects a $1.4 billion budget gap for
fiscal 1998 and $1 billion for fiscal 1999. The State Comptroller had projected
a $3.9 billion gap for fiscal 1998.

For decades, the State's economy has grown more slowly than that of the rest
of the nation as a whole. Part of the reason for this decline has been
attributed to the combined State and local tax burden, which is among the
highest in the nation. The State's dependence on Federal funds and sensitivity
to changes in economic cycles, as well as the high level of taxes, may continue
to make it difficult to balance State and local budgets in the future. The
total employment growth rate in the State has been below the national average
since 1984. The State lost 524,000 jobs in 1990-1992. It regained
approximately 185,000 jobs between November 1992 and June 1995.

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

MAC has no taxing power and pays its obligations out of sales taxes imposed
within the City and per capita State aid to the City. The State has no legal
obligation to back the MAC bonds, although it has a "moral obligation" to do so.
MAC is now authorized to issue bonds only for refunding outstanding issues and
up to $1.5 billion should the City fail to fund specified transit and school
capital programs. The State also established the Financial Control Board
("FCB") to review the City's budget, four-year financial plans, borrowings and
major contracts. The FCB is required to impose a review and approval process of
the proposals if the City were to experience certain adverse financial
circumstances. The City's fiscal condition is also monitored by a Deputy State
Comptroller.

From 1989 through 1993, the gross city product declined by 10.1% and
employment, by almost 11%, while the public assistance caseload grew by over
25%. Unemployment averaged 10.8% in 1992, 10.1% in 1993 and 8.7% in 1994.
While the City's unemployment rate averaged 8.1% for the first 11 months of
1995, it is still above the rest of the State and the nation as a whole. The
number of persons on welfare exceeds 1.1 million, and one in seven residents is
currently receiving some form of public assistance.

While the City, as required by State law, has balanced its budgets in
accordance with GAAP since 1981, this has required exceptional measures in
recent years. City expenditures grew faster than revenues each year from 1986
through 1994, masked in part by a large number of non-recurring gap closing
actions. To eliminate potential budget gaps of $1-$3 billion each year since
1988 the City has taken a wide variety

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of measures. In addition to increased taxes and productivity increases, these
have included hiring freezes and layoffs, reductions in services, reduced
pension contributions, and a number of nonrecurring measures such as bond
refundings, transfers of surplus funds from MAC, sales of City property and tax
receivables. The FCB concluded that the City has neither the economy nor the
revenues to do everything its citizens have been accustomed to expect.

The City closed a budget gap for the 1993 fiscal year (estimated at $1.2
billion) through actions including service reductions, productivity initiatives,
transfer of $0.5 billion surplus from the 1992 fiscal year and $100 million from
MAC. A November 1992 revision offset an additional $561 million in projected
expenditures through measures including a refunding to reduce current debt
service costs, reduction in the reserve and an additional $81 million of gap
closing measures. Over half of the City's actions to eliminate the gap were
non-recurring.

The Financial Plan for the City's 1994 fiscal year relied on increases in
State and Federal aid, as well as the 1993 $280 million surplus and a partial
hiring freeze, to close a gap resulting primarily from labor settlements and
decline in property tax revenues. The Plan contained over $1.3 billion of one-
time revenue measures including bond refundings, sale of various City assets and
borrowing against future property tax receipts. Interim expenditure reductions
of approximately $300 million were implemented. The FCB reported that although
a $98 million surplus was projected for the year (the surplus was actually $81
million), a $312 million shortfall in budgeted revenues and $904 million of
unanticipated expenses (including an unbudgeted increase of over 3,300 in the
number of employees and a record level of overtime), net of certain increased
revenues and other savings, resulted in depleting prior years' surpluses by $326
million.

The City's original Financial Plan for the fiscal year ended June 30, 1995,
proposed to eliminate a projected $2.3 billion budget gap through measures
including reduction of the City's workforce (achieved in substantial part
through voluntary severance packages funded by MAC),increased State and Federal
aid, a bond refinancing, reduced contributions to City pension funds and sale of
certain City assets. The Mayor's proposals include efforts toward privatization
of certain City services and agencies, greater control of independent
authorities and agencies, and reducing social service expenditures. He also
sought concessions from labor unions representing City employees. In 1995, an
initiative to replace city school custodians with private workers was
implemented in 52 of the City's 1,100 schools. As several of these measures
failed to implemented, the City experienced lower than anticipated tax
collections and higher than budgeted costs (particularly overtime and liability
claims) during the year, and various alternative measures were implemented, for
an aggregate of more than $3 billion of gap closing measures. $1.9 billion of
these were non-recurring and, in the case of a second bond refinancing, will
increase City expenses for future years. Reduced maintenance of City
infrastructure could also lead to increased future expenses. In December 1994,
the City Council rejected the Mayor's recommendations, adopted its own budget
revisions and sued to enforce them; the suit was dismissed and the Mayor
impounded funds to achieve his proposed expense reductions.

The City projected a $3.1 billion budget gap for the fiscal year that began
July 1, 1995, attributed to large use of non-recurring measures in the 1995
fiscal year, a $500 million decline in tax revenues and a $630 million shortfall
in anticipated State aid, as well as higher Medicaid and agency spending,
failure to negotiate increased lease payments for City airports, additional
funding for pensions and State failure to adopt a tort reform measure. The
Financial Plan approved in June has reduced a wide range of City services. City
agency and labor savings are projected at $1.2 billion and $600 million
respectively. The City Comptroller identified $0.7 to $1.0 billion of risks for
the current fiscal year, including anticipated State and Federal aid increases,
savings in welfare expenditures through increased fraud detection, proposed gap
closing measures by the Board of Education and a substantial projected deficit
for the Health and Hospitals Corporation, labor concessions (including health
insurance costs) and increased rental payments for the City's airports.
Estimates of non-recurring measures range from $500-800 million. The Mayor
separately proposed selling the City's water system the New York Water Board,
which would issue $2.3 billion of bonds for the purpose. Issuance of bonds by
the Water Board would also permit the City to issue more bonds as it approaches
its debt limit. The Mayor recently invited bids from non-profit entities for

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long-term leases on three City hospitals. However, a City counsel report
questions the projected savings and whether the plan would provide adequate care
for the indigent. It has also been suggested that City Council approval is
needed. In October 1995 S&P reduced its rating on Health and Hospitals
Corporation debt to BBB- (its lowest investment-grade rating), citing City
failure to articulate a coherent strategy for the hospital system. Following
conflicts with the City's Board of Education and the previous Schools
Chancellor, the Mayor recently proposed to disband the Board and replace the
Chancellor with an Education Commissioner whom he would appoint. These proposals
would require implementing legislation by the State. The City Council President
subsequently proposed a Superintendent appointed jointly by the Mayor and the
Council. The Mayor has imposed fingerprinting and workfare requirements for
certain welfare recipients. A recently filed suit seeks an injunction to suspend
the City's Eligibility Verification Review program which began in January 1995
to detect welfare fraud. Other proposals including mandatory managed care
programs for Medicaid recipients have been blocked. Most of the proposed gap-
closing measures depend on cooperation of Federal or State governments, of which
there can be no assurance. The City Comptroller predicted that certain
reductions in Medicaid and welfare expenditures may lead to job reductions and
higher costs for other programs. In November 1995 the Mayor submitted a revised
fiscal plan which would reduce expenses by $100 million in the current fiscal
year; another $123 million would be obtained from a debt refinancing. The State
Comptroller noted that use of one-time resources nearly doubled (to $1.4
billion) from the plan approved in June. The revision reduces reliance on
further union concessions and increases the reserve by $100 million. The Mayor
stated that the Governor's December 1995 budget proposal will provide only $150
million of the $675 million State assistance requested to close the City's
fiscal 1997 budget gap. In January 1996 the Mayor ordered preparation of $100
million additional reductions in agency spending for the current fiscal year to
offset higher social service spending and projected reductions in State and
Federal aid. On January 31, the Mayor presented a preliminary budget to close a
projected $2 billion budget gap for fiscal 1997. Rating agency representatives
questioned the proposal's assumptions of $800 million of additional State and
Federal assistance, $300 million from sale of City assets (including parking
meters), and $244 million in retroactive additional airport rent (two thirds of
the gap-closing measures). The proposal includes $349 million in further tax
reductions. In addition to $691 million of spending reductions in the
preliminary budget (including $181 million by the Board of Education), on
February 1 the Mayor ordered City agencies to prepare $200 million in additional
reductions. On February 8, the City's budget director directed the agencies to
prepare for an additional $500 million in reductions. The Board of Education is
also facing proposed reductions of $265 million in State aid and $189 million in
Federal aid. The January proposal projected a remaining gap of $750 million for
the current fiscal year (the City Comptroller assessed the risks at close to $1
billion). The Mayor is seeking $150 million in assistance from MAC to fund a
further worker severance program and legislation to authorize selling as a
package of $281 million of tax liens. Gaps of $3.3 billion and $4.1 billion are
projected for the 1998 and 1999 fiscal years. Fiscal monitors have commented
that the City needs to take significant additional actions to work toward
structural balance.

A major uncertainty is the City's labor costs, which represent about 50% of
its total expenditures. Although the City workforce was reduced by 17,000
workers in the year and a half since January 1994, with wage and benefit
increases and overtime, wage costs continue to grow. Contracts with virtually
all of the City's labor unions expired in 1995, and the current Financial Plan
assumes no further wage increases. A tentative agreement with labor leaders in
June 1995 proposed to realize $440 million of the $600 million in savings sought
for the current fiscal year, mostly from reduced health care costs and spreading
out City contributions to pension funds. Certain of these actions will increase
City costs in future years. The agreement did not include layoffs or changes in
productivity work rules. Substantially better than anticipated earnings on City
pension funds in the latest fiscal year will allow the City to reduce pension
fund contributions over the next several years. In November 1995, the City
reached tentative five-year agreements with the United Federation of Teachers
and with unions representing 140,000 city civilian employees. The proposed
contracts would postpone wage increases for two years, and would protect members
(other than hospital and certain other workers) from layoffs through 1998, but
do not provide any significant productivity savings. However, the civil unions
pledged to cooperate with the Mayor on competing with private companies to
provide services and on use of welfare recipients for routine work. The
contracts would cost an estimated $772 million and $830 million additional,
respectively, over the next three years. The Mayor in December signed
legislation increasing the salaries of 64 elected

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officials by up to 28%. The teachers rejected the first contract; the public
employees approved the second. Negotiations for new contracts with police and
fire unions are at an impasse. On February 12, 1996, the State legislature
overrode the Governor's veto of legislation that will transfer arbitration of
City labor disputes with police and fire unions from the Office of Collective
Bargaining to the State's Public Employment Relations Board. The transfer is
expected to result in awards of higher salaries to City workers, commensurate
with those paid suburban officers. The City would also be adversely affected by
a labor-sponsored proposal to increase the minimum wages paid by contractors
serving the City.

Budget balance may also be adversely affected by the effect of the economy on
economically sensitive taxes. Reflecting the downturn in real estate prices and
increasing defaults, estimates of property tax revenues have been reduced. If
this trend continues, the City's ability to issue additional general obligation
bonds could be limited. The City also faces uncertainty in its dependence on
State aid. Other uncertainties include additional expenditures to combat
deterioration in the City's infrastructure (such as bridges, schools and water
supply), costs of developing alternatives to ocean dumping of sewage sludge
(which the City expects to defray through increased water and sewer charges),
cost of the AIDS epidemic and problems of drug addiction and homelessness.
Elimination of any additional budget gaps will require various actions,
including by the State, a number of which are beyond the City's control.

