Exhibit 99.2

CONSOLIDATED FINANCIAL STATEMENTS

FGIC Corporation and Subsidiaries

December 31, 2006

with Report of Independent Registered Public
Accounting Firm



F-1



---

FGIC Corporation and Subsidiaries

Consolidated Financial Statements

December 31, 2006

Contents



|                                                        |  |    
|------------------------------------------------------- |  | ---
|Report of Independent Registered Public Accounting Firm |  | F-3
|Consolidated Balance Sheets                             |  | F-4
|Consolidated Statements of Income                       |  | F-5
|Consolidated Statements of Stockholders Equity         |  | F-6
|Consolidated Statements of Cash Flows                   |  | F-7
|Notes to Consolidated Financial Statements              |  | F-8



F-2



---

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

FGIC Corporation

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

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

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

/s/ Ernst & Young LLP

New York,
New York

February 2, 2007



F-3



---

FGIC Corporation and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)



|                                                                                                                                                                                                      |  |              |           |      |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ---- | - | --------- | -
|                                                                                                                                                                                                      |  | December 31, |          
|                                                                                                                                                                                                      |  | 2006         |           | 2005 |  
|Assets                                                                                                                                                                                                |  |              |           |      |   |           |  
|Fixed maturity securities, available for sale, at fair value (amortized cost of $3,644,851 in 2006 and $3,300,634 in 2005)                                                                            |  | $            | 3,644,195 |      | $ | 3,281,671 |  
|Variable interest entity fixed maturity securities, held to maturity at amortized cost                                                                                                                |  |              | 750,000   |      |   |          |  
|Short-term investments                                                                                                                                                                                |  |              | 222,844   |      |   | 176,146   |  
|                                                                                                                                                                                                      |  |              |           |      |   |           |  
|Total investments                                                                                                                                                                                     |  |              | 4,617,039 |      |   | 3,457,817 |  
|Cash and cash equivalents                                                                                                                                                                             |  |              | 33,278    |      |   | 51,901    |  
|Accrued investment income                                                                                                                                                                             |  |              | 50,214    |      |   | 42,871    |  
|Reinsurance recoverable on losses                                                                                                                                                                     |  |              | 1,485     |      |   | 3,271     |  
|Prepaid reinsurance premiums                                                                                                                                                                          |  |              | 156,708   |      |   | 110,636   |  
|Policy acquisition costs deferred, net                                                                                                                                                                |  |              | 93,170    |      |   | 63,330    |  
|Property and equipment, net of accumulated depreciation of $2,107 in 2006 and $885 in 2005                                                                                                            |  |              | 2,617     |      |   | 3,092     |  
|Prepaid expenses                                                                                                                                                                                      |  |              | 1,282     |      |   | 1,378     |  
|Foreign deferred tax asset                                                                                                                                                                            |  |              | 3,491     |      |   | 3,500     |  
|Other assets                                                                                                                                                                                          |  |              | 53,948    |      |   | 14,180    |  
|                                                                                                                                                                                                      |  |              |           |      |   |           |  
|Total assets                                                                                                                                                                                          |  |              | 5,013,232 |      |   | 3,751,976 |  
|                                                                                                                                                                                                      |  |              |           |      |   |           |  
|                                                                                                                                                                                                      |  |             
|Liabilities and stockholders equity                                                                                                                                                                  |  |              |           |      |   |           |  
|Liabilities:                                                                                                                                                                                          |  |              |           |      |   |           |  
|Unearned premiums                                                                                                                                                                                     |  |              | 1,347,592 |      |   | 1,201,163 |  
|Loss and loss adjustment expense reserves                                                                                                                                                             |  |              | 40,299    |      |   | 54,812    |  
|Ceded reinsurance balances payable                                                                                                                                                                    |  |              | 7,524     |      |   | 1,615     |  
|Accounts payable and accrued expenses                                                                                                                                                                 |  |              | 46,207    |      |   | 41,459    |  
|Other liabilities                                                                                                                                                                                     |  |              | 40,235    |      |   | 3,881     |  
|Payable for securities purchased                                                                                                                                                                      |  |              | 10,770    |      |   |          |  
|Variable interest entity floating rate notes                                                                                                                                                          |  |              | 750,000   |      |   |          |  
|Accrued interest expense  variable interest entity                                                                                                                                                   |  |              | 1,298     |      |   |          |  
|Capital lease obligations                                                                                                                                                                             |  |              | 2,941     |      |   | 4,262     |  
|Current income taxes payable                                                                                                                                                                          |  |              | 22,609    |      |   | 6,376     |  
|Deferred income taxes                                                                                                                                                                                 |  |              | 66,424    |      |   | 35,902    |  
|Debt                                                                                                                                                                                                  |  |              | 323,373   |      |   | 323,350   |  
|                                                                                                                                                                                                      |  |              |           |      |   |           |  
|Total liabilities                                                                                                                                                                                     |  |              | 2,659,272 |      |   | 1,672,820 |  
|                                                                                                                                                                                                      |  |              |           |      |   |           |  
|                                                                                                                                                                                                      |  |             
|Stockholders equity:                                                                                                                                                                                 |  |              |           |      |   |           |  
|Senior Participating Mandatorily Convertible Modified Preferred Stock, par value $ 0.01 per share; 2,500 shares authorized, 2,346 shares
issued and outstanding at December 31, 2006 and 2005         |  |              | 287,355   |      |   | 268,870   |  
|Preferred stock, par value $0.01 per share; 47,500 shares authorized, none issued and outstanding                                                                                                     |  |              |          |      |   |          |  
|Common stock, par value $0.01 per share; 6,000,000 shares authorized at December 31, 2006 and 2005, 2,403,067 and 2,402,830 shares issued
and outstanding at December 31, 2006 and 2005, respectively |  |              | 24        |      |   | 24        |  
|Additional paid-in capital                                                                                                                                                                            |  |              | 1,442,077 |      |   | 1,435,261 |  
|Accumulated other comprehensive income (loss), net of tax                                                                                                                                             |  |              | 7,237     |      |   | (12,907   | )
|Retained earnings                                                                                                                                                                                     |  |              | 617,267   |      |   | 387,908   |  
|                                                                                                                                                                                                      |  |              |           |      |   |           |  
|Total stockholders equity                                                                                                                                                                            |  |              | 2,353,960 |      |   | 2,079,156 |  
|                                                                                                                                                                                                      |  |              |           |      |   |           |  
|Total liabilities and stockholders equity                                                                                                                                                            |  | $            | 5,013,232 |      | $ | 3,751,976 |  
|                                                                                                                                                                                                      |  |              |           |      |   |           |  

See accompanying notes to consolidated financial statements.



F-4



---

FGIC Corporation and Subsidiaries

Consolidated Statements of Income

(Dollars in thousands)



|                                                                          |  |                            |          |   |                            |   |          |                            |  |   |          |  
|------------------------------------------------------------------------- |  | -------------------------- | -------- | - | -------------------------- | - | -------- | -------------------------- |  | - | -------- | -
|                                                                          |  | Year endedDecember 31,2006 |          |   | Year endedDecember 31,2005 |   |          | Year endedDecember 31,2004 | 
|Revenues:                                                                 |  |                            |          |   |                            |   |          |                            |  |   |          |  
|Gross direct and assumed premiums written                                 |  | $                          | 441,231  |   |                            | $ | 410,202  |                            |  | $ | 323,575  |  
|Reassumed ceded premiums                                                  |  |                            |         |   |                            |   |         |                            |  |   | 4,959    |  
|Ceded premiums written                                                    |  |                            | (74,417  | ) |                            |   | (29,148  | )                          |  |   | (14,656  | )
|                                                                          |  |                            |          |   |                            |   |          |                            |  |   |          |  
|Net premiums written                                                      |  |                            | 366,814  |   |                            |   | 381,054  |                            |  |   | 313,878  |  
|Change in net unearned premiums                                           |  |                            | (100,357 | ) |                            |   | (156,485 | )                          |  |   | (138,929 | )
|                                                                          |  |                            |          |   |                            |   |          |                            |  |   |          |  
|Net premiums earned                                                       |  |                            | 266,457  |   |                            |   | 224,569  |                            |  |   | 174,949  |  
|Net investment income                                                     |  |                            | 139,748  |   |                            |   | 118,802  |                            |  |   | 98,002   |  
|Interest income  investments held by variable interest entity            |  |                            | 35,893   |   |                            |   |         |                            |  |   |         |  
|Net realized gains                                                        |  |                            | 336      |   |                            |   | 104      |                            |  |   | 559      |  
|Net realized and unrealized gains (losses) on credit derivative contracts |  |                            | 507      |   |                            |   | (167     | )                          |  |   |         |  
|Other income                                                              |  |                            | 1,815    |   |                            |   | 762      |                            |  |   | 737      |  
|                                                                          |  |                            |          |   |                            |   |          |                            |  |   |          |  
|Total revenues                                                            |  |                            | 444,756  |   |                            |   | 344,070  |                            |  |   | 274,247  |  
|Expenses:                                                                 |  |                            |          |   |                            |   |          |                            |  |   |          |  
|Loss and loss adjustment expenses                                         |  |                            | (8,700   | ) |                            |   | 18,506   |                            |  |   | 5,922    |  
|Underwriting expenses                                                     |  |                            | 91,356   |   |                            |   | 81,761   |                            |  |   | 68,149   |  
|Policy acquisition costs deferred, net                                    |  |                            | (39,728  | ) |                            |   | (38,069  | )                          |  |   | (32,952  | )
|Amortization of policy acquisition costs deferred                         |  |                            | 11,486   |   |                            |   | 8,302    |                            |  |   | 2,038    |  
|Other operating expenses                                                  |  |                            | 6,704    |   |                            |   | 6,960    |                            |  |   | 11,375   |  
|Interest expense  debt held by variable interest entity                  |  |                            | 35,893   |   |                            |   |         |                            |  |   |         |  
|Interest expense                                                          |  |                            | 19,500   |   |                            |   | 19,500   |                            |  |   | 14,927   |  
|                                                                          |  |                            |          |   |                            |   |          |                            |  |   |          |  
|Total expenses                                                            |  |                            | 116,511  |   |                            |   | 96,960   |                            |  |   | 69,459   |  
|                                                                          |  |                            |          |   |                            |   |          |                            |  |   |          |  
|Income before income tax expense                                          |  |                            | 328,245  |   |                            |   | 247,110  |                            |  |   | 204,788  |  
|Income tax expense:                                                       |  |                            |          |   |                            |   |          |                            |  |   |          |  
|Current                                                                   |  |                            | 59,382   |   |                            |   | 32,223   |                            |  |   | 36,825   |  
|Deferred                                                                  |  |                            | 21,019   |   |                            |   | 24,421   |                            |  |   | 11,083   |  
|                                                                          |  |                            |          |   |                            |   |          |                            |  |   |          |  
|Total income tax expense                                                  |  |                            | 80,401   |   |                            |   | 56,644   |                            |  |   | 47,908   |  
|                                                                          |  |                            |          |   |                            |   |          |                            |  |   |          |  
|Net income                                                                |  |                            | 247,844  |   |                            |   | 190,466  |                            |  |   | 156,880  |  
|Preferred stock dividends                                                 |  |                            | (18,485  | ) |                            |   | (17,295  | )                          |  |   | (16,348  | )
|                                                                          |  |                            |          |   |                            |   |          |                            |  |   |          |  
|Net income available to common stockholders                               |  | $                          | 229,359  |   |                            | $ | 173,171  |                            |  | $ | 140,532  |  
|                                                                          |  |                            |          |   |                            |   |          |                            |  |   |          |  

See accompanying notes to consolidated financial statements.



F-5



---

FGIC Corporation and Subsidiaries

Consolidated Statements of Stockholders Equity

(Dollars in thousands)



|                                                                   |  |                |         |             |   |                          |  |   |                   |   |  |                                                       |      |   |                  |   |         |       |  |   |         |   |  |   |           |  
|------------------------------------------------------------------ |  | -------------- | ------- | ----------- | - | ------------------------ |  | - | ----------------- | - |  | ----------------------------------------------------- | ---- | - | ---------------- | - | ------- | ----- |  | - | ------- | - |  | - | --------- | -
|                                                                   |  | PreferredStock |         | CommonStock |   | AdditionalPaid-inCapital |  |   | StockCompensation |   |  | AccumulatedOtherComprehensiveIncome (Loss),Net of Tax |      |   | RetainedEarnings |   |         | Total | 
|Balance at January 1, 2004                                         |  | $              | 235,227 |             | $ | 1                        |  | $ | 1,431,566         |   |  | $                                                     |     |   |                  | $ | 2,059   |       |  | $ | 74,205  |   |  | $ | 1,743,058 |  
|Net income                                                         |  |                |        |             |   |                         |  |   |                  |   |  |                                                       |     |   |                  |   |        |       |  |   | 156,880 |   |  |   | 156,880   |  
|Other comprehensive income :                                       |  |                |         |             |   |                          |  |   |                   |   |  |                                                       |      |   |                  |   |         |       |  |   |         |   |  |   |           |  
|Change in fixed maturity securities available for sale, net of tax |  |                |        |             |   |                         |  |   |                  |   |  |                                                       |     |   |                  |   | 9,318   |       |  |   |        |   |  |   | 9,318     |  
|Change in foreign currency translation adjustment, net of tax      |  |                |        |             |   |                         |  |   |                  |   |  |                                                       |     |   |                  |   | 4,086   |       |  |   |        |   |  |   | 4,086     |  
|Amortization of gain on interest rate lock                         |  |                |        |             |   |                         |  |   |                  |   |  |                                                       |     |   |                  |   | 970     |       |  |   |        |   |  |   | 970       |  
|                                                                   |  |                |         |             |   |                          |  |   |                   |   |  |                                                       |      |   |                  |   |         |       |  |   |         |   |  |   |           |  
|Total comprehensive income                                         |  |                |         |             |   |                          |  |   |                   |   |  |                                                       |      |   |                  |   |         |       |  |   |         |   |  |   | 171,254   |  
|Issuance of additional common stock                                |  |                |        |             |   |                         |  |   | 3,598             |   |  |                                                       |     |   |                  |   |        |       |  |   |        |   |  |   | 3,598     |  
|Stock split                                                        |  |                |        |             |   | 23                       |  |   | (23               | ) |  |                                                       |     |   |                  |   |        |       |  |   |        |   |  |   |          |  
|Issuance of restricted stock                                       |  |                |        |             |   |                         |  |   | 120               |   |  |                                                       | (120 | ) |                  |   |        |       |  |   |        |   |  |   |          |  
|Amortization of restricted stock                                   |  |                |        |             |   |                         |  |   |                  |   |  |                                                       | 75   |   |                  |   |        |       |  |   |        |   |  |   | 75        |  
|Accrued dividends                                                  |  |                | 16,348  |             |   |                         |  |   |                  |   |  |                                                       |     |   |                  |   |        |       |  |   | (16,348 | ) |  |   |          |  
|                                                                   |  |                |         |             |   |                          |  |   |                   |   |  |                                                       |      |   |                  |   |         |       |  |   |         |   |  |   |           |  
|Balance at December 31, 2004                                       |  |                | 251,575 |             |   | 24                       |  |   | 1,435,261         |   |  |                                                       | (45  | ) |                  |   | 16,433  |       |  |   | 214,737 |   |  |   | 1,917,985 |  
|Net income                                                         |  |                |        |             |   |                         |  |   |                  |   |  |                                                       |     |   |                  |   |        |       |  |   | 190,466 |   |  |   | 190,466   |  
|Other comprehensive income (loss):                                 |  |                |         |             |   |                          |  |   |                   |   |  |                                                       |      |   |                  |   |         |       |  |   |         |   |  |   |           |  
|Change in fixed maturity securities available for sale, net of tax |  |                |        |             |   |                         |  |   |                  |   |  |                                                       |     |   |                  |   | (23,795 | )     |  |   |        |   |  |   | (23,795   | )
|Change in foreign currency translation adjustment, net of tax      |  |                |        |             |   |                         |  |   |                  |   |  |                                                       |     |   |                  |   | (5,532  | )     |  |   |        |   |  |   | (5,532    | )
|Amortization of gain on interest rate lock                         |  |                |        |             |   |                         |  |   |                  |   |  |                                                       |     |   |                  |   | (13     | )     |  |   |        |   |  |   | (13       | )
|                                                                   |  |                |         |             |   |                          |  |   |                   |   |  |                                                       |      |   |                  |   |         |       |  |   |         |   |  |   |           |  
|Total comprehensive income                                         |  |                |         |             |   |                          |  |   |                   |   |  |                                                       |      |   |                  |   |         |       |  |   |         |   |  |   | 161,126   |  
|Amortization of restricted stock                                   |  |                |        |             |   |                         |  |   |                  |   |  |                                                       | 45   |   |                  |   |        |       |  |   |        |   |  |   | 45        |  
|Accrued dividends                                                  |  |                | 17,295  |             |   |                         |  |   |                  |   |  |                                                       |     |   |                  |   |        |       |  |   | (17,295 | ) |  |   |          |  
|                                                                   |  |                |         |             |   |                          |  |   |                   |   |  |                                                       |      |   |                  |   |         |       |  |   |         |   |  |   |           |  
|Balance at December 31, 2005                                       |  |                | 268,870 |             |   | 24                       |  |   | 1,435,261         |   |  |                                                       |     |   |                  |   | (12,907 | )     |  |   | 387,908 |   |  |   | 2,079,156 |  
|Net income                                                         |  |                |        |             |   |                         |  |   |                  |   |  |                                                       |     |   |                  |   |        |       |  |   | 247,844 |   |  |   | 247,844   |  
|Other comprehensive income (loss):                                 |  |                |         |             |   |                          |  |   |                   |   |  |                                                       |      |   |                  |   |         |       |  |   |         |   |  |   |           |  
|Change in fixed maturity securities available for sale, net of tax |  |                |        |             |   |                         |  |   |                  |   |  |                                                       |     |   |                  |   | 11,961  |       |  |   |        |   |  |   | 11,961    |  
|Change in foreign currency translation adjustment, net of tax      |  |                |        |             |   |                         |  |   |                  |   |  |                                                       |     |   |                  |   | 8,196   |       |  |   |        |   |  |   | 8,196     |  
|Amortization of gain on interest rate lock                         |  |                |        |             |   |                         |  |   |                  |   |  |                                                       |     |   |                  |   | (13     | )     |  |   |        |   |  |   | (13       | )
|                                                                   |  |                |         |             |   |                          |  |   |                   |   |  |                                                       |      |   |                  |   |         |       |  |   |         |   |  |   |           |  
|Total comprehensive income                                         |  |                |        |             |   |                         |  |   |                  |   |  |                                                       |     |   |                  |   |        |       |  |   |        |   |  |   | 267,988   |  
|Amortization of stock options and restricted stock                 |  |                |        |             |   |                         |  |   | 6,816             |   |  |                                                       |     |   |                  |   |        |       |  |   |        |   |  |   | 6,816     |  
|Accrued dividends                                                  |  |                | 18,485  |             |   |                         |  |   |                  |   |  |                                                       |     |   |                  |   |        |       |  |   | (18,485 | ) |  |   |          |  
|                                                                   |  |                |         |             |   |                          |  |   |                   |   |  |                                                       |      |   |                  |   |         |       |  |   |         |   |  |   |           |  
|Balance at December 31, 2006                                       |  | $              | 287,355 |             | $ | 24                       |  | $ | 1,442,077         |   |  | $                                                     |     |   |                  | $ | 7,237   |       |  | $ | 617,267 |   |  | $ | 2,353,960 |  
|                                                                   |  |                |         |             |   |                          |  |   |                   |   |  |                                                       |      |   |                  |   |         |       |  |   |         |   |  |   |           |  

See accompanying notes to consolidated financial statements.



F-6



---

FGIC Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)



|                                                                                                             |  |                             |            |   |                             |   |          |                              |  |   |          |  
|------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ---------- | - | --------------------------- | - | -------- | ---------------------------- |  | - | -------- | -
|                                                                                                             |  | Year endedDecember 31, 2006 |            |   | Year endedDecember 31, 2005 |   |          | Year ended December 31, 2004 | 
|Operating activities                                                                                         |  |                             |            |   |                             |   |          |                              |  |   |          |  
|Net income                                                                                                   |  | $                           | 247,844    |   |                             | $ | 190,466  |                              |  | $ | 156,880  |  
|Adjustments to reconcile net income to net cash provided by operating activities:                            |  |                             |            |   |                             |   |          |                              |  |   |          |  
|Amortization of policy acquisition costs deferred                                                            |  |                             | 11,486     |   |                             |   | 8,574    |                              |  |   | 2,038    |  
|Policy acquisition costs deferred                                                                            |  |                             | (39,728    | ) |                             |   | (38,069  | )                            |  |   | (32,952  | )
|Depreciation of property and equipment                                                                       |  |                             | 1,222      |   |                             |   | 721      |                              |  |   | 164      |  
|Amortization of debt issuance costs and discount                                                             |  |                             | 109        |   |                             |   | 83       |                              |  |   |         |  
|Amortization of fixed maturity securities                                                                    |  |                             | 33,725     |   |                             |   | 31,354   |                              |  |   | 37,016   |  
|Amortization of short-term investments                                                                       |  |                             | 131        |   |                             |   | 481      |                              |  |   | 29       |  
|Net realized gains on investments                                                                            |  |                             | (336       | ) |                             |   | (104     | )                            |  |   | (559     | )
|Stock compensation expense                                                                                   |  |                             | 6,816      |   |                             |   | 45       |                              |  |   |         |  
|Change in accrued investment income, prepaid expenses, foreign deferred tax asset and other assets, net      |  |                             | (47,323    | ) |                             |   | (11,911  | )                            |  |   | (5,854   | )
|Change in net realized and unrealized gains (losses) on credit derivative contracts                          |  |                             | 1,336      |   |                             |   | 167      |                              |  |   |         |  
|Change in current income taxes receivable                                                                    |  |                             |           |   |                             |   |         |                              |  |   | 272      |  
|Change in reinsurance recoverable on losses                                                                  |  |                             | 1,786      |   |                             |   | (217     | )                            |  |   | 5,011    |  
|Change in prepaid reinsurance premiums                                                                       |  |                             | (46,072    | ) |                             |   | (1,344   | )                            |  |   | 14,476   |  
|Change in other reinsurance receivables                                                                      |  |                             |           |   |                             |   |         |                              |  |   | 5,295    |  
|Change in receivable from related parties                                                                    |  |                             |           |   |                             |   |         |                              |  |   | 9,877    |  
|Change in unearned premiums                                                                                  |  |                             | 147,589    |   |                             |   | 157,829  |                              |  |   | 124,452  |  
|Change in loss and loss adjustment expenses                                                                  |  |                             | (14,513    | ) |                             |   | 15,631   |                              |  |   | (1,286   | )
|Change in ceded reinsurance balances payable and accounts payable and accrued expenses and other liabilities |  |                             | 44,584     |   |                             |   | 2,968    |                              |  |   | 15,232   |  
|Change in current income taxes payable                                                                       |  |                             | 16,233     |   |                             |   | (1,282   | )                            |  |   | 7,658    |  
|Change in accrued interest expense  variable interest entity                                                |  |                             | 1,298      |   |                             |   |         |                              |  |   |         |  
|Change in deferred federal income taxes                                                                      |  |                             | 21,193     |   |                             |   | 14,406   |                              |  |   | 11,083   |  
|                                                                                                             |  |                             |            |   |                             |   |          |                              |  |   |          |  
|Net cash provided by operating activities                                                                    |  |                             | 387,380    |   |                             |   | 369,798  |                              |  |   | 348,832  |  
|                                                                                                             |  |                             |            |   |                             |   |          |                              |  |   |          |  
|Investing activities                                                                                         |  |                             |            |   |                             |   |          |                              |  |   |          |  
|Sales and maturities of fixed maturity securities                                                            |  |                             | 212,061    |   |                             |   | 128,142  |                              |  |   | 284,227  |  
|Purchases of fixed maturity securities                                                                       |  |                             | (584,739   | ) |                             |   | (520,080 | )                            |  |   | (569,527 | )
|Purchases, sales and maturities of short-term investments, net                                               |  |                             | (46,432    | ) |                             |   | 5,073    |                              |  |   | (167,352 | )
|Receivable for securities sold                                                                               |  |                             |           |   |                             |   | (20      | )                            |  |   | 170      |  
|Payable for securities purchased                                                                             |  |                             | 10,770     |   |                             |   | (5,715   | )                            |  |   | 5,715    |  
|Purchase of fixed assets                                                                                     |  |                             | (477       | ) |                             |   | (1,405   | )                            |  |   | (2,572   | )
|Purchase of investments held by variable interest entity                                                     |  |                             | (750,000   | ) |                             |   |         |                              |  |   |         |  
|                                                                                                             |  |                             |            |   |                             |   |          |                              |  |   |          |  
|Net cash used in investing activities                                                                        |  |                             | (1,158,817 | ) |                             |   | (394,005 | )                            |  |   | (449,339 | )
|                                                                                                             |  |                             |            |   |                             |   |          |                              |  |   |          |  
|Financing activities                                                                                         |  |                             |            |   |                             |   |          |                              |  |   |          |  
|Debt issuance                                                                                                |  |                             |           |   |                             |   |         |                              |  |   | 323,296  |  
|Repayment of debt                                                                                            |  |                             |           |   |                             |   |         |                              |  |   | (227,300 | )
|Debt issuance cost                                                                                           |  |                             |           |   |                             |   |         |                              |  |   | (4,822   | )
|Proceeds from issuance of debt held by variable interest entity                                              |  |                             | 750,000    |   |                             |   |         |                              |  |   |         |  
|                                                                                                             |  |                             |            |   |                             |   |          |                              |  |   |          |  
|Net cash provided by financing activities                                                                    |  |                             | 750,000    |   |                             |   |         |                              |  |   | 91,174   |  
|                                                                                                             |  |                             |            |   |                             |   |          |                              |  |   |          |  
|Effect of exchange rate changes on cash                                                                      |  |                             | 2,814      |   |                             |   | 1,530    |                              |  |   | (1,717   | )
|                                                                                                             |  |                             |            |   |                             |   |          |                              |  |   |          |  
|Net decrease in cash and cash equivalents                                                                    |  |                             | (18,623    | ) |                             |   | (22,677  | )                            |  |   | (11,050  | )
|Cash and cash equivalents at beginning of period                                                             |  |                             | 51,901     |   |                             |   | 74,578   |                              |  |   | 85,628   |  
|                                                                                                             |  |                             |            |   |                             |   |          |                              |  |   |          |  
|Cash and cash equivalents at end of period                                                                   |  |                             | 33,278     |   |                             | $ | 51,901   |                              |  | $ | 74,578   |  
|                                                                                                             |  |                             |            |   |                             |   |          |                              |  |   |          |  
|Supplemental disclosure of cash flow information                                                             |  |                             |            |   |                             |   |          |                              |  |   |          |  
|Income taxes paid                                                                                            |  | $                           | 41,732     |   |                             | $ | 44,631   |                              |  | $ | 31,771   |  
|Interest paid  debt                                                                                         |  |                             | 19,500     |   |                             |   | 19,500   |                              |  |   | 6,894    |  
|Interest paid  debt held by variable interest entity                                                        |  |                             | 34,595     |   |                             |   |         |                              |  |   |         |  

See accompanying notes to consolidated financial statements.



F-7



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share
amounts)

1. Business and Organization

FGIC
Corporation (FGIC Corp.) is an insurance holding company whose wholly owned subsidiary, Financial Guaranty Insurance Company (FGIC), provides financial guaranty insurance and other forms of credit enhancement for public
finance and structured finance obligations. FGIC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. FGIC is licensed to write financial guaranty insurance in all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, and, through a branch, the United Kingdom.
In addition, a United Kingdom subsidiary of FGIC is authorized to write financial guaranty business in the United Kingdom and has passport rights to write business in other European Union member countries. As used in these notes, the term
Company refers to FGIC Corp. and its subsidiaries.

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

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

2. Basis of Presentation

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

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

Certain 2005 and 2004 amounts have been reclassified to
conform to the 2006 presentation.



F-8



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

3. Summary of Significant Accounting Policies

The Companys significant accounting policies are as follows:

a. Investments

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

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

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

b. Cash and Cash Equivalents

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

c. Premium Revenue Recognition

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

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



F-9



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

3. Summary of Significant Accounting Policies (continued)

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

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

d. Policy Acquisition Costs

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

e. Loss and Loss Adjustment Expense Reserves

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



F-10



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

3. Summary of Significant Accounting Policies (continued)

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

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

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

f. Income Taxes

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

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



F-11



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

3. Summary of Significant Accounting Policies (continued)

g. Property and Equipment

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

h. Foreign Currency Translation

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

i. Stock Compensation Plan

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

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



F-12



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

3. Summary of Significant Accounting Policies (continued)

j. Variable Interest Entities

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

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

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

k. Derivative Instruments

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

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



F-13



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

3. Summary of Significant Accounting Policies (continued)

l. New Accounting Pronouncements

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

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

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



F-14



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

3. Summary of Significant Accounting Policies (continued)

m. Review of Financial Guaranty Industry Accounting Practices

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

4. Statutory Accounting Practices

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



F-15



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

5. Investments

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



|                                                                                      |  |               |           |                      |   |                        |  |            |        |  |   |          
|------------------------------------------------------------------------------------- |  | ------------- | --------- | -------------------- | - | ---------------------- |  | ---------- | ------ |  | - | ---------
|                                                                                      |  | AmortizedCost |           | GrossUnrealizedGains |   | Gross UnrealizedLosses |  | Fair Value
|At December 31, 2006                                                                  |  |               |           |                      |   |                        |  |            |        |  |   |          
|Available for sale:                                                                   |  |               |           |                      |   |                        |  |            |        |  |   |          
|Obligations of states and political subdivisions                                      |  | $             | 3,117,989 |                      | $ | 27,106                 |  | $          | 20,879 |  | $ | 3,124,216
|Asset- and mortgage-backed securities                                                 |  |               | 275,647   |                      |   | 814                    |  |            | 3,574  |  |   | 272,887  
|U.S. Treasury securities and obligations of U.S. government corporations and agencies |  |               | 108,486   |                      |   | 528                    |  |            | 1,974  |  |   | 107,040  
|Corporate bonds                                                                       |  |               | 87,805    |                      |   | 85                     |  |            | 1,776  |  |   | 86,114   
|Debt securities issued by foreign governments                                         |  |               | 41,425    |                      |   | 15                     |  |            | 245    |  |   | 41,195   
|Preferred stock                                                                       |  |               | 13,499    |                      |   |                       |  |            | 756    |  |   | 12,743   
|                                                                                      |  |               |           |                      |   |                        |  |            |        |  |   |          
|Total fixed maturity securities                                                       |  |               | 3,644,851 |                      |   | 28,548                 |  |            | 29,204 |  |   | 3,644,195
|Short-term investments                                                                |  |               | 222,866   |                      |   |                        |  |            | 22     |  |   | 222,844  
|Held to maturity:                                                                     |  |               |           |                      |   |                        |  |            |        |  |   |          
|Variable interest entity fixed maturity securities                                    |  |               | 750,000   |                      |   |                       |  |            |       |  |   | 750,000  
|                                                                                      |  |               |           |                      |   |                        |  |            |        |  |   |          
|Total investments                                                                     |  | $             | 4,617,717 |                      | $ | 28,548                 |  | $          | 29,226 |  | $ | 4,617,039
|                                                                                      |  |               |           |                      |   |                        |  |            |        |  |   |          



|                                                                                      |  |               |           |                      |   |                       |  |            |        |  |   |          
|------------------------------------------------------------------------------------- |  | ------------- | --------- | -------------------- | - | --------------------- |  | ---------- | ------ |  | - | ---------
|                                                                                      |  | AmortizedCost |           | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|At December 31, 2005                                                                  |  |               |           |                      |   |                       |  |            |        |  |   |          
|Available for sale:                                                                   |  |               |           |                      |   |                       |  |            |        |  |   |          
|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 |  |               | 168,609   |                      |   | 1,387                 |  |            | 2,396  |  |   | 167,600  
|Corporate bonds                                                                       |  |               | 94,941    |                      |   | 501                   |  |            | 1,536  |  |   | 93,906   
|Debt securities issued by foreign governments                                         |  |               | 30,930    |                      |   | 345                   |  |            | 5      |  |   | 31,270   
|Preferred stock                                                                       |  |               | 19,199    |                      |   | 427                   |  |            | 639    |  |   | 18,987   
|                                                                                      |  |               |           |                      |   |                       |  |            |        |  |   |          
|Total fixed maturity securities                                                       |  |               | 3,300,634 |                      |   | 15,513                |  |            | 34,476 |  |   | 3,281,671
|Short-term investments                                                                |  |               | 176,146   |                      |   |                      |  |            |       |  |   | 176,146  
|                                                                                      |  |               |           |                      |   |                       |  |            |        |  |   |          
|Total investments                                                                     |  | $             | 3,476,780 |                      | $ | 15,513                |  | $          | 34,476 |  | $ | 3,457,817
|                                                                                      |  |               |           |                      |   |                       |  |            |        |  |   |          



F-16



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

5. Investments (continued)

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



|                                                                                      |  |                     |         |                   |   |                  |  |            |  |                  |           |                  |   |            |  |                  |  |                  |           |  |   |        |  |    
|------------------------------------------------------------------------------------- |  | ------------------- | ------- | ----------------- | - | ---------------- |  | ---------- |  | ---------------- | --------- | ---------------- | - | ---------- |  | ---------------- |  | ---------------- | --------- |  | - | ------ |  | ---
|                                                                                      |  | Less Than 12 Months |         | 12 Months or More |   | Total           
|                                                                                      |  | Fair Value          |         | UnrealizedLosses  |   | No. ofSecurities |  | Fair Value |  | UnrealizedLosses |           | No. ofSecurities |   | Fair Value |  | UnrealizedLosses |  | No. ofSecurities
|Obligations of states and political subdivisions                                      |  | $                   | 582,407 |                   | $ | 1,971            |  | 173        |  | $                | 1,173,894 |                  | $ | 18,908     |  | 263              |  | $                | 1,756,301 |  | $ | 20,879 |  | 436
|Asset- and mortgage-backed securities                                                 |  |                     | 54,862  |                   |   | 366              |  | 13         |  |                  | 149,103   |                  |   | 3,208      |  | 40               |  |                  | 203,965   |  |   | 3,574  |  | 53 
|U.S. Treasury securities and obligations of U.S. government corporations and agencies |  |                     | 15,967  |                   |   | 83               |  | 6          |  |                  | 66,447    |                  |   | 1,891      |  | 13               |  |                  | 82,414    |  |   | 1,974  |  | 19 
|Other                                                                                 |  |                     | 54,123  |                   |   | 542              |  | 73         |  |                  | 62,892    |                  |   | 1,479      |  | 50               |  |                  | 117,015   |  |   | 2,021  |  | 123
|Preferred stock                                                                       |  |                     |        |                   |   |                 |  |           |  |                  | 12,742    |                  |   | 756        |  | 1                |  |                  | 12,742    |  |   | 756    |  | 1  
|                                                                                      |  |                     |         |                   |   |                  |  |            |  |                  |           |                  |   |            |  |                  |  |                  |           |  |   |        |  |    
|Total temporarily impaired securities                                                 |  | $                   | 707,359 |                   | $ | 2,962            |  | 265        |  | $                | 1,465,078 |                  | $ | 26,242     |  | 367              |  | $                | 2,172,437 |  | $ | 29,204 |  | 632
|                                                                                      |  |                     |         |                   |   |                  |  |            |  |                  |           |                  |   |            |  |                  |  |                  |           |  |   |        |  |    

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

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

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



|                                       |  |               |           |            |   |          
|-------------------------------------- |  | ------------- | --------- | ---------- | - | ---------
|                                       |  | AmortizedCost |           | Fair Value
|Due within one year                    |  | $             | 76,430    |            | $ | 76,017   
|Due after one year through five years  |  |               | 756,980   |            |   | 744,174  
|Due after five years through ten years |  |               | 1,499,596 |            |   | 1,494,287
|Due after ten years                    |  |               | 1,311,845 |            |   | 1,329,717
|                                       |  |               |           |            |   |          
|Total                                  |  | $             | 3,644,851 |            | $ | 3,644,195
|                                       |  |               |           |            |   |          



F-17



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

5. Investments (continued)

For
the years ended December 31, 2006, 2005 and 2004, proceeds from sales of fixed maturity securities, available for sale, were $20,781, $31,380 and $178,030, respectively. For the years ended December 31, 2006, 2005 and 2004, gross gains of
$382, $188 and $1,859 respectively, and gross losses of $108, $84 and $1,300, respectively, were realized on such sales. In 2006, $62 of gross gains realized on sales of short-term investments were included in the Net realized gains on the
Consolidated Statements of Income.

Net investment income of the Company was derived from the following sources:



|                                                               |  |                         |         |   |      |   |         |      |  |   |        |  
|-------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                               |  | Year ended December 31, |        
|                                                               |  | 2006                    |         |   | 2005 |   |         | 2004 | 
|Income from fixed maturity securities                          |  | $                       | 131,313 |   |      | $ | 113,612 |      |  | $ | 98,117 |  
|Income from short-term investments                             |  |                         | 11,023  |   |      |   | 7,535   |      |  |   | 1,346  |  
|                                                               |  |                         |         |   |      |   |         |      |  |   |        |  
|Total investment income                                        |  |                         | 142,336 |   |      |   | 121,147 |      |  |   | 99,463 |  
|Investment expenses                                            |  |                         | (2,588  | ) |      |   | (2,345  | )    |  |   | (1,461 | )
|                                                               |  |                         |         |   |      |   |         |      |  |   |        |  
|Net investment income                                          |  |                         | 139,748 |   |      |   | 118,802 |      |  |   | 98,002 |  
|Interest income  investments held by variable interest entity |  |                         | 35,893  |   |      |   |        |      |  |   |       |  
|                                                               |  |                         |         |   |      |   |         |      |  |   |        |  
|                                                               |  | $                       | 175,641 |   |      | $ | 118,802 |      |  | $ | 98,002 |  
|                                                               |  |                         |         |   |      |   |         |      |  |   |        |  

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



|                      |  |            |          
|--------------------- |  | ---------- | ---------
|                      |  | Fair Value
|New York              |  | $          | 325,042  
|Texas                 |  |            | 281,781  
|Florida               |  |            | 223,742  
|New Jersey            |  |            | 191,543  
|Illinois              |  |            | 186,600  
|California            |  |            | 180,295  
|Massachusetts         |  |            | 155,202  
|Michigan              |  |            | 128,268  
|                      |  |            |          
|                      |  |            | 1,672,473
|                      | 
|All other states      |  |            | 1,389,883
|All other investments |  |            | 804,683  
|                      |  |            |          
|Total investments     |  | $          | 3,867,039
|                      |  |            |          



F-18



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

6. Derivative Instruments

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

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



|                                                                          |  |                         |        |   |      |   |      |  
|------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ---- | -
|                                                                          |  | Year ended December 31, |       
|                                                                          |  | 2006                    |        |   | 2005 |  
|Change in unrealized gains                                                |  | $                       | 2,887  |   |      | $ | 545  |  
|Change in unrealized losses                                               |  |                         | (4,223 | ) |      |   | (712 | )
|Realized gains                                                            |  |                         | 1,843  |   |      |   |     |  
|Realized losses                                                           |  |                         |       |   |      |   |     |  
|                                                                          |  |                         |        |   |      |   |      |  
|Net realized and unrealized gains (losses) on credit derivative contracts |  | $                       | 507    |   |      | $ | (167 | )
|                                                                          |  |                         |        |   |      |   |      |  

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



F-19



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

7. Income Taxes

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

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

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



|                                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                            |  | Year ended December 31, |        
|                                                                                                            |  | 2006                    |         |   | 2005 |   |         | 2004 | 
|Income taxes computed on income before provision for federal income taxes, at the statutory income tax rate |  | $                       | 114,886 |   |      | $ | 86,489  |      |  | $ | 71, 676 |  
|State and local income taxes, net of                                                                        |  |                         |         |   |      |   |         |      |  |   |         |  
|Federal income taxes                                                                                        |  |                         | 756     |   |      |   | 453     |      |  |   | 503     |  
|Tax effect of:                                                                                              |  |                         |         |   |      |   |         |      |  |   |         |  
|Tax-exempt interest                                                                                         |  |                         | (35,646 | ) |      |   | (31,072 | )    |  |   | (28,015 | )
|Other, net                                                                                                  |  |                         | 405     |   |      |   | 774     |      |  |   | 3,744   |  
|                                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Provision for income taxes                                                                                  |  | $                       | 80,401  |   |      | $ | 56,644  |      |  | $ | 47,908  |  
|                                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  

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



|         |  |                         |         |   |      |   |        |      |  |   |        |  
|-------- |  | ----------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|         |  | Year ended December 31, |        
|         |  | 2006                    |         |   | 2005 |   |        | 2004 | 
|Foreign  |  |                         |         |   |      |   |        |      |  |   |        |  
|Current  |  | $                       | (383    | ) |      | $ | 2,409  |      |  | $ | (983   | )
|Deferred |  |                         | (752    | ) |      |   | (3,038 | )    |  |   |       |  
|Domestic |  |                         |         |   |      |   |        |      |  |   |        |  
|Current  |  |                         | 59,765  |   |      |   | 29,814 |      |  |   | 37,808 |  
|Deferred |  |                         | 21,771  |   |      |   | 27,459 |      |  |   | 11,083 |  
|         |  |                         |         |   |      |   |        |      |  |   |        |  
|Total    |  |                         | $80,401 |   |      | $ | 56,644 |      |  | $ | 47,908 |  
|         |  |                         |         |   |      |   |        |      |  |   |        |  



F-20



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

7. Income Taxes (continued)

The tax effects of temporary differences that give rise to significant portions of the net deferred tax liability at December 31, 2006 and 2005 are presented below:



|                                                                 |  |      |         |      |   |       
|---------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------
|                                                                 |  | 2006 |         | 2005
|Deferred tax assets:                                             |  |      |         |      |   |       
|Tax and loss bonds                                               |  | $    | 24,375  |      | $ | 24,375
|Loss and loss adjustment expense reserves                        |  |      | 3,717   |      |   | 6,180 
|AMT credit carryforward                                          |  |      | 10,506  |      |   | 17,538
|Property and equipment                                           |  |      | 125     |      |   | 83    
|Deferred compensation                                            |  |      | 5,264   |      |   | 1,525 
|Capital lease                                                    |  |      | 2,592   |      |   | 2,483 
|Net operating loss on foreign subsidiaries                       |  |      | 4,228   |      |   | 2,948 
|Other                                                            |  |      | 571     |      |   | 266   
|                                                                 |  |      |         |      |   |       
|Total gross deferred tax assets                                  |  |      | 51,378  |      |   | 55,398
|                                                                 |  |      |         |      |   |       
|Deferred tax liabilities:                                        |  |      |         |      |   |       
|Contingency reserves                                             |  |      | 42,656  |      |   | 42,656
|Unrealized gains on fixed maturity securities available for sale |  |      | 15,622  |      |   | 12,739
|Deferred acquisition costs                                       |  |      | 26,559  |      |   | 19,639
|Premium revenue recognition                                      |  |      | 22,916  |      |   | 10,359
|Profit commission                                                |  |      | 1,444   |      |   | 1,435 
|Unrealized gains on foreign currency                             |  |      | 3,581   |      |   | 194   
|Other                                                            |  |      | 1,533   |      |   | 778   
|                                                                 |  |      |         |      |   |       
|Total gross deferred tax liabilities                             |  |      | 114,311 |      |   | 87,800
|                                                                 |  |      |         |      |   |       
|Net deferred tax liability                                       |  | $    | 62,933  |      | $ | 32,402
|                                                                 |  |      |         |      |   |       

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



F-21



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

7. Income Taxes (continued)

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

8. Reinsurance

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

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

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

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

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



F-22



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

8. Reinsurance (continued)

Reinsurance decreased the following balances recorded in the consolidated statements of income as follows:



|                                  |  |                         |        |      |   |        |  |   |       
|--------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                                  |  | Year ended December 31,
|                                  |  | 2006                    |        | 2005 |   | 2004  
|Net premiums earned               |  | $                       | 28,324 |      | $ | 25,921 |  | $ | 24,173
|Loss and loss adjustment expenses |  |                         | 1,722  |      |   | 217    |  |   | 4,759 

9. Loss and Loss Adjustment Expense Reserves

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



|                               |  |                         |        |   |      |   |        |      |  |   |        |  
|------------------------------ |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                               |  | Year ended December 31, |       
|                               |  | 2006                    |        |   | 2005 |   |        | 2004 | 
|Case reserves                  |  | $                       | 33,328 |   |      | $ | 15,700 |      |  | $ | 18,900 |  
|Watchlist reserves             |  |                         | 21,484 |   |      |   | 23,481 |      |  |   | 21,567 |  
|                               |  |                         |        |   |      |   |        |      |  |   |        |  
|Balance at beginning of period |  |                         | 54,812 |   |      |   | 39,181 |      |  |   | 40,467 |  
|Less reinsurance recoverable   |  |                         | (3,271 | ) |      |   | (3,054 | )    |  |   | (8,065 | )
|                               |  |                         |        |   |      |   |        |      |  |   |        |  
|Net balance                    |  |                         | 51,541 |   |      |   | 36,127 |      |  |   | 32,402 |  
|                               |  |                         |        |   |      |   |        |      |  |   |        |  
|Incurred related to:           |  |                         |        |   |      |   |        |      |  |   |        |  
|Current period                 |  |                         |       |   |      |   | 23,985 |      |  |   | 11,756 |  
|Prior periods                  |  |                         | (8,700 | ) |      |   | (5,479 | )    |  |   | (5,834 | )
|                               |  |                         |        |   |      |   |        |      |  |   |        |  
|Total incurred                 |  |                         | (8,700 | ) |      |   | 18,506 |      |  |   | 5,922  |  
|                               |  |                         |        |   |      |   |        |      |  |   |        |  
|Paid related to:               |  |                         |        |   |      |   |        |      |  |   |        |  
|Current period                 |  |                         |       |   |      |   | (1,993 | )    |  |   |       |  
|Prior periods                  |  |                         | (4,027 | ) |      |   | (1,099 | )    |  |   | (2,197 | )
|                               |  |                         |        |   |      |   |        |      |  |   |        |  
|Total paid                     |  |                         | (4,027 | ) |      |   | (3,092 | )    |  |   | (2,197 | )
|                               |  |                         |        |   |      |   |        |      |  |   |        |  
|                               |  |                         |       
|Net balance                    |  |                         | 38,814 |   |      |   | 51,541 |      |  |   | 36,127 |  
|Plus reinsurance recoverable   |  |                         | 1,485  |   |      |   | 3,271  |      |  |   | 3,054  |  
|                               |  |                         |       
|Case reserves                  |  |                         | 28,558 |   |      |   | 33,328 |      |  |   | 15,700 |  
|Watchlist reserves             |  |                         | 11,741 |   |      |   | 21,484 |      |  |   | 23,481 |  
|                               |  |                         |        |   |      |   |        |      |  |   |        |  
|Balance at end of period       |  | $                       | 40,299 |   |      | $ | 54,812 |      |  | $ | 39,181 |  
|                               |  |                         |        |   |      |   |        |      |  |   |        |  



F-23



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

9. Loss and Loss Adjustment Expense Reserves (continued)

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

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

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

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

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

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



F-24



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

10. Variable Interest Entities

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

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

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



F-25



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FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

10. Variable Interest Entities (continued)

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

11. Related Party Transactions

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

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

In 2004, 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 under this agreement for the year ended December 31, 2004. This agreement was terminated by FGIC in July 2004 and was
replaced by a new soft capital facility (see Note 16).



F-26



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FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

11. Related Party Transactions (continued)

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

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

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

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

Cypress, a member of the Investor Group, is reported to own approximately 15% of Scottish Re Group Limited
(Scottish Re). During 2006, FGIC entered into a structured finance transaction and assumed a structured finance transaction in which subsidiaries of Scottish Re were involved.



F-27



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

11. Related Party Transactions (continued)

Neither transaction involves (a) a guaranty by FGIC of any obligation of Scottish Re, or (b) the payment of any fees or other amounts between FGIC and Scottish Re. As of December 31, 2006, there were no
amounts due to or from Scottish Re. Gross premiums written and premiums earned of $699 and $637, respectively, are reflected in the Consolidated Statements of Income for the year ended December 31, 2006.

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

12. Compensation Plans

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

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

13. Stock Compensation Plan

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



F-28



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

13. Stock Compensation Plan (to be continued)

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

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

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



|                           |  |                             |        |  
|-------------------------- |  | --------------------------- | ------ | -
|                           |  | Year endedDecember 31, 2006 |       
|Income before income taxes |  | $                           | (6,816 | )
|Income tax benefit         |  |                             | 2,386  |  
|                           |  |                             |        |  
|Net income                 |  | $                           | (4,430 | )
|                           |  |                             |        |  

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



|                                                                                       |  |                         |         |   |      |   |         |  
|-------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | -
|                                                                                       |  | Year ended December 31, |        
|                                                                                       |  | 2005                    |         |   | 2004 |  
|Net income, as reported                                                                |  | $                       | 190,466 |   |      | $ | 156,880 |  
|Stock option compensation expense determined under fair value-based method, net of tax |  |                         | (2,109  | ) |      |   | (1,200  | )
|                                                                                       |  |                         |         |   |      |   |         |  
|Pro forma net income                                                                   |  | $                       | 188,357 |   |      | $ | 155,680 |  
|                                                                                       |  |                         |         |   |      |   |         |  



F-29



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

13. Stock Compensation Plan (continued)

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



|                                          |  |                                   |   |  |                                         |    
|----------------------------------------- |  | --------------------------------- | - |  | --------------------------------------- | ---
|                                          |  | Number ofShares Subjectto Options |   |  | WeightedAverage ExercisePrice per Share
|Balance at December 31, 2003:             |  | 93,373                            |   |  | $                                       | 840
|                                          |  |                                   |   |  |                                         |    
|Granted                                   |  | 22,017                            |   |  |                                         | 752
|Exercised                                 |  |                                  |   |  |                                         |   
|Forfeited                                 |  | (1,237                            | ) |  |                                         | 746
|Expired                                   |  |                                  |   |  |                                         |   
|                                          |  |                                   |   |  |                                         |    
|Balance at December 31, 2004:             |  | 114,153                           |   |  |                                         | 824
|                                          |  |                                   |   |  |                                         |    
|Granted                                   |  | 27,145                            |   |  |                                         | 711
|Exercised                                 |  |                                  |   |  |                                         |   
|Forfeited                                 |  | (1,876                            | ) |  |                                         | 685
|Expired                                   |  |                                  |   |  |                                         |   
|                                          |  |                                   |   |  |                                         |    
|Balance at December 31, 2005:             |  | 139,422                           |   |  |                                         | 804
|                                          |  |                                   |   |  |                                         |    
|Granted                                   |  | 38,113                            |   |  |                                         | 850
|Exercised                                 |  |                                  |   |  |                                         |   
|Forfeited                                 |  | (6,504                            | ) |  |                                         | 776
|Expired                                   |  |                                  |   |  |                                         |   
|                                          |  |                                   |   |  |                                         |    
|Balance at December 31, 2006:             |  | 171,031                           |   |  | $                                       | 815
|                                          |  |                                   |   |  |                                         |    
|Shares subject to options exercisable at: |  |                                   |   |  |                                         |    
|December 31, 2006                         |  | 72,585                            |   |  | $                                       | 818
|December 31, 2005                         |  | 42,630                            |   |  | $                                       | 840
|December 31, 2004                         |  | 22,831                            |   |  | $                                       | 824

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



F-30



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FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

13. Stock Compensation Plan (continued)

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



|                        |  |                         |   |  |         |   |  |         |  
|----------------------- |  | ----------------------- | - |  | ------- | - |  | ------- | -
|                        |  | Year ended December 31, |  
|                        |  | 2006                    |   |  | 2005    |   |  | 2004    |  
|Expected life           |  | 4 Years                 |   |  | 5 Years |   |  | 5 Years |  
|Risk-free interest rate |  | 4.46                    | % |  | 3.691   | % |  | 4.021   | %
|Volatility factor       |  | 25.0                    | % |  | 25.0    | % |  | 25.0    | %
|Dividend yield          |  |                        |   |  |        |   |  |        |  

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

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



F-31



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

13. Stock Compensation Plan (continued)

Restricted Stock Units

The Company recorded $880 and $45 in compensation expense related to the grant of restricted stock units for the
years ended December 31, 2006 and 2005, respectively.

A summary of restricted stock units is as follows:



|                              |  |        |   |  |                                     |    
|----------------------------- |  | ------ | - |  | ----------------------------------- | ---
|                              |  | Shares |   |  | WeightedAverage GrantDate FairValue
|Balance at December 31, 2003: |  |       |   |  |                                     |   
|Granted                       |  | 200    |   |  |                                     | 600
|Delivered                     |  |       |   |  |                                     |   
|Forfeited                     |  |       |   |  |                                     |   
|                              |  |        |   |  |                                     |    
|Balance at December 31, 2004: |  | 200    |   |  | $                                   | 600
|                              |  |        |   |  |                                     |    
|Granted                       |  | 37     |   |  |                                     | 710
|Delivered                     |  |       |   |  |                                     |   
|Forfeited                     |  |       |   |  |                                     |   
|                              |  |        |   |  |                                     |    
|Balance at December 31, 2005: |  | 237    |   |  |                                     | 617
|                              |  |        |   |  |                                     |    
|Granted                       |  | 3,275  |   |  |                                     | 850
|Delivered                     |  | (237   | ) |  |                                     | 617
|Forfeited                     |  | (213   | ) |  |                                     | 850
|                              |  |        |   |  |                                     |    
|Balance at December 31, 2006: |  | 3,062  |   |  |                                     | 850
|                              |  |        |   |  |                                     |    

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

14. Dividends

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



F-32



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FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

14. Dividends (continued)

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

The stockholders agreement among members of the Investor Group and FGIC Corp. restricts the payment of
dividends by FGIC Corp. The agreement provides that FGIC Corp. will not declare or pay cash dividends to holders of its Common Stock prior to the earlier of the fifth anniversary of the closing of the Transaction and the completion of the first
underwritten public offering of FGIC Corp.s Common Stock and, in any event, that such dividends will not be paid prior to the redemption of FGIC Corp.s Senior Preferred Shares and Class B Common Stock.

In addition, as long as any Senior Preferred Shares or any Class B Common Stock issued upon conversion of the Senior Preferred Shares is outstanding, FGIC Corp.s
certificate of incorporation generally prohibits the payments of dividends or other amounts on any of FGIC Corp.s capital stock, except the Senior Preferred Shares presently held by GE Capital, without the consent of the holders of two-thirds
of the Senior Preferred Shares (or the Class B Common Stock issued upon conversion of Senior Preferred Shares). This restriction does not apply to cash dividends declared and paid on the Class A Common Stock after the ninth anniversary of the
Transaction (December 18, 2012), provided that those dividends are paid from retained earnings in excess of the amount of FGIC Corp.s retained earnings on the closing date of the Transaction, the amount of the dividends in any fiscal year does
not exceed one-third of one percent of FGIC Corp.s stockholders equity, and equivalent dividends are paid on the Class B Common Stock.

FGIC
Corp. is further restricted in the payment of dividends by the terms of its 6% Senior Notes, due 2034 (see Note 15). Except as described in the following sentence, FGIC Corp. may not pay dividends unless the amount of the dividends, together with
other similar payments, or restricted payments, during any fiscal year does not exceed the greater of (1) 30% of the net income of the Company for the previous fiscal year and (2) 2.5% of the stockholders equity on the consolidated
balance sheet of the Company as of the end of the previous fiscal year. FGIC Corp. may make restricted payments regardless of amount as long as the payments would not reasonably be expected to cause an adverse change in either (1) the then
current insurance financial strength rating and outlook of FGIC or (2) FGIC Corp.s then current senior unsecured debt rating and outlook.



F-33



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FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

14. Dividends (continued)

The
Certificate of Incorporation of FGIC Corp. provides Senior Preferred Shares at the rate of 1.71875% quarterly (6.875% annually) in the form of an increase in the redemption value of the Senior Preferred Shares. Dividends declared in respect of any
single fiscal year are limited to the earnings of FGIC Corp., as defined. Dividends that cannot be declared in respect of a single fiscal year due to earnings limitations do not accrue to future years. For the years ended December 31, 2006,
2005, and 2004, the Company accrued dividends of $18,485, $17,295, $16,348, respectively, on the Senior Preferred Shares. During the years ended December 31, 2006, 2005 and 2004, FGIC Corp. did not declare or pay dividends on its common stock.

15. Debt and Revolving Credit Facility

On
January 12, 2004 and December 7, 2004, FGIC Corp. issued $250,000 and $75,000, respectively, of senior notes due January 15, 2034 (the Notes). The Notes pay interest on January 15 and July 15 of each year at a
rate of 6% per annum. The costs of the issuance of the Notes of $4,822 were capitalized and are amortized to other operating expenses over the term of the Notes. In relation to the issuance of the Notes, FGIC Corp. entered into an interest rate
lock from which FGIC Corp. realized a gain of $1,511 in the year ended December 31, 2004. The gain is recorded as a component of other comprehensive income and is recognized into income over the term of the Notes.

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

16. Preferred Trust Securities

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



F-34



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

16. Preferred Trust Securities (continued)

In this way, the program provides capital support to FGIC 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. FGIC recorded expenses for the right to put its shares to the Trusts of
$1,432, $1,806, and $905 for the years ended December 31, 2006, 2005, and 2004, respectively.

17. Senior Participating Mandatorily Convertible
Modified Preferred Stock

The Senior Preferred Shares will be redeemable, at the option of the Company, commencing on the earlier of December 18,
2007, or the date on which the Company completes an initial public offering for proceeds of greater than $100,000 and may only be redeemed with the proceeds of a common equity offering. On December 18, 2012, the outstanding Senior Preferred
Shares will convert automatically into shares of Class B Common Stock of FGIC Corp. The Senior Preferred Shares are convertible into a variable number of shares of common stock based on the redemption value of the Senior Preferred Shares at the time
of conversion, relative to the total stockholders equity of FGIC Corp. at book value at the time of conversion. The number of shares of common stock that the Senior Preferred Shares can be converted to is subject to a maximum, such that the
value of the converted Class B Shares cannot exceed approximately 15% of the total book value of all common equity at the date of conversion. The Class B Common Stock will have substantially the same terms as FGIC Corp.s principal class of
common stock (the Class A), except that it will have only 1/10 of one vote per share and will have the right to vote as a separate class with respect to certain charter amendments, asset sales and other business combinations, and other specified
events. Each share of Class B Common Stock will be convertible at any time, at the option of the holder, into one share of Class A Common Stock. Each share of Class B Common Stock will also be redeemable by FGIC Corp. at any time, but only with
the proceeds of a common equity offering. The per share redemption value of the Senior Preferred Shares at any given date is equal to the sum of (i) $100, plus (ii) the per share amount of previously declared dividends, plus (iii) the
per share amount of dividends accrued not yet payable or declared. At December 31, 2006 and 2005, the aggregate redemption value of the Senior Preferred Shares was $287,255 and $268,870, respectively.



F-35



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

18. Other

During the first
quarter of 2006, the Company replaced a financial services company as the lender in connection with a lease of a utility cooperatives interest in a power plant. As part of the transaction, the utility cooperative also placed a deposit with the
Company. Since no right of offset exists between the loan and the deposit, the loan is included in Other assets and the deposit is reflected as a component of Other liabilities on the Companys consolidated balance
sheets. At December 31, 2006, the loan balance included in Other assets was $33,026 and the deposit balance included in Other liabilities was $32,854. The maturity date of both the loan and the deposit is January 5,
2018.

19. Financial Instruments

(a) Fair Value of
Financial Instruments

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

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

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

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



F-36



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

19. Financial Instruments (continued)

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



|                                                                     |  |                |           |            |   |                |  |            |           |  |   |          
|-------------------------------------------------------------------- |  | -------------- | --------- | ---------- | - | -------------- |  | ---------- | --------- |  | - | ---------
|                                                                     |  | 2006           |           | 2005      
|                                                                     |  | CarryingAmount |           | Fair Value |   | CarryingAmount |  | Fair Value
|Financial assets:                                                    |  |                |           |            |   |                |  |            |           |  |   |          
|Cash on hand and in-demand accounts                                  |  | $              | 33,278    |            | $ | 33,278         |  | $          | 51,901    |  | $ | 51,901   
|Short-term investments                                               |  |                | 222,844   |            |   | 222,844        |  |            | 176,146   |  |   | 176,146  
|Fixed maturity securities, available for sale                        |  |                | 3,644,195 |            |   | 3,644,195      |  |            | 3,281,671 |  |   | 3,281,671
|Variable interest entity fixed maturity securities, held to maturity |  |                | 750,000   |            |   | 750,000        |  |            |          |  |   |         

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

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

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

(b) Concentrations of Credit Risk

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

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



F-37



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

19. Financial Instruments (continued)

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

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

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



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



F-38



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

19. Financial Instruments (continued)

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



|                             |  |                            |           
|---------------------------- |  | -------------------------- | ----------
|                             |  | Ceded PrincipalOutstanding
|Reinsurer:                   |  |                            |           
|Radian Asset Assurance Inc.  |  | $                          | 9,104,883 
|Assured Guaranty Corp        |  |                            | 5,634,737 
|BluePoint RE                 |  |                            | 3,933,256 
|Assured Guaranty Re Ltd.     |  |                            | 3,167,811 
|RAM Reinsurance Company Ltd. |  |                            | 2,637,039 
|Other                        |  |                            | 5,410,511 
|                             |  |                            |           
|Total                        |  | $                          | 29,888,237
|                             |  |                            |           

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

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



F-39



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

19. Financial Instruments (continued)

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



|                          |  |                          |            
|------------------------- |  | ------------------------ | -----------
|                          |  | Net PrincipalOutstanding
|California                |  | $                        | 35,178,629 
|New York                  |  |                          | 22,327,210 
|Pennsylvania              |  |                          | 14,525,136 
|Florida                   |  |                          | 15,617,186 
|Illinois                  |  |                          | 11,957,490 
|Texas                     |  |                          | 12,799,320 
|New Jersey                |  |                          | 10,150,268 
|Michigan                  |  |                          | 8,685,038  
|Ohio                      |  |                          | 7,056,980  
|Arizona                   |  |                          | 6,556,683  
|                          |  |                          |            
|                          | 
|All other states          |  |                          | 74,482,184 
|Mortgage and asset-backed |  |                          | 67,980,672 
|International             |  |                          | 12,572,470 
|                          |  |                          |            
|Total                     |  | $                        | 299,889,266
|                          |  |                          |            



F-40



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

20. Commitments and Contingencies

Lease Obligations

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



|                                     |  |                                 |       
|------------------------------------ |  | ------------------------------- | ------
|                                     |  | Operating LeaseCommitmentAmount
|Year:                                |  |                                 |       
|2007                                 |  | $                               | 3,740 
|2008                                 |  |                                 | 4,841 
|2009                                 |  |                                 | 5,980 
|2010                                 |  |                                 | 6,013 
|2011                                 |  |                                 | 6,109 
|2012 and thereafter                  |  |                                 | 52,170
|                                     |  |                                 |       
|Total minimum future rental payments |  | $                               | 78,853
|                                     |  |                                 |       

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



|                                        |  |                               |      
|--------------------------------------- |  | ----------------------------- | -----
|                                        |  | Capital LeaseCommitmentAmount
|Year ending December 31:                |  |                               |      
|2007                                    |  |                               | 1,545
|2008                                    |  |                               | 1,391
|2009                                    |  |                               | 265  
|                                        |  |                               |      
|Total                                   |  |                               | 3,201
|                                        |  |                               |      
|Less interest                           |  |                               | 258  
|                                        |  |                               |      
|Present value of minimum lease payments |  | $                             | 2,943
|                                        |  |                               |      



F-41



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

20. Commitments and Contingencies (continued)

Justice Department Subpoena

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

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

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

21. Comprehensive Income

Accumulated other comprehensive income
(loss) of the Company consists of net unrealized gains and losses on investment securities, foreign currency translation adjustments, and amortization of the realized gain on the interest rate lock (see Note 15). The components of other
comprehensive income for the years ended December 31, 2006, 2005 and 2004 are as follows:



|                                                                  |  |                              |        |   |     |   |        |                 |  |   |        |  
|----------------------------------------------------------------- |  | ---------------------------- | ------ | - | --- | - | ------ | --------------- |  | - | ------ | -
|                                                                  |  | Year ended December 31, 2006 |       
|                                                                  |  | BeforeTaxAmount              |        |   | Tax |   |        | Net ofTaxAmount | 
|Unrealized holding gains arising during the year                  |  | $                            | 18,738 |   |     | $ | (6,559 | )               |  | $ | 12,179 |  
|Less reclassification adjustment for gains realized in net income |  |                              | (336   | ) |     |   | 118    |                 |  |   | (218   | )
|                                                                  |  |                              |        |   |     |   |        |                 |  |   |        |  
|Unrealized gains on investments                                   |  |                              | 18,402 |   |     |   | (6,441 | )               |  |   | 11,961 |  
|Foreign currency translation adjustment                           |  |                              | 11,583 |   |     |   | (3,387 | )               |  |   | 8,196  |  
|Amortization of gain on interest rate lock                        |  |                              | (20    | ) |     |   | 7      |                 |  |   | (13    | )
|                                                                  |  |                              |        |   |     |   |        |                 |  |   |        |  
|Total other comprehensive income                                  |  | $                            | 29,965 |   |     | $ | (9,821 | )               |  | $ | 20,144 |  
|                                                                  |  |                              |        |   |     |   |        |                 |  |   |        |  



F-42



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

21. Comprehensive Income (continued)



|                                                                  |  |                              |         |   |     |   |        |                 |  |   |         |  
|----------------------------------------------------------------- |  | ---------------------------- | ------- | - | --- | - | ------ | --------------- |  | - | ------- | -
|                                                                  |  | Year ended December 31, 2005 |        
|                                                                  |  | BeforeTaxAmount              |         |   | Tax |   |        | Net ofTaxAmount | 
|Unrealized holding losses arising during the year                 |  | $                            | (36,426 | ) |     | $ | 12,699 |                 |  | $ | (23,727 | )
|Less reclassification adjustment for gains realized in net income |  |                              | (104    | ) |     |   | 36     |                 |  |   | (68     | )
|                                                                  |  |                              |         |   |     |   |        |                 |  |   |         |  
|Unrealized losses on investments                                  |  |                              | (36,530 | ) |     |   | 12,735 |                 |  |   | (23,795 | )
|Foreign currency translation adjustment                           |  |                              | (8,454  | ) |     |   | 2,922  |                 |  |   | (5,532  | )
|Amortization of gain on interest rate lock                        |  |                              | (20     | ) |     |   | 7      |                 |  |   | (13     | )
|                                                                  |  |                              |         |   |     |   |        |                 |  |   |         |  
|Total other comprehensive loss                                    |  | $                            | (45,004 | ) |     | $ | 15,664 |                 |  | $ | (29,340 | )
|                                                                  |  |                              |         |   |     |   |        |                 |  |   |         |  
|                                                                  | 
|                                                                  |  | Year ended December 31, 2004 |        
|                                                                  |  | BeforeTaxAmount              |         |   | Tax |   |        | Net ofTaxAmount | 
|Unrealized holding gains arising during the year                  |  | $                            | 14,894  |   |     | $ | (5,213 | )               |  | $ | 9,681   |  
|Less reclassification adjustment for gains realized in net income |  |                              | (559    | ) |     |   | 196    |                 |  |   | (363    | )
|                                                                  |  |                              |         |   |     |   |        |                 |  |   |         |  
|Unrealized gains on investments                                   |  |                              | 14,335  |   |     |   | (5,017 | )               |  |   | 9,318   |  
|Foreign currency translation adjustment                           |  |                              | 6,286   |   |     |   | (2,200 | )               |  |   | 4,086   |  
|Amortization of gain on interest rate lock                        |  |                              | 1,492   |   |     |   | (522   | )               |  |   | 970     |  
|                                                                  |  |                              |         |   |     |   |        |                 |  |   |         |  
|Total other comprehensive income                                  |  | $                            | 22,113  |   |     | $ | (7,739 | )               |  | $ | 14,374  |  
|                                                                  |  |                              |         |   |     |   |        |                 |  |   |         |  



F-43



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except
per share amounts)

22. Quarterly Financial Information (Unaudited)



|                                                                                          |  |                    |        |   |                             |   |         |                   |  |                  |         |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | --------------------------- | - | ------- | ----------------- |  | ---------------- | ------- |  | - | ------- | - |  | - | ------- | -
|                                                                                          |  | Three months ended |        |   | Year ended December 31,2006 |  
|                                                                                          |  | March 31,2006      |        |   | June 30,2006                |   |         | September 30,2006 |  | December 31,2006 |         | 
|Gross premiums written                                                                    |  | $                  | 89,281 |   |                             | $ | 163,260 |                   |  | $                | 85,030  |  | $ | 103,660 |   |  | $ | 441,231 |  
|Net premiums written                                                                      |  |                    | 82,858 |   |                             |   | 134,373 |                   |  |                  | 66,590  |  |   | 82,993  |   |  |   | 366,814 |  
|Net premiums earned                                                                       |  |                    | 59,464 |   |                             |   | 71,845  |                   |  |                  | 62,738  |  |   | 72,410  |   |  |   | 266,457 |  
|Net investment income and net realized gains                                              |  |                    | 32,639 |   |                             |   | 34,312  |                   |  |                  | 36,162  |  |   | 36,971  |   |  |   | 140,084 |  
|Interest income-investments held by variable interest entity                              |  |                    | 4,937  |   |                             |   | 9,658   |                   |  |                  | 10,033  |  |   | 11,265  |   |  |   | 35,893  |  
|Other income and net realized and unrealized gains (losses) on credit derivative products |  |                    | 307    |   |                             |   | (37     | )                 |  |                  | 1,600   |  |   | 452     |   |  |   | 2,322   |  
|Total revenues                                                                            |  |                    | 97,347 |   |                             |   | 115,778 |                   |  |                  | 110,533 |  |   | 121,098 |   |  |   | 444,756 |  
|Losses and loss adjustment expenses                                                       |  |                    | (1,933 | ) |                             |   | (265    | )                 |  |                  | 520     |  |   | (7,022  | ) |  |   | (8,700  | )
|Interest expense  debt held by variable interest entity                                  |  |                    | 4,937  |   |                             |   | 9,658   |                   |  |                  | 10,033  |  |   | 11,265  |   |  |   | 35,893  |  
|Underwriting expense                                                                      |  |                    | 24,435 |   |                             |   | 23,151  |                   |  |                  | 21,231  |  |   | 22,539  |   |  |   | 91,356  |  
|Income before taxes                                                                       |  |                    | 72,690 |   |                             |   | 83,281  |                   |  |                  | 79,005  |  |   | 93,269  |   |  |   | 328,245 |  
|Net income                                                                                |  |                    | 55,536 |   |                             |   | 62,369  |                   |  |                  | 59,592  |  |   | 70,347  |   |  |   | 247,844 |  
|                                                                                          |  |                   
|                                                                                          |  | Three months ended |        |   | Year ended December 31,2005 |  
|                                                                                          |  | March 31,2005      |        |   | June 30,2005                |   |         | September 30,2005 |  | December 31,2005 |         | 
|Gross premiums written                                                                    |  | $                  | 84,404 |   |                             | $ | 131,335 |                   |  | $                | 96,787  |  | $ | 97,676  |   |  | $ | 410,202 |  
|Net premiums written                                                                      |  |                    | 82,609 |   |                             |   | 113,305 |                   |  |                  | 92,331  |  |   | 92,809  |   |  |   | 381,054 |  
|Net premiums earned                                                                       |  |                    | 52,633 |   |                             |   | 61,907  |                   |  |                  | 54,794  |  |   | 55,235  |   |  |   | 224,569 |  
|Net investment income and net realized gains                                              |  |                    | 27,997 |   |                             |   | 28,818  |                   |  |                  | 30,528  |  |   | 31,563  |   |  |   | 118,906 |  
|Other income and net realized and unrealized gains (losses) on credit derivative products |  |                    | 426    |   |                             |   | 90      |                   |  |                  | 402     |  |   | (323    | ) |  |   | 595     |  
|Total revenues                                                                            |  |                    | 81,056 |   |                             |   | 90,815  |                   |  |                  | 85,724  |  |   | 86,475  |   |  |   | 344,070 |  
|Losses and loss adjustment expenses                                                       |  |                    | (2,611 | ) |                             |   | (3,066  | )                 |  |                  | 20,693  |  |   | 3,490   |   |  |   | 18,506  |  
|Underwriting expense                                                                      |  |                    | 20,519 |   |                             |   | 16,933  |                   |  |                  | 22,142  |  |   | 22,167  |   |  |   | 81,761  |  
|Income before taxes                                                                       |  |                    | 65,069 |   |                             |   | 75,378  |                   |  |                  | 42,558  |  |   | 64,105  |   |  |   | 247,110 |  
|Net income                                                                                |  |                    | 49,385 |   |                             |   | 56,097  |                   |  |                  | 35,357  |  |   | 49,627  |   |  |   | 190,466 |  



F-44