UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

_________________________



FORM 10-Q_________________________





QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
  EXCHANGE ACT OF 1934  For the quarterly period ended September 30, 2006




Commission File Number 000-23745

BNP U.S. FUNDING L.L.C.

(Exact name of registrant as specified in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                      |  | 13-3972207                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)









|                                         |  |           
|---------------------------------------- |  | ----------
|787 Seventh Avenue New York, NY          |  | 10019     
|(Address of principal executive offices) |  | (Zip Code)







(212) 841-2000

(Registrants telephone number, including area code)



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 twelve 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 ninety days.Yesþ Noo



Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large Accelerated FileroAccelerated FileroNon-Accelerated Filerx Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes o Nox


Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.

All outstanding shares of Common Stock were held by BNP Paribas at September 30, 2006.



The number of shares outstanding of each of the issuers classes of common stock, as of the close of business on November 14, 2006, was as follows:

Class
        Number of SharesCommon Stock, $10,000 per share par value
        53,011




---



Form 10-Q Index



|PART I   |                                                                                                                                                           | PAGE
|-------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|         |                                                                                                                                                           |     
|Item 1:  | Condensed Financial Statements (Unaudited)                                                                                                                |     
|         | Balance Sheets - As of September 30, 2006 and December 31, 2005                                                                                           | 3   
|         | Statements of Income  Three and Nine Months Ended September 30, 2006 and 2005                                                                            | 4   
|         | Statements of Comprehensive Income  Three and Nine Months Ended September 30, 2006 and 2005                                                              | 5   
|         | Statements of Changes in Redeemable Common Securities, Preferred Securities and Security Holders Equity  Three and Nine Months Ended September 30, 2006 | 6   
|         | Statements of Cash Flows - Three and Nine Months Ended September 30, 2006 and 2005                                                                        | 7   
|         | Notes to Financial Statements                                                                                                                             | 8   
|         |                                                                                                                                                           |     
|Item 2:  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                     | 16  
|         |                                                                                                                                                           |     
|Item 3:  | Quantitative and Qualitative Disclosures about Market Risk                                                                                                | 24  
|         |                                                                                                                                                           |     
|Item 4:  | Controls and Procedures                                                                                                                                   | 27  
|         |                                                                                                                                                           |     
|PART II  |                                                                                                                                                           |     
|         |                                                                                                                                                           |     
|Item 1:  | Legal Proceedings                                                                                                                                         | 27  
|         |                                                                                                                                                           |     
|Item 1A: | Risk Factors                                                                                                                                              | 27  
|         |                                                                                                                                                           |     
|Item 2:  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                               | 28  
|         |                                                                                                                                                           |     
|Item 3:  | Defaults Upon Senior Securities                                                                                                                           | 28  
|         |                                                                                                                                                           |     
|Item 4:  | Submission of Matters to a Vote Security Holders                                                                                                          | 28  
|         |                                                                                                                                                           |     
|Item 5:  | Other Information                                                                                                                                         | 28  
|         |                                                                                                                                                           |     
|Item 6:  | Exhibits                                                                                                                                                  | 28  





2






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Part IItem 1.FINANCIAL STATEMENTS

BNP U.S. FUNDING L.L.C.

BALANCE SHEETS

(in thousands, except per share data)

|                                                           |   | September 30, 2006 |   | December 31, 2005
|---------------------------------------------------------- | - | ------------------ | - | -----------------
|                                                           |   | (unaudited)        |   | (audited)        
|                                                           |   |                    |   |                  
|ASSETS                                                     |   |                    |   |                  
|                                                          
|Cash and cash equivalents                                  |   | 33,736             | $ | 19,485           
|                                                          
|Certificates of deposit                                    |   | 310,000            |   | 220,000          
|                                                          
|Investment securities (Note 4)                             |   |                    |   |                  
|Available-for-sale, at fair value                          |   | 688,156            |   | 798,454          
|                                                          
|Receivable arising from payment for securities, pursuant   |   |                    |   |                  
|to the application of SFAS 125, as replaced by             |   |                    |   |                  
|SFAS 140 (Note 3), at amortized cost                       |   | 10,053             |   | 13,690           
|                                                          
|Accounts receivable                                        |   | 14                 |   | 16               
|                                                          
|Accrued interest receivable                                |   | 15,945             |   | 11,431           
|                                                           |   |                    |   |                  
|                                                          
|TOTAL ASSETS                                               | $ | 1,057,904          | $ | 1,063,076        
|                                                           |   |                    |   |                  
|                                                          
|LIABILITIES                                                |   |                    |   |                  
|                                                          
|Accrued interest payable                                   | $ | 578                | $ | 2,385            
|Accrued expenses                                           |   | 634                |   | 543              
|Other liabilities                                          |   | 5,235              |   | 17,469           
|                                                           |   |                    |   |                  
|                                                          
|TOTAL LIABILITIES                                          |   | 6,447              |   | 20,397           
|                                                           |   |                    |   |                  
|                                                          
|Redeemable common securities, par value and redeemable     |   |                    |   |                  
|value $10,000 per security; 150,000 securities authorized, |   |                    |   |                  
|53,011 securities issued and outstanding                   |   | 530,110            |   | 530,110          
|                                                          
|Preferred securities, liquidation preference $10,000 per   |   |                    |   |                  
|security; 150,000 securities authorized, 50,000 securities |   |                    |   |                  
|issued and outstanding                                     |   | 500,000            |   | 500,000          
|                                                          
|Additional paid-in capital                                 |   | 803                |   | 803              
|Accumulated other comprehensive loss                       |   | (8,608)            |   | (2,045)          
|Retained earnings                                          |   | 29,152             |   | 13,811           
|                                                           |   |                    |   |                  
|                                                          
|TOTAL REDEEMABLE COMMON SECURITIES,                        |   |                    |   |                  
|PREFERRED SECURITIES AND                                   |   |                    |   |                  
|SECURITYHOLDERS EQUITY                                    |   | 1,051,457          |   | 1,042,679        
|                                                           |   |                    |   |                  
|                                                          
|TOTAL LIABILITIES AND TOTAL REDEEMABLE                     |   |                    |   |                  
|COMMON SECURITIES, PREFERRED                               |   |                    |   |                  
|SECURITIES AND SECURITYHOLDERS EQUITY                     | $ | 1,057,904          | $ | 1,063,076        
|                                                           |   |                    |   |                  







3






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BNP U.S. FUNDING L.L.C.

STATEMENTS OF INCOME (UNAUDITED)(in thousands, except per share data)

|                                       |  | For the Three Months Ended September 30, |        | For the Nine Months Ended September 30,
|-------------------------------------- |  | ---------------------------------------- | ------ | ---------------------------------------
|INTEREST INCOME                        |  | 2006                                     |        | 2005                                   
|                                       |  |                                          |        |                                        
|                                      
|Collateralized Mortgage Obligations:   |  |                                          |        |                                        
|Floating-Rate REMICs                   |  | $                                        | 34     |                                        
|Fixed-Rate REMICs                      |  |                                          | 427    |                                        
|Mortgage Backed Securities:            |  |                                          |        |                                        
|Agency ARMs                            |  |                                          | 72     |                                        
|Agency Hybrid ARMs                     |  |                                          | 120    |                                        
|Agency DUSs                            |  |                                          | 1,983  |                                        
|Agency Debentures                      |  |                                          | 7,284  |                                        
|Interest on deposits                   |  |                                          | 3,693  |                                        
|                                       |  |                                          |        |                                        
|                                      
|Total                                  |  |                                          | 13,613 |                                        
|                                       |  |                                          |        |                                        
|                                      
|NONINTEREST INCOME                     |  |                                          |        |                                        
|                                      
|Gain on swaps                          |  |                                          | 6,111  |                                        
|                                       |  |                                          |        |                                        
|                                      
|NONINTEREST (EXPENSE)                  |  |                                          |        |                                        
|                                      
|Fees and expenses                      |  |                                          | (231)  |                                        
|                                       |  |                                          |        |                                        
|                                       |  |                                          | 5,880  |                                        
|                                       |  |                                          |        |                                        
|                                      
|                                      
|NET INCOME APPLICABLE TO PREFERRED AND |  |                                          |        |                                        
|REDEEMABLE COMMON SECURITIES           |  | $                                        | 19,493 |                                        
|                                       |  |                                          |        |                                        
|                                      
|NET INCOME  PER REDEEMABLE             |  |                                          |        |                                        
|COMMON SECURITY (Note 2)               |  | $                                        | 367.71 |                                        
|                                       |  |                                          |        |                                        

See Notes to Financial Statements.









4






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BNP U.S. FUNDING L.L.C.

STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)(in thousands)

|                                                      |  | For the Three Months Ended September 30, |         | For the Nine Months Ended September 30,
|----------------------------------------------------- |  | ---------------------------------------- | ------- | ---------------------------------------
|                                                      |  | 2006                                     |         |                                        
|                                                      |  |                                          |         |                                        
|                                                     
|NET INCOME                                            |  | $                                        | 19,493  |                                        
|                                                     
|OTHER COMPREHENSIVE LOSS                              |  |                                          |         |                                        
|Unrealized loss in fair value                         |  |                                          |         |                                        
|of available-for-sale securities that are not treated |  |                                          |         |                                        
|as collateral and that are not hedged by              |  |                                          |         |                                        
|derivative instruments                                |  |                                          | (5,356) |                                        
|                                                      |  |                                          |         |                                        
|TOTAL OTHER COMPREHENSIVE LOSS                        |  |                                          | (5,356) |                                        
|                                                      |  |                                          |         |                                        
|COMPREHENSIVE INCOME                                  |  | $                                        | 14,137  |                                        
|                                                      |  |                                          |         |                                        

See Notes to Financial Statements.





5






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BNP U.S. FUNDING L.L.C.

STATEMENT OF CHANGES IN REDEEMABLE COMMON SECURITIES, PREFERRED SECURITIES AND SECURITYHOLDERS' EQUITY (UNAUDITED)(in thousands)

|For the Three Months Ended March 31, 2006, June 30, 2006 and September 30, 2006
|-------------------------------------------------------------------------------
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Balance at December 31, 2005                                                   
|                                                                               
|                                                                               
|Net income                                                                     
|Other comprehensive loss                                                       
|                                                                               
|                                                                               
|                                                                               
|Balance at March 31, 2006                                                      
|                                                                               
|                                                                               
|Net income                                                                     
|Other comprehensive income                                                     
|Return of Capital to Common Shareholder                                        
|Dividends paid - preferred securities                                          
|                                                                               
|                                                                               
|Balance at June 30, 2006                                                       
|                                                                               
|                                                                               
|Net income                                                                     
|Other comprehensive loss                                                       
|                                                                               
|                                                                               
|Balance at September 30, 2006                                                  
|                                                                               









6






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BNP U.S. FUNDING L.L.C.