The City sold $1.8 billion, $2.2 billion and $2.4 billion of short-term
notes, respectively, during the 1994, 1995 and current fiscal years. At June
30, 1995, there were outstanding $23.3 billion of City bonds (not including City
debt held by MAC), $4.0 billion of MAC bonds and $1.1 billion of City-related
public benefit corporation indebtedness, each net of assets held for debt
service. Standard & Poor's and Moody's during the 1975-80 period either
withdrew or reduced their ratings of the City's bonds. Standard & Poor's
reduced its rating of the City's general obligation debt to BBB+ on July 10,
1995, citing the City's economy, substantial retention of non-recurring revenues
and optimistic revenue projections in the budget. Moody's rates City bonds Baa1.
City-related debt almost doubled since 1987, although total debt declined as a
percentage of estimated full value of real property. The City's financing
program projects long-term financing during fiscal years 1996-1999 to aggregate
$15.2 billion, including $1 billion from the proposed sale of the City's water
system. An addition $0.8 billion is to be derived from other sources,
principally use of restricted cash balances. Assuming sale of the City's water
system, from fiscal year 1999 through fiscal year 2005, debt service is
estimated to average 18.2% of tax revenues, up from 12.3% in fiscal year 1990
and 14% in fiscal year 1995. If the sale is not consummated, the debt service
ratio would increase. The City's latest Ten Year Capital Strategy plans capital
expenditures of $45.6 billion during 1994-2003 (93% to be City funded).

Other New York Localities. In 1993, other localities had an aggregate of
approximately $17.7 billion of indebtedness outstanding. In recent years,
several experienced financial difficulties. A March 1993 report by Moody's
Investors Service concluded that the decline in ratings of most of the State's
largest cities in recent years resulted from the decline in the State's
manufacturing economy. $105 million was for deficit financing. Any reductions
in State aid to localities may cause additional localities to experience
difficulty in achieving balanced budgets. County executives have warned that
reductions in State aid to localities to fund future State tax reductions are
likely to require increased local taxes. If special local assistance were
needed from the State in the future, this could adversely affect the State's as
well as the localities' financial condition. Most localities depend on
substantial annual State appropriations. Legal actions by utilities to reduce
the valuation of their municipal franchises, if successful, could result in
localities becoming liable for substantial tax refunds.

State Public Authorities. In 1975, after the Urban Development Corporation
("UDC"), with $1 billion of outstanding debt, defaulted on certain short-term
notes, it and several other State authorities became unable to market their
securities. Since 1975 the State has provided substantial direct and indirect
financial assistance to UDC, the Housing Finance Agency ("HFA"), the
Environmental Facilities Corporation and other authorities. Practical and legal
limitations on these agencies' ability to pass on rising costs through rents and
fees could require further State appropriations. Refundings by the State's Jobs
Development Authority and UDC have been proposed to avert a projected deficity
by the Authority. 18 State authorities had an aggregate of $70.3 billion of
debt outstanding at September 30, 1994. At March

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31, 1995, approximately $0.4 billion of State public authority obligations was
State-guaranteed, $7.0 billion was moral obligation debt (including $4.6 billion
of MAC debt) and $22.7 billion was financed under lease-purchase or contractual
obligation financing arrangements with the State. Various authorities continue
to depend on State appropriations or special legislation to meet their budgets.

The Metropolitan Transportation Authority ("MTA"), which oversees operation
of the City's subway and bus system by the City Transit Authority (the "TA") and
operates certain commuter rail lines, has required substantial State and City
subsidies, as well as assistance from several special State taxes. Measures to
balance the TA's 1993 budget included increased funding by the City, increased
bridge and tunnel tolls and allocation of part of the revenues from the
petroleum business tax. The New York City Transit Financial plan submitted in
May 1995 projects a TA deficit of $150 million for 1995 (reflecting a $113
million reduction in City funding), and cash basis budget gaps of $262 million,
$547 million, $673 million and $731 million for 1996 through 1999. An MTA budget
gap of $388 million is projected for 1996. In August 1995, the MTA Chairman
proposed an ambitious program of fare increases (20% for the TA) and a five-year
program of $2.85 billion in expense reductions which he urged was needed to
restore the MTA budget to a sound financial basis. Fares were increased in
November 1995. In a draft budget released in October 1995, the TA proposed to
eliminate 1600 jobs in 1996, in addition to 1500 jobs previously eliminated. The
workforce serving the commuter railroads would also be reduced.

Substantial claims have been made against the TA and the City for damages
from a 1990 subway fire and a 1991 derailment. The MTA infrastructure,
especially in the City, needs substantial rehabilitation. In December 1993, a
$9.5 billion MTA Capital Plan was finally approved for 1992-1996; however, $500
million was contingent on increased contributions from the City, which it
declined to approve. In November 1995 the MTA board approved a $12 million
capital plan for 1996 through 1999, which includes $4.5 billion to be raised by
bonds backed by fares and a portion of the State's petroleum business tax, as
well as excess revenues of the Triborough Bridge and Tunnel Authority. The plan
does not contemplate further fare increases until 2000. The plan is subject to
approval by the State's Capital Program Review Board. The plan also projects
$2.85 billion in expense reductions over the five years. Critics have questioned
whether many of the projected labor and other savings can be achieved. It is
anticipated that the MTA and the TA will continue to require significant State
and City support. Moody's reduced its rating of certain MTA obligations to Baa
on April 14, 1992.

Litigation. The State and the City are defendants in numerous legal
proceedings, including challenges to the constitutionality and effectiveness of
various welfare programs, alleged torts and breaches of contract, condemnation
proceedings and other alleged violations of laws. Adverse judgments in these
matters could require substantial financing not currently budgeted. For
example, in addition to real estate certiorari proceedings, claims in excess of
$286 billion were outstanding against the City at June 30, 1994, for which it
estimated its potential future liability at $2.6 billion. City settlements were
$275 million in fiscal 1994, up from $247 million the preceding year and $175
million in fiscal 1990. It was recently reported that settlement of claims
against the City for the effects of lead poisoning may cost $500 million during
the next several years. Another action seeks a judgment that, as a result of an
overestimate by the State Board of Equalization and Assessment, the City's 1992
real estate tax levy exceeded constitutional limits. In March 1993, the U.S.
Supreme Court ruled that if the last known address of a beneficial owner of
accounts held by banks and brokerage firms cannot be ascertained, unclaimed
funds therein belong to the state of the broker's incorporation rather than
where its principal office is located. New York has agreed to pay $351 million
by the 2003 fiscal year.

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

NORTH CAROLINA

RISK FACTORS--See Portfolio for a list of the Debt Obligations included in
the North Carolina Trust. The portions of the following discussion regarding
the financial condition of the State government

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may not be relevant to general obligation or revenue bonds issued by political
subdivisions of the State. Those portions and the sections which follow
regarding the economy of the State, are included for the purpose of providing
information about general economic conditions that may or may not affect issuers
of the North Carolina Obligations. None of the information is relevant to any
Puerto Rico or Guam Debt Obligations which may be included in the portfolio of
the North Carolina Trust.

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

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

State Budget and Revenues. The North Carolina State Constitution requires
that the total expenditures of the State for the fiscal period covered by each
budget not exceed the total of receipts during the fiscal period and the surplus
remaining in the State Treasury at the beginning of the period. The State's
fiscal year runs from July 1st through June 30th.

In 1990 and 1991 the State had difficulty meeting its budget projections.
The General Assembly responded by enacting a number of new taxes and fees to
generate additional revenue and reduce allowable departmental operating
expenditures and continuation funding. The spending reductions were based on
recommendations from the Governor, the Government Performance Audit Committee
and selected reductions identified by the General Assembly.

The State, like the nation, has experienced economic recovery since 1991. In
the opinion of the State Controller, the growth in the economy and the
legislative actions taken in 1991 had a positive effect on the State's revenue
collections over the past several years. The State had a budget surplus of
approximately $865 million at the end of fiscal 1993-94. After review of the
1994-95 continuation budget adopted in 1993, the General Assembly approved
spending expansion funds, in part to restore certain employee salaries to
budgeted levels, which amounts had been deferred to balance the budgets in
1989-1993, and to authorize funding for new initiatives for economic
development, education, human services and environmental programs. (The cutback
in funding for infrastructure and social development projects had been cited by
agencies rating State obligations, following the 1991 reductions, as cause for
concern about the long-term consequences of those reductions on the economy of
the State and the State's fiscal prospects).

Because of projected growth in State tax and fee revenues, the General Fund
balance at the end of the 1994-95 fiscal year was reported at approximately $300
million.

The state budget is based upon estimated revenues and a multitude of existing
and assumed State and non-State factors, including State and national economic
conditions, international activity and federal government policies and
legislation. The Congress of the United States is considering a number of
matters affecting the federal government's relationship with state governments
that, if enacted into law, could affect fiscal and economic policies of the
states, including North Carolina.

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In April 1995, the North Carolina General Assembly repealed, effective for
taxable years beginning on or after January 1, 1995, the tax levied on various
forms of intangible personal property. The intangibles tax revenues receivable
by counties and municipalities will no longer be received. Instead, the
legislature has provided for specific appropriations to counties and
municipalities.

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

Litigation. Litigation against the State includes the following.
-----------

Leandro, et al. v. State of North Carolina and State Board of Education - In
May 1994, students and boards of education in five counties in the State filed
suit in state court requesting a declaration that the public education system of
North Carolina,including its system of funding, violates the State constitution
by failing to provide adequate or substantially equal educational opportunities
and denying due process of law and violates various statutes relating to public
education. The suit is similar to a number of suits in other states, some of
which resulted in holdings that the respective systems of public education
funding were unconstitutional under the applicable state law. The defendants in
such suit have filed a motion to dismiss, which was denied. After trial at the
Superior Court level, the Plaintiff petitioned the North Carolina Supreme Cout
for discretionary review prior to a determination by the Court of Appeals; this
motion was denied. The North Carolina Attorney General's Office believes that
sound legal arguments supports the state's position, but no significant
financial impact is expected to result from the ultimate resolution of this
case, even if adverse to the State.

Francisco Case - In August 1994, a class action lawsuit was filed in state
court against the Superintendent of Public Instruction and the State Board of
Education on behalf of a class of parents and their children who are
characterized as limited English proficient. The complaint alleges that the
State has failed to provide funding for the education of these students and has
failed to supervise local school systems in administering programs for them.
The complaint does not allege an amount in controversy, but asks the Court to
order the defendants to fund a comprehensive program to ensure equal educational
opportunities for children with limited English proficiency. The North Carolina
Attorney General's Office believes that sound legal arguments supports the
state's position, but no significant financial impact is expected to result from
the ultimate resolution of this case, even if adverse to the State.

Faulkenbury v. Teachers' and State Employees' Retirement System; Peele v.
Teachers' and State Employees' Retirement System; Woodard v. Local Government
Employees' Retirement System -- Plaintiffs are disability retirees who brought
class actions in state court challenging changes in the formula for payment of
disability retirement benefits and claiming impairment of contract rights,
breach of fiduciary duty, violation of other federal constitutional rights, and
violation of state constitutional and statutory rights. The State estimates
that the cost in damages and higher prospective benefit payments to class
members would probably amount of $50 million or more in Faulkenbury, $50 million
or more in Peele, and $15 million or more in Woodward, all ultimately payable,
at least initially, from the state retirement systems funds.

Upon review in Faulkenbury, the North Carolina Court of Appeals and Supreme
Court have held that claims made in Faulkenbury substantially similar to those
in Peele and Woodward -- for breach of fiduciary duty and violation of federal
constitutional rights brought under the federal Civil Rights Act -- either do
not state a cause of action or are barred by the statute of limitations. In
1994 plaintiffs took voluntary dismissals of their claims for impairment of
contract rights in violation of the United States Constitution and filed new
actions in federal court asserting the same claims, along with claims for
violation of constitutional rights in the taxation of retirement benefits. The
remaining state court claims in all cases are yet to be heard. The federal
court actions have been stayed pending the trial in state court. The North
Carolina Attorney General's Office believes that sound legal arguments support
the State's position.

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Fulton Corporation v. Justus, Secretary of Revenue -- The State's intangible
personal property tax levied on certain shares of stock (repealed as of the tax
year beginning January 1, 1995) has been challenged by the plaintiff on grounds
that it violates the Commerce Clause of the united States Constitution by
discriminating against stock issued by corporations that do all or part of their
business outside the State. The plaintiff, a North Carolina corporation, paid
the intangibles tax on stock it owns in other corporations. The plaintiff seeks
to invalidate the tax in its entirety and to recover the intangibles taxes it
paid for the 1990 tax year.

