UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934

For the transition period to _______________________ from ______________________

Commission file number:  333-117232-34

                      GMACM HOME EQUITY LOAN TRUST 2005-HE2
                                (Issuing Entity)

                    RESIDENTIAL ASSET MORTGAGE PRODUCTS, INC.
                                   (Depositor)
             (Exact name of registrant as specified in its charter)

                DELAWARE                                 41-1955181
(State or other jurisdiction incorporation  (I.R.S. Employer Identification No.)
            or organization)

      400 NORMANDALE LAKE BLVD., SUITE 250                        55437
             MINNEAPOLIS, MINNESOTA                            (Zip Code)
     (Address of Principal Executive Office)

              Registrant's telephone number, including area code: (952) 857-7000

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act. Yes ____ No _X__

Indicate  by check  mark if the  registrant  is not  required  to filed  reports
pursuant to Section 13 or Section 15(d) of the Act. Yes _X_ No ___

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15 (d) of the  Securities  Exchange Act of
1934  during the  preceding  12 months  (or for such  shorter  periods  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__       No___

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K (229.405 of this chapter) is not contained  herein,  and will
not be contained,  to the best of registrant's knowledge, in definitive proxy or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. _X_

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerate  filer, or a  non-accelerated  filer.  See definition of "accelerated
filer and large  accelerated  filer" in Rule 12-b-2 of the Exchange  Act.  Large
accelerated filer: ____ Accelerated filer: __ _ Non-accelerated filer _X__


<PAGE>

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes ____        No _X__

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates  computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common  equity,  as of
the last business day of the registrant's most recently  completed second fiscal
quarter.

        Registrant does not have any voting or non-voting common equity.

Documents Incorporated by Reference:  None

PART I

Item 1. Business.

        Not Applicable.

Item 1A.       Risk Factors.

        Not Applicable.

Item 1B.       Unresolved Staff Comments.

        Not Applicable.

Item 2. Properties.

        See Item 15 (a),  Exhibits 99.1, 99.2 and 99.3 for information  provided
        in lieu of information required by Item 102 of Regulation S-K.

Item 3. Legal Proceedings.

        The registrant knows of no material pending legal proceedings  involving
        the trust created under the Pooling and Serviving Agreement (the Trust),
        the Trustee, the Servicer or the registrant with respect to the Trust.

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

        None.

PART II

Item 5. Market for the Registrant's  Common Equity,  Related Stockholder Matters
     and Issuer Purchases of Equity Securities.

        (a) The Trust does not issue stock.  There is  currently no  established
        public trading market for the  securities.  As of December 31, 2005, the
        number of holders of all classes of Notes was 37.

               The remaining information is not provided pursuant to a no action
request.

        (b) Not applicable.

        (c) Information not provided pursuant to no action request.


<PAGE>


Item 6. Selected Financial Data.

        Not Applicable.

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
     of Operations.

        Not Applicable.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

        Not applicable.

Item 8. Financial Statements and Supplementary Data.

        See Item 15 (a),  Exhibits 99.1, 99.2 and 99.3 for information  provided
        in lieu of information required by Item 102 of Regulation S-K.

Item 9.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
     Financial Disclosure.

        None.

Item 9A. Controls and Procedures.

        Not applicable.

Item 9B Other Information.

        None.

PART III

Item 10. Directors and Executive Officers of the Registrant.

        Not Applicable.

Item 11. Executive Compensation.

        Not Applicable.

Item 12.  Security  Ownership of Certain  Beneficial  Owners and  Management and
     Related Stockholder Matters.

        Not Applicable.

Item 13. Certain Relationships and Related Transactions.

        Not Applicable.

Item 14. Principal Accountant Fees and Services.

        Not applicable.

PART IV

Item 15.       Exhibits and Financial Statement Schedules.


<PAGE>

(a) Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification

     Exhibit 99.1 Annual Independent  Accountants'  Servicing Reports concerning
servicing activities

     Exhibit 99.2 Report of Management as to Compliance  with Minimum  Servicing
Standards

     Exhibit  99.3  Annual  Statements  of  Compliance  under  the  Pooling  and
Servicing Agreements

     Exhibit 99.4 Aggregate Statement of Principal and Interest Distributions to
Certificate Holders

     Exhibit 99.5 Audited  financial  statements for the year ended December 31,
2005 for Financial Guaranty Insurance Corporation

(b) Not Applicable.

(c) Not Applicable.
__________________________



<PAGE>


                                   SIGNATURES

        Pursuant to the  requirements  of Section 13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned,  there unto duly authorized,  on this 20th day of
March 2006.


By:     GMAC MORTGAGE CORPORATION


/s/ Anthony N. Renzi
Name: Anthony N. Renzi
Title: Executive Vice President


<PAGE>



SUPPLEMENTAL  INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.

The  registrant  has not sent an annual  report or proxy  material  to  security
holders.  The registrant  will not be sending an annual report or proxy material
to its security holders subsequent to the filing of this form.


<PAGE>


                                  EXHIBIT INDEX

Exhibit               Description

Exhibit 31.1   Rule 13a-14(a)/15d-14(a) Certification

Exhibit  99.1  Annual  Independent  Accountants'  Servicing  Reports  concerning
     servicing activities

Exhibit 99.2  Report of  Management  as to  Compliance  with  Minimum  Servicing
     Standards

Exhibit 99.3 Annual  Statements  of  Compliance  under the Pooling and Servicing
     Agreements

Exhibit 99.4  Aggregate  Statement of Principal  and Interest  Distributions  to
     Certificate Holders

Exhibit 99.5 Audited  financial  statements for the year ended December 31, 2005
     for Financial Guaranty Insurance Corporation



<PAGE>


                                  Exhibit 31.1


                                  CERTIFICATION


        I, Anthony N. Renzi, certify that:

        1. I have  reviewed  this annual report on Form 10-K for the fiscal year
ended December 31, 2005, and all reports on Form 8-K containing  distribution or
servicing  reports  filed in respect of periods  included in the year covered by
this annual report, of GMACM Home Equity Loan Trust 2005-HE2.

        2. Based on my knowledge,  the information in these reports,  taken as a
whole, does not contain any untrue statement of a material fact or omit to state
a  material  fact  necessary  to make  the  statements  made,  in  light  of the
circumstances  under which such  statements  were made, not misleading as of the
last day of the period covered by this annual report;

        3. Based on my  knowledge,  the  distribution  or servicing  information
required to be provided  to the  trustee by the  servicer  under the pooling and
servicing, or similar,  agreement, for inclusion in these reports is included in
these reports;

        4. I am  responsible  for  reviewing  the  activities  performed  by the
servicer under the pooling and servicing,  or similar,  agreement and based upon
my knowledge and the annual compliance review required under that agreement, and
except as disclosed in the reports,  the servicer has fulfilled its  obligations
under that agreement; and

        5. The reports  disclose all  significant  deficiencies  relating to the
servicer's compliance with the minimum servicing standards based upon the report
provided by an  independent  public  accountant,  after  conducting  a review in
compliance with the Uniform Single  Attestation  Program for Mortgage Bankers or
similar  procedure,  as set forth in the  pooling  and  servicing,  or  similar,
agreement, that is included in these reports.

        In  giving  the  certifications  above,  I  have  reasonably  relied  on
information provided to me by the following  unaffiliated  parties:  Wells Fargo
Bank, N.A.

In Witness  Whereof,  I have duly  executed this  certificate  as of March 20th,
2006.

By:     GMAC MORTGAGE CORPORATION


/s/ Anthony N. Renzi
Name: Anthony N. Renzi
Title: Executive Vice President


<PAGE>


                                  EXHIBIT 99.1


                       [PRICEWATERHOUSECOOPERS LETTERHEAD]




                         REPORT OF INDEPENDENT AUDITORS


To the Board of Directors and Stockholder
of GMAC Mortgage Corporation:

We have examined management's  assertion about GMAC Mortgage Corporation and its
subsidiaries'  (the "Company")  compliance with the minimum servicing  standards
identified  in the Mortgage  Bankers  Association  of America's  Uniform  Single
Attestation  Program for Mortgage Bankers ("USAP")  exclusive of standards I.4.,
III.3., III.4., V.3. and V.4.,  (collectively the "Applicable Standards") solely
for the purposes of  servicing  the home equity  loans  underlying  the Consumer
Lending Portfolio as of and for the year ended December 31, 2005 included in the
accompanying management assertion (see Exhibit I).

As the loans applicable to management's  assertion are home equity loans, rather
than first mortgage loans,  certain USAP minimum servicing standards relating to
escrows are not applicable.  Therefore,  USAP minimum servicing  standards I.4.,
III.3., III.4., V.3. and V.4., were not addressed during our examination.

