SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 1996

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
            OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                         Commission File Number 1-14096

                              CapMAC Holdings Inc.
             (Exact name of registrant as specified in its charter)

             Delaware                                  13-3670828      
  (State or other jurisdiction of                   (I.R.S. Employer   
  incorporation or organization)                   Identification No.) 

                   885 Third Avenue, New York, New York 10022
          (Address of principal executive offices, including zip code)

                                 (212) 755-1155
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act:

          Title of each class          Name of each exchange on which registered
Common Stock, par value $.01 per share        New York Stock Exchange, Inc.

           Securities registered pursuant to section 12(g) of the Act:

                                      None

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

         The aggregate market value of voting stock, excluding treasury shares,
held by non-affiliates of the registrant at March 24, 1997 was $459,069,915
(based on the closing price of the registrant's shares on the New York Stock
Exchange on March 24, 1997, which was $27.75).

         At March 24, 1997, there were outstanding 16,543,060 shares of Common
Stock, par value $0.01 per share, of the registrant.

Documents Incorporated By Reference

     Portions of the registrant's definitive Proxy Statement, to be mailed to
stockholders, for the annual meeting of stockholders to be held on May 7, 1997
are incorporated by reference into Part III hereof.
<PAGE>

                                TABLE OF CONTENTS

                                                                   To be updated

                                                                          Page
                                                                          ----

Item 1   Business........................................................   2
Item 2.  Properties......................................................  33
Item 3.  Legal Proceedings...............................................  33
Item 4.  Submission of Matters to a Vote of Security Holders.............  33
Item 5.  Market for Registrant's Common Equity
         and Related Stockholder Matters.................................  34
Item 6.  Selected Financial Data.........................................  35
Item 7.  Management's Discussion and Analysis
         of Financial Condition and Results of Operations................  38
Item 8.  Financial Statements and Supplementary Data.....................  47
Item 9.  Changes in and Disagreements with Accountants
         on Accounting and Financial Disclosure..........................  75
Item 10. Directors and Executive Officers of the Registrant..............  76
Item 11. Executive Compensation..........................................  76
Item 12. Security Ownership of Certain Beneficial Owners
         and Management..................................................  76
Item 13. Certain Relationships and Related Transactions..................  76
Item 14. Exhibits, Financial Statement Schedules,
         and Reports on Form 8K..........................................  77


                                        1
<PAGE>

                                     Part I

Item 1. Business

General

            CapMAC Holdings Inc. ("Holdings" or the "Company") is a holding
company which provides financial guaranty insurance, principally of asset-backed
obligations, through its wholly owned subsidiary Capital Markets Assurance
Corporation ("CapMAC") and advisory and structuring services through its wholly
owned subsidiaries CapMAC Financial Services, Inc. and CapMAC Financial Services
(Europe) Ltd. (collectively, "CFS"), primarily in connection with transactions
in which CapMAC issues guarantees. Holdings is also the parent of CapMAC
Investment Management, Inc. ("CIM"), a money management subsidiary incorporated
in 1996 to sponsor and manage specialized investment funds to be marketed to
institutional investors and high-net worth individuals in the U.S. and abroad.

            CapMAC's claims-paying ability is rated triple-A by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. ("S&P"), Duff & Phelps Credit Rating
Co. ("DCR") and Nippon Investors Service, Inc., a Japanese rating agency. CapMAC
focuses on the asset-backed market while participating on a limited basis in
selected transactions in the primary municipal market. As of December 31, 1996,
obligations backed by consumer, trade and corporate receivables and other
taxable obligations constituted approximately 96% of CapMAC's portfolio of
insured obligations while municipal and government obligations constituted
approximately 4%.

            Citicorp (through its subsidiary, Citibank (New York State)
established the predecessor to the Company ("Original Holdings") in 1987 to
focus primarily on the taxable structured asset-backed market. The Company was
previously called CapMAC Acquisition Corp. and is the successor by merger to
Original Holdings. The merger occurred on June 26, 1992 in connection with the
purchase from Citicorp of Original Holdings by a group of institutional
investors together with the Company's management and certain employees (the
"Acquisition"). CapMAC Acquisition Corp. then changed its name to CapMAC
Holdings Inc.

            The Company raised additional equity capital through two private
placements and an initial public offering in 1995. In July 1995, the Company
sold 500,001 shares of newly issued common stock to ORIX USA Corporation. The
net proceeds of $9 million were contributed to CapMAC. In December 1995, the
Company completed the initial public offering of its common stock, in which the
Company sold 2,500,000 newly issued shares and certain members of its initial
group of investors sold 1,766,437 shares. Contemporaneously with the closing of
the initial public offering, the Company sold in a private placement an
additional 500,000 newly issued shares to Centre Reinsurance Limited ("Centre
Re"). The Company raised approximately $54.7 million of net proceeds from the
initial public offering and the sale to Centre Re, of which $50 million were
contributed to CapMAC. In July 1996, certain of the Acquisition investors sold
3,737,500 shares in a registered secondary public offering.

            The Company is organized into five separate business units--Credit
Enhancement, Financial Engineering, Latin America, Project Finance and
Specialized Funds Management, reflecting both the Company's current business
operations and the anticipated focus of future business growth. The Company's
specialized funds management business is conducted through its wholly-owned
subsidiary, CIM. In addition, the Company has combined its overall marketing
efforts under a global marketing unit, which is part of CapMAC Financial
Services, Inc. To support its business and marketing efforts, the


                                        2
<PAGE>

Company has four support units- Finance/Distribution, Research and Development,
Risk Management and Legal/Administration.

            Financial guaranty insurance written by CapMAC generally guarantees
to the holder of the guaranteed obligation the timely payment of principal and
interest in accordance with the obligation's original payment schedule. In the
case of a default on the insured obligation, payment under the insurance policy
generally may not be accelerated by the holder without the consent of CapMAC,
even though the underlying obligation may be accelerated.

            The structured asset-backed transactions guaranteed by CapMAC
include securities backed by trade and lease receivables, automobile loans,
credit card receivables, home equity loans, assets securing guaranteed
investment contracts issued by insurance companies, health care receivables,
residential mortgages and real estate tax lien receivables. CapMAC has also
insured securitizations backed by senior bank loans, sovereign and corporate
bonds of emerging market countries, premium receivables of property/casualty
insurance companies, and obligations of counterparties under hedging contracts
such as interest rate swaps and obligations of special purpose derivative
product subsidiaries of financial institutions. In connection with the
activities of the recently formed Project Finance business unit, it is
anticipated that CapMAC will insure obligations backed by revenues to be
generated from infrastructure and project financings, such as toll roads and
power plants, located primarily outside of the United States.

            For primary issues, the Company works with issuers to structure
asset-backed transactions into investment grade obligations which it believes
would satisfy investment grade criteria of the rating agencies before the
addition of CapMAC's guarantee. The Company generally relies on a diversified
pool of underlying assets and structural and first loss protections to minimize
credit and legal risks. Protection to CapMAC against losses can be provided by
excess collateral, cash reserve accounts, and third party credit support. The
amount of such protection is sized to cover expected credit losses on the
underlying collateral pool, even under adverse scenarios. Consequently, CapMAC
insured issues are structured to meet a "zero-loss" underwriting standard.
Unlike underwriting used in connection with life, property and casualty and
other insurance products, where a certain level of loss is expected for a
portfolio of business written, "zero-loss" underwriting is a method of
underwriting in which no losses are expected on the insurance policy at the time
it is issued, based on worst-case assumptions.

            The Company is also entering into a variety of other business
activities through its Financial Engineering business unit which may or may not
be related to the provision of financial guarantee insurance by CapMAC. These
include providing advisory services to specialty finance companies and, under
certain circumstances in connection with services provided by the Company,
making equity investments in such companies; creating and enhancing synthetic
investment products for investors; and participating in the production and
distribution of asset repackaging and arbitrage products for investors, such as
collateralized bond and loan obligations. These activities and investments have
a higher risk/reward profile than the provision of financial guarantee insurance
or advisory and structuring services. It is anticipated that investments in
Financial Engineering activities in general, and any equity investments of the
Company made in connection with such activities in particular, will generate
long-term revenue growth. However, the amount and timing of such revenue, and
the Company's success in these activities and investments, is uncertain.
Investments above a threshold amount are subject to review by a committee of the
Board of Directors.

            The Company also has a secondary market insurance program in which
CapMAC provides


                                        3
<PAGE>

guarantees of securities, primarily utility first mortgage bonds and municipal
obligations, that are already issued and trading in the secondary markets.

            CapMAC issues both full and partial guarantees of securities. Full
guarantees provide a guarantee of all payments of principal and interest on the
insured security. Partial guarantees provide a guarantee of payments of
principal and interest on a security up to a specified percentage (less than
100%) of the outstanding principal amount of the security.

Industry Overview

            The securitization market has continued to expand every year since
1987, as measured both by the aggregate principal amount of asset-backed
obligations issued and the variety of assets which have been securitized. While
mortgages, home equity loans, credit card receivables and auto loans constitute
the largest percentage of assets backing asset-backed securities, the variety of
asset-backed obligations available to investors has continued to expand
dramatically, as corporations, financial institutions and even state and local
governments have sought to access the capital markets at attractive interest
rates by securitizing their respective assets and utilizing the techniques of
structured finance.

            The principles of securitization and structured finance have been
increasingly applied in overseas markets, although development in particular
countries has varied due to the sophistication of the capital markets and the
impact of financial regulatory requirements, accounting standards and legal
systems. Recently, securitization has been used to finance assets and
originators located in Europe, Japan, Hong Kong, and in various other Asian
countries, as well as in South America. Foreign issuers in countries have
increasingly applied the principles of structured finance to issue obligations
that are rated higher than the rating ceiling imposed by the sovereign debt
ratings of the countries in which they are domiciled, a trend which management
believes will continue, albeit at varying rates in each region and country.

            Asset-backed obligations are typically issued in connection with
structured financings or securitizations, in which the securities being issued
are secured by or payable from a specific pool of assets having an ascertainable
cash flow and held by a special purpose issuing entity. While most asset-backed
obligations are secured by or represent interests in pools of assets, such as
residential and commercial mortgages and credit card and auto loan receivables,
financial guaranty insurance companies have also insured asset-backed
obligations secured by one or a few assets, such as utility first mortgage
bonds, project finance bonds and multifamily or commercial real estate. In
addition, so-called "future-flow" transactions, where the obligations are backed
by financial assets generated after the date on which the obligation is issued,
are often included in the general category of asset-backed obligations.

            In general, asset-backed obligations are payable only from cash flow
generated by a pool of assets and take the form of either "pass-through"
obligations, which represent interests in the related assets, or "pay-through"
obligations, which generally are debt obligations collateralized by the related
assets. Both types of asset-backed obligations typically have the benefit of
overcollateralization or one or more forms of credit enhancement to cover credit
risks associated with the related assets.