The North Carolina Court of Appeals invalidated the taxable percentage
deduction and excised it from the statute beginning with the 1994 tax year. The
effect of this ruling was to increase collections by rendering all stock taxable
on 100% of its value. The North Carolina Supreme Court reversed the Court of
Appeals and held that the tax is valid and constitutional. The plaintiff's
petition for review by the U.S. Supreme Court was granted; after argument, a
decision is expected in 1996. The North Carolina Attorney General's Office
believes that sound legal arguments support the State's position.

Other Tax Cases. In Davis v. Michigan (1989), the United States Supreme
Court ruled that a Michigan income tax statute which taxed federal retirement
benefits while exempting those paid by state and local governments violated the
constitutional doctrine of intergovernmental tax immunity. At the time of the
Davis decision, North Carolina law contained similar exemptions in favor of
state and local retirees. Those exemptions were repealed prospectively,
beginning with the 1989 tax year. All public pension and retirement benefits
are now entitled to a $4,000 annual exclusion.

The Swanson Cases -- Following Davis, federal retirees filed a class action
suit in federal court in 1989 seeking damages equal to the North Carolina income
tax paid on federal retirement income by the class members. A companion suit
was filed in state court in 1990. The complaints alleged that the amount in
controversy exceeded $140 million. The North Carolina Department of Revenue
estimated refunds and interest liability of $280.89 million as of June 30, 1994.

The North Carolina Supreme Court ultimately held in favor of the State in the
case brought in State court, and the United States Supreme Court denied the
plaintiffs' request for review of that decision, thereby concluding the State
litigation. Plaintiffs also were unsuccessful in the federal court action. The
federal retirees continue to seek relief through State legislation.

Patton v. State -- In connection with the legislature's repeal of the tax
exemption for state retirees in 1989, certain adjustments were adopted that
reduced the state retirees' tax burden. In May 1995, federal retirees filed a
lawsuit in State court for tax refunds for the years 1989 through 1994 alleging
that these adjustments also constitute unlawful discrimination against federal
retirees. The amount of the claim has not been set forth. This case is still
pending in superior court.

The Bailey Cases -- State and local government retirees filed a class action
suit in 1990 as a result of the repeal of the income tax exemptions for state
and local government retirement benefits. The original suit was dismissed after
the North Carolina Supreme Court ruled in 1991 that the plaintiffs had failed to
comply with state law requirements for challenging unconstitutional taxes and
the United States Supreme Court denied review.

In 1992, many of the same plaintiffs filed a new lawsuit alleging essentially
the same claims, including breach of contract, unconstitutional impairment of
contract rights by the State in taxing benefits that were allegedly promised to
be tax-exempt, and violation of several state constitutional provisions.
Although the Superior Court ruled largely in the plaintiffs' favor, appeals are
expected from both sides. Additional suits have been filed to recover taxes
subsequently paid. The North Carolina Attorney General's Office estimates that
the amount in controversy is approximately $40-$45 million annually for the tax
years 1989 through 1992. The North Carolina Attorney General's Office believes
that sound legal arguments support the State's position.

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General. The population of the State has increased 13% from 1980, from
5,880,095 to 6,657,106 as reported by the 1990 federal census and the State rose
from twelfth to tenth in population. The State's estimate of population as of
June 30, 1995 is 7,165,298. Notwithstanding its rank in population size, North
Carolina is primarily a rural state, having only five municipalities with
populations in excess of 100,000. The labor force has undergone significant
change during recent years as the State has moved from an agricultural to a
service and goods producing economy. Those persons displaced by farm
mechanization and farm consolidations have, in large measure, sought and found
employment in other pursuits. Due to the wide dispersion of non-agricultural
employment, the people have been able to maintain, to a large extent, their
rural habitation practices. During the period 1980 to 1994, the State labor
force grew about 26% (from 2,855,200 to 3,609,000). Per capita income during
the period 1980 to 1993 grew from $7,999 to $18,702, an increase of 133.8%.

The current economic profile of the State consists of a combination of
industry, agriculture and tourism. As of November 1994, the State was reported
to rank ninth among the states in non-agricultural employment and eighth in
manufacturing employment. Employment indicators have varied somewhat in the
annual periods since June of 1990, but have demonstrated an upward trend since
1991. The following table reflects the fluctuations in certain key employment
categories.

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<TABLE>

Category (all seasonally
adjusted) June 1991 June 1992 June 1993 June 1994 June 1995
========= =========
<S> <C> <C> <C> <C> <C>
Civilian Labor Force 3,228,000 3,495,000 3,504,000 3,560,000 3,578,000
========= =========
Nonagricultural Employment 3,059,000 3,135,000 3,203,400 3,358,700 3,419,100
========= =========
Goods Producing Occupations
(mining, construction and
manufacturing) 973,600 980,800 993,600 1,021,500 1,036,700
========= =========
Service Occupations 2,085,400 2,154,200 2,209,800 2,337,200 2,382,400
========= =========
Wholesale/Retail Occupations 704,100 715,100 723,200 749,000 776,900
======= =======
Government Employees 496,700 513,400 515,400 554,600 555,300
======= =======
Miscellaneous Services 596,300 638,300 676,900 731,900 742,200
======= =======
Agricultural Employment 88,700 102,800 88,400 53,000 53,000
====== ======
</TABLE>

The seasonally adjusted unemployment rate in June 1995 was estimated to be
4.4% of the labor force, as compared with 5.6% nationwide.

As of 1994, the State was ninth in the nation in gross agricultural income,
of which nearly the entire amount (approximately $5.5 billion) was from
commodities. According to the State Commissioner of Agriculture, in 1994 the
State ranked first in the nation in the production of flue-cured tobacco, total
tobacco, turkeys and sweet potatoes; second in hog production, trout and the
production of cucumbers for pickles; third in the value of poultry and egg
products, peanuts and net farm income; fourth in commercial broilers,
blueberries and strawberries; fifth in burley tobacco; and sixth in peaches.

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

Tobacco production, which has been the leading source of agricultural income
in the State, declined in 1994, based on preliminary figures. For 1994,
commercial broiler production and pork production surpassed tobacco among
sources of agricultural income, providing 30% and 15.5%, respectively. Tobacco
farming in North Carolina has been and is expected to continue to be affected by
major Federal legislation and regulatory measures regarding tobacco production
and marketing and by international competition. Measures adverse to tobacco
farming could have negative effects on farm income and the North Carolina
economy generally.

The number of farms has been decreasing; in 1994 there were approximately
58,000 farms in the State (down from approximately 72,000 in 1987, a decrease of
about 19% in seven years). However, a strong agribusiness sector supports
farmers with farm inputs (fertilizer, insecticide, pesticide and farm machinery)
and processing of commodities produced by farmers (vegetable canning and
cigarette manufacturing). North Carolina's agriculture industry, including
food, fiber and forest products, contributes over $42 billion annually to the
State's economy.

The State Department of Commerce, Travel and Tourism Division, statistics
office, reports that in 1993 approximately $8.3 billion was spent on tourism in
the State. The Department estimates that two-thirds of total expenditures came
from out-of-state travelers and that approximately 250,000 people were employed
in tourism-related jobs.

Bond Ratings. Currently, Moody's rates North Carolina general obligation
bonds as Aaa and Standard & Poor's rates such bonds as AAA. Standard & Poor's
also reaffirmed its stable outlook for the State in January 1994.

Standard & Poor's reports that North Carolina's rating reflects the State's
strong economic characteristics, sound financial performances, and low debt
levels.

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

OHIO

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

Employment and Economy. Economic activity in Ohio, as in many other
----------------------
industrially developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Ohio ranked fourth in the nation in 1990
gross state product derived from manufacturing. Although manufacturing
(including auto-related manufacturing) remains an important part of Ohio's
economy, the greatest growth in employment in Ohio in recent years, consistent
with national trends, has been in the non-manufacturing area. Payroll
employment in Ohio peaked in the summer of 1993, decreased slightly but is now
near the new high reached in the summer of 1995. Growth in recent years has been
concentrated among non-manufacturing industries, with manufacturing tapering off
since its 1969 peak. Over three-fourths of the payroll workers in Ohio are
employed by non-manufacturing industries.

The average monthly unemployment rate in Ohio was 5.3% in November, 1995.

With 14.2 million acres in farm land, agriculture is a very important segment
of the economy in Ohio, providing an estimated 750,000 jobs or approximately
15.9% of total Ohio employment. By many measures, agriculture is Ohio's leading
industry contributing nearly $5.7 billion to the state's economy each year.

Ohio continues to be a major "headquarters" state. Of the top 500
corporations (industrial, commercial and service) based on 1994 sales as
reported in 1995 by Fortune magazine, 48 had headquarters in Ohio, placing Ohio
fifth as a "headquarters" state for corporations.

The State Budget, Revenues and Expenditures and Cash Flow. Ohio law
---------------------------------------------------------
effectively precludes the State from ending a fiscal year or a biennium with a
deficit. The State Constitution provides that no appropriation may be made for
more than two years and consistent with that provision the State operates on a
fiscal biennium basis. The current fiscal biennium runs from July 1, 1995
through June 30, 1997.

Under Ohio law, if the Governor ascertains that the available revenue
receipts and balances for the general revenue fund or other funds for the then
current fiscal year will probably be less than the appropriations for the year,
he must issue orders to the State agencies to prevent their expenditures and
obligations from exceeding the anticipated receipts and balances. The Governor
implemented this directive in some prior years, including fiscal years 1992 and
1993.

Consistent with national economic conditions, the 1990-91 and 1992-93
bienniums presented a greater challenge to Ohio's finances. In the 1990-91
biennium, Ohio experienced an economic slowdown producing some significant
changes in certain general revenue fund revenue and expenditure levels for the
fiscal year 1991. Several executive and legislative measures were taken to
address the anticipated shortfall in revenues and increase in expenditures. As
a result, the OBM reported a positive general revenue fund balance of
approximately $135.4 million at the end of fiscal year 1991.

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

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

The GRF appropriations act for the 1994-95 biennium provided for total GRF
biennial expenditures of approximately $30.7 billion. Authorized expenditures
in fiscal year 1994 were 9.2% higher than in fiscal year 1993, and for fiscal
year 1995 were 6.6% higher than in fiscal year 1994. Fiscal year 1994 ended
with a GRF fund balance of over $560 million. The 1994-95 biennium ending GRF
fund balance was $928 million.

The GRF appropriations act for the current biennium was passed on June 28,
1995 and promptly signed (with selected vetoes) by the Governor. That act
provides for total GRF biennial expenditures of approximately $33.5 billion.

Because the schedule of general revenue fund cash receipts and disbursements
do not precisely coincide, temporary general revenue fund cash flow deficiencies
often occur in some months of a fiscal year, particularly in the middle months.
Statutory provisions provide for effective management of these temporary cash
flow deficiencies by permitting adjustment of payment schedules and the use of
total operating funds. In fiscal year 1992 there were general revenue fund cash
flow deficiencies in ten months, with the highest being approximately $743.1
million. In fiscal year 1993, general revenue fund cash flow deficiencies
occurred in August 1992 through May 1993, with the highest being approximately
$768.6 million in December. General revenue fund cash flow deficiencies
occurred in six months of fiscal year 1994, with the highest being approximately
$500.6 million. In fiscal year 1995, a general revenue fund cash flow
deficiency occurred in four months with the highest being approximately $338
million in November 1994.

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

At various times between 1921 and 1993, Ohio voters, by thirteen specific
constitutional amendments, authorized the incurrence of up to $6.764 billion in
State debt to which taxes or excises were pledged for payment. Of that amount,
$715 million was for veterans' bonuses. As of January 4, 1996, of the total
amount authorized by the voters, excluding highway obligations and general
obligation park bonds discussed below, approximately $3.405 billion has been
issued, of which approximately $2.624 billion has been retired and approximately
$777.9 million remains outstanding. The only such State debt still authorized
to be incurred are portions of the Highway Obligation Bonds, the general
obligation Coal Development Bonds, local infrastructure bonds and natural
resources capital facilities bonds.