Management is responsible  for the Company's  compliance  with those  Applicable
Standards.   Our  responsibility  is  to  express  an  opinion   exclusively  on
management's  assertion  about  the  Company's  compliance  with the  Applicable
Standards based on our examination.

Our examination  was performed in accordance  with standards  established by the
American  Institute of Certified Public Accountants and,  accordingly,  included
examining,  on a test basis,  evidence about the Company's  compliance  with the
Applicable  Standards  and  performing  such other  procedures  as we considered
necessary  in the  circumstances.  We believe  that our  examination  provides a
reasonable  basis for our  opinion.  Our  examination  does not  provide a legal
determination on the Company's compliance with the Applicable Standards.

In our  opinion,  management's  assertion  that the  Company  complied  with the
Applicable  Standards  solely for the purpose of servicing loans  underlying the
Consumer  Lending  Portfolio  as of and for the year ended  December 31, 2005 is
fairly stated, in all material respects.

/s/ PricewaterhouseCoopers LLP

March 21, 2006



<PAGE>
                                  EXHIBIT 99.2

                                                                       EXHIBIT 1

                     [GMAC MORTGAGE CORPORATION LETTERHEAD]



                  MANAGEMENT'S ASSERTION CONCERNING COMPLIANCE
                      WITH USAP MINIMUM SERVICING STANDARDS

March 21, 2006


As of and for the year ended December 31, 2005,  GMAC Mortgage  Corporation  and
its subsidiaries (the "Company") have complied in all material respects with the
minimum  servicing  standards set forth in the Mortgage  Bankers  Association of
America's  Uniform  Single  Attestation  Program for Mortgage  Bankers  ("USAP")
exclusive of standards I.4., III.3.,  III.4.,  V.3. and V.4.,  (collectively the
"Applicable  Standards")  solely for the purposes of  servicing  the home equity
loans underlying the Consumer Lending Portfolio.

As of and for this same  period,  the Company had in effect a fidelity  bond and
errors and  omissions  policy in the amounts of  $350,000,000  and  $100,000,000
respectively.




/s/ Jim Hillsman
-----------------------------------------------
Jim Hillsman
Chief Operating Officer
GMAC Residential Holding Corp

/s/ Dave Bricker
-----------------------------------------------
Dave Bricker
Chief Financial Officer
GMAC Residential Holding Corp

/s/ Tony Renzi
-----------------------------------------------
Tony Renzi
Executive Vice President,
National Servicing Administration
GMAC Residential Holding Corp


<PAGE>

                                  EXHIBIT 99.3

                              OFFICER'S CERTIFICATE

                            GMAC MORTGAGE CORPORATION

        I,  Frank  G.  Ruhl,  hereby  certify  that I am the duly  elected  Vice
President of GMAC Mortgage Corporation (the "Servicer"), a corporation organized
under  the laws of the  Commonwealth  of  Pennsylvania,  that I have  made  such
reasonable investigation as I have deemed necessary to deliver this Certificate,
including  discussions  with  responsible  officers of the  Servicer and further
certify to the best of my knowledge as follows:

               1. A review of the activities of the Servicer during the calendar
        year  beginning  January 1, 2005 and ending on  December  31,  2005 (the
        "Calendar Year") and of its performance under the servicing  agreements,
        including  the  servicing  agreement  dated  as of June  29,  2005  (the
        "Servicing  Agreement"),  by and among the Servicer, the Issuer, and the
        Indenture Trustee, has been made under my supervision.

               2. To the  best  of my  knowledge,  based  on  such  review,  the
        Servicer  has  complied  in  all  material  respects  with  the  minimum
        servicing  standards set forth in the Uniform Single Attestation Program
        for Mortgage  Bankers and has fulfilled all of its material  obligations
        in all material respects throughout the Calendar Year.


        Capitalized  terms not defined herein have the meanings set forth in the
Servicing Agreement.

IN WITNESS  WHEREOF,  I have hereunto signed my name and affixed the seal of the
Servicer.

Dated:  March 31, 2006
Re: GMACM Home Equity Loan Trust 2005-HE2

                                                   By: GMAC MORTGAGE CORPORATION

                                                   By: /s/ Frank G. Ruhl
                                                   __________________

                                                   Name:  Frank G. Ruhl
                                                   Title:   Vice President
                                                   Date:    March 31, 2006




<PAGE>


                                  Exhibit 99.4


Schedule   of   Year-To-Date    Principal   and   Interest    Distributions   to
Certificateholders

GMACM 2005-HE2

Class            Interest           Principal       Losses       Ending Balance
A-1           4,880,554.86      192,971,128.01        0.00       137,259,871.99
A-2           3,273,769.87                0.00        0.00       168,243,000.00
A-3           8,283,640.86                0.00        0.00       358,444,000.00
A-4           4,209,858.90                0.00        0.00       170,820,000.00
A-5           1,077,191.52                0.00        0.00        41,784,000.00
A-6           1,076,460.00                0.00        0.00        44,000,000.00
IO            4,311,300.00                0.00        0.00       143,710,000.00
Total        27,112,776.01      192,971,128.01        0.00     1,064,260,871.99




<PAGE>


                                 EXHIBIT 99.5




CONSOLIDATED FINANCIAL STATEMENTS
Financial Guaranty Insurance Company and Subsidiaries
December 31, 2005
with Report of Independent Auditors


<PAGE>


              Financial Guaranty Insurance Company and Subsidiaries

                        Consolidated Financial Statements


                                December 31, 2005




                                    CONTENTS

Report of Registered Public Accounting Firm.................................   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,
2005 and 2004, and the related consolidated statements of income,  stockholder's
equity and cash flows for the years  ended  December  31,  2005 and 2004 and the
periods from  December  18, 2003  through  December 31, 2003 and from January 1,
2003  through   December  17,  2003.   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 audits
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 as of
December 31, 2005 and 2004, and the consolidated results of their operations and
their cash flows for the years ended  December 31, 2005 and 2004 and the periods
from  December  18, 2003  through  December  31,  2003 and from  January 1, 2003
through December 17, 2003, in conformity with U.S. generally accepted accounting
principles.


                                                          /s/ Ernst & Young LLP


New York, New York
January 23, 2006



<PAGE>





<TABLE>
<CAPTION>
              Financial Guaranty Insurance Company and Subsidiaries

                           Consolidated Balance Sheets

                (Dollars in thousands, except per share amounts)


                                                                   DECEMBER 31
                                                               2005           2004
                                                          -------------------------------
ASSETS
<S>                                                       <C>              <C>
Fixed maturity securities, at fair value (amortized cost
of$3,277,291 in 2005 and $2,921,320 in 2004)                $ 3,258,738    $2,938,856
Short-term investments                                          159,334       140,473
                                                          -------------------------------
Total investments                                             3,418,072     3,079,329

Cash and cash equivalents                                        45,077        69,292
Accrued investment income                                        42,576        36,580
Reinsurance recoverable on losses                                 3,271         3,054
Prepaid reinsurance premiums                                    110,636       109,292
Deferred policy acquisition costs                                63,330        33,835
Receivable from related parties                                   9,539           802
Property and equipment, net of accumulated depreciation
  of $885 in 2005 and $164 in 2004                                3,092         2,408
Prepaid expenses and other assets                                10,354         7,826
Federal income taxes receivable                                   2,158             -
                                                          -------------------------------
Total assets                                                $ 3,708,105    $3,342,418
                                                          ===============================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
  Unearned premiums                                         $ 1,201,163    $1,043,334
  Loss and loss adjustment expenses                              54,812        39,181
  Ceded reinsurance balances payable                              1,615         3,826
  Accounts payable, accrued expenses and other
  liabilities                                                    36,359        22,874
  Payable for securities purchased                                    -         5,715
  Capital lease obligations                                       4,262         6,446
  Federal income taxes payable                                        -         4,401
  Deferred income taxes                                          42,463        38,765
                                                          -------------------------------
Total liabilities                                             1,340,674     1,164,542
                                                          -------------------------------
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                                  1,894,983     1,882,772
  Accumulated other comprehensive (loss) income, net of
  tax                                                           (13,597)       15,485
  Retained earnings                                             471,045       264,619
                                                          -------------------------------
Total stockholder's equity                                    2,367,431     2,177,876
                                                          -------------------------------
Total liabilities and stockholder's equity                  $ 3,708,105    $3,342,418
                                                          ===============================
</TABLE>

See accompanying notes to consolidated financial statements.

                                        2

<PAGE>

<TABLE>
<CAPTION>

              Financial Guaranty Insurance Company and Subsidiaries

                        Consolidated Statements of Income

                             (Dollars in thousands)

                                                  SUCCESSOR                  PREDECESSOR
                                 ------------------------------------------  -----------
                                                              PERIOD FROM    PERIOD FROM
                                                              DECEMBER 18,   JANUARY 1,
                                                                  2003          2003
                                  YEAR ENDED     YEAR ENDED      THROUGH       THROUGH
                                 DECEMBER 31,   DECEMBER 31,  DECEMBER 31,  DECEMBER 17,
                                     2005           2004          2003          2003
                                  ---------------------------------------------------------
Revenues:
<S>                                 <C>           <C>            <C>           <C>
  Gross premiums written            $410,202      $323,575       $12,213       $248,112
  Reassumed ceded premiums                 -         4,959         6,300         14,300
  Ceded premiums written             (29,148)      (14,656)          (39)       (14,852)
                                 ---------------------------------------------------------
  Net premiums written               381,054       313,878        18,474        247,560
  Increase in net unearned
     premiums                       (156,485)     (138,929)       (9,892)      (105,811)
                                 ---------------------------------------------------------
Net premiums earned                  224,569       174,949         8,582        141,749

Net investment income                117,072        97,709         4,269        112,619
Net realized gains                       101           559             -         31,506
Net mark-to-market losses on
  credit derivative contracts           (167)            -             -              -
Other income                             762           736            44            580
                                 ---------------------------------------------------------
Total revenues                       342,337       273,953        12,895        286,454

Expenses:
  Loss and loss adjustment
     expenses                         18,506         5,922           236         (6,757)
  Underwriting expenses               82,064        73,426         7,622         54,481
  Policy acquisition costs
     deferred                        (38,069)      (32,952)       (2,931)       (23,641)
  Amortization of deferred
     policy acquisition costs          8,302         2,038            10         15,563
                                 ---------------------------------------------------------
Total expenses                        70,803        48,434         4,937         39,646
                                 ---------------------------------------------------------
Income before income tax
  expense (benefit)                  271,534       225,519         7,958        246,808

Income tax expense (benefit):
  Current                             32,370        42,510         1,191         57,071
  Deferred                            32,738        12,923           573         (1,612)
                                 ---------------------------------------------------------
Total income tax expense              65,108        55,433         1,764         55,459
                                 ---------------------------------------------------------
Income before extraordinary item     206,426       170,086         6,194        191,349
Extraordinary gain                         -             -        13,852              -
                                 ---------------------------------------------------------
Net income                          $206,426      $170,086       $20,046       $191,349
                                 =========================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                                3
<PAGE>

<TABLE>
<CAPTION>

              Financial Guaranty Insurance Company and Subsidiaries

                 Consolidated Statements of Stockholder's Equity

                             (Dollars in thousands)

                                                                                 ACCUMULATED
                                                                  ADDITIONAL        OTHER
                                                       COMMON      PAID-IN      COMPREHENSIVE     RETAINED
                                                       STOCK       CAPITAL     (LOSS) INCOME,     EARNINGS        TOTAL
                                                                                 NET OF TAX
                                                      ----------------------------------------------------------------------
PREDECESSOR
<S>                <C>                                  <C>          <C>           <C>            <C>            <C>
Balance at January 1, 2003                              $15,000      $383,511      $ 49,499       $1,740,885     $2,188,895
Net income                                                   -               -            -          191,349       191,349
Other comprehensive income (loss):
  Change in fixed maturities available-for-sale              -               -         (424)               -          (424)
  Change in foreign currency translation adjustment          -               -        4,267                -         4,267
                                                                                                              --------------
Total comprehensive income                                                                                         195,192
Dividends declared                                           -               -            -         (284,300)     (284,300)
                                                      ----------------------------------------------------------------------
Balance at December 17, 2003                            15,000         383,511       53,342        1,647,934     2,099,787
SUCCESSOR
Purchase accounting adjustments                              -       1,474,261      (53,342)      (1,573,447)     (152,528)
Net income                                                   -               -            -           20,046        20,046
Other comprehensive income:
  Change in fixed maturities available-for-sale              -               -        2,059                -         2,059
                                                                                                              --------------
Total comprehensive income                                                                                          22,105
Balance at December 31, 2003                            15,000       1,857,772        2,059           94,533     1,969,364
                                                      ----------------------------------------------------------------------
Net income                                                   -            -               -          170,086       170,086
Other comprehensive income:
  Change in fixed maturities available-for-sale              -            -           9,340              -           9,340
  Change in foreign currency translation adjustment          -            -           4,086              -           4,086
                                                                                                              --------------
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 loss:
  Change in fixed maturities available-for-sale              -            -         (23,550)             -         (23,550)
  Change in foreign currency translation adjustment          -            -          (5,532)             -          (5,532)
                                                                                                              --------------
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
                                                      ======================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                                4
<PAGE>
<TABLE>
<CAPTION>

              Financial Guaranty Insurance Company and Subsidiaries

                      Consolidated Statements of Cash Flows

                             (Dollars in thousands)

                                                           SUCCESSOR                 PREDECESSOR
                                             --------------------------------------- ------------
                                                                       PERIOD FROM  PERIOD FROM
                                                                         DECEMBER    JANUARY 1,
                                                                         18, 2003       2003
                                             YEAR ENDED    YEAR ENDED    THROUGH      THROUGH
                                             DECEMBER 31,  DECEMBER 31,  DECEMBER 31, DECEMBER 17,
                                                2005          2004          2003         2003
                                            -----------------------------------------------------
OPERATING ACTIVITIES
<S>                                           <C>           <C>           <C>         <C>
Net income                                    $206,426      $170,086      $20,046     $191,349
Adjustments to reconcile net income to
  net cash provided by operating
  activities:
    Extraordinary gain                                             -      (13,852)           -
    Amortization of deferred policy
     acquisition costs                           8,574         2,038           10       15,563
    Policy acquisition costs deferred          (38,069)      (32,952)      (2,931)     (23,641)
    Depreciation of property and
     equipment                                     721           164            -           22
    Amortization of fixed maturity
     securities                                 31,504        37,013          693       21,129
    Amortization of short-term
     investments                                   481            29
    Net realized gains on investments             (101)         (559)           -      (31,506)
    Change in accrued investment income
     and prepaid expenses and other
     assets                                     (8,504)       (5,545)      (5,065)       6,292
    Change in net mark-to-market losses
     on credit derivative contracts                167             -            -            -
    Change in federal income taxes
     receivable                                      -           126         (172)      (2,407)
    Change in reinsurance recoverable
    on losses                                     (217)        5,011         (104)         410
    Change in prepaid reinsurance
     premiums                                   (1,344)       14,476        7,432       19,725
    Changes in other reinsurance
    receivables                                      -         5,295       (5,295)           -
    Change in receivable from related
    parties                                     (8,737)        8,957          (76)      (9,811)
    Change in unearned premiums                157,829       124,452        2,460       86,250
    Change in loss and loss adjustment
     expenses                                   15,631        (1,286)         236       (7,644)
    Change in ceded reinsurance
     balances payable and accounts
     payable and accrued expenses                8,923         7,348        6,485        1,804
    Change in current federal income
     taxes payable                              (6,559)        4,401            -      (97,477)
    Change in deferred federal income
    taxes                                       19,252        12,923          573       (1,612)
                                            -----------------------------------------------------
Net cash provided by operating                 385,977       351,977       10,440      168,446
activities
                                           -----------------------------------------------------

INVESTING ACTIVITIES
Sales and maturities of fixed maturity
  securities                                   122,638       284,227        1,780    1,028,103
Purchases of fixed maturity securities        (520,089)     (546,028)           -     (877,340)
Purchases, sales and maturities of
  short-term investments, net                  (19,342)     (126,125)     (12,736)      41,504
Receivable for securities sold                     (20)          170          538          283
Payable for securities purchased                (5,715)        5,715            -       (5,333)
Purchase of fixed assets                        (1,405)       (2,572)           -            -
                                            -----------------------------------------------------
Net cash (used in) provided by                (423,933)     (384,613)     (10,418)     187,217
  investing activities
                                            -----------------------------------------------------

FINANCING ACTIVITIES
Capital contribution                            12,211        25,000            -            -
Dividends paid to common stockholders                -             -            -     (284,300)
                                            -----------------------------------------------------
Net cash provided by (used in)                  12,211        25,000            -     (284,300)
financing activities
                                            -----------------------------------------------------
Effect of exchange rate changes on cash          1,530        (1,717)           -            -
                                            -----------------------------------------------------
Net (decrease) increase in cash and            (24,215)       (9,353)          22       71,363
cash equivalents
Cash and cash equivalents at beginning
of period                                       69,292        78,645       78,623        7,260
                                            -----------------------------------------------------
Cash and cash equivalents at end of           $ 45,077      $ 69,292      $78,645     $ 78,623
period
                                            =====================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Income taxes paid                             $ 49,613      $ 40,890      $     -     $156,800
                                            =====================================================
</TABLE>


See accompanying notes to consolidated financial statements.

                                        5
<PAGE>





              Financial Guaranty Insurance Company and Subsidiaries

                   Notes to Consolidated Financial Statements

                                December 31, 2005
                (Dollars in thousands, except per share amounts)


1. BUSINESS AND ORGANIZATION

Financial   Guaranty  Insurance  Company  (the  "Company")  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  began  insuring  public  finance
obligations  in 1984 and structured  finance  obligations in 1988. 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 engage in
writing 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,
in 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. FGIC
Corp.  and the Company have formed  subsidiaries  to facilitate  geographic  and
business expansion.

On December  18,  2003,  an investor  group  consisting  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").  GE
Capital  retained  2,346  shares  of FGIC  Corp.  Senior  Preferred  Mandatorily
Convertible  Modified  Preferred  Stock  ("Senior  Preferred  Shares")  with  an
aggregate  liquidation  preference  of $234,600,  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, 2005 and 2004.
Blackstone,  Cypress and CIVC own approximately  23%, 23% and 7% of FGIC Corp.'s
common stock, respectively, at December 31, 2005 and 2004.

2. BASIS OF PRESENTATION

The consolidated  financial  statements  include the accounts of the Company and
its subsidiaries.  All significant intercompany balances have been eliminated in
consolidation.


                                        6
<PAGE>





              Financial Guaranty Insurance Company and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


                (Dollars in thousands, except per share amounts)


2. BASIS OF PRESENTATION (CONTINUED)

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 2004
and 2003 information has been reclassified to conform to the 2005 presentation.

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  cost,  which
approximates fair value.

Bond  discounts  and  premiums  are  amortized  over the  remaining  term of the
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.


                                        7
<PAGE>


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

C. PREMIUM REVENUE RECOGNITION

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).  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 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 advanced refundings were $54,795,  $42,695, $5,013 and $39,858 for the
years ended  December 31, 2005 and 2004 and the periods  from  December 18, 2003
through  December  31,  2003 and  January 1, 2003  through  December  17,  2003,
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,  state premium taxes 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.


                                        8
<PAGE>


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

E. LOSS AND LOSS ADJUSTMENT EXPENSES

Provision for loss and loss adjustment  expenses fall into two categories:  case
reserves and watchlist reserves.  Case reserves are established for the value of
estimated losses on particular 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
time period of the  anticipated  shortfall.  As of  December  31, 2005 and 2004,
discounted  case-basis loss and loss adjustment expense reserves totaled $33,328
and $15,700,  respectively.  Loss and loss adjustment  expenses included amounts
discounted at an approximate  interest rate of 4.5% in 2005 and 2004. The amount
of the  discount  at  December  31,  2005  and  2004  was  $15,015  and  $2,500,
respectively.

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
specifically   identified  impaired   obligations  on  the  watchlist  based  on
historical  trends and other  factors.  The  watchlist  reserve is  adjusted  as
necessary to reflect  changes in the loss  expectation  inherent in the group of
impaired  credits.  As of December 31, 2005 and 2004, such reserves were $21,484
and $23,500, respectively.

The reserve for loss and loss  adjustment  expenses  is reviewed  regularly  and
updated  based on claim  payments and the results of ongoing  surveillance.  The
Company conducts ongoing insured portfolio surveillance to identify all impaired
obligations and thereby provide a materially complete  recognition of 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.


                                        9
<PAGE>


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

F. INCOME TAXES

Deferred  tax  assets  and   liabilities  are  recognized  for  the  future  tax
consequences   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 on deferred tax assets and
liabilities  of a change in tax rates is  recognized  in income in the period in
which a change occurs.

The  Company is a financial  guaranty  insurance  writer and is  permitted a tax
deduction,  subject to certain  limitations under Section 832(e) of the Internal
Revenue  Code,  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.  For the
years ended  December  31,  2005 and 2004,  the  Company  purchased  $13,565 and
$10,810,  respectively,  of tax and loss bonds.  For the period from  January 1,
2003 through  December 17, 2003,  there were no tax and loss bonds purchased and
$102,540 of tax and loss bonds were redeemed.

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
straight-line 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.


                                        10
<PAGE>


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

H. GOODWILL

In  accounting  for the  Transaction  in  2003,  the  Company  applied  purchase
accounting,  as  prescribed  by  Statement  of  Financial  Accounting  Standards
("SFAS") No. 141, Business Combinations ("SFAS 141") and Securities and Exchange
Commission Staff Accounting  Bulletin 54. Under these  accounting  methods,  the
purchase  price was pushed  down into the  accompanying  consolidated  financial
statements,  with the  difference  between the purchase price and the sum of the
fair  value  of  tangible  and  identifiable  intangible  assets  acquired  less
liabilities  assumed  resulting in negative  goodwill of $27,300 at December 18,
2003. In  accordance  with SFAS 141, the Company  reduced the value  assigned to
non-financial  assets,  and the  remaining  negative  goodwill  of  $13,852  was
recorded as an extraordinary gain in the consolidated statement of income.

As a result of the purchase  accounting,  effective December 18, 2003, the basis
of the Company's assets and liabilities changed,  necessitating the presentation
of  Predecessor  Company  and  Successor  Company  columns  in the  consolidated
statements of income, stockholder's equity and cash flows.

I. 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, 2005
and 2004, and revenues and expenses are translated at average  monthly  exchange
rates. The cumulative  translation (loss) gain at December 31, 2005 and 2004 was
$(1,446)  and $4,086,  respectively,  net of tax benefit  (expense)  of $723 and
$(2,200),  respectively,  and is reported as a separate component of accumulated
other  comprehensive  income in the  consolidated  statements  of  stockholder's
equity.


                                        11
<PAGE>


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

J. STOCK COMPENSATION PLAN

The  Company  has  an  incentive   stock  plan  that  provides  for  stock-based
compensation,  including stock options,  restricted  stock awards and restricted
stock units of FGIC Corp. 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.  FGIC Corp.  accounts for stock-based  compensation using the intrinsic
value method under Accounting  Principles  Board Opinion No. 25,  Accounting for
Stock Issued to Employees,  and, accordingly,  if the exercise price is equal to
the fair value of the shares at the date of the grant, no  compensation  expense
related to stock options is allocated to the Company by FGIC Corp. For grants to
employees  of the  Company  of  restricted  stock and  restricted  stock  units,
unearned compensation, equivalent to the fair value of the shares at the date of
grant, is allocated to the Company.  The Company has adopted the disclosure-only
provisions  of SFAS No. 123,  Accounting  for  Stock-Based  Compensation  ("SFAS
123"), as amended.

Had FGIC Corp.  determined  compensation  expense for stock  options  granted to
employees  and  management  based on the fair value of the  options at the grant
dates  consistent  with the method of  accounting  under SFAS 123, the Company's
estimated pro forma net income would have been as follows:
<TABLE>
<CAPTION>

                                           YEAR ENDED    YEAR ENDED    PERIOD FROM
                                                                       DECEMBER 18,
                                                                           2003
                                                                         THROUGH
                                          DECEMBER 31,  DECEMBER 31,   DECEMBER 31,
                                              2005          2004           2003
                                         --------------------------------------------

<S>                                          <C>            <C>           <C>
Reported net income                          $  206,426     $ 170,086     $20,046
Add: Allocated stock-based
  compensation related to restricted
  stock units, net of tax included in
  reported net income                                29            49           -
Less: Allocated total stock-based
  compensation determined under the
  fair value method for all awards,
  net of tax                                     (2,138)        (1,249)       (40)
                                         --------------------------------------------
Pro forma net income                         $  204,317     $ 168,886     $ 20,006
                                         ============================================
</TABLE>

There were no stock options prior to December 18, 2003.

                                        12

<PAGE>


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

K. VARIABLE INTEREST ENTITIES

Financial  Interpretation  No. 46,  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.  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  transactions,   and  does  not  believe  any  such   transactions   require
consolidation or disclosure under FIN 46-R.

During 2004, FGIC arranged the issuance of contingent preferred trust securities
by a group of special purpose trusts. 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 (see Note 16).

L. DERIVATIVES

The  Financial  Accounting  Standards  Board  ("FASB")  issued and  subsequently
amended  SFAS  No.  133,  Accounting  for  Derivative  Instruments  and  Hedging
Activities ("SFAS 133"). Under SFAS 133, as amended, 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.


                                        13
<PAGE>


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In 2005,  the Company sold credit  default  swaps  ("CDS") to certain  buyers of
credit protection. It considers these 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.  Changes in fair value are recorded
in net  mark-to-market  gains (losses) on credit  derivative  instruments in the
consolidated  statements of income and in other assets or other  liabilities  in
the consolidated  balance sheets. The Company uses dealer-quoted  market values,
when  available,  to determine  fair value.  If market prices are not available,
management uses internally developed estimates of fair value.