STATEMENTS OF CASH FLOWS (UNAUDITED)(in thousands)

|                                                                     |        | For the Nine Months Ended September 30,
|-------------------------------------------------------------------- | ------ | ---------------------------------------
|                                                                     |        | 2006                                   
|                                                                     |        |                                        
|OPERATING ACTIVITIES                                                 |        |                                        
|                                                                    
|Net income                                                           |        | $                                      
|Adjustments to reconcile net income to net cash                      |        |                                        
|provided by operating activities:                                    |        |                                        
|Amortization                                                         |        |                                        
|Gain on swaps                                                        |        |                                        
|Loss on hedge activity                                               |        |                                        
|Changes in assets and liabilities:                                   |        |                                        
|Interest receivable                                                  |        |                                        
|Accounts receivable                                                  |        |                                        
|Accrued expenses                                                     |        |                                        
|Accrued interest payable                                             |        |                                        
|                                                                     |        |                                        
|Net cash provided by operating activities                            |        |                                        
|                                                                     |        |                                        
|                                                                    
|INVESTING ACTIVITIES                                                 |        |                                        
|                                                                    
|Purchases of certificate of deposits                                 |        |                                        
|Proceeds from principal payments of securities,                      |        |                                        
|not treated as collateral                                            |        |                                        
|Proceeds from principal payments of securities,                      |        |                                        
|treated as collateral                                                |        |                                        
|                                                                     |        |                                        
|Net cash provided by (used in) investing activities                  |        |                                        
|                                                                     |        |                                        
|                                                                    
|FINANCING ACTIVITIES                                                 |        |                                        
|                                                                    
|(Return of Capital)/Additional Paid in Capital                       |        |                                        
|Cash dividends - preferred securities                                |        |                                        
|                                                                     |        |                                        
|Net cash used in financing activities                                |        |                                        
|                                                                     |        |                                        
|                                                                    
|                                                                    
|                                                                    
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                 | 14,251 |                                        
|                                                                    
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                       |        |                                        
|                                                                     |        |                                        
|                                                                    
|CASH AND CASH EQUIVALENTS, END OF PERIOD                             |        | $                                      
|                                                                     |        |                                        
|                                                                    
|NONCASH FINANCING AND INVESTING ACTIVITIES                           |        |                                        
|                                                                    
|Decrease in receivable arising from payment for securities, pursuant |        |                                        
|to the application of SFAS 125, as replaced by SFAS 140 (Note 3)     |        | $                                      

See Notes to Financial Statements.



























7






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UNAUDITED

NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION

BNP U.S. Funding L.L.C. (the Company or the Registrant) is a Delaware limited liability company formed on October 14, 1997, for the purpose of acquiring and holding certain types of eligible securities that generate net income for distribution to the holders of its Series A Preferred Securities (as defined below) and its redeemable Common Securities (as defined below).  The Company has no subsidiaries and is a wholly owned subsidiary of the New York Branch (the Branch) of BNP PARIBAS (formerly, Banque Nationale de Paris), asociété anonymeor limited liability corporation organized under the laws of the Republic of France (the Bank, BNP PARIBAS or BNPP).  The Company was continued pursuant to the Amended and Restated Limited Liability Company Agreement of the Company (the
Companys Charter or the Charter) entered into on December 5, 1997, by the Branch.

The Company was initially capitalized on October 14, 1997, with the issuance to the Branch of one share of the Companys redeemable common securities, $10,000 par value (the Common Securities).  On December 5, 1997 (inception), the Company commenced operations concurrent with the issuance of 50,000 noncumulative preferred securities, Series A, liquidation preference $10,000 per security (the Series A Preferred Securities), to qualified institutional buyers, and the issuance of an additional 53,010 Common Securities to the Branch.  These issuances raised in the aggregate $1,030,115,873 of net capital (including $5,873 of additional paid-in capital).  This entire amount was used to acquire a portfolio of debt securities (the Initial Portfolio) at their fair values from the Branch.  The Branch contributed additional paid-in capital of $3,000,000, $5,500,000, $7,500,000,
$8,500,000, $6,800,000 and $3,400,000 on December 3, 2002, June 3, 2003, December 3, 2003, June 3, 2004, December 2, 2004 and June 2, 2005, respectively.  On June 21, 2006, $6,000,000 of the capital contribution was returned to the Branch as a repayment.

The Company entered into a services agreement (the Services Agreement) with the Branch on December 5, 1997, pursuant to which the Branch maintains the securities portfolio of the Company (the Portfolio) and performs other administrative functions.  The Company has no employees.  All of the Companys officers are officers or employees of the Branch or the Bank or their affiliates.  The securities in the Portfolio are held by Citibank N.A., acting as trustee (the Trustee) under the trust agreement between the Company and Citibank N.A. dated December 1, 1997 (the Trust Agreement).

The accounting and financial reporting policies of the Company conform to U.S. generally accepted accounting principles ("GAAP") and current industry practices.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts and disclosures and may vary from actual results.

The accompanying financial statements are unaudited but, in the opinion of management, contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position and the results of operations and cash flows for the periods presented in conformity with GAAP applicable to interim periods.  The 2005 Balance Sheet data was derived from audited financial statements, however, it does not include all the disclosures required by GAAP.  The accompanying financial statements should be read in conjunction with the audited financial statements of BNP U.S. Funding L.L.C reported in Form 10-K for the year ended December 31, 2005, filed on March 31, 2006.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INVESTMENT SECURITIES

Investments in debt securities are classified as available-for-sale (recorded on a trade-date basis) and are carried at fair value. The debt securities can be categorized as hedged or non-hedged securities.  Fair values of non-hedged debt securities are estimated based on quoted market price for these securities.  For the hedged securities, changes in the fair market value of both the securities and the derivatives used as hedging instruments (cross currency and interest rate swaps) are reported in current earnings in the Statements of Income, pursuant to application of SFAS 133 (see below, Accounting for Derivatives and Hedging Activities).  Unrealized gains and losses on the non-hedged securities are reported as a component of Other Comprehensive Income (Loss).  The hedged securities are generally valued using discounted cash flows in a yield-curve model based on LIBOR, and
obtained from independent market sources.

Interest on securities is included in interest income and is recognized using the interest method.  Premiums and discounts are amortized in a manner that approximates the constant yield method.



8






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ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES

Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, requires that an entity measure all derivatives at fair value and recognize those derivatives as either assets or liabilities on the balance sheet.  The change in the derivatives fair value is generally to be recognized in current period earnings.  However, if certain conditions are met, a derivative may be specifically designated as a hedge of an exposure to changes in fair value, variability of cash flows, or certain foreign currency exposures.

The Company has made an assessment of all its financial instruments and concluded that it holds freestanding derivative instruments but no embedded derivative instruments at September 30, 2006.  As part of its asset management activities, the Company uses foreign exchange and interest rate swaps to modify the interest rate and foreign exchange characteristics of existing assets.  The interest rate swaps have a high correlation between the instrument and the asset being hedged, both at inception and throughout the hedge period.  These instruments qualify for hedge accounting.



CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three months or less at acquisition date to be cash equivalents.

CERTIFICATES OF DEPOSITS

The Company has seven certificates of deposits stated at cost that mature in less than six months.

DIVIDENDS

Dividends on the Series A Preferred Securities, when, as and if declared by the Companys Board of Directors, are payable semi-annually in arrears on a non-cumulative basis on the fifth day of June and December of each year, commencing June 5, 1998, at a rate per annum of 7.738% of the liquidation preference through and including December 5, 2007.Thereafter, dividends, when, as and if declared by the Companys Board of Directors, will be payable quarterly in arrears on the third Wednesday of March, June, September, and December of each year and will be calculated on a weekly basis in each quarter at a rate per annum of the liquidation preference equal to 2.8% per annum above one-week LIBOR for the week concerned as determined on the related LIBOR determination date.  Holders of Common Securities are
entitled to receive dividends when, as and if declared by the Companys Board of Directors out of the Companys net income not required to be applied to fund dividends with respect to the Series A Preferred Securities.  Dividends to the Preferred Security Holders may be paid out of (i) net income, determined without regard to capital gains or losses, and/or (ii) amounts contributed by the Bank or the Branch to the Companys capital. As of September 30, 2006, the Branch has contributed a total (net of a return of capital) of $28,700,000 of additional paid-in capital, which was used to facilitate the semi-annual payments of dividends to the holders of the Series A Preferred Securities.

To date, the Company has declared and paid dividends as follows:



Security
        Amount
        Date PaidSeries A Preferred Securities
        $19,345,000
        June 5, 1998Common Securities
        $  5,347,365
        June 22, 1998Series A Preferred Securities
        $19,345,000
        December 5, 1998Common Securities
        $  8,787,127
        December 15, 1998Series A Preferred Securities
        $19,345,000
        June 5, 1999Common Securities
        $  8,454,284
        June 15, 1999Series A Preferred Securities
        $19,345,000
        December 5, 1999Common Securities
        $10,352,672
        December 15, 1999Series A Preferred Securities
        $19,345,000
        June 5, 2000Common Securities
        $12,508,486
        June 19, 2000Series A Preferred Securities
        $19,345,000
        December 5, 2000Common Securities
        $14,792,297
        December 19, 2000Series A Preferred Securities
        $19,345,000
        June 5, 2001Common Securities
        $10,718,708
        June 19, 2001Series A Preferred Securities
        $19,345,000
        December 5, 2001Series A Preferred Securities
        $19,345,000
        June 5, 2002Series A Preferred Securities
        $19,345,000
        December 5, 2002Series A Preferred Securities
        $19,345,000
        June 5, 2003Series A Preferred Securities
        $19,345,000
        December 5, 2003






9






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Series A Preferred Securities
        $19,345,000
        June 5, 2004Series A Preferred Securities
        $19,345,000
        December 5, 2004Series A Preferred Securities
        $19,345,000
        June 5, 2005Series A Preferred Securities
Series A Preferred Securities
        $19,345,000
$19,345,000
        December 5, 2005
June 5, 2006




If the Banks financial condition were to deteriorate with the consequence that a Shift Event (as defined below) were to occur, substantially all of the Common Securities would be redeemed automatically without prior redemption of the Series A Preferred Securities, and dividends payable on each Series A Preferred Security could be substantially reduced or completely eliminated.  In addition, if the Banks Tier 1 risk-based capital ratio were to decline below the minimum percentage required by French banking regulations (currently 4%), the Company would pay a special dividend consisting of all of the Companys net assets (other than assets having a total market value of approximately $40,000,000) to the Branch as holder of the Common Securities.

A Shift Event would be deemed to have occurred if (i) the Banks total risk-based capital ratio or Tier 1 risk-based capital ratio were to decline below the minimum percentages required by French banking regulations, (ii) the Bank were to become subject to certain specified receivership proceedings or (iii) the French Banking Commission (Commission Bancaire), in its sole discretion, were to notify the Bank and the Company that it has determined that the Banks financial condition was deteriorating such that either of the foregoing clauses (i) or (ii) would apply in the near term.  French banking regulations currently require French banks to maintain a minimum total risk-based capital ratio of at least 8.0% and a minimum Tier 1 risk-based capital ratio of at least 4.0%.

The Company may not pay dividends or make other distributions on the Common Securities or the Series A Preferred Securities if, after giving effect to the distributions, the Companys liabilities would exceed the fair value of its assets.  Additionally, as long as any Series A Preferred Securities are outstanding, except during a Shift Period (i.e., following the occurrence of a Shift Event causing a shift in dividend preference and before the termination thereof), the amount of dividends on the Common Securities in any fiscal year may not exceed the amount by which the net income of the Company for such fiscal year exceeds the stated dividends on the Series A Preferred Securities scheduled to be paid during such fiscal year irrespective of whether dividends on the Series A Preferred Securities are in fact declared and paid.  Additionally, other than during a Shift Period, no dividends may be
declared, paid or set apart for payment on the Common Securities (a) with respect to any period of time included in any Dividend Period unless full dividends have been or contemporaneously are declared and paid, or declared and a sum sufficient for the payment thereof is set apart for such payment on the Series A Preferred Securities for the then-current Dividend Period and (b) the Company may not declare, pay or set apart funds for any dividends or other distributions with respect to any Common Securities unless and until (x) full dividends on the Series A Preferred Securities for the two most recent preceding Dividend Periods are declared and paid, or declared and a sum sufficient for payment has been paid over to the dividend disbursing agent for payment of such dividends and (y) the Company has declared a cash dividend on the Series A Preferred Securities at the annual dividend rate for the then-current Dividend Period, and sufficient funds have been paid over to the dividend
disbursing agent for payment of such cash dividends for such then-current Dividend Period.

COMPREHENSIVE INCOME (LOSS)

Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income, established standards for reporting and display of comprehensive income (loss) and its components.  Components of comprehensive income (loss) include net income.  Other comprehensive income (loss) consists of unrealized gains and losses on marketable securities available for sale.

NET INCOME PER REDEEMABLE COMMON SECURITY

Net income per redeemable common security is calculated by dividing net income after preferred dividends by the weighted average number of Common Securities outstanding.  For the nine months ending September 30, 2006, the net income after preferred dividends was $21,340,939, and divided by the weighted average number of Common Securities outstanding of 53,011, resulted in net income per redeemable common security of $402.58. For the three months ending September 30, 2006, the net income was $19,492,760 and divided by the weighted average number of Common Securities outstanding of 53,011, resulted in net income per redeemable common security of $367.71.



INCOME TAXES

The Company is treated as a partnership for U.S. federal income tax purposes.  As a partnership it is not a taxable entity; the Company will not be subject to U.S. federal, state and local income tax on its income.  Instead, each securityholder is required to



10






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take into account its allocable share of items of income, gain, loss and deduction of the Company in computing its U.S. federal tax liability.  Accordingly, the Company has made no provision for income taxes in the accompanying statements of income.



FOREIGN CURRENCY TRANSLATION

Assets denominated in foreign currencies are translated to U.S. dollars using applicable rates of exchange.

All of the Companys assets denominated in a foreign currency are included in its available-for-sale securities portfolio, and their foreign currency exchange risk is hedged by means of cross currency swaps.  In accordance with the requirements of SFAS 133, the change in fair value, due to the change in the foreign currency exchange rate, of both the hedged securities and the hedging instruments is recorded in current period earnings.

Revenues and expenses are translated monthly at amounts which approximate weighted average exchange rates.

NEW ACCOUNTING PRONOUNCEMENTS

In February 2006, the FASB issued Statement of Financial Accounting Standard No. 155 Accounting for Certain Hybrid Instruments, and amendment of FASB Statement No. 133 and 140 (SFAS 155).  SFAS 155 contains a variety of provisions which address fair value of hybrid financial instruments containing an embedded derivative, clarifies which interest only and principal only strips are not subject to SFAS 133, establishes requirements to evaluate securitized financial assets to identify embedded derivatives and addresses certain aspects of SFAS 140 regarding qualifying special purpose entities and their holding of certain derivative financial instruments.  SFAS 155 is effective for fiscal years beginning after September 15, 2006.  The Company is presently evaluating what impact, if any, SFAS 155 will have.



In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets" ("SFAS 156"). The Statement amends SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," with respect to accounting for separately recognized mortgage servicing rights ("MSR"). SFAS 156 requires all separately recognized MSR to be initially measured at fair value, if practicable.  SFAS 156 permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and liabilities:  (1) amortizing servicing assets or liabilities in proportion to and over the period of estimated net servicing income or net servicing loss; or (2) reporting servicing assets or liabilities at fair value at each reporting date and reporting changes in fair value in earnings in the period in which the changes occur.  In the event that the first method
is selected, SFAS 156 requires an assessment of servicing assets or liabilities for impairment or increased obligation based on fair value at each reporting date.  SFAS 156 further requires additional disclosures for all separately recognized MSR.  SFAS 156 is effective as of commencement of the first fiscal year that begins after September 15, 2006.  Adoption of SFAS 156 is not expected to have a material impact on the Companys consolidated financial condition or results of operations.



In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements.  Other current accounting pronouncements that require or permit fair value measurements will require application of SFAS 157.  SFAS 157 does not require any new fair value measurements, however, does change the definition of fair value and the methods used to measure fair value, and expands disclosures about fair value measurements.  SFAS 157 emphasizes fair value as a market-based measurement, not an entity-specific measurement. Under SFAS 157, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  SFAS 157 further establishes a fair value hierarchy that distinguishes between (1) market
participants' assumptions developed based on market data obtained from sources



11






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independent of the reporting entity (observable inputs) and (2) the reporting entitys own assumptions about market participants' assumptions developed based on the best information available in the circumstances. SFAS 157 also expands disclosures about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.   Adoption of SFAS 157 is not expected to have a material impact upon the Company's financial condition or results of operations.



In September 2006, the FASB issued SFAS No. 158, "Employers Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)" (SFAS 158").  SFAS158 requires an employer sponsoring a single employer defined benefit plan to do the following: (1) recognize the funded status of a benefit plan, measured as the difference between plan assets at fair value (with limited exceptions) and the benefit obligation, in its statement of financial position. For a pension plan, the benefit obligation is the projected benefit obligation; for any other postretirement benefit plan, such as a retiree health care plan, the benefit obligation is the accumulated postretirement benefit obligation; (2) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are
not recognized as components of net periodic benefit cost pursuant to SFAS No. 87, "Employers Accounting for Pensions," or SFAS No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions."  Amounts recognized in accumulated other comprehensive income, including the gains or losses, prior service costs or credits, and the transition asset or obligation remaining from the initial application of Statements 87 and 106, are adjusted as they are subsequently recognized as components of net periodic benefit cost pursuant to the recognition and amortization provisions of those Statements; (3) measure defined benefit plan assets and obligations as of the date of the employers fiscal year-end statement of financial position (with limited exceptions); and (4) disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or
losses, prior service costs or credits, and transition asset or obligation.  Adoption of SFAS 158 is required for fiscal years ending after December 15, 2006.  Adoption of SFAS 158 is not expected to have a material impact upon the Company's financial condition or results of operations.



In September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements(SAB No. 108). SAB No. 108 requires the use of two alternative approaches in quantitatively evaluating materiality of misstatements. If the misstatement as quantified under either approach is material to the current year financial statements, the misstatement must be corrected. If the effect of correcting the prior year misstatements, if any, in the current year income statement is material, the prior year financial statements should be corrected. This guidance is effective for the calendar year ending 2006. In the year of adoption, the misstatements may be corrected as an accounting change by adjusting opening retained earnings rather
than being included in the current year income statement. The Company is currently evaluating the impact of SAB No. 108 will have on the Companys financial position or results of operations.



NOTE 3--RECEIVABLE ARISING FROM PAYMENT FOR SECURITIES

Statement of Financial Accounting Standards No. 140 (SFAS 140), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities addresses the accounting for the transfer of financial assets.  Under SFAS 140, transfers of financial assets that do not meet certain sale accounting requirements must be accounted for as secured borrowing transactions with a pledge of collateral. Due to the potential consequences of a Shift Event (as described above), the Companys purchase of the Initial Portfolio from the Branch did not meet certain SFAS 125, as replaced by SFAS 140, sale accounting requirements.  Therefore, the purchase of the Initial Portfolio has been accounted for as a secured borrowing transaction with a pledge of collateral.  In accounting for this transaction as a secured borrowing in accordance with SFAS 125, as replaced by SFAS 140, the Company
has recorded a receivable in an amount equal to the remaining amount paid to the Branch to acquire the Initial Portfolio.  In this case, however, having delivered the securities in the Initial Portfolio to the Company, neither the Branch nor BNPP has any further obligation to the Company to repay any part of the purchase price for the Initial Portfolio or otherwise to repurchase or redeem any securities in the Initial Portfolio.



The Company has not sold or repledged the collateral; the securities within the Initial Portfolio mature or prepay over time.  As they do, the Company recognizes the cash proceeds as a reduction in the receivable arising from payment for securities.  The collateral at September 30, 2006 is reported in Note 4 below.



NOTE 4--INVESTMENT SECURITIES

The amortized cost and estimated fair value of the securities were as follows based on managements prepayment assumptions (in thousands):





12




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September 30, 2006Gross Unrealized
      
      Gross UnrealizedNon-Collateral
      Amortized Cost
      
      Gains
      
      Losses
      
      Fair ValueCollateralized Mortgage Obligations:Floating-Rate REMICs
      $
      327
      
      $
      1
      
      $
      ---
      
      $
      328Fixed-Rate REMICs
      
      30,915
      
      
      385
      
      
      ---
      
      
      31,300Mortgage Backed Securities:Agency ARMs
      
      2,053
      
      
      ---
      
      
      34
      
      
      2,019Agency Hybrid ARMs
      
      3,829
      
      
      11
      
      
      18
      
      
      3,822Agency DUSs
      
      138,485
      
      
      2,306
      
      
      99
      
      
      140,692Agency Debentures
      
      504,667
      
      
      5,752
      
      
      424
      
      
      509,995Total Non-Collateral
      $
      680,276
      
      
      8,455
      
      $
      575
      
      $
      688,156CollateralCollateralized Mortgage Obligations:Floating-Rate REMICs
      $
      2,126
      
      $
      ---
      
      $
      26
      
      $
      2,100Fixed-Rate REMICs
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---Mortgage Backed Securities:Agency ARMs
      
      3,260
      
      
      1
      
      
      19
      
      
      3,242Agency Hybrid ARMs
      
      4,667
      
      
      9
      
      
      58
      
      
      4,618Agency DUSs
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---Agency Debentures
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---Total Collateral
      $
      10,053
      
      $
      10
      
      $
      103
      
      $
      9,960September 30, 2006 Total Portfolio
      $
      690,329
      
      **$**
      8,465
      
      **$**
      678
      
      $
      698,116






Because the Company has the ability and intent to hold those securities with unrealized losses until a recovery of fair value, which may be maturity, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2006.

The breakdown of the Companys securities by category and weighted average life distribution (stated in terms of amortized cost) is summarized below based on managements prepayment assumptions (actual maturities may differ from maturities shown below due to prepayments)(in thousands):



September 30, 2006Due in 1 year
      or less
      
      Due after 1 
through 5 years
      
      Due after 5
       through 10years
      
      Due after 10
        years
      
      TotalNon-CollateralCollateralized Mortgage Obligations:Floating-Rate REMICs
      $
      ---
      
      $
      327
      
      
      ---
      
      $
      ---
      
      $
      327Fixed-Rate REMICs
      
      30,915
      
      
      ---
      
      
      ---
      
      
      ---
      
      
      30,915Mortgage Backed Securities:Agency ARMs
      
      ---
      
      
      829
      
      
      1,132
      
      
      92
      
      
      2,053Agency Hybrid ARMs
      
      ---
      
      
      2,098
      
      
      1,174
      
      
      557
      
      
      3,829Agency DUSs
      
      46,127
      
      
      92,358
      
      
      ---
      
      
      ---
      
      
      138,485Agency Debentures
      
      172,628
      
      
      332,039
      
      
      ---
      
      
      ---
      
      
      504,667Total Non-Collateral
      $
      249,670
      
      $
      427,651
      
      $
      2,306
      
      $
      649
      
      $
      680,276CollateralCollateralized Mortgage Obligations:Floating-Rate REMICs
      $
      37
      
      $
      2,089
      
      $
      ---
      
      $
      ---
      
      $
      2,126Fixed-Rate REMICs
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---Mortgage Backed Securities:Agency ARMs
      
      250
      
      
      2,364
      
      
      233
      
      
      413
      
      
      3,260Agency Hybrid ARMs
      
      419
      
      
      4,248
      
      
      ---
      
      
      ---
      
      
      4,667Agency DUSs
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---Agency Debentures
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---Total Collateral
      $
      706
      
      $
      8,701
      
      $
      233
      
      $
      413
      
      $
      10,053September 30, 2006 Total Portfolio
      $
      250,376
      
      $
      436,352
      
      $
      2,539
      
      $
      1,062
      
      $
      690,329






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The breakdown of the Companys securities by category and yield, before the result of hedges, is summarized below:

Due after 1
      
      Due after 5Due in 1 year
      
      through 5
      
      through 10
      
      Due after 10
      
      
      
      Yield afterSeptember 30, 2006
      or less
      
      years
      
      years
      
      years
      
      Total
      
      HedgingCollateralized MortgageObligations:Floating-Rate REMICs
      4.63%
      
      5.03%
      
      ---%
      
      ---%
      
      5.02%
      
      5.02%Fixed-Rate REMICs
      6.74
      
      ---
      
      ---
      
      ---
      
      6.74
      
      5.05Mortgage Backed Securities:Agency ARMs
      2.07
      
      5.13
      
      4.39
      
      5.91
      
      4.74
      
      4.74Agency Hybrid ARMs
      4.40
      
      5.19
      
      5.17
      
      5.96
      
      5.17
      
      5.17Agency DUSs
      5.93
      
      6.07
      
      ---
      
      ---
      
      6.01
      
      4.85Agency Debentures
      6.55
      
      5.37
      
      ---
      
      ---
      
      6.02
      
      5.35Total
      6.40%
      
      5.62%
      
      4.75%
      
      5.94%
      
      6.02%
      
      5.22%




NOTE 5--FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values of securities at September 30, 2006 were obtained from independent market sources and are summarized in Note 4.  The carrying value of securities, as shown in Note 4, approximates their fair value.  The fair value of the receivable arising from payment for securities, pursuant to the application of SFAS 125, as replaced by SFAS 140, was $9,960,195 at September 30, 2006.

The carrying value of cash and cash equivalents, accounts receivable, accrued interest receivable, accrued expenses, and accounts payable approximate fair value due to their short-term nature.  The seven certificates of deposits also approximate fair value and mature within sixmonths.

The fair value of the cross currency and interest rate swaps was $(5,235,054) at September 30, 2006 and is reflected in Other liabilities.

NOTE 6--DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to hedge the interest rate risk and foreign currency risk of fixed-income securities.  As a result of interest rate or exchange rate fluctuations, hedged fixed-rate assets will appreciate or depreciate in market value.  The effect of this unrealized appreciation or depreciation is expected to substantially offset the Companys gains or losses on the derivative instruments that are linked to these hedged assets and liabilities.  The Company considers its use of derivatives to be a prudent method of managing interest rate and foreign currency rate sensitivity, as it prevents earnings from being exposed to undue risk posed by changes in interest and exchange rates in compliance with the Companys policies.  Hedge accounting may not be available on certain derivatives due to occurrence of
hedge ineffectiveness.



Derivative instruments that are used as part of the Companys interest rate risk management strategy include interest rate and cross currency swap contracts that have indices related to the pricing of specific balance sheet assets and liabilities.  As a matter of policy, the Company does not use highly leveraged derivative instruments for interest rate risk management.  Interest rate



14






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swaps generally involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date.



By using derivative instruments, the Company exposes itself to credit and market risk.  If a counterparty fails to fulfill its performance obligations under a derivative contract, the Companys credit risk will equal the fair value gain in a derivative.  Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes the Company, thus creating a repayment risk for the Company.  When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, assumes no repayment risk.  The Company minimizes the credit (or repayment) risk in derivative instruments by entering into transactions with BNP PARIBAS.  Consequently, the Company does not require that collateral be provided by the counterparty.



Market risk is the adverse effect that a change in interest rates, currency, or implied volatility rates might have on the value of a financial instrument.  The Company does not expose itself to market risk by using derivatives but rather reduces market risk since it uses derivatives only for fair value hedges that effectively offset fluctuations in the fair value of the hedged items.



The Company formally documents all relationships between derivatives and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions.  This process includes linking all derivatives that are designated as fair value or cash flow hedges to (1) assets and liabilities on the balance sheet, (2) firm commitments or (3) forecasted transactions.



Fair Value Hedges

The Company mainly enters into interest rate swaps and cross currency interest rate swaps to convert fixed rate Agency Debentures, Agency DUSs and Fixed-Rate REMICs into variable rate securities.

The fair value of the hedging instruments was $(3,239,190) at September 30, 2006, and has been recorded in Other liabilities.  It has been offset, except for the ineffective portion of the hedge, by the revaluation of the respective hedged investment securities.  The fair value of the hedging instruments does not include accrued interest receivable and payable, which are shown separately on the balance sheet.  For the nine months ended September 30, 2006, the Company also recognized a gain of $3,013,603 in current year to date earnings related to cross
currency swaps that no longer meet the requirements of FAS 133 for the hedge effectiveness to qualify as a fair value hedging instrument. For the three months ended September 30, 2006, the Company recognized a gain of $6,110,533 in current quarter to date earnings related to cross currency swaps that no longer meet the requirements of FAS 133 for the hedge effectiveness to qualify as a fair value hedging instrument.



Cash Flow Hedges

For the nine months ended September 30, 2006, the Company did not enter into cash flow hedge transactions and it is not the intention of the Company to use interest rate swaps to convert floating rate financial instruments to fixed rate financial instruments as part of a cash flow hedge strategy.



At September 30, 2006, the Company had outstanding interest rate and cross currency swap agreements with a notional principal amount of $458,800,182.

NOTE 7--
        RELATED PARTY TRANSACTIONS


The Company entered into a Services Agreement with the Branch on December 5, 1997 pursuant to which the Branch manages the securities portfolio of the Company and performs other administrative functions.  Expenses incurred under such Agreement were $433,499 for the period ended September 30, 2006.  Under a specific allocation methodology, the costs of personnel servicing the Company is based on actual man-hours devoted to the activities of the Company and remains at arms length.



The counterparty to all cross currency and interest rate swaps is BNP PARIBAS.  For the nine months ended September 30, 2006, interest rate swap income and expense were $18,686,996 and 14,477,165, respectively. For the three months ended September 30, 2006, interest rate swap income and expense were $6,564,329 and $4,484,860, respectively.



The Branch also serves as the dividend paying agent, registrar and transfer agent with respect to the Series A Preferred Securities.  The fee is $4,000 per annum for these services.



All of the Companys officers  and all but one of the members of the Companys Board of Directors are officers and employees of the Branch or BNP PARIBAS or their affiliates.





15






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Item 2:
        Managements Discussion and Analysis of Financial Condition and Results of Operations


FORWARD LOOKING DISCLOSURE STATEMENT

From time to time, the Company may publish, verbally or in written form, forward-looking statements relating to such matters as anticipated financial performance, economic conditions, interest rate levels, investment prospects and similar matters.  In fact, this quarterly report on Form 10-Q and our annual report on Form 10-K (or any other periodic reporting documents required by the Securities Exchange Act of 1934 Act, as amended (the Exchange Act)) may contain forward-looking statements reflecting the current views of the Company concerning potential future events or developments.  The Private Securities Litigation Reform Act of 1995  provides a safe harbor for forward-looking statements.  In order to comply with the terms of the safe harbor, the Company cautions investors that any forward-looking statements made by the Company are not guarantees of
future performance and that a variety of factors could cause the Companys actual results and experience to differ materially from the anticipated results or other expectations expressed in the Companys forward-looking statements.  The risks and uncertainties which may affect the operations, performance, development and results of the Companys business include, but are not limited to, the following: uncertainties relating to economic conditions and interest rate levels, and uncertainties relating to government and regulatory policies.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statements were made.

Set forth on the following pages is managements discussion and analysis of the results of operations for the nine months ended September 30, 2006 and 2005. Such information should be read in conjunction with our Financial Statements together with the Notes to the Financial Statements.

General

The Company was formed on October 14, 1997, with the issuance of one share to the Branch and commenced operations on December 5, 1997, by the sale to qualified institutional buyers of 50,000 Series A Preferred Securities and the sale to the Branch of 53,010 Common Securities.  Together, such sales raised net capital of $1,030,115,873, which the Company used to purchase the Initial Portfolio from the Branch.  The Branch contributed $3,400,000, $6,800,000, $8,500,000, $7,500,000, $5,500,000, and $3,000,000 of additional paid-in capital on June 2, 2005, December 2, 2004, June 3, 2004, December 3, 2003, June 3, 2003 and December 3, 2002, respectively.  On June 21, 2006, $6,000,000 of the capital contribution was returned to the Branch as a repayment.



The Companys sole business is to acquire, hold and manage debt instruments, largely consisting of mortgage obligations, in the Portfolio, which generate net income for distribution to security holders.  The Companys major source of income is interest generated by the securities in the Portfolio.

SUMMARY OF CRITICAL ACCOUNTING POLICIES

The Notes to the Financial Statements contain a summary of the Company's significant accounting policies, including a discussion of recently issued accounting pronouncements. Certain of these policies as well as estimates made by management are considered to be important to the portrayal of the Company's financial condition, since they require management to make difficult, complex or subjective judgments and estimates, some of which may relate to matters that are inherently uncertain.

16






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Investment Securities

Investments in debt securities are classified as available-for-sale (recorded on a trade-date basis) and are carried at fair value. The debt securities can be categorized as hedged or non-hedged securities. Fair values of non-hedged debt securities are estimated based on quoted market price for these securities. For the hedged securities, changes in the fair market value of both the securities and the derivatives used as hedging instruments (cross currency and interest rate swaps) are reported in current earnings in the Statements of Income, pursuant to application of SFAS 133, (see below, Accounting for Derivatives and Hedging Activities). Unrealized gains and losses on the non-hedged securities are reported as a component of Other Comprehensive Income (Loss). The hedged securities are generally valued using discounted cash flows in a yield-curve model based on LIBOR, and obtained from independent market sources.