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No more than $1.2 billion in state highway obligations may be outstanding at
any time and not more than $220 million can be issued in a fiscal year. As of
January 4, 1996, approximately $457.7 million of highway obligations were
outstanding. No more than $100 million in State obligations for coal
development may be outstanding at any one time. As of January 4, 1996,
approximately $45.3 million of such bonds were outstanding. Not more than $2.4
billion of State general obligation bonds to finance local capital
infrastructure improvements may be issued at any one time, and no more than $120
million can be issued in a calendar year. As of January 4, 1996, approximately
$685.4 million of those bonds were outstanding.

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

The Treasurer of State has been authorized to issue bonds to finance
approximately $138.6 million of capital improvements for local elementary and
secondary public school facilities. Debt service on the obligations is payable
from State resources.

A statewide economic development program assists with loans and loan
guarantees, and the financing of facilities for industry, commerce, research and
distribution. The law authorizes the issuance of State bonds and loan
guarantees secured by a pledge of portions of the State profits from liquor
sales. The General Assembly has authorized the issuance of these bonds by the
State Treasurer, with a maximum amount of $300 million, subject to certain
adjustments, currently authorized to be outstanding at any one time. Of an
approximate $147.7 million issue in 1989, approximately $69.3 million is
outstanding. The highest future year annual debt service on those 1989 bonds,
which are payable through 2000, is approximately $18.3 million.

An amendment to the Ohio Constitution authorizes revenue bond financing for
certain single and multifamily housing. No State resources are to be used for
the financing. As of January 12, 1996, the Ohio Housing Financing Agency,
pursuant to that constitutional amendment and implementing legislation, had sold
revenue bonds in the aggregate principal amount of approximately $234.32 million
for multifamily housing and approximately $3.996 billion for single family
housing.

A constitutional amendment adopted in 1990 authorizes greater State and
political subdivision participation in the provision of housing for individuals
and families in order to supplement existing State housing assistance programs.
The General Assembly could authorize State borrowing for the new programs and
the issuance of State obligations secured by a pledge of all or a portion of
State revenues or receipts, although the obligations may not be supported by the
State's full faith and credit. Also, a constitutional amendment approved in
November 1994 pledges the full faith and credit and taxing power of the State to
meet certain guarantees under the State's tuition credit program. Under the
amendment, to secure the tuition guarantees, the General Assembly is required to
appropriate moneys sufficient to offset any deficiency that may occur from time
to time in the trust fund that provides for the guarantee and at any time
necessary to make payment of the full amount of any tuition payment or refund
required by a tuition payment contract.

A 1986 act, amended in 1994 (the "Rail Act"), authorizes the Ohio Rail
Development Commission (the "Rail Commission") to issue obligations to finance
the costs of rail service projects within the State either directly or by loans
to other entities. The Rail Commission has considered financing plan options
and the possibility of issuing bonds or notes. The Rail Act prohibits, without
express approval by joint resolution of the General Assembly, the collapse of
any escrow of financing proceeds for any purpose other than payment of the
original financing, the substitution of any other security, and the application
of any proceeds to loans or grants. The Rail Act authorizes the Rail
Commission, but only with subsequent General Assembly action, to pledge the full
faith and credit of the State but not the State's power to levy

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and collect taxes (except ad valorem property taxes if subsequently authorized
by the General Assembly) to secure debt service on any post-escrow obligations
and, provided it obtains the annual consent of the State Controlling Board, to
pledge to and use for the payment of debt service on any such obligations, all
excises, fees, fines and forfeitures and other revenues (except highway
receipts) of the State after provision for the payment of certain other
obligations of the State.

Schools and Municipalities. The 612 public school districts and 49 joint
--------------------------
vocational school districts in the State receive a major portion (approximately
46%) of their operating funds from State subsidy appropriations, the primary
portion known as the Foundation Program. They also must rely heavily upon
receipts from locally-voted taxes. Some school districts in recent years have
experienced varying degrees of difficulty in meeting mandatory and discretionary
increased costs. Current law prohibits school closings for financial reasons.

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

In previous years school districts facing deficits at year end had to apply
to the State for a loan from the Emergency School Advancement Fund. This Fund
met all the needs of the school districts with potential deficits in fiscal
years 1979 through 1989. Legislation replaced the Fund with enhanced provisions
for individual district local borrowing, including direct application of
Foundation Program distributions to repayment if needed. In fiscal year 1993,
there were 27 loans made for an approximate aggregate amount of $94.5 million.
In fiscal year 1994, 28 school districts took down loans aggregating
approximately $41.1 million. In fiscal year 1995, 29 school districts have
received approvals for loans totaling approximately $71.1 million. In fiscal
year 1996, 6 school districts have received approvals for loans totaling
approximately $19.6 million.

Litigation contesting the Ohio system of school funding is pending on appeal
with defendants being the State and several State agencies and officials. In
August 1995, a court of appeals reversed the trial court's findings for
plaintiffs. The complaints essentially request a declaratory judgment that the
State's statutory system of funding public elementary and secondary education
violates various provisions of the Ohio Constitution and request the State to
devise a constitutionally acceptable system of school funding. In July 1994,
the trial court concluded that certain provisions of current law violated
provisions of the Ohio constitution. The trial court directed the State to
provide for and fund a system of funding public elementary and secondary
education in compliance with the Ohio Constitution. Defendants appealed this
ruling and applied for a stay until the case is resolved on appeal. In November
1994, the trial court granted a stay of its findings and conclusions, and
certain of its orders. It is not possible at this time to state whether the
suit will be successful or, if plaintiffs should prevail, the effect on the
State's present school funding system, including the amount of and criteria for
State basic aid allocations to school districts.

Various Ohio municipalities have experienced fiscal difficulties. Due to
these difficulties, the State established an act in 1979 to identify and assist
cities and villages experiencing defined "fiscal emergencies". A commission
appointed by the Governor monitors the fiscal affairs of municipalities facing
substantial financial problems. To date, this act has been applied to eleven
cities and twelve villages. The situations in nine cities and ten villages have
been resolved and their commissions terminated.

State Employees and Retirement Systems. The State has established five
--------------------------------------
public retirement systems which provide retirement, disability retirement and
survivor benefits. Federal law requires newly-hired

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State employees to participate in the federal Medicare program, requiring
matching employer and employee contributions, each now 1.45% of the wage base.
Otherwise, State employees covered by a State retirement system are not
currently covered under the federal Social Security Act. The actuarial
evaluations reported by these five systems showed aggregate unfunded accrued
liabilities of approximately $17,275.2 billion covering both State and local
employees.

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

Health Care Facilities Debt. Revenue bonds are issued by Ohio counties and
---------------------------
other agencies to finance hospitals and other health care facilities. The
revenues of such facilities consist, in varying but typically material amounts,
of payment from insurers and third-party reimbursement programs, such as
Medicaid, Medicare and Blue Cross. Consistent with the national trend,
third-party reimbursement programs in Ohio have begun new programs, and modified
benefits, with a goal of reducing usage of health care facilities. In addition,
the number of alternative health care delivery systems in Ohio has increased
over the past several years. For example, the number of health maintenance
organizations licensed by the Ohio Department of Insurance increased from 12 on
February 14, 1983 to 37 as of January 11, 1996. Due in part to changes in the
third-party reimbursement programs and an increase in alternative delivery
systems, the health care industry in Ohio has become more competitive. This
increased competition may adversely affect the ability of health care facilities
in Ohio to make timely payments of interest and principal on the indebtedness.

OREGON

RISK FACTORS--Introduction. Oregon's public finances were dramatically
altered in November 1990 by the adoption of Ballot Measure No. 5 by the voters
of the State of Oregon. The Measure, which amended the Oregon Constitution by
the addition of a new Article XI, Section 11b, limited property taxes for
non-school government operations to $10 per $1,000 of real market value
beginning in the 1991-92 fiscal year. Property taxes for school operations were
limited to $15 per $1,000 of real market value in the 1991-92 fiscal year, while
ultimately declining to $5 per $1,000 of real market value in the 1995-96 fiscal
year. The Measure also required the State of Oregon to use the State General
Fund revenues to pay school districts replacement dollars through the 1995-96
fiscal year for most of the revenues lost by the school districts because of the
Measure's limitations on their tax levies.

The State Legislative Revenue Office reports that, as a result of Ballot
Measure No. 5, non-school districts lost approximately $59.0 million of revenues
during the 1993-95 fiscal biennium, and school districts lost $1.604 billion of
tax revenues in the 1993-95 fiscal biennium.

The Measure contains many confusing and ill-defined terms, which may
ultimately be resolved by litigation in Oregon courts. In an attempt to define
some of these terms, and to provide guidance to Oregon municipalities, the 1991
Oregon Legislature approved a comprehensive revision of the statutes applicable
to the issuance of municipal debt in Oregon. A section of the 1991 legislation,
which excluded tax increment financing for urban renewal bonds indebtedness from
the limits of Ballot Measure No. 5, was declared invalid by the Oregon Supreme
Court in September, 1992. The Court, which affirmed an earlier ruling of the
Oregon Tax Court, determined that tax increment financing plans imposed a "tax"
on property subject to the limitations of Ballot Measure No. 5. A proposed
State constitutional amendment which would have revalidated tax increment
financing was referred to the Oregon voters in May 1993 and rejected. The City
of Portland has outstanding $73.6 million in principal amount of urban renewal
bonds as of December 31, 1995. The Portland City Council has committed the City
to honor the payment of the urban renewal bonds from alternative sources.

The Measure defines the term "tax" as "any charge imposed by a governmental
unit upon property or upon a property owner as a direct consequence of ownership
of that property," excepting only from that

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definition "incurred charges and assessments for local improvements." All Oregon
issuers are required to analyze the charges they assess to determine if they
constitute "taxes," which are then limited by the constraints of the Measure.
Moreover, debt service payments for revenue and special assessment bonds are
required to be reviewed in the light of the Measure to determine if the charges
made by the municipal issuer for these debt service payments will constitute
"taxes" limited by the Measure. The comprehensive legislative revision of
Oregon municipal debt contains statutory guidelines to assist a municipality in
determining if the charges assessed are "taxes" limited under the Measure.

Debt service on bonded indebtedness may be adversely affected by Ballot
Measure No. 5 if the tax levied to provide funds for the servicing of the debt
will be included in the calculation of the maximum permitted tax levy under the
Measure. Taxes levied to pay for bonded debt will generally be included in the
limitations prescribed by the Measure, unless

* The bonded indebtedness was specifically authorized by the Oregon
Constitution (as, for example, the Oregon Veterans' Bonds), or

* (i) The bonded indebtedness was incurred or will be incurred "for capital
construction or improvements," (ii) the bonds issued for the capital
construction or improvements are general obligation bonds, and (iii) the bonds
were either issued before November 6, 1990, or, if issued after that date, were
approved by the electors of the issuer.

To provide for this limitation on the authority to tax, the Oregon
legislation creates two classifications of bonds secured by the taxing authority
of a municipal issuer: "general obligation bonds," which are bonds secured by an
authority to tax unlimited by the Measure, and "limited tax bonds," which are
bonds secured by an authority to levy taxes only within the overall limits
imposed on a municipal issuer by the Measure.

Fiscal Matters. The State Department of Administrative Services expects
continued growth in Oregon's economy during 1996, although the Department
expects job growth to slow to 3.0 percent in 1996 and to 2.7 percent in 1997,
after exceeding 4 percent in both 1994 and 1995, due in part to a shortage of
workers. The Department projects that net in-migration should provide some
additional skilled workers, but movement to Oregon from other states is likely
to be limited by higher home prices in Oregon and a continuing economic recovery
in California. The Department projects that high technology manufacturing will
remain the driving force behind Oregon's economic growth, while growth in the
service-producing sectors should, according to the Department, contribute the
bulk of new Oregon jobs. The Department expects that income, population and
employment growth will exceed the national average for the six-year period
between 1995 and 2001.

The Department of Administrative Services reports that Oregon wage and salary
employment for the third quarter of 1995 increased at an annual rate of 4.5
percent, and employment at the end of the third quarter of 1995 was 59,300 above
the level existing at the end of the third quarter of 1994. The Department
projects that Oregon wage and salary income growth will increase 6.4 percent in
1996, down from an estimated 8.1 in 1995. The Department estimates that
personal income increased 7.6 percent in 1995 and projects an increase of 5.9
percent in 1996.

The Oregon Constitution requires that the State budget be balanced during
each fiscal biennium. Should the State experience budgetary difficulties
similar to the effects of the national recession on Oregon during the first half
of the 1980's, the State, its agencies, local units of government, schools and
private organizations which depend on State revenues and appropriations for both
operating funds and debt service could be required to expand revenue sources or
curtail certain services or operations in order to meet payments on their
obligations. To the extent any difficulties in making payments are perceived,
the market value and marketability of outstanding debt obligations in the Oregon
Trust, the asset value of the Oregon Trust and interest income to the Oregon
Trust could be adversely affected.

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The budget for the 1995-97 biennium includes a General Fund budget of $7.373
billion, representing an increase of 15.2% over 1993-95 expenditures. Total
appropriations for all funds in the 1995-97 budget are $22.260 billion,
representing an increase of 8.9% over the 1993-95 expenditures. This total
includes, in addition to the General Fund, $10.917 billion in Other Funds and
$3.970 billion in Federal Funds.

The obligation of the State under Ballot Measure No. 5 to replace most of the
lost revenues of school districts has had an adverse effect on the State's
General Fund. These replacement dollars are estimated by the State Legislative
Revenue Office to total $461.0 million during the 1991-93 fiscal biennium,
$1.499 billion during the 1993-95 biennium, and $1.309 billion during the
1995-96 fiscal year. Under Ballot Measure No. 5, the State's obligation to
replace school revenues terminates after fiscal year 1995-96.

Debt Obligations. The State of Oregon issued $440.8 million in bonds, notes
and certificates of participation ("COPs") during the fiscal year ended June 30,
1995, an increase of 12.7% from the $391.1 million in bonds, notes and COPs
issued in the fiscal year ended June 30, 1994. Of the fiscal year 1994-95
total, $148.0 million were general obligations, $265.2 million were revenue
obligations, and $27.6 million were COPs. During fiscal year ended June 30,
1995, local Oregon governments issued approximately $1.317 billion in debt, a
decrease of approximately 5.6% from the fiscal year ended June 30, 1995
issuances of $1.395 billion.

The State of Oregon had outstanding $3.870 billion in general obligations at
December 31, 1995 representing a decrease of 12.3% from the total outstanding of
$4.411 billion at December 31, 1994. Oregon local governments had $7.273
billion in total debt outstanding at December 31, 1995, representing an increase
of 12.5% from the total outstanding of $6.468 billion at December 31, 1994.

At December 31, 1995, the State of Oregon had outstanding approximately
$2.953 billion of Oregon Veterans' Welfare Bonds and Notes, representing a
decrease of 15.4 percent from the total outstanding of $3.491 billion at
December 31, 1994. The Veterans' Bonds and Notes, which are utilized to finance
the veterans' mortgage loan program, administered by the Oregon Department of
Veterans' Affairs, are general obligations of the State of Oregon.

General obligation bonds of the State of Oregon are currently rated Aa by
Moody's and AA- by Standard & Poor's.

Taxes and Other Revenues. The State relies heavily on the personal income
tax. The personal income tax generated $5.381 billion of the total 1993-95
biennium General Fund revenues of $6.536 billion. The State's Department of
Revenue estimates that the personal income tax will generate $5.950 billion of
the total General Fund revenues of $7.035 billion projected for the 1995-97
biennium. The State corporate income and excise tax generated $575.8 million in
revenues during the 1993-95 biennium, and is projected by the Department of
Revenue to generate $457.3 million in revenues during the 1995-97 biennium.

Revenues generated by the State lottery are currently dedicated to economic
development and education. State lottery officials report that revenues
generated from the regular lottery sales for the 1994-95 fiscal year totaled
$339.8 million, with $78.1 million of that amount having been made available to
the State. State lottery officials also report that the State's video poker
program, which commenced operation in March 1992, generated revenues of $331.7
million during the 1994-95 fiscal year, with $183.2 million of that amount being
made available to the State. State lottery officials currently forecast $335.2
million from regular lottery sales and $352.4 million from video poker sales for
the 1995-96 fiscal year, with $74.7 million and $201.5 million of those amounts,
respectively, projected to be available to the State. State lottery officials
project that revenues for the 1995-1997 biennium from regular lottery sales will
be $676.2 million and from video poker sales will be $718.5 million, with $151.6
million and $409.5 million of those amounts, respectively, projected to be
available to the State. State lottery officials have revised

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downward projected revenues from video poker sales for the 1995-1997 biennium
due to a substantial decline in sales per video terminal and increased
competition from tribal gambling casinos.

Under existing state tax programs, if the actual corporate income and excise
taxes received by the State in a fiscal biennium exceed by two percent or more
the amount estimated to be received from such taxes for the biennium, the excess
must be refunded as a credit to corporate income and excise taxpayers in a
method prescribed by statute. Similarly, if General Fund revenue sources (other
than corporate income and excise taxes) received in the biennium exceed by two
percent or more the amount estimated to be received from such sources during the
biennium, the excess must be refunded as a credit to personal income taxpayers.

Authority to levy property taxes is presently vested with the governing body
of each local government unit. In addition to the restrictions of Ballot
Measure No. 5, other constitutional and statutory provisions exist which limit
the amount that a governing body may levy:

1. Levy Within 6 Percent Limitation (Tax Base Levy). A tax base, approved
by a majority of voters at a statewide general or primary election, represents
permanent authority to annually levy a dollar amount which cannot exceed the
highest amount levied in the three most recent years in which a levy was made,
PLUS six percent thereof. A local unit is permitted to have but one tax base
levy and proceeds may be used for any purpose for which the unit may lawfully
expend funds.

2. Levy Outside 6 Percent Limitation (Special, Serial or Continuing Levy).
Special and serial levies are temporary taxing authorities permitting the levy
of a specific dollar amount for one year (Special) or for two or more years up
to ten years (Serial). Continuing levies are those approved by voters prior to
1953, are permanent in nature and are limited in amount by the product of the
voted tax rate and the assessed value of the unit. Since 1978 Serial levies may
also be established based on a specified tax rate but the term may not exceed
three years. Not more than four serial levy measures may be proposed in a given
year.

3. Levy Not Subject to 6 Percent Limitation (Debt Levy). Local units are
required to annually levy an amount sufficient to pay principal and interest
costs for a bonded debt. Bond measures to be paid from future tax levies must
first be approved by a majority of those voting unless otherwise provided by
law.

Responding to a number of school closures occurring as a result of tax levy
failures during the last decade, Oregon voters approved a school "safety Net"
measure in 1987 designed to prevent future closures and maintain schools at the
standards required by the State. The law provides that in the event a school
district levy is defeated, upon making a finding that schools may close for lack
of funds, the school board is authorized to levy property taxes no greater than
the amount levied in the prior year and to adjust the district budget
accordingly for the period through the next date set to vote on the levy.

Litigation. The following summary of litigation relates only to matters as
to which the State of Oregon is a party and as to which the State of Oregon has
indicated that the individual claims against the State exceed $5 million. Other
litigation may exist with respect to individual municipal issuers as to which
the State of Oregon is not a party, but which, if decided adversely, could have
a materially adverse effect on the financial condition of the individual
municipal issuer.

1. SAIF Fund Transfers. During 1983, three special sessions of the
Legislature were convened to balance the previously approved budget for the
1981-83 fiscal biennium. Among the actions required to balance the budget were
the reduction of expenditures during the biennium by more than $215 million and
the transfer to the State's General Fund in June 1983 of $81 million from the
surplus of the State Accident Insurance Fund ("SAIF"). The State was sued in
litigation challenging the legality of the transfer of this surplus from SAIF to
the General Fund. The Oregon Supreme Court held that the transfer of the $81
million was not proper. The Court did not, however, require that the funds be
repaid to SAIF, nor did the Court award the plaintiff any damages.

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As a result of the decision, a coalition of Oregon businesses filed companion
class action lawsuits in 1988 against the State seeking the return of the entire
$81 million, plus interest accrued. The lawsuit alleged that 30,000 Oregon
businesses were denied potential dividend payments when the Legislature
improperly transferred the SAIF reserves to the General Fund.

After a series of appeals, on November 19, 1993, the Oregon Supreme Court
ruled that the State must return to SAIF the $81 million that the Legislature
transferred to the General Fund. The Oregon Supreme Court remanded the case to
the trial court to fashion a decree based upon evidence of what SAIF would have
done with the money if it had not been transferred to the General Fund. On
remand, the trial court ordered the State to return the $81 million to SAIF,
with interest, but the trial court did not determine the rate of interest.
Initial estimates by the State indicate that the amount of principal and
interest owing under the court's ruling will be approximately $280 million. In
its 1995 session, the Legislative Assembly appropriated $60 million to the
Industrial Accident Fund. To date, the State has repaid $65 million of the $81
million principal amount, but has not yet paid any of the interest obligation.

The parties have drafted a proposed settlement agreement which the trial
court has tentatively approved. A final hearing on the approval is scheduled to
occur at the end of February 1996. Under the agreement, the State would be
obligated to pay a total of $225 million to the Industrial Accident Fund. Of
that amount, $65 million has already been paid, $80 million would be paid at the
end of the 1997 legislative session, and an additional $80 million would be paid
at the end of the 1999 legislative session. If the State Legislature failed to
appropriate the required amounts, the State would be in breach of the agreement
and subject to additional court action from the plaintiffs.

2. Spotted Owl Timber Sale Cases. The State is currently facing potential
claims in connection with twenty-two State timber sales involving timber lands
that spotted owls may be using as habitats. Although only a few suits have been
brought against the State at this time, the State anticipates that other similar
cases will be filed. While the State has indicated that it is not now possible
to estimate the probable outcome of these claims, it estimates that the total
potential exposure to the State exceeds $11.6 million.

3. State Employee Claims for Overtime Pay. Two cases have been brought on
behalf of state employees who had been deemed exempt from the federal Fair Labor
Standards Act overtime provisions. In the first case, plaintiffs sought class
status for state employees who claim that they are not salaried employees exempt
from the federal Fair Labor Standards Act overtime provisions. In November 1995,
judgment was entered in this case against the State in the amount of $705,802,
plus $84,801 in prejudgment interest. In the second case, filed on behalf of
all state management service employees, plaintiffs claim that employees who are
subject to disciplinary pay reduction are entitled to payment for overtime. The
plaintiff class consists of approximately 50 individuals. The State estimates
that the amount of damages the plaintiff class could recover equals
approximately $1 million plus attorneys' fees.

4. Taxation of Federal Retiree Pension Benefits. Several cases have been
filed in the Oregon Tax Court and the State Circuit Courts alleging that a 1991
increase in the Public Employes' Retirement System ("PERS") benefits, to offset
State taxation of the PERS benefits violates a holding by the United States
Supreme Court in Davis v. Michigan Dept. of Treasury. The Davis case holds that
state statutes may not provide disparate tax treatment of state and federal
pension benefits. The State has indicated that it is not possible to estimate
the potential impact of liability under these cases at this time. The Oregon
Supreme Court upheld a ruling by the Oregon Tax Court in one of the cases that
the increase in PERS benefits did not violate the Davis holding, and is
constitutional. A petition for review in a related case is pending before the
United States Supreme Court.

5. Taxation of State Retiree Benefits. Class action certification has been
granted in an action filed against the State and other public entities regarding
the taxation of Oregon public employment retirement benefits. The defendant
class is composed of all employers participating in PERS. The plaintiffs seek
enforcement of the Oregon Supreme Court's decision in Hughes v. State. In
Hughes, the Court ruled that a statutory amendment repealing a tax exemption for
retirement benefits violated the constitutional provision

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against impairment of contract for benefits received from work performed prior
to the date of amendment. The Court in Hughes deferred to the Oregon
Legislature to fashion a remedy. Plaintiffs filed this action, therefore, to
seek to require public employers to pay breach of contract damages or to
increase benefits due to taxation of previously untaxed pensions.

The 1995 Oregon Legislature enacted House Bill 3349 ("HB 3349"), which
provides a remedy to the PERS beneficiaries. Under the bill, PERS members are
entitled to increased benefits as compensation for damages resulting from the
taxation of the PERS benefits. The bill also prohibits any class action suit
for damages based upon such taxation and, according to the State, effectively
renders the claims of the PERS beneficiaries moot. The fiscal impact statement
submitted with this bill indicated that State agencies will be obligated to pay
increased employer contributions of approximately $27 million in the 1995-97
biennium and approximately $36 million in the 1997-99 biennium to fund the
benefits increase.

