FINANCIAL STATEMENTS
Financial Guaranty Insurance Company and Subsidiaries
December 31, 2006
with Report of Independent Auditors


<PAGE>









              Financial Guaranty Insurance Company and Subsidiaries

                        Consolidated Financial Statements


                                December 31, 2006




                                    CONTENTS

Report of Independent Auditors.....................................    1

Consolidated Balance Sheets........................................    2
Consolidated Statements of Income..................................    3
Consolidated Statements of Stockholder's Equity....................    4
Consolidated Statements of Cash Flows..............................    5
Notes to Consolidated Financial Statements.........................    6


<PAGE>



                     Report of Independent Registered Public Accounting Firm


The Board of Directors and Stockholder
Financial Guaranty Insurance Company

We have  audited  the  accompanying  consolidated  balance  sheets of  Financial
Guaranty  Insurance  Company and Subsidiaries (the "Company") as of December 31,
2006 and 2005, and the related consolidated statements of income,  stockholder's
equity,  and cash flows for each of the three years in the period ended December
31, 2006.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  We were not engaged to perform an
audit of the Company's  internal  control over  financial  reporting.  Our audit
included  consideration of internal control over financial  reporting as a basis
for designing audit  procedures that are appropriate in the  circumstances,  but
not for the  purpose  of  expressing  an  opinion  on the  effectiveness  of the
Company's internal control over financial reporting.  Accordingly, we express no
such  opinion.  An audit also  includes  examining,  on a test  basis,  evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial  position of the Company at
December 31, 2006 and 2005, and the consolidated results of their operations and
their cash flows for each of the three years in the period  ended  December  31,
2006 in conformity with U.S. generally accepted accounting principles.



                                                         /S/ Ernst & Young LLP


New York, New York
February 2, 2007


                                        1
<PAGE>



              Financial Guaranty Insurance Company and Subsidiaries

                           Consolidated Balance Sheets

                (Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>

                                                                          DECEMBER 31,      DECEMBER 31,
                                                                              2006              2005
                                                                       --------------------------------------
                                                                          (Unaudited)
ASSETS
<S>                                                                     <C>                  <C>
Fixed maturity securities, available for sale, at fair value
   (amortized cost of  $3,627,344 in 2006 and $3,277,291 in 2005)          $ 3,627,007       $ 3,258,738
Variable interest entity fixed maturity securities, held to maturity
   at amortized cost                                                           750,000                 -
Short-term investments                                                         211,726           159,334
                                                                       --------------------------------------
Total investments                                                            4,588,733         3,418,072

Cash and cash equivalents                                                       29,963            45,077
Accrued investment income                                                       49,843            42,576
Reinsurance recoverable on losses                                                1,485             3,271
Prepaid reinsurance premiums                                                   156,708           110,636
Policy acquisition costs deferred, net                                          93,170            63,330
Receivable from related parties                                                  2,483             9,539
Property and equipment, net of accumulated depreciation of $2,107 in
   2006 and  $885 in 2005                                                        2,617             3,092
Prepaid expenses and other assets                                               17,589            10,354
Foreign deferred tax asset                                                       3,491             3,500
Current income tax receivable                                                        -             2,158
                                                                       --------------------------------------
Total assets                                                               $ 4,946,082       $ 3,711,605
                                                                       ======================================

LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
    Unearned premiums                                                      $ 1,347,592       $ 1,201,163
    Losses and loss adjustment expense reserves                                 40,299            54,812
    Ceded reinsurance balances payable                                           7,524             1,615
    Accounts payable and accrued expenses and other liabilities                 43,405            36,359
    Capital lease obligations                                                    2,941             4,262
    Payable for securities purchased                                            10,770                 -
    Variable interest entity floating rate notes                               750,000                 -
    Accrued interest expense  - variable interest entity                         1,298                 -
    Current income taxes payable                                                17,520                 -
    Deferred income taxes                                                       76,551            45,963
    Dividends payable                                                           10,000                 -
                                                                       --------------------------------------
Total liabilities                                                            2,307,900         1,344,174
                                                                       --------------------------------------

Stockholder's equity:
   Common stock, par value $1,500 per share; 10,000 shares authorized,
     issued and outstanding                                                     15,000            15,000
   Additional paid-in capital                                                1,901,799         1,894,983
   Accumulated other comprehensive income (loss), net of tax                     6,500           (13,597)
   Retained earnings                                                           714,883           471,045
                                                                       --------------------------------------
Total stockholder's equity                                             2,638,182              $2,367,431
                                                                       --------------------------------------
Total liabilities and stockholder's equity                                 $ 4,946,082       $ 3,711,605
                                                                       ======================================

See accompanying notes to consolidated financial statements.
</TABLE>


                                        2


<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

                        Consolidated Statements of Income

                             (Dollars in thousands)


<TABLE>
<CAPTION>

                                                                        YEAR ENDED      YEAR ENDED     YEAR ENDED
                                                                       DECEMBER 31,    DECEMBER 31,   DECEMBER 31,
                                                                           2006            2005           2004
                                                                      -----------------------------------------------
         Revenues:
<S>                                                                      <C>             <C>            <C>
            Gross direct and assumed premiums written                    $  441,231      $  410,202     $  323,575
            Reassumed ceded premiums                                              -               -          4,959
            Ceded premiums written                                          (74,417)        (29,148)       (14,656)
                                                                       --------------- -------------- ---------------
            Net premiums written                                            366,814         381,054        313,878
            Change in net unearned premiums                                (100,357)       (156,485)      (138,929)
                                                                       --------------- -------------- ---------------
         Net premiums earned                                                266,457         224,569        174,949

         Net investment income                                              138,475         117,072         97,709
         Interest income - investments held by variable interest
            entity                                                           35,893               -              -
         Net realized gains                                                     274             101            559
         Net realized and unrealized gains (losses) on credit
            derivative contracts                                                507            (167)             -
         Other income                                                         1,815             762            736
                                                                       --------------- -------------- ---------------
         Total revenues                                                     443,421         342,337        273,953

         Expenses:
            Loss and loss adjustment expenses                                (8,700)         18,506          5,922
            Underwriting and other operating expenses                        91,614          82,064         73,426
            Policy acquisition costs deferred, net                          (39,728)        (38,069)       (32,952)
            Amortization of policy acquisition costs deferred                11,486           8,302          2,038
            Interest expense - debt held by variable interest entity         35,893               -              -
                                                                       --------------- -------------- ---------------
         Total expenses                                                      90,565          70,803         48,434
                                                                       --------------- -------------- ---------------

         Income before income tax expense                                   352,856         271,534        225,519

         Income tax expense:
            Current                                                          67,895          32,370         42,510
            Deferred                                                         21,123          32,738         12,923
                                                                       --------------- -------------- ---------------
         Total income tax expense                                            89,018          65,108         55,433
                                                                       --------------- -------------- ---------------
         Net income                                                      $  263,838      $  206,426    $   170,086
                                                                       =============== ============== ===============
</TABLE>


See accompanying notes to consolidated financial statements.


                                        3

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

                 Consolidated Statements of Stockholder's Equity

                             (Dollars in thousands)
<TABLE>
<CAPTION>

                                                                          ACCUMULATED OTHER
                                                          ADDITIONAL        COMPREHENSIVE
                                            COMMON         PAID-IN         (LOSS) INCOME,         RETAINED
                                            STOCK          CAPITAL           NET OF TAX           EARNINGS          TOTAL
                                           -------------------------------------------------------------------------------------
<S>                                           <C>           <C>                  <C>                 <C>            <C>
Balance at January 1, 2004                     15,000        1,857,772            2,059               94,533         1,969,364
Net income                                          -              -                  -              170,086           170,086
Other comprehensive income:
   Change in fixed maturity securities              -              -              9,340                   -              9,340
        available for sale, net of tax
   Change in foreign currency translation           -              -              4,086                   -              4,086
        adjustment, net of tax
                                                                                                               -----------------
Total comprehensive income                                                                                             183,512
Capital contribution                                -           25,000                -                   -             25,000
                                           -------------------------------------------------------------------------------------
Balance at December 31, 2004                   15,000        1,882,772           15,485              264,619         2,177,876
Net income                                          -              -                  -              206,426           206,426
Other comprehensive income:
   Change in fixed maturity securities              -              -            (23,550)                  -            (23,550)
        available for sale, net of tax
   Change in foreign currency translation           -              -             (5,532)                  -             (5,532)
        adjustment, net of tax

Total comprehensive income                                                                                             177,344
Capital contribution                                -           12,211                -                   -             12,211
                                           -------------------------------------------------------------------------------------
Balance at December 31, 2005                   15,000        1,894,983          (13,597)             471,045         2,367,431
Net Income                                          -              -                  -              263,838           263,838
Other comprehensive income:
     Change in fixed maturity securities            -              -             11,901                   -             11,901
          available for sale, net of tax
   Change in foreign currency translation           -              -              8,196                   -              8,196
          adjustment, net of tax
Total comprehensive income                          -              -                -                     -            283,935
Dividends declared to FGIC Corp.                    -              -                -                (20,000)          (20,000)
Amortization of stock options and                   -            6,816              -                     -              6,816
      restricted stock                     -------------------------------------------------------------------------------------
Balance at December 31, 2006                 $ 15,000       $1,901,799        $   6,500          $   714,883      $  2,638,182
                                           =====================================================================================

</TABLE>

See accompanying notes to consolidated financial statements.