Interest on securities is included in interest income and is recognized using the interest method. Premiums and discounts are amortized in a manner that approximates the constant yield method.



Accounting for Derivatives and Hedging Activities

Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, requires that an entity measure all derivatives at fair value and recognize those derivatives as either assets or liabilities on the balance sheet. The change in the derivatives fair value is generally to be recognized in current period earnings. However, if certain conditions are met, a derivative may be specifically designated as a hedge of an exposure to changes in fair value, variability of cash flows, or certain foreign currency exposures.

The Company has made an assessment of all its financial instruments and concluded that it holds freestanding derivative instruments but no embedded derivative instruments at September 30, 2006. As part of its asset management activities the Company uses foreign exchange and interest rate swaps to modify the interest rate and foreign exchange characteristics of existing assets. The interest rate swaps have a high correlation between the instrument and the asset being hedged, both at inception and throughout the hedge period. These instruments qualify for hedge accounting.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less at acquisition date to be cash equivalents.

Certificates of Deposits

The Company has seven certificates of deposits stated at cost that mature in less than six months.

Dividends

Dividends on the Series A Preferred Securities, when, as and if declared by the Companys Board of Directors, are payable semi-annually in arrears on a non-cumulative basis on the fifth day of June and December of each year, commencing June 5, 1998, at a rate per annum of 7.738% of the liquidation preference through and including December 5, 2007.Thereafter, dividends, when, as and if declared by the Companys Board of Directors, will be payable quarterly in arrears on the third Wednesday of March, June, September, and December of each year and will be calculated on a weekly basis in each quarter at a rate per annum of the liquidation preference equal to 2.8% per annum above one-week LIBOR for the week concerned as determined on the related LIBOR determination date. Holders of Common Securities are entitled to receive dividends when, as and if declared by the Companys Board of Directors out of the Companys net income not required to be applied to fund dividends with respect to the Series A Preferred Securities. Dividends to the Preferred Security Holders may be paid out of (i) net income, determined without regard to capital gains or losses, and/or (ii) amounts contributed by the Bank or the Branch to the Companys capital. As of September 30, 2006, the Branch has contributed a total (net of a return of capital) of $28,700,000 of additional paid-in capital, which was used to facilitate the semi-annual payments of dividends to the holders of the Series A Preferred Securities.

17






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To date, the Company has declared and paid dividends as follows:

|Security                      | Amount       | Date Paid        
|----------------------------- | ------------ | -----------------
|Series A Preferred Securities | $19,345,000  | June 5, 1998     
|Common Securities             | $  5,347,365 | June 22, 1998    
|Series A Preferred Securities | $19,345,000  | December 5, 1998 
|Common Securities             | $  8,787,127 | December 15, 1998
|Series A Preferred Securities | $19,345,000  | June 5, 1999     
|Common Securities             | $  8,454,284 | June 15, 1999    
|Series A Preferred Securities | $19,345,000  | December 5, 1999 
|Common Securities             | $10,352,672  | December 15, 1999
|Series A Preferred Securities | $19,345,000  | June 5, 2000     
|Common Securities             | $12,508,486  | June 19, 2000    
|Series A Preferred Securities | $19,345,000  | December 5, 2000 
|Common Securities             | $14,792,297  | December 19, 2000
|Series A Preferred Securities | $19,345,000  | June 5, 2001     
|Common Securities             | $10,718,708  | June 19, 2001    
|Series A Preferred Securities | $19,345,000  | December 5, 2001 
|Series A Preferred Securities | $19,345,000  | June 5, 2002     
|Series A Preferred Securities | $19,345,000  | December 5, 2002 
|Series A Preferred Securities | $19,345,000  | June 5, 2003     
|Series A Preferred Securities | $19,345,000  | December 5, 2003 
|Series A Preferred Securities | $19,345,000  | June 5, 2004     
|Series A Preferred Securities | $19,345,000  | December 5, 2004 
|Series A Preferred Securities | $19,345,000  | June 5, 2005     
|Series A Preferred Securities | $19,345,000  | December 5, 2005 
|Series A Preferred Securities | $19,345,000  | June 5, 2006     

If the Banks financial condition were to deteriorate with the consequence that a Shift Event (as defined below) were to occur, substantially all of the Common Securities would be redeemed automatically without prior redemption of the Series A Preferred Securities and dividends payable on each Series A Preferred Security could be substantially reduced or completely eliminated. In addition, if the Banks Tier 1 risk-based capital ratio were to decline below the minimum percentage required by French banking regulations (currently 4%), the Company would pay a special dividend consisting of all of the Companys net assets (other than assets having a total market value of approximately $40,000,000) to the Branch as holder of the Common Securities.

A Shift Event would be deemed to have occurred if (i) the Banks total risk-based capital ratio or Tier 1 risk-based capital ratio were to decline below the minimum percentages required by French banking regulations, (ii) the Bank were to become subject to certain specified receivership proceedings or (iii) the French Banking Commission (Commission Bancaire), in its sole discretion, were to notify the Bank and the Company that it has determined that the Banks financial condition was deteriorating such that either of the foregoing clauses (i) or (ii) would apply in the near term. French banking regulations currently require French banks to maintain a minimum total risk-based capital ratio of at least 8.0% and a minimum Tier 1 risk-based capital ratio of at least 4.0%.

The Company may not pay dividends or make other distributions on the Common Securities or the Series A Preferred Securities if, after giving effect to the distributions, the Companys liabilities would exceed the fair value of its assets. Additionally, as long as any Series A Preferred Securities are outstanding, except during a Shift Period (i.e., following the occurrence of a Shift Event causing a shift in dividend preference and before the termination thereof), the amount of dividends on the Common Securities in any fiscal year may not exceed the amount by which the net income of the Company for such fiscal year exceeds the stated dividends on the Series A Preferred Securities scheduled to be paid during such fiscal year irrespective of whether dividends on the Series A Preferred Securities are in fact declared and paid. Additionally, other than during a Shift Period, no dividends may be declared, paid or set apart for payment on the Common Securities (a) with respect to any period of time included in any Dividend Period unless full dividends have been or contemporaneously are declared and paid, or declared and a sum sufficient for the payment thereof is set apart for such payment on the Series A Preferred Securities for the then-current Dividend Period and (b) the Company may not declare, pay or setapart funds for any dividends or other distributions with respect to any Common Securities unless and until (x) full dividends on the Series A Preferred Securities for the two most recent preceding Dividend Periods are declared and paid, or declared and a sum sufficient for payment has been paid over to the dividend disbursing agent for payment of such dividends and (y) the Company has declared a cash dividend on the Series A Preferred Securities at the annual dividend rate for the then-current Dividend Period, and sufficient funds have been paid over to the dividend disbursing agent for payment of such cash dividends for such then-current Dividend Period.

18






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Comprehensive Income (Loss)

Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income, established standards for reporting and display of comprehensive income (loss) and its components. Components of comprehensive income (loss) include net income. Other comprehensive income (loss) consists of unrealized gains and losses on marketable securities available for sale.

Net Income Per Redeemable Common Security

Net income per redeemable common security is calculated by dividing net income after preferred dividends by the weighted average number of Common Securities outstanding. For the nine months ending September 30, 2006 the net income after preferred dividends was $21,340,939, and divided by the weighted average number of Common Securities outstanding of 53,011, resulted in net income per redeemable common security of $402.58. For the three months ending September 30, 2006 the net income was $19,492,760 and divided by the weighted average number of Common Securities outstanding of 53,011, resulted in net income per redeemable common security of $367.71.

Income Taxes

The Company is treated as a partnership for U.S. federal income tax purposes. As a partnership it is not a taxable entity; the Company will not be subject to U.S. federal, state and local income tax on its income. Instead, each securityholder is required to take into account its allocable share of items of income, gain, loss and deduction of the Company in computing its U.S. federal tax liability. Accordingly, the Company has made no provision for income taxes in the accompanying statements of income.

Foreign Currency Translation

Assets denominated in foreign currencies are translated to U.S. dollars using applicable rates of exchange.

All of the Companys assets denominated in a foreign currency are included in its available-for-sale securities portfolio, and their foreign currency exchange risk is hedged by means of cross currency swaps. In accordance with the requirements of SFAS 133, the change in fair value, due to the change in the foreign currency exchange rate, of both the hedged securities and the hedging instruments is recorded in current period earnings.

Revenues and expenses are translated monthly at amounts which approximate weighted average exchange rates.





Valuations of Financial Instruments

Investments include mortgage backed securities and derivatives. The Company carries its investments at fair value if they are considered to be available-for-sale. For a substantial majority of the Company's investments, fair values are determined based upon quoted prices or validated models with externally verifiable model inputs. If available, quoted market prices provide the best indication of fair value. If quoted market prices are not available for mortgage backed securities and derivatives, the Company discounts the expected cash flows using market interest rates commensurate with the duration of the investment.

The Company has made an assessment of all its financial instruments and concluded that it holds freestanding derivative instruments but no embedded derivative instruments at September 30, 2006. As part of its asset management activities, the



19






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Company uses foreign exchange and interest rate swaps to modify the interest rate and foreign exchange characteristics of existing assets.  The interest rate swaps have a high correlation between the instrument and the asset being hedged, both at inception and throughout the hedge period.





NINE MONTH PERIOD

Results of Operations

The following discussion pertains to the nine months ended September 30, 2006 and September 30, 2005 (the 2006 Period and the 2005 Period, respectively).

Portfolio

The average amortized cost of the Portfolio during the 2006 Period and 2005 Period was $719,527,770 and $852,554,099, respectively.  This reflects the following prepayments and reinvestments:



|PREPAYMENTS          |  | 2006 Period |            | 2005 Period
|-------------------- |  | ----------- | ---------- | -----------
|                     |  |             |            |            
|                     |  |             |            |            
|Floating-Rate REMICs |  | $           | 688,811    |            
|Fixed-Rate REMICs    |  | $           | ---        |            
|Agency ARMs          |  | $           | 1,859,167  |            
|Agency Hybrid ARMs   |  | $           | 2,881,925  |            
|Agency DUS           |  | $           | 92,182,105 |            
|Agency Debentures    |  | $           | ---        |            
|                     |  |             |            |            
|REINVESTMENTS        |  | 2006 Period |            | 2005 Period
|                     |  |             |            |            
|Floating-Rate REMICs |  | $           | ---        |            
|Fixed-Rate REMICs    |  | $           | ---        |            
|Agency ARMs          |  | $           | ---        |            
|Agency Hybrid ARMs   |  | $           | ---        |            
|Agency DUS           |  | $           | ---        |            
|Agency Debentures    |  | $           | ---        |            



As ofSeptember 30, 2006and 2005, as calculated by aggregate amortized cost, approximately26.89% and 36.37%,respectively, of the Portfolio consisted of collateralized mortgage obligations (Floating-Rate REMICs and Fixed-Rate REMICs) and mortgage backed securities (Agency ARMs, Agency Hybrid ARMs and Agency DUSs), and approximately73.11% and 63.63%, respectively, consisted of Agency Debentures.  As ofSeptember 30, 2006and 2005, floating rate securities accounted for approximately2.36% and 3.04%, respectively, of the Portfolios collateralized mortgage
obligations and mortgage backed securities.  In addition, a significant portion of the Agency Debentures and the Agency DUSs are hedged so that in all but one case, the fixed interest rates received on the bonds are converted into prevailing floating rates.



The aggregate market value of the securities in the Portfolio as ofSeptember 30, 2006and 2005 was higher than the amortized cost by approximately1.13% and 4.47%, respectively, due to a net decrease in interest rates from the time of their original purchase.  For the hedged securities, changes in the fair market value of both the securities and the derivatives used as hedging instruments (cross currency and interest rate swaps) are reported in current earnings in the Statements of Income, pursuant to application of SFAS 133 (Note 2 to Financial Statements).  Unrealized gains and losses on the non-hedged securities are reported as a component of Other Comprehensive Income (Loss).



Revenue

The Companys net income for the 2006 Period and 2005 Period was$40,685,939 and $29,219,873, respectively.

For the 2006 Period and 2005 Period, the Company had revenues of$38,326,423and$28,873,690, respectively.  These amounts consisted of interest income on the investment securities, the unrealized gain/loss on hedged securities and derivatives used as hedging instruments, net swap revenue, and interest on short-term investments.  Interest revenue and expense is a function of the mix of financial instruments owned and hedging activities, the prevailing level of interest rates, and the term structure of our derivatives.  Net interest revenue in the 2006 Period rose 33% compared with the corresponding 2005 Period, principally attributable to an increase in short-term interest rates of the floating rate component of the swaps used as hedging instruments coupled with the
decrease in the total outstanding swap contracts.



20






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The company normally declares and pays dividends in June and December of each fiscal year.  The Company has declared and paid dividends for the 2006 and 2005 fiscal years as follows:

Security
        Amount
        Date PaidSeries A Preferred
        $19,345,000
        June 05, 2006Series A Preferred
        $19,345,000
        December 05, 2005Series A Preferred
        $19,345,000
        June 05, 2005




Interest Income and Yields

For the 2006 Period and 2005 Period interest on the securities in the Portfolio amounted to$23,935,414 and $30,324,133, respectively, representing an aggregate yield of6.02%and6.10%,respectively.  Interest earned and average yield with respect to each category of security in the Portfolio was as follows (yield based on average amortized cost):

2006 Period
      
      2005 PeriodFloating-Rate REMICs
      
      $
      104,093
      
      5.02%
      
      $
      112,025
      
      3.07%Fixed-Rate REMICs
      
      $
      1,562,753
      
      6.74%
      
      $
      1,551,177
      
      6.69%Agency ARMs
      
      $
      216,672
      
      4.74%
      
      $
      236,735
      
      3.92%Agency Hybrid ARMs
      
      $
      389,307
      
      5.17%
      
      $
      439,958
      
      4.11%Agency DUS
      
      $
      7,427,482
      
      6.01%
      
      $
      13,857,728
      
      6.39%Agency Debentures
      
      $
      14,235,107
      
      6.02%
      
      $
      14,126,510
      
      3.73%




The yield on Agency Debentures is based on U.S. dollar denominated securities, which excludes the Japanese Yen denominated securities.



During the 2006 Period, the yields on the Agency DUSs, Agency Debentures and Fixed-Rate REMICs were approximately4.85%, 5.35% and 5.05%,respectively, when taking into account the income and expense from the derivative products used to hedge these securities.  During the 2005 Period, the yields on the Agency DUSs, Agency Debentures and Fixed-Rate REMICS were approximately 3.07%, 4.39% and 3.06%, respectively, when taking into account the income and expense from the derivative products used to hedge these securities.

The Company also recorded interest income from short-term investments for the 2006 Period and 2005 Period of$10,020,100 and $863,528,respectively.



These amounts are attributable to the interest earned on (i) interest payments on securities in the Portfolio, (ii) prepayments of principal pending their reinvestment and (iii) short-term investments classified as cash equivalents.  The Company began reinvesting prepayments in certificate of deposits in fourth quarter of 2004.



Operating Expenses

Operating expenses for the 2006 Period and 2005 Period totaled$654,088 and $1,067,707, respectively.  Operating expenses consisted largely of fees paid to the Branch under the Services Agreement, fees to Citibank as Trustee, consulting fees and audit fees.  The cost of Branch personnel servicing the Company is based on actual man-hours devoted to the activities of the Company and remains at arms length.  Expenses incurred under the Services Agreement for the 2006 Period and 2005 Period totaled$433,499 and $766,724, respectively.



THREE MONTH PERIOD

Results of Operations

The following discussion pertains to the three months endedSeptember 30, 2006andSeptember 30, 2005(the 2006 Period and the 2005 Period, respectively).

Portfolio

The average amortized cost of the Portfolio during the 2006 Period and 2005 Period was$698,424,030 and $810,086,845, respectively.  This reflects the following prepayments and reinvestments:



PREPAYMENTS
      2006 Period
      
      2005 PeriodFloating-Rate REMICs
      $
      282,158
      
      $
      649,038Fixed-Rate REMICs
      $
      ---
      
      $
      ---Agency ARMs
      $
      331,963
      
      $
      321,184Agency Hybrid ARMs
      $
      1,167,714
      
      $
      1,285,605Agency DUS
      $
      16,683,651
      
      $
      42,599,835Agency Debentures
      $
      ---
      
      $
      ---






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|REINVESTMENTS        | 2006 Period |     | 2005 Period
|-------------------- | ----------- | --- | -----------
|                     |             |     |            
|                    
|Floating-Rate REMICs | $           | --- |            
|Fixed-Rate REMICs    | $           | --- |            
|Agency ARMs          | $           | --- |            
|Agency Hybrid ARMs   | $           | --- |            
|Agency DUS           | $           | --- |            
|Agency Debentures    | $           | --- |            





Revenue

The Companys net income for the 2006 Period and 2005 Period was$19,492,760 and $10,799,352, respectively.

For the 2006 Period and 2005 Period, the Company had revenues of$13,612,246and$10,982,160,respectively.  These amounts consisted of interest income on the investment securities, the unrealized gain/loss on hedged securities and derivatives used as hedging instruments, net swap revenue, and interest on short-term investments.  Interest revenue and expense is a function of the mix of financial instruments owned and hedging activities, the prevailing level of interest rates, and the term structure of our derivatives.  Net interest revenue in the 2006 Period rose 24% compared with the corresponding 2005 Period, principally attributable to an increase in short-term interest rates of the floating rate component of the swaps used as hedging instruments coupled with the
decrease in the total outstanding swap contracts.



Interest Income and Yields

For the 2006 Period and 2005 Period interest on the securities in the Portfolio amounted to$7,679,108 and $9,595,049,respectively, representing an aggregate yield of 4.40% and 6.19%, respectively.  Interest earned and average yield with respect to each category of security in the Portfolio was as follows (yield based on average amortized cost):

|                     | 2006 Period |           | 2005 Period
|-------------------- | ----------- | --------- | -----------
|                     |             |           |            
|                     |             |           |            
|Floating-Rate REMICs | $           | 34,438    |            
|Fixed-Rate REMICs    | $           | 520,917   |            
|Agency ARMs          | $           | 71,694    |            
|Agency Hybrid ARMs   | $           | 120,196   |            
|Agency DUS           | $           | 2,188,022 |            
|Agency Debentures    | $           | 4,743,841 |            







The yield on Agency Debentures is based on U.S. dollar denominated securities, which excludes the Japanese Yen denominated securities.



During the 2006 Period, the yields on the Agency DUSs, Agency Debentures and Fixed-Rate REMICs were approximately 5.43%, 5.64% and 5.52%,respectively, when taking into account the income and expense from the derivative products used to hedge these securities.  During the 2005 Period, the yields on the Agency DUSs, Agency Debentures and Fixed-Rate REMICS were approximately 3.71%, 4.92% and 3.56%, respectively, when taking into account the income and expense from the derivative products used to hedge these securities.

The Company also recorded interest income from short-term investments for the 2006 Period and 2005 Period of$3,692,612 and $324,935,respectively.



These amounts are attributable to the interest earned on (i) interest payments on securities in the Portfolio, (ii) prepayments of principal pending their reinvestment and (iii) short-term investments classified as cash equivalents.  The Company began reinvesting prepayments in certificate of deposits in fourth quarter of 2004.



Operating Expenses

Operating expenses for the 2006 Period and 2005 Period totaled$230,019 and $355,011, respectively. Operating expenses consisted largely of fees paid to the Branch under the Services Agreement, fees to Citibank as Trustee, consulting fees and audit fees. The cost of Branch personnel servicing the Company is based on actual man-hours devoted to the activities of the Company and remains at arms length. Expenses incurred under the Services Agreement for the 2006 Period and 2005 Period totaled$156,548 and $254,580, respectively.



22






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Receivable Arising from Payment for Securities

Due to the potential consequences of a Shift Event (as defined in Item 1 Note 2 to Financial Statements), the Companys purchase of the Initial Portfolio (as defined in Item 1 herein) from the Branch did not meet certain SFAS 125, as replaced by SFAS 140, sale accounting requirements.  Accordingly, the Company recorded at December 5, 1997 a receivable for the consideration paid to the Branch for the Initial Portfolio treated as collateral.  As a legal and economic matter, however, there is no such receivable since (a) neither the Bank nor the Branch has any obligation to repay any part of the purchase price for the Initial Portfolio or to repurchase or redeem any of the securities included therein, and (b) the Company has no obligation to return any of such securities to the Bank or the Branch (except in the limited circumstances and to the extent that the occurrence of a Shift Event under the Charter
would require the transfer of any assets held by the Company at the time).  As the securities in the Initial Portfolio are paid, the receivable will be deemed to be realized by an amount corresponding to the amount of the payments received.  AtSeptember 30, 2006, the receivable arising from payment for securities amounted to$10,053,381.  The decrease in the amount of such receivable reflects the prepayment of securities in the Initial Portfolio.  The Company recognized the cash proceeds of such prepayments as a reduction in the receivable.  Such decreases in the receivable did not affect the Companys results of operations or cash flow.  Disclosures required under SFAS 125, as replaced by SFAS 140, are included in Note 3 to Financial Statements.

Investment Income

The interest income on the investment securities includes interest income on the remaining securities in the Initial Portfolio, which are considered to be collateral held by the Company and which are no longer recognized on the balance sheet pursuant to guidance in Statement of Financial Accounting Standards No. 140 (SFAS 140), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS 125, which modified SFAS 125 in this respect, as explained in Note 3 to the financial statements.  The receivable for the consideration paid to the Branch for the Initial Portfolio is recognized on the balance sheet and is an asset of similar size as the remaining securities in the Initial Portfolio.  The balance sheet presentation results from compliance with SFAS 140 but does not reflect the economic substance of the transaction, as further
explained in the section on the application of SFAS 125, as replaced by SFAS 140.  For all economic intent and purposes, the securities in the Initial Portfolio are owned by the Company and managed as any other investment security, with related revenues belonging to the Company and recorded as such in the respective income statements.