Local governments have asserted claims that they should not be required to
provide funds for the remedy provided in HB 3349 based upon breach of contract
theories, and are seeking indemnification from the State. The passage of HB
3349 does not moot the claims of the local government. If the local governments
are successful, liability would be imposed directly on the General Fund for the
amount of increased benefits that the local governments must pay as a result of
HB 3349. According to the State, the amount of liability imposed on the State
as a result of the local governments' claims is uncertain. The trial court has
ruled in favor of local governments on the breach of contract issues

In November 1995, the Circuit Court ruled on the State's motions for
reconsideration of the Court's earlier ruling with respect to the local
governments' claims and on HB 3349. The Court upheld its ruling with respect to
local governments. The Court also found that the effect of HB 3349 was to
require local governments to pay breach of contract damages in violation of the
Court's prior ruling, because the local governments would be required to pay
increased contribution amounts to fund the remedy provided in HB 3349. The Court
also found that because the source of funds for the increased benefit payments
was an integral part of HB 3349, and could not be severed from the rest of the
bill, HB 3349 was void in its entirety. The Court enjoined the payment of
increased benefits, scheduled to begin in January 1996, to PERS retirees under
HB 3349. The State has indicated that it will appeal the Circuit Court's ruling.

6. Out-of-State Insurance Company Claims. In August 1993, several
out-of-state insurance companies filed a lawsuit against the State challenging
the State's gross premiums tax on out-of-state insurers. The lawsuit alleges
that the tax violates the Equal Protection Clause of the 14th Amendment to the
United States Constitution because the tax treats domestic and "foreign"
insurers differently. The insurance companies seek a declaration that the
Oregon gross premium tax is unconstitutional, refunds of all premiums paid from
1982 to date, and the recovery of their attorney's fees. According to the
State, if claims were brought by all affected foreign insurers, the State's
possible refund liability exposure could exceed $30 million. In hearings before
the 1993 Oregon Legislative Assembly concerning the gross premium tax laws, the
estimates of the State's potential refund liability in such a case ranged from
$174.6 million to $27.4 million. Although the State has indicated that the
possibilities of a result adverse to the State are substantial, on May 19, 1994,
the trial court granted motions by the State that limit the time for which
refunds must be paid to 1993 and subsequent years. According to the State,
under the trial court's ruling, the State's exposure would be limited to
approximately $10-20 million per year covering a two to three year period.
Plaintiffs have filed an amended complaint in response to the trial court
ruling. According to the State, motions for summary judgment have been filed
that may partially or completely dispose of the case. Oral arguments on those
motions were set for January 1996, and trial is set for February 1996. The
State has indicated, however, it is impossible to predict a probable outcome of
this case at this time.

7. Liability for PERS Losses. Four separate plaintiffs have filed lawsuits
against the State seeking reimbursement on behalf of the Public Employes'
Retirement Fund for losses in excess of $5 million allegedly suffered by the
Fund as a result of investment actions taken by former Oregon State Treasury
employees. The plaintiffs seek recovery of the losses from the issuers of
certain fidelity bonds or, in the

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alternative, a transfer from the State's general fund to the Fund of any losses
that are not recoverable under the fidelity bonds. The State has now recovered
on the fidelity bond an amount that offsets part of the losses to the Fund.
According to the State, plaintiffs' claims that are based upon recovery under
the bond are now moot. The remaining claims were dismissed by the trial court.
In February 1995 the Oregon Court of Appeals upheld the trial court's decision.
The Oregon Supreme Court has granted review of the case on several issues.
According to the State, while many of the plaintiffs' claims are subject to the
limits of the Oregon Tort Claims Act, the plaintiffs' breach of contract claim
would not be subject to Oregon tort claims limits. At this time, therefore, the
State believes that it would be premature to estimate the actual exposure of the
State's General Fund if the plaintiffs were ultimately to prevail on any of
their claims.

8. Challenge to Oregon Health Plan. A class action suit has been filed in
federal court seeking to add certain Medicare beneficiaries, consisting of
disabled and elderly persons, to the group of persons covered under the Oregon
Health Plan (the "Plan"). The plaintiff class is seeking additional services
offered under the Plan which they do not receive under the Federal Medicare
program. If plaintiffs are successful, the State estimates that costs under the
Plan would increase an additional $30 million per biennium. The Court has ruled
in favor of the State on its motion for summary judgment and dismissed the case.
The time within which the plaintiffs may appeal the ruling has not yet expired.

PENNSYLVANIA

RISK FACTORS--Potential purchasers of Units of the Pennsylvania Trust should
consider the fact that the Trust's portfolio consists primarily of securities
issued by the Commonwealth of Pennsylvania (the "Commonwealth"), its
municipalities and authorities and should realize the substantial risks
associated with an investment in such securities. Although the General Fund of
the Commonwealth (the principal operating fund of the Commonwealth) experienced
deficits in fiscal 1990 and 1991, tax increases and spending decreases have
resulted in surpluses the last four years; as of June 30, 1994, the General Fund
had a surplus of $892.9 million. The deficit in the Commonwealth's
unsecured/undesignated funds also has been eliminated, and there was a surplus
of $79.2 million as of June 30, 1994.

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

Certain litigation is pending against the Commonwealth that could adversely
affect the ability of the Commonwealth to pay debt service on its obligations
including suit relating to the following matters: (i) the ACLU has filed suit in
federal court demanding additional funding for child welfare services; the
Commonwealth settled a similar suit in the Commonwealth Court of Pennsylvania
and is seeking the dismissal of the federal suit, inter alia because of that
settlement. After its earlier denial of class certification was reversed by the
Third Circuit Court of Appeals, the district court granted class certification
to the ACLU, and the parties are proceeding with discovery (no available
estimate of potential liability); (ii) in 1987, the Supreme Court of
Pennsylvania held the statutory scheme for country funding of the judicial
system to be in conflict with the constitution of the Commonwealth, but stayed
judgment pending enactment by the legislature of funding consistent with the
opinion, and the legislature has yet to consider legislation implementing the
judgment. In 1992, a new action in mandamus was filed seeking to compel the
Commonwealth to comply with the original decision; (iii) litigation has been
filed in both state and federal court by an association of rural and small
schools and several individual school districts and

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parents challenging the constitutionality of the Commonwealth's system for
funding local school districts--the federal case has been stayed pending the
resolution of the state case, and the state case is in the pre-trial stage (no
available estimate of potential liability); and (iv) Envirotest/Synterra
Partners ("Envirotest") has filed suit against the Commonwealth asserting that
it sustained damages in excess of $350 million, as a result of investments it
made in reliance on a contract to conduct emissions testing before the emission
testing program was suspended. Envirotest has entered into a Standstill
Agreement to resolve Envirotest's claims (no available estimate of potential
liability).

Although there can be no assurance that such conditions will continue, the
Commonwealth's general obligation bonds are currently rated AA- by Standard &
Poor's and A1 by Moody's and Philadelphia's general obligation bonds are
currently rated BBB- by Standard & Poor's and Baa by Moody's.

The City of Philadelphia (the "City") experienced a series of General Fund
deficits for Fiscal Years 1998 through 1992 and, while its general financial
situation has improved, the City is still seeking a long-term solution for its
economic difficulties. The audited balance of the City's General Fund as of
June 30, 1994 was a surplus of $15.4 million and preliminary unaudited financial
statements as of June 30, 1995 project a surplus of approximately $59.6 million.

In recent years an authority of the Commonwealth, the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), has issued approximately $1.4
billion of Special Revenue Bonds on behalf of the City to cover budget
shortfalls, to eliminate projected deficits and to fund capital spending. As
one of the conditions of issuing bonds on behalf of the City, PICA exercises
oversight of the City's finances. The City is currently operating under a five
year plan approved by PICA in 1995. PICA's power to issue further bonds to
finance capital projects expired on December 31, 1994. PICA may continue to
issue bonds to finance cash flow deficits until December 31, 1996, and its
authority to refund existing debt will not expire.

TENNESSEE

RISK FACTORS--In 1978, the voters of the State of Tennessee approved an
amendment to the State Constitution requiring that (1) the total expenditures of
the State for any fiscal year shall not exceed the State's revenues and
reserves, including the proceeds of debt obligations issued to finance capital
expenditures and (2) in no year shall the rate of growth of appropriations from
State tax revenues exceed the estimated rate of growth of the State's economy.
That amendment also provided that no debt obligation may be authorized for the
current operation of any State service or program unless repaid within the
fiscal year of issuance.

In response to public demand for better public education throughout the
State, the 1992 Tennessee General Assembly temporarily raised the State sales
tax by one-half of one percent to 6%, effective April 1, 1992. This increase
became permanent as a result of the 1993 legislative session. This increase
establishes the maximum total State and local sales tax rate at 8.75%. Although
the issue of instituting a new State income tax scheme remains a matter of
discussion amongst legislators, most political observers in Tennessee doubt such
a proposal will be passed within the next two-three years.

The Tennessee economy generally tends to rise and fall in a roughly parallel
manner with the U.S. economy. Like the U.S. economy, the Tennessee economy
entered recession in the last half of 1990 which continued throughout 1991 and
into 1992 as the Tennessee index of coincident and leading economic indicators
trended downward throughout the period. However, the Tennessee economy gained
strength during the latter part of 1992 and this renewed vitality steadily
continued through 1993, 1994 and into 1995. Although some of the most recent
economic data reveal some downward movement in the leading economic index, most
experts believe that the State will continue the moderate economic gains it has
achieved in 1993, 1994 and the first half of 1995. The State's fiscal year runs
from July 1 through June 30.

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The Tennessee index of coincident economic indicators, which gauges current
economic conditions throughout the State, has steadily risen each quarter since
the third calendar quarter of 1991. For calendar year 1994 the coincident index
rose approximately 6.20% over 1993 figures, while 1993 figures increased
approximately 4.29% over 1992 figures and 1992 figures showed a 2.45% increase
over the previous year's figures. In 1995, figures for the coincident index are
up over 1994 figures for every month from January through September, the most
recent monthly period for which data is available.

Tennessee taxable sales were approximately $44.16 billion in 1991,
approximately $46.96 billion in 1992, approximately $50.65 billion in 1993, and
approximately $55.34 billion in 1994, representing percentage increases of 1.4%,
6.4%, 7.9% and 9.3%, respectively, over the previous year's total. Tennessee
taxable sales for the first nine months of 1995 were as follows: approximately
$4.78 billion in January, $4.78 billion in February, $5.12 billion in March,
$4.98 billion in April, $4.90 billion in May, $5.04 billion in June, $4.89
billion in July, $5.14 billion in August, and $5.07 billion in September. These
figures represent the following percentage increases over figures for the same
months in 1994: January (15.39%), February (8.68%), March (7.33%), April
(10.83%), May (8.03%), June (9.26%), July (6.02%), August (7.33%) and September
(8.42%).

Current data indicate that seasonally-adjusted personal income in Tennessee
has grown approximately $5.34 billion from calendar year 1992 averages to
calendar year 1993 averages, representing an approximate 5.90% increase, and
grown approximately $6.89 billion from calendar year 1993 averages to calendar
year 1994 averages, representing an approximate 7.03% increase. Comparative
figures for 1994 to 1995 are not currently available. From 1983 to 1993
Tennessee's per capita income has increased approximately 87.1% to $18,434,
compared to the national per capita income of $20,817 which translates into a
ten-year increase of approximately 70.3%. For the fiscal year ended June 30,
1993, however, Tennessee still led the nation in household bankruptcy filings (1
in every 49) with a rate twice the national average (1 in 102).

Tennessee's unemployment rate stood at 4.0% for December 1994, the lowest
figure since the 1980's. The unemployment rate has slowly risen over the
December 1994 low, and at September 1995, the State's unemployment rate stood at
5.2% with the national rate at 5.6%. By December 1993, only one Tennessee
county had an unemployment rate over 10% for the first time since 1974. Over
the past four years, average annual unemployment in Tennessee has steadily
decreased, from 6.6% in 1991, to 6.4% in 1992, to 5.7% in 1993 and to 4.8% in
1994. Figures for 1995 are not currently available. The Tennessee Department
of Employment Security has projected minimum growth of approximately 23% in
Tennessee's total employment by the year 2005, with an increase of approximately
550,000-600,000 new jobs as compared to the projection for national employment
growth of 20.5% over the same period.

Historically, the Tennessee economy has been characterized by a slightly
greater concentration in manufacturing employment than the U.S. as a whole. The
Tennessee economy, however, has been undergoing a structural change in the last
15-20 years through increases in service sector and trade sector employment.
Service sector employment has climbed steadily since 1973, increasing its share
of overall state non-agricultural employment from 14.5% to 24.7% in 1993. Over
the same period, employment in manufacturing has declined from 33.9% to 22.7%,
and employment in the trade sector has increased from 1973 to 1993 from 20.4% to
23.0% of non-agricultural employment. Recently, overall Tennessee
non-agricultural employment has grown in the period from 1991 to 1994 from
approximately 2.18 million persons to approximately 2.42 million persons,
representing percentage increases of approximately 2.8%, 3.7% and 4.0% for 1992,
1993 and 1994, respectively, over the previous year's figure. Accordingly,
non-agricultural employment in Tennessee is relatively uniformly diversified
today with approximately 23% in the manufacturing sector, approximately 25% in
the trade and service sectors and approximately 16% in government. Figures for
1995 are not currently available.

Manufacturing employment is one component of non-agricultural employment.
Tennessee manufacturing employment averaged approximately 503,000 persons in
1991; 515,000 persons in 1992; 529,000 persons in 1993 and 538,000 persons in
1994, with the 1992, 1993 and 1994 figures representing

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percentage increases of approximately 2.4%, 2.7% and 1.9%, respectively, over
the previous year's average. Figures for 1995 are not currently available.

The Tennessee index of leading economic indicators acts as a signal of the
health of the State's economy six to nine months ahead. In 1994, figures for
the leading index rose approximately 2.40% over 1993 figures while 1993 figures
were up approximately 1.38% over 1992 figures. Thus far in 1995, monthly
figures for the leading index rose in January (2.42%), February (1.67%), March
(.48%), April (.61%) and May (.09%), as compared to figures for the same months
in 1994. However, with respect to the most recent four months for which 1995
data is available, the leading index has shown a negative trend with each month
reflecting a decrease in the index as compared to the 1994 figures for those
same months: June (-.34%), July (-.16%), August (-.12%) and September (-.73%).
Monthly figures for the leading index for the remainder of 1995 are not
currently available.

Tennessee Department of Revenue collections for calendar year 1995 increased
to approximately $5.91 billion, an increase of approximately $410 million, or
6.84% over 1994 figures. The State's rainy-day fund remained constant from
December 1994 to December 1995 at $101 million.

Tennessee's population increased approximately 6.2% from 1980 to 1990, less
than the national increase of 10.2% for the same period. As of July 1, 1995,
the State's population was estimated at approximately 5.2 million. A U.S.
census study projects that Tennessee will be the fifth most popular destination
for new residents coming from other states during the period from 1990-2020.
Population growth in Tennessee is expected to come mostly in the major
metropolitan areas (Memphis, Nashville, Knoxville and Chattanooga) over the next
10-15 years. The overall state population is expected to grow 5.5% between 1990
and 2000, then 4.6% for the period between 2000 and 2010. Greatest growth is
expected to occur in the Nashville MSA, which, in 1995, and for the first time,
passed the Memphis MSA as the largest metropolitan population center in
Tennessee. The largest population decline is expected in the rural counties of
northwest Tennessee. This declining rate of the rural population, coupled with
the structural changes in the Tennessee economy and the increased competition
from domestic and international trading partners, comprise three trends that are
likely to influence the State's long-term economic outlook.
Tennessee's general obligation bonds are rated Aaa by Moody's and AA+ by
Standard & Poor's. Tennessee's smallest counties have Moody's lower ratings
ranging from Baa to B, in part due to these rural counties' limited economies
that make them vulnerable to economic downturns. Tennessee's four largest
counties (Shelby, Davidson, Knox and Hamilton) have the second highest of
Moody's nine investment grades, Aa. There can be no assurance that the economic
conditions on which these ratings are based will continue or that particular
obligations contained in the Portfolio of the Tennessee Trust may not be
adversely affected by changes in economic or political conditions.

The Sponsors believe that the information summarized above describes some of
the more significant matters affecting the Tennessee economy and relating to the
Tennessee Trust. For a discussion of the particular risks with each of the Debt
Obligations, and other factors to be considered in connection therewith,
reference should be made to the Official Statements and other offering materials
relating to each of the Debt Obligations included in the Portfolio of the
Tennessee Trust. The foregoing information regarding the State does not purport
to be a complete description of the matters covered and is based solely upon
information provided by State agencies, publicly available documents and news
reports of statements by State officials and employees. The Sponsors and their
counsel have not independently verified this information, however, the Sponsors
have no reason to believe that such information is incorrect in any material
respect. None of the information presented in this summary is relevant to
Puerto Rico or Guam Debt Obligations which may be included in the Tennessee
Trust.

TEXAS

RISK FACTORS--The State Economy. Over the last decade, the Texas economy has
become more like the national economy, and, as it has done so, the nature of the
Texas work force has also

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changed. The Texas economy has become more concentrated in the service and
trade industries, with over half of the Texans working in non-farm jobs being
employed in those industries. Furthermore, Texas has continued to add many new
jobs in "high-tech" industries over the past years, with employment in that
segment growing by approximately 319,000 jobs from 1983 to 1993. At the same
time, the oil and gas industry, which has traditionally been one of the most
important contributors to the state economy, providing both jobs and substantial
amounts of tax revenue, has become of reduced importance to the Texas economy.
During 1995, oil and gas comprised only 11% of Texas' total gross state product
and accounted for approximately 1.9% of the jobs in Texas and, with production
levels of oil and gas in Texas being less than historical high levels, oil and
gas severance taxes now make up 5% of state tax revenue, down from 27% in 1982.
In addition, as the job force has grown in Texas and jobs have been added in
most major industry segments in the past few years, the size of the agricultural
work force has remained relatively unchanged.

Various economic indicators showed significant improvement in the Texas
economy during 1995. The gross state product is estimated by the State
Comptroller of Public Accounts to have increased by approximately 4% in 1995
over the 1994 levels, while industrial production in Texas is estimated to have
increased by 2.5% during the same period. Retail sales as of October 31, 1995
were approximately 7.7% ahead of levels during the comparable period in 1994.
During 1994, Texas exports rose to approximately $60 billion, an increase of
almost $20 billion from 1993 value of exported goods. Approximately two-thirds
of the exports in 1994 were electronic equipment and components, scientific
instruments, industrial machinery, computers, transportation equipment, and
chemicals and related products. Much of the increase in exports during 1994 was
as a result of trade with Mexico and Latin American countries.

During 1995, Texas experienced a net job gain of almost 250,000 jobs, an
increase in the job base of approximately 3.2%. From April 1994 to April 1995,
non-farm employment in Texas grew at a faster rate in almost every major
industry division employed by the United Department of Labor, Bureau of Labor
Statistics than did employment in those divisions in the United States as a
whole. During that period, however, statewide mining employment in Texas, which
includes employment in the oil and gas industry, declined by 7,500, or 4.6%, to
leave mining employment at its lowest level since 1977. Total non-farm jobs in
the state were estimated to be approximately 8.06 million at the end of
September 1995, while manufacturing jobs grew by 15,000 jobs, or 1.5%, during
fiscal year 1995. During fiscal 1995, the construction industry in Texas was
for the second consecutive year the fastest growing segment of the state
economy, albeit at a lesser rate of gain than in 1994, with employment in that
segment growing by approximately 24,000 jobs in fiscal 1995, a 6.3% increase
compared with 1994 employment levels. In large measure the growth in
construction jobs was the result of new construction of residential units and
commercial buildings and an increase in nonbuilding construction fueled in part
by state highway construction programs in the Dallas-Fort Worth and Houston
areas. Preliminary labor statistics from November 1995 indicate that
unemployment in Texas has increased slightly from the previous year to 6.1% on a
seasonally adjusted basis and was still higher than the unemployment rate for
the United States as a whole. This increase in the Texas unemployment rate and
its deviation from the national rate may be attributable in large measure to the
failure of job growth in Texas to keep pace with the increase in the growing
labor force in Texas.

As a consequence of the changes in the Texas economy, it has become more
vulnerable to changes in the value of the dollar and the federal budget deficit.
In addition, as is shown by the effect of the recent economic crisis in Mexico,
international economic events and trade policies now have a heightened effect on
the economic activity in Texas. In March, 1995 state government officials
estimated that as much as one-half of a percentage point in the growth of the
Texas economy forecasted for 1995 by the state Comptroller of Public Accounts
could be lost as a result of the recent fiscal crisis in Mexico. That loss
would be the result of a decrease in exports to Mexico as well as a slowdown in
retail trade and economic activities in the important region along the Texas-
Mexico border. Trade with Mexico was estimated in March 1995 to support
directly and indirectly more than 464,000 jobs in Texas, about 6% of the total
Texas employment. Although Texas exports to Mexico in the first quarter of 1995
(the period for which the most recent data is readily attainable) dropped less
than 1% from the comparable period in 1994, the failure of the Mexican economy
to recover fully from its recent economic crisis could result in additional

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unemployment, less growth in the Texas gross state product during 1996 and
reduced tax revenue for the state.

Recent Congressional proposals to replace assistance and Medicaid funding
programs for the states with block grants could adversely affect states such as
Texas. Any program adopted that makes little or no allowance for varying
population growths and poverty rates among the states could penalize Texas and
other states with high population growth and high poverty rates. In Texas'
fiscal year 1995,Texas received over $11.4 billion in federal funding, which
constituted 29.5% of all state revenues for that fiscal year. It is estimated
by state officials that one formula contained in legislation under consideration
by the United States Congress could reduce funding for discretionary programs
such as education, job training, and highway programs by over $530 million from
amounts currently assumed in the state budget for fiscal year 1996 and reduce
funding for entitlement or mandatory spending on such items as family
assistance, food stamps and social services by over $309 million from the
amounts currently assumed in the state biennial revenue estimate for its fiscal
years 1996 and 1997. Although there is no assurance that legislation providing
for any block grant program will be enacted by the United States Congress or, if
enacted, will be signed into law by the President, adoption of such a program
could result in budgetary shortfalls for Texas if the social services programs
mandated for the states and otherwise provided by Texas are not subject to
corresponding cuts. The Comptroller of Public Accounts in Texas is working with
the Texas Congressional delegation to ensure that any block grant program
adopted would not penalize Texas or result in any substantial decease in federal
funding.

The recent decisions of the federal Base Closure and Realignment Commission
may affect certain regions in Texas significantly. Most notably, Kelly Air
Force Base in San Antonio, Texas, is slated for closure over the next several
years with the resulting direct job loss estimated to be 13,000 jobs. Local
officials in San Antonio have asserted that loss of those jobs would increase
unemployment of Hispanics in San Antonio area by 73%. In addition, three other
metropolitan areas in Texas may be affected by the actions of the commission.
State officials and members of the Texas Congressional delegation are working to
reduce the adverse effect of the commission's actions, both through attempts to
save jobs and by otherwise reducing community dependence on defense
establishments. There is no way to predict accurately at this time the effect
of these closures on the Texas economy generally and economy of the San Antonio
region in particular.

The state government of Texas still faces significant financial challenges as
demands for state and social services increase and spending of state funds for
certain purposes is mandated by the courts and federal law and is required by
growing social services caseloads. The population of Texas has grown
significantly in the recent past and is estimated now to be approximately 18.7
million persons. Illegal immigration into Texas continues to be problematic for
the state, creating additional demand for governmentally provided social
services. In addition, among the ten most populous states, Texas has the
highest percentage of its population living below the poverty line, a total of
almost 18% of its populace. Some state officials are concerned that Texas'
growth pattern and the number of persons living in poverty in Texas are not and
will not be recognized properly by programs distributing federal funds available
for social assistance programs to the states, resulting in Texas having fewer
funds than a fair allocation of federal funding would otherwise provide to
Texas. As a result, unless funding is appropriately allocated or additional
sources of funding can be found, the growing need for social services will
further strain the limited state and local resources for these programs.

Bond Ratings. The state's credit ratings have been unchanged over recent
periods, although such ratings have caused the state to pay higher interest
rates on state bonds than those historically enjoyed by the state. Some local
governments and other political subdivisions also have had their credit ratings
lowered from their historical levels. As of December 31, 1995, general
obligation bonds issued by the State of Texas were rated AA by Standard &
Poor's, Aa by Moody's and AA+ by Fitch's Investor Services.

State Finances. The finances of the State of Texas suffered a setback during
the state's fiscal year ended August 31, 1995. After a number of fiscal years
in which the state enjoyed a budgetary surplus,

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in fiscal 1995, the state's net expenditures exceeded net revenue for general
and special funds by approximately $655 million. Although revenues increased by
5.4% from fiscal 1994, they failed to keep pace with expenditures, which
increased by 10.4%. The largest increases in expenditures were in spending on
health and human services, which increased by 12.8% or $1.5 billion, and
education, which increased 8.2% or $1.1 billion from fiscal 1994 levels. This
budgetary shortfall appears to have been the result of inaccurate forecasting of
revenues and expenditures during the biennial budgeting process in 1993.
Although Texas continued to maintain cash surplus in the state treasury that
state officials believe to be adequate to meet the state's spending
requirements, this cushion against budget overruns dropped from $4.985 billion
in 1994 to $4.202 billion in 1995. There is no assurance that sufficient cash
funds will be available in the state treasury to make up for any budgetary
shortfall in future years.

The state budget for the 1996-1997 biennium adopted by the 74th Legislature
provides for expenditures of $78.9 billion which represents a $4.7 billion or
6.2% increase over the 1994-1995 biennium budget. Much of the increase in the
next biennium's budget is related to increased spending for public education,
health and human services and public safety and criminal justice. While state
government officials have based this budget on forecasts of the revenues that
will be available from all sources during the two fiscal year period, there is
no assurance that revenues in the estimated amounts will be received by the
State of Texas during that period or that the State will not have a budget
deficit for that two-year period. The revenue estimates on which the budget is
based assume aggregate receipts of almost $23.5 billion from the federal
government during the biennium, which will be 29.4% of the state's budget for
the period. As noted above, changes in federal law could result in the amounts
of federal funding being less than those assumed by the state government for
budgeting purposes.

The two major sources of state revenue are state taxes and federal funds.
Other revenue sources include income from licenses, fees and permits, interest
and investment income, the state lottery, income from sales of goods and
services and land income (which includes income from oil, gas and other mineral
royalties as well as from leases on state lands). The major sources of state
government tax collection are the sales tax, the sales and rentals taxes on
motor vehicles and interstate carriers, and the franchise tax.

Limitations on Bond Issuances and Ad Valorem Taxation. Although Texas has
few debt limits on the incurrence of public debt, certain tax limitations
imposed on counties and cities are in effect debt limitations. The requirement
that counties and cities in Texas provide for the collection of an annual tax
sufficient to retire any bonded indebtedness they create operates as a
limitation on the amount of indebtedness which may be incurred as counties and
cities may never incur indebtedness which cannot be satisfied by revenue
received from taxes imposed within the tax limits. The same requirement is
generally applicable to indebtedness of the State of Texas. However, voters
have authorized from time to time, by constitutional amendment, the issuance of
general obligation bonds of the state for various purposes.

The State of Texas cannot itself impose ad valorem taxes. Although the state
franchise tax system does function as an income tax on corporations, limited
liability companies and certain banks, the State of Texas does not impose an
income tax on personal income. Consequently, the state government must look to
sources of revenue other than state ad valorem taxes and personal income taxes
to fund the operations of the state government and to pay interest and principal
on outstanding obligations of the state and its various agencies.

To the extent the Texas Debt Obligations in the Portfolio are payable, either
in whole or in part, from ad valorem taxes levied on taxable property, the
limitations described below may be applicable. The Texas Constitution limits
the rate of growth of appropriations from tax revenues not dedicated to a
particular purpose by the Constitution during any biennium to the estimated rate
of growth for the Texas economy, unless both houses of the Texas Legislature, by
a majority vote in each, find that an emergency exists. In addition, the Texas
Constitution authorizes cities having more than 5,000 inhabitants to provide
further limitations in their city charters regarding the amount of ad valorem
taxes which can be assessed. Furthermore, certain provisions of the Texas
Constitution provide for exemptions from ad valorem taxes, of which some are
mandatory and others are available at the option of the particular county, city,
town,

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school district or other political subdivision of the state. The following is
only a summary of certain laws which may be applicable to an issuer of the Texas
Debt Obligations regarding ad valorem taxation.

Counties and political subdivisions are limited in their issuance of bonds
for certain purposes (including construction, maintenance and improvement of
roads, reservoirs, dams, waterways and irrigation works) to an amount up to
one-fourth of the assessed valuation of real property. No county, city or town
may levy a tax in any one year for general fund, permanent improvement fund,
road and bridge fund or jury fund purposes in excess of $.80 on each $100
assessed valuation. Cities and towns having a population of 5,000 or less may
not levy a tax for any one year for any purpose in excess of 1-1/2% of the
taxable property ($1.50 on each $100 assessed valuation), and a limit of 2 1/2%
($2.50 on each $100 assessed valuation) is imposed on cities having a population
of more than 5,000. Hospital districts may levy taxes up to $.75 on each $100
assessed valuation. School districts are subject to certain restrictions
affecting the issuance of bonds and the imposition of taxes.

Governing bodies of taxing units may not adopt tax rates that exceed certain
specified rates until certain procedural requirements are met (including, in
certain cases, holding a public hearing preceded by a published notice thereof).
Certain statutory requirements exist which set forth the procedures necessary
for the appropriate governmental body to issue and approve bonds and to levy
taxes. To the extent that such procedural requirements are not followed
correctly, the actions taken by such governmental bodies could be subject to
attack and their validity and the validity of the bonds issued questioned.

Property tax revenues are a major source of funding for public education in
Texas. The method for funding public education in Texas has undergone material
changes over the last five years and has been the subject of rancorous
litigation during that period. In response to challenges to prior laws relating
to the funding of public education in Texas, the Texas legislature adopted new
legislation in 1993 that attempts to reduce the disparity of revenues per
student between low-wealth school districts and high-wealth school districts by
causing the high-wealth school districts to share their ad valorem tax revenues
with the low-wealth school districts. In January 1995, the Texas Supreme Court
affirmed the constitutionality of that legislation. Subsequently, the Texas
Legislature created a new $170 million school facilities construction funding
program designed primarily to help property-poor school districts build and
renovate school facilities. The money for this program will come from the
General Revenue Fund of the State of Texas. There is no assurance that further
challenges to this method of funding public education will not be mounted in
Texas. In fact, the Governor has appointed a tax reform task force to study the
possibility of a complete restructuring or replacement of the current property
tax system and to analyze alternatives to the current system for funding public
education; however, no proposals have been made by the task force, and it is not
possible to predict if or when the current property tax structure may be amended
or replaced.

VIRGINIA

RISK FACTORS--The Constitution of Virginia limits the ability of the
Commonwealth to create debt. An amendment to the Constitution requiring a
balanced budget was approved by the voters on November 6, 1984.

General obligations of cities, towns or counties in Virginia are payable from
the general revenues of the entity, including ad valorem tax revenues on
property within the jurisdiction. The obligation to levy taxes could be
enforced by mandamus, but such a remedy may be impracticable and difficult to
enforce. Under section 15.1--227.61 of the Code of Virginia, a holder of any
general obligation bond in default may file an affidavit setting forth such
default with the Governor. If, after investigating, the Governor determines
that such default exists, he is directed to order the State Comptroller to
withhold State funds appropriated and payable to the entity and apply the amount
so withheld to unpaid principal and interest. The Commonwealth, however, has no
obligation to provide any additional funds necessary to pay such principal and
interest.

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Revenue bonds issued by Virginia political subdivisions include (1) revenue
bonds payable exclusively from revenue producing governmental enterprises and
(2) industrial revenue bonds, college and hospital revenue bonds and other
"private activity bonds" which are essentially non-governmental debt issues and
which are payable exclusively by private entities such as non-profit
organizations and business concerns of all sizes. State and local governments
have no obligation to provide for payment of such private activity bonds and in
many cases would be legally prohibited from doing so. The value of such private
activity bonds may be affected by a wide variety of factors relevant to
particular localities or industries, including economic developments outside of
Virginia.

Virginia municipal securities that are lease obligations are customarily
subject to "non-appropriation" clauses. See "Municipal Revenue Bonds - Lease
Rental Bonds." Legal principles may restrict the enforcement of provisions in
lease financing limiting the municipal issuer's ability to utilize property
similar to that leased in the event that debt service is not appropriated.

No Virginia law expressly authorizes Virginia political subdivisions to file
under Chapter 9 of the United States Bankruptcy Code, but recent case law
suggests that the granting of general powers to such subdivisions may be
sufficient to permit them to file voluntary petitions under Chapter 9.

Virginia municipal issuers are generally not required to provide ongoing
information about their finances and operations, although a number of cities,
counties and other issuers prepare annual reports.

Although revenue obligations of the Commonwealth or its political
subdivisions may be payable from a specific project or source, including lease
rentals, there can be no assurance that future economic difficulties and the
resulting impact on Commonwealth and local government finances will not
adversely affect the market value of the Virginia Series portfolio or the
ability of the respective obligors to make timely payments of principal and
interest on such obligations.

The Commonwealth has maintained a high level of fiscal stability for many
years due in large part to conservative financial operations and diverse sources
of revenue. The budget for the 1994-96 biennium submitted by Governor Allen
does not contemplate any significant new taxes or increases in the scope or
amount of existing taxes.

The economy of the Commonwealth is based primarily on manufacturing, the
government sector (including defense), agriculture, mining and tourism. Defense
spending is a major component. Defense installations are concentrated in
Northern Virginia, the location of the Pentagon, and the Hampton Roads area,
including the Cities of Newport News, Hampton, Norfolk and Virginia Beach, the
locations of, among other installations, the Army Transportation Center (Ft.
Eustis), the Langley Air Force Base, Norfolk Naval Base and the Oceana Naval Air
Station, respectively. Any substantial reductions in defense spending generally
or in particular areas, including base closings, could adversely affect the
state and local economies. In addition both residential and non-residential
construction have not fully recovered from recessionary conditions which caused
a major contraction in real estate, construction and related activities in
Northern Virginia and resulted in substantial financial deterioration for many
participants in these activities.

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 or local governments and not exempting
retirement benefits paid by the federal government. At the time of this ruling,
under legislation subsequently amended in 1989 to provide uniform exemptions for
all retirees, Virginia exempted state and local but not federal government
retirement benefits. A number of suits for refunds were filed by federal
retirees in state courts in 1989.

During pendency of an appeal to the Virginia Supreme Court in the principal
refund suit, Harper v. Department of Taxation, the General Assembly enacted
legislation intended to settle the retirees' litigation by providing for
payments of $60 million on March 1, 1995, and (subject to appropriation) $70
million

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on each March I thereafter through March 31, 1999, to retirees who accept the
settlement, release the Commonwealth from all claims based on taxation of
federal retirement benefits during 1985-88 and dismiss all related lawsuits to
which they are parties. The settlement amount is reduced by a percentage of the
dollar amount of claims of retirees who opt out. Approximately 91% of the
retirees accepted the settlement.

On September 15, 1995, the Virginia Supreme Court decided the Harper appeal
in favor of the retirees and ordered refunds with interest. The Commonwealth
will not seek an appeal or rehearing of this decision and has issued refund
checks to the retirees who opted out of the legislative settlement. The cost of
the refund is approximately $78.4 million, including interest.

The Commonwealth has a Standard & Poor's rating of AAA and a Moody's rating
of Aaa on its general obligation bonds. There can be no assurance that the
economic conditions on which these ratings are based will continue or that
particular bond issues may not be adversely affected by changes in economic or
political conditions.

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