                                        4

<PAGE>

              Financial Guaranty Insurance Company and Subsidiaries

                      Consolidated Statements of Cash Flows

                             (Dollars in thousands)


<TABLE>
<CAPTION>


                                                               YEAR ENDED    YEAR ENDED     YEAR ENDED
                                                              DECEMBER 31,  DECEMBER 31,   DECEMBER 31,
                                                                  2006          2005           2004
                                                             --------------------------------------------
OPERATING ACTIVITIES
<S>                                                            <C>            <C>           <C>
Net income                                                     $  263,838     $  206,426    $  170,086
Adjustments to reconcile net income to net cash provided
  by operating activities:
     Amortization of policy acquisition costs deferred             11,486          8,574         2,038
     Policy acquisition costs deferred                            (39,728)       (38,069)      (32,952)
     Depreciation of property and equipment                         1,222            721           164
     Amortization of fixed maturity securities                     33,774         31,504        37,013
     Amortization of short-term investments                           131            481            29
     Net realized gains on investments                               (274)          (101)         (559)
     Stock compensation expense                                     6,816              -             -
     Change in accrued investment income, prepaid
      expenses, foreign deferred tax asset, and other
      assets, net                                                 (14,725)        (8,504)       (5,545)
     Change in realized and unrealized gains on credit
      derivative contracts                                          1,336            167             -
     Change in current income taxes receivable                          -              -           126
     Change in reinsurance recoverable on losses                    1,786           (217)        5,011
     Change in prepaid reinsurance premiums                       (46,072)        (1,344)       14,476
     Change in other reinsurance receivables                            -              -         5,295
     Change in receivable from related parties                      7,056         (8,737)        8,957
     Change in unearned premiums                                  147,589        157,829       124,452
     Change in loss and loss adjustment expenses                  (14,513)        15,631        (1,286)
     Change in ceded reinsurance balances payable and
      accounts payable and accrued expenses and other
      liabilities                                                  10,529          8,923         7,348
     Change in current income taxes payable                        19,678         (6,559)        4,401
     Change in accrued interest expense - variable
     interest entity                                                1,298              -             -
     Change in deferred federal income taxes                       20,878         19,252        12,923
                                                             --------------------------------------------
Net cash provided by operating activities                         412,105        385,977       351,977
                                                             --------------------------------------------

INVESTING ACTIVITIES
Sales and maturities of fixed maturity securities                 198,186        122,638       284,227
Purchases of fixed maturity securities                           (576,386)      (520,089)     (546,028)
Purchases, sales and maturities of short-term
  investments, net                                                (52,126)       (19,342)     (126,125)
Receivable for securities sold                                          -            (20)          170
Payable for securities purchased                                   10,770         (5,715)        5,715
Purchase of fixed assets                                             (477)        (1,405)       (2,572)
Purchase of investments held by variable interest entity         (750,000)             -             -
                                                             --------------------------------------------
Net cash used in investing activities                          (1,170,033)      (423,933)     (384,613)
                                                             --------------------------------------------

FINANCING ACTIVITIES
Proceeds from issuance of debt held by variable interest
entity                                                            750,000              -             -
Capital contribution                                                    -         12,211        25,000
Dividends paid                                                    (10,000)             -             -
                                                             --------------------------------------------
Net cash provided by  financing activities                        740,000         12,211        25,000
                                                             --------------------------------------------
Effect of exchange rate changes on cash                             2,814          1,530        (1,717)
                                                             --------------------------------------------
Net decrease in cash and cash equivalents                         (15,114)       (24,215)       (9,353)

Cash and cash equivalents at beginning of period                   45,077         69,292        78,645
                                                             --------------------------------------------
Cash and cash equivalents at end of period                     $   29,963     $   45,077    $   69,292
                                                             ============================================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid                                              $   47,507     $   49,613    $   40,890
Interest paid - debt held by variable interest entity          $   34,595     $        -    $        -

See accompanying notes to consolidated financial statements.
</TABLE>


                                        5


<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)




1. BUSINESS AND ORGANIZATION

Financial Guaranty Insurance Company (the "Company" or "FGIC") is a wholly owned
subsidiary of FGIC Corporation  ("FGIC Corp.").  The Company provides  financial
guaranty  insurance and other forms of credit enhancement for public finance and
structured finance obligations.  The Company's financial strength is rated "Aaa"
by Moody's Investors Service,  Inc., "AAA" by Standard & Poor's Rating Services,
a division of The McGraw-Hill Companies,  Inc., and "AAA" by Fitch Ratings, Inc.
The Company is licensed to write financial  guaranty insurance in all 50 states,
the District of Columbia,  the  Commonwealth  of Puerto  Rico,  the U.S.  Virgin
Islands,  and,  through a branch,  the United  Kingdom.  In  addition,  a United
Kingdom  subsidiary  of the Company is authorized  to write  financial  guaranty
business in the United  Kingdom  and has  passport  rights to write  business in
other European Union member countries.

On December 18, 2003, an investor group  consisting  primarily of The PMI Group,
Inc. ("PMI"), affiliates of the Blackstone Group L.P. ("Blackstone"), affiliates
of the Cypress  Group L.L.C.  ("Cypress")  and  affiliates of CIVC Partners L.P.
("CIVC") (collectively,  the "Investor Group") completed the acquisition of FGIC
Corp. from a subsidiary of General Electric  Capital  Corporation ("GE Capital")
in a transaction  valued at  approximately  $2,200,000 (the  "Transaction").  An
affiliate  of GE Capital owns 2,346  shares,  or 100%,  of FGIC  Corp.'s  Senior
Participating   Mandatorily   Convertible   Modified  Preferred  Stock  ("Senior
Preferred Shares"),  with an aggregate liquidation  preference of $287,255 as of
December 31, 2006,  and  approximately  5% of FGIC  Corp.'s  outstanding  common
stock.

PMI is the largest  stockholder of FGIC Corp.,  owning  approximately 42% of its
common stock at December 31, 2006 and 2005.  Blackstone,  Cypress and CIVC owned
approximately  23%, 23% and 7% of FGIC Corp.'s  common stock,  respectively,  at
December 31, 2006 and 2005.

2. BASIS OF PRESENTATION

The consolidated  financial  statements  include the accounts of the Company and
all other  entities in which the Company has a controlling  financial  interest.
All significant intercompany balances have been eliminated.

The  preparation  of  consolidated   financial  statements  in  conformity  with
accounting  principles generally accepted in the United States ("GAAP") requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and the accompanying notes. Actual results
could differ from those estimates.

The accompanying  financial  statements have been prepared on the basis of GAAP,
which differs in certain  respects from the accounting  practices  prescribed or
permitted by the New York State Insurance  Department (see Note 4). Certain 2005
and 2004 amounts have been reclassified to conform to the 2006 presentation.

                                        6

<PAGE>



              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)






3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company's significant accounting policies are as follows:

A. INVESTMENTS

All the Company's fixed maturity securities are classified as available for sale
and are  recorded on the trade date at fair value.  Unrealized  gains and losses
are recorded as a separate component of accumulated other  comprehensive  (loss)
income,  net of  applicable  income  taxes,  in the  consolidated  statements of
stockholders'  equity.  Short-term  investments are carried at fair value, which
approximates cost.

Bond  discounts  and  premiums are  amortized  over the  remaining  terms of the
respective  securities.  Realized gains or losses on the sale of investments are
determined based on the specific identification method.

Securities that have been determined to be other than  temporarily  impaired are
reduced to realizable  value,  establishing  a new cost basis,  with a charge to
realized loss at such date.

B. CASH AND CASH EQUIVALENTS

The  Company   considers  all  bank  deposits,   highly  liquid  securities  and
certificates  of deposit with  maturities of three months or less at the date of
purchase to be cash  equivalents.  These cash  equivalents  are carried at cost,
which approximates fair value.

C. PREMIUM REVENUE RECOGNITION

Direct and assumed  premiums  are  received  either  up-front or over time on an
installment  basis. The premium  collection method is determined at the time the
policy is issued.  Up-front  premiums  are paid in full at the  inception of the
policy and are earned over the period of risk in  proportion to the total amount
of  principal  and  interest  amortized  in the  period as a  proportion  of the
original principal and interest outstanding.  Installment premiums are collected
periodically and are reflected in income pro rata over the period covered by the
premium payment,  including  premiums received on credit default swaps (see Note
6).

Gross direct and assumed premiums written for the years ended December 31, 2006,
2005, and 2004 include $15,989, $965, and $0, respectively,  of assumed premiums
written.


                                                7

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Unearned  premiums  represent  the portion of premiums  received  applicable  to
future periods on insurance policies in force. When an obligation insured by the
Company  is  refunded  by the  issuer  prior to the end of the  expected  policy
coverage  period,  any remaining  unearned premium is recognized at that time. A
refunding occurs when an insured  obligation is called or legally defeased prior
to stated  maturity.  Premiums earned on refundings were $41,836,  $54,795,  and
$42,695 for the years ended December 31, 2006, 2005, and 2004, respectively.

Ceded premiums are recognized in a manner  consistent with the premium earned on
the underlying policies.

D. POLICY ACQUISITION COSTS

Policy acquisition costs include only those expenses that relate directly to and
vary with  premium  production.  Such costs  include  compensation  of employees
involved in marketing, underwriting and policy issuance functions, rating agency
fees,  premium taxes,  ceding  commissions  paid on assumed policies and certain
other  expenses.  In  determining  policy  acquisition  costs,  the Company must
estimate  and  allocate  the  percentage  of its  costs  and  expenses  that are
attributable  to premium  production,  rather than to other  activities.  Policy
acquisition  costs,  net of  ceding  commission  income  on  premiums  ceded  to
reinsurers,  are  deferred  and  amortized  over the period in which the related
premiums  are earned.  Anticipated  loss and loss  adjustment  expenses,  future
maintenance  costs  on the  in-force  business  and net  investment  income  are
considered in determining the recoverability of acquisition costs.

E. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

Provision for loss and loss adjustment expenses falls into two categories:  case
reserves and watchlist reserves.  Case reserves are established for the value of
estimated losses on specific insured obligations that are presently or likely to
be in  payment  default  and  for  which  future  loss  is  probable  and can be
reasonably estimated.  These reserves represent an estimate of the present value
of the anticipated  shortfall  between (1) payments on insured  obligations plus
anticipated  loss adjustment  expenses and (2)  anticipated  cash flow from, and
proceeds to be received on, sales of any  collateral  supporting  the obligation
and/or other anticipated  recoveries.  The discount rate used in calculating the
net present value of estimated  losses is based upon the risk-free  rate for the
duration of the anticipated shortfall.

                                        8


<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company establishes watchlist reserves to recognize the potential for claims
against the Company on insured  obligations  that are not  presently  in payment
default,  but  which  have  migrated  to an  impaired  level  where  there  is a
substantially  increased  probability  of  default.  These  reserves  reflect an
estimate  of  probable  loss given  evidence  of  impairment,  and a  reasonable
estimate of the amount of loss given default.  The methodology for  establishing
and calculating the watchlist reserve relies on a categorization  and assessment
of the probability of default, and loss severity in the event of default, of the
specific  impaired  obligations on the watchlist based on historical  trends and
other  factors.  The  watchlist  reserves  are  adjusted as necessary to reflect
changes in the loss expectation inherent in the group of impaired credits.

The reserves for loss and loss  adjustment  expenses are reviewed  regularly and
updated  based on claim  payments and the results of  surveillance.  The Company
conducts  ongoing  insured  portfolio  surveillance  to  identify  all  impaired
obligations and thereby provide a materially  complete  recognition of potential
losses for each  accounting  period.  The  reserves are  necessarily  based upon
estimates  and  subjective  judgments  about the outcome of future  events,  and
actual results will likely differ from these estimates. Adjustments of estimates
made in prior years may result in additional loss and loss  adjustment  expenses
or a reduction of loss and loss adjustment  expenses in the period an adjustment
is made.

Reinsurance  recoverable on losses is calculated in a manner consistent with the
calculation of loss and loss adjustment expenses.

F. INCOME TAXES

Deferred tax assets and  liabilities  are  recognized  to reflect the tax impact
attributable to differences  between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.

Deferred tax assets and  liabilities  are  measured  using  statutory  tax rates
expected to apply to taxable income in the years in which temporary  differences
are expected to be recovered or settled.  The effect of a change in tax rates on
deferred tax assets and  liabilities  is  recognized  in income in the period in
which a change occurs.

G. PROPERTY AND EQUIPMENT

Property  and  equipment  consists  of  office  furniture,   fixtures,  computer
equipment and software and leasehold improvements that are reported at cost less
accumulated  depreciation.  Office  furniture and fixtures are  depreciated on a
straight-line basis over five years.  Leasehold  improvements are amortized over
their  estimated  service  lives  or over the life of the  lease,  whichever  is
shorter.  Computer  equipment  and  software are  depreciated  over three years.
Maintenance and repairs are charged to expense as incurred.

                                        9

<PAGE>



              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)






3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

H. FOREIGN CURRENCY TRANSLATION

The Company has an  established  foreign  branch and three  subsidiaries  in the
United Kingdom and insured exposure from a former branch in France.  The Company
has  determined  that the  functional  currencies of these  operations are their
local  currencies.  Accordingly,  the assets and liabilities of these operations
are translated  into U.S.  dollars at the rates of exchange at December 31, 2006
and 2005, and revenues and expenses are translated at average  monthly  exchange
rates. The cumulative  translation gain (loss) at December 31, 2006 and 2005 was
$6,750 and $(1,446),  respectively, net of tax (expense) benefit of ($3,580) and
$723, respectively, and is reported as a separate component of accumulated other
comprehensive income in the consolidated statements of stockholders' equity.

I. STOCK COMPENSATION PLAN

FGIC  Corp.  has  an  incentive   stock  plan  that  provides  for   stock-based
compensation,  including stock options,  restricted  stock awards and restricted
stock  units.  Stock  options are  granted for a fixed  number of shares with an
exercise  price equal to or greater than the estimated  fair value of the common
stock at the date of the grant.  Restricted stock awards and units are valued at
the estimated fair value of the common stock on the grant date. Prior to January
1, 2006, the Company  accounted for grants under this plan under the recognition
and measurement  provisions of Accounting  Principles  Board ("APB") Opinion No.
25, Accounting for Stock Issued to Employees,  and related  interpretations,  as
permitted  by  Statement of  Financial  Accounting  Standards  ("SFAS") No. 123,
Accounting for Stock-Based Compensation.


                                        10

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Effective  January 1,  2006,  the  Company  adopted  the fair value  recognition
provisions of SFAS No. 123(R),  Share-Based  Payment ("SFAS No. 123 (R)),  using
the modified-prospective-transition method. Under that method, compensation cost
includes all  share-based  payments  granted prior to, but not yet vested as of,
January 1, 2006, based on the grant date fair value estimated in accordance with
SFAS No.  123(R).  The Company has estimated the fair value of all stock options
at the  date of grant  using  the  Black-Scholes-Merton  option  pricing  model.
Results for prior periods have not been restated.

J. VARIABLE INTEREST ENTITIES

Financial  Interpretation  No.46-R,  Consolidation of Variable Interest Entities
("FIN 46-R"),  provides  accounting and disclosure rules for determining whether
certain entities should be consolidated in the Company's  consolidated financial
statements.  An entity is subject to FIN 46-R, and is called a Variable Interest
Entity  ("VIE"),  if it has (i) equity that is insufficient to permit the entity
to finance its activities without additional  subordinated  financial support or
(ii) equity investors that cannot make significant  decisions about the entity's
operations or that do not absorb the majority of expected  losses or receive the
majority of expected residual returns of the entity.


                                        11


<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Under FIN 46-R, a VIE is consolidated by its primary  beneficiary,  which is the
party that has a majority of the  expected  losses or a majority of the expected
residual  returns  of the  VIE,  or  both.  FIN 46-R  requires  disclosures  for
companies that have either a primary or significant  variable interest in a VIE.
All other entities not  considered  VIEs are evaluated for  consolidation  under
SFAS No. 94, Consolidation of all Majority-Owned Subsidiaries.

As part of its structured finance business, the Company insures debt obligations
or certificates  issued by special purpose  entities.  The Company has evaluated
the relevant  transactions  and does not believe any such  transactions  require
consolidation or disclosure under FIN 46-R other than as disclosed in Note 10.

K. DERIVATIVE INSTRUMENTS

Under  SFAS  No.  133,   Accounting  for  Derivative   Instruments  and  Hedging
Activities, as amended by SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, all derivative instruments are recognized on
the  consolidated  balance sheet at their fair value,  and changes in fair value
are recognized immediately in earnings unless the derivatives qualify as hedges.

The Company  provides  credit default swaps ("CDSs") to certain buyers of credit
protection  by  entering  into  contracts  that  reference  collateralized  debt
obligations  from cash and  synthetic  structures  backed by pools of corporate,
consumer or structured  finance debt. It also offers credit protection on public
finance and structured  finance  obligations in CDS form. The Company  considers
CDS  agreements  to be a normal  extension of its financial  guaranty  insurance
business,  although they are considered  derivatives  for  accounting  purposes.
These  agreements are recorded at fair value. The Company believes that the most
meaningful  presentation of the financial  statement impact of these derivatives
is to reflect  premiums as installments  are received,  and to record losses and
loss adjustment expenses and changes in fair value as incurred.


                                        12


<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)




3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

L. NEW ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial  Accounting Standards Board (the "FASB") issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), an
interpretation  of SFAS No. 109,  Accounting for Income Taxes.  FIN 48 clarifies
the  accounting  for  uncertainty  in income  taxes  recognized  in an  entity's
financial  statements in accordance with SFAS No. 109 and prescribes metrics for
the financial  statement  recognition and measurement of a tax position taken or
expected to be taken in a tax  return.  FIN 48 also  provides  guidance on other
matters related to accounting for income taxes.  FIN 48 is applicable for fiscal
years beginning after December 15, 2006, with earlier application  encouraged if
financial  statements,  including  interim financial  statements,  have not been
issued  for  the  period  of  adoption.   The  Company  has  not  elected  early
application, and the interpretation is not expected to have a material impact on
the Company's operating results or financial condition.

In February  2006,  the FASB issued SFAS No. 155,  Accounting for Certain Hybrid
Financial  Instruments.  SFAS No. 155 amends  SFAS No.  133,  and SFAS No.  140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities,  and addresses issues raised in SFAS No. 133  Implementation  Issue
No. D1,  Application  of Statement  133 to Beneficial  Interests in  Securitized
Financial Assets.  The primary  objectives of SFAS No. 155 are: (i) with respect
to SFAS  No.  133,  to  address  the  accounting  for  beneficial  interests  in
securitized  financial assets and (ii) with respect to SFAS No. 140, eliminate a
restriction  on the passive  derivative  instruments  that a qualifying  special
purpose  entity  may  hold.  SFAS  No.  155 is  effective  for  those  financial
instruments  acquired or issued  after  January 1, 2007.  The Company will adopt
SFAS No. 155 on January 1, 2007 and is currently  evaluating the implications of
SFAS No. 155 on its  financial  statements.  The adoption of SFAS No. 155 is not
expected  to have a  material  impact  on the  Company's  operating  results  or
financial condition.

In September 2006, the FASB issued SFAS No. 157, Fair Value  Measurements.  SFAS
No. 157 defines fair value,  establishes a framework for measuring fair value in
generally accepted accounting  principles,  and requires additional  disclosures
about fair value measurements.  SFAS No. 157 does not require any new fair value
measurements,  but its application could change current practices in determining
fair value. SFAS No. 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Company is currently evaluating the
implications of SFAS No. 157 and its potential impact on the Company's financial
statements.

                                        13

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

M. REVIEW OF FINANCIAL GUARANTY INDUSTRY ACCOUNTING PRACTICES

The  FASB is  drafting  a  pronouncement  to  address  loss  reserving,  premium
recognition and deferred  acquisition costs in the financial  guaranty industry.
Currently,  the financial  guaranty  industry  accounts for  financial  guaranty
insurance  contracts  under SFAS No. 60,  Accounting  and Reporting by Insurance
Enterprises,  which  was  developed  prior  to the  emergence  of the  financial
guaranty  industry.  As SFAS No.  60 does  not  specifically  address  financial
guaranty  contracts,  there has been diversity in the manner in which  different
financial   guarantors   account  for  these  contracts.   The  purpose  of  the
pronouncement  would be to provide  authoritative  guidance  on  accounting  for
financial  guaranty  contracts  issued  by  insurance  companies  that  are  not
accounted for as derivative contracts under SFAS No. 133. When the FASB issues a
final  pronouncement,  the Company,  along with other companies in the financial
guaranty  industry,  may be required to change certain aspects of accounting for
loss reserves, premium income and deferred acquisition costs. It is not possible
to  predict  the  impact  the  FASB's  pronouncement  may have on the  Company's
accounting practices.

4. STATUTORY ACCOUNTING PRACTICES

Statutory-basis  surplus  of the  Company  at  December  31,  2006  and 2005 was
$1,130,779  and  $1,162,904,  respectively.  Statutory-basis  net income for the
years  ended  December  31,  2006,  2005  and 2004 was  $220,519,  $192,009  and
$144,100,  respectively.  The  Company's  statutory  contingency  reserves  were
$1,274,274 and $1,035,397 as of December 31, 2006 and 2005.


                                        14

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





5. INVESTMENTS

The amortized cost and fair values of  investments  classified as fixed maturity
securities are as follows:
<TABLE>
<CAPTION>

                                                            GROSS           GROSS
                                          AMORTIZED      UNREALIZED      UNREALIZED
                                            COST            GAINS          LOSSES        FAIR VALUE
                                       ---------------------------------------------------------------
AT DECEMBER 31, 2006
AVAILABLE FOR SALE:
Obligations of states and political
<S>                                      <C>              <C>             <C>            <C>
   subdivisions                          $ 3,117,989      $  27,105       $   20,879     $ 3,124,215
Asset- and mortgage-backed securities        275,647            814            3,574         272,887
U.S. Treasury securities and
   obligations of U.S. government
   corporations and agencies                  90,978            528            1,655          89,851
Corporate bonds                               87,805             85            1,776          86,114
Debt securities issued by foreign
   governments                                41,426             15              245          41,196
Preferred stock                               13,499              -              755          12,744
                                       ---------------------------------------------------------------
Total fixed maturity securities            3,627,344         28,547           28,884       3,627,007
Short-term investments                       211,749              -               23         211,726
HELD TO MATURITY:
Variable interest entity fixed
   maturity securities                       750,000              -                -         750,000
                                       ---------------------------------------------------------------
Total investments                        $ 4,589,093      $  28,547       $   28,907     $ 4,588,733
                                       ===============================================================


                                                            GROSS           GROSS
                                          AMORTIZED      UNREALIZED      UNREALIZED
                                            COST            GAINS          LOSSES        FAIR VALUE
                                       ---------------------------------------------------------------
AT DECEMBER 31, 2005
 Obligations of states and political
   subdivisions                          $ 2,777,807      $  12,718       $  26,410      $ 2,764,115
 Asset- and mortgage-backed securities       209,148            135           3,490          205,793
 U.S. Treasury securities and
   obligations of U.S. government
   corporations and agencies                 148,785          1,387           2,036          148,136
 Corporate bonds                              91,422            501           1,486           90,437
 Debt securities issued by foreign
   governments                                30,930            345               5           31,270
 Preferred stock                              19,199            427             639           18,987
                                       ---------------------------------------------------------------
 Total fixed maturity securities           3,277,291         15,513          34,066        3,258,738
 Short-term investments                      159,334              -               -          159,334
                                       ---------------------------------------------------------------
 Total investments                       $ 3,436,625      $  15,513       $  34,066      $ 3,418,072
                                       ===============================================================

</TABLE>


                                        15

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)






 5. INVESTMENTS (CONTINUED)

The following  table shows gross  unrealized  losses and the fair value of fixed
maturity  securities,  aggregated by investment  category and the length of time
that individual  securities have been in a continuous  unrealized loss position,
at December 31, 2006:
<TABLE>
<CAPTION>

                                         LESS THAN 12 MONTHS               12 MONTHS OR MORE                       TOTAL
                                  --------------------------------------------------------------------------------------------------
                                     FAIR    UNREALIZED  NO. OF        FAIR     UNREALIZED NO. OF     FAIR     UNREALIZED NO. OF
                                    VALUE      LOSSES    SECURITIES    VALUE      LOSSES   SECURITIES VALUE       LOSSES  SECURITIES
                                  --------------------------------------------------------------------------------------------------
<S>                               <C>          <C>          <C>      <C>          <C>         <C>     <C>           <C>         <C>
Obligations of states and         $ 582,407    $  1,971     173      $1,173,894   $18,908     263   $1,756,301    $ 20,879    436
   political subdivisions
Asset- and mortgage-backed
   securities                        54,862         365      13        149,103      3,209     40       203,965       3,574     53
U.S. Treasury securities and
   obligations of U.S.
   government corporations and
   agencies                          11,988          78      5          53,238      1,578     10        65,226       1,656     15
Other                                54,123         542      73         62,892      1,478     50       117,015       2,020    123
Preferred stock                           -           -      -          12,742        756      1        12,742         756      1
                                  --------------------------------------------------------------------------------------------------
Total temporarily impaired        $ 703,380    $  2,956     264     $1,451,869    $25,929    364    $2,155,249   $  28,885    628
   securities
                                  ==================================================================================================
</TABLE>

The unrealized losses in the Company's  investments were caused by interest rate
increases.  The Company has evaluated the credit ratings of these securities and
noted no  deterioration.  Because the decline in market value is attributable to
changes in interest  rates and not credit  quality,  and because the Company has
the ability and intent to hold these  investments until a recovery of fair value
above amortized cost, which may be maturity,  the Company did not consider these
investments to be other than temporarily impaired at December 31, 2006.

Investments  in fixed  maturity  securities  carried at fair value of $4,456 and
$4,625 as of December  31,  2006 and 2005,  respectively,  were on deposit  with
various regulatory authorities, as required by law.

The amortized cost and fair values of  investments in fixed maturity  securities
available for sale at December 31, 2006 are shown below by contractual  maturity
date. Actual maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without penalties.
<TABLE>
<CAPTION>

                                                                AMORTIZED             FAIR
                                                                  COST                VALUE
                                                           ----------------------------------------

<S>                                                           <C>                 <C>
Due within one year                                           $       72,446      $       72,036
Due after one year through five years                                746,986             734,423
Due after five years through ten years                             1,496,067           1,490,829
Due after ten years                                                1,311,845           1,329,719
                                                           ----------------------------------------
Total                                                         $    3,627,344      $    3,627,007
                                                           ========================================

</TABLE>


                                        16

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)






5. INVESTMENTS (CONTINUED)

For the years ended  December 31, 2006,  2005 and 2004,  proceeds  from sales of
fixed  maturity  securities,  available  for sale,  were  $20,781,  $31,380  and
$178,030,  respectively.  For the years ended December 31, 2006,  2005 and 2004,
gross gains of $382, $185 and $1,859 respectively, and gross losses of $108, $84
and $1,300, respectively, were realized on such sales.

Net investment income of the Company was derived from the following sources:
<TABLE>
<CAPTION>

                                                                               YEAR ENDED DECEMBER 31,
                                                             -------------------------------------------------------------
                                                                    2006                2005                 2004
                                                             -------------------------------------------------------------
<S>                                                              <C>                 <C>                  <C>
Income from fixed maturity securities                            $   130,498         $    112,616         $  97,720
Income from short-term investments                                    10,556                6,801             1,450
                                                             -------------------------------------------------------------
Total investment income                                              141,054              119,417            99,170
Investment expenses                                                   (2,579)              (2,345)           (1,461)
                                                             -------------------------------------------------------------
Net investment income                                                138,475              117,072            97,709
Interest income - investments held by variable interest
   entity                                                             35,893                    -                 -
                                                             -------------------------------------------------------------
                                                                    $   174,368           117,072            97,709
                                                             =============================================================
</TABLE>

As of December 31, 2006, the Company did not have more than 3% of its investment
portfolio concentrated in a single issuer or industry;  however, the Company had
the following investment concentrations by state:

                                           FAIR VALUE
                                       -------------------

New York                                 $      325,042
Texas                                           281,781
Florida                                         223,742
New Jersey                                      191,543
Illinois                                        186,600
California                                      180,295
Massachusetts                                   155,202
Michigan                                        128,268
                                       -------------------
                                              1,672,473

All other states                              1,389,883
All other investments                           776,377
                                       -------------------
Total investments                        $    3,838,733
                                       ===================



                                        17

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





6. DERIVATIVE INSTRUMENTS

The Company  provides  CDSs to certain  buyers of credit  protection by entering
into contracts  that reference  collateralized  debt  obligations  from cash and
synthetic  structures  backed  by pools of  corporate,  consumer  or  structured
finance debt. It also offers credit  protection on public finance and structured
finance  obligations in CDS form.  The Company  considers CDS agreements to be a
normal extension of its financial guaranty insurance business, although they are
considered derivatives for accounting purposes. These agreements are recorded at
fair value.  The Company  believes that the most meaningful  presentation of the
financial  statement  impact of these  derivatives  is to reflect  revenues as a
component of premiums,  and to record claims  payments,  expected claims as loss
and loss  adjustment  expenses,  and changes in fair value as "Net  realized and
unrealized  gains (losses) on credit  derivative  contracts" on the Consolidated
Statements  of Income.  The Company  recorded  revenue  under CDS  agreements of
$17,095,  $3,036 and $0 for the years ended  December 31,  2006,  2005 and 2004,
respectively.  As of December 31,  2006,  the Company has recorded no losses and
loss adjustments expenses related to CDS agreements.

The gains and losses  recognized by recording  CDS  agreements at fair value are
determined each quarter based on quoted market prices,  if available.  If quoted
market prices are not available,  the determination of fair value is based on an
internally  developed  model.  As of December 31, 2006 and 2005,  all fair value
prices were determined using an internally  developed model. The following table
summarizes  the  realized and  unrealized  gains  (losses) on credit  derivative
agreements.
<TABLE>
<CAPTION>

                                                                      YEAR ENDED DECEMBER 31,
                                                                 ----------------------------------
                                                                        2006             2005
                                                                 ----------------- ----------------

<S>                                                                 <C>                <C>
    Change in unrealized gains                                      $    2,887         $     545
    Change in unrealized losses                                        (4,223)             (712)
    Realized gains                                                       1,843                 -
    Realized losses                                                          -                 -
                                                                 ----------------- ----------------
Net  realized   and   unrealized   gains   (losses)  on  credit     $      507         $   (167)
    derivative contracts
                                                                 ================= ================
</TABLE>

The  mark-to-market  gain and (loss) on the CDS portfolio were $314 and ($1,817)
at  December  31,  2006,  and $545 and ($712) at  December  31,  2005,  and were
recorded in "Other assets" and in "Other liabilities," respectively.





                                        18

<PAGE>



              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)






7. INCOME TAXES

The Company files a  consolidated  federal income tax return with FGIC Corp. The
method of allocation between FGIC Corp. and its subsidiaries is determined under
a tax sharing agreement approved by the Company's Board of Directors and the New
York State Insurance Department, and is based upon separate return calculations.

The Company is permitted a tax deduction,  subject to certain  limitations,  for
amounts required to be set aside in statutory  contingency reserves by state law
or regulation. The deduction is allowed only to the extent the Company purchases
U.S.  Government  non-interest  bearing tax and loss bonds in an amount equal to
the tax benefit attributable to such deductions. Purchases of tax and loss bonds
are recorded as a reduction of current tax expense. The Company did not purchase
any tax and loss bonds in the year ended  December 31, 2006. For the years ended
December  31,  2005  and  2004,  the  Company  purchased  $13,565  and  $10,810,
respectively, of tax and loss bonds.

The following is a reconciliation  of foreign and domestic income taxes computed
at the  statutory  income tax rate and the  provision  for foreign and  domestic
income taxes:
<TABLE>
<CAPTION>

                                                                  YEAR ENDED DECEMBER 31,
                                                     ---------------------------------------------------
                                                          2006             2005             2004
                                                     ---------------------------------------------------
<S>                                                     <C>              <C>              <C>
              Income taxes computed on income           $   123,500      $   95,037       $   78,932
                before provision for federal income
                taxes, at the statutory income tax
                rate
              State and local income taxes, net of
                Federal income taxes                            756             453              479
              Tax effect of:
                 Tax-exempt interest                        (35,646)        (31,072)         (28,015)
                 Other, net                                     408             690            4,037
                                                     ---------------------------------------------------
              Provision for income taxes                $    89,018      $   65,108       $   55,433
                                                     ===================================================

Following are the foreign and domestic components of provision of income taxes:

                                                                  YEAR ENDED DECEMBER 31,
                                                     ---------------------------------------------------
                                                          2006             2005             2004
                                                     ---------------------------------------------------
              Foreign
                 Current                                $      (383)     $    2,409       $     (983)
                 Deferred                                      (752)         (3,038)               -
               Domestic
                 Current                                     68,278          29,961           43,492
                 Deferred                                    21,875          35,776           12,924
                                                     ---------------------------------------------------
               Total                                    $    89,018      $   65,108       $   55,433
                                                     ===================================================
</TABLE>



                                        19


<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





7. INCOME TAXES (CONTINUED)

The tax effects of temporary  differences that give rise to significant portions
of the net  deferred tax  liability at December 31, 2006 and 2005 are  presented
below:
<TABLE>
<CAPTION>
                                                                              2006               2005
                                                                   --------------------------------------
 Deferred tax assets:
<S>                                                                   <C>                  <C>
    Tax and loss bonds                                                $      24,375        $   24,375
    Loss and loss adjustment expense reserves                                 3,717             6,180
    AMT credit carryforward                                                       -             7,140
    Property and equipment                                                      125                83
    Deferred compensation                                                     5,222             1,483
    Capital lease                                                             2,591             2,483
    Net operating loss on foreign subsidiaries                                4,228             2,948
    Other                                                                       586               266
                                                                   --------------------------------------
 Total gross deferred tax assets                                             40,844            44,958
                                                                   --------------------------------------

 Deferred tax liabilities:
    Contingency reserves                                                     42,656            42,656
    Unrealized gains on fixed maturity securities
      available for sale                                                     15,734            12,883
    Deferred acquisition costs                                               26,558            19,639
    Premium revenue recognition                                              22,915            10,359
    Profit commission                                                         1,444             1,435
    Unrealized gains on foreign currency                                      3,581               194
    Other                                                                     1,016               255
                                                                   --------------------------------------
 Total gross deferred tax liabilities                                       113,904            87,421
                                                                   --------------------------------------
 Net deferred tax liability                                           $      73,060        $   42,463
                                                                   ======================================
</TABLE>

As of December 31, 2006 and 2005,  there were gross foreign  deferred tax assets
of $4,359 and $3,677,  respectively,  and gross foreign deferred tax liabilities
of $868 and $177, respectively. The net operating losses on foreign subsidiaries
of $14,094 as of  December  31, 2006 were  generated  by FGIC's  United  Kingdom
subsidiaries.  The  United  Kingdom  does not allow net  operating  losses to be
carried back,  but does permit them to be carried  forward  indefinitely.  Based
upon projections of future taxable income over the periods in which the deferred
tax assets are deductible and the estimated reversal of future taxable temporary
differences,  the  Company  believes  it is more  likely  than  not that it will
realize the benefits of these  deductible  differences and,  therefore,  has not
established a valuation allowance at December 31, 2006 and 2005.


                                        20
<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)




7. INCOME TAXES (CONTINUED)

The  Company's  consolidated  income tax return for the year ended  December 31,
2004 is  currently  under  examination  by tax  authorities.  In the  opinion of
management,  adequate  provision has been made for any additional taxes that may
become due as a result of current or future examinations by tax authorities.

8. REINSURANCE

Reinsurance  is the  commitment  by one  insurance  company (the  reinsurer)  to
reimburse another insurance company (the ceding company) for a specified portion
of  the  insurance  risks  under  policies  issued  by  the  ceding  company  in
consideration for a portion of the related premiums received. The ceding company
typically will receive a ceding commission from the reinsurer.

The Company uses  reinsurance  to increase its capacity to write  insurance  for
obligations  of large,  frequent  issuers;  to meet  internal,  rating agency or
regulatory  single risk limits;  to diversify  risk; and to manage rating agency
and regulatory  capital  requirements.  In 2005 and 2006,  the Company  arranged
reinsurance  primarily  on  a  facultative  (transaction-by-transaction)  basis.
During 2006, the Company began  arranging  reinsurance  on a proportional  share
basis, as well.

The Company  seeks to place  reinsurance  with  financially  strong  reinsurance
companies  since, as a primary  insurer,  the Company is required to fulfill all
its  obligations to  policyholders  even where a reinsurer  fails to perform its
obligations under the applicable  reinsurance  agreement.  The Company regularly
monitors the financial condition of its reinsurers.  Under most of the Company's
reinsurance  agreements,  the Company has the right to reassume all the exposure
ceded to a reinsurer (and receive all the remaining  unearned premiums ceded) in
the event of a ratings  downgrade of the reinsurer or the  occurrence of certain
other  events.  In certain of these  cases,  the  Company  also has the right to
impose additional ceding commissions.

In  2004,  some  of the  Company's  reinsurers  were  downgraded  by the  rating
agencies,  reducing the  financial  benefits of using  reinsurance  under rating
agency capital  adequacy  models,  because the Company must allocate  additional
capital to the related reinsured exposure.  In connection with such a downgrade,
the Company  reassumed  $4,959 of ceded premiums for the year ended December 31,
2004.

Under certain reinsurance  agreements,  the Company holds collateral in the form
of letters of credit and trust agreements.  Such collateral  totaled $102,370 at
December 31, 2006, and can be drawn on in the event of default by the reinsurer.


                                        21
<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)






8. REINSURANCE (CONTINUED)

Reinsurance  decreased  the  following  balances  recorded  in the  consolidated
statements of income as follows:
<TABLE>
<CAPTION>

                                                    YEAR ENDED DECEMBER 31,
                                        -------------------------------------------------
                                             2006             2005            2004
                                        -------------------------------------------------

<S>                                        <C>           <C>              <C>
Net premiums earned                        $    28,324   $      25,921    $      24,173
Loss and loss adjustment expenses                1,722             217            4,759


9. LOSS AND LOSS ADJUSTMENT EXPENSES

Activity in the reserves for loss and loss adjustment  expenses is summarized as
follows:

                                                YEAR ENDED DECEMBER 31,
                                    -------------------------------------------------
                                         2006             2005            2004
                                    -------------------------------------------------


Case reserves                           $   33,328      $   15,700       $   18,900

Watchlist reserves                          21,484          23,481           21,567
                                    -------------------------------------------------
Balance at beginning of period              54,812          39,181           40,467
Less reinsurance recoverable                (3,271)         (3,054)          (8,065)
                                    -------------------------------------------------
Net balance                                 51,541          36,127           32,402
                                    -------------------------------------------------
Incurred related to:
  Current period                                 -          23,985           11,756
  Prior periods                             (8,700)         (5,479)          (5,834)
                                    -------------------------------------------------
Total incurred                              (8,700)         18,506            5,922
                                    -------------------------------------------------

Paid related to:
  Current period                                 -          (1,993)             -
  Prior periods                             (4,027)         (1,099)          (2,197)
                                    -------------------------------------------------
Total paid                                  (4,027)         (3,092)          (2,197)
                                    -------------------------------------------------

Net balance                                 38,814          51,541           36,127

Plus reinsurance recoverable                 1,485           3,271            3,054


Case reserves                               28,558          33,328           15,700

Watchlist reserves                          11,741          21,484           23,481
                                    -------------------------------------------------
Balance at end of period               $    40,299     $    54,812      $    39,181
                                    =================================================

</TABLE>


                                        22

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)






9. LOSS AND LOSS ADJUSTMENT EXPENSES (CONTINUED)

Case reserves were discounted at interest rates of  approximately  4.6% and 4.5%
in 2006 and 2005, respectively.  The amount of the discount at December 31, 2006
and 2005 was $6,369 and $15,015, respectively.

At December 31, 2005, the Company had insured public finance obligations located
in the  City  of New  Orleans  and  the  immediately  surrounding  areas  and an
investor-owned  utility in New Orleans that were impacted by Hurricane  Katrina.
During the year  ended  December  31,  2006,  incurred  loss  expense  consisted
primarily  of the  release  of  reserves  on  certain  obligations  impacted  by
Hurricane Katrina due to the improved  financial  condition of these credits and
activity related to several  structured  finance  transactions.  During the year
ended  December  31, 2005,  incurred  loss  expense  consisted  primarily of the
establishment  of reserves on  obligations  impacted  by  Hurricane  Katrina and
incurred expense related to several  structured finance  transactions.  Loss and
loss  adjustment  expense  included  (benefit)  expense of $(7,919)  and $20,093
related  to  obligations  impacted  by  Hurricane  Katrina  for the years  ended
December 31, 2006 and 2005, respectively.

At  December  31,  2006 and 2005  loss  reserves  and  reinsurance  recoverables
included  $8,967  and $255 and  $21,833  and  $1,740,  respectively,  related to
obligations  impacted by Hurricane  Katrina.  Loss reserves at December 31, 2006
and 2005 were  based on  management's  assessment  that the  associated  insured
obligations have experienced impairment due to diminished revenue sources. Given
the  unprecedented  nature  of the  events  and the  magnitude  of damage in the
affected areas related to Hurricane Katrina,  the loss reserves were necessarily
based upon  estimates  and  subjective  judgments  about the  outcomes of future
events. The loss reserves were adjusted as additional information was available.

The  Company  paid no claims  related  to  insured  public  finance  obligations
impacted by Hurricane  Katrina during the year ended  December 31, 2006.  During
the year ended  December  31,  2005,  the Company  paid claims  totaling  $4,855
related to the insured public finance  obligations and was fully  reimbursed for
these claims payments in 2005.

During the years  ended  December  31, 2006 and 2005,  the  Company  paid claims
totaling $4,216 and $1,055, respectively,  related to the investor-owned utility
impacted by Hurricane  Katrina and received  reimbursements of $796 in 2006, for
these  claims  payments.  For the years ended  December  31, 2006 and 2005,  the
Company paid loss adjustment  expenses for professional fees totaling $1,835 and
$748,   respectively,   related  to  the  investor-owned  utility  and  received
reimbursements  of $1,792  for  these  expenses  in 2006.  The  Company  has not
recorded a potential recovery for paid claims and loss adjustment  expenses that
have not been reimbursed as of December 31, 2006.

During the year ended  December 31, 2004, the increase in incurred loss and loss
adjustment  expense related to several  structured  finance  transactions of one
particular issuer.

                                        23

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





10. VARIABLE INTEREST ENTITIES

FIN 46-R  provides  accounting  and  disclosure  rules for  determining  whether
certain entities should be consolidated in the Company's  consolidated financial
statements.  An entity is subject to FIN 46-R, and is called a variable interest
entity  ("VIE"),  if it has (i) equity that is insufficient to permit the entity
to finance its activities without additional  subordinated  financial support or
(ii) equity investors that cannot make significant  decisions about the entity's
operations or that do not absorb the majority of its expected  losses or receive
the majority of its expected residual returns. A VIE must be consolidated by its
primary  beneficiary,  which is the  party  that  has a  majority  of the  VIE's
expected losses or a majority of its expected residual returns, or both.

Additionally,  FIN 46-R requires  disclosures  for companies  that have either a
primary or  significant  variable  interest  in a VIE.  All other  entities  not
considered VIEs are evaluated for consolidation under SFAS No. 94, Consolidation
of all Majority-Owned Subsidiaries.

As part of its structured finance business, the Company insures debt obligations
or certificates issued by special purpose entities.  During the first quarter of
2006,  the  Company  consolidated  a VIE as a  result  of  financial  guarantees
provided by the Company on one transaction related to the securitization of life
insurance  reserves.  This  third-party  VIE had assets of $750,000 and an equal
amount of  liabilities  at December  31, 2006,  which are shown under  "Assets -
Variable  interest  entity  fixed  maturity  securities,  held  to  maturity  at
amortized  cost" and  "Liabilities  - Variable  interest  entity  floating  rate
notes,"  respectively,  on the Company's  consolidated balance sheet at December
31, 2006. In addition,  accrued investment income includes $1,298 related to the
VIE's fixed income maturity securities, and the corresponding liability is shown
under "Accrued  investment  expense-variable  interest  entity" on the Company's
consolidated balance sheet at December 31, 2006. Although the third-party VIE is
included in the  consolidated  financial  statements,  its creditors do not have
recourse to the general assets of the Company outside of the financial  guaranty
policy  provided  to the VIE.  The Company has  evaluated  its other  structured
finance  transactions  and  does not  believe  any of the  third-party  entities
involved in these  transactions  requires  consolidation or disclosure under FIN
46-R.  Interest  income and expense of $35,893 and $35,893,  respectively,  were
recognized in the year ended December 31, 2006 on the assets and  liabilities of
the VIE and are included on the  Consolidated  Statements of Income in "Interest
income - investments held by variable  interest entity" and "Interest  expense -
debt held by variable interest entity," respectively.


                                        24

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





10. VARIABLE INTEREST ENTITIES (CONTINUED)

The Company has entered into agreements providing for the issuance of contingent
preferred trust  securities by a group of special purpose trusts.  Each trust is
solely responsible for its obligations, and has been established for the purpose
of entering into a put agreement with the Company that obligates the trusts,  at
the Company's discretion,  to purchase Perpetual Preferred Stock of the Company.
The purpose of this  arrangement is to provide capital support to the Company by
allowing it to obtain  immediate access to new capital at its sole discretion at
any time through the exercise of the put  options.  These trusts are  considered
VIEs  under  FIN  46-R.  However,  the  Company  is  not  considered  a  primary
beneficiary and therefore is not required to consolidate the trusts.

11. RELATED PARTY TRANSACTIONS

The Company had various service agreements with subsidiaries of General Electric
Company and GE Capital. These agreements provided for the payment by the Company
of certain  payroll  and office  expenses,  investment  fees  pertaining  to the
management of the Company's investment portfolio, and telecommunication  service
charges.  Approximately  $179 in expenses  were  incurred  during the year ended
December  31,  2004  related  to  such  agreements  and  are  reflected  in  the
accompanying consolidated financial statements. No expenses were incurred during
the years 2006 and 2005.

The  Company  is party to a capital  lease  agreement  with a  subsidiary  of GE
Capital. The lease agreement covers leasehold improvements made to the Company's
headquarters  as well as  furniture  and  fixtures  and  computer  hardware  and
software used by the Company (see Note 19).

In 2004,  the Company  entered into a $300,000  soft capital  facility,  with GE
Capital as lender and  administrative  agent. The soft capital  facility,  which
replaced the capital  support  facility that the Company  previously had with GE
Capital,  had an initial term of eight years. The Company paid GE Capital $1,132
under this  agreement for the year ended  December 31, 2004.  This agreement was
terminated  by the Company in July 2004 and was  replaced by a new soft  capital
facility (see Note 16).


                                        25
<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





11. RELATED PARTY TRANSACTIONS (CONTINUED)

FGIC Corp. is party to transaction  fee and  monitoring fee agreements  with the
members of the Investor  Group.  Pursuant to these  agreements,  an affiliate of
each member of the Investor  Group received its pro rata portion of an aggregate
transaction  fee equal to  $25,000.  In  addition,  each of the  members  of the
Investor  Group will  receive,  in  exchange  for  providing  certain  financial
advisory  services on behalf of FGIC Corp.,  its pro rata share of an  aggregate
$5,000 annual  monitoring fee. FGIC Corp. may defer paying the monitoring fee in
certain  circumstances and did elect to defer in the period between December 18,
2003 and September  30, 2005.  During 2005,  FGIC Corp.  paid the members of the
Investor Group an aggregate of $10,192 in payment of the monitoring fee covering
the period from December 18, 2003 through  December 31, 2005.  During 2006, FGIC
Corp.  paid the members of the  Investor  Group an  aggregate  of $3,789 for the
monitoring  fee  covering the year ended  December 31, 2006.  As of December 31,
2006, FGIC Corp. had $1,211 payable to the Investor Group for the monitoring fee
covering the year ended December 31, 2006.  Pursuant to the  transaction fee and
monitoring fee agreements, FGIC Corp. has agreed to indemnify the members of the
Investor Group and their  respective  affiliates  and other related  parties for
losses relating to the transaction fee and monitoring fee agreements.

The Company insures certain  non-municipal issues with GE Capital involvement as
sponsor of the insured  securitization and/or servicer of the underlying assets.
For some of these issues,  GE Capital also provides first loss protection in the
event of default.  Gross premiums written on these issues amounted to $2, $3 and
$6 for the years ended  December 31, 2006,  2005 and 2004,  respectively.  As of
December  31,  2006  and  2005,  principal  outstanding  on these  deals  before
reinsurance was $5,667 and $6,142, respectively.

During 2006, the Company,  in the normal course of operations,  has entered into
reinsurance  transactions with PMI Guaranty Co. and PMI Mortgage  Insurance Co.,
which are both  wholly-owned  subsidiaries  of PMI. For the years ended December
31, 2006 and 2005,  ceded premiums  written were $4,041 and $582,  respectively,
and ceding commission income was $578 and $114,  respectively.  Accounts payable
due to these  subsidiaries  were $1,283 and $102 at December  31, 2006 and 2005,
respectively.

The Company,  in the normal course of operations,  has entered into  reinsurance
transactions with RAM Reinsurance  Company Ltd ("RAM Re"), which is 24% owned by
PMI. For the years ended December 31, 2006 and 2005,  ceded premiums written for
these transactions were $9,824 and $4,582,  respectively,  and ceding commission
income was $2,929 and $1,369, respectively.  Accounts payable due to RAM Re were
$91 and $3 at December 31, 2006 and 2005, respectively.


                                        26

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)




11. RELATED PARTY TRANSACTIONS (CONTINUED)

Cypress, a member of the Investor Group, is reported to own approximately 15% of
Scottish Re Group Limited ("Scottish Re"). During 2006, the Company entered into
a structured finance transaction and assumed a structured finance transaction in
which subsidiaries of Scottish Re were involved.  Neither  transaction  involves
(a) a guaranty  by the  Company of any  obligation  of  Scottish  Re, or (b) the
payment of any fees or other amounts  between the Company and Scottish Re. As of
December  31,  2006,  there were no amounts due to or from  Scottish  Re.  Gross
premiums  written  and  premiums  earned  of $699 and  $637,  respectively,  are
reflected in the  Consolidated  Statements of Income for the year ended December
31, 2006.

The Company  believes that the terms of the  transactions  involving GE Capital,
PMI  subsidiaries,  RAM Re and  Scottish Re described  above were  substantially
identical to comparable transactions between unaffiliated parties.

12. COMPENSATION PLANS

Since January 1, 2004,  the Company has offered a defined  contribution  savings
plan  under  Section  401(k) of the  Internal  Revenue  Code.  This plan  covers
substantially  all employees who meet minimum age and service  requirements  and
allows participants to defer a portion of their annual compensation on a pre-tax
basis (for 2006, up to $15 for employees under age 50, plus an additional "catch
up"  contribution of up to $5 for employees 50 and older).  The Company may also
make discretionary contributions to the plan on behalf of employees. The Company
contributed $4,255, $3,429 and $2,532 to the plan on behalf of employees for the
years ended December 31, 2006, 2005 and 2004, respectively.

The Company also offers a non-qualified  deferred  compensation plan for certain
employees  whose cash  compensation  equals or exceeds  the cap under the 401(k)
Plan.  These  employees  may  defer  up  to  100%  of  their  pre-tax  incentive
compensation  to a future  date and  accumulate  tax-deferred  earnings  on this
compensation.  The Company may also make discretionary contributions to the plan
on behalf of employees.  The Company contributed $827, $583 and $470 to the plan
on behalf of employees  for the years ended  December  31, 2006,  2005 and 2004,
respectively.

13. STOCK COMPENSATION PLAN

Employees of the Company may receive stock-based compensation under a FGIC Corp.
incentive stock plan that provides for stock-based compensation, including stock
options,  restricted stock awards and restricted stock units.  Stock options are
granted for a fixed number of shares with an exercise  price equal to or greater
than the fair  value of the shares at the date of the  grant.  Restricted  stock
awards and  restricted  stock units are valued at the fair value of the stock on
the grant  date,  with no cost to the  grantee.  Prior to January  1, 2006,  the
Company  accounted  for  those  plans  under  the  recognition  and  measurement
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees,  and
related   interpretations,   as  permitted  by  SFAS  No.  123,  Accounting  for
Stock-Based Compensation.


                                        27

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





13. STOCK COMPENSATION PLAN (CONTINUED)

No  stock-based  employee   compensation  cost  related  to  stock  options  was
recognized in the Consolidated Statements of Income for the years ended December
31, 2005 and 2004,  as all  options  granted  through  that date had an exercise
price  equal to the fair  value of the  underlying  common  stock on the date of
grant. For grants of restricted stock units, unearned  compensation,  equivalent
to the  estimated  fair  value of the  common  stock at the date of  grant,  was
recorded  as a separate  component  of  stockholders'  equity  and  subsequently
amortized to compensation expense over the vesting period.

Effective  January 1,  2006,  the  Company  adopted  the fair value  recognition
provisions   of   SFAS   No.   123(R),    Share-Based    Payment,    using   the
modified-prospective-transition  method.  Under that method,  compensation  cost
includes all  share-based  payments  granted prior to, but not yet vested as of,
January 1, 2006, based on the grant date fair value estimated in accordance with
SFAS No.  123(R).  The Company  estimated the fair value of all stock options at
the date of grant using the  Black-Scholes-Merton  option pricing model. Results
for prior periods have not been restated.

As a result of adopting SFAS No. 123(R) effective January 1, 2006, the Company's
income before  income taxes and net income for the year ended  December 31, 2006
were impacted as follows:
<TABLE>
<CAPTION>

                                                                        YEAR ENDED
                                                                  -----------------------
                                                                     DECEMBER 31, 2006
<S>                                                                   <C>
                        Income before income taxes                    $    (6,816)

                           Income tax benefit                               2,386
                                                                  ------------------------

                       Net income                                     $    (4,430)
                                                                  ========================
</TABLE>

The  following  table  illustrates  the effect on net income if the  Company had
applied  the fair  value  recognition  provisions  of SFAS No.  123(R)  to stock
options  granted during the years ended December 31, 2005 and 2004. For purposes
of this pro forma  disclosure,  the value of the stock  options is  amortized to
expense over the stock options' vesting periods.
<TABLE>
<CAPTION>

                                                                          YEAR ENDED
                                                                         DECEMBER 31,
                                                             --------------------------------------
                                                                    2005               2004
<S>                                                             <C>                 <C>
Net income, as reported                                         $      190,466      $    156,880

    Stock option compensation expense determined under fair
    value-based method, net of tax                                     (2,109)           (1,200)
                                                             --------------------------------------
Pro forma net income                                            $      188,357      $    155,680
                                                             ======================================

</TABLE>


                                        28

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





13. STOCK COMPENSATION PLAN (CONTINUED)

A summary of option  activity for the years ended  December  31, 2006,  2005 and
2004 is as follows:
<TABLE>
<CAPTION>

                                                     NUMBER OF SHARES    WEIGHTED AVERAGE
                                                        SUBJECT TO      EXERCISE PRICE PER
                                                         OPTIONS               SHARE
                                                    ------------------- --------------------
<S>                                                         <C>             <C>
          Balance at December 31, 2003:                       93,373         $    840
                                                    =================== ====================
               Granted                                        22,017              752
              Exercised                                            -                -
              Forfeited                                       (1,237)             746
              Expired                                              -                -
                                                    ------------------- --------------------
          Balance at December 31, 2004:                      114,153              824
                                                    ------------------- --------------------
              Granted                                         27,145              711
              Exercised                                            -                -
              Forfeited                                       (1,876)             685
              Expired                                             -                 -
                                                    ------------------- --------------------
          Balance at December 31, 2005:                       139,422             804
                                                    ------------------- --------------------
              Granted                                          38,113             850
              Exercised                                             -               -
              Forfeited                                        (6,504)            776
              Expired                                               -               -
                                                    ------------------- --------------------
          Balance at December 31, 2006:                       171,031       $     815
                                                    ------------------- --------------------
          Shares  subject to  options  exercisable
          at:
          December 31, 2006                                    72,585       $     818
          December 31, 2005                                    42,630       $     840
          December 31, 2004                                    22,831       $     824
</TABLE>

Exercise  prices for the stock  options  outstanding  at December 31, 2006 range
from $600 to $1,080 per share.  At  December  31,  2006,  the  weighted  average
remaining  contractual life of the outstanding  options was approximately  seven
years.  Stock  options  granted in 2006 vest  ratably over four years and expire
seven years from the date of grant.  All stock options granted prior to December
31,  2005 vest  ratably  over five  years and  expire ten years from the date of
grant.


                                        29

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





13. STOCK COMPENSATION PLAN (CONTINUED)

The weighted  average per share fair value of the stock options  granted  during
the years ended  December 31,  2006,  2005 and 2004 was  $238.00,  $211.94,  and
$48.21,   respectively,   estimated   at  the   date   of   grant,   using   the
Black-Scholes-Merton option valuation model based on the following assumptions:
<TABLE>
<CAPTION>

                                                             YEAR ENDED DECEMBER 31,
                                             ---------------------------------------------------------
                                                   2006                2005               2004
                                             ------------------ ------------------- ------------------

<S>                                                <C>                <C>                 <C>
             Expected life                         4 YEARS            5 Years             5 Years
             Risk-free interest rate                 4.46%             3.691%              4.021%
             Volatility factor                       25.0%              25.0%               25.0%
             Dividend yield                              -                  -                   -
</TABLE>

The total fair value of stock options  granted  during the years ended  December
31,  2006,  2005  and  2004  was  approximately   $9,071,   $5,753  and  $1,100,
respectively.

As of December 31,  2006,  there was $5,584 of total  unrecognized  compensation
cost related to unvested stock options  granted.  These costs are expected to be
recognized through April 30, 2010.

                                        30

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





13. STOCK COMPENSATION PLAN (CONTINUED)

Restricted Stock Units
The Company  recorded $880 and $45 in compensation  expense related to the grant
of  restricted  stock  units for the years  ended  December  31,  2006 and 2005,
respectively. A summary of restricted stock units is as follows:

                                                             WEIGHTED
                                                           AVERAGE GRANT
                                            SHARES        DATE FAIR VALUE
                                       ----------------- ------------------
   Balance at December 31, 2003:               -                        -
       Granted                                200                     600
       Delivered                               -                        -
       Forfeited                               -                        -
                                       ----------------- ------------------
   Balance at December 31, 2004:              200           $         600
                                       ----------------- ------------------
        Granted                                37                     710
       Delivered                               -                        -
       Forfeited                               -                        -
                                       ----------------- ------------------
   Balance at December  31, 2005:             237                     617
                                       ----------------- ------------------
       Granted                              3,275                     850
       Delivered                             (237)                    617
       Forfeited                             (213)                    850
                                       ----------------- ------------------
   Balance at December  31, 2006:           3,062                     850
                                       ----------------- ------------------

As of December 31, 2006 there was $1,451 of total unrecognized compensation cost
related to unvested restricted stock units granted.  These costs are expected to
be recognized through January 31, 2009.

14. DIVIDENDS

Under New York insurance  law, the Company may pay dividends to FGIC Corp.  only
from earned  surplus,  subject to the following  limitations:  (a) the Company's
statutory  surplus after any dividend may not be less than the minimum  required
paid-in capital, which was $72,500 in 2006, 2005, and 2004 and (b) dividends may
not exceed the lesser of 10% of its surplus or 100% of adjusted  net  investment
income,  as defined by New York  insurance  law, for the preceding  twelve-month
period,  without  the prior  approval  of the New York State  Superintendent  of
Insurance.

                                        31

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





14. DIVIDENDS (CONTINUED)

During the year ended December 31, 2006, the Company declared  dividends to FGIC
Corp. totaling $20,000 on its common stock and paid dividends of $10,000 to FGIC
Corp.,  which owns all of the  Company's  common  stock.  During the years ended
December  31, 2005 and 2004,  the Company did not declare nor pay  dividends  to
FGIC Corp.

15.  REVOLVING CREDIT FACILITY

During  December 2005, FGIC Corp. and the Company entered into a $250,000 senior
unsecured  revolving  credit  facility  that matures on December  11, 2010.  The
facility is provided by a syndicate of banks and other  financial  institutions.
In connection with the facility, $150 in syndication costs were prepaid and will
be amortized into expense over the term of the facility. The facility replaced a
similar one-year facility that matured in December 2005. No draws have been made
under either facility.

16. PREFERRED TRUST SECURITIES

On July 19, 2004, the Company  entered into a $300,000  facility,  consisting of
Money Market Committed  Preferred Custodial Trust Securities ("CPS Securities").
This facility replaced a $300,000 "soft capital" facility previously provided by
GE Capital.  Under the 2004 facility,  each of six separate Delaware trusts (the
"Trusts"),  issues  $50,000 in  perpetual  CPS  Securities  on a rolling  28-day
auction rate basis. Proceeds from these securities are invested in high quality,
short-term  securities  and are held in the  respective  Trusts.  Each  Trust is
solely  responsible for its obligations and has been established for the purpose
of entering into a put agreement with the Company,  which  obligates the Trusts,
at the  Company's  discretion,  to  purchase  perpetual  Preferred  Stock of the
Company.

In this way, the program  provides capital support to the Company by allowing it
to obtain  immediate  access to new capital at its sole  discretion  at any time
through the exercise of the put options. In connection with the establishment of
the Trusts, the Company incurred $4,638 of expenses, which is included in "Other
operating  expenses" for the year ended December 31, 2004. The Company  recorded
expenses  for the right to put its shares to the Trusts of $1,432,  $1,806,  and
$905 for the years ended December 31, 2006, 2005, and 2004, respectively.


                                        32
<PAGE>



              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





17. FINANCIAL INSTRUMENTS

 (a)  Fair Value of Financial Instruments

      The  following  methods  and  assumptions  were  used  by the  Company  in
estimating the fair values of financial instruments:

      Fixed Maturity  Securities:  Fair values for fixed maturity securities are
      based on quoted market prices,  if available.  If a quoted market price is
      not  available,  fair values are estimated  using quoted market prices for
      similar securities. Fair value disclosure for fixed maturity securities is
      included in the consolidated balance sheets and in Note 5.

      Short-Term Investments:  Short-term investments are carried at fair value,
which approximates cost.

      Cash and Cash Equivalents, Accrued Investment Income, Prepaid Expenses and
      Other Assets,  Receivable from Related Parties, Ceded Reinsurance Balances
      Payable,  Accounts Payable and Accrued Expenses and Payable for Securities
      Purchased:  The  carrying  amounts of these items  approximate  their fair
      values.

      The  estimated  fair  values of the  Company's  financial  instruments  at
December 31, 2006 and 2005 were as follows:

<TABLE>
<CAPTION>

                                                           2006                       2005
                                                 ------------------------------------------------------
                                                   CARRYING       FAIR       CARRYING        FAIR
                                                    AMOUNT        VALUE       AMOUNT         VALUE
                                                 ------------------------------------------------------
         Financial assets:
<S>                                               <C>          <C>          <C>           <C>
            Cash on hand and in-demand accounts   $    29,963  $   29,963   $    45,077   $   45,077
            Short-term investments                    211,726     211,726       159,334      159,334
            Fixed maturity securities,
              available for sale                    3,627,007   3,627,007     3,258,738    3,258,738
            Variable interest entity fixed
              maturity securities, held to
              maturity                                750,000     750,000             -            -

</TABLE>

       Financial  Guaranties:  The  carrying  value of the  Company's  financial
       guaranties  is  represented  by  the  unearned  premium  reserve,  net of
       deferred acquisition costs, loss and loss adjustment expense reserves and
       prepaid reinsurance  premiums.  Estimated fair values of these guaranties
       are based on an estimate of the balance  that is  necessary  to bring the
       future  returns for the  Company's  embedded book of business to a market
       return.  The  estimated  fair  values of such  financial  guaranties  was
       $1,176,823  compared to a carrying value of $1,243,530 as of December 31,
       2006,  and  $1,098,165  compared to a carrying  value of $1,099,045 as of
       December 31, 2005.

                                        33



<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





17. FINANCIAL INSTRUMENTS (CONTINUED)

       As of  December  31,  2006 and  2005,  the net  present  value of  future
       installment   premiums   was   approximately   $630,831   and   $393,000,
       respectively, both discounted at 5%.

       Derivatives:  For fair value  adjustments  on  derivatives,  the carrying
       amount  represents fair value. The Company uses quoted market prices when
       available, but if quoted market prices are not available, management uses
       internally developed estimates.

(b)   Concentrations of Credit Risk

      The  Company  considers  its  role in  providing  insurance  to be  credit
      enhancement  rather than credit  substitution.  The Company  insures  only
      those securities  that, in its judgment,  are of investment grade quality.
      The Company has established and maintains its own  underwriting  standards
      that are based on those aspects of credit that the Company deems important
      for the particular category of obligations considered for insurance.

      Credit  criteria  include  economic and social  trends,  debt  management,
      financial management and legal and administrative factors, the adequacy of
      anticipated cash flows,  including the historical and expected performance
      of assets pledged to secure payment of securities  under varying  economic
      scenarios,  and  underlying  levels of  protection,  such as  insurance or
      over-collateralization.

      In  connection  with  underwriting  new  issues,   the  Company  sometimes
      requires,  as a condition to insuring an issue, that collateral be pledged
      or, in some  instances,  that a  third-party  guaranty be provided for the
      term of the issue by a party of  acceptable  credit  quality  obligated to
      make payment prior to any payment by the Company.  The types and extent of
      collateral varies, but may include  residential and commercial  mortgages,
      corporate and/or government debt and consumer receivables.

      As of December 31, 2006, the Company's total outstanding principal insured
      was $299,889,266, net of reinsurance of $29,888,237. The Company's insured
      portfolio as of December 31, 2006 was broadly  diversified  by  geographic
      and bond market sector,  with no single obligor  representing more than 1%
      of the Company's principal insured  outstanding,  net of reinsurance.  The
      insured  portfolio  includes  exposure  executed  in the  form of a credit
      derivative.  The principal  written in the form of credit  derivatives was
      $25,888,996 at December 31, 2006.


                                        34
<PAGE>



17. FINANCIAL INSTRUMENTS (CONTINUED)

          As of December 31, 2006, the composition of principal  insured by type
of issue, net of reinsurance, was as follows:
<TABLE>
<CAPTION>

                                                                              NET PRINCIPAL
                                                                               OUTSTANDING
                                                                          ----------------------
            Municipal:
<S>                                                                          <C>
              Tax-supported                                                  $    134,917,574
              Utility revenue                                                      35,337,159
              Transportation                                                       24,501,099
              Education                                                            10,259,116
              Health Care                                                           6,495,630
              Investor-owned utilities                                              4,825,029
              Housing                                                               1,582,963
               Other                                                                1,417,555
            Non-municipal and international                                        80,553,141
                                                                          ----------------------
            Total                                                            $    299,889,266
                                                                          ======================

      As of December 31, 2006,  the  composition  of principal  insured ceded to
reinsurers was as follows:

                                                                            CEDED PRINCIPAL
                                                                              OUTSTANDING
                                                                         -----------------------
          Reinsurer:
            Radian Asset Assurance Inc.                                      $      9,104,883
            Assured Guaranty Corp                                                   5,634,737
            BluePoint RE                                                            3,933,256
            Assured Guaranty Re Ltd.                                                3,167,811
            RAM Reinsurance Company Ltd.                                            2,637,039
            Other                                                                   5,410,511
                                                                          -----------------------
          Total                                                              $     29,888,237
                                                                          =======================
</TABLE>

      The Company  did not have  recoverables  in excess of 3% of  stockholders'
equity from any single reinsurer.

      The Company's insured gross and net principal and interest outstanding was
      $519,514,036 and $468,625,903, respectively, as of December 31, 2006.


                                        35

<PAGE>



              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)




      17. FINANCIAL INSTRUMENTS (CONTINUED)

      FGIC is  authorized  to do  business  in all 50 states,  the  District  of
      Columbia,  the Commonwealth of Puerto Rico, the U.S. Virgin Islands and in
      the United Kingdom.  Principal insured outstanding at December 31, 2006 by
      state, net of reinsurance, was as follows:


                                                        NET PRINCIPAL
                                                         OUTSTANDING
                                                    ----------------------

            California                                $     35,178,629
            New York                                        22,327,210
            Florida                                         15,617,186
            Pennsylvania                                    14,525,136
            Texas                                           12,799,320
            Illinois                                        11,957,490
            New Jersey                                      10,150,268
            Michigan                                         8,685,038
            Ohio                                             7,056,980
            Arizona                                          6,556,683
                                                    ----------------------

            All other states                                74,482,184
            Mortgage and asset-backed                       67,980,672
            International                                   12,572,470
                                                    ----------------------
            Total                                     $    299,889,266
                                                    ======================



                                        36

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





18. COMMITMENTS AND CONTINGENCIES

Lease Obligations

The Company leases office space and equipment under  operating lease  agreements
in the United States and the United Kingdom. Rent expense under operating leases
for the years ended  December 31, 2006,  2005 and 2004 was $4,319,  $3,631,  and
$3,070 respectively. Future payments associated with these leases are as follows
as of December 31, 2006:

                                                              OPERATING LEASE
                                                                COMMITMENT
                                                                  AMOUNT
                                                            -------------------
             Year:
                2007                                         $       3,740
                2008                                                 4,841
                2009                                                 5,980
                2010                                                 6,013
                2011                                                 6,109
                2012 and thereafter                                 52,170
                                                            --------------------
             Total minimum future rental payments            $      78,853
                                                            ====================

In connection  with the  Transaction,  the Company  entered into a capital lease
with an affiliate of GE Capital,  covering  leasehold  improvements and computer
equipment to be used at its headquarters.  At the lease termination date of June
30, 2009, the Company will own the leased equipment.  Future payments associated
with this lease are as follows as of December 31, 2006:

                                                                 CAPITAL LEASE
                                                                  COMMITMENT
                                                                    AMOUNT
                                                            --------------------
             Year ending December 31:
                2007                                                1,545
                2008                                                1,391
                2009                                                  265
             Total                                                  3,201
             Less interest                                            258
                                                            --------------------
             Present value of minimum lease payments        $       2,943
                                                            ====================

                                        37

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





18. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Justice Department Subpoena

On November 15, 2006,  FGIC  received a grand jury  subpoena  from the Antitrust
Division of the U.S.  Department  of  Justice.  Based upon press  reports,  FGIC
believes  that the  subpoena  relates to an ongoing  criminal  investigation  of
alleged  bid  rigging of awards of  municipal  guaranteed  investment  contracts
("Municipal  GICs") and that several other companies  (including other financial
guarantors) received similar subpoenas.

Until December 18, 2003, FGIC was affiliated with certain companies (the "Former
Affiliates") that provided Municipal GICs;  however, at no time did FGIC provide
program insurance for Municipal GICs. The Former  Affiliates  remained a part of
GE Capital after the  Transaction,  and all  obligations  under the  outstanding
Municipal GICs remained with the Former Affiliates.

The subpoena contains no allegations or statements  concerning FGIC's activities
or business practices,  and FGIC is not aware of any such allegations.  FGIC has
complied with all requests of the Justice  Department and intends to continue to
cooperate fully with the investigation.

19. COMPREHENSIVE INCOME

Accumulated  other  comprehensive  income (loss) of the Company  consists of net
unrealized  gains and  losses on  investment  securities  and  foreign  currency
translation  adjustments.  The components of other comprehensive  income for the
years ended December 31, 2006, 2005 and 2004 are as follows:
<TABLE>
<CAPTION>

                                                                        YEAR ENDED DECEMBER 31, 2006
                                                               -----------------------------------------------
                                                                   BEFORE          TAX            NET OF
                                                                    TAX                            TAX
                                                                   AMOUNT                         AMOUNT
                                                               -----------------------------------------------

<S>                                                               <C>            <C>            <C>
       Unrealized holding gains arising during the year           $  18,583      $  (6,504)     $   12,079
       Less reclassification adjustment for gains realized
          in net income                                                (274)            96            (178)
                                                               -----------------------------------------------
       Unrealized gains on investments                               18,309         (6,408)         11,901
       Foreign currency translation adjustment                       11,583         (3,387)          8,196
                                                               -----------------------------------------------
       Total other comprehensive income                           $  29,892      $  (9,795)     $   20,097
                                                               ===============================================
</TABLE>


                                        38


<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





19. COMPREHENSIVE INCOME (CONTINUED)
<TABLE>
<CAPTION>

                                                                        YEAR ENDED DECEMBER 31, 2005
                                                                  ------------------------------------------
                                                                     BEFORE         TAX          NET OF
                                                                      TAX                          TAX
                                                                     AMOUNT                      AMOUNT
                                                                  ------------------------------------------

<S>                                                                 <C>           <C>            <C>
Unrealized holding losses arising during the year                   $  (36,050)   $  12,566      $ (23,484)
Less reclassification adjustment for gains realized
   in net income                                                          (101)          35            (66)
                                                                  ------------------------------------------
Unrealized losses on investments                                       (36,151)      12,601        (23,550)
Foreign currency translation adjustment                                 (8,454)       2,922         (5,532)
                                                                  ------------------------------------------
Total other comprehensive loss                                      $  (44,605)   $  15,523      $ (29,082)
                                                                  ==========================================


                                                                        YEAR ENDED DECEMBER 31, 2004
                                                                  ------------------------------------------
                                                                     BEFORE         TAX          NET OF
                                                                      TAX                          TAX
                                                                     AMOUNT                      AMOUNT
                                                                  ------------------------------------------

Unrealized holding gains arising during the year                    $  14,928     $  (5,225)     $   9,703
Less reclassification adjustment for gains realized
   in net income                                                         (559)          196           (363)
                                                                  ------------------------------------------
Unrealized gains on investments                                        14,369        (5,029)         9,340
Foreign currency translation adjustment                                 6,286        (2,200)         4,086
                                                                  ------------------------------------------
Total other comprehensive income                                    $  20,655     $  (7,229)     $  13,426
                                                                  ==========================================

</TABLE>


                                        39

<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)





20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED
                                     ------------------------------------------------------YEAR ENDED
                                       MARCH 31,    JUNE 30,    SEPTEMBER   DECEMBER 31,   DECEMBER 31,
                                         2006         2006       30, 2006       2006           2006
                                     ---------------------------------------------------------------------
<S>                                     <C>         <C>          <C>         <C>            <C>
Gross premiums written                  $ 89,281    $163,260     $  85,030   $  103,660     $  441,231
Net premiums written                      82,585      134,373       66,590       83,266        366,814
Net premiums earned                       59,464       71,845       62,738       72,410        266,457
Net investment income and net
    realized gains                        32,319       34,038       35,803       36,315        138,475
Interest income-investments held by
    variable interest entity               4,937        9,658       10,033       11,265         35,893
Other income and net realized and
   unrealized gains (expense) on
   credit derivative products                308          (48)       1,596          740          2,596
Total revenues                            97,028      115,493      110,170      120,730        443,421
Losses and loss adjustment expenses       (1,933)        (265)         520       (7,022)        (8,700)
Interest expense - debt held by
    variable interest entity               4,937        9,658       10,033       11,265         35,893
Income before taxes                       77,573       90,732       85,119       99,432        352,856
Net income                                58,711       67,211       63,563       74,353        263,838

                                                        THREE MONTHS ENDED
                                     ---------------------------------------------------------YEAR ENDED
                                        MARCH 31,      JUNE 30,   SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
                                          2005           2005          2005         2005         2005
                                     ----------------------------------------------------------------------
Gross premiums written                   $84,404       $131,335       $96,787      $97,676      $410,202
Net premiums written                      82,609        113,305        92,331       92,809       381,054
Net premiums earned                       52,633         61,907        54,794       55,235       224,569
Net investment income and net
realized gains                            27,558         28,389        30,117       31,109       117,173
Other income (expense)                       426             90           402         (323)          595
Total revenues                            80,617         90,386        85,313       86,021       342,337
Losses and loss adjustment expenses       (2,611)        (3,066)       20,693        3,490        18,506
Income before taxes                       71,100         81,377        48,783       70,274       271,534
Net income                                53,306         59,992        39,407       53,721       206,426

</TABLE>


                                        40