* US and Honduran cooperation in resupply efforts to El Salvador's armed forces in the event of a large scale insurrectional offensive.

* US willingness to assist Honduras in case of outbreak of open hostilities with Nicaragua.

Although our efforts in Honduras have already proven very useful, their impact has been exaggerated by a failure to take account of domestic developments in that country:

* A hard line majority within the military establishment has been pressuring to contain and even reverse the democratization process. It is with representatives of this faction that the agreements above were discussed.

* This headline faction favors counter-insurgency cooperation with El Salvador, tolerates and encourages National Guard exile groups hostile to Nicaragua to operate from Honduras, and believes it could win a military confrontation with Nicaragua.

* A minority moderate faction within the armed forces is seeking closer relations with the civilian democratic opposition. It favors friendly relations with the Nicaraguan government and with the FSLN. It wants no Honduran involvement in El Salvador. It considers that open conflict with Nicaragua could prove dangerously destabilizing for Honduras and is not convinced of the possibility of defeating the new Sandinista army and militias.

* There has been a notable increase in trade union, religious, professional and political activity in Honduras. The organizations involved share a sympathetic view of the Nicaraguan process and oppose Honduras support for El Salvador's armed forces.

* Rural and urban guerrilla groups have begun to operate in Honduras in the past year. Although their capabilities pose no threat to internal stability, their disruptive potential in the event of gradual regionalization of conflict should not be underestimated.

NICARAGUA

The following background items should be kept in mind in attempting to predict Nicaraguan behavior in the event of escalated US involvement in El Salvador:

* Cooperation between the FSLN and various branches of the Salvadorean guerrilla groups can be traced back to the mid 1970's. Salvadorean contingents participated and provided logistical support during the war in Nicaragua. Historically, cooperation between the two countries against US interventions is documented in the 1920's and during the 19th century.

* Prior to July 1979, the FSLN maintained support networks in Honduras, El Salvador and Guatemala. FSLN commanders and troops are familiar with the terrain and the population. Nicaraguans have extensive family ties in these countries.

* Widespread popular support for the opposition forces in El Salvador and Guatemala, the high level of military preparedness of the population, the recent combat and insurrectional experience, and the high levels of unemployment would make recruitment and training a relatively simple and rapid operation.

* Despite economic recovery and surprisingly effective planning, administration and management, the Nicaraguan economy remains weak and vulnerable to a war effort. An outbreak of hostilities would force the Nicaraguan authorities to adopt "war communism" methods. This would imply labor conscription, extending government control over private sector activities, and generally would radicalize the Nicaraguan political process.

* Nicaraguan military supplies are sufficient to cope with internal disorders and limited border skirmishes. Nicaraguan involvement in regional hostilities would require expanded supplies and would provide ample opportunities for increased Cuban and Soviet bloc leverage in that country.