            The following table sets forth certain industry information relating
to selected asset-backed obligations issued for the periods indicated:


                                        4
<PAGE>

                New U.S. Issuance of Asset-Backed Obligations (1)

                                                  Year Ended December 31,
                                           -------------------------------------
                                           1996    1995    1994    1993    1992 
--------------------------------------------------------------------------------
                                                      ($ in billions)
Credit Cards                              $ 46.9  $ 47.0  $ 31.9  $ 19.6  $ 15.8
Auto Loans                                  32.1    24.7    17.5    24.8    23.2
Home Equities                               36.3    16.1    10.1     7.1     6.2
Manufacturing Housing                        7.9     5.6     4.3     2.5     2.8
Other (2)                                   28.2    14.4    12.0     5.9     3.2
--------------------------------------------------------------------------------
Public Asset-Backed Insurance              151.4   107.8    75.8    59.9    51.2
Private Asset-Backed Insurance              22.2    17.9    12.7    13.1    11.5
Asset-Backed Commercial Paper              152.0    99.0    71.0    58.0    47.0
--------------------------------------------------------------------------------
                  Total                   $325.6  $224.7  $159.0  $131.0  $109.7
================================================================================

----------
(1)   Sources: For data on public asset-backed issuance, Dean Witter
      Asset-Backed Securities Reference Guide, Year Ended 1992 and Year Ended
      1993 and MCM CorporateWatch (data for 1994-1996); for data on asset-backed
      commercial paper, Goldman Sachs, "Overview of the Commercial Paper
      Market," February 1997; and for data on private asset-backed issuance,
      Securities Data Co., as supplemented by CapMAC estimates.

(2)   Including (but not limited to) obligations backed by student loans;
      recreational vehicle loans; boat loans; unsecured consumer loans;
      agricultural equipment loans; loans to small businesses; various
      equipment, computer, rolling stock and aircraft leases; and trade and real
      estate tax receivables.

            Based on data compiled by the Association of Financial Guaranty
Insurers, the Company wrote approximately 30% of the financial guaranty
insurance directly written (excluding business assumed through reinsurance) by
financial guaranty insurers during 1995 on taxable asset-backed obligations.
Statistics for 1996 were unavailable as of the date of this report.

            The rapid growth in the issuance of asset-backed obligations up to
1995 was due in part to increased capital requirements of commercial banks and
insurance companies and the contraction of credit extended to corporations.
Banks responded to increased capital requirements by selling certain of their
assets, such as credit card receivables and automobile loans, in securitized
structures to the financial markets. Finance companies were established which
utilized securitization as their primary source of funding. As the market for
asset-backed obligations has expanded and the cost to issuers has fallen, many
corporations found securitization of their assets to be a funding alternative
increasingly less costly than traditional forms of borrowing. The continuation
of the growth trend through 1996 appears to be a function of the increased
acceptance of securitization as an efficient financing technique which has
benefits for both issuers and investors, rather than a response to specific
changes in regulatory capital requirements or general credit market conditions.
The general trend in the asset-backed market has been that investors demand
higher premiums for financing novel assets or new issuers, and that this
interest rate premium is reduced as the market becomes more familiar with the
assets or the issuer, as applicable. Financial guaranty insurers tend to have a
higher rate of involvement with these new issuers and assets.


                                        5
<PAGE>

            Asset-backed obligations generally entail two forms of risks: asset
risk, which is related to the amount and quality of asset coverage; and
structural risk, which is related to the extent to which the transaction
structure protects the interests of the investors (and therefore the insurer).
In general, the amount and quality of asset coverage required is determined by
the historical performance of the assets. The projected future performance of
the underlying pool of assets (for example, loss and delinquency rates, yield
and the rate at which payments are received on the assets) will generally
determine whether the amount of overcollateralization or other credit
enhancement ultimately was sufficient to protect investors (and therefore the
insurer) against adverse asset performance. The ability of the servicer of the
assets to properly service and collect the underlying assets often is a factor
in determining future asset performance.

            Structural risks addressed by asset-backed transactions include
bankruptcy and tax risks. Asset-backed structures are usually designed to
protect the investors (and therefore the insurer) from the bankruptcy or
insolvency of the entity that originated the underlying assets as well as from
the bankruptcy or insolvency of the servicer of those assets (which may be
receiving the cash payments from the underlying obligors). Related issues that
often raise concerns are whether the sale of the assets by the originator to the
issuer of the asset-backed obligations would be respected in the event of the
bankruptcy or insolvency of the originator and whether the servicer of the
assets may be permitted or required to delay the remittance to investors of any
cash collections held by it at, or received by it after, the time it becomes
subject to bankruptcy or insolvency proceedings. In addition, because the cash
flow generated by the underlying assets is the primary source for the repayment
of the asset-backed obligations, asset-backed transactions are structured to
take into account the tax status of the issuing entity and the tax
characterization (debt or equity) of the asset-backed obligations which are
issued. The Company endeavors to address these risks through its credit
underwriting guidelines, standards and procedures.

            Municipal obligations comprise bonds, notes and other evidences of
indebtedness issued by states and their political subdivisions (such as
counties, cities, or towns), utility districts, public universities and
hospitals, public housing and transportation authorities and other public and
quasi-public entities. Municipal obligations are supported by the issuer's
taxing power in the case of general obligation bonds, or by the issuer's ability
to impose and collect fees and charges for public services or specific projects
in the case of most special revenue bonds. Although insurance of municipal
obligations represents the largest portion of the overall financial guaranty
insurance business, as of December 31, 1996 it forms only 4% of the Net Par
insured by CapMAC. "Net Par" is the amount of principal or other obligations
(excluding the interest portion) guaranteed under an insurance policy or a
reinsurance agreement, net of ceded reinsurance. CapMAC's share of the market
for the insurance of directly issued municipal bonds was approximately 0.3% in
1995 and is estimated to be less than 0.4% in 1996.

            The Company's Project Finance business unit has been formed to
provide insurance for obligations backed by infrastructure and other project
financings. These obligations are subject to risks different from asset-backed
and municipal obligations, insofar as repayment of the obligation guaranteed
depends on the ability of the project to produce and sell its' product, such as
power or a commodity, or collect fees from the users of the project, in the case
of toll roads. In addition, certain projects are subject to risks relating to
construction and/or, if financed is outside of the United States, foreign
currency. These risks are addressed in each transaction though credit
underwriting guidelines, standards and procedures similar to those applied to
asset-backed and municipal obligations, and with respect to certain risks, third
party credit support. For example, construction risk may be mitigated with
letters of credit or corporate guarantees and currency risk may be addressed
through a currency swap.


                                        6
<PAGE>

            Generally, financial guaranty insurance companies have increasingly
sought to diversify their product base as the market for the insurance of
traditional asset-backed and municipal transactions has become more competitive.
This diversification has been in the form of an expansion of the core businesses
and in the provision of nontraditional new products. The overall trend has been
for financial guarantors of asset-backed obligations to insure a higher
proportion of obligations backed by new asset classes than obligations backed by
assets which have been securitized in large quantities and are therefore
familiar to investors. Financial guarantors generally also guaranty a higher
proportion of obligations issued by issuers who are unfamiliar to asset-backed
investors. This is because investors particularly value the additional security
provided by a financial guarantor when either the asset securitized or the
issuer is unfamiliar.

Underwriting Procedures and Guidelines

            CapMAC specializes in the credit enhancement of structured
asset-backed obligations. Management believes that these generally represent a
lower risk of loss than the credit enhancement of obligations which are neither
backed by a dedicated pool of assets nor structured to protect against
bankruptcy risks because such obligations have at least some of the following
characteristics: (i) they typically involve a large, diverse pool of assets;
(ii) they employ structural protections which segregate the underlying assets
from the credit risk of the seller/servicer; and (iii) they have a first loss
protection built into the transaction, the amount of which is based on the
historical performance of the assets and is usually in the form of (a)
overcollateralization or cash collateral/reserves, (b) retention of risk by the
seller/servicer or (c) assumption of risk by a third party other than CapMAC.
While not all obligations guaranteed by CapMAC have all of the protective
characteristics described above, substantially all obligations employ at least
some of them. Structured asset-backed obligations are typically subject to
independent review and oversight by a variety of third parties (rating agencies,
underwriters, reinsurers, liquidity banks and legal counsel).

            The Company has developed strict and highly specific underwriting
procedures for the various types of obligations CapMAC insures, consistent with
the financial guaranty industry's standard of "zero-loss" underwriting. The
Company's underwriting policies, procedures and guidelines outline the process
for analyzing, approving and monitoring all prospective and closed transactions.
The underwriting policies and procedures encompass the approval process and the
portfolio limits.

            Each potential transaction is managed by the appropriate business
unit--Financial Engineering, Credit Enhancement, Project Finance or Latin
America. As transactions are assigned to each business unit, teams are
established consisting of members of that unit and/or other individuals with the
appropriate expertise within the Company.

            A formal written analysis is prepared and is included in the
presentation by the transaction team to CapMAC's Underwriting Committee (the
"Underwriting Committee"), which must approve all transactions other than
certain transactions for approved programs. These approved programs may be
approved outside of the Underwriting Committee by a committee of three
individuals consisting of the head of exposure management and at least two
members of the Underwriting Committee. The Underwriting Committee is comprised
of 12 senior underwriting officers, including the Chief Underwriting Officer and
the Chairman/Chief Executive Officer. In addition to the Underwriting Committee,
the Underwriting Committee of CapMAC's Board of Directors must approve all
transactions which have an aggregate exposure greater than a specified limit or
which present certain risk issues. Upon approval by the


                                        7
<PAGE>

applicable underwriting committees, the transaction team is responsible for
documenting and closing the transaction.

            While the underwriting process necessarily varies depending on the
transaction, all evaluations for structured asset-backed transactions generally
include: a review of the transaction structure, an asset analysis, a financial
review of the entities involved (primarily the issuer and/or seller/servicer),
on-site due diligence and visits with management of the significant entities.

            The Company has developed a pricing model that for each transaction
takes into account various factors, such as estimated prepayments on consumer
transactions, the level of capital required by insurance regulators and the
rating agencies, the estimated incremental expenses to underwrite and monitor
the transaction, an allocation of general and administrative expenses, a
statistically determined assessment of probable losses based on industry
experience, and the impact of any reinsurance and taxes. Using this pricing
model, the earnings from the transaction and the transaction's projected return
on capital are calculated.

            Each transaction is also reviewed by the Risk Management support
unit, specifically the Portfolio Manager, in the context of CapMAC's existing
insured portfolio to ensure compliance with general guidelines. Regulatory and
rating agency guidelines generally limit the amount of exposure that CapMAC can
retain with respect to any transaction guaranteed, and CapMAC sets internal
limits on its exposure, such as limits for each transaction and the type of
assets securitized. CapMAC also actively uses reinsurance to manage its
exposure.

            On occasion, CapMAC reinsures other financial guaranty insurers.
CapMAC provides such reinsurance only on a transaction-by-transaction basis
pursuant to the underwriting standards and procedures utilized in direct
writings.

Monitoring Procedures

            CapMAC monitors each transaction on an ongoing basis. The
responsibility for monitoring completed transactions rests primarily with the
Exposure Management Group within Risk Management, which reports to the Chief
Underwriting Officer. Typically, an officer from the Exposure Management Group
is assigned to each transaction and is responsible for continuous monitoring of
events and conditions which could affect the transaction until the end of the
term of the Company's insurance policy.

            The culmination of the formal and informal monitoring plus periodic
reviews of the asset pools securing CapMAC's financial guaranty policy, if
appropriate, is a formal "Annual Review" which summarizes how the transaction
has performed since the last review. These reviews are approved by the
designated officer(s) of the Risk Management support unit and a member of the
Underwriting Committee. If the term of a transaction is to be extended or the
amount of the policy increased, then the review is formally presented and
approved by the Underwriting Committee or, under certain limited circumstances,
by the manager of the applicable business unit and two members of the
Underwriting Committee.

            If a transaction is not performing according to expectations, or an
external event has occurred which had or may have an adverse effect, the
Exposure Management Group performs an "Event Review." An Event Review identifies
the condition or event giving rise to the Event Review, analyzes its effect on
the transaction, and recommends corrective action or special monitoring.


                                        8
<PAGE>

            Changes in condition can range from a deterioration in the asset
pool performance, as measured by delinquencies, losses, and prepayments or by a
change in servicer management ability, such as faulty reports. Additional
reasons for special monitoring include deterioration in the financial condition
of any significant party in the transaction (e.g., seller/servicer, trustee,
third party guarantor, major obligors) and adverse regulatory, political,
economic or environmental events.

            Upon completion of an Event Review, the Underwriting Committee
approves an action plan, which may include exercising CapMAC's rights under the
transaction documentation. Such rights vary but may include replacing the
servicer of the assets, liquidating the program or taking other actions to
protect CapMAC's collateral.

            Placing a transaction on "special monitoring" does not necessarily
imply an expectation of potential loss, but rather is part of the program of the
Exposure Management Group to identify specific transactions where there is a
change from the initial conditions under which the transaction was underwritten.

Portfolio of Insured Obligations

            CapMAC uses several methods to measure and report exposure and
business volume under its financial guaranty policies. One method used to
determine exposure under a policy is the principal amount guaranteed under the
policy ("Par"), since CapMAC's liability for principal under the policy is
limited to the face amount of the policy. For example, if CapMAC issues a 10%
guarantee on a $100 million par amount asset-backed security, the Par exposure
is $10 million. In addition, for statutory and other purposes, CapMAC measures
the principal plus interest guaranteed under its policies, or statutory
principal and interest ("Statutory P&I"). In the above example, the Statutory
P&I is $10 million plus interest based upon the terms of the policy, since that
is the maximum amount of claims that CapMAC will have to pay. For purposes of
measuring certain business volume, CapMAC uses the principal amount of the
obligation that is supported by the CapMAC policy, whether a full or partial
guarantee; this is referred to as "Inforce Par." In the example above, the
Inforce Par would be reported as $100 million.

            Reinsurance that meets certain regulatory and rating agency
requirements is used to reduce exposure. CapMAC reports Par and Statutory P&I
exposure both before ("Gross") and after ("Net") giving effect to reinsurance.
The following table shows CapMAC's policies outstanding as of December 31, 1996,
1995 and 1994.


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<PAGE>

                     Insured Portfolio Policies Outstanding

                                                   Year Ended December 31,
                                       -----------------------------------------
($ in millions)                              1996           1995           1994
--------------------------------------------------------------------------------
Inforce Par (1)                            $42,001        $32,278        $23,578
Net Par (2)                                 19,655         12,628          9,397
Net Statutory P&I (3)                       23,311         15,138         10,838
--------------------------------------------------------------------------------

----------
(1)   Inforce Par - the full amount of principal, commitment or other
      obligations (excluding interest portion) of the securities or obligations
      in respect of which an insurance policy or a reinsurance agreement has
      been issued, whether or not the full amount is guaranteed by such policy
      or agreement.

(2)   Net Par - the amount of principal or other obligations (excluding interest
      portion) guaranteed under an insurance policy or a reinsurance agreement,
      net of ceded reinsurance.

(3)   Net Statutory P&I - the amount of principal or other obligations and
      interest guaranteed under an insurance policy or a reinsurance agreement,
      net of ceded reinsurance, determined in accordance with rules and
      procedures prescribed or permitted by state insurance regulatory
      authorities.

            Net Par is lower than Inforce Par because exposure is reduced due to
ceded reinsurance and because of the significant portion of partial guarantees
issued by CapMAC. At December 31, 1996, approximately 47% of Inforce Par
constituted full (100%) guarantees and the remaining 53% was associated with
partial guarantees. The following table displays the insured portfolio policies
written for the years ended December 31, 1996, 1995 and 1994:

                       Insured Portfolio Policies Written

                                                Year Ended December 31,
                                    --------------------------------------------
($ in millions)                         1996            1995            1994
--------------------------------------------------------------------------------
Inforce Par                           $19,559(1)      $27,069(2)      $15,685(3)
Net Par                                11,742          15,769           8,186
Net Statutory P&I                      13,511          17,040           8,871
--------------------------------------------------------------------------------

----------
(1)   Inforce Par written in 1996 included the issuance of a guarantee on a
      large commercial paper conduit and the renewal of two partial guarantees
      on large asset-backed commercial paper conduits. If these guarantees were
      excluded, Inforce Par written would have been $14,309.

(2)   Inforce Par written in 1995 included the issuance of a guarantee with
      respect to the assets held by an asset-backed investment vehicle and the
      renewal of partial guarantees on two large commercial paper conduits. If
      these guarantees were excluded, Inforce Par written would have been
      $12,569.


                                       10
<PAGE>

(3)   Inforce Par written in 1994 included the issuance of partial guarantees on
      two large asset-backed commercial paper conduits. If these partial
      guarantees were excluded, Inforce Par written would have been $11,536.

            The Company's management tracks the geographic distribution of its
insured obligations using a methodology developed internally. Management
believes that economic deterioration within one state or region will have less
of an impact on structured obligations backed by diversified pools of assets
located in such state or region and having significant first loss protection
than on non-structured obligations of a single issuer. Furthermore, in the case
of collateral pools backed by corporate obligations, the scope of an
originator's or corporate obligor's business may, if diversified geographically,
minimize the risk due to the economic deterioration in a state or region.
Consequently, the Company's management considers geographic exposure to be less
meaningful for structured obligations than for municipal or other single issuer
obligations.

            In reporting geographic exposure associated with structured
asset-backed securities, CapMAC looks at the underlying collateral pool. If the
pool consists of corporate obligations with no clear concentration in a
particular state or region, then the transaction will be assigned to a category
called "nationally diversified corporate assets." For collateral pools of
consumer obligations, the transaction will be assigned to a category called
"nationally diversified consumer assets" provided that no more than 20% of the
collateral is associated with a particular state and provided that no more than
40% of the collateral falls into a particular region of states. If these
limitations are exceeded, then the entire transaction will be assigned to
specific states depending on the distribution of the underlying collateral.


                                       11
<PAGE>

The following table sets forth the geographic distribution of CapMAC's insured
portfolio in terms of Net Par as of December 31, 1996, 1995 and 1994:

                                Insured Portfolio
                             Geographic Distribution
                             Net Par Outstanding(1)
                                 ($ in millions)

                               -------------------------------------------------
State/Region                           1996            1995            1994
--------------------------------------------------------------------------------
Nationally Diversified
 Corporate Assets               $ 4,750   24.2%  $ 2,064   16.3%  $2,023   21.5%

Nationally Diversified
 Consumer Assets                  4,263   21.6     2,197   17.4    1,121   11.9

California                        1,736    8.8     1,257   10.0    1,019   10.8
New York                          1,013    5.2       810    6.4      769    8.2
New Jersey                          406    2.1       236    1.9      223    2.4
Florida                             395    2.0       285    2.3      203    2.2
Texas                               351    1.8       299    2.4      117    1.3
Maryland                            348    1.8       356    2.8      326    3.5
Pennsylvania                        334    1.7       301    2.4      276    2.9
Virginia                            330    1.7       300    2.4      159    1.7
Ohio                                150    0.8       154    1.2      199    2.1
Other U.S. (2)                    3,126   15.8     2,568   20.2    1,745   18.5
Non-U.S. (2)                      2,453   12.5     1,801   14.3    1,217   13.0
--------------------------------------------------------------------------------
                  Total         $19,655  100.0%  $12,628  100.0%  $9,397  100.0%
================================================================================

----------
(1)   The geographic information presented above is based on the latest such
      data available to the Company. Such data for asset-backed transactions is
      based on information received from the seller/servicer and therefore may
      not necessarily be the actual distribution as of the above indicated
      dates.

(2)   No state or country in these categories accounts for more than 2% of total
      Net Par outstanding.


                                       12
<PAGE>

            The table below shows the implied credit quality of CapMAC's insured
portfolio, where credit quality is assessed without giving effect to CapMAC's
insurance policy. Rating assessments are determined based on an assessment from
one of the U.S. rating agencies or by CapMAC's own evaluation where such
assessments have not yet been received. The proposed transaction is then
evaluated thoroughly to ensure that it meets CapMAC's underwriting/credit
standards. Each accepted transaction undergoes continuous review to ensure that
no material changes occur which would affect the quality of the transaction.

                                Insured Portfolio
                         Distribution by Credit Quality
                               Net Par Outstanding
                                 ($ in millions)

                                             Year Ended December 31,
                             ---------------------------------------------------
                                      1996             1995           1994
--------------------------------------------------------------------------------
AAA                             $   898    4.6%  $   363    2.9%  $  166    1.8%
AA                                1,064    5.4       636    5.0      453    4.8
A                                 4,053   20.6     3,145   24.9    2,122   22.6
BBB                              13,511   68.7     8,318   65.9    6,640   70.7
Non-investment grade                129    0.7       166    1.3       16    0.1
--------------------------------------------------------------------------------
                  Total         $19,655  100.0%  $12,628  100.0%  $9,397  100.0%
================================================================================

            The obligations insured by CapMAC are divided into three general
categories: consumer receivables, trade/corporate receivables and
municipal/government obligations.

            Obligations insured by CapMAC and primarily backed by consumer
receivables include pass-through and pay-through securities, commercial paper
obligations and other, more highly structured products. The consumer receivables
backing such obligations include automobile loans and leases, credit card
receivables, home equity loans, recreational vehicle loans, residential mortgage
loans, student loans and other consumer obligations.

            Obligations insured by CapMAC and primarily backed by
trade/corporate receivables include obligations collateralized by corporate debt
securities, corporate loans and other corporate receivables and other products
underwritten primarily on the basis of the cash flow or market value of the
assets dedicated to the payment of the insured obligations. These assets include
corporate bonds, trade receivables, equity securities, securities which are
backed by senior bank loans, utility first mortgage bonds and other assets which
are neither consumer receivables nor municipal/government obligations. CapMAC
classifies as trade/corporate receivables insurance issued by it to guarantee
counterparty risk in areas such as interest rate swaps and special purpose
derivative products subsidiaries of financial institutions and insurance issued
which guarantees payment of previously issued bonds at a stated maturity date.

            Obligations backed by municipal/government obligations insured by
CapMAC include, with respect to municipal obligations, general obligation bonds,
housing revenue bonds, municipal utility revenue bonds, health care revenue
bonds, transportation revenue bonds, tax-backed revenue and lease


                                       13
<PAGE>

bonds and, with respect to government obligations, bonds of public and
quasi-public agencies of the United States, obligations of local and national
governments outside of the United States and obligations relating to
infrastructure financings.

            The following table displays the insured portfolio breakdown by type
of underlying obligation insured by CapMAC in terms of Net Par outstanding as of
December 31, 1996, 1995 and 1994:

                                Insured Portfolio
                        By Type of Underlying Obligation
                               Net Par Outstanding
                                 ($ in millions)

                                              Year Ended December 31,
                              --------------------------------------------------
                                      1996             1995            1994
--------------------------------------------------------------------------------
Consumer Receivables            $10,362   52.8%  $ 6,959   55.1%  $4,740   50.4%
Trade/Corporate
Receivables                       8,479   43.1     4,912   38.9    4,039   43.0
Municipal/Government
Obligations                         814    4.1       757    6.0      618    6.6
--------------------------------------------------------------------------------
                  Total         $19,655  100.0%  $12,628  100.0%  $9,397  100.0%
================================================================================


                                       14
<PAGE>

            The following table provides a further breakdown by category of
asset, measured by Net Par outstanding as of December 31, 1996.

                                Insured Portfolio
                              By Category of Asset
                               Net Par Outstanding
                             As of December 31, 1996
                                 ($ in millions)

Category of Asset                                    Net Par     %    Asset Type
--------------------------------------------------------------------------------
Domestic:
Home Equity Loans and Residential Mortgages         $ 6,176    31.4    Consumer
Other Corporate                                       2,769    14.1    Corporate
Overcollateralized Corporate Pools                    2,183    11.1    Corporate
Credit Cards                                          1,680     8.5    Consumer
Auto Loans                                            1,135     5.8    Consumer
Other Consumer                                        1,028     5.2    Consumer
Noncollateralized Corporate Obligations                 707     3.6    Corporate
Utilities                                               668     3.4    Corporate
Municipal/Government                                    647     3.3    Municipal
Recreational Vehicle and Marine                         120     0.6    Consumer
--------------------------------------------------------------------------------
      Subtotal                                      $17,113    87.0
--------------------------------------------------------------------------------
International:
Other Corporate                                       1,830     9.3    Corporate
Overcollateralized Corporate Pools                      312     1.6    Corporate
Other Consumer                                          211     1.1    Consumer
Sovereign                                               166     0.8    Sovereign
Residential Mortgages                                    12     0.1    Consumer
Noncollaterlized Corporate Obligations                   11     0.1    Corporate
--------------------------------------------------------------------------------
      Subtotal                                      $ 2,542    13.0
--------------------------------------------------------------------------------
          Total                                     $19,655   100.0%
================================================================================


                                       15
<PAGE>

            The table below shows distribution of CapMAC's insured portfolio by
size of transaction insured on a Net Par basis as of December 31, 1996:

                                Insured Portfolio
                         by Size of Transaction Insured
                               Net Par Outstanding
                             As of December 31, 1996

                                Number of     Percentage              Percentage
($ in millions)               Transactions     of Total     Net Par    of Total
--------------------------------------------------------------------------------
Greater than $200                  23            3.8%      $ 8,076       41.1%
$101 - $200                        28            4.6         3,967       20.2
$51-$100                           50            8.2         3,799       19.3
$25-$50                            56            9.2         1,999       10.2
Less than $25                     450           74.2         1,814        9.2
--------------------------------------------------------------------------------
      Total                       607          100.0%      $19,655      100.0%
================================================================================

            The remaining weighted average life based upon Net Par of CapMAC's
insured portfolio as of December 31, 1996 was approximately 6.4 years, which
reflects CapMAC's focus on asset-backed securities. Financial guarantee
insurance companies which focus on the credit enhancement of municipal
obligations have insured portfolios with a weighted average life that is
typically longer than CapMAC's portfolio. The following table sets forth the
estimated terms to maturity of CapMAC's policies as of December 31, 1996, 1995
and 1994:

                                Insured Portfolio
             Estimated Terms to Maturity of Insured Obligations (1)
                                 ($ in millions)

                                                        Year Ended December 31,
                                             -----------------------------------
Estimated Terms to Maturity                            1996      1995      1994
--------------------------------------------------------------------------------
Due in five years or less                             $10,743   $ 6,163   $5,861
Due after five years through ten years                  6,258     4,067    1,789
Due after ten years through fifteen years                 916     1,002      948
Due after fifteen years through twenty years              399       384      246
Due after twenty years                                  1,339     1,012      553
--------------------------------------------------------------------------------
      Total                                           $19,655   $12,628   $9,397
================================================================================


                                       16
<PAGE>

(1)   Based on estimates by the issuers of the insured obligations as of the
      original issuance dates of such obligations. Actual maturities could
      differ from the contractual maturities because borrowers in certain
      issuances have the right to call or prepay certain obligations with or
      without call or prepayment penalties.

Loss Reserves

            CapMAC maintains reserves in an amount believed by its management to
be sufficient to pay its estimated ultimate liability for losses and loss
adjustment expenses with respect to obligations it has insured. The reserves
established under Generally Accepted Accounting Principles ("GAAP") consist of a
reserve based on estimates of the portion of premiums earned required to cover
potential future claims inherent in currently insured obligations (a
"Supplemental Loss Reserve") and case basis reserves for expected levels of
defaults resulting from credit failures on currently insured obligations. The
Supplemental Loss Reserve and case basis reserves amounted to $10.7 million and
$0.3 million, respectively, at December 31, 1996. A case basis loss reserve is
established for insured obligations when, in the judgement of management, a
default in the timely payment of debt service is imminent. For defaults
considered temporary, a case basis loss reserve is established in an amount
equal to the present value of the anticipated defaulted debt service payments
over the expected period of default. If the default is judged not to be
temporary, the present value of all remaining defaulted debt service payments is
recorded as a case basis loss reserve. Anticipated salvage recoveries are
considered in establishing case basis loss reserves when such amounts may be
reasonably estimated.

            Under GAAP, CapMAC defers recognition of the premium received at the
inception of the insurance policy by crediting the premium to an unearned
premium reserve and amortizing the premium over the life of the underlying
insured obligation. CapMAC's unearned premium reserve, net of reinsurance, as of
December 31, 1996 was $49.8 million.

            In addition to reserves established under GAAP, CapMAC establishes a
reserve under statutory accounting practices prescribed or permitted by state
insurance regulatory authorities ("SAP") for unearned premiums relating to
premiums received from an up-front insurance policy but not earned. These
premiums are earned in accordance with regulatory requirements over the term of
the obligations to which the premiums relate. At December 31, 1996, CapMAC's SAP
reserve for unearned premiums, net of reinsurance, was $52.9 million.

            The New York financial guaranty insurance statute applicable to
CapMAC requires that financial guaranty insurers also maintain a special SAP
reserve called the "contingency reserve" to protect policyholders against the
impact of excessive losses occurring during adverse economic cycles. The
statutory contingency reserve with respect to CapMAC's insured portfolio has not
been utilized since CapMAC's inception. At December 31, 1996 CapMAC had
statutory contingency reserves totaling $66.1 million.

            From CapMAC's commencement of operations in 1987 through December
31, 1996, CapMAC had incurred gross losses and loss adjustment expenses
(exclusive of additions to the Supplemental Loss Reserve) of $2.7 million with
respect to insured obligations, all of which related to a single transaction.
Such losses and expenses were covered under a quota share reinsurance
arrangement for $0.2 million and a reduction in the Supplemental Loss Reserve
for $2.5 million. The portion of the loss not covered under the quota share
agreement was funded through payments to CapMAC from the Lureco Trust Account,
as discussed in "--Reinsurance."


                                       17
<PAGE>

            Because reserves are necessarily based on estimates and because of
the absence of a sufficient number of losses in its financial guaranty insurance
activities and in the financial guaranty insurance industry generally to
establish a meaningful statistical base, there can be no assurance that the case
basis reserves or the Supplemental Loss Reserve will be adequate in light of
subsequent experience with respect to defaults to cover losses in CapMAC's
insured portfolio. Losses from future defaults, depending on their magnitude,
could have a material adverse effect on the results of operations and financial
condition of the Company.

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 underwritten by the ceding company on
one or more specified policies in consideration for a portion of the premiums
received for the policy or policies being reinsured. The ceding company
generally receives from the reinsurer a commission based on a percentage of the
reinsurance premium (a "ceding commission") to cover the cost incurred by the
ceding company to generate the business being reinsured as well as to compensate
the ceding company for the monitoring and surveillance of the transaction(s) so
ceded. The reinsurance does not relieve the ceding company from any obligation
under the policy reinsured even if the reinsurer fails to pay the ceding company
under the reinsurance agreement.

            The Company actively pursues reinsurance as a means of diversifying
and reducing risk, enhancing its return on capital and adding underwriting
capacity. Reinsurance of CapMAC's insured obligations is done both on a
facultative (transaction-by-transaction) and treaty (automatic cession) basis.
CapMAC uses both quota share reinsurance and excess of loss reinsurance
structures. Quota share reinsurance provides that the reinsurer reimburses the
ceding company on a pro-rata basis for a specified percentage of all losses
incurred under the policy reinsured starting with the first loss incurred.
Excess of loss or stop-loss reinsurance provides that the reinsurer reimburses
the ceding company for all or a specified percentage of losses incurred by the
ceding company in excess of a specified amount of losses.

            CapMAC monitors the creditworthiness of all of its reinsurers on a
continual basis. As of December 31, 1996, 97% of CapMAC's reinsurance was ceded
to reinsurers who were rated AA or better by S&P. CapMAC reinsures with two
triple-A rated monoline financial guarantee reinsurance companies in the United
States and with a number of international companies located in Europe and Japan.
As of December 31, 1996, 22% of CapMAC's Gross Statutory P&I outstanding was
reinsured, of which no single entity reinsured more than 8.4% of Gross Statutory
P&I outstanding.

            CapMAC entered into a Stop-loss Reinsurance Agreement with Mitsui
Marine and Fire Insurance Co., Ltd. ("Mitsui Marine") as reinsurer (the "Mitsui
Stop-loss Agreement"), effective December 1, 1995, pursuant to which Mitsui
Marine was required to pay any losses in excess of $100 million losses in the
aggregate incurred by CapMAC during the term of the Mitsui Stop-loss Agreement
on the insurance policies in effect on December 1, 1995 and written through
December 31, 1996, up to an aggregate limit of $50 million. The Mitsui Stop-loss
Agreement replaced a stop-loss agreement with Winterthur Swiss Insurance Company
which had been in effect since the Acquisition in June, 1992.

            Effective January 1, 1997, the Mitsui Stop-loss Agreement was
amended and restated, and additional stop loss agreements were entered into with
AXA Re Finance S.A. ("AXA Re") and Munchener Ruckverischerungs-Gesellschaft
("Munich Re") such that Mitsui Marine, AXA Re and Munich Re are


                                       18
<PAGE>

required to pay in the aggregate any losses up to $75 million in the aggregate
incurred by CapMAC in excess of $150 million increasing annually based on
increases in CapMAC's statutory qualified capital. The Mitsui Stop-loss
Agreement requires Mitsui to pay 40% of any such losses up to a maximum of $30
million; the stop-loss agreement with AXA Re requires AXA Re to pay
approximately 27% of any such losses up to a maximum of $20 million; and the
stop-loss agreement with Munich Re requires Munich Re to pay approximately 33%
of any such losses up to a maximum of $25 million.

            The Mitsui Stop-loss Agreement and each of the stop-loss agreements
with AXA Re and Munich Re have an initial term of one year and are subject to
automatic one year extensions unless either party to any of the agreements
provides the other with 180 days notice that it does not intend to renew such
agreement. The Mitsui Stop-loss Agreement and each of the stop-loss agreements
with AXA Re and Munich Re are also subject to early termination by CapMAC in
certain circumstances.

            Effective April 1, 1994, CapMAC and Luxembourg European Reinsurance
LURECO S.A. ("Lureco"), entered into a Per Annum Aggregate Reinsurance Treaty
(the "Lureco Treaty") pursuant to which Lureco reinsures CapMAC for certain
losses and related expenses, including all amounts which have been incurred by
CapMAC for anticipated settlement of claims regardless of whether such amounts
have been paid by CapMAC. The Lureco Treaty provides that the annual reinsurance
premium payable by CapMAC to Lureco, after deduction of the reinsurer's fee
payable to Lureco, be deposited in a trust account (the "Lureco Trust Account")
to be applied by CapMAC, at its option, to offset losses and loss expenses
incurred by CapMAC in connection with incurred claims. Amounts on deposit in the
Lureco Trust Account which have not been applied against claims are
contractually due to CapMAC at the termination of the treaty. The agreement is
renewable annually at CapMAC's option, subject to certain conditions.

            The premium deposit amounts in the Lureco Trust Account have been
reflected as assets by CapMAC during the term of the agreement. Premiums in
excess of the deposit amounts have been recorded as ceded premiums in the
statements of operations. In the 1996 policy year the agreement provided $7
million of loss coverage in excess of the premium deposit amount of $5 million
retained in the Lureco Trust Account. Additional coverage is provided for losses
incurred in excess of 200% of the net premiums earned up to $4 million for any
one agreement year. In September of 1995, claims incurred of approximately $2.5
million on a CapMAC insurance policy were applied against the Lureco Trust
Account.

            The reinsurance of risk does not relieve the ceding insurer of its
original liability to its policyholders. A contingent liability exists with
respect to the aforementioned reinsurance arrangements which may become a
liability of CapMAC in the event the reinsurers are unable to meet obligations
assumed by them under the reinsurance contracts.

CapMAC Financial Services

            CFS provides advisory and structuring services to third parties in
connection with asset securitization transactions, primarily those in which
CapMAC issues a guaranty. CFS provides customers, such as banks, large and
mid-sized corporations, insurance companies and other financial institutions,
with advice as to the most appropriate structure to use for a given
securitization transaction based on the nature of the assets and financial
objective of the customer. Depending on the structure of the transaction, CFS
will provide advice regarding the most advantageous available funding mechanism,
the hedging of certain risks through third-parties and liquidity facilities in
transactions involving issuance of commercial paper.


                                       19
<PAGE>

CFS' sole role with respect to hedging contracts is to provide advisory
services, and neither CFS nor the Company takes any offsetting position with
respect to any such hedging contracts. CFS also provides clients with guidance
on the review process by the rating agencies with respect to transactions.

            CFS also serves as a technical advisor to Asian Securitization and
Infrastructure Assurance (Pte) Ltd ("Asia Services"), a financial guaranty
company located in Singapore formed in 1995 to provide guarantees and engage in
related business activities in the Asian fixed income capital markets, and to
P.T. ABS Finance Indonesia, a securitization corporation located in Indonesia.
The Company owns an indirect equity interest in Asia Services and is a minority
shareholder of P.T. ABS Finance Indonesia.

            The structuring of the more complex and innovative asset
securitization transactions in which CFS participates generally involve advisory
and structuring services for which fees are generally paid upon closing of the
transaction; consequently, the timing of such transactions and the amount of the
related fees can result in significant fluctuations attributable to such fees
from period to period. Transactions may involve more than one advisor, and CFS
competes with a number of advisors including financial guarantors, investment
banks and advisory boutiques for advisory assignments that typically culminate
in insured funding and/or restructuring solutions. Generally, CFS receives
larger fees in connection with transactions which require an increased
expenditure of time and effort to achieve a satisfactory execution. These
transactions typically involve unfamiliar assets or structures. Advisory and
other fees received by CFS increased from $17.0 million for the year ended
December 31, 1995 to $27.1 million for the year ended December 31, 1996.

            CFS also has within it the global marketing unit of the Company,
which is responsible for the overall global marketing efforts on behalf of the
Company and its subsidiaries. The global marketing unit is organized along
geographic and industry lines and manages relationships with the Company's major
clients.

            CFS is a wholly owned subsidiary of Holdings and was incorporated in
Delaware in 1992 in connection with the Acquisition. While the scope of CFS'
business activities has expanded since the Acquisition, CFS was created to
provide various services to CapMAC and to engage in other activities in support
of CapMAC's business. At the time of the Acquisition, the CFS Servicing
Agreement detailing the terms and conditions of the services to be provided by
CFS for CapMAC was executed and approved by the Insurance Department of the
State of New York. Under the CFS Servicing Agreement, which is still in force,
CFS bills CapMAC a fee for providing administrative services to CapMAC,
including activities related to underwriting, reinsurance, marketing,
accounting, data processing and other services, but not in excess of CFS's cost
for such services. CFS also provides administrative services to Holdings and CFS
Europe.

CapMAC Investment Management

            CapMAC Investment Management, Inc. ("CIM") is a new subsidiary of
Holdings incorporated in Delaware in October 1996. CIM is a registered
investment advisor and has been formed for the purpose of establishing
investment funds and providing investment advice regarding asset-backed
structures, mortgage-backed securities, foreign and domestic fixed income and
equity securities and certain other securities based on the investment
objectives of its clients. The Company has hired the president of CIM and is
currently in the process of hiring additional personnel. It is anticipated that
CIM will be initially capitalized with approximately $2 million and will
commence operations in early 1997.


                                       20
<PAGE>

            It is anticipated that CIM will generate income through fees charged
for assets under management. The Company does not expect that CIM will be
profitable in 1997.

Derivative Products

      In 1995, Holdings entered into a strategic alliance with The Mutual Life
Assurance Company of Canada ("MLC"), and three of its derivatives products
subsidiaries (each such subsidiary, a "TMG Subsidiary" and such subsidiaries
collectively, the "TMG Group") to assist the TMG Group in providing a broad
range of derivative products, with an initial emphasis on "municipal
derivatives," including investment agreements and long dated interest rate
swaps. The TMG Group also provides interest rate swaps, currency swaps and
equity-linked financial products. Because the obligations of the TMG Group under
its derivative transactions are guaranteed by The Mutual Life Assurance Company
of Canada, the TMG Group is rated AA by S&P and Aa3 by Moody's. CapMAC intended
that the relationship with the TMG Group would facilitate the hedging of risks
inherent within particular structured transactions insured by CapMAC and help
CapMAC better evaluate such risks.

      Holdings has warrants to purchase shares of stock in each TMG Subsidiary
for an aggregate initial exercise price of $10 million. Holdings may exercise
its warrants in whole or in part (subject to a 25% minimum) at any time.
Holdings is obligated to exercise its warrants upon the demand of any TMG
Subsidiary after February 27, 2000 and earlier upon the occurrence of certain
events relating to the TMG Group as well as certain events relating to Holdings
and CapMAC. The amount of Holdings investment in the TMG Group at any date is
the initial exercise price of $10 million plus an imputed cost-of-carry on the
investment (calculated pursuant to a LIBOR based formula). For example, if the
warrants were exercised on February 27, 2000, it is estimated (assuming a
constant LIBOR rate of 5%) that the total cost to exercise the warrants will be
approximately $13 million.

      After exercising the warrants, the Company has the right to require MLC to
purchase the shares in the TMG Group held by it during the six month period
beginning on February 27, 2002. The price to be paid by MLC for such shares
would be their book value, except in certain limited circumstances. Originally,
management expected that the Company would exercise its warrants on February 27,
2000, hold the stock for two years and, depending on management's evaluation of
the value of its investment, sell the shares to MLC during the six-month period
beginning on February 27, 2002. Recent losses incurred by the TMG Group, which
have caused the Company to write-down the value of its investment as described
below, and the on-going capital restructuring of the TMG Group, have caused the
Company to reevaluate its intentions with respect to the warrants, and it is not
possible to determine as of the date of this report what actions, if any, the
Company will take.

      The Company values the warrants as of any date of determination based upon
the difference between the exercise price of the warrants as of such date and
the estimated fair value of the percentage share of the TMG Group it would own
upon exercise of the warrants. Based upon losses incurred and projections by the
TMG Group at the end of the fourth quarter of 1996, the Company in the fourth
quarter of 1996 realized a pre-tax capital loss of $2.0 million on its
investment in the warrants. Estimated losses by the TMG Group during the first
quarter of 1997 are materially worse than the expectations of the management of
the TMG Group at year end 1996, and therefore the Company's current estimate is
that Holdings will realize an additional non-operating charge to earnings in the
first quarter of approximately $3.5 million to $4.0 million. The effect of the
write-off in the fourth quarter of 1996 and the current estimate of the
write-off for the first quarter of 1997 will be to reduce the value of the
Company's TMG Group warrants to approximately $5.0 million to $5.5 million as of
March 31, 1997. MLC has announced that it has


                                       21
<PAGE>

contributed an additional $50 million to the TMG Group, which has the effect of
diluting the Company's investment from an approximately 17% ownership interest
to approximately 7%. However, notwithstanding the additional capital
contribution, the Company may in the future realize additional losses of part or
all of the remaining value of the warrants.

      The agreement between the Company and MLC governing CapMAC's investment in
the TMG Group contains covenants restricting the Company's ability to incur
liens on its property, other than certain permitted liens, or incur debt (other
than certain permitted debt) which would result in the Company's total debt
(other than certain permitted debt) to capital ratio exceeding 25%.

Funding Vehicles

            In order to be able to offer its customers a variety of funding
options in addition to credit enhancement, the Company, together with two
investment banks, participated in the formation of Triple-A One Funding
Corporation, Triple-A One Plus Funding Corporation and Hemispheres Funding
Corporation. Triple-A One Funding Corporation and Triple-A One Plus Funding
Corporation (collectively, "Triple-A One Funding") are third party owned and
managed special purpose conduits that issue asset-backed commercial paper, and
Hemispheres Funding Corporation ("Hemispheres") is a third party owned and
managed special purpose conduit that issues asset-backed medium term notes. Each
of these conduits provides multiple sellers/borrowers with access to the
commercial paper and medium term note markets on better terms than they could
obtain by issuing securities directly. CFS provides administrative and referral
services to these conduits, and CapMAC guarantees the underlying asset-backed
transactions. In general, customers of the Company transfer or pledge
receivables to the conduits in exchange for funds which are raised either by the
sale of commercial paper (in the case of Triple-A One Funding) or medium term
notes (in the case of Hemispheres). Typically, payment of principal and interest
on the obligations issued by the conduits is dependent on the performance of the
underlying assets, as supported by one or more guarantees issued by CapMAC. As
of December 31, 1996, the aggregate principal amount of commitments issued by
Triple-A One Funding was approximately $5.5 billion and the commercial paper
outstanding under such commitments was approximately $2.9 billion, while the
total notes issued by Hemispheres amounted to approximately $1.0 billion. It is
anticipated that the Company may participate in the establishment of additional
special purpose asset-backed commercial paper and medium-term note conduits to
provide additional funding opportunities to its customers.

International Operations

            The Company participates in international transactions through its
headquarters in New York, its offices in Europe and by way of joint ventures and
other business arrangements in Asia. The aggregate Net Par resulting from
international transactions totaled $2.5 billion as of December 31, 1996, $1.7
billion as of December 31, 1995 and $1.2 billion as of December 31, 1994. An
obligation insured by CapMAC is deemed to involve an "international transaction"
when either the originator or the assets underlying the insured obligations are
primarily located outside the United States.

Europe

            CapMAC established its representative office in London in 1990. The
office presently has a staff of four professionals. Activities in Europe are
based out of the London office. CapMAC transactions which are originated through
the London office are issued insurance policies out of CapMAC's


                                       22
<PAGE>

New York headquarters. CapMAC's office in Paris, which is the headquarters of
CapMAC's newly established French subsidiary, CapMAC Assurance, S.A., works
closely with the London office and focuses on those aspects of transactions
which involve assets, investors or clients located in continental Europe. The
Company has capitalized CapMAC Assurance, S.A., and will be able to write
financial guaranty insurance throughout the countries of the European Economic
Community upon receipt of its license from the French authorities, which it
anticipates receiving in 1997. A substantial portion of the policies written by
such subsidiary will be reinsured by CapMAC.

Asia

            Given the growing importance and growth prospects of Asia's
economies, the Company has undertaken a number of initiatives to expand into
Asia. These initiatives have resulted in separate arrangements with respect to
Japan, the Asian emerging markets and Indonesia.

      In June 1995, CapMAC and CFS entered into a cooperation agreement with
Mitsui Marine regarding the development of the financial guaranty business in
Japan, including the provision of financial guaranties and other credit
enhancement in connection with securities or obligations that are backed by
assets originated in Japan or which are issued by Japanese entities. The
agreement requires CFS to make financial technology available to Mitsui Marine,
provides for mutual business development, reinsurance, business promotion,
employee exchanges and related training, and office sharing. It also includes
provisions regarding the reinsurance of transactions related to the provision of
credit enhancement for financial obligations offered and sold in Japan and
Japanese financial obligations which are offered and sold outside of Japan.

      As part of its strategy to expand into Asia, the Company has promoted the
establishment of and in December, 1995, through its affiliate, CapMAC Asia Ltd.
("CapMAC Asia"), made an investment in Asia Credit Services (Pte) Ltd ("Asia
Services"), which owns all of the stock of Asian Securitization and
Infrastructure Assurance (Pte) Ltd ("ASIA Ltd."), a regional financial guaranty
company located in Singapore. The Company's initial investment consisted of
approximately $11.2 million in cash and a commitment to provide up to an
additional $6.8 million in certain circumstances. During 1996, the Company
invested an additional $1.2 million in CapMAC Asia and sold $1.9 million of its
investment to certain of its employees, directors and shareholders. As of
December 31, 1996, as a result of the additional investment and the sale to
employees, directors and shareholders, the amount of the Company's commitment to
provide additional financing to CapMAC Asia had been reduced to $4.9 million.
The total subscribed capital of Asia Services is $150 million, of which $102
million has been paid-in as of December 31, 1996.

      ASIA Ltd. was formed to provide guarantees of debt securities in the
primary and secondary Asian fixed income capital markets, and together with Asia
Services, to engage in related business activities in the Asian capital markets
and to provide technical advice and assistance in connection with Asian
securitization transactions. CFS has entered into a technical assistance and
cooperation agreement, pursuant to which CFS or its designated affiliate will
provide certain technical, advisory and structuring services to Asia Services
and ASIA Ltd., including employee exchanges between CFS and Asia Services and
ASIA Ltd., and CapMAC will have the right to reinsure certain transactions
entered into by ASIA Ltd. and to participate in ASIA Ltd.'s treaty reinsurance.
The agreement also limits the Company's ability to compete in Asia directly with
Asia Services and ASIA Ltd. with respect to credit enhancement activities.


                                       23
<PAGE>

      In consideration for its role in the creation of Asia Services and ASIA
Ltd. and in connection with the technical assistance to be provided by CFS, the
Company has options to purchase for a nominal price shares of Asia Services
representing up to 10% of its paid-in capital, the amount of such options to be
determined based on the internal rate of return to the investors in Asia
Services at the time of public offering or sale of the stock of Asia Services.

      In April 1995, Holdings became a minority shareholder in P.T. ABS Finance
Indonesia ("ABS Finance"), formerly known as P.T. Citimas Capital (Pte) Ltd., a
corporation established to develop securitization in Indonesia for obligations
that are backed by assets originated in Indonesia or that are issued by
Indonesian entities. ABS Finance participates as a principal in the
securitization markets in Indonesia, but does not offer financial guaranty
insurance in Indonesia. Simultaneously with the execution of the joint venture
agreement with the other investors in ABS Finance, CFS entered into a technical
assistance agreement with ABS Finance to provide technical and advisory
assistance to ABS Finance, including making employees of the Company available
to ABS Finance on a short-term basis to provide technical assistance with
respect to securitizations and training ABS Finance professional staff in New
York and elsewhere as agreed upon by ABS Finance and CFS. In addition, CapMAC
has the right to reinsure transactions which are executed by ABS Finance and to
provide direct insurance on those transactions which ABS Finance chooses not to
underwrite. Each of CFS and ABS Finance have agreed that they will not enter
into any cooperation or arrangement similar to the technical assistance
agreement with any other party with respect to the development of securitization
in Indonesia or the issuance of Indonesian asset-backed securities.

Investment Portfolio

            The Company's investment portfolio consists of both equity
investments and high quality, intermediate-term taxable and tax-exempt
securities to obtain an optimal portfolio mix of liquidity, quality, maturity
and earnings. Holdings' equity investments include investments in the TMG Group,
ABS Finance and ASIA Services, as well as other equity investments which are not
liquid and may be speculative, such as investments in specialized finance
companies in connection with its Financial Engineering activities. The
discussion in this section with respect to the Company's investment portfolio
excludes the equity investments of Holdings.

            CapMAC has a conservative investment strategy of limiting investment
to government obligations and securities that are rated A or better and
short-term investments rated A1+/P1 or higher by the major U.S. rating agencies.
Any investment in a security rated below A requires special approval. If a
security's rating falls below single-A subsequent to purchase, a case-by-case
determination is made as to whether the security should be sold. Under CapMAC's
investment guidelines the amount of securities rated single-A or lower is
restricted to 40% of the total portfolio, with the remainder comprised of
double-A and triple-A rated securities, and U.S. Government and federal agency
securities. Currently, CapMAC's investment guidelines do not allow investments
in equity securities, securities issued by affiliates and securities that CapMAC
insures, without prior approval of the Investment Committee of the Board of
Directors. The Company's investment portfolio has an average credit quality of
at least AA as of December 31, 1996. The Company's investment portfolio is
managed by the firm of Standish, Ayer & Wood, Inc.

      As of December 31, 1996, the carrying value of the Company's investments
(excluding equity investments) was $339.2 million. This investment portfolio
consisted of marketable, investment grade and


                                       24
<PAGE>

fixed income securities. Based upon their respective estimated fair values at
December 31, 1996, approximately 53.7% of the Company's investments were in
obligations of states, municipalities and political subdivisions, 38.5% in U.S.
Treasury obligations and mortgage-backed securities of U.S. government
corporations and agencies, and 7.8% in corporate and asset-backed securities. As
of December 31, 1996, all of the Company's investments were classified as
available-for-sale securities. The following tables set forth certain
information concerning the investment portfolio (excluding equity investments)
of the Company:

                              Investment Portfolio
                         Distribution by Credit Ratings
                             as of December 31, 1996

<TABLE>
<CAPTION>
                                                                    Estimated     Percentage
$ in thousands                                                      Fair Value     of Total
--------------------------------------------------------------------------------------------
<S>                                                                  <C>             <C>  
U.S. Treasury obligations and mortgage-backed securities of U.S. 
  government instrumentalities and agencies (1)                      $130,759        38.5%
AAA                                                                   127,340        37.5
AA                                                                     35,811        10.6
A                                                                      45,264        13.4
--------------------------------------------------------------------------------------------
           Total                                                     $339,174       100.0%
============================================================================================
</TABLE>

----------
(1)   Mortgage-backed securities consist entirely of Government National
      Mortgage Association (GNMA), Federal National Mortgage Association (FNMA),
      Federal Home Loan Mortgage Corporation (FHLMC) and other federal agency
      securities.


                                       25
<PAGE>

                              Investment Portfolio
                              By Type of Securities
                             as of December 31, 1996

<TABLE>
<CAPTION>
                                                                                Weighted
                                                        Amortized   Estimated   Average
Investment Category                                       Cost      Fair Value   Yield
---------------------------------------------------------------------------------------
<S>                                                     <C>            <C>       <C>  
U.S. Treasury obligations                               $  4,059       4,069     6.15%
Mortgage-backed securities of U.S. government
    instrumentalities and agencies                       105,371     104,577     6.20
Obligations of states, municipalities and political
    subdivisions                                         177,811     181,858     5.23
Corporate and asset-backed securities                     15,043      14,918     4.02
---------------------------------------------------------------------------------------
      Total long-term investments                        302,284     305,422     5.50
Short term investments                                    33,752      33,752     4.54
---------------------------------------------------------------------------------------
      Total                                             $336,036     339,174     5.34%
=======================================================================================
</TABLE>

                     Distribution of Investments by Maturity
                             as of December 31, 1996
                                ($ in thousands)

Maturity                                   Amortized Cost   Estimated Fair Value
--------------------------------------------------------------------------------
Due in one year or less (1)                   $ 38,637            $ 38,654      
Due after one year through five years           31,821              32,815      
Due after five years through ten years          76,450              78,200      
Due after ten years                             83,757              84,928      
--------------------------------------------------------------------------------
      Sub-total                                230,665             234,597      
Mortgage-backed securities                     105,371             104,577      
--------------------------------------------------------------------------------
      Total(2)                                $336,036            $339,174      
================================================================================

----------
(1)   Includes long-term investments in the amount of $4.9 million maturing
      within one year and short-term mortgage backed securities in the amount of
      $22.1 million.

(2)   The average contractual maturity of the Company's investment portfolio was
      approximately 6.1 years.


                                       26
<PAGE>

Competition

            The credit enhancement activities of the Company face competition
from both other providers of third party credit enhancement and from
alternatives to third party credit enhancement. Because the majority of
asset-backed (and municipal) obligations are sold without third party credit
enhancement, each transaction proposed to be insured by CapMAC generally must
compete with an alternative structure which does not employ third party credit
enhancement. CapMAC also competes with other monoline primary financial guaranty
insurers. Historically, the primary competitor of CapMAC in asset-backed
obligations was Financial Security Assurance Inc. However, Financial Guaranty
Insurance Company, MBIA Insurance Corporation (formerly Municipal Bond Investors
Assurance Corporation), and AMBAC Indemnity Corporation, which originally
focused on providing guarantees for municipal obligations, have increased their
levels of participation in the asset-backed market, and the Company expects such
competition to continue. The Company expects to face increased competition in
its primary business of providing financial guarantees with respect to
asset-backed obligations both from other monoline primary financial guaranty
insurers and from alternative structures which do not employ credit enhancement.
Competition for the credit enhancement of asset-backed obligations is also
provided by traditional credit enhancers such as mortgage pool insurers and bank
letter of credit providers. CapMAC also competes with other forms of credit
enhancement, including senior/subordinated structures and various forms of cash
collateral.

            CFS competes with other providers of advisory and structuring
services, such investment and commercial banks. CIM will compete with mutual
funds, hedge funds and other asset managers.

            Insurance law generally restricts multiline insurance companies,
such as the large property and casualty insurers and life insurance companies,
from engaging in the financial guaranty insurance business on a direct basis
other than through separately capitalized affiliates. Entry requirements include
(i) assembling the group of experts required to operate a financial guaranty
business, (ii) establishing the triple-A claims-paying ability ratings with the
statistical rating agencies, (iii) complying with substantial capital
requirements, (iv) developing name recognition and market acceptance with
issuers, investment bankers and investors and (v) developing an understanding of
financial guaranty insurance regulatory matters. Multiline insurance companies
are not major participants in the financial guaranty business in the United
States.

Rating Agencies

            Moody's, S&P, DCR and Nippon Investors Service, Inc. periodically
review the business and financial condition of CapMAC and other companies
providing financial guaranty insurance. These rating agency reviews focus on the
insurer's underwriting policies and procedures and the quality of the
obligations insured. The rating agencies frequently perform assessments of the
credits insured by CapMAC to confirm that CapMAC continues to meet the criteria
considered necessary by the particular rating agency to maintain CapMAC's
triple-A claims-paying ability rating. CapMAC's ability to engage in business as
currently conducted, and its results of operations and financial condition,
would be materially adversely affected by any reduction in its ratings.


                                       27
<PAGE>

Insurance Regulatory Matters

General Law

            CapMAC is licensed to engage in insurance business in all 50 states,
the District of Columbia and Puerto Rico. As a domestic insurer, CapMAC is
subject to the insurance laws of New York, including the New York Insurance Law.
CapMAC is also subject to the insurance laws and regulations of the other states
in which it is licensed to transact an insurance business. These laws and
regulations, as well as the level of supervisory authority that may be exercised
by the various state insurance departments, vary by jurisdiction, but generally
require insurance companies to maintain minimum standards of business conduct
and solvency, to meet certain financial tests, to file certain reports with
regulatory authorities, including information concerning their capital
structure, ownership and financial condition, and to require prior approval of
certain changes in control of domestic insurance companies and their direct and
indirect parents and the payment of certain dividends and distributions. In
addition, these laws and regulations require approval of certain intercorporate
transfers of assets and certain transactions between insurance companies and
their direct and indirect parents and affiliates, and generally require that all
such transactions have terms no less favorable than terms that would result from
transactions between parties negotiating at arm's length. CapMAC is required to
file quarterly and financial statements prepared in accordance with SAP in each
jurisdiction in which it is licensed, and is subject to single and aggregate
risk limits and other statutory restrictions concerning the types and quality of
investments and the filing and use of policy forms and premium rates. In
addition, CapMAC's accounts and operations are subject to periodic examination
by the New York Superintendent of Insurance (the "New York Superintendent") (the
last such examination having been conducted in 1995 for the five years ended
December 31, 1993) and other state insurance regulatory authorities. No material
deficiencies were indicated in the report issued in connection with the last
examination.

Insurance Holding Company Laws

            Holdings and CapMAC are subject to regulation under the insurance
holding company statute of New York (where CapMAC is domiciled) as well as of
other jurisdictions where CapMAC is licensed to conduct an insurance business.
The requirements of holding company statutes vary from jurisdiction to
jurisdiction but generally require insurance holding companies and their
insurance subsidiaries to register and file certain reports describing, among
other information, their capital structure, ownership and financial condition.
The holding company statutes impose standards on certain transactions with
related companies, which require that all transactions be fair and reasonable
and that specified types of transactions and those exceeding specified limits
require prior notice to or approval by insurance regulators.

            Under the insurance holding company laws in effect in New York, any
acquisition of control of Holdings, and thereby indirect control of CapMAC,
requires the prior approval of the New York Superintendent. "Control" is defined
as the direct or indirect power to direct or cause the direction of the
management and policies of a person, whether through the ownership of voting
securities, by contract or otherwise. Any purchaser of 10% or more of the
outstanding voting securities of a corporation is presumed to have acquired
control of that corporation and its subsidiaries, although the insurance
regulator may find that "control" in fact does or does not exist when a person
owns or controls either a lesser or greater amount of voting securities.


                                       28
<PAGE>

New York Financial Guaranty Insurance Law

            In 1989, New York enacted Article 69 ("Article 69") of the New York
Insurance Law, a comprehensive financial guaranty insurance statute, which
governs all financial guaranty insurers licensed to do business in New York,
including CapMAC. This statute limits the business of financial guaranty
insurers to financial guaranty insurance and related lines (such as credit,
surety and residual value insurance).

            Article 69 requires that financial guaranty insurers maintain a
special SAP reserve called the "contingency reserve" to protect policyholders
against the effects of adverse economic developments or cycles or other
unforeseen circumstances. Article 69 requires a financial guaranty insurer to
provide a contingency reserve (i) with respect to policies written prior to July
1, 1989 in an amount equal to 50% of earned premiums and (ii) with respect to
policies written on and after July 1, 1989, quarterly on a pro rata basis over a
period of 20 years for municipal bonds and 15 years for all other obligations,
in an amount equal to the greater of 50% of premiums written for the relevant
category of insurance or a percentage of the principal guaranteed, varying from
0.55% to 2.50%, depending upon the type of obligation guaranteed, until the
contingency reserve amount for the category equals the applicable percentage of
net unpaid principal. Virtually all of CapMAC's currently outstanding policies
were written after July 1, 1989. This reserve must be maintained for the periods
specified above, except that reductions by the insurer may be permitted under
specified circumstances in the event that actual loss experience exceeds certain
thresholds or if the reserve accumulated is deemed excessive in relation to the
insurer's outstanding insured obligations. Financial guaranty insurers are also
required to maintain reserves for losses and loss adjustment expenses on a
case-by-case basis and reserves for unearned premiums.

            Article 69 establishes single risk limits for financial guaranty
insurers applicable to all obligations issued by a single entity and backed by a
single revenue source. For example, under the limit applicable to qualifying
asset-backed securities, the lesser of (i) the insured average annual debt
service for a single risk or (ii) the insured unpaid principal (reduced by the
extent to which the unpaid principal of the supporting assets exceeds the
insured unpaid principal) divided by nine, net of qualifying reinsurance and
collateral, may not exceed 10% of the aggregate of the insurer's surplus to
policyholders and contingency reserve, subject to certain conditions. Under the
risk limit applicable to municipal obligations the insured average annual debt
service for a single risk, net of qualifying reinsurance and collateral, may not
exceed 10% of the sum of the insurer's policyholders' surplus and contingency
reserve, and the insured principal, net of qualifying reinsurance and
collateral, may not exceed 75% of the sum of the insurer's policyholders'
surplus and contingency reserve. Single risk limits are also specified for other
categories of insured obligations.

            Article 69 also establishes aggregate risk limits on the basis of
aggregate net liability insured as compared to the sum of policyholders' surplus
and contingency reserves. "Aggregate net liability" is defined as outstanding
principal and interest of guarantied obligations insured, net of qualifying
reinsurance and collateral. Under these limits, policyholders' surplus and
contingency reserves must not be less than a percentage of aggregate net
liability equal to the sum of various percentages of aggregate net liability for
various categories of specified obligations. The percentage varies from a low of
0.33% for municipal obligations to 4% for certain non-investment grade
obligations.

            Article 69 was amended in 1996. Among the most significant revisions
were changes to financial guaranty insurers to write policies in currencies of
all countries which have an investment grade


                                       29
<PAGE>

sovereign rating, and, subject to the approval of the New York State Department
of Insurance, in countries that do not have an investment grade sovereign
rating.

Financial Guaranty Insurance Regulation in Other Jurisdictions

            CapMAC is subject to laws and regulations of jurisdictions other
than the State of New York concerning the transaction of financial guaranty
insurance. The laws and regulations of these other jurisdictions are generally
not more stringent in any material respect than the New York Insurance Law.

            The London office of CapMAC operates as a marketing and sales office
with underwriting activities conducted through the Company's New York office
under a no-action response by the U.K. Department of Trade and Industry to the
Company's filings. The Paris office of CapMAC is presently a representative
office. It is anticipated that in 1997 CapMAC Assurance, S.A. will be granted a
license to write financial guarantee insurance by the French authorities. Unlike
the current representative office, CapMAC Assurance will be permitted to write
financial guarantee insurance in all of the countries of the European Economic
Community.

Dividend Restrictions

            Pursuant to the insurance laws of New York, CapMAC may declare
dividends, subject to any restriction in its articles of incorporation, only out
of its earned surplus. Earned surplus is defined as the portion of
policyholders' surplus that represents the net earnings, gains or profits, after
deduction of all losses, that have not been distributed to the shareholders as
dividends, or transferred to stated capital or capital surplus or applied to
other purposes permitted by law, but does not include unrealized appreciation of
assets. CapMAC may not declare or distribute any dividend to shareholders which,
together with all dividends declared or distributed by it during the preceding
12 months, exceeds the lesser of (i) 10% of policyholders' surplus as of the
date of its last statement on file with the New York Superintendent or (ii)
adjusted net investment income during such period unless, upon prior application
therefor, the New York Superintendent approves a greater dividend distribution
based upon his finding that CapMAC will retain sufficient policyholders' surplus
to support its obligations and writings. "Adjusted net investment income" is
defined as net investment income for the 12 months immediately preceding the
declaration or distribution of the current dividend increased by the excess, if
any, of net investment income over dividends declared or distributed during the
period commencing 36 months prior to the declaration or distribution of the
current dividend and ending 12 months prior thereto.

            Based upon CapMAC's statutory financial statements for the year
ended December 31, 1996, under current New York insurance laws, CapMAC is
presently unable to pay any dividends to Holdings without the prior approval of
the New York Superintendent because it has a negative earned surplus under SAP.
Holdings, however, has paid quarterly dividends on its common stock each quarter
since it became a public company and management currently expects Holdings to
continue to pay quarterly dividends at the annual rate of $0.08 per share per
year on its common stock using funds available from sources other than CapMAC.
Dividends are normally paid on the Wednesday preceding the end of February, May,
August and October to holders of record two weeks earlier.

