NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORP /DC/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-7102

NATIONAL RURAL UTILITIES COOPERATIVE
FINANCE CORPORATION
(Exact name of registrant as specified in its charter)

DISTRICT OF COLUMBIA
(State or other jurisdiction of incorporation or organization)

52-0891669
(I.R.S. Employer Identification Number)

2201 COOPERATIVE WAY, HERNDON, VA 20171
(Address of principal executive offices)
(Registrant's telephone number, including area code, is 703-709-6700)

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class on which registered

8.50% Collateral Trust Bonds, Series U, Due 1998 New York Stock Exchange
9.00% Collateral Trust Bonds, Series V, Due 2021 New York Stock Exchange
8.00% Quarterly Income Capital Securities Due 2045 New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the
best of the registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part IV of this Form 10-K or any
amendment to this Form 10-K.
Yes X No .

The Registrant has no common or voting stock.

DOCUMENTS INCORPORATED BY REFERENCE:
None

TABLE OF CONTENTS

Part No. Item No. Page

I. 1. Business 1
Members 1
Loans and Guarantees 2
General 2
Loan and Guarantee Policies 6
Long-Term Loans to Utility Members 6
Intermediate-Term Loans to Utility Members 8
Short-Term Loans to Utility Members 8
Loans to Telecommunication Borrowers 8
Loans to Associate Members 9
RUS Guaranteed Loans 9
Guarantees of Pollution Control Facility
and Utility Property Financings 9
Guarantees of Lease Transactions 10
Guarantees of Tax Benefit Transfers 10
Other 10
CFC Financing Factors 11
Revolving Credit Agreement 11
Tax Status 14
Investment Policy 14
Competition 14
Employees 15
The Rural Electric and Telephone Systems 16
General 16
The RUS Program 16
Distribution Systems 16
Power Supply Systems 17
Telephone Systems 18
Regulation and Competition 18
Financial Information 19
Composite Financial Statements 21
2. Properties 25
3. Legal Proceedings 25
4. Submission of Matters to a Vote of Security Holders 26
II. 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 26
6. Selected Financial Data 26
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
8. Financial Statements and Supplementary Data 39
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 39
III. 10. Directors and Executive Officers of the Registrant 39
Compliance with Section 16(a) of the Exchange Act 43
11. Executive Compensation 43
12. Security Ownership of Certain Beneficial Owners and
Management 45
13. Certain Relationships and Related Transactions 45
IV. 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 46

i

PART I

Item 1. Business.

National Rural Utilities Cooperative Finance Corporation (the "Company" or
"CFC") was incorporated as a private, not-for-profit cooperative
association under the laws of the District of Columbia in April 1969. The
principal purpose of CFC is to provide its members with a source of
financing to supplement the loan programs of the Rural Utilities Service
("RUS") of the United States Department of Agriculture. CFC makes loans
primarily to its rural utility system members ("Utility Members") to enable
them to acquire, construct and operate electric distribution, generation,
transmission and related facilities. Most CFC long-term loans to Utility
Members have been made in conjunction with concurrent loans from RUS and
are secured equally and ratably with RUS's loans by a single mortgage. CFC
also has provided guarantees for tax-exempt financings of pollution control
facilities and other properties constructed or acquired by its members, and
has provided guarantees of taxable debt in connection with certain lease
and other transactions of its members.

CFC's 1,052 members as of May 31, 1997, included 907 Utility Members,
virtually all of which are consumer-owned cooperatives, 74 service members
and 71 associate members. The Utility Members included 841 distribution
systems and 66 generation and transmission ("power supply") systems
operating in 46 states and U.S. territories. At December 31, 1995, CFC's
member rural electric systems provided service to about 70% of the
contiguous continental land territory of the United States, serving
approximately 11.5 million consumers, representing an estimated 27.8
million ultimate users of electricity, and owned approximately $69.1
billion (before depreciation of $20.8 billion) in total utility plant.

Rural Telephone Finance Cooperative ("RTFC") was incorporated as a taxable
cooperative association in the State of South Dakota in September 1987.
RTFC is a controlled affiliate of CFC and was created for the purpose of
providing financing to its rural telecommunication members and affiliates.
RTFC's bylaws and voting members' agreement require that the majority of
RTFC's Board of Directors be elected from individuals designated by CFC.
CFC is the sole source of funding for RTFC. See Note 1 to Combined
Financial Statements for summary financial information relating to RTFC at
May 31, 1997. As of that date, RTFC had 464 members.

Guaranty Funding Cooperative ("GFC") was organized in December 1991 as a
taxable cooperative association owned by its member rural electric systems
and CFC to provide a source of funds for members to refinance their RUS
guaranteed debt previously held by the Federal Financing Bank of the United
States Treasury ("FFB"). GFC is a controlled affiliate of CFC (the
majority of its directors are appointed by CFC). All loans from GFC are
guaranteed by RUS. CFC is the sole source of funding for GFC. See Note 1
to Combined Financial Statements for summary financial information relating
to GFC at May 31, 1997. As of May 31, 1997, GFC had four members.

Except as indicated, financial information presented herein includes CFC,
RTFC and GFC on a combined basis.

National Cooperative Services Corporation ("NCSC") was organized in 1981 as
a taxable cooperative, owned and operated by its member rural electric
distribution systems, to provide specialized financing and services to the
cooperative rural electric industry that CFC could not otherwise provide
due to competitive, regulatory or other reasons. NCSC has an independent
Board of Directors, with CFC providing all management services through a
contractual arrangement. CFC is the source for essentially all of NCSC's
financing capabilities through direct loans or, predominantly, providing
credit enhancements (guarantees) of debt issued by NCSC in the public and
private credit markets. NCSC's financial statements are not combined or
consolidated with CFC's.

Members

CFC currently has five classes of members: Class A-cooperative or
nonprofit distribution systems; Class B-cooperative or nonprofit power
supply systems which are federations of Class A or other Class B members;
Class C-statewide and regional associations which are wholly-owned or
controlled by Class A or Class B members; Class D-national associations of
cooperatives; and Class E-associate members' nonprofit groups or entities
organized on a cooperative basis which are owned, controlled or operated by
Class A, B or C members and which provide non-electric services primarily
for the benefit of ultimate consumers. Associate members are not entitled
to vote at any meeting of the members and are not eligible to be
represented on CFC's Board of Directors.

Membership in RTFC is limited to CFC and commercial or cooperative
corporations eligible to receive loans or other assistance from RUS and
which are engaged (or plan to be engaged) in providing telephone or
telecommunication services to ultimate users and affiliates of such
corporations.
1

Membership in GFC is limited to CFC and cooperative or nonprofit Utility
Member systems who have refinanced all or a portion of their FFB debt
through CFC.

Set forth below is a table showing by State or U.S. territory, at May 31,
1997, the total number of CFC, RTFC and GFC members (memberships in each
other have been eliminated and corporations which belong to more than one
of CFC, RTFC and GFC have been counted only once), the percentage of loans
and the percentage of loans and guarantees outstanding.

Number Loan and Number Loan and
of Loan Guarantee of Loan Guarantee
members % % members % %

Alabama 33 1.5% 1.9% Montana 38 1.8% 1.4%
Alaska 28 1.2% 1.0% Nebraska 38 0.2% 0.2%
American Samoa 1 0.0% 0.0% Nevada 5 0.3% 0.3%
Arizona 20 1.0% 1.3% New Hampshire 6 2.9% 2.3%
Arkansas 29 2.7% 3.4% New Jersey 1 0.1% 0.1%
California 10 0.2% 0.1% New Mexico 18 1.0% 0.8%
Colorado 38 3.6% 3.0% New York 14 0.1% 0.1%
Delaware 1 0.2% 0.1% North Carolina 46 3.4% 3.8%
District of Columbia 5 1.3% 1.0% North Dakota 35 0.6% 0.5%
Florida 21 3.8% 5.9% Ohio 38 1.3% 1.0%
Georgia 73 8.1% 6.6% Oklahoma 52 2.9% 2.9%
Guam 1 0.0% 0.0% Oregon 37 1.9% 1.6%
Idaho 16 0.9% 0.7% Pennsylvania 23 1.1% 1.0%
Illinois 52 4.9% 4.0% South Carolina 38 3.4% 3.2%
Indiana 56 1.4% 2.3% South Dakota 52 1.3% 1.0%
Iowa 105 2.6% 2.2% Tennessee 25 0.9% 0.8%
Kansas 50 2.5% 2.4% Texas 117 11.5% 10.5%
Kentucky 36 2.2% 3.5% Utah 7 4.8% 6.5%
Louisiana 17 1.8% 1.5% Vermont 9 0.7% 0.6%
Maine 9 0.6% 0.5% Virgin Islands 1 0.6% 0.5%
Maryland 2 1.0% 0.8% Virginia 25 2.0% 2.0%
Massachusetts 1 0.0% 0.0% Washington 20 0.9% 0.7%
Michigan 24 1.1% 0.9% West Virginia 3 0.0% 0.0%
Minnesota 70 4.3% 4.8% Wisconsin 64 2.3% 1.9%
Mississippi 24 2.5% 2.7% Wyoming 17 1.3% 1.2%
Missouri 65 3.3% 4.5% Total Members 1,516 100.0% 100.0%

Loans and Guarantees

General

CFC provides its Utility Members with a source of financing to supplement
the loan programs of RUS. CFC provides the majority of total non-RUS
direct funding and guarantees obtained by members. Interest rates charged
on loans by CFC include the cost of funds incurred by CFC plus increments
estimated to cover general and administrative expenses, a provision for
loan and guarantee losses and to provide margins in amounts considered by
CFC to be consistent with sound financial practice. While interest rates
are set to cover estimated costs and to provide reasonable margins, CFC
does not always match the maturity of its borrowings to those of its loans.
CFC generally finances its long-term variable rate loans to members through
borrowings having shorter maturities than the loans. CFC generally finances
its long-term fixed rate loans with fixed rate funds whose maturities
generally coincide with, or exceed, the term of the rate adjustment cycle
of the loan (see "Loan and Guarantee Policies").

Substantially all long-term and most intermediate-term loans are secured,
while substantially all short-term loans are unsecured. Long-term loans
have maturities of up to 35 years. Fixed rate long-term loans provide for
a fixed interest rate for terms of one to 35 years (but not beyond the
maturity of the loan). Generally, borrowers select a fixed interest rate
term that is shorter than the maturity of the loan. Upon expiration of the
fixed rate term, the borrower may select another
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fixed rate term or a variable rate. Variable rate long-term interest rates
are subject to adjustment monthly as determined by CFC. Intermediate- and
short-term loans are made for terms not exceeding 60 months. CFC adjusts the
rate monthly on outstanding short- and intermediate-term loans. On
notification to borrowers, CFC may adjust the rate semimonthly. Interest
rates are established by CFC and are not tied to any external index, however
some rates may be capped at a percentage over prime. Long-term
telecommunication loans are generally secured fixed or variable rate loans
with maturities generally not exceeding 15 years. Intermediate- and short-
term telecommunications loans are generally unsecured. CFC has also
provided guarantees for tax-exempt financings of pollution control
facilities and utility properties constructed or acquired by its members
and for members' obligations under certain lease transactions (see "Loan
and Guarantee Policies").

Set forth below is a table showing loans outstanding to borrowers as of May
31, 1997, 1996 and 1995 and the weighted average interest rates thereon and
loans committed but unadvanced to borrowers at May 31, 1997.

Loans committed
Loans outstanding and weighted average interest but unadvanced
rates thereon at May 31, at May 31,1997(A)(B)
(Dollar Amounts In Thousands) 1997 1996 1995

Long-term fixed rate loans(C):
Distribution Systems (D) $2,503,890 7.20% $2,380,587 7.29% $1,645,551 7.68% $ 46,657
Power Supply Systems (D) 239,381 7.54% 247,556 7.71% 253,208 7.68% 1,214
Telecommunication Organizations 148,566 8.53% 134,497 8.66% 141,144 8.98% -
Service Organizations (D)(E) 82,634 8.62% 77,205 8.03% 81,521 9.27% 3,170
Associate Members 1,512 10.25% 1,542 10.25% 1,569 10.25% -
Total long-term fixed rate
secured loans 2,975,983 7.33% 2,841,387 7.41% 2,122,993 7.83% 51,041

Long-term variable rate loans (F):
Distribution Systems 3,209,472 6.55% 2,717,494 6.45% 2,553,590 6.50% 1,185,303
Power Supply Systems 281,368 6.55% 202,249 6.45% 191,967 6.50% 798,984
Telecommunication Organizations 875,135 6.65% 764,911 6.55% 704,427 6.64% 237,170
Service Organizations (E) 54,802 6.55% 46,376 6.45% 53,332 6.50% 86,229
Associate Members 48,186 6.29% 47,541 6.19% 42,561 6.20% 13,666
Total long-term variable rate
secured loans 4,468,963 6.57% 3,778,571 6.47% 3,545,877 6.52% 2,321,352

Refinancing variable rate loans
guaranteed by RUS:
Power Supply Systems 137,984 6.49% 416,637 6.47% 429,129 7.27% -

Intermediate-term secured loans:
Distribution Systems 12,530 6.70% 4,831 6.60% 4,176 6.85% 2,609
Power Supply Systems 198,985 6.70% 53,614 6.60% 40,237 6.85% 196,385
Service Organizations 14,592 6.70% 27,652 6.60% 11,429 6.85% 2,884
Total intermediate-term
secured loans 226,107 6.70% 86,097 6.60% 55,842 6.85% 201,878

Intermediate-term unsecured loans:
Distribution Systems 72,860 6.70% 16,019 6.45% 11,392 6.50% 37,687
Power Supply Systems 43,129 6.70% 28,957 6.45% 47,443 6.50% 124,405
Telecommunication Organizations 13,683 7.25% 12,048 6.80% 3,255 7.54% 9,387
Total intermediate-term
unsecured loans 129,672 6.76% 57,024 6.52% 62,090 6.56% 171,479

Short-term loans (G):
Distribution Systems 473,639 6.70% 409,664 6.60% 445,962 6.85% 2,436,785
Power Supply Systems 25,051 6.70% 25,763 6.60% 10,267 6.85% 913,371
Telecommunication Organizations 61,779 7.25% 63,813 7.15% 34,637 7.60% 478,807
Service Organizations 27,420 6.70% 23,467 6.60% 25,653 6.85% 93,346
Associate Members 13,417 6.70% 9,240 6.60% 7,651 6.85% 19,308

Total short-term loans 601,306 6.76% 531,947 6.67% 524,170 6.90% 3,941,617

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Loans committed
Loans outstanding and weighted average interest but unadvanced
rates thereon at May 31, at May 31, 1997(A) (B)
(Dollar Amounts In Thousands) 1997 1996 1995

Nonperforming loans(H):
Distribution Systems $ 1,705 7.21% $ 1,739 7.20% $ 1,830 7.21% $ -
Power Supply Systems 7,723 6.64% 23,555 6.48% 25,811 6.57% -

Total nonperforming loans 9,428 6.75% 25,294 6.53% 27,641 6.61% -

Restructured loans(I):
Distribution Systems - - 2,576 18.37% 2,654 18.37% -
Power Supply Systems 361,961 8.32% 205,074 9.13% 180,521 9.01% -
Service Organizations - - 1,711 6.45% 1,803 6.50% -

Total restructured loans 361,961 8.32% 209,361 9.22% 184,978 9.12% -

Total loans 8,911,404 6.81% 7,946,318 6.85% 6,952,720 7.01% 6,687,367
Less: Allowance for loan and
guarantee losses 233,208 218,047 205,596 -

Net loans $8,678,196 $7,728,271 $6,747,124 $6,687,367

(A) The interest rates in effect at August 1, 1997, for loans to electric
members were 6.95% for long-term loans with a seven-year fixed rate
term, 6.55% on variable rate long-term loans and 6.70% on intermediate-
and short-term loans. The rates in effect at August 1, 1997, on loans
to telecommunication organizations were 7.50% for long-term loans with
a seven-year fixed rate term, 6.65% on long-term variable rate loans,
6.90% on intermediate-term loans and 7.25% on short-term loans. The
rates in effect at August 1, 1997, on loans to associate members were
7.40% for long-term loans with a seven-year fixed rate term, 6.55% on
long-term variable rate loans and 6.70% on short-term loans.

(B) Unadvanced commitments include loans approved by CFC for which loan
contracts have not yet been executed and for which loan contracts have
been executed but funds have not been advanced. Since commitments may
expire without being fully drawn upon, the total amounts reported as
commitments do not necessarily represent future cash requirements.
Collateral and security requirements for commitments are identical to
those for advanced loans. Long-term unadvanced commitments that do not
have an interest rate associated with the commitment have been listed
with the variable rate loans. Rates, fixed or variable, are set at the
time of each advance on the amount of the advance.

(C) Includes $38.4 million and $198.3 million of unsecured loans at May 31,
1997 and 1996.

(D) During calendar year 1998, $172.1 million of such outstanding fixed
rate loans, which currently have a weighted average interest rate of
8.17% per annum, will become subject to rate adjustment. During the
first quarter of calendar year 1997, long-term fixed rate loans
totaling $41.3 million had their interest rates adjusted. These loans
will be eligible to readjust their interest rate again during the first
quarter of calendar year 1998 to the lowest long-term fixed rate
offered during 1997 for the term selected. At January 1 and May 31,
1997, the seven-year long-term fixed rate was 7.55% and 7.60%,
respectively.

(E) CFC had loans outstanding to NCSC in each of the periods shown. Long-
term fixed rate loans outstanding to NCSC as of May 31, 1997, 1996 and
1995, were $29.2 million, $31.8 million and $48.5 million,
respectively. In addition, as of May 31, 1997, 1996 and 1995, CFC had
unadvanced long-term loan commitments to NCSC in the amounts of $15.4
million, $15.4 million and $12.3 million, respectively.

(F) Includes $112.4 million, $84.6 million and $41.4 million of unsecured
loans at May 31, 1997, 1996 and 1995.

(G) Includes $99.1 million, $92.7 million and $30.9 million of secured
loans at May 31, 1997, 1996 and 1995.

(H) The rates on nonperforming loans are the weighted average of the stated
rates on such loans as of the dates shown and do not necessarily relate
to the interest recognized by CFC from such loans.
4

(I) The rates on restructured loans are the weighted average of the
effective rates (based on the present value of scheduled future
cashflows) as of the dates shown and do not necessarily relate to the
interest recognized by CFC on such loans.

Set forth below are the weighted average interest rates earned by CFC
(recognized in the case of nonperforming and restructured loans) on all
loans outstanding during the fiscal years ended May 31.

INTEREST RATES EARNED ON LOANS

1997 1996 1995

Long-term fixed rate 7.65% 7.92% 8.63%
Long-term variable rate 6.25% 6.30% 5.90%
Telecommunication organizations 6.73% 6.86% 6.70%
Refinancing loans guaranteed by RUS 6.36% 6.75% 6.07%
Intermediate-term 7.08% 6.57% 6.19%
Short-term 6.40% 6.49% 6.29%
Associate members 6.42% 6.46% 5.40%
Nonperforming 0.00% 0.25% 1.56%
Restructured 0.56% 1.49% 1.92%
All loans 6.58% 6.77% 6.72%

At May 31, 1997, CFC's ten largest exposures, which were all power supply
members, had outstanding loans from CFC totaling $1,198.7 million
(excluding $2.8 million of loans guaranteed by RUS), which represented
approximately 13.5% of CFC's total loans outstanding. As of May 31, 1997,
outstanding CFC guarantees for these same ten borrowers totaled $1,261.7
million, which represented 59.3% of CFC's total guarantees outstanding,
including guarantees of the maximum amounts of lease obligations at such
date. On that date, no member had outstanding loans and guarantees in
excess of 10% of the aggregate amount of CFC's outstanding loans and
guarantees; however, one of the ten largest borrowers, Deseret Generation &
Transmission Co-operative ("Deseret"), was in financial difficulty (see
Note 10 to Combined Financial Statements). At May 31, 1997, loans
outstanding to Deseret (excluding loans guaranteed by RUS) accounted for
4.1% of total loans outstanding. Guarantees outstanding to Deseret
accounted for 13.7% of total guarantees outstanding. Total loans and
guarantees outstanding to Deseret equaled 38.1% of total Members' Equity,
Members' Subordinated Certificates and the allowance for loan and guarantee
losses.

Set forth below is a table showing CFC's guarantees as of the dates
indicated. Substantially all guarantees have been provided on behalf of
power supply members.

May 31,
1997 1996 1995
(Dollar Amounts In Thousands)

Long-term tax-exempt bonds $1,190,925* $1,317,655* $1,496,930*
Debt portions of leveraged lease transactions 418,916 432,516 568,662
Indemnifications of tax benefit transfers 338,264 363,702 389,755
Other guarantees 132,566 135,567 119,575
Total $2,080,671 $2,249,440 $2,574,922

* Includes $1,043.2 million, $1,168.9 million and $1,200.1 million at May
31, 1997, 1996 and 1995, respectively, of adjustable rate pollution
control bonds which can be tendered for purchase at specified times at
the option of the holders (in the case of $260.7 million, $370.1 million
and $376.7 million of such bonds outstanding at May 31, 1997, 1996 and
1995, respectively, at any time on seven days' notice, in the case of
$242.3 million, $248.8 million and $254.5 million outstanding at May 31,
1997, 1996 and 1995, respectively, at any time on a minimum of one day's
notice and in the case of the remainder on a five-week or semiannual
basis). CFC has agreed to purchase any such bonds that cannot be
remarketed. Since the inception of the program, CFC has not been
required to purchase any such bonds.

Loan Contingencies

CFC maintains a loan and guarantee loss allowance to cover losses that may
be incurred in the course of lending or extending credit enhancements. The
allowance is periodically evaluated by management with the Board of
Directors.
5

CFC classifies a loan as nonperforming if interest or principal payments
are contractually past due 90 days or more, repayment in accordance with
the original terms is not expected due to court order or ultimate repayment
is otherwise not expected. Loans in which the original terms have been
modified as a result of a borrower's financial difficulties are classified
as restructured. Interest income on nonperforming loans is recognized on a
cash basis as long as CFC believes the collateral value supports the
outstanding principal balance.

Loan and Guarantee Policies

Long-Term Loans to Utility Members

Under CFC's lending criteria, distribution systems must generally achieve a
Modified DSC ("MDSC") (as described herein) of 1.35. The MDSC calculation
is the ratio of (x) operating margins and patronage capital plus interest
on long-term debt plus depreciation and amortization expense plus Non-
operating Margins-Interest plus cash received in respect of generation and
transmission and other capital credits to (y) long-term debt service
obligations. Distribution systems are also required to have achieved a
20% ratio of equity to total assets at the end of the preceding calendar
year (the "Equity" test) to be eligible collateral for pledging under the
1994 Collateral Trust Bond Indenture. The MDSC is computed using the
average of the best two of three calendar years' ratios preceding the date
of determination. The borrower is required to maintain these ratios at or
above the minimum loan eligibility requirements as long as there is a
balance outstanding on the loan. Unadvanced loan funds may be stop ordered
if CFC determines that the borrower's ability to make debt service
payments has been seriously impaired. Loans that have been pledged as
security for the collateral trust bonds that have ratios below the
minimum must be replaced, unless there is sufficient excess collateral on
deposit.

Under present RUS policy, a system which meets the RUS concurrent mortgage
requirement for Average TIER and Average DSC (as described herein) of 1.50
and 1.25, respectively, will generally be required to borrow a portion of
its financial requirements from a supplemental lender. TIER is the ratio
of (x) margins and patronage capital as defined under "The Rural Electric
Systems---Financial Information" plus interest on long-term debt (y)
interest on long-term debt. DSC is the ratio of (x) net margins and
patronage capital plus interest on long-term debt plus depreciation and
amortization expense to (y) long-term debt service obligations. In
applying the tests, obligations under contracts providing for payment
whether or not the purchaser in fact receives electric power from the
seller, guarantees and other contingent obligations are not considered
debt, nor is interest on the proposed CFC loan given effect. In
determining the eligibility of a member for a long-term loan, each of the
above ratios is averaged for the best two of three calendar years preceding
the date of determination, resulting in the "Average TIER" and "Average
DSC". The extent of the supplemental loan required generally reflects the
revenue productivity of the borrower's investment in plant, as measured by
the ratio of its investment in plant to its operating revenues (the "plant-
revenue ratio"). RUS regulations, however, permit borrowers which meet
certain rate disparity, consumer income or extremely high rate tests to
qualify for 100% RUS loans. Further, the Administrator of RUS has the
authority to approve 100% RUS loans according to new qualifications
established in 1993, or at his/her discretion on a case-by-case basis.

It is anticipated that many CFC loans to distribution systems will continue
to be made in conjunction with loans by RUS. However, in addition to
making concurrent loans, CFC's loan policy permits it to make 100% loans to
member systems which meet the applicable borrowing requirements. As of May
31, 1997, CFC had a total of $3,985.0 million in long-term loans committed
and outstanding to 105 Utility Members which did not have long-term RUS
loans outstanding. These systems have either prepaid their RUS loans or
have never incurred any RUS debt.

Under CFC policy, a member power supply system having an MDSC of at least
1.0 in each case is eligible for a long-term loan from CFC. Loans have
been made both for additions to or acquisition of existing power supply
facilities and in connection with the construction of new power supply
projects. Loans have also been made in connection with the termination
costs associated with certain plant construction for canceled power supply
projects. However, most loans to CFC member power supply systems for new
generating plants and transmission facilities have been made by other
lenders (principally the FFB, which has typically offered rates lower than
CFC's) under repayment guarantees from RUS, with RUS's rights as guarantor
secured by a mortgage on the system's properties.

Under the RUS mortgage, distribution borrowers are required to design their
rates to cover all operating expenses, including all payments in respect of
principal and interest on notes when due, provide and maintain reasonable
working capital and to maintain a TIER of not less than 1.5 and a DSC of
not less than 1.25.
6

CFC has made and may continue to approve long-term secured loans to
borrowers which fall below CFC's loan eligibility requirements. Such loans
are made on a case-by-case basis, based upon the submission by the borrower
of, among other things, a long-range financial forecast which indicates
that the borrower will, in future years, meet the applicable borrowing
requirements. During the past five years, such loans accounted for 6.8% of
the total dollar amount of loans approved. While certain borrowers may not
meet the eligibility requirements at the time of loan approval, such
borrowers may meet the eligibility requirements by the time the loan is
fully advanced.

The rate charged for long-term fixed rate mortgage loans is designed to
reflect CFC's estimated overall cost of fixed rate capital allocated to its
fixed rate mortgage loans (including Subordinated
Certificates, Collateral Trust Bonds, Medium-Term Notes, Quarterly Income
Capital Securities, variable rate borrowings supported by interest rate
exchange agreements and Members' Equity) plus increments estimated to cover
general and administrative expenses, a provision for loan and guarantee
losses and a reasonable margin.

Long-term fixed rate loans provide for a fixed interest rate for periods of
one to 35 years. Upon expiration of the interest rate period, the borrower
may select another fixed rate term of one to 35 years (but not beyond the
maturity of the loan) or in certain instances may repay the loan or convert
to another interest rate program.

The rate on long-term fixed rate loans is set at the time of advance. In
the event that there is more than one advance, each advance will receive
the fixed rate in effect at the time of advance for the selected maturity
period.

CFC also makes long-term loans with variable interest rates. Such loans
are funded primarily from available variable rate sources, and the rate is
adjusted monthly to reflect CFC's cost of capital raised to fund these
loans plus increments estimated to cover general and administrative
expenses, a provision for loan and guarantee losses and the maintenance of
a reasonable margin.

A borrower may convert a long-term loan from the variable rate to a fixed
rate at any time with no fee. Some fixed rate loans may be converted to
variable rate loans at any time, subject to the payment of a conversion fee
and in certain cases borrower's regulatory approval.

Prepayment of concurrent loans, where permitted by CFC and RUS, or
otherwise agreed to by CFC and RUS, will be apportioned pro-rata between
RUS and CFC based on the respective balances of their concurrent loans
outstanding as of the date of prepayment. All prepayments except those
required to maintain the original RUS/CFC concurrent loan proportions will
be subject to a prepayment fee.

Distribution systems may be required to purchase Loan Subordinated
Certificates in an amount up to 3% of the loan amount or may not be
required to purchase any certificates depending upon the borrower's
leverage ratio with CFC (the ratio of the outstanding and available loan
funds to Subordinated Certificates and allocated but unretired patronage
capital), including the new loan. Power supply members are required to
purchase the certificates in amounts up to 10% of the loan amount.

CFC long-term loans made in conjunction with concurrent RUS loans are
generally for terms of 35 years and under present policy are payable, after
a short period during which interest only is payable, in level quarterly
installments which include both accrued interest and a portion of the
principal. Substantially all of CFC's present long-term mortgage loans to
Utility Members are secured by a first mortgage lien upon all property
(other than office equipment and vehicles) at any time owned by the
borrower and future revenues. In the case of members whose property is
already subject to a mortgage to RUS, RUS approval of the loan is required,
even in the case of a 100% CFC loan, in order to accommodate RUS's mortgage
lien so that CFC may share ratably in the security provided by the
mortgaged property. CFC and RUS are then mortgagees in common, entitled to
the security in proportion to the unpaid principal amounts of their
respective loans. Mortgages do not require that the value of the mortgaged
property be equal to the obligations secured thereby.

Events of default under the long-term mortgages include default in the
payment of the mortgage notes, default (continuing after grace periods in
some cases) in the performance of the covenants in the loan agreements or
the mortgages and events of bankruptcy and insolvency. Under common
mortgages securing long-term CFC loans to distribution system members, RUS
has the sole right to exercise remedies on behalf of all holders of
mortgage notes for 30 days after default. If RUS does not act within 30
days or if RUS is not legally entitled to act on behalf of all noteholders,
CFC may exercise remedies. Under common mortgages securing long-term CFC
loans to, or guarantee reimbursement obligations of, power supply members,
RUS retains substantial control over the exercise of mortgage remedies.
7

Intermediate-Term Loans to Utility Members

Intermediate-term loans are made to members for terms of up to five years.
The interest rates on intermediate-term loans are adjusted monthly (and may
be adjusted semimonthly) to cover CFC's cost of capital raised to fund
these loans plus increments estimated to cover general and administrative
expenses, a provision for loan and guarantee losses and the maintenance of
a reasonable margin. Intermediate-term loans that are classified as
secured are secured by a first mortgage lien upon all property (other than
office equipment and vehicles) at any time owned by the borrower and future
revenues. Borrowers are generally not required to purchase Loan
Subordinated Certificates in conjunction with an intermediate-term loan.

Short-Term Loans to Utility Members

CFC makes short-term line of credit loans to its member distribution
systems in amounts based on the system's monthly operation and maintenance
expenses and prior year's additions to plant. Power supply systems are
eligible for lines of credit in amounts up to a maximum of $50 million,
based on the system's quarterly operation and maintenance expenses. Loans
made to distribution and power supply systems under such lines of credit
are generally unsecured, have terms agreed to by the system and CFC and
may be prepaid without premium and reborrowed in whole or in part during
such term. Short-term loans with terms greater than 12 months are required
to be paid down to a zero balance for five consecutive business days during
each 12-month period.

The interest rates on short-term line of credit loans are adjusted monthly
(and may be adjusted semimonthly) to cover CFC's cost of capital raised to
fund these loans plus increments estimated to cover general and
administrative expenses, a provision for loan and guarantee losses and the
maintenance of a reasonable margin. Borrowers are not required to purchase
Loan Subordinated Certificates in conjunction with a short-term loan.

Loans to Telecommunication Borrowers

RTFC makes long-term loans to rural telecommunication companies for the
acquisition of telecommunication systems and the construction or upgrade of
wireline telephone systems, wireless telephone systems, fiber optic
networks and cable television systems as well as other legitimate corporate
purposes.

Under RTFC policy, a wireline telephone system able to demonstrate to CFC's
satisfaction the ability to achieve and maintain an Average DSC and an
Average TIER of 1.25 and 1.50, respectively, is eligible for a long-term
mortgage loan from RTFC. A cable television system or cellular telephone
system able to demonstrate to CFC's satisfaction the ability to achieve and
maintain an Average DSC of 1.25 is eligible for a long-term mortgage loan.
Loans made to start-up ventures using emerging technologies are evaluated
based on the quality of the business plan and the level and quality of
credit support from established companies. Based on the business plan,
specific covenants are developed for each transaction which require
performance at levels sufficient to repay the RTFC obligations under the
approved terms.

Security for RTFC long-term loans made to RUS borrowers generally consists
of a first mortgage lien on the assets and revenues of the system on a pari
passu basis with RUS. Security from non-RUS borrowers is considered on a
case-by-case basis but generally a loan will not exceed 80% of the
estimated initial value of the collateral. At May 31, 1997, a total of
$74.0 million or 6.7% of RTFC loans outstanding were unsecured. Long-term
loans are made to RTFC borrowers for terms generally up to 15 years and
amortized quarterly over the life of the loan. Borrowers are required to
purchase Loan Subordinated Certificates from RTFC in amounts equal to 5% of
the loan amount.

The interest rate on long-term loans can be fixed for the full term of the
loan or for a predetermined period. Alternatively, the borrower may elect
a variable rate which is adjusted monthly (and may be adjusted
semimonthly). A long-term variable rate loan may be converted to a fixed
rate at any time. A long-term fixed rate loan may be converted to a
variable rate without payment of a fee on a rate adjustment date, or at any
other time upon payment of a fee calculated to ensure that RTFC is made
whole on the funding placed for that loan.

RTFC provides intermediate-term equipment financing for periods up to five
years. These loans are provided on an unsecured basis and are used to
finance the purchase and installation of central office equipment, support
assets and other communications equipment. Intermediate-term equipment
financing loans are generally made to operating telephone companies with an
equity level of at least 25% of total assets and which have achieved a DSC
ratio for each of the previous two calendar years of at least 1.75.
8

RTFC also provides short-term financing to telecommunication systems for
periods up to 60 months. These short-term loans are typically in the form
of a revolving line of credit which requires the borrower to pay off the
balance for five consecutive business days at least once during each 12-
month period. These loans are provided on an unsecured basis and are used
primarily for normal cash management. Lines of credit are available to
telecommunication systems generally in amounts not to exceed the greater of
five percent of total assets or 25% of equity in excess of 35% of total
assets. Borrowers are not required to purchase Loan Subordinated
Certificates as a condition to receiving a line of credit.

Interim financing lines of credit are also made available to RTFC members
which have an RUS and/or Rural Telephone Bank ("RTB") loan pending and have
received approval from RUS to obtain interim financing. These loans are
for terms up to 24 months and must be retired with advances from the
RUS/RTB long-term loans.

RTFC interest rates on all loans are set to cover the cost of funds, plus
an increment estimated to cover general and administrative expenses, a
provision for loan losses and the maintenance of a reasonable margin.

RTFC obtains funding for its loans through back-to-back borrowing from CFC.
Under a long-term financing agreement, RTFC grants CFC a security interest
in RTFC's right to receive payments under the RTFC notes and in the
security interests created pursuant to the RTFC loan agreements with its
members.

Loans to Associate Members

CFC also makes loans to Associate Members, which are non-profit or
cooperative organizations owned, controlled or operated by a CFC Class A, B
or C Member or by CFC and engaged primarily in furnishing nonelectric
services within the sponsor's service area. Long-term loans are available
to Associate Members for periods of one to 35 years and are secured by the
assets financed or by a guarantee from a Utility Member, or both. The rate
on these loans, to the extent funding sources are available, may be fixed
for the full term of the loan or for a predetermined period.
Alternatively, the borrower may elect a variable rate which is adjusted
monthly (and may be adjusted semimonthly). Associate Members are required
to purchase a Loan Subordinated Certificate equal to 5% of the long-term
loan amount. CFC also provides short-term loans to Associate Members for
periods of up to 60 months. The short-term loans are generally revolving
lines of credit which may require the borrower to pay off the balance for
five consecutive business days during each 12-month period. Borrowers are
not required to purchase Loan Subordinated Certificates as a condition to
receiving a short-term loan. Short-term interest rates are set monthly
(and may be adjusted semimonthly). These loans are generally unsecured but
are guaranteed by operating Utility Members of CFC.

Associate Member interest rates are set to cover the cost of funds plus an
increment estimated to cover general and administrative expenses, a
provision for loan losses and a reasonable margin.

RUS Guaranteed Loans

In connection with legislation which allowed certain systems to prepay
existing borrowings from the FFB without prepayment penalties or fees, CFC
established a program under which it made long-term loans to members for
the purpose of prepaying these loans. Each note evidencing such a loan was
issued to a trust which in turn issued certificates evidencing its
ownership to CFC. The principal and interest payments on these notes are
guaranteed by RUS. Under RUS regulations, the note rate may not exceed the
rate borne by the system's prepaid borrowings from the FFB adjusted to
reflect savings accrued since prepayment of the note compared with the rate
on the prepaid borrowing. The systems are required to pay service fees to
CFC in connection with these transactions. Most of these loans that have
not been sold in public offerings have been transferred to GFC ($135.2
million of the $138.0 million outstanding at May 31, 1997.) In addition,
CFC services $420.2 million of these loans for trusts, the certificates of
which have been sold in public offerings.

Guarantees of Pollution Control Facility and Utility Property Financings

CFC has guaranteed debt issued in connection with the construction or
acquisition by CFC members of pollution control, solid waste disposal,
industrial development and electric distribution facilities. Such debt is
issued by governmental authorities and the interest thereon is exempt from
Federal income taxation. The proceeds of the offering are made available
to the member system, which in turn is obligated to pay the governmental
authority amounts sufficient to service the debt. The debt, which is
guaranteed by CFC, may include short- and long-term obligations.
9

In the event of a default by a system for nonpayment of debt service, CFC
is obligated to pay, after available debt service reserve funds have been
exhausted, scheduled debt service under its guarantee and the bond issue
will not be accelerated so long as CFC performs under its guarantee. The
system is required to repay, on demand, any amount advanced by CFC pursuant
to its guarantee. This repayment obligation is secured by a common
mortgage with RUS on all the system's assets, but CFC may not exercise
remedies thereunder for up to two years following default. However, if the
debt is accelerated because of a determination that the interest thereon is
not tax-exempt, the system's obligation to reimburse CFC for any guarantee
payments will be treated as a long-term loan.

In connection with these transactions, the systems generally must purchase
unsecured Guarantee Subordinated Certificates from CFC in an amount up to
12% of the principal amount guaranteed and maturing at the final maturity
of the related debt (but not less than 20 years). These certificates
generally bear interest at the greater of the 34-year FFB interest rate,
the interest rate on the longest maturity of the debt being guaranteed or
90% of the rate on the loan from CFC used to purchase the certificate. In
addition, if a debt service reserve fund is created by CFC to secure the
debt being issued, the system must buy an additional Debt Service
Subordinated Certificate, maturing at the time of the final maturity of the
debt, in the amount of such reserve. No interest is paid on such
certificate, but any earnings from investments held by the trustee of such
debt service reserve funds will be credited against the system's debt
service obligations. The system is also required to pay to CFC initial
and/or on-going servicing fees in connection with these transactions.

Certain guaranteed long-term debt bears interest at variable rates which
are adjusted at intervals of one to 270 days, weekly, each five weeks or
semi-annually to a level expected to permit their resale or auction at par.
At the option of the member on whose behalf it is issued and provided
funding sources are available, rates on such debt may be fixed until
maturity. Holders have the right to tender the debt for purchase at par at
the time rates are reset when it bears interest at a variable rate and CFC
has committed to purchase debt so tendered if it cannot otherwise be
remarketed. If CFC held the securities, the cooperative would pay interest
to CFC at its intermediate-term loan rate.

Guarantees of Lease Transactions

CFC has a program of lending to or guaranteeing debt issued by NCSC in
connection with leveraged lease transactions. In such transactions, NCSC
has lent money to an industrial or financial company (a "Lessor") for the
purchase of a power plant (or an undivided interest therein) or utility
equipment which was then leased to a CFC member ("the Lessee") under a
lease requiring the Lessee to pay amounts sufficient to permit the Lessor
to service the loan. The loans were made on a non-recourse basis to the
Lessor but were secured by the property leased and the owner's rights as
Lessor. NCSC borrowed the funds it lent either under a CFC guarantee or on
an interim basis directly from CFC and purchased from CFC a Guarantee
Subordinated Certificate in an amount up to 12% of the amount CFC
guaranteed or lent. The Guarantee Subordinated Certificates generally bear
interest at a rate equal to the FFB rate for 34-year loans or 90% of CFC's
loan rate and are repaid proportionally as the amount guaranteed decreases.
NCSC is obligated to pay administrative and/or guarantee fees to CFC in
connection with these transactions. Such fees are reimbursed to NCSC by
the Lessee in each transaction.

Guarantees of Tax Benefit Transfers

CFC has also guaranteed members' obligations to indemnify against loss of
tax benefits in certain tax benefit transfers that occurred in 1981 and
1982. A member's obligation to reimburse CFC for any guarantee payments
would be treated as a long-term loan, secured on a pari passu basis with
RUS by a first lien on substantially all the member's property to the
extent of any cash received by the member at the outset of the transaction.
The remainder would be treated as an intermediate-term loan secured by a
subordinated mortgage on substantially all of the member's property. Due
to changes in Federal tax law in 1982, no further guarantees of this nature
have occurred since 1982. In connection with these transactions, the
members purchased from CFC Guarantee Subordinated Certificates in an amount
up to 12% of the amount guaranteed.

Other

CFC may provide other loans and guarantees as requested by its members.
Such loans and guarantees will generally be made on a secured basis with
interest rates and guarantee fees set to cover CFC's cost of capital,
general and administrative expenses, a provision for loan and guarantee
losses and maintenance of a reasonable margin. In connection with these
transactions, the system generally must purchase from CFC a Loan or
Guarantee Subordinated Certificate in an amount up to 12% of the amount
guaranteed or lent.
10

CFC Financing Factors

Funding for the Company's loan programs is derived from Members' Equity
(net margins, retained as allocated but unreturned patronage capital), the
issuance of its Subordinated Certificates to members (see Note 3 to
Combined Financial Statements), Collateral Trust Bonds, Medium-Term Notes,
Commercial Paper, Bank Bid Notes, and Quarterly Income Capital Securities.
CFC's ability to obtain short- and long-term funds from external sources as
needed depends on such factors as its credit ratings and reputation in the
investment community, its financial condition and that of its members, the
depth and liquidity of the markets in which it participates, market factors
outside of its control, its ability to conduct its operations to meet or
exceed the financial standards of performance expected by investment
markets and credit rating agencies and the continued support of its
members.

Each year CFC allocates its net margins among its borrowers in proportion
to interest earned by CFC from such borrowers. These allocations are
evidenced by Patronage Capital Certificates which bear no interest or
dividends and have no stated maturity. These amounts are available for use
in CFC's operations pending their retirement.

As a condition of membership, CFC members have agreed to purchase
Membership Subordinated Certificates, which like CFC's Loan and Guarantee
Subordinated Certificates are unsecured subordinated obligations of CFC.
They generally mature 100 years after issuance and bear interest at the
rate of 5% per annum. The purchase of non-interest bearing Loan
Subordinated Certificates may also be required as a condition of each long-
term loan and certain intermediate-term loans made by CFC to its members.
Guarantee Subordinated Certificates, bearing interest at various rates, are
also required to be purchased in connection with CFC guarantees of member
debt. The maturity of Loan and Guarantee Subordinated Certificates
generally coincides with the maturity of the related loan or guaranteed
debt. Membership Certificates and Loan and Guarantee Certificates
represented 53% and 47%, respectively, of total Subordinated Certificates
outstanding at May 31, 1997.

To fund a portion of its long-term fixed rate loan program, CFC issues
intermediate- and long-term senior secured Collateral Trust Bonds, senior
unsecured Medium-Term Notes and subordinated unsecured Quarterly Income
Capital Securities with differing maturities, interest rates and redemption
provisions. The Collateral Trust Bonds are secured by pledges of eligible
mortgage notes with a principal amount at least equal to the total amount
of bonds outstanding. If certain minimum eligibility ratios are not
maintained, the mortgage notes affected must be replaced with other
eligible collateral. In addition, variable rate funding supported by an
equal amount of interest rate exchange agreements is used to fund long-term
fixed rate loans (see Note 5 to Combined Financial Statements).

The Company issues Commercial Paper in the United States and Europe through
dealers and directly to members and other eligible nonmember investors to
provide funds for short-, intermediate- and long-term variable rate loans
to members, including RUS guaranteed loans, and temporarily to fund long-
term fixed rate loans to members prior to funding with long-term fixed rate
securities. All securities issued in Europe have been denominated in U.S.
dollars. Commercial Paper could also be used to fund purchases of tax-
exempt securities which CFC may be obligated to purchase pursuant to its
commitment to act as standby purchaser. Commercial Paper outstanding at
May 31, 1997, 1996 and 1995, net of discount related to the issuance of
dealer Commercial Paper, was approximately $5,492.4 million, $4,718.1
million and $3,892.6 million respectively. The outstanding Commercial
Paper at May 31, 1997, 1996 and 1995 had average maturities of 34 days, 35
days and 68 days respectively. The amount of such outstanding Commercial
Paper sold directly by CFC to its members and eligible nonmembers as a
percentage of total outstanding Commercial Paper was 23% as of May 31, 1997
versus 26% at May 31, 1996.

CFC also issues short-term Bank Bid Notes to fund its variable rate loans.
These bid notes are unsecured loan obligations. Bank Bid Note facilities
are uncommitted lines of credit for which CFC does not pay a fee. The
amount of Bank Bid Notes outstanding as of May 31, 1997, 1996 and 1995 was
$115.0 million, $183.5 million and $350.0 million, respectively.

Revolving Credit Agreement

As of May 31, 1997, CFC had three revolving credit agreements totaling
$5,000.0 million which are used principally to provide liquidity support
for CFC's outstanding U.S. and European commercial paper programs, CFC's
guaranteed commercial paper issued by NCSC and the adjustable or
floating/fixed rate put bonds which CFC guarantees and for which it is
standby purchaser.
11

Two of these credit agreements, which total a combined $4,500.0 million,
were executed with 52 banks, with J.P. Morgan Securities, Inc. and The Bank
of Nova Scotia as Co-Syndication Agents and Morgan Guaranty Trust Company
of New York as Administrative Agent. Under these agreements, CFC can
borrow up to $2,250.0 million until November 26, 2001(the "five-year
facility"), and $2,250.0 million until November 25, 1997 (the "364-day
facility"). Any amounts outstanding under these facilities will be due on
the respective maturity dates. A third revolving credit agreement for
$500.0 million was executed on November 27, 1996 with ten banks, including
The Bank of Nova Scotia as Administrative and Syndication Agent (the "BNS
facility"). This agreement has a 364-day revolving credit period which
terminates November 26, 1997 during which CFC can borrow, and such
borrowings may be converted to a 1-year term loan at the end of the
revolving credit period.

In connection with the five-year facility, CFC pays a per annum facility
fee of .090%. The per annum facility fee for both agreements with a 364-
day maturity is .065% and there is no commitment fee at CFC's current
credit rating level. If CFC's long-term ratings decline, these fees may be
increased by no more than .035%. Generally, pricing options are the same
under all three agreements and will be at one or more rates as defined in
the agreements, as selected by CFC.

The revolving credit agreements require CFC among other things to maintain
Members' Equity and Members' Subordinated Certificates of at least $1,349.9
million as of May 31, 1997, an increase of $3.6 million compared to the
$1,346.3 million required at May 31, 1996. Each year, the required amount
of Members' Equity and Members' Subordinated Certificates is increased by
90% of net margins not distributed to members. CFC is also required to
maintain an average fixed charge coverage ratio over the six most recent
fiscal quarters of at least 1.025 and may not retire patronage capital
unless a minimum fixed charge coverage ratio of 1.05 was achieved for the
preceding fiscal year. The credit agreements prohibit CFC from incurring
senior debt (including guarantees but excluding indebtedness incurred to
fund RUS guaranteed loans and Quarterly Income Capital Securities) in an
amount in excess of ten times the sum of Members' Equity and subordinated
debt, restrict, with certain exceptions, the creation by CFC of liens on
its assets and contain certain other conditions to borrowing. The
agreements also prohibit CFC from pledging collateral in excess of 150% of
the principal amount of Collateral Trust Bonds outstanding. Provided that
CFC is in compliance with these financial covenants (including that CFC has
no material contingent or other liability or material litigation that was
not disclosed by or reserved against in its most recent annual financial
statements) and is not in default, CFC may borrow under the agreements
until the termination date. As of May 31, 1997 CFC was in compliance with
all covenants and conditions.

As of May 31, 1997 there were no borrowings outstanding under the
revolving credit agreements. On the basis of the five-year facility, at
May 31, 1997, CFC classified $2,250.0 million of its short term notes
payable outstanding as long-term debt. CFC expects to maintain more than
$2,250.0 million of notes payable outstanding during the next 12 months.
If necessary, CFC can refinance such notes payable on a long-term basis by
borrowing under the five-year facility, subject to the conditions therein.
12

Set forth below is a table showing CFC's outstanding borrowings and the
weighted average interest rates thereon as of the dates shown:

Amounts Outstanding at May 31,
(Dollar Amounts In Thousands) 1997 1996 1995

Long- and intermediate-term debt: (A)
Floating Rate Series 1994A Collateral Trust Bonds,
Due 1996(B)(2) $ - $ 150,000 $ 150,000
9.50% Series T Collateral Trust Bonds, Due 1997 (1) - 150,000 150,000
8.50% Series U Collateral Trust Bonds, Due 1998(B)(1) 149,800 149,800 149,800
Variable Rate Collateral Trust Bonds, Due 1999(2) 150,000 - -
6.75% Collateral Trust Bonds, Due 2001(2) 100,000 - -
6.45% Collateral Trust Bonds, Due 2001(2) 100,000 100,000 -
6.50% Collateral Trust Bonds, Due 2002(2) 100,000 100,000 -
5.95% Collateral Trust Bonds, Due 2003(2) 100,000 100,000 -
6.65% Collateral Trust Bonds, Due 2005(2) 50,000 50,000 -
7.30% Collateral Trust Bonds, Due 2006(2) 100,000 - -
Floating Rate Series E-2 Collateral Trust Bonds,
Due 2010(1) 2,142 2,178 2,189
7.20% Collateral Trust Bonds, Due 2015(2) 50,000 50,000 -
9.00% Series O Collateral Trust Bonds, Due 2016(C)(1) - - 82,289
9.00% Series V Collateral Trust Bonds, Due 2021(1) 150,000 150,000 150,000
7.35% Collateral Trust Bonds, Due 2026(2) 100,000 - -
Medium-Term Notes and weighted
average interest rates 615,396 (6.30%) 604,252 (6.68%) 573,637 (7.23%)
Total long- and intermediate-term
debt and weighted average interest
rates (D) (E) 1,767,338 (6.82%) 1,606,230 (7.20%) 1,257,915 (7.90%)
Quarterly Income Capital Securities 125,000 (8.00%) - -
Members' Subordinated Certificates,
including advance payments and
weighted average interest rates (F) 1,069,158 (4.29%) 1,073,924 (4.29%) 1,096,466 (4.36%)
Total long- and intermediate-term
debt and Members' Subordinated
Certificates and weighted average
interest rates $2,961,496 (5.96%) $2,680,154 (6.03%) $2,354,381 (6.25%)
Short-term debt(G) and weighted
average interest rates(H) $5,607,372 (5.64%) $4,901,570 (5.41%) $4,242,570 (6.11%)
Total debt and weighted average
interest rates at May 31 $8,568,868 (5.75%) $7,581,724 (5.63%) $6,596,951 (6.16%)

(1) Collateral Trust Bonds issued under the 1972 Indenture.
(2) Collateral Trust Bonds issued under the 1994 Indenture.

(A) Net of $0.2 million, $0.2 million and $1.1 million principal amount of
bonds held in treasury at May 31, 1997, 1996 and 1995, respectively,
all of which was purchased in connection with CFC's deferred
compensation program.

(B) Collateral Trust Bonds maturing during fiscal year 1998 have been
reclassified to short-term debt in the balance sheet.

(C) The Series O Collateral Trust Bonds were called on March 16, 1996.

(D) Excludes $2,250.0 million, $2,730.0 million, and $2,430.0 million of
Commercial Paper classified as long-term debt as of May 31, 1997, 1996
and 1995, respectively (see Note 4 to Combined Financial Statements).

(E) Total long- and intermediate-term debt at May 31, 1997 includes $368.7
million which will be due or is expected to be redeemed during fiscal
year 1998.

(F) Excluding $103.5 million, $102.5 million and $114.1 million of Debt
Service Reserve Certificates and $39.8 million, $31.4 million and $24.3
million of subscribed but unissued Subordinated Certificates as of May
31, 1997, 1996 and 1995, respectively, since such funds are not
generally available for investing in earning assets.

(G) Net of discount; includes $2,250.0 million, $2,730.0 million and $2,430.0
million of Commercial Paper classified as long-term debt as of May 31, 1997,
1996 and 1995, respectively. Includes $115.0 million, $183.5 million and
13

$350.0 million of Bank Bid Notes at May 31, 1997,
1996 and 1995, respectively (see Note 4 to Combined Financial
Statements).

(H) Average interest rates are weighted on the basis of amounts of
outstanding borrowings without adjustment for bank credit compensation
arrangements for short-term borrowings and without adjustment for
Collateral Trust Bonds due within one year and reclassified as notes
payable.

Set forth below are the weighted average costs incurred by CFC on its
short-term borrowings (Commercial Paper and Bank Bid Notes) and on its
long-term borrowings (Collateral Trust Bonds, Medium-Term Notes, Quarterly
Income Capital Securities and interest rate swaps) for the period shown.

Years Ended May 31,
1997 1996 1995

Short-term borrowings 5.54% 5.83% 5.59%
Long-term borrowings 7.36% 7.99% 8.15%
Total short- and long-term borrowings 5.99% 6.33% 6.15%

Tax Status

In 1969, CFC obtained a ruling from the Internal Revenue Service (the
"IRS") recognizing CFC's exemption from the payment of Federal income taxes
under Section 501(c)(4) of the Internal Revenue Code. Such exempt status
could be removed as a result of changes in legislation or in administrative
policy or as a result of changes in CFC's business. CFC believes that its
operations have not changed materially from those described to the IRS.
CFC's affiliates RTFC and GFC are taxable Subchapter T corporations.

Investment Policy

Surplus funds are invested pursuant to policies adopted by CFC's Board of
Directors. Under present policy, surplus funds may be invested in direct
obligations of or obligations guaranteed by the United States or agencies
thereof, the World Bank, or certain high quality commercial paper,
obligations of foreign governments, Eurodollar deposits, bankers'
acceptances, bank letters of credit, certificates of deposit or working
capital acceptances. The policy also permits investments in certain types
of repurchase agreements with highly rated financial institutions, whereby
the assets consist of eligible securities of a type listed above set aside
in a segregated account. CFC typically has two types of funds available
for investment: (1) the debt service reserve funds held by the trustee
under the indenture under which CFC formerly issued Collateral Trust Bonds
(the "1972 Indenture"), used to make bond interest and sinking fund
payments; and (2) member loan payments and Commercial Paper investments in
excess of daily cash funding requirements. Debt service reserve funds are
invested with maturities scheduled to coincide with interest and sinking
fund payment dates.

Competition

According to annual financial statements filed with CFC, the electric
cooperative distribution and power supply systems had a total of $42.1
billion in long-term debt outstanding at December 31, 1996. RUS is the
dominant lender to the electric cooperative industry with $30.2 billion
or 72% of the total outstanding debt. RUS currently prices the majority
of its loans based on a municipal government obligation index, prices
hardship loans at a rate of 5% and provides guarantees of loans to its
electrical cooperatives by others, principally the FFB. RUS typically
does not lend the full amount of debt requested by the cooperative,
requiring the cooperative to seek supplemental lending from private
capital sources. CFC and other lenders are not in competition with RUS,
but rather compete for the supplemental lending requirement, as well as
for the full lending requirement for those cooperatives that have decided
not to borrower from RUS. At December 31, 1996, CFC had a total of $8.8
billion in long-term loans and guarantees outstanding to the electric
cooperatives. This total included $2.1 billion of guarantees provided
to the cooperatives for tax-exempt bonds, leverage leases and other debt
obligations. The remaining $3.2 billion was outstanding from other
sources. During fiscal year 1997, CFC was selected as the lender for 93%
of the total supplemental lending requirement. During this same period,
CFC was selected as lender for 95% of the amount lent to distribution
systems for the repayment of their RUS debt.

The competitive market for providing credit to the rural telephone
industry is difficult to quantify, since rural areas are served by
commercial telephone companies as well as cooperatives, and many
rural telephone companies are not RUS
14

borrowers. At December 31, 1995, RUS had a total of $3.6 billion
outstanding to telecommunications borrowers. The RTB, which is
a government sponsored enterprise providing supplemental
financing to RUS borrowers and is managed by RUS, had a total of $1.5
billion outstanding. CFC is not in direct competition with RUS or RTB,
but rather competes with other lenders for additional supplemental
lending and for the full lending requirement of the telecommunications
borrowers that have decided not to borrow from RUS or RTB or for projects
not eligible for RUS or RTB financing. CFC's competition includes
regional banks, government sponsored enterprises and insurance companies.
At December 31, 1995, CFC had a total of $1.0 billion in loans
outstanding to telecommunications borrowers. At December 31, 1995, to
the best of CFC's knowledge, there was one other lender with a portfolio
of similar size to CFC's, but no other lenders to rural
telecommunications borrowers with portfolios of similar size to the RUS
and RTB.

Employees

At May 31, 1997, CFC had 150 employees, including engineering, financial
and legal personnel, management specialists, credit analysts, accountants
and support staff. CFC believes that its relations with its employees are
good.

15

THE RURAL ELECTRIC AND TELEPHONE SYSTEMS

General

The majority of the reporting systems at December 31, 1995, are members of
CFC and information regarding these systems is available in the Annual
Statistical Reports of RUS (the "RUS Reports"), therefore commentary in
this section is based on information about the systems generally, rather
than CFC members alone (see Note on page 20). However, the Composite
Financial Statements on pages 21 to 25 relate only to CFC Utility Members.
At December 31, 1995 and for the year then ended, CFC's members accounted
for approximately 98% of the total utility plant, 97% of the total equity,
98% of the net margins and 97% of the total number of systems covered by
RUS Reports, and CFC believes that its members are representative of the
systems as a whole.

The RUS Program

Since the enactment of the Rural Electrification Act in 1936 (the "Act"),
RUS has financed the construction of electric generating plants,
transmission facilities and distribution systems in order to provide
electricity to persons in rural areas who were without central station
service. Principally through the organization of systems under the RUS
loan program in 46 states and U.S. territories, the percentage of farms and
residences in rural areas of the United States receiving central station
electric service increased from 11% in 1934 to almost 99% currently. Rural
electric systems serve 11% of all consumers of electricity in the United
States and its territories. They account for approximately 8% of total
sales of electricity and about 7% of energy generation and generating
capacity.

In 1949, the Act was amended to allow RUS to lend for the purpose of
furnishing and improving rural telephone service. The RUS
telecommunications lending program had 844 reporting borrowers at December
31, 1995. The 844 borrowers operated 4,835 exchanges, providing service to
approximately 1.0 million business customers and 4.1 million residential
customers.

The Act provides for RUS to make insured loans and to provide other forms
of financial assistance to borrowers. RUS is authorized to make direct
loans, at below market rates, to systems which are eligible to borrow from
it. RUS is also authorized to guarantee loans which have been used mainly
to provide financing for construction of Bulk Power Supply Projects.
Guaranteed loans bear interest at a rate agreed upon by the borrower and
the lender (which generally has been the FFB). For telephone borrowers,
RUS also provides financing through the RTB. The RTB is a government
sponsored enterprise providing financing at rates reflecting its cost of
capital and is managed by RUS. RUS exercises a high degree of financial
and technical supervision over borrowers' operations. Its loans and
guarantees are generally secured by a mortgage on substantially all of the
system's property and revenues.

For fiscal year 1997, both the House and Senate Agriculture Appropriation
Committees have approved RUS electric insured loan levels of $524 million,
of which $69 million would be at the 5% rate, and $455 million would be at
a government obligation index. An additional $300 million is available
from the FFB and guaranteed by RUS in loan guarantees. Proposed electric
funding levels for fiscal year 1998 are $525 million for loans and $300
million for guarantees. These levels must be approved by both Houses and
the President. The loan levels may be further adjusted based on the loan
subsidies appropriated and the gap between the rate on these loans and the
government cost of money on October 1, 1997.

Legislation enacted in 1994 allows RUS electric borrowers to prepay their
loans to RUS at a discount based on the government's cost of funds at the
time of prepayment. If a borrower chooses to prepay its notes, it becomes
ineligible for future RUS loans for a period of ten years, but remains
eligible for RUS loan guarantees. As of June 30, 1997, 108 borrowers had
either fully prepaid or partially prepaid their RUS notes, under these
provisions, in the total amount of $1,435.7 million. A total of 86 of
these borrowers have refinanced a total of $1,261.4 million of this amount
with CFC.

Distribution Systems

Distribution systems are local utilities distributing electric power,
generally purchased from wholesale sources, to consumers in their
service areas. Virtually all are locally-managed cooperative,
non-profit associations, and most have been in operation for at
least 40 years. At December 31, 1995, the approximate number of
consumers served by RUS electric borrowers was 11.5 million, representing
an estimated 27.7 million ultimate users. Aggregate operating revenues
of the distribution systems from sales of electric energy for the year
ended December 31, 1995, totaled $15.0 billion, of
16

which 66 was derived from the sales of electricity to
residential consumers (farm and non-farm), 31% from such sales to
commercial and industrial consumers and the remainder from sales to various
other consumers.

The composite TIER of CFC member distribution systems increased from 2.42
in 1995 to 2.44 in 1996. The composite DSC ratio increased from 2.40 in
1995 to 2.42 in 1996. The composite MDSC ratio increased from 2.28 in
1995 to 2.30 in 1996. Composite equity as a percent of total assets for
member distribution systems increased from 41.7% at December 31, 1995 to
42.5% at December 31, 1996.

Virtually all power contracts between power supply systems and their member
distribution systems provide for rate adjustments to cover costs of
supplying power, although in certain cases such adjustments must be
approved by regulatory agencies. During the last five years, costs and
rates have generally been stable, and in some cases, have actually
declined.

Wholesale power supply contracts ordinarily guarantee neither an
uninterrupted supply nor a constant cost of power. Contracts with RUS-
financed power supply systems (which generally require the distribution
system to purchase all its power requirements from the power supply system)
provide for rate increases to pass along increases in sellers' costs. The
wholesale power contracts permit the power supply system, subject to
approval by RUS and, in certain circumstances, regulatory agencies, to
establish rates to its members so as to produce revenues sufficient, with
revenues from all other sources, to meet the costs of operation and
maintenance (including, without limitation, replacements, insurance, taxes
and administrative and general overhead expenses) of all generating,
transmission and related facilities, to pay the cost of any power and
energy purchased for resale, to pay the costs of generation and
transmission, to make all payments on account of all indebtedness and
leases of the power supply system and to provide for the establishment and
maintenance of reasonable reserves. The rates under the wholesale power
contracts are required to be reviewed by the Board of Directors of the
power supply system at least annually.

Power contracts with investor-owned utilities and power supply systems
which do not borrow from RUS generally have rates subject to regulation by
the Federal Energy Regulatory Commission, ("FERC"). Contracts with Federal
agencies generally permit rate changes by the selling agency (subject, in
some cases, to Federal regulatory approval). In the case of many
distribution systems, only one power supplier is within a feasible distance
to provide wholesale electricity.

Power Supply Systems

Power supply systems are utilities which purchase or generate electric
power and provide it wholesale to distribution systems for delivery to the
ultimate retail consumer. Of the 63 operating power supply systems
financed in whole or in part by RUS or CFC at December 31, 1996, 62 were
cooperatives owned directly or indirectly by groups of distribution systems
and one was government owned. Of this number, 39 had generating capacity
of at least 100 megawatts, and nine had no generating capacity. Eight of
the nine systems with no generating capacity operated transmission lines to
supply certain distribution systems. Certain other power supply systems
had been formed but did not yet own generating or transmission facilities.

At December 31, 1996, the 53 power supply systems reporting to RUS owned
interests in 145 generating plants representing generating capacity of
approximately 29,034 megawatts, or approximately 4.3% of the nation's
estimated electric generating capacity, and served 689 RUS distribution
system borrowers. Certain of the power supply systems which lease
generating plants from others operate these facilities to produce their
power requirements. Of the power supply systems' total generating capacity
in place as of December 31, 1996, steam plants accounted for 94.1%
(including nuclear capacity representing approximately 10.0% of such total
generating capacity), internal combustion plants accounted for 5.5% and
hydroelectric plants accounted for 0.4%. RUS loans and loan guarantees as
of December 31, 1996, have provided funds for the installation of over
34,000 megawatts (including nuclear capacity of approximately 3,806
megawatts, or 11.2% of the total) of which 1,279 megawatts or 3.8% of the
total have officially been canceled.

The high level of growth in demand for electricity experienced in the
1970's was not expected to decline in the 1980's and the power supply
systems continued their construction programs in anticipation of continued
growth in demand. During the 1980's, however, slower growth in power
requirements of the systems reduced the need for additional generating
capacity in most areas of the country. Thus, many areas are now
experiencing a surplus of generating capacity and, as a result, some power
supply systems have significant amounts of fixed costs for power plant
investment not fully supported by increased revenues (see Note 10 to
Combined Financial Statements for further information concerning certain
CFC members experiencing this problem).
17

While the level of funds needed for new generating units is expected to be
low over the next few years, the need for transmission and capital
additions will continue to generate substantial long-term capital
requirements. The power supply systems are expected to continue to seek to
satisfy these requirements primarily through the RUS loan guarantee
program.

Telephone Systems

As of December 31, 1995 (complete data at December 31, 1996 is not yet
available), there were 863 telephone systems that were RUS borrowers, (RUS
had collected financial data on 844). The 863 telephone systems included
235 cooperative not-for-profit organizations and 622 commercial for-profit
organizations. These organizations provided telephone service to
approximately 5.1 million consumers and owned approximately 851,357 miles
of telephone lines. Total assets at December 31, 1995 were $13.6, billion,
with a composite TIER of 3.08 and composite equity ratio of 48.4%. The
telephone systems operate in all fifty states and seven U.S. territories.

The RTB was created by a 1971 amendment to the Act to serve as a source of
supplemental financing for rural telephone systems. To initially
capitalize the RTB, between 1971 and 1991 the government purchased $592
million in Class A stock of the RTB. RTB borrowers are required to
purchase class B stock in an amount equal to five percent of the amount of
each loan. As of June 30, 1995, these borrowers have invested $524
million. In addition, borrowers and other eligible entities have purchased
$112 million in Class C stock of the RTB.

The Rural Electrification Act provides that the RTB is to redeem and retire
the government's Class A stock as soon as practicable after September 30,
1995, but not to the extent that the bank's Board of Directors determines
that such retirement would impair the operation of the RTB. During fiscal
year 1996, the RTB retired 3% of the U. S. Government's investment. Up to
five percent of the U.S. government's remaining investment will be retired
in fiscal year 1997 and subsequent years. Legislation to facilitate the
RTB's operation as a privatized entity has been drafted by the Department
of Agriculture, but has not yet been introduced to Congress or released to
industry. CFC will continue to monitor the situation, and will play
whatever role is in the best interest of the RTB's telecommunication
borrowers.

Regulation and Competition

In 1992 Congress passed the Energy Policy Act effectively providing
competition in the generation sector of the wholesale electric power
industry. In 1996, the FERC promulgated rules governing transmission
access within the wholesale market and providing for the recovery of
stranded generation costs. These rules were designed to support the
competitive wholesale market. Recently several states have passed laws
requiring utilities to unbundle their vertically structured retail rates
and to subsequently begin providing customer choice for retail generation
services. Many other states are considering such legislation. The
structure of subsequent legislation and rules defining the competitive
retail market and the provision for stranded cost recovery are not yet
known. The ultimate impact on CFC's members can not be determined until
these items have been resolved.

The degree of regulation of rural electric systems by state authorities
varies from state to state. The retail rates of rural electric systems are
regulated in 16 states (in which there are 257 systems). Distribution
systems in these states account for 32% of the total operating revenues and
patronage capital of all distribution systems nationwide. State agencies,
principally public utility commissions, of 19 states regulate those states'
293 systems as to the issuance of long-term debt securities. In five
states (in which there are 53 systems) state agencies regulate, to varying
degrees, the issuance of short-term debt securities. Since 1967, the
Federal Power Commission and its successor, FERC, which regulates
interstate sales of energy at wholesale, has taken the position that it
lacks jurisdiction to regulate cooperative rural electric systems which are
current borrowers from RUS. However, rural electric cooperatives that pay
off their RUS debt or never incur RUS debt may be regulated by FERC with
respect to financing and/or rates.

In addition to competition from other utility systems, some distribution
systems have expressed increasing concern about the loss of desirable
suburban service areas as a result of annexation by expanding municipal or
franchised investor-owned utility systems, regardless of the degree of
territorial protection otherwise provided by applicable law. The systems
are also subject to competition from alternate sources of energy such as
bottled gas, natural gas, fuel oil, diesel generation, wood stoves and
self-generation.

The systems, in common with the electric power industry generally, may
incur substantial capital expenditures and increases in operating costs in
order to meet the requirements of both present and future Federal, state
and local standards relating to safety and environmental quality control.
These include possible requirements for burying distribution lines and
meeting air and water quality standards.
18

The 1990 amendments to the Clean Air Act of 1970 (the "Amendments"),
required utilities and others to reduce emissions. The Amendments contain a
range of compliance options and a phase-in period which will help mitigate
the immediate costs of implementation. Many of CFC's member systems
already comply with the provisions of the Amendments. CFC is currently
monitoring the overall impact of the Amendments on individual member
systems, which must implement compliance plans and operating or equipment
modifications for Phase II of the Act (2000). Compliance plans for member
systems with units affected in Phase I primarily involved fuel switching to
low-sulfur coal. The trading of emission allowances may also be an
economical alternative in Phase II. Some member systems originally
believed to be affected by the Amendments have developed strategies
designed to minimize the Amendments' impact. At this time, it is not
anticipated that the Amendments will have a material adverse impact on the
quality of CFC's loan portfolio.

On April 24, 1996, FERC issued orders 888 and 889. Order 888 provides for
competitive wholesale power sales by requiring jurisdictional public
utilities that own, control, or operate transmission facilities to file
non-discriminatory open access transmission tariffs that provide others
with transmission service comparable to the service they provide
themselves. The reciprocity provision associated with Order 888 also
provides comparable access to transmission facilities of non-jurisdictional
utilities (including RUS borrowers and municipal and other publicly owned
electric utilities) that use jurisdictional utilities' transmission
systems. The order further provides for the recovery of stranded costs
from departing wholesale customers with agreements dated prior to July 11,
1994. After that date, stranded costs must be agreed upon in the service
agreement. Order 889 provides for a real time electronic information
system referred to as the Open Access Same-Time Information System
("OASIS"). It also establishes standards of conduct to ensure that
transmission owners and their affiliates do not have an unfair competitive
advantage by using transmission to sell power. Presently, many of the
issues surrounding the implementation of Orders 888 and 889 remain
unresolved. Due to this uncertainty, CFC is unable to estimate the
ultimate impact of these orders on its member systems.

Section 211 of the Federal Power Act as amended by the Energy Policy Act of
1992 classifies any cooperative with significant transmission assets as a
"transmitting utility" for purposes of this section. Under the provisions
of this Act, FERC has the authority to order such cooperatives to provide
open access for unaffiliated entities. This provision also authorizes FERC
to require investor-owned and other utilities to provide the same open
access transmission for the benefit of cooperatives. Electric cooperatives
have strongly supported section 211 for this reason. Under sections 205
and 206 of the Federal Power Act, cooperatives that pay off their RUS debt
are treated as "jurisdictional public utilities". FERC is proceeding under
the legal theory that, under these sections, it can order "jurisdictional
public utilities" to provide open access.

All telephone systems are regulated by the Federal Communications
Commission ("FCC") with respect to long distance access rates. Most states
also regulate local rates.

The Telecommunications Act of 1996 opened the local exchange market to
competition. The Telecommunications Act contains numerous provisions
designed to assure the continued viability of the rural
telecommunications companies. Currently, the large and small Local
Exchange Carriers ("LEC") and their potential competitors are arguing
before the FCC and in the courts about how to fairly translate the
provisions of the Telecommunications Act into the rules and regulations
by which the new telecommunications industry will operate. If the
provisions favorable to the rural telecommunications companies are not
negated, they should be able to meet potential competitors on favorable
terms.

Due to the Telecommunications Act, competition will eventually come to
the rural areas. The cost of competing with an established LEC may
limit the majority of the competition to the larger local exchanges
located adjacent to suburban areas and to rural areas containing large
customers. The majority of CFC's telecommunications borrowers are well
established in their service areas, with no significant competition at
present.

The impact of the Telecommunication Act on CFC's telecommunications
borrowers can not be determined until such time as the final rules and
regulations have been decided by the FCC and in the courts.

Financial Information

The rural electric systems differ from investor-owned utilities in that the
vast majority are cooperative, non-profit organizations operating under
policies which provide that rates should be established so as to minimize
rates over the long term. Revenues in excess of operating costs and
expenses are referred to as "net margins and patronage capital" and are
treated as equity capital furnished by the systems' consumers. This
"capital" is transferred to a balance sheet account designated as
"patronage capital", and is usually allocated to consumers in proportion
to their patronage. Such capital is
19

not refunded to them for a period of years during which time it is available
to the system to be used for proper corporate purposes. Subject to their
applicable contractual obligations, the systems may refund such capital to
their members when doing so will not impair the systems' financial condition.
In the terminology of the Uniform System of Accounts prescribed by RUS for
its borrowers, "operating revenues and patronage capital" refers to all
utility operating income received during a given period.

Similar to the practice followed by investor-owned utilities pursuant to
FERC procedures and as prescribed by RUS, the systems capitalize as a cost
of construction the interest charges on borrowed funds ("interest charged
to construction") and the estimated unearned interest attributable to
internally-generated funds ("allowance for funds used during construction")
used in the construction of generation, and to a lesser extent transmission
and distribution facilities. This accounting policy, which increases net
margins by the amounts of these actual and imputed interest charges, is
based on the premise that the cost of financing construction is an
expenditure serving to increase the productive capacity and value of the
utility's assets and thus should be included in the cost of the assets
constructed and recovered over the life of the assets. In the case of
power supply systems, RUS has included in its direct loans and guarantees
of loans amounts sufficient to meet the estimated interest charges during
construction. If the foregoing accounting policy were not followed,
utilities would presumably request regulatory permission, if applicable, to
increase their rates to cover such costs. The amounts of interest charged
to construction and allowance for funds used during construction
capitalized by distribution systems are relatively insignificant. Because
power supply systems generally expend substantial amounts on long-term
construction projects, the application of this accounting policy may result
in substantially lower interest expense and in substantially higher net
margins for such systems during construction than would be the case if such
a policy were not followed.

On the following pages are tables providing composite statements of
revenues, expenses and patronage capital from the distribution systems
which were members of CFC and power supply systems which were members of
CFC during the five years ended December 31, 1996, and their respective
composite balance sheets at the end of each such year.

________
NOTE: Statistical information contained in this section has not been
examined by CFC's independent public accountants, and the number and
geographical dispersion of the systems have made impractical an independent
investigation by CFC of the statistical information. The information
presented is based upon financial statements submitted to CFC, subject to
year-end audit adjustments, by reporting borrowers and do not, with minor
exceptions, take into account current data for certain systems, primarily
those which are not active CFC borrowers.
20

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE STATEMENTS OF REVENUES, EXPENSES AND PATRONAGE CAPITAL
AS REPORTED BY CFC MEMBER DISTRIBUTION SYSTEMS

The following are unaudited figures which are based
upon financial statements submitted to RUS or to
CFC by CFC Member Distribution Systems

Years Ended December 31,
(Dollar Amounts In Thousands) 1996 1995 1994 1993 1992

Operating revenues and patronage capital $17,028,087 $16,253,957 $15,603,853 $15,072,400 $13,921,515
Operating deductions:
Cost of power (1) 10,924,695 10,486,773 10,174,716 9,882,450 9,211,421
Distribution expense (operations) 445,990 412,058 386,235 366,148 346,183
Distribution expense (maintenance) 804,663 752,659 699,253 643,390 589,722
Administrative and general expense (2) 1,627,925 1,584,099 1,506,729 1,398,749 1,287,224
Depreciation and amortization expense 1,069,101 1,000,017 942,435 879,957 828,966
Taxes 458,623 436,563 417,471 396,024 365,473
Total 15,330,997 14,672,169 14,126,839 13,566,718 12,628,989
Utility operating margins 1,697,090 1,581,788 1,477,014 1,505,682 1,292,526
Non-operating margins 180,311 172,118 134,831 110,612 157,912
Power supply capital credits (3) 282,800 254,839 260,335 274,250 219,638
Total 2,160,201 2,008,745 1,872,180 1,890,544 1,670,076
Interest on long-term debt (4) 869,076 833,110 752,749 730,078 749,594
Other deductions 43,711 46,859 52,574 36,644 27,841
Total 912,787 879,969 805,323 766,722 777,435
Net margins and patronage capital $1,247,414 $1,128,776 $1,066,857 $1,123,822 $ 892,641

TIER (5) 2.44 2.42 2.42 2.54 2.19
DSC (6) 2.42 2.40 2.26 2.44 2.07
MDSC (7) 2.30 2.28 2.09 2.21 1.99
Number of systems included 832 824 828 825 821

(1) Includes cost of purchased power, power production and transmission
expense.
(2) Includes sales expenses, consumer accounts and customer service and
informational expense as well as other administrative and general
expenses.
(3) Represents net margins of power supply systems and other associated
organizations allocated to their member distribution systems and added in
determining net margins and patronage capital of distribution systems
under RUS accounting practices. Cash distributions of this credit have
rarely been made by the power supply systems and such other organizations
to their members.
(4) Interest on long-term debt is net of interest charged to construction,
which is stated separately as a credit in RUS Reports. For a description
of the reasons for, and the effect on net margins and patronage capital
of, the accounting policies governing interest charged to construction
and allowance for funds used during construction, see "Financial
Information". CFC believes that amounts incurred by distribution systems
for interest charged to construction and allowance for funds used during
construction are immaterial relative to their total interest on long-term
debt and net margins and patronage capital.
(5) The ratio of (x) interest on long-term debt (in each year including all
interest charged to construction) and net margins and patronage capital
to (y) interest on long-term debt (in each year including all interest
charged to construction).
(6) The ratio of (x) net margins and patronage capital plus interest on long-
term debt (including all interest charged to construction) plus
depreciation and amortization to (y) long-term debt service obligations.
(7) The ratio of (x) operating margins and patronage capital plus interest on
long-term debt (including all interest charged to construction) plus
depreciation and amortization expense plus Non-operating Margins-
Interest plus cash received in respect of generation and transmission and
other capital credits to (y) long-term debt service obligations.
21

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE BALANCE SHEETS
AS REPORTED BY CFC MEMBER DISTRIBUTION SYSTEMS

The following are unaudited figures which are based
upon financial statements submitted to RUS or to
CFC by CFC Member Distribution Systems

At December 31,
(Dollar Amounts In Thousands) 1996 1995 1994 1993 1992

Assets and other debits:
Utility plant:
Utility plant in service $35,406,826 $33,118,001 $31,162,069 $29,172,898 $27,502,596
Construction work in progress 975,357 881,171 799,327 697,329 619,764
Total utility plant 36,382,183 33,999,172 31,961,396 29,870,227 28,122,360
Less: accumulated provision for depreciation
and amortization 9,911,677 9,221,378 8,631,903 7,992,325 7,401,028
Net utility plant 26,470,506 24,777,794 23,329,493 21,877,902 20,721,332
Investments in associated organizations (1) 3,348,326 3,207,671 3,051,840 2,847,260 2,585,621
Current and accrued assets 4,126,415 3,980,052 3,789,699 3,733,893 3,611,874
Other property and investments 503,871 496,105 456,923 366,452 343,734
Deferred debits 488,009 511,977 472,536 463,194 439,529
Total assets and other debits $34,937,127 $32,973,599 $31,100,491 $29,288,701 $27,702,090
Liabilities and other credits:
Net worth:
Memberships $ 105,497 $ 127,749 $ 114,080 $ 100,689 $ 98,450
Patronage capital and other equities (2) 14,731,432 13,633,993 12,804,404 11,859,273 10,826,559
Total net worth 14,836,929 13,761,742 12,918,484 11,959,962 10,925,009
Long-term debt (3) 16,214,420 15,718,979 15,020,664 14,569,363 14,303,024
Current and accrued liabilities 2,697,605 2,418,230 2,260,514 2,066,601 1,898,868
Deferred credits 872,013 786,455 714,083 598,997 555,618
Miscellaneous operating reserves 316,160 288,193 186,746 93,778 19,571
Total liabilities and other credits $34,937,127 $32,973,599 $31,100,491 $29,288,701 $27,702,090
Equity Percentage (4) 42.5% 41.7% 41.5% 40.8% 39.4%
Number of systems included 832 824 828 825 821

(1) Includes investments in service organizations, power supply capital
credits and investments in CFC.
(2) Includes non-refundable donations or contributions in cash, services or
property from states, municipalities, other government agencies,
individuals and others for construction purposes separately listed
the applicable RUS Report.
(3) Principally debt to RUS and includes $5,467,636, $4,824,491, $3,989,914,
$3,607,159 and $3,536,794 for the years 1996, 1995, 1994, 1993 and 1992,
respectively, due to CFC.
(4) Determined by dividing total net worth by total assets and other debits.
22

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE STATEMENTS OF REVENUES, EXPENSES AND PATRONAGE CAPITAL
AS REPORTED BY CFC MEMBER POWER SUPPLY SYSTEMS

The following are unaudited figures which are based
upon financial statements submitted to RUS or to
CFC by CFC Member Power Supply Systems

Years Ended December 31,
(Dollar Amounts In Thousands) 1996 1995 1994 1993 1992

Operating revenues and patronage capital $10,585,875 $10,182,928 $9,972,873 $9,976,560 $ 9,111,434
Operating deductions:
Cost of power (1) 7,322,039 6,984,648 6,760,543 6,606,419 5,855,131
Distribution expense (operations) 15,431 16,019 14,668 14,391 12,959
Distribution expense (maintenance) 16,607 15,950 14,703 11,081 11,300
Administrative and general expense (2) 473,869 483,030 431,645 433,278 390,521
Depreciation and amortization expense 1,056,113 956,889 930,483 902,810 872,657
Taxes 237,700 246,700 241,775 223,122 233,420
Total 9,121,759 8,703,236 8,393,817 8,191,101 7,375,988
Utility operating margins 1,464,116 1,479,692 1,579,056 1,785,459 1,735,446
Non-operating margins 493,874 253,883 221,003 328,958 280,810
Power supply capital credits (3) 55,590 48,981 32,531 47,838 30,771

Total 2,013,580 1,782,556 1,832,590 2,162,255 2,047,027
Interest on long-term debt (4) 1,436,200 1,476,062 1,857,644 2,014,794 2,075,939
Other deductions (5) 1,601,919 89,784 129,794 184,902 137,344
Total 3,038,119 1,565,846 1,987,438 2,199,696 2,213,283
Net margins and patronage $(1,024,539) $ 216,710 $ (154,848) $ (37,441) $ (166,256)
TIER (6) .29 1.15 .93 .98 .92
DSC (7) .69 1.02 1.01 1.03 1.05
Number of systems included (8) 54 53 53 50 50

(1) Includes cost of purchased power, power production and transmission
expense, separately listed in the applicable RUS Report.
(2) Includes sales expenses and consumer accounts expense and consumer
service and informational expense as well as other administrative and
general expenses, separately listed in the applicable RUS Report.
(3) Certain power supply systems purchase wholesale power from other power
supply systems of which they are members. Power supply capital
credits represent net margins of power supply systems allocated to
member power supply systems on the books of the selling power supply
systems. This item has been added in determining net margins and
patronage capital of the purchasing power supply systems under RUS
accounting practices. Cash distributions of this credit have rarely
been made by the selling power supply systems to their members. This
item also includes net margins of associated organizations allocated
to CFC power supply members and added in determining net margins and
patronage capital of the CFC member systems under RUS accounting
practices.
(4) Interest on long-term debt is net of interest charged to construction.
Allowance for funds used during construction has been included in non-
operating margins. For a description of the reasons for, and the
effect on net margins and patronage capital of, the accounting
policies governing interest charged to construction and allowance for
funds used during construction, see "Financial Information".
According to unpublished information furnished by RUS, interest
charged to construction and allowance for funds used during
construction for CFC power supply members in the years 1992-1996 were
as follows:
23

Allowance for
Interest Charged Funds used
(Dollar Amounts In Thousands) to Construction During Construction Total

1996 $ 13,434 $ 11,620 $ 25,054
1995 68,400 11,018 79,418
1994 46,773 8,913 55,686
1993 49,237 8,621 57,858
1992 54,093 4,396 58,489

(5) Includes $1,119,635 in 1996 related to the Cajun Electric Power Coop.,
Inc., with whom CFC has no credit exposure.
(6) The ratio of (x) interest on long-term debt (in each year including
all interest charged to construction) and net margins and patronage
capital to (y) interest on long-term debt (in each year including all
interest charged to construction). The TIER calculation includes the
operating results of six systems which failed to make debt service
payments or are operating under a debt restructure agreement, without
which the composite TIER would have been 1.21, 1.23, 1.31, 1.20 and
1.15 for the years ended December 31, 1996, 1995, 1994, 1993 and
1992, respectively.
(7) The ratio of (x) net margins and patronage capital plus interest on
long-term debt (including all interest charged to construction) plus
depreciation and amortization to (y) long-term debt service
obligations (including all interest charged to construction). The DSC
calculation includes the operating results of six systems which failed
to make debt service payments or are operating under a debt
restructure agreement. Without these systems, the composite DSC would
have been 1.20, 1.22, 1.24, 1.21 and 1.22 for the years ended December
31, 1996, 1995, 1994, 1993 and 1992, respectively.
(8) Thirteen CFC power supply system members are not required to report to
RUS since they are not currently borrowers from RUS. These systems,
with the exception of Old Dominion Electric Cooperative, are either in
the developmental stage or act as coordinating agents for their
members. Their inclusion would not have a material effect on this
data.
24

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE BALANCE SHEETS
AS REPORTED BY CFC MEMBER POWER SUPPLY SYSTEMS

The following are unaudited figures which are based
upon financial statements submitted to RUS or to
CFC by CFC Member Power Supply Systems

At December 31,
(Dollar Amounts In Thousands) 1996 1995 1994 1993 1992

Assets and other debits:
Utility plant:
Utility plant in service $32,191,089 $34,182,352 $32,934,304 $32,240,926 $31,375,391
Construction work in progress 640,005 931,397 1,624,978 1,469,882 1,324,432
Total utility plant 32,831,094 35,113,749 34,559,282 33,710,808 32,699,823
Less: accumulated provision for
depreciation and amortization 11,783,058 11,586,462 10,777,786 9,936,528 8,983,913
Net utility plant 21,048,036 23,527,287 23,781,496 23,774,280 23,715,910
Investments in associated organizations(1) 1,178,785 1,049,409 248,677 992,921 865,162
Current and accrued assets 3,984,238 4,211,004 3,997,466 4,284,613 4,076,841
Other property and investments 2,000,584 1,656,563 2,483,232 1,899,809 1,717,451
Deferred debits 3,636,749 4,391,800 4,366,377 4,078,879 1,879,607
Total assets and other debits $31,848,392 $34,836,063 $34,877,248 $35,030,502 $32,254,971
Liabilities and other credits:
Net worth:
Memberships $ 258 $ 250 $ 322 $ 252 $ 246
Patronage capital and other equities (2) (646,115) 497,756 246,262 432,095 315,793
Total net worth (645,857) 498,006 246,584 432,347 316,039
Long-term debt (3) 25,900,628 28,372,321 28,779,577 28,528,640 28,838,255
Current and accrued liabilities 2,040,563 1,848,755 2,747,022 1,185,182 1,531,722
Deferred credits 1,826,945 1,309,860 1,206,488 1,849,906 1,071,393
Miscellaneous operating reserves 2,726,113 2,807,121 1,897,577 3,034,427 497,562
Total liabilities and other credits $31,848,392 $34,836,063 $34,877,248 $35,030,502 $32,254,971
Number of systems included (4) 54 53 53 50 50

(1) Includes investments in service organizations, power supply capital
credits and investments in CFC.
(2) Includes a $1.2 billion decrease for Cajun Electric Power Coop., Inc.,
with whom CFC has no credit exposure, for 1996.
(3) Principally debt to RUS or debt guaranteed by RUS and loaned by FFB and
includes $1,264,475, $1,085,594, $1,065,556, $1,041,731 and $744,470 for
the years 1996, 1995, 1994, 1993 and 1992, respectively, due to CFC.
(4) Thirteen CFC power supply system members are not required to report to
RUS since they are not currently borrowers from RUS. These systems,
with the exception of Old Dominion Electric Cooperative, are either in
developmental stages or act as coordinating agents for their members.
Their inclusion would not have a material effect on these data.

Item 2. Properties.

CFC owns and operates a headquarters facility in Fairfax County, Virginia.
This facility consists of a six-story office building with separate parking
garage situated on four acres of land. The company also owned an
additional 31.5 acres of unimproved land adjacent to the building. On
August 12, 1997, CFC sold 23.5 acres of this unimproved land.

Item 3. Legal Proceedings.

None.
25

Item 4. Submission of Matters to a Vote of Security Holders.

None.
PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.

Inapplicable.

Item 6. Selected Financial Data.

The following is a summary of selected financial data for each of the
five years ended May 31, 1997.

(Dollar Amounts In Thousands) 1997 1996 1995 1994 1993

For the year ended May 31:
Operating income $ 564,439 $ 505,073 $ 440,109 $ 324,682 $ 336,387
Operating margin $ 51,530 $ 46,857 $ 41,803 $ 29,159 $ 38,352
Nonoperating income 3,206 3,764 3,409 4,029 3,296
Extraordinary loss (A) - (1,580) - - (3,161)
Net margins $ 54,736 $ 49,041 $ 45,212 $ 33,188 $ 38,487
Fixed charge coverage ratio (A) 1.12 1.12 1.13 1.1 1.16

As of May 31:
Assets $9,057,495 $8,054,089 $7,080,789 $6,224,296 $5,464,144
Long-term debt (B) $3,596,231 $3,682,421 $3,423,031 $2,841,220 $3,095,488
Members' subordinated certificates $1,212,486 $1,207,684 $1,234,715 $1,222,858 $1,215,547
Members' equity $ 271,594 $ 269,641 $ 270,221 $ 260,968 $ 258,299
Leverage ratio (C) 5.84 5.69 5.13 4.63 4.41
Debt to equity ratio (D) 3.97 3.63 3.01 2.52 2.24

(A) During the years ended May 31, 1996 and 1993, CFC paid premiums
totaling $1.6 million and $3.2 million, respectively, in connection
with the prepayment of Collateral Trust Bonds. Margins used to
compute the fixed charge coverage ratio represent net margins before
extraordinary loss plus fixed charges. The fixed charges used in the
computation of the fixed charge coverage ratio consist of interest and
amortization of bond discount and bond issuance expenses.
(B) Includes commercial paper reclassified as long-term debt and excludes
$268.7 million, $351.5 million, $262.7 million, $200.8 million and
$286.8 million in long-term debt that comes due, matures and/or will be
redeemed early during fiscal years 1998, 1997, 1996, 1995 and 1994,
respectively (see Note 5 to Combined Financial Statements).
(C) In accordance with CFC's revolving credit agreements, the leverage
ratio is calculated by dividing debt and guarantees outstanding,
excluding Quarterly Income Capital Securities and debt used to fund
loans guaranteed by the U.S. Government, by the total of Quarterly
Income Capital Securities, Members' Subordinated Certificates and
Members' Equity.
(D) The debt to equity ratio is calculated by dividing debt outstanding,
excluding Quarterly Income Capital Securities and debt used to fund
loans guaranteed by RUS, by the total of Quarterly Income Capital
Securities, Members' Subordinated Certificates, Members' Equity and the
loan and guarantee loss allowance.

CFC has had outstanding guarantees for its members' indebtedness in each of
the fiscal years shown above. Members' interest expense on such
indebtedness was approximately $90.8 million for the year ended May 31,
1997.

The Company does not have outstanding any common stock and does not pay
dividends. Under current policies, CFC retires Patronage Capital
Certificates, which represent annual allocations of CFC's net margins, 70%
during the next fiscal year and expects to retire the remaining 30% after
15 years, if permitted by CFC's contractual obligations and to the extent
that the Board of Directors in its discretion may determine from time to
time that the financial condition of CFC will not be impaired as a result.
26

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

The management discussion and analysis contains statements that may be
considered forward looking. In making these statements, CFC has made an
evaluation of estimates, risks and uncertainties related to each
circumstance. The actual results may differ from the estimates and
assumptions discussed in this presentation, which could cause the actual
results to differ materially.

Overview

The following discussion and analysis is designed to provide a better
understanding of the Company's combined financial condition and results of
operations and as such should be read in conjunction with the Combined
Financial Statements, including the notes thereto.

CFC was formed in 1969 by the rural electric cooperatives to provide them
with a source of funds to supplement the financing provided by RUS. The
Company was organized as a cooperative in which each member (other than
associate members) receives one vote. Under CFC's bylaws, the Board of
Directors must be comprised of 22 individuals who are either general
managers or directors of members. CFC was granted tax-exempt status under
Section 501(c)(4) of the Internal Revenue Code.

In 1987, RTFC was formed by CFC to provide a source of funds for the rural
telephone industry. Like CFC, RTFC is a cooperative. However, RTFC's
bylaws and voting members' agreement require that the majority of RTFC's
Board of Directors be elected from individuals designated by CFC. The
remaining board positions are filled by individuals nominated by the other
RTFC members. Because CFC has control of the RTFC Board, RTFC's financial
condition and results of operations are combined with those of CFC. (Unless
stated otherwise, all references to CFC refer to the combined results of
CFC, RTFC and all other CFC controlled affiliates.)

CFC's purpose is to provide its member rural electric and telephone
cooperatives with financial and business management solutions. CFC
enters the capital markets, based on the combined strength of its members
to borrow the funds required to offer long- and short-term, fixed and
variable rate loan options. CFC also offers its AA credit rating to
enhance its members' credit on other public or private placement
transactions. CFC also provides management services, such as cost of
service studies, assistance with FERC compliance, expert testimony in
rate and tax appraisal cases, consumer loans, financial forecasting
software and the sponsorship of numerous seminars and meetings for the
members' business and financial management staff.

Each rural electric cooperative that joins CFC agrees to purchase
Membership Subordinated Certificates from CFC as a condition of membership.
In connection with any long-term loan or guarantee made by CFC to or on
behalf of one of its members, CFC generally requires that the member make
an additional investment in CFC by purchasing Loan or Guarantee
Subordinated Certificates. Like the Membership Subordinated Certificates,
the Loan and Guarantee Subordinated Certificates are unsecured and
subordinate to other debt.

CFC is required by the cooperative laws under which it is incorporated to
have the mechanism to allocate its earnings to its members. CFC thus
allocates its net margins, (patronage capital) based on each member's
participation in loan programs during the year. The Membership, Loan and
Guarantee Subordinated Certificates along with patronage capital provide
CFC's base capitalization. On a regular basis, CFC obtains debt financing
in the market by issuing long-term fixed rate or variable rate Collateral
Trust Bonds and Quarterly Income Capital Securities, intermediate-term
fixed or variable rate Medium-Term Notes, Commercial Paper and enters into
Bank Bid Note agreements. In addition, CFC obtains debt financing from its
membership and other qualified investors through the direct sale of its
Commercial Paper and Medium-Term Notes.

CFC's primary objective as a cooperative is to provide its members with the
lowest possible loan and guarantee rates. Therefore, CFC marks up its
funding costs only to the extent necessary to cover its operating expenses,
a provision for loan and guarantee losses and to provide for margins
sufficient to preserve interest coverage in light of CFC's financing
objectives. To the extent members contribute to CFC's base capital with
Subordinated Certificates carrying below-market interest rates, CFC can
offer proportionally lower interest rates on its loans to members.

CFC's performance is closely tied to the performance of its member rural
electric and telephone utility systems due to the near 100% concentration
of its loan and guarantee portfolio in those industries. The following
provides an analysis of both CFC's performance and a discussion of the
quality of CFC's loan and guarantee portfolio.

27

Financial Condition

At May 31, 1997, CFC had $9.1 billion in total assets. Approximately $8.7
billion or 96% of these assets consisted of loans made to CFC's members.
The remaining $0.4 billion consisted of other assets to support CFC's
operations. Except as required for the debt service account and unless
excess cash is invested overnight, generally CFC does not use funds to
invest in debt or equity securities.

At May 31, 1997, 88% of CFC's loan portfolio consisted of 35-year long-term
secured amortizing loans, including long-term loans classified as
nonperforming and restructured. The remaining 12% consisted of short- and
intermediate-term secured and unsecured lines of credit and long-term loans
guaranteed by the United States Government. Approximately 37% or $3.3
billion in long-term loans carry a fixed rate of interest. All other
loans, including $4.5 billion in long-term loans, are subject to interest
rate adjustment monthly or semimonthly.

In addition to its loans, CFC had provided approximately $2.1 billion in
guarantees for its members at May 31, 1997. These guarantees relate
primarily to tax-exempt financed pollution control equipment and to
leveraged lease transactions for equipment and plant.

At May 31, 1997, CFC had also committed to lend an additional amount of
approximately $6.8 billion to its members. Most unadvanced loan
commitments contain a material adverse change condition. As many of these
commitments are provided for operational back-up liquidity, CFC does not
anticipate funding the majority of the commitments outstanding.

CFC funds its assets through the sale of Subordinated Certificates,
retained equity and other debt instruments. As discussed previously,
Subordinated Certificates include both original Membership Subordinated
Certificates and Loan and Guarantee Subordinated Certificates, all of which
are subordinate to other CFC debt. At May 31, 1997, Membership
Subordinated Certificates totaled $645 million. These certificates
generally mature in 70 to 100 years and generally pay interest at 5.0%. At
May 31, 1997, Loan Subordinated Certificates totaled $334 million and
carried a weighted average interest rate of 1.1%. At May 31, 1997,
Guarantee Subordinated Certificates totaled $233 million and carried a
weighted average interest rate of 4.8%. Both the loan and guarantee
certificates are long-term instruments which generally amortize at a rate
equivalent to that of the loan or guarantee to which they relate. On a
combined basis, Subordinated Certificates carried a weighted average
interest rate of 4.3%. Subordinated Certificates are required to be
purchased in conjunction with the receipt of a loan or credit enhancement
based on the member's leverage ratio, total debt and credit enhancements
divided by total equity investments in CFC. Members that have a leverage
ratio with CFC in excess of a level in the approved policy are required to
purchase additional Subordinated Certificates to receive a loan or credit
enhancement. At the present time, the majority of CFC's members maintain a
CFC leverage ratio within the policy limit. The issuance of zero percent
loan certificates is expected to exceed the issuance of 5.0% Membership
Certificates. Therefore, management expects this average interest rate to
decline over time. CFC paid a total of $43.3 million of interest to
holders of Subordinated Certificates during fiscal year 1997.

During fiscal year 1995, CFC adjusted its patronage capital retirement
policy to return 70% of net margins in the next fiscal year, with the
remaining 30% to be held and then retired at a future date, if permitted by
CFC's contractual obligations and to the extent that the Board of Directors
in its discretion may determine from time to time that the financial
condition of CFC will not be impaired as a result. During the next 12
years, CFC will retire the unretired allocations representing net margins
for fiscal years 1988 to 1993, all of which had been allocated under the
previous policy. The unretired allocations (Members' Equity) do not earn
interest and are junior to all debt instruments, including Subordinated
Certificates. At May 31, 1997, CFC had $272 million in retained equity.

CFC enters the capital markets through the issuance of Collateral Trust
Bonds, Medium-Term Notes, Commercial Paper, Quarterly Income Capital
Securities and Bank Bid Notes. At May 31, 1997, CFC had $999 million in
fixed rate Collateral Trust Bonds and $150 million in variable rate
Collateral Trust Bonds outstanding. Under its Collateral Trust Bond
Indentures, CFC must pledge as collateral eligible mortgage notes from its
distribution system borrowers, evidencing loans equal in principal amount
to at least 100% of the outstanding Bonds. At May 31, 1997, CFC had
pledged $1,295 million in mortgage notes. During fiscal year 1997, CFC
issued a total of $450 million in Collateral Trust Bonds in four separate
debt offerings. Subsequent to the end of the year on June 9, 1997, CFC
issued an additional $100 million in Collateral Trust Bonds, bearing a rate
of 6.70% and due in 2002. All Collateral Trust Bonds issued after February
1994 have been issued under an Indenture with First Bank National
Association as trustee ("1994 Indenture"). Virtually all Collateral Trust
Bonds were offered to outside investors in underwritten public offerings.
28

At May 31, 1997, CFC had $615 million outstanding in Medium-Term Notes.
Medium-Term Notes are issued for terms of 270 days to 30 years and are
unsecured obligations of CFC. Medium-Term Notes outstanding to CFC's
members totaled $277 million at May 31, 1997. The remaining $338 million
were sold through dealers to outside investors. During fiscal year 1998,
CFC anticipates the offering of Medium-Term Notes in the European markets.

At May 31, 1997, CFC had $5,492 million outstanding in Commercial Paper
with a weighted average maturity of 34 days. Commercial Paper notes are
issued with maturities up to 270 days and are unsecured obligations of CFC.
Commercial Paper outstanding to CFC's members totaled $1,197 million at May
31, 1997. The remaining $4,295 million was sold through dealers to outside
investors in the United States and Europe. European commercial paper may
be issued in currencies other than U.S. dollars. For notes issued in a
foreign currency, CFC will enter into a currency swap with a highly rated
counterparty at the time of the issuance.

In addition, CFC obtains funds from various banking institutions under Bank
Bid Note arrangements, similar to bank lines of credit. The notes are
issued for terms up to three months and are unsecured obligations of CFC.
At May 31, 1997, CFC had $115 million outstanding in Bank Bid Notes.

At May 31, 1997, CFC had $125 million outstanding in Quarterly Income
Capital Securities. The Quarterly Income Capital Securities were issued
during fiscal year 1997. The securities were issued in denominations of
$25, a coupon rate of 8%, and a final maturity of 49 years and are
unsecured obligations of CFC, subordinate and junior in right of payment to
senior debt and the debt obligations guaranteed by CFC, but senior to
Subordinated Certificates. In addition, CFC has the right at any time and
from time to time during the term of the Quarterly Income Capital
Securities to suspend interest payments for a period not exceeding 20
consecutive quarters.

During the year, total assets increased by $1,003 million. Net loan
balances increased by $950 million or 12%. Gross loans increased by a
total of $965 million, partially offset by an increase in the allowance for
loan and guarantee losses of $15 million, over the prior year. As a
percentage of the portfolio, long-term loans (excluding loans guaranteed by
RUS) represented 88% at May 31, 1997, compared to 86% at May 31, 1996.
Long-term fixed rate loans represented 38% and 44% of the total long-term
loans at May 31, 1997 and 1996. Loans converting from a variable rate to a
fixed rate for the year ended May 31, 1997, totaled $136 million, a
decrease from the $606 million that converted for the year ended May 31,
1996. Offsetting the conversions to the fixed rate were $109 million and
$103 million of loans that converted from the fixed rate to the variable
rate or selected a variable rate upon the expiration of the current fixed
interest rate period, for the years ended May 31, 1997 and 1996,
respectively. This resulted in a net conversion of $27 million from the
variable rate to the fixed rate for the year ended May 31, 1997 compared to
a net conversion of $503 million from the fixed rate to the variable rate
for the year ended May 31, 1996.

The increase in total loans outstanding at May 31, 1997, was primarily due
to an increase of $690 million in long-term variable rate loans, an
increase of $213 million in intermediate-term loans and an increase of $135
million in long-term fixed rate loans offset by a decrease of $279 million
in RUS guaranteed loans. The increase to loans outstanding for fiscal year
1997 included the advance of $907 million for the purpose of repaying RUS
loans, a total of $471 million was advanced to two borrowers as part of
debt restructuring agreements in which the RUS debt was repaid at a
significant discount.

During the year, CFC substantially increased its short-term debt
outstanding to fund the increase in variable rate loans outstanding. Notes
Payable, which consists of Commercial Paper, Bank Bid Notes and Collateral
Trust Bonds that mature within one year, increased $1,036 million. At
May 31, 1997, CFC's short-term debt consisted of $4,214 million in dealer
Commercial Paper, $1,203 million in Commercial Paper issued to CFC's
members, $75 million in Commercial Paper issued to certain nonmembers,
$115 million in Bank Bid Notes and $150 million in Collateral Trust Bonds
due within one year. The Commercial Paper sold to CFC's members and
certain nonmembers increased by $42 million, the amount of Bank Bid Notes
outstanding decreased by $69 million and Commercial Paper sold through
CFC's dealers increased by $732 million from the prior year. CFC's
Commercial Paper and Bank Bid Notes had a weighted average maturity of 34 days
at May 31, 1997. As described in the footnotes to the Combined Financial
Statements, CFC reclassifies a portion of its short-term debt as long-term,
as it has the ability (subject to certain conditions) to refinance this
short-term debt on a long-term basis under its revolving credit agreements.
CFC renegotiated its revolving credit agreements during the second quarter
of fiscal year 1997 and was able to reclassify $2,250 million and $2,730
million in short-term debt as long-term at May 31, 1997 and 1996,
respectively.

During fiscal year 1997, long-term debt outstanding decreased by $169
million. The decrease in long-term debt outstanding was due to a decrease
of $480 million in the amount of short-term debt supported by the revolving
credit
29

agreement and the reclassification of $150 million of Collateral
Trust Bonds maturing within one year as Notes Payable. This decrease
was offset by the issuance of a total of $300 million in fixed rate
Collateral Trust Bonds and $150 million in variable rate Collateral Trust
Bonds, and a net increase of $11 million in Medium-Term Notes outstanding

Deferred income (primarily fees from loan conversions) decreased by over
$10 million, due to the recognition of $11 million in conversion fees in
income during fiscal year 1997. CFC will amortize the remaining $1 million
of deferred fees into income over the next year.

Subordinated Certificates and Members' Equity increased by $7 million to
$1,484 million at May 31, 1997, compared to $1,477 million at May 31, 1996.
During fiscal year 1995, CFC adopted policy changes that generally reduced
the amount of Subordinated Certificates required to be purchased as a
precondition to receiving a loan advance and increased the amount of
allocated net margins to be retired in the next fiscal year from 50% to
70%.

Off-balance sheet, CFC experienced an increase of $1,156 million in
unadvanced loan commitments to a total of $6,768 million at May 31, 1997
and guarantees outstanding decreased by $169 million to a balance of $2,081
million at May 31, 1997. Unadvanced commitments include loans approved by
CFC for which loan contracts have not yet been executed or for which
contracts have been executed, but funds have not been advanced. The
majority of the short-term unadvanced commitments provide backup liquidity
to CFC borrowers, and therefore CFC does not anticipate funding most of
such commitments. To qualify for the advance of funds under all
commitments, a borrower must assure CFC that there has been no material
change since the loan was approved. The guarantee balance decreased due to
the redemption of one tax-exempt bond issue and scheduled repayments and
lease reductions. The guarantee balance is anticipated to continue its
decline; however, there has been a development of lease/lease back
transactions by power supply members, which may result in new guarantees in
future years.

CFC's leverage ratio increased during the year from 5.69 at May 31, 1996,
to 5.84 at May 31, 1997. The ratio is calculated after excluding from debt
the Quarterly Income Capital Securities and all debt associated with the
funding of the RUS 100% guaranteed loans. Subordinated Certificates and
Quarterly Income Capital Securities are treated as equity in the
calculation of the leverage ratio. The increase in the leverage ratio was
primarily due to an increase in loans outstanding to members financed by
the issuance of short-term debt, Collateral Trust Bonds and Medium-Term
Notes, offset by the issuance of the $125 million in Quarterly Income
Capital Securities. CFC contemplates that its leverage ratio will continue
to increase modestly as it obtains external capital to accommodate its loan
growth. CFC will retain the flexibility to further amend its capital
retention policies to retain members' investments in CFC consistent with
maintaining acceptable financial ratios.

Margin Analysis

CFC uses an interest coverage ratio instead of the dollar amount of gross
or net margins as a primary performance indicator, since CFC's net margins
are subject to fluctuation as interest rates change. During the year ended
May 31, 1997, CFC achieved a Times Interest Earned Ratio ("TIER") of 1.12.
Management has established a 1.10 TIER as its minimum operating objective.
CFC has earned TIER's of 1.12, 1.12 and 1.13 for the years ended May 31,
1997, 1996, and 1995 respectively. Earned TIER is a reflection of CFC's
ability to cover the interest expense on funding.

Fiscal Year 1997 versus 1996 Results

Operating income for the year ended May 31, 1997 was $564 million, an
increase of $59 million or 11.7% over the prior year. The increase in
interest income was due to an increase in average loans outstanding.
The average loan balance outstanding for fiscal year 1997 was $8,581
million, an increase of $1,125 million or 15.1% over the prior year. The
average yield earned on the loan portfolio decreased by 19 basis points
to 6.58% for fiscal year 1997, from 6.77% earned the prior year. A
total of $11 million of deferred conversion fees were recognized as
interest income during the year. At May 31, 1997, only $1 million of
deferred conversion fees remained to be recognized in future years.

CFC's total cost of funding for fiscal year 1997 was $476 million, an
increase of $50 million or 11.7% over the prior year. The increase to
the cost of funding was also due to the growth in average loans
outstanding. During the year CFC issued $300 million of Collateral Trust
Bonds, $125 million of Quarterly Income Capital Securities and incurred a
net increase of $11 million of Medium-Term Notes at fixed interest
rates. CFC also issued $150 million of Collateral Trust Bonds and had a
net increase of $706 million of Commercial Paper and Bid Notes at
variable rates. During the year, $150 million of fixed rate Collateral
Trust Bonds and $150 million of variable rate Collateral Trust Bonds
30

matured. The cost of funds as a percentage of average loan volume
decreased by 17 basis points, from 5.71% for fiscal year 1996 to 5.54%
for fiscal year 1997.

The gross margin earned on loans for fiscal year 1997 was $89 million, an
increase of $10 million or 12.7% over the prior year. The increase to
the gross margin earned was due to the increased average loan volume.
CFC was able to reduce its yield earned on the portfolio by 19 basis
points and the cost of funding by 17 basis points, resulting in a
reduction of 2 basis points of gross margin. The reduction in the
percentage of gross margin was offset by the large increase in average
loan volume outstanding.

Operating expenses for fiscal year 1997 totaled $22 million, an increase
of $2 million or 10% over the prior year. The increase to operating
expenses was due to foreclosure litigation, conversion of the information
systems and an increased marketing effort. Further details regarding
the foreclosure litigation are contained in the footnotes to the Combined
Financial Statements. The conversion of the information systems from
the main frame to the client server should be completed during fiscal
year 1998. The increased marketing effort includes the enhancement of
the CFC brand image along with the development and rollout of new
products and services for CFC members to use in differentiating their
service from that of other energy providers.

During fiscal year 1997, CFC added a total of $15 million to the loan and
guarantee loss allowance, an increase of $3 million over the prior year.
The increase to the amount provided to the loan and guarantee loss
reserve was required due to the growth in the loan portfolio.

Nonoperating income earned during fiscal year 1997 was $3 million, a
decrease from the $4 million earned the prior year. The decrease was
primarily due to reduced fees from the servicing of grantor trusts. The
total loans serviced by CFC decreased by $538 million during the year.
The decrease was due to the RUS early redemption of loans it had
guaranteed after the negotiated restructuring of the debt for one of
CFC's members.

Net margins earned by CFC for fiscal year 1997 were $55 million, an
increase of $6 million over the prior year. The increase to the net
margins was primarily due to the increase to the average loan volume
outstanding during fiscal year 1997.

Fiscal Year 1996 versus 1995 Results

For the year ended May 31, 1996, operating income totaled $505 million, an
increase of $65 million over the prior year. The increase to operating
income was due to a positive volume variance of $65 million. Average loans
outstanding increased by $903 million from $6,553 million at May 31, 1995
to $7,456 million at May 31, 1996. The average yield on loans outstanding
increased slightly for the year ended May 31, 1996, 6.77% compared to
6.72% for the prior year.

For the year ended May 31, 1996, the cost of funds totaled $426 million, an
increase of $65 million over the prior year. Included in the cost of funds
is interest expense on CFC's Subordinated Certificates and other debt
instruments offset by earnings on debt service investments. The increase
in the cost of funds was due to a positive volume variance of $53 million
and a positive rate variance of $12 million. As stated above, the average
loan volume increased by $903 million during the year. The average
interest rate on all funding increased from 5.51% for the year ended May
31, 1995 to 5.71% for the year ended May 31, 1996.

Gross margins for both years totaled $79 million. The overall gross margin
yield dropped from 1.21% for the year ended May 31, 1995 to 1.06% for the
year ended May 31, 1996. This is a result of the pricing factor changes
described above.

General and administrative expenses were approximately $20 million for both
years. The provision to the allowance for loan and guarantee losses for
fiscal year 1996 totaled $12 million, a reduction of $5 million from the
prior year. Total expenses for the year ended May 31, 1996 were $32
million, a decrease of $5 million from the year ended May 31, 1995.

Nonoperating income for fiscal year 1996 increased slightly to $4 million.
During fiscal year 1996, CFC effected the early redemption of the Series O
Collateral Trust Bonds, recording an extraordinary loss for the redemption
premium of $2 million. The sum of the nonoperating income and the
extraordinary loss represent a net decrease of $1 million compared to the
nonoperating income of $3 million for fiscal year 1995.

Overall, CFC's net margins increased by $4 million for the year ended May
31, 1996 to a total of $49 million.
31

The following is a summary of CFC's operating results as a percentage of
average loans outstanding for the last three fiscal years ending May 31,
1997, 1996 and 1995.

1997 1996 1995

Interest on loans 6.58% 6.77% 6.72%
Less: Cost of funds 5.54% 5.71% 5.51%
Gross operating margin 1.04% 1.06% 1.21%
General and administrative expenses 0.26% 0.26% 0.30%
Provision for loan and guarantee losses 0.18% 0.16% 0.26%
Total expenses 0.44% 0.42% 0.56%
Operating margin 0.60% 0.64% 0.65%
Nonoperating income (1) 0.04% 0.02% 0.05%
Net margins 0.64% 0.66% 0.70%
TIER 1.12 1.12 1.13

(1) Nonoperating income includes the extraordinary loss in fiscal year 1996
resulting from the prepayment of debt.

Loan and Guarantee Portfolio Assessment

Portfolio Diversity

CFC and its combined affiliates make loans and provide financial guarantees
to their qualified members. The combined memberships include rural
electric distribution systems, rural electric generation and transmission
systems, telecommunication systems, statewide rural electric and
telecommunication associations, and associate organizations.

The following chart summarizes loans and guarantees outstanding by member
class at May 31, 1997, 1996 and 1995.

Percentage of Total
1997 1996 1995

Distribution Systems 57.16% 54.37% 49.08%
Power Supply Systems 30.29% 33.38% 38.87%
Service Organizations 1.63% 1.77% 1.82%
Telecommunication Organizations 10.00% 9.57% 9.27%
Associate Members 0.92% 0.91% 0.96%
Total 100.00% 100.00% 100.00%

CFC's members are widely dispersed throughout the United States and its
territories, including 46 states, the District of Columbia, Guam, Samoa and
the U.S. Virgin Islands. At May 31, 1997, 1996 and 1995, no state or
territory had over 10.6%, 9.9% and 9.1%, respectively, of total loans and
guarantees outstanding.

Credit Concentration

In addition to the geographic diversity of the portfolio, CFC limits its
exposure to any one borrower. The majority of the largest single exposures
are concentrated in the power supply systems due to their large plant and
equipment requirements. At May 31, 1997, the total exposure outstanding to
any one borrower did not exceed 5% of total loans (excluding loans
guaranteed by RUS) and guarantees outstanding. At May 31, 1997, CFC had
$2,809 million in loans outstanding, excluding loans guaranteed by RUS, and
$1,820 million in guarantees outstanding to its largest 40 borrowers,
representing 32% of total loans outstanding and 85% of total guarantees
outstanding. Credit exposure to the largest 40 borrowers represented 42%
of total credit exposure at May 31, 1997, compared to 43% at May 31, 1996.
CFC's ten largest credit exposures represented 22% of total exposure at
May 31, 1997 and 1996.

Security Provisions

Except when providing lines of credit, CFC typically lends to its members
on a secured basis. At May 31, 1997, a total of $767.8 million of loans
were unsecured representing 8.6% of total loans and 7.0% of total loans and
guarantees.
32

Approximately $128.2 million or 18.6% of the unsecured loans
represent obligations of distribution borrowers for the initial phase(s) of
RUS note buyouts. Upon completion of the buyout from RUS, CFC will receive
first lien security on all assets and future revenues. The unsecured loans
would represent 7.0% of total loans and and 5.7% of total loans and
guarantees, if the partial note buyout obligations were excluded. CFC's
long-term loans are typically secured pro-rata with other secured lenders,
if any (primarily RUS), by all assets and future revenues of the borrower.
Short-term loans are generally unsecured lines of credit. Guarantees are
secured on a pro-rata basis with other secured creditors by all assets and
future revenues of the borrower or by the underlying financed asset. In
addition to the collateral received, CFC also requires that its borrowers
set rates designed to achieve certain financial ratios.

Portfolio Quality

The following table summarizes the key composite operating results of CFC's
two main borrower types, distribution and power supply systems, which
together comprised 87.5% and 87.7% of CFC's total loan and guarantee
portfolio at May 31, 1997 and 1996. The information presented below is as
of December 31, and taken from the RUS data contained on pages 21 to 25.

CFC Distribution Member Borrowers
Composite Results

1996 1995 1994 1993 1992

TIER 2.44 2.42 2.42 2.54 2.19
DSC 2.42 2.40 2.26 2.44 2.07
MDSC 2.30 2.28 2.09 2.21 1.99
Equity percentage 2.47% 41.70% 41.50% 40.83% 39.44%

CFC Power Supply Member Borrowers
Composite Results

1996 1995 1994 1993 1992

TIER 1.21 1.23 1.31 1.20 1.15
DSC 1.20 1.22 1.24 1.21 1.22
Equity percentage 12.3% 11.7% 9.3% 9.7% 8.0%

NOTE: The power supply composite results have been presented without the
operating results of six systems experiencing financial
difficulties. CFC had credit exposure to four of the six borrowers
(see footnote 10 to the Combined Financial Statements for a
detailed description of these borrowers).

Most CFC power supply borrowers sell the majority of their power under all-
power-requirements contracts with their member distribution systems. These
contracts allow, subject to regulatory requirements and competitive
constraints, for the recovery of all costs at the power supply level. Due
to the contractual connection between the power supply and distribution
systems, total combined system equity (power supply equity plus the equity
at its affiliated distribution systems) has typically been maintained at
the distribution level.

As with CFC, to the extent distribution systems can fund their assets with
retained Members' Equity (i.e., unretired capital credits), overall funding
costs for plant and equipment are reduced. Distribution systems can, in
turn, pass these savings on to their member/consumers in the form of lower
utility rates.

The effectiveness of the all-power-requirements contract is dependent on
the individual systems' right and ability (legal as well as economic) to
establish rates to cover all costs. The boards of directors of most of
CFC's power supply and distribution members have the authority to establish
binding rates for their consumer members. Some states regulate rate-
setting and can therefore override the system's internal rate-setting
procedures. However, most CFC members are not externally rate regulated.
CFC has 841 distribution members of which 594 are not regulated. Of the
remaining 247 distribution systems, 16 are regulated only on a streamlined
basis. At the power supply level, 22 members are regulated.

During the past few years, power supply members have been increasing their
equity levels. Under recently changed RUS underwriting standards, in order
to qualify for additional RUS loan funds, power supply systems may be
required to
33

maintain, or demonstrate an ability to reach, a 20% of assets
equity level, or they must obtain guarantees from their affiliated
distribution systems.

CFC telecommunications borrowers reported composite TIER of 3.21, DSC of
1.58 and Equity ratio of 34% for the year ended December 31, 1996. As
of the date of this filing, all borrowers had not reported financial
results for the year ended December 31, 1996.

Nonperforming and Restructured Loans

CFC classifies a borrower as nonperforming when any one of the following
criteria are met: (1) principal or interest payments on any loan to the
borrower are past due 90 days or more, (2) the borrower is operating under
protection of the bankruptcy court, or (3) for some other reason,
management does not expect the timely repayment of principal or interest.
Once a borrower is classified as nonperforming, interest on its loans is
recognized on a cash basis. Alternatively, CFC may choose to apply all
cash received to the reduction of principal, thereby forgoing interest
income recognition. At May 31, 1997, nonperforming loans totaled $9
million, a decrease of $16 million over the prior year-end. The decrease
was due to principal repayments received during the year. There were no
new loans classified as nonperforming during the year.

Loans classified as restructured are loans for which agreements have been
executed that change the original terms of the loan, generally a change to
the originally scheduled cashflows. At May 31, 1997, restructured loans
totaled $362 million, an increase of $153 million from the prior year.
Restructured loans in the amount of $362 million, $205 million and $131
million were on a nonaccrual basis with respect to the recognition of
interest income at May 31, 1997, 1996 and 1995, respectively. The increase
in restructured loans outstanding was due to the advance of funds in
accordance with the restructured loan agreements.

The majority of CFC's problem loan situations arose prior to the past five
years as a result of excess capacity or canceled capacity additions after
the plant and equipment construction cycle of the mid-1980s. Since 1986,
when power supply construction-in-progress represented 16.3% of total power
supply plant, power supply members have reduced the level of plant
additions (see Note 10 to Combined Financial Statements for a more complete
discussion of certain loan and guarantee contingencies).

NONPERFORMING AND RESTRUCTURED ASSETS

As of May 31,
(Dollar Amounts In Thousands) 1997 1996 1995

Nonperforming loans $9,428 $25,294 $27,641
Percent of loans and guarantees outstanding 0.09% 0.25% 0.29%

Restructured loans $361,961 $209,361 184,978
Percent of loans and guarantees outstanding 3.29% 2.05% 1.94%

Total nonperforming and restructured loans $371,389 $234,655 212,619
Percent of loans and guarantees outstanding 3.38% 2.30% 2.23%

Allowance for Loan and Guarantee Losses

CFC maintains an allowance for potential loan and guarantee losses which is
periodically reviewed by management for adequacy. In performing this
assessment, management considers various factors including an analysis of
the financial strength of CFC's borrowers, delinquencies, loan charge-off
history, underlying collateral, and economic and industry conditions. At
May 31, 1997, the allowance for loan and guarantee losses totaled $233
million, an increase of $15 million from the prior year-end. The allowance
represented 62.8% of nonperforming and restructured loans and 2.12% of
total loans and guarantees outstanding at year-end.

Since its inception in 1969, CFC has charged off loan balances in the total
amount of $28.4 million, net of recoveries.

Management believes that the allowance for loan and guarantee losses is
adequate to cover any portfolio losses which may occur.
34

The following chart presents a summary of the allowance for loan and
guarantee losses at May 31, 1997, 1996 and 1995.

ALLOWANCE FOR LOAN AND GUARANTEE LOSSES

Years Ended May 31,
(Dollar Amounts In Thousands) 1997 1996 1995

Beginning balance $218,047 $205,596 $188,196
Provision for loan and guarantee losses 15,161 12,451 17,400
Charge offs - - -
Ending balance $233,208 $218,047 $205,596

As a percentage of loans and guarantees
outstanding 2.12% 2.14% 2.16%
As a percentage of nonperforming
and restructured loans outstanding 92.79% 92.88% 96.71%

Asset/Liability Management

A key element of CFC's funding operations is the monitoring and management
of interest rate and liquidity risk. This process involves controlling
asset and liability volumes, repricing terms and maturity schedules to
stabilize gross operating margins and retain liquidity.

Interest Rate Risk

CFC is subject to interest rate risk to the extent CFC's loans are subject
to interest rate adjustment at different times than the liabilities which
fund those assets. Therefore, CFC's interest rate risk management policy
involves the close matching of asset and liability repricing terms within a
range of 5% of total assets. CFC measures the matching of funds to assets
by comparing the amount of fixed rate assets repricing or amortizing to the
total fixed rate debt maturing over the next year. At May 31, 1997, CFC
had $303 million in fixed rate assets amortizing or repricing and $204
million in fixed rate liabilities maturing during fiscal year 1998. The
difference, $99 million, represents the fixed rate assets in excess of the
fixed rate debt maturing during the next fiscal year. This difference of
$99 million at May 31, 1997 represents 1.1% of total assets. CFC funds
variable rate assets which reprice monthly with short-term liabilities,
primarily Commercial Paper and Bank Bid Notes, both of which are issued
primarily with original maturities under 90 days. CFC funds fixed rate
loans with fixed rate Collateral Trust Bonds, Medium-Term Notes, Quarterly
Income Capital Securities, Subordinated Certificates and Members' Equity.
With the exception of Subordinated Certificates, which are generally issued
at rates below CFC's long-term cost of funding and with extended
maturities, CFC's liabilities have average maturities that closely match
the repricing terms of CFC's fixed interest rate loans. CFC also uses
Commercial Paper supported by interest rate exchange agreements to fund its
portfolio of fixed rate loans.

Certain of CFC's Collateral Trust Bonds and Medium-Term Notes were issued
with early redemption provisions. To the extent borrowers are allowed to
convert their fixed rate loans to a variable interest rate and to the
extent it is beneficial, CFC takes advantage of these early redemption
privileges. However, because conversions can take place at different
intervals from early redemptions, CFC charges conversion fees designed to
compensate for any additional interest rate risk assumed by the Company.

35

INTEREST RATE GAP ANALYSIS
(Fixed Assets/Liabilities)
As of May 31, 1997

(Dollar Amounts In Millions)
Over 1 yr. Over 3 yrs. Over 5 yrs. Over 10 yrs.
Less than but less but less but less but less Over
1 year than 3 yrs. than 5 yrs. than 10 yrs. than 20 yrs. 20 yrs. Total

Assets:
Loan Amortization
and repricing $302.7 $716.0 $672.3 $750.5 $577.3 $ 139.4 $3,158.2

Total Assets $302.7 $716.0 $672.3 $750.5 $577.3 $ 139.4 $3,158.2

Liabilities and Equity:
Long-Term Debt $196.0 $302.9 $315.3 $614.8 $ 52.2 $ 375.0 $1,856.2
Subordinated Certificates 8.0 273.9 257.9 189.8 166.8 72.7 969.1
Equity - 135.2 20.0 25.0 50.0 - 230.2

Total Liabilities and Equity $204.0 $712.0 $593.2 $829.6 $269.0 $ 447.7 $3,055.5

Gap * $ 98.7 $ 4.0 $ 79.1 $(79.1) $308.3 $(308.3) $ 102.7

Cumulative Gap $ 98.7 $102.7 $181.8 $102.7 $411.0 $ 102.7
Cumulative Gap as a %
of Total Assets 1.09% 1.13% 2.01% 1.13% 4.54% 1.13%

* Loan amortization/repricing over/(under) debt maturities

Interest Rate Exchange Agreements

CFC uses interest rate exchange agreements as part of its overall
interest rate matching strategy. Interest rate exchange agreements are
used when they provide CFC a lower cost funding option or minimize basis
risk. CFC will only enter into interest rate exchange agreements with
highly rated financial institutions. At May 31, 1997, CFC was a party to
a total of $438.8 million, notional amount, of such agreements. CFC is
using such agreements to fix the rate on $238.8 million of its variable
rate commercial paper and on $200.0 million to minimize the LIBOR
variable rate versus a commercial paper variable rate basis risk. The
difference between the rate paid and rate received on these agreements is
included in CFC's total cost of funding.

Foreign Currency Risk

CFC may issue European Commercial Paper, Collateral Trust Bonds or Medium-
Term Notes denominated in foreign currencies. For any such note issued,
CFC expects to enter into a foreign currency swap with a highly rated
counterparty. The cost of the currency swap would be factored into the
interest rate CFC pays on the obligation and included in CFC's total cost
of funds.

Liquidity

CFC is subject to liquidity risk, which includes market factors beyond its
control, to the extent cash repayments on its assets are insufficient to
cover the cash requirements on maturing liabilities and other sources of
funds with which to make debt repayments are not available. For the most
part, CFC funds its long-term loans with much shorter term maturity debt
instruments. As a result, CFC has to manage its liquidity risk by ensuring
that other sources of funding are available to make debt maturity payments.
CFC accomplishes this in four ways. First, CFC maintains revolving credit
agreements which (subject to certain conditions) allow CFC to borrow funds
on terms of up to five years. Second, CFC has maintained investment grade
ratings, facilitating access to the capital markets. Third, CFC maintains
shelf registrations for Collateral Trust Bonds, Medium-Term Notes and
Quarterly Income Capital Securities which (absent market disruptions and
assuming CFC remains creditworthy) could be issued at fixed or variable
rates in sufficient amounts to fund the next 18 to 24 months' funding
requirements. Fourth, CFC obtains a significant portion of its funding
directly from its members and believes this funding is more stable than
funding obtained from outside sources.
36

CFC's long- and short-term debt and guarantees are rated by three of the
major credit rating agencies, Moody's Investors Service ("Moody's"),
Standard & Poor's Corporation ("S&P") and Fitch Investors Service
("Fitch"). Fitch, Moody's and S & P have reaffirmed CFC's current
ratings. The following table presents CFC's credit ratings at year-end.

Moody's Standard & Poor's Fitch
Investors Service Corporation Investors Service
Direct

Collateral Trust Bonds Aa3 AA AA
Medium-Term Notes A1 AA- AA-
Quarterly Income Capital Securities A2 A+ A+
Domestic and European Commercial Paper P1 A-1+ F-1+

Guarantees

Leveraged Lease Debt A1 AA- AA-
Pooled Bonds Aa3 AA- AA-
Other Bonds A1 AA- AA-
Short-Term P1 A-1+ F-1+

The ratings listed above have the meaning as defined by each of the
respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by the
rating organizations.

At May 31, 1997 and 1996, CFC's members provided 33.0% and 37.4% of total
capitalization as follows:

MEMBERSHIP CONTRIBUTIONS TO TOTAL CAPITALIZATION

As of May 31,
(Dollar Amounts In Thousands) % of % of
1997 Total 1996 Total

Commercial Paper $1,203,335 21.9% $1,170,039 24.8%
Long-term debt
(primarily Medium-Term Notes) 276,821 17.1% 338,977 26.0%
Subordinated Certificates 1,212,486 100.0% 1,207,684 100.0%
Members' Equity 271,594 100.0% 269,641 100.0%
Total $2,964,236 $2,986,341

Percentage of total capitalization 33.0% 37.4%

The total amount of member investments decreased by $22 million at May 31,
1997, compared to May 31, 1996. Total member investment as a percentage of
total capitalization decreased due to the increase in nonmember debt
required to fund the growth in loans. Total capitalization at May 31, 1997
was $8,981 million, an increase of $998 million over the total
capitalization of $7,983 million at May 31, 1996. When the loan and
guarantee loss allowance is added to both membership contributions and
total capitalization, the percentages of membership investments to total
capitalization are 34.7% and 39.1% at May 31, 1997 and 1996, respectively.
37

Historical Results

The following chart provides CFC's key operating results over the last five
years.

SELECTED KEY FINANCIAL DATA
(Dollar Amounts In Thousands)

1997 1996 1995 1994 1993
As of May 31:
Net loans $8,678,196 $7,728,271 $6,747,124 $5,921,022 $5,112,471
Total liabilities $7,573,414 $6,576,764 $5,575,853 $4,740,470 $3,990,298
Total Subordinated Certificates
and Members' Equity $1,484,080 $1,477,325 $1,504,936 $1,483,826 $1,473,846
Guarantees $2,080,671 $2,249,440 $2,574,922 $2,655,827 $2,813,731
Leverage ratio (1) 5.84 5.69 5.13 4.63 4.41
Debt/Equity (2) 3.97 3.63 3.01 2.52 2.24

Gross margins $ 88,710 $ 78,994 $ 78,771 $ 61,452 $ 70,975
Net margins $ 54,736 $ 49,041 $ 45,212 $ 33,188 $ 38,487
TIER (3) 1.12 1.12 1.13 1.13 1.16

(1) The leverage ratio is calculated by dividing debt and guarantees
outstanding, excluding Quarterly Income Capital Securities and debt
used to fund loans guaranteed by RUS, by the total of Members'
Subordinated Certificates, Members' Equity and Quarterly Income
Capital Securities.
(2) The debt/equity ratio is calculated by dividing debt outstanding,
excluding Quarterly Income Capital Securities and debt used to fund
loans guaranteed by RUS, by the total of Members' Subordinated
Certificates, Members' Equity, the loan and guarantee loss allowance
and Quarterly Income Capital Securities.
(3) TIER is calculated by dividing net margins before extraordinary items
plus the cost of funds by the cost of funds.

Financial and Industry Outlook

During the coming year, management expects CFC's borrowers to continue to
utilize the variable interest rate programs to a greater extent than the fixed
interest rate program. This is due primarily to the positive interest yield
curve and due partly to CFC's borrowers diversifying the interest terms on
their long-term debt. As the demand for variable interest rate loans
increases, CFC will continue to match fund these loans as to rate with
variable interest rate debt instruments and will continue to redeem, to
the extent possible and economically beneficial, its fixed interest rate debt
instruments. These variable rate loans at the borrower level typically
represent a small portion of the borrower's overall capitalization.

CFC does not expect a significant increase in the competition for the
supplemental electric loan business. RUS will continue to be the dominant
lender, since others can not match the rates it offers. The level of funding
appropriated for the RUS program in fiscal year 1998 should be close to the
level that was approved for fiscal year 1997. CFC expects there to be
significant competition for the telecommunications lending business. RUS and
RTB will continue to be the primary lenders to the rural telecommunications
industry which comprises CFC's target market.

The amount of loan funds available from RUS to its borrowers is dependent upon
the size of the congressionally allocated subsidy for RUS's revolving loan fund
and the current interest rates. As interest rates rise, a larger portion of
the subsidy is required to buy down the interest rate, reducing the total
amount of funding available for new loans. As the level of loan funds
available decreases, borrowers will be required to seek out additional sources
for loan funds.

During fiscal year 1997, CFC advanced approximately $907 million to electric
borrowers for the purpose of prepaying their RUS loans. From March 1994, the
date final regulations were adopted, through May 1997, CFC has advanced a total
of $2,163 million to borrowers for the purpose of prepaying their RUS loans.
CFC has been selected as the lender for over 93% of the RUS debt refinancings.
There are applications pending at RUS for an additional $44 million of buyouts,
in which CFC has been selected as the lender and has approved loan commitments.
Future volume of RUS note prepayments will depend on a number of factors
including interest rates, tax consequences and possible acquisition or other
business opportunities available to the members. CFC does not expect large
volumes of prepayment requests to be made at any one time, but believes that
there will be a steady stream of activity.

CFC remains optimistic that the effort to restructure the electric utility
industry will provide a reasonable market for generation and that provisions
adopted for stranded cost recovery will permit an orderly transition to a
competitive retail market. The high cost generation systems have a greater
risk of a negative impact, while the low cost generation systems may have the
opportunity to expand their market share. CFC currently has limited exposure
to systems with a high cost of producing power and is working with these
systems to mitigate any potential negative impact.
38

Item 8. Financial Statements and Supplementary Data.

The Combined Financial Statements, Auditors' Report and Combined Quarterly
Financial Results are included on pages 49 through 75 (see Note 12 to Combined
Financial Statements for a summary of the quarterly results of CFC's operations)

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.

PART III

Item 10. Directors and Executive Officers of the Registrant.

(a) Directors
Director Date present
Name Age since term expires

Paul J. Liess (President of CFC) 59 1993 1999
Eldwin Wixson (Vice President of CFC) 65 1995 1998
Benson Ham (Secretary-Treasurer of CFC) 63 1995 1998
James O. Baker 58 1997 1999
Robert J. Bauman 52 1992 1998
Glenn English 56 1994 1998
Alden J. Flakoll 63 1996 1999
Nadine Griffin 65 1992 1998
Wade R. Hensel 45 1997 2000
George W. Kline 68 1993 1999
Kenneth Krueger 59 1997 2000
Eugene Meier 68 1997 2000
R. Layne Morrill 57 1995 1998
Robert J. Occhi 50 1996 1999
Michael Pigott 53 1997 2000
J. C. Roberts 59 1996 1999
R.B. Sloan Jr. 45 1996 1999
Thomas W. Stevenson 55 1997 2000
Clifford G. Stewart 51 1997 2000
Robert Stroup 52 1996 1999
Robert C. Wade 63 1997 2000
Robert O. Williams 64 1994 2000

(b) Executive Officers

Held present
Title Name Age office since

President and Director Paul J. Liess 59 1997
Vice President and Director Eldwin Wixson 65 1997
Secretary-Treasurer and Director Benson Ham 63 1997
Governor and Chief Executive Officer Sheldon C. Petersen 44 1995
Senior Vice President of Member Services
and General Counsel John J. List 50 1997
Senior Vice President and Chief Financial Officer Steven L. Lilly 47 1994
Senior Vice President for Strategic Services David J. Hedberg 46 1995

The President, Vice President and Secretary-Treasurer are elected annually by
the Board of Directors at its first meeting following CFC's annual membership
meeting, each to serve a term of one year; the Governor serves at the pleasure
of the Board of Directors; and the other Executive Officers serve at the
pleasure of the Governor.

39

(c) Identification of Certain Significant Employees.

Inapplicable.

(d) Family Relationships.

No family relationship exists between any director or executive officer and
any other director or executive officer of the registrant.

(e) (1) and (2) Business Experience and Directorships.

In accordance with Article IV of CFC's Bylaws, each candidate for election to
the Board of Directors must be a trustee, director or manager of a member of
CFC.

Mr. Liess has been General Manager of Twin Valleys Rural Public Power District,
Cambridge, NE, since 1978. He has been an alternate Director of the Nebraska
Rural Electric Association ("NREA") and the Nebraska Electric Generation and
Transmission Cooperative, Inc. since 1979. He was a chairman and still serves
on the Board of the Nebraska ACRE and is currently Chairman of the NREA Credit
Union Board. He is a member and one of five original founders of Five District
Joint Venture, developers of Rural Power Manager Software. Mr. Liess has been
a member of the Board of Governors of the Central Community College since 1989.
He is a member of the Board of Directors of the Central Plains Technical and
Business Development Center and Chairman of the Cambridge Economic Development
Board.

Mr. Wixson has been a Director of New Hampshire Electric Cooperative, Inc.,
Plymouth, NH, since June 1986 and President (now retitled Chair) of the Board
of Directors since June 1992. Mr. Wixson has been a professor of mathematics
at Plymouth State College, of the University System of New Hampshire, since
1966 and was Interim Dean from July 1994 to June 1995. He also has been Chair
of the Board of Directors of the Community Guaranty Savings Bank since 1988
and served as a Director of the Speare Memorial Hospital since 1986. He was
the principal-controlling partner of the Plymouth Pharmacy from 1979 to 1982
and was a Maine dairy farmer from 1956 to 1963.

Mr. Ham has been a Director of Central Georgia Electric Membership Cooperative,
Jackson, GA, since 1983. He has also been the managing partner in the law
firm of Ham, Jenkins, Wilson & Wangerin, since 1991. He is a partner in
Sleepy Creek Farms, a commercial cow-calf operation established in 1983. He
also served for ten years in the Georgia Legislature. He is currently a
member of the Monroe County Economic Development Authority. He has served as
President on the Flint Judicial Circuit Bar Association from 1962 to 1963 and
has served on the Board of Governors of the Georgia Bar Association. He
currently serves as a member of the Board of Directors of Georgia Transmission
Corporation and Georgia Electric Membership Corporation.

Mr. Baker has been the General Manager of Middle Tennessee Electric Membership
Cooperative, Murfreesboro, TN, since 1980. He has been President of the
National Rural Electric Cooperative Association (NRECA) since 1997, and has
served on the NRECA Board since 1985. He has been Chairman of the Action
Committee for Rural Electrification since 1992, a member of Group Purchase
Committee of the Tennessee Electric Cooperative Association since 1992, the
Legislative Committee since 1992, the Tax Committee since 1992, and a member
of the Joint Use and Power Supply Committee of the Tennessee Valley Public
Power Association since 1992. He is the past President of Middle Tennessee
Industrial Development Association, past President and District Governor of
the Lions Club, and past board member of both Southeastern Electric
Reliability Council and EPRI.

Mr. Bauman has been the General Manager of Butler County Rural Electric
Cooperative, Allison, IA, since 1984. He is a member of the Iowa Association
of Business and Industry's Economic Development Committee and a Board member
of Cooperative Development Services, Madison, WI. Mr. English has been
Executive Vice President and General Manager of NRECA, Washington, DC, since
February 1994. He served in the House of Representatives from 1975 to 1994.
He served on the House Agriculture Committee from 1975 to 1994, and was
Chairman of the House Agricultural Subcommittee on Environment, Credit and
Rural Development in 1989.

Mr. Flakoll has been Vice President of FEM Electric Association, Inc., Ipswich,
SD since 1977, and is a Director of the East River Electric Power Cooperative,
Madison, SD. He has been the owner and operator of Flakoll Enterprises, a
diversified farming, ranching and feedlot operation, since 1957. He has also
been the Chairman of District 4 South Dakota
40

Rural Electric Association Legislative and Resolutions Committee since 1992.
He is President of the South Dakota Outstanding Farmers of America and
Secretary-Treasurer of North Central Hereford Association. Mr. Flakoll is a
past President of the North Central Livestock Association and past business
manager of Wachter School District.

Mrs. Griffin has been a Director of D.S.& O. Rural Electric Cooperative
Association, Abilene, KS, since 1987. She is a member of the National Rural
Electric Women's Association, and has been a rural electric director for 19
years. She is also a homemaker and part-time tax preparer. She served as a
member of the Kansas Wheat Commission and is a member of the Kansas Association
of Wheat Growers. She has been a member of the KEPCO Executive Committee and a
former chair on the KEPCO Power Supply Planning and Operation Committee.

Mr. Hensel has been General Manager of Frost-BENCO-Wells Electric, Mankato, MN,
since 1981. He is a former Chairman of Minnesota Rural Electric Manager's
Association and a former Chairman of the Cooperative Power Manager's
Association. He has been a member of the management committee of Cooperative
Television Association of Southern Minnesota since 1993, a partner in North
Mankato/Frost-BENCO-Wells Industrial Park since 1991, a director of Mankato
Rehabilitation Center since 1995, and a director and former Chairman of Valley
Industrial Development Corporation. He is a former chairman and former
director of the Chamber of Commerce, a former president of the Jaycees, a
former treasurer and board member of the Independent School District #77, and
former director of Immanuel-St. Joseph's Hospital.

Mr. Kline has been a Director of Trico Electric Cooperative, Tucson, AZ since
1988. He has been Vice President of Grand Canyon State Electric Cooperative
Association, since 1992. He was a part-time Magistrate for the town of Marana,
AZ, from 1983 to 1993 and is currently retired.

Mr. Krueger has been a Director of Flathead Electric Cooperative, Kalispell,
MT, since 1972 and was President from 1977 to 1984. He also served as Director
and member of the Executive and Legislative Committees. He has owned and
operated a grain farm since 1960. He was President of the Montana Electric
Cooperatives' Association from 1979 to 1988, and Secretary-Treasurer from 1976
to 1979. He served on the Building Committee, the Dues and Policy Committee,
and the Budget Committee. He is also a member of the NRECA Region IX
Resolutions Committee. Mr. Krueger was Flathead County Commissioner from 1983
to 1989. He is a past member of the Montana State Rural Area Development
Committee, past Master of the Stillwater Grange, and former board member and
Chairman of the West Valley School Board.

Mr. Meier has been the Director of Pierce-Pepin Electric Cooperative,
Ellsworth, WI, since 1991. He has been Vice President of the Wisconsin
Electric Cooperative since 1995 and Chairman of its Legislative Committee
since 1994. Prior to his retirement in 1994, Mr. Meier was Maintenance
Foreman of Continental Nitrogen and Resources, Inc. He has also owned and
operated a farm since 1964. He has been a director of the Wisconsin
Federation of Cooperatives since 1995. He is a former member of Legislative
Standing Committee, NRECA, and a former executive committee member of the
Wisconsin Electric Cooperative Association. He is an active member
and past President of Joy Lutheran Church of Prescott.

Mr. Morrill has been a Director of White River Valley Electric Cooperative,
Inc., Branson, MO, since 1976 and is currently serving as Secretary-Treasurer.
He is also a Director of KAMO Electric Cooperative. He has been President of
Shepherd of the Hills Realty Co., Inc., since 1967 and President of Shepherd
of the Hills Properties Inc., since 1967. He is also a Director of the Bank
of Kimberling City and of Rural Missouri Cable T.V. Inc. He has been President
of the Kimberling City Water Company since 1982.

Mr. Occhi has been Executive Vice President and General Manager of Coast
Electric Power Association, Bay St. Louis, MS since 1986. He has been a
Director of the South Mississippi Electric Power Association since 1986 and
President of the Electric Power Associations of Mississippi since 1996. He is
also a Director of the Mississippi Council of Farmer Cooperatives and of the
Greater Biloxi Economic Development Foundation, and a past Director of
Mississippi Economic Council.

Mr. Pigott has been the Executive Vice President and General Manager of
Beauregard Electric Cooperative, DeRidder, LA, since 1988. He has been
President of the Association of Louisiana Electric Cooperatives since 1994,
a director of Cajun Electric Power Cooperative since 1992, and a member of
Louisiana Electric Distribution Cooperative Managers Association since 1988.
He has been a director of the Louisiana Resource Recovery and Development
Authority since 1990. Mr. Pigott is currently Director of the Rotary Club,
and is a member of the Chamber of Commerce, the Beauregard
41

Parish Cattlemen's Association, the Allen Parish Rice Growers Association,
and the Human Resources Management Association.

Mr. Roberts has been Executive Vice President and General Manager of South
Plains Electric Cooperative, Inc., Lubbock, TX, since 1980. He served on the
NRECA Board of Directors from 1980 to 1995, and was president in 1994-1995;
during that time, he also served on the CFC Board for District 11. He was
General Manager of San Bernard Electric Cooperative from 1974 to 1980, Director
and former Board Chairman of Golden Spread Electric Cooperative from 1987 to
1988, and a member of NRECA Financing for the Future and Cooperative Finance
Study Committee.

Mr. Sloan has been Executive Vice President and General Manager of Crescent
Electric Membership Corporation, Statesville, North Carolina since 1989. He
has been a member of the boards of North Carolina Electric Membership
Corporation since 1989, North Carolina Association of Electric Cooperatives
since 1989, Tarheel Electric Membership Association since 1989, and was
Chairman of the North Carolina Rural Electrification Authority from 1987 to
1993. He is also the past Chairman of the National Association of Counties'
Rural Development Committee, past Chairman of the Greater Statesville Chamber
of Commerce, and is the present Chairman of the Greater Statesville Development
Corporation.

Mr. Stevenson has been President and Chief Executive Officer of Wolverine
Power Supply Cooperative, Inc., Cadillac, MI, since 1995. He was the General
Manager and Chief Executive Officer of Ketchikan Public Utilities, Ketchikan,
AK from 1989 to 1995. He has been a Director of Michigan Association of Rural
Electric Cooperatives since 1995. He is a member of NRECA's Power and
Generation Committee, G & T Managers Association, and ACES. Mr. Stevenson
served as mayor pro tem and city council member of Longmont, Colorado from
1978 to 1981. He served as a board member of Denver Regional Council of
Governments, and as a board member and executive committee member of Ketchikan
Chamber of Commerce. He is a member of the American Institute of Certified
Public Accountants, the Colorado Society of CPAs, Rotary International (Paul
Harris Fellow), the American Legion, and the VFW.

Mr. Stewart has been the Vice President and General Manager of Oregon Trail
Electric Consumers Cooperative, Baker City, OR, since 1993, and Vice President
of Pacific Northwest Generating Cooperative since 1995. He was general manager
of Farmers' Electric Cooperative, Inc. from 1985 to 1993 and served on the
Clovis-Curry Economic Development Board from 1990 to 1993. He is past
president of the New Mexico Rural Electric Self Insurers Fund, a former
director of the New Mexico Rural Electric Association, and Chairman of the
Association's Publications committee.

Mr. Stroup has been Vice President of Shelby County REMC, Shelbyville, IN since
1994 and has owned a construction and design company since 1964. He has been a
Director of Hoosier Energy REC since 1992 and of the Indiana Statewide
Association of Rural Electric Cooperatives since 1993. He is also a member of
the Marietta Volunteer Fire Department and the Shelby County Chamber of
Commerce. Mr. Wade serves as Chairman of Nolin Rural Electric Cooperative
Corporation, Elizabethtown, KY, and has been engaged in grain farming since
1960. He is the Director of Kentucky Association of Electric Cooperatives,
of which he was Chairman from 1980 to 1982. He has been Vice Chairman of
Kentucky Electric Cooperatives' Political Action Committee, SURE--Speak Up
for Rural Electrification since 1974. He is a member of KAEC Strategic
Planning Committee and Management and Employees Committee, and served on CFC's
Committee on Objectives and Planning. Mr. Wade is Treasurer of Hardin County
Extension Feed Committee, Director of PNC Bank Advisory Board, board member
and past President of North Central Kentucky Education Foundation, Director of
Hardin County Community Foundation, a member of University of Kentucky
Community College Futures Commission, past Chairman of Hardin County Planning
and Development Commission and Hardin County Extension Council, and a member
of Public Advisory Committee of Kentucky Outlook 2000: A Strategy For
Kentucky's Third Century.

Mr. Williams has been President and Chief Executive Officer of York Electric
Cooperative, York, SC since 1974. He has also been a trustee for both the
Saluda River Electric Cooperative, Laurens, SC, and the Electric Cooperatives
of South Carolina since 1974. He was a trustee for the South Carolina State
Development Board from 1991 to 1993 and a trustee for the York Technical
College Foundation Board from 1983 to 1991.

Mr. Petersen joined CFC in August 1983 as an Area Representative. He became
the Director of Policy Development and Internal Audit in January 1990, then
Director of Credit Analysis in November 1990 and Corporate Secretary on
June 1, 1992. He became Assistant to the Governor on May 1, 1993. He became
Assistant to the Governor and Acting Administrative Officer on June 1, 1994.
He became Governor and CEO on March 1, 1995.
42

Mr. List joined CFC as a staff attorney in February 1972. He served as
Corporate Counsel from June 1980 until 1991. He became Senior Vice President
and General Counsel on June 1, 1992, and became Senior Vice President, Member
Services and General Counsel on February 1, 1997.

Mr. Lilly joined CFC as a Senior Financial Consultant in October 1983. He
became Director of Special Finance in June 1985 and Director of Corporate
Finance in June 1986. He became Treasurer and Principal Finance Officer on
June 1, 1993. He became Senior Vice President and Chief Financial Officer
on January 1, 1994.

Mr. Hedberg joined CFC as Director of Rates and Special Projects in 1981. He
became Senior Vice President of Strategic Services on June 1, 1995.

(f) Involvement in Certain Legal Proceedings.

None to the knowledge of CFC.

(g) Promoters and control persons.

Inapplicable.

Item 405. Compliance with Section 16 (a) of the Exchange Act.

Inapplicable.

Item 11. Executive Compensation

The Summary Compensation Table below sets forth the aggregate remuneration for
services in all capacities to CFC, on an accrual basis, for the three years
ended May 31, 1997, 1996 and 1995 to the named executive officers. The named
executive officers include the CEO and the next most highly compensated
executive officers serving at May 31, 1997, with salary and bonus for fiscal
year 1997 in excess of $100,000.

Summary Compensation Table

Annual Compensation Long-Term Compensation
Awards Payouts
Other Restricted Options/ All
Annual Stock SARs LTIP Other
Name and Principal Position Year Salary Bonus Comp (1) Award(2) (#)(2) Payouts(2) Comp(3)

Sheldon C. Petersen 1997 289,711 - - - - - 18,358
Governor and Chief 1996 256,250 4,231 - - - - 17,717
Executive Officer 1995 185,257 1,911 - - - - 21,715

John J. List 1997 173,246 - - - - - 11,177
Senior Vice President of Member
Services and General Counsel 1996 155,581 2,464 - - - - 15,742
1995 149,621 2,574 - - - - 9,876

Steven L. Lilly 1997 192,620 3,500 - - - - 9,232
Senior Vice President and 1996 176,154 13,284 - - - - 16,612
Chief Financial Officer 1995 169,331 3,173 - - - - 12,336

David J. Hedberg 1997 147,704 - - - - - 8,309
Senior Vice President for 1996 138,230 2,458 - - - - 11,261
Strategic Services 1995 109,548 1,901 - - - - 9,588

_________________
(1) Reportable perquisites and other personal benefits do not exceed the
lesser of $50,000 or 10% of salary and bonus. All other items
reportable under this column are not applicable to CFC.
(2) Not applicable to CFC.
(3) Amounts for fiscal years 1997, 1996 and 1995 include $13,325, $13,192
and $19,039 related to leave accruals and $5,033, $4,525 and $2,676
related to CFC contributions to a savings plan for Mr. Petersen;
$7,819, $12,632 and $6,886 related to leave accruals and $3,358,
$3,110 and $2,990 related to CFC contributions to a savings plan for
Mr. List; $5,473, $13,089 and $8,949 related to leave accruals and
$3,759, $3,523 and $3,387

43

related to CFC contributions to a savings
plan for Mr. Lilly; $5,415, $8,491 and $7,303 related to leave
accruals and $2,894, $2,770 and $2,285 related to CFC contributions
to a savings plan for Mr. Hedberg.

Defined Benefit or Actuarial Plan Disclosure

NRECA maintains the Retirement and Security Program entitling CFC employees
to receive annually, under a 50% joint and surviving spouse annuity, 1.90%
of the average of their five highest base salaries during their last ten
years of employment, multiplied by the number of years of participation in
the program. As of May 31, 1997, the number of years of service credited
and the compensation covered under the program, respectively, for the
officers listed above was as follows: Steven L. Lilly-12 years 3 months,
$154,769; John Jay List-24 years 1 month, $160,615; Sheldon C. Petersen-13
years 5 months, $196,850; David J. Hedberg-15 years, $119,963.

Pension Plan Table
Years of Services
Average base salary 5 10 15 20 25 30

$100,000 $ 9,500 $ 19,000 28,500 $ 38,000 $ 47,500 $ 57,000
125,000 11,875 23,750 35,625 47,500 59,375 71,250
150,000 14,250 28,500 42,750 57,000 71,250 85,500
175,000 16,625 33,250 49,875 66,500 83,125 99,750
200,000 19,000 38,000 57,000 76,000 95,000 114,000
225,000 21,375 42,750 64,125 85,500 106,875 125,000*
250,000 23,750 47,500 71,250 95,000 118,750 125,000*
275,000 26,125 52,250 78,375 104,500 125,000* 125,000*

*The Tax Reform Act of 1984 places a cap on maximum salary used to compute
retirement benefits and maximum yearly benefit. For calendar year 1997, the
salary cap is $160,000 (the cap represents the amount of salary for 1997
that may be used in the computation of the average base salary) and the
benefits cap is $125,000.

The Budget Reconciliation Act of 1993 has set a limit of $160,000 on the
compensation to be used in the calculation of pension benefits. In order to
restore potential lost benefits, CFC has set up a Pension Restoration Plan.
Under the plan, the amount that NRECA invoices CFC will continue to be based
on the full compensation paid to each employee. Upon the retirement of a
covered employee, NRECA will calculate the retirement and security benefit
to be paid with consideration of the compensation limits and will pay the
maximum benefit thereunder. NRECA will also calculate the retirement and
security benefit that would have been available without consideration of the
compensation limits and CFC will pay the difference. NRECA will then give
CFC a credit against future retirement and security contribution liabilities
in the amount paid by CFC to the covered employee.

CFC will pay such additional benefits to the covered employee through a
Severance Pay Plan and a Deferred Pay Restoration Plan. Under the Severance
Pay Plan, the employee is paid an amount equal to the lost pension benefits
but not to exceed twice the employee's annual compensation for the prior
year. The benefit must be paid within 24 months of termination of
employment. To the extent that the Severance Pay Plan cannot pay all of the
lost pension benefits, the remainder will be paid under a Deferred
Compensation Plan, which will be paid out in a lump sum or in installments
of up to 60 months.

Compensation of Directors

No director received any remuneration as an officer or director of CFC.
Directors are reimbursed for travel expenses and receive a daily per diem to
cover meals and lodging for their attendance at all Board of Directors
functions.

Employment Contracts and Termination of Employment and Change-In-Control
Arrangements

Pursuant to an employment agreement effective as of March 1, 1996, CFC has
agreed to employ Mr. Petersen as Chief Executive Officer through February
28, 2001 (with automatic one-year extensions unless either party objects) at
no less than $245,000 per annum plus such bonus (if any) as may be awarded
him. Certain payments have been agreed to in the event of Mr. Petersen's
termination other than for cause, for example, Mr. Petersen leaving for good
reason, disability or termination of his employment due to death.
44

Pursuant to a separate employment agreement effective as of the same date,
RTFC has agreed to employ Mr. Petersen for the same term. As compensation,
RTFC must credit to a deferred compensation account on January 1 of each
year of the term $30,000. Interest will be credited to the account on
December 31 of each such year at a rate equal to CFC's 20-year Medium-Term
Note rate on that date. If Mr. Petersen's employment is terminated by RTFC
other than for cause, or by Mr. Petersen for good reason, or by his death or
disability, the account will be deemed continued for the remainder of the
term of employment (but in no event less than six months nor more than a
year), interest will be credited on a proportional basis for the calendar
year during which the continuation ends and the balance in the account will
be paid to Mr. Petersen in a lump sum.

Compensation Committee Interlocks and Insider Participation

During the year ended May 31, 1997 the following directors and former
directors of CFC served as members on the Executive Committee of the Board
of Directors (which functions as the Board's compensation committee):

Garry Bye (Former Director of CFC)
J. Chris Cariker ( Former President of CFC)
Harold I. Dycus (Former Vice President of CFC)
Benson Ham (Secretary-Treasurer of CFC)
Gordon J. Hudson (Former Director of CFC)
George W. Kline
Paul J. Liess (President of CFC)
Robert J. Occhi
Terry Pitchford (Former Secretary-Treasurer of CFC)
R.B. Sloan
Robert Stroup
Ed Wixson (Vice President of CFC)

Other than those mentioned above, there were no compensation committee
interlocks or insider participation related to executive compensation.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

Inapplicable.

Item 13. Certain Relationships and Related Transactions.

(a), (b) and (c) At May 31, 1997, CFC had commitments for long- and
intermediate-term loans aggregating $878 million and $34 million,
respectively, and committed lines of credit aggregating $193 million, to
member systems, excluding NCSC, RTFC and GFC, of which executive officers or
directors of CFC are members, employees, officers or directors. At May 31,
1997, $499 million and $12 million of advances were outstanding with respect
to such long- and intermediate-term loans, respectively, and $29 million was
outstanding under such lines of credit. At May 31, 1997, CFC had guaranteed
$359 million of contractual obligations of such members. CFC had
outstanding guarantees of certain contractual obligations in the amount of
$556 million at May 31, 1997 on behalf of NCSC. At May 31, 1997, advances
outstanding with respect to such long-term loans were $60 million for NCSC.
Such loans and guarantees were made in the ordinary course of CFC's business
on the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transaction with other members and did
not involve more than normal risk of uncollectibility or present other
unfavorable features. It is anticipated that, consistent with its loan and
guarantee policies in effect from time to time, additional loans and
guarantees will be made by CFC to member systems and trade and service
organizations of which officers or directors of CFC are members, employees,
officers or directors. In light of its cooperative nature, pursuant to
which CFC was established for the very purpose of extending financing to its
members (from whose ranks its directors must be drawn), CFC is of the view
that no purpose would be served by including detailed information with
respect to specific loans and guarantees to members with which any of its
directors are affiliated.

(d) Inapplicable.

45

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) Documents filed as a part of this report.

1. Financial statements
Page
Report of Independent Public Accountants 49
Combined Balance Sheets 50
Combined Statements of Income, Expenses and Net Margins 52
Combined Statements of Changes in Members' Equity 53
Combined Statements of Cash Flows 54
Notes to Combined Financial Statements 55

2. Financial statement schedules
Page
Note 12 to Combined Financial Statements
"Combined Quarterly Financial Results" 74

All other schedules are omitted because they are not required or inapplicable
or the information is included in the financial statements or notes thereto.

3. Exhibits

3.1 - Articles of Incorporation. Incorporated by reference
to Exhibit 3.1 to Registration Statement No. 2-46018,
filed October 12, 1972.
3.4 - Amendments to Bylaws as approved by CFC's Board of
Directors and members on February 28, 1995, and a copy
of the Bylaws as amended. Incorporated by reference
to Exhibit 3.4 from CFC's Form 10-K filed August 29,
1995.
4.1 - Form of Capital Term Certificate. Incorporated by
reference to Exhibit 4.3 Registration Statement No.
2-46018 filed October 12, 1972.
4.2 - Indenture dated as of February 15, 1994, between the
Registrant and First Bank National Association, trustee.
Incorporated by reference to Exhibit 4.3 from the report
on Form 8-K filed by CFC on June 14, 1994.
4.3 - Revolving Credit Agreements dated February 28, 1995.
Incorporated by reference to Exhibit 4.3 from CFC's
quarterly report on Form 10-Q filed April 3, 1995.
4.4 - The first amendment to the February 28, 1995 revolving
credit agreements dated February 27, 1996. Incorporated
by reference to Exhibit 4.4 from CFC's Annual Report
on Form 10-K filed August 27, 1996.
4.5 - Revolving Credit Agreement dated April 30, 1996.
Incorporated by reference to Exhibit 4.5 from
CFC's Annual Report on Form 10-K filed August 27, 1996.
- Registrant agrees to furnish to the Commission a copy
of all other instruments defining the rights of holders
of its long-term debt upon request.

Management Contracts and Compensatory Plans and
Arrangements.

10.1 - Plan Document for CFC deferred compensation program.
Incorporated by reference to Exhibit 10 to Registration
Statement No. 2-70355, filed December 23, 1980.
10.2 - Employment Contract between CFC and Sheldon C.
Petersen, dated as of March 1, 1996.
Incorporated by reference to Exhibit 10.2 to CFC's
Form 10-K filed August 27, 1996.
10.3 - Supplemental Benefit Agreement between RTFC
and Sheldon C. Petersen, dated as of March 1, 1996.
Incorporated by reference to Exhibit 10.3 to CFC's
Form 10-K filed August 27, 1996.
12 - Computations of ratio of margins to fixed charges.
23 - Consent of Arthur Andersen LLP.
27 - Financial Data Schedules.

(b) Reports on Form 8-K.
46

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the County of
Fairfax, Commonwealth of Virginia, on the 29th day of August, 1997.

NATIONAL RURAL UTILITIES COOPERATIVE
FINANCE CORPORATION

By: /s/ SHELDON C. PETERSEN
Sheldon C. Petersen
Governor and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the date indicated.

Signature Title Date

/s/ SHELDON C. PETERSEN Governor and Chief Executive
Sheldon C. Petersen Officer

/s/ STEVEN L. LILLY Senior Vice President and
Steven L. Lilly Chief Financial Officer

/s/ ANGELO M. SALERA Controller (Principal
Angelo M. Salera Accounting Officer)

/s/ PAUL J. LIESS President and Director
Paul J. Liess

/s/ ELDWIN WIXSON Vice President and Dire
Eldwin Wixson

/s/ BENSON HAM Secretary-Treasurer and
Benson Ham Director -- August 29, 1997

/s/ JAMES O. BAKER Director
James O. Baker

/s/ ROBERT J. BAUMAN Director
Robert J. Bauman

/s/ GLENN ENGLISH Director
Glenn English

/s/ ALDEN J. FLAKOLL Director
Alden J. Flakoll

47

Signature Title Date

/s/ NADINE GRIFFIN Director
Nadine Griffin

/s/ WADE R. HENSEL Director
Wade R. Hensel

/s/ GEORGE W. KLINE Director
George W. Kline

/s/ KENNETH KRUEGER Director
Kenneth Krueger

/s/ EUGENE MEIER Director
Eugene Meier

/s/ R. LAYNE MORRILL Director
R. Layne Morrill
-- August 29, 1997

/s/ ROBERT J. OCCHI Director
Robert J. Occhi

/s/ CLIFTON M. PIGOTT Director
Clifton M. Pigott

/s/ J. C. ROBERTS Director
J. C. Roberts

/s/ R. B. SLOAN, JR. Director
R. B. Sloan, Jr.

/s/ THOMAS W. STEVENSON Director
Thomas W. Stevenson

/s/ CLIFFORD G. STEWART Director
Clifford G. Stewart

/s/ ROBERT STROUP Director
Robert Stroup

/s/ ROBERT C. WADE Director
Robert C. Wade

/s/ ROBERT O. WILLIAMS Director
Robert O. Williams

48

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

NATIONAL RURAL UTILITIES COOPERATIVE
FINANCE CORPORATION:

We have audited the accompanying combined balance sheets of National Rural
Utilities Cooperative Finance Corporation (a not-for-profit corporation
under the District of Columbia Cooperative Association Act) and other
related entities ("Companies") as discussed in Note 1 as of May 31, 1997 and
1996, and the related combined statements of income, expenses and net
margins, changes in members' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of National Rural
Utilities Cooperative Finance Corporation and other related entities as of
May 31, 1997 and 1996, and the results of their operations and their cash
flows for the years then ended, in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP

Washington, D. C.
July 21, 1997

49

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

COMBINED BALANCE SHEETS

(Dollar Amounts In Thousands)

May 31, 1997 and 1996

ASSETS

1997 1996

CASH $ 50,011 $ 31,368

CERTIFICATES OF DEPOSIT - 25,000

DEBT SERVICE INVESTMENTS 77,219 40,907

LOANS TO MEMBERS, net 8,678,196 7,728,271

RECEIVABLES 101,613 84,600

FIXED ASSETS, net 33,208 33,576

DEBT SERVICE RESERVE FUNDS 103,489 102,512

OTHER ASSETS 13,758 7,855

$9,057,494 $8,054,089

The accompanying notes are an integral part of these combined financial
statements.

50

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

COMBINED BALANCE SHEETS

(Dollar Amounts In Thousands)

May 31, 1997 and 1996

LIABILITIES AND MEMBERS' EQUITY

1997 1996

NOTES PAYABLE, due within one year $3,507,074 $2,471,552

ACCOUNTS PAYABLE 23,200 16,591

ACCRUED INTEREST PAYABLE 46,924 40,819

LONG-TERM DEBT 3,864,887 4,033,881

OTHER LIABILITIES 6,329 13,921

COMMITMENTS, GUARANTEES AND CONTINGENCIES

QUARTERLY INCOME CAPITAL SECURITIES 125,000 -

MEMBERS' SUBORDINATED CERTIFICATES:
Membership Subordinated Certificates 645,449 638,440
Loan and Guarantee Subordinated Certificate 567,037 569,244

Total Members' Subordinated Certificates 1,212,486 1,207,684

MEMBERS' EQUITY 271,594 269,641

Total Members' Subordinated Certificates
and Members' Equity 1,484,080 1,477,325

$9,057,494 $8,054,089

The accompanying notes are an integral part of these combined financial
statements.
51

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

COMBINED STATEMENTS OF INCOME, EXPENSES AND NET MARGINS

(Dollar Amounts In Thousands)

For the Years Ended May 31, 1997, 1996 and 1995

1997 1996 1995

OPERATING INCOME-Interest on loans to members $564,439 $505,073 $440,109
Less: Cost of funds 475,729 426,079 361,338

Gross operating margin 88,710 78,994 78,771

EXPENSES:
General, administrative and loan processing 22,019 19,686 19,568
Provision for loan and guarantee losses 15,161 12,451 17,400

Total expenses 37,180 32,137 36,968

Operating margin 51,530 46,857 41,803

NONOPERATING INCOME 3,206 3,764 3,409

NET MARGINS BEFORE EXTRAORDINARY LOSS 54,736 50,621 45,212

EXTRAORDINARY LOSS - (1,580) -

NET MARGINS $ 54,736 $ 49,041 $ 45,212

The accompanying notes are an integral part of these combined financial
statements.

52

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY

(Dollar Amounts In Thousands)

For the Years Ended May 31, 1997, 1996 and 1995

Patronage
Capital Allocated
General
Education Unallocated Reserve
Total Memberships Fund Margins Fund Other

Balance as of May 31, 1994 $260,968 $1,339 $325 $2,289 $ 495 $256,520
Retirement of Patronage Capital (34,184) - - - (177) (34,007)
Net Margins - Allocated 45,212 - 50 - 180 44,982
Other (1,775) 44 - - - (1,819)

Balance as of May 31, 1995 270,221 1,383 375 2,289 498 265,676
Retirement of Patronage Capital (48,313) - - - (152) (48,161)
Net Margins - Allocated 49,041 - 101 - 155 48,785
Other (1,308) 41 - - - (1,349)

Balance as of May 31, 1996 269,641 1,424 476 2,289 501 264,951
Retirement of Patronage Capital (50,962) - - - (135) (50,827)
Net Margins - Allocated 54,736 - 120 - 138 54,478
Other (1,821) 46 - - - (1,867)

Balance as of May 31, 1997 $271,594 $1,470 $596 $2,289 $ 504 $266,735

The accompanying notes are an integral part of these combined financial
statements.

53

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

COMBINED STATEMENTS OF CASH FLOWS

(Dollar Amounts In Thousands)

For the Years Ended May 31, 1997, 1996 and 1995

1997 1996 1995

CASH FLOWS FROM OPERATING ACTIVITIES:
Net margins $ 54,736 $ 49,041 $ 45,212
Add (deduct):
Provision for loan and guarantee losses 15,161 12,451 17,400
Depreciation 1,253 1,247 2,359
Amortization of Issuance Costs and Deferred Charges 1,912 2,627 1,286
Amortization of Deferred Income (10,702) (9,942) (17,226)
Add (deduct) changes in accrual accounts:
Receivables (10,000) 7,987 (2,880)
Accounts payable 8,520 (114) (1,824)
Accrued interest payable 6,105 1,476 3,746
Other (13,737) (5,188) 6,002

Net cash flows provided by operating activities 53,248 59,585 54,075

CASH FLOWS FROM INVESTING ACTIVITIES:
Advances made on loans (3,799,004) (3,774,427) (3,619,998)
Principal collected on loans 2,833,917 2,780,830 2,776,496
Change in fixed assets (885) 1,984 (448)
Change in Certificates of Deposit 25,000 5,000 (30,000)

Net cash flows used in investing activities (940,972) (986,613) (873,950)

CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable, net 705,804 658,999 604,595
Debt service investments, net (36,312) (8,167) 928
Proceeds from issuance of long-term debt 890,524 794,836 476,233
Payments for retirement of long-term debt (730,116) (446,521) (232,798)
Proceeds from issuance of Quarterly Income Capital Securities 125,000 - -
Proceeds from issuance of Members' Subordinated Certificates 29,026 18,457 30,156
Payments for retirement of Members' Subordinated Certificates (32,210) (39,365) (19,603)
Payments for retirement of Patronage Capital (45,349) (46,152) (35,495)

Net cash flows provided by financing activities 906,367 932,087 824,016

NET INCREASE IN CASH 18,643 5,059 4,141
BEGINNING CASH 31,368 26,309 22,168
ENDING CASH $ 50,011 $ 31,368 $ 26,309

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during year for interest $ 476,914 $ 427,846 $ 360,308

The accompanying notes are an integral part of these combined financial
statements.

54

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS

May 31, 1997, 1996 and 1995

(1) General Information and Accounting Policies

(a) General Information

National Rural Utilities Cooperative Finance Corporation (the "Company" or
"CFC") was incorporated as a private, not-for-profit cooperative
association under the laws of the District of Columbia in April 1969. The
principal purpose of CFC is to provide its members with a source of
financing to supplement the loan programs of the Rural Utilities Service
("RUS") of the United States Department of Agriculture. CFC makes loans
primarily to its rural utility system members ("Utility Members") to enable
them to acquire, construct and operate electric distribution, generation,
transmission and related facilities. Most CFC long-term loans to Utility
Members are made in conjunction with concurrent loans from RUS and are
secured equally and ratably with RUS's loans by a single mortgage. CFC
also provides guarantees for tax-exempt financings of pollution control
facilities and other properties constructed or acquired by its members and,
in addition, provides guarantees of taxable debt in connection with certain
lease and other transactions of its members. CFC is exempt from payment of
Federal income taxes under Section 501(c)(4) of the Internal Revenue Code.

CFC's 1,052 members as of May 31, 1997, included 907 Utility Members,
virtually all of which are consumer-owned cooperatives, 74 service members
and 71 associate members. The Utility Members included 841 distribution
systems and 66 generation and transmission ("power supply") systems
operating in 46 states and U.S. territories.

Rural Telephone Finance Cooperative ("RTFC") was incorporated as a private
cooperative association in the state of South Dakota in September 1987.
RTFC is a controlled affiliate of CFC and was created for the purpose of
providing and/or arranging financing for its rural telecommunication
members and affiliates. RTFC's bylaws require that the majority of RTFC's
Board of Directors be elected from individuals designated by CFC. CFC is
the sole source of funding for RTFC. As of May 31, 1997, RTFC had 464
members. RTFC is a taxable entity under Subchapter T of the Internal
Revenue Code and accordingly takes deductions for allocations of net
margins to its patrons.

Guaranty Funding Cooperative ("GFC") was incorporated as a private
cooperative association in the state of South Dakota in December 1991. GFC
is a controlled affiliate of CFC and was created for the purpose of
providing a source of funds for its members to refinance their RUS
guaranteed debt previously held by the Federal Financing Bank. All trust
certificates held by GFC were transferred to GFC by CFC and the notes owned
by the trusts are guaranteed by the RUS. CFC is the sole source of funding
for GFC. GFC had four members other than CFC at May 31, 1997. GFC is a
taxable entity under Subchapter T of the Internal Revenue Code and
accordingly takes deductions for allocations of net margins to its patrons.

(b) Principles of Combination

The accompanying financial statements include the combined accounts of CFC,
RTFC and GFC, after elimination of all material intercompany accounts and
transactions. CFC has a $1,000 membership interest in both RTFC and GFC.
CFC exercises control over RTFC and GFC through majority representation on
their Boards of Directors. CFC manages the affairs of RTFC through a long-
term management agreement. CFC services the loans for GFC for which it
collects a servicing fee.

As of May 31, 1997, CFC was authorized to lend RTFC up to a total of $3.4
billion to fund loans to its members and their affiliates. As of the same
date, RTFC had outstanding loans and unadvanced loan commitments totaling
$1,825.0 million. RTFC's net margins are allocated to RTFC borrowers.
55

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

Summary financial information relating to RTFC included in the combined
financial statements is presented below:

As of May 31: 1997 1996
(Dollar Amounts In Thousands)

Outstanding loans to members and their affiliates $1,099,163 $ 975,269
Total assets 1,197,753 1,079,920
Notes payable to CFC 1,089,336 966,690
Total liabilities 1,100,497 981,790
Members' Equity (1) and Subordinated Certificates 97,256 98,130

For the years ended May 31: 1997 1996 1995
(Dollar Amounts In Thousands)
Operating income $ 71,891 $ 64,674 $ 54,639
Net margins 9,239 8,543 7,527

(1) The transfer of RTFC equity is governed by the South Dakota
Cooperative Association Act which provides that net margins shall be
distributed and paid to patrons. However, reserves may be created and
credited to patrons in proportion to total patronage. CFC has been
the sole funding source for RTFC's loans to its members. As CFC is
not a borrower of RTFC and is not expected to be in the foreseeable
future, RTFC's net margins would not be available to CFC in the form
of patronage capital.

As of May 31, 1997, CFC had loaned GFC $135.2 million to fund the purchase
of certificates evidencing interests in trusts holding RUS guaranteed notes
from CFC. Summary financial information relating to GFC included in the
combined financial statements is presented below:

As of May 31: 1997 1996
(Dollar Amounts In Thousands)

Outstanding loans to members $135,220 $411,373
Total assets 141,353 429,177
Notes payable to CFC 136,960 415,414
Total liabilities 139,934 427,079
Members' Equity (1) 1,419 2,098

For the years ended May 31: 1997 1996 1995
(Dollar Amounts In Thousands)

Operating income $20,673 $28,064 $28,494
Net margins (1) 1,762 2,701 3,235

(1) The transfer of GFC equity is governed by the South Dakota
Cooperative Association Act which provides that net margins shall be
distributed and paid to patrons. However, reserves may be created and
credited to patrons in proportion to total patronage. CFC has been
the sole funding source for GFC's loans to its members. As CFC is not
a borrower of GFC and is not expected to be in the foreseeable future,
GFC's net margins would not be available to CFC in the form of
patronage capital.

Unless stated otherwise, references to CFC relate to CFC, RTFC and GFC on a
combined basis.

(c) Amortization of Bond Discount and Bond Issuance Costs

Bond discount and bond issuance costs are amortized using the effective
interest method over the life of each bond issue.
56

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

(d) Nonperforming Loans

It is CFC's policy to classify a loan as nonperforming when it meets any of
the following criteria:

(i) Interest or principal payments are contractually past due 90 days
or more,

(ii) As a result of court proceedings, repayment in accordance with
the original terms is not anticipated, or

(iii) For other reasons, timely repayment of principal or interest is
not expected.

(e) Allowance for Loan and Guarantee Losses

CFC maintains an allowance for loan and guarantee losses at a level
believed to be adequate in relation to the credit quality and size of its
loans and guarantees outstanding. It is CFC's policy to review
periodically its loans and guarantees and to make adjustments to the
allowance as necessary. The allowance is based on estimates, and
accordingly, actual loan and guarantee losses may differ from the allowance
amount.

Activity in the allowance account is summarized as follows for the years
ended May 31:

1997 1996 1995
(Dollar Amounts In Thousands)

Balance at beginning of year $218,047 $205,596 $188,196
Provision for loan and guarantee losses 15,161 12,451 17,400
Charge-offs - - -
Balance at end of year $233,208 $218,047 $205,596

(f) Fixed Assets

Buildings, furniture and fixtures and related equipment are stated at cost
less accumulated depreciation and amortization of $9.1 million and $8.0
million as of May 31, 1997 and 1996, respectively. Depreciation and
amortization expenses ($1.5 million, $1.2 million and $2.4 million in
fiscal years 1997, 1996 and 1995, respectively) are computed primarily on
the straight-line method over estimated useful lives ranging from 2 to 40
years.

(g) Financial Instruments with Off-Balance Sheet Risk

In the normal course of business, CFC is a party to financial instruments
with off-balance sheet risk both to meet the financing needs of its member
borrowers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit, guarantees of members' obligations and interest rate
exchange agreements. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts
recognized in the combined balance sheets.

(h) Accounting by Creditors for Impairment of a Loan

CFC implemented Financial Accounting Standards Board ("FASB")
Statement No. 114, "Accounting by Creditors for Impairment of a Loan" and
Statement No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures" as of May 31, 1996. These statements require
CFC to calculate impairment on loans receivable by comparing the present
value of the future cash flows associated with the loan against CFC's
investment in the loan. The statements also require that CFC provide loss
reserves for loans based on the calculated impairment. The implementation
of these statements did not have a material impact on CFC's financial
statements.
57

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

(i) Accounting for Certain Investments in Debt and Equity Securities

CFC has implemented FASB Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The CFC investments covered by
this statement, at May 31, 1997, include the debt service investments.
These items have been recorded at amortized cost, due to the Company's
intent and ability to hold all investments to maturity. The implementation
of this statement did not have a material impact on CFC's financial
statements.

(j) Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments

CFC implemented FASB Statement No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments" as of May
31, 1995. This statement requires disclosure about the amounts, nature and
terms of derivative financial instruments. CFC is neither a dealer nor a
trader in derivative financial instruments. CFC uses interest rate
exchange agreements to help manage its interest rate risk. The
implementation of this statement did not have a material impact on CFC's
financial statements.

(k) Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the assets and liabilities and the revenue and
expenses reported in the financial statements, as well as amounts included
in the notes thereto, including discussion and disclosure of contingent
liabilities. While the Company uses its best estimates and judgments based
on the known facts at the date of the financial statements, actual results
could differ from these estimates as future events occur.

CFC does not believe it is vulnerable to the risk of a near-term severe
impact as a result of any concentrations of its activities.

(l) Memberships

Members are charged a one-time membership fee based on member class. CFC
distribution system members (Class A), power supply system members (Class
B), national associations of cooperatives (Class D) and associate members
(Class E) all pay a $1,000 membership fee. CFC service organization
members (Class C) pay a $200 membership fee. RTFC voting members pay a
$1,000 membership fee and non-voting members pay a $100 membership fee.
All GFC members pay a $1,000 membership fee. Membership fees are accounted
for as members' equity.

(m) Reclassifications

Certain reclassifications of prior year amounts have been made to conform
with fiscal year 1997 presentation.

(2) Loans and Commitments

Loans to members bear interest at rates determined from time to time by the
Board of Directors on the basis of CFC's cost of funds, operating expenses,
provision for loan and guarantee losses and the maintenance of reasonable
margin levels. In keeping with its not-for-profit, cooperative character,
CFC's policy is to set interest rates at the lowest levels it considers to
be consistent with sound financial management. Loans outstanding to
members, weighted average interest rates thereon and unadvanced commitments
are summarized by loan type as follows as of May 31:
58

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

1997 1996
(Dollar Amounts In Thousands) Wtd. Average Wtd. Average
Loans Interest Unadvanced Loans Interest Unadvanced
Outstanding Rates Commitments(A) Outstanding Rates Commitments(A)

Long-term fixed rate loans (B):
Distribution Systems $2,503,890 7.20% $ 46,657 $2,380,587 7.29% $ 36,117
Power Supply Systems 239,381 7.54% 1,214 247,556 7.71% 1,214
Telecommunication Organizations 148,566 8.53% - 134,497 8.66% -
Service Organizations (C) 82,634 8.62% 3,170 77,205 8.03% 3,140
Associate Members 1,512 10.25% - 1,542 10.25% -
Total long-term fixed rate loans 2,975,983 7.33% 51,041 2,841,387 7.41% 40,471

Long-term variable rate loans (D):
Distribution Systems 3,209,472 6.55% 1,185,303 2,717,494 6.45% 839,861
Power Supply Systems 281,368 6.55% 798,984 202,249 6.45% 626,926
Telecommunication Organizations 875,135 6.65% 237,170 764,911 6.55% 202,971
Service Organizations (C) 54,802 6.55% 86,229 46,376 6.45% 71,400
Associate Members 48,186 6.29% 13,666 47,541 6.19% 38,979
Total long-term variable rate loans 4,468,963 6.57% 2,321,352 3,778,571 6.47% 1,780,137

Refinancing variable rate loans guaranteed by RUS:
Power Supply Systems 137,984 6.49% - 416,637 6.47% -

Intermediate-term secured loans:
Distribution Systems 12,530 6.70% 2,609 4,831 6.60% 2,300
Power Supply Systems 198,985 6.70% 196,385 53,614 6.60% 168,123
Service Organizations 14,592 6.70% 2,884 27,652 6.60% 9,384
Total intermediate-term secured loans 226,107 6.70% 201,878 86,097 6.60% 179,807

Intermediate-term unsecured loans:
Distribution Systems 72,860 6.70% 37,687 16,019 6.45% 41,572
Power Supply Systems 43,129 6.70% 124,405 28,957 6.45% 67,190
Telecommunication Organizations 13,683 7.25% 9,387 12,048 6.80% 8,501
Total intermediate-term unsecured loans 129,672 6.76% 171,479 57,024 6.52% 117,263

Short-term loans (E):
Distribution Systems 473,639 6.70% 2,436,785 409,664 6.60% 2,191,156
Power Supply Systems 25,051 6.70% 913,371 25,763 6.60% 930,710
Telecommunication Organizations 61,779 7.25% 478,807 63,813 7.15% 278,811
Service Organizations 27,420 6.70% 93,346 23,467 6.60% 77,499
Associate Members 13,417 6.70% 19,308 9,240 6.60% 15,685
Total short-term loans 601,306 6.76% 3,941,617 531,947 6.67% 3,493,861

Nonperforming loans (F):
Distribution Systems 1,705 7.21% - 1,739 7.20% -
Power Supply Systems 7,723 6.64% - 23,555 6.48% -
Total nonperforming loans 9,428 6.75% - 25,294 6.53% -

Restructured loans (G):
Distribution Systems - - - 2,576 18.37% -
Power Supply Systems 361,961 8.32% - 205,074 9.13% -
Service Organizations - - - 1,711 6.45% -
Total restructured loans 361,961 8.32% - 209,361 9.22% -

Total loans 8,911,404 6.81% 6,687,367 7,946,318 6.85% 5,611,539
Less: Allowance for Loan and
Guarantee Losses 233,208 - 218,047 -

Net loans $8,678,196 $6,687,367 $7,728,271 $5,611,539

(A) Unadvanced commitments include loans approved by CFC for which loan
contracts have not yet been executed and for which loan contracts have
been executed but funds have not been advanced. Since commitments may
expire without being fully drawn upon, the total amounts reported as
commitments do not necessarily represent future cash requirements.
Collateral and security requirements for lending on commitments are
identical to those for advanced
59

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

loans. Long-term unadvanced commitments that do not have an interest rate
associated with the commitment have been listed under the variable rate.
Rates, fixed or variable, are set at the time of each advance.

(B) Generally, long-term fixed rate loans provide for a fixed interest rate
for terms of one to 35 years. Upon expiration of the term, the borrower
may select another fixed rate term of one to 35 years (but not beyond
maturity of the loan) or a variable rate. The borrower may select
either option or may repay to CFC the principal then outstanding
together with interest due thereon and other sums, if required.
Includes $38.4 million of unsecured loans at May 31, 1997.

(C) CFC had loans outstanding to National Cooperative Services Corporation
("NCSC") in each of the periods shown. Long-term fixed rate loans
outstanding to NCSC as of May 31, 1997 and 1996, were $29.2 million and
$31.8 million, respectively. In addition, as of May 31, 1997 and 1996,
CFC had unadvanced loan commitments to NCSC in the amount of $15.4
million and $15.4 million, respectively.

(D) Includes $112.4 million and $84.6 million of unsecured loans at May 31,
1997 and 1996.

(E) Includes $99.1 million and $92.7 million of secured loans at May 31,
1997 and 1996.

(F) The rates on nonperforming loans are the weighted average of the stated
rates on such loans as of the dates shown and do not necessarily relate
to the interest recognized by CFC from such loans.

(G) The rates on restructured loans are the weighted average of the
effective rates (based on present values of scheduled future cash flows)
as of the dates shown and do not necessarily relate to the interest
recognized by CFC from such loans.

Loans outstanding, by State or U.S. territory, are summarized below:

(Dollar Amounts In Thousands) May 31, May 31,
State 1997 1996 State 1997 1996

Alabama $ 136,644 $ 137,433 Nevada $ 28,446 $ 9,131
Alaska 107,292 114,247 New Hampshire 255,929 246,332
Arizona 88,463 85,182 New Jersey 6,122 6,216
Arkansas 244,033 226,489 New Mexico 91,745 96,213
California 16,235 24,301 New York 11,277 11,260
Colorado 319,516 288,642 North Carolina 303,507 270,284
Delaware 16,554 16,888 North Dakota 53,870 44,257
District of Columbia 112,593 96,052 Ohio 112,137 97,932
Florida 340,709 348,651 Oklahoma 260,785 273,356
Georgia 723,936 631,225 Oregon 169,983 151,918
Idaho 79,020 56,535 Pennsylvania 99,150 85,352
Illinois 436,197 483,737 South Carolina 307,033 301,760
Indiana 123,415 112,134 South Dakota 112,559 48,402
Iowa 228,042 164,604 Tennessee 84,430 79,494
Kansas 227,768 237,778 Texas 1,024,611 871,775
Kentucky 192,815 168,449 Utah 428,217 173,323
Louisiana 162,067 144,644 Vermont 61,762 64,250
Maine 51,592 51,344 Virgin Islands 51,885 57,214
Maryland 86,396 87,992 Virginia 179,307 166,493
Michigan 99,771 85,663 Washington 82,616 77,737
Minnesota 382,531 332,664 West Virginia 1,108 1,022
Mississippi 225,255 202,363 Wisconsin 196,843 138,398
Missouri 295,275 279,058 Wyoming 119,800 105,240
Montana 158,372 169,863 Total $8,911,404 $7,946,318
Nebraska 13,791 23,021

60

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

CFC's members are widely dispersed throughout the United States and its
territories, including 46 states, the District of Columbia, Guam, Samoa and
the U.S. Virgin Islands. At May 31, 1997, 1996 and 1995, no state or
territory had over 10.6%, 9.9% and 9.1%, respectively, of total loans and
guarantees outstanding.

In addition to the geographic diversity of the portfolio, CFC limits its
exposure to any one borrower. The majority of the largest single exposures
are concentrated in the power supply systems due to their large plant and
equipment requirements. At May 31, 1997, the total exposure outstanding to
any one borrower did not exceed 5% of total loans (excluding loans
guaranteed by RUS) and guarantees outstanding. At May 31, 1997, CFC had
$2,809 million in loans outstanding, excluding loans guaranteed by RUS, and
$1,820 million in guarantees outstanding to its largest 40 borrowers,
representing 32% of total loans outstanding and 85% of total guarantees
outstanding. Credit exposure to the largest 40 borrowers represented 42%
of total credit exposure at May 31, 1997, compared to 43% at May 31, 1996.
CFC's ten largest credit exposures represented 22% of total exposure at
May 31, 1997 and 1996.

Weighted average interest rates earned (recognized in the case of
nonperforming and restructured loans) on all loans outstanding are
summarized below:

For the Years Ended May 31,
1997 1996 1995

Long-term fixed rate 7.65% 7.92% 8.63%
Long-term variable rate 6.25% 6.30% 5.90%
Telecommunication organizations 6.73% 6.86% 6.70%
Refinancing loans guaranteed by RUS 6.36% 6.75% 6.07%
Intermediate-term 7.08% 6.57% 6.19%
Short-term 6.40% 6.49% 6.29%
Associate members 6.42% 6.46% 5.40%
Nonperforming 0.00% 0.25% 1.56%
Restructured 0.56% 1.49% 1.92%
All loans 6.58% 6.77% 6.72%

Long-term fixed rate loans outstanding at May 31, 1997 which will be
subject to adjustment of their interest rates during the next five fiscal
years are summarized as follows (due to principal repayments, amounts
subject to interest rate adjustment may be lower at the actual time of
interest rate adjustment):

Weighted
(Dollar Amounts In Thousands) Average
Interest Amounts
Rate Outstanding

1998 8.17% $172,053
1999 7.42% 282,274
2000 6.71% 137,255
2001 6.95% 178,074
2002 6.80% 253,917
$1,023,573

During the first quarter of calendar year 1997, long-term fixed rate loans
totaling $41.3 million had their interest rates adjusted. These loans will
be eligible to readjust their interest rates again during the first quarter
of calendar year 1998 to the lowest long-term fixed rate offered during
1997 for the term selected. At January 1 and May 31, 1997, the standard
long-term fixed rate was 7.55% and 7.60%, respectively.

On most long-term secured loans, level quarterly payments are required
with respect to principal and interest in amounts sufficient to repay
the loan principal, generally over a period ending approximately 35
years from the date of the secured
61

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

promissory note. Fiscal year 1998 repayments of principal on long-term
loans outstanding are expected to be a relatively minor amount of such
outstanding loans.

CFC evaluates each borrower's creditworthiness on a case-by-case basis. It
is generally CFC's policy to require collateral for most long-term and some
intermediate-term loans. Such collateral usually consists of a first
mortgage lien on the borrower's total system, including plant and
equipment, and a pledge of future revenues. The loan and security
documents also contain various provisions with respect to the mortgaging of
the borrower's property, the maintenance of certain earnings and debt
service coverage ratios, maintenance of adequate insurance coverage and
certain other restrictive covenants.

Under common mortgages securing long-term CFC loans to distribution system
members, RUS has the sole right to act within 30 days or, if RUS is not
legally entitled to act on behalf of all noteholders, CFC may exercise
remedies. Under common mortgages securing long-term CFC loans to, or
guarantee reimbursement obligations of, power supply members, RUS retains
substantial control over the exercise of mortgage remedies.

As of May 31, 1997 and 1996, mortgage notes representing approximately
$1,294.5 million and $1,094.2 million, respectively, of outstanding long-
term loans to members were pledged as collateral to secure CFC's Collateral
Trust Bonds.

CFC has received no guarantee of its loans from RUS; however, "Refinancing
variable rate loans guaranteed by RUS" represents loans made by CFC and
transferred to its affiliate GFC to fund the prepayment of members' Federal
Financing Bank debt, effected through grantor trusts which each hold a note
from the member, the repayment of which has been guaranteed by RUS. Each
trust issues Trust Certificates which represent an undivided interest in
the trust assets. GFC, as holder of Trust Certificates, is financing these
loans from funds provided by CFC at a variable rate until fixed rate
funding is obtained through the public markets.

CFC sets the variable interest rates monthly on outstanding short- and
intermediate-term loans. On notification to borrowers, CFC may adjust the
interest rate semimonthly. Under CFC policy, the maximum interest rate
which may be charged on short-term loans is the prevailing bank prime rate
plus 1% per annum; on intermediate-term loans, the prevailing bank prime
rate plus 1.5% per annum; and on RTFC short-term loans, the prevailing bank
prime rate plus 3% per annum.

At May 31, 1997, 1996 and 1995, nonperforming loans in the amount of $9.4
million, $25.3 million and $27.6 million, respectively, were on a
nonaccrual basis with respect to recognition of interest income. The
effect of not accruing interest on nonperforming loans was a decrease in
interest income of $1.2 million, $2.5 million and $2.1 million for the
years ended May 31, 1997, 1996 and 1995, respectively. Income recognized
on these loans totaled $0.0 million, $0.1 million and $0.7 million,
respectively.

At May 31, 1997, 1996 and 1995, the total amount of restructured debt was
$362.0 million, $209.4 million and $185.0 million, respectively. CFC
elected to apply all principal and interest payments received against
principal outstanding on restructured debt of $362.0 million, $205.1
million and $131.1 million, respectively. The interest income that would
have been recorded under the original terms of the debt, assuming the debt
had been outstanding for the period, was $21.1 million, $15.0 million and
$12.4 million, for the years ended May 31, 1997, 1996 and 1995,
respectively. The interest income actually recorded for restructured debt
was $1.8 million, $3.1 million and $3.5 million, respectively.

(3) Members' Subordinated Certificates

Membership Subordinated Certificates

To join CFC and to establish eligibility to borrow, CFC members (other than
associate members and service organizations) are required to execute
agreements to subscribe to Membership Subordinated Certificates. Such
certificates are interest-bearing, unsecured, subordinated debt of CFC.
CFC is authorized to issue Subordinated Certificates without limitation as
to the total principal amount.
62

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

Generally, Membership Subordinated Certificates mature in the years 2070
through 2095 and bear interest at 5% per annum.

New members joining CFC are required to purchase Membership Subordinated
Certificates in an amount equal to 5% of each loan advance up to a maximum
amount based on their operating results. The maturity dates and interest
rates payable on such certificates vary in accordance with applicable CFC
policy.

In certain cases, the Board of Directors has approved alternative deferred
payment arrangements for purchase of Membership Subordinated Certificates.
These deferred payments are evidenced by noninterest-bearing, unsecured
notes from the member and are shown as receivables.

Loan and Guarantee Subordinated Certificates

Members obtaining long-term loans, certain intermediate-term loans or
guarantees from CFC are generally required to purchase additional Loan or
Guarantee Subordinated Certificates with each such loan or guarantee.
These certificates are unsecured, subordinated debt of CFC.

Certificates currently purchased in conjunction with loans are noninterest-
bearing and are generally repaid periodically over the life of the loan in
relation to the loan principal balance outstanding. Such certificate
purchase requirements, if any, range from 1% to 12% of the loan amount
depending on the membership classification of the borrower and the
borrower's leverage ratio, including the new loan, with CFC, for Utility
Systems.

The maturity dates and the interest rates payable on Guarantee Subordinated
Certificates purchased in conjunction with CFC's guarantee program vary in
accordance with applicable CFC policy. Members may be required to purchase
noninterest-bearing Debt Service Reserve Subordinated Certificates in
connection with CFC's guarantee of long-term tax-exempt bonds (see Note 8).
Proceeds from the sale of such certificates are pledged by CFC to the Debt
Service Reserve Fund established in connection with the bond issue, and any
earnings from the investments of the fund inure solely to the benefit of
the members for whose benefit the bonds are issued. These certificates have
varying maturities but none is greater than the longest maturity of the
guaranteed obligation.

Information with respect to Members' Subordinated Certificates at May 31,
is as follows:

(Dollar Amounts In Thousands) 1997 1996
Membership Subordinated Certificates
Number of subscribing members 907 903

Issued and outstanding:
Certificates maturing 2020 through 2095 $ 629,412 $ 631,282
Subscribed and unissued 16,037 7,158
Total Membership Subordinated
Certificates 645,449 638,440

Loan and Guarantee Subordinated Certificates
Issued and outstanding:
3% certificates maturing through 2040 135,540 129,520
5.74% to 13.70% certificates maturing
through 2018 114,834 125,139
Noninterest-bearing certificates maturing
through 2029 292,861 290,352
Subscribed and unissued 23,802 24,233
Total Loan and Guarantee
Subordinated Certificates 567,037 569,244

Total Members' Subordinated Certificates $1,212,486 $1,207,684

63

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

CFC estimates the amount of Subordinated Certificates that will be repaid
during the next five fiscal years will total approximately 1.51% of
certificates outstanding. The weighted average interest rate paid on all
Subordinated Certificates was 4.29%, 4.29% and 4.36% as of May 31, 1997,
1996 and 1995, respectively. These rates do not include $103.5 million,
$102.5 million and $114.1 million of Debt Service Reserve Subordinated
Certificates and $39.8 million, $31.4 million and $24.3 million of
subscribed but unissued Subordinated Certificates at May 31, 1997, 1996 and
1995, respectively.

(4) Notes Payable and Credit Arrangements

Notes payable due within one year as of May 31, and weighted average
interest rates thereon, are summarized as follows:

1997 1996
Weighted Weighted
Average Average
Amounts Interest Amounts Interest
(Dollar Amounts In Thousands) Outstanding Rates Outstanding Rates

Commercial paper, sold through dealers, net of discounts of
$21,529 and $17,540, respectively $4,214,109 5.68% $3,482,133 5.43%
Commercial paper sold by CFC directly to members, at par 1,203,335 5.51% 1,170,039 5.33%
Commercial paper sold by CFC directly to nonmembers,
at par 74,929 5.48% 65,898 5.33%

5,492,373 5.64% 4,718,070 5.41%

Bank Bid Notes 115,000 5.60% 183,500 5.42%

Long-term debt maturing within one year 149,701 8.76% 299,982 7.75%
5,757,074 5.72% 5,201,552 5.54%

Notes payable supported by revolving credit agreements,
classified as long-term debt (see Note 5) (2,250,000) 5.72% (2,730,000) 5.54%

$3,507,074 5.72% $2,471,552 5.54%

Other information with regard to notes payable due within one year at
May 31, is as follows:

(Dollar Amounts In Thousands) 1997 1996 1995

Original maturity range of notes outstanding at
year-end 1 to 255 days 1 to 270 days 1 to 261 days
Weighted average maturity of notes outstanding
at year-end 34 days 35 days 65 days
Average amount outstanding during the year $5,558,201 $4,839,483 $3,895,274
Maximum amount outstanding at any month-end during
the year $5,781,905 $5,201,552 $4,242,570
Weighted average interest rate paid for the year,
without effect of compensating balances and
commitment fees 5.51% 5.77% 5.44%
Weighted average effective interest rate paid for the
year, including effect of compensating balances
and commitment fees 5.55% 5.83% 5.59%

64

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

CFC issues short-term Bid Notes which are unsecured obligations of CFC and
do not require back-up bank lines for liquidity purposes. Bid Note
facilities are uncommitted lines of credit for which CFC does not pay a
fee. The commitments are generally subject to termination at the
discretion of the individual banks.

As of May 31, 1997, CFC had three revolving credit agreements totaling
$5,000.0 million which are used principally to provide liquidity support
for CFC's outstanding commercial paper, CFC's guaranteed commercial paper
issued by NCSC and the adjustable or floating/fixed rate bonds which CFC
has guaranteed, and is standby purchaser for the benefit of its members.

Two of these credit agreements, which total a combined $4,500.0 million,
were executed with 52 banks, with J.P. Morgan Securities, Inc. and The Bank
of Nova Scotia as Co-Syndication Agents and Morgan Guaranty Trust Company
of New York as Administrative Agent. Under these agreements, CFC can
borrow up to $2,250.0 million until November 26, 2001 (the "five-year
facility"), and $2,250.0 million until November 25, 1997 (the "364-day
facility"). Any amounts outstanding under these facilities will be due on
the respective maturity dates. A third revolving credit agreement for
$500.0 million was executed with ten banks, including The Bank of Nova
Scotia as Administrative and Syndication Agent (the "BNS facility"). This
agreement has a 364-day revolving credit period which terminates November
26, 1997 during which CFC can borrow and such borrowings may be converted
to a 1-year term loan at the end of the revolving credit period.

In connection with the five-year facility, CFC pays a per annum facility
fee of .090%. The per annum facility fee for both agreements with a 364-
day maturity is .065% and there is no commitment fee at CFC's current
credit rating level. If CFC's long-term ratings decline, these fees may be
increased by no more than .035%. Generally, pricing options are the same
under all three agreements and will be at one or more rates as defined in
the agreements, as selected by CFC.

The revolving credit agreements require CFC, among other things, to maintain
Members' Equity and Members' Subordinated Certificates of at least $1,349.9
million at May 31, 1997, an increase of $3.6 million compared to the
$1,346.3 million required at May 31, 1996. Each year, the required amount
of Members' Equity and Members' Subordinated Certificates is increased by
90% of net margins not distributed to members. CFC is also required to
maintain an average fixed charge coverage ratio over the six most recent
fiscal quarters of at least 1.025 and may not retire patronage capital
unless CFC has achieved a fixed charge coverage ratio of 1.05 for the
preceding fiscal year. The credit agreements prohibit CFC from incurring
senior debt (including guarantees but excluding indebtedness incurred to
fund RUS guaranteed loans) in an amount in excess of ten times the sum of
Members' Equity and subordinated debt and restrict, with certain
exceptions, the creation by CFC of liens on its assets and contain certain
other conditions to borrowing. The agreements also prohibit CFC from
pledging collateral in excess of 150% of the principal amount of Collateral
Trust Bonds outstanding. Provided that CFC is in compliance with these
financial covenants (including that CFC has no material contingent or other
liability or material litigation that was not disclosed by or reserved
against in its most recent annual financial statements) and is not in
default, CFC may borrow under the agreements until the termination date.
As of May 31, 1997 CFC was in compliance with all covenants and conditions.

As of May 31, 1997 there were no borrowings outstanding under the revolving
credit agreements. On the basis of the five-year facility, at May 31,
1997, CFC classified $2,250.0 million of its notes payable outstanding as
long-term debt. CFC expects to maintain more than $2,250.0 million of
notes payable outstanding during the next 12 months. If necessary, CFC can
refinance such notes payable on a long-term basis by borrowing under the
five-year facility, subject to the conditions therein.

65

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

(5) Long-Term Debt

The following is a summary of long-term debt as of May 31:

(Dollar Amounts In Thousands)
1997 1996

Notes payable supported by revolving credit agreement
(see Note 4) $2,250,000 $2,730,000
Medium-Term Notes, sold through dealer 338,575 265,275
Medium-Term Notes, sold directly to members 276,821 338,977
615,396 604,252
Collateral Trust Bonds:
8.50%, Series U, due 1998 (2)(3) - 150,000
Variable Rate Bonds, due 1999 (1) 150,000 -
6.45%, Bonds, due 2001 (1) 100,000 100,000
6.75%, Bonds, due 2001 (1) 100,000 -
6.50%, Bonds, due 2002 (1) 100,000 100,000
5.95%, Bonds, due 2003 (1) 100,000 100,000
6.65%, Bonds, due 2005 (1) 50,000 50,000
7.30%, Bonds, due 2006 (1) 100,000 -
Floating Rate, Series E-2, due 2010 (3) 2,142 2,178
7.20%, Bonds, due 2015 (1) 50,000 50,000
9.00%, Series V, due 2021 (3) 150,000 150,000
7.35%, Bonds, due 2026 (1) 100,000 -
1,002,142 702,178
Less: Collateral Trust Bonds held in treasury - 200
Unamortized bond discount 2,651 2,349
Total Collateral Trust Bonds 999,491 699,629
Total long-term debt $3,864,887 $4,033,881

(1) Issued under the 1994 indenture.
(2) As of May 31, 1997, included with short term debt.
(3) Issued under the 1972 indenture.

The weighted average interest rate on Medium-Term Notes and Collateral
Trust Bonds was 6.82%, 7.20% and 7.90% as of May 31, 1997, 1996 and 1995,
respectively. These rates do not include notes payable supported by the
revolving credit agreement.

The principal amount of Medium-Term Notes and Collateral Trust Bonds
maturing (including any sinking fund requirements) in each of the five
fiscal years following May 31, 1997, is as follows:

(Dollar Amounts In Thousands)

1998 $268,656
1999 202,967
2000 182,096
2001 154,602
2002 108,900
Thereafter 697,666
$1,614,887

Under the 1972 Indenture for Collateral Trust Bonds, CFC is required to
maintain funds in a Debt Service Investment account equivalent to principal
and interest payments due on the bonds over the next 12 months. At May 31,
1997 and
66

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

1996, CFC had $77.2 million and $40.9 million, respectively, of
such funds invested in bank certificates of deposit and marketable
securities.

The outstanding Collateral Trust Bonds are secured by the pledge of
mortgage notes taken by CFC in connection with long-term secured loans made
to those members fulfilling specified criteria as set forth in the
indenture. Medium-Term Notes are unsecured obligations of CFC.

Interest Rate Exchange Agreements

The following table lists the notional principal amounts and the weighted
average interest rates paid by CFC under interest rate exchange agreements
at May 31, 1997 and 1996:

(Dollar Amounts in Thousands)

Maturity Interest Rate Paid Interest Rate Received Notional Principal Amount
Date 1997 1996 1997 1996 1997 1996

August 1996 (1) - 8.40% - 5.87% $ - $ 30,000
September 1996 (2) - 5.82% - 5.84% - 150,000
February 1997 (1) - 9.34% - 5.46% - 35,000
February 1997 (1) - 9.33% - 5.89% - 40,000
February 1997 (1) - 9.36% - 5.91% - 25,000
February 1998 (2) 5.61% 5.83% 5.57% 5.87% 50,000 50,000
November 1999(2) 5.63% - 5.52% - 50,000 -
November 1999 (2) 5.63% - 5.52% - 50,000 -
November 1999(2) 5.63% - 5.52% - 50,000 -
January 2000(1) 6.47% - 5.57% - 52,851 -
January 2001(1) 6.64% - 5.57% - 42,749 -
October 2004 (1) 6.23% 6.23% 5.64% 5.75% 43,200 45,600
April 2006 (1) 6.88% 6.88% 5.65% 5.49% 25,000 25,000
April 2006 (1) 6.89% 6.89% 5.65% 5.49% 25,000 25,000
April 2006 (1) 6.88% 6.88% 5.65% 5.49% 25,000 25,000
April 2006 (1) 6.89% 6.89% 5.65% 5.49% 25,000 25,000
Total $438,800 $475,600

__________
(1) Under these agreements, CFC pays a fixed rate of interest and receives
interest based on a variable rate.
(2) Under these agreements, CFC pays a variable rate of interest and
receives a variable rate of interest.

CFC's objective in using interest rate exchange agreements in which it pays
a fixed rate of interest and receives a variable rate of interest is to fix
the interest rate on a portion of its commercial paper. CFC then uses
commercial paper, in an amount equal to the notional principal value of the
interest rate exchange agreements, to fund a portion of its long-term fixed
rate loan portfolio. The net difference between the rate paid by CFC and
the rate received is included in the cost of funds.

CFC's objective in using interest rate exchange agreements in which it pays
and receives a variable rate of interest is to change the variable rate on
a notional amount of debt from a LIBOR rate index to a commercial paper
rate index. The variable rate Collateral Trust Bonds and Medium-Term Notes
are issued based on a LIBOR rate index, while CFC sets its variable rate
loan interest rates based on a commercial paper rate. The net difference
between the rate paid by CFC and the rate received is included in the cost
of funds.

CFC is exposed on these interest rate swap agreements to interest rate risk
if the counterparty to the interest rate swap agreement does not perform
pursuant to the agreement's terms. CFC only enters swap agreements with
highly rated financial institutions.

67

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

(6) Employee Benefits

CFC is a participant in the National Rural Electric Cooperative Association
("NRECA") Retirement and Security Program. This program is available to all
qualified CFC employees. Under the program, participating employees are
entitled to receive annually, under a 50% joint and surviving spouse
annuity, 1.90% of the average of their five highest base salaries during
their last ten years of employment, multiplied by the number of years of
participation in the program. CFC contributed $615,000 to the Retirement
and Security Program during fiscal year 1997. Funding requirements are
charged to general and administrative expenses as billed on a monthly
basis. This is a multi-employer plan, available to all member cooperatives
of NRECA, and therefore the projected benefit obligation and plan assets
are not determined or allocated separately by individual employer.

The Budget Reconciliation Act of 1993 has set a limit of $160,000 for
calendar year 1997 on the compensation to be used in the calculation of
pension benefits. In order to restore potential lost benefits, CFC has set
up a Pension Restoration Plan. Under the plan, the amount that NRECA
invoices CFC will continue to be based on the full compensation paid to
each employee. Upon the retirement of a covered employee, NRECA will
calculate the retirement and security benefit to be paid with consideration
of the compensation limits and will pay the maximum benefit thereunder.
NRECA will also calculate the retirement and security benefit that would
have been available without consideration of the compensation limits and
CFC will pay the difference. NRECA will then give CFC a credit against
future retirement and security contribution liabilities in the amount paid
by CFC to the covered employee.

CFC will pay such additional benefits to the covered employee through a
Severance Pay Plan and a Deferred Pay Restoration Plan. Under the
Severance Pay Plan, the employee is paid an amount equal to the lost
pension benefits but not to exceed twice the employee's annual compensation
for the prior year. The benefit must be paid within 24 months of
termination of employment. To the extent that the Severance Pay Plan
cannot pay all of the lost pension benefits, the remainder will be paid
under a Deferred Compensation Plan, which will be paid out in a lump sum or
in installments of up to 60 months.

CFC recognizes in current year margins any expected payouts for post-
retirement benefits (other than pensions) as a result of current service.
Post-retirement benefits include, but are not limited to, health and
welfare benefits provided after retirement. While CFC allows retired
employees to participate in its medical and life insurance plans, the
retirees must do so at their own expense. Any liability which may be
incurred by allowing retired employees to remain on CFC's medical and life
insurance plans is not material to CFC's financial condition, results of
operations or cashflows.

CFC offers a 401(k) defined contribution savings program to all employees
that have completed a minimum of 1,000 hours of service, in either the
first 12 consecutive months or first full calendar year of employment.
Employee contributions for calendar year 1997 are tax deductible up to
$9,500, the limit set by IRS regulations. Employees may contribute
additional amounts to the program on an after-tax basis subject to the
limitations established by section 415 of the Internal Revenue Code. The
Company will contribute an amount equal to 2% of an employee's salary each
year for all employees participating in the program. During the year ended
May 31, 1997, the Company contributed a total of $153,000 under the
program.

(7) Retirement of Patronage Capital

Patronage capital in the amount of $51.3 million was retired during fiscal
year 1997. CFC retired $42.7 million to its members, excluding $4.7
million retired to RTFC and $3.3 million retired to GFC. RTFC retired $5.9
million to its members and GFC retired $2.7 million to its members.

It is anticipated that CFC will retire patronage capital totaling $54.6
million, representing one-sixth of the fiscal years 1988, 1989 and 1990
allocations and 70% of the fiscal year 1997 allocation, in August 1997.
Management anticipates that 70% of RTFC's margins for fiscal year 1997 will
be retired in January 1998, and that 100% of GFC's margins for fiscal year
1997 will be retired in the second quarter of fiscal year 1998. Future
retirements of patronage capital will be

68

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

made as determined by the Companies' respective Boards of Directors with due
regard for their individual financial conditions.

(8) Guarantees

As of May 31, 1997 and 1996, CFC had outstanding guarantees of the
following contractual obligations of its members (see Note 1(e) for a
description of CFC's allowance for loan and guarantee losses and Note 3 for
a discussion of requirements to purchase Guarantee Subordinated
Certificates in connection with these guarantees):

(Dollar Amounts In Thousands)
1997 1996

Long-term tax exempt bonds (A) $1,190,925 $1,317,655
Debt portions of leveraged lease transactions (B) 418,916 432,516
Indemnifications of tax benefit transfers (C) 338,264 363,702
Other guarantees (D) 132,566 135,567

Total $2,080,671 $2,249,440

(A) CFC has unconditionally guaranteed to the holders or to trustees for
the benefit of holders of these bonds the full principal, premium,
if any, and interest on each bond when due. In addition, CFC has
agreed to make up, at certain times, deficiencies in the debt
service reserve funds for certain of these issues of bonds. In the
event of a default by a system for nonpayment of debt service, CFC
is obligated to pay any required amounts under its guarantee, which
will prevent the acceleration of the bond issue. The system is
required to repay, on demand, any amount advanced by CFC pursuant
to its guarantee. This repayment obligation is secured by a common
mortgage with RUS on all of the system's assets, but CFC may not
exercise remedies thereunder for up to two years. However, if the
debt is accelerated because of a determination that the interest
thereon is not tax-exempt, the system's obligation to reimburse CFC
for any guarantee payments will be treated as a long-term loan.

Of the amounts shown, $1,043.2 and $1,168.9 million as of May 31,
1997 and 1996, respectively, are adjustable or floating/fixed rate
bonds. The floating interest rate on such bonds may be converted to
a fixed rate as specified in the indenture for each bond offering.
During the variable rate period (including at the time of conversion
to a fixed rate), CFC has unconditionally agreed to purchase bonds
tendered or called for redemption if such bonds have not previously
been sold to other purchasers by the remarketing agents.

(B) CFC has guaranteed debt issued by NCSC in connection with leveraged
lease transactions. The amounts shown represent loans from NCSC to
a trust for the benefit of an industrial or financial company for
the purchase of a power plant or utility equipment which was
subsequently leased to a CFC member. The loans are secured by the
property leased and the owner's rights as lessor. NCSC borrowed the
funds for these loans either under a CFC guarantee or directly from
CFC.

(C) CFC has unconditionally guaranteed to lessors certain indemnity
payments which may be required to be made by the lessees in
connection with tax benefit transfers. The amounts shown represent
CFC's maximum potential liability at May 31, 1997 and 1996.
However, the amounts of such guarantees vary over the lives of the
leases. A member's obligation to reimburse CFC for any guarantee
payments would be treated as a long-term loan, secured pari passu
with the RUS by a first lien on substantially all of the member's
property to the extent of any cash received by the member at the
outset of the transaction. The remainder would be treated as an
intermediate-term loan secured by a subordinated mortgage on
substantially all of the member's property. Due to changes in
Federal tax law, no further guarantees of this nature are
anticipated.

(D) At May 31, 1997 and 1996, CFC had unconditionally guaranteed
commercial paper issued by NCSC in the amount of $33.7 million and
$34.7 million, respectively.
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

Guarantees outstanding, by state, are summarized as follows:

(Dollar Amounts In Thousands)

May 31, May 31,
State 1997 1996 State 1997 1996

Alabama $ 68,750 $ 71,680 Nebraska 3,375 3,620
Arizona 55,825 59,370 North Carolina 117,500 120,050
Arkansas 131,498 137,897 Oklahoma 56,296 63,326
Colorado 12,196 114,750 Oregon 4,945 5,070
Florida 312,400 320,834 Pennsylvania 13,718 14,547
Indiana 126,568 129,561 South Carolina 46,260 47,310
Iowa 10,275 12,015 Texas 125,418 125,528
Kansas 40,949 41,841 Utah 291,826 304,482
Kentucky 193,120 197,390 Virginia 37,875 39,133
Minnesota 148,904 156,077 Wisconsin 7,895 8,385
Mississippi 69,205 71,710 Wyoming 10,875 -
Missouri 194,998 204,864 Total $2,080,671 $2,249,440

CFC uses the same credit policies and monitoring procedures in providing
guarantees as it does for loans and commitments.

The following table details the scheduled reductions in each of the fiscal
years following May 31, 1997 to the amount of obligations guaranteed by
CFC:

(Dollar Amounts In Thousands)
Amount

1998 $ 76,941
1999 84,531
2000 88,460
2001 93,334
2002 112,390
Thereafter 1,625,015
$2,080,671

(9) Fair Value of Financial Instruments

The following disclosure of the estimated fair value of financial
instruments is made in accordance with FASB Statement No. 107, "Disclosure
about Fair Value of Financial Instruments." Whenever possible, the
estimated fair value amounts have been determined using quoted market
information as of May 31, 1997, along with other valuation methodologies
which are summarized below. The estimated fair value information presented
is not necessarily indicative of amounts CFC could realize currently in a
market sale since CFC may be unable to sell such instruments due to
contractual restrictions or to the lack of an established market and the
estimated market values have not been updated since May 31, 1997.Therefore,
current estimates of fair value may differ significantly from the amounts
presented. With the exception of redeeming Collateral Trust Bonds under
early redemption provisions and allowing borrowers to prepay their loans,
CFC has held all financial instruments to maturity. Below is a summary of
significant methodologies used in estimating fair value amounts and a
schedule of fair values at May 31, 1997.

Cash and Cash Equivalents

Includes cash and certificates of deposit with remaining maturities of less
than 90 days, which are valued at cost.

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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

Debt Service Investments

The fair value of debt service investments is estimated based on published
bid prices or dealer quotes or is estimated using quoted market prices for
similar securities when no market quote is available. Debt service
investments purchased with original maturities of less than or equal to 90
days are valued at the carrying value which is a reasonable estimate of
fair value.

Loans to Members

Fair values are estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. Loans with
different risk characteristics, specifically nonperforming and restructured
loans, are valued using a discount rate commensurate with the risk
involved. Loans with interest rate repricing maturities of less than or
equal to 90 days are valued at cost which approximates fair value.

Notes Payable

Notes payable consist of commercial paper and bank bid notes. The fair
value of commercial paper and bid notes with maturities greater than 90
days is estimated based on quoted market rates with similar maturities for
commercial paper and on bid prices from the various banking institutions
for bid notes. The fair value of commercial paper and bank bid notes with
maturities less than or equal to 90 days are valued at carrying value which
is a reasonable estimate of fair value. The fair value of Collateral Trust
Bonds maturing within one year is estimated based on published bid prices
or dealer quotes or is estimated using quoted market prices for similar
securities when no market quote is available.

Long-Term Debt

Long-term debt consists of Collateral Trust Bonds and Medium-Term Notes.
The fair value of long-term debt is estimated based on published bid prices
or dealer quotes or is estimated using quoted market prices for similar
securities when no market quote is available.

Quarterly Income Capital Securities

The fair value of Quarterly Income Capital Securities is estimated based on
published market prices.

Members' Subordinated Certificates

As it is impracticable to develop a discount rate that measures fair value,
Subordinated Certificates have not been valued. Subordinated Certificates
are extended long-term obligations to CFC; many have maturities of 70 to
100 years. These certificates are issued to CFC's members as a condition
of membership or as a condition of obtaining loan funds or guarantees and
are non-transferable. As these certificates were issued not primarily for
their future payment stream but mainly as a condition of membership and to
receiving future loan funds, there is no ready market from which to obtain
fair value rates.

Interest Rate Exchange Agreements

The fair value is estimated as the amount CFC would receive or pay to
terminate the agreement, taking into account the current market rate of
interest and the current creditworthiness of the exchange counterparties.

Commitments

The fair value is estimated as the carrying value, or zero. Extensions of
credit under these commitments, if exercised, would result in loans priced
at market rates.
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

Guarantees

CFC charges guarantee fees based on the specifics of each individual
transaction. The demand for CFC guarantees has been small in the last few
years. In addition, there is no other company that provides guarantees to
rural electric utility companies from which to obtain market fee
information. As a result, it is impracticable to supply fair value
information related to guarantee fees.

Carrying and fair values as of May 31, 1997 and 1996 are presented as
follows:

(Dollar Amounts In Thousands) 1997 1996
Carrying Fair Carrying Fair
Value Value Value Value

Assets:
Cash and Cash Equivalents $ 50,011 $ 50,011 $ 56,368 $ 56,368
Debt Service Investments 77,219 77,219 40,907 40,907
Loans to Members, net 8,678,196 8,602,301 7,728,271 7,661,739

Liabilities:
Notes Payable (1) 5,757,074 5,759,584 5,201,552 5,206,878
Long-Term Debt (1) 1,614,887 1,610,726 1,303,881 1,358,688
Quarterly Income Capital Securities 125,000 126,875 - -
Members' Subordinated Certificates 1,212,486 N/A 1,207,684 N/A

Off-Balance Sheet Instruments:
Interest Rate Exchange Agreements - (4,331) - (6,458)
Commitments - - - -
Guarantees - - - -

(1) Prior to reclassification of notes payable supported by the
revolving credit agreements.

(10) Contingencies

(a) At May 31, 1997 and 1996, CFC had a total of $371.4 million and $230.4
million of loans classified as impaired under the provisions of FASB
Statements No. 114 and 118. At those dates, CFC had allocated $126.0
million and $160.9 million of the loan and guarantee loss allowance to
such impaired loans. At May 31, 1997 and 1996, 3% and 32% of impaired
loans were collateral dependent. Loans are considered to be collateral
dependent when there are no reliable future payment schedules and the
amount expected to be collected is directly related to the value of the
assets and future revenues that represent the underlying security for
the loan. CFC does not recognize interest income on loans classified
as impaired. Instead, all payments received are applied as a reduction
to principal outstanding. The average recorded investment in impaired
loans, for the year ended May 31, 1997, was $332.7 million.

(b) On December 31, 1996 the Wabash Valley Power Association ("WVPA") plan
of reorganization became effective. Under the plan, CFC received a
$4.9 million cash payment and offset $9.9 million of WVPA's
investments in CFC commercial paper and Subordinated Certificates,
for a total of $14.8 million. CFC also received a combination of
secured and unsecured promissory notes bearing interest at market
rates totaling $13.4 million, bringing the total received by CFC to
$28.2 million. CFC applied the cash and offsets against the $17.7
million nonperforming loan to Wabash, reducing the balance to $2.9
million at May 31, 1997. The notes receivable have been classified
as performing and are accruing interest at CFC's intermediate-term
interest rate. WVPA is current with respect to amounts due on the
notes. The $2.9 million has been classified as nonperforming and is
on a nonaccrual status with respect to the recognition of interest
income.

CFC and RUS are negotiating a settlement on the amount of true up
payments under a separate agreement entered into in May 1988. This
agreement provides for CFC and RUS to allocate between them all post-
petition, pre-
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

confirmation payments made by WVPA to CFC on debt
secured by a mortgage under which CFC and RUS were co-mortgagees in
proportion to the respective amounts of debt secured. CFC
anticipates making a payment to RUS under this agreement. At May 31,
1997, CFC has a deferred gain of $10.5 million (total received $28.2
million less outstanding loans of $17.7 million). This gain will be
used to offset a portion of any true-up payment that is made to RUS.

CFC believes that it has adequately reserved for any potential losses
related to WVPA.

(c) Deseret Generation & Transmission Co-operative ("Deseret") failed to
make the payments required under a prior workout agreement, the
Agreement Restructuring Obligations (the "ARO"), during 1995. The
creditors were unable to agree on the terms of a negotiated settlement
and the ARO was terminated as of February 29, 1996. CFC filed a
foreclosure action against the owner of the Bonanza Plant in State
Court in Utah on March 21, 1996. In this action, CFC has not
terminated the lease or sought removal of Deseret as the plant
operator. One of the defendants in the foreclosure action has filed
amended counterclaims against CFC. These amended counterclaims allege
breaches of contract and fiduciary duties, fraudulent concealment,
tortious interference with contract and conspiracy. These amended
counterclaims also seek rescission or equitable subordination of CFC's
interest in the Bonanza Plant. A trial has been scheduled for June
1998.

On October 16, 1996, Deseret and CFC entered into an Obligations
Restructuring Agreement (the "ORA") for the purpose of restructuring
Deseret's debt with CFC. Pursuant to the terms of the ORA, CFC agreed
to (i) forbear from exercising any remedy to collect the CFC Debt (as
defined in the ORA) and (ii) pay and perform all of the CFC Guarantees
(as defined in the ORA) in consideration for Deseret agreeing to make
quarterly minimum payments to CFC through December 31, 2025. In
addition to the quarterly minimum payments, Deseret is required to pay
to CFC certain percentages of its excess cash flow and proceeds from
the disposition of assets, as detailed in the ORA. If Deseret performs
all of its obligations under the ORA, CFC has agreed to forgive any
remaining CFC Debt on December 31, 2025.

In connection with the ORA, on October, 16, 1996 CFC acquired all of
Deseret's indebtedness in the outstanding principal amount of $740
million from RUS for $238.5 million (the "RUS Debt"). As a result of
the purchase, CFC holds a majority of Deseret's outstanding secured
debt. Pursuant to a participation agreement dated October 16, 1996,
the member systems of Deseret purchased from CFC, for $55.0 million, a
participation interest in the RUS Debt. CFC provided long-term
financing to the members of Deseret as follows: (i) $32.5 million in
the aggregate to finance the buyout by the members of their respective
RUS debt (the "Note Buyout Loans"), and (ii) $55.0 million in the
aggregate to finance the members' purchase of participation interests
in the RUS Debt acquired by CFC (the "Participation Loans"). The Note
Buyout Loans and the Participation Loans are secured by the assets and
revenues of the member systems. Under the participation agreement the
Deseret members will receive a share of the minimum quarterly payments
that Deseret makes to CFC which the members will use to service their
Participation Loans. Each member of Deseret has the option to put its
Participation Loan back to CFC at any time after twelve years, provided
that no event of default exists under the ORA or under such member's
Participation Loan.

From January 1, 1989 through May 31, 1997, CFC funded $165.4 million in
cash flow shortfalls related to Deseret's debt service and rental
obligations. All cash flow shortfalls funded by CFC represent an
increase to the restructured loan to Deseret. They also serve to
reduce CFC's guarantee exposure to Deseret. As of May 31, 1997, CFC
had approximately $653.8 million in current credit exposure to Deseret
consisting of $362.0 million in secured loans and $291.8 million in
guarantees by CFC of various direct and indirect obligations of
Deseret. The secured loans to Deseret are on nonaccrual status with
respect to interest income. All payments received from Deseret are
applied against principal outstanding. CFC's guarantees include $5.0
million in tax-benefit indemnifications and $23.1 million relating to
mining equipment for a coal supplier of Deseret. The remaining CFC
guarantee is for semi-annual debt service payments on $263.7 million of
bonds issued in a $655 million leveraged lease financing of the Bonanza
Plant in 1985. RUS is now responsible for the repayment of $174.9
million of Deseret loans held by grantor trusts and serviced by CFC.
CFC holds $2.8 million of the grantor trust certificates which are
currently in the variable rate mode.

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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

On August 19, 1997, CFC guaranteed the obligation of Blue Mountain
Energy (a Deseret subsidiary) to make annual lease payments on mine
equipment sold to and leased back from a third party. The guarantee
is for $34.4 million and will amortize through 2007. CFC received a
total of $25.1 million from the proceeds of the equipment sale, all
of which was applied against the outstanding Deseret loan balance.
CFC has agreed to reduce the annual minimum payment due, as provided
for in the ORA, by an amount equal to the lease payments.

CFC believes that, given its analysis of Deseret's cash flow
projections, it has adequately reserved for any potential loss on its
loans and guarantees to Deseret.

(d) On September 13, 1996, CFC advanced $235.0 million to Soyland Power
Cooperative, Inc. ("Soyland"), for the purpose of repaying its RUS
obligations at a significant discount. This loan will amortize over a
five-year term. As a condition to this advance, certain distribution
members of Soyland agreed to guarantee repayment to CFC of $117.5
million.

As a result of the buyout, RUS assumed responsibility for the repayment
of $618.0 million of guaranteed loans to Soyland. A total of $354.8
million of these loans were held in grantor trusts and serviced by CFC,
while the remaining $263.2 million were held by CFC. On February 13,
1997 RUS repaid the $263.2 million of guaranteed loans held by CFC.
On March 20, 1997 RUS repaid $257.0 million of the loans held by the
grantor trusts and serviced by CFC. At May 31, 1997, the balance of
loans held by grantor trusts and payable by RUS was $93.7 million.

As of May 31, 1997, CFC had a total of $215.2 million of loans
outstanding to Soyland. All of these loans have been classified as
performing and are on full accrual status with respect to interest
income. Soyland is current with respect to all payments due on its
loans.

CFC believes that it is adequately reserved for any potential loss on
its loans to Soyland.

(e) At May 31, 1997, two other borrowers were in payment default to CFC on
secured and unsecured loans totaling $6.5 million. At May 31, 1996,
the same two borrowers were in payment default to CFC on secured and
unsecured loans totaling $6.6 million.

(11) Extraordinary Loss

During the year ended May 31, 1996, CFC paid a prepayment premium of
$1.6 million for the early retirement of Collateral Trust Bonds.
During the years ended May 31, 1997 and 1995, CFC did not incur any
prepayment premiums related to the early retirement of Collateral Trust
Bonds.

(12) Combined Quarterly Financial Results (Unaudited)

Summarized results of operations for the four quarters of fiscal years
1997 and 1996 are as follows:

Fiscal Year 1997
(Dollar Amounts In Thousands) Quarters Ended
Total
August 31 November 30 February 28 May 31 Year

Operating income $134,267 $140,233 $142,562 $147,377 $564,439
Operating margin 12,105 12,985 14,842 11,598 51,530
Nonoperating income 661 672 700 1,173 3,206
Net margins 12,766 13,657 15,542 12,771 54,736

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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)

Fiscal Year 1996
Quarters Ended
Total
August 31 November 30 February 29 May 31 Year

Operating income $122,048 $124,880 $126,269 $131,876 $505,073
Operating margin 11,569 11,563 11,470 12,255 46,857
Nonoperating income 819 928 1,311 706 3,764
Extraordinary loss - - - (1,580) (1,580)
Net margins 12,388 12,491 12,781 11,381 49,041

NOTE: During fiscal year 1997, CFC made regular provisions for loan and
guarantee losses totaling $10.0 million and special provisions
totaling $5.2 million. During fiscal year 1996, CFC made nine
monthly provisions for loan and guarantee losses of $0.625 million
and special provisions totaling $6.8 million.

75