The Trust invests in two types of derivative financial instruments. Equity index futures are used as strategic substitutions to cost effectively replicate the underlying index of its domestic equity investment fund. At December 31, 1998, the fair value of these instruments was approximately $3.0 million and was included in non-JM investments available-for-sale on the statement of net claimants’equity. Foreign currency forwards are utilized for both currency translation purposes and to hedge against the currency risk inherent in foreign bond issues. At December 31, 1998, the Trust held at market value approximately $142.5 million in sell currency forward contracts offset by approximately $144.8 million in buy currency forward contracts. The unrealized losses on these outstanding currency forward contracts of approximately $2.3 million is principally offset by a corresponding unrealized gain due to currency exchange on the underlying securities being hedged. These amounts are recorded in the statement of changes in net claimants’equity at December 31, 1998.

The cost of non-income producing assets that will be exhausted during the life of the Trust and are not available for satisfying claims are expensed as incurred. Since inception these costs, net of disposals, include:

These items have not been recorded as assets, but rather as direct deductions to net claimants’ equity in the accompanying financial statements. The cost of fixed assets, net of proceeds on disposals, that were expensed during the years ended December 31, 1998 and 1997 was approximately $243,800 and $226,600 respectively.

Depreciation expense related to asset acquisitions using generally accepted accounting principles would have been approximately $203,800 and $227,300 for the years ended December 31, 1998 and 1997, respectively.

(f) JM Dividends

Beginning in September 1996, the JM Board of Directors has declared regular quarterly dividends. JM dividends are reported as additions to net claimant's equity.

During April 1997, the Trust disqualified all of the approximately 27,000 unsettled claims which had been filed by the Maritime Asbestosis Legal Clinic (MALC). At the time of the disqualification, the Trust stated that, among other things, the documentation that had been submitted in support of the MALC claims was inadequate and that the claims lacked both credibility and reliability.

In early June 1997, certain MALC claimants filed two essentially identical civil actions against the Trust and the Trustees alleging breach of fiduciary duties and breach of contract and seeking equitable relief. These actions are now pending in the United States District Court for the Eastern District of New York. The Trust and Trustees contested this matter and filed a third party complaint in connection with the case. During the third quarter of 1998, under the supervision of a Special Master appointed by the court, the parties began negotiations to attempt to settle the litigation. It appears that a settlement will be achieved pursuant to which most of the MALC disqualified claims will be eligible for refiling by MALC pursuant to agreed upon filing procedures. In addition, the Trust has offered to settle all of MALC’s previously categorized eligible pleural disease claims for an amount less than scheduled values, and accordingly, has recorded the liability in Unpaid Claims on the Statements of Net Claimants’ Equity as of December 31, 1998.

In December 1997, the Trust filed a civil action in the United States District Court for the Eastern District of New York against seven tobacco companies to recover reimbursements for all past sums paid by the Trust to individuals whose asbestos disease or illness was caused in whole or in part, or was increased in severity, by the smoking-related illness which the tobacco defendants caused. The defendants have filed answers denying the allegations in the complaint. This case is in the early stages of discovery and it is too early to estimate the amount, if any, of any recovery.

In September 1998, the Trust was sued by certain Maryland claimants who allege that the Trust has violated the terms of the Trust Distribution Process with respect to certain medical audit procedures. The complaint asks the court to order the Trust to cease its medical audit program, requests the immediate payment of certain claims, and also seeks an independent review of certain of the Trust’s financial actions and the dismissal of the Trustees and four Trust staff members. The Trust has filed an answer which denies the allegations of the complaint and has also filed a counterclaim seeking judicial approval of the medical audit program. Seven additional lawsuits concerning the medical audit procedures have been filed by attorneys who allege they represent Trust beneficiaries. In addition, two interventions by Class Action representatives (Note 4) have been filed. It is expected that all of these cases will be consolidated in one proceeding. Issues concerning such consolidation, as well as case management (including discovery), have been assigned to a United States Magistrate. Management believes that this litigation will not materially affect outstanding settlement offers as the Trust does not record a liability until an offer has been made.

The Trust distinguishes between claims that were resolved prior to the filing of the class action complaint on November 19, 1990 and claims resolved after the filing of that complaint. Claims resolved prior to the complaint (Pre-Class Action Claims) were resolved under various payment plans, all of which called for 100% payment of the full liquidated amount without interest over some period of time. However, between July 1990 and February 1995, payments on all claims except qualified exigent health and hardship claims were stayed by the Courts. By Order of the Courts on July 22, 1993 (which became final on January 11, 1994), a plan submitted by the Trust was approved to immediately pay, subject to claimant approval, a discounted amount on Pre-Class Action Claims, in full satisfaction of these claims. The discount amount taken, based on the claimants who accepted the Trust’s discounted offer, was approximately $135 million.

The unpaid liability for the Post-Class Action claims represents outstanding offers made in First-in, First-out (FIFO) order to claimants eligible for settlement after November 19, 1990. Under the TDP (Note 6), claimants receive an initial pro rata payment equal to 10% of the liquidated value of their claim. The Trust remains liable for the unpaid portion of the liquidated amount only to the extent that assets will be available after paying all claimants the established pro rata share of their claims. The Trust makes these offers in the form of a check made payable to the claimant and/or claimant’s counsel. If the offer is accepted, the check is deposited, a Trust release is completed and the claim is recorded as settled. An unpaid claim liability is recorded once an offer is made. The unpaid claim liability remains on the Trust’s books until accepted or expiration of the offer after 180 days. A claimant may request that an offer be extended for an additional 180 days.

Pursuant to the Stipulation of Settlement, the Trust is obligated to pay approximately $63 million plus investment earnings on funds set aside for contribution and indemnity claims occurring before July 25, 1994. To date the Trust has paid approximately $58 million under this obligation.

(5) COMMITMENTS AND CONTINGENCIES

In September 1993, the Trust executed a 5-year lease through December 1998 for its offices in Fairfax, Virginia. The lease was extended for an additional 5 years beginning at the expiration of the current lease during 1997.

Future minimum rental commitments under this operating lease, as of December 31, 1998 are as follows:

 This obligation has been recorded as a liability at face value in the accompanying financial statements.

(6) NET CLAIMANTS’ EQUITY

A class action complaint was filed on behalf of all Trust beneficiaries on November 19, 1990, seeking to restructure the methods by which the Trust administers and pays claims. On July 25, 1994, the parties signed a Stipulation of Settlement which included a revised Trust Distribution Process (the TDP). The TDP prescribes certain procedures for distributing the Trust’s limited assets, including pro rata payments and initial determination of claim value based on scheduled diseases and values. The Court approved the settlement in an order dated January 19, 1995. Though six appeals were filed with the Court of Appeals, no stay was granted and the Trust implemented the TDP payment procedures effective February 21, 1995. On February 21, 1996, the Court of Appeals affirmed the decision.

Prior to the commencement of the class action in 1990, the Trust filed a motion for a determination that its assets constitute a "limited fund" for purposes of Federal Rules of Civil Procedure 23(b)(1)(B). The Courts adopted the findings of the Special Master that the Trust is a "limited fund". In part, the limited fund finding concludes that there is a substantial probability that estimated future assets of the Trust are and will be insufficient to pay in full all claims that have been and will be asserted against the Trust.

The TDP contains certain procedures for the distribution of the Trust’s limited assets. Under the TDP, the Trust forecasts its anticipated annual sources and uses of cash until the last projected future claim has been paid. A pro rata payment percentage is calculated such that the Trust will have no remaining assets or liabilities after the last future claimant receives his/her pro rata share.

The Trust has conducted its own research and monitored studies prepared by the Courts’ appointee regarding the valuation of Trust assets and liabilities. Based on this valuation, the TDP provides for an initial 10% payment of the liquidated value of current and future claims. Accordingly, the Trust has reported Post-Class Action Claims at 10% of their liquidated value. The 10% pro rata payment represents the Trust’s best estimate of funds available over the life of the Trust to pay claims settled under the TDP. The Trust will continue to monitor this estimate based on changes in settlement practices and changes in future projected values of Trust assets and liabilities and make any necessary changes in the pro rata payment percentage as required under the TDP.

(7) EMPLOYEE BENEFIT PLANS

The Trust established a tax-deferred employee savings plan under Section 401 (k) of the Internal Revenue Code, with an effective date of January 1, 1988. The plan allows employees to defer a percentage of their salaries within limits set by the Internal Revenue Code with the Trust matching contributions by employees of up to 6% of their salaries. The total employer contributions and expenses under the plan were approximately $284,200 and $322,100 for the years ended December 31, 1998 and 1997, respectively.

In order to avoid the high costs of director and officer liability insurance and with the approval of the United States Bankruptcy Court for the Southern District of New York, the Trust established a segregated security fund of $30,000,000 and, with the additional approval of the United States District Court for the Southern and Eastern Districts of New York, an escrow fund of $3,000,000 from the assets of the Trust, which are devoted exclusively to securing the obligations of the Trust to indemnify the former and current Trustees and officers, employees, agents and representatives of the Trust. In addition, a $15,000,000 escrow and security fund was established to secure the obligations of the Trust to exclusively indemnify the current Trustees, whose access to the other security funds is subordinated to the former Trustees. Upon the final order in the Class Action litigation (Note 4), the $15,000,000 escrow and security fund was reduced by $5,000,000. Pursuant to Section 5.07 of the plan, Trustees are entitled to a lien on the segregated security and escrow funds to secure the payment of any amounts payable to them through such indemnification. Accordingly, in total $43 million has been transferred from the Trust’s bank accounts to separate escrow accounts and pledge and security agreements have been executed perfecting those interests. The investment earnings on these escrow accounts accrue to the benefit of the Trust and are recorded as unrestricted investments.

Pursuant to the Stipulation of Settlement, the Trust funded separate investment accounts for two of the sub-class beneficiaries. During 1996, one of these accounts was fully disbursed and the remaining balance for the other account at December 31, 1998 is $6.4 million. This balance and the $43 million of self-insurance funds described above, have been reported as restricted investments.

For Federal income tax purposes, JM has elected for the qualified assets of the Trust to be taxed as a "Designated Settlement Fund." Income and expenses associated with these qualified assets of the Trust are taxed in accordance with Section 468B of the Internal Revenue Code. JM is obligated to indemnify the Trust for any income tax liability imposed upon the Trust.

To the extent that JM has a residual interest in any assets of the Trust or such assets represent stock or indebtedness of JM, the income and expenses attributable to such assets are taxed as if these assets were in a "Grantor Trust." In addition, for tax purposes the Trust has segregated at times certain non-JM available-for-sale securities that are held in a Grantor Trust Account. Consequently, income and expenses associated with these assets are included in the income tax return of JM (the Grantor) and are not part of the Designated Settlement Fund.

Proof of claim forms have been filed with the Trust as follows: