Exhibit 99.2

CONSOLIDATED FINANCIAL STATEMENTS

FGIC Corporation and Subsidiaries

Year Ended December 31, 2007

With Report of Independent Registered
Public Accounting Firm



---

FGIC Corporation and Subsidiaries

Consolidated Financial Statements

Year Ended December 31, 2007

Contents



|                                                        |  |  
|------------------------------------------------------- |  | -
|                                                        | 
|Report of Independent Registered Public Accounting Firm |  | 1
|                                                        | 
|Consolidated Balance Sheets                             |  | 2
|                                                        | 
|Consolidated Statements of Income                       |  | 3
|                                                        | 
|Consolidated Statements of Stockholders Equity         |  | 4
|                                                        | 
|Consolidated Statements of Cash Flows                   |  | 5
|                                                        | 
|Notes to Consolidated Financial Statements              |  | 6



---

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

FGIC
Corporation

We have audited the accompanying consolidated balance sheets of FGIC Corporation and subsidiaries (the Company) as of
December 31, 2007 and 2006, and the related consolidated statements of income, shareholders equity, and cash flows for each of the three years in the period ended December 31, 2007. 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, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended
December 31, 2007 in conformity with U.S. generally accepted accounting principles.

LOGO

New York, New York

March 14,
2008, except for Note 25,

as to which the date is March 25, 2008



1



---

FGIC Corporation and Subsidiaries

Consolidated Balance Sheets



|                                                                                                                                                                                                                                |  |                                                 |            |   |      |   |          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ---------- | - | ---- | - | ---------
|                                                                                                                                                                                                                                |  | December 31                                    
|                                                                                                                                                                                                                                |  | 2007                                            |            |   | 2006
|                                                                                                                                                                                                                                |  | (Dollars in Thousands, ExceptPer Share Amounts)
|Assets                                                                                                                                                                                                                          |  |                                                 |            |   |      |   |          
|Fixed maturity securities, available for sale, at fair value (amortized cost of $3,942,868 in 2007 and $3,644,851 in 2006)                                                                                                      |  | $                                               | 3,976,178  |   |      | $ | 3,644,195
|Variable interest entity fixed maturity securities, held to maturity at amortized cost                                                                                                                                          |  |                                                 | 750,000    |   |      |   | 750,000  
|Short-term investments                                                                                                                                                                                                          |  |                                                 | 126,688    |   |      |   | 222,844  
|                                                                                                                                                                                                                                |  |                                                 |            |   |      |   |          
|Total investments                                                                                                                                                                                                               |  |                                                 | 4,852,866  |   |      |   | 4,617,039
|Cash and cash equivalents                                                                                                                                                                                                       |  |                                                 | 140,590    |   |      |   | 33,278   
|Accrued investment income                                                                                                                                                                                                       |  |                                                 | 55,745     |   |      |   | 50,214   
|Reinsurance recoverable on losses                                                                                                                                                                                               |  |                                                 | 8,693      |   |      |   | 1,485    
|Prepaid reinsurance premiums                                                                                                                                                                                                    |  |                                                 | 225,516    |   |      |   | 156,708  
|Policy acquisition costs deferred, net                                                                                                                                                                                          |  |                                                 | 107,854    |   |      |   | 93,170   
|Property and equipment, net of accumulated depreciation of $3,891 in 2007 and $2,107 in 2006                                                                                                                                    |  |                                                 | 16,713     |   |      |   | 2,617    
|Deferred income taxes                                                                                                                                                                                                           |  |                                                 | 839,265    |   |      |   | 3,491    
|Derivative assets                                                                                                                                                                                                               |  |                                                 | 267        |   |      |   | 314      
|Income taxes receivable                                                                                                                                                                                                         |  |                                                 | 116,766    |   |      |   |         
|Other assets                                                                                                                                                                                                                    |  |                                                 | 65,092     |   |      |   | 54,916   
|                                                                                                                                                                                                                                |  |                                                 |            |   |      |   |          
|Total assets                                                                                                                                                                                                                    |  | $                                               | 6,429,367  |   |      | $ | 5,013,232
|                                                                                                                                                                                                                                |  |                                                 |            |   |      |   |          
|Liabilities and stockholders equity                                                                                                                                                                                            |  |                                                 |            |   |      |   |          
|Liabilities:                                                                                                                                                                                                                    |  |                                                 |            |   |      |   |          
|Unearned premiums                                                                                                                                                                                                               |  | $                                               | 1,458,476  |   |      | $ | 1,347,592
|Loss and loss adjustment expense reserves                                                                                                                                                                                       |  |                                                 | 1,267,420  |   |      |   | 40,299   
|Ceded reinsurance balances payable                                                                                                                                                                                              |  |                                                 | 3,696      |   |      |   | 7,524    
|Accounts payable and accrued expenses                                                                                                                                                                                           |  |                                                 | 55,976     |   |      |   | 46,207   
|Derivative liabilities                                                                                                                                                                                                          |  |                                                 | 1,938,930  |   |      |   | 1,817    
|Other liabilities                                                                                                                                                                                                               |  |                                                 | 44,276     |   |      |   | 38,418   
|Payable for securities purchased                                                                                                                                                                                                |  |                                                 |           |   |      |   | 10,770   
|Variable interest entity floating rate notes                                                                                                                                                                                    |  |                                                 | 750,000    |   |      |   | 750,000  
|Accrued interest expense  variable interest entity                                                                                                                                                                             |  |                                                 | 1,208      |   |      |   | 1,298    
|Capital lease obligations                                                                                                                                                                                                       |  |                                                 | 1,562      |   |      |   | 2,941    
|Federal and foreign income taxes payable                                                                                                                                                                                        |  |                                                 |           |   |      |   | 22,609   
|Deferred income taxes                                                                                                                                                                                                           |  |                                                 |           |   |      |   | 66,424   
|Debt                                                                                                                                                                                                                            |  |                                                 | 323,397    |   |      |   | 323,373  
|                                                                                                                                                                                                                                |  |                                                 |            |   |      |   |          
|Total liabilities                                                                                                                                                                                                               |  |                                                 | 5,844,941  |   |      |   | 2,659,272
|                                                                                                                                                                                                                                |  |                                                 |            |   |      |   |          
|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, 2007 and December 31, 2006                       |  |                                                 | 301,921    |   |      |   | 287,355  
|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, 2007 and December 31, 2006, 2,403,223 and
2,403,067 shares issued and outstanding at December 31, 2007 and December 31, 2006, respectively |  |                                                 | 24         |   |      |   | 24       
|Treasury stock                                                                                                                                                                                                                  |  |                                                 | (165       | ) |      |   |         
|Additional paid-in capital                                                                                                                                                                                                      |  |                                                 | 1,451,530  |   |      |   | 1,442,077
|Accumulated other comprehensive income, net of tax                                                                                                                                                                              |  |                                                 | 37,309     |   |      |   | 7,237    
|Retained (loss) earnings                                                                                                                                                                                                        |  |                                                 | (1,206,193 | ) |      |   | 617,267  
|                                                                                                                                                                                                                                |  |                                                 |            |   |      |   |          
|Total stockholders equity                                                                                                                                                                                                      |  |                                                 | 584,426    |   |      |   | 2,353,960
|                                                                                                                                                                                                                                |  |                                                 |            |   |      |   |          
|Total liabilities and stockholders equity                                                                                                                                                                                      |  | $                                               | 6,429,367  |   |      | $ | 5,013,232
|                                                                                                                                                                                                                                |  |                                                 |            |   |      |   |          

See accompanying notes.



2



---

FGIC Corporation and Subsidiaries

Consolidated Statements of Income



|                                                                 |  |                        |            |   |      |   |          |      |  |   |          |  
|---------------------------------------------------------------- |  | ---------------------- | ---------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                 |  | Year Ended December 31 |           
|                                                                 |  | 2007                   |            |   | 2006 |   |          | 2005 | 
|                                                                 |  | (Dollars in Thousands) |           
|Revenues:                                                        |  |                        |            |   |      |   |          |      |  |   |          |  
|Gross direct and assumed premiums written                        |  | $                      | 451,268    |   |      | $ | 441,231  |      |  | $ | 410,202  |  
|Ceded premiums written                                           |  |                        | (103,907   | ) |      |   | (74,417  | )    |  |   | (29,148  | )
|                                                                 |  |                        |            |   |      |   |          |      |  |   |          |  
|Net premiums written                                             |  |                        | 347,361    |   |      |   | 366,814  |      |  |   | 381,054  |  
|Change in net unearned premiums                                  |  |                        | (42,076    | ) |      |   | (100,357 | )    |  |   | (156,485 | )
|                                                                 |  |                        |            |   |      |   |          |      |  |   |          |  
|Net premiums earned                                              |  |                        | 305,285    |   |      |   | 266,457  |      |  |   | 224,569  |  
|Net investment income                                            |  |                        | 157,970    |   |      |   | 139,748  |      |  |   | 118,802  |  
|Interest income  investments held by variable interest entity   |  |                        | 41,691     |   |      |   | 35,893   |      |  |   |         |  
|Net realized gains                                               |  |                        | 962        |   |      |   | 336      |      |  |   | 104      |  
|Net mark-to-market (losses) gains on credit derivative contracts |  |                        | (1,936,536 | ) |      |   | 507      |      |  |   | (167     | )
|Other income                                                     |  |                        | 3,679      |   |      |   | 1,815    |      |  |   | 762      |  
|                                                                 |  |                        |            |   |      |   |          |      |  |   |          |  
|Total revenues                                                   |  |                        | (1,426,949 | ) |      |   | 444,756  |      |  |   | 344,070  |  
|Expenses:                                                        |  |                        |            |   |      |   |          |      |  |   |          |  
|Loss and loss adjustment expenses                                |  |                        | 1,226,775  |   |      |   | (8,700   | )    |  |   | 18,506   |  
|Underwriting expenses                                            |  |                        | 96,010     |   |      |   | 91,356   |      |  |   | 81,761   |  
|Policy acquisition costs deferred, net                           |  |                        | (29,615    | ) |      |   | (39,728  | )    |  |   | (38,069  | )
|Amortization of policy acquisition costs deferred                |  |                        | 15,652     |   |      |   | 11,486   |      |  |   | 8,302    |  
|Other operating expenses                                         |  |                        | 8,241      |   |      |   | 6,704    |      |  |   | 6,960    |  
|Interest expense  debt held by variable interest entity         |  |                        | 41,691     |   |      |   | 35,893   |      |  |   |         |  
|Interest expense                                                 |  |                        | 19,500     |   |      |   | 19,500   |      |  |   | 19,500   |  
|                                                                 |  |                        |            |   |      |   |          |      |  |   |          |  
|Total expenses                                                   |  |                        | 1,378,254  |   |      |   | 116,511  |      |  |   | 96,960   |  
|                                                                 |  |                        |            |   |      |   |          |      |  |   |          |  
|(Loss) income before income tax (benefit) expense                |  |                        | (2,805,203 | ) |      |   | 328,245  |      |  |   | 247,110  |  
|Income tax (benefit) expense:                                    |  |                        |            |   |      |   |          |      |  |   |          |  
|Current                                                          |  |                        | (82,522    | ) |      |   | 59,382   |      |  |   | 32,223   |  
|Deferred                                                         |  |                        | (913,787   | ) |      |   | 21,019   |      |  |   | 24,421   |  
|                                                                 |  |                        |            |   |      |   |          |      |  |   |          |  
|Total income tax (benefit)expense                                |  |                        | (996,309   | ) |      |   | 80,401   |      |  |   | 56,644   |  
|                                                                 |  |                        |            |   |      |   |          |      |  |   |          |  
|Net (loss) income                                                |  |                        | (1,808,894 | ) |      |   | 247,844  |      |  |   | 190,466  |  
|Preferred stock dividends                                        |  |                        | (14,566    | ) |      |   | (18,485  | )    |  |   | (17,295  | )
|                                                                 |  |                        |            |   |      |   |          |      |  |   |          |  
|Net (loss) income available to common stockholders               |  | $                      | (1,823,460 | ) |      | $ | 229,359  |      |  | $ | 173,171  |  
|                                                                 |  |                        |            |   |      |   |          |      |  |   |          |  

See accompanying notes.



3



---

FGIC Corporation and Subsidiaries

Consolidated Statements of Stockholders Equity



|                                                                   |  |                        |         |             |   |                          |  |               |           |  |                   |      |   |                                                       |   |     |                        |  |   |         |   |  |   |            |   |  |   |            |  
|------------------------------------------------------------------ |  | ---------------------- | ------- | ----------- | - | ------------------------ |  | ------------- | --------- |  | ----------------- | ---- | - | ----------------------------------------------------- | - | --- | ---------------------- |  | - | ------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                                   |  | PreferredStock         |         | CommonStock |   | AdditionalPaid-inCapital |  | TreasuryStock |           |  | StockCompensation |      |   | AccumulatedOtherComprehensiveIncome
(Loss),Net of Tax |   |     | Retained(Loss)Earnings |  |   | Total   |  
|                                                                   |  | (Dollars in Thousands) |        
|Balance at January 1, 2005                                         |  | $                      | 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  |  
|Net loss                                                           |  |                        |        |             |   |                         |  |               |          |  |                   |     |   |                                                       |   |    |                        |  |   |        |   |  |   | (1,808,894 | ) |  |   | (1,808,894 | )
|Other comprehensive income (loss):                                 |  |                        |         |             |   |                          |  |               |           |  |                   |      |   |                                                       |   |     |                        |  |   |         |   |  |   |            |   |  |   |            |  
|Change in fixed maturity securities available for sale, net of tax |  |                        |        |             |   |                         |  |               |          |  |                   |     |   |                                                       |   |    |                        |  |   | 22,144  |   |  |   |           |   |  |   | 22,144     |  
|Change in foreign currency translation adjustment, net of tax      |  |                        |        |             |   |                         |  |               |          |  |                   |     |   |                                                       |   |    |                        |  |   | 7,941   |   |  |   |           |   |  |   | 7,941      |  
|Amortization of gain on interest rate lock                         |  |                        |        |             |   |                         |  |               |          |  |                   |     |   |                                                       |   |    |                        |  |   | (13     | ) |  |   |           |   |  |   | (13        | )
|                                                                   |  |                        |         |             |   |                          |  |               |           |  |                   |      |   |                                                       |   |     |                        |  |   |         |   |  |   |            |   |  |   |            |  
|Total comprehensive income (loss)                                  |  |                        |         |             |   |                          |  |               |           |  |                   |      |   |                                                       |   |     |                        |  |   |         |   |  |   |            |   |  |   | (1,778,822 | )
|                                                                   |  |                        |         |             |   |                          |  |               |           |  |                   |      |   |                                                       |   |     |                        |  |   |         |   |  |   |            |   |  |   |            |  
|Repurchase of treasury stock                                       |  |                        |        |             |   |                         |  |               |          |  |                   | (165 | ) |                                                       |   |    |                        |  |   |        |   |  |   |           |   |  |   | (165       | )
|Amortization of stock options and restricted stock                 |  |                        |        |             |   |                         |  |               | 9,453     |  |                   |     |   |                                                       |   |    |                        |  |   |        |   |  |   |           |   |  |   | 9,453      |  
|Accrued dividends                                                  |  |                        | 14,566  |             |   |                         |  |               |          |  |                   |     |   |                                                       |   |    |                        |  |   |        |   |  |   | (14,566    | ) |  |   |           |  
|                                                                   |  |                        |         |             |   |                          |  |               |           |  |                   |      |   |                                                       |   |     |                        |  |   |         |   |  |   |            |   |  |   |            |  
|Balance at December 31, 2007                                       |  | $                      | 301,921 |             | $ | 24                       |  | $             | 1,451,530 |  | $                 | (165 | ) |                                                       | $ |    |                        |  | $ | 37,309  |   |  | $ | (1,206,193 | ) |  | $ | 584,426    |  
|                                                                   |  |                        |         |             |   |                          |  |               |           |  |                   |      |   |                                                       |   |     |                        |  |   |         |   |  |   |            |   |  |   |            |  

See accompanying notes.



4



---

FGIC Corporation and Subsidiaries

Consolidated Statements of Cash Flows



|                                                                                                          |  |                        |            |   |      |   |            |      |  |   |          |  
|--------------------------------------------------------------------------------------------------------- |  | ---------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | -------- | -
|                                                                                                          |  | Year Ended December 31 |           
|                                                                                                          |  | 2007                   |            |   | 2006 |   |            | 2005 | 
|                                                                                                          |  | (Dollars in Thousands) |           
|Operating activities                                                                                      |  |                        |            |   |      |   |            |      |  |   |          |  
|Net (loss) income                                                                                         |  | $                      | (1,808,894 | ) |      | $ | 247,844    |      |  | $ | 190,466  |  
|Adjustments to reconcile net income to net cash provided by operating activities:                         |  |                        |            |   |      |   |            |      |  |   |          |  
|Amortization of policy acquisition costs deferred                                                         |  |                        | 15,652     |   |      |   | 11,486     |      |  |   | 8,574    |  
|Policy acquisition costs deferred, net                                                                    |  |                        | (29,615    | ) |      |   | (39,728    | )    |  |   | (38,069  | )
|Depreciation of property and equipment                                                                    |  |                        | 1,758      |   |      |   | 1,222      |      |  |   | 721      |  
|Amortization of debt issuance costs and discount                                                          |  |                        | 93         |   |      |   | 109        |      |  |   | 83       |  
|Amortization of fixed maturity securities                                                                 |  |                        | 35,365     |   |      |   | 33,725     |      |  |   | 31,354   |  
|Amortization of short-term investments                                                                    |  |                        | (150       | ) |      |   | 131        |      |  |   | 481      |  
|Net realized gains on investments                                                                         |  |                        | (962       | ) |      |   | (336       | )    |  |   | (104     | )
|Stock compensation expense                                                                                |  |                        | 9,453      |   |      |   | 6,816      |      |  |   | 45       |  
|Change in accrued investment income, prepaid expenses and other assets, net                               |  |                        | (15,796    | ) |      |   | (47,323    | )    |  |   | (11,911  | )
|Change in mark-to-market (losses) gains on credit derivative contracts                                    |  |                        | 1,937,160  |   |      |   | 1,336      |      |  |   | 167      |  
|Change in reinsurance recoverable on losses                                                               |  |                        | (7,208     | ) |      |   | 1,786      |      |  |   | (217     | )
|Change in prepaid reinsurance premiums                                                                    |  |                        | (68,808    | ) |      |   | (46,072    | )    |  |   | (1,344   | )
|Change in unearned premiums                                                                               |  |                        | 111,121    |   |      |   | 147,589    |      |  |   | 157,829  |  
|Change in loss and loss adjustment expenses                                                               |  |                        | 1,227,121  |   |      |   | (14,513    | )    |  |   | 15,631   |  
|Change in ceded reinsurance balances payable, accounts payable and accrued expenses and other liabilities |  |                        | 10,420     |   |      |   | 44,584     |      |  |   | 2,968    |  
|Change in current income taxes                                                                            |  |                        | (139,375   | ) |      |   | 16,233     |      |  |   | (1,282   | )
|Change in accrued interest expense  variable interest entity                                             |  |                        | (90        | ) |      |   | 1,298      |      |  |   |         |  
|Change in deferred income taxes                                                                           |  |                        | (910,867   | ) |      |   | 21,193     |      |  |   | 14,406   |  
|                                                                                                          |  |                        |            |   |      |   |            |      |  |   |          |  
|Net cash provided by operating activities                                                                 |  |                        | 366,378    |   |      |   | 387,380    |      |  |   | 369,798  |  
|                                                                                                          |  |                        |            |   |      |   |            |      |  |   |          |  
|Investing activities                                                                                      |  |                        |            |   |      |   |            |      |  |   |          |  
|Sales and maturities of fixed maturity securities                                                         |  |                        | 229,718    |   |      |   | 212,061    |      |  |   | 128,142  |  
|Purchases of fixed maturity securities                                                                    |  |                        | (564,884   | ) |      |   | (584,739   | )    |  |   | (520,080 | )
|Purchases, sales and maturities of short-term investments, net                                            |  |                        | 101,547    |   |      |   | (46,432    | )    |  |   | 5,073    |  
|Receivable for securities sold                                                                            |  |                        | 20         |   |      |   |           |      |  |   | (20      | )
|Payable for securities purchased                                                                          |  |                        | (10,770    | ) |      |   | 10,770     |      |  |   | (5,715   | )
|Purchase of fixed assets                                                                                  |  |                        | (15,816    | ) |      |   | (477       | )    |  |   | (1,405   | )
|Purchase of investments held by variable interest entity                                                  |  |                        |           |   |      |   | (750,000   | )    |  |   |         |  
|                                                                                                          |  |                        |            |   |      |   |            |      |  |   |          |  
|Net cash used in investing activities                                                                     |  |                        | (260,185   | ) |      |   | (1,158,817 | )    |  |   | (394,005 | )
|                                                                                                          |  |                        |            |   |      |   |            |      |  |   |          |  
|Financing activities                                                                                      |  |                        |            |   |      |   |            |      |  |   |          |  
|Proceeds from issuance of debt held by variable interest entity                                           |  |                        |           |   |      |   | 750,000    |      |  |   |         |  
|Repurchase of treasury stock                                                                              |  |                        | (165       | ) |      |   |           |      |  |   |         |  
|                                                                                                          |  |                        |            |   |      |   |            |      |  |   |          |  
|Net cash (used in) provided by financing activities                                                       |  |                        | (165       | ) |      |   | 750,000    |      |  |   |         |  
|                                                                                                          |  |                        |            |   |      |   |            |      |  |   |          |  
|Effect of exchange rate changes on cash                                                                   |  |                        | 1,284      |   |      |   | 2,814      |      |  |   | 1,530    |  
|                                                                                                          |  |                        |            |   |      |   |            |      |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                                      |  |                        | 107,312    |   |      |   | (18,623    | )    |  |   | (22,677  | )
|Cash and cash equivalents at beginning of period                                                          |  |                        | 33,278     |   |      |   | 51,901     |      |  |   | 74,578   |  
|                                                                                                          |  |                        |            |   |      |   |            |      |  |   |          |  
|Cash and cash equivalents at end of period                                                                |  | $                      | 140,590    |   |      | $ | 33,278     |      |  | $ | 51,901   |  
|                                                                                                          |  |                        |            |   |      |   |            |      |  |   |          |  
|Supplemental disclosure of cash flow information                                                          |  |                        |            |   |      |   |            |      |  |   |          |  
|Income taxes paid                                                                                         |  | $                      | 51,713     |   |      | $ | 41,732     |      |  | $ | 44,631   |  
|                                                                                                          |  |                        |            |   |      |   |            |      |  |   |          |  
|Interest paid  debt                                                                                      |  | $                      | 19,500     |   |      | $ | 19,500     |      |  | $ | 19,500   |  
|                                                                                                          |  |                        |            |   |      |   |            |      |  |   |          |  
|Interest paid  debt held by variable interest entity                                                     |  | $                      | 41,781     |   |      | $ | 34,595     |      |  | $ |         |  
|                                                                                                          |  |                        |            |   |      |   |            |      |  |   |          |  

See accompanying notes.



5



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

December 31, 2007

(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 typically guarantees the scheduled
payments of principal and interest on an issuers obligations when due. 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, FGIC UK Limited, a wholly owned United Kingdom subsidiary of FGIC (FGIC UK Ltd) is authorized to write financial guaranty business in the United Kingdom and has passport rights to write business
in other European Union member countries. In 2007, FGIC Corp. established a wholly owned subsidiary in Australia to act as a marketing office. When credit enhancement is provided in credit default swap (CDS) form, the CDS are entered
into by FGIC Credit Products, LLC (FGIC Credit Products) , a wholly owned subsidiary of FGIC. As used in these notes, the term Company refers to FGIC Corp. and its subsidiaries.

The PMI Group, Inc. (PMI) is the largest stockholder of FGIC Corp., owning approximately 42% of its common stock at December 31, 2007 and
2006. Affiliates of the Blackstone Group L.P. (Blackstone), the Cypress Group L.L.C. (Cypress) and CIVC Partners L.P. (CIVC) owned approximately 23%, 23% and 7% of FGIC Corp.s common stock,
respectively, at December 31, 2007 and 2006. As of December 31, 2007, an affiliate of General Electric Capital Corp. (GE Capital) owned 2,346 shares, or 100%, of FGIC Corp.s senior participating mandatorily convertible
modified preferred stock (the Senior Preferred Shares), with an aggregate liquidation preference of $301,921 and approximately 5% of FGIC Corp.s outstanding common stock.

2. Recent Developments

The recent deterioration in the U.S. housing
and mortgage markets and the global credit markets, which accelerated in the fourth quarter of 2007, has adversely affected the Companys business, results of operations and financial condition. As described below, (i) the Companys
financial strength and credit ratings were recently downgraded by various rating agencies and (ii) for the fourth quarter of 2007 significant loss reserves were established for the Companys exposure to certain collateralized debt
obligations of asset-backed securities (ABS CDOs), which are backed primarily by subprime residential mortgage-backed securities, and to certain residential mortgage-backed securities (RMBS), primarily backed by second-lien
mortgages.

As a result of these developments, the Company has ceased writing new business for a period of time to preserve capital and is considering
various alternatives to enhance its capital, restructure its operations and mitigate losses. However, no assurance can be given that any action taken by the Company will improve its current ratings, that further rating downgrades will not occur, or
that the Company will be able to recommence writing new business in the near term or at all



6



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



2. Recent Developments (continued)

FGIC has proposed a significant restructuring of its insurance operations to the New York State Insurance Department (the NYSID), including the organization of a new financial guaranty insurer to be
domiciled in New York to provide support for global public finance and infrastructure obligations previously insured by FGIC and to write new business to serve those markets. Any restructuring will require approval from the NYSID, among other
requirements, and significant new capital investment. No assurance can be given that such restructuring or investment will be completed.

Prior to the
fourth quarter of 2007, FGICs financial strength was rated Aaa by Moodys Investors Service, Inc. (Moodys), AAA by Standard & Poors Rating Services, a division of The McGraw-Hill
Companies, Inc. (S&P), and AAA by Fitch Ratings, Inc (Fitch). Moodys, S&P and Fitch have since completed several assessments of FGICs capital adequacy in relation to the Companys exposure
to ABS CDOs which are backed primarily by subprime RMBS, and its exposure to first-lien and second-lien RMBS. As a result of these assessments, Moodys, S&P and Fitch downgraded the financial strength ratings of FGIC and FGIC UK Ltd In
connection with these downgrades, Moodys, S&P and Fitch also downgraded the ratings of FGIC Corp.s Senior Notes (see Note 17) and the Money Market Committed Preferred Custodial Trust Securities (CPS Securities) issued by
Grand Central Capital Trusts I - VI (see Note 18). These ratings as of March 14, 2008 are summarized in the table below.



|                                  |  |                                                                                            |  |                                                                                                         |  |                                                                                                                  
|--------------------------------- |  | ------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------
|                                  |  | Fitch Ratings                                                                              |  | Moodys                                                                                                 |  | Standard & Poors                                                                                                
|                                  |  |                                                                                            | 
|FGIC                              |  | Insurer Financial Strength Rating lowered from AAA to AA Remains on Ratings Watch Negative |  | Insurance Financial Strength Rating lowered from Aaa to A3 Remains on review for possible downgrade     |  | Financial Strength Rating lowered from AAA to A Remains on CreditWatch with developing implications              
|                                  |  |                                                                                            | 
|FGIC UK Ltd                       |  | Insurer Financial Strength Rating lowered from AAA to AA Remains on Ratings Watch Negative |  | Insurance Financial Strength Rating lowered from Aaa to A3 Remains on review for possible downgrade     |  | Financial Strength Rating lowered from AAA to A Remains on CreditWatch with developing implications              
|                                  |  |                                                                                            | 
|FGIC Corp.                        |  | Senior Unsecured Debt Rating lowered from AA to A Remains on Ratings Watch Negative        |  | Long-Term Senior Unsecured Debt Rating lowered from Aa2 to Ba1 Remains on review for possible downgrade |  | Long-Term Senior Unsecured Debt Rating lowered from AA to BBB Remains on CreditWatch with developing implications
|                                  |  |                                                                                            | 
|Grand Central Capital Trusts I-VI |  | NA                                                                                         |  | Rating lowered from Aa2 to Baa3 Remains on review
for possible downgrade                                |  | Rating lowered from AA to BBB Remains on
CreditWatch with developing implications                                

The financial strength ratings downgrades have adversely impacted the Companys ability to generate new
business and, unless restored, will impact the Companys future business, operations and financial results.



7



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



2. Recent Developments (continued)

FGIC has established statutory loss reserves related to its exposure on certain ABS CDOs and RMBS, which has substantially reduced FGICs statutory capital and surplus position as of December 31, 2007. As a
result of this reduction, as of December 31, 2007, FGICs aggregate net liability under its insured exposures exceeded the aggregate risk limit prescribed by New York State Insurance Law and FGICs insured exposure under certain
individual policies exceeded the applicable single risk limits prescribed by New York State Insurance Law. As required by New York State Insurance Law, FGIC intends to submit a plan to the Superintendent of the NYSID detailing the steps that FGIC
has taken and will seek to take to reduce its exposure to loss to no more than the permitted amounts. Following the submission of such plan, after notice and hearing, the Superintendent could require FGIC to cease transacting any new financial
guaranty business until its exposure to loss no longer exceeds said limits. As noted above, FGIC has already voluntarily ceased writing new business for a period of time to preserve capital.

As a result of establishing loss reserves related to its potential exposure on certain ABS CDOs, the statutory capital and surplus of FGIC UK Ltd as of December 31,
2007, fell below certain minimum statutory requirements. FGIC UK Ltd is prohibited from writing new business until the shortfall is corrected. FGIC UK Ltd intends to submit a plan to its primary regulator to address this shortfall.

FGICs ability to pay dividends to FGIC Corp. is subject to restrictions contained in the New York Insurance Law (see Note 16). Due to FGICs statutory earned
surplus deficit at December 31, 2007, FGIC does not currently have the capacity to pay dividends without the prior approval of the NYSID. FGIC Corp.s ability to meet its cash needs may be adversely impacted by FGICs inability to pay
dividends. However, FGIC Corp. believes that its cash resources are sufficient to fund its obligations as they come due for at least the next 12 months.

3. 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, and those differences could be material.

Certain 2006 and 2005 amounts have been
reclassified to conform to the 2007 presentation.



8



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



4. Summary of Significant Accounting Policies

The Companys significant accounting policies are as follows:

Investments

All of the Companys fixed maturity securities are classified as available for sale and are recorded at fair value on the trade date. Unrealized gains and losses are
recorded as a separate component of accumulated other comprehensive income (loss), 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.

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.

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 a policy and are earned over the period of risk based upon the principal and interest
amortized during the period as compared to the original principal and interest outstanding. Installment premiums, including premiums received on CDSs (see Note 8) are collected periodically and are reflected in income pro rata over the payment
period.

Gross direct and assumed premiums written for the years ended December 31, 2007, 2006 and 2005 include $3,639, $15,989 and $965,
respectively, of assumed premiums written.



9



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



4. 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. A refunding occurs when an insured obligation is retired or legally defeased prior to stated maturity. Premiums earned on
refundings were $43,717, $41,836, and $54,795 for the years ended December 31, 2007, 2006, and 2005, respectively.

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

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. 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 in-force business and net investment income are considered in determining the recoverability of acquisition costs.

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 non-derivative public finance and structured finance insured obligations that are currently or likely to be in payment default and for which future loss is probable and can be
reasonably estimated. The amounts of these reserves are determined using internally developed models and 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.



10



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



4. Summary of Significant Accounting Policies (continued)

The Companys case reserve models are dependent on a number of assumptions that require management to make judgments about the outcome of future events using
historical and current market data. Significant assumptions include the liquidation value of the assets supporting the insured obligations, the volume and timing of collateral cash flows and the behavior of the underlying borrower. Changes in any
significant assumptions from time to time will affect the Companys case reserves and financial results, possibly materially.

The Company establishes
watchlist reserves to recognize the potential for claims against the Company on insured obligations that are not currently in payment default, but that have migrated to an impaired level where there is a substantially increased probability of
default. These reserves reflect a reasonable 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 Companys watchlist based on historical trends and other factors. Watchlist reserves are
adjusted as necessary to reflect changes in the loss expectation inherent in the group of impaired credits.

Loss reserves and loss adjustment expenses are
regularly reviewed and updated based on claim payments and the results of ongoing insured portfolio surveillance. The Company conducts ongoing insured portfolio surveillance seeking to identify a complete population of impaired obligations and
enable the Company to establish reserves that recognize potential losses for each accounting period.

The Companys loss reserves are necessarily
based upon estimates and subjective judgments by management, including estimates and judgments with respect to the probability of default, the severity of loss upon default and the outcome of other future events. As such, the ultimate liability
associated with claims will likely differ, possibly materially, from estimates. Adjustments of estimates made in prior years may result in additions to or reductions of loss and loss adjustment expense reserves for the period in which such
adjustments are made, and those additions or deductions could be material.

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

Income Taxes

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



11



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



4. Summary of Significant Accounting Policies (continued)

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 the change occurs.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits where the ultimate recognition is uncertain. The Company adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109(FIN 48,) on January 1, 2007 (see Note 9).

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.

The Company capitalizes certain computer software and development costs when incurred in connection with developing or obtaining computer software for internal use. Capitalized software costs are amortized over three
years.

Foreign Currency Translation

The Company has
an established foreign branch and three subsidiaries in the United Kingdom, a subsidiary in Australia and insured exposure from a former branch in France. The Company has determined that the functional currencies of these operations are their
respective local currencies. Accordingly, the assets and liabilities of these operations are translated into U.S. dollars at the rates of exchange at December 31, 2007 and 2006, and revenues and expenses are translated at average monthly
exchange rates. The cumulative translation gains at December 31, 2007 and 2006 were $14,691 and $6,751, respectively, net of tax expense of $3,419 and $3,580, respectively, and are reported as separate components of accumulated other
comprehensive income in the consolidated statements of stockholders equity.



12



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



4. Summary of Significant Accounting Policies (continued)

Stock Compensation Plan

FGIC Corp. has a stock incentive 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 in accordance with 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, using the
modified-prospective-transition method. Under that method, compensation cost includes all share-based compensation granted prior to, but not yet vested as of, January 1, 2006, based on the fair value at the grant date 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.

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 of the VIE 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.



13



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



4. Summary of Significant Accounting Policies (continued)

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 12.

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 cash flow hedges.

Certain financial guaranty contracts (primarily CDSs) issued by the Company are
considered derivatives under SFAS No.133. Accordingly, these contracts are recognized on the Consolidated Balance Sheet at their fair value, and changes in fair value are recognized currently in earnings. The Company considers these contracts to be
a normal extension of its financial guaranty insurance business. Under the terms of these credit derivative contracts, the Company is not required to post collateral, and if the underlying obligation were to be in default, payments would not be
accelerated and would be made on a pay-as-you-go basis.

The Company records premium installments on these contracts as a component of premiums, and
records claims payments, expected claims, loss and loss adjustment expenses, and changes in fair value on these contracts as Net mark-to-market (losses) gains on credit derivative contracts in the Consolidated Statements of Income.

Commitments

Although commitments are not insurance
policies, commitments to issue financial guaranty insurance policies are generally accounted for in the same manner as issued insurance policies. However, fees received related to a commitment to issue a financial guaranty insurance policy are
deferred until a policy is issued, if any, and if the Company determines that it is unlikely that an insurance policy will be issued, the commitment fee received is earned over the commitment period.



14



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



4. Summary of Significant Accounting Policies (continued)

New Accounting Pronouncements

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 under GAAP, 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 adopting SFAS No.157 effective January 1, 2008. Adoption of SFAS No. 157 is not expected to have a material effect on the Companys consolidated financial position or results of operation.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB
Statement No. 115. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value but does not require any new fair value measurements. SFAS No. 159 is effective for
financial statements issued for fiscal years beginning after November 15, 2007. At this time, the Company does not contemplate changing the measurement of any financial instruments not already measured at fair value.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin
(ARB) No. 51. SFAS No. 160 requires reporting entities to present noncontrolling (minority) interests as equity (rather than as a liability or mezzanine equity) and provides guidance on accounting for transactions between an
entity and noncontrolling interests. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the provisions of SFAS No. 160, and adoption of this guidance is not expected
to have a material effect on the Companys consolidated financial position or results of operation.

Review of Financial Guaranty Industry
Accounting Practices

On April 18, 2007, the FASB issued an Exposure Draft of a Proposed SFAS entitled Accounting for Financial Guarantee
Insurance Contracts, an Interpretation of FASB Statement No. 60. The proposed statement addresses accounting for loss reserving, premium recognition and additional disclosures regarding financial guaranty insurance contracts. 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.



15



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



4. Summary of Significant Accounting Policies (continued)

The purpose of the proposed SFAS is to provide authoritative guidance on accounting for financial guaranty contracts that are not accounted for as derivative contracts
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. The final pronouncement is expected to
be issued in the first quarter of 2008 with an effective date of January 1, 2009. Upon the issuance of the 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 disclosures.

5. Statutory Surplus and Accounting Practices

Statutory-basis surplus of FGIC at December 31, 2007 and 2006 was $260,909 and $1,130,779, respectively. Statutory-basis net (loss)income for the years ended
December 31, 2007, 2006 and 2005 was ($1,502,511), $220,519 and $192,009 respectively. The Companys statutory contingency reserves were $575,785 and $1,274,274 as of December 31, 2007 and 2006, respectively.

Under the New York State Insurance Law, FGIC must maintain surplus to policy holders of at least $65,000. Should FGIC be required to increase its loss reserves in
future periods, this could cause FGICs surplus to fall below that minimum amount. While FGIC has additional capital resources available to it (see Note 18), there can be no assurance that FGIC would be able to obtain sufficient capital to
meet any such requirement. In the event that FGIC is unable to meet such requirement, the Superintendent of the NYSID has discretion to take various remedial actions, including suspending FGICs ability to write new policies and seeking an
order to place FGIC under regulatory control.



16



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



5. Statutory Surplus and Accounting Practices (continued)

The following is a reconciliation of net (loss) income and stockholders equity for FGIC presented on a GAAP basis to the corresponding amounts prepared and reported
under statutory accounting principles:



|                                                                                         |  |           |            |   |                     |   |           |           |  |   |                     |   |  |   |            |  
|---------------------------------------------------------------------------------------- |  | --------- | ---------- | - | ------------------- | - | --------- | --------- |  | - | ------------------- | - |  | - | ---------- | -
|                                                                                         |  | 2007      |            |   | 2006                |  
|                                                                                         |  | Net(Loss) |            |   | StockholdersEquity |   |           | NetIncome |  |   | StockholdersEquity |  
|GAAP-basis amount                                                                        |  | $         | (1,804,363 | ) |                     | $ | 852,987   |           |  | $ | 263,838             |   |  | $ | 2,638,182  |  
|Unrealized gains on fixed maturity securities held at fair value, net of tax             |  |           |           |   |                     |   | (21,614   | )         |  |   |                    |   |  |   | 230        |  
|Unrealized losses from subsidiaries:                                                     |  |           |            |   |                     |   |           |           |  |   |                     |   |  |   |           |  
|FGIC Credit Products LLC (CDS issuer)                                                    |  |           | 1,846,381  |   |                     |   | 1,846,381 |           |  |   |                    |   |  |   |           |  
|All other subsidiaries                                                                   |  |           | 108,150    |   |                     |   |          |           |  |   | 11,048              |   |  |   |           |  
|Tax and loss bonds                                                                       |  |           |           |   |                     |   | 24,375    |           |  |   |                    |   |  |   | 24,375     |  
|Premium revenue recognition                                                              |  |           | (33,911    | ) |                     |   | (311,255  | )         |  |   | (36,858             | ) |  |   | (277,344   | )
|Deferral of acquisition costs                                                            |  |           | (13,963    | ) |                     |   | (107,854  | )         |  |   | (28,242             | ) |  |   | (93,170    | )
|Mark-to-market losses on financial guarantee insurance treated as derivatives under GAAP |  |           | 89,503     |   |                     |   | 89,503    |           |  |   |                    |   |  |   |           |  
|Non-admitted assets                                                                      |  |           |           |   |                     |   | (471,067  | )         |  |   |                    |   |  |   | (11,116    | )
|Loss reserves (primarily related to insurance of CDS contracts)                          |  |           | (800,323   | ) |                     |   | (789,702  | )         |  |   | (7,038              | ) |  |   | 10,619     |  
|Contingency reserve                                                                      |  |           |           |   |                     |   | (575,785  | )         |  |   |                    |   |  |   | (1,274,274 | )
|Unauthorized reinsurance reserve                                                         |  |           |           |   |                     |   | (660      | )         |  |   |                    |   |  |   |           |  
|Deferral of income taxes                                                                 |  |           | (890,341   | ) |                     |   | (285,939  | )         |  |   | 21,091              |   |  |   | 98,472     |  
|Recognition of profit commission                                                         |  |           | (529       | ) |                     |   | (4,654    | )         |  |   | (24                 | ) |  |   | (4,125     | )
|Purchase accounting adjustments, net of tax                                              |  |           | (1,737     | ) |                     |   | 16,022    |           |  |   | (1,844              | ) |  |   | 17,758     |  
|Capital lease obligation                                                                 |  |           | (1,378     | ) |                     |   | 1,562     |           |  |   | (1,321              | ) |  |   | 2,941      |  
|Other                                                                                    |  |           |           |   |                     |   | (1,391    | )         |  |   | (131                | ) |  |   | (1,769     | )
|                                                                                         |  |           |            |   |                     |   |           |           |  |   |                     |   |  |   |            |  
|Statutory-basis amount                                                                   |  | $         | (1,502,511 | ) |                     | $ | 260,909   |           |  | $ | 220,519             |   |  | $ | 1,130,779  |  
|                                                                                         |  |           |            |   |                     |   |           |           |  |   |                     |   |  |   |            |  

Statutory practices differ in some respects from GAAP. Significant accounting policies, and variances from GAAP,
where applicable, are as follows:

Investments

Under
statutory reporting, bonds and short-term investments are stated at amortized cost. Under GAAP, bond and short-term investments are stated at fair value.



17



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



5. Statutory Surplus and Accounting Practices (continued)

Under GAAP, subsidiaries are consolidated with the Company. For statutory reporting purposes, investments in wholly owned subsidiaries are recorded under the statutory
equity method based on the underlying GAAP equity and reported as common stock investments. Changes in the value of subsidiaries are recorded as unrealized gains and losses and reported as a component of unassigned surplus. Under statutory
reporting, the reporting entity can discontinue applying the equity method when the investment in a subsidiary is reduced to zero, and statutory reporting does not provide for additional losses unless the reporting entity has guaranteed obligations
of the investee or is otherwise committed to provide further financial support for the investee. In connection with the issuance of a CDS by FGIC Credit Products, FGIC issues a financial guaranty contract for the benefit of the counterparty
guaranteeing timely payment of FGIC Credit Products payment obligations under the CDS. For statutory purposes, FGIC accounts for the financial guaranty as insurance, and records losses as incurred.

Tax and loss bonds are required to be stated at cost for statutory purposes. Under GAAP, tax and loss bonds are recorded as federal income tax payments.

Premium Revenue Recognition

For statutory purposes, premiums
collected in a single payment at a policys inception are earned in proportion to the scheduled principal and interest payments under the policy rather than in proportion to the total exposure outstanding at any point in time, as is the case
under GAAP.

Policy Acquisition Costs

For statutory
purposes, policy acquisition costs are charged to expense as incurred; under GAAP, they are deferred and amortized over the period during which the related premiums are earned.

Credit Derivative Contracts

Under GAAP, financial guaranty contracts, including the guarantee of a CDS, that
guarantee the payment obligation under a derivative contract are recorded at fair value. These financial guaranty contracts are accounted for as insurance for statutory purposes.

Non-admitted Assets

Certain assets are charged directly against surplus, but are reflected as assets under GAAP.
Such assets principally include prepaid expenses, property and equipment, and deferred tax assets.



18



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



5. Statutory Surplus and Accounting Practices (continued)

Loss and Loss Adjustment Expense and Loss Reserves

Case reserves are
established for the value of estimated losses on particular insured obligations that are currently or likely to be in payment default, and for which a future loss is probable and can be reasonably estimated. These reserves represent an estimate of
the present value of the anticipated shortfall, net of reinsurance, 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 is based upon the pretax yield of admitted assets. Under GAAP, unpaid losses and loss adjustment expenses are reported on a gross basis (i.e., before
reinsurance), and are discounted based on the risk-free rate for the anticipated shortfall.

In addition, under GAAP, the Company establishes watchlist
reserves to recognize the potential for claims against the Company on insured obligations that are not currently in payment default, but that have migrated to an impaired level, where there is a substantially increased probability of default. These
reserves reflect a reasonable estimate of probable loss given evidence of impairment, and a reasonable estimate of the amount of loss in the event of default.

Contingency Reserves

Contingency reserves are computed on the basis of statutory requirements for the security of all policyholders,
regardless of whether loss contingencies actually exist. Changes in the contingency reserve are charged directly to statutory surplus. In February 2008, the Company received approval from the NYSID to release $979,714 from the December 31, 2007
contingency reserves. Under GAAP, contingency reserves are not permitted.

Unauthorized Reinsurance

A liability is recorded for uncollateralized amounts due from reinsurers not authorized to do business in New York State. Changes in this liability are charged or
credited directly to unassigned surplus.

Federal Income Taxes

Federal income tax expenses are provided only with respect to taxable income for which income taxes are currently payable. Deferred income tax assets and liabilities arising from differences between the financial reporting and tax bases of
assets and liabilities are recorded as a component of surplus. Under GAAP, deferred income tax assets and liabilities arising from differences between financial reporting and tax bases of assets and liabilities are recorded as a component of federal
income tax expense.



19



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



5. Statutory Surplus and Accounting Practices (continued)

Profit Commission

Under the terms of certain reinsurance agreements,
the Company is entitled to receive profit commissions if the actual loss experience for a particular underwriting year is less than a prescribed level. For statutory purposes, the Company records such profit commissions when received. For GAAP
purposes, managements best estimate of the ultimate amount recoverable by the Company is accrued and the change each year is recorded in the statement of income.

Purchase Accounting

In a business combination under GAAP, the assets and the liabilities of the acquired entity are
recorded at fair value and the purchase price is pushed down to the subsidiary, with the differences between the purchase price and the sum of the fair value of tangible and identifiable intangible assets acquired less liabilities assumed recorded
as goodwill. For statutory purposes, these adjustments are not recorded.

Capital Leases

Under GAAP reporting, certain leases are treated as capital leases, and a liability is established for the present value of the minimum payments under such leases. For
statutory purposes, these leases are treated as operating leases and rental payments are charged to expense over the lease term.



20



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



6. Investments

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



|                                                                                      |  |               |           |                      |   |                       |  |            |        |  |   |          
|------------------------------------------------------------------------------------- |  | ------------- | --------- | -------------------- | - | --------------------- |  | ---------- | ------ |  | - | ---------
|                                                                                      |  | AmortizedCost |           | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|At December 31, 2007                                                                  |  |               |           |                      |   |                       |  |            |        |  |   |          
|Available for sale                                                                    |  |               |           |                      |   |                       |  |            |        |  |   |          
|Obligations of states and political subdivisions                                      |  | $             | 3,376,228 |                      | $ | 38,798                |  | $          | 7,605  |  | $ | 3,407,421
|Asset- and mortgage-backed securities                                                 |  |               | 307,218   |                      |   | 2,376                 |  |            | 1,485  |  |   | 308,109  
|U.S. Treasury securities and obligations of U.S. government corporations and agencies |  |               | 98,967    |                      |   | 2,855                 |  |            |       |  |   | 101,822  
|Corporate bonds                                                                       |  |               | 81,116    |                      |   | 262                   |  |            | 1,184  |  |   | 80,194   
|Debt securities issued by foreign governments                                         |  |               | 65,840    |                      |   | 1,219                 |  |            | 175    |  |   | 66,884   
|Preferred stock                                                                       |  |               | 13,499    |                      |   |                      |  |            | 1,751  |  |   | 11,748   
|                                                                                      |  |               |           |                      |   |                       |  |            |        |  |   |          
|Total fixed maturity securities                                                       |  |               | 3,942,868 |                      |   | 45,510                |  |            | 12,200 |  |   | 3,976,178
|Short-term investments                                                                |  |               | 126,655   |                      |   | 63                    |  |            | 30     |  |   | 126,688  
|Held to maturity:                                                                     |  |               |           |                      |   |                       |  |            |        |  |   |          
|Variable interest entity fixed maturity securities                                    |  |               | 750,000   |                      |   |                      |  |            |       |  |   | 750,000  
|                                                                                      |  |               |           |                      |   |                       |  |            |        |  |   |          
|Total investments                                                                     |  | $             | 4,819,523 |                      | $ | 45,573                |  | $          | 12,230 |  | $ | 4,852,866
|                                                                                      |  |               |           |                      |   |                       |  |            |        |  |   |          
|                                                                                      |  |               |           |                     
|                                                                                      |  | AmortizedCost |           | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | 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
|                                                                                      |  |               |           |                      |   |                       |  |            |        |  |   |          



21



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



6. 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, 2007:



|                                                                                      |  |                     |         |                   |   |                  |  |           |  |                  |         |                  |   |           |  |                  |  |                  |           |  |   |        |  |    
|------------------------------------------------------------------------------------- |  | ------------------- | ------- | ----------------- | - | ---------------- |  | --------- |  | ---------------- | ------- | ---------------- | - | --------- |  | ---------------- |  | ---------------- | --------- |  | - | ------ |  | ---
|                                                                                      |  | Less Than 12 Months |         | 12 Months or More |   | Total           
|                                                                                      |  | FairValue           |         | UnrealizedLosses  |   | No. ofSecurities |  | FairValue |  | UnrealizedLosses |         | No. ofSecurities |   | FairValue |  | UnrealizedLosses |  | No. ofSecurities
|Obligations of states and political subdivisions                                      |  | $                   | 321,749 |                   | $ | 4,080            |  | 60        |  | $                | 670,911 |                  | $ | 3,525     |  | 218              |  | $                | 992,660   |  | $ | 7,605  |  | 278
|Asset- and mortgage-backed securities                                                 |  |                     | 8,775   |                   |   | 28               |  | 3         |  |                  | 101,774 |                  |   | 1,457     |  | 30               |  |                  | 110,549   |  |   | 1,485  |  | 33 
|U.S. Treasury securities and obligations of U.S. government corporations and agencies |  |                     |        |                   |   |                 |  |          |  |                  |        |                  |   |          |  |                 |  |                  |          |  |   |       |  |   
|Other                                                                                 |  |                     | 7,065   |                   |   | 34               |  | 11        |  |                  | 73,695  |                  |   | 1,325     |  | 92               |  |                  | 80,760    |  |   | 1,359  |  | 103
|Preferred stock                                                                       |  |                     |        |                   |   |                 |  |          |  |                  | 11,748  |                  |   | 1,751     |  | 1                |  |                  | 11,748    |  |   | 1,751  |  | 1  
|                                                                                      |  |                     |         |                   |   |                  |  |           |  |                  |         |                  |   |           |  |                  |  |                  |           |  |   |        |  |    
|Total temporarily impaired securities                                                 |  | $                   | 337,589 |                   | $ | 4,142            |  | 74        |  | $                | 858,128 |                  | $ | 8,058     |  | 341              |  | $                | 1,195,717 |  | $ | 12,200 |  | 415
|                                                                                      |  |                     |         |                   |   |                  |  |           |  |                  |         |                  |   |           |  |                  |  |                  |           |  |   |        |  |    

The unrealized losses in the Companys investment portfolio reflect interest rate increases and credit spread
widening on insured investments. The Company has evaluated the credit ratings of the securities in its investment portfolio and noted no deterioration. Because the decline in market value is attributable to changes in interest rates and credit
spreads on insured investments and not to the credit quality of the underlying investments, and because the Company has the ability and intent to hold these investments until their fair value exceeds their amortized cost or until maturity, the
Company did not consider these investments to be other than temporarily impaired at December 31, 2007.

Investments in fixed maturity securities
carried at fair value of $4,641 and $4,456 as of December 31, 2007 and 2006, respectively, were on deposit with various regulatory authorities, as required by law.



22



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



6. Investments (continued)

The amortized cost and fair values of investments in fixed maturity securities available for sale at December 31, 2007 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.



|                                       |  |                                                       |           |           |   |          
|-------------------------------------- |  | ----------------------------------------------------- | --------- | --------- | - | ---------
|                                       |  | Fixed Maturity Securities ByContractual Maturity Date
|                                       |  | As of 12/31/07                                       
|                                       |  | AmortizedCost                                         |           | FairValue
|Fixed Maturity Securities              |  |                                                       |           |           |   |          
|Due within one year                    |  | $                                                     | 102,332   |           | $ | 102,272  
|Due after one year through five years  |  |                                                       | 792,922   |           |   | 791,554  
|Due after five years through ten years |  |                                                       | 1,469,627 |           |   | 1,486,014
|Due after ten years                    |  |                                                       | 1,270,769 |           |   | 1,288,229
|Mortgage-backed securities             |  |                                                       | 307,218   |           |   | 308,109  
|                                       |  |                                                       |           |           |   |          
|Total                                  |  | $                                                     | 3,942,868 |           | $ | 3,976,178
|                                       |  |                                                       |           |           |   |          

For the years ended December 31, 2007, 2006 and 2005, proceeds from sales of fixed maturity securities,
available for sale, were $20,935, $20,781 and $31,380, respectively. For the years ended December 31, 2007, 2006 and 2005, gross gains of $1,156, $382 and $188, respectively, and gross losses of $194, $108 and $84, respectively, were realized
on such sales. In 2007 and 2006, $543 and $62 of gross gains realized on sales of short-term investments were included in the Net realized gains on the Consolidated Statements of Income, respectively.



23



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



6. Investments (continued)

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



|                                                               |  |                        |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                               |  | Year Ended December 31 |        
|                                                               |  | 2007                   |         |   | 2006 |   |         | 2005 | 
|Income from fixed maturity securities                          |  | $                      | 148,634 |   |      | $ | 131,313 |      |  | $ | 113,612 |  
|Income from short-term investments                             |  |                        | 12,604  |   |      |   | 11,023  |      |  |   | 7,535   |  
|                                                               |  |                        |         |   |      |   |         |      |  |   |         |  
|Total investment income                                        |  |                        | 161,238 |   |      |   | 142,336 |      |  |   | 121,147 |  
|Investment expenses                                            |  |                        | (3,268  | ) |      |   | (2,588  | )    |  |   | (2,345  | )
|                                                               |  |                        |         |   |      |   |         |      |  |   |         |  
|Net investment income                                          |  |                        | 157,970 |   |      |   | 139,748 |      |  |   | 118,802 |  
|Interest income  investments held by variable interest entity |  |                        | 41,691  |   |      |   | 35,893  |      |  |   |        |  
|                                                               |  |                        |         |   |      |   |         |      |  |   |         |  
|Total                                                          |  | $                      | 199,661 |   |      | $ | 175,641 |      |  | $ | 118,802 |  
|                                                               |  |                        |         |   |      |   |         |      |  |   |         |  

As of December 31, 2007, the Company did not have more than 4% of its investment portfolio (excluding
variable interest entity fixed maturity securities) concentrated in a single issuer or industry; however, the Company had the following investment concentrations by state:



|                      |  |            |          
|--------------------- |  | ---------- | ---------
|                      |  | Fair Value
|New York              |  | $          | 324,357  
|Texas                 |  |            | 305,909  
|California            |  |            | 254,243  
|Florida               |  |            | 231,263  
|Illinois              |  |            | 211,350  
|Massachusetts         |  |            | 205,059  
|New Jersey            |  |            | 190,201  
|Michigan              |  |            | 127,091  
|                      |  |            |          
|                      |  |            | 1,849,473
|All other states      |  |            | 1,431,075
|All other investments |  |            | 822,318  
|                      |  |            |          
|Total investments     |  | $          | 4,102,866
|                      |  |            |          



24



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



7. Property and Equipment

The components of property and equipment at December 31, 2007 and 2006 were as follows:



|                                          |  |      |        |   |      |   |        |  
|----------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                          |  | 2007 |        |   | 2006 |  
|Artwork                                   |  | $    | 371    |   |      | $ | 371    |  
|Computer equipment                        |  |      | 1,750  |   |      |   | 1,104  |  
|Furniture and fixtures                    |  |      | 3,640  |   |      |   | 1,324  |  
|Leasehold improvements                    |  |      | 13,915 |   |      |   | 1,515  |  
|Capitalized software                      |  |      | 928    |   |      |   | 410    |  
|                                          |  |      |        |   |      |   |        |  
|                                          |  |      | 20,604 |   |      |   | 4,724  |  
|Accumulated depreciation and amortization |  |      | (3,891 | ) |      |   | (2,107 | )
|                                          |  |      |        |   |      |   |        |  
|Total Property and equipment, net         |  | $    | 16,713 |   |      | $ | 2,617  |  
|                                          |  |      |        |   |      |   |        |  

As of December 31, 2007 and 2006, the unamortized costs related to capitalized development stage application
cost for significant internally developed software projects were $483 and $0, respectively. For the years ended December 31, 2007, 2006 and 2005, depreciation expense was $1,758, $1,222 and $721, respectively.

8. Derivative Instruments

The Company previously provided CDS to
certain buyers of credit protection by entering into contracts that referenced collateralized debt obligations from cash and synthetic structures backed by pools of corporate, consumer or structured finance debt. It also offered credit protection on
public finance and structured finance obligations in CDS form. These CDS agreements and certain other financial guaranty contracts are considered derivatives under SFAS No. 133. The Companys total outstanding principal insured, net of
reinsurance, on these contracts was $34,114,661 as of December 31, 2007 and $22,696,360 as of December 31, 2006. The Company recorded net earned premiums under these contracts of $30,127, $18,740 and $3,036 for the years ended
December 31, 2007, 2006 and 2005, respectively.

Since quoted market values are not available for the Companys credit derivative contracts, the
estimated unrealized gains and losses attributable to these contracts are recognized in the Consolidated Statements of Income by recording their fair value, as determined each quarter based on internally developed models. These models require
market-driven inputs, including dealer quotes for the underlying bonds, credit spreads and yield curves. The models calculate a theoretical exit price and reflect managements best judgment about current market conditions.



25



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



8. Derivative Instruments (continued)

There is likely to be volatility in the market-driven inputs obtained from an illiquid market for CDS and the underlying bonds and other obligations, and differences are likely to exist between available market data
and assumptions used by management to estimate the fair value of these instruments. Accordingly, the valuation results from the model are likely to differ, possibly materially, from amounts that would be realized in the market if the derivatives
were traded. Moreover, volatile market conditions are likely to cause future valuations to differ, possibly materially, from those reflected in the current period.

The following table summarizes the net mark-to-market (losses) gains on credit derivative contracts.



|                                                                 |  |                        |            |   |      |   |        |      |  |   |      |  
|---------------------------------------------------------------- |  | ---------------------- | ---------- | - | ---- | - | ------ | ---- |  | - | ---- | -
|                                                                 |  | Year Ended December 31 |           
|                                                                 |  | 2007                   |            |   | 2006 |   |        | 2005 | 
|Mark-to-market (losses) gains                                    |  | $                      | (1,937,160 | ) |      | $ | (1,336 | )    |  | $ | (167 | )
|Realized gains                                                   |  |                        | 624        |   |      |   | 1,843  |      |  |   |     |  
|                                                                 |  |                        |            |   |      |   |        |      |  |   |      |  
|Net mark-to-market (losses) gains on credit derivative contracts |  | $                      | (1,936,536 | ) |      | $ | 507    |      |  | $ | (167 | )
|                                                                 |  |                        |            |   |      |   |        |      |  |   |      |  

The increase in net mark-to-market losses for the year ended December 31, 2007 is primarily related to large
increases in credit spreads and the deterioration of the credit quality of the underlying collateral on certain structured finance obligations insured by the Company, most significantly ABS CDOs backed primarily by subprime RMBS.

The Companys estimate of fair value at December 31, 2007 does not reflect the potential impact, if any, of ongoing commutation, settlement and restructuring
efforts. As discussed above, the fair value of the Companys CDS contracts has been determined based on internally developed models. At each reporting date, the Companys fair value assessment is evaluated to reflect the current credit
quality and spread environment, and the fair value may be adjusted to reflect the impact of the commutation, settlement or restructuring efforts.

9.
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 NYSID, 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.



26



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



9. Income Taxes (continued)

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 years ended December 31,
2007 and 2006. During the year ended December 31, 2005 the Company purchased $13,565 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 (benefit) provision for foreign and domestic income taxes:



|                                                                                                                   |  |                        |          |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------------ |  | ---------------------- | -------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                   |  | Year Ended December 31 |         
|                                                                                                                   |  | 2007                   |          |   | 2006 |   |         | 2005 | 
|Income taxes computed on (loss) income before provision for federal income taxes, at the statutory income tax rate |  | $                      | (981,821 | ) |      | $ | 114,886 |      |  | $ | 86,489  |  
|State and local income taxes, net of federal income taxes                                                          |  |                        | (775     | ) |      |   | 756     |      |  |   | 453     |  
|Tax effect of:                                                                                                     |  |                        |          |   |      |   |         |      |  |   |         |  
|Tax-exempt interest                                                                                                |  |                        | (39,393  | ) |      |   | (35,646 | )    |  |   | (31,072 | )
|Foreign subsidiary adjustments                                                                                     |  |                        | 37,365   |   |      |   |        |      |  |   |        |  
|Reductions following completion of IRS audit of 2003 and 2004                                                      |  |                        | (12,773  | ) |      |   |        |      |  |   |        |  
|Other, net                                                                                                         |  |                        | 1,088    |   |      |   | 405     |      |  |   | 774     |  
|                                                                                                                   |  |                        |          |   |      |   |         |      |  |   |         |  
|(Benefit) provision for income taxes                                                                               |  | $                      | (996,309 | ) |      | $ | 80,401  |      |  | $ | 56,644  |  
|                                                                                                                   |  |                        |          |   |      |   |         |      |  |   |         |  

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



|         |  |                        |          |   |      |   |        |      |  |   |        |  
|-------- |  | ---------------------- | -------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|         |  | Year Ended December 31 |         
|         |  | 2007                   |          |   | 2006 |   |        | 2005 | 
|Foreign  |  |                        |          |   |      |   |        |      |  |   |        |  
|Current  |  | $                      | (662     | ) |      | $ | (383   | )    |  | $ | 2,409  |  
|Deferred |  |                        | 3,128    |   |      |   | (752   | )    |  |   | (3,038 | )
|Domestic |  |                        |          |   |      |   |        |      |  |   |        |  
|Current  |  |                        | (81,859  | ) |      |   | 59,765 |      |  |   | 29,814 |  
|Deferred |  |                        | (916,916 | ) |      |   | 21,771 |      |  |   | 27,459 |  
|         |  |                        |          |   |      |   |        |      |  |   |        |  
|Total    |  | $                      | (996,309 | ) |      | $ | 80,401 |      |  | $ | 56,644 |  
|         |  |                        |          |   |      |   |        |      |  |   |        |  



27



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



9. Income Taxes (continued)

As of December 31, 2007, the Company had a domestic net operating loss carryforward of $1,345,191 for tax purposes, which will be available to offset future taxable income. If not used, the carryforward will
expire in 2027. As of December 31, 2007, the Company had an alternative minimum tax (AMT) credit of $20,416, which will be available to offset future regular tax payments. AMT credits do not expire.

The tax effects of temporary differences that give rise to significant portions of the net deferred tax asset (liability) at December 31, 2007 and 2006 are
presented below:



|                                                                 |  |      |         |      |   |         |  
|---------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|                                                                 |  | 2007 |         | 2006 |  
|Deferred tax assets:                                             |  |      |         |      |   |         |  
|Net mark-to-market losses on credit derivative contracts         |  | $    | 402,245 |      | $ |        |  
|Tax and loss bonds                                               |  |      | 24,375  |      |   | 24,375  |  
|Loss and loss adjustment expense reserves                        |  |      | 2       |      |   | 3,717   |  
|AMT credit carryforward                                          |  |      | 20,416  |      |   | 10,506  |  
|Property and equipment                                           |  |      |        |      |   | 125     |  
|Deferred compensation                                            |  |      | 10,468  |      |   | 5,264   |  
|Capital lease                                                    |  |      | 2,171   |      |   | 2,592   |  
|Net operating loss carryforward foreign subsidiaries             |  |      | 31,410  |      |   |        |  
|Net operating loss carryforward                                  |  |      | 470,817 |      |   | 4,228   |  
|Other                                                            |  |      | 2,598   |      |   | 571     |  
|                                                                 |  |      |         |      |   |         |  
|Total gross deferred tax assets                                  |  |      | 964,502 |      |   | 51,378  |  
|Valuation allowance                                              |  |      | 31,410  |      |   |        |  
|                                                                 |  |      |         |      |   |         |  
|Total net deferred tax assets                                    |  |      | 933,092 |      |   | 51,378  |  
|                                                                 |  |      |         |      |   |         |  
|Deferred tax liabilities:                                        |  |      |         |      |   |         |  
|Contingency reserves                                             |  |      |        |      |   | 42,656  |  
|Unrealized gains on fixed maturity securities available for sale |  |      | 24,974  |      |   | 15,622  |  
|Deferred acquisition costs                                       |  |      | 28,528  |      |   | 26,559  |  
|Premium revenue recognition                                      |  |      | 34,102  |      |   | 22,916  |  
|Profit commission                                                |  |      | 1,629   |      |   | 1,444   |  
|Unrealized gains on foreign currency                             |  |      | 3,419   |      |   | 3,581   |  
|Property and equipment                                           |  |      | 69      |      |   |        |  
|Other                                                            |  |      | 1,106   |      |   | 1,533   |  
|                                                                 |  |      |         |      |   |         |  
|Total deferred tax liabilities                                   |  |      | 93,827  |      |   | 114,311 |  
|                                                                 |  |      |         |      |   |         |  
|Net deferred tax asset (liability)                               |  | $    | 839,265 |      | $ | (62,933 | )
|                                                                 |  |      |         |      |   |         |  



28



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



9. Income Taxes (continued)

Management believes that no valuation allowance is necessary in connection with its domestic deferred tax asset because it is more likely than not that the amortization of the unearned premium reserve, collection of
future installment premiums on contracts already written, and income from the investment portfolio will generate sufficient taxable income to realize the domestic deferred tax asset prior to its expiration.

As of December 31, 2007 and 2006, the Company had gross foreign deferred tax assets of $31,664 and $4,359, respectively, and gross foreign deferred tax liabilities
of $211 and $868, respectively. The net operating losses on foreign subsidiaries of $31,410 as of December 31, 2007 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 does not anticipate realizing the benefits of these deductible differences and, therefore, has established a valuation allowance at December 31, 2007 of $31,410.

The Company adopted FIN 48 effective January 1, 2007. The Companys liability for unrecognized tax benefits was not impacted as a result of the adoption of FIN 48. A reconciliation of the beginning and
ending amount of unrecognized tax benefits is as follows:



|                                                              |  |   |         |  
|------------------------------------------------------------- |  | - | ------- | -
|Balance at January 1, 2007                                    |  | $ | 24,677  |  
|Additions based on tax positions related to the current year  |  |   |        |  
|Additions for tax positions of prior years                    |  |   | 916     |  
|Reductions for tax positions of prior year                    |  |   | (6,023  | )
|Reductions following completion of IRS audit of 2003 and 2004 |  |   | (12,773 | )
|Payments following completion of IRS audit of 2003 and 2004   |  |   | (199    | )
|                                                              |  |   |         |  
|Balance at December 31, 2007                                  |  | $ | 6,598   |  
|                                                              |  |   |         |  

The Company recognizes accrued interest and penalties related to unrecognized tax benefits where the ultimate
recognition is uncertain. Tax expense related to interest and penalties amounted to $440, $0, and $0 during the years ended December 31, 2007, 2006, and 2005, respectively. Approximately $265 and $0 were accrued for the payment of interest and
penalties at December 31, 2007 and 2006, respectively, which is included as a component of the balance of unrecognized tax benefits.



29



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



9. Income Taxes (continued)

In the second quarter of 2006, the Internal Revenue Service (IRS) commenced an examination of the Companys consolidated U.S. federal income tax returns for 2003 and 2004. The examination was
completed in the second quarter of 2007. As a result, the Company is not subject to federal income tax examination by the IRS for years before 2005.

Upon
completion of the audit, previously unrecognized tax benefits of $5,353 relating to the years under examination were recognized. Further, the Company, in connection with the examination, agreed to an IRS adjustment related to the deductibility of
transaction costs associated with the sale of FGIC Corp. in 2003. As a result, the Company believes that the uncertainty regarding the deductibility of such transaction costs was reduced to a level that no longer required the Company to maintain an
unrecognized tax benefit for this position. Consequently, the Company recognized a tax benefit of $7,420 in 2007, which represents the difference between the liability accrued by the Company for this tax position and the agreed upon adjustment.

The Companys United Kingdom operations are subject to examination by foreign tax authorities for the periods since they commenced operation in 2004.

10. Reinsurance

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

The Company uses reinsurance to increase its capacity to write insurance
for obligations of large, frequent issuers; to meet internal, rating agency or regulatory single risk limits; to diversify risk; and to manage rating agency and regulatory capital requirements. The Company arranges reinsurance on both a facultative
(transaction-by-transaction) basis and on a proportional share basis.

As a primary insurer, the Company is required to fulfill all its obligations to
policyholders even if a reinsurer fails to perform its obligations under the applicable reinsurance agreement. The Company regularly monitors the financial condition of its reinsurers. The Company evaluated the financial condition of its reinsurers
and determined that no allowance for unrecoverable reinsurance was needed. 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.



30



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



10. Reinsurance (continued)

FGIC has also assumed exposure from certain other financial guarantors under reinsurance agreements.

As a result of the
downgrade in the Companys financial strength ratings (see Note 2), the counterparties from which the Company has assumed exposures have the ability either to reassume the exposures ceded and receive the remaining unearned premiums, or to
impose additional ceding commissions.

Under certain reinsurance agreements, the Company holds collateral in the form of letters of credit and trust
agreements. Such collateral totaled $180,125 at December 31, 2007 and can be drawn on in the event of default by a reinsurer.

The effect of
reinsurance on premiums written and earned was as follows:



|             |  |                        |          |   |        |   |         |         |  |   |         |   |  |         |         |   |        |   |         |   |  |   |         |  
|------------ |  | ---------------------- | -------- | - | ------ | - | ------- | ------- |  | - | ------- | - |  | ------- | ------- | - | ------ | - | ------- | - |  | - | ------- | -
|             |  | Year Ended December 31 |         
|             |  | 2007                   |          |   | 2006   |   |         | 2005    | 
|             |  | Written                |          |   | Earned |   |         | Written |  |   | Earned  |   |  | Written |         |   | Earned |  
|Direct       |  | $                      | 447,629  |   |        | $ | 338,245 |         |  | $ | 425,242 |   |  | $       | 293,962 |   |        | $ | 409,237 |   |  | $ | 246,914 |  
|Assumed      |  |                        | 3,639    |   |        |   | 2,194   |         |  |   | 15,989  |   |  |         | 819     |   |        |   | 965     |   |  |   | 54      |  
|Ceded        |  |                        | (103,907 | ) |        |   | (35,154 | )       |  |   | (74,417 | ) |  |         | (28,324 | ) |        |   | (29,148 | ) |  |   | (22,399 | )
|             |  |                        |          |   |        |   |         |         |  |   |         |   |  |         |         |   |        |   |         |   |  |   |         |  
|Net premiums |  | $                      | 347,361  |   |        | $ | 305,285 |         |  | $ | 366,814 |   |  | $       | 266,457 |   |        | $ | 381,054 |   |  | $ | 224,569 |  
|             |  |                        |          |   |        |   |         |         |  |   |         |   |  |         |         |   |        |   |         |   |  |   |         |  

For the years ended December 31, 2007, 2006 and 2005, reinsurance recoveries reduced loss and loss adjustment
expenses incurred by $7,287, $1,722 and $217, respectively.



31



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



11. Loss and Loss Adjustment Expenses Reserves

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



|                                   |  |                        |           |   |      |   |        |      |  |   |        |  
|---------------------------------- |  | ---------------------- | --------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                   |  | Year Ended December 31 |          
|                                   |  | 2007                   |           |   | 2006 |   |        | 2005 | 
|Balance at beginning of period:    |  |                        |           |   |      |   |        |      |  |   |        |  
|Case reserves                      |  | $                      | 28,558    |   |      | $ | 33,328 |      |  | $ | 15,700 |  
|Watch list reserves                |  |                        | 11,741    |   |      |   | 21,484 |      |  |   | 23,481 |  
|                                   |  |                        |           |   |      |   |        |      |  |   |        |  
|Total                              |  |                        | 40,299    |   |      |   | 54,812 |      |  |   | 39,181 |  
|Less reinsurance recoverable       |  |                        | (1,485    | ) |      |   | (3,271 | )    |  |   | (3,054 | )
|                                   |  |                        |           |   |      |   |        |      |  |   |        |  
|Net balance at beginning of period |  |                        | 38,814    |   |      |   | 51,541 |      |  |   | 36,127 |  
|                                   |  |                        |           |   |      |   |        |      |  |   |        |  
|Incurred related to:               |  |                        |           |   |      |   |        |      |  |   |        |  
|Current period                     |  |                        | 1,239,069 |   |      |   |       |      |  |   | 23,985 |  
|Prior periods                      |  |                        | (12,294   | ) |      |   | (8,700 | )    |  |   | (5,479 | )
|                                   |  |                        |           |   |      |   |        |      |  |   |        |  
|Total incurred                     |  |                        | 1,226,775 |   |      |   | (8,700 | )    |  |   | 18,506 |  
|                                   |  |                        |           |   |      |   |        |      |  |   |        |  
|Paid related to:                   |  |                        |           |   |      |   |        |      |  |   |        |  
|Current period                     |  |                        | (7,920    | ) |      |   |       |      |  |   | (1,993 | )
|Prior periods                      |  |                        | 3,894     |   |      |   | (4,027 | )    |  |   | (1,099 | )
|                                   |  |                        |           |   |      |   |        |      |  |   |        |  
|Total paid                         |  |                        | (4,026    | ) |      |   | (4,027 | )    |  |   | (3,092 | )
|FX on UK Ltd reserves              |  |                        | (2,836    | ) |      |   |       |      |  |   |       |  
|Net balance                        |  |                        | 1,258,727 |   |      |   | 38,814 |      |  |   | 51,541 |  
|Plus reinsurance recoverable       |  |                        | 8,693     |   |      |   | 1,485  |      |  |   | 3,271  |  
|                                   |  |                        |          
|Case reserves                      |  |                        | 1,259,202 |   |      |   | 28,558 |      |  |   | 33,328 |  
|Watchlist reserves                 |  |                        | 8,218     |   |      |   | 11,741 |      |  |   | 21,484 |  
|                                   |  |                        |           |   |      |   |        |      |  |   |        |  
|Balance at end of period           |  | $                      | 1,267,420 |   |      | $ | 40,299 |      |  | $ | 54,812 |  
|                                   |  |                        |           |   |      |   |        |      |  |   |        |  

Case reserves at December 31, 2007 increased to $1,259,202 at December 31, 2007 from $28,558 at
December 31, 2006 - an increase of $1,230,644. The increase was mainly attributable to the establishment of loss reserves for financial guaranty obligations impacted by the deterioration in mortgage underwriting quality in the U.S. mortgage
market during 2007 and 2006. Reserves at December 31, 2007 relate predominantly to ABS CDOs and RMBS transactions. Approximately seventy-five percent of the reserves at December 31, 2007 relate to an outstanding commitment to provide
financial guaranties with respect to a referenced portfolio of ABS CDOs upon satisfaction of certain conditions.

Loss and loss adjustment expense reserves
at December 31, 2007 do not reflect the potential impact, if any, of ongoing loss mitigation efforts; however, there can be no assurance that any loss mitigation efforts will be successful, and it is not possible to predict the magnitude of any
benefit that might be derived from any such efforts that are successful. Loss reserves have been established based on the



32



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



11. Loss and Loss Adjustment Expenses Reserves (continued)

performance of the underlying collateral. If the Company identifies credit impairment, a provision for loss and loss adjustment expense is recorded. At each reporting
date the reserves are evaluated and may be adjusted to reflect the impact of any loss mitigation efforts that have yielded results that are probable and estimable. The Company believes that the reserve for estimated losses as of December 31,
2007 is adequate to cover expected future net claims. However, the establishment of the appropriate level of reserves is an inherently uncertain process involving numerous estimates and subjective judgments by management. Small changes underlying
these estimates could result in significant changes in the Companys loss expectations. At present, there remains a considerable amount of uncertainty relating to risks in real estate prices, credit markets and the economy as a whole, and there
is no historical precedent for the current conditions. There can be no assurance that the Companys estimates of probable and estimable losses are accurate. Accordingly, there can be no assurance that actual claims paid by the Company will not
exceed its reserves at December 31, 2007, and it is possible that they could significantly exceed those reserves. Additionally, further deterioration in the performance of RMBS, ABS CDOs and other obligations the Company insures could lead to
the establishment of additional loss reserves and further loss or reduction to income.

Incurred loss reserves for the years ended December 31, 2006
and 2005 related primarily to obligations impacted by Hurricane Katrina. During the year ended December 31, 2005, the Company established loss reserves of $21,833 for an investor-owned utility and other public finance obligations located in the
City of New Orleans. During the years ended December 31, 2007, 2006 and 2005, the Company paid claims and loss adjustment expenses of $2,000, $6,051 and $6,658, respectively, related to these obligations. During the years ended
December 31, 2007, 2006 and 2005, the Company received reimbursements of $6,927, $2,589 and $4,855, respectively, related to the paid claims and loss adjustment expenses.

Case reserves were discounted at interest rates ranging from 3.5% to 5.0% and from 4.5% to 4.8% in 2007 and 2006, respectively. The amount of the discount at December 31, 2007 and 2006 was $291,522 and $6,369,
respectively.



33



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



12. 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.

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, 2007 and
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
Consolidated Balance Sheets. In addition, accrued investment income includes $1,208 and $1,298 related to the VIEs fixed income maturity securities, and the corresponding liability is shown under Accrued interest expense-variable
interest entity on the Consolidated Balance Sheets.

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 covering certain obligations of the VIE. Interest income of $41,691 and $41,691 and interest expense of $35,893 and $35,893, respectively, were
recognized in the years ended December 31, 2007 and 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.

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.

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



34



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



12. Variable Interest Entities (continued)

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 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 (see Note
18).

13. Related Party Transactions

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 22).

FGIC Corp. is party to monitoring fee agreements with each of PMI, Blackstone, Cypress and CIVC (collectively, the Investor
Group). Pursuant to these agreements, each member of the Investor Group receives, 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.

During 2007 and 2006, FGIC Corp. paid the members of the Investor Group an aggregate
of $5,000 and $3,789, respectively, of monitoring fees for those years. 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. As of December 31, 2007 and 2006, the Company had $1,211 payable to the Investor Group for the monitoring fee covering the years ended December 31, 2007 and 2006. Pursuant to the 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 services provided under the monitoring fee agreements.

In 2007, FGIC engaged Blackstone Advisory Services L.P., an affiliate of Blackstone, to provide services related to loss mitigation and remediation. For the year ended
December 31, 2007, the Company recorded loss adjustment expenses of $9,500 for these services. In addition, for the years ended December 31, 2007 and 2006, FGIC paid Blackstone $522 and $257, respectively, for loss mitigation and
remediation advisory services related to an investor-owned utility located in the City of New Orleans (see Note 11).



35



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



13. Related Party Transactions (continued)

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, $2 and $3 for the years ended December 31, 2007, 2006 and 2005, respectively. As of December 31, 2007 and 2006, principal outstanding on these deals
before reinsurance was $5,476, and $5,667 respectively.

FGIC, in the normal course of operations, has entered into reinsurance transactions with PMI
Guaranty Co. and PMI Mortgage Insurance Co. Ltd., which are both wholly owned subsidiaries of PMI. For the years ended December 31, 2007, 2006 and 2005, ceded premiums written were $6,893, $4,041 and $582, respectively, and ceding commission
income was $1,000, $578 and $114, respectively, with respect to these PMI subsidiaries. Accounts payable due to these subsidiaries were $118 and $1,283 at December 31, 2007 and 2006 respectively. Loss reserves ceded to PMI Mortgage Insurance
Co. Ltd. were $2,371, $0, and $0 at December 31, 2007, 2006 and 2005, respectively.

FGIC, in the normal course of operations, has entered into
reinsurance transactions with RAM Reinsurance Company Ltd (RAM Re), in which PMI has a minority ownership interest. For the years ended December 31, 2007, 2006 and 2005, ceded premiums written for these transactions were $29,517,
$9,824 and $4,582, respectively, and ceding commission income was $8,831, $2,929 and $1,369, respectively. Accounts payable due to RAM Re were $945 and $91 at December 31, 2007 and 2006 respectively. Loss reserves ceded to RAM Re were $513, $0
and $0 at December 31, 2007, 2006 and 2005, respectively.

Cypress is reported to own approximately 15% of Scottish Re Group Limited (Scottish
Re). During 2006, FGIC insured a structured finance transaction and also assumed exposure from another monoline insurer in respect of another structured finance transaction in which subsidiaries of Scottish Re were involved.
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, 2007, there were no amounts due to or from Scottish Re. For the years ended December 31, 2007 and 2006, gross premiums written of $1,160 and $1,141, and premiums earned of $699 and $637,
respectively, relating to these transactions are reflected in the Consolidated Statements of Income.



36



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



13. Related Party Transactions (continued)

In 2005, FGIC issued a financial guaranty insurance policy with respect to an accounts receivable securitization sponsored by a company in which Blackstone was contemporaneously acquiring a minority interest. In
connection with this transaction, FGIC received premiums of $3,223, $3,260, $645 in 2007, 2006 and 2005, respectively.

FGIC believes that the terms of the
transactions described above were completed on an arms length basis.

14. 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 2007, up to $15.5 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 $5,027, $4,255 and $3,429 to the plan on
behalf of employees for the years ended December 31, 2007, 2006 and 2005, respectively.

The Company also offers a non-qualified deferred compensation
plan for certain employees whose cash compensation equals or exceeds the limit 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 $1,348, $827 and $583 to the Plan on behalf of employees for the years ended December 31, 2007, 2006 and 2005,
respectively.

15. 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.



37



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



15. Stock Compensation Plan (continued)

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.

No stock-based employee compensation cost related to
stock options was recognized in the Consolidated Statements of Income for the year ended December 31, 2005, 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.

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 year ended December 31, 2005. For purposes of this pro forma disclosure, the value of the stock options is amortized to expense over the stock options
vesting periods.



|                                                                                       |  |                            |         |  
|-------------------------------------------------------------------------------------- |  | -------------------------- | ------- | -
|                                                                                       |  | Year EndedDecember 31,2005 |        
|Net income, as reported                                                                |  | $                          | 190,466 |  
|Stock option compensation expense determined under fair value-based method, net of tax |  |                            | (2,109  | )
|                                                                                       |  |                            |         |  
|Pro forma net income                                                                   |  | $                          | 188,357 |  
|                                                                                       |  |                            |         |  



38



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



15. Stock Compensation Plan (continued)

A summary of option activity for the years ended December 31, 2007, 2006 and 2005 is as follows:



|                                          |  |                                   |   |  |                                         |    
|----------------------------------------- |  | --------------------------------- | - |  | --------------------------------------- | ---
|                                          |  | Number ofShares Subjectto Options |   |  | WeightedAverage ExercisePrice per Share
|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
|                                          |  |                                   |   |  |                                         |    
|Granted                                   |  | 49,058                            |   |  |                                         | 971
|Exercised                                 |  |                                  |   |  |                                         |   
|Forfeited                                 |  | (4,042                            | ) |  |                                         | 847
|Expired                                   |  |                                  |   |  |                                         |   
|                                          |  |                                   |   |  |                                         |    
|Balance at December 31, 2007:             |  | 216,047                           |   |  | $                                       | 850
|                                          |  |                                   |   |  |                                         |    
|Shares subject to options exercisable at: |  |                                   |   |  |                                         |    
|December 31, 2007                         |  | 106,616                           |   |  | $                                       | 818
|December 31, 2006                         |  | 72,585                            |   |  | $                                       | 818
|December 31, 2005                         |  | 42,630                            |   |  | $                                       | 840

Exercise prices for the stock options outstanding at December 31, 2007 range from $600 to $1,080 per share.
At December 31, 2007, the weighted average remaining contractual life of the outstanding options was approximately seven years. Stock options granted in 2007 and 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.



39



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



15. Stock Compensation Plan (continued)

The weighted average per share fair value of the stock options granted during the years ended December 31, 2007, 2006 and 2005 was $234.00, $238.00 and $211.94, respectively, estimated at the date of grant, using
the Black-Scholes-Merton option valuation model based on the following assumptions:



|                        |  |                        |   |  |         |   |  |         |  
|----------------------- |  | ---------------------- | - |  | ------- | - |  | ------- | -
|                        |  | Year Ended December 31 |  
|                        |  | 2007                   |   |  | 2006    |   |  | 2005    |  
|Expected life           |  | 3.8 Years              |   |  | 4 Years |   |  | 5 Years |  
|Risk-free interest rate |  | 4.50                   | % |  | 4.46    | % |  | 3.691   | %
|Volatility factor       |  | 20.7                   | % |  | 25.0    | % |  | 25.0    | %
|Dividend yield          |  |                       |   |  |        |   |  |        |  

The total fair value of stock options granted at the time of grant during the years ended December 31, 2007,
2006 and 2005 was approximately $11,480, $9,071 and $5,753, respectively.

As of December 31, 2007, there was $6,825 of total unrecognized
compensation cost related to unvested stock options. These costs are expected to be recognized through February 28, 2011.



40



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



15. Stock Compensation Plan (continued)

Restricted Stock Units

The Company recorded $1,028, $880 and $45 in compensation expense related to the grant of
restricted stock units for the years ended December 31, 2007, 2006 and 2005, respectively. A summary of restricted stock units is as follows:



|                              |  |        |   |  |                                      |    
|----------------------------- |  | ------ | - |  | ------------------------------------ | ---
|                              |  | Shares |   |  | WeightedAverage GrantDate Fair Value
|Balance at December 31, 2004: |  | 200    |   |  | $                                    | 600
|Granted                       |  | 37     |   |  |                                      | 710
|Delivered                     |  |       |   |  |                                      |   
|Forfeited                     |  |       |   |  |                                      |   
|                              |  |        |   |  |                                      |    
|Balance at December 31, 2005: |  | 237    |   |  |                                      | 617
|                              |  |        |   |  |                                      |    
|Granted                       |  | 2,949  |   |  |                                      | 850
|Delivered                     |  | (237   | ) |  |                                      | 617
|Forfeited                     |  | (213   | ) |  |                                      | 850
|                              |  |        |   |  |                                      |    
|Balance at December 31, 2006: |  | 2,736  |   |  |                                      | 850
|                              |  |        |   |  |                                      |    
|Granted                       |  | 362    |   |  |                                      | 971
|Delivered                     |  | (326   | ) |  |                                      | 850
|Forfeited                     |  |       |   |  |                                      |   
|                              |  |        |   |  |                                      |    
|Balance at December 31, 2007: |  | 2,772  |   |  | $                                    | 866
|                              |  |        |   |  |                                      |    

As of December 31, 2007 there was $775 of total unrecognized compensation cost related to unvested restricted
stock units. These costs are expected to be recognized through February 28, 2009.

16. Dividends

Under the New York State 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 2007, 2006 and 2005, 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 State Insurance Law, for the preceding twelve-month period, without the prior approval of the New York State Superintendent of Insurance. Due to FGICs deficit in earned surplus at
December 31, 2007, FGIC does not currently have the capacity to pay dividends without the prior approval of the NYSID.



41



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



16. Dividends (continued)

During the years ended December 31, 2007 and 2006, FGIC declared dividends totaling $20,000 and $20,000, respectively, on its common stock and paid dividends of $20,000 and $10,000, respectively. During the year ended December 31,
2005, FGIC did not declare or pay dividends on its common stock. FGIC Corp.s ability to meet its cash needs may be adversely impacted by FGICs inability to pay dividends. However, FGIC Corp. believes its cash resources are sufficient to
fund its obligations as they come due for at least the next 12 months.

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 December 18, 2008 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 December 18, 2012, provided that those dividends are paid from retained earnings in excess of the amount of FGIC Corp.s retained earnings on December 18, 2003, 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 17). 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.



42



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



16. Dividends (continued)

The Certificate of Incorporation of FGIC Corp. provides for the declaration and payment of dividends on Senior Preferred Shares at the rate of 1.71875% quarterly in the form of an increase in the redemption value of the Senior Preferred
Shares. Quarterly 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, 2007, 2006 and 2005, the Company accrued dividends of $14,566, $18,485 and $17,295, respectively, on the Senior Preferred Shares. As a result of the net loss for the quarter ended December 31, 2007,
the Company did not accrue a dividend on the Senior Preferred Shares for the quarterly dividend period ended December 31, 2007. During the years ended December 31, 2007, 2006 and 2005, FGIC Corp. did not declare or pay dividends on its
common stock.

17. 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 Senior Notes). The Senior 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 Senior Notes of $4,822 were capitalized and are amortized to other operating expenses over the term of the Senior Notes. In relation to the issuance of the
Senior Notes, FGIC Corp. entered into an interest rate lock from which FGIC Corp. realized a gain of $1,511 that is recorded as a component of other comprehensive income and is recognized into income over the term of the Senior Notes.

In 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. In February 2008, FGIC Corp. borrowed $250,000 under the facility.

FGIC Corp. and FGIC are currently in full compliance
with the terms and conditions of the Senior Notes and the revolving credit facility.



43



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



18. Preferred Trust Securities

FGIC has a $300,000 soft capital facility, consisting of Money Market Committed Preferred Custodial Trust Securities (CPS Securities). Under the 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. In this way, the
program provides capital support to FGIC by allowing it to obtain access to new capital through the exercise of the put options.

Beginning in the third
quarter of 2007, disruptions in the short term market caused the auctions for these facilities to fail. When an auction fails, the existing investors are required to hold their investments, and the interest rate paid on the trust
securities rises to a maximum rate (150 basis points over Libor when the securities are rated double-A, and to a rate of 200 basis points over Libor when the securities are rated at single-A or below). The impact of the failed auctions on the
Company was an increase in the cost of the put option premium paid to the trusts. For the years ended December 31, 2007, 2006, and 2005, the fees incurred related to these put options were $2,984, $1,432, and $1,806, respectively.

19. Senior Participating Mandatorily Convertible Modified Preferred Stock

The Senior Preferred Shares are redeemable, at the option of the Company, but only with the proceeds from the issuance and sale of common equity. 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 the time of conversion. The number of shares of common stock into which the Senior Preferred Shares can be converted 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 Common Stock), 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.



44



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



19. Senior Participating Mandatorily Convertible Modified Preferred Stock (continued)

Each share of Class B Common Stock will also be redeemable by FGIC Corp. at any time, but only with the proceeds of the issuance and sale of common equity. 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, 2007 and 2006, the aggregate redemption value of the Senior Preferred Shares was $301,921, and $287,355, respectively. Due to the Companys reported net loss for 2007, no dividends were permitted or
required to be accrued or paid on the Senior Preferred Shares for the fourth quarter of 2007.

20. 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, 2007, the loan balance included in Other assets was $33,407 and the deposit balance included in Other
liabilities was $33,178. 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.

21. Financial Instruments

Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating the fair values of
financial instruments. Fair values estimated based upon internal valuation models are not necessarily indicative of the amount the Company could realize in a current market exchange.

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 6.

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

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



45



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



21. Financial Instruments (continued)

Financial Guaranties: The carrying value of the Companys financial guaranties is represented by the unearned premium reserve net of 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 Company does not record a carrying value for future expected installment premiums. The
fair value of future expected installment premiums as of December 31, 2007 and 2006 was approximately $838,533 and $630,831, respectively, both discounted at 5%.

Loss and loss adjustment expense reserves, net: The carrying amount of case reserves is 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. The carrying amount of watchlist reserves is an estimate of probable loss given evidence of impairment, and a reasonable estimate of
the amount of loss given default. The carrying amounts of these items approximate their fair values.

Derivative assets and liabilities:Derivative
assets and liabilities are carried at fair value, as determined each quarter based on internally developed models. These models require market-driven inputs, including dealer quotes for the underlying bonds, credit spreads and yield curves. The
models calculate a theoretical exit price and reflect managements best judgment about current market conditions. There may be volatility in the market-driven inputs obtained from an illiquid market for CDS and the underlying bonds and other
obligations, and differences may exist between available market data and assumptions used by management to estimate the fair value of these instruments.

Accordingly, the valuation results from the model could differ materially from amounts that would be realized in the market if the derivative were traded. Moreover, volatile market conditions are likely to cause future valuations to differ,
possibly materially, from those reflected in the current period (see Note 8).

Debt: The carrying amount of the Companys debt is net of the
unamortized balance of the issuance discount and capitalized debt issuance costs. The fair value of the debt is based on a quoted market price.



46



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



21. Financial Instruments (continued)

Put agreements on FGIC perpetual preferred stock:As noted in Notes 12 and 18, FGIC has put agreements with six non consolidated trusts that obligates the trusts, at FGICs discretion, to purchase
Perpetual Preferred Stock of FGIC. The exercise of the put options would provide FGIC access to new capital at a pre-established rate. Given the downgrades in the Companys financial strength and credit ratings and the resulting increase in
credit spreads on Companys debt, the fair value of the put options was estimated to be $60,120 and $0 at December 31, 2007 and 2006, respectively.

The carrying amounts and estimated fair values of the Companys financial instruments at December 31, 2007 and 2006 were as follows:



|                                                                     |  |                |           |           |   |                |  |           |           |  |   |          
|-------------------------------------------------------------------- |  | -------------- | --------- | --------- | - | -------------- |  | --------- | --------- |  | - | ---------
|                                                                     |  | 2007           |           | 2006     
|                                                                     |  | CarryingAmount |           | FairValue |   | CarryingAmount |  | FairValue
|Financial assets:                                                    |  |                |           |           |   |                |  |           |           |  |   |          
|Cash on hand and in-demand accounts                                  |  | $              | 140,590   |           | $ | 140,590        |  | $         | 33,278    |  | $ | 33,278   
|Short-term investments                                               |  |                | 126,688   |           |   | 126,688        |  |           | 222,844   |  |   | 222,844  
|Fixed maturity securities, available for sale                        |  |                | 3,976,178 |           |   | 3,976,178      |  |           | 3,644,195 |  |   | 3,644,195
|Variable interest entity fixed maturity securities, held to maturity |  |                | 750,000   |           |   | 750,000        |  |           | 750,000   |  |   | 750,000  
|Financial liabilities:                                               |  |                |           |           |   |                |  |           |           |  |   |          
|Liability for net financial guaranties                               |  |                | 1,232,960 |           |   | 1,139,968      |  |           | 1,190,884 |  |   | 1,124,179
|Loss and loss adjustment expense reserves, net                       |  |                | 1,258,727 |           |   | 1,258,727      |  |           | 38,814    |  |   | 38,814   
|Derivative liabilities, net                                          |  |                | 1,938,663 |           |   | 1,938,663      |  |           | 1,503     |  |   | 1,503    
|Debt                                                                 |  |                | 323,397   |           |   | 283,693        |  |           | 323,373   |  |   | 334,747  

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 at the
time of underwriting. 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.



47



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



21. 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, 2007, the Companys total outstanding principal insured was $313,949,268, net of reinsurance of
$43,478,699. The Companys insured portfolio as of December 31, 2007 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 credit derivatives. The principal written in the form of credit derivatives was $35,614,330 at December 31, 2007. Total outstanding principal insured does not reflect
any amounts relating to commitment agreements.

As of December 31, 2007, the composition of principal insured by type of issue, net of reinsurance,
was as follows:



|                         |  |                          |            
|------------------------ |  | ------------------------ | -----------
|                         |  | Net PrincipalOutstanding
|Municipal:               |  |                          |            
|Tax-supported            |  | $                        | 135,969,517
|Utility revenue          |  |                          | 35,141,684 
|Transportation           |  |                          | 23,409,842 
|Education                |  |                          | 10,739,032 
|Health Care              |  |                          | 7,562,002  
|Investor-owned utilities |  |                          | 5,591,324  
|Housing                  |  |                          | 1,911,198  
|Other                    |  |                          | 1,751,151  
|                         |  |                          |            
|Total Municipal          |  |                          | 222,075,750
|Non-municipal            |  |                          |            
|Asset-Backed             |  |                          | 16,533,851 
|Mortgage-Backed          |  |                          | 29,614,582 
|Other Structured Finance |  |                          | 93,875     
|Pooled Debt Obligations  |  |                          | 24,406,069 
|                         |  |                          |            
|Total Non-Municipal      |  |                          | 70,648,377 
|International            |  |                          | 21,225,141 
|                         |  |                          |            
|Total                    |  | $                        | 313,949,268
|                         |  |                          |            



48



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



21. Financial Instruments (continued)

As of December 31, 2007, the composition of principal insured ceded to reinsurers was as follows:



|                             |  |                            |           
|---------------------------- |  | -------------------------- | ----------
|                             |  | Ceded PrincipalOutstanding
|Reinsurer:                   |  |                            |           
|Radian Asset Assurance Inc.  |  | $                          | 9,564,232 
|RAM Reinsurance Company Ltd. |  |                            | 7,379,569 
|Assured Guaranty Re Ltd.     |  |                            | 7,275,619 
|BluePoint RE.                |  |                            | 5,752,860 
|Assured Guaranty Corp        |  |                            | 4,984,281 
|Other                        |  |                            | 8,522,138 
|                             |  |                            |           
|Total                        |  | $                          | 43,478,699
|                             |  |                            |           

As of December 31, 2007, the Company had recoverables in excess of 3% of stockholders equity from
single reinsurers, as follows:



|                             |  |                  |        
|---------------------------- |  | ---------------- | -------
|                             |  | TotalRecoverable
|Reinsurer:                   |  |                  |        
|Radian Asset Assurance Inc.  |  | $                | 65,078 
|RAM Reinsurance Company Ltd. |  |                  | 39,471 
|Assured Guaranty Re Ltd.     |  |                  | 38,044 
|BluePoint RE.                |  |                  | 17,654 
|                             |  |                  |        
|Total                        |  | $                | 160,247
|                             |  |                  |        

The Companys insured gross and net principal and interest outstanding was $578,617,777 and $500,960,962,
respectively, as of December 31, 2007.



49



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



21. 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 the United Kingdom. Principal insured outstanding at December 31, 2007 by
state, net of reinsurance, was as follows:



|                           |  |                          |            
|-------------------------- |  | ------------------------ | -----------
|                           |  | Net PrincipalOutstanding
|California                 |  | $                        | 37,477,126 
|New York                   |  |                          | 22,275,797 
|Florida                    |  |                          | 16,910,078 
|Texas                      |  |                          | 13,047,209 
|Pennsylvania               |  |                          | 12,741,172 
|Illinois                   |  |                          | 12,270,735 
|New Jersey                 |  |                          | 10,032,445 
|Michigan                   |  |                          | 8,619,975  
|Washington                 |  |                          | 7,071,760  
|Ohio                       |  |                          | 6,589,090  
|All other states           |  |                          | 75,040,363 
|Mortgage- and asset-backed |  |                          | 70,648,377 
|International              |  |                          | 21,225,141 
|                           |  |                          |            
|Total                      |  | $                        | 313,949,268
|                           |  |                          |            



50



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



22. Commitments and Contingencies

Lease Obligations

The Company leases office space and equipment under operating lease agreements in the United
States, the United Kingdom and Australia. Rent expense under operating leases for the years ended December 31, 2007, 2006 and 2005 was $6,474, $4,319 and $3,631, respectively. Future payments associated with these leases are as follows as of
December 31, 2007:



|                                     |  |                                 |       
|------------------------------------ |  | ------------------------------- | ------
|                                     |  | Operating LeaseCommitmentAmount
|Year:                                |  |                                 |       
|2008                                 |  | $                               | 5,113 
|2009                                 |  |                                 | 6,253 
|2010                                 |  |                                 | 6,262 
|2011                                 |  |                                 | 6,242 
|2012                                 |  |                                 | 6,341 
|2013 and thereafter                  |  |                                 | 46,500
|                                     |  |                                 |       
|Total minimum future rental payments |  | $                               | 76,711
|                                     |  |                                 |       

In connection with the sale of FGIC Corp by GE Capital in 2003, 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, 2007:



|                                        |  |                               |      
|--------------------------------------- |  | ----------------------------- | -----
|                                        |  | Capital LeaseCommitmentAmount
|Year ending December 31:                |  |                               |      
|2008                                    |  | $                             | 1,391
|2009                                    |  |                               | 265  
|                                        |  |                               |      
|Total                                   |  |                               | 1,656
|Less interest                           |  |                               | 91   
|                                        |  |                               |      
|Present value of minimum lease payments |  | $                             | 1,565
|                                        |  |                               |      



51



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



23. 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 17). The components of other comprehensive income for the years ended December 31, 2007, 2006 and 2005 are as follows:



|                                                 |  |                              |        |   |     |   |         |                 |  |   |        |  
|------------------------------------------------ |  | ---------------------------- | ------ | - | --- | - | ------- | --------------- |  | - | ------ | -
|                                                 |  | Year Ended December 31, 2007 |       
|                                                 |  | Before TaxAmount             |        |   | Tax |   |         | Net ofTaxAmount | 
|Unrealized holding gains arising during the year |  | $                            | 35,030 |   |     | $ | (12,260 | )               |  | $ | 22,770 |  
|Reclassification of gains realized in net income |  |                              | (962   | ) |     |   | 336     |                 |  |   | (626   | )
|                                                 |  |                              |        |   |     |   |         |                 |  |   |        |  
|Unrealized gains on investments                  |  |                              | 34,068 |   |     |   | (11,924 | )               |  |   | 22,144 |  
|Foreign currency translation adjustment          |  |                              | 12,216 |   |     |   | (4,275  | )               |  |   | 7,941  |  
|Amortization of gain on interest rate lock       |  |                              | (20    | ) |     |   | 7       |                 |  |   | (13    | )
|                                                 |  |                              |        |   |     |   |         |                 |  |   |        |  
|Total other comprehensive income                 |  | $                            | 46,264 |   |     | $ | (16,192 | )               |  | $ | 30,072 |  
|                                                 |  |                              |        |   |     |   |         |                 |  |   |        |  
|                                                 | 
|                                                 |  | Year Ended December 31, 2006 |       
|                                                 |  | Before TaxAmount             |        |   | Tax |   |         | Net ofTaxAmount | 
|Unrealized holding gains arising during the year |  | $                            | 18,738 |   |     | $ | (6,559  | )               |  | $ | 12,179 |  
|Reclassification of 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 |  
|                                                 |  |                              |        |   |     |   |         |                 |  |   |        |  



52



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



23. Comprehensive Income (continued)



|                                                  |  |                              |         |   |     |   |                 |  |   |         |  
|------------------------------------------------- |  | ---------------------------- | ------- | - | --- | - | --------------- |  | - | ------- | -
|                                                  |  | Year Ended December 31, 2005 |        
|                                                  |  | Before TaxAmount             |         |   | Tax |   | Net ofTaxAmount | 
|Unrealized holding losses arising during the year |  | $                            | (36,426 | ) |     | $ | 12,699          |  | $ | (23,727 | )
|Reclassification of 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 | )
|                                                  |  |                              |         |   |     |   |                 |  |   |         |  

24. Quarterly Financial Information (Unaudited)



|                                                                                 |  |                    |         |              |            |         |                   |  |   |                  |   |  |                  |            |   |  |   |            |  
|-------------------------------------------------------------------------------- |  | ------------------ | ------- | ------------ | ---------- | ------- | ----------------- |  | - | ---------------- | - |  | ---------------- | ---------- | - |  | - | ---------- | -
|                                                                                 |  | Three Months Ended |         |              | Year Ended |        
|                                                                                 |  | March 31,2007      |         | June 30,2007 |            |         | September 30,2007 |  |   | December 31,2007 |   |  | December 31,2007 |           
|Gross direct and assumed premiums written                                        |  | $                  | 103,175 |              | $          | 124,976 |                   |  | $ | 122,268          |   |  | $                | 100,849    |   |  | $ | 451,268    |  
|Net premiums written                                                             |  |                    | 90,980  |              |            | 93,394  |                   |  |   | 93,917           |   |  |                  | 69,070     |   |  |   | 347,361    |  
|Net premiums earned                                                              |  |                    | 76,583  |              |            | 80,593  |                   |  |   | 74,619           |   |  |                  | 73,490     |   |  |   | 305,285    |  
|Net investment income and net realized gains                                     |  |                    | 38,033  |              |            | 38,723  |                   |  |   | 40,301           |   |  |                  | 41,875     |   |  |   | 158,932    |  
|Interest income-investments held by variable interest entity                     |  |                    | 11,357  |              |            | 8,755   |                   |  |   | 10,901           |   |  |                  | 10,678     |   |  |   | 41,691     |  
|Other income and net mark-to-market gains (losses) on credit derivative products |  |                    | 874     |              |            | (15,385 | )                 |  |   | (206,054         | ) |  |                  | (1,712,292 | ) |  |   | (1,932,857 | )
|Total revenues                                                                   |  |                    | 126,847 |              |            | 112,686 |                   |  |   | (80,233          | ) |  |                  | (1,586,249 | ) |  |   | (1,426,949 | )
|Losses and loss adjustment expenses                                              |  |                    | 1,182   |              |            | (5,388  | )                 |  |   | (2,031           | ) |  |                  | 1,233,012  |   |  |   | 1,226,775  |  
|Interest expense  debt held by variable interest entity                         |  |                    | 11,357  |              |            | 8,755   |                   |  |   | 10,901           |   |  |                  | 10,678     |   |  |   | 41,691     |  
|Underwriting expenses                                                            |  |                    | 28,753  |              |            | 23,403  |                   |  |   | 23,638           |   |  |                  | 20,216     |   |  |   | 96,010     |  
|Income (loss) before taxes                                                       |  |                    | 89,224  |              |            | 83,320  |                   |  |   | (114,649         | ) |  |                  | (2,863,098 | ) |  |   | (2,805,203 | )
|Net income (loss)                                                                |  |                    | 73,386  |              |            | 68,911  |                   |  |   | (65,295          | ) |  |                  | (1,885,896 | ) |  |   | (1,808,894 | )



53



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



24. Quarterly Financial Information (Unaudited) (continued)



|                                                                                 |  |                    |        |   |              |   |         |                   |  |                  |         |  |                  |         |   |  |   |         |  
|-------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ------------ | - | ------- | ----------------- |  | ---------------- | ------- |  | ---------------- | ------- | - |  | - | ------- | -
|                                                                                 |  | Three Months Ended |        |   | Year Ended   |  
|                                                                                 |  | March 31,2006      |        |   | June 30,2006 |   |         | September30, 2006 |  | December 31,2006 |         |  | December31, 2006 |        
|Gross direct and assumed 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 mark-to-market 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 |  

25. Subsequent Events

In June 2007, FGIC UK Ltd entered into a commitment agreement with Havenrock II Limited (Havenrock II), a special purpose vehicle created by IKB Deutsche Industriebank (IKB) for the sole purpose of the transaction, to issue a financial
guaranty policy in respect of up to $1.875 billion of high-grade and mezzanine ABS CDOs contained in a $2.5 billion reference portfolio (the Commitment Agreement), subject to FGIC UK Ltds rights and defenses and to the terms and
conditions of the Commitment Agreement.



54



---

FGIC Corporation and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands,
except per share amounts)



25. Subsequent Events (continued)

On March 12, 2008, FGIC and FGIC UK Ltd filed a lawsuit against IKB, Havenrock II, IKB Credit Asset Management (IKB CAM) and Calyon Credit Agricole CIB (Calyon). FGIC and FGIC UK Ltd allege in their complaint,
filed in the Supreme Court of the State of New York, that IKB and IKB CAM, through a series of fraudulent misrepresentations and omissions regarding IKBs financial condition and stability, induced FGIC UK Ltd to enter into the Commitment
Agreement. On March 17, 2008, Calyon issued proceedings in the High Court of England and Wales (Queens Bench Division, Commercial Court) against FGIC UK Ltd and Havenrock II seeking a declaration that the Commitment Agreement is valid and
enforceable against FGIC UK Ltd. Management believes that FGIC UK Ltd has meritorious claims and defenses and intends to vigorously pursue litigation to prove that the commitment to issue insurance under the Commitment Agreement is unenforceable.

In addition, management believes that, subsequent to year-end 2007, a party failed to perform certain responsibilities under the operative documents, and
consequently management believes that substantially all of the assets that could potentially have qualified for coverage by FGIC UK Ltd can no longer qualify and that FGIC UK Ltd therefore has no further obligation to insure those assets. As noted
in Note 11, approximately seventy-five percent of the Companys loss reserves at December 31, 2007 related to the Commitment Agreement; those reserves did not reflect the developments described above. Management is assessing whether the
loss reserve related to the Commitment Agreement needs to be adjusted in the future to reflect the impact of these developments; any such adjustment could be material.



55