10-K 1 0001.txt 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, 2000 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 telecommunications number, including area code, is 703-709-6700) __________________ Securities registered pursuant to Section 12(b) of the Act:

Name of each Name of each exchange on exchange on Title of each class which registered Title of each class which registered 6.45% Collateral trust bonds Due 2001 NYSE 7.30% Collateral trust bonds Due 2006 NYSE 6.75% Collateral trust bonds Due 2001 NYSE 6.20% Collateral trust bonds Due 2008 NYSE 6.70% Collateral trust bonds Due 2002 NYSE 5.75% Collateral trust bonds Due 2008 NYSE 6.50% Collateral trust bonds Due 2002 NYSE 5.70% Collateral trust bonds Due 2010 NYSE 5.00% Collateral trust bonds Due 2002 NYSE Variable Collateral trust bonds, Series E-2 Due 2010 NYSE 5.95% Collateral trust bonds Due 2003 NYSE 7.20% Collateral trust bonds Due 2015 NYSE 7.375% Collateral trust bonds Due 2003 NYSE 6.55% Collateral trust bonds Due 2018 NYSE 5.30% Collateral trust bonds Due 2003 NYSE 9.00% Collateral trust bonds, Series V Due 2021 NYSE 6.00% Collateral trust bonds Due 2004 NYSE 7.35% Collateral trust bonds Due 2026 NYSE 6.375% Collateral trust bonds Due 2004 NYSE 8.00% Quarterly Income Capital Securities Due 2045 NYSE 5.50% Collateral trust bonds Due 2005 NYSE 7.65% Quarterly Income Capital Securities Due 2046 NYSE 6.125% Collateral trust bonds Due 2005 NYSE 7.375% Quarterly Income Capital Securities Due 2047 NYSE 6.65% Collateral trust bonds Due 2005 NYSE

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 stock. TABLE OF CONTENTS Part No. Item No. Page I 1 Business 1 General 1 Members 1 Distribution Systems 2 Power Supply Systems 3 Service Organizations and Associate Member Systems 3 Telecommunications Systems 3 Loan Programs 3 Interest Rates on Loans 5 Electric Loan Programs 5 Telecommunications Loan Programs 6 RUS Guaranteed Loans 6 Largest Borrowers 7 Credit Limitation 7 Loan Security 7 Conversion of Loans 8 Prepayment of Loans 8 Pledging of Loans 8 Guarantee Programs 8 Guarantees of Long-Term Tax-Exempt Bonds 8 Guarantees of Lease Transactions 9 Guarantees of Tax Benefit Transfers 9 Letters of Credit 9 Other Guarantees 9 CFC Financing Factors 10 Members' Subordinated Certificates 10 Members' Equity 11 Debt Issuance 11 Interest Rate and Currency Exchange Agreements 11 Revolving Credit Agreements 11 Borrowing Costs 12 Tax Status 12 Investment Policy 12 Employees 13 CFC Lending Competition 13 Member Regulation and Competition 13 The RUS Program 16 Member Financial Data 16 2. Properties 24 3. Legal Proceedings 24 4. Submission of Matters to a Vote of Security Holders 24 II. 5. Market for the Registrant's Common Equity and Related Stockholder Matters 25 6. Selected Financial Data 25 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 26 7A. Quantitative and Qualitative Disclosures About Market Risk 41 8. Financial Statements and Supplementary Data 41 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 41 III. 10. Directors and Executive Officers of the Registrant 42 11. Executive Compensation 46 12. Security Ownership of Certain Beneficial Owners and Management 48 13. Certain Relationships and Related Transactions 48 IV. 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 49 Part I Item 1. Business. General National Rural Utilities Cooperative Finance Corporation ("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 dependable source of low cost capital and state-of-the-art financial products and services. CFC provides its members with a source of financing to supplement the loan programs of the Rural Utility Service ("RUS") of the United States Department of Agriculture. CFC will also lend 100% of the loan requirement for those distribution utility members electing not to borrow from RUS. CFC is owned by and 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. CFC also provides guarantees to its members for tax-exempt financings of pollution control facilities, properties constructed or acquired by its members, taxable debt in connection with certain leases and various other transactions. CFC is exempt from federal income taxes under the provisions of IRS code section 501(c)(4). CFC has formed two affiliated corporations that are controlled by CFC through majority representation on the companies' boards of directors. 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 external funding for RTFC. 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 the 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 external funding for GFC. Except as indicated, financial information presented herein includes CFC, RTFC and GFC on a combined basis. CFC provides financing for rural utility cooperatives and companies. There are two primary segments of CFC's business, rural electric lending and rural telecommunications lending. Lending to electric cooperatives is done through CFC and GFC and lending to telecommunications organizations is done through RTFC. In many cases, the customers of the electric cooperatives are also the customers of the telecommunications organizations, as both sets of members serve the rural areas of the United States. Members CFC had 1,050 members as of May 31, 2000, including 902 utility members, virtually all of which are consumer-owned cooperatives, 75 of which are service members and 73 of which are associate members. The utility members included 832 distribution systems and 70 generation and transmission ("power supply") systems operating in 49 states and four U.S. territories. CFC currently has five classes of members: * Class A - cooperative or nonprofit distribution systems; * Class B - cooperative or nonprofit power supply systems; * 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. RTFC had 536 members as of May 31, 2000. Membership in RTFC is limited to CFC and commercial or cooperative (non-profit) telecommunications systems eligible to receive loans or other assistance from RUS and which are engaged (or plan to be engaged) in providing telecommunication services to ultimate users and affiliates of such corporations. 1 GFC had two members as of May 31, 2000. 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 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 total loans and the percentage of total loans and guarantees outstanding at May 31, 2000.

Number Loan and Number Loan and of Loan Guarantee of Loan Guarantee Members % % Members % % Alabama 30 2.6% 2.6% Missouri 66 4.2% 4.6% Alaska 29 2.0% 1.8% Montana 39 1.4% 1.3% American Samoa 1 0.0% 0.0% Nebraska 40 0.1% 0.1% Arizona 24 0.5% 0.8% Nevada 5 0.5% 0.5% Arkansas 29 2.8% 3.1% New Hampshire 7 1.7% 1.5% California 11 0.5% 0.5% New Jersey 1 0.0% 0.0% Colorado 40 2.5% 2.6% New Mexico 26 0.5% 0.4% Connecticut 2 0.0% 0.0% New York 14 0.1% 0.1% Delaware 2 0.2% 0.2% North Carolina 45 4.0% 4.1% District of Columbia 7 2.3% 3.8% North Dakota 36 0.4% 0.3% Florida 21 2.7% 3.7% Ohio 41 2.1% 1.9% Georgia 72 9.0% 8.0% Oklahoma 52 2.5% 2.4% Guam 1 0.0% 0.0% Oregon 39 1.6% 1.5% Hawaii 1 0.0% 0.1% Pennsylvania 25 0.9% 0.9% Idaho 16 0.7% 0.7% South Carolina 38 3.3% 3.0% Illinois 55 3.4% 3.1% South Dakota 50 1.0% 0.9% Indiana 53 1.2% 1.7% Tennessee 28 0.7% 0.6% Iowa 125 2.1% 2.0% Texas 115 15.3% 14.4% Kansas 52 1.8% 1.8% Utah 11 3.9% 3.9% Kentucky 33 1.4% 2.2% Vermont 8 0.3% 0.3% Louisiana 18 1.4% 1.2% Virgin Islands 1 3.3% 2.9% Maine 8 0.3% 0.2% Virginia 28 2.2% 2.0% Maryland 2 0.8% 0.7% Washington 19 0.5% 0.5% Massachusetts 2 0.0% 0.0% West Virginia 5 0.0% 0.0% Michigan 28 1.8% 1.6% Wisconsin 67 1.6% 1.4% Minnesota 76 5.0% 5.1% Wyoming 15 0.8% 0.8% Mississippi 26 2.1% 2.2% Total 1,585 100.0% 100.0%

Distribution Systems Distribution systems are utilities engaged in retail sales of electricity to consumers in their service areas. Most distribution systems have all- requirements power contracts with their power supply systems, which are owned and controlled by the member systems. The wholesale power contracts between the distribution systems and the power supply systems provide for rate adjustments to cover the costs of supplying power, although in certain cases such adjustments must be approved by regulatory agencies. Wholesale power for resale also comes from other sources, including power supply system contracts with government agencies, investor-owned utilities and other entities, and in rare cases, the cooperative's own generating facilities. 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 2 reserves. The rates under the wholesale power contracts are 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). Power Supply Systems Power supply systems are utilities that purchase or generate electric power and provide it wholesale to distribution systems for delivery to the ultimate retail consumer. Of the 62 operating power supply systems financed in whole or in part by RUS or CFC at December 31, 1999, 61 were cooperatives owned directly or indirectly by groups of distribution systems and one was government owned. Of this number, 37 had generating capacity of at least 100 megawatts, and ten had no generating capacity. Nine of the ten systems with no generating capacity operated transmission lines to supply certain distribution systems. Certain other power supply systems have been formed but do not yet own generating or transmission facilities. At December 31, 1999, the 54 power supply systems reporting to CFC owned interests in 141 generating plants representing generating capacity of approximately 31,058 megawatts, or approximately 4.1% of the nation's estimated electric generating capacity, and served 649 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, 1999, steam plants accounted for 89.5% (including nuclear capacity representing approximately 8.6% of such total generating capacity), internal combustion plants accounted for 8.1% and hydroelectric plants accounted for 2.4%. Service Organizations and Associate Member Systems Service organizations include the National Rural Electric Cooperative Association ("NRECA"), which represents cooperatives nationally, as well as the statewide cooperative associations, which represent the cooperatives within a state. Associate members include organizations that are 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. Telecommunications Systems Telecommunications systems include not-for-profit cooperative organizations and for-profit commercial organizations that provide telecommunications services to rural areas. Independent rural telecommunications companies provide service in the majority of America's rural areas. These companies, which number approximately 1,020, are called independent because they are not affiliated with the Bell operating companies or other large holding companies. The majority of these independent rural telecommunications companies are small family-owned or privately-held commercial companies. Six of these commercial companies are publicly traded. Included in the total are approximately 275 not-for-profit cooperative telecommunications companies. Rural telecommunications companies serve approximately 1.2 million business customers and 4.7 million residential customers in 48 states and U.S. territories, and range in size from fewer than 50 customers to more than 100,000. Rural telecommunications companies' annual operating revenues range from less than $100,000 to $100 million. In addition to basic telecommunications service, most independents offer other communications services including wireless, cable television and internet access. Most rural telecommunications companies' networks are state-of-the-art, incorporating digital switching, fiber optics and other advanced technologies. Loan Programs CFC offers long-term loans with maturities of up to 35 years, intermediate- term loans with maturities of up to five years, and line of credit loans. Long-term and intermediate-term loans are available at fixed or variable interest rates and line of credit loans are available only at a variable interest rate. Long-term loans are generally secured by a first mortgage lien on all assets and revenues of the borrower. Intermediate-term loans may be secured or unsecured and line of credit loans are generally unsecured. On line of credit loans with a maturity of more than one year, the outstanding balance is generally required to be paid down to zero for five consecutive days during each year. CFC makes loans to borrowers on a concurrent basis with RUS (generally 70% RUS/30% CFC) and will also make 100% loans to borrowers electing not to borrow from RUS. 3 Borrowers are required to provide annual audited financial statements to CFC. Borrowers also must make various representations in an officer's certificate and maintain certain levels of financial performance as prescribed under each loan program. Set forth below is a table showing loans outstanding to borrowers as of May 31, 2000, 1999 and 1998 and the weighted average interest rates thereon and loans committed but unadvanced to borrowers at May 31, 2000.

(Dollar amounts in thousands) Loans committed Loans outstanding and weighted average interest rates but unadvanced thereon at May 31, at May 31, 2000 2000 (A) 1999 1998 (B) Long-term fixed rate secured (C) (D): Electric systems $ 6,674,470 6.74% $ 6,797,786 6.69% $ 4,289,629 7.02% $ - Telecommunication systems 1,540,928 7.36% 1,258,458 6.88% 222,733 8.05% - Total long-term fixed rate secured 8,215,398 6.86% 8,056,244 6.72% 4,512,362 7.07% - Long-term variable rate secured loans (E): Electric systems 4,019,155 7.45% 2,334,878 5.85% 3,209,815 6.55% 7,524,197 Telecommunication systems 1,816,826 8.02% 1,096,312 6.43% 1,131,561 6.65% 589,696 Total long-term variable rate secured 5,835,981 7.62% 3,431,190 6.04% 4,341,376 6.57% 8,113,893 Loans guaranteed by RUS: Electric systems 89,153 6.92% 130,940 5.87% 133,195 6.36% - Intermediate-term secured loans: Electric systems 141,771 7.41% 198,894 6.62% 151,202 7.39% 48,533 Telecommunication systems - - 686 6.42% 86 7.25% - Total intermediate-term secured loans 141,771 7.41% 199,580 6.50% 151,288 7.39% 48,533 Intermediate-term unsecured loans: Electric systems 200,706 7.35% 102,221 6.26% 198,121 6.70% 408,644 Telecommunication systems 12,206 7.80% 12,809 6.42% 15,495 7.25% 6,090 Total intermediate-term unsecured 212,912 7.37% 115,030 6.28% 213,616 6.74% 414,734 Line of credit loans (F): Electric systems 1,281,483 7.59% 850,039 5.99% 688,995 6.70% 4,403,987 Telecommunication systems 329,768 8.32% 342,074 6.66% 205,026 7.25% 717,700 Total line of credit loans 1,611,251 7.74% 1,192,113 6.19% 894,021 6.83% 5,121,687 Nonperforming loans: Electric systems (G) - - 1,643 5.55% 4,080 6.41% - Restructured loans: Electric systems (H) 571,579 3.90% 576,662 3.90% 329,538 7.17% - Total loans 16,678,045 7.12% 13,703,402 6.37% 10,579,476 6.70% 13,698,847 Less: Allowance for loan losses (228,292) (212,203) (250,131) - Net loans $16,449,753 $13,491,199 $10,329,345 $13,698,847 Total by member class: Distribution $10,394,985 $ 8,714,742 $ 7,257,330 $ 9,644,058 Power supply 2,037,108 1,895,712 1,489,908 2,054,322 Statewide and associate 546,224 382,609 257,337 686,981 Telecommunication systems 3,699,728 2,710,339 1,574,901 1,313,486 Total $16,678,045 $13,703,402 $10,579,476 $13,698,847

____________________________ (A) The interest rates in effect at August 1, 2000, on loans to electric members were 8.15% to 8.80% for long-term loans with a seven-year fixed rate term, 7.70% to 8.10% on variable rate long-term loans and 8.25% on intermediate-term loans and lines of credit. The rates in effect at August 1, 2000, on loans to telecommunication systems were 8.20% to 8.65% for long-term loans with a seven-year fixed rate term, 7.75% to 8.15% on long-term variable rate loans, 8.40% on intermediate-term loans and 8.80% on lines of credit. (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 advances on commitments are identical to those on initial loan approval. Long-term unadvanced commitments that do not have an interest rate associated with the commitment have been listed with the variable rate loans. The type of interest rate, fixed or variable, is determined at the time the loan is advanced. (C) Includes $102 million, $162 million and $122 million of unsecured loans at May 31, 2000, 1999 and 1998, respectively. (D) On January 1, 2000, long-term fixed rate loans totaling $241 million had their interest rates adjusted. (E) Includes $49 million, $39 million and $53 million of unsecured loans at May 31, 2000, 1999 and 1998, respectively. (F) Includes $342 million, $278 million and $81 million of secured loans at May 31, 2000, 1999 and 1998, respectively. (G) 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 represent the interest recognized by CFC from such loans. (H) The rate on restructured loans for 1999 and 2000 represents the effective interest rate based on the scheduled minimum payments. The interest rate on restructured loans for 1998 is the weighted average of the stated rate on restructured loans. 4 Interest Rates on Loans CFC's goal as a non-profit cooperatively-owned finance company is to set its rates at levels that will provide its members with the lowest cost financing while maintaining sound financial results as required to obtain high credit ratings on its debt instruments. CFC sets its interest rates based on the cost of funding plus provisions for general and administrative expenses, the loan loss allowance and a reasonable net margin. Various discounts, which reduce the stated interest rates, are available to borrowers meeting certain criteria related to performance, and whether they borrow exclusively from CFC. Set forth below are the interest rates earned on all loans outstanding during the fiscal years ended May 31: 2000 1999 1998 Long-term fixed rate 6.66% 6.69% 7.12% Long-term variable rate 6.59% 6.20% 6.53% Telecommunication organizations (1) 7.45% 6.88% 7.05% Refinancing loans guaranteed by RUS 6.29% 5.87% 6.32% Intermediate-term 6.92% 6.98% 7.08% Short-term 7.01% 6.26% 6.74% Associate members 6.85% 6.47% 6.65% Nonperforming (2) (3) 0.00% 0.00% 0.00% Restructured 3.90% 1.73% 0.00% All loans 6.74% 6.51% 6.60% _________________________ (1) Includes long-term fixed rate, long-term variable rate, intermediate- term and short-term loans. (2) Rate does not reflect recognition of $12.5 million of deferred gain in 1999. (3) Interest rate earned by CFC recognized on a cash basis. Electric Loan Programs Long-Term Loans Long-term loans are generally for terms of up to 35 years. A borrower can select a fixed interest rate for periods of one to 35 years or the variable rate. Upon the expiration of the selected fixed interest rate term, the borrower must select the variable rate or select another fixed rate term for a period that does not exceed the remaining loan maturity. Long-term fixed rates are set daily by CFC and the long-term variable rate is set on the first day of each month. The fixed rate on a loan is determined on the day the loan is advanced based on the rate term selected. A borrower may divide its loan into various mini-notes. The borrower then has the option of selecting a fixed or variable interest rate for each mini-note. To be eligible for long-term loan advances, distribution systems must maintain an average modified debt service coverage ratio ("MDSC"), as defined in the loan agreement, of 1.35 or greater. The distribution systems must also be in good standing with CFC and their states of incorporation, supply evidence of proper corporate authority and deliver to CFC annual audited financial statements. Generally, the minimum eligibility requirements for power supply systems are an average times interest earned ratio ("TIER") and MDSC, as described in the loan agreement, of 1.0 or greater. Loans to power supply systems are considered on a case-by-case basis depending on the amount of the loan, the intended use of funds, the financial condition of the borrower and any guarantees that may be provided by a third party, including RUS and the member distribution systems. CFC has in the past and may in the future make long- term loans to distribution and power supply systems that do not meet the minimum lending criteria. During the five years ended May 31, 2000, 1.1% of the dollar amount of long-term loans approved were to borrowers that did not meet the minimum lending criteria. In addition, during the five years ended May 31, 2000, CFC approved loans totaling $867 million for discounted RUS note buyouts by four power supply systems. In these transactions, CFC obtained guarantees from the member distribution systems totaling $323 million. Intermediate-Term Loans and Line of Credit Loans Intermediate-term loans are generally for terms of one year to five years. Intermediate-term loans can be advanced at a fixed interest rate or at a variable interest rate. Line of credit loans may be advanced only at a variable interest rate. The intermediate-term loan and line of credit loan variable interest rate is set on the first day of each month. Line of credit loans with maturities of greater than one year generally must be paid down to a zero outstanding balance for five consecutive days during each year. To be eligible for an intermediate-term loan or line of credit loan, distribution and power supply borrowers must be in good standing with CFC and demonstrate their ability to repay the loan. 5 Power Vision Program Under the Power Vision program, an eligible borrower is pre-approved for long-term secured financing, in an aggregate amount that can be drawn down in increments as requested by the borrower over a five-year period. All necessary approvals, administrative procedures and loan documentation are obtained or put into place at the time the credit facility is established, and the borrower has significant flexibility in determining the size and maturity of each loan requested under the facility. CFC does not charge its members a commitment fee on amounts approved under the Power Vision program. A borrower must meet loan eligibility criteria at the time of any advance under the Power Vision program. Telecommunications Loan Programs Long-Term Loans CFC makes long-term loans to rural telecommunications companies and their affiliates for the acquisition of and the construction or upgrade of wireline telecommunications systems, wireless telecommunications systems, fiber optic networks and cable television systems as well as other legitimate corporate purposes. Long-term loans are generally for periods of up to 15 years. Loans may be advanced at a fixed or variable interest rate. Fixed rates are generally available for periods from 1 year to 15 years. Upon the expiration of the selected fixed interest rate term, the borrower must select another fixed rate term for a period that does not exceed the remaining loan maturity or select the variable rate. Long-term fixed rates for telecommunications loans are set daily by CFC and the long- term variable rate is set on the first day of each month. The fixed rate on a loan is determined on the day the loan is advanced based on the term selected. A borrower may divide its loan into various mini-notes. The borrower then has the option of selecting a fixed or variable interest rate for each note. A wireline telecommunications system generally must be able to demonstrate the ability to achieve and maintain an annual debt service coverage ratio ("DSC") and an annual TIER of 1.25 and 1.50, respectively, to borrow from CFC. A cable television system, fiber optic network or cellular telecommunications system generally must be able to demonstrate the ability to achieve and maintain an annual DSC of 1.25 to borrow from CFC. 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 CFC obligations under the approved terms. Intermediate-Term Loans and Line of Credit Loans CFC provides intermediate-term equipment financing to telecommunications borrowers 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 telecommunications 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. CFC also provides line of credit loans to telecommunications systems for periods of up to five years. These line of credit 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 line of credit loans are provided on an unsecured basis and are used primarily for cash management. Line of credit loans are available to telecommunications systems generally in amounts not to exceed the greater of 5% of total assets or 25% of equity in excess of 35% of total assets. Interim financing line of credit loans are also made available to CFC telecommunications members who have an RUS and/or Rural Telephone Bank ("RTB") loan application 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. RUS Guaranteed Loans Congress enacted legislation that allows 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 loan repayment 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 servicing fees to CFC in connection with these transactions. All of these certificates that have not been sold in public offerings have been transferred to GFC ($46 million outstanding at May 31, 2000). In addition, at May 31, 2000, CFC services $147 million of these loans for trusts, the certificates of which have been sold in public offerings. 6 The level of authority for RUS loan guarantees for the fiscal year ending September 30, 2000, is $1.7 billion. Proposed levels for fiscal year 2001 range from $1.2 billion to $1.7 billion. CFC may participate as an eligible lender in the RUS loan guarantee program under the terms and conditions of the Master Loan Guarantee and Servicing Agreement, dated as of February 16, 1999, between RUS and CFC. Under this agreement, CFC may make long-term secured loans to eligible members for periods of up to 35 years, at fixed or variable rates established by CFC. As long as CFC is in compliance with the terms and conditions of the agreement, RUS will guarantee the principal and interest payments on the notes evidencing such loans. At May 31, 2000, CFC had $43 million of loans outstanding under this program. Largest Borrowers At May 31, 2000, the ten largest borrowers had outstanding loans from CFC totaling $3,464 million, which represented 21% of CFC's total loans outstanding. At May 31, 2000, outstanding guarantees for these same ten borrowers totaled $495 million, which represented 25% of CFC's total guarantees outstanding. CFC's ten largest credit exposures represented 21% and 19% of total exposure at May 31, 2000 and 1999, respectively. On those dates, no member had outstanding loans and guarantees in excess of 3.6% 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 operating under a restructure agreement (see Note 10 to Combined Financial Statements). At May 31, 2000, total exposure to Deseret represented 3.5% of total loans and guarantees outstanding. Loans outstanding to Deseret accounted for 3.4% of total loans outstanding. Guarantees outstanding to Deseret accounted for 4.5% of total guarantees outstanding. Total loans and guarantees outstanding to Deseret equaled 34.6% of the total of members' equity, members' subordinated certificates and the allowance for loan losses. Credit Limitation In the fourth quarter of fiscal year 2000, CFC adopted a new credit limitation policy. Under the new policy, (1) a borrower's total exposure is limited to 25% of CFC's defined net worth, (2) a borrower's unsecured loans are limited to 10% of CFC's defined net worth, and (3) a borrower's guarantees outstanding are limited to 10% of CFC's defined net worth. CFC's defined net worth is the total of subordinated certificates issued and outstanding, members' equity and the loan loss allowance. If a borrower submitting a new loan application has an exposure in excess of any one of the three tests, only the CFC Board of Directors may approve the new loan application. The new policy allows more total exposure, but is more restrictive on guarantee and unsecured loan exposure than the old policy. CFC's Board of Directors may approve a loan to a borrower with an exposure in excess of one or more of these tests after consideration of other factors, including the amount of the loan, the maturity of the loan, and the value of collateral held by CFC. At May 31, 2000, there were three borrowers with total exposure greater than 25% of defined net worth and one borrower with total guarantees outstanding in excess of 10% of defined net worth. Any new loan applications to these borrowers may be approved only by CFC's Board of Directors. Loan Security CFC typically makes long-term loans to its members on a secured basis. Intermediate-term loans may be secured, as determined on a case-by-case basis. Line of credit loans are generally unsecured. At May 31, 2000, a total of $1,632 million of loans were unsecured representing 9.8% of total loans. CFC's long-term loans are typically secured pro-rata with other secured lenders (primarily RUS) by all assets and future revenues of the borrower. 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. In the case of members whose property is subject to the new form of RUS mortgage that has been issued to borrowers since January 1996, no RUS approval of the CFC loan is required if certain objective tests set forth in the mortgage are met. In August 1998, RUS promulgated regulations which provide that no RUS approval is required for a loan made to a member whose property is subject to the pre-1996 form of RUS mortgage, so long as the objective tests set forth in the new form of RUS mortgage are met. In all other cases, 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 at least 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 7 members, RUS retains substantial control over the exercise of mortgage remedies. RUS holds the loan security on loans for which it has provided a guarantee. Security for long-term loans made to RUS telecommunications 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 telecommunications borrowers is considered on a case-by-case basis, but generally a loan will not exceed 80% of the estimated value of the collateral. At May 31, 2000, a total of $212 million or 5.7% of CFC's telecommunications loans outstanding were unsecured. At May 31, 2000, CFC had a total of $297 million of unsecured guarantees, representing 14.8% of total guarantees. When considered together, CFC's unsecured credit at May 31, 2000, totaled $1,929 million, representing 10.3% of total loans and guarantees outstanding. Conversion of Loans A borrower may convert a long-term loan from a variable interest rate to a fixed interest rate at any time without a fee. A borrower may convert a fixed rate to another fixed rate or a variable rate at any time, subject to a fee in most instances. Intermediate-term loans and line of credit loans do not offer conversion options. The fee on the conversion of a fixed interest rate to a variable interest rate at all other times ranges from 25 to 50 basis points of the outstanding loan amount plus an amount to cover the funding loss on the remainder of the current fixed rate pricing term. Prepayment of Loans Borrowers may prepay long-term loans at any time, subject to the payment of a prepayment premium and a make-whole premium, if applicable. Long-term loans prepaid before the maturity of the fixed rate term will be assessed a prepayment premium ranging from 33 to 50 basis points of the outstanding loan balance at the time of prepayment. In addition, long-term loans with a fixed interest rate which have a rate greater than the current rate for the same remaining term will be assessed a premium to cover funding losses. Line of credit loans may be prepaid at any time without a premium. Pledging of Loans CFC pledges long-term secured distribution member loans as collateral to secure its collateral trust bonds. CFC must maintain collateral on deposit with the trustee in a principal amount at least equal to the balance of collateral trust bonds outstanding. At May 31, 2000 and 1999, CFC had $3,484 million and $3,017 million, respectively, of collateral on deposit securing $3,351 million and $2,996 million, respectively, of collateral trust bonds outstanding. CFC may withdraw collateral at any time, provided that the principal balance of notes and cash and eligible securities on deposit after withdrawal is greater than the amount of bonds outstanding. Guarantee Programs Substantially all guarantees have been provided on behalf of power supply members. Set forth below is a table showing CFC's guarantees: May 31, (Dollar amounts in thousands) 2000 1999 1998 Long-term tax-exempt bonds $1,024,340* $1,062,185* $1,148,500* Debt portions of leveraged lease Transactions 111,319 174,961 437,175 Indemnifications of tax benefit Transfers 259,223 285,169 312,771 Letters of credit 328,995 208,732 45,325 Other guarantees 274,325 162,150 136,048 Total $1,998,202 $1,893,197 $2,079,819 _______________________ * Includes $920 million, $947 million and $1,018 million at May 31, 2000, 1999 and 1998, 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 $239 million, $244 million and $253 million of such bonds outstanding at May 31, 2000, 1999 and 1998, respectively, at any time on seven days' notice; in the case of $219 million, $226 million and $236 million outstanding at May 31, 2000, 1999 and 1998, 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 bonds that cannot be remarketed. Since the inception of the program, CFC has not been required to purchase any bonds. Guarantees of Long-Term Tax-Exempt Bonds 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 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. 8 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. 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. The system is required to pay to CFC initial and/or on-going guarantee 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 National Cooperative Services Corporation ("NCSC") in connection with leveraged lease transactions. In such transactions, NCSC lends 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 is 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 are made on a non-recourse basis to the lessor but are secured by the property leased and the owner's rights as lessor. NCSC borrows the funds it lends either directly from CFC or from another creditor with a CFC guarantee. 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. CFC may also guarantee the rent obligation of its members to a third party. 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, no guarantees of this nature have occurred since 1982. Letters of Credit CFC issues irrevocable letters of credit to support members' obligations to energy marketers, other third parties and to the Rural Business and Cooperative Development Service. Letters of credit are generally issued on an unsecured basis and with such issuance fees as may be determined from time to time. Each letter of credit issued by CFC is supported by a reimbursement agreement with the member on whose behalf the letter of credit was issued. In the event a beneficiary draws on a letter of credit, the agreement generally requires the member to reimburse the issuer of the letter of credit within one year from the date of the draw, with interest accruing from such date at the issuer's variable rate of interest in effect on the date of the draw. The agreement also requires the member to pay, as applicable, a late payment charge and all costs of collection, including reasonable attorneys' fees. Other Guarantees CFC may provide other guarantees as requested by its members. Such guarantees may be made on a secured or unsecured basis with guarantee fees set to cover CFC's cost of capital, general and administrative expenses, a provision for losses and maintenance of a reasonable margin. 9 CFC Financing Factors CFC funds its loan programs through retained margins for the current year, allocated but unretired patronage capital (members' equity investments), members' subordinated certificate investments and issuance of debt to members and in the capital markets. The following table details the funds outstanding, percentage of total capitalization and the average interest rate on funds outstanding at May 31, 2000, 1999 and 1998.

(Dollar amounts in thousands) 2000 1999 1998 Average Average Average Amount % of Interest Amount % of Interest Amount % of Interest Outstanding Total Rate Outstanding Total Rate Outstanding Total Rate Commercial paper (1) $ 6,705,035 40% 6.17% $ 6,246,243 45% 4.94% $ 5,865,904 55% 5.54% Collateral trust bonds 3,351,366 20% 6.34% 2,996,299 22% 6.42% 1,897,688 18% 6.79% Medium-term notes 4,791,361 28% 6.33% 2,625,286 19% 6.10% 1,109,258 10% 6.31% Quarterly income capital securities 400,000 2% 7.62% 400,000 3% 7.62% 200,000 2% 7.87% Members' subordinated certificates 1,340,417 8% 3.02% 1,239,816 9% 3.25% 1,229,166 12% 3.70% Members' equity 341,217 2% 0.00% 294,953 2% 0.00% 279,278 3% 0.00% Total $16,929,396 100% 5.91% $13,802,597 100% 5.30% $10,581,294 100% 5.53%

_________________________ (1) Includes $155 million, $375 million and $185 million of bank bid notes for 2000, 1999 and 1998, respectively. Members' Subordinated Certificates As a Condition of Membership Generally, members are required to purchase membership subordinated certificates as a condition of membership. The amount of certificates required to be purchased is determined by applying a formula to the member's operations for a period of time, generally 15 years. The membership subordinated certificates generally mature in 100 years from issuance and pay interest at a rate of 5%. At May 31, 2000, CFC had a total of $642 million in membership subordinated certificates outstanding. A small portion of these certificates matures 50 years from issuance and pays interest at a rate of 3%. Issuance of these certificates has not been significant in recent years. At May 31, 2000, the weighted average maturity of these certificates is approximately 76 years. As a Condition of Borrowing Distribution system members may be required to purchase, on long-term loans, a loan subordinated certificate for 2% of the loan amount. Power supply system members may be required to purchase a loan subordinated certificate of 7% of the loan amount. These certificates do not pay interest and do not amortize. The requirement to purchase such a certificate is determined by the member's leverage ratio with CFC and the type of loan selected. In large transactions, CFC may increase the purchase requirement of loan subordinated certificates. Certificates issued in these transactions may pay interest and/or may amortize. Telecommunications systems and associate members are required to purchase, on long-term loans, loan subordinated certificates for up to 10% of each loan advance. These certificates do not pay interest, but amortize annually based on the outstanding loan balance. At May 31, 2000, CFC had a total of $517 million of loan subordinated certificates outstanding. A small portion of these certificates, issued prior to policy changes, matures at the same time as the loan and pays interest at a rate of 3%. As a Condition of Receiving a Guarantee Members may be required to purchase a guarantee subordinated certificate of up to 12.5% of the principal amount of the guarantee. The guarantee subordinated certificate matures at the same time as the guarantee. The certificates pay interest at a rate determined in each transaction. At May 31, 2000, CFC had a total of $181 million of guarantee subordinated certificates outstanding. Century Certificates CFC has created a new type of subordinated certificate for its members to purchase. The century certificate is a voluntary investment by members, not a required purchase as with membership, loan and guarantee certificates. The century certificates may be issued with maturities of up to 100 years. The certificates are redeemable by the members after 44, 59, 69, 79 and 89 years. Interest is paid on the certificates semi-annually. The interest rate may be fixed or variable. The rates offered are higher than the fixed or variable rates on other securities of similar maturity offered by CFC to its members. CFC has the right to defer interest payments for up to 10 semi-annual interest payment periods, or 5 years. CFC began to offer the certificates for sale during the first quarter of fiscal year 2001. 10 Members' Equity Patronage Capital CFC is required by law to have a methodology to allocate its net margin to its members. CFC allocates substantially all of its net margin annually based on the members' patronage of CFC during the year. The allocated margins are retained by CFC and used to fund operations until retired. Currently, CFC retires 70% of the prior year's net margin during the first quarter of the current fiscal year and holds the remaining 30% for a period of 15 years. All retirements must be authorized by the Board of Directors with regard to FC's financial condition. CFC allocates and retires margins to its affiliated organization, RTFC, which in turn allocates its net margin, including the CFC retirement, to its members under similar policies. At May 31, 2000, CFC had a total of $320 million of allocated but unretired margins and $19 million of unallocated margins, which along with $2 million of education fund reserve and membership fees comprise the total of members' equity. Debt Issuance Debt Issued in the Capital Markets CFC issues long- and short-term debt in the domestic and foreign capital markets. CFC issues long-term secured collateral trust bonds for periods of 2 years to 30 years, unsecured medium-term notes for periods of 9 months to 30 years, unsecured quarterly income capital securities for periods of up to 49 years and unsecured commercial paper for periods of 1 to 270 days and extendable commercial notes with maturities up to 390 days. CFC also enters into bank bid note arrangements with banks. CFC's collateral trust bonds, medium-term notes, quarterly income capital securities and commercial paper all carry investment grade ratings from three rating agencies (see table in the Management Discussion and Analysis section, page 38). Debt Issued to Members CFC sells unsecured commercial paper and medium-term notes to its members. Commercial paper is sold for periods of up to 270 days and medium-term notes are sold for periods of 9 months to 30 years. Rates for both securities are set daily by CFC. Interest Rate and Currency Exchange Agreements CFC will enter interest rate and currency exchange agreements when required by certain transactions. CFC also uses interest rate exchange agreements as part of its funding strategy to match the interest rate paid on its liabilities with the interest rate received on its assets. At May 31, 2000, CFC was a party to $4,817 million of interest rate exchange agreements and $438 million of currency exchange agreements (see Note 5 to the Combined Financial Statements). Revolving Credit Agreements As of May 31, 2000, CFC had three revolving credit agreements totaling $5,493 million which are used principally to provide liquidity support for CFC's outstanding commercial paper, commercial paper issued by NCSC and guaranteed by CFC and the adjustable or floating/fixed rate bonds which CFC has guaranteed and for which CFC is standby purchaser for the benefit of its members. Under a five-year agreement with 55 banks, executed in November 1996, CFC can borrow $2,403 million until November 26, 2001. J.P. Morgan Securities Inc. and The Bank of Nova Scotia were Co-Syndication Agents, and Chase Manhattan Bank is the Administrative Agent for this agreement. Any amounts outstanding under the multi-year facility will be due on the maturity date. On September 30, 1999, a 364-day agreement for $2,540 million was executed with 31 banks including Chase Manhattan Bank as Administrative Agent, Bank of America, N.A. as Syndication Agent, The Bank of Nova Scotia and Banc One, N.A. as Co-Documentation Agents and Chase Securities Inc. and Bank of America Securities LLC as Joint Lead Arrangers. A third revolving credit agreement for $550 million was also executed on September 30, 1999 with ten banks, including The Bank of Nova Scotia as Lead Arranger and Administrative Agent (the "BNS facility") and Banc One, N.A. as Documentation Agent. Both of the 364-day facilities have a revolving credit period that terminates on September 29, 2000 during which CFC can borrow and such borrowings may be converted to a one-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 of 1%. The per annum facility fee for both agreements with a 364-day maturity is .085 of 1%. There is no commitment fee for any of the revolving credit facilities. If CFC's senior secured debt ratings decline below AA- or Aa3 and amounts outstanding exceed 50% of the total commitment, the facility fees may be replaced with a utilization fee of .125 of 1%. 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 multi-year revolving credit agreement requires CFC to maintain members' equity and members' subordinated certificates of at least $1,418 million at May 31, 2000 (increased each fiscal year by 90% of net margin not distributed to members). The revolving credit agreements require CFC to achieve at least an average TIER over the six most recent fiscal quarters of 1.025 and prohibit the retirement of patronage capital unless CFC has achieved at least a TIER of 1.05 for the preceding fiscal year. The revolving credit agreements prohibit CFC from incurring senior debt (including guarantees but excluding 11 indebtedness incurred to fund RUS guaranteed loans) in an amount in excess of ten times the sum of members' equity, members' subordinated certificates and quarterly income capital securities and restrict, with certain exceptions, the creation by CFC of liens on its assets. 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 or reserved against in its most recent annual financial statements) and is not in default, CFC may borrow under the agreements until the termination dates. As of May 31, 2000 and May 31, 1999, CFC was in compliance with all covenants and conditions under its revolving credit agreements and there were no borrowings outstanding under such agreements. Based on the ability to borrow under the three revolving credit facilities at May 31, 2000, CFC classified $5,493 million, of its notes payable outstanding as long-term debt. CFC expects to maintain more than $5,493 million of notes payable outstanding during the next twelve months. If necessary, CFC can refinance such notes payable on a long-term basis by borrowing under the five-year facility or the 364-day facilities with the one year term out option, subject to the conditions therein. Borrowing Costs 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 debt supported by interest rate swaps) for the periods shown. Years Ended May 31, 2000 1999 1998 Short-term borrowings 5.83% 5.36% 5.73% Long-term borrowings 6.11% 6.09% 6.74% Total short- and long-term borrowings 6.00% 5.73% 6.03% 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 under Subchapter T of the Internal Revenue Code. As long as they continue to qualify under Subchapter T of the Internal Revenue Code, RTFC and GFC are allowed a deduction from taxable income for the amount of net margin allocated to their members. 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 guaranteed by the United States or agencies thereof or other highly liquid investment grade paper. Investments include high-rated securities such as 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: * 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 * 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. 12 Employees At May 31, 2000, CFC had 186 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. CFC Lending Competition CFC competes with other lenders on price, the variety of options and additional services offered as well as its overall approach to and relationship with its member/owners. According to annual financial statements filed with CFC, its electric cooperative distribution and power supply member systems had a total of $38.9 billion in long-term debt outstanding at December 31, 1999. RUS is the dominant lender to the electric cooperative industry with $23.2 billion or 60% of the total outstanding debt. RUS currently prices the majority of its insured loans to distribution systems 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. Under the insured loan program, 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. The amount of funding proposed for the insured loan program for fiscal year 2001 ranges from $172 million to $345 million. The amount approved for the prior year was $417 million. The amount proposed for RUS guaranteed loans for fiscal year 2001 ranges from $1.2 billion to $1.7 billion. 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 borrow from RUS. Under the hardship program, RUS lends 100% of the amount. Under the guarantee program, RUS will guarantee the repayment of all principal and interest by the cooperative. At December 31, 1999, CFC had a total of $12.4 billion of long-term exposure to distribution and power supply member systems, $10.4 billion of long-term loans and $2.0 billion of guarantees outstanding. CFC's $12.4 billion long-term exposure represented 32% of the total long- term debt to these electric systems. The remaining $3.3 billion or 8% was outstanding from other sources. During fiscal year 2000, CFC was selected as the lender for 98% of the total supplemental lending requirement (not including amounts lent by FFB). During this same period, CFC was selected as lender for 94% of the total lent to distribution systems for the repayment of their RUS debt. The competitive market for providing credit to the rural telecommunications industry is difficult to quantify, since many rural telecommunications companies are not RUS borrowers. At December 31, 1999, RUS had a total of $3.5 billion outstanding to telecommunications borrowers. The RTB, an instrumentality of the United States that provides supplemental financing to RUS borrowers and is managed by RUS, had a total of $1.2 billion outstanding to telecommunication borrowers. 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 rural telecommunications companies 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, 1999, CFC had a total of $3.0 billion in long-term loans outstanding to telecommunications borrowers. At December 31, 1999, CFC believes that there were no other lenders with telecommunications loan portfolios of similar size to CFC's and RUS's. Member Regulation and Competition Electric Systems In 1992 Congress passed the Energy Policy Act effectively requiring competition in the generation sector of the wholesale electric power industry. In 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. 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. 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 13 retail market and the provision for stranded cost recovery are not yet known. The ultimate impact on CFC's members cannot be determined until these items have been resolved. 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. Currently eight states are operating under customer choice laws. In seven of these states (Arizona, California, Massachusetts, Montana, New Jersey, New York and Pennsylvania), CFC has a total of 57 distribution system members and five power supply system members. In California, cooperatives are not required to offer customer choice and all three of CFC's distribution members located in the state have opted not to allow customer choice. In New York, cooperatives are not required to file competition plans with the State Public Utility Commission. CFC currently does not have any members in the eighth state, Rhode Island. In an additional 14 states, laws have been passed and open access is scheduled to be in effect by 2004. In these states, power supply systems with rates that are above market may be at risk of losing customer loads. The distribution systems in these states will continue to deliver power to the ultimate customer, regardless of who is supplying the power, the CFC member power supply system or some other power generator. Thus, CFC's distribution system members are not believed to be at significant risk due to the move to open customer access to power supply. While customer choice laws have been passed in the above states, there are many factors that may delay or influence the choices that customers have available and the timing of true competition. One of the biggest factors will be the issue of stranded cost recovery. Stranded costs are the portion of the investment in generation and/or other facilities which in a competitive environment would be above market price and therefore not otherwise recoverable by the utility. The amount of stranded costs a system is allowed to recover, the timing of the recovery and the method of recovery will all affect the level of competition in a state. The level of fees that systems will be allowed to charge other utilities for use of their transmission and distribution system may also impact the level of residential competition. Other issues that may delay competition include the following: * cooperatives are allowed to "opt out" of the provisions of the laws in some states; * utilities in many states will still be regulated regarding rates on non- competitive services, such as distribution; * many states will still regulate the borrowing by utilities; * FERC regulation of transmission; * reconciling the differences in various state laws, so that out-of-state utilities can compete with in-state utilities; and * few competitors have targeted residential customers. The pace of states passing customer choice laws has slowed. As of July 1, 2000, there were 24 states that had neither customer choice laws nor comprehensive restructuring orders by the state public utility commissions. The time required to pass such laws as well as the issues described above could significantly delay nationwide retail competition. The U.S. Congress has not passed legislation mandating retail customer choice and the passage of such legislation is not anticipated in this Congress. In addition to customer choice laws, some state agencies regulate electric cooperatives with regard to rates and borrowing. There are 16 states that regulate the rates electric systems charge. There are 19 states that regulate electric systems regarding the issuance of long-term debt and there are five states that regulate the issuance of short-term debt. FERC also has jurisdiction to regulate rates of and refinancing by electric systems within its jurisdiction that are not borrowers of RUS which are otherwise jurisdictional. 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. 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 to operating or equipment modifications for Phase II (2000). Some member systems originally believed to be adversely 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. 14 Telecommunications Systems CFC member telecommunications systems are regulated at the state and federal levels. Most state regulatory bodies regulate local service rates, intrastate access rates and telecommunications company borrowing. The Federal Communications Commission ("FCC") regulates interstate access rates. The Telecommunications Act of 1996 (the "Telecom Act") created a framework for competition and deregulation in the local telecommunications market. The Telecom Act has four basic goals: competition, universal service, deregulation and advanced telecommunications and information technologies. The Telecom Act seeks to achieve competition by requiring all carriers to interconnect with all others, local exchange carriers to provide total service resale, number portability, dialing parity, access to rights-of- way, reciprocal compensation, co-location, and unbundled access. Congress included provisions in the Telecom Act granting rural local exchange carriers ("LECs") an exemption from the above requirements. In America's cities, vibrant competition is taking hold. Facility and non- facility based competitors are pursuing after and winning (primarily) large business users. Few of these competitors have targeted residential customers. The Bell companies are motivated to cooperate with competitors in order to win approval to enter the long distance market in their service territories. Bell Atlantic has won FCC approval to provide long distance service in New York and SBC Communications, Inc. is expected to gain such approval in Texas. Rural markets, with their preponderance of residential subscribers, will likely be among the last to see wide-scale local telecommunications service competition. Rural telecommunications companies that border metropolitan areas would be the first to experience competition. These rural telecommunications providers generally are not waiting for competition to arrive, but they are using the period before they come under competitive attack to enter small towns and cities as competitive local exchange carriers. They are able to leverage their modern infrastructure, organization skills, financial strength and local presence to compete with big, incumbent providers that are not focused on these small markets. In addition to competition, the Telecom Act also mandated a new universal telecommunications service support mechanism and required that it be sufficient to ensure that rural customers receive reasonably comparable rates and services when compared to urban customers. Congress stated its intent that implicit subsidies presently contained in the access charges local telecommunications companies levy on long distance carriers be eliminated and be made explicit in the new universal service support mechanism. The FCC recently approved a plan put forward by large LECs and interexchange carriers ("IXCs") that reduced access charges the large LECs charge the IXCs and authorizes alternative mechanisms by which the large LECs can recover a significant portion of lost access revenues. The national telephone trade associations are promoting a similar plan for small rural LECs that includes a solution for the uncertainty that has surrounded universal service funding. If enacted, the plan would assure that rural LECs' interstate access and universal service revenues are sufficient and predictable. CFC does not anticipate that any loss in revenue resulting from this plan (if adopted by the FCC) would result in material losses on loans outstanding to rural telecommunications companies. Deregulation thus far has not had much effect on LECs. The FCC has promulgated a series of rules to implement the Telecom Act, and eliminated very few existing regulatory requirements. Perhaps after competition takes hold more widely there may be an effort to lessen regulations on LECs. The final aspect of the Telecom Act dealt with advanced telecommunications and information technologies. The current administration is concerned that there is a growing "digital divide" between various groups in the country and that such a divide exists relative to rural areas versus urban areas access to advanced telecommunications and information services. It is anticipated that RUS will play a significant role in financing infrastructure to help provide rural Americans with access to these services. RTFC is prepared to supplement the government's financing of this effort. 15 The RUS Program Since the enactment of the Rural Electrification Act in 1936 (the "RE 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. Principally through the organization of systems under the RUS loan program in 48 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 100% currently. Rural electric systems serve 12% of all consumers of electricity in the United States and its territories and account for approximately 8% of total sales of electricity and about 5% of energy generation and generating capacity. In 1949, the RE Act was amended to allow RUS to lend for the purpose of furnishing and improving rural telecommunications service. The RUS telecommunications lending program had 779 reporting borrowers at December 31, 1998. The 779 borrowers operated 4,746 exchanges, providing service to a total of 5.5 million subscribers, including 1.1 million business subscribers and 4.4 million residential customers (data for 1999 not yet available). The RE 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 that 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 telecommunications borrowers, RUS also provides financing through the RTB. The RTB is an instrumentality of the United States providing financing at rates reflecting its cost of capital and is managed by RUS. RUS exercises 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 2001, both the House and Senate Agriculture Appropriation Committees have approved RUS electric muni-rate loan levels of $295 million. The House bill includes $50 million for hardship 5% loans and the Senate includes $122 million. RUS is also authorized to provide 100% guarantees on loans available from the FFB or other lenders. The House appropriations bill has included $1.2 billion and the Senate has provided $1.7 billion for these loan guarantees for the fiscal year beginning October 1, 2000. Differences between the House and Senate will be worked out with a final bill expected before the start of the fiscal year beginning October 1, 2000. Electric funding levels for the fiscal year ending September 30, 2000 were $122 million at the 5% rate, $295 million for loans at a municipal government obligation index and $1.7 billion for guarantees. Legislation enacted in 1992 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 insured loans for a period of ten years, but remains eligible for RUS loan guarantees. As of May 31, 2000, 223 borrowers had either fully prepaid or partially prepaid their RUS notes, under these provisions. These borrowers have $5.4 billion in loans outstanding from CFC. Member Financial Data Electric Systems On the following pages are tables providing composite statements of revenues, expenses and patronage capital from the distribution systems and power supply systems which were members of CFC during the five years ended December 31, 1999, and their respective composite balance sheets at the end of each such year. The data in the tables for 1995 is comprised of information collected by RUS for all CFC members that were RUS borrowers and information collected by CFC on the members that do not borrow from RUS. The data for 1996 to 1999 is data collected by CFC only. CFC began making its own data collection in 1996 due to the larger number of its members that no longer borrow from RUS. Distribution members submit annual data as of December 31 on form 7 and power supply members submit annual data as of December 31 on form 12 or FERC form 1. As of July 31, 2000, CFC had received a form 7 from 811 distribution systems and a form 12 or FERC form 1 from 54 power supply systems. While CFC is reporting 832 distribution system members at May 31, 2000, only 813 were required to file form 7's with CFC at December 31, 1999. CFC collected form 7's from 811 distribution systems; two systems did not meet the filing deadline. The other 20 systems were not required to file a form 7 because they did not have outstanding balances of long-term loans at December 31, 1999. Only 54 of the 70 total power supply systems report financial results to CFC. Fifteen of the remaining power supply systems did not report financial results because they are subsidiaries of other member power supply systems and thus their financial results were consolidated with and filed by the parent power supply system, act as coordinating agents for their members, did not have an outstanding balance of long-term loans at December 31, 1999, or bought out CFC debt after that date. In addition, one power supply system did not meet the filing deadline. 16 Telecommunications Systems On the following pages are tables providing composite statements of revenues and expenses from the telecommunications systems that were members of CFC during the two years ended December 31, 1999. The first year for which CFC has collected such data and their respective composite balance sheet was 1998. Members with long-term loans outstanding are generally required to submit annual data as of December 31 in the form of audited financial statements. As of August 16, 2000, CFC had received audited financial statements from 191 telecommunications systems. While CFC had 536 telecommunications system members at May 31, 2000, a total of 246 had long-term loans outstanding and were required to submit audited financial statements to CFC at December 31, 1999. A total of 43 telecommunications system members did not meet the filing deadline and 12 telecommunications system members submitted consolidated audited financial statements. ____________________ 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 and RUS, 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. 17

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 that are based upon financial statements submitted to RUS and CFC by Member Distribution Systems Years ended December 31, (Dollar amounts in thousands) 1999 1998 1997 1996 1995 Operating revenues and patronage capital $18,805,359 $18,284,021 $17,232,257 $17,028,087 $16,253,957 Operating deductions: Cost of power (1) 11,828,572 11,580,829 10,907,145 10,924,695 10,486,773 Distribution expense (operations) 792,249 728,565 472,629 445,990 412,058 Distribution expense (maintenance) 1,024,734 985,571 829,991 804,663 752,659 Administrative and general expense (2) 1,864,344 1,735,074 1,720,805 1,627,925 1,584,099 Depreciation and amortization expense 1,290,354 1,203,438 1,134,149 1,069,101 1,000,017 Taxes 230,238 241,010 458,620 458,623 436,563 Total 17,030,491 16,474,487 15,523,339 15,330,997 14,672,169 Utility operating margin 1,774,868 1,809,534 1,708,918 1,697,090 1,581,788 Non-operating margin 179,940 173,446 235,334 180,311 172,118 Power supply capital credits (3) 259,099 297,451 268,015 282,800 254,839 Total 2,213,907 2,280,431 2,212,267 2,160,201 2,008,745 Interest on long-term debt (4) 1,024,369 980,863 919,892 869,076 833,110 Other deductions 50,523 49,628 45,439 43,711 46,859 Total 1,074,892 1,030,491 965,331 912,787 879,969 Net margin and patronage capital $ 1,139,015 $ 1,249,940 $ 1,246,936 $ 1,247,414 $ 1,128,776 TIER (5) 2.11 2.35 2.34 2.44 2.42 DSC (6) 2.15 2.32 2.26 2.42 2.40 MDSC (7) 2.03 2.25 2.17 2.30 2.28 Number of systems included 811 820 821 832 824

____________________ (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 margin of power supply systems and other associated organizations allocated to their member distribution systems and added in determining net margin 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 on form 7. 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 margin and patronage capital. (5) The ratio of (x) interest on long-term debt (in each year including all interest charged to construction) and net margin 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 margin 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 margin and patronage capital plus interest on long-term debt (including all interest charged to construction) plus depreciation and amortization expense plus non-operating margin, interest plus cash received in respect of generation and transmission and other capital credits to (y) long-term debt service obligations. 18

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION COMPOSITE BALANCE SHEETS AS REPORTED BY CFC MEMBER DISTRIBUTION SYSTEMS The following are unaudited figures that are based upon financial statements submitted to RUS and CFC by Member Distribution Systems At December 31, (Dollar amounts in thousands) 1999 1998 1997 1996 1995 Assets and other debits: Utility plant: Utility plant in service $43,023,535 $40,387,723 $37,763,550 $35,406,826 $33,118,001 Construction work in progress 1,262,537 1,129,147 1,062,356 975,357 881,171 Total utility plant 44,286,072 41,516,870 38,825,906 36,382,183 33,999,172 Less: Accumulated provision for Depreciation and amortization 12,225,421 11,409,118 10,608,302 9,911,677 9,221,378 Net utility plant 32,060,651 30,107,752 28,217,604 26,470,506 24,777,794 Investment in associated organizations (1) 3,790,623 3,665,208 3,483,154 3,348,326 3,207,671 Current and accrued assets 4,520,592 4,526,663 4,185,884 4,126,415 3,980,052 Other property and investments 703,585 644,353 552,033 503,871 496,105 Deferred debits 599,511 530,606 514,670 488,009 511,977 Total assets and other debits $41,674,962 $39,474,582 $36,953,345 $34,937,127 $32,973,599 Liabilities and other credits: Net worth: Memberships $ 119,175 $ 112,391 $ 105,505 $ 105,497 $ 127,749 Patronage capital and other equities (2) 17,542,625 16,710,887 15,674,556 14,731,432 13,633,993 Total net worth 17,661,800 16,823,278 15,780,061 14,836,929 13,761,742 Long-term debt (3) 19,308,152 18,343,340 16,924,955 16,214,420 15,718,979 Current and accrued liabilities 433,687 3,098,525 3,046,528 2,697,605 2,418,230 Deferred credits 3,429,173 884,595 864,384 872,013 786,455 Miscellaneous operating services 842,150 324,845 337,417 316,160 288,193 Total liabilities and other credits $41,674,962 $39,474,583 $36,953,345 $34,937,127 $32,973,599 Equity percentage (4) 42.5% 42.6% 42.7% 42.5% 41.7% Number of systems included 811 820 821 832 824

______________________________ (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 on form 7. (3) Principally debt to RUS and CFC. Includes $8,342,631, $7,481,368, $6,121,902, $5,467,636, $, and $4,824,491, for the years 1999, 1998, 1997, 1996 and 1995, respectively, due to CFC. (4) Determined by dividing total net worth by total assets and other debits. 19

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 that are based upon financial statements submitted to RUS and CFC by Member Power Supply Systems Years ended December 31, (Dollar amounts in thousands) 1999 1998 1997 1996 1995 Operating revenues and patronage capital $10,758,413 $10,901,138 $10,702,813 $10,585,875 $10,182,928 Operating deductions: Cost of power (1) 7,945,476 7,979,542 7,604,521 7,322,039 6,984,648 Distribution expense (operations) 23,634 17,499 12,555 15,431 16,019 Distribution expense (maintenance) 14,908 12,524 12,937 16,607 15,950 Administrative and general expense (2) 414,362 406,441 474,681 473,869 483,030 Depreciation and amortization expense 904,826 914,270 915,879 1,056,113 956,889 Taxes 68,681 69,095 231,843 237,700 246,700 Total 9,371,887 9,399,371 9,252,416 9,121,759 8,703,236 Utility operating margin 1,386,526 1,501,767 1,450,397 1,464,116 1,479,692 Non-operating margin 258,186 577,842 232,778 493,874 253,883 Power supply capital credits (3) 44,180 56,646 46,520 55,590 48,981 Total 1,688,892 2,136,255 1,729,695 2,013,580 1,782,556 Interest on long-term debt (4) 1,227,548 1,221,512 1,295,082 1,436,200 1,476,062 Other deductions (5) 185,621 184,868 409,396 1,601,919 89,784 Total 1,413,169 1,406,380 1,704,478 3,038,119 1,565,846 Net margin and patronage capital $ 275,723 $ 729,875 $ 25,217 $(1,024,539) $ 216,710 TIER (6) 1.22 1.60 1.02 0.29 1.15 DSC (7) 1.15 1.45 1.11 0.69 1.02 Number of systems included 54 58 57 54 53

______________________________ (1) Includes cost of purchased power, power production and transmission expense, separately listed on the form 12. (2) Includes sales expenses and consumer accounts expense and consumer service and informational expense as well as other administrative and general expenses, separately listed on the form 12 or FERC form 1. (3) Certain power supply systems purchase wholesale power from other power supply systems of which they are members. Power supply capital credits represent net margin 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 margin 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 margin of associated organizations allocated to CFC power supply members and added in determining net margin 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 margin. According to unpublished information interest charged to construction and allowance for funds used during construction for CFC power supply members in the years 1995-1999 were as follows: Interest Charged to Allowance for Funds used Construction During Construction Total 1999 $10,073 $13,604 $23,677 1998 9,947 13,133 23,080 1997 7,798 12,684 20,482 1996 13,434 11,620 25,054 1995 68,400 11,018 79,418 (5) Includes $1,119,635 in 1996 related to the reorganization of 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 margin 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 five systems which failed to make debt service payments or are operating under a debt restructure agreement, without which the composite TIER would have been, 1.24, 1.27, 1.04, 1.21 and 1.23 for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively. (7) The ratio of (x) net margin 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 five 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 1.23, 1.28, 1.13, 1.20 and 1.22 for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively. 20

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION COMPOSITE BALANCE SHEETS AS REPORTED BY CFC MEMBER POWER SUPPLY SYSTEMS The following are unaudited figures that are based upon financial statements submitted to RUS and CFC by Member Power Supply Systems At December 31, (Dollar amounts in thousands) 1999 1998 1997 1996 1995 Assets and other debits: Utility plant: Utility plant in service $31,140,658 $31,141,532 $31,656,202 $32,191,089 $34,182,352 Construction work in progress 1,151,859 1,041,760 825,421 640,005 931,397 Total utility plant 32,292,517 32,183,292 32,481,623 32,831,094 35,113,749 Less: Accumulated provision for 13,230,060 13,059,537 12,558,247 11,783,058 11,586,462 depreciation and amortization Net utility plant 19,062,457 19,123,755 19,923,376 21,048,036 23,527,287 Investments in associated 1,173,026 1,132,157 1,179,185 1,178,785 1,049,409 organizations (1) Current and accrued assets 3,904,535 3,740,302 3,697,391 3,984,238 4,211,004 Other property and investments 1,511,145 1,691,932 1,553,774 2,000,584 1,656,563 Deferred debits 3,251,458 3,400,876 3,228,708 3,636,749 4,391,800 $28,902,621 $29,089,022 $29,582,434 $31,848,392 $34,836,063 Total assets and other debits Liabilities and other credits: Net worth: Memberships $ 49,131 $ 263 $ 258 $ 258 $ 250 Patronage capital and other equities (2) 3,175,374 (52,606) (778,357) (646,115) 497,756 Total net worth 3,224,505 (52,343) (778,099) (645,857) 498,006 Long-term debt (3) 19,591,883 23,389,067 24,426,867 25,900,628 28,372,321 Current and accrued liabilities 2,328,504 1,877,320 1,791,628 2,040,563 1,848,755 Deferred credits 1,338,343 1,296,308 1,343,053 1,826,945 1,309,860 Miscellaneous operating reserves 2,419,386 2,578,670 2,798,985 2,726,113 2,807,121 Total liabilities and other credits $28,902,621 $29,089,022 $29,582,434 $31,848,392 $34,836,063 Number of systems included 54 58 57 54 53

____________________ (1) Includes investments in service organizations, power supply capital credits and investments in CFC. (2) Large increase in 1999 due to the elimination of Cajun Electric Power Cooperative and includes a $1.2 billion decrease in 1996 related to the reorganization of Cajun with whom CFC has no credit exposure. (3) Principally debt to RUS or debt guaranteed by RUS and loaned by FFB and includes $1,761,847, $1,652,943, $1,411,157, $1,264,475 and $1,085,594 for the years 1999, 1998, 1997, 1996, and 1995, respectively, due to CFC. 21 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION COMPOSITE STATEMENTS OF REVENUES AND EXPENSES AS REPORTED BY CFC TELECOMMUNICATIONS SYSTEM MEMBERS The following are unaudited figures that are based upon financial statements submitted to CFC by Member Telecommunications Systems Years ended December 31, (Dollar amounts in thousands) 1999 (3) 1998 Operating revenues $3,908,496 $2,535,461 Operating expenses (1) 3,003,530 1,846,215 Net income before interest, depreciation and taxes 904,966 689,246 Interest on long-term debt 221,103 140,436 Net income before depreciation and taxes 683,863 548,810 Depreciation and amortization expenses 410,805 279,277 Net income before taxes 273,058 269,533 Taxes 89,030 71,326 Net income $ 184,028 $ 198,207 DSC (2) 2.30 2.14 Number of systems included 191 169 ____________________ (1) Includes sales expenses, consumer accounts and customer service and informational expense as well as other administrative and general expenses. (2) The ratio of (x) net margin plus interest on long-term debt (including all interest charged to construction) plus depreciation and amortization to (y) long-term debt service obligations. (3) Some RTFC members have been acquired by Alltel Corporation and RTFC agreed to accept Alltel Corporation's financial statements rather than those of the acquired operating companies. Given Alltel Corporation's size, it is not included in the composite statistics. 22 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION COMPOSITE BALANCE SHEETS AS REPORTED BY CFC TELECOMMUNICATIONS SYSTEMS The following are unaudited figures that are based upon financial statements submitted to RUS and CFC by Member Telecommunications Systems At December 31, (Dollar amounts in thousands) 1999 (3) 1998 Assets and other debits: Cash and cash equivalents $ 646,409 $ 401,507 Current assets 1,029,905 590,248 Plant, property and equipment 3,998,038 2,699,798 Other non-current assets 2,505,597 1,456,301 Total assets $8,179,949 $5,147,854 Liabilities and equity: Current liabilities $ 898,080 $ 586,176 Affiliate debt 3,804 23,442 Long-term debt (1) 4,309,996 2,686,987 Other non-current liabilities 392,982 232,219 Equity 2,575,087 1,619,030 Total liabilities and equity $8,179,949 5,147,854 Equity percentage (2) 37% 32% Number of systems included 191 169 ____________________ (1) Includes current maturities. (2) Determined by dividing total net worth by total assets and other debits. (3) Some RTFC members have been acquired by Alltel Corporation and RTFC agreed to accept Alltel Corporation's financial statements rather than those of the acquired operating companies. Given Alltel Corporation's size, it is not included in the composite statistics. 23 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. In July 1999, CFC completed construction of a second building on the adjacent unimproved land. The new building is a six-story office building with a separate parking garage situated on six acres of land. CFC also owns an additional two acres of unimproved land. Item 3. Legal Proceedings. None. Item 4. Submission of Matters to a Vote of Security Holders. None. 24 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, 2000.

(Dollar amounts in thousands) 2000 1999 1998 1997 1996 For the year ended May 31: Operating income $ 1,020,998 $ 792,052 $ 639,948 $ 567,065 $ 508,090 Operating margin $ 116,497 $ 76,439 $ 57,022 $ 54,736 $ 50,621 Gain on sale of land - - 5,194 - - Extraordinary loss (A) (1,164) - - - (1,580) Net margin $ 115,333 $ 76,439 $ 62,216 $ 54,736 $ 49,041 Fixed charge coverage ratio (A) 1.13 1.12 1.12 1.12 1.12 As of May 31: Assets $17,083,440 $13,925,252 $10,682,888 $9,057,495 $8,054,089 Long-term debt (B) $10,595,596 $ 6,891,122 $ 5,024,621 $3,596,231 $3,682,421 Members' subordinated certificates $ 1,340,417 $ 1,239,816 $ 1,229,166 $1,212,486 $1,207,684 Members' equity $ 341,217 $ 296,481 $ 279,278 $ 271,594 $ 269,641 Leverage ratio (C) 8.12 7.11 6.39 5.87 5.70 Debt to equity ratio (D) 6.46 5.52 4.51 3.97 3.63

___________________ (A) During the years ended May 31, 2000 and May 31, 1996, CFC paid premiums of $1.2 million and $1.6 million, respectively, in connection with the prepayments of collateral trust bonds. Margin used to compute the fixed charge coverage ratios represent net margin before extraordinary losses plus fixed charges. The fixed charges used in the computation of the fixed charge coverage ratios consist of interest and amortization of bond discounts and bond issuance expenses. (B) Includes commercial paper reclassified as long-term debt and excludes $3,040 million, $983 million, $327 million, $269 million and $352 million in long-term debt that comes due, matures and/or will be redeemed during fiscal years 2001, 2000, 1999, 1998 and 1997, 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 RUS, 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 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 $40 million for the year ended May 31, 2000. CFC does not have any outstanding common stock and does not pay dividends. Annually, CFC allocates its net margin to its members in the form of patronage capital certificates. Under current policies, CFC retires patronage capital 70% during the next fiscal year and holds the remaining 30% for 15 years. All retirements of patronage capital are subject to approval by the Board of Directors, 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 would not be impaired as a result. 25 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Dollar amounts in millions) This 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. The following discussion and analysis is designed to provide a better understanding of CFC'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. Overview 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. CFC was organized as a cooperative in which each member (other than associate members) receives one vote. Under CFC's bylaws, the Board of Directors is comprised of 22 individuals who must be 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 telecommunications 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. CFC is the sole source of external funding for RTFC. Because CFC has control of the RTFC Board, RTFC's financial condition and results of operations are combined with those of CFC. 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 the RUS guaranteed debt previously held by the 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 external funding for GFC. Because CFC has control of the GFC Board, GFC'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 GFC. 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 losses and to provide a margin sufficient to preserve interest coverage in light of CFC's financing objectives. To the extent members contribute to CFC's base capital by purchasing subordinated certificates carrying below-market interest rates, CFC can offer proportionally lower interest rates on its loans to members. CFC obtains its funding from the capital markets and its membership. CFC enters the capital markets, based on the combined strength of its members, to borrow the funds required to fulfill the financing requirements of its members. On a regular basis, CFC obtains debt financing in the capital markets 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. CFC also offers its AA/A credit rating to enhance its members' credit on other public or private placement transactions through guarantees. 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. Rural electric cooperatives that join CFC are required 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 may require 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 senior debt of CFC. CFC is required by the cooperative laws under which it is incorporated to have a mechanism to allocate its earnings to its members. CFC allocates its net margin annually based on each member's participation in loan programs during the 26 year. The membership, loan and guarantee subordinated certificates along with unretired patronage capital provide CFC's base capitalization. CFC's performance is closely tied to the performance of its member rural electric and telecommunications 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. Financial Condition At May 31, 2000, CFC had $17,083 in total assets, an increase of $3,158 or 23% over the prior year. Net loans outstanding to members represented approximately $16,450 or 96% of total assets. The remaining $633 consisted of other assets to support CFC's operations. Except as required for the debt service account and unless excess cash is invested overnight, CFC does not generally use funds to invest in debt or equity securities. At May 31, 2000, 88% of CFC's loan portfolio consisted of long-term loans, including secured long-term loans classified as restructured. The remaining 12% consisted of secured and unsecured intermediate-term and line of credit loans. Approximately 53% or $8,812 of loans carried a fixed rate of interest. All other loans, including $5,900 in long-term loans, are subject to interest rate adjustment monthly or semi-monthly. In addition to its loans, CFC provided approximately $1,998 in guarantees for its members at May 31, 2000. These guarantees relate primarily to tax- exempt financed pollution control equipment. At May 31, 2000, CFC had also committed to lend an additional amount of approximately $13,699 to its members. Most unadvanced loan commitments contain a material adverse change condition. About 37% of these commitments are provided for operational back-up liquidity. Approximately one-third of the unadvanced commitments were approved under the Power Vision program and will expire if not advanced within 60 months of approval. 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, 2000, membership subordinated certificates totaled $642. These certificates generally mature in 100 years and pay interest at 5.0%. At May 31, 2000, loan subordinated certificates totaled $517 and carried a weighted average interest rate of 0.7%. At May 31, 2000, guarantee subordinated certificates totaled $181 and carried a weighted average interest rate of 3.3%. 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 3.0%. Loan and guarantee 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 policy are required to purchase additional subordinated certificates to receive a loan or credit enhancement. At present, the majority of CFC's members maintain a CFC leverage ratio below the level requiring the purchase of additional certificates. The issuance of non-interest bearing loan subordinated certificates is expected to exceed the issuance of 5% membership subordinated certificates. Therefore, management expects the average interest rate paid on all certificates to decline over time. CFC paid a total of $40 in interest to holders of subordinated certificates during fiscal year 2000. Under current policy, CFC returns 70% of the allocated net margin in the next fiscal year, with the remaining 30% to be held and then retired at a future date (currently 15 years), as 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 nine years, CFC will retire the unretired allocations representing net margin for fiscal years 1991 to 1993, all of which had been allocated under a previous retirement policy. The unretired allocations (members' equity) do not earn interest and are junior to all debt instruments, including subordinated certificates. At May 31, 2000, CFC had $341 in retained equity. CFC enters the capital markets through the issuance of collateral trust bonds, medium-term notes, commercial paper and quarterly income capital securities. At May 31, 2000, CFC had $3,349 in fixed rate collateral trust bonds and $2 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 at least equal in principal amount to 100% of the outstanding principal amount of collateral trust bonds. At May 31, 2000, CFC had pledged $3,484 in mortgage notes. During fiscal year 2000, CFC issued a total of $525 in collateral trust bonds. All collateral trust bonds issued after February 1994 have been issued under an indenture with U.S. Bank National Association as 27 substitute trustee. Virtually all collateral trust bonds were offered to investors in underwritten public offerings. At May 31, 2000, CFC had $4,791 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 $294 at May 31, 2000. The remaining $4,497 were sold through dealers to investors including $985 in the European markets. At May 31, 2000, a total of $438 of medium-term notes were issued in a foreign currency. At the time of issuance, CFC also entered into a currency exchange agreement to cover all principal and interest payments due in a foreign currency. At May 31, 2000, CFC had $6,550 outstanding in commercial paper with a weighted average maturity of 68 days. Commercial paper notes are issued with maturities up to 270 days and are senior unsecured obligations of CFC. Commercial paper sold directly by CFC and outstanding to CFC's members and others totaled $974 at May 31, 2000. The remaining $5,576 was sold through dealers to investors in the United States and Europe. Included in the commercial paper sold through dealers at May 31, 2000, was a total of $117 of extendable commercial notes. These are notes issued with a stated maturity of 90 days, and CFC has the option to extend the maturity to 390 days. 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 exchange agreement with a highly rated counterparty at the time of the issuance. At May 31, 2000, there were no foreign-denominated commercial paper notes outstanding. 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, 2000, CFC had $155 outstanding in bank bid notes. At May 31, 2000, CFC had $400 outstanding in quarterly income capital securities. The securities 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. 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 $3,158. Net loan balances increased by $2,959 or 22%. Gross loans increased by a total of $2,975, and the allowance for loan losses increased by $16, compared to the prior year. As a percentage of the portfolio, long-term loans represented 88% at May 31, 2000, compared to 89% at May 31, 1999. Long-term fixed rate loans represented 60% and 71% of the total long-term loans at May 31, 2000 and 1999, respectively. Loans converting from a variable rate to a fixed rate for the year ended May 31, 2000 totaled $51, a decrease from the $1,639 that converted for the year ended May 31, 1999. Offsetting the conversions to the fixed rate were $6 and $55 of loans that converted from the fixed rate to the variable for the years ended May 31, 2000 and 1999, respectively. This resulted in a net conversion of $45 from the variable rate to a fixed rate for the year ended May 31, 2000 compared to a net conversion of $1,584 for the year ended May 31, 1999. The increase in total loans outstanding at May 31, 2000, was primarily due to increases of $2,564 in long-term loans, $419 in line of credit loans, and $40 to intermediate-term loans offset by decreases in RUS guaranteed loans of $42 and restructured loans of $6. The increase to loans outstanding for fiscal year 2000 included long-term electric advances of $1,785 and telephone advances of $1,495. The electric long-term advances included $205 for the purpose of repaying RUS loans, $1,382 under the 100% and Power Vision programs, $157 under the RUS concurrent loan program and $41 under the RUS guaranteed loan program. Telephone long-term advances were primarily for the acquisition of local exchange properties. The loans advanced under the 100%, RUS concurrent and Power Vision loan programs were used for a variety of general corporate purposes, including, construction of headquarters facilities and transmission facilities, system upgrades, refinancing of non-RUS debt, and electric plant upgrades. There were a number of reasons underlying the increased demand for CFC loan advances, including: * the strong economy, which has spurred construction and business development; * RUS waiting periods are at an all time high, which caused more borrowers to buy out their RUS debt and/or make greater use of CFC 100% loan funds; * a large number of systems have bought out their RUS debt over the last few years, requiring them to seek non-RUS financing; * some borrowers have begun to expand and diversify their operations through acquisitions and mergers; and * increase level of lending to rural telecommunications systems for the acquisition of rural local exchange assets. 28 Notes payable, which consists of commercial paper, bank bid notes and long- term debt due within one year, totaled $4,252, a decrease of $725 over the prior year. At May 31, 2000, CFC's short-term debt consisted of $5,576 in dealer commercial paper, $841 in commercial paper issued to CFC's members, $133 in commercial paper issued to certain nonmembers, $3,040 in collateral trust bonds and medium-term notes that mature within one year and $155 in bank bid notes. The commercial paper sold to CFC's members and certain nonmembers decreased by $214, the amount of bank bid notes outstanding decreased by $220 and commercial paper sold through CFC's dealers increased by $942 from the prior year. There was also a decrease of $50 to commercial paper outstanding to European investors. CFC's commercial paper and bank bid notes had a weighted average maturity of 67 days at May 31, 2000. As described in the footnotes to the Combined Financial Statements, CFC reclassifies a portion of its short-term debt as long-term, since 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 had reclassified $5,493 and $2,403 of short-term debt as long-term at May 31, 2000 and 1999, respectively. During fiscal year 2000, long-term debt outstanding increased by $3,704. The increase in long-term debt outstanding was due to increases of $355 in collateral trust bonds, $2,166 in medium-term notes and $3,090 in the amount of short-term debt supported by revolving credit agreements offset by an increase of $1,907 of long-term debt due within one year reclassified as notes payable. This increase was required to fund the increase in long- term loans outstanding. Members' subordinated certificates and members' equity increased by $147 to $1,682 at May 31, 2000, compared to $1,535 at May 31, 1999. The increase was due to increases of $94 to loan subordinated certificates, $7 to guarantee subordinated certificates and $46 to members equity. Off-balance sheet, CFC experienced an increase of $1,099 in gross unadvanced loan commitments to a total of $13,699 at May 31, 2000. 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; therefore, CFC does not anticipate funding most such commitments. Approximately 37% of the outstanding commitments at May 31, 2000 were for short-term or line of credit loans. Approximately one-third of the unadvanced commitments were approved under the Power Vision program and will expire if not advanced within 60 months of approval. 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. Guarantees outstanding at May 31, 2000 were $1,998, representing an increase of $105 from the May 31, 1999 balance of $1,893. The increase in guarantees was due primarily to the increase in other guarantees and letters of credit. CFC's leverage ratio increased during the year from 7.11 at May 31, 1999 to 8.12 at May 31, 2000. The ratio is calculated by dividing debt and guarantees outstanding, excluding quarterly income capital securities and all debt used to fund loans guaranteed by the RUS, by the total of quarterly income capital securities, members' subordinated certificates and members' equity. The increase in the leverage ratio was primarily due to an increase in loans outstanding to members financed by the issuance of debt to members and in the capital markets. CFC's debt to equity ratio increased from 5.52 at May 31, 1999 to 6.46 at May 31, 2000. The 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 loss allowance and quarterly income capital securities. The increase to the debt to equity ratio was primarily due to an increase in loans outstanding, which was financed by the issuance of debt in the capital markets. CFC's leverage and debt to equity ratios have increased due to the significant increase in loan volume. CFC's management is committed to maintaining these ratios within a range that is required for a strong credit rating. During fiscal year 2000, CFC amended a number of policies and created a new member investment. Members that have a CFC debt to equity ratio in excess of the limit in the policy will be required to purchase a non-amortizing and non-interest bearing subordinated certificate in the amount of 2% of the loan for distribution systems and 7% of the loan for power supply systems. This change in policy should increase the amount of subordinated certificates issued as a percentage of loans advanced. The new policy will be effective in the first quarter of fiscal year 2001. CFC also created century certificates, which are new long-term member investments. These securities have a maturity of up to 100 years, with optional redemption dates at 44, 59, 69, 79 and 89 years and pay interest at similar rates to retail quarterly income capital securities. Members may purchase these securities at any time. CFC began offering the century certificates in July 2000. CFC also created a members' capital reserve, in which a portion of the net margin will be held annually rather than allocated back to the members. CFC will have the ability to allocate the members' capital 29 reserve back to its members if necessary. CFC's management will continue to monitor the leverage and debt to equity ratios. If required, additional changes to policy will be made to maintain the ratios within an acceptable range. Margin Analysis CFC uses an interest coverage ratio instead of the dollar amount of gross or net margin as its primary performance indicator, since CFC's net margin is subject to fluctuation as interest rates change. Management has established a 1.10 Times Interest Earned Ratio ("TIER") as its minimum operating objective. CFC has earned TIERs of 1.13, 1.12 and 1.12 for the years ended May 31, 2000, 1999 and 1998. TIER is a measure of CFC's ability to cover the interest expense on funding. Fiscal Year 2000 versus 1999 Results Net margin for the year ended May 31, 2000 was $115, an increase of $39 or 51% over the $76 earned the prior year. Operating income for the year ended May 31, 2000 was $1,021, an increase of $229 or 29% over the prior year. Operating income increased due to increases in average loan volume and the average interest rate on the loan portfolio. Average loan volume increased by $2,996 to an average loan balance of $15,136 at May 31, 2000. The average interest rate on the portfolio for the year ended May 31, 2000 was 6.75%, an increase of 0.23% from the 6.52% for the prior year. The increase in the average interest rate was primarily due to increases in interest rates during the fiscal year in the capital markets that were passed on through increases in CFC loan interest rates. The total cost of funding for the year ended May 31, 2000 was $860, an increase of $196 or 30% over the prior year. The cost of funding increased due to increases in average loan volume outstanding and the average interest rate on funds outstanding. The average interest rate on funding for the year ended May 31, 2000 was 5.68%, an increase from 5.47% in 1999. This rate increased as a result of five 25 basis point increases and one 50 basis point increase in the federal funds rate during the year ended May 31, 2000. The gross margin earned on loans for fiscal year 2000 was $161, an increase of $33 or 26% over the prior year. The gross margin of $161 represents 1.07% of average loan volume for the year, an increase from the 1.05% from the prior year. General and administrative expenses for fiscal year 2000 totaled $27, a slight decrease from the prior year. The general and administrative expenses for fiscal year 2000 represented 0.18% of average loan volume, a decrease of 5 basis points or 22% from the prior year. The growth in loans outstanding, with no increase in general and administrative expenses, caused a large decrease in general and administrative expenses as a percentage of average loan volume. General and administrative expenses remained at approximately the same level in fiscal year 2000 as in fiscal year 1999 due to a highly focused effort to keep costs down. A total provision of $17 was added to the loan loss reserve during the year ended May 31, 2000. The $17 provision is a decrease of $7 or 27% over the amount added in the prior year. The provision to the reserve for fiscal year 2000 represented 0.11% of average loan volume, a reduction from 0.20% for the prior year. The increase to the provision for fiscal year 2000 was due to the overall growth in the portfolio. During the year ended May 31, 2000, CFC incurred an extraordinary loss of $1 related to the early redemption of collateral trust bonds. Fiscal Year 1999 versus 1998 Results Net margin for the year ended May 31, 1999 was $76, an increase of $14 or 23% over the $62 earned the prior year. Operating income for the year ended May 31, 1999 was $792, an increase of $152 or 24% over the prior year. Operating income increased due to an increase in average loan volume offset by a slight decrease in the average interest rate on the loan portfolio. Average loan volume increased by $2,485 to a balance of $12,140 at May 31, 1999. The average interest rate on the portfolio for the year ended May 31, 1999 was 6.52%, a decrease of 0.11% from the 6.63% for the prior year. The decrease was due to the reductions to interest rates during 1999 in the capital markets that were passed on through reductions in CFC loan interest rates. The total cost of funding for the year ended May 31, 1999 was $664, an increase of $124 or 23% over the prior year. The cost of funding increased due to the increase in average loan volume outstanding offset by a decrease to the average interest rate on funds outstanding. The average interest rate on funding for the year ended May 31, 1999 was 5.47%, a decrease 30 from 5.60% in 1998. This rate decreased as a result of three 25 basis point reductions in the federal funds rate offset by an increase in collateral trust bonds and medium-term notes and quarterly income capital securities outstanding. The gross margin earned on loans for fiscal year 1999 was $128, an increase of $29 or 29% over the prior year. The gross margin of $128 represents 1.05% of average loan volume for the year, an increase from the 1.03% represented by the $99 gross margin for the prior year. General and administrative expenses for fiscal year 1999 totaled $28, an increase of $4 or 17% over the prior year. The general and administrative expenses for fiscal year 1999 represented 0.23% of average loan volume, slightly less than the 0.24% for the prior year. While the dollar amount of general and administrative expenses increased during the year ended May 31, 1999, the cost as a percentage of average loan volume decreased. The increase to the dollar amount of general and administrative expenses was due to an increase in salaries and benefits from normal base salary increases and an increase in the number of employees, and the increased marketing effort. Staffing increases were required to support operations related to a growing loan portfolio, the increased marketing effort and the development of new products and services. A total provision of $24 was added to the loan loss reserve during the year ended May 31, 1999. The $24 provision is an increase of $5 or 26% over the amount added in the prior year. The provision to the reserve for fiscal year 1999 represented 0.20% of average loan volume, the same as the prior year. The increase to the provision for fiscal year 1999 was due to the overall growth in the portfolio. During the year ended May 31, 1998, CFC recognized a gain of $5.2 on the sale of land. No such gain was recognized in the year ended May 31, 1999. The following is a summary of CFC's operating results as a percentage of average loans outstanding for the fiscal years ended May 31, 2000, 1999 and 1998. 2000 1999 1998 Operating income 6.75% 6.52% 6.63% Less: cost of funds 5.68% 5.47% 5.60% Gross margin 1.07% 1.05% 1.03% General and administrative expenses 0.18% 0.23% 0.24% Provision for loan losses 0.11% 0.20% 0.20% Total expenses 0.29% 0.43% 0.44% Operating margin 0.78% 0.62% 0.59% Gain on sale of land - - 0.05% Extraordinary (loss) (0.01%) - - Net margin 0.77% 0.62% 0.64% TIER 1.13 1.12 1.12 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 power supply 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, 2000, 1999 and 1998. Loans and Guarantees by Member Class 2000 1999 1998 Electric systems: Distribution $10,487 56% $ 8,749 56% $ 7,278 57% Power supply 3,907 21% 3,606 23% 3,525 28% Service organizations 475 2% 428 3% 225 2% Associate members 107 1% 104 1% 102 1% Subtotal electric systems 14,976 80% 12,887 83% 11,130 88% Telecommunication systems 3,700 20% 2,710 17% 1,575 12% Total $18,676 100% $15,597 100% $12,705 100% 31 CFC's members are widely dispersed throughout the United States and its territories, including 49 states, the District of Columbia, Guam, American Samoa and the U.S. Virgin Islands. At May 31, 2000, 1999 and 1998, no state or territory had over 15%, 13% and 12%, 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. At May 31, 2000, the total exposure outstanding to any one borrower did not exceed 3.6% of total loans and guarantees outstanding. At May 31, 2000, CFC had $3,464 million in loans outstanding and $495 in guarantees outstanding, to its largest 10 borrowers. The amounts outstanding to the largest 10 borrowers at May 31, 2000 represented 21% of total loans outstanding and 25% of total guarantees outstanding. Total credit exposure to the largest 10 borrowers represented 21% and 19% of total credit exposure at May 31, 2000 and 1999, respectively. At May 31, 2000, the ten largest borrowers included four distribution systems, three power supply systems and three telecommunications systems. Security Provisions Except when providing lines of credit, CFC typically lends to its members on a secured basis. At May 31, 2000, a total of $1,632 of loans were unsecured representing 9.8% of total loans. Approximately $118 or 7.2% of the unsecured loans represent obligations of distribution borrowers for the initial phase(s) of RUS note buyouts. Upon completion of a borrower's buyout from RUS, CFC receives first lien security on all assets and future revenues. The unsecured loans would represent 9.1% of total loans if these partial note buyout obligations were excluded. CFC's long-term loans are typically secured pro-rata with any other secured lenders (primarily RUS) by all assets and future revenues of the borrower. Short-term loans are generally unsecured lines of credit. At May 31, 2000, a total of $297 of guarantees were unsecured, representing 14.8% of total guarantees. 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. At May 31, 2000, CFC had a total of $1,929 of unsecured loans and guarantees, representing 10.3% of total loans and guarantees. Portfolio Quality The following tables summarize the key composite operating results of CFC's two main electric system borrower types, distribution and power supply systems, and the telecommunications system borrowers. The information presented below is as of December 31, and is taken from the data contained on pages 18 to 23. CFC Distribution Member Borrowers Composite Results 1999 1998 1997 1996 1995 TIER 2.11 2.35 2.34 2.44 2.42 DSC 2.15 2.32 2.26 2.42 2.40 MDSC 2.03 2.25 2.17 2.30 2.28 Equity percentage 42.5% 42.6% 42.7% 42.5% 41.7% CFC Power Supply Member Borrowers Composite Results 1999 1998 1997 1996 1995 TIER 1.24 1.27 1.04 1.21 1.23 DSC 1.23 1.28 1.13 1.20 1.22 Equity percentage 14.6% 13.8% 12.8% 12.3% 11.7% NOTE: The power supply composite results have been presented without the operating results of five systems experiencing financial difficulties for 1999 and six systems for all other years presented. CFC had credit exposure to three of these systems (see Note 10 to the Combined Financial Statements). 32 CFC Telecommunications System Borrowers Composite Results 1999 1998 1997 1996 DSC 2.30 2.14 2.39 3.21 Equity percentage 37% 32% 31% 34% Most CFC power supply borrowers sell the majority of their power under all- requirements power contracts to 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-requirements power 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 subject to state and federal regulations, as applicable. Some states regulate rate-setting and can therefore override the system's internal rate-setting procedures. Nonperforming and Restructured Loans CFC classifies a borrower as nonperforming when any one of the following criteria are met: * principal or interest payments on any loan to the borrower are past due 90 days or more, * as a result of court proceedings, repayment on the original terms is not anticipated, or * 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 foregoing interest income recognition. At May 31, 2000, CFC had no loans classified as nonperforming. This is a decrease of $2 from the prior year-end. This decrease was due to a write-off and offset of equity against nonperforming loans totaling $2. During the fourth quarter of fiscal year 2000, CFC received the payment required to bring $28 of nonperforming loans current. 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, 2000, restructured loans totaled $572, a decrease of $4 from the prior year. This decrease was due to principal repayments received during the year. At May 31, 2000, all restructured loans were on an accrual status at a rate of 3.9%. As of June 1, 2000 all restructured loans were on accrual status at a rate of 5.0%. CFC increased the rate at which it will accrue interest on restructured loans as a result of excess cash payments received since the inception of the restructuring agreement. NONPERFORMING AND RESTRUCTURED ASSETS As of May 31, 2000 1999 1998 Nonperforming loans $ - $ 2 $ 4 Percent of loans and guarantees outstanding - 0.01% 0.03% Restructured loans $ 572 $ 576 $ 330 Percent of loans and guarantees outstanding 3.06% 3.70% 2.61% Total nonperforming and restructured loans $ 572 $ 578 $ 334 Percent of loans and guarantees outstanding 3.06% 3.71% 2.64% 33 Allowance for Loan Losses CFC maintains an allowance for potential loan losses that 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, 2000, the allowance for loan losses totaled $228, a net increase of $16 from the prior year-end. The allowance represented 39.94% of nonperforming and restructured loans and 1.22% of total loans and guarantees outstanding at year-end. During fiscal year 2000, CFC recorded net loan charge-offs of $1. Since its inception in 1969, CFC has charged off loan balances in the total amount of $80, net of recoveries. Management believes that the allowance for loan losses is adequate to cover any portfolio losses that may occur. The following chart presents a summary of the allowance for loan losses at May 31, 2000, 1999 and 1998. Years Ended May 31, 2000 1999 1998 Beginning balance $212 $250 $233 Provision for loan losses 17 24 19 Charge-offs (1) (62) (2) Ending balance $228 $212 $250 As a percentage of total loans outstanding 1.37% 1.55% 2.36% As a percentage of total loans and guarantees outstanding 1.22% 1.36% 1.98% As a percentage of total nonperforming and restructured loans outstanding 39.94% 36.69% 74.98% Since May 31, 1998, the loan loss reserve has decreased from a balance of $250 to a balance of $228 at May 31, 2000. The decrease was due to $62 of write-offs taken during fiscal year 1999 and $1 of write-offs taken during fiscal year 2000. The resolution of these troubled situations has left CFC with no non-performing loans and only Deseret as a restructured loan. The overall risk in the portfolio has been reduced due to the resolution of these troubled situations. Thus, the coverage percentage provided by the loss reserve has decreased since May 31, 1998. The May 31, 2000 loss reserve balance represents 1.37% of total loans outstanding and 1.22% of total loans and guarantees outstanding, compared to 2.36% and 1.98% at May 31, 1998. Management has taken the improvement in the overall quality of the portfolio into consideration in setting the amount of the provision in each of the last two fiscal years. As stated above, management believes that the existing reserve is adequate to cover any losses in the portfolio. During fiscal year 2000, CFC reduced the specific reserve on restructured loans from $101 to $85. This reduction was a result of excess cash payments received on restructured loans. 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 margin and retain liquidity. Match Funding Policy 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 remaining period maturity of the fixed rate loan portfolio. It is CFC's policy to manage the match funding of asset and liability repricing terms within a range of 5% of total assets. At May 31, 2000, CFC had $8,240 in fixed rate assets amortizing or repricing, which were funded by $7,865 in fixed rate liabilities maturing during the next 30 years and $288 in members' equity that does not have a scheduled maturity. The difference, $87 or 0.5% of total assets, represents the fixed rate assets in excess of the fixed rate debt maturing during the next 30 years. 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, 34 members' subordinated certificates and members' equity. With the exception of members' subordinated certificates, which are generally issued at rates below CFC's long-term cost of funding and with extended maturities, and commercial paper. 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 CFC. CFC makes use of an interest rate analysis in the funding of its long-term fixed rate loan portfolio. The analysis compares the scheduled fixed rate loan amortizations and repricings against the scheduled fixed rate debt and members' subordinated certificate amortizations to determine the fixed rate funding gap for each individual year and for the portfolio as a whole. There are no scheduled maturities for the members' equity, primarily unretired patronage capital allocations. The balance of members' equity is assumed to remain relatively stable since annual retirements have been approximately equal to the annual allocation of net margin. The non- amortizing members' subordinated certificates either mature at the time of the related loan or guarantee or 100 years from issuance (50 years in the case of a small portion of certificates). Accordingly, it is assumed in the funding analysis that non-amortizing members' subordinated certificates and members' equity are first used to "fill" any fixed rate funding gaps. The remaining gap represents the amount of excess fixed rate funding due in that year or the amount of fixed rate assets that are assumed funded by short-term variable rate debt, primarily commercial paper. The interest rate associated with the assets and debt maturing or equity and certificates is used to calculate a TIER for each year and for the portfolio as a whole. The schedule allows CFC to analyze the impact on the overall TIER of issuing a certain amount of debt at a fixed rate for various maturities, prior to issuance of the debt. The following chart shows the scheduled amortization, and maturity of fixed rate assets and liabilities outstanding at May 31, 2000.

INTEREST RATE GAP ANALYSIS (Fixed Rate Assets/Liabilities) As of May 31, 2000 Over 1 Over 3 Over 5 Over 10 year but years but years but years but Less than less than less than less than less than Over 20 1 year 3 years 5 years 10 years 20 years years Total Assets: Amortization and repricing $ 778 $1,673 $1,771 $2,090 $1,399 $529 $8,240 Total assets $778 $1,673 $1,771 $2,090 $1,399 $529 $8,240 Liabilities and Equity: Long-term debt $924 $1,536 $1,479 $1,937 $ 469 $297 $6,642 Subordinated certificates 3 25 26 295 510 364 1,223 Member's equity - - - - 288 - 288 Total liabilities and equity $927 $1,561 $1,505 $2,232 $1,267 $661 $8,153 Gap* $149 $ (112) $ (266) $ 142 $ (132) $132 $ (87) Cumulative gap $149 $ 37 $ (229) $ (87) $ (219) $(87) Cumulative gap as a % of total assets 0.87% 0.22% (1.34)% (0.51)% (1.29)% (0.51)%

__________________________________ * Loan amortization and repricing (over)/under debt maturities 35 Derivative and Financial Instruments All of the financial instruments to which CFC was a party at May 31, 2000 were purchased for purposes other than trading. All of CFC's financial instruments at May 31, 2000 were interest rate sensitive. The following table provides the significant balances and contract terms related to the market risk related financial instruments at May 31, 2000.

Outstanding Principal Amortization Remaining Instrument Balance Fair Value 2001 2002 2003 2004 2005 Years Investments $ 74 $ 74 $ 74 $ - $ - $ - $ - $ - Average rate 1.84% 1.84% - - - - - Long-term fixed rate loans (1) 8,215 7,090 791 863 785 784 988 4,004 Average rate 7.00% 6.80% 6.77% 7.03% 6.94% 7.26% 7.02% Long-term variable rate loans 5,836 5,836 214 197 212 122 285 4,806 Average rate (2) 7.62% - - - - - - Intermediate-term loans (3) 355 355 355 - - - - - Average rate 7.39% 7.39% - - - - - Line of credit loans (4) 1,611 1,611 1,611 - - - - - Average rate (2) 7.74% - - - - - - RUS fixed rate loans 25 24 11 - - - - 14 Average rate 6.43% 5.75% - - - - 6.95% RUS variable rate loans 64 64 1 1 1 1 1 59 Average rate (2) 7.11% - - - - - - Restructured loans (5) 572 279 7 8 5 4 6 542 Average rate 3.90% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Liabilities and equity: Commercial paper $ 6,550 $ 6,550 $ 6,550 $ - $ - $ - $ - $ - Average rate 6.17% 6.17% - - - - - Bank bid notes 155 155 155 - - - - - Average rate 6.41% 6.41% - - - - - Medium-term notes 4,791 4,443 2,940 646 362 116 12 715 Average rate 6.30% 6.35% 6.51% 6.25% 5.51% 6.58% 6.05% Collateral trust bonds 3,351 3,062 100 100 1,025 300 500 1,326 Average rate 6.40% 6.45% 6.75% 6.62% 5.77% 5.73% 6.59% QUICS 400 345 - - - - - 400 Average rate 7.62% - - - - - 7.62% Subordinated certificates 1,340 1,340 3 4 21 23 3 1,286 Average rate 3.02% 9.63% 4.70% 1.25% 1.99% 4.80% 3.04%

_____________________ (1) The principal amount of fixed rate loans is the total of scheduled principal amortizations and scheduled repricings. (2) Variable rates are set the first day of each month. (3) Intermediate-term loan amortizations include principal payments on variable rate loans. There is no scheduled amortization for these variable rate loans. (4) Line of credit loans are generally required to be paid down for a period of five consecutive days each year. These loans do not have a principal amortization schedule. (5) All restructured loans were performing on the negotiated terms (see note 10 to Combined Financial Statements). Amortization based on scheduled minimum payments. At May 31, 2000 restructured loans were accruing interest at 3.90%. On June 1, 2000 that rate was increased to 5.00% The following table provides the notional amount, average rate paid, average rate received and maturity dates for the interest rate exchange agreements to which CFC was a party at May 31, 2000. Principal Amortization Notional Principal Fair Remaining Instrument Balance Value 2001 2002 2003 2004 2005 Years Interest rate swaps $4,817 $4,901 $2,313 $335 $622 $308 $394 $845 Average rate paid (1) 6.25% Average rate received (1) 7.00% ___________________________________ (1) Scheduled interest rate exchange agreement maturities include agreements in which CFC pays both fixed and variable rates and receives variable rates. 36 The following table provides the notional amount in U.S. dollars, average rate paid, average rate received and maturity dates for the currency exchange agreements to which CFC was a party at May 31, 2000.

Principal Amortization Notional Average Principal Average Rate Fair Remaining Maturity Date Balance Rate Received Value 2001 2002 2003 2004 2005 Years February 24, 2006 $390 6.22% 4.13% $453 $ - $ - $ - $ - $ - $390 July 14, 2000 24 6.90% 6.30% 24 24 - - - - - August 14, 2000 24 6.72% 6.28% 26 24 - - - - -

Market Risk CFC's primary risk exposure is interest rate risk. A secondary risk exposure is liquidity risk. CFC is also exposed to counterparty risk related to the interest rate and currency exchange agreements it has entered. The interest rate risk exposure is related to the funding of the fixed rate loan portfolio. CFC does not match fund the majority of its fixed rate loans with a specific debt issuance at the time the loan is advanced. CFC aggregates fixed rate loans until the volume reaches a level that will allow an economically efficient issuance of debt. CFC uses fixed rate collateral trust bonds, medium-term notes, quarterly income capital securities, members' subordinated certificates, members' equity and variable rate debt to fund fixed rate loans. CFC allows borrowers flexibility in the selection of the period for which a fixed interest rate will be in effect. Long-term loans typically have a 15 to 35 year maturity. Borrowers may select fixed interest rates for periods of one year through the life of the loan. To mitigate interest rate risk related to the funding of fixed rate loans, CFC performs a monthly gap analysis, a comparison of fixed rate assets repricing or maturing by year to fixed rate liabilities and equity maturing by year (see chart on page 35). The analysis will indicate the total amount of fixed rate loans maturing by year and in aggregate that are assumed to be funded by variable rate debt. CFC's funding objective is to limit the total amount of fixed rate loans that are funded by variable rate debt to 5% or less. At May 31, 2000 and 1999, 0.5% and 2.1%, respectively, of the fixed rate loans were funded with variable rate debt. The interest rate risk is minimal on variable rate loans, since the loans are priced monthly based on the cost of the debt used to fund the loans. CFC uses variable rate debt, non-interest bearing members' subordinated certificates and members' equity to fund variable rate loans. At May 31, 2000 and 1999, 47% and 37%, respectively, of loans carry variable interest rates. CFC faces liquidity risk in the funding of its variable rate loans and in being able to obtain the funds required to meet the loan requests of its members or conversely, having funds to repay debt obligations when they are due. CFC offers variable rate loans with maturities of up to 35 years. These loans are funded by variable rate commercial paper, bank bid notes, collateral trust bonds and medium-term notes, non-interest bearing members' subordinated certificates and members' equity. The average maturity of commercial paper and bank bid notes is typically about 30 to 35 days. The collateral trust bonds and medium-term notes are issued for longer periods, but typically much shorter than the maturity of the loans. Loan capital term certificates are issued for the same period as the related loan. Thus, CFC is at risk if it is unable to continually roll over its commercial paper balances or issue other forms of variable rate debt to support its variable rate loans. CFC also faces liquidity risk in the funding of its fixed rate loans. Borrowers may select a fixed interest rate term of one year to the loan maturity. When a loan has an interest rate term of a duration shorter than loan maturity, the borrower may select a new fixed interest rate term of one year to the remaining loan maturity or the long-term variable rate. CFC does not match fund each fixed rate loan, but rather funds its fixed rate loans in aggregate. CFC matches the maturity of the fixed rate funding to the fixed interest rate terms selected, rather than the loan maturity. When the fixed interest rate term expires, CFC obtains new fixed rate funding based on the new interest rate term selected by the borrower. CFC is at risk in the rolling over of its fixed rate funding of a maturity less than the loan maturity. To mitigate liquidity risk, CFC maintains back-up liquidity through revolving credit agreements with domestic and foreign banks. At May 31, 2000 and 1999, CFC had a total of $5,493 and $4,793, respectively, in revolving credit agreements and bank lines of credit. Subsequent to the end of the fiscal year, CFC increased the total of revolving credit agreements and bank lines of credit to $7,040. To facilitate entry into the debt markets, CFC maintains high credit ratings on all of its debt issuances from three credit rating agencies (see chart on page 38). CFC also maintains shelf registrations with the SEC for its collateral trust bonds, medium-term notes and quarterly income capital securities. At May 31, 2000 and 1999, CFC had effective shelf registrations totaling $175 and $700 related to collateral trust bonds, $2,542 and $144 related to medium-term notes and $100 and $100 related to quarterly income capital securities, respectively. Subsequent to the year-end on June 9, 2000, CFC registered an additional 37 $1,000 and $300, respectively, related to collateral trust bonds and quarterly income capital securities. All of the registrations allow for issuance of the related debt at both variable and fixed interest rates. CFC also has commercial paper and medium-term note issuance programs in Europe. At May 31, 2000 and 1999, CFC had $0 and $50 of commercial paper, respectively, and $985 and $735 of medium-term notes, respectively, outstanding to European investors. CFC has issuance authority of $1,000 related to commercial paper and $2,000 related to medium-term notes under these programs. CFC believes that the ability to issue debt in both domestic and foreign markets allows CFC to maintain access to capital in the event of disruptions in either the domestic or foreign markets. In addition, CFC believes that its policy of setting interest rates at the time a fixed rate loan is advanced and the ability to reset all variable rates at least monthly protects it from erosion of its net margin in the event that CFC is unable to access the market efficiently or if rates in the market increase sharply. CFC is exposed to counterparty risk related to the performance of the parties with which it has entered into interest rate exchange agreements. To mitigate this risk, CFC only enters into interest rate exchange agreements with highly rated counterparties. At May 31, 2000 and 1999, CFC was a party to $4,817 and $2,796, respectively, of interest rate exchange agreements. To date, CFC has not experienced a failure of a counterparty to perform as required under the interest rate exchange agreement. At May 31, 2000, CFC's interest rate exchange agreement counterparties had credit ratings ranging from A to AAA as assigned by Standard & Poor's Corporation. Foreign Currency Risk CFC may issue European commercial paper, medium-term notes or bonds denominated in foreign currencies. For any such obligation issued, CFC expects to enter into a foreign currency exchange agreement with a highly rated counterparty. The cost of the currency exchange agreement would be factored into the interest rate CFC pays on the obligation and included in CFC's total cost of funds. At May 31, 2000, CFC had a total of $390 of medium-term notes, denominated in Euros and $48 of medium-term notes denominated in British Pound Sterling outstanding. CFC is exposed to counterparty risk related to the performance of the parties with which it has entered into foreign currency exchange agreements. To mitigate this risk, CFC only enters into foreign currency exchange agreements with highly rated counterparties. At May 31, 2000, CFC was a party to $438 of foreign currency exchange agreements. To date, CFC has not experienced a failure of a counterparty to perform as required under the foreign currency exchange agreements. At May 31, 2000, CFC's foreign currency counter parties had credit ratings ranging from AA to AA+ as assigned by Standard & Poor's Corporation. Credit Ratings CFC's long- and short-term debt and guarantees are rated by three of the major credit rating agencies, Moody's Investors Service, Standard & Poor's Corporation and Fitch Investors Service. The following table presents CFC's credit ratings at May 31, 2000. Moody's Investors Standard & Poor's Fitch Investors Service Corporation Service Direct Collateral trust bonds Aa3 AA AA Domestic and European medium-term notes A1 AA- AA- Quarterly income capital securities A2 A A+ Domestic and European commercial paper P-1 A-1+ F-1+ Guarantees Leveraged lease debt A1 AA- AA- Pooled bonds Aa3 AA- AA- Other bonds A1 AA- AA- Short-term P-1 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. 38 Member Investments At May 31, 2000 and 1999, CFC's members provided 16.6% and 20.4% of total capitalization as follows: MEMBERSHIP CONTRIBUTIONS TO TOTAL CAPITALIZATION 2000 % of Total 1999 % of Total Commercial paper $ 841 13% $1,063 18% Medium-term notes 294 6% 211 3% Members' subordinated certificates 1,340 100% 1,240 100% Members' equity 341 100% 295 100% Total $2,816 $2,809 Percentage of total capitalization 16.6% 20.4% The total amount of member investments increased by $7 at May 31, 2000, compared to May 31, 1999. The volume of growth experienced by CFC over the last few years has resulted in member required equity purchases and member excess cash available for investment in CFC medium-term notes and commercial paper not being sufficient to maintain the percentage of member investment as compared to total investment. Total capitalization at May 31, 2000 was $16,929, an increase of $3,126 over the total capitalization of $13,803 at May 31, 1999. When the loan loss allowance is added to both membership contributions and total capitalization, the percentages of membership investments to total capitalization are 17.8% and 21.6% at May 31, 2000 and 1999, respectively. During fiscal year 2000, CFC made a number of policy changes intended to increase the amount of members' equity and members' subordinated certificates outstanding. The amount of members' investments as a percentage of total capitalization should begin to increase as result of these changes. As stated earlier, CFC's management is committed to maintaining the leverage and debt to equity ratios within an acceptable range. Increasing the amount of members' equity and subordinated certificates outstanding is a significant component of that effort. Historical Results The following chart provides CFC's key operating results over the last five years. SELECTED KEY FINANCIAL DATA As of May 31: 2000 1999 1998 1997 1996 Net loans $16,450 $13,491 $10,329 $8,678 $7,728 Total liabilities $15,402 $12,390 $ 9,174 $7,573 $6,577 Total members' subordinated certificates and equity $ 1,682 $ 1,535 $ 1,508 $1,484 $1,477 Guarantees $ 1,998 $ 1,893 $ 2,080 $2,132 $2,266 Leverage ratio (1) 8.12 7.11 6.39 5.87 5.70 Debt to equity (2) 6.46 5.52 4.51 3.97 3.63 Gross margin $ 161 $ 128 $ 99 $ 91 $ 82 Net margin $ 115 $ 76 $ 62 $ 55 $ 49 TIER (3) 1.13 1.12 1.12 1.12 1.12 ____________________ (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 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 members' subordinated certificates, members' equity, the loan loss allowance and quarterly income capital securities. (3) The TIER is calculated by dividing net margin before extraordinary items plus the cost of funds by the cost of funds. Year 2000 Compliance CFC has not experienced any year 2000 related problems. All computer systems were successfully restarted and are currently operating normally. There were no problems with the buildings or building operating systems. To date, there have been no reported problems with the disbursement or receipt of funds. We have not received any reports of problems from any of our banks or vendors. In 1994, CFC began to move from a main frame computer system to a client server system to allow for better access to data by internal staff and its members. As a result of the decision to migrate to a client server system, CFC's year 2000 problems were mitigated. Also, as a result of expenditures on new client server hardware and software, CFC's year 2000 specific expenditures were relatively minor. 39 CFC's borrowers have not experienced any significant year 2000 related incidents, that would have a material adverse impact on their business operations and their ability to generate revenue to service debt obligations. Financial and Industry Outlook RUS loans and loan guarantees continue to provide a significant portion of the financing needed by electric cooperatives. The most recent significant change in the RUS electric loan programs began in fiscal year 1999, when the RUS funding programs shifted away from more heavily subsidized direct lending to RUS guarantees of loans made by the FFB at the government's cost of money plus 1/8th of one percent. For example, for fiscal year 2000, the RUS has authority to provide $1,700 of loan guarantees versus direct electric lending authority of $416($121 at a fixed 5% hardship interest rate and $295 at municipal rates). The same pattern of large loan guarantee programs relative to the size of RUS direct lending is expected to continue in fiscal year 2001 and future years. The RUS loan guarantee program is expected to be the preferred source of funding for rural electric generation projects, including the combustion turbine projects being planned by several generation and transmission systems. The RUS direct lending programs will provide assistance to electric cooperatives that may be in greater need of subsidized interest rate loans. Other electric distribution cooperatives, including the approximately 250 cooperatives that have exited the RUS loan program, rely on private lenders, like CFC, for all of their financing needs. During fiscal year 2000, CFC advanced approximately $205 to electric borrowers for the purpose of prepaying their RUS loans. From March 1994, the date final regulations were adopted, through May 2000, CFC advanced a total of $2,908 to borrowers for this purpose. To date, CFC has been selected as the lender for 95% of the RUS debt refinancings. At May 31, 2000, there were applications pending at RUS for an additional $31 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 CFC believes that there will be a steady stream of activity. CFC believes that it will be difficult to maintain the rapid loan growth experienced over the last four years. Since May 31, 1996, CFC has increased the balance of loans outstanding by $8,732 or 110%, from a balance of $7,946 at May 31, 1996 to a balance of $16,678 at May 31, 2000. The primary factor limiting future growth is the significant increase to the amount of RUS loan guarantees available. RUS has increased the authorized level of loan guarantees from $300 to about $1,700. These funds have typically been advanced from the FFB, which is able to raise funds at lower rates. CFC became an eligible lender under the loan guarantee program in February 1999 and has a total of $43 in loans outstanding at May 31, 2000. There is a long lead time to secure the RUS guaranteed loan funds. In some cases, CFC members will not be able to wait that long and will borrow from CFC, and in other cases CFC will provide bridge financing that will be paid off by the advance of the RUS guaranteed loan funds. In addition, CFC may not be the sole lender in future large transactions extended to its members. In the past, CFC would lend the entire amount for deals that met the lending requirements. In the future, CFC may bring together a syndicate of lenders or sell loan participations. Not lending the full amount required in these large transactions will assist CFC in a number of ways, including the management of both the debt to equity ratio and credit concentration with large borrowers. The telecommunications loan portfolio has grown significantly in the last few years. The growth has come from the sell off of rural exchanges by larger telecommunications organizations (primarily GTE) and the expansion of wireless services. Future growth in telecommunications lending is expected to come from the following areas: * acquisitions of rural exchanges from investor-owned organizations that require a high rate of return; * consolidations of rural telecommunications companies; * expansion of wireless services, including local multiple distribution services, which offer a variety of one and two way broadband telecommunications services; and * refinancing of existing debt. The significant loan growth over the past few years has caused CFC's debt to equity and leverage ratios to increase. CFC has implemented a number of policies during fiscal year 2000 and in the first quarter of fiscal year 2001 aimed at increasing the level of retained equity. CFC has made changes that will result in an increase in the amount of loan certificates required to be purchased by borrowers that have a CFC debt to equity ratio in excess of the amount 40 stated in the policy. CFC has also created a new subordinated certificate not tied to the advance of a loan or guarantee that members may purchase at any time. CFC has created a member's capital reserve in which a portion of each year's net margins will be placed. This reserve will be maintained by CFC as retained unallocated margins. CFC will have the ability to allocate the retained margins to its members. These changes should begin to increase CFC's equity retention, which will help maintain the debt to equity and leverage ratios within an acceptable range. Item 7A. Quantitative and Qualitative Disclosures About Market Risk See Market Risk discussion on pages 37 and 38. Item 8. Financial Statements and Supplementary Data. The Combined Financial Statements, Auditors' Report and Combined Quarterly Financial Results are included on pages 52 through 78 (see Note 14 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. 41 PART III Item 10. Directors and Executive Officers of the Registrant. (a) Directors Name Age Director Date present Since term expires Benson Ham (President of CFC) 66 1995 2001 R.B. Sloan, Jr. (Vice President of CFC) 48 1996 2002 Wade R. Hensel (Secretary-Treasurer of CFC) 48 1997 2003 James Andrew 63 1999 2001 Robert A. Caudle 55 1999 2002 James P. Duncan 54 2000 2003 Glenn English 59 1994 2001 Alden J. Flakoll 66 1996 2002 James A. Hudelson 55 1999 2002 Kenneth Krueger 62 1997 2003 Stephen R. Louder 48 1998 2001 Eugene Meier 71 1997 2003 R. Layne Morrill 60 1995 2001 Robert J. Occhi 53 1996 2002 Clifton M. Pigott 56 1997 2003 Timothy Reeves 52 1998 2001 Brian D. Schlagel 50 1998 2001 Thomas W. Stevenson 58 1997 2003 Clifford G. Stewart 54 1997 2001 Robert Stroup 55 1996 2002 Robert C. Wade 66 1997 2003 Eldwin A. Wixson 68 1995 2001 (b) Executive Officers Title Name Age Held present office since President and Director Benson Ham 66 1999 Vice President and Director R.B. Sloan, Jr. 48 1999 Secretary-Treasurer and Director Wade R. Hensel 48 1999 Governor and Chief Executive Officer Sheldon C. Petersen 47 1995 Senior Vice President of Member Services and General Counsel John J. List 53 1997 Senior Vice President and Chief Financial Officer Steven L. Lilly 50 1994 Senior Vice President of Operations John T. Evans 50 1997 Senior Vice President of Corporate Relations Richard E. Larochelle 47 1998 Senior Vice President of RTFC Lawrence Zawalick 42 2000 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. (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. 42 (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. Ham has been a Director of Central Georgia Electric Membership Cooperative, Jackson, GA, since 1983. He is retired as the managing partner of the law firm of Ham, Jenkins, Wilson & Wangerin, from 1991 to 1998. 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 of 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. Sloan has been Chief Executive Officer of Energy United, a consolidated corporation since 1998, and one of its predecessor cooperatives, Crescent Membership Corporation, since 1989. He has been a member of the boards of North Carolina Electric Membership Corporation, North Carolina Association of Electric Cooperatives, and Tarheel Electric Membership Association since 1989. He 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 the past Chairman of the Iredell County Board of Commissioners. Mr. Hensel has been General Manager of BENCO Electric Cooperative, 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/BENCO Electric Cooperative 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. Andrew has served on the NRECA Board since 1989, and has been President since 1999. He serves as director of Jefferson Energy Cooperative since 1976, and is also director and former president for Georgia Electric Membership Corporation. Before his semi-retirement, Mr. Andrew was president/owner of BAS, Inc., an agricultural irrigation business in Waynesboro, GA. He serves as Chairman of Ogeechee Valley Bank since 1997 where he has been on the bank board since 1973. He also serves on the Board of Queensboro, Inc., a bank holding company. Mr. Caudle is a Trustee for the Lea County Electric Cooperative in Lovington, NM. He has been active in the domestic oil and gas industry as a partner in two independent companies, CB Partners of Midland, TX, since 1992 and M & W of Lovington, NM since 1993. Since 1990, Mr. Caudle has also owned a consulting business named after him which specializes in utility title and regulatory issues in Lovington, NM. Mr. Duncan is the CEO and General Manager of Sumter Electric Cooperative, Inc. In addition, Mr. Duncan is a director of Seminole Electric Cooperative and also serves as its Chairman of Finance Committee and Vice Chairman of the Rate Committee. He is a Vice President of Florida Electric Cooperatives Association and the Vice President of Sumter County Economic Development Council. He serves as Deputy Campaign Chairperson of the United Way of Lake and Sumter Counties and is active in numerous other community organizations. Mr. English has been Chief Executive Officer of NRECA, Washington, DC, since March 1994. He served in the United States 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 is President of FEM Electric Association, Inc., Ipswich, SD and has been on the board of directors 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 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. Mr. Hudelson has been General Manager of Wyoming Rural Electric Company since 1976. He became Chairman of the Legislative Committee for the Wyoming Rural Electric Association in 1989. He served as president of Goshen County 43 Economic Development Corporation from 1991 to 1994, and has been a member since 1990. He has been the Director for the Eastern Wyoming Development Corporation since 1999. Mr. Krueger has been a Director of Flathead Electric Cooperative, Inc., 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 in Flathead, MT. He was also District VI Director of Montana Wheat and Barley Committee from 1986-1991. Mr. Louder has been President and General Manager of Deaf Smith Electric Cooperative, Hereford, TX, since 1992. He is a director and currently serves as Secretary/Treasurer at Golden Spread Electric Cooperative and a former member and Chairman of the Texas Electric Cooperative Member Services Committee. He is a registered professional engineer in the state of Texas, a member of the Community Christian School Board of Trustees and a member of the Board of Elders at Community Church in Hereford, TX. He is also active in local economic development and the 4-H Club. Mr. Meier has been a Director of Cooperative Development Services since 1998 and the Director of Pierce-Pepin Cooperative Service, Ellsworth, WI, since 1991. He has been Vice President of the Wisconsin Electric Cooperative since 1995 and was Chairman of its Legislative Committee from 1994 to 1997. 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 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., 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 past President of the Electric Power Associations of Mississippi. He is also Vice President of the Mississippi Council of Farmer Cooperatives and of the Greater Biloxi Economic Development Foundation, and a past Director of the 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 from 1994 to 1999, a director of Cajun Electric Power Cooperative from 1992 to 1999, 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 from 1990 to 1998. Mr. Pigott is currently Director of the Rotary Club, and is a member of the Chamber of Commerce, the Beauregard Parish Cattlemen's Association, the Allen Parish Rice Growers Association, and the Human Resources Management Association. Mr. Reeves has been President and General Manager of Southern Illinois Power Cooperative, Marion, IL, since 1993. He was Executive Vice President and General Manager of Southern Illinois Electric Cooperative from 1981 to 1990, and Assistant to the Manager of Egyptian Electric Cooperative Association from 1974 to 1980. He is the Chairman of Illinois ACRE and a member of Illinois Managers Association and the G&T Managers Association. He also served as President of the Union County Hospital Board and the Southern Most Illinois Tourism Board. Mr. Schlagel has been the President of Morgan County REA, Fort Morgan, CO, since 1997. He has owned and operated Schlagel Farms, an irrigated agriculture enterprise, since 1971. Mr. Schlagel is also a Director of the Colorado Rural Electric Association, serves on the Facilities Committee at Tri-State Generation and Transmission Association, Inc., is Vice President of Roggen Farmer's Elevator Association and a Fellow of the Colorado Agriculture Leadership Program. He also served as President of Strasburg School District 31-J and Vice President of the Southeast Wild Fire Protection District. 44 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 and G & T Managers Association. Mr. Stevenson served as mayor pro tem and city council member of Longmont, CO, 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), and the American Legion. Mr. Stewart has been the Vice President and General Manager of Oregon Trail Electric Consumers Cooperative, Baker City, OR, since 1993, and is Chairman of the Board at Pacific Northwest Generating Cooperative since 1998. 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 owned a construction and design company since 1964. He has been a Director of Hoosier Energy REC since 1992. 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 is Vice Chairman of Kentucky Electric Cooperatives' Political Action Committee, SURE--Speak Up for Rural Electrification. He is a member of KAEC Management and Employees Committee, and served on CFC's Committee on Objectives and Planning. Mr. Wade is a member 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. 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. He also served as President and CEO of Cooperative Resources, an internet service provider serving the Lakes region of New Hampshire, from the time of incorporation in April 1997 to June 1999. 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. He served as a Director of the Speare Memorial Hospital from 1986 to 1998 and rejoined the board as Vice President in September 1999. He was the principal-controlling partner of the Plymouth Pharmacy from 1979 to 1983 and was a Maine dairy farmer from 1956 to 1963. Mr. Petersen joined CFC in August 1983 as an area representative. He became the Director of Policy Development and Internal Audit in January 1990, 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. Mr. List joined CFC as a staff attorney in February 1972. He served as Corporate Counsel from June 1980 to 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. Evans joined CFC as Senior Vice President of Operations in November 1997. He was Senior Vice President and Chief Operating Officer of Suburban Hospital Healthcare System, Bethesda, MD, from 1994 to 1997. He was Senior Vice President and Chief Operating Officer for Geisinger Medical Center, Danville, PA, from 1991 to 1994. 45 Mr. Larochelle joined CFC as Director of Corporate Relations in May 1996. He became Senior Vice President of Corporate Relations in August 1998. Prior to joining CFC, he was the Legislative Director at NRECA where he worked for 12 years. Mr. Zawalick joined CFC in 1980. Throughout the years, Mr. Zawalick has held various positions. In April 1995, he was appointed Vice President of Business Development for CFC and Administrative Coordinator of RTFC. In February 2000, Mr. Zawalick was named CFC's Senior Vice President of RTFC. (f) Involvement in Certain Legal Proceedings. None to the knowledge of CFC. (g) Promoters and control persons. 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, 2000, 1999 and 1998, to the named executive officers. The named executive officers include the CEO and the four next most highly compensated executive officers serving at May 31, 2000, with salary and bonus for fiscal year 2000 in excess of $100,000. Summary Compensation Table Annual Compensation All Other Year Salary Bonus Compensation (1) Sheldon C. Petersen 2000 $363,750 $83,789 $ 5,823 Governor and Chief 1999 358,750 77,656 19,208 Executive Officer 1998 328,854 - 25,009 John J. List 2000 207,667 44,945 7,704 Senior Vice President of Member 1999 198,667 43,750 3,474 Services and General Counsel 1998 194,652 19,100 4,035 Steven L. Lilly 2000 229,417 49,650 8,703 Senior Vice President and 1999 218,167 48,344 8,665 Chief Financial Officer 1998 205,869 12,200 10,352 John T. Evans (2) 2000 212,833 46,062 24,241 Senior Vice President of 1999 202,500 44,844 16,312 Operations 1998 106,571 10,500 24,252 Richard Larochelle (3) 2000 168,250 36,416 17,424 Senior Vice President of Corporate Relations Group _________________ (1) Amounts for fiscal years 2000, 1999 and 1998 include $1,173, $13,166 and $21,501 related to leave accruals and $4,050, $6,042 and $3,508 related to CFC contributions to a savings plan for Mr. Petersen; $4,422, $(166) and $854 related to leave accruals and $3,282, $3,640 and $3,181 related to CFC contributions to a savings plan for Mr. List; $4,885, $4,670 and $7,159 related to leave accruals and $3,818, $3,995 and $3,193 related to CFC contributions to a savings plan for Mr. Lilly; $20,699, $14,262 and $24,252 related to leave accruals and $3,542, $2,050 and $0 related to CFC contributions to a savings plan for Mr. Evans. Amounts for fiscal year 2000 for Mr. Larochelle include $14,059 related to leave accruals and $3,365 related to CFC contributions to a savings plan. (2) Mr. Evans joined CFC in November 1997. The compensation table for 1998 includes the actual compensation paid to Mr. Evans through May 31, 1998 and not his annual salary. (3) During fiscal year 2000, Mr. Hedberg, who was one of the top four most highly compensated employees in 1999 and 1998, left CFC and Mr. Larochelle became one of the top four most highly compensated employees. CFC established a short-term incentive compensation plan for all employees in fiscal year 1999. The plan provides for incentive payments of between 15% and 25% of salary based on the achievement of performance targets established at the beginning of the fiscal year. CFC's executives are eligible to receive incentive payments of up to 46 25% of salary under this plan, depending on corporate performance and the performance of the operating groups reporting to each executive. The incentive plan replaces the bonus plan that was in effect through fiscal year 1998. CFC's Board of Directors approves the performance targets for the incentive plan annually during the strategic planning and budgeting process. The Board of Directors will also review the performance achievements for the year and must approve the payout under the incentive plan prior to disbursement. In July 2000, CFC's Board of Directors approved a long-term incentive plan. The plan will provide for payouts of up to 25% of salary based on performance over a three-year period. CFC's executives are eligible to receive incentive payments of up to 25% of salary under this plan. The long-term incentive will be in addition to the short-term incentive described above. 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, 2000, the number of years of service credited and the compensation covered under the program, respectively, for the officers listed above was as follows: Sheldon C. Petersen-16 years 9 months, $319,000; John J. List-28 years 3 months, $190,151; Steven L. Lilly-16 years 7 months, $205,399; Richard Larochelle-4 years, $145,900; and John T. Evans-2 years 6 months, $203,133. Pension Plan Table Years of Service 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 85,500 106,875 128,250 250,000 23,750 47,500 71,250 95,000 118,750 135,000* 275,000 26,125 52,250 78,375 104,500 130,625 135,000* 300,000 28,500 57,000 85,500 114,000 135,000* 135,000* 325,000 30,875 61,750 92,625 123,500 135,000* 135,000* *The Tax Reform Act of 1984 places a cap on maximum salary used to compute retirement benefits and maximum yearly benefit. For calendar year 2000, the salary cap is $170,000 (the cap represents the amount of salary for 2000 that may be used in the computation of the average base salary) and the benefits cap is $135,000. The Budget Reconciliation Act of 1993 has set a limit of $170,000 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. 47 Compensation of Directors No director received any remuneration as an officer or director of CFC. Directors are reimbursed for travel and lodging expenses and receive a daily per diem to cover meals and other expenses related to 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. 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 or his beneficiaries in a lump sum. Compensation Committee Interlocks and Insider Participation During the year ended May 31, 2000 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): Benson Ham Wade R. Hensel Stephen R. Louder R. Layne Morrill Robert J. Occhi Brian D. Schlagel R. B. Sloan, Jr., Robert O. Williams 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. Loans and guarantees were made to member systems of which officers or directors of CFC are members, employees or directors 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. 48 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 52 Combined Balance Sheets 53 Combined Statements of Income, Expenses and Net Margin 55 Combined Statements of Changes in Members' Equity 56 Combined Statements of Cash Flows 57 Notes to Combined Financial Statements 58 2. Financial statement schedules Page Note 14 to Combined Financial Statements "Combined Quarterly Financial Results" 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 March 21, 2000, and a copy of the Bylaws as amended. 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 U.S. Bank National Associaton, 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 filed August 27, 1996. 4.5 - Revolving Credit Agreement dated as of August 10, 2000 for $4,087,500,000 maturing on August 9, 2001 CFC's Quarterly Report on Form 10-Q filed January 14, 2000. 4.6 - Revolving Credit Agreement dated as of August 10, 2000 for $550,000,000 maturing on August 9, 2001. - 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 margin to fixed charges. 23 - Consent of Arthur Andersen LLP. 27 - Financial Data Schedule. (b) Reports on Form 8-K. Item 5 on May 8, 2000 - Filing of Hunton and Williams tax opinion dated May 2, 2000. 49 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, 2000. 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 Sheldon C. Petersen Executive Officer /s/ STEVEN L. LILLY Senior Vice President and Steven L. Lilly Chief Financial Officer /s/ STEVEN L. SLEPIAN Controller (Principal Steven L. Slepian Accounting Officer) /s/ BENSON HAM President and Director Benson Ham /s/ R.B. SLOAN, JR. Vice President and R.B. Sloan, Jr. Director /s/ WADE R. HENSEL Secretary-Treasurer and Wade R. Hensel Director /s/ JAMES M. ANDREW Director -August 29, 2000 James M. Andrew Director Robert A. Caudle /s/ JAMES P. DUNCAN Director James P. Duncan Director Glenn English /s/ ALDEN J. FLAKOLL Director Alden J. Flakoll /s/ JAMES A. HUDELSON Director James A. Hudelson 50 Signature Title Date /s/ KENNETH KRUEGER Director Kenneth Krueger /s/ STEPHEN R. LOUDER Director Stephen R. Louder /s/ EUGENE MEIER Director Eugene Meier /s/ R. LAYNE MORRILL Director R. Layne Morrill /s/ ROBERT J. OCCHI Director Robert J. Occhi /s/ CLIFTON M. PIGOTT Director Clifton M. Pigott /s/ TIMOTHY REEVES Director -August 29, 2000 Timothy Reeves /s/ BRIAN D. SCHLAGEL Director Brian D. Schlagel /s/ THOMAS W. STEVENSON Director Thomas W. Stevenson /s/ CLIFFORD G. STEWART Director Clifford G. Stewart /s/ ROBERT STROUP Director Robert Stroup Director Robert C. Wade /s/ ELDWIN A. WIXSON Director Eldwin A. Wixson 51 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS 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 ("the Companies") as discussed in Note 1 as of May 31, 2000 and 1999, and the related combined statements of income, expenses and net margin, changes in members' equity and cash flows for the three 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 auditing standards generally accepted in the United States. 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, 2000 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Vienna, Virginia July 14, 2000 52 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION COMBINED BALANCE SHEETS (Dollar Amounts In Thousands) May 31, 2000 and 1999 ASSETS 2000 1999 CASH AND CASH EQUIVALENTS $ 246,028 $ 74,403 DEBT SERVICE INVESTMENTS 22,968 22,969 LOANS TO MEMBERS, net 16,449,753 13,491,199 RECEIVABLES 180,106 161,523 FIXED ASSETS, net 43,672 38,683 DEBT SERVICE RESERVE FUNDS 98,870 98,870 OTHER ASSETS 42,043 37,605 $17,083,440 $13,925,252 The accompanying notes are an integral part of these combined financial statements. 53 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION COMBINED BALANCE SHEETS (Dollar Amounts In Thousands) May 31, 2000 and 1999 LIABILITIES AND MEMBERS' EQUITY 2000 1999 NOTES PAYABLE, due within one year $ 4,252,166 $ 4,976,706 ACCOUNTS PAYABLE 20,145 16,707 ACCRUED INTEREST PAYABLE 125,708 95,741 LONG-TERM DEBT 10,595,596 6,891,122 OTHER LIABILITIES 8,191 10,207 QUARTERLY INCOME CAPITAL SECURITIES 400,000 400,000 MEMBERS' SUBORDINATED CERTIFICATES: Membership subordinated certificates 641,985 641,937 Loan and guarantee subordinated certificates 698,432 597,879 Total members' subordinated certificates 1,340,417 1,239,816 MEMBERS' EQUITY 341,217 294,953 Total members' subordinated certificates and members' equity 1,681,634 1,534,769 $17,083,440 $13,925,252 The accompanying notes are an integral part of these combined financial statements. 54 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION COMBINED STATEMENTS OF INCOME, EXPENSES AND NET MARGIN (Dollar Amounts In Thousands) For the Years Ended May 31, 2000, 1999 and 1998 2000 1999 1998 Operating income $1,020,998 $792,052 $639,948 Less: Cost of funds 860,160 664,109 540,535 Gross margin 160,838 127,943 99,413 Expenses: General and administrative 26,986 27,638 23,364 Provision for loan losses 17,355 23,866 19,027 Total expenses 44,341 51,504 42,391 Operating margin 116,497 76,439 57,022 Gain on sale of land - - 5,194 Net margin before extraordinary loss 116,497 76,439 62,216 Extraordinary loss (1,164) - - Net margin $ 115,333 $ 76,439 $ 62,216 The accompanying notes are an integral part of these combined financial statements. 55 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY (Dollar Amounts In Thousands) For the Years Ended May 31, 2000, 1999 and 1998

Patronage Capital Allocated General Education Unallocated Reserve Total Memberships Fund Margin Fund Other Balance as of May 31, 1997 $271,594 $1,470 $596 $ 2,289 $504 $266,735 Retirement of patronage capital (52,661) - - - (123) (52,538) Net margin 62,216 - 404 - 119 61,693 Other (1,871) 21 (324) - - (1,568) Balance as of May 31, 1998 279,278 1,491 676 2,289 500 274,322 Retirement of patronage capital (57,601) - - - - (57,601) Net margin 76,439 - 315 - 3 76,121 Other (3,163) 44 (448) - - (2,759) Balance as of May 31, 1999 294,953 1,535 543 2,289 503 290,083 Retirement of patronage capital (66,445) - - - - (66,445) Net margin 115,333 - 631 16,329 - 98,373 Other (2,624) 3 (247) - (3) (2,377) Balance as of May 31, 2000 $341,217 $1,538 $927 $18,618 $500 $319,634

The accompanying notes are an integral part of these combined financial statements. 56 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION COMBINED STATEMENTS OF CASH FLOWS (Dollar Amounts In Thousands) For the Years Ended May 31, 2000, 1999 and 1998 2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net margin $ 115,333 $ 76,439 $ 62,216 Add (deduct): Provision for loan losses 17,355 23,866 19,027 Depreciation 1,726 1,454 1,274 Amortization of issuance costs and deferred charges 5,727 3,959 2,188 Amortization of deferred income (2,182) (4,417) (1,467) Gain on sale of land - - (5,194) Receivables (15,966) (29,458) (12,397) Accounts payable 3,438 (10,043) 4,122 Accrued interest payable 29,967 27,244 21,573 Other (22,049) (20,050) (13,930) Net cash provided by operating activities 133,349 68,994 77,412 CASH FLOWS FROM INVESTING ACTIVITIES: Advances made on loans (8,077,346) (10,122,726) (5,594,408) Principal collected on loans 5,101,437 6,937,006 3,924,232 Net investment in fixed assets (6,715) (15,075) (1,423) Proceeds from sale of land - - 13,489 Net cash used in investing activities (2,982,624) (3,200,795) (1,658,110) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes payable, net 458,792 380,339 258,531 Debt service investments, net 1 - 54,250 Proceeds from issuance of long-term debt 3,703,013 3,003,765 1,819,265 Payments for retirement of long-term debt (1,181,993) (387,710) (574,455) Proceeds from issuance of quarterly income capital securities - 200,000 75,000 Extraordinary loss on retirement of long-term debt (1,164) - - Proceeds from issuance of members' subordinated certificates 136,691 65,432 34,040 Payments for retirement of members' subordinated certificates (38,706) (69,911) (15,718) Payments for retirement of patronage capital (55,734) (50,985) (54,952) Net cash provided by financing activities 3,020,900 3,140,930 1,595,961 NET INCREASE IN CASH AND CASH EQUIVALENTS 171,625 9,129 15,263 BEGINNING CASH AND CASH EQUIVALENTS 74,403 65,274 50,011 ENDING CASH AND CASH EQUIVALENTS $ 246,028 $ 74,403 $ 65,274 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during year for interest $ 837,441 $ 640,947 $ 525,881 The accompanying notes are an integral part of these combined financial statements. 57 NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS As of May 31, 2000, 1999 and 1998 (1) General Information and Accounting Policies (a) General Information National Rural Utilities Cooperative Finance Corporation ("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. 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 1,050 members as of May 31, 2000, included 902 utility members, virtually all of which are consumer-owned cooperatives, 75 service members and 73 associate members. The utility members included 832 distribution systems and 70 generation and transmission ("power supply") systems in 49 states and four U.S. territories. Rural Telecommunications 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 external funding for RTFC. As of May 31, 2000, RTFC had 536 members. RTFC is a taxable entity under Subchapter T of the Internal Revenue Code and accordingly takes deductions for allocations of net margin 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 ("FFB"). Under this program, notes are purchased from the FFB and placed in a trust and beneficial certificates in the trust are then sold to investors. The notes held by the trust are guaranteed by the RUS. All trust certificates held by GFC were transferred to GFC by CFC. CFC is the sole source of external funding for GFC. GFC had two members other than CFC at May 31, 2000. GFC is a taxable entity under Subchapter T of the Internal Revenue Code and accordingly takes deductions for allocations of net margin 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, 2000, CFC was authorized to lend RTFC up to $10.0 billion to fund loans to its members and their affiliates. As of the same date, RTFC had outstanding loans and unadvanced loan commitments totaling $4,994 million. RTFC's net margin is allocated to RTFC borrowers, its patrons. 58 Summary financial information relating to RTFC included in the combined financial statements is presented below: As of May 31: 2000 1999 (Dollar amounts in thousands) Outstanding loans to members and their affiliates $3,699,728 $2,710,339 Total assets 3,975,990 2,893,810 Notes payable to CFC 3,679,822 2,693,675 Total liabilities 3,727,438 2,729,102 Members' subordinated certificates 213,734 135,217 Members' equity (1) 34,818 29,491 For the years ended May 31: 2000 1999 1998 (Dollar amounts in thousands) Operating income $ 240,189 $ 149,037 $90,663 Net margin (1) 3,535 3,858 3,135 ____________________________ (1) The transfer of RTFC equity is governed by the South Dakota Cooperative Association Act which provides that net margin 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 margin would not be available to CFC in the form of patronage capital. As of May 31, 2000, CFC had loaned GFC $45.9 million to fund the purchase from CFC of certificates evidencing interests in trusts holding RUS guaranteed notes of members. Summary financial information relating to GFC included in the combined financial statements is presented below: As of May 31: 2000 1999 (Dollar amounts in thousands) Outstanding loans to members $ 45,855 $ 130,940 Total assets 47,166 133,091 Notes payable to CFC 45,855 130,940 Total liabilities 46,978 132,861 Members' equity (1) 188 230 For the years ended May 31: 2000 1999 1998 (Dollar amounts in thousands) Operating income $ 6,349 $ 7,716 $ 8,467 Net margin (1) 589 714 798 _______________________ (1) The transfer of GFC equity is governed by the South Dakota Cooperative Association Act which provides that net margin 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 margin 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) Interest Income Interest income is recognized on an accrual basis on all loans, unless specified otherwise in Note 10. 59 (d) Amortization of Bond Discounts and Bond Issuance Costs Bond discounts and bond issuance costs are deferred and amortized as interest expense using the effective interest method over the life of each bond issue. (e) 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. (f) Allowance for Loan Losses CFC maintains an allowance for loan losses at a level believed to be adequate in relation to the credit quality and amount of its loans and guarantees outstanding. According to the terms of CFC's guarantees, any amount advanced by CFC under its guarantee of a members' obligation is treated as a demand loan. It is CFC's policy to periodically review its loans and guarantees and to make adjustments to the allowance as necessary. The allowance is based on estimates and, accordingly, actual loan losses may differ from the allowance amount. Activity in the allowance account is summarized as follows for the years ended May 31: (Dollar amounts in thousands) 2000 1999 1998 Balance at beginning of year $212,203 $250,131 $233,208 Provision for loan losses 17,355 23,866 19,027 Charge-offs (1,266) (61,794) (2,104) Balance at end of year $228,292 $212,203 $250,131 (g) Fixed Assets Buildings, furniture and fixtures and related equipment are stated at cost less accumulated depreciation and amortization of $10 million and $9 million as of May 31, 2000 and 1999, respectively. Depreciation and amortization expenses ($2 million, $2 million and $1 million in fiscal years 2000, 1999 and 1998, respectively) are computed primarily on the straight-line method over estimated useful lives ranging from 2 to 40 years. (h) 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, currency exchange agreements and interest rate exchange agreements. These instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the combined balance sheets. (i) Accounting by Creditors for Impairment of a Loan CFC calculates impairment of loans receivable by comparing the present value of the future cash flows associated with the loan against CFC's investment in the loan; loss reserves are provided based on the calculated impairment. 60 (j) Accounting for Certain Investments in Debt and Equity Securities Debt service investments are recorded at amortized cost, since it is CFC's intent and ability to hold all of these investments to maturity. (k) Derivative Financial Instruments CFC is neither a dealer nor a trader in derivative financial instruments. CFC uses interest rate and currency exchange agreements to manage its interest rate risk and foreign exchange risk. CFC accounts for these agreements on an accrual basis. CFC does not value the interest rate exchange agreements on its balance sheet, but values the underlying hedged debt at cost. CFC does not recognize a gain or loss on these agreements, but includes the difference between the interest rate paid and interest rate received in the overall cost of funding. In the event that an agreement was terminated early, CFC would record the fee paid or received due to the early termination as part of the overall cost of funding. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. In June 1999, the FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133. In June 2000, the FASB issued Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133. Statement No. 133, as amended, establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative instrument's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative instrument's gains and losses to offset related results on the hedged item in the income statement, to the extent effective, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The statement is effective for all fiscal years beginning after June 15, 2000. CFC will be required to implement this statement as of June 1, 2001. CFC has not yet quantified all effects of adopting Statement No. 133 on its financial statements. (l) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 CFC 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. (m) Membership Fees 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) 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. (n) Reclassifications Certain reclassifications of prior year amounts have been made to conform with the fiscal year 2000 presentation. 61 (2) Loans and Commitments Loans to members bear interest at rates determined from time to time by the Board of Directors after considering CFC's cost of funds, operating expenses, provision for loan 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 by loan type are summarized as follows as of May 31:

(Dollar amounts in thousands) 2000 1999 Weighted Weighted Average Unadvanced Average Unadvanced Loans Interest Commitments Loans Interest Commitments Outstanding Rates (A) Outstanding Rates (A) Long-term fixed rate secured loans (B): Electric systems $ 6,674,470 6.74% $ - $ 6,797,786 6.69% $ 198,010 Telecommunication systems 1,540,928 7.36% - 1,258,458 6.88% - Total long-term fixed rate secured loans 8,215,398 6.86% - 8,056,244 6.72% 198,010 Long-term variable rate secured loans (C): Electric systems 4,019,155 7.45% 7,524,197 2,334,878 5.85% 6,806,682 Telecommunication systems 1,816,826 8.02% 589,696 1,096,312 6.43% 561,442 Total long-term variable rate secured loans 5,835,981 7.62% 8,113,893 3,431,190 6.04% 7,368,124 Loans guaranteed by RUS: Electric systems 89,153 6.53% - 130,940 5.87% - Intermediate-term secured loans: Electric systems 141,771 7.41% 48,533 198,894 6.62% 80,411 Telecommunication systems - - - 686 6.42% - Total intermediate-term secured loans 141,771 7.41% 48,533 199,580 6.50% 80,411 Intermediate-term unsecured loans: Electric systems 200,706 7.35% 408,644 102,221 6.26% 219,248 Telecommunication systems 12,206 7.80% 6,090 12,809 6.42% 11,680 Total intermediate-term unsecured loans 212,912 7.37% 414,734 115,030 6.28% 230,928 Line of credit loans (D): Electric systems 1,281,483 7.59% 4,403,987 850,039 5.99% 4,183,280 Telecommunication systems 329,768 8.32% 717,700 342,074 6.66% 538,619 Total line of credit loans 1,611,251 7.74% 5,121,687 1,192,113 6.19% 4,721,899 Nonperforming loans (E): Electric systems - - - 1,643 5.55% - Restructured loans (F): Electric systems 571,579 3.90% - 576,662 3.90% - Total loans 16,678,045 7.12% 13,698,847 13,703,402 6.37% 12,599,372 Less: Allowance for loan losses (228,292) - (212,203) - Net loans $16,449,753 $13,698,847 $13,491,199 $12,599,372 Total by member class: Distribution $10,394,985 $ 9,644,058 $ 8,714,742 $ 9,233,999 Power supply 2,037,108 2,054,322 1,895,712 1,963,569 Statewide and associate 546,224 686,981 382,609 290,063 Telecommunication systems 3,699,728 1,313,486 2,710,339 1,111,741 Total $16,678,045 $13,698,847 $13,703,402 $12,599,372

________________________ (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 advances on commitments are identical to those on initial loan approval. 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, the terms of long-term fixed rate loans range from one to 35 years. Upon expiration of the interest rate 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 also repay to CFC the principal then outstanding together with interest due thereon and other sums, if required. Includes $102 million and $162 million of unsecured loans at May 31, 2000 and 1999, respectively. (C) Includes $49 million and $39 million of unsecured loans at May 31, 2000 and 1999, respectively. (D) Includes $342 million and $278 million of secured loans at May 31, 2000 and 1999, respectively. (E) 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 represent the interest recognized by CFC from such loans. (F) The rates on restructured loans represent the effective rate based on the scheduled minimum payments. 62 Total loans outstanding, by state or U.S. territory, are summarized below: (Dollar amounts in thousands) May 31, May 31, State/Territory 2000 1999 State/Territory 2000 1999 Alabama $ 431,922 $ 204,861 Nebraska $ 13,928 $ 15,524 Alaska 334,694 205,106 Nevada 91,669 76,543 Arizona 90,680 88,790 New Hampshire 282,913 257,711 Arkansas 475,015 428,697 New Jersey 7,385 6,899 California 85,577 58,843 New Mexico 83,654 85,834 Colorado 421,427 375,099 New York 18,503 17,052 Connecticut 200 2,400 North Carolina 663,073 610,656 Delaware 37,543 15,812 North Dakota 65,505 53,269 District of Columbia 386,928 258,945 Ohio 354,835 313,631 Florida 457,197 465,114 Oklahoma 410,938 354,791 Georgia 1,499,168 1,086,622 Oregon 259,934 256,086 Hawaii 360 - Pennsylvania 149,902 106,839 Idaho 125,070 112,561 South Carolina 547,906 565,434 Illinois 562,423 520,602 South Dakota 161,851 178,493 Indiana 202,051 181,430 Tennessee 117,572 101,901 Iowa 357,726 304,480 Texas 2,541,717 1,843,776 Kansas 299,047 288,873 Utah 642,368 650,322 Kentucky 232,979 218,426 Vermont 56,801 51,887 Louisiana 230,806 207,967 Virgin Islands 548,928 376,409 Maine 46,215 49,354 Virginia 362,232 298,526 Maryland 129,239 128,990 Washington 85,191 85,148 Michigan 305,464 275,538 West Virginia 1,466 4,692 Minnesota 826,804 548,255 Wisconsin 263,157 228,994 Mississippi 345,513 281,310 Wyoming 135,580 125,514 Missouri 693,376 496,010 Total $16,678,045 $13,703,402 Montana 233,613 233,386 CFC's members are widely dispersed throughout the United States and its territories, including 49 states, the District of Columbia, Guam, American Samoa and the U.S. Virgin Islands. At May 31, 2000 and 1999, no state or territory had over 15% and 13%, respectively, of total loans and guarantees outstanding. In addition to the geographic diversity of the portfolio, CFC limits its exposure to any one borrower. At May 31, 2000, the total exposure outstanding to any one borrower did not exceed 3.6% of total loans (excluding loans guaranteed by RUS) and guarantees outstanding. At May 31, 2000, CFC had $3,464 million in loans outstanding and $495 million in guarantees outstanding, to its largest 10 borrowers, representing 21% of total loans outstanding and 25% of total guarantees outstanding. Credit exposure to the largest 10 borrowers represented 21% and 19% of total credit exposure at May 31, 2000 and May 31, 1999, respectively. At May 31, 2000, the largest 10 borrowers included 4 distribution systems, 3 power supply systems and 3 telephone systems. Set forth below are the interest rates earned on all loans outstanding during the fiscal years ended May 31: For the Years Ended May 31, 2000 1999 1998 Long-term fixed rate 6.66% 6.69% 7.12% Long-term variable rate 6.59% 6.20% 6.53% Telecommunication organizations (1) 7.45% 6.88% 7.05% Refinancing loans guaranteed by RUS 6.29% 5.87% 6.32% Intermediate-term 6.92% 6.98% 7.08% Short-term 7.01% 6.26% 6.74% Associate members 6.85% 6.47% 6.65% Nonperforming (2)(3) 0.00% 0.00% 0.00% Restructured 3.90% 1.73% 0.00% All loans 6.74% 6.51% 6.60% ____________________ (1) Includes long-term fixed rate, long-term variable rate, intermediate-term and short-term loans. (2) Rate does not reflect the recognition of $12.5 million of deferred gain in 1998. (3) Interest rate earned by CFC recognized on a cash basis. 63 Long-term fixed rate loans outstanding at May 31, 2000 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): (Dollar amounts in thousands) Weighted Average Interest Rate Amount Repricing 2001 6.24% $323,361 2002 6.31% 516,267 2003 6.37% 380,208 2004 6.37% 413,907 2005 6.12% 439,430 At January 1, 2000, long-term fixed rate loans totaling $241.2 million had their interest rates adjusted. 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 promissory note. Fiscal year 2001 repayments of principal on long-term loans outstanding are expected to be an immaterial amount of such outstanding loans. Total long-term loans maturing in each of the five fiscal years following May 31, 2000 and thereafter, are as follows: (Dollar amounts in thousands) Amount Maturing 2001 $ 705,221 2002 545,284 2003 618,060 2004 493,046 2005 835,323 Thereafter 10,943,598 CFC evaluates each borrower's creditworthiness on a case-by-case basis. It is generally CFC's policy to require collateral for long-term and certain 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 as well as certain other restrictive covenants. Under default provisions of common mortgages securing long-term CFC loans to distribution system members that also borrow from RUS, 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 default provisions of 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, 2000 and 1999, mortgage notes representing approximately $3,484 million and $3,017 million, respectively, of outstanding long-term loans to members were pledged as collateral to secure CFC's collateral trust bonds. At May 31, 2000, CFC had a total of $89 million of loans outstanding on which RUS had guaranteed the repayment of principal and interest. There are two programs under which these loans were advanced. RUS previously allowed cooperatives to repay FFB loans early and allowed the transfer of the guarantee to the new lender. CFC had $46 million of loans outstanding through GFC that carried the RUS guarantee on the repayment of principal and interest. In 64 February 1999, RUS approved CFC as a lender under its loan guarantee program. During fiscal year 2000, CFC advanced $43 million under the RUS guaranteed loan program. CFC sets variable interest rates monthly on outstanding short-term and intermediate-term loans. On notification to borrowers, CFC may adjust the interest rate semi-monthly. Under CFC's 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 1/2% per annum; and on RTFC short-term loans, the prevailing bank prime rate plus 1 1/2% per annum. At May 31, 2000 and 1999, CFC had nonperforming loans in the amount of $0 and $2 million, respectively. During the fourth quarter of fiscal year 2000, CFC received the payment required to bring $28 million of nonperforming loans current. In addition, CFC wrote off the remaining $2 million of nonperforming loans in April 2000. At May 31, 1999, all loans classified as nonperforming 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 $0.1 million, $0.1 million and $0.4 million for the years ended May 31, 2000, 1999 and 1998, respectively. At May 31, 2000 and 1999, the total amount of restructured loans was $572 million and $577 million, respectively. A total of $22 million of interest was accrued on restructured loans for the year ended May 31, 2000 at 3.90%. The effect of not accruing interest income at the stated rates on restructured loans was a decrease in interest income of $19 million, $23 million and $25 million for the years ended May 31, 2000, 1999 and 1998, 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 membership subordinated certificates without limitation as to the total principal amount. Generally, membership subordinated certificates mature in the years 2070 through 2095 and bear interest at 5% per annum. The maturity dates and interest rates payable on such certificates vary in accordance with applicable CFC policy. 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 CFC loan. 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 reserves 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 whom the bonds are issued. These certificates have varying maturities not exceeding the longest maturity of the guaranteed obligation. 65 Information with respect to members' subordinated certificates at May 31 is as follows:

2000 1999 Weighted Weighted (Dollar amounts in thousands) Amounts Average Amounts Average Outstanding Interest Rate Outstanding Interest Rate Number of subscribing members 902 908 Membership subordinated certificates Certificates maturing 2020 through 2090 $ 626,812 $ 626,560 Subscribed and unissued 15,173 15,377 Total membership subordinated certificates 641,985 4.83% 641,937 4.83% Loan and guarantee subordinated certificates 3% certificates maturing through 2040 126,860 127,625 5.30% to 12.12% certificates maturing through 2039 71,877 64,576 Noninterest-bearing certificates maturing through 2040 452,298 368,126 Subscribed and unissued 47,397 37,552 Total loan and guarantee subordinated certificates 698,432 1.36% 597,879 1.56% Total members' subordinated certificates $1,340,417 3.02% $1,239,816 3.25%

CFC estimates the amount of members' subordinated certificates that will be repaid during the next five fiscal years will total approximately 1.14% of certificates outstanding at May 31, 2000. (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:

2000 1999 Weighted Weighted (Dollar amounts in thousands) Amounts Average Amounts Average Outstanding Interest Rate Outstanding Interest Rate Commercial paper sold through dealers, net of discounts of $72 and $34, respectively $ 5,576,445 6.29% $ 4,684,066 4.96% Commercial paper sold by CFC directly to members, at par 841,229 6.35% 1,063,450 4.86% Commercial paper sold by CFC directly to nonmembers, at par 132,361 6.32% 123,727 4.86% 6,550,035 6.17% 5,871,243 4.94% Bank bid notes 155,000 6.41% 375,000 4.86% Long-term debt maturing within one year 3,039,631 6.36% 1,132,963 5.34% Total notes payable due within one year 9,744,666 6.23% 7,379,206 5.00% Notes payable supported by revolving credit agreements, classified as long-term debt (see Note 5) (5,492,500) 6.23% (2,402,500) 5.00% Total notes payable due in one year after reclassification to long-term $ 4,252,166 6.23% $ 4,976,706 5.00%

Other information with regard to notes payable due within one year at May 31, is as follows: (Dollar amounts in thousands) 2000 1999 1998 Original maturity range of Notes outstanding at year-end 1 to 260 days 1 to 270 days 1 to 268 days Weighted average maturity of notes outstanding at year-end 85 days 38 days 34 days Average amount outstanding During the year $8,796,932 $5,757,698 $5,976,346 Maximum amount outstanding at any month-end during the year $9,744,666 $7,335,247 $6,281,683 CFC enters short-term bank bid note agreements, which are unsecured o bligations of CFC and do not require back-up bank lines for liquidity purposes. Bank bid note facilities are uncommitted lines of credit for which CFC does not pay 66 a fee. The commitments are generally subject to termination at the discretion of the individual banks. As of May 31, 2000, CFC had three revolving credit agreements totaling $5,493 million which are used principally to provide liquidity support for CFC's outstanding commercial paper, commercial paper issued by National Cooperative Services Corporation ("NCSC") and guaranteed by CFC and the adjustable or floating/fixed rate bonds which CFC has guaranteed and of which CFC is standby purchaser for the benefit of its members. Under a five-year agreement, executed in November 1996, CFC can borrow $2,403 million until November 26, 2001. J.P. Morgan Securities Inc. and The Bank of Nova Scotia were Co-Syndication Agents, and Chase Manhattan Bank is the Administrative Agent for this agreement that is with 55 banks. Any amounts outstanding under the multi-year facility will be due on the maturity date. On September 30, 1999, a 364-day agreement for $2,540 million was executed with 31 banks including Chase Manhattan Bank as Administrative Agent, Bank of America, N.A. as Syndication Agent, The Bank of Nova Scotia and Banc One, N.A. as Co-Documentation Agents and Chase Securities Inc. and Bank of America Securities LLC as Joint Lead Arrangers. A second 364-day facility for $550 million was also executed on September 30, 1999 with ten banks, including The Bank of Nova Scotia as Lead Arranger and Administrative Agent and Banc One, N.A. as Documentation Agent. Both of the 364-day facilities have a revolving credit period that terminates on September 29, 2000 during which CFC can borrow and such borrowings may be converted to a one-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 of 1%. The per annum facility fee for both agreements with a 364-day maturity is .085 of 1%. There is no commitment fee for any of the revolving credit facilities. If CFC's senior secured debt ratings decline below AA- or Aa3 and amounts outstanding exceed 50% of the total commitment, the facility fees may be replaced with a utilization fee of .125 of 1%. Generally, pricing options are the same under all three agreements and are at one or more rates as defined in the agreements, as selected by CFC. The multi-year revolving credit agreement requires CFC, among other things, to maintain members' equity and members' subordinated certificates of at least $1,418 million at May 31, 2000 (increased each fiscal year by 90% of net margin not distributed to members). The revolving credit agreements require CFC to achieve an average fixed charge coverage ratio over the six most recent fiscal quarters of at least 1.025 and prohibits the retirement of patronage capital unless CFC has achieved a fixed charge coverage ratio of at least 1.05 for the preceding fiscal year. The revolving 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, members' subordinated certificates and quarterly income capital securities, and restrict with certain exceptions, the creation by CFC of liens on its assets. 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 or reserved against in its most recent annual financial statements) and is not otherwise in default, CFC may borrow under the agreements until the termination dates. As of May 31, 2000 and May 31, 1999, CFC was in compliance with all covenants and conditions under its revolving credit agreements and there were no borrowings outstanding under such agreements. At May 31, 2000 and May 31, 1999, CFC classified $5,493 million and $2,403 million, respectively, of its notes payable outstanding as long-term debt based on the ability to borrow under each of the facilities. CFC expects to maintain more than $5,493 million of notes payable outstanding during the next twelve months. If necessary, CFC can refinance such notes payable on a long-term basis by borrowing under these facilities, subject to the conditions therein. 67 (5) Long-Term Debt The following is a summary of long-term debt as of May 31:

2000 1999 Weighted Weighted (Dollar amounts in thousands) Amounts Average Amounts Average Outstanding Interest Rate Outstanding Interest Rate Notes payable supported by revolving credit agreement agreements: $ 5,492,500 6.23% $2,402,500 5.00% Medium-term notes: Medium-term notes, sold through dealer 1,731,121 1,596,913 Medium-term notes, sold directly to members 121,072 46,037 Subtotal 1,852,193 1,642,950 Less: unamortized discount (480) (627) Total medium-term notes 1,851,713 6.31% 1,642,323 6.10% Collateral trust bonds: 6.45%, Bonds, due 2001 - 100,000 6.75%, Bonds, due 2001 100,000 100,000 6.50%, Bonds, due 2002 100,000 100,000 6.70%, Bonds, due 2002 100,000 100,000 5.00%, Bonds, due 2002 200,000 200,000 5.95%, Bonds, due 2003 100,000 100,000 7.375%, Bonds, due 2003 525,000 - 5.30%, Bonds, due 2003 100,000 100,000 6.00%, Bonds, due 2004 200,000 200,000 6.375%, Bonds, due 2004 100,000 100,000 6.125%, Bonds, due 2005 200,000 200,000 6.65%, Bonds, due 2005 50,000 50,000 5.50%, Bonds, due 2005 200,000 200,000 7.30%, Bonds, due 2006 100,000 100,000 6.20%, Bonds, due 2008 300,000 300,000 5.75%, Bonds, due 2008 225,000 225,000 Floating Rate, Series E-2, due 2010 (1) 2,068 2,078 5.70%, Bonds, due 2010 200,000 200,000 7.20%, Bonds, due 2015 50,000 50,000 6.55%, Bonds, due 2018 175,000 175,000 9.00%, Series V, due 2021 (1) 130,000 150,000 7.35%, Bonds, due 2026 100,000 100,000 Subtotal 3,257,068 2,852,078 Less: unamortized discount (5,685) (5,779) Total collateral trust bonds 3,251,383 6.34% 2,846,299 6.42% Total long-term debt $10,595,596 6.28% $6,891,122 5.85%

______________________ (1) Issued under the 1972 indenture. 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, 2000 and thereafter is as follows: Weighted Average (Dollar amounts in thousands) Amount Maturing Interest Rate 2001 (1) $3,039,631 6.36% 2002 746,306 6.54% 2003 1,386,820 6.52% 2004 416,050 5.70% 2005 511,641 5.74% Thereafter 2,042,279 6.40% ______________________ (1) The amount scheduled to mature in fiscal year 2001, has been presented as long-term debt due in one year under notes payable. 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, 2000 and 1999, CFC 68 had $23 million 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 indentures. 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/received by CFC under interest rate exchange agreements at May 31, 2000 and 1999:

(Dollar amounts in thousands) Weighted Maturity Date Interest Rate Paid Interest Rate Received Notional Principal Amount 2000 1999 2000 1999 2000 1999 June-1999 (3) - 5.00% - 5.81% $ - $ 50,000 September-1999 (1) - 4.99% - 5.06% - 300,000 November-1999 (1) - 4.96% - 5.06% - 450,000 January-2000 (2) - 6.47% - 4.85% - 52,851 June-2000 (1) 6.61% - 6.86% - 675,000 - July-2000 (1) 6.63% - 6.86% - 301,363 - August-2000 (2) 4.95% 4.95% 6.50% 4.85% 190,000 220,000 September-2000 (2) 5.12% 5.13% 6.50% 4.85% 10,410 20,805 September-2000 (1) 6.62% - 11.11% - 250,000 - October-2000 (2) 4.55% 4.55% 6.50% 4.85% 20,000 20,000 January-2001 (1) 6.62% - 6.86% - 500,000 - January-2001 (2) 6.09% 6.09% 6.50% 6.50% 65,749 65,749 February-2001 (2) 5.63% 5.63% 6.50% 4.85% 300,000 300,000 September-2001 (2) 5.15% 5.15% 6.50% 4.85% 34,810 34,810 May-2002 (1) 6.60% - 6.86% - 300,000 - January-2003 (2) 5.56% 5.56% 6.50% 4.85% 22,375 22,375 February-2003 (3) 6.79% - 7.57% - 525,000 - April-2003 (2) 7.01% - 6.50% - 75,000 - June-2003 (2) 5.86% 5.86% 6.50% 4.85% 48,000 48,000 August-2003 (2) 5.85% 5.85% 6.86% 5.07% 100,000 100,000 September-2003 (2) 5.24% 5.24% 6.50% 4.85% 91,230 91,229 October-2003 (2) 4.76% 4.76% 6.50% 4.85% 68,576 90,546 September-2004 (2) 5.28% 5.28% 6.50% 4.85% 15,080 17,650 October-2004 (2) 6.59% 6.23% 6.50% 4.85% 150,700 38,000 November-2004 (2) 5.30% 5.30% 6.50% 4.85% 122,000 122,000 January-2005 (2) 5.70% 5.70% 6.50% 4.85% 8,000 8,000 April-2005 (2) 7.02% - 6.50% - 97,820 - April-2006 (2) 6.89% 6.89% 6.50% 4.85% 100,000 100,000 January-2008 (2) 5.84% 5.84% 6.50% 4.85% 14,000 14,000 July-2008 (2) 5.86% 5.86% 6.50% 4.85% 40,400 40,400 September-2008 (2) 5.48% 5.48% 6.50% 4.85% 66,410 67,560 October-2008 (2) 5.00% 5.00% 6.50% 4.85% 33,512 33,512 April-2009 (2) 5.54% 5.54% 6.50% 4.85% 29,700 33,000 September-2010 (2) 6.80% - 6.50% - 43,000 - January-2012 (2) 6.01% 6.01% 6.50% 4.85% 13,000 13,000 February-2012 (2) 6.00% 6.00% 6.50% 4.85% 9,000 10,000 December-2013 (2) 5.43% 5.43% 6.50% 4.85% 173,300 175,100 June-2014 (2) - 6.43% - 4.85% - 18,250 June-2018 (2) 6.88% 6.88% 6.50% 4.85% 5,000 5,000 September-2020 (2) 6.91% - 6.50% - 43,000 - December-2026 (2) 5.58% 5.58% 6.50% 4.85% 48,185 48,185 September-2028 (2) 5.75% 5.75% 6.50% 4.85% 118,440 120,000 April-2029 (2) 5.95% 5.95% 6.50% 4.85% 66,000 66,000 September-2030 (2) 6.90% - 6.50% - 43,000 - Total $4,817,060 $2,796,022

________________________________ (1) Under these agreements, CFC pays a variable rate of interest and receives a variable rate of interest. (2) Under these agreements, CFC pays a fixed rate of interest and receives interest based on a variable rate. (3) Under these agreements, CFC pays a variable rate of interest and receives a fixed rate of interest. 69 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'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 a variable rate and receives a fixed rate is to change the rate on a portion of its medium-term notes from fixed to variable. The rate on the medium-term notes is exchanged to variable to allow the use of medium-term notes in the funding of short-term variable rate loans. The net difference between the rate paid by CFC and the rate received is included in the cost of funds. In all interest rate exchange agreements, CFC receives a rate that is equal to the rate on the underlying debt and pays a rate that is tied to the rate on the asset funded by the exchange agreement and underlying debt. CFC is exposed to counterparty credit risk on these interest rate exchange agreements if the counterparty to the interest rate swap agreement does not perform pursuant to the agreement's terms. CFC only enters into interest rate exchange agreements with financial institutions rated single A and above. During fiscal years 1999 and 2000, CFC issued medium-term notes denominated in foreign currencies. The following chart provides details of the related foreign currency exchange agreement that CFC had outstanding at May 31, 2000:

(Currency amounts in thousands) Type of Debt (1) Issue Date Maturity Date U.S. Dollars Foreign Currency (2) Rate MTN February 24, 1999 February 24, 2006 $390,250 350,000 EU 1.115 MTN July 14, 1999 July 14, 2000 23,363 15,000 GBP 1.558 MTN August 13, 1999 August 14, 2000 24,225 15,000 GBP 1.615

______________________________ (1) MTN - CFC medium-term notes (2) EU - Euros, GBP - British Pound Sterling CFC enters into an exchange agreement to sell the amount of foreign currency received from the investor for U.S. dollars on the issuance date, and to buy the amount of foreign currency required to repay the investor principal and interest due through or on the maturity date. By locking in the exchange rates at the time of issuance, CFC has eliminated the possibility of any currency gain or loss which might otherwise have been produced by the foreign currency borrowing. Commercial paper principal and interest are paid at maturity, which will range from 1 day to 270 days. Interest is paid annually on foreign currency denominated medium-term notes with maturities longer than one year. CFC considers the cost of all related foreign currency exchange agreements as part of the total cost of debt issuance when deciding on whether to issue debt in the U.S. or foreign capital markets and whether to issue the debt denominated in U.S. or foreign currencies. 70 Quarterly Income Capital Securities Quarterly income capital securities are long-term obligations that are subordinated to CFC's other outstanding debt. Quarterly income capital securities are issued for terms of up to 49 years, pay interest quarterly, may be called at par after five years and allow CFC to defer the payment of interest for up to 20 consecutive quarters. The following table is a summary of quarterly income capital securities outstanding at May 31:

2000 1999 Weighted Weighted (Dollar amounts in thousands) Amounts Average Amounts Average Outstanding Interest Rate Outstanding Interest Rate 8.00% quarterly income capital securities, due 2045 $125,000 $125,000 7.65% quarterly income capital securities, due 2046 75,000 75,000 7.375% quarterly income capital securities, due 2047 200,000 200,000 Total quarterly income capital securities $400,000 7.62% $400,000 7.62%

(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 $1.1 million, $1.0 million and $0.7 million to the Retirement and Security Program during fiscal years 2000, 1999 and 1998. Funding requirements are charged to general and administrative expenses which are 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 $170,000 for calendar year 2000 on the compensation to be used in the calculation of pension benefits. In order to restore potential lost benefits, CFC has established 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 margin 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 cash flows. 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. CFC contributes an amount equal to 2% of an employee's salary each year for all employees participating in the program. During the years ended May 31, 2000 and May 31, 1999, CFC contributed a total of $215,824 and $190,195, respectively, under the program. 71 (7) Retirement of Patronage Capital Patronage capital in the amount of $66 million was retired in August 1999, representing 70% of the allocation for the fiscal year 1999 and one-sixth of the total allocations for fiscal years 1989, 1990 and 1991. The $66 million includes $11 million retired to RTFC and $0.2 million retired to GFC. RTFC retired $13 million to its members in January 2000 and GFC retired $0.2 million to its members in September 1999. It is anticipated that CFC will retire patronage capital totaling $77 million, representing 70% of the fiscal year 2000 allocation and one-ninth of the fiscal years 1991, 1992 and 1993 allocations, on August 31, 2000. Management anticipates that 70% of RTFC's margin for fiscal year 2000 will be retired in January 2001, and that 100% of GFC's margin for fiscal year 2000 will be retired in the second quarter of fiscal year 2001. Future retirements of patronage capital will be made as determined by the respective Boards of Directors with due regard for their individual financial conditions. (8) Guarantees As of May 31, 2000 and 1999, CFC had outstanding guarantees of the following contractual obligations of its members: (Dollar amounts in thousands) 2000 1999 Long-term tax exempt bonds (A) $1,024,340 $1,062,185 Debt portions of leveraged lease transactions (B) 111,319 174,961 Indemnifications of tax benefit transfers (C) 259,223 285,169 Letters of credit (D) 328,995 208,732 Other guarantees (E) 274,325 162,150 Total $1,998,202 $1,893,197 _________________________ (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 and interest thereon 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 above, $920 million and $947 million as of May 31, 2000 and 1999, 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 that 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, 2000 and 1999. 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 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) CFC issues irrevocable letters of credit to support members' obligations to energy marketers, other third parties and to the Rural Business and Cooperative Development Service. Letters of credit are generally issued on an unsecured basis and with such issuance fees as may be determined from time to time. Each letter of credit issued by CFC is supported by a reimbursement agreement with the member on whose behalf the letter of credit was issued. In the event a beneficiary draws on a letter of credit, the agreement generally requires the member to reimburse the issuer of the letter of credit within one year from the date of the draw, with interest accruing from such date at the issuer's variable rate of interest in effect on the date of the draw. The agreement also requires the member to pay, as applicable, a late payment charge and all costs of collection, including reasonable attorneys' fees. 72 (E) At May 31, 2000 and 1999, CFC had unconditionally guaranteed commercial paper issued by NCSC in the amount of $171 million and $64 million, respectively. Guarantees outstanding by state and territory are summarized as follows: (Dollar amounts in thousands)

May 31, May 31, 2000 1999 2000 1999 Alabama $ 62,200 $ 65,575 Mississippi $ 58,740 $ 60,665 Alaska 4,840 1,600 Missouri 161,974 173,048 Arizona 52,462 55,012 Montana 100 100 Arkansas 106,639 113,901 New Hampshire 6,000 - Colorado 59,547 60,209 North Carolina 108,150 111,600 District of Columbia 314,494 175,120 Ohio 5,000 - Florida 238,032 293,735 Oklahoma 38,432 45,144 Hawaii 13,500 - Oregon 15,075 19,650 Illinois 13,935 2,171 Pennsylvania 12,651 11,995 Indiana 117,824 120,866 South Carolina 3,495 3,750 Idaho 850 850 Texas 146,090 138,881 Iowa 10,432 11,417 Utah 89,740 54,794 Kansas 38,091 39,214 Virginia 4,050 4,150 Kentucky 175,610 181,030 Wisconsin 2,050 2,050 Michigan 700 1,050 Wyoming 10,550 10,715 Minnesota 126,948 134,905 Total $1,998,202 $1,893,197

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, 2000 to the amount of obligations guaranteed by CFC: (Dollar amounts in thousands) Amount 2001 $ 232,764 2002 202,528 2003 93,282 2004 207,848 2005 204,194 Thereafter 1,057,586 (9) Fair Value of Financial Instruments The following disclosure of the estimated fair value of financial instruments is made in accordance with SFAS 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, 2000 and 1999, 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. The estimated market values have not been updated since May 31, 2000, 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 and intends to hold 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, 2000 and 1999. Cash and Cash Equivalents Includes cash and certificates of deposit with remaining maturities of less than 90 days, which are valued at the carrying value. 73 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 bank 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. 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. Members' 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 not issued 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 quotes. Interest Rate and Currency Exchange Agreements The fair value of the interest rate exchange agreements 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. The fair value of the currency exchange agreements is estimated as the amount CFC would receive or pay to terminate the agreement, taking into account the currency exchange rate 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. 74 Guarantees CFC charges guarantee fees based on the specifics of each individual transaction. The demand for CFC guarantees has been insignificant 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 rate information. As a result, it is impracticable to supply fair value information related to guarantees. Carrying and fair values as of May 31, 2000 and 1999 are presented as follows:

(Dollar amounts in thousands) 2000 1999 Carrying Value Fair Value Carrying Value Fair Value Assets: Cash and cash equivalents $ 246,028 $ 246,028 $ 74,403 $ 74,403 Debt service investments 22,968 22,968 22,969 22,969 Loans to members, net 16,449,753 15,030,991 13,491,199 12,648,316 Liabilities: Notes payable (1) $9,744,666 $9,744,679 $7,379,206 $ 7,379,203 Long-term debt (1) 5,103,096 4,465,947 4,488,622 4,334,428 QUICS 400,000 344,680 400,000 400,586 Off-Balance Sheet Instruments: Interest rate exchange agreements $ - $ 83,664 $ - $ 44,539 Currency exchange agreements - 65,486 - (20,436) Commitments - - - -

_________________________ (1) Prior to reclassification of notes payable supported by the revolving credit agreements. (10) Contingencies (a) At May 31, 2000 and 1999, CFC had nonperforming loans in the amount of $0 and $2 million, respectively. During the fourth quarter of fiscal year 2000, CFC received the payment required to bring $28 million of nonperforming loans current. In addition, CFC wrote off the remaining $2 million of nonperforming loans in April 2000. At May 31, 1999, all loans classified as nonperforming were on a nonaccrual status with respect to the recognition of interest income. At May 31, 2000 and 1999, CFC had restructured loans in the amount of $572 million and $577 million, respectively. All restructured loans were on accrual status with respect to the recognition of interest income. A total of $23 million of interest was accrued on restructured loans for the year ended May 31, 2000. (b) CFC classified $572 million and $577 million of the amount described in Note 10(a) as impaired pursuant to the provisions of FASB Statements No. 114 and 118 at May 31, 2000 and 1999, respectively. CFC had established $85 million and $101 million of the loan loss allowance for such impaired loans at May 31, 2000 and May 31, 1999, respectively. The amount of loan loss allowance allocated for such loans was based on a comparison of the present value of the expected future cashflow associated with the loan and/or the estimated fair value of the collateral securing the loan to the recorded investment in the loan. CFC accrued interest income totaling $22 million on loans classified as impaired during the year ended May 31, 2000. The average recorded investment in impaired loans for the year ended May 31, 2000 was $578 million compared to $460 million for the year ended May 31, 1999. (c) Deseret Generation & Transmission Co-operative ("Deseret") is a power supply member of CFC located in Utah. Deseret owns and operates the Bonanza generating plant ("Bonanza") and owns a 25% interest in the Hunter generating plant along with a system of transmission lines. Deseret also owns and operates a coal mine through its Blue Mountain Energy subsidiary. Due to large anticipated increases in demands for electricity, the Bonanza site was designed for two plants and Deseret built the infrastructure to support two plants, although only one plant has been built to date. When the large increases in demand never materialized, Deseret was unable to make the debt payment obligations on the Bonanza plant and debt service payments to RUS. As a consequence, Deseret and its creditors entered into several restructuring agreements. 75 In 1991, Deseret and its creditors signed the Agreement Restructuring Obligations ("ARO") which restructured Deseret's obligations to CFC, RUS and certain other creditors. Deseret was unable to meet the payment schedule established by the ARO which resulted in the agreement being amended by a second agreement. In 1996 Deseret and CFC entered into an Obligations Restructuring Agreement ("ORA"). Under the ORA, Deseret agreed to make quarterly minimum payments and to share excess cashflow with CFC through December 31, 2025, while CFC agreed to forebear from exercising any remedies. CFC continued to pay and perform on all of the obligations it had guaranteed for Deseret. 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 the sum of $239 million. The member systems of Deseret purchased from CFC, for $55 million, a participation interest in the RUS debt. The participation agreement allows the Deseret member distribution systems to put the participations back to CFC unconditionally on December 31, 2019. Certain other creditors brought litigation regarding the CFC Deseret agreement. In December 1998, all parties to the litigation entered into a settlement arrangement. The settlement arrangement allowed CFC to effect the early redemption of the Bonanza Secured Lease Obligation Bonds, which were outstanding at an interest rate in excess of 9%. The settlement arrangement also resulted in an amendment of the Deseret cashflow payments in the final years of the agreement. In March 1998, the cities of Riverside, CA and Anaheim, CA brought FERC and civil actions against Deseret. All of these actions were dismissed in April 2000, with no material impact on Deseret's ability to meet its annual payment requirements under the ORA. At May 31, 2000 and 1999, CFC had the following exposure to Deseret: (Dollar amounts in millions) 2000 1999 Loans outstanding (1) $572 $577 Guarantees outstanding: Tax-exempt bonds 2 3 Mine equipment leases 47 52 Letters of credit 28 - Other (2) 12 12 Total guarantees 89 67 Total exposure $661 $644 _____________________________ (1) As of May 31, 2000, the loan balance of $572 million to Deseret is comprised of $179 million of cash flow shortfalls related to Deseret's debt service and rental obligations guaranteed by CFC, $266 million related to the redemption of the Bonanza secured lease obligation bonds, $99 million related to the purchase of RUS loans, $18 million related to the original CFC loan to Deseret and $10 million related to the settlement of the foreclosure litigation. (2) Other guarantees includes a guarantee of certain operational and maintenance expenses. Deseret has made all payments required by the ORA. CFC received minimum cashflow payments totaling $31 million and excess cash payments totaling $10 million during the year ended May 31, 2000. For calendar year 1999, the total payments collected, $41 million, were split $35 million to CFC and $6 million to the member participations based on the ORA. Through June 30, 2000, Deseret had made quarterly payments totaling $17 million. A total of $34 million is due from Deseret during calendar year 2000. Based on its analysis, CFC believes that it has adequately reserved for any potential loss on its loans and guarantees to Deseret. (d) At May 31, 2000, no other borrowers were in payment default. At May 31, 1999, one borrower was in payment default to CFC on an unsecured loan totaling $2 million. (11) Segment Information CFC operates in two business segments - rural electric lending and rural telecommunications lending. Summary financial 76 information relating to each segment is presented below. The information reviewed by management on a regular basis are the combined financial statements and the stand-alone RTFC financial statements. The information presented below includes the stand-alone RTFC financial statements for the telecommunications systems, the combined financial statements as the total and the difference between the RTFC and the combined is presented for the electric systems. All activity is with electric or telecommunications systems. As stated previously in the business section, RTFC is an associate member of CFC and CFC is the sole funding source for RTFC. RTFC borrows from CFC and then relends to the telecommunications systems. RTFC pays an administrative fee to CFC for work performed by CFC staff as part of the interest rate on the loans from CFC. RTFC does not maintain a loan loss allowance, but CFC maintains a loss allowance on its loans to RTFC.

(Dollar amounts in thousands) For the year ended May 31, 2000 Electric Systems Telecommunications Systems Total Combined Income statement: Operating income $ 780,809 $ 240,189 $ 1,020,998 Cost of funds 624,033 236,127 860,160 Gross margin 156,776 4,062 160,838 Operating expenses 26,421 565 26,986 Loan loss provision 17,355 - 17,355 Net margin before extraordinary item 113,000 3,497 116,497 Extraordinary loss (1,164) - (1,164) Net margin $ 111,836 $ 3,497 $ 115,333 Assets: Loans outstanding $12,750,025 $3,699,728 $16,449,753 Other assets 357,425 276,262 633,687 Total assets $13,107,450 $3,975,990 $17,083,440

(Dollar amounts in thousands) For the year ended May 31, 1999 Electric Systems Telecommunications Systems Total Combined Income statement: Operating income $ 643,014 $ 149,038 $ 792,052 Cost of funds 519,289 144,820 664,109 Gross margin 123,725 4,218 127,943 Operating expenses 27,255 383 27,638 Loan loss provision 23,866 - 23,866 Net margin $ 72,604 $ 3,835 $ 76,439 Assets: Loans outstanding $10,780,860 $2,710,339 $13,491,199 Other assets 250,582 183,471 434,053 Total assets $11,031,442 $2,893,810 $13,925,252

(Dollar amounts in thousands) For the year ended May 31, 1998 Electric Systems Telecommunications Systems Total Combined Income statement: Operating income $ 549,285 $ 90,663 $ 639,948 Cost of funds 453,312 87,223 540,535 Gross margin 95,973 3,440 99,413 Operating expenses 23,059 305 23,364 Loan loss provision 19,027 - 19,027 Net margin before extraordinary item 53,887 3,135 57,022 Gain on sale of land 5,194 - 5,194 Net margin $ 59,081 $ 3,135 $ 62,216

(12) Gain on Sale of Land During the year ended May 31, 1999, CFC sold land with a cost basis of $8 million for $13 million, resulting in a gain of $5 million. (13) Extraordinary Loss During the year ended May 31, 2000, CFC incurred a $1 million loss related to the early redemption of collateral trust bonds. (14) Combined Quarterly Financial Results (Unaudited) Summarized results of operations for the four quarters of fiscal years 2000 and 1999 are as follows: (Dollar amounts in thousands) Fiscal Year 2000 Quarters Ended August 31 November 30 February 29 May 31 Total Year Operating income $226,680 $243,140 $265,842 $285,336 $1,020,998 Gross margin 35,839 37,979 41,697 45,323 160,838 Total expenses 13,872 14,368 6,069 10,032 44,341 Net margin 21,967 23,612 35,628 34,126 115,333 (Dollar amounts in thousands) Fiscal Year 1999 Quarters Ended August 31 November 30 February 29 May 31 Total Year Operating income $180,448 $192,547 $200,344 $218,713 $792,052 Gross margin 28,479 34,149 27,511 37,804 127,943 Total expenses 10,986 15,918 6,520 18,080 51,504 Net margin 17,493 18,230 20,991 19,725 76,439