Liquidity and Capital Resources

The objective of liquidity management is to ensure the availability of sufficient cash flows to meet all of the Companys financial commitments.  The Companys sole liquidity needs are to acquire reinvestment securities as original securities repay or prepay and to pay dividends on the Series A Preferred Securities.  The acquisition of reinvestment securities is funded with the proceeds of principal repayments or prepayments on original securities, and the payments of dividends on the Series A Preferred Securities are funded through interest income from the securities in the Portfolio.

Increases in prevailing interest rates in 2005 and throughSeptember 30, 2006had a positive impact on the interest income of the company.  As a result, the Branch made a substantially smaller contribution to the Companys capital in 2005 than in either of the previous two years and received a return of capital in June of 2006.  If interest rates remain at their 2005 levels or increase further, we expect the Companys interest income to continue to be higher than in 2004 and at least as high as it was in 2005.  If interest income increases, the Company may have sufficient capital after paying dividends on the Series A Preferred Securities to pay one or more dividends to the Common Securities.  However, no assurance can be given that interest rates will not decrease, which would have an adverse affect on the Companys income.



BNP PARIBAS Group's total and Tier 1 risk-based capital ratios at September 30, 2006 exceeded the minimum standards required by French banking regulations, which are currently 8% for total risk-based capital and 4% for Tier 1 risk-based capital.  A Shift Event would occur if BNP PARIBAS risk-based capital fell below these minimum standards of 8% and 4%, respectively.  See Note 2 of the attached financial statements for a detailed explanation of Shift Events.







23






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Accounting and Reporting Developments



In February 2006, the FASB issued Statement of Financial Accounting Standard No. 155 Accounting for Certain Hybrid Instruments, and amendment of FASB Statement No. 133 and 140 (SFAS 155).  SFAS 155 contains a variety of provisions which address fair value of hybrid financial instruments containing an embedded derivative, clarifies which interest only and principal only strips are not subject to SFAS 133, establishes requirements to evaluate securitized financial assets to identify embedded derivatives and addresses certain aspects of SFAS 140 regarding qualifying special purpose entities and their holding of certain derivative financial instruments.SFAS 155 is effective for fiscal years beginning after September 15, 2006.  The Company is presently evaluating what impact, if any, SFAS 155 will have.



In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets" ("SFAS 156"). The Statement amends SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," with respect to accounting for separately recognized MSR. SFAS 156 requires all separately recognized MSR to be initially measured at fair value, if practicable. SFAS 156 permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and liabilities: (1) amortizing servicing assets or liabilities in proportion to and over the period of estimated net servicing income or net servicing loss; or (2) reporting servicing assets or liabilities at fair value at each reporting date and reporting changes in fair value in earnings in the period in which the changes occur. In the event that the first method is selected, SFAS 156 requires an assessment of servicing assets or liabilities for impairment or increased obligation based on fair value at each reporting date. SFAS 156 further requires additional disclosures for all separately recognized MSR. SFAS 156 is effective as of commencement of the first fiscal year that begins after September 15, 2006. Adoption of SFAS 156 is not expected to have a material impact on the Companys consolidated financial condition or results of operations.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. Other current accounting pronouncements that require or permit fair value measurements will require application of SFAS 157. SFAS 157 does not require any new fair value measurements, however, does change the definition of fair value and the methods used to measure fair value, and expands disclosures about fair value measurements. SFAS 157 emphasizes fair value as a market-based measurement, not an entity-specific measurement. Under SFAS 157, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. SFAS 157 further establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) the reporting entitys own assumptions about market participant assumptions developed based on the best information available in the circumstances. SFAS 157 also expands disclosures about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Adoption of SFAS 157 is not expected to have a material impact upon the Company's financial condition or results of operations.

In September 2006, the FASB issued SFAS No. 158, "Employers Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)" (SFAS 158"). SFAS158 requires an employer sponsoring a single employer defined benefit plan to do the following: (1) recognize the funded status of a benefit plan, measured as the difference between plan assets at fair value (with limited exceptions) and the benefit obligation, in its statement of financial position. For a pension plan, the benefit obligation is the projected benefit obligation; for any other postretirement benefit plan, such as a retiree health care plan, the benefit obligation is the accumulated postretirement benefit obligation; (2) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS No. 87, "Employers Accounting for Pensions," or SFAS No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions." Amounts recognized in accumulated other comprehensive income, including the gains or losses, prior service costs or credits, and the transition asset or obligation remaining from the initial application of Statements 87 and 106, are adjusted as they are subsequently recognized as components of net periodic benefit cost pursuant to the recognition and amortization provisions of those Statements; (3) measure defined benefit plan assets and obligations as of the date of the employers fiscal year-end statement of financial position (with limited exceptions); and (4) disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. Adoption of SFAS 158 is required for fiscal years ending after December 15, 2006. Adoption of SFAS 158 is not expected to have a material impact upon the Company's financial condition or results of operations.



In September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements(SAB No. 108). SAB No. 108 requires the use of two alternative approaches in quantitatively evaluating materiality of misstatements. If the misstatement as quantified under either approach is material to the current year financial statements, the misstatement must be corrected. If the effect of correcting the prior year misstatements, if any, in the current year income statement is material, the prior year financial statements should be corrected. This guidance is effective for the calendar year ending 2006. In the year of adoption, the misstatements may be corrected as an accounting change by adjusting opening retained earnings rather than being included in the current year income statement. The Company is currently evaluating the impact of SAB No. 108 will have on the Companys financial position or results of operations.



Item 3:
        Quantitative and Qualitative Disclosures About Market Risk


Interest Rate Sensitivity

The Companys principal market risk exposure is to changes in interest rates.  This exposure arises from its investments in collateralized mortgage obligations, mortgage-backed securities, agency debentures, agency DUSs and certain derivative instruments used by the Company to modify interest rate exposure.

The outstanding principal amount and estimated fair value of the Companys investments as of September30, 2006, by each category of investment, is depicted in the Financial Statements.



Interest Rate Risk

The Companys income consists primarily of interest payments on collateralized mortgage obligations, mortgage-backed securities, agency debentures and agency DUSs.  Currently, the Company uses derivative products to manage a portion of its interest rate risk.

Increases in prevailing interest rates in 2005 and the first three quarters of 2006 have improved the Companys income compared to  prior periods, through the floating rate component of the portfolio, which is mainly indexed on short term rates, such as one-month and three month LIBOR.  Increasing interest rates make the pre-payment of the loans underlying the mortgage-backed securities in the Portfolio less likely, making it more likely those securities will be held to maturity without redemption.  However, no assurances can be given that interest rates will not decrease.

The Company regularly reviews its hedging requirements.  In the future, the Company may enter into additional swaps and unwind part or all of the initial and any future swaps.  This strategy is implemented in order to rebalance the fixed and floating mix of interest obligations (including those arising as a result of previous interest rate swaps entered into) and the fixed and floating mix of interest payments.

The Companys interest rate management strategy will continue to be rebalanced with any purchases of new investments.  There can be no assurance, however, that the Companys interest rate risk management strategies will be effective in this regard.

The Company is a party to seventeen interest rate swaps and six cross currency swaps, all with BNP PARIBAS as counterparty, as set out in the table below.  In all but one of these swaps, the Company pays a fixed coupon and receives floating rate payments on the notional balances.  The notional amount of each swap is tied to the outstanding principal of the securities they hedge.  The maturity dates of the swaps reflect the maturity of these securities.  However, the maturity dates maybe earlier due to prepayments on some of these securities.





24






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Value Date
        Maturity Date
        Fixed Rate
        Receive Rate
        Fair Value at     
  September 30, 2006
  (in 000s)
        Notional Balance(in 000s)February 11, 1999
        March 14, 2007
        U.S. 6.80
        U.S. Three Month LIBOR Minus Two Basis Points
        (309)
        50,000February 12, 1999
        March 5, 2007
        U.S. 6.68
        U.S. Three Month LIBOR Minus Two Basis Points
        (339)
        50,000February 25, 1999
        February 25, 2009
        U.S. 5.95
        U.S. One Month LIBOR Plus Three Basis Points
        (250)
        14,556June 25, 1999
        June 25, 2009
        U.S. 6.06
        U.S. One Month LIBOR Plus Three and Half Basis Points
        (372)
        15,719July 1, 1999
        June 25, 2009
        U.S. 6.39
        U.S. One Month LIBOR Plus Three and Half Basis Points
        (493)
        14,815September 27, 1999
        March 25, 2009
        U.S. 5.858
        U.S. One Month LIBOR Plus Four Basis Points
        (263)
        15,347November 26, 1999
        April 25, 2009
        U.S. 6.04
        U.S. One Month LIBOR Plus Four Basis Points
        (328)
        14,495June 26, 2000
        October 1, 2008
        U.S. 6.26
        U.S. One Month LIBOR
        (45)
        4,253October 2, 2000
        June 1, 2007
        U.S. 7.024
        U.S. One Month LIBOR Minus Two Basis Points
        (24)
        1,958October 2, 2000
        July 1, 2007
        U.S. 7.405
        U.S. One Month LIBOR Minus Two Basis Points
        (126)
        7,271March 25, 2001
        October 25, 2007
        U.S. 6.94
        U.S. One Month LIBOR Plus Two Basis Points
        (71)
        2,901May 3, 2002
        August 25, 2007
        U.S. 6.74
        U.S. One Month LIBOR Plus One Basis Point
        (127)
        10,000August 25, 2002
        August 25, 2007
        U.S. 4.90
        U.S. One Month LIBOR Plus Five Basis Points
        99
        26,500September 25, 2002
        June 25, 2007
        U.S. 7.007
        U.S. One Month LIBOR Plus Seven Basis Points
        (40)
        3,386March 21, 2003
        February 25, 2009
        U.S. 5.945
        U.S. One Month LIBOR Plus Nine Basis Points
        (237)
        13,172August 1, 2003
        October 25, 2007
        U.S. 6.812
        U.S. One Month LIBOR Plus Ten Basis Points
        (58)
        4,110April 1, 2004
        August 25, 2007
        U.S. 6.74
        U.S. One Month LIBOR Plus Five Basis Points
        (256)
        20,917Total Swaps- Fair Value Hedges
        
        
        
        $ (3,239)
        $ 269,400November 25, 1998
        March 26, 2008
        JPY 1.75
        U.S. Three Month LIBOR Plus Six Basis Points
        (927)
        42,000November 25, 1998
        October 9, 2007
        JPY 2.125
        U.S. Three Month LIBOR Plus Six Basis Points
        (1,745)
        58,000March 29, 1999
        October 9, 2007
        JPY 2.125
        U.S. Three Month LIBOR Minus Two and Half Basis Points
        (20)
        30,000April 6, 1999
        October 9, 2007
        JPY 2.125
        U.S. Three Month LIBOR Minus One Basis Point
        (794)
        26,400November 2, 2000
        October 9, 2007
        JPY 2.125
        U.S. Three Month LIBOR Minus Two Basis Points
        1,119
        15,000January 17, 2001
        March 26, 2008
        JPY 1.750
        U.S. 5.80
        371
        18,000Other Swap
        
        
        
        $       (1,996)
        $   189,400Total Swap Portfolio (Other liabilities)
      
      
      
      $ (5,235)
      $ 458,800






25






---











The main feature of mortgage securities is their sensitivity to the prepayment of mortgage loans, creating a contraction risk when interest rates decline and an extension risk when interest rates increase. The Company uses an estimate of the prepayment rate given either by the CPR (Conditional Prepayment Rate) or the PSA (Public Securities Association) prepayment model. Because of this risk, the securities are valued based on their average life rather than on their stated maturity date. The prepayment risk is evaluated and analyzed as this impacts the structure of the portfolio and the re-investment policy.



The breakdown of the Companys securities by category and weighted average life distribution (stated in terms of amortized cost) is summarized below based on managements prepayment assumptions (actual maturities may differ from maturities shown below due to prepayments) (in thousands):

|September 30, 2006              |                  |     |                     |   |                     |  |                    |         |                    |   |                     |  |       |     |  |   |        |  |   |        
|------------------------------- | ---------------- | --- | ------------------- | - | ------------------- |  | ------------------ | ------- | ------------------ | - | ------------------- |  | ----- | --- |  | - | ------ |  | - | -------
|                                | Due In 
    2006 |     | Due after 
    2006 |   | Due after 
    2007 |  | Due after
    2008 |         | Due After
    2009 |   | Due After 
    2010 |  | Total
|                                |                  |     |                     |   |                     | 
|Non-Collateral                  |                  |     |                     |   |                     | 
|                                |                  |     |                     |   |                     |  |                    |         |                    |   |                     |  |       |     |  |   |        |  |   |        
|                                |                  |     |                     |   |                     |  |                    |         |                    |   |                     |  |       |     |  |   |        |  |   |        
|Fixed-Rate Instruments:         |                  |     |                     |   |                     |  |                    |         |                    |   |                     |  |       |     |  |   |        |  |   |        
|Fixed-Rate REMICs               | $                | --- |                     | $ | 30,915              |  | $                  | ---     |                    | $ | ---                 |  | $     | --- |  | $ | ---    |  | $ | 30,915 
|Agency DUS                      |                  | --- |                     |   | 46,127              |  |                    | 27,745  |                    |   | 64,613              |  |       | --- |  |   | ---    |  |   | 138,485
|Agency Debentures               |                  | --- |                     |   | 372,759             |  |                    | 131,908 |                    |   | ---                 |  |       | --- |  |   | ---    |  |   | 504,667
|                                |                  |     |                     |   |                     |  |                    |         |                    |   |                     |  |       |     |  |   |        |  |   |        
|Total Fixed-Rate Instruments    |                  | --- |                     |   | 449,801             |  |                    | 159,653 |                    |   | 64,613              |  |       | --- |  |   | ---    |  |   | 674,067
|                                |                  |     |                     |   |                     |  |                    |         |                    |   |                     |  |       |     |  |   |        |  |   |        
|Floating-Rate Instruments:      |                  |     |                     |   |                     |  |                    |         |                    |   |                     |  |       |     |  |   |        |  |   |        
|Floating-Rate REMICs            |                  | --- |                     |   | ---                 |  |                    | ---     |                    |   | 327                 |  |       | --- |  |   | ---    |  |   | 327    
|Agency ARMs                     |                  | --- |                     |   | ---                 |  |                    | 370     |                    |   | 460                 |  |       | --- |  |   | 1,223  |  |   | 2,053  
|Agency Hybrid ARMs              |                  | --- |                     |   | 159                 |  |                    | 146     |                    |   | 1,793               |  |       | --- |  |   | 1,731  |  |   | 3,829  
|                                |                  |     |                     |   |                     |  |                    |         |                    |   |                     |  |       |     |  |   |        |  |   |        
|Total Floating-Rate Instruments |                  | --- |                     |   | 159                 |  |                    | 516     |                    |   | 2,580               |  |       | --- |  |   | 2,954  |  |   | 6,209  
|                                |                  |     |                     |   |                     |  |                    |         |                    |   |                     |  |       |     |  |   |        |  |   |        
|                                |                  |     |                     |   |                     |  |                    |         |                    |   |                     |  |       |     |  |   |        |  |   |        
|Total Non-Collateral            | $                | --- |                     | $ | 449,960             |  | $                  | 160,169 |                    | $ | $67,193             |  | $     | --- |  | $ | $2,954 |  | $ | 680,276
|                                |                  |     |                     |   |                     |  |                    |         |                    |   |                     |  |       |     |  |   |        |  |   |        





CollateralFixed-Rate Instruments:
      $
      ---
      
      $
      ---
      
      $
      ---
      
      $
      ---
      
      $
      ---
      
      $
      ---
      
      $
      ---Fixed-Rate REMICsAgency DUS
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---Agency Debentures
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---Total Fixed-Rate Instruments
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---
      
      
      ---Floating-Rate Instruments:Floating-Rate REMICs
      
      ---
      
      
      37
      
      
      1,239
      
      
      850
      
      
      ---
      
      
      ---
      
      
      2,126Agency ARMs
      
      ---
      
      
      346
      
      
      477
      
      
      131
      
      
      1,660
      
      
      646
      
      
      3,260Agency Hybrid ARMs
      
      ---
      
      
      1,063
      
      
      1,949
      
      
      ---
      
      
      ---
      
      
      1,655
      
      
      4,667Total Floating-Rate Instruments
      
      ---
      
      
      1,446
      
      
      3,665
      
      
      981
      
      
      1,660
      
      
      2,301
      
      
      10,053Total Collateral
      $
      ---
      
      $
      1,446
      
      $
      3,665
      
      $
      981
      
      $
      1,660
      
      $
      2,301
      
      $
      10,053September 30, 2006 Total Portfolio
      $
      ---
      
      $
      451,406
      
      $
      163,834
      
      $
      68,174
      
      $
      1,660
      
      $
      5,255
      
      $
      690,329






26






---











Item 4:
        Controls and Procedures




Evaluation of Disclosure Controls and Procedures



As of September 30, 2006, the Company carried out an evaluation under the supervision and with the participation of the Companys management, including the President and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon and as of the date of the Companys evaluation, the President and Chief Financial Officer concluded that the disclosure controls and procedures are effective in all material respects to provide reasonable assurance that information required
to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. There has not been any change in the Companys internal control over financial reporting that occurred during the third fiscal quarter that has materially affected, or is  reasonably likely to materially affect, the Companys internal control over financial reporting.



Part II

Item 1:
        Legal Proceedings


None.


Item 1A:
        Risk Factors






The following important factors, among others, could adversely affect the Companys results of operations and financial condition.



Since the major source of the Companys income is from interest payments, the Company is subject to interest rate risk.



The purpose of the Company is to acquire and hold eligible securities that will generate net income for distribution to the holders of the Series A Preferred Securities and the Common Securities.  The eligible securities in the Portfolio carry either fixed, adjustable or floating interest rates.  Some of the fixed rate securities are hedged with derivatives instruments that aim to transform the fixed rate exposure into floating rate income, based on one-month and three-month Libor rates.  As a consequence, a decreasing or low interest rate environment will negatively affect the net income of the Company through the floating rate component of the Portfolio, which may affect the ability of the Company to distribute dividends to the holders of the Series A Preferred Securities.  Conversely, in an increasing or high interest rate environment, the net income of the Company will benefit from higher interest income.



The Companys investments are subject to prepayment and reinvestment risks.



Mortgage-backed securities are subject to prepayment of the underlying loans.  In a declining or low interest rate environment, mortgage-backed securities are exposed to more prepayments that shorten their average term.  Prepayments received in such a situation may be reinvested into securities that carry a lower current yield.  In an increasing or high interest rate environment, mortgage-backed securities are less subject to prepayment.



The Company is subject to changes in French bank regulatory policies that may affect its ability to pay dividends.



As a subsidiary of the Bank, the company is subject to the risk that French Banking Commission (Commission Bancaire), in their exercise of regulatory oversight with respect to the Bank, may make determinations that would restrict the Companys ability to make distributions to holders of its securities (including dividend payments to the holders of the Series A Preferred Securities) or to redeem its securities, or render other regulatory decisions that may impair or alter the Companys current operations.



27






---







A Shift Event could have materially adverse consequences for the Company and the Security holders.

If a Shift Event (as defined below) occurs, then substantially all the Common Securities would be automatically redeemed without prior redemption of the Series A Preferred Securities.  In addition, if the Banks Tier 1 risk-based capital ratio were to decline below the minimum percentage required by French banking regulations (currently 4%), the Company would pay a special dividend consisting of all of its net assets (other than assets having a total market value of approximately $40,000,000) to the Branch as holders of the Common Securities.



A Shift Event would be deemed to have occurred if (i) the Banks total risk-based capital ratio or Tier 1 risk-based capital ratio were to decline below the minimum percentages required by French banking regulations, (ii) the Bank were to become subject to certain specified receivership proceedings or (iii) the French Banking Commission, in its sole discretion, were to notify the Bank and the Company that it has determined that the Banks financial condition was deteriorating such that either of the foregoing clauses(i) or (ii) would apply in the near term.  French banking regulations currently require French banks to maintain a minimum total risk-based capital ratio of at least 8.0% and a minimum Tier 1 risk-based capital ratio of at least 4.0%.



The Company has business relationships with affiliated parties that may generate conflicts of interest.



Because of the relationship between the Company and the Branch, the Bank and their affiliates, conflicts of interest may arise between the Branch, the Bank and their affiliates and the Company.  The Companys officers, employees and directors (other than the independent director) are officers and employees of the Branch, the Bank or an affiliate.  Conflicts of interest may arise in between the discharge by such individuals of their duties as officers, employees or directors of the Company on the one hand and the Branch, the Bank and its affiliates on the other hand.



Item 2:
        Unregistered Sales of Equity Securities and Use of Proceeds


None.

Item 3:
        Defaults upon Senior Securities


None.

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


None.

Item 5:
        Other Information None.




Item 6:
        Exhibits


EXHIBITS

A)
        Exhibits:


11)
      Computation of Per Share Earnings (omitted in accordance with section (b)(11) of Item 601 of Regulation S-K)12)
      Computation of ratio of earnings to fixed charges and preferred security dividends31.1)
      Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2)
      Certification of President pursuant to Section 302 of the Sarbanes-Oxley Act of 200232)
      Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002






28






---







Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

|                        | BNP U.S. FUNDING L.L.C.                                                   
|----------------------- | --------------------------------------------------------------------------
|                        | Registrant                                                                
|Date: November 14, 2006 | By /s/  Martine Billeaud
      Martine BilleaudPresident and Director     
|Date: November 14, 2006 | By /s/ Thomas Clyne
      Thomas ClyneChief Financial Officer and Director





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