Employees

            As of March 24, 1997, the Company has 157 full-time employees. None
of the employees are covered by collective bargaining agreements. The Company
considers its employee relations to be good.

Forward Looking Statements

            The Company through its management may from time to time make oral
forward-looking statements. In connection with the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, the Company is hereby
identifying important factors that could cause actual results to differ
materially from those contained in any forward-looking statement made by or on
behalf of the Company. Any such statement is qualified by reference to the
following cautionary statements.


                                       30
<PAGE>

            The Company operates in highly competitive markets, and demand for
financial guaranty insurance depends upon many factors, some of which are beyond
the control of the Company. Additionally, the demand for the advisory services
rendered by CFS is highly dependent upon the number and nature of the
transactions done by CapMAC. Periodic results may fluctuate depending on the
volume and timing of the closing of transactions. The establishment of the
appropriate level of loss reserves is an inherently uncertain process involving
numerous estimates and subjective judgments by management, and therefore there
can be no assurance that losses in CapMAC's insured portfolio will not exceed
the loss reserves. Finally, the total estimated present value of future revenues
("PFR") actually realized by the Company could be reduced in the future by
factors such as early termination of insurance contracts, accelerated
prepayments of underlying obligations or lower than anticipated utilization of
insured structured programs, such as commercial paper conduits. See Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, for a discussion of PFR.

            Developments in any of these areas, as well as other risks and
uncertainties detailed from time to time in the Company's Securities and
Exchange Commission filings, could cause the Company's results to differ from
results that have been or may be projected by or on behalf of the Company. The
Company cautions that the foregoing list of important factors is not exclusive.
The Company does not undertake to update any forward-looking statements that may
be made from time to time by or on behalf of the Company.

Executive Officers of the Registrant

            Set forth below is certain information with respect to each
executive officer of the Registrant. Each person holds the position set forth
below in both Holdings and CapMAC.

<TABLE>
<CAPTION>
Name and Age               Position                                             Served Since
------------               --------                                             ------------
<S>                        <C>                                                      <C> 
John B. Caouette, 52       Chairman of the Board of Directors, President            1987
                           and Chief Executive Officer since 1987.

Michael L. Hein, 54        Managing Director since 1989.  Currently                 1988
                           responsible for United States marketing. Head
                           of Corporate Structured Finance from 1989
                           through March, 1996.  Senior Vice President
                           from 1988 to 1989.

Allyn W. Keiser, 51        Managing Director since 1996 and President of            1996
                           CapMAC Financial Services since January,
                           1997.  From 1980 to 1996, Mr. Keiser was
                           held a variety of management positions at
                           Canadian Imperial Bank of Commerce. He was
                           appointed Executive Vice President, North
                           American Corporate Banking in 1992 and
                           became a Managing Director of CIBC Wood
                           Gundy in 1994.
</TABLE>


                                       31
<PAGE>

<TABLE>
<S>                        <C>                                                      <C> 
Charles J. Lester, 47      Managing Director since 1989.  Currently                 1988
                           responsible for Europe/Global Project Finance
                           business development unit.  Head of  Europe
                           and Global Relationship Management from
                           1994 to March, 1996.  Senior Vice President,
                           1988 to 1989.

C. Thomas Meyers, 59       Managing Director since 1989.  Currently                 1987
                           responsible for Credit Enhancement business
                           unit.  Head of Consumer Structured Finance
                           from 1989 through March, 1996.  Senior Vice
                           President from 1987 to 1989.

Maryam H. Muessel, 38      Managing Director since 1996.  Currently                 1988
                           responsible for Financial Engineering business
                           unit.  Senior Vice President in the Corporate
                           Structured Finance Group until March, 1996.

Jan Nicholson, 51          Managing Director since 1988. Currently                  1988
                           responsible for new product development.
                           Head of real estate securitization at CapMAC
                           from 1988 to 1990.  Held various positions at
                           Citicorp including Senior Credit Officer and
                           Department Head of Citicorp Real Estate from
                           1990 to 1994, when she returned to CapMAC
                           in her current position

Paul V. Palmer, 47         Managing Director since 1990 and Chief                   1990
                           Financial Officer since 1995.  Head of
                           Finance/Distribution support unit since March,
                           1996.

Joyce S. Richardson, 52    Managing Director since 1987 with                        1987
                           responsibility for Latin America since January,
                           1996.  Ms. Richardson was Chief
                           Underwriting Officer from 1987 to January,
                           1996.

Ram D. Wertheim, 42        Secretary and General Counsel since 1989.                1989
                           Appointed head of Legal/Administration
                           support unit in March, 1996. Mr. Wertheim
                           was named Managing Director in 1994 and
                           Chief Administrative Officer in 1995.  From
                           1989 to 1994, Mr. Wertheim was Senior Vice
                           President.

Ruth D. Whaley, 41         Managing Director and Chief Underwriting                 1987
                           Officer since January, 1996.  Appointed head
                           of Risk Management support unit in March,
                           1996. From 1987 to 1994, Ms. Whaley was
                           Vice President and from 1994 to 1996, Senior
                           Vice President in the Underwriting Department.

Howard A. York, 52         Managing Director and President, CapMAC                  1996
                           Investment Management, Inc. since November,
                           1996.  From 1978 until 1993, Mr. York was
                           with the ITT Hartford Group, Inc. and its
                           predecessor companies, where he held a variety
                           of management positions ending with Executive
                           Vice President and Chief Investment Officer.
                           He joined American General Corporation as
                           Executive Vice President and Chief Investment
                           Officer in 1993 and then was President and
                           Chief Investment Officer of Metropolitan Life
                           Investment Management Corporation from 1994
                           until 1996.
</TABLE>


                                       32
<PAGE>

Item 2. Properties.

            The Company maintains its principal executive offices at 885 Third
Avenue, New York, New York 10022. CapMAC also maintains offices in London,
England and Paris, France. The headquarters of CapMAC Assurance, S.A. is in
Paris. All offices are leased. The Company does not own any real property.

Item 3. Legal Proceedings.

            There are no material legal proceedings pending against the Company
or any of its affiliates.

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

            No matters were submitted to a vote of the stockholders of the
Company during the fourth quarter of 1996.


                                       33
<PAGE>

                                     Part II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
        Matters.

            The Company's common stock is traded on the New York Stock Exchange.
The high and low sales price per share and the dividend paid for each quarterly
period since the initial public offering of the Company's common stock on
December 14, 1995 is set forth below:

                         Dividends Paid Per Share          Market Price
                         ------------------------  -----------------------------
                                                   High        Low        Close
--------------------------------------------------------------------------------
1996
1st Quarter                    $   0.02           25 3/8      22 1/4      24 1/2
2nd Quarter                    $   0.02           29 7/8      23 5/8      28 1/2
3rd Quarter                    $   0.02           33 1/8      26 3/4      33 1/8
4th Quarter                    $   0.02           36 5/8      30 5/8      33 1/8
--------------------------------------------------------------------------------
1995
December 14-31                     --             25 1/8      21 3/8      25 1/8
--------------------------------------------------------------------------------

            The Company has paid quarterly dividends on its common stock at a
rate of $.02 per share starting February 28, 1996. Information regarding
restrictions on the payment of dividends by CapMAC to Holdings is set forth in
Item 1 above under the heading "Insurance Regulatory Matters--Dividend
Restrictions." At March 12, 1997, there were approximately 2500 beneficial
holders of the Company's common stock.


                                       34
<PAGE>

Item 6. Selected Financial Data.

            The selected financial data set forth below should be read in
conjunction with the consolidated financial statements of the Company and the
notes thereto set forth herein, as well as the Management's Discussion and
Analysis of Financial Conditions and Results of Operations which is also set
forth herein.

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                   -------------------------------------------------------------
                                                                                    Holdings
                                                                                  Pro Forma (1)
                                                     Holdings                    for Acquisition
                                   --------------------------------------------  ---------------
                                     1996        1995        1994        1993         1992
                                   --------     -------    --------     -------  ---------------
                                                      (Audited)                    (Unaudited)
                                            ($ in thousands, except per share data)
<S>                                <C>          <C>        <C>          <C>          <C>    
Operating Data:
Gross premiums written             $ 72,838     $57,476    $ 44,662     $24,894      $17,607
Net premiums written                 57,734      41,484      33,593      21,308       13,359
Net premiums earned                  40,557      29,242      23,103      17,483       12,222
Advisory and other fees              27,143      16,968      11,318       4,861        1,130
Net realized gains (losses)          (1,804)      1,351        (117)      1,490          176
Net investment income                17,906      12,843      10,316      10,205       10,045
Total revenues                       83,979      62,632      44,551      34,547       24,254
Total expenses                       36,042      27,968      19,693      16,508       14,168
Income before income taxes and                                                     
minority interest                    47,937      34,664      24,858      18,039       10,086
Net income                           33,568      23,528      17,066      12,469        7,853
Primary earnings per share (2)         1.92        1.73        1.23        0.96         0.62(2)
Fully diluted earnings per share       1.89        1.65        1.23        0.96         0.62(2)
Selected Financial Statistics                                                    
---GAAP Basis (3):
Loss ratio                             11.9%       10.7%        6.2%        5.2%       7.2%
Expense ratio                          55.3        71.9        70.8        80.8       96.1
Combined ratio                         67.2        82.6        77.0        86.0      103.3
---SAP Basis (3):
Loss ratio                              0.0%        0.0%        0.0%        0.0%       0.0%
Expense ratio                          56.6        77.1        81.8       112.2      141.9
Combined ratio                         56.6        77.1        81.8       112.2      141.9
</TABLE>


                                       35
<PAGE>

<TABLE>
<CAPTION>
                                                           December 31,
                                -------------------------------------------------------------------
                                                             Holdings
                                -------------------------------------------------------------------
                                  1996          1995          1994          1993          1992
                                -----------   -----------   -----------   -----------   -----------
                                                             (Audited)
                                                  ($ in thousands, except share data)
<S>                             <C>           <C>           <C>           <C>           <C>        
Balance Sheet Data:
Total investments (4)           $   374,060   $   329,758   $   202,637   $   190,428   $   172,474
Total assets                        457,234       391,273       244,404       212,992       184,693
Unearned premiums                    68,262        45,767        25,905        10,062         6,038
Long term debt                       15,000        15,000        15,000        15,000        15,000
Total liabilities                   123,739        95,191        63,743        41,564        29,983
Stockholders' equity                310,387       276,519       180,661       171,428       154,710
Book value per share                  19.38         17.86         15.38         14.72         13.34
Shares outstanding (5)           16,017,911    15,478,729    11,745,186    11,646,290    11,599,935
Selected Financial
Statistics (3)
Net Statutory P&I               $23,311,000   $15,138,000   $10,838,000   $ 6,846,000   $ 4,933,000
Qualified Statutory Capital     $   260,217   $   239,927   $   170,477   $   167,825   $   163,087
Policyholders' leverage ratio          90:1          63:1          64:1          41:1          30:1
Other Data:
Adjusted book value per         $     26.98   $     22.91   $     19.50   $     17.48   $     15.82
share (6)
</TABLE>

(1)   The following table presents the statements of income for (i) the
      six-month period ended June 30, 1992 for Original Holdings prior to the
      Acