NEW YORK (Standard & Poor's) Aug. 24, 2004--Standard & Poor's Ratings 
Services said today that National Rural Utilities Cooperative Finance 
Corp.'s (CFC; A/Stable/A-1) announcement that VarTec Telecom will not be 
able to meet the principal portion of the debt service payments due on 
Aug. 31, 2004 and Nov. 30, 2004 is unfavorable for credit quality, but 
does not affect the rating or outlook on CFC at this time. CFC indicated 
in its 10-K filing that the $340 million in loans to VarTec were 
reclassified as non-performing and put on non-accrual status as of June 1, 
2004. Standard & Poor's has always considered VarTec to be a high-risk 
credit among CFC's top-10 borrowers. However, the potential default of 
VarTec on its loans, in addition to the recent litigation against 
Innovative Communication Corp. for breaching its loan and security 
agreements for $552 million, detract from CFC's credit quality. The 
outcomes of these two situations or a further deterioration in the loan 
portfolio could cause a change in the outlook to negative. As of end of 
its fiscal year on May 31, 2004, CFC had a $574 million loan loss reserve 
for its loan portfolio, $233 million of which was for impaired loans.