M. NEW ACCOUNTING PRONOUNCEMENTS

On December 16, 2004,  FASB issued SFAS 123(R)  which  requires all  share-based
payments  to  employees,  including  grants of  employee  stock  options,  to be
recognized in the financial statements based on their fair values. Following the
effective date, pro forma disclosure is no longer an alternative. In April 2005,
the SEC announced the adoption of a rule allowing public  companies to defer the
adoption of SFAS 123(R) until the  beginning  of their  fiscal  years  beginning
after  June  15,  2005.  Non-public  entities  will be  required  to  adopt  the
provisions  of the new standard in fiscal  years  beginning  after  December 15,
2005.

Under SFAS 123(R),  the Company must determine the transition  method to be used
at the date of adoption, the appropriate fair value model to be used for valuing
share-based  payments and the  amortization  method for  compensation  cost. The
transition methods include retroactive and prospective  adoption options.  Under
the retroactive option, prior periods may be restated either as of the beginning
of the year of adoption or for all periods  presented.  The  prospective  method
requires that compensation  expense be recorded for all outstanding  share-based
awards  for  which  the  requisite  service  has  not  yet  been  rendered.  The
retroactive method would record  compensation for all unvested stock options and
restricted  stock  beginning  with  the  first  period  restated.   The  Company
anticipates  adopting  the  prospective  method and expects that the adoption of
SFAS 123(R) will have an impact similar to the current pro forma  disclosure for
existing  options  under SFAS 123(R).  In addition,  the Company does not expect
that the expense associated with future grants (assuming grant levels consistent
with 2005)  derived  from the fair  value  model  selected  will have a material
adverse  effect on the Company's  consolidated  financial  position,  results of
operations or cash flows.

                                        14
<PAGE>


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

N. REVIEW OF FINANCIAL GUARANTY INDUSTRY ACCOUNTING PRACTICES

The  FASB  staff  is  considering  whether  additional  accounting  guidance  is
necessary to address loss reserving and certain other practices in the financial
guaranty   industry.   SFAS  No.  60,  Accounting  and  Reporting  by  Insurance
Enterprises,  was developed  prior to the  emergence of the  financial  guaranty
industry.  As it does not specifically  address  financial  guaranty  contracts,
there has been  diversity in the accounting  for these  contracts.  In 2005, the
FASB added a project to consider  accounting by insurers for financial  guaranty
insurance.  The objective of the project is to develop an  accounting  model for
financial  guaranty  contracts  issued  by  insurance  companies  that  are  not
accounted  for as  derivative  contracts  under SFAS 133. A  financial  guaranty
contract  guarantees  the holder of a financial  obligation  the full and timely
payment  of  principal  and  interest  when  due  and  is  typically  issued  in
conjunction  with  municipal  bond  offerings  and  certain  structured  finance
transactions.  The goal of this  project  is to  develop a single  model for all
industry participants to apply.

The FASB is  expected  to meet in 2006 to  consider  the  accounting  model  for
issuers of financial guaranty insurance.  Proposed and final  pronouncements are
expected to be issued in 2006. When the FASB reaches a conclusion on this issue,
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 review may have on the Company's accounting practices.

4. STATUTORY ACCOUNTING PRACTICES

Statutory-basis  surplus  of the  Company  at  December  31,  2005  and 2004 was
$1,162,904 and $1,172,600,  respectively.  Statutory-basis net income (loss) for
the years ended December 31, 2005 and 2004 and for the periods from December 18,
2003 through  December 31, 2003,  and January 1, 2003 through  December 17, 2003
was $192,009, $144,100, $(1,669), and $180,091, respectively.


                                        15
<PAGE>


5. INVESTMENTS

The amortized cost and fair values of  investments in fixed maturity  securities
and short-term investments classified as available-for-sale are as follows:
<TABLE>
<CAPTION>

                                                GROSS        GROSS
                                 AMORTIZED    UNREALIZED   UNREALIZED
                                    COST        GAINS        LOSSES     FAIR VALUE
                                ----------------------------------------------------
<S>                             <C>                                     <C>
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             3,277,291      15,513       34,066     3,258,738
  securities
 Short-term investments             159,334           -            -       159,334
                                ----------------------------------------------------
 Total investments                $3,436,625    $15,513      $34,066     $3,418,072
                                ====================================================

                                                 GROSS        GROSS
                                 AMORTIZED    UNREALIZED   UNREALIZED
                                    COST        GAINS        LOSSES     FAIR VALUE
                                ----------------------------------------------------

AT DECEMBER 31, 2004
 Obligations of states and
  political subdivisions          $2,461,087    $19,569      $ 3,090     $2,477,566
 Asset- and mortgage-backed
  securities                        214,895       1,267          695       215,467
 U.S. Treasury securities and
  obligations of U.S.
  Government corporations and
  agencies                          131,771         559          943       131,387
 Corporate bonds                     54,655         663          236        55,082
 Debt securities issued by
  foreign governments                39,713         176           21        39,868
 Preferred stock                     19,199         311           24        19,486
                                ----------------------------------------------------
 Total fixed maturities           2,921,320      22,545        5,009     2,938,856
 Short-term investments             140,473           -            -       140,473
                                ----------------------------------------------------
 Total investments                $3,061,793    $22,545      $ 5,009     $3,079,329
                                ====================================================
</TABLE>

                                        16

<PAGE>


5. INVESTMENTS (CONTINUED)

The following  table shows gross  unrealized  losses and the fair value of fixed
maturity  securities,  aggregated by investment category and length of time that
individual  securities have been in a continuous  unrealized  loss position,  at
December 31, 2005:
<TABLE>
<CAPTION>

                               LESS THAN 12 MONTHS  12 MONTHS OR MORE        TOTAL
                             ------------------------------------------------------------
                                FAIR    UNREALIZED  FAIR   UNREALIZED   FAIR    UNREALIZED
                               VALUE     LOSSES    VALUE    LOSSES     VALUE     LOSSES
                             ------------------------------------------------------------
<S>                          <C>         <C>      <C>        <C>     <C>         <C>
Obligations of states and    $1,622,119  $16,646  $463,156   $9,764  $2,085,275  $26,410
  political subdivisions
Asset- and mortgage-backed
  securities                   133,196     1,839    56,824    1,651    190,020     3,490
U.S. Treasury securities
  and obligations of U.S.
  government corporations
  and agencies                  47,872       520    76,380    1,516    124,252     2,036
Other                           42,379       690    28,026      801     70,405     1,491
Preferred stock                 12,860       639         -        -     12,860       639
                             ------------------------------------------------------------
Total temporarily impaired   $1,858,426  $20,334  $624,386   $13,732 $2,482,812  $34,066
  securities
                             ============================================================
</TABLE>


The unrealized losses in the Company's  investments were caused by interest rate
increases.  The Company  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,
which may be maturity,  the Company did not  consider  these  investments  to be
other than temporarily impaired at December 31, 2005.

Investments  in fixed  maturity  securities  carried at fair value of $4,625 and
$4,049 as of December  31,  2005 and 2004,  respectively,  were on deposit  with
various regulatory authorities as required by law.


                                        17
<PAGE>


5. INVESTMENTS (CONTINUED)

The amortized cost and fair values of investments in fixed maturity  securities,
available-for-sale at December 31, 2005, 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  call or
prepayment penalties.

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

Due one year later or less                         $     77,668     $    77,071
Due after one year through five years                   472,292         463,162
Due after five years through ten years                1,463,806       1,448,990
After ten years                                       1,263,525       1,269,515
                                                 -------------------------------
Total                                              $  3,277,291     $ 3,258,738
                                                 ===============================

For the years ended December 31, 2005 and 2004 and for the periods from
December 18, 2003 through December 31, 2003 and January 1, 2003 through December
17, 2003,  proceeds from sales of  available-for-sale  securities  were $31,380,
$178,030, $0, and $855,761  respectively.  For the years ended December 31, 2005
and 2004 and for the periods from  December  18, 2003 through  December 31, 2003
and January 1, 2003 through December 17, 2003, gross gains of $185,  $1,900, $0,
and  $31,700,  respectively,  and gross  losses of $84,  $1,300,  $0,  and $200,
respectively, were realized on such sales.

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

                                                       SUCCESSOR                  PREDECESSOR
                                       ------------------------------------------ -------------
                                                                   PERIOD FROM   PERIOD FROM
                                                                     DECEMBER       JANUARY
                                                                     18, 2003       1, 2003
                                        YEAR ENDED    YEAR ENDED      THROUGH       THROUGH
                                       DECEMBER 31,  DECEMBER 31,  DECEMBER 31,  DECEMBER 17,
                                           2005          2004          2003          2003
                                      ---------------------------------------------------------
   Income from fixed maturity
<S>                                     <C>              <C>          <C>          <C>
     securities                         $  112,616       $ 97,720     $ 4,294      $ 111,075
   Income from short-term investments        6,801          1,450          12          2,326
                                      ---------------------------------------------------------
   Total investment income                 119,417         99,170       4,306        113,401
   Investment expenses                      (2,345)        (1,461)        (37)          (782)
                                      ---------------------------------------------------------
   Net investment income                $  117,072       $ 97,709     $ 4,269      $ 112,619
                                      =========================================================

</TABLE>

                                        18

<PAGE>


5. INVESTMENTS (CONTINUED)

As of December 31, 2005, 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                             $   302,290
Florida                                  220,150
Texas                                    217,145
New Jersey                               193,315
Massachusetts                            169,635
Illinois                                 155,922
California                               139,742
Michigan                                 113,040
                                   ----------------
                                       1,511,239

All other states                       1,326,785
All other investments                    580,048
                                   ----------------
Total investments                    $ 3,418,072
                                   ================

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 other public  finance and
structured  finance  obligations  in  CDS  form.  The  Company  considers  these
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.  The Company
recorded  $3,036  of net  earned  premium,  $0 in  losses  and  loss  adjustment
expenses,  and net mark-to-market  losses of $167 in changes in fair value under
these agreements for the year ended December 31, 2005.


                                        19
<PAGE>


6. DERIVATIVE INSTRUMENTS (CONTINUED)

The gains or losses  recognized by recording  these  contracts 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
internally  developed  estimates.  Management applies judgments to estimate fair
value which are based on changes in expected  loss of the  underlying  assets as
well as changes in current market prices for similar products.

Consideration  is given to  current  market  spreads  and on  evaluation  of the
current  performance  of the assets.  The Company does not believe that the fair
value  adjustments  are an  indication  of potential  claims under the Company's
guarantees.  The  inception-to-date net mark-to-market loss on the CDS portfolio
was $167 at December 31, 2005 and was recorded in other liabilities.

7. INCOME TAXES

For periods subsequent to the closing date of the Transaction, the Company files
its own  consolidated  federal  income tax returns with FGIC Corp. The method of
allocation  between FGIC Corp. and its  subsidiaries  is determined  under a tax
sharing  agreement  approved by FGIC Corp.'s Board of Directors and the New York
State Insurance Department, and is based upon a separate return calculation. For
periods  ended on or prior to December 18, 2003,  the Company  filed its federal
income tax return as part of the consolidated return of GE Capital.  Under a tax
sharing  agreement with GE Capital,  tax was allocated to the Company based upon
its contributions to GE Capital's consolidated net income.


                                        20

<PAGE>


7. INCOME TAXES (CONTINUED)

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

                                                   SUCCESSOR                       PREDECESSOR
                                ---------------------------------------------     ------------
                                                                  PERIOD FROM     PERIOD FROM
                                                                  DECEMBER 18,     JANUARY 1,
                                                                     2003            2003
                                      YEAR ENDED   YEAR ENDED       THROUGH         THROUGH
                                     DECEMBER 31,  DECEMBER 31,   DECEMBER 31,    DECEMBER 17,
                                         2005        2004            2003            2003
                               -----------------------------------------------------------------
<S>                                <C>              <C>              <C>            <C>
  Income taxes computed on         $  95,037        $ 78,932         $2,785         $ 86,383
    income before provision
    for Federal income taxes,
    at the statutory income
    tax rate
  State and local income
    taxes, net of Federal
    income taxes                         453             479              -              844
  Tax effect of:
    Tax-exempt interest              (31,072)        (28,015)          (979)         (26,112)
    Prior period adjustment                -               -              -           (4,978)
    Other, net                           690           4,037            (42)            (678)
                               -----------------------------------------------------------------
  Provision for income taxes       $  65,108        $ 55,433         $1,764         $ 55,459
                               =================================================================
</TABLE>

                                        21

<PAGE>


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, 2005 and 2004 are  presented
below:

                                                       2005         2004
                                                    -------------------------
 Deferred tax assets:
   Tax and loss bonds                                 $24,375       $10,810
   Loss and loss adjustment expense reserves            6,180         7,472
   AMT credit carryforward                              7,140         8,107
   Property and equipment                                  83            55
   Deferred compensation                                1,483           623
   Capital lease                                        2,483         2,539
   Net operating loss on foreign subsidiaries           2,948             -
   Other                                                  266           233
                                                    -------------------------
 Total gross deferred tax assets                       44,958        29,839
                                                    -------------------------

 Deferred tax liabilities:
   Contingency reserves                                42,656        18,917
   Unrealized gains on fixed maturity securities,
     available-for-sale                                12,883        29,156
   Deferred acquisition costs                          19,639        11,842
   Premium revenue recognition                         10,359         3,076
   Profit commission                                    1,435         2,343
   Foreign currency                                       194         3,117
   Other                                                  255           153
                                                    -------------------------
 Total gross deferred tax liabilities                  87,421        68,604
                                                    -------------------------
 Net deferred tax liability                           $42,463       $38,765
                                                    =========================

The net operating  losses on foreign  subsidiaries of $10,863 as of December 31,
2005 were  generated by FGIC Corp.'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 the level of  historical
taxable  income,  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 has not
established a valuation allowance at December 31, 2005 and 2004.

In the  opinion  of  management,  an  adequate  provision  has been made for any
additional  taxes that may become due  pending  any future  examinations  by tax
authorities.

                                        22
<PAGE>


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.  The Company currently arranges reinsurance
primarily on a facultative  (transaction-by-transaction)  basis.  Prior to 2003,
the Company also had treaty  reinsurance  agreements,  primarily  for the public
finance business,  that provided coverage for a specified portion of the insured
risk under all qualifying policies issued during the term of the treaty.

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 recent years, some of the Company's  reinsurers were downgraded by the rating
agencies,  thereby 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. However, the Company still
receives  regulatory  credit for this  reinsurance.  In  connection  with such a
downgrade,  the  Company  reassumed  $0,  $4,959,  $6,300,  and $14,300 of ceded
premiums for the years ended  December  31, 2005 and 2004,  and the periods from
December  18, 2003  through  December  31,  2003,  and  January 1, 2003  through
December 17, 2003, respectively, from the reinsurers.

Under certain reinsurance  agreements,  the Company holds collateral in the form
of letters of credit and trust  agreements.  Such collateral  totaled $62,394 at
December 31, 2005, and can be drawn on in the event of default by the reinsurer.


                                        23
<PAGE>


8. REINSURANCE (CONTINUED)

The  effect  of  reinsurance  on  the  balances  recorded  in  the  consolidated
statements of income is as follows:
<TABLE>
<CAPTION>

                                               SUCCESSOR                   PREDECESSOR
                                ----------------------------------------   -----------
                                                             PERIOD FROM   PERIOD FROM
                                                             DECEMBER 18,   JANUARY 1,
                                                                2003          2003
                                   YEAR ENDED   YEAR ENDED    THROUGH      THROUGH
                                  DECEMBER 31, DECEMBER 31,  DECEMBER 31,  DECEMBER 17,
                                      2005       2004          2003          2003
                              ---------------------------------------------------------

<S>                               <C>           <C>              <C>         <C>
Net premiums earned               $25,921       $24,173          $1,236      $20,300
Loss  and   loss   adjustment
expenses                             (416)       (4,759)              -        1,700

9. LOSS AND LOSS ADJUSTMENT EXPENSES

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

                                               SUCCESSOR                   PREDECESSOR
                                ----------------------------------------   -----------
                                                             PERIOD FROM   PERIOD FROM
                                                             DECEMBER 18,   JANUARY 1,
                                                                2003          2003
                                   YEAR ENDED   YEAR ENDED    THROUGH      THROUGH
                                  DECEMBER 31, DECEMBER 31,  DECEMBER 31,  DECEMBER 17,
                                      2005       2004          2003          2003
                              ---------------------------------------------------------
Balance at beginning of
  period                          $39,181       $40,467         $40,224      $47,868
Less reinsurance recoverable       (3,054)       (8,065)         (8,058)      (8,371)
                              ---------------------------------------------------------
Net balance                        36,127        32,402          32,166       39,497
                              ---------------------------------------------------------
Incurred related to:
  Current period                   23,985        11,756               -       20,843
  Prior periods                    (5,479)       (5,834)            236      (27,600)
                              ---------------------------------------------------------
Total incurred                     18,506         5,922             236       (6,757)
                              ---------------------------------------------------------

Paid related to:
  Current period                   (1,993)            -               -            -
  Prior periods                    (1,099)       (2,197)              -         (574)
                              ---------------------------------------------------------
Total paid                         (3,092)       (2,197)              -         (574)
                              ---------------------------------------------------------

Net balance                        51,541        36,127          32,402       32,166
Plus reinsurance recoverable        3,271         3,054           8,065        8,058
                              ---------------------------------------------------------
Balance at end of period          $54,812       $39,181         $40,467      $40,224
                              =========================================================
</TABLE>

                                        24
<PAGE>


9. LOSS AND LOSS ADJUSTMENT EXPENSES (CONTINUED)

During the year ended  December 31, 2005,  the increase in incurred  expense was
primarily  related to issuers impacted by Hurricane  Katrina.  Case reserves and
credit  watchlist  reserves at December  31, 2005  include  $8,511 and  $13,322,
respectively,  of estimated losses related to obligations  impacted by Hurricane
Katrina (see Note 10).

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

During the period from  January 1, 2003 through  December 17, 2003,  the overall
decrease in incurred  expense was driven by a reduction  in reserves  previously
established on several structured finance transactions of one particular issuer.
In  addition,  prior to the closing of the  Transaction,  rather than  watchlist
reserves,  the Company  established  portfolio reserves based upon the aggregate
average net par outstanding of the Company's insured mortgage-backed  securities
portfolio.

10. HURRICANE KATRINA

At December 31, 2005, the Company insured public finance  obligations with a net
par in force  ("NPIF") of  approximately  $4,011,871  in  locations  impacted by
Hurricane  Katrina.  Approximately  $2,023,315  of these  obligations  relate to
locations  designated by the U.S. Federal  Emergency  Management  Administration
("FEMA")  as  eligible  for both public and  individual  assistance  ("FEMA-dual
designated  locations");  the  remainder,  or $1,988,556,  of these  obligations
relate to locations  designated  by FEMA as eligible for  individual  assistance
only.  The Company  believes that insured  obligations  in FEMA-dual  designated
locations  are  more  likely  to  be  impaired  than  obligations  eligible  for
individual  assistance  only.  Consequently,  since the  occurrence of Hurricane
Katrina,  the Company has focused its portfolio  surveillance efforts related to
Hurricane  Katrina on evaluating its insured  public finance  obligations in the
FEMA-dual  designated  locations.  These FEMA-dual  designated locations consist
primarily of counties and parishes in Alabama, Mississippi and Louisiana.


                                        25
<PAGE>


10. HURRICANE KATRINA (CONTINUED)

As a result of this  evaluation,  the  Company  placed  insured  public  finance
obligations  with an NPIF  totaling  $979,153 on its credit  watchlist  of which
reserves  were  recorded  on  obligations  with  an  NPIF  of  $585,303.   These
obligations  relate to  locations in the Parish of Orleans (in which New Orleans
is located) and the immediately  surrounding parishes. At December 31, 2005, the
Company  recorded  case  reserves of $8,511,  watchlist  reserves of $13,322 and
estimated  reinsurance  recoverables of $1,740 related to insured public finance
obligations  placed on the credit watchlist.  The case reserves of $8,511 relate
to an investor-owned  utility,  for which the Company has insured public finance
obligations  with  an  NPIF  of  $75,000,   that  has  entered  into  bankruptcy
proceedings.  The  watchlist  reserves  of $13,322  were  based on  management's
assessment  that  the  associated   insured  public  finance   obligations  have
experienced  impairment  due to  diminished  revenue  sources.  The NPIF for the
insured public finance  obligations for which watchlist reserves of $13,322 have
been  established  totals  $510,303.  The $510,303 (a subset of the $979,153) is
supported by the revenue sources below:

                                    NET PAR
     REVENUE SOURCE                 IN FORCE
-------------------------------- ---------------
General obligation                 $  90,079
Hotel tax                            165,000
Sales tax                            117,141
Municipal utility                    119,657
Public higher education               18,426
                                 ---------------
Total                               $510,303
                                 ===============

Given the  unprecedented  nature of the  events and  magnitude  of damage in the
affected  areas,  the loss reserves were  necessarily  based upon  estimates and
subjective  judgments  about the  outcome of future  events,  including  without
limitation  the amount and timing of any future  federal and state aid. The loss
reserves will likely be adjusted as additional  information  becomes  available,
and such adjustments may have a material impact on future results of operations.
However,  the Company believes that the losses ultimately  incurred as result of
Hurricane Katrina will not have a material impact on the Company's  consolidated
financial position.


                                        26
<PAGE>


10. HURRICANE KATRINA (CONTINUED)

For the year ended  December 31, 2005, the Company paid claims  totaling  $5,910
related to insured public  finance  obligations  impacted by Hurricane  Katrina.
During 2005,  the Company  subsequently  received  reimbursements  of $4,855 for
these claims payments.

The  Company's  structured  finance  insured  portfolio  was  not  significantly
impacted by Hurricane Katrina,  reflecting the geographic diversification of the
credits comprising the insured structured finance obligations.

11. RELATED PARTY TRANSACTIONS

Prior to the  Transaction,  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.  In addition,  as part of the
Transaction,  the Company entered into a transitional  services  agreement under
which GE  Capital  continued  to  provide  certain  administrative  and  support
services,  in exchange for certain scheduled fees during the 12 months following
the date of the  agreement.  Approximately  $0, $179,  $0 and $1,600 in expenses
were  incurred  during the years  ended  December  31, 2005 and 2004 and for the
periods from  December  18, 2003  through  December 31, 2003 and January 1, 2003
through  December 17, 2003,  respectively,  related to such  agreements  and are
reflected in the accompanying consolidated financial statements.

At the end of the first  quarter of 2004,  the  Company  transferred  investment
management services from GE Capital to Blackrock Financial Management,  Inc. and
Wellington Management Company, LLP.

In connection  with the  Transaction,  the Company  entered into 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, computer hardware and software used by the Company (see Note 17).


                                        27
<PAGE>


11. RELATED PARTY TRANSACTIONS (CONTINUED)

In connection  with the  Transaction,  FGIC 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 FGIC previously had
with GE Capital, had an initial term of eight years. FGIC paid GE Capital $1,132
and $70 under this agreement for the year ended December 31, 2004 and the period
from December 18, 2003 through December 31, 2003,  respectively.  This agreement
was  terminated  by FGIC in July  2004 and was  replaced  by a new soft  capital
facility (see Note 15).

The  Company  also  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 $3, $6, $0 and $20 for the year ended December 31, 2005 and 2004 and
for the periods from December 18, 2003 through  December 31, 2003 and January 1,
2003  through  December  17, 2003,  respectively.  As of December 31, 2005,  par
outstanding on these deals before  reinsurance was $6,142.  Issues  sponsored by
affiliates of GE accounted for  approximately  1% of gross  premiums  written in
2003.

During 2005 FGIC, in the normal course of operations,  entered into  reinsurance
transactions  with  PMI-affiliated  companies.  Ceded premiums were $582 for the
year  ended  December  31,  2005 and  accounts  payable  due to PMI were $102 at
December 31, 2005.

As of December 31, 2005 and 2004, there were no receivables due from GE Capital.

During 2005 and 2004, the Company allocated certain overhead costs to FGIC Corp.
which amounted to $540 and $317, respectively.


                                        28
<PAGE>


12. COMPENSATION PLANS

All employees of the Company  participate in an incentive  compensation plan. In
addition,   the  Company  offers  a  deferred  compensation  plan  for  eligible
employees. Expenses incurred by the Company under compensation plans amounted to
$21,824,  $15,493, $3,996, and $10,087 for the years ended December 31, 2005 and
2004 and for the periods from  December  18, 2003 through  December 31, 2003 and
January 1, 2003 through  December 17, 2003,  respectively,  and are reflected in
the  accompanying  consolidated  financial  statements.  During  2005 and  2004,
compensation  increased primarily due to an increase in employee headcount.  For
2003,  compensation for certain  employees was part of an allocation of expenses
of affiliates  and was therefore  recorded as an allocated  expense  rather than
compensation expense. In 2005 and 2004, these expenses were directly recorded by
the   Company.   In  2003,   compensation   levels   were   driven  in  part  by
Transaction-related  costs,  including  retention bonuses and sign-on bonuses to
new hires post-acquisition.

Commencing  effective  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 2005, up to $14 for employees under age 50,
plus an  additional  "catch up"  contribution  of up to $4 for  employees 50 and
older).  The Company may also make  discretionary  contributions  to the plan on
behalf of employees.  The Company  contributed  $3,429 and $2,532 to the plan on
behalf  of  employees   for  the  years  ended   December  31,  2005  and  2004,
respectively.

13. DIVIDENDS

Under New York insurance  law, the Company may pay dividends to FGIC Corp.  only
from earned surplus, subject to the following limitations: (a) statutory surplus
after any dividend may not be less than the minimum  required  paid-in  capital,
which was $72,500 in 2005,  2004 and 2003,  and (b) dividends may not exceed the
lesser  of 10% of the  Company's  surplus  or 100% of  adjusted  net  investment
income, as defined by New York insurance law, for the twelve-month  period ended
on the preceding  December 31,  without the prior approval of the New York State
Superintendent of Insurance.

                                        29
<PAGE>


13. DIVIDENDS (CONTINUED)

During  the years  ended  December  31,  2005 and 2004 and for the  period  from
December 18, 2003 through December 31, 2003, the Company did not declare and pay
dividends. During the period from January 1, 2003 through December 17, 2003, the
Company  declared and paid dividends to FGIC Corp. of $284,300.  These dividends
were approved by the New York State Superintendent of Insurance.

14. 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
led by  JPMorgan  Chase,  as  administrative  agent and sole lead  arranger.  In
connection with the facility,  $150 in syndication costs was prepaid and will be
amortized  into income 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.

15. PREFERRED TRUST SECURITIES

On July 19, 2004,  the Company closed 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 new facility,  each of six separate newly organized 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
$1,806 and $905 for the years ended December 31, 2005 and 2004, respectively.

                                        30
<PAGE>


16. 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 cost, which
approximates fair value.

     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, 2005 and 2004 were as follows:

                                               2005                  2004
                                      ------------------------------------------
                                       CARRYING      FAIR   CARRYING      FAIR
                                        AMOUNT       VALUE    AMOUNT      VALUE
                                     -------------------------------------------
       Financial assets:
         Cash on hand and in-demand
           accounts                   $ 45,077     $ 45,077  $ 69,292   $ 69,292
         Short-term investments        159,334      159,334   140,473    140,473
         Fixed maturity securities   3,258,738    3,258,738 2,938,856  2,938,856

     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 $1,098,165 compared
     to a carrying  value of $1,099,045 as of December 31, 2005, and is $965,992
     compared to a carrying value of $936,334 as of December 31, 2004.

                                        31

<PAGE>


16. FINANCIAL INSTRUMENTS (CONTINUED)

     As of  December  31,  2005  and  2004,  the net  present  value  of  future
     installment premiums was approximately $393,000 and $192,000, 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 a term  of the
     obligation issued 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 debt, government debt and consumer receivables.

     As of December 31, 2005, the Company's total outstanding  principal insured
     was $275,327,000,  net of reinsurance of $22,711,000. The Company's insured
     portfolio as of December 31, 2005 was broadly diversified by geographic and
     bond market sector, with no single obligor representing more than 1% of the
     Company's insured principal  outstanding,  net of reinsurance.  The insured
     portfolio includes exposure under credit  derivatives.  The par written for
     credit derivatives was $15,640,000 at December 31, 2005.

                                        32
<PAGE>


16. FINANCIAL INSTRUMENTS (CONTINUED)

     As of December 31, 2005, the  composition  of principal  insured by type of
     issue, net of reinsurance, was as follows:

                                                               NET PRINCIPAL
                                                                OUTSTANDING
                                                             ------------------
          Municipal:
            Tax supported                                      $  134,762,000
            Water and sewer                                        34,859,000
            Healthcare                                              4,216,000
            Transportation                                         24,956,000
            Education                                               9,939,000
            Housing                                                 1,234,000
            Other                                                   5,153,000
          Non-municipal and international                          60,208,000
                                                             ------------------
          Total                                                $  275,327,000
                                                             ==================

     As of December 31, 2005,  the  composition  of principal  insured  ceded to
reinsurers was as follows:

                                                             CEDED PRINCIPAL
                                                               OUTSTANDING
                                                            -------------------
        Reinsurer:
          Radian Reinsurance Company                           $  7,808,000
          Ace Guaranty Inc.                                       6,367,000
          American Re-Insurance Company                           2,231,000
          RAM Reinsurance Company                                 2,024,000
          Other                                                   4,281,000
                                                            -------------------
        Total                                                  $ 22,711,000
                                                            ===================

     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
     $472,161,000 and $433,587,000, respectively, as of December 31, 2005.


                                        33
<PAGE>


16. FINANCIAL INSTRUMENTS (CONTINUED)

     FGIC is authorized  to do business in 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, 2005 by state, net
     of reinsurance, was as follows:

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

California                                     $  32,882,000
New York                                          21,265,000
Pennsylvania                                      15,952,000
Florida                                           15,483,000
Illinois                                          13,049,000
Texas                                             12,223,000
New Jersey                                        10,883,000
Michigan                                           8,311,000
Ohio                                               6,903,000
Washington                                         6,359,000
                                             ------------------
                                                 143,310,000

All other states                                  71,809,000
Mortgage and asset-backed                         54,262,000
International                                      5,946,000
                                             ------------------
Total                                          $ 275,327,000
                                             ==================


                                        34
<PAGE>


17. COMMITMENTS

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, 2005 and 2004 and for the period from December
18, 2003 through December 31, 2003 and January 1, 2003 through December 17, 2003
was $3,631,  $3,070, $90, and $3,210,  respectively.  Future payments associated
with these leases are as follows:

                                                 OPERATING LEASE
                                                  COMMITMENT
                                                    AMOUNT
                                               -------------------
Year:
  2006                                              $  3,141
  2007                                                 3,119
  2008                                                 1,968
  2009                                                   412
  2010                                                   412
  2011 and thereafter                                  1,496
                                               -------------------
Total minimum future rental payments                 $10,548
                                               ===================

In connection  with the  Transaction,  the Company  entered into a capital lease
with  a  related  party  (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:

                                                OPERATING LEASE
                                                   COMMITMENT
                                                     AMOUNT
                                               -------------------
Year ending December 31:
   2006                                               $1,570
   2007                                                1,545
   2008                                                1,391
   2009                                                  265
                                               -------------------
Total                                                  4,771
Less interest                                            509
                                               -------------------
Present value of minimum lease payments               $4,262
                                               ===================

                                        35
<PAGE>


18. COMPREHENSIVE INCOME

Accumulated  other  comprehensive  (loss) income of the Company  consists of net
unrealized  gains  on  investment   securities,   foreign  currency  translation
adjustments, and a cash flow hedge. The components of other comprehensive income
for the years ended December 31, 2005 and 2004 and for the periods from December
18, 2003 through  December 31,  2003,  and January 1, 2003 through  December 17,
2003 are as follows:
<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>

                                        36

<PAGE>


18. COMPREHENSIVE INCOME (CONTINUED)

<TABLE>
<CAPTION>

                                                        PERIOD FROM DECEMBER 18, 2003
                                                          THROUGH DECEMBER 31, 2003
                                                      -----------------------------------
                                                        BEFORE       TAX       NET OF
                                                         TAX                     TAX
                                                        AMOUNT                 AMOUNT
                                                      -----------------------------------

<S>                                                      <C>        <C>         <C>
Unrealized holding gains arising during the period       $3,168     $(1,109)    $2,059
Less reclassification adjustment for gains realized
  in net income                                               -           -          -
                                                      -----------------------------------
Unrealized gains on investments                           3,168      (1,109)     2,059
                                                      -----------------------------------
Total other comprehensive income                         $3,168     $(1,109)    $2,059
                                                      ===================================

                                                         PERIOD FROM JANUARY 1, 2003
                                                          THROUGH DECEMBER 17, 2003
                                                     -----------------------------------
                                                        BEFORE       TAX       NET OF
                                                         TAX                     TAX
                                                        AMOUNT                 AMOUNT
                                                      -----------------------------------
Unrealized holding gains arising during the period     $ 30,853    $(10,798)   $ 20,055
Less reclassification adjustment for gains realized
  in net income                                         (31,506)     11,027     (20,479)
Unrealized losses on investments                           (653)        229        (424)
Foreign currency translation adjustment                   6,565      (2,298)      4,267
                                                      -----------------------------------
Total other comprehensive income                       $  5,912    $ (2,069)   $  3,843
                                                      ===================================
</TABLE>

                                        37

<PAGE>


19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>


                                            THREE MONTHS ENDED              YEAR ENDED
                              -----------------------------------------------
                                MARCH 31,   JUNE 30,   SEPTEMBER  DECEMBER   DECEMBER
                                  2005        2005      30, 2005   31, 2005  31, 2005
                              ----------------------------------------------------------

<S>                             <C>         <C>         <C>        <C>       <C>
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

                                            THREE MONTHS ENDED              YEAR ENDED
                              -----------------------------------------------
                                MARCH 31,   JUNE 30,   SEPTEMBER  DECEMBER   DECEMBER
                                  2004        2004      30, 2004   31, 2004  31, 2004
                              ----------------------------------------------------------

Gross premiums written          $56,395     $106,457    $87,869    $72,854   $323,575
Net premiums written             53,649      105,645     87,072     67,512    313,878
Net premiums earned              31,202       53,151     49,760     40,836    174,949
Net investment income and net
realized gains                   24,198       22,611     24,466     26,993     98,268
Other income (expense)              317          240        117         62        736
Total revenues                   55,717       76,002     74,343     67,891    273,953
Losses and loss adjustment
expenses                            664       (1,070)     6,725       (397)     5,922
Income before taxes              48,208       64,839     56,713     55,759    225,519
Net income                       38,304       48,393     41,954     41,435    170,086


</TABLE>


                                        38