MUNICIPAL INVESTMENT TR FD INTERM TERM SER 308 DEF ASSET FDS, 487, 1997-09-12

MUNICIPAL INVESTMENT TR FD INTERM TERM SER 308 DEF ASSET FDS
487, 1997-09-12

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 1997
REGISTRATION NO. 333-30863

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

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

------------------------------------------
AMENDMENT NO. 1
TO
FORM S-6
------------------------------------------

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

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

A. EXACT NAME OF TRUST:

MUNICIPAL INVESTMENT TRUST FUND
INTERMEDIATE TERM SERIES--308
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
INCORPORATED
DEFINED ASSET FUNDS
POST OFFICE BOX 9051
PRINCETON, NJ 08543-9051 SMITH BARNEY INC.
388 GREENWICH STREET--23RD
FLOOR
NEW YORK, NY 10013

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

D. NAMES AND COMPLETE ADDRESSES OF AGENTS FOR SERVICE:

TERESA KONCICK, ESQ. DOUGLAS LOWE, ESQ. LAURIE A. HESSLEIN
P.O. BOX 9051 DEAN WITTER REYNOLDS INC. 388 GREENWICH STREET
PRINCETON, NJ 08543-9051 TWO WORLD TRADE NEW YORK, NY 10013
CENTER--59TH FLOOR
NEW YORK, NY 10048

COPIES TO:

LEE B. SPENCER, JR. PIERRE DE SAINT PHALLE, ROBERT E. HOLLEY
ONE NEW YORK PLAZA ESQ. 1200 HARBOR BLVD.
NEW YORK, NY 10292 450 LEXINGTON AVENUE WEEHAUKEN, NJ 07087
NEW YORK, NY 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: Inapplicable.

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 September 12, 1997 pursuant to Rule 487.

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<PAGE>
DEFINED ASSET FUNDSSM
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MUNICIPAL INVESTMENT 4.71% ESTIMATED CURRENT RETURN shows the estimated
TRUST FUND annual cash to be received from interest-bearing
INTERMEDIATE TERM bonds in the Portfolio (net of estimated annual
SERIES 308 expenses) divided by the Public Offering Price
A UNIT INVESTMENT TRUST (including the maximum sales charge).
- ------------------------------4.50% ESTIMATED LONG TERM RETURN is a measure of
/ / INTERMEDIATE MATURITIES the estimated return over the estimated average
/ / EXEMPT FROM REGULAR life of the Fund (about 11 years). This represents
FEDERAL INCOME TAX an average of the yields to maturity (or in
/ / DEFINED PORTFOLIO OF certain cases, to an earlier call date) of the
MUNICIPAL BONDS individual bonds in the Portfolio, adjusted to
/ / MONTHLY INCOME reflect the maximum sales charge and estimated
/ / PROFESSIONAL SELECTION expenses. The average yield for the Portfolio is
4.71% derived by weighting each bond's yield by its
ESTIMATED CURRENT RETURN market value and the time remaining to the call or
4.50% maturity date, depending on how the bond is
ESTIMATED LONG TERM RETURN priced. Unlike Estimated Current Return, Estimated
AS OF SEPTEMBER 11, 1997 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.

-------------------------------------------------
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 1-800-323-1508.
Prudential Securities Prospectus dated September 12, 1997.
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 $115 billion sponsored in the last 25 years. Each Defined
Asset Fund is a portfolio of preselected securities. The 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 bond portfolios
o Corporate bond portfolios
o Government bond portfolios
o Equity portfolios
o International equity and bond portfolios

The terms of Defined Funds are as short as one year or as long as 30 years.
Special defined bond 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 Intermediate Term Series
- ----------------------------------------------------------------

Our defined portfolio 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 intermediate term
municipal bonds issued by or on behalf of states and their local governments and
authorities.

DIVERSIFICATION

The Portfolio contains 13 bond issues. Spreading your investment among different
issuers reduces your risk, but does not eliminate it. 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

The Portfolio contains a variety of bonds selected by experienced buyers. 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.

TYPES OF BONDS

The Portfolio consists of $10,745,000 face amount of municipal bonds of the
following types:

APPROXIMATE
PORTFOLIO
PERCENTAGE
/ / General Obligations 13%
/ / Hospitals/Nursing Homes/Mental Health 20%
/ / Housing 14%
/ / Industrial Development Revenue 13%
/ / Lease Rental Appropriation 10%
/ / Special Tax Issues 15%
/ / State/Local Municipal Electric 10%
/ / Tax Allocation 5%

LETTERS OF CREDIT OR INSURANCE

Approximately 13% of the bonds included in the Portfolio are backed by letters
of credit, which are irrevocable obligations of the issuing entities.
Approximately 51% of the bonds included in the Portfolio are insured. Letters of
credit and insurance guarantee the timely payment of principal and interest on
the bonds, but do not guarantee the value of the bonds or the Fund units.
Insurance may 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.

A-2
<PAGE>
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 most
bonds in the Portfolio generally cannot be called for a number of years and
thereafter at a price not less than par.

TAX INFORMATION

Based on the opinion of bond counsel, interest income from the bonds held by
this Fund is generally 100% exempt under existing laws from regular federal
income tax. Interest on approximately 14% of the bonds will be a preference item
for purposes of the Alternative Minimum Tax (AMT). Any gain on a disposition of
the underlying bonds or units will be subject to tax. If you hold your units for
more than 18 months you may be entitled to the new 20% maximum federal tax rate
for gains from the sale of your units. (See Taxes in Part B.)
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Defining Your Risks
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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
banks or other entities backing 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.

The Portfolio is not considered to be concentrated in any particular category of
bonds. In addition, since interest on some of the bonds will be a preference
item for purposes of AMT, the fund may not be appropriate for investors who are
subject to AMT.
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Defining Your Investment
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PUBLIC OFFERING PRICE PER UNIT $1,038.38

The Public Offering Price as of September 11, 1997, the business day prior to
the Initial Date of Deposit, is based on the aggregate offer side value of the
underlying bonds in the Fund ($10,760,876.70), plus cash ($85,000.00) divided by
the number of units outstanding (10,445). 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.

LOW MINIMUM INVESTMENT

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

UNIT PAR VALUE

The par value of your unit--the amount of money you will receive by termination
of the Fund, 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.

REINVESTMENT OPTION

You can elect to automatically reinvest your distributions into a separate
portfolio of federally tax-exempt bonds. Reinvesting helps to compound your
income tax-free.

PRINCIPAL DISTRIBUTIONS

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

TERMINATION DATE

The Fund will generally terminate no later than the maturity date of the last
maturing bond listed in the Portfolio. The Fund may be terminated earlier 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 the Fund 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 of $59,433.65 on the deposit of the bonds.

UNDERWRITING ACCOUNT
One or more of the Sponsors have participated as sole underwriter, managing
underwriter or member of an underwriting syndicate from which approximately 13%
of the bonds in the Portfolio were acquired.

UNDERWRITERS
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
P.O. Box 9051,
Princeton, NJ 08543-9051 70.18%
SMITH BARNEY INC.
388 Greenwich Street--23rd Floor,
New York, NY 10013 11.97%
PAINEWEBBER INCORPORATED
1285 Avenue of the Americas,
New York, NY 10019 11.63%
PRUDENTIAL SECURITIES INCORPORATED
One New York Plaza,
New York, NY 10292 2.39%
DEAN WITTER REYNOLDS INC.
Two World Trade Center--59th Floor,
New York, NY 10048 3.83%
100.00%

A-3
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Defined Portfolio
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Municipal Investment Trust Fund
Intermediate Term Series--308 September 12, 1997

<TABLE>
<CAPTION>
OPTIONAL SINKING
RATING REFUNDING FUND COST
PORTFOLIO TITLE OF ISSUES (1) REDEMPTIONS (2) REDEMPTIONS (2) TO FUND (3)
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<S> <C> <C> <C> <C>
1. The City of Cape Coral, FL,
Hlth. Facs. Auth., First Mtge. Rev.
Bonds (Gulf Care, Inc. Proj), Ser.
1997 (Asset Guaranty Ins.) AA
$145,000, 4.80%, 10/1/05 (4) -- -- $ 145,000.00
$160,000, 4.90%, 10/1/06 (4) -- -- 160,000.00
$70,000, 5.00%, 10/1/07 (4) -- -- 70,000.00
$100,000, 5.10%, 10/1/08 (4) 10/1/07 @ 102 -- 100,000.00
2. $1,345,000 City of Chicago, IL,
G.O. Bldg. Acquisition Certs. (Ltd.
Tax), Ser. 1997 (FSA Ins.), 5.00%,
1/1/09 AAA 1/1/08 @ 102 -- 1,327,757.10
3. $305,000 Illinois Hlth. Facs.
Auth. Rev. Rfdg. Bonds (Advocate
Hlth. Care Network), Ser. 1997 A,
5.30%, 8/15/07 AA -- -- 312,079.05
4. East Allen Woodlan Sch. Bldg.
Corp., Allen Cnty., IN, First Mtge.
Bonds, Ser. 1997 (AMBAC Ins.) (4) AAA
$365,000, 4.90%, 7/15/07 -- -- 365,000.00
$450,000, 5.00%, 7/15/08 7/15/07 @ 101 1/15/08 450,000.00
$295,000, 5.00%, 7/15/09 7/15/07 @ 101 1/15/09 293,675.45
5. $500,000 City of Detroit, MI,
Local Dev. Fin. Auth., Tax
Increment Rfdg. Bonds (Senior Bonds
- -Credit Enhanced), Ser. 1997 A,
5.25%, 5/1/07 (4) A -- -- 511,355.00
6. Michigan Strategic Fund Ltd.
Oblig. Rev. Bonds (NSF Intl. Proj.)
(First of America Bank, N.A. -
Letter of Credit), Ser. 1997 A A1(m)
$425,000, 5.20%, 8/1/08 8/1/07 @ 101 -- 428,493.50
$1,000,000, 5.30%, 8/1/09 8/1/07 @ 101 -- 1,008,720.00
7. $970,000 Nebraska Pub. Pwr.
Dist., Pwr. Supply Sys. Rev. Bonds,
Ser. 1993 C (MBIA Ins.), 5.00%,
1/1/10 AAA 7/1/03 @ 102 -- 961,134.20
8. $1,600,000 Redevelopment Agy. of
the City of Sparks, NV, Tax Alloc.
Rfdg. Rev. Bonds, Ser. 1997 (Asset
Guaranty Ins.), 5.05%, 1/15/07 AA -- -- 1,605,792.00

</TABLE>

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(1) These ratings are ratings of the bonds themselves by Standard & Poor's or
by Moody's if followed by '(m)', or by Fitch if followed by '(f)' (Moody's and
Fitch ratings have been furnished by the Evaluator but not confirmed with
Moody's or Fitch); '+' following a rating indicates it is a rating of the issuer
of the letter of credit; '++' indicates that while there is no available rating,
in the opinion of Defined Asset Funds research analysts, the bond has credit
characteristics comparable to bonds rated A or better. (See Appendix A.)
(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.

A-4
<PAGE>
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Defined Portfolio
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Municipal Investment Trust Fund
Intermediate Term Series--308 (Continued) September 12, 1997

9. New Hampshire Higher Educl. and
Hlth. Facs. Auth. Hosp. Rev. Bonds,
Androscoggin Valley Hosp. Issue,
Ser. 1997 (4) A-
$85,000, 4.20%, 11/1/98 (6) -- -- $ 85,000.00
$95,000, 4.45%, 11/1/99 (6) -- -- 95,000.00
$135,000, 4.55%, 11/1/00 (6) -- -- 135,000.00
$200,000, 5.00%, 11/1/05 -- -- 200,650.00
$210,000, 5.05%, 11/1/06 -- -- 210,747.60
$220,000, 5.10%, 11/1/07 -- -- 220,849.20
$230,000, 5.25%, 11/1/08 11/1/07 @ 102 -- 230,945.30
$245,000, 5.35%, 11/1/09 11/1/07 @ 102 -- 246,068.20
10. State of North Dakota, North
Dakota Hsg. Fin. Agy., Hsg. Fin.
Prog. Bonds, Home Mtge. Fin. Prog.,
Ser. 1997 D (4)(5) Aa3(m)
$190,000, 5.10%, 1/1/07 -- -- 190,000.00
$160,000, 5.20%, 7/1/08 1/1/08 @ 102 -- 160,000.00
$100,000, 5.30%, 1/1/09 1/1/08 @ 102 -- 100,000.00
$250,000, 5.30%, 7/1/09 1/1/08 @ 102 -- 250,000.00
$205,000, 5.40%, 1/1/10 1/1/08 @ 102 -- 205,000.00
11. State of North Dakota, North
Dakota Hsg. Fin. Agy., Hsg. Fin.
Prog. Bonds, Home Mtge. Fin. Prog.,
Ser. 1997 F (5) Aa3(m)
$160,000, 5.20%, 7/1/08 1/1/08 @ 102 -- 160,000.00
$165,000, 5.30%, 1/1/09 1/1/08 @ 102 -- 165,000.00
$170,000, 5.30%, 7/1/09 1/1/08 @ 102 -- 170,000.00
12. $70,000 Redevelopment Agy. of
Salt Lake City, Salt Lake Cnty.,
UT, Central Bus. Dist.,
Neighborhood Redev. Tax Increment
Rev. Rfdg. Bonds, Ser. 1997 A,
4.15%, 10/1/98 (5)(6) A -- -- 70,030.10
13. $125,000 City of Waterloo,
Jefferson Cnty., WI, Combined Util.
Rev. Bonds, Ser. 1997, 5.65%,
11/1/09 ++ 11/1/08 @ 100 11/1/05 127,580.00
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$ 10,760,876.70
--------------------
--------------------
</TABLE>

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(3) Evaluation of the bonds by the Evaluator is made on the basis of current
offer side evaluation. On this basis, approximately 48% of the bonds were
deposited at a premium, 28% at par and 24% at a discount from par.
(4) These bonds are when-issued bonds and are expected to settle 1 to 15 days
after the settlement date for Units. The Trustee's fees and expenses will be
reduced by $0.64 per Unit to compensate for interest that would have accrued on
the bonds between the settlement date for Units and the actual date of delivery
of the bonds. (See Income, Distributions and Reinvestment--Income in Part B.)
(5) These bonds are subject to AMT.
(6) It is anticipated that interest and principal received from these bonds
will be applied to the payment of the Fund's deferred sales charge and,
therefore, these amounts have not been included in the Fund's calculation of
Estimated Current and Long Term Returns.

A-5
<PAGE>
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Defining Your Costs
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SALES CHARGES

The Fund does not have an up-front sales charge in the initial offering period
until the deduction of the first of 12 deferred sales charge installments from
holders of record on November 10, 1997. In the first three years of owning your
units you will pay a deferred sales charge of $13.40 per unit each year ($3.35
quarterly November, February, May and August), a total of $40.20. This deferred
sales charge will be paid from interest on the short-term bonds in the Portfolio
and proceeds from the periodic sale or maturity of those bonds. Interest on
these short-term bonds is not included in the Fund's return figures. Units
purchased after the deduction of the first deferred sales charge installment
will be charged an up-front sales charge equal to 0.335% per unit based on the
Public Offering Price (less the value of the short-term bonds reserved to pay
the deferred sales charge not yet accrued) multiplied by the number of deferred
sales charge payments already deducted. (See How to Buy Units in Part B.)

Although the Fund 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
Offering Period Amount per
Public Offering $1,000
Price invested
----------------- --------------
Maximum Sales Charges 4.02% $ 40.20

The Fund (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% $ 0.72
Portfolio Supervision,
Bookkeeping and Administrative
Fees .044% $ 0.46
Organizational Expenses .019% $ 0.20
Evaluator's Fee .012% $ 0.13
Other Operating Expenses .035% $ 0.36
----------------- -------------
TOTAL .180% $ 1.87

- ------------------
* Based on the mean of the bid and offer 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 and
redemption at the end of the period.

1 Year 3 Years 5 Years 10 Years
$42 $46 $50 $63

No redemption at the end of the period:

1 Year 3 Years 5 Years 10 Years
$15 $46 $50 $63

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.

REDEEMING OR SELLING YOUR INVESTMENT

You may redeem or sell your units at any time. Your price is based on the Fund's
then current net asset value (based on the offer side evaluation of the bonds
during the initial public offering period and for at least the first three
months of the Fund and on the lower, bid side evaluation thereafter, as
determined by an independent evaluator) plus principal cash, if any, as well as
accrued interest. The per Unit redemption and Sponsors' repurchase price as of
September 11, 1997, was $40.20 less than the Public Offering Price, reflecting
the deduction of the deferred sales charge, which declines by $3.35 quarterly
over approximately the first three years of the Fund. If you redeem or sell your
Units before the final deferred sales charge installment deduction, you will pay
the remaining balance of the deferred sales charge. (See How to Buy Units in
Part B.)
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Defining Your Income
- ----------------------------------------------------------------

MONTHLY FEDERALLY TAX-FREE INTEREST INCOME

The Fund pays monthly income, even though the bonds generally pay interest
semi-annually.

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
(October 25, 1997): $ 3.80
Regular Monthly Income per unit
(Beginning on November 25, 1997): $ 4.07
Annual Income per unit: $ 48.91

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.

A-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

The Sponsors, Trustee and Holders of Municipal Investment Trust Fund,
Intermediate Term Series--308, Defined Asset Funds (the 'Fund'):

We have audited the accompanying statement of condition and the related defined
portfolio included in the prospectus of the Fund as of September 12, 1997. This
financial statement is the responsibility of the Trustee. Our responsibility is
to express an opinion on this financial statement based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is 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 cash, securities and an irrevocable letter of credit deposited
for the purchase of securities, as described in the statement 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 audit provides a
reasonable basis for our opinion.

In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of the Fund as of September 12,
1997 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP
NEW YORK, N.Y.
SEPTEMBER 12, 1997

STATEMENT OF CONDITION AS OF SEPTEMBER 12, 1997

TRUST PROPERTY

Investments--Bonds and Contracts to purchase Bonds(1) $ 10,760,876.70
Cash 85,000.00
Accrued interest to Initial Date of Deposit on underlying
Bonds 32,510.97
Organizational costs (2) 10,445.00
--------------------
Total $ 10,888,832.67
--------------------
--------------------
LIABILITIES AND INTEREST OF HOLDERS
Liabilities: Advance by Trustee for accrued interest (3) $ 32,510.97
Accrued Liability(2) 10,445.00
--------------------
Subtotal 42,955.97
--------------------
Interest of Holders of 10,445 Units of fractional
undivided interest outstanding:
Cost to investors(4)(5) 10,845,876.70
--------------------
Total $ 10,888,832.67
--------------------
--------------------

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

(1) Aggregate cost to the Fund of the bonds listed under 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 Fuji Bank, Ltd., New York Branch, in the
amount of $7,620,905.62 and deposited with the Trustee. The amount of the letter
of credit includes $7,595,957.05 for the purchase of $7,605,000.00 face amount
of the bonds, plus $24,948.57 for accrued interest.
(2) This represents a portion of the Fund'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.
(4) A mandatory distribution of $3.35 per Unit is payable quarterly
November, February, May and August up to an aggregate of $40.20 per Unit over a
three-year period. Distributions will be made to an account maintained by the
Trustee from which the deferred sales charge obligation of the investors to the
Sponsors will be satisfied. If units are redeemed prior to the end of the second
anniversary of the Fund, the remaining portion of the distribution applicable to
such Units will be transferred to such account on the redemption date.
(5) 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.

A-7
<PAGE>
- --------------------------------------------------------------------------------
TAX-FREE VS. TAXABLE INCOME: A COMPARISON OF TAXABLE AND TAX-FREE YIELDS

EFFEC-
TIVE %
TAXABLE INCOME 1997* TAX TAX-FREE YIELD OF
SINGLE RETURN JOINT RETURN BRACKET 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- 24,650 $ 0- 41,200 15.00 4.71 5.29 5.88 6.47 7.06 7.65 8.24 8.82 9.41
- ------------------------------------------------------------------------------------------------------------------
$ 24,651- 59,750 $ 41,201- 99,600 28.00 5.56 6.25 6.94 7.64 8.33 9.03 9.72 10.42 11.11
- ------------------------------------------------------------------------------------------------------------------
$ 59,751-124,650 $ 99,601-151,750 31.00 5.80 6.52 7.25 7.97 8.70 9.42 10.14 10.87 11.59
- ------------------------------------------------------------------------------------------------------------------
$124,651-271,050 $151,751-271,050 36.00 6.25 7.03 7.81 8.59 9.38 10.16 10.94 11.72 12.50
- ------------------------------------------------------------------------------------------------------------------
OVER $271,050 OVER $271,050 39.60 6.62 7.45 8.28 9.11 9.93 10.76 11.59 12.42 13.25
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

To compare the yield of a taxable security with the yield of a tax-free
security, find your taxable income and read across. The table incorporates 1997
federal income tax rates and assumes that all income would otherwise be taxed at
the investor's highest tax rate. Yield figures are for example only.

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

MUNICIPAL BONDS AND THE ALTERNATIVE MINIMUM TAX

INCOME+ MAXIMUM 'PREFERENCE' INCOME
WITHOUT TRIGGERING AMT
(STATE INCOME TAX RATES)
SINGLE ++ JOINT ++ 0% 7% 11%
- --------------------------------------------------
$50,000 $22,000 $17,000 $14,000
- --------------------------------------------------
$30,000 $20,000 $17,000 $15,000
- --------------------------------------------------
$100,000 $26,000 $17,000 $12,000
- --------------------------------------------------
$55,000 $22,000 $17,000 $14,000
- --------------------------------------------------
$225,000 $33,000 $15,000 $6,000
- --------------------------------------------------
$205,000 $32,000 $16,000 $8,000
- --------------------------------------------------

NOTES:
+ Regular taxable income plus state income
taxes and personal exemptions.
++ Assuming no dependents.
Under the tax law, interest income on certain municipal bonds, although
exempt from regular federal income tax, is treated as a 'preference' item for
purposes of AMT. The table above shows amounts of such municipal bond
'preference' interest income, assuming no other 'preference' or similar items
apply, that individual taxpayers could receive in 1997 without becoming subject
to the AMT. The table gives information for single and joint returns of
individuals having no dependents. The table provides three income levels and
three hypothetical state income tax rates. The table further assumes that the
stated amount of municipal bond 'preference' interest income is subject to state
income taxes.

A-8
<PAGE>
MUNICIPAL INVESTMENT TRUST FUND
INTERMEDIATE TERM 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. 644 NEW YORK, NY NECESSARY
IF MAILED
POSTAGE WILL BE PAID BY ADDRESSEE IN THE
THE CHASE MANHATTAN BANK (MITF) UNITED STATES
RETAIL PROCESSING DEPARTMENT
BOWLING GREEN STATION
P.O. BOX 5179
NEW YORK, N.Y. 10274-5179

- --------------------------------------------------------------------------------
(Fold along this line.)

- --------------------------------------------------------------------------------
(Fold along this line.)
<PAGE>
DEFINED ASSET FUNDSSM
PROSPECTUS--PART B
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 Redeem or Sell Units........................... 9
Income, Distributions and Reinvestment................ 10
Fund Expenses......................................... 12
Taxes................................................. 12
PAGE
---------
Records and Reports................................... 13
Trust Indenture....................................... 14
Miscellaneous......................................... 14
Exchange Option....................................... 16
Supplemental Information.............................. 17
Appendix A--Description of Ratings.................... a-1
Appendix B--Secondary Market Sales Charge Schedule.... b-1

FUND DESCRIPTION

BOND PORTFOLIO SELECTION

Professional buyers 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 Defined Asset Funds
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 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.

1
<PAGE>
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 refundings)
that, in the opinion of the Sponsors 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.

Every investment involves some risk; for example, the market prices of most
fixed-income investments decline when interest rates rise, and this exposure
increases with the remaining life of the investment. Historically, however,
municipal bonds generally have been second only in creditworthiness to U.S.
government obligations. Municipal unit trusts can be an efficient alternative to
investing in actively managed funds. Active management of a portfolio of quality
municipal bonds may not be as important as with other securities. Insured bonds
provide additional assurance of prompt payments of interest and principal (but
not stability of market value).

The Sponsors and the Trustee are not liable for any default or defect in a
Bond. If a contract to purchase any Bond fails within the 90-day period
following the initial date of deposit, the Sponsors may generally deposit a
replacement bond so long as it is a tax-exempt bond that is not a 'when, as and
if issued' bond, has a fixed maturity or disposition date substantially similar
to the failed Bond and has a rating at least equal to that of the Bond it
replaces (or, if not rated, has comparable credit characteristics). A
replacement bond must be deposited within 110 days after the initial date of
deposit, 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, if the value of the
short-term Bonds intended 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

2
<PAGE>
brief description of certain risks associated with bonds which may be 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. Recent
and significant changes in Federal welfare policy may have substantial negative
impact on certain states, and localities within those states, making their
ability to maintain balanced finances more difficult in the future.

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 revenues of the project,
excise taxes 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. The movement to introduce
competition in the investor-owned electric utility industry is likely to
indirectly affect municipal utility systems by inducing them to maintain
rates as low as possible. In this effort to keep rates low, municipal
utilities may have more trouble raising rates to completely recover
investment in generating plant;

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;

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;

3
<PAGE>
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, mental health and nursing home facility bonds whose payments
are dependent upon revenues of hospitals and other health care providers.
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 providers. Hospitals must also deal with shifting competition
resulting from hospital mergers and affiliations and the need to reduce
costs as HMOs increase market penetration. Nursing homes need to keep
residential facilities for the elderly, which are not reimbursable from
Medicare/Medicaid, on a profitable basis. Hospital supply and drug
companies must deal with their need to raise prices in an environment where
hospitals and other health care providers are under intense pressure to
keep their costs low. Hospitals and health care providers are subject to
various legal claims by patients and others and are adversely affected by
increasing costs of insurance;

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.
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.

4
<PAGE>
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 (such as the recently
enacted phased repeal of the Puerto Rico and possession federal tax credit)
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 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.

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 an Insured Series, in the event that the rating of an insurance
company insuring a bond 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, except at the
sole option of the insurer, 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:

FINANCIAL INFORMATION
AS OF DECEMBER 31, 1996
(IN MILLIONS OF DOLLARS)
-------------------------------------
POLICYHOLDERS'
NAME DATE ESTABLISHED ADMITTED ASSETS SURPLUS
- ----------------------------------------------------- ----------------- --------------- --------------------
<S> <C> <C> <C>

AMBAC Indemnity Corporation.......................... 1970 $ 2,585 $ 899
Asset Guaranty Insurance Co. (AA by S&P)............. 1988 204 87
Capital Markets Assurance Corp. (CAPMAC) 1987 321 194
Connie Lee Insurance Company......................... 1987 233 116
Financial Guaranty Insurance Company................. 1984 2,392 1,093
Financial Security Assurance Inc. (FSA) (including
Financial Security Assurance of Maryland Inc.
(FSAM) (formerly Capital Guaranty Insurance
Company)........................................... 1984 1,155 449
MBIA Insurance Corporation........................... 1986 4,189 1,467
</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

5
<PAGE>
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 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
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.

6
<PAGE>
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.

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.

PUBLIC OFFERING PRICE

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.

During the initial offering period and 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

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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.

The Fund does not have an up-front sales charge in the initial offering
period until after the deduction of the first quarterly Deferred Sales Charge
installment which will commence on the date indicated in part A of this
Prospectus. Units redeemed or repurchased prior to the accrual of the final
Deferred Sales Charge installment will have the amount of any remaining
installments deducted from the redemption or repurchase proceeds, although this
deduction will be waived in the event of the death or disability (as defined in
the Internal Revenue Code of 1986) of an investor. Units purchased after the
deduction of the first Deferred Sales Charge installment will be charged the up-
front per Unit sales charge indicated in Part A of this Prospectus based on the
Public Offering Price (less the value of the short-term bonds reserved to pay
the deferred sales charge not yet accrued), multiplied by the number of Deferred
Sales Charge installments already deducted. Units purchased after the deduction
of the final Deferred Sales Charge installment will be subject only to an
up-front sales charge based on the maturities of the bonds in the Portfolio, as
set forth in Appendix B.

The following table shows the maximum sales charge in the initial offering
period, reduced on a graduated scale for sales to any purchaser of at least 250
Units. To qualify for the reduced sales charge the dealer must confirm that the
sale is to a single purchaser as defined below or is purchased for its own
account and not for distribution.

MONTHLY PAYMENT SERIES, INSURED SERIES, STATE TRUSTS (LONG-TERM):

NUMBER OF UNITS MAXIMUM SALES CHARGE
- ---------------- ----------------------
1-249 $ 45.00
250-499 40.00
500-749 35.00
750-999 32.50
1,000 or more 30.00

INTERMEDIATE SERIES (10 YEAR) AND INTERMEDIATE STATE TRUSTS (10 YEAR):

NUMBER OF UNITS MAXIMUM SALES CHARGE
- ---------------- ----------------------
1-249 $ 40.20
250-499 35.00
500-749 32.50
750-999 30.00
1,000 or more 27.50

The graduated sales charge will apply on all purchases on any one day by the
same purchaser of Units, and purchases will not be aggregated with concurrent
purchases of any other unit trusts sponsored by the Sponsors. Units held in the
name of the purchaser's spouse or his child under age 21 are deemed to be
registered in the purchaser's name. The graduated sales charge is also
applicable to a trustee or other fiduciary purchasing securities for a single
trust estate or single fiduciary account.

Employees of certain of the Sponsors and their affiliates may buy Units at
prices based on a reduced sales charge of not less than $5.00 per Unit.

In the initial offering period the concession to dealers will be equal to:
the Public Offering Price less $30.00 per Unit for Monthly Payment Series,
Insured Series and long-term State Trusts; the Public Offering Price less $27.50
per Unit for Intermediate-Term Series (10 year) and Intermediate State Trusts;
and the Public Offering Price less $20.00 per Unit for Intermediate Term Series
(5 year).

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

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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 Redeem or Sell Units-- Redeeming Units
with the Trustee). 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.

HOW TO REDEEM OR SELL UNITS

You can redeem your Units at any time for a price based on net asset value.
In addition, the Sponsors have maintained an uninterrupted secondary market for
Units for over 20 years and will ordinarily buy back Units at the same price.
The following describes these two methods to redeem or sell Units in greater
detail.

REDEEMING UNITS WITH THE TRUSTEE

You can always redeem your Units directly with the Trustee for net asset
value. This can be done by sending the Trustee a redemption request together
with any Unit certificates you hold, which 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 trust instrument, certificate of corporate authority, certificate of
death or appointment as executor, administrator or guardian.

Within seven days after the Trustee's receipt of your request containing
the necessary documents, a check will be mailed to you in an amount based on the
net asset value of your Units. If you redeem or sell your Units before the final
deferred sales charge installment date, the remaining deferred sales charges
will be deducted from the net asset value. Because of sales charges, market
movements or changes in the Portfolio, net asset value at the time you redeem
your Units may be greater or less than the original cost of your Units. Net
asset value is calculated 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 and
any remaining deferred sales charges, 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. 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.

As long as the Sponsors are maintaining a secondary market for Units (as
described below), the Trustee will not actually redeem your Units but will sell
them to the Sponsors for net asset value. If the Sponsors are not maintaining a
secondary market, the Trustee will redeem your Units for net asset value or will
sell your Units in the over-the-counter market if the Trustee believes it will
obtain a higher net price for your Units. If the Trustee is able to sell the
Units for a net price higher than net asset value, you will receive the net
proceeds of the sale.

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 may
also reduce the size and diversity of the Fund. If Bonds are being sold during a
time when additional Units are being created by the purchase of additional Bonds
(as described under Portfolio Selection), Bonds will be sold in a manner
designed to maintain, to the extent practicable, the proportionate relationship
among the face amounts of each Bond in the Portfolio.

The Trustee is authorized, on a redemption request for Units with a value
exceeding $250,000 by any investor who acquired 25% or more of the outstanding
Units of a Trust, to pay part or all of the redemption 'in kind' (by the
distribution of Bonds and cash with an aggregate value equal to the applicable
Redemption Price of the Units tendered for redemption). The Trustee will attempt
to make a pro rata distribution of Bonds in the Portfolio, but reserves the
right to distribute solely one or more Bonds. The distribution will be made to
the distribution agent and either held for the account of the investor or
disposed of in accordance with the instructions of the investor. Any

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<PAGE>
transaction costs as well as transfer and ongoing custodial fees on sales of the
Bonds distributed in kind will be borne by the redeeming investor.

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

SPONSORS' SECONDARY MARKET FOR UNITS

The Sponsors, while not obligated to do so, will buy back Units at net
asset value without any other fee or charge as long as they are maintaining a
secondary market for Units. Because of sales charges, market movements or
changes in the portfolio, net asset value at the time you sell your Units may be
greater or less than the original cost of your Units. The Sponsors may resell
the Units to other buyers or redeem the Units by tendering them to the Trustee.
You should consult your financial professional for current market prices to
determine if other broker-dealers or banks are offering higher prices for Units.

The Sponsors may discontinue the secondary market for Units without prior
notice if the supply of Units exceeds demand or for other business reasons.
Regardless of whether the Sponsors maintain a secondary market, you have the
right to redeem your Units for net asset value with the Trustee at any time, as
described above.

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
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,
distributions of amounts necessary to pay the deferred 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 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.

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<PAGE>
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. Advertisements and sales
literature may illustrate the effects of compounding at different hypothetical
interest rates. Investors participating in the Program will be subject to state
and local income taxes to the same extent 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
currently estimated at $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 Series of Municipal Investment Trust Fund will not
exceed their costs for providing 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 Defined Asset Funds,
currently estimated at $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

11
<PAGE>
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 summary describes some of the important income tax
consequences of holding Units, assuming that the investor is not a dealer,
financial institution or insurance company or other investor with special
circumstances. Investors should consult their tax advisers about an investment
in the Fund.

At the date of issue of each Bond, counsel for the issuer delivered an
opinion to the effect that interest on the Bond is generally exempt from regular
federal income tax. However, interest may be subject to federal alternative
minimum tax or state and local taxes. Neither the Sponsors nor Davis Polk &
Wardwell has reviewed the issuance of the Bonds, related proceedings or the
basis of the opinions of counsel for the issuers. There can be no assurance,
therefore, that the issuer (or other users) have complied or will comply with
any requirements necessary for a bond to be tax-exempt. If any of the Bonds were
determined not to be tax-exempt, investors might be required to pay income tax
for current and prior years, and if the Fund were to sell the Bond, it might
have to sell it at a substantial discount.

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

GENERAL TREATMENT OF THE FUND

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

INCOME OR LOSS UPON DISPOSITION

Upon a disposition of all or part of an investor's pro rata portion of a
Bond (by sale, exchange or redemption of the Bond or his Units), an investor
will generally recognize capital gain or loss. However, gain from the
disposition will generally be ordinary income to the extent of any accrued
'market discount'. An investor will generally have market discount to the extent
that his basis in a Bond when he purchases a Unit is less than its stated
redemption price at maturity (or, if it is an 'original issue discount' bond,
the issue price increased by 'original issue discount' that has accrued to
previous holders). Investors should consult their tax advisers in this regard.

The excess of a non-corporate investor's net long-term capital gains over
his net short-term capital losses may be subject to tax at a lower rate than
ordinary income. A capital gain or loss is long-term if the investment is held
for more than one year and short-term if held for one year or less. Because the
deduction of capital losses is subject to limitations, an investor may not be
able to deduct all of his capital losses. Under the recently enacted Taxpayer
Relief Act of 1997, an investor who is an individual and has held his pro rata
portions of Bonds for more than 18 months may be entitled to a 20% maximum
federal tax rate for gains from the sale of these Bonds or corresponding Units.
Investors should consult their tax advisers in this regard.

INVESTOR'S BASIS IN THE BONDS

An investor's aggregate basis in the Bonds will be equal to the cost of his
Units, including any sales charges and the organizational expenses borne by the
investor but excluding any amount paid for accrued interest, and adjusted to
reflect any accruals of 'original issue discount', 'acquisition premium' and
'bond premium'. Investors should consult their tax advisers in this regard.

EXPENSES

A non-corporate investor is not entitled to a deduction for his pro rata
share of fees and expenses of the Fund. Also, if an investor borrowed money in
order to purchase or carry his Units, he will not be able to deduct the interest
on this borrowing. The Internal Revenue Service may treat an investor's purchase
of Units as made with borrowed money even if the borrowed money was not directly
used to purchase the Units.

STATE AND LOCAL TAXES

Under the income tax laws of the State and City of New York, the Fund will
not be taxed as a corporation. The income recognized by investors that are New
York taxpayers will not be tax-exempt in New York except to the extent it is
earned on Bonds that are tax-exempt for New York purposes. Depending on where
investors live, income from the Fund may be subject to state and local taxation.
Investors should consult their tax advisers in this regard.

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<PAGE>
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 cash proceeds received by the Fund from the disposition
of any Bond (resulting from redemption or payment at maturity or sale of any
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.

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<PAGE>
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 New York
State banking authorities.

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 Morgan Stanley,
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.

CODE OF ETHICS

The Agent for the Sponsors has adopted a code of ethics requiring
preclearance and reporting of personal securities transactions by its personnel
who have access to information on Defined Asset Funds portfolio transactions.
The code is intended to prevent any act, practice or course of conduct which
would operate as a fraud or deceit on any Fund and to provide guidance to these
persons regarding standards of conduct consistent with the Agent's
responsibilities to the Funds.

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.

14
<PAGE>
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.

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. Average annual compounded rates of return of selected asset
classes over various periods of time may also be compared to the rate of
inflation over the same periods.

DEFINED ASSET FUNDS

Municipal Investment Trust Funds have provided investors with tax-free
income and balance for their portfolios for more than 30 years. As tax reforms
over the years have eliminated many of the ways to reduce individual taxes,
municipal bonds have remained a significant source of tax-free income. 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. Defined equity funds offer growth potential and some
protection against inflation. 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 cost-effective 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

15
<PAGE>
investment experts recommend stocks for long-term capital growth. Long-term
corporate bonds offer relatively high rates of interest income.

EXCHANGE OPTION

You may exchange Units of the Fund for units of certain other Defined Asset
Funds subject only to a reduced sales charge.

Upon the deduction of the final Deferred Sales Charge installment for the
Fund, 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
on the units being exchanged, 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. 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.

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.

16
<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
SECONDARY MARKET SALES CHARGE SCHEDULE

Units purchased after the deduction of the final deferred sales charge
installment will be subject only to an up-front sales charge based on the
maturities of the bonds in the Portfolio, as set forth below.

ACTUAL SALES CHARGE AS DEALER CONCESSION AS
PERCENT OF EFFECTIVE PERCENT OF EFFECTIVE
NUMBER OF UNITS SALES CHARGE SALES CHARGE
- ---------------- ----------------------- -----------------------
1-249 100% 65.00%
250-499 80 52.00
500-749 60 39.00
750-999 45 29.25
1,000 or more 35 22.75

EFFECTIVE SALES CHARGE

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.

b-1
<PAGE>
Defined
Asset FundsSM

SPONSORS: MUNICIPAL INVESTMENT
Merrill Lynch, TRUST FUND
Pierce, Fenner & Smith IncorporatedIntermediate Term Series--308
Defined Asset Funds A Unit Investment Trust
P.O. Box 9051 PROSPECTUS
Princeton, NJ 08543-9051 This Prospectus does not contain all of the
(609) 282-8500 information with respect to the investment
Smith Barney Inc. company set forth in its registration
Unit Trust Department statement and exhibits relating thereto which
388 Greenwich Street have been filed with the Securities and
23rd Floor Exchange Commission, Washington, D.C. under
New York, NY 10013 the Securities Act of 1933 and the Investment
(212) 816-4000 Company Act of 1940, and to which reference
PaineWebber Incorporated is hereby made. Copies of filed material can
1200 Harbor Blvd. be obtained from the Public Reference Section
Weehawken, NJ 07087 of the Commission, 450 Fifth Street, N.W.,
(201) 902-3000 Washington, D.C. 20549 at prescribed rates.
Prudential Securities Incorporated The Commission also maintains a Web site that
One New York Plaza contains information statements and other
New York, NY 10292 information regarding registrants such as
(212) 778-6164 Defined Asset Funds that file electronically
Dean Witter Reynolds Inc. with the Commission at http://www.sec.gov.
Two World Trade Center ------------------------------
59th Floor No person is authorized to give any
New York, NY 10048 information or to make any representations
(212) 392-2222 with respect to this investment company not
EVALUATOR: contained in this Prospectus; and any
Kenny S&P Evaluation Services, information or representation not contained
a division of J. J. Kenny Co., Inc.herein must not be relied upon as having been
65 Broadway authorized.
New York, NY 10006 ------------------------------
INDEPENDENT ACCOUNTANTS: When Units of this Fund are no longer
Deloitte & Touche LLP available this Prospectus may be used as a
2 World Financial Center preliminary prospectus for a future series,
9th Floor and investors should note the following:
New York, NY 10281-1414 Information contained herein is subject to
TRUSTEE: amendment. A registration statement relating
The Chase Manhattan Bank to securities of a future series has been
Customer Service Retail Department filed with the Securities and Exchange
Bowling Green Station Commission. These securities may not be sold
P.O. Box 5187 nor may offers to buy be accepted prior to
New York, NY 10274-5187 the time the registration statement becomes
1-800-323-1508 effective.
This Prospectus shall not constitute an offer
to sell or the solicitation of an offer to
buy nor shall there be any sale of these
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.

11326--9/97

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

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

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

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

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

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

Merrill Lynch, Pierce, Fenner & Smith Incorporated 8-7221
Smith Barney Inc. ........................................ 8-8177
PaineWebber Incorporated.................................. 8-16267
Prudential Securities Incorporated........................ 8-27154
Dean Witter Reynolds Inc. ................................ 8-14172

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

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

Merrill Lynch, Pierce, Fenner & Smith Incorporated 13-5674085
Smith Barney Inc. ........................................ 13-1912900
PaineWebber Incorporated.................................. 13-2638166
Prudential Securities Incorporated........................ 22-2347336
Dean Witter Reynolds Inc. ................................ 94-0899825
The Chase Manhattan Bank, Trustee......................... 13-4994650

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

II-1
<PAGE>
SERIES OF MUNICIPAL INVESTMENT TRUST FUND, 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
One Hundred Thirty-Eighth Intermediate Term Series........ 33-30946
One Hundred Fortieth Intermediate Term Series............. 33-31142
Multistate Series--48..................................... 33-50247
Multistate Series--83..................................... 33-57443
Monthly Payment Series--600............................... 333-13265
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 --Consent of the Evaluator.
5.1 --Consent of independent accountants.
9.1 --Information Supplement.

R-1
<PAGE>

MUNICIPAL INVESTMENT TRUST FUND
INTERMEDIATE TERM SERIES--308
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 12TH DAY OF
SEPTEMBER 1997.

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 DANIEL C. TYLER
(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, 33-50073
and 333-10441

STEVEN D. BLACK
JAMES BOSHART III
ROBERT A. CASE
JAMES DIMON
ROBERT DRUSKIN
ROBERT H. LESSIN
WILLIAM J. MILLS, II
MICHAEL B. PANITCH
PAUL UNDERWOOD

By KEVIN E. KOPCZYNSKI
(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 Number: 33-55073
of PaineWebber Incorporated:

DONALD B. 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 a majority of Powers of Attorney
the Board of Directors of Prudential Securities have been filed
Incorporated: under Form SE and
the following 1933
Act File Numbers:
33-41631 and
333-15919

ROBERT C. GOLDEN
ALAN D. HOGAN
A. LAURENCE NORTON, JR.
LELAND B. PATON
VINCENT T. PICA II
MARTIN PFINSGRAFF
HARDWICK SIMMONS
LEE B. SPENCER, JR.
BRIAN M. STORMS

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 1933
the Board of Directors of Dean Witter Act File Numbers: 33-17085 and
Reynolds Inc.: 333-13039

RICHARD M. DeMARTINI
ROBERT J. DWYER
CHRISTINE A. EDWARDS
CHARLES A. FIUMEFREDDO
JAMES F. HIGGINS
MITCHELL M. MERIN
STEPHEN R. MILLER
RICHARD F. POWERS III
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

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

SEPTEMBER 12, 1997

MUNICIPAL INVESTMENT TRUST FUND,
INTERMEDIATE TERM SERIES--308
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, N.J. 08543-9051

Dear Sirs:

We have acted as special counsel for you, as sponsors (the 'Sponsors') of
Intermediate Term Series--308 of Municipal Investment Trust Fund, Defined Asset
Funds (the 'Fund'), in connection with the issuance of units of fractional
undivided interest in the Fund (the 'Units') in accordance with the Trust
Indenture relating to the Fund (the 'Indenture').

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

Based upon the foregoing, we are of the opinion that (i) the execution and
delivery of the Indenture and the issuance of the Units have been duly
authorized by the Sponsor and (ii) the Units, when duly issued and delivered by
the Sponsors and the Trustee in accordance with the Indenture, 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 names 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

SEPTEMBER 12, 1997

KENNY S&P EVALUATION SERVICES
A DIVISION OF J. J. KENNY CO., INC.

MERRILL LYNCH PIERCE FENNER & SMITH
INCORPORATED
DEFINED ASSET FUNDS
P.O. BOX 9051
PRINCETON, NJ 08543-9051

THE CHASE MANHATTAN BANK
CUSTOMER SERVICE RETAIL DEPARTMENT
BOWLING GREEN STATION
P.O. BOX 5187
NEW YORK, N.Y. 10274-5187

RE: MUNICIPAL INVESTMENT TRUST FUND, INTERMEDIATE TERM SERIES--308, DEFINED
ASSET FUNDS

Gentlemen:

We have examined the Registration Statement File No. 333-30863 for the
above captioned fund. We hereby acknowledge that Kenny S&P Evaluation Services,
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 S&P Evaluation Services, 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,

F. A. SHINAL
Vice President
Chief Financial Officer

EXHIBIT 5.1
CONSENT OF INDEPENDENT ACCOUNTANTS

The Sponsors and Trustee of
Municipal Investment Trust Fund,
Intermediate Term Series--308, Defined Asset Funds

We consent to the use in this Registration Statement No. 333-30863 of our report
dated September 12, 1997, relating to the Statement of Condition of Municipal
Investment Trust Fund, Intermediate Term Series--308, Defined Asset Funds 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.
September 12, 1997

<PAGE>

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

MUNICIPAL INVESTMENT TRUST FUND
MUNICIPAL INSURED SERIES

INFORMATION SUPPLEMENT

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

This Information Supplement is dated September 12, 1997. 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 . . . . . . . . . . . . . . . . . . . . 7
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 . . . . . . . . . . . . . . . . . . . . . . . 23
Tax Exemption . . . . . . . . . . . . . . . . . . . . . . . 23
Income and Returns . . . . . . . . . . . . . . . . . . . . . . . 24
Income . . . . . . . . . . . . . . . . . . . . . . . 24
State Matters . . . . . . . . . . . . . . . . . . . . . . . 25
Alabama . . . . . . . . . . . . . . . . . . . . . . . 25
Arizona . . . . . . . . . . . . . . . . . . . . . . . 28
California . . . . . . . . . . . . . . . . . . . . . . . 31
Colorado . . . . . . . . . . . . . . . . . . . . . . . 41
Connecticut . . . . . . . . . . . . . . . . . . . . . . . 43
Florida . . . . . . . . . . . . . . . . . . . . . . . 46
Georgia . . . . . . . . . . . . . . . . . . . . . . . 50
Illinois . . . . . . . . . . . . . . . . . . . . . . . 53
Louisiana . . . . . . . . . . . . . . . . . . . . . . . 54
Maine . . . . . . . . . . . . . . . . . . . . . . . 57
Maryland . . . . . . . . . . . . . . . . . . . . . . . 63
Massachusetts . . . . . . . . . . . . . . . . . . . . . . . 67
Michigan . . . . . . . . . . . . . . . . . . . . . . . 75
Minnesota . . . . . . . . . . . . . . . . . . . . . . . 78
Mississippi . . . . . . . . . . . . . . . . . . . . . . . 80
Missouri . . . . . . . . . . . . . . . . . . . . . . . 83
New Jersey . . . . . . . . . . . . . . . . . . . . . . . 84
New Mexico . . . . . . . . . . . . . . . . . . . . . . . 90

<PAGE>

New York . . . . . . . . . . . . . . . . . . . . . . . 93
North Carolina . . . . . . . . . . . . . . . . . . . . . . .100
Ohio . . . . . . . . . . . . . . . . . . . . . . .105
Oregon . . . . . . . . . . . . . . . . . . . . . . .109
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . .116
Tennessee . . . . . . . . . . . . . . . . . . . . . . .118
Texas . . . . . . . . . . . . . . . . . . . . . . .121
Virginia . . . . . . . . . . . . . . . . . . . . . . .127

<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.

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

<PAGE>

(see Risk Factors -- Payment of the Bonds and Life of the Fund). Accordingly,
the face amount of Units may be less than their original face amount at the time
of the creation of the Fund. A reduced value per Unit does not therefore mean
that a Unit is necessarily valued at a market discount; market discounts, as
well as market premiums, on Units are determined solely by a comparison of a
Unit's outstanding face amount and its evaluated price.

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

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

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

Debt rated below investment grade or having similar credit characteristics
also tends to be more thinly traded than investment-grade debt and held
primarily by institutions, and this lack of liquidity can negatively affect the
value of the debt. Debt which is not rated investment grade or having similar
credit characteristics may be subordinated to other obligations of the issuer.
Senior debtholders would be entitled to receive payment in full before

<PAGE>

subordinated debtholders receive any payment at all in the event of a bankruptcy
or reorganization. Lower rated debt obligations and debt obligations having
similar credit characteristics may also present payment-expectation risks. For
example, these bonds may contain call or redemption provisions that would make
it attractive for the issuers to redeem them in periods of declining interest
rates, and investors would therefore not be able to take advantage of the higher
yield offered.

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

RISK FACTORS

Concentration

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

General Obligation Bonds

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

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

Moral Obligation Bonds

The repayment of a "moral obligation" bond is only a moral commitment, and
not a legal obligation, of the state or municipality in question. Even though
the state may be called on to restore any deficits in capital reserve funds of
the agencies or authorities which issued the bonds, any restoration generally

<PAGE>

requires appropriation by the state legislature and accordingly does not
constitute a legally enforceable obligation or debt of the state. The agencies
or authorities generally have no taxing power.

Refunded Bonds

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

Industrial Development Revenue Bonds

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

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

Municipal Revenue Bonds

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

The demand for a utility's services is influenced by, among other factors,
competition, weather conditions and economic conditions. Electric utilities, for
example, have experienced increased competition as a result of the availability

<PAGE>

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
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

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particular, on November 15, 1990, legislation was signed into law that
substantially revises the Clean Air Act (the "1990 Amendments"). The 1990
Amendments seek to improve the ambient air quality throughout the United States
by the year 2000. A main feature of the 1990 Amendments is the reduction of
sulphur dioxide and nitrogen oxide emissions caused by electric utility power
plants, particularly those fueled by coal. Under the 1990 Amendments the U.S.
Environmental Protection Agency ("EPA") must develop limits for nitrogen oxide
emissions by 1993. The sulphur dioxide reduction will be achieved in two phases.
Phase I addresses specific generating units named in the 1990 Amendments. In
Phase II the total U.S. emissions will be capped at 8.9 million tons by the year
2000. The 1990 Amendments contain provisions for allocating allowances to power
plants based on historical or calculated levels. An allowance is defined as the
authorization to emit one ton of sulphur dioxide.

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

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

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

Lease Rental Bonds. Lease rental bonds are issued for the most part by
governmental authorities that have no taxing power or other means of directly
raising revenues. Rather, the authorities are financing vehicles created solely
for the construction of buildings (administrative offices, convention centers
and prisons, for example) or the purchase of equipment (police cars and computer
systems, for example) that will be used by a state or local government (the
"lessee"). Thus, the bonds are subject to the ability and willingness of the
lessee government to meet its lease rental payments which include debt service
on the bonds. Willingness to pay may be subject to changes in the views of
citizens and government officials as to the essential nature of the finance
project. Lease rental bonds are subject, in almost all cases, to the annual

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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 pfinanciarojects may
also be adversely affected by high rent levels and income limitations imposed
under Federal, state or local programs.

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

The tax exemption for certain housing revenue bonds depends on
qualification under Section 143 of the Internal Revenue Code of 1986, as amended
(the "Code"), in the case of single family mortgage revenue bonds or Section
142(a)(7) of the Code or other provisions of Federal law in the case of certain
multi-family housing revenue bonds (including Section 8 assisted bonds). These
sections of the Code or other provisions of Federal law contain certain ongoing
requirements, including requirements relating to the cost and location of the
residences financed with the proceeds of the single family mortgage revenue
bonds and the income levels of tenants of the rental projects financed with the
proceeds of the multi-family housing revenue bonds. While the issuers of the

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bonds and other parties, including the originators and servicers of the
single-family mortgages and the owners of the rental projects financed with the
multi-family housing revenue bonds, generally covenant to meet these ongoing
requirements and generally agree to institute procedures designed to ensure that
these requirements are met, there can be no assurance that these ongoing
requirements will be consistently met. The failure to meet these requirements
could cause the interest on the bonds to become taxable, possibly retroactively
from the date of issuance, thereby reducing the value of the bonds, subjecting
Holders to unanticipated tax liabilities and possibly requiring a Trustee to
sell these bonds at reduced values. Furthermore, any failure to meet these
ongoing requirements might not constitute an event of default under the
applicable mortgage or permit the holder to accelerate payment of the bond or
require the issuer to redeem the bond. In any event, where the mortgage is
insured by the Federal Housing Administration, its consent may be required
before insurance proceeds would become payable to redeem the mortgage bonds.

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

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

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

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

Certain hospital bonds provide for redemption at par at any time upon the
sale by the issuer of the hospital facilities to a non-affiliated entity, if the
hospital becomes subject to ad valorem taxation, or in various other

<PAGE>

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

The Internal Revenue Service is currently engaged in a program of
intensive audits of certain large tax-exempt hospital and health care facility
organizations. Although these audits have not yet been completed, it has been
reported that the tax-exempt status of some of these organizations may be
revoked.

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

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

Solid Waste Disposal Bonds. Bonds issued for solid waste disposal
facilities are generally payable from dumping fees and from revenues that may be
earned by the facility on the sale of electrical energy generated in the
combustion of waste products. The ability of solid waste disposal facilities to
meet their obligations depends upon the continued use of the facility, the
successful and efficient operation of the facility and, in the case of
waste-to-energy facilities, the continued ability of the facility to generate
electricity on a commercial basis. All of these factors may be affected by a
failure of municipalities to fully utilize the facilities, an insufficient
supply of waste for disposal due to economic or population decline, rising
construction and maintenance costs, any delays in construction of facilities,
lower-cost alternative modes of waste processing and changes in environmental
regulations. Because of the relatively short history of this type of financing,
there may be technological risks involved in the satisfactory construction or
operation of the projects exceeding those associated with most municipal
enterprise projects. Increasing environmental regulation on the federal, state
and local level has a significant impact on waste disposal facilities. While
regulation requires more waste producers to use waste disposal facilities, it
also imposes significant costs on the facilities. These costs include compliance
with frequently changing and complex regulatory requirements, the cost of
obtaining construction and operating permits, the cost of conforming to
prescribed and changing equipment standards and required methods of operation

<PAGE>

and, for incinerators or waste-to-energy facilities, the cost of disposing of
the waste residue that remains after the disposal process in an environmentally
safe manner. In addition, waste disposal facilities frequently face substantial
opposition by environmental groups and officials to their location and
operation, to the possible adverse effects upon the public health and the
environment that may be caused by wastes disposed of at the facilities and to
alleged improper operating procedures. Waste disposal facilities benefit from
laws which require waste to be disposed of in a certain manner but any
relaxation of these laws could cause a decline in demand for the facilities'
services. Finally, waste-to-energy facilities are concerned with many of the
same issues facing utilities insofar as they derive revenues from the sale of
energy to local power utilities.

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

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

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

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

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

<PAGE>

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

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

Puerto Rico

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

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

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

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

Bonds Backed by Letters of Credit or Repurchase Commitments

In the case of Bonds secured by letters of credit issued by commercial
banks or savings banks, savings and loan associations and similar institutions
("thrifts"), the letter of credit may be drawn upon, and the Bonds consequently
redeemed, if an issuer fails to pay amounts due on the Bonds or defaults under

<PAGE>

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 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

<PAGE>

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

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

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

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

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

<PAGE>

payment made would include interest on the defaulted Debt Obligations for the
period after the appointment of the receiver or conservator through the payment
date.

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

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

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

Liquidity

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

Any Bonds which were purchased from these portfolios are exempt from the
registration provisions of the Federal securities laws, and, therefore, can be
sold free of the registration requirements of the securities laws. Because there
is no established secondary market for these Bonds, however, there is no
assurance that the price realized on sale of these Bonds will not be adversely
affected. Consequently it is more likely that the sale of these Bonds may cause
a decline in the value of Units than a sale of debt obligations for which an
established secondary market exists. In addition, in certain Intermediate Term
and Put Series and certain other Series, liquidity of the Fund is additionally

<PAGE>

augmented by the Sellers' collateralized or letter of credit-backed Liquidity
Repurchase commitment in the event it is necessary to sell any Bond to meet
redemptions of Units. If, upon the scheduled Disposition Date for any Bond, the
Trustee elects not to sell the Bond scheduled for disposition on this date in
the open market (because, for example, a price in excess of its Put Price cannot
be obtained), the Seller of the Bond is obligated to repurchase the Bond
pursuant to its collateralized or letter of credit-backed Disposition Repurchase
commitment. There can be no assurance that the prices that can be obtained for
the Bonds at any time in the open market will exceed the Put Price of the Bonds.
In addition, if any Seller should become unable to honor its repurchase
commitments and the Trustee is consequently forced to sell the Bonds in the open
market, there is no assurance that the price realized on this sale of the Bonds
would not be adversely affected by the absence of an established secondary
market for certain of the Bonds.

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

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

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

Bonds Backed by Insurance

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

<PAGE>

for accelerated payments of principal or cover redemptions resulting from events
of taxability. If the issuer of any insured Bond should fail to make an interest
or principal payment, the insurance policies generally provide that a Trustee or
its agent will give notice of nonpayment to the Insurance Company or its agent
and provide evidence of the Trustee's right to receive payment. The Insurance
Company is then required to disburse the amount of the failed payment to the
Trustee or its agent and is thereafter subrogated to the Trustee's right to
receive payment from the issuer.

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

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

Financial Guaranty Insurance Company ("Financial Guaranty") is a wholly-
owned subsidiary of FGIC Corporation ("Corporation"), a Delaware holding
company. The Corporation is a wholly-owned subsidiary of General Electric
Capital Corporation ("GECC"). Neither the Corporation nor GECC is obligated to

<PAGE>

pay the debts of or the claims against Financial Guaranty. Financial Guaranty
is domiciled in the State of New York and is subject to regulation by the State
of New York Insurance Department. As of June 30, 1997, the total capital and
surplus of Financial Guaranty was approximately $1,164,694,536. Copies of
Financial Guaranty's financial statements, prepared on the basis of statutory
accounting principles, and the Corporation's financial statements, prepared on
the basis of generally accepted accounting principles, may be obtained by
writing to Financial Guaranty at 115 Broadway, New York, New York 10006,
Attention: Communications Department [telephone number is (212) 312-3000] or to
the New York State Insurance Department at 160 West Broadway, 18th Floor, New
York, New York 10013, Attention: Financial Condition Property/Casualty Bureau
[telephone number: (212) 621-0389].

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

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

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

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

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

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

<PAGE>

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

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

State Risk Factors

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

Payment of Bonds and Life of a Fund

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

<PAGE>

maintaining a current prospectus for a Fund. These factors may also lead the
Sponsors to seek to terminate a Fund earlier than would otherwise be the case.

Redemption

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

Tax Exemption

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

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

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

<PAGE>

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 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.

<PAGE>

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.

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. In addition, On August 5, 1997, the federal government enacted
legislation that not only will reduce payments made under the Federal Medicaid
Program but also will change the method of calculating the payments that are due
to the states from the Federal government. Although the legislation includes a
waiver provision that should allow Alabama to continue its current method of
calculating payments due from the Federal Medicaid program, this waiver expires
in 1998. Material reductions in Federal Medicaid payments are expected at that
time. If such reductions occur, it is unlikely that the State of Alabama will
be able to fund completely any resulting short-falls.

In April 1997, the Alabama Supreme Court held that the Alabama Medicaid
program has underpaid providers by limiting certain payments, and the court
enjoined the Medicaid program from any future such limitations. 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 as the result of increased reimbursements.

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

<PAGE>

time to predict with assurance the effect of any health care reform proposals
that might be enacted.

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 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. 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. On January 10, 1997, the Alabama Supreme Court affirmed Judge Reese's
ruling. The court stated that the Alabama Legislature must develop a plan within
one year to correct the unconstitutional disparity. Any allocation of funds away
from school districts could impair the ability of such districts to service
debt.

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

<PAGE>

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.

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%.

Jefferson County, Alabama, in which Birmingham is located, levies an
occupational tax which generates approximately $39 million annually and which is
imposed on the income of persons who work in Jefferson County. Certain
professionals, however, are exempt from paying the tax. Several non-exempt
taxpayers have sued the County and claim that their due process and equal
protection rights have been violated. The Alabama Supreme Court rejected this
lawsuit based on an earlier, unsuccessful challenge to the tax. As a result of
the United State's Supreme Court's decision in November 1995, to hear the appeal
from the Alabama Supreme Court's ruling, Moody's Credit Perspectives placed the
bond ratings of Jefferson County under review. On June 10, 1996, the United
States Supreme Court reversed the Alabama Supreme Court's decision, thereby
allowing the suit against the tax to proceed. At this time, it is not known what
action Moody's Credit Perspective will take as a result of the recent decision
allowing the case to go forward. 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 serve 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. The Arizona economy continued to show moderate growth in
1995 and 1996. It is expected that the Arizona economy will continue to grow,
but at a slower rate, in 1997.

<PAGE>

Historically, the State economy has been somewhat dependent on the
construction industry and is sensitive to trends in that sector. Single-family
housing has been a major driver in Arizona's economic expansion over the last
five years, with the peak single family growth rate occurring in 1994 and
remaining strong in 1995. Growth in the housing market is expected to decline
in 1997. Growth in commercial, office and hotel construction is expected to
increase.

Tourism is another industry which affects the Arizona economy. Arizona's
tourism industry fared well in 1996. Super Bowl XXX, held in January 1996,
brought over $300 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 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 FDIC taking over any
remaining functions of the RTC.

The trend in the Arizona banking community for the past several years has
been one of consolidation. 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.

America West Airlines, a Phoenix-based carrier, emerged from Chapter 11
reorganization in August, 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
approximately 6,000 in Arizona. 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.

All ten of Arizona's largest employers expanded their workforce during
1996. However, few of Arizona's largest employers are based entirely in
Arizona; many have headquarters and operations in other states. Therefore,
economic factors in other states could affect the employment situation in
Arizona.

Job growth in Arizona, defined as growth of total wage and salary
employment, was consistently in the range of 2.1% to 2.5% for the years 1988
through 1990, declined to 0.6% in 1991, then increased to 1.7% in 1992, 3.0% in
1993, and 6.7% in 1994. Job growth was 6.1% in 1995, 5.6% in 1996 and is
currently forecast at 3.7% for 1997.

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

Current personal income in Arizona has continued to rise, but at slower
rates than in the early to mid-1980's. Personal income grew at a rate of 5.8% in
1990 and dropped to 4.6% in 1991. Growth in personal income increased at a rate
of 6.7% in 1992, 7.3% in 1993, 8.4% in 1994, 9.4% in 1995 and 7.5% in 1996.
Growth in Arizona personal income is forecast at 6.8% for 1997.

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

<PAGE>

were the highest ever recorded for January. Bankruptcy filings during the first
half of 1997 totaled 12,233.

The inflation rate, as measured by the consumer price index in the
Phoenix, Arizona metropolitan area, including all of Maricopa County, hovered
around the national average during the late 1980's and early 1990's, but has
been higher than the national average since 1993. The Phoenix metropolitan area
inflation rate for 1996 was 5.1%, the highest since 1990, and approximately 2%
higher than the national average for 1996. The Phoenix metropolitan area
inflation rate remained well above the national average during the first quarter
of 1997, with a rate of 5.2%. The Phoenix metropolitan area inflation rate for
1997 is projected at 4.9%, compared to a projected national average rate of
2.9%.

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

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

The General Fund revenues for fiscal year 1997 are estimated at $4.865
billion. Total General Fund revenues of $4.711 billion are expected during
fiscal year 1998. Approximately 46.2% of this expected revenue comes from sales
and use taxes, 37.6% from income taxes (both individual and corporate) and 0.9%
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.

The General Fund expenditures for fiscal year 1997 are estimated at $4.830
billion. For fiscal year 1998, General Fund expenditures of $5.092 billion are
expected. Approximately 41.7% of major General Fund appropriations are for the
Department of Education for K-12, 15.7% is for higher education, 9.8% is for the
administration of the AHCCCS program (the State's alternative to Medicaid), 7.6%
is for the Department of Economic Security, 4.2% is for the Department of Health
Services and 9.1% is for the Department of Corrections.

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

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

<PAGE>

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. The Arizona Supreme
Court has upheld a state court decision imposing a deadline of June 30, 1998 to
comply with the Supreme Court mandate. The Arizona legislature recently adopted
a new funding program in response to the judgment, but a state court judge has
ruled that the program fails to meet the requirements of the Arizona Supreme
Court mandate. It is not yet known whether the Arizona Supreme Court will
uphold the state court's ruling and, if so, what measures will be needed to
comply with the judgment. 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 System ("AHCCCS"), which
provides health care to indigent persons meeting certain financial eligibility
requirements, through managed care programs. AHCCCS is financed by a combination
of federal, state and county funds.

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

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

Utilities. Arizona's utilities are 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 and provides electric
service to approximately 700,000 customers. APS is a significant part owner of
Arizona's nuclear generator, the Palo Verde Nuclear Generating Station. APS is
owned by Pinnacle West Capital Corporation ("Pinnacle West").

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.

Other Factors. The uncertainty concerning the Mexico economy could have
an impact on Arizona's economy, as trade and tourism in the southern regions of
the state bordering Mexico could be affected by the condition of the Mexico
economy.

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.

<PAGE>

Fiscal Years Prior to 1996-97. By the close of the 1989-90 Fiscal Year,
California's revenues had fallen below projections so that the State's budget
reserve, the Special Fund for Economic Uncertainties (the "Special Fund"), was
fully depleted by June 30, 1990. A recession which had begun in mid-1990,
combined with higher health and welfare costs driven by the State's rapid
population growth, adversely affected General Fund revenues and raised
expenditures above initial budget appropriations.

As a result of these factors and others, the State confronted a period of
budget imbalance. Beginning with the 1990-91 Fiscal Year and for several years
thereafter, the budget required multibillion dollar actions to bring projected
revenues and expenditures into balance. During this period, expenditures
exceeded revenues in four out of six years, and the State accumulated and
sustained a budget deficit in the Special Fund approaching $2.8 billion at its
peak on June 30, 1993.

By the 1993-94 Fiscal Year, the accumulated deficit was too large to be
prudently retired in one year and a two-year program was implemented. This
program used revenue anticipation warrants to carry a portion of the deficit
over to the end of the fiscal year.

The 1994-95 Budget Act projected General Fund revenues and transfers of
$41.9 billion. Expenditures were projected to be $40.9 billion -- an increase of
$1.6 billion over the prior year. As a result of the improving economy, however,
the fiscal year ultimately produced revenues and transfers of $42.7 billion
which more than offset expenditures of $42.0 billion and thereby reduced the
accumulated budget deficit.

With strengthening revenues and reduced caseload growth driven by an
improving economy, the State entered the 1995-96 Fiscal Year budget negotiations
with the smallest nominal "budget gap" to be closed in many years. The 1995-96
Budget Act projected General Fund revenues and transfers of $44.1 billion, a 3.5
percent increase from the prior year, and expenditures were budgeted at $43.4
billion. In addition, the Department of Finance projected that after repaying
the last of the carryover budget deficit, there would be a positive balance of
$28 million in the budget reserve as of June 30, 1996.

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

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

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

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

<PAGE>

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

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

1. Proposition 98 funding for schools and community college districts
increased by almost $1.6 billion (General Fund) and $1.65 billion above revised
1995-96 levels. Almost half of this money was budgeted to fund class-size
reductions in kindergarten and grades 1-3. Also, for the second consecutive
year, the full cost of living allowance (3.2 percent) was funded. Proposition 98
increases have brought K-12 expenditures to almost $4,800 per pupil (also called
ADA, or Average Daily Attendance), an almost 15% increase over the level
prevailing during the recession years. Out of this $1.6 billion total community
colleges will receive an increase in funding of $157 million for 1996-97.

Due to higher than projected revenues in 1995-96, an additional $1.1
billion ($190 per K-12 ADA and $145 million for community colleges) was
appropriated and retroactively applied towards the 1995-96 Proposition 98
guarantee, bringing K-12 expenditures in that year to over $4,600 per ADA.
Similar retroactive increases totaling $230 million, based on final figures on
revenues and State population growth, were made to the 1991-92 and the 1994-95
Proposition 98 guarantees, most of which was allocated to each school site.

2. The Budget Act assumed savings of approximately $660 million in
health and welfare costs which required changes in federal law, including
federal welfare reform. The Budget Act further assumed federal law changes in
August 1996 which would allow welfare cash grant levels to be reduced by October
1, 1996. These cuts totaled approximately $163 million of the anticipated $660
million savings. See"Federal Welfare Reform".

3. A 4.9 percent increase in funding for the University of California
($130 million General Fund) and the California State University system ($101
million General Fund), with no increases in student fees.

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

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

6. With respect to aid to local governments, the principal new
programs included in the Budget Act are $100 million in grants to cities and
counties for law enforcement purposes, and budgeted $50 million for competitive
grants to local governments for programs to combat juvenile crime.

The Budget Act did not contain any tax increases. As noted, there was a
reduction in bank and corporate taxes. In addition, the Legislature approved
another one-year suspension of the Renters' Tax Credit, saving $520 million in
expenditures.

Federal Welfare Reform - Following enactment of the 1996-97 Budget Act,
Congress passed and the President signed (on August 22, 1996) the Personal
Responsibility and Work Opportunity Act of 1996 (P.L. 104-193, the "Law") making
a fundamental reform of the current welfare system. Among many provisions, the
Law includes: (i) conversion of Aid to Families with Dependent Children from an
entitlement program to a block grant titled Temporary Assistance for Needy
Families (TANF), with lifetime time limits on TANF recipients, work requirements
and other changes; (ii) provisions denying certain federal welfare and public
benefits to legal noncitizens, allowing States to elect to deny additional
benefits (including TANF to legal noncitizens, and generally denying almost all
benefits to illegal immigrants; and (iii) changes in the Food Stamp program,
including reducing maximum benefits and imposing work requirements.

The Law requires states to implement the new TANF program not later than
July 1, 1997 and provides California approximately $3.7 billion in block grant

<PAGE>

funds for FY 1996-97. States are allowed to implement TANF as soon as possible
and will receive a prorated block grant effective the date of application. The
California State Plan is to be submitted in time to allow grant reductions to be
implemented effective January 1, 1997 (allowing $92 million of the $163 million
referred to in paragraph 2 above to be saved) and to allow the State to capture
approximately $267 million in additional federal block grant funds over the
currently budgeted level. None of the other federal changes needed to achieve
the balance of the $660 million cost savings were enacted. Thus in lieu of the
$660 million savings initially assumed to be saved, it is now projected that
savings will total approximately $360 million.

A preliminary analysis of the Law by the Legislative Analyst's Office
indicated than an overall assessment of how these changes will affect the
State's General Fund will not be known for some time, and will depend on how the
State implements the Law. There are many choices including how quickly the State
implements the Law; the degree to which the State elects to make up for cuts in
federal aid; provide more aid to counties, or cut some of its own existing
programs for noncitizens; and the State's ability to avoid certain penalties
written into the Law.

1997-98 Fiscal Year Proposed Budget. On January 9, 1997, the Governor
released his proposed budget for the 1997-98 Fiscal Year (the "Governor's
Budget"). The Governor's Budget projects General Fund revenues and transfers in
1997-98 of $50.7 billion, a 4.6% increase from revised 1996-97 figures. The
Governor proposes expenditures of $50.3 billion, a 3.9% increase from 1996-97.
The Governor's Budget projects a balance in the SFEU of $553 million on June 30,
1998. The Governor's Budget also anticipates about $3 billion of external
borrowing for cash flow purposes during the year, with no requirement for cross-
fiscal year borrowing.

Among the major initiatives and features of the Governor's Budget are the
following:

1. A proposed 10% cut in the Bank and Corporation Tax rate, to be
phased in over two years.

2. Proposition 98 funding for K-14 schools will be increased again, as
a result of stronger revenues. Per-pupil funding for K-12 schools will reach
$5,010, compared to $4,220 as recently as the 1993-94 Fiscal Year. Part of the
new funding is proposed to be dedicated to the completion of the current program
to reduce class size to 20 pupils in lower elementary grades, and to expand the
program by one grade, so that it will cover K-3rd grade.

3. Funding for higher education will be increased consistent with a
four-year "compact" established in 1995-96. There is not projected to be any
increase in student fees at any of the three levels of the State higher
education system.

4. The 1997-98 proposed governor's Budget assumes approximately $500
million in savings contingent upon federal action. The Budget assumes that
federal law will be enacted to remove the maintenance-of-effect requirement for
Supplemental Security Income (SSI) payments, thereby enabling the state to
reduce grant levels pursuant to previously enacted state law ($279 million).
The Budget also assumes the federal government will fund $216 million in costs
of health care for illegal immigrants.

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

<PAGE>

pending against investment firms and other finance professionals. Thus, it is
impossible to determine the ultimate impact of the bankruptcy and its aftermath
on these various agencies and their claims.

Constitutional, Legislative and Other Factors.

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

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

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

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

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

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

These Debt Obligations may also be insured by the State of California
pursuant to an insurance program implemented by the Office of Statewide Health
Planning and Development for health facility construction loans. If a default
occurs on insured Debt Obligations, the State Treasurer will issue debentures
payable out of a reserve fund established under the insurance program or will
pay principal and interest on an unaccelerated basis from unappropriated State
funds. At the request of the Office of Statewide Health Planning and
Development, Arthur D. Little, Inc. prepared a study in December, 1983, to

<PAGE>

evaluate the adequacy of the reserve fund established under the insurance
program and based on certain formulations and assumptions found the reserve fund
substantially underfunded. In September of 1986, Arthur D. Little, Inc. prepared
an update of the study and concluded that an additional 10% reserve be
established for "multi-level" facilities. For the balance of the reserve fund,
the update recommended maintaining the current reserve calculation method. In
March of 1990, Arthur D. Little, Inc. prepared a further review of the study and
recommended that separate reserves continue to be established for "multi-level"
facilities at a reserve level consistent with those that would be required by an
insurance company.

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

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

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

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

Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made

<PAGE>

during the first five years during the term of the mortgage loan, and then only
if the borrower prepays an amount in excess of 20% of the original principal
amount of the mortgage loan in a 12-month period; a prepayment charge cannot in
any event exceed six months' advance interest on the amount prepaid during the
12-month period in excess of 20% of the original principal amount of the loan.
This limitation could affect the flow of revenues available to an issuer for
debt service on the outstanding debt obligations which financed such home
mortgages.

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

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

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

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

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

<PAGE>

revenues, plus an additional small adjustment factor. If Test 3 is used in any
year, the difference between Test 3 and Test 2 would become a "credit" to
schools which would be the basis of payments in future years when per capita
General Fund revenue growth exceeds per capita personal income growth.

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

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

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

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

In September 1988, the California Court of Appeal in City of Westminster
-------------------
v. County of Orange, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal. Ct. App.
- -------------------
1988), held that Proposition 62 is unconstitutional to the extent that it

<PAGE>

requires a general tax by a general law city, enacted on or after August 1, 1985
and prior to the effective date of Proposition 62, to be subject to approval by
a majority of voters. The Court held that the California Constitution prohibits
the imposition of a requirement that local tax measures be submitted to the
electorate by either referendum or initiative. It is not possible to predict the
impact of this decision on charter cities, on special taxes or on new taxes
imposed after the effective date of Proposition 62.

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

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

Senate Bill 1590 (O'Connell), introduced February 16, 1996, would make the
Guardino decision inapplicable to any tax first imposed or increased by an
- --------
ordinance or resolution adopted before December 14, 1995. The California State
Senate passed the Bill on May 16, 1996 and it is currently pending in the
California State Assembly. It is not clear whether the Bill, if enacted, would
be constitutional as a non-voted amendment to Proposition 62 or as a non-voted
change to Proposition 62's operative date.

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

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

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

<PAGE>

administrative rather than legislative matters and therefore beyond the
initiative power.

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

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

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

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

COLORADO

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

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care the issues contained in the portfolio of the Colorado Trust, review
carefully the information set out in Part A of the Prospectus under the caption
"Colorado Risk Factors" and consult with their investment advisors as to the
merits of particular issues in the portfolio.

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

The State Economy. The State's economic growth is estimated to have
surpassed that of the nation for the past nine consecutive years, including
1996. 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 an estimated
19.6% from 1992 through 1996. Retail trade sales has increased an estimated
36.4% from 1992 through 1996.

Net migration into the State peaked in 1993 at 72,667 (an increase of
approximately 15.7% over 1992's net migration), with the overall State
population increasing 3.0% in 1993. Net migration into the State is estimated to
have been 45,216 in 1996 (a decrease of approximately 19.0% from 1995's net
migration of 55,854, but with the overall State population still increasing
approximately 2.0% in 1996. The State's job growth rate was 4.5% in 1995,
compared to 2.7% at the national level, and is estimated to be 3.4% for 1996,
compared to 2.0% at the national level. An estimated 62,500 nonfarm jobs were
generated in the State economy in 1996, down from 78,500 in 1995. The State's
unemployment rate is estimated to have remained below the national unemployment
rate for 1996.

State Revenues. The State operates on a fiscal year beginning July 1 and
ending June 30. Fiscal year 1996 refers to the year ended June 30, 1996, and
fiscal year 1997 refers to the year ended June 30, 1997.

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 31.0% and 54.3%,
respectively, of total net General Fund revenues during fiscal year 1996. Based
upon Office of State Planning and Budgeting figures it is estimated that, during
fiscal year 1997, sales and use taxes will account for approximately 30.4% of
total General Fund revenues and individual income taxes will account for
approximately 55.4% of total net General Fund revenues. The ending General Fund
balance for fiscal year 1996 was $368.5 million and for fiscal year 1997 is
estimated at $386.3 million.

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

The State is authorized pursuant to State statute to issue short-term
notes to alleviate temporary cash flow shortfalls. The most recent issue of such
notes, issued on July 1, 1997 and maturing June 26, 1998, was given the highest
rating available for short-term obligations by Standard & Poor's Ratings Group a
division of The McGraw-Hill Companies, Inc. and Fitch Investors Service, Inc.
Because of the short-term nature of such notes, their ratings should not
necessarily be considered indicative of the State's general financial condition.
It has not yet been determined whether the State will issue similar short-term
notes for the beginning of the State's 1998 fiscal year.

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

The provisions of TABOR apply to "districts," which are defined in TABOR
as the State or any local government, with certain exclusions. Under the terms
of TABOR, districts must have prior voter approval to impose any new tax, tax

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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." TABOR
prescribes the timing and procedures for any elections required by it.

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

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

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

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

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

CONNECTICUT

RISK FACTORS - The State Economy. Manufacturing has historically been of
prime economic importance to Connecticut. 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 1987 to
1996, however, there was a rise in employment in service-related industries.
During this period, manufacturing employment declined 28.3%, while the number of
persons employed in service establishments increased 24.6%. In 1996,
manufacturing accounted for only 17.4% of total non-agricultural employment in

<PAGE>

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 few 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, after a number of
important changes in the method of calculation, increased to 5.7% in 1996.
However, 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
$9,200,000,000 for the 1996-97 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 five fiscal years ended June 30, 1996, the General Fund
recorded operating surpluses of approximately $110,200,000, $113,500,000,
$19,700,000, $80,500,000, and $250,000,000, respectively. General Fund budgets
for the biennium ending June 30, 1997, were adopted in 1995. General Fund
expenditures and revenues were budgeted to be approximately $9,200,000,000, for
the 1996-97 fiscal year. General Fund budgets for the biennium ending June 30,
1999, were adopted in 1997. General Fund expenditures and revenues are budgeted
to be approximately $9,550,000,000 and $9,700,000,000 for the 1997-98 and 1998-
99 fiscal years, respectively.

State Debt. The 1991 legislation also authorized the State Treasurer to
issue Economic Recovery Notes to fund the General Fund's accumulated deficit of
$965,712,000 as of June 30, 1991, and during 1991 the state issued a total of
$965,710,000 Economic Recovery Notes, of which $157,055,000 were outstanding as
of August 1, 1997. The notes were to be payable no later than June 30, 1996,
but as part of the budget adopted for the biennium ending June 30, 1997, payment
of the remaining notes scheduled to occur during the 1995-96 fiscal year was
rescheduled to be made over the four fiscal years ending June 30, 1999. The
primary method for financing capital projects by the State is through the sale
of the general obligation bonds of the State. These bonds are backed by the full
faith and credit of the State. As of August 1, 1997, there was a total
legislatively authorized bond indebtedness of $11,469,639,000, of which
$9,990,468,000 had been approved for issuance by the State Bond Commission,
$8,897,072,000 had been issued and $6,331,770,097 were outstanding.

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 through June 30, 2000, 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.

As of October 15, 1996, the General Assembly has authorized STO bonds for
the program in the aggregate amount of $4,157,900,000, of which $3,594,700,000
of new money borrowings had been issued. It is anticipated that additional STO
bonds will be authorized by the General Assembly annually in an amount necessary

<PAGE>

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 general obligation bonds are rated AA- by Standard & Poor's
and Aa3 by Moody's. 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 its employees are defendants in
numerous lawsuits. Although it is not possible to determine the outcome of these
lawsuits, the Attorney General has opined that an adverse decision in any of the
following cases might have a significant impact on the State's financial
position: (i) a class action by the Connecticut Criminal Defense Lawyers
Association claiming a campaign of illegal surveillance activity and seeking
damages and injunctive relief; (ii) an action on behalf of all persons with
traumatic brain injury, claiming that their constitutional rights are violated
by placement in State hospitals alleged not to provide adequate treatment and
training, and seeking placement in community residential settings with
appropriate support services; and (iii) litigation involving claims by Indian
tribes to a portion of the State's land area.

As a result of litigation on behalf of black and Hispanic school children
in the City of Hartford seeking "integrated education" within the Greater
Hartford metropolitan area, on July 9, 1996, the State Supreme Court directed
the legislature to develop appropriate measures to remedy the racial and ethnic
segregation in the Hartford public schools. The fiscal impact of this decision
might be significant but is not determinable at this time.

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

<PAGE>

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, 1996, ranked fourth with an
estimated population of 14.4 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 at an average of 224,240 new residents per year, from 1987 through
1996. Since 1987 the prime working age population (18-44) has grown at an
average annual rate of 2.1%. The share of Florida's total working age population
(18-59) to total State population is approximately 54%. Non-farm employment has
grown by over 35.6% since 1987. Total non-farm employment in Florida is expected
to increase 3.1% in 1996-97 and rise 3.1% in 1997-98. By the end of 1997-98,
non-farm employment in the State is expected to reach an average of 6.5 million
jobs. The service sector is Florida's largest employment sector, presently
accounting for nearly 87% of total non-farm employment. Employment in the
service sector should experience an increase of 4.4% in 1996-97, while growing
4.9% in 1997-98. 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 2.6% of total U.S. manufacturing employment since the
beginning of the nineties. Foreign trade has contributed significantly to
Florida's employment growth. Trade is expected to expand 3.3% this year and 3.2%
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 5% in 1996. Although the job creation rate for the State of Florida
since 1987 is almost twice the rate for the nation as a whole, throughout most
of the 1980's the unemployment rate for the State has tracked below that of the
nation's. In the nineties, the trend was reversed until 1995 and 1996, when the
state's unemployment rate again tracked below the U.S. The average rate of
unemployment for Florida since 1987 is 6.2%, while the national average is also
6.2%. Florida's unemployment rate is forecasted at 5.1% in both 1996-97 and
1997-98. 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 1995, Florida's employment income represented 60.6% of total personal
income, while nationally, employment income represented 70.8% of total personal
income. In the ten years ending in 1995, Florida's total nominal personal income
grew by nearly 103% and per capita income expanded approximately 62.5%. For the
nation, total and per capital personal income increased by roughly 77.8% and
61.0%, respectively. Real personal income in Florida is estimated to increase
4.2% in 1996-97 and increase 4.2% in 1997-98, while real personal income per
capita in the State is projected to grow at 2.3% in 1996-97 and 2.4% in 1997-98.

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

<PAGE>

The financial operations of the State covering all receipts and
expenditures are maintained through the use of four types of funds: the General
Revenue Fund, Trust Funds, the Working Capital Fund and the Budget Stabilization
Fund. The majority of the State's tax revenues are deposited in the General
Revenue Fund and monies for all funds are expended pursuant to appropriations
acts. In fiscal year 1995-96, expenditures for education, health and welfare and
public safety represented approximately 51%, 31% and 14%, respectively, of
expenditures from the General Revenue Fund. The Trust Funds consist of monies
received by the State which under law or trust agreement are segregated for a
purpose authorized by law. Revenues in the General Revenue Fund which are in
excess of the amount needed to meet appropriations may be transferred to the
Working Capital Fund.

State Revenues. For fiscal year 1996-97 the estimated General Revenue plus
Working Capital Fund and Budget Stabilization funds total $16,617.4 million, a
6.7% increase over 1995-96. The $15,568.7 million in Estimated Revenues
represent an increase of 6.3% over the analogous figure in 1995-96. With
combined General Revenue, Working Capital Fund and Budget Stabilization Fund
appropriations at $15,537.2 million, unencumbered reserves at the end of 1996-97
are estimated at $1,080.2 million. For fiscal year 1997-98, the estimated
General Revenue plus Working Capital and Budget Stabilization funds available
total $17,537.3 million, a 5.5% increase over 1996-97. The $16,359.7 million in
Estimated Revenues represent a 5.1% increase over the analogous figure in
1996-97.

In fiscal year 1995-96, the State derived approximately 66% of its total
direct revenues for deposit in the General Revenue Fund, Trust Funds, Working
Capital Fund and Budget Stabilization Fund from State taxes and fees. Federal
funds and other special revenues accounted for the remaining revenues. The
greatest single source of tax receipts in the State is the 6% sales and use tax.
For the fiscal year ended June 30, 1996, receipts from the sales and use tax
totalled $11,461 million, an increase of 7.4% from fiscal year 1994-95. 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, 1996, show collections
of this tax totalled $1,923.0 million.

The State currently does not impose a personal income tax. However, the
State does impose a corporate income tax on the net income of corporations,
organizations, associations and other artificial entities for the privilege of
conducting business, deriving income or existing within the State. For the
fiscal year ended June 30, 1996, receipts from the corporate income tax totalled
$1,162.7 million, an increase of 9.3% from fiscal year 1994-95. The Documentary
Stamp Tax collections totalled $775.2 million during fiscal year 1995-96,
posting a 11.5% increase from the previous fiscal year. The Alcoholic Beverage
Tax, an excise tax on beer, wine and liquor totalled $441.5 million in fiscal
year 1995-96. The Florida lottery produced sales of $2.07 billion in fiscal year
1995-96 of which $788.1 million was used for education purposes.

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

The State Constitution and statutes provide for the exemption of
homesteads from certain taxes. The homestead exemption is an exemption from all
taxation, except for assessments for special benefits, up to a specific amount
of the assessed valuation of the homestead. This exemption is available to every
person who has the legal or equitable title to real estate and maintains thereon
his or her permanent home. All permanent residents of the State are currently

<PAGE>

entitled to a $25,000 homestead exemption from levies by all taxing authorities,
however, such exemption is subject to change upon voter approval.

As of January 1, 1994, the property valuations for homestead property are
subject to a growth cap of the lesser of 3% or the 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. If the
property changes ownership or homestead status, it is to be re-valued at full
just value on the next tax roll.

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

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

State General Obligation Bonds and State Revenue Bonds. The State
Constitution does not permit the State to issue debt obligations to fund
governmental operations. Generally, the State Constitution authorizes 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

<PAGE>

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, AA by Standard & Poor's, and AA by Fitch Investors Services, Inc.

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

A. In a suit filed against the Florida Department of Health and
Rehabilitative Services (DHRS) arising out of the implementation of a DHRS
computer system, plaintiffs seek declaratory relief and money damages. Issues
included allegations concerning contract performance, warranty provisions,
payment for equipment and software, computer usage charges, computer programming
work, liquidated damages, breach of contract, claims for extra work allegedly
required by DHRS, and warranty breach of contract. This case has been settled
and DHRS agreed to pay plaintiff $42,800,000.

B. In an inverse condemnation suit, plaintiff claims that the action
of State constitutes a taking of plaintiff's leases for which compensation is
due. The Circuit judge granted the State's motion for summary judgment finding
that as a matter of law, the State had not deprived plaintiff of any royalty
rights. Plaintiff appealed to the First District Court of Appeals, but the case
was remanded to the Circuit Court for trial. Final judgment was made in favor
of the State; however plaintiff is appealing the judgment to the First District
Court of Appeals.

C. In a challenge by plaintiffs to the constitutionality of the $295
impact fee imposed by Florida law on the issuance of certificates of title for
vehicles previously titled outside the State, the Court granted summary judgment
to the plaintiff finding the fee violated the commerce clause of the U.S.
Constitution. In an appeal to the State Supreme Court by the State, the Court
ordered full refunds to all those who paid the impact fee since the Statute came
into existence in 1991. Refunds of approximately $188 million were made.
Litigation pertaining to post judgment interest is still active.

D. The Florida Department of Transportation has filed an action
against owners of property adjoining property that is subject to a claim by the
U.S. Environmental Protection Agency, seeking a declaratory judgment that the
Department is not the owner of such property. The case was dismissed and FDOT's
appeal of the order of dismissal is pending in the Third District Court of
Appeal. The EPA has agreed to await the outcome of the Department's declaratory
action before proceeding further. If the Department's action is not successful,
the possible clean-up costs could exceed $25 million.

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

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

G. In an action against the Florida Department of Corrections,
plaintiffs seek a declaratory judgment that they are not exempt employees under
the Fair Labor Standards Act and that, therefore, they are entitled to certain
overtime compensation. The U.S. District Court entered an order dismissing the
case for lack of jurisdiction. Plaintiffs filed a lawsuit against the
Department at the State level making the same allegations previously made at the

<PAGE>

federal level. The State court determined it has jurisdiction over the FLSA
claim.

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.

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, as of July 1997, Standard & Poor's Corporation rates
such bonds AAA. 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. A 1996 report by Fitch
Investors Services said that Georgia's two-decade adherence to the sole use of
general obligation or guaranteed bonds has led to a sound debt structure and is
just one part of the State's bright economic outlook. The report stated that
Georgia also had conservative financial operations with reserves maintained at
3% as well as an undesignated surplus which reached almost $174,000,000 in
fiscal year 1996 out of a balanced budget of $10.7 billion. The report went on
to estimate that tax revenue growth in Georgia will rise only 2.9% in fiscal
year 1997 with the reduced growth attributable to gradual elimination of sales
tax on food. The Georgia State Financing and Investment Commission at the end of
fiscal year 1997 estimates that State Treasury Receipts for fiscal year 1997
will increase by 1.41% and that State Treasury Receipts for fiscal year 1998
will increase by 4.01%.

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

<PAGE>

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 1997, the total principal indebtedness of the
State of Georgia consisting of general obligation debt, guaranteed revenue debt
and remaining authority debt totalled $4,814,020,000 and the highest aggregate
annual payment for such debt equalled 5.37% of fiscal 1997 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 1997" refers to the year ended June 30, 1997. In July 1997,
the State estimated that fiscal 1998 revenue collections would be
$11,777,578,880 with an estimated increase of 4.01% 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 1996, income
tax receipts and sales tax receipts of the State for fiscal 1996 comprised
approximately 48.9% and 38%, respectively, of the total State tax revenues.

The unemployment rate of the civilian labor force in the State as of April
1997 was 4.4% according to data provided by the Georgia Department of Labor. The
Metropolitan Atlanta area, which is the largest employment center in the area
comprised of Georgia and its five bordering states and which accounts for
approximately 46% 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.

Age International, Inc. v. State (two cases). Two suits for refund have
been filed in state court 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, plus interest, imposed under Georgia's post-Bacchus
(468 U.S. 263) statute, O.C.G.A. Sec.3-4-60., i.e., as amended in 1985. 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, plus interest, for later time periods. These two
cases encompass all known or anticipated claims for refund of such type within
the apparently applicable statute of limitations for the years in question,
i.e., 1989 through January 1993. The cases are pending in the trial court at
the discovery stage.

DeKalb County v. Schrenko. This suit, originally filed in Federal
District Court for the Northern District of Georgia, against the State School
Superintendent and the State of Georgia is based on a claim that the State's

<PAGE>

funding formula for pupil transportation is unconstitutional and a local school
board's claim that the State should finance the major portion of the costs of
its desegregation program. The Plaintiffs are seeking approximately $67,500,000
in restitution. The Federal District Court ruled that the State's funding
formula for pupil transportation is contrary to state law but ruled in the
State's favor on the school desegregation costs issue. 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, as of the date of decision. Notices of appeal and briefs to the
Eleventh Circuit Court of Appeals were filed by both sides, and oral arguments
on appeal were heard in October, 1996. In April, 1997, a three-judge panel of
the Eleventh Circuit Court of Appeals rendered a decision, affirming the trial
court's decision in the State's favor as to school desegregation costs issue and
reversing the trial court's decision against the State as to the State's funding
formula for pupil transportation being contrary to state law, 109 F.3d 680 (11th
Cir. 1997). Thus, under the Eleventh Circuit panel's decision, the State has no
liability. On April 28, 1997, the Plaintiffs filed a motion for rehearing and
en banc consideration, and that motion is still pending. The State intends to
continue to defend the suit vigorously.

George Jackson, et al. v. Georgia Lottery Corporation. Plaintiffs seek a
court order declaring that two games sponsored by the Georgia Lottery
Corporation, "Quick Cash" and "Cash Three," are unconstitutional and enjoining
the lottery from further offering of these games. Plaintiffs also seek the
return of all monies played on these games during a specified period,
approximately $1,703,462,781. As a preliminary matter, the Court has ruled that
the plaintiffs would not be legally entitled to the monies claimed. The
plaintiffs have attempted to appeal. Any judgment against the Georgia Lottery
Corporation would not be satisfied from the State's general fund. See O.C.G.A.
Sec.50-27-32(c).

Pursuant to a review of the Georgia Department of Revenue's revenue
collection information systems by the State Auditor, it was determined that form
April, 1995 to May, 1996 the Department did not maintain an adequate accounting
system to determine the accuracy of the amounts of Local Option Sales Tax,
Special Purpose Local Option Sales Tax and MARTA Sales Tax collected by the
Department on behalf of local governments and the disbursements of those taxes
to local governments imposing the sales-based taxes. The Department of Revenue
during this period estimated collections and disbursements to local governments
by reviewing the payment pattern to the local governments for the previous
twenty-four month period and followed that pattern, adjusting for known growth
in sales tax collections. The Department has corrected this situation as of May,
1996 and has ceased using estimates for making payments to the local
governments. Additionally, during this same period, a review of the Department
of Revenue's computer processing systems revealed significant internal control
weaknesses. Procedures are being studied to correct these problems.

As a result of the findings by the State Auditor, a task force appointed
by the Governor in September 1996 engaged KPMG Peat Marwick to make
recommendations to modernize the Department of Revenue's revenue collection
system. Peat Marwick has completed its study and the implementation of its
recommendations is underway. The Governor requested and the legislature
approved expenditures of $15,000,000 in the Amended Fiscal Year 1997 budget and
$6,000,000 was requested and approved in the Fiscal Year 1998 budget to begin
the process of updating the Revenue Department's computer system.

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--As of the end of fiscal year 1996 the State of Illinois
reported overall a GAAP basis excess of revenues over expenditures of $252
million. Although the State continued to run a year-end deficit in its General
Fund, at June 30, 1996 the General Fund deficit was reduced to $952 million
compared to a deficit of $1.2 billion at June 30, 1995. However, the State's
governmental funds used for daily operations increased $574 million compared to
an increase of $800 million in daily operational expenditures. Overall, the
State's payables increased only slightly largely because of a $774 million
reduction in the State's medicaid backlog. Finally, the State underfunded its
pension expense on a GAAP basis by $1.6 billion for fiscal year 1996 and has a
cumulative underfunding of $11.0 billion since 1981.

The State has traditionally taken the position that the minimum available
General Fund balance necessary to meet the State's daily payout needs in a
timely manner is $200 million. During fiscal year 1996 the end-of-month General
Fund available balances were approximately at or above the $200 million dollar
mark in ten of the twelve months. The financial community, however, generally
believes that 4%-5% of the State's 15-month budgetary expenditures (taking into
account lapse period spending) is a more adequate working balance. In that
regard, the State's end-of-month General Fund balances have not been at or above
the 4% threshold since fiscal year 1990.

Certain non-home rule units of government within the State are subject to
a cap on property tax increases. The cap limits increases in property tax
extensions to the lesser of 5% or the rate of inflation as measured by the
Consumers Price Index.

In 1988, the Illinois General Assembly approved the Retail Rate Act which
provided a state subsidy for Illinois waste-to-power incinerators. Following
passage of that legislation, bonds were issued to finance certain facilities
which were expected to be repaid from the revenue of the state subsidized
electricity sales. On March 14, 1996, legislation was enacted to repeal the
Retail Rate Act without transition rules to preserve the state subsidy for
outstanding bond issues. As a result of the loss of the state subsidy, there may
not be sufficient revenues to repay the bonds issued to finance the waste-to-
power incinerators. Lawsuits against the State have been filed in response to
the repeal of the Retail Rate Act.

A group of Democratic lawmakers has filed a lawsuit to enjoin the State
from spending amounts appropriated to repay Certificates of Participation (COPs)
issued by the Illinois Department of Central Management Services (CMS) to
construct a Chicago headquarters for the Illinois Department of Public Aid. The
lawsuit contends that the COPs in fact constitute State debt which was illegally
issued because the required approval for issuance by three-fifths majority of
the Illinois General Assembly was not obtained. If that contention is rejected,
the lawsuit alternatively alleges that the COPs issued by CMS are invalid
because only the Illinois Bureau of the Budget can issue COPs for real property.
If the first contention is ultimately upheld in litigation it could adversely
affect the value of outstanding COPs issued within the State of Illinois. If the
alternative contention is ultimately successful in litigation, it could
adversely affect the value of outstanding COPs issued by CMS to finance real
property. Moreover, if the litigation permanently enjoins the State from
repaying the COPs, that result may adversely affect the State's credit rating or
reputation in the municipal bond industry which, in either case, could adversely
affect the value of other State of Illinois debt.

In May, 1997, a Cook County (Illinois) Circuit Court ruled that the
Illinois State Toll Highway Authority had violated the Illinois State
Constitution by failing to submit its annual budget to the General Assembly for
approval. The court issued a preliminary injunction instructing the Tollway
Authority to submit its current budget to the General Assembly for approval on
or before December 15, 1997. If by that date the budget has not been approved,
the Tollway Authority could be forced to stop spending revenues on anything
except debt service on its approximately $1 billion of outstanding bonds. The
trustee for the outstanding bond issues has stated that requiring General
Assembly approval of the Tollway Authority budget could constitute a technical
default under the indenture pursuant to which the outstanding bounds were
issued. Moreover, the rating agencies have stated that loss of autonomy with
respect to its budget could cause a downgrade in the long-term debt rating

<PAGE>

issued to the Tollway Authority (the rating is separate from the rating of
Illinois general obligation debt). The decision of the Cook County Circuit
Court is currently on appeal.

General obligation bonds of the State of Illinois are currently rated Aa3
by Moody's, upgraded from A1 in February, 1997, and AA by Standard & Poor's,
upgraded from AA- in July, 1997.

LOUISIANA

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

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

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

State General Fund: The State General Fund is the principal operating fund
of the State and was established administratively to provide for the
distribution of funds appropriated by the Louisiana Legislature for the ordinary
expenses of the State government. Revenue is provided from the direct deposit of
federal grants and the transfer of State revenues from the Bond Security and
Redemption Fund after general obligation debt requirements are met. The
beginning accumulated State General Fund balance for fiscal year 1995-1996 was
$145 million.

The Revenue Estimating Conferences adopted, on April 29, 1996, its revised
official forecast of revenues for Fiscal Year 1996-97 at $4.676 billion. Based
upon that estimate, forecasted revenues would be approximately $847.5 million
short of the amount needed to continue State operations in Fiscal 1996-97 at a
level equivalent to Fiscal Year 1995-96 on a continuation basis. However, the
Louisiana legislature's enactment of suspension of certain exemptions from sales
and income taxes and adoption of the Federal budget on April 26, 1996, reduced
that projected shortfall to $72.5 million. The State intends to reduce
expenditures by that amount to balance the State's budget for Fiscal Year 1996-
97.

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

<PAGE>

program, ports, airports, transit and state police traffic control projects and
to fund the Parish Transportation Fund. The Transportation Trust Fund is funded
by a levy of $0.20 per gallon on gasoline and motor fuels and on special fuels
(diesel, propane, butane and compressed natural gas) used, sold or consumed in
the state (the "Gasoline and Motor Fuels Taxes and Special Fuels Taxes"). This
levy was increased from $0.16 per gallon (the "Existing Taxes") to the current
$0.20 per gallon pursuant to Act No. 16 of the First Extraordinary Session of
the Louisiana Legislature for the year 1989, as amended. The additional tax of
$0.04 per gallon (the "Act 16 Taxes") became effective January 1, 1990 and will
expire on the earlier of January 1, 2005 or the date on which obligations
secured by the Act No. 16 taxes are no longer outstanding. The Transportation
Infrastructure Model for Economic Development Account (the "TIME Account") was
established in the Transportation Trust Fund. Moneys in the TIME account will be
expended for certain projects identified in the Act aggregating $1.4 billion and
to fund not exceeding $160 million of additional capital transportation
projects. The State issued $263,902,639.95 of Gasoline and Fuels Tax Revenue
Bonds, 1990 Series A, dated April 15, 1990 payable from the (i) Act No. 16
Taxes, (ii) any Act No. 16 Taxes and Existing Taxes deposited in the
Transportation Trust Fund, and (iii) any additional taxes on gasoline and motor
fuels and special fuels pledged for the payment of said Bonds. As of December
31, 1995 the outstanding principal amount of said Bonds was $215,207,000.

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, 1995 the aggregate principal balance of
the 1988 Series Bonds and the Series 1992 Bonds was $249,875,000 and
$122,530,000, 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'

<PAGE>

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 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 is based primarily on natural
-----------------
resources, manufacturing related to natural resources, agriculture and tourism.
Gradually the economy has begun to diversify with growth in the trade and
services sector and in relatively new industries such as health and business
services and electronics manufacturing. Maine's economy has become more
diversified as manufacturing declines in importance. Currently, about 16% of
employment is in manufacturing, mostly non-durable, while trade accounts for 24%
of employment and services accounts for 28% of employment. Recent employment
growth has been in the service sector, and this is expected to continue, as
several of the major employers are expanding in the State. MBNA expects to more
than double employment at its Belfast, Maine facility over the next few years
and National Semiconductor, in addition to an $830 million investment in a new
wafer chip plant in South Portland, Maine, has spun off a new company, Fairchild
Semiconductor, which plans to add some 800-850 employees of its own.

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. Following the severe economic
contraction of the early 1990s, the New England Region returned to 95% of peak
employment levels by the end of 1995. At that time, the northern tier states of
Maine, New Hampshire and Vermont actually recouped the jobs lost in the
downturn. The outlook for the overall New England economy is for continued slow
recovery with the lackluster performance of the Connecticut and Rhode Island
economies clouding the vibrancy of the Massachusetts and New Hampshire showing.
According to the State Planning Office, the fact that Maine is likely more
influenced by our closest neighbors should translate to the State receiving

<PAGE>

relatively more benefit than harm form the varied performance of those in the
region.

Since 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. Since that time, by most measures, the State economy has
been in a steady, if slow, recovery. 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. Thus, while Maine continues
to demonstrate economic improvement, current economic growth would hardly be
described as robust. After 4 full years, the jobs that had been lost earlier
this decade were finally recouped. In 1995, employment was down only 0.4% from
the 1989 peak. Based on preliminary 1996 information, employment levels will
approximate that peak. Unemployment has also come down and appears to be
returning to its historical position, at or below the national average;
preliminary 1996 information showed a 5.1% unemployment rate, about 94% of the
national figure and 106% of the regional average. The May 1997 unemployment rate
was 4.8%, the same as the national figure. The average annual unemployment rate
forecast for the State prepared by the Maine State Planning Office is 5.2% for
1997 and 5.1% for 1998. There is, however, continued concern over the quality of
the jobs that have replaced those that had been lost. The bulk of all jobs
created through the 1980s came from the nonmanufacturing sector, led by medical
and business services, retail trade, and construction. Manufacturing employment
continued to dwindle through the decade with the exception of a work-force
build-up at Bath Iron Works in 1988 that bolstered the industrial job figures.
As with the rest of the nation, job growth in manufacturing is expected to be
minimal, but productivity gains in this sector will continue to bring wealth to
the State. Overall employment growth will average 0.5%-1.0%, a mere fraction of
the 5%-6% growth that marked the mid-eighties. The upward push on wages brought
about by fairly tight labor market conditions will be somewhat offset by the
service sector's generally lower wage and lower benefit job offerings keeping
real income growth below the 2% mark through the next 5 years.

The recession of the early 1990s took its toll on both manufacturing and
non-manufacturing sectors, as a cyclical downturn combined with defense cutbacks
and industry restructuring to eliminate over 34,000 jobs spread fairly evenly
over the services and goods-producing sectors. Two of the State's largest
employers are Bath Iron Works (August 1996 employment 7,800) and Portsmouth
Naval Shipyard (August 1996 employment 3,550). These employment figures reflect
reductions from 1995 peaks of 8,900 and 4,086 respectively. There continues to
be some exposure here to defense cuts. In order to enhance BIW's competitive
position, however, the Maine legislature approved assistance legislation
amounting to about 3 million dollars annually. There is a possibility, however,
that this assistance will be reconsidered by the legislature in light of certain
news stories reporting that BIW's parent company, General Dynamics, may merge
with the parent of BIW's chief rival, Ingalls Shipyard in Mississippi.

Consistent with the trends experienced over the past several decades,
virtually all job growth is expected to be in the nonmanufacturing sector, led
by business and health services, retail trade and construction. In the
manufacturing sector, only the fabricated metals, food, and instrument
industries are projected to see any job gains while the other goods-producing
industries will experience stable employment or minor declines. Given Maine's
comparatively high electricity prices, the restructuring of Maine's electric
utilities to create retail access to electricity supplies could be the single
most important factor in the future vibrancy and direction of the State's
economy. Over the past year, the debate on restructuring shifted to the Public
Utilities Commission as phase II of the Legislatively-mandated process to
develop a plan unfolded. While several State's have moved forward with
deregulation and greater competition in the generation and sale of electricity,
the Maine PUC created a plan for re-regulating Maine's two largest investor-
owned utilities and submitted it to the 118th session of the Maine Legislature.
More of a blueprint than a detailed plan, the PUC proposal calls for full retail
access by the year 2000. Many of the specific steps in the process are deferred
to subsequent Commission decisions, but the Legislature will ultimately set the
direction and pace of utility restructuring in Maine. The recent decision by
the owners of the Maine Yankee Nuclear Power plant to shut the plant down is the
real wild card in the ongoing deregulation trend.

State and economic growth figures often mask important regional
differences in economic activity. For example, the unadjusted State jobless

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rate in May 1997 was 4.6%. Cumberland, York, Hancock and Lincoln counties,
however, all had rates of 3% or lower while the western and northern counties
had unemployment rates in the 8% to 10% range. Thus, as the State Planning
Office observes while it appears that the south and midcoast counties might be
straining against labor shortages to grow even faster, the remainder of the
State is still in low gear.

As a result of the slow expansion of the Maine economy, the economic
indicators present a mixed bag, with some increasing and others decreasing. Of
17 economic indicators tracked most closely by the State Planning Office, 8
indicators showed improvement in 1996 while 8 showed a decline. Building permits
showed no change. This indicates an economy that is growing very slowly. Indeed,
most of the indicators, whether positive or negative showed only modest
deviation from this "no change" midpoint. Conversely, of the seven national
indicators looked at by the State Planning Office, five fell into the "better"
column, confirming a faster growing national economy than Maine's. 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 rebounded from an almost 2 1/2
point drop at the end of March 1997, climbing to a new high of 112.1 in April
1997. The Maine economic outlook calls for continued slow growth, yielding
payroll employment growth for 1997 and 1998 of 0.5% and 0.8% respectively and
personal income growth in the same periods of approximately 4.8% and 4.9%
respectively. Consumer retail sales are projected to increase only 2.6% in 1997
and 3.6% in 1998, down from the 1996 projections of 5.4%. Major dampers to
Maine economic growth over the near term are expected to include slow income
growth and high family debt loads. According to the State Planning Office,
perhaps the single greatest impediment to faster economic growth in Maine is the
State's very slow population growth. Between 1991 and 1996, Maine's population
increased by about 8,000. Over the previous five years, the State's population
increased by about 64,000, for a growth rate eight times as fast as in the
latest five year period. Additionally, migration and aging patterns caused a
decline of 11,000 persons in the 16-24 age group between 1990 and 1995, leaving
a dearth of people in the labor force's entry-level age group. However, this
situation may be improving. According to the U.S. Bureau of the Census, Maine
had a net in-migration (2,300) in 1996, for the first time since 1990, and the
Bureau's projections call for continued modest net in-migration over the next
five years.

The seasonally adjusted unemployment rate in Maine rose to 4.8% in May
1997 from a low of 4.3% in February 1997. This still reflects a drop from 5.2%
a year ago in May 1996. Maine continues to rank fairly low when measuring per
capita personal income, tallying 37th in the United States in 1996, 85.9% of the
national average.

Construction contract awards fell approximately 17% comparing the first 2
months of 1997 with the same period in 1996. Unlike a year ago, however, the
principal drag has been extremely weak non-residential construction sector,
which was down approximately 68% between the first 2 months of 1996 and the
first 2 months of 1997. In contrast, the residential sector increased 17% and
the non-building sector (roads, bridges, etc.) increased approximately 69% in
comparing the same periods. According to the Institute for Real Estate Research
and Education, the number of housing units sold in 1996 was up 5% from 1995.

In summary, through the first several months of 1997, the Maine economy
has been growing, but sporadically. Curiously, while economic growth in Maine
has been relatively slow, general fund revenues are well above the forecast,
with a $58 million surplus through May 1997. During this time, a real economic
growth for the first quarter in the US was 5.9%, but only 1.9% in Maine.
Similarly, retail store sales for the year through April were up 5.5%
nationally, but only up 3.1% (through May) in Maine. Also payroll employment
for May was up 2.1% over the previous May in the US, but only up 1.4% in Maine.
And, while national personal income rose 5.4% in 1996, the increase in Maine was
only 3.7%.

Yet, while income growth in Maine has been relatively weak (and below
projections), personal income tax revenues have been very strong ($42.8 million
surplus for the fiscal year through May 1997). Personal income growth was
weaker in Maine than in the nation in part because of slower population growth,
but the major factor appears to be that job growth here has been largely in the

<PAGE>

lower wage paying industries these vis-a-vis the US. The State Planning Office
surmises that Maine income tax revenues have likely been stronger than expected
(given the slow income growth) in part because the distribution of income gains
have been weighted toward the higher income brackets (capital gains from stock
transfers, etc.) and at higher incomes the marginal tax rates increase
considerably with increasing revenues.

The important question concerning how the restructuring of the United
States military will affect defense related industries in Maine now has at least
a preliminary answer. 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 base closing,
coupled with the shutdown of the Backscatter radar system in Bangor, meant the
loss of a substantial amount of military and civilian jobs in the region. Base
clean-up operations have begun and are expected to take several years to
complete. In the meantime, the Loring Development Authority has begun the task
of attracting public and private business to the facility. Recent news has been
more favorable as LAFB was selected as a Defense Finance and Accounting Service
Center (the "DFAS Center") and a JOBS Corps site. Currently one million square
feet of approximately 3.2 million square feet of available space has been
leased.

The DFAS Center became operational at Loring on May 3, 1995. To date, the
Center has hired 332 employees with a total employment projection estimated at
550 when fully operational. In addition, a $6.3 million renovation project for
the JOBS Corps site was completed in the fall of 1996. It is now operational
with 269 students and 125 employees. The Loring Development Authority has also
decided to pursue locating a National Airline Training Center at Loring.

Bath Iron Works ("BIW"), the State's largest employer, was recently
awarded a $108 million ship building contract for the construction of Aegis
Class destroyers. The U.S. Navy also awarded BIW a $7.8 million contract for
other continued work on the AEGIS destroyers. In June 1996, the Navy awarded BIW
a $348 million contract on a second AEGIS destroyer. BIW was also recently
awarded a $33 million contract to provide engineering, design and maintenance on
the Navy's Arliegh Burke destroyer fleet. 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. Recent news stories about a possible merger between BIW's parent company
and the parent company of its chief rival, however, do raise significant
questions about the future of BIW. In January 1996, BIW completed a study about
commercial prospects and concluded that the shipyard could not depend on
commercial shipbuilding to significantly supplement its defense work.

Another major employer, the Portsmouth Naval Shipyard in Kittery, Maine
staffed almost completely by a civilian work force, has taken drastic steps over
the past year to become more competitive and efficient, and is considering re-
focusing its mission and role in submarine repair. After large layoffs in 1994
helped to shrink its staffing level by half from the eight thousand workers
employed in the 1980s the shipyard has now stabilized. 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
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Independent candidate to be Governor of the State. In 1996, the voters also
elected a Democratic controlled Senate and House of Representatives. 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.

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

<PAGE>

$1,785,543,156 and Highway Fund expenditures of $220,551,295. The Legislature
met in special session in November and December 1995 and authorized General Fund
Expenditures of $1,732,041,447 and Highway Fund Expenditures of $257,727,929 for
fiscal year 1996 and General Fund Expenditures of $1,786,060,521 and Highway
Fund Expenditures of $226,708,840 for fiscal year 1997. In the Legislature's
regular session convened January 1996 and adjourned on April 4, 1996, the
Legislature amended the budget again and authorized General Fund Expenditures of
$1,733,842,806 and Highway Fund Expenditures of $260,799,573 for fiscal year
1996 and General Fund Expenditures $1,797,414,117 and Highway Fund Expenditures
of $227,316,195 for fiscal year 1997.

Laws authorizing expenditures for fiscal years 1998 and 1999 were enacted
in the first regular session of the Legislature in 1997 and provide for fiscal
year 1998 General Fund expenditures of $1,825,047,780 and Highway Fund
expenditures of $217,416,987 and, for fiscal year 1999 General Fund expenditures
of $1,984,859,413 and Highway Fund expenditures of $218,026,687.

There can be no assurance that the budget acts for fiscal years 1998 and
1999 will not be amended from time to time.

Maine's financial operations have recovered from the pressures created by
the recession and a financial cushion has been restored. The State has
anticipated a small-unappropriated surplus at the June 30, 1997, end of the
biennium, as well as a rainy day fund balance of $23 million. In actuality,
revenues were stronger than expected in 1995-1996 allowing for an increase in
the rainy day fund to $38 million. With the trend continuing into the 1996-1997
fiscal year, revenues are now estimated to close the year some $30 million to
$40 million (currently $24 million) over estimates and the rainy day fund is
expected to reach $45 million as of June 30, 1997, equal to approximately 2.5%
of revenues. Revenue collection through March 1997 is about 2% over estimates.
The bulk of the revenue at overage is expected to go into a tax relief fund.
The biennial 1998-1999 budget addressed an expected gap of some $360 million due
to the repeal of the hospital and nursing home taxes and a cap placed on income
tax receipts intended to be effective July 1, 1997. Governmental down sizing
and program cuts of some $244 million were enacted to ease the phase-out of the
hospital taxes and income tax cap was repealed.

Maine has passed legislation phasing out the hospital and nursing home
taxes by 1998-1999 (one year later than initially planned) and has repealed the
cap of $671 million on individual tax collections, which would have become
effective July 1, 1997. The absorption of this structural gap of some $360
million is accomplished by about $244 million of program cuts and spending
reductions, as well as the stronger revenue performance. The rainy day fund is
expected to hold $45 million at the end of 1996-1997, its historical high and
equal to 2.5% of revenues. Revenues through the first 9 months of the year are
currently $24 million or 2% ahead of estimates with expectations of a $30
million-$40 million operating surplus. The excess is expected to be applied to
tax relief to increase the personal exemption.

The principal operating account for the State is the general fund;
supplementing it is the highway fund. The State is in the process of conversion
to a GAAP accounting system but operations are currently founded on the
budgetary basis. On a budgetary basis, Maine retained an unappropriated surplus
in the general fund through the recession. From a high of $163.1 million in
1989, the balance dropped to $61 million at June 30, 1990, and reached $3.5
million at June 30, 1991. On a GAAP basis, the general fund has been in deficit
(based on undesignated balances) for several years.

The State Controller prepares as soon as possible after the close of each
fiscal year an explanatory report of the financial condition of the State. This
report is the official financial report of the State government. The financial
statements of the State of Maine for the year ended June 30, 1996 have been
prepared by the State controller and have been audited by the Department of
Audit in accordance with generally accepted auditing standards. The Department
of Audit has qualified its most recent audit opinion on these financial
statements because of certain departures from generally accepted accounting
principles.

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.

<PAGE>

The State of Maine's outstanding general obligations are rated AA+ by
Standard & Poor's Ratings Services, Aa3 by Moody's Investors Services, Inc. and
AA by Fitch Investors Services, L.P.

As of March 31, 1997, there was outstanding approximately $444,157,945
general obligation bonds of the State. As of May 1, 1997, there were authorized
by the voters of the State for certain purposes, but unissued, bonds in the
aggregate principal amount of $96,155,316. As of May 1, 1997, 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.

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 February 28, 1997, the aggregate
principal amount of certificates of participation outstanding was $27,983,635.

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 or 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 1993 the Maine Legislature amended the laws relating to the benefit
structure of the Maine State Retirement System (the "Amendments"). The
Amendments limited certain retirement benefits which would otherwise have been
available to eligible retirees. Litigation was commenced in federal district
court by affected employees in the Retirement System seeking declaratory and
injunctive relief which, if granted, would, in effect, overturn the Amendments
and oblige the State to increase its annual payments to the Retirement System.
In September 1996, the Federal District Court for the District of Maine entered
an order granting in part and denying in part the relief sought by the affected
employees. The Federal District Court order has been appealed to the First
Circuit Court of Appeals by both the State and the affected employees. Oral
argument of the appeal was heard by the First Circuit Court of Appeals in April
1997, and a decision on the appeal is anticipated in the next several months.
The Department of Attorney General of the State continues to believe that the
State will ultimately prevail in the claims of the Plaintiffs in this
litigation.

Certain public authorities. The portfolio may contain obligations of
--------------------------
certain public authorities and quasi-municipal corporations of the State of
Maine including the Maine Municipal Bond Bank, the Maine Health and Higher
Educational Facilities Authority and Regional Waste Systems, Inc., among others.
These various obligations will generally constitute revenue obligations secured
by loan repayments of the ultimate borrowers of the proceeds or other revenue
streams. The risks associated with these various obligations should be assessed
through reference to the official statements for each of the respective
obligations.

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

<PAGE>

acquisition of capital assets. These lease agreements specify that payments
thereunder are subject to annual appropriation by the General Assembly.

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

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

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

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

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

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

<PAGE>

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. On November 9, 1994, the Maryland Transportation Authority
issued $162.6 million of special obligation revenue bonds to fund projects at
the Baltimore/Washington International Airport secured by revenues from the
passenger facility charges received by the Maryland Aviation Administration and
from the general account balance of the Transportation Authority. As of June 30,
1997, $388.7 million of the Transportation Authority's revenue bonds were
outstanding.

Maryland Stadium Authority Bonds. The Maryland Stadium Authority is
responsible for financing and directing the acquisition and construction of one
or more new professional sports facilities in Maryland. Currently, the Stadium
Authority operates Oriole Park at Camden Yards which opened in 1992. In
connection with the construction of that facility, the Authority issued $155
million in notes and bonds. These notes and bonds, 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 Centers in Baltimore and Ocean City
and construction of a conference center in Montgomery County. The Baltimore
Convention Center expansion is expected to cost $163 million and is being
financed through a combination of funding from Baltimore City, Stadium Authority
revenue bonds, and State general obligation bonds. The Ocean City Convention
Center expansion is expected to cost $35 million and is being financed through a
combination of funding from Ocean City and the Stadium Authority. The Montgomery
County conference center is expected to cost $27.5 million and is being financed
through a combination of funding from Montgomery County and the Stadium
Authority.

In October 1995, the Stadium Authority and the Baltimore Ravens (formally
known as the Cleveland Browns) executed a Memorandum of Agreement which commits
the Ravens to occupy a to be constructed football stadium in Baltimore City. The
Agreement was approved by the Board of Public Works and constitutes a "long-term
lease with a National Football League team" as required by statute for the
issuance of Stadium Authority bonds. The Stadium Authority sold $87.565 million
in lease-backed revenue bonds on May 1, 1996. The proceeds from the bonds, along
with cash available from State lottery proceeds, investment earnings, and other
sources will be used to pay project design and construction expenses of
approximately $200 million. The bonds are solely secured by an assignment of
revenues received under a lease of the project from the Stadium Authority to the
State.

Miscellaneous Revenue and Enterprise Financings. Certain other
instrumentalities of the State government are authorized to borrow money under
legislation which expressly provides that the loan obligations shall not be
deemed to constitute a debt or a pledge of the faith and credit of the State.
The Community Development Administration of the Department of Housing and
Community Development, higher educational institutions (including St. Mary's
College of Maryland, the University of Maryland System, and Morgan State
University), and the Maryland Environmental Service 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

<PAGE>

is authorized to issue bonds secured by revenues of the Fund, including loan
repayments, federal capitalization grants, and matching State grants.

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

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 specifically
pledged to the payment of the debt. Neither the faith and credit nor the taxing

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power of the State, the issuer or any other political subdivision of either is
pledged to the payment of the debt. The issuance of the debt is not directly or
indirectly or contingently an obligation, moral or other, of the State, the
issuer or any other political subdivision of either to levy any tax for its
payment.

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

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

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

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

MASSACHUSETTS

RISK FACTORS--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.

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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 1996, the
aggregate property tax levy grew from $3.347 billion to $5.924 billion,
representing an increase of approximately 77%. 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 92%.

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 increased from $2.359 billion
in 1992 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
was an increase of approximately 9.1% above the fiscal 1994 level. Fiscal 1996
expenditures for direct local aid were $3.246 billion, an increase of
approximately 9.1% above the 1995 level. It is estimated that fiscal 1997
expenditures for direct local aid will be $3.538 billion, which is an increase
of approximately 9.0% above the 1996 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, pensions
for teachers, pension cost-of-living allowances for municipal retirees, housing
subsidies and the costs of courts and district attorneys that formerly had been
paid by the counties.

Many communities have responded to the limitations imposed by Proposition
2 1/2 through statutorily permitted overrides and exclusions. Override activity
steadily increased throughout the 1980's before peaking in fiscal 1991 and
decreasing thereafter. In fiscal 1992, 65 communities approved one of the three
types of referenda questions (override of levy limit, exclusion of debt service,
or exclusion of capital expenditures) adding $31.0 million to their levy limits.
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. In fiscal 1996, 30 communities added $5.8 million to their levy limits.

<PAGE>

Capital exclusions were passed by 19 communities in 1996 and totalled $1.5
million. In fiscal 1996, the impact of successful debt exclusion votes going
back as far as fiscal 1983, was to raise the levy limits of 229 communities by
$125.8 million.

A statute adopted by voter initiative petition at the November, 1990
statewide election regulates the distribution of local aid to cities and towns.
This statute requires that, subject to annual appropriation, no less than 40% of
collections from personal income taxes, sales and use taxes, corporate excise
taxes and lottery fund proceeds be distributed to cities and towns. Under the
law, the local aid distribution to each city or town would equal no less than
100% of the total local aid received for fiscal 1989. Distributions in excess of
fiscal 1989 levels would be based on new formulas that would replace the current
local aid distribution formulas. By its terms, the new formula would have called
for a substantial increase in direct local aid in fiscal 1992, and would call
for such an increase in fiscal 1993 and in subsequent years. However, local aid
payments expressly remain subject to annual appropriation, and fiscal 1992,
fiscal 1993, fiscal 1994, fiscal 1995 and fiscal 1996 appropriations for local
aid did not meet, and fiscal 1997 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, 1995,
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 $6.421 billion,
$395.6 million and $1.410 billion, respectively, for a total unfunded actuarial
liability of $8.227 billion. As of December 31, 1996 the Commonwealth's pension
reserves had grown to approximately $7.7 billion. The fiscal 1998 budget of the
Commonwealth adopts a 20-year flat payment schedule which will fund the unfunded
employee pension liability by the year 2018, 10 years earlier than the previous
schedule.

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 1997 and 1998
are estimated to be increased to approximately $1.061 billion and $1.128
billion, respectively. Total pension expenditures increased from $751.5 million
in fiscal 1992 to $1.005 billion in 1996. The estimated pension expenditures for
fiscal 1997 are approximately $1.074 billion and for fiscal 1998 $1.046 billion.

Pursuant to legislation enacted as part of the fiscal 1997 budget, public
employees hired on or after July 1, 1996 must contribute 9% of their regular
compensation to their retirement system except for state police hired on or
after such date who must contribute 12%.

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 1992 through fiscal 1996
were lower than the limits. The Executive Office for Administration and Finance
currently estimates that state tax revenues in fiscal 1997 will not reach the
limit imposed by either the initiative petition or the legislative enactment.

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

<PAGE>

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.

State finance law provides for a Stabilization Fund relating to the use of
fiscal year-end surpluses. A limitation formerly equal to 0.5% of total tax
revenues (less the amount of annual debt service costs), is imposed on the
amount of any aggregate surplus 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. Legislation adopted in May 1997 raised the statutory ceiling on the
Stabilization Fund to 0.5% of budgeted revenues for the preceding fiscal year
(as opposed to just tax revenues) and also provided that up to 40% of any fiscal
year-end surplus may, prior to any transfer to the Stabilization Fund, be held
in a separate account to be used for capital expenditures, if there is a
negative balance in the state's capital funds. Amounts credited to the
Stabilization Fund are not generally available to defray current year expenses
without subsequent specific legislative authorization. Amounts in excess of the
limit are to be applied to the reduction of personal income taxes.

Fiscal 1992 budgeted revenues and other sources were $13.728 billion,
including tax revenues of $9.484 billion. Fiscal 1992 budgeted expenditures were
approximately $13.416 billion. 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 totaled 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 totaled 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 totaled approximately $15.55 billion.
Budgeted expenditures and other uses of funds in fiscal 1994 were $15.523
billion.

As a result of comprehensive education reform legislation enacted in June,
1993, a large portion of general revenue sharing funds are earmarked for public
education and are distributed through a formula designed to provide more aid to
the Commonwealth's poorer communities. The legislation established a fiscal 1993
state spending base of approximately $1.288 billion for local education purposes
and required annual increases in state expenditures for such purposes above that
base, subject to appropriation, estimated to be approximately $175 million in
fiscal 1994, approximately $396 million in fiscal 1995, approximately $629
million in fiscal 1996 and approximately $881 million in fiscal 1997, with
additional annual increases anticipated in later years. The fiscal 1994, 1995,
1996 and 1997 budgets have fully funded the requirements imposed by this
legislation.

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
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

<PAGE>

billion. The Commonwealth ended fiscal 1995 with an operating gain of $137
million and an ending fund balance of $726 million.

The final fiscal 1995 supplemental budget modified, with respect to the
fiscal 1995 year-end surplus, the provisions of state law governing deposits to
the Stabilization Fund. For fiscal 1995, surplus funds as defined in the law
(the sum of the undesignated fund balances at year-end in the three principal
operating funds) in excess of the amount which can be carried forward as a
beginning balance for fiscal 1996 were to be credited, first, to the
Stabilization Fund, to the extent of 0.25% of total tax revenues, second, to a
newly credited Cost Relief Fund, to the extent of 0.5% of total tax revenues,
and, third to the Stabilization Fund to the extent of any remaining amount.
Amounts in the Cost Relief Fund can be appropriated for environmental and
sanitation purposes as well as for unanticipated obligations, unavoidable
deficiencies or extraordinary expenditures of the Commonwealth. As calculated by
the Comptroller, the amount of surplus funds (as so defined) for fiscal 1995 was
approximately $94.9 million, of which $55.9 million was available to be carried
forward as a beginning balance for fiscal 1996. Of the balance, approximately
$27.9 million was deposited in the Stabilization Fund, and approximately $11.1
million was deposited in the Cost Relief Fund.

Budgeted operating funds of the Commonwealth ended fiscal 1996 with a
surplus of revenues and other sources over expenditures and other uses of $446.4
million, resulting in aggregate ending fund balances in the budgeted operating
funds of the Commonwealth of approximately $1.172 billion. Budgeted revenues
and other sources for fiscal 1996 totaled approximately $17.328 billion,
including tax revenues of approximately $12.049 billion. Budgeted revenues and
other sources increased by approximately 5.7% from fiscal 1995 to fiscal 1996,
while tax revenues increased by approximately 7.9% for the same period. Budgeted
expenditures and other uses in fiscal 1996 totaled approximately $16.881
billion, an increase of approximately $630.6 million, or 3.9% over fiscal 1995.
The fiscal 1996 year-end transfer to the Stabilization Fund amounted to
approximately $177.4 million, bringing its balance to approximately $625
million, which exceeded the maximum then allowed under State law. Under state
finance law, year-end surplus amounts (as defined in the law) in excess of the
amount that can remain in the Stabilization Fund are transferred to the Tax
Reduction Fund, to be applied, subject to legislative appropriation, to the
reduction of personal income taxes. The balance in the Tax Reduction Fund, as
reflected in the 1996 Comptroller's Audited Financial Report, is approximately
$231.7 million. Legislation approved by the Governor on July 30, 1996
appropriated $150 million from the Tax Reduction Fund for personal income tax
reductions in fiscal 1997, to be implemented by a temporary increase in the
amount of the personal exemption allowable for the 1996 taxable year.
Legislation adopted in May, 1997 authorized the remaining balance of
approximately $85 million in the Tax Reduction Fund to be applied toward an
additional temporary personal exemption increase during the 1997 taxable year.

The 1997 fiscal budget signed on June 30, 1996, totaled $17.45 billion.
Projected total fiscal 1997 expenditures are approximately $17.735 billion,
including $212.8 million in supplemental spending requests filed by the
Governor. Total fiscal 1997 revenues are estimated at approximately $17.918
billion. Supplemental fiscal 1997 appropriations to date total approximately
$135.8 million. Preliminary results indicate that fiscal 1997 tax collections
totaled approximately $12.861 billion, an increase of approximately $812
million, or 6.7%, over fiscal 1996, and approximately $354 million higher than
the most recent official estimates released by the Secretary of Administration
and Finance on May 20, 1997. Under these spending and revenue assumptions,
approximately $241.0 million would be transferred to the Stabilization Fund on
account of fiscal 1997, bringing its balance to approximately $804.3 million,
and $160.7 million would be transferred to a newly established capital projects
funds. Action by the State legislature could have the effect of reducing the
amount of the fiscal 1997 surplus.

On July 10, 1997, the Governor signed an $18.4 billion budget for the 1998
fiscal year, an increase of 3.8% over anticipated fiscal 1997 expenditures. The
budget is based on a consensus tax revenue forecast of $12.85 billion which,
according to preliminary results, is approximately equivalent to the amount of
actual tax receipts for fiscal 1997. On July 30, 1997, the Executive Office for
Administration and Finance revised the fiscal 1998 tax forecast upward by $250
million over the consensus estimate. This is subject to periodic review. The
budget incorporates tax cuts valued by the Department of Revenue at $61 million

<PAGE>

and provides for an accelerated pension funding schedule. On July 30, 1997, the
Acting Governor filed legislation that would reduce the tax rate over three
calendar years. The Executive Office for Administration and Finance estimates
that, should the legislation be adopted as filed, the static revenue impact of
these changes would be a reduction in personal income tax collections of
approximately $196 million in fiscal 1998, $587 million in fiscal 1999, $985
million in fiscal 2000, and $1.229 billion in fiscal 2001, at which time the
rate reduction would be fully implemented.

On July 29, 1997, Governor Weld resigned in an attempt to secure his
appointment as Ambassador to Mexico, and Lieutenant Governor Cellucci became the
Acting Governor of the Commonwealth through the expiration of Governor Weld's
term on January 7, 1999.

As of June 30, 1996, the Commonwealth had a cash position of approximately
$889 million, not including the Stabilization Fund. The most recent quarterly
cash flow projections prepared by the State Treasurer and Secretary of
Administration and Finance are dated June 11, 1997 and estimate the fiscal 1997
year-end cash position to be approximately $162.6 million. The projected year-
end balance does not include any fiscal 1997 activity that may occur after June
30, 1997, nor does it include $95.4 million to be transferred to the
Stabilization Fund on account of fiscal 1996. The fiscal 1998 ending cash
balance is estimated to be $349.0 million.

During fiscal years 1992, 1993, 1994, 1995 and 1996, Medicaid expenditures
were $2.818 billion, $3.151 billion, $3.313 billion, $3.398 billion and $3.416
billion, respectively. The average annual growth rate from fiscal 1992 to fiscal
1996 was 3.9%, compared to an average annual growth of approximately 17% between
fiscal 1987 and fiscal 1991. There was virtually no growth from fiscal 1995 to
fiscal 1996. The Executive Office for Administration and Finance estimates that
fiscal 1997 Medicaid expenditures will be approximately $3.387 billion.
Factoring out one-time payments in 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, Medicaid expenditures are expected to
remain flat from fiscal 1996 to fiscal 1997. 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. Fiscal
1998 spending for the current Medicaid program is projected to total $3.511
billion, an increase of $123.5 million, or 3.5%, over fiscal 1997.

The liabilities of the Commonwealth with respect to outstanding bonds and
notes payable as of July 1, 1997 totaled $14.370 billion. These liabilities
consisted of $9.561 billion of general obligation debt, $130 million of
dedicated income tax debt (the Fiscal Recovery Bonds), $521 million of special
obligation debt, $3.661 billion of supported debt, and $496 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 million
per fiscal year. Capital expenditures were $694.1 million, $575.9 million,
$760.6 million, $902.2 million and $908.5 million in fiscal 1992, 1993, 1994,
1995 and fiscal 1996, respectively. Commonwealth financed capital expenditures
are projected to be approximately $900 million in fiscal 1997. 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, $1.231 billion and $1.183 billion for fiscal
1993, fiscal 1994, fiscal 1995 and fiscal 1996, respectively, and are projected
to be $1.289 billion for fiscal 1997. 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

<PAGE>

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 in fiscal 1997 and
approximately $136 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 1997 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 1997 is
$9.113 billion; as of January 1, 1997 there were $8.301 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 are
not 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 1997
through 2002, the plan forecasts total capital spending to be financed by
Commonwealth debt of approximately $4.7 billion, which is significantly below
legislatively authorized capital spending levels. The current plan assumes that
the projected level of capital spending will leverage additional federal
transportation aid of approximately $4.538 billion for this period and also
projects the issuance of $1.5 billion in grant anticipation notes in
anticipation of future federal aid to be received during fiscal years 2003-2007,
inclusive. Up to $900 million of such notes are payable from Commonwealth bonds
if federal grants are not available. Federal aid is uncertain beyond September
30, 1997, when the Intermodal Surface Transportation Efficiency Act of 1991
expires. The five-year plan also assumes that the projected level of payments
from third-party agencies, such as the Massachusetts Turnpike Authority and the
Massachusetts Port Authority, and from other sources will be $1.4 billion.

Unemployment. The Massachusetts unemployment rate averaged 8.5%, 6.9%,
6.0%, 5.4% and 4.5% in calendar year 1992, 1993, 1994, 1995 and 1996,
respectively. The Massachusetts unemployment rate in June, 1997 was 3.9% as
compared to 4.2% in May, 1997 and 4.8% in June, 1996. 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.

The assets and liabilities of the Commonwealth Unemployment Compensation
Trust Fund are not assets and liabilities of the Commonwealth. As of June 30,
1997 the private contributory sector of the Massachusetts Unemployment Trust
Fund had a surplus of $1.147 billion. The Department of Employment and
Training's April 1997 quarterly report indicated that the contributions provided
by current law should result in a private contributory account balance of $1.349
billion in the Unemployment Compensation Trust Fund by December, 1997 and
rebuild reserves in the system to $2.097 billion by the end of 2001.

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

Former residents of a state facility have commenced an action against the
Commonwealth alleging that in the 1950's they were fed radioactive isotopes
without their informed consent. The amount of potential liability is estimated
to be $25 million.

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

<PAGE>

developing and implementing a court approved plan and time table for the
construction of the treatment facilities necessary to achieve compliance with
the federal requirements. The MWRA currently projects the total cost of
construction of the wastewater facilities required under the court's order as
approximately $3.584 billion in current dollars, with approximately $734 million
to be spent after June 30, 1996. 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.

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

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

There continues to be one large eminent domain case pending against the
Commonwealth with potential liability aggregating $60 million. A second eminent
domain case settled with the Commonwealth paying approximately $58 million in
May 1997.

The constitutionality of the former version of the Commonwealth's bank
excise tax has been challenged by a Massachusetts bank. In 1992, several pre-
1992 petitions, which raised the same issues, were settled prior to a board
decision. The petitioner has now filed claims with respect to 1993 and 1994
claiming the tax violated the Commerce Clause of the United States Constitution
by including the bank's worldwide income without apportionment. Another
Massachusetts bank has raised the same claims as outlined above. The
Commonwealth's potential aggregate liability is $81 million.

In March 1995, the Supreme Judicial Court held that certain deductions
from the net worth measure of the Massachusetts corporate excise tax violate the
Commerce Clause of the United States Constitution. In October 1995, the United
States Supreme Court denied the Commonwealth's petition for a writ of
certiorari. A partial final judgment for tax years ending prior to January 1,
1995 was subsequently entered by the Supreme Judicial Court. The Department of
Revenue estimates that tax revenues in the amount of $40 million to $55 million
may be abated as a result of this decision. On May 13, 1996, the Supreme
Judicial Court entered an order for judgment for tax years ending on or after
January 1, 1996. A final judgment was entered on June 6, 1996. The Department of
Revenue is estimating the fiscal impact of that ruling; to date it has paid
approximately $11 million in abatements in accordance with the judgement.

There are also several other tax matters in litigation which may result in
an aggregate liability in excess of $75 million.

Ratings. The ratings by the three bond rating agencies, Standard & Poor's,
Moody's Investors Service, Inc. and Fitch Investors Service, L.P., on
Massachusetts general obligation debt reached lows in 1989-1990 of BBB, Baa and
A, respectively, where they remained until 1992-1993 when they were all
increased. Currently, the Commonwealth's general obligation debt is rated at A+,
A1 and A+ by Standard & Poor's, Moody's and Fitch Investors, respectively.

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

<PAGE>

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 17.1 percent in 1995, 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 below the
national average. During 1995, the average monthly unemployment rate in this
State was 5.3% as compared to a national average of 5.6% 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.

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

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

<PAGE>

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 55% from the payment of State taxes and
45% 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 each of the
last five fiscal years the State ended the fiscal year with its General Fund in
balance after transfers from the General Fund to the Budget Stabilization Fund.
Those and certain other transfers into and out of the Fund raised the balance in
the Budget Stabilization Fund to $1.15 billion as of September 30, 1996. In all
but one of the last five fiscal years the State has borrowed between $500
million and $900 million for cash flow purposes. It borrowed $900 million in
each of the 1996 and 1997 fiscal years.

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, while total State revenue sharing payments have increased
in each of the last five years, the State reduced revenue sharing payments to
municipalities below that level otherwise provided under formulas in each of
those fiscal years.

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

<PAGE>

In addition, the State Legislature recently adopted a package of state tax
cuts including a phase-out of the intangibles tax, an increase in exemption
amount for the personal income tax and reductions in the single business tax.

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

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

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

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

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 the past, 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.

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 budget reserve accounts at $350 million and $204
million, respectively. Spending increases focused on education, health and human
services and criminal justice.

<PAGE>

As a consequence of strong economic growth and human services cost
savings, and giving effect to supplemental budget revisions adopted by the State
legislature, in April 1996 the 1995-1997 budget was revised to anticipate
revenues of $18.5 billion and expenditures of $18.9 billion, with cash flow and
budget reserve accounts at $350 million and $270 million, respectively.
Additional expenditures were authorized for education, health and human
services, public safety and criminal justice, and transportation and
environmental programs.

In February 1997, the Minnesota Department of Finance forecast an $866
million budgetary surplus for the end of the biennium on June 30, 1997. Several
proposals to utilize the surplus were advanced by the Governor and legislature,
including tax rebates in various forms and amounts. In May and June 1997, the
legislature, in its regular and first special session, adopted measures which
increased spending for the biennium, resulting in assumed revenues for the
biennium of $19.4 billion, total expenditures of $18.7 billion, anticipated
maintenance of the cash flow account at $350 million, the budget reserve account
at $233 million, a school aid reserve account at $114 million and an
appropriations carried forward account, dedicated to the Minnesota State
Colleges and Universities system, of $72 million, and an $841 million projected
surplus. Preliminary estimates of the Department of Finance indicated that
revenues at the completion of the biennium on June 30, 1997 were higher than
forecast.

In its regular and first special session in May and June 1997, the
legislature adopted a budget for the 1997-1999 biennium which provided for
revenues of $20.3 billion, expenditures of $20.9 billion and maintenance of the
cash flow account at $350 million, the budget reserve account at $522 million, a
new property tax reserve account at $46 million and the appropriations carried
forward account at $72 million, and projected a budgetary surplus of $32 million
at the end of the biennium. The most significant revenue measure enacted by the
legislature was a $500 million property tax rebate in the form of an income tax
credit for taxes filed in 1998. Total budgeted expenditures increased 11.5%
over the previous biennium, with significant increases in education finance,
health and human services and anticipated property tax reform.

Any 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. Recent forecasts by the Minnesota Department of
Finance have been based on an assumption of continuing economic growth and its
favorable impact on State revenues and expenditures. Concerns have also been
raised in the past regarding cost of debt service and the capacity of the State
to authorize additional major bonding. 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.

As of August 1, 1997, the total of State general obligation bonds
outstanding was approximately $2.2 billion and the total authorized but unissued
was approximately $600 million.

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's
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 and in May 1996 raised its
rating again to Aaa. In July 1997, Standard & Poor's announced an upgrading in
its rating to AAA. These improved ratings were applied to the State's issuance
of $226 million in general obligation bonds in August 1997.

<PAGE>

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, the State and certain State agencies, such as the Minnesota Housing
Finance Agency, University of Minnesota, Minnesota Higher Education Services
Office, Minnesota State Colleges and 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
are not general obligation debts of the State. The payment of these obligations
is generally subject to revenues generated from prescribed sources or 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 the
deficiency. A decision of the Minnesota Supreme Court sustained the
legislature's position that no State obligation had been created.

A final decision in a case which held the Minnesota excise tax on banks to
be unconstitutional resulted in an initially estimated judgment, including
interest to the date of judgment in 1994, of $327 million. In 1995 the
legislature authorized the Commissioner of Finance to issue up to $400 million
in State revenue bonds to pay the judgment and related obligations. The State
sold $200 million of the bonds in May 1996. The debt service on the bonds is
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 are to be held in a special reserve fund with the
expected excess over debt service requirements being transferred to the general
fund. The bonds issued for this purpose are not general obligations of the State
and the revenue sources supporting the bonds are subject to risks of adverse
legislative, executive or judicial action and economic conditions. The
Commissioner of Revenue has reduced the estimated total liability to the
plaintiffs to approximately $216 million. Most of the bond proceeds have been
expended to cover the judgment and the legislature has appropriated $16.6
million to pay amounts in excess of the bond proceeds. However, new claims have
been filed against the State by plaintiffs not part of the original litigation,
which claims could aggregate $40 million. The State has contested these claims
as barred by the statute of limitations.

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 St. Paul School District and
several individual plaintiffs have commenced a suit claiming that the State has
failed to provide sufficient resources to the district to enable it to provide
an adequate education to the district's poor and minority students and students
in need of special education and English instruction. The complaint seeks
declaratory relief and an order that the State provide the district with the
resources it needs. The potential costs to the State have not been quantified.
The State's motion to dismiss the district's complaint for failure to state a
claim upon which relief can be granted was denied by the trial court and the
State Court of Appeals denied the State's request for discretionary review of
that decision. The State has filed a petition for discretionary review by the
State Supreme Court and has also brought a motion in the trial court to dismiss
the individual plaintiffs' complaints and for judgment on the pleadings as to
the district's complaint. Second, the Minnesota Branch of the NAACP and several
Minneapolis school children and their parents have brought suit against the
State claiming that the segregation of minority and poor students in the
Minneapolis public schools has deprived the students of an adequate education
equal to that received by students in suburban schools. The suit is a class
action seeking a mandatory injunction and attorneys' fees. Injunctive relief
could force the State to provide substantial additional funding for the
Minneapolis schools, and if the State were required to pay the cost of
alleviating the causes or effects of segregated housing, substantial additional
expenditures could be required. The district court denied the State's motion to

<PAGE>

dismiss the case and denied the plaintiffs' motion for partial summary
judgment. The district court has issued an order certifying certain legal
questions for appeal by the Minnesota Supreme Court. Third, twelve
corporations have filed a claim in the Minnesota Tax Court claiming
unconstitutional treatment under certain provisions of the Minnesota tax
law. The most significant issue involves a provision which provides a
special research and development credit only to domiciliary corporations.
The Department of Revenue has not determined the potential refund liability
were the plaintiffs and all similarly-situated taxpayers to prevail. Fourth,
the State has been sued by plaintiffs seeking certain special education
services in private, parochial schools. Unspecified damages, costs and
attorneys' fees are claimed and any relief granted could result in
additional expenditures for education programs. Adverse decisions in
the foregoing and other cases which individually or collectively may exceed
several hundred 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 any litigation affecting the State.

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, 1996, approximately $4.7 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 $1.40 billion for public health and welfare and $358.1
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, 1996, of the
$2.70 billion in General Fund receipts, sales taxes accounted for 40.0%,
individual income taxes for 27.4%, and corporate income taxes for 9.7%. 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 30 casinos operating in the
State as of June 30, 1996, fiscal year 1996 gaming license fees and gaming tax
revenues transferred to the General Fund for the State amounted to $110.4
million as compared to $128.8 million in fiscal year 1995. Additionally, $34.2
million representing 25% in gaming tax revenues have been dedicated to repayment
of bonds issued for construction of certain gaming-related highway projects.

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

<PAGE>

Department of Finance and Administration. In the fiscal year ending June 30,
1996, approximately 59.1% 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)
totaled approximately $159.5 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. Fiscal year 1996 revenue collections exceeded the
budgeted estimates by 0.77%. Commencing with fiscal year 1994, the aggregate
appropriation from the General Fund is limited to 98% of the sum of the official
revenue estimate and the estimated prior year ending cash balance. 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 May 1996, Mississippi's
unemployment rate was 6.3%, slightly above the State's 1995 level of 6.1%. The
nation's unemployment rate as of May 1996 was 5.6%.

As of May 1996 the manufacturing sector of the economy, the largest
employer in the State, employed approximately 245,000 persons or 22.6% 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 27,800, 26,400, 28,300 and 27,900,
respectively. Agriculture contributes significantly to the State's economy as
agriculture-related cash receipts amounted to $3.15 billion for 1994. The number
of persons employed by the agricultural sector of the State's labor force during
May of 1996 was 45,100. 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 4.7% in 1995 as compared to
a 5.0% increase for the United States. However, Mississippi's per capita income
of $16,531 in 1995 was approximately 73% of the national average. The number of
bankruptcies filed in Mississippi during 1996, on an annualized basis, is
13,946, a 17.8% increase over the 1995 level of 11,831.

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 1994 and 1995 fiscal

<PAGE>

years, the State issued general obligation bonds in amounts totaling $284.6
million and $311.9 million, respectively. In fiscal year 1996, the State issued
bonds totalling approximately $288.7 million. The total bond indebtedness of the
State has increased from a level of $432.5 million on July 1, 1987 to $1.25
billion as of July 1, 1996.

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 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

<PAGE>

percentage increase in the general price level (plus the value of new
construction and improvements), even if the assessed valuation of property in
the local governmental unit, excluding the value of new construction and
improvements, increases at a rate exceeding the increase in the general price
level.

School Desegregation Lawsuits. Desegregation lawsuits in St. Louis and
Kansas City continue to require significant levels of state funding and are
sources of uncertainty; litigation continues on many issues, notwithstanding a
1995 U.S. Supreme Court decision favorable to the State in the Kansas City
desegregation litigation, court orders are unpredictable, and school district
spending patterns have proven difficult to predict. The State paid $282 million
for desegregation costs in fiscal 1994, $315 million for fiscal 1995 and $274
million for fiscal 1996. This expense accounted for close to 7% of total state
General Revenue Fund spending in fiscal 1994 and 1995, and close to 5% in fiscal
1996.

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 1,945,813 and 1,016,457 residents, respectively,
constituting over fifty percent of Missouri's 1995 population census of
approximately 5,339,041. St. Louis is an important site for banking and
manufacturing activity, as well as a distribution and transportation center,
with nine 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 second
largest dollar volume of defense contracts in the United States in 1995 was
McDonnell Douglas Corporation which lost the number one position it held in 1994
by reason of the merger of the Lockheed and Martin companies. McDonnell Douglas
Corporation is the State's largest employer, currently employing approximately
20,000 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. On August 1,
1997, McDonnell Douglas Corporation became a wholly-owned subsidiary of The
Boeing Company. It is impossible to determine what effect, if any, the
acquisition of McDonnell Douglas Corporation by the Boeing Company will have on
the operations conducted by McDonnell Douglas Corporation. However, any shift or
loss of production operations now conducted in Missouri would have a negative
impact on the economy of the state and particularly on the economy of the St.
Louis metropolitan area.

<PAGE>

NEW JERSEY

RISK FACTORS--The following is a brief summary of factors affecting the
economy of New Jersey and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily
upon one or more publicly available offering statements relating to debt
offerings of state issuers, however, it has not been updated nor will it be
updated during the year. The fund has not independently verified the
information.

The State's 1997 Fiscal Year budget became law on June 30, 1996.

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 1997" refers to the year ending June 30, 1997.

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% in 1995 and 6.1% for the four month period from
May, 1996 through August, 1996. Despite an increase reported in December, 1995,
the average annualized unemployment rate remains at 6.4% for the fourth quarter
of 1995.

For the recovery period as a whole, May 1992 to August 1996, service-
producing employment in New Jersey has expanded by 228,500 jobs. Hiring has been
reported by food stores, auto dealers, wholesale distributors, trucking and
warehousing firms, utilities, business and engineering/management service firms,

<PAGE>

hotels/hotel-casinos, social service agencies and health care providers other
than hospitals. Employment growth was particularly strong in business services
and its personnel supply component with increases of 17,500 and 8,100,
respectively, in the 12-month period ending August, 1996.

In the manufacturing sector, employment losses slowed between 1992 and
1994. After an average annual job loss of 33,500 from 1989 through 1992, New
Jersey's factory job losses fell to 13,300 during 1993 and 7,300 during 1994.
During 1995, however, manufacturing job losses increased slightly to 9,100,
reflecting a slowdown in national manufacturing production activity. While
experiencing growth in the number of production workers in 1994, the number
declined in 1995 at the same time that managerial and office staff were also
reduced as part of nationwide downsizing. Through August 1996 layoffs of white
collar workers and corporate downsizing appear to be abating.

Conditions have slowly improved in the construction industry, where
employment has risen by 15,600 since its low in May 1992. Between 1992 and
1995, this sector's hiring rebound was driven primarily by increased
homebuilding and nonresidential projects. During 1996, public works projects
and homebuilding became the growth segments while nonresidential construction
lessened.

Nonresidential construction activity, as measured by contract awards, grew
by 9.7% in 1993, 19.6% in 1994 and 3.0% in 1995. More recently, nonresidential
building construction contracts fell by 20.5% in the first eight months of
1996. This decline is largely attributable to an abundance of large, one-time
contract awards during 1995, including a $202.9 million contract for the
construction of a state prison.

Residential construction contracts through August 1996, despite monthly
fluctuations, increased by 1.4% for the first eight months of 1996 as compared
to the first eight months of 1995 ($1,502 million and $1,481 million,
respectively). Nonbuilding or infrastructure construction rose robustly by
17.8% during this period. Despite these increases, total construction contracts
declined by 3.9% when comparing the first eight months of 1995 and 1996.

Improvements in overall employment opportunities and the economy in
general have led to increased consumer spending during the recovery. While
overall retail sales in New Jersey grew by only 1.6% during 1993, they performed
much better in 1994, advancing by 7.8% which exceeded the 7.5% growth registered
nationwide. During 1995, especially the winter months, consumer confidence and
actual consumer spending moderated both nationally and in the State. For all of
1995, retail sales in New Jersey grew by 2.3%. Retail sales regained momentum
in 1996 and have been on a moderately upward trend, rising to an annual rate of
$76.5 billion through June. The State's pickup in growth after a blizzard-
related January decline resulted in sales growth of 4.2% when comparing the
first six months of 1995 with those of 1996. The rising trend in retail sales
has translated into steady increases in retail trade jobs (both full- and part-
time) with a rise in retail employment from December 1995 to August 1996 of
6,900 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% but declined
by 4.4% in 1995. Through July, 1996 however, total new vehicle registrations
rose by 3.5% compared to the same time period in 1995.

Unemployment in the State through August 1996 has been receding.
According to the U.S. Bureau of Labor Statistics, the jobless rate dropped from
7.5% in 1993 to 6.8% in 1994 and to 6.4% in 1995. Subsequently, it has dropped
to 6.1% for the four-month period from May 1996 through August 1996.

The insured unemployment rate, i.e., the number of individuals claiming
benefits as a percentage of the number of workers covered by unemployment
insurance, declined from 3.9% during calendar years 1991 and 1992 to 3.3% during
1993 and then averaged 3.2% throughout 1994, 1995 and the first six months of
1996. As of August, 1, 1996, the State's unemployment insurance trust fund
balance stood at $2.1 billion.

The State has benefitted from the national recovery. New Jersey's
recovery is in its fifth year and appears to be sustainable now that the
national economy has "soft landed." The U.S. economy is in a period of steady,

<PAGE>

moderate growth, having slowed enough during the fourth quarter of 1995 and
first quarter of 1996 to avoid inflation, but not enough to slip into a
recession. While the latest national indicators show that economic growth
accelerated during the second quarter of this year, the inflation rate remained
low.

Business investment expenditures and consumer spending has increased
substantially in the nation as well as in the State. Capital and consumer
spending may very well continue to rise due to the sustained character of the
recovery, although the interest-sensitive homebuilding industry may provide only
a moderate amount of stimulus both nationally and in New Jersey. It is expected
that the employment and income growth that has and is taking place will lead to
further growth in consumer outlays. Reasons for cautious optimism in New Jersey
include increasing employment levels, a declining jobless rate, and a higher-
than-national level of per capita personal income.

If the nation's economic growth rate slows from the robust 4.7% growth in
the second quarter of 1996, business expansion could become somewhat more
subdued in New Jersey as the rest of 1996 unfolds. However, the State's economy
should have enough momentum to keep its trend line pointing upwards. Its growth
potential is not yet limited by the labor supply constraints beginning to affect
some other parts of the country.

Looking further ahead, prospects for New Jersey appear favorable. While
growth is likely to be slower than in the nation, the locational advantages that
have served New Jersey well for many years will still be there. Structural
changes that have been going on for years can be expected to continue, with job
creation concentrated most heavily in the service industries.

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.

Of the $16,278.7 million appropriated in Fiscal Year 1997 from the General
Fund, the Property Tax Relief Fund, the Gubernatorial Elections Fund, the Casino
Control Fund and the Casino Revenue Fund, $6,419.0 million (39.5%) was
appropriated for State Aid to Local Governments, $3,858.0 million (23.7%) is
appropriated for Grants-in-Aid, $5,175.7 million (31.8%) for Direct State
Services, $466.9 million (2.7%) for Debt Service on State general obligation
bonds and $379.1 million (2.3%) for Capital Construction.

State Aid to Local Governments is the largest portion of Fiscal Year 1997
appropriations. In Fiscal Year 1997, $6,419.0 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 $4,877.4 million, is provided for local elementary and secondary
education programs. Of this amount, $2,721.7 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 $601.1 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
$667.4 million on behalf of school districts as the employer share of the
teachers' pension and benefits programs, $247.2 million to pay for the cost of
pupil transportation, $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
$840.4 million in State Aid monies for Fiscal Year 1997. 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
$755.0 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 $5.7
million in other aid.

<PAGE>

Appropriations to the State Department of the Treasury total $212.4
million in State Aid monies for Fiscal Year 1997. The principal programs funded
by these appropriations are aid to county colleges ($128.8 million); the cost of
senior citizens, disabled and veterans property tax deductions and exemptions
($55.8 million); and aid to densely populated municipalities ($9.0 million) and
the State contribution to the Consolidated Police and Fireman's Pension Fund
($9.7 million).

Other appropriations of State Aid in Fiscal Year 1997 include welfare
programs ($340.6 million); and aid to county mental hospitals ($76.0 million).

The second largest portion of appropriations in Fiscal Year 1997 is
applied to Direct State Services: which supports the operation of State
government's 16 departments, the Executive Office, several commissions, the
State Legislature and the Judiciary. In Fiscal Year 1997, appropriations for
Direct State Services aggregate $5,175.7 million. Some of the major
appropriations for Direct State Services during Fiscal Year 1997 are detailed
below.

$602.1 million is appropriated for programs administered by the State
Department of Human Services. Of that amount, $439.2 million is appropriated for
mental health and mental retardation programs, including the operation of seven
psychiatric institutions and nine schools for the retarded.

$19.4 million is appropriated for administration of the Medicaid program;
$37.7 million for administration of the various income maintenance programs,
including Work First New Jersey; and $72.2 million for the Division of Youth and
Family Services, which protect the children of the State from abuse and neglect.

The Department of Labor is appropriated $55.5 million for the
administration of programs for workers' compensation, unemployment and
disability insurance, manpower development, and health safety inspection.

The Department of Health and Senior Services is appropriated $45.1 million
for the prevention and treatment of diseases, alcohol and drug abuse programs,
regulation of health care facilities and the uncompensated care program.

$732.3 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.

$908.4 million is appropriated to the State Department of Law and Public
Safety (excluding the Division of Juvenile Services) 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.

$57.6 million is appropriated for the programs operated by the Division of
Juvenile Services, including $19.7 million for the New Jersey Training School
for Boys and $14.8 million for the Juvenile Medium Security Center.

$159.4 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.

$179.9 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.

<PAGE>

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. In
fiscal year 1997, the amount appropriated to this purpose is $379.1 million.

The aggregate outstanding general obligation bonded indebtedness of the
State as of June 30, 1996 was $3,688,360,598. The appropriation for the service
obligation on outstanding indebtedness is $466.9 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.

Aside from its general obligation bonds, the State's "moral obligation"
backs certain obligations issued by the New Jersey Housing and Mortgage Finance
Agency, the South Jersey Port Corporation (the "Corporation") and the Higher
Education Assistance Authority. As of June 30, 1996, there was outstanding in
excess of $589 million of moral obligation indebtedness issued by such entities,
for which the maximum annual debt service was over $57 million as of such date.
The State provides the Corporation with funds to cover the debt service and
property tax requirements when earned revenues are anticipated to be
insufficient to cover these obligations.

At any given time, there are various numbers of claims and cases pending
against the State, State agencies and employees, seeking recovery 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.

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).

<PAGE>

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
economic growth in recent years. However, the rate of growth slowed
dramatically in 1996 from the boom levels of the 1992-1994 period. 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 June, 1997 and covering reports of
economic results for 1996 and the first quarter of 1997, 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 has continued to
increase, as well, further growth in employment and personal income is expected
to be well below the levels of the recent past.

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. 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 further
job losses are expected as a result of spending cutbacks by the Department of
Energy which impact the national laboratories at Sandia in Albuquerque and at
Los Alamos.

Employment in New Mexico's construction sector declined by 1.5% during
1996, influenced by the completion of numerous large construction projects,
including the expansion of Intel's manufacturing plant and the Cottonwood Mall
in the Rio Rancho area and a number of public works projects, and a large drop
in housing construction.

The rate of growth in manufacturing employment slowed during 1996. More
than 5,000 new jobs have been added by the manufacturing sector since 1990, led
by expansion of the Intel plant, Motorola, Philips Semiconductor and Sumitomo,
and the relocation of two significant manufactured housing facilities in the
Albuquerque MSA and numerous new food processing operations in the eastern part
of the State. However, overall growth in this sector during 1996 was only 1.8%,
a slight increase over 1995's rate of growth, but below the annual growth rates
in the 4% range that were achieved in the 1993-1994 period.

Mining employment was weak during 1996. The services and trade sectors
saw small advances during the year, with trade affected by a weak tourism year
and a slower rate of growth in real disposable income in New Mexico. The
government sector grew, with increases at the local government level offsetting
declines at both federal and state levels. The reclassification of employees of
enterprises owned by Indian tribes and tribal government into the local
government sector, from the services, construction and retail sectors,
benefitted local government employment statistics at the expense of the other
sectors.

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

<PAGE>

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, the rate of growth of the economy of the
Albuquerque MSA slowed dramatically during 1996. The Albuquerque MSA accounts
for almost 47% of the jobs in New Mexico.

Non-agricultural employment in the Albuquerque MSA increased at a rate of
1.7% during 1996, compared to 1995's 4.2%. The slowdown in growth was evident
across all sectors of the economy other than the local government sector-- for
which statistics were impacted by the reclassification of employees of Indian
enterprises noted above -- and the financial/insurance/real estate sector. 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 1995, services was the
fastest growth sector in the Albuquerque MSA, with employment increasing at a
rate of 8.7%. During 1996, the rate of growth slowed to 0.9%. 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 19.5 percent of the Albuquerque MSA's total
nonagricultural employment. Not included in this calculation are the 7,500 jobs
at Sandia National Laboratories and about 5,900 military jobs at Kirtland Air
Force Base. As of June 1996, the Albuquerque Public Schools system, Sandia,
Kirtland and the University of New Mexico 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.

In 1993 and 1994, the construction sector led the Albuquerque economy
spurred by low interest rates, pent up demand for housing and retail and public
works construction projects. During 1995, construction employment continued to
increase, at a rate of approximately 6.4%, following three consecutive years of
annual increases that were close to 20%. A dramatic change occurred during
1996, which saw construction employment actually decline by 0.9%, largely
because of a weak housing sector. Authorizations for single family units
declined slightly from prior year levels, but authorizations for multi-family
units saw a sharp reduction, off by 36.8% from the prior year.

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,
Sumitomo and Philips Semiconductor. Employment in the manufacturing sector
continued to increase during 1996, but at a significantly lesser rate (1.5%)
than the rate achieved during each of the three prior years. 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 yet another expansion is expected to add 1,200 new
manufacturing jobs, bringing Intel's total employment to almost 7,000 and making
it the largest private employer in New Mexico.

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

<PAGE>

1994, the most recent year for which the statistic is available. In 1994, annual
per capita personal income for the Albuquerque MSA, the State of New Mexico and
the United States was $19,899, $17,138 and $22,047, 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 659,855 for
1995. (The population of the State is estimated at 1,685,401.)

Outlook. As of early 1997, BBER projected moderate near-term prospects for
-------
the New Mexico state economy and pretty good prospects for the Albuquerque MSA.
At the state level, the two sectors that are expected to show significant growth
in the short term are services and manufacturing. Health and lodging services
are expected to be strong and growth in the business services sector will
reflect recent success in attracting telemarketing firms to the area.
Manufacturing growth will be supported by another major employment expansion at
Intel and the addition of major employers in manufactured housing, among others.
Construction employment is expected to show only minimal gains in 1997, as
housing construction continues to decline. Personal income is forecasted to
advance at a slower pace, at a rate closer to the national average.

For the Albuquerque MSA, the rate of expansion is expected to approximate
2.5%. Services and manufacturing are expected to lead the MSA economy. Personal
income is expected to gain only slightly in 1997 over the 5.4% level of 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.

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. For many years, there have been extended delays in
adopting the State's budget, repeated revisions of budget projections and often
significant revenue shortfalls (as well as increased expenses). These
developments reflect faster long-term growth in State spending than revenues and
the sensitivity of State revenues to economic factors, as well as its
substantial reliance on non-recurring revenue sources. The State's general fund
incurred 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,

<PAGE>

recalculating the State's pension fund obligations (subsequently ruled illegal),
hiring freezes and layoffs, reduced aid to localities, sales of State property
to State authorities, and additional borrowings (including until 1993 issuance
of additional short-term tax and revenue anticipation notes payable out of
impounded revenues in the next fiscal year). The State's general fund realized
surpluses of $671 million, $1.54 billion, $445 million and $1.4 billion for the
1993, 1994, 1996 and 1997 fiscal years and a $241 million deficit for the 1995
fiscal year.

Approximately $5.0 billion of State general obligation debt was
outstanding at March 31, 1997. State supported debt (restated to reflect LGAC's
assumption of $4.7 billion obligations previously funded through issuance of
short-term debt) was $37.1 billion at March 31, 1997, up from $9.8 billion in
1986. Standard & Poor's rates the State's general obligation bonds A (raised
from A- in August 1997 but still tied for lowest rating for any state). Moody's
rates State general obligation bonds A2. The State will submit a $2.4 billion
general obligation bond issue, dedicated for school construction, for voter
approval in November 1997. In July 1997, State officials approved issuance of
$7.3 billion in bonds by the Long Island Power Authority to finance a partial
takeover of the Long Island Lighting Company (including refunding LILCO
obligations from building the decommissioned Shoreham nuclear power plant; LILCO
agreed to invest $1.3 billion of the remainder on Long Island and to drop
property tax refund litigation against various Long Island localities). The
takeover is designed to reduce electric rates by at least 14% over 10 years; an
IRS ruling to waive capital gains tax on LILCO's gain and additional approvals
are needed. The Legislature in 1997 also increased the limits on certain
appropriation-backed debt for the Dormitory and Urban Development Authorities.

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

<PAGE>

To address a $3.9 billion projected budget gap for the fiscal year that
began April 1, 1996, in July 1996 the State adopted a budget that includes $1.3
billion of non-recurring measures. A surplus of $1.4 billion was realized, due
primarily to higher than expected revenue and reduced social service spending.

The financial plan for the 1998 fiscal year, adopted 126 days after it
began, proposes to use most of the 1997 surplus to close a budget gap estimated
at $2.3 billion. $11 billion of spending increases (5.4% in the current year or
twice the rate of inflation), primarily for local assistance including $2.3
billion for education, and $4.75 billion of tax cuts will be phased in over the
next five years, most after 1998. These features were sharply criticized by
bond raters and fiscal monitors as likely to create major financial pressures
beginning with the 1999 fiscal year (yet S&P subsequently increased its rating
of State general obligation debt as described earlier). Use of non-recurring
resources is estimated at $270 million. Implementing last year's Federal
welfare requirements, recipients under both State and Federal programs generally
will be required to work in exchange for benefits, and benefits will generally
terminate after 5 years. The City issued a letter to its principal union
pledging to provide adequate health and safety protections and that workfare
recipients were not intended to replace union employees. State benefits will be
denied to immigrants for the first year of U.S. residence; Mayor Giuliani
announced that the City will continue to provide benefits to legal new
immigrants (if needed) during this period. $530 million is reserved to help
balance the 1999 fiscal year budget. In August 1987, the President vetoed an
item in the Federal budget bill that would have sanctioned continued eligibility
of State tax on medical expenditures as an item for Federal reimbursement under
Medicaid; if this veto is not overridden, State expenses for the current fiscal
year would increase by about $200 million. The State projects budget gaps of
$1.68 billion and $1.35 billion for the next two fiscal years. State and other
estimates are subject to uncertainties including the effects of federal
legislation and economic developments.

The State normally adjusts its cash basis balance by deferring until the
first quarter of the succeeding fiscal year substantial amounts of tax refunds
and other disbursements. For many years, it also paid in that quarter more than
40% of its annual assistance to local governments. Payment of these annual
deferred obligations and the State's accumulated deficit was substantially
financed by issuance of short-term tax and revenue anticipation notes shortly
after the beginning of each fiscal year. The New York Local Government
Assistance Corporation ("LGAC") was established in 1990 to issue $4.7 billion of
long-term bonds over several years, payable from a portion of the State sales
tax, to fund certain payments to local governments traditionally funded through
the State's annual seasonal borrowing. The legislation will normally prevent
State seasonal borrowing until an equal amount of LGAC bonds are retired. The
State's last seasonal borrowing, in May 1993, was $850 million.

Generally accepted accounting principles ("GAAP") for municipal entities
apply modified accrual accounting and give no effect to payment deferrals. On an
audited GAAP basis, reflecting payments by LGAC to local governments out of
proceeds from bond sales, the general fund realized surpluses of $0.9 billion,
$0.4 billion and $1.9 billion for the 1994, 1996 and 1997 fiscal years and a
deficit of $1.4 billion for the 1995 fiscal year. The remaining accumulated
deficit at March 31, 1997 was $1.0 billion. The State asserts that the budget
is balanced over the 1997 and 1998 fiscal years, but use of the 1997 fiscal year
surplus to fund 1998 fiscal year expenses is projected to result in a $959
million deficit for the 1998 fiscal year.

For decades, the State's economy has grown more slowly than that of the
rest of the nation as a whole. Part of the reason for this decline has been
attributed to the combined State and local tax burden, which is among the
highest in the nation. The State's dependence on Federal funds and sensitivity
to changes in economic cycles, as well as the high level of taxes, may continue
to make it difficult to balance State and local budgets in the future. The total
employment growth rate in the State has been below the national average since
1984. The State lost 524,000 jobs in 1990-1992, and in 1996 State employment
remained 295,000 jobs lower than 1990.

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

<PAGE>

markets for several years and depended on a variety of fiscal rescue measures
including commitments by certain institutions to postpone demands for payment, a
moratorium on note payment (later declared unconstitutional), seasonal loans
from the Federal government under emergency congressional legislation, Federal
guarantees of certain City bonds, and sales and exchanges of bonds by The
Municipal Assistance Corporation for the City of New York ("MAC") to fund the
City's debt.

MAC has no taxing power and pays its obligations out of sales taxes
imposed within the City and per capita State aid to the City. The State has no
legal obligation to back the MAC bonds, although it has a "moral obligation" to
do so. MAC is now authorized to issue bonds only for refunding outstanding
issues and up to $1.5 billion should the City fail to fund specified transit and
school capital programs. S&P increased its rating of MAC bonds to A+ in April
1996. MAC plans to covenant not to issue additional parity or prior lien debt in
the future other than refunding bonds. The State also established the Financial
Control Board ("FCB") to review the City's budget, four-year financial plans,
borrowings and major contracts. The FCB is required to impose a review and
approval process of the proposals if the City were to experience certain adverse
financial circumstances. The City's fiscal condition is also monitored by a
Deputy State Comptroller.

From 1989 through 1993, the gross city product declined by 10.1% and
employment, by almost 11%, while the public assistance caseload grew by over
25%. The City's unemployment rate for the first half of 1997 was 9.7%, after
averaging 10.8%, 10.1%, 8.7% and 8.1% in 1992 through 1995. This is well above
the rest of the State and the nation as a whole. Even with new fraud detection
procedures (including fingerprinting) since January 1995, public assistance
recipients only receded to 1983 levels (about 900,000) in June 1997. A report
by the Citizens Budget Commission found that in 1996 most of the applicants were
eligible and were denied benefits due to administrative errors or reasons other
than fraud.

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

The City 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

<PAGE>

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

The City closed a projected $3.1 billion budget gap for the fiscal year
ended June 30, 1996. The Financial Plan reduced a wide range of City services.
City agency and labor savings were projected at $1.2 billion and $600 million
respectively. During the fiscal year, the Major implemented several additional
spending reductions as various proposals (including projected State and Federal
aid increases) failed to be implemented. An additional debt refinancing was also
made. Non-recurring measures (including a $250 million payment from the MTA in
exchange for an agreement to issue $500 million in bonds over the next four
years for transit improvements and a $300 million sale of tax liens) rose to
$1.3 billion. One of the Mayor's privatization proposals has been to sell or
lease City hospitals. In August 1997 the Mayor announced plans to rebuild
rather than sell the Queens Hospital Center. The Appellate Division of the
State Supreme Court ruled in September 1997 that the Health and Hospitals
Corporation exceeded its authority in entering into a 99-year lease for Coney
Island Hospital. It ruled that the State would have to amend the law
authorizing HHC to sell or lease City hospitals. In October 1995 S&P reduced
its rating on Health and Hospitals Corporation debt to BBB- (its lowest
investment-grade rating), citing City failure to articulate a coherent strategy
for the hospital system. Other proposals including mandatory managed care
programs for Medicaid recipients have been blocked. The City Comptroller
predicted that certain reductions in Medicaid and welfare expenditures may lead
to job reductions and higher costs for other programs. The Board of Education
also faced reductions of $265 million in State aid and $189 million in Federal
aid.

For the fiscal year ended June 30, 1997, the City faced a projected $2.6
billion gap including $1.7 billion of increased operating expenditures, $800
million of increased debt service and a $150 million decline in revenues. Gap-
closing measures in the Financial Plan included $1.2 billion of agency spending
reductions and extension of the personal income tax surcharge. In August 1996,
the Major directed City agencies to plan for $500 million in further spending
reductions. A surplus of over $1.2 billion, in large part because of the boom in
the financial sector, was used to prepay debt service due during the current and
1999 fiscal years.

For the fiscal year that began July 1, 1997, the City adopted a budget to
close a projected $1.6 billion gap, including $2.0 billion of non-recurring
measures. Risks include asset sales, additional State actions and control of
Board of Education budget imbalance without additional City aid.

Spending is projected to increase faster than revenue for the next three
years, leaving City-projected future budget gaps of $1.8 billion, $2.8 billion
and $2.6 billion, respectively, for the 1999, 2000 and 2001 fiscal years; fiscal
monitors have significantly higher estimates. 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 nearly
14,000 workers since January 1994, with wage and benefit increases and overtime,
wage costs continue to grow. Contracts with virtually all of the City's labor
unions expired in 1995. New labor agreements with unions for most of the City
employees froze wages until 1997 but commit the City to avoid layoffs until

<PAGE>

1998, increase wages by 11% over the next three years and fail to achieve any
significant productivity savings. Costs will increase by $1.2 billion for the
1999 fiscal year and over $2 billion each year thereafter.

Budget balance may also be adversely affected by the effect of the economy
on economically sensitive taxes. The City also faces uncertainty in its
dependence on Federal and State aid. Federal and State welfare reform provisions
may require additional training programs to satisfy workfare guidelines and also
additional City expenditures for immigrants disqualified. There can be no
assurance that City pension contributions will continue to be reduced by
investment performance exceeding assumptions. Other uncertainties include
additional expenditures to combat deterioration in the City's infrastructure
(such as bridges, schools and water supply), the impact of real estate prices on
City tax revenues, the costs of closing the Fresh Kills landfill (which may be
accelerated by pending litigation), 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 $2.2 billion, $2.4 billion and $2.4 billion of short-term
notes, respectively, during the 1995, 1996 and 1997 fiscal years. At March 31,
1997, there were outstanding $26.0 billion of City bonds (not including City
debt held by MAC), $3.8 billion of MAC bonds and $1.2 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 doubled since 1987, although total debt declined as a
percentage of estimated full value of real property. To avoid additional
financial demands on the 1997 fiscal year budget, the Major proposed borrowing
an additional $1.4 billion over the next four years for school repairs. The City
also anticipates spending about $1 billion over the next ten years on its
upstate watershed area in an effort to avoid building a filtration plant,
estimated to cost $7 billion; there can be no assurance that these measures will
satisfy Environmental Protection Agency water purity standards. To prevent the
City from reaching the constitutional limit on its general obligation debt
(based on real estate values), the State in 1997 authorized creation of the New
York City Transitional Finance Authority, to sell up to $7.5 billion of
additional bonds. Bonds will be backed by City personal income and sales tax
revenues, to fund capital projects. A lawsuit challenging the constitutionality
of the Authority is pending. The first issuance, expected in September 1997,
was rated A2 by Moody's and AA by S&P. Despite the new authority, City bond
issuances are now estimated to reach the debt limit before the end of the 2000
fiscal year. The State's proposed education construction bond proposal, if
approved by voters in November, could reduce these issuances by about $1
billion. Debt service is expected to consume 20% of projected tax revenues by
the 1999 fiscal year. The City's financing program projects long-term financing
during fiscal years 1998-2001 to aggregate $16.8 billion, including $7.1 billion
from the Transitional Finance Authority and $4.0 billion of Water Authority
Financing. Debt service is expected to reach 20% of City tax revenues by fiscal
year 1999, up from 12.3% in fiscal year 1990 and 14% in fiscal year 1995. The
City's latest Ten Year Capital Strategy plans capital expenditures of $45.0
billion during 1998-2007 (94% to be City funded).

Other New York Localities. In 1995, other localities had an aggregate of
approximately $19.0 billion of indebtedness outstanding. $102.3 million was for
deficit financing. In recent years, several experienced financial difficulties.
A Financial Control Board was established for Yonkers in 1984 and a Municipal
Assistance Corporation for Troy in 1995. In 1996, the State purchased debt
issued by Troy and Utica to avert defaults when those bonds were not bought by
others. Troy, Utica, Newburgh, Cohoes and Niagara Falls general obligations are
rated below investment grade. Buffalo, with a minimum investment grade rating,
is on CreditWatch with negative implications. Pending proposals to increase
State fiscal oversight of local government finances, tax lien securitization and
cash management were not adopted in the 1997 State legislative session. A March
1993 report by Moody's Investors Service concluded that the decline in ratings
of most of the State's largest cities in recent years resulted from the decline
in the State's manufacturing economy. Any reductions in State aid to localities
may cause additional localities to experience difficulty in achieving balanced

<PAGE>

budgets. County executives have warned that reductions in State aid to
localities to fund future State tax reductions are likely to require increased
local taxes. If special local assistance were needed from the State in the
future, this could adversely affect the State's as well as the localities'
financial condition. Most localities depend on substantial annual State
appropriations. Legal actions by utilities to reduce the valuation of their
municipal franchises, if successful, could result in localities becoming liable
for substantial tax refunds.

State Public Authorities. In 1975, after the Urban Development Corporation
("UDC"), with $1 billion of outstanding debt, defaulted on certain short-term
notes, it and several other State authorities became unable to market their
securities. From 1975 through 1987 the State provided substantial direct and
indirect financial assistance to UDC, the Housing Finance Agency ("HFA"), the
Project Finance Agency, the Environmental Facilities Corporation and other
authorities. Practical and legal limitations on these agencies' ability to pass
on rising costs through rents and fees could require further State
appropriations. In July 1996, the Public Authorities Control Board approved a
$650 million refinancing by the Empire State Development Corp. (formerly the
UDC) to bail out the deficit-ridden Job Development Authority. 17 State
authorities had an aggregate of $73.5 billion of debt outstanding at September
30, 1996, of which approximately $25.7 billion was State-supported. At March 31,
1997, approximately $0.3 billion of State public authority obligations was
State-guaranteed, $3.3 billion was moral obligation debt (including $2.2 billion
of MAC debt) and $22.5 billion was financed under lease-purchase or contractual
obligation financing arrangements with the State. Various authorities continue
to depend on State appropriations or special legislation to meet their budgets.

The Metropolitan Transportation Authority ("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. The
New York City Transit Financial plan submitted in May 1997 projects a TA surplus
for 1997. The Financial Plan forecasts cash-basis gaps of $50.9 million in 1999,
$90.8 million in 2000, and $130.8 million in 2001, and a surplus of $1.2 million
in 1998.

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 July 1996 the State
Legislature approved a $7.3 billion capital plan for 1997-1999, which includes
$3.5 billion to be raised by bonds backed by fares. The plan does not
contemplate further fare increases until 2000. The plan also projects $2.85
billion in expense reductions over the five years. Critics have questioned
whether many of the projected labor and other savings can be achieved. It is
anticipated that the MTA and the TA will continue to require significant State
and City support.

Litigation. The State and the City are defendants in numerous legal
proceedings, including challenges to the constitutionality and effectiveness of
various welfare programs, alleged torts and breaches of contract, condemnation
proceedings and other alleged violations of laws. Adverse judgments in these
matters could require substantial financing not currently budgeted. The State
estimates unfavorable judgments of $364 million, of which $134 million is
expected to be paid during the current fiscal year. Claims in excess of $380
billion were outstanding against the City at June 30, 1996, for which it
estimated its potential future liability at $2.8 billion, in addition to real
estate certiorari proceedings with an estimated liability of $336 million. City
settlements were $305 million in fiscal 1997, up from $175 million in fiscal
1990. Several actions seek judgments that, as a result of an overestimate by the
State Board of Equalization and Assessment, the City's real estate tax levy in
1993-1996 exceeded constitutional limits; if upheld, substantial tax refunds
would be due and this could also adversely affect the City's constitutional debt
limit.

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

<PAGE>

NORTH CAROLINA

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

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

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

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

Since 1994, the State has had a budget surplus, in part as a result of new
taxes and fees and spending reductions put into place in the early 1990s. In
addition, the State, like the nation, has experienced economic recovery during
the 1990s. The State budget is based upon estimated revenues and a multitude of
existing and assumed State and non-State factors, including State and national
economic conditions, international activity and federal government policies and
legislation. The unreserved General Fund balance at June 30, 1996, the end of
the 1995-96 fiscal year, was approximately $406 million, and the reserved
balance of the General Fund was approximately $765 million.

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

<PAGE>

In the 1996-97 Budget prepared by the Office of State Budget and
Management, it is projected that General Fund net revenues will increase 3% over
1995-96. This increase is expected to result primarily from growth in the North
Carolina economy, despite a tax reduction package enacted by the Legislature
during the 1996 legislative session. A preliminary report for 1996-97 net
revenues indicates that the actual revenue growth over 1995-96 was approximately
8%.

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 Superior 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 Superior Court denied defendants' motion to
dismiss, but was reversed by the state Court of Appeals.

On July 24, 1997, the North Carolina Supreme Court issued a decision in
the case, in which the Court held that the north Carolina Constitution
guarantees every child of the state an opportunity to receive a sound basic
education in North Carolina public schools, and defined the basic parameters of
a "sound basic education". The Court also held, however, that the Constitution
does not require substantially equal funding and educational advantages in all
school districts. The Court remanded the case to the Superior Court to
determine whether the plaintiffs could make a clear showing that the State Board
of Education has established and is administering a system that denies the
children of the State a sound basic education. The North Carolina Attorney
General's Office believes that sound legal arguments support the State's
position.

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.

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 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 State action dismissals subsequently were declared
void, and the federal court actions have been stayed pending the trial in state
court. The cases were consolidated for discretionary review by the State Supreme
Court which ruled the alteration to the retirement systems constitutes a breach
of the contract formed with the employee when hired. The Court further decided

<PAGE>

that the class represented by the plaintiffs may pursue claims for underpayments
for the three years preceding the commencement of their actions, plus interest
on such amount. The State Attorney General's Office has stated that payment of
such amounts were made from the state retirement systems and not from general
funds.

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) was 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
sought 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
appealed to the U.S. Supreme Court which held that the tax violated the Commerce
Clause of the U.S. Constitution, and remanded the case to the North Carolina
Supreme Court for consideration of possible remedies, including refunds. On
remand, the North Carolina Supreme Court determined that the Court of Appeals
was correct in finding that all stock was taxable and, moreover, that that tax
must be applied retroactively. The Court offered that the legislature could
"forgive" the tax, but the Court did not have this ability. Prior to the U.S.
Supreme Court decision, an additional lawsuit was filed by which plaintiffs
therein sued to obtain refunds of intangibles taxes paid for the tax years 1991
through 1994. Thereafter, the court dismissed the claims of those plaintiffs
who did not make a demand for refund as statutorily required, but awarded
taxpayers who timely demanded refunds full refunds with interest. On July 21,
1997, the North Carolina General Assembly ratified legislation providing a
refund to all taxpayers who paid intangibles tax on shares of stock from 1990
through 1994, who protested payment in a timely manner under applicable state
law, and whose refund claim was pending on the date the United States Supreme
Court struck down the tax. The amount of refunds is estimated at $155 million.

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 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. In May 1995, the trial court found that the repeal
of the tax exemption for state and local government retirement benefits that was
vested before August 1989 were unlawful and that such benefits remain exempt
from income taxation. Appeals have been taken from both sides and the North
Carolina Supreme Court has allowed discretionary review before hearing by the
Court of Appeals.

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. In addition, it is anticipated that the decision reached in this
case will govern the resolution of tax refund claims made by retired state and
local government employees for taxes paid on retirement benefit income for tax

<PAGE>

years after 1991. Furthermore, if the order of the Superior Court is upheld, its
provisions would apply prospectively to prevent future taxation of State and
local government retirement benefits that were vested before August 1989. The
North Carolina Attorney General's Office believes that sound legal arguments
support the State's position on the merits.

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.

This action is being held in abeyance pending the outcome in Bailey.
Should plaintiffs prevail in Bailey, such a result, these federal retirees
allege, would re-establish the disparity of treatment between state and federal
pension income which was held unconstitutional in Davis. Potential refunds
exceed $300 million.

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

General. The population of the State has increased 13% from 1980, from
5,895,195 to 6,656,810 as reported by the 1990 federal census and the State rose
from twelfth to tenth in population. The State's estimate of population as of
July 1996 is 7,322,317. Notwithstanding its rank in population size, North
Carolina is primarily a rural state, having only six municipalities with
populations in excess of 100,000.

The labor force has undergone significant change during recent years as
the State has moved from an agricultural to a service and goods producing
economy. Those persons displaced by farm mechanization and farm consolidations
have, in large measure, sought and found employment in other pursuits. Due to
the wide dispersion of non-agricultural employment, the people have been able to
maintain, to a large extent, their rural habitation practices. During the period
1980 to 1996, the State labor force grew about 30% (from 2,855,200 to
3,718,000). Per capita income during the period 1985 to 1995 grew from $11,870
to $21,103, an increase of 77.8%.

The current economic profile of the State consists of a combination of
industry, agriculture and tourism. As of December 1996, the State was reported
to rank eleventh among the states in non-agricultural employment and eighth in
manufacturing employment. Employment indicators have varied somewhat in the
annual periods since June of 1990, but have demonstrated an upward trend since
1991. The following table reflects the fluctuations in certain key employment
categories.

<TABLE>
<CAPTION>
Category
(all seasonally adjusted) June 1992 June 1993 June 1994 June 1995 June 1996
<S> <C> <C> <C> <C> <C>

Civilian Labor Force 3,495,000 3,504,000 3,560,000 3,578,000 3,704,000

Nonagricultural Employment 3,135,000 3,203,400 3,358,700 3,419,100 3,506,000

Goods Producing Occupations
(mining, construction and
manufacturing) 980,800 993,600 1,021,500 1,036,700 1,023,800

Service Occupations 2,154,200 2,209,800 2,337,200 2,382,400 2,482,400

Wholesale/Retail Occupations 715,100 723,200 749,000 776,900 809,100

Government Employees 513,400 515,400 554,600 555,300 570,800

Miscellaneous Services 638,300 676,900 731,900 742,200 786,100

Agricultural Employment 102,800 88,400 53,000 53,000 53,000
</TABLE>

<PAGE>

The seasonally adjusted unemployment rate in December 1996 was estimated to
be 3.8% of the labor force, as compared with 5.3% nationwide.

North Carolina's economy continues to benefit from a vibrant manufacturing
section. Manufacturing firms employ approximately 25% of the total non-
agricultural workforce. North Carolina has a higher percentage of manufacturing
workers than any state in the nation. The State's annual value of manufacturing
shipments totals $142 billion, ranking the State eighth in the nation. The State
leads the nation in the production of textiles, tobacco products, furniture and
fiberoptic cable, and is among the largest producers of pharmaceuticals,
electronics and telecommunications equipment. More than 700 international firms
have established a presence in the State. Charlotte is now the second largest
financial center in the country, based on assets of banks headquarters there.
The strength of the State's manufacturing sector also supports the growth in
exports; the latest annual statistics show $8.76 billion in exports, making
North Carolina one of the few states with an export trade surplus.

In 1995, the State's gross agricultural income of nearly $7.0 billion
placed it eighth in the nation in gross agricultural income. According to the
State Commissioner of Agriculture, in 1996 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, the production of cucumbers for
pickles, and net farm income; third in the value of poultry and egg products,
and greenhouse and nursery income; fourth in commercial broilers, peanuts,
blueberries and strawberries; and fifth in burley tobacco.

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 1995. The poultry industry is now the leading
source of gross agricultural income, at 29%, and the pork industry provides over
18% of the total agricultural income. Tobacco farming in North Carolina has been
and is expected to continue to be affected by major Federal legislation and
regulatory measures regarding tobacco production and marketing 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 eight 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 $45 billion annually to the State's
economy.

The State Department of Commerce, Travel and Tourism Division, reports that
in 1995 approximately $9 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 161,000 people were employed in
tourism-related jobs. The effects of two severe hurricanes in 1996 may have an
adverse effect on tourism in certain areas of the State.

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 1996. Standard &
Poor's reports that North Carolina's rating reflects the State's strong economic
characteristics, sound financial performances, and low debt levels.

<PAGE>

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 1991
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 then reached a new
high in the summer of 1996. 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 4.3% in June, 1997.

With 14.2 million acres in farm land, agriculture and related sectors are a
very important segment of the economy in Ohio, providing an estimated 935,000
jobs or approximately 15.9% of total Ohio employment.

Ohio continues to be a major "headquarters" state. Of the top 500
corporations (industrial, commercial and service) based on 1995 revenues as
reported in 1996 by Fortune magazine, 30 had headquarters in Ohio, placing Ohio
sixth as a "headquarters" state for corporations.

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

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

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

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

<PAGE>

1992-93 biennium with a balance of approximately $111 million and a cash balance
of approximately $394 million.

The GRF appropriations act for the 1994-95 biennium provided for total GRF
biennial expenditures of approximately $30.7 billion. Authorized expenditures in
fiscal year 1994 were 9.2% higher than in fiscal year 1993, and such
expenditures for fiscal year 1995 were 6.6% higher than in fiscal year 1994.
Fiscal year 1994 ended with a GRF balance of over $560 million. The 1994-95
biennium ending GRF balance was $928 million.

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

The GRF appropriations act for the current biennium passed the General
Assembly on June 25, 1997 and was signed by the Governor. The act provided for
total GRF biennial expenditures of over $36 billion. Necessary GRF debt service
was provided for in the act.

Because GRF cash receipts and disbursements do not precisely coincide,
temporary GRF cash flow deficiencies often occur in some months of a fiscal
year, particularly in the middle months. Statutory provisions provide for
effective management of these temporary cash flow deficiencies by permitting
adjustment of payment schedules and the use of total operating funds. In fiscal
year 1997, a GRF cash flow deficiency occurred in four months with the highest
being approximately $565 million. The OBM projects GRF cash flow deficiencies
will occur in some months in fiscal year 1998.

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

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

Not more than $1.2 billion in certain state highway obligations may be
outstanding at any time and not more than $220 million can be issued in a fiscal
year. As of August, 1997, approximately $170 million of such highway obligations
were outstanding. The authority to issue certain other highway obligations
expired in December, 1996; however, as of August, 1997 approximately $358
million of such highway obligations were outstanding. Not more than $100 million
in State obligations for coal development may be outstanding at any one time. As
of August, 1997, approximately $31 million of such coal obligations were
outstanding. Not more than $2.4 billion of State general obligation bonds to
finance local capital infrastructure improvements may be issued at any one time,
and no more than $120 million can be issued in a calendar year. As of August,
1997, approximately $827 million of those bonds were outstanding. Not more than
$200 million of natural resources bonds may be outstanding at any time, and no
more than $50 million can be issued in any year. As of August, 1997,
approximately $94 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

<PAGE>

secondary public school facilities. Debt service on the obligations is payable
from State resources.

A statewide economic development program assists with loans and loan
guarantees, and the financing of facilities for industry, commerce, research and
distribution. The law authorizes the issuance of State bonds and loan guarantees
secured by a pledge of portions of the State profits from liquor sales. The
General Assembly has authorized the issuance of these bonds by the State
Treasurer, with a maximum amount of $300 million, subject to certain
adjustments, currently authorized to be outstanding at any one time. A 1996
issue of approximately $168.7 million of taxable bonds refunded previously
outstanding bonds. The highest future fiscal year debt service on the
outstanding bonds, which are payable through 2022, is approximately $16 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 July 18, 1997, the Ohio Housing Financing Agency, pursuant
to that constitutional amendment and implementing legislation, had sold revenue
bonds in the aggregate principal amount of approximately $300.8 million for
multifamily housing and approximately $4.627 billion for single family housing.
A constitutional amendment adopted in 1990 authorizes greater State and
political subdivision participation in the provision of housing for individuals
and families. The General Assembly could authorize State borrowing for this
purpose by the issuance of State obligations secured by a pledge of all or a
portion of State revenues or receipts, although the obligations may not be
supported by the State's full faith and credit.

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

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

Original State basic aid appropriations for the 1992-93 biennium provided
for an increase in school funding compared to the preceding biennium. The
reduction in appropriations spending for fiscal year 1992 included a 2.5%
overall reduction in the annual Foundation Program appropriations and a 6%
reduction in other primary and secondary education programs. The reductions were
in varying amounts, and had varying effects, with respect to individual school
districts. State appropriations for primary and secondary education for the
1994-95 biennium provided for 2.4% and 4.6% increases in basic aid for the two
fiscal years of the biennium. State appropriations for primary and secondary
education for the 1996-97 biennium provided for a 13.6% increase in school
funding appropriations over those in the preceding biennium. State
appropriations for the current 1998-99 biennium provide for a 14.5% increase
over the previous 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 1994, 28
school districts took down loans aggregating approximately $41.1 million. In
fiscal year 1995, 29 school districts received loans totaling approximately
$71.1 million. In fiscal year 1996, 20 school districts have received loans
totaling approximately $87.2 million. In fiscal year 1997, 12 school districts
have received loans totaling approximately $113 million.

The Ohio Supreme Court concluded, in a decision released March 24, 1997,
that major aspects of the State's system of school funding are unconstitutional.

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The Court ordered the State to provide for and fund sufficiently a system
complying with the Ohio Constitution, staying its order for a year to permit
time for responsive corrective actions by the Ohio General Assembly. In response
to a State motion for reconsideration and clarification of its opinion, the
Court, on April 25, 1997, indicated that property taxes may still play a role
in, but can no longer by the primary means of, school funding. The Court also
confirmed that contractual repayment provisions of certain debt obligations
issued for school funding will remain valid until the stay terminates.

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 thirteen 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
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public retirement systems which provide retirement, disability retirement and
survivor benefits. Federal law requires newly-hired State employees to
participate in the federal Medicare program, requiring matching employer and
employee contributions, each now 1.45% of the wage base. Otherwise, State
employees covered by a State retirement system are not currently covered under
the federal Social Security Act. The actuarial evaluations reported by these
five systems showed aggregate unfunded accrued liabilities of approximately
$15,265.5 million 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 1997. As
of August, 1997, all but two bargaining units have entered into new agreements.

Health Care Facilities Debt. Revenue bonds are issued by Ohio counties and
---------------------------
other agencies to finance hospitals and other health care facilities. The
revenues of such facilities consist, in varying but typically material amounts,
of payment from insurers and third-party reimbursement programs, such as
Medicaid, Medicare and Blue Cross. Consistent with the national trend,
third-party reimbursement programs in Ohio have begun new programs, and modified
benefits, with a goal of reducing usage of health care facilities. In addition,
the number of alternative health care delivery systems in Ohio has increased
over the past several years. For example, the number of health insuring
corporations licensed by the Ohio Department of Insurance increased from 12 on
February 14, 1983 to 42 as of July 24, 1997. 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

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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
had outstanding $70.6 million in principal amount of urban renewal bonds as of
June 30, 1996. 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 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.

November 1996 Ballot Measures. Oregon voters will be asked to consider 23
ballot measures at the November 1996 general election. These ballot measures may
have direct and indirect impacts on the finances of the State and its municipal
institutions. The net financial effect of these ballot measures is not possible
to gauge at this time, but the approval of several of these ballot measures
(whether individually or cumulatively, if more than one ballot measure were
approved) could adversely effect the ability of Oregon issuers to service their
outstanding debt and to issue new debt.

Ballot Measure 47, for example, would reduce property taxes through the
1997-98 fiscal year based on prior year levels and would limit growth in
property taxes in subsequent years to 3 percent a year, with certain exceptions.
Ballot Measure 47 would also prohibit, without a vote of the people, alternate
local financing of government services or products paid in part or whole
historically by property taxes. Ballot Measure 47 would also require a majority
vote and 50 percent voter turnout to pass new property tax measures on any date
other than a general election. The State Legislative fiscal office estimates
revenue losses to local governments from Ballot Measure 47 at $472 million in
1997-98, $560 million in 1998-99, and increasing thereafter. This reduction in
local government revenues could have a significant impact on the ability of
local governments to service their outstanding debt.

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Ballot Measure 46 would require the vote of a majority of registered voters
to pass revenue measures; the current system requires only a majority of those
voting in an election to pass revenue measures. The new requirement would apply
to all proposed tax increases, including property tax operating levies and
levies for general obligation bond issues. If adopted, Ballot Measure 46 would
make the passage of taxation measures much more difficult, and would most likely
lead to fewer tax supported debt and operating levies.

The impact of other ballot measures is more indirect, with some ballot
measures projected by the State to result in net savings for the State and its
municipal institutions, and others projected to require additional expenditures.
The approval by voters of these ballot measures could cause a reduction in the
ratings for debt obligations issued by the State and its political subdivisions,
as well as by Oregon municipalities. Rating changes, if any, may also depend
upon the specific impact of the individual ballot measure or measures on the
revenues of the issuer and the effect of the ballot measures on the revenues
utilized to pay the debt service of the rated indebtedness.

Fiscal Matters. The State Department of Administrative Services expects
some slowing in Oregon's economy due in part to a shortage of skilled labor and
some decrease in the growth rate of the construction sector. The Department
projects job growth to be 4.1 percent in 1996 and 2.4 percent in 1997. 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 expansion of the semiconductor industry will remain
the driving force behind Oregon's economic growth. Strong export activity, broad
base service sector growth and growth in electronic jobs and overall high
technology manufacturing jobs should, according to the Department, also
contribute to Oregon economic growth. The Department expects that income,
population and employment growth will exceed the national average for the eight-
year period between 1995 and 2003.

The Department of Administrative Services reports that Oregon wage and
salary employment for the first quarter of 1996 increased at an annual rate of
4.8 percent, and projects an increase of 7.8 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 6.9 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.

The budget for the 1995-97 biennium includes a General Fund budget of
$7.375 billion, representing an increase of 15.3% over 1993-95 expenditures.
Total appropriations for all funds in the 1995-97 budget are $22.262 billion,
representing an increase of 8.6% 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 $658.1 million in bonds, notes
and certificates of participation ("COPs") during the fiscal year ended June 30,
1996, an increase of 49.3% from the $440.8 million in bonds, notes and COPs
issued in the fiscal year ended June 30, 1995. Of the fiscal year 1995-96 total,
$174.6 million were general obligations, $213.6 million were revenue

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obligations, and $269.9 million were COPs. During the fiscal year ended June 30,
1996, local Oregon governments issued approximately $1.051 billion in debt, a
decrease of approximately 20.2% from the fiscal year ended June 30, 1995
issuances of $1.317 billion.

The State of Oregon had outstanding $3.697 billion in general obligations
at June 30, 1996 representing a decrease of 12.7% from the total outstanding of
$4.235 billion at June 30, 1995. Oregon local governments had $7.302 billion in
total debt outstanding at June 30, 1995, representing an increase of 8.7% from
the total outstanding of $6.718 billion at June 30, 1995.

At June 30, 1996, the State of Oregon had outstanding approximately $2.837
billion of Oregon Veterans' Welfare Bonds and Notes, representing a decrease of
14.9% from the total outstanding of $3.333 billion at June 30, 1995. The
Veterans' Welfare Bonds and Notes, which are utilized to finance the veterans'
mortgage loan program, are administered by the Oregon Department of Veterans'
Affairs, and 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 $6.024 billion of
the total General Fund revenues of $7.127 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 $470.9 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 1995-96 fiscal year totaled
$344.2 million, with $75.3 million of that amount having been made available to
the State. State lottery officials also report that the State's video poker
program generated revenues of $355.7 million during the 1995-96 fiscal year,
with $202.7 million of that amount being made available to the State. State
lottery officials currently forecast $354.4 million from regular lottery sales
and $340.6 million from video poker sales for the 1996-97 fiscal year, with
$80.0 million and $187.3 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 $698.6 million and from
video poker sales will be $696.3 million, with $155.3 million and $390.1 million
of those amounts, respectively, projected to be available to the State. State
Lottery officials expect video poker revenues to remain uncertain due to
increasing 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.

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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") that were held in SAIF's
Industrial Accident Fund. The State was sued in litigation challenging the
legality of the transfer of this surplus from SAIF's Industrial Accident Fund 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.

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 should 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 at the rate Industrial Accident Fund investments have earned since
July 1, 1982. 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 drafted a settlement agreement, which the trial court approved
on February 26, 1996. Under the agreement, the State is obligated to pay a total
of $225 million to the Industrial Accident Fund. Of that amount, $65 million has
already been paid, $80 million must be paid at the end of the 1997 legislative
session, and an additional $80 million must be paid at the end of the 1999
legislative session. If the State Legislature fails to appropriate the required
amounts, the State will be in breach of the agreement and subject to additional
court action from the plaintiffs.

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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 $1.5 to $2 million plus attorneys' fees. Based upon a
recent decision by the United States Supreme Court that expands the scope of
Eleventh Amendment immunity of states from suits in federal court, the State has
asked the United States Court of Appeals for the Ninth Circuit to remand one of
these cases for entry of a judgment dismissing the action for lack of subject
matter jurisdiction and anticipates filing a similar motion in the second case.
The State anticipates the Court of Appeals will grant its motion and plaintiffs
will refile their cases in state court.

4. Taxation of Federal Retiree Pension Benefits. Several cases have
been filed in the Oregon Tax Court and the Oregon Circuit Courts alleging that a
1991 increase in the Public Employees' 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 Oregon Supreme Court upheld a ruling by the Oregon
Tax Court in Ragsdale v. Dept. of Revenue that the increase in PERS benefits did
not violate the Davis holding, and is constitutional; the United States Supreme
Court has denied review of this case.

Suits involving the same plaintiffs and issues have also been filed in the
state circuit court and in the tax court on behalf of a group of federal
retirees seeking refunds of taxes paid to the State. The case has been stayed in
circuit court and is being litigated in the tax court. In 1995, the Oregon
Legislature enacted House Bill 3349 ("HB 3349"), which provides a remedy to PERS
beneficiaries. The federal retirees are also challenging the provisions of HB
3349. The State has indicated that it is not possible to estimate the potential
impact of liability under any of the PERS cases at this time.

An additional case challenging the PERS benefit increase on the same
grounds that the court ruled against in the Ragsdale case, and seeking to
invalidate HB 3349, was filed in Multnomah County. The court ruled in favor of
the State, but plaintiffs are seeking clarification and reconsideration of the
judge's ruling.

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 of Oregon. In Hughes, the Court ruled that a statutory amendment repealing
a tax exemption for retirement benefits violated the constitutional provision
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; the Oregon Legislature failed to fashion a remedy, however,
in its 1993 session. 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 HB 3349, which provides a remedy to
PERS beneficiaries by granting PERS members increased benefits as compensation
for damages resulting from the taxation of the PERS benefits. The bill also

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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 defenses 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 for any
amounts they must pay toward a remedy. The passage of HB 3349 does not moot the
claims of local governments. 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. In
addition, 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,
the Court held that 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 appealed 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 premium 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 $27.4 million to
$174.6 million.

The 1995 Oregon Legislative Assembly passed House Bill 2855 ("HB 2855")
which equalizes the taxation of foreign and domestic insurers. Most insurance
companies have dismissed their cases due to the passage of HB 2855. One
insurance company, however, has not dropped its counterclaim on the equal
protection issue. If this case proceeds to trial and succeeds, it could open the
door to recovery by other insurers who are not a party to the present action and
have not allowed the case to be dismissed against them with prejudice. If such
insurers do bring cases, the State could be subject to potential refund
liability of several million dollars per year for each year that must be
refunded. In February 1996, the court ruled on cross motions for summary
judgment. The court ruled in favor of the State on all issues except the years
for which a retaliatory tax could be imposed, with the result that the State
will be unable to collect approximately $750,000. No judgment has been entered
in the case. The parties are pursuing settlement negotiations to arrive at a
consent decree.

7. Liability for PERS Losses. Four separate plaintiffs have filed
lawsuits against the State seeking reimbursement on behalf of the Public
Employees' Retirement Fund (the "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 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

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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. Upon reconsideration, however, the
Oregon Supreme Court dismissed the review as improvidently granted. The Court of
Appeals ruling that affirmed the trial court's dismissal of the case, therefore,
stands as the final resolution of these cases.

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 plaintiffs have filed an appeal of the court's ruling with the United States
Court of Appeals for the Ninth Circuit.

9. Liability for Radiation Experiments. A class action suit has been
filed in federal court on behalf of inmates and their families for injuries
sustained by inmates in radiation experiments in the 1960s and 1970s. The former
head of the medical services for the Oregon State Police has been named as a
defendant. Plaintiffs seek $250 million in damages. Although the State believes
it is too early to determine the actual amount plaintiffs are likely to recover,
the State believes it is unlikely they will recover the full amount sought.
According to the State, the State intends to assert defenses based on statute of
limitation and ultimate repose.

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, 1996, the General Fund
had a surplus of $635.2 million.

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

Certain litigation is pending against the Commonwealth that could adversely
affect the ability of the Commonwealth to pay debt service on its obligations
including suit relating to the following matters: (i) the ACLU has filed suit in
federal court demanding additional funding for child welfare services; the
Commonwealth settled a similar suit in the Commonwealth Court of Pennsylvania
and is seeking the dismissal of the federal suit, inter alia because of that
settlement. After its earlier denial of class certification was reversed by the
Third Circuit Court of Appeals, the district court granted class certification
to the ACLU, 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 county funding of the judicial system
to be in conflict with the constitution of the Commonwealth, but stayed judgment
pending enactment by the legislature of funding consistent with the opinion, 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. The Court issued a writ in mandamus and
appointed a special master in 1996 to submit a plan for implementation, which it

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intended to require by January 1, 1998. In January 1997, the Court established
a committee, consisting of the special master and representatives of the
Executive and Legislature, to develop an implementation plan; (iii) litigation
has been filed in both state and federal court by an association of rural and
small schools and several individual school districts and parents challenging
the constitutionality of the Commonwealth's system for funding local school
districts--the federal case has been stayed pending the resolution of the state
case; a trial in the state case commenced in January 1997 and has recessed; no
briefing schedule or date for oral argument has yet been set (no available
estimate of potential liability); (iv) Envirotest/Synterra Partners
("Envirotest") filed suit against the Commonwealth asserting that it sustained
damages in excess of $350 million as a result of investments it made in reliance
on a contract to conduct emissions testing before the emission testing program
was suspended. Envirotest has entered into a Settlement Agreement to resolve
Envirotest's claims that will pay Envirotest a conditional sum of $195 million
over four years; (v) in litigation brought by the Pennsylvania Human Relations
Commission to remedy unintentional conditions of segregation in the Philadelphia
public schools, the School District of Philadelphia filed a third-party
complaint against the Commonwealth asking the Commonwealth Court to require the
Commonwealth to supply funding necessary for the District to comply with orders
of the court; the Commonwealth Court found that the School District was entitled
to receive an additional $45.1 million for the 1996-97 school year, but the
Pennsylvania Supreme Court vacated this decision in September 1996; in January
1997, the Supreme Court ordered the parties to brief certain issues, but no
further decision by the Supreme Court has been issued (no available estimate of
potential liability); and (vi) in February 1997, five residents of the City of
Philadelphia, joined by the City, the School District and others, filed a civil
action in the Commonwealth Court for declaratory judgment against the
Commonwealth and certain Commonwealth officers and officials that the defendants
had failed to provide an adequate quality of education in Philadelphia, as
required by the Pennsylvania Constitution (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 1988 through 1992 and, while its general financial
situation has improved, the City is still seeking a long-term solution for its
economic difficulties. The audited balance of the City's General Fund as of June
30, 1996 was a surplus of approximately $118.5 million up from approximately
$80.5 million as of June 30, 1995.

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

THE TENNESSEE TRUST

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. The State's fiscal year runs from July 1 through June
30.

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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. 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 indexes 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. During the latter half of
1995 and throughout calendar year 1996, the State's economy generally became
inconsistent in its performance. However, many experts believe that the State
will achieve modest economic gains for fiscal year ending June 30, 1997.

The Tennessee index of coincident economic indicators, which gauges current
economic conditions throughout the State, has steadily risen each quarter
beginning the third calendar quarter of 1991 except for the second quarter of
calendar year 1996 where the coincident index declined slightly. For calendar
year 1994 the coincident index rose approximately 6.20% over 1993 figures, while
1993 figures increased approximately 4.27% over 1992 figures, and 1992 figures
showed a 2.45% increase over the previous year's figures. In 1995, figures for
the coincident index showed a 2.97% increase over 1994 figures. In 1996, figures
for the coincident index were up 2.18% over 1995 annual figures. No monthly
figures for the coincident index are currently available for 1997.

Tennessee taxable sales were approximately $44.16 billion in 1991,
approximately $46.96 billion in 1992, approximately $50.64 billion in 1993,
approximately $55.32 billion in 1994, approximately $59.65 billion in 1995 and
approximately $63.01 billion in 1996, representing percentage increases of 1.4%,
6.4%, 7.8%, 9.3%, 7.8%, and 5.6%, respectively, over the previous year's total.
No Tennessee taxable sales figures are presently confirmed for 1997.

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.
Seasonably-adjusted personal income grew approximately $6.89 billion from
calendar year 1993 averages to calendar year 1994 averages, representing an
approximate 7.03% increase, and grew approximately $6.46 billion from calendar
year 1994 averages to calendar year 1995 averages, representing an approximate
6.42% increase. Comparative figures for calendar year 1996 versus calendar year
1995 are not yet available.

From 1983 to 1993 Tennessee's per capita income 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%. In 1995, the year
for which the most current data is available, per capita income in Tennessee
registered $21,038 which equaled approximately 90.6% of the national level. For
the fiscal year ended June 30, 1996, however, Tennessee remained the leading
state in the nation in household bankruptcy filings (1 in every 45 households)
with a rate more than twice the national average (1 in every 93 households).

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. At the end of calendar year 1995, the State's unemployment
rate stood at 5.2% with the national rate at 5.6% and at December 1996 the
state's unemployment rate had declined slightly to 5.0% with the national rate
at 5.3%. There currently is no unemployment data for 1997. For the four-year
period beginning 1991 and ending 1994, average annual unemployment in Tennessee
steadily decreased, from 6.6% in 1991, to 6.4% in 1992, to 5.7% in 1993 to 4.8%
in 1994. However, in 1995 the average annual Tennessee unemployment rate rose to
5.2% but has since declined again to 4.9% for calendar year 1996. 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 600,000-700,000 new jobs. These projections for Tennessee compare
favorably to the projections for national employment growth of 20.5% over the
same period.

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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
20-25 years through increases in service sector and trade sector employment and
manufacturing employment in Tennessee has steadily declined on a percentage of
work force basis. Service sector employment in Tennessee 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 in the period 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 1996 from approximately 2.18
million persons to approximately 2.60 million persons, representing percentage
increases of approximately 2.8%, 3.7%, 4.0%, 3.3% and 4.0% for 1992, 1993, 1994,
1995 and 1996, 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
each of the trade and service sectors and approximately 15% in government. No
data is currently available for 1997 non-agricultural employment figures.

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, 539,000 persons in 1994,
543,000 persons in 1995, and 531,000 persons in 1996. Comparatively, these
figures represent the following percentage changes from the previous year's
figures: approximately 2.4% (1992 vs. 1991), 2.7% (1993 vs. 1992), 1.9% (1994
vs. 1993), 6.5% (1995 vs. 1994) and -2.28% (1996 vs. 1995). No manufacturing
employment figures are currently available for 1997.

The Tennessee index of leading economic indicators acts as a signal of the
health of the State's economy four 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. In 1995, figures for the leading
index rose a very small .02% over 1994 numbers. In this most recent year, the
1996 leading index average showed an increase of .84% over the 1995 leading
index average.

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. Calendar year 1996 figures are unconfirmed
at the time of this publication. The State's rainy-day fund remained constant
from December 1994 to December 1996 at approximately $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, 1996, the
State's population was estimated at approximately 5.4 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.

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 information regarding 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

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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.

TENNESSEE TAXES

In the opinion of Hunton & Williams, Knoxville, Tennessee, special counsel
on Tennessee tax matters, under existing Tennessee law and assuming that (i) the
Tennessee Trust is a grantor trust under the grantor trust rules of Sections
671-677 of the Code and (ii) not less than 75% of the value of the investments
of the Tennessee Trust are in any combination of bonds of the United States,
State of Tennessee, or any county or any municipality or political subdivision
of the State, including any agency, board, authority or commission of the State
or its subdivisions:

1. The Tennessee Trust will not be subject to the Tennessee individual
income tax, also known as the Hall Income Tax; the Tennessee corporate income
tax, also known as the Tennessee Excise Tax, or the Tennessee Franchise Tax.

2. Tennessee Code Annotated

Section 67-2-104(q) specifically exempts from the Hall Income Tax
distributions from the Tennessee Trust to Holders of Units to the extent such
distributions represent interest on bonds or securities of the United States
government or any agency or instrumentality thereof or on bonds of the State of
Tennessee, or any county, municipality or political subdivision thereof,
including any agency, board, authority or commission. The Tennessee Department
of Revenue has taken the administrative position that distributions attributable
to interest on obligations issued by Puerto Rico and Guam are exempt from the
Hall Income Tax.

3. The Tennessee Trust will not be subject to any intangible personal
property tax in Tennessee on any Debt Obligation in the Tennessee Trust. The
Units of the Tennessee Trust also will not be subject to any intangible personal
property tax in Tennessee but may be subject to Tennessee estate and inheritance
taxes.

Holders of Units should consult their own tax advisor as to the tax
consequences to them of an investment in and distributions from 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 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. Texas has, however,
added 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. Recent oversupplies of certain types of computer chips and other computer
components have had, however, an adverse effect on the high-tech industry in
Texas and the Texas economy. Any major downturns in this industry would likely
hamper further economic growth in Texas in the near future.

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.
Exports of goods and services to Central and South America, as well as elsewhere
in the world, are becoming an increasingly important factor in the Texas
economy. 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

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estimated that as much as one-half of a percentage point in the growth of the
Texas economy forecasted for 1996-1997 fiscal biennium by the state Comptroller
of Public Accounts could be lost as a result of the fiscal crisis in Mexico that
has occurred over the past few years. That estimate was made based on an
anticipated 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. Texas
exports to Mexico in 1995, in fact, are estimated to have dropped to $21.9
billion, a decrease of $2 billion from the level of exports to Mexico in 1994.
Retail sales and trade in the border region was also adversely affected.
Although the Mexican economy has improved in the last year, the failure of the
Mexican economy to recover fully from its economic crisis could result in
additional unemployment, less growth in the Texas gross state product during
1996 and reduced tax revenue for the state.

The federal Base Closure and Realignment Commission has made decisions in
the recent past that 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 in the significant Hispanic population of metropolitan San
Antonio by 73%. In addition, three other metropolitan areas in Texas may be
affected by the actions of the commission. State officials and members of the
Texas Congressional delegation have been working to reduce the adverse effect of
the Commission's actions, both through attempts to save jobs and by otherwise
reducing community dependence on defense establishments. There is no way to
predict accurately at this time the effect these closures may ultimately have on
the Texas economy generally and economy of the San Antonio metropolitan region
in particular.

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

During Texas' 1996 fiscal year ended August 31, 1996, Texas expended almost
$14.7 billion on health and human services and for the first six months of the
1997 fiscal year expended over $7 billion on health and human services. In
fiscal 1996, Texas received over $11.7 billion in federal funding for all
purposes, which constituted 24.3% of all state revenues for that fiscal year.
Generally, over half of the federal funding received by Texas in any fiscal year
is allocated to health and human services programs provided and administered by
Texas. The welfare reform legislation adopted by the United States Congress and
signed into law by President Clinton in August, 1996, provides for limits on Aid
to Dependent Children benefits, reduces food stamp benefits and prohibits the
provision of food stamps and Supplemental Security Income to legal immigrants.
In addition, certain limits are imposed on the amount of lifetime benefits that
can be paid to any recipients of welfare benefits. The legislation also provides
for block grants of funds from the federal government and for the states to be
able to fashion programs for the use of those funds. Although the ultimate
effect of the new federal law on Texas' public assistance programs is unclear,
with its high number of legal immigrants and dependence of poorer Texans on food
stamps rather than other types of assistance, the new law may have a
disproportionate effect on Texas' public assistance programs. Formulas for the
allocation of block grant funds have typically favored states with demographics

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different from those of Texas with its rapidly increasing population and high
incidence of poverty among its population. Texas has typically provided low
levels of assistance for the working poor, with the assistance given being
centered on the provision of food stamps to this group. In addition, one
estimate has concluded that in 1995, Texas had a total of 187,000 legal
immigrants who were receiving food stamps and 53,000 who were receiving
Supplemental Security Income. If Texas continues to provide assistance to these
groups at current levels of spending, even with block grants from the federal
government, it is anticipated that such public assistance programs would
adversely affect state finances. The welfare reform initiatives are also
expected to result in additional requirements that Texas provide additional job
training to its residents, while the federal government will provide less aid to
subsidize that job training. The Texas Workforce Commission estimates that in
1997 Texas will be required to provide work activities for an additional 29,000
clients (who are public assistance recipients) beyond the prior federal
requirements. Under the welfare reform law, within five years, Texas must have
50 percent of its welfare recipients working at least 30 hours per week or lose
up to five percent of its federal funds that are used to fund public assistance
programs. Such loss of funds would be required to be made up out of the state's
general revenues. It is possible that under the new federal welfare law, Texas
will lose substantial amounts of federal funding of its public assistance
programs, placing even greater strains on Texas' state and local finances if
public assistance is to continue at current levels. However, it is impossible to
predict at this time what the long term effect of this new legislation will be
on the Texas economy.

During the first half of 1996, many parts of Texas suffered a severe
drought. In some areas of Texas, the drought of 1996 was a continuation of a
drought that started in 1994. The drought has had a substantial effect on Texas'
$15 billion farming and ranching industry. As of April 1996, 115 of Texas' 254
counties had qualified for low-interest loans from the federal government. In
addition, 219 counties were eligible for the Emergency Feed Program, a program
that is expected to be eliminated under the new federal farm bill. Hardest hit
by the drought have been cattle ranchers and wheat farmers. Cattle ranchers have
experienced a shortfall in feed for their cattle, forcing them, where possible,
to acquire feed for their herds from commercial sources in amounts significantly
greater than in prior years. In addition, wheat farmers in Texas are expecting a
wheat crop of only 57 million bushels in 1996, about half a normal year's
production. The Rio Grande Valley has suffered from the drought with its
important citrus, cattle and cotton industries being threatened. In addition,
the drought has emphasized the concerns that the lower rainfall levels, coupled
with increased water use for all purposes, has left many regions of Texas with
substantially reduced fresh water resources. If Texas continues to have the
annual rainfalls of the levels experienced in the last few years, the
availability of water will continue to adversely affect Texas' agricultural and
other industries, as well as the municipal water resources for some Texas cities
such as San Antonio and Corpus Christi. Such water shortages may have other
effects on the resources of the Texas state government, such as a need to expend
governmental resources on costly water management projects. In addition, such
water shortages could affect population growth in Texas, as well as Texas'
continued ability to attract businesses to locate in Texas.

Initial steps have been taken to deregulate the electric power utilities in
Texas. Although the major electric utilities in Texas have not been deregulated,
certain electric power cooperatives have been deregulated, and it is expected
that further deregulation will occur. Although the deregulation of electric
utilities is anticipated to lower the cost of electricity to consumers
ultimately, consumers are expected to bear a substantial portion of the costs of
any transition to a deregulated industry. Such costs could have a short term
adverse effect on the ability of Texas to attract new businesses to locate in
Texas and to create the new jobs needed to provide work for the growing Texas
workforce.

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 June 30, 1996, 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.

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State Finances. In its fiscal year ended August 31, 1996, the Texas state
government's total net revenue exceeded its total net expenditures by
approximately $6.6 billion, reversing the prior year's experience in which total
net spending exceeded total net revenues by approximately $655 million. 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 1996-
1997 biennium's budget is related to increased spending for public education,
health and human services and public safety and criminal justice. Current
revenue estimates by the Comptroller of Public Accounts anticipate revenues of
$81.4 billion for the 1996-1997 biennium. While state government officials have
based the 1996-1997 biennium budget on forecasts of these revenues, 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 Texas Legislative Budget Board, which prepares estimates that are a
starting point from which the Texas biennial appropriations act is developed by
the Texas Legislature, has initially proposed approximately $83.24 billion in
appropriations for expenditures by the Texas state government in the 1998-1999
biennium.

The two major sources of state revenue are state taxes and federal funds.
Other revenue sources include income from licenses, fees and permits, interest
and investment income, the state lottery, income from sales of goods and
services and land income (which includes income from oil, gas and other mineral
royalties as well as from leases on state lands). The major sources of state
government tax collection are the sales tax, the sales and rentals taxes on
motor vehicles and interstate carriers, and the franchise tax.

Texas currently has a relatively low state debt burden compared to other
states, ranking thirty-third among all states and ninth among the ten most
populous states in net tax-supported debt per capita, according to reports
published in 1996. However, the debt service of Texas that is payable from
general revenues has grown significantly since 1987. At the end of Texas' fiscal
year 1996, the state debt paid from general revenue was $3.04 billion. During
the 1994-95 budget period, debt service from general revenue averaged $286
million annually or 1.7 percent of available general revenue after
constitutional and other restrictions. Texas has the potential to substantially
increase its debt burden, considering only the bond authorization that was
unused in August, 1996. At August 31, 1996, approximately $1.04 billion in bonds
payable from general revenue had been authorized by the state legislature, but
not issued. While Texas law limits the amount of tax-supported debt that Texas
may incur to five percent of average annual general revenue fund revenues, as of
August 31, 1996, the outstanding debt-to-limit ratio was only 1.9 percent at
that date. If all authorized bonds had been issued as of that date, the debt-to-
limit ratio would have increased to 2.7 percent. The amount of tax-supported
bonds issued by the State of Texas and its instrumentalities did not materially
increase in fiscal 1996 over 1995, reversing a trend of significant increases in
the amount of long-term tax-supported debt obligations of the State of Texas
over the prior two years.

Of greater concern is the fact that Texas ranks second in the local
government debt per capita according to the latest Bureau of Census information
available (which is from 1993 and 1994). Local government debt per capita in
Texas was then $3,261 compared to an average of $2,456 per capita for the ten
most populous states. As of August 31, 1996, the total tax-supported long-term
debt of Texas' local governments was estimated to be approximately
$27,821,000,000. During fiscal 1996, local governments issued an additional
$5.80 billion of new money debt obligations, including tax-supported and
revenue-supported obligations.

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

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limitation on the amount of indebtedness which may be incurred as counties and
cities may never incur indebtedness which cannot be satisfied by revenue
received from taxes imposed within the tax limits. The same requirement is
generally applicable to indebtedness of the State of Texas. However, voters have
authorized from time to time, by constitutional amendment, the issuance of
general obligation bonds of the state for various purposes.

The State of Texas cannot itself impose ad valorem taxes. Although the
state franchise tax system does function as an income tax on corporations,
limited liability companies and certain banks, the State of Texas does not
impose an income tax on personal income. Consequently, the state government must
look to sources of revenue other than state ad valorem taxes and personal income
taxes to fund the operations of the state government and to pay interest and
principal on outstanding obligations of the state and its various agencies.

To the extent the Texas Debt Obligations in the Portfolio are payable,
either in whole or in part, from ad valorem taxes levied on taxable property,
the limitations described below may be applicable. The Texas Constitution limits
the rate of growth of appropriations from tax revenues not dedicated to a
particular purpose by the Constitution during any biennium to the estimated rate
of growth for the Texas economy, unless both houses of the Texas Legislature, by
a majority vote in each, find that an emergency exists. In addition, the Texas
Constitution authorizes cities having more than 5,000 inhabitants to provide
further limitations in their city charters regarding the amount of ad valorem
taxes which can be assessed. Furthermore, certain provisions of the Texas
Constitution provide for exemptions from ad valorem taxes, of which some are
mandatory and others are available at the option of the particular county, city,
town, school district or other political subdivision of the state. The following
is only a summary of certain laws which may be applicable to an issuer of the
Texas Debt Obligations regarding ad valorem taxation.

Counties and political subdivisions are limited in their issuance of bonds
for certain purposes (including construction, maintenance and improvement of
roads, reservoirs, dams, waterways and irrigation works) to an amount up to
one-fourth of the assessed valuation of real property. No county, city or town
may levy a tax in any one year for general fund, permanent improvement fund,
road and bridge fund or jury fund purposes in excess of $.80 on each $100
assessed valuation. Cities and towns having a population of 5,000 or less may
not levy a tax for any one year for any purpose in excess of 1-1/2% of the
taxable property ($1.50 on each $100 assessed valuation), and a limit of 2 1/2%
($2.50 on each $100 assessed valuation) is imposed on cities having a population
of more than 5,000. Hospital districts may levy taxes up to $.75 on each $100
assessed valuation. School districts are subject to certain restrictions
affecting the issuance of bonds and the imposition of taxes.

Governing bodies of taxing units may not adopt tax rates that exceed
certain specified rates until certain procedural requirements are met
(including, in certain cases, holding a public hearing preceded by a published
notice thereof). Certain statutory requirements exist which set forth the
procedures necessary for the appropriate governmental body to issue and approve
bonds and to levy taxes. To the extent that such procedural requirements are not
followed correctly, the actions taken by such governmental bodies could be
subject to attack and their validity and the validity of the bonds issued
questioned.

Property tax revenues are a major source of funding for public education in
Texas. The method for funding public education in Texas has undergone material
changes over the last five years. In 1993, the Texas legislature adopted new
legislation 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.

The Texas legislature convened on January 14, 1997, and is expected to
consider several alternatives that may impact taxes in Texas, including a

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proposal to restructure the current property tax system that funds public
education by revising existing taxes or enacting new taxes. One proposal being
urged upon the Texas Legislature would result in the lowering of property taxes
paid on real property and exempting business inventories from personal property
taxes. Such reduction on the real property tax would benefit homeowners, as well
as other owners of real property, by reducing the cost of housing. Early
estimates indicate that the annual impact on Texas' tax revenues would be a
decrease in tax revenues of approximately $2.8 billion, approximately 7.5% of
the average annual tax revenues Texas is estimated to collect during each fiscal
year in the 1996-1997 biennium. Numerous suggestions have been made to offset
the effect of such a decrease in the tax revenues, including decreasing
governmental spending, increasing the state sales tax by 0.5%, increasing motor
vehicle sales and rental tax rates by 0.5%, and replacing the current corporate
franchise tax with a business activity tax. The business activity tax would at
least partially offset any savings that businesses would experience on the
exemption of business inventories from taxation. While current proposals for tax
reform suggest that the business activity tax would create a larger tax base and
allow lower rates, certain forms of businesses, such as partnerships, that are
typically exempt from franchise taxation would be subject to the business
activity tax. It is not possible to predict what form any tax reform would
ultimately take or what effect that reform will have on the economy of Texas or
the revenues realized by the state government. At this time it is difficult to
predict whether the Texas Legislature will amend or replace the current property
tax structure in Texas or adopt other taxes.

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VIRGINIA

RISK FACTORS--The Constitution of Virginia limits the ability of the
Commonwealth to create debt. An amendment to the Constitution requiring a
balanced budget was approved by the voters on November 6, 1984.

General obligations of cities, towns or counties in Virginia are payable
from the general revenues of the entity, including ad valorem tax revenues on
property within the jurisdiction. The obligation to levy taxes could be enforced
by mandamus, but such a remedy may be impracticable and difficult to enforce.
Under section 15.1--227.61 of the Code of Virginia, a holder of any general
obligation bond in default may file an affidavit setting forth such default with
the Governor. If, after investigating, the Governor determines that such default
exists, he is directed to order the State Comptroller to withhold State funds
appropriated and payable to the entity and apply the amount so withheld to
unpaid principal and interest. The Commonwealth, however, has no obligation to
provide any additional funds necessary to pay such principal and interest.

Revenue bonds issued by Virginia political subdivisions include (1) revenue
bonds payable exclusively from revenue producing governmental enterprises and
(2) industrial revenue bonds, college and hospital revenue bonds and other
"private activity bonds" which are essentially non-governmental debt issues and
which are payable exclusively by private entities such as non-profit
organizations and business concerns of all sizes. State and local governments
have no obligation to provide for payment of such private activity bonds and in
many cases would be legally prohibited from doing so. The value of such private
activity bonds may be affected by a wide variety of factors relevant to
particular localities or industries, including economic developments outside of
Virginia.

Virginia municipal securities that are lease obligations are customarily
subject to "non-appropriation" clauses. "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 1996-98 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.

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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.

119

<ARTICLE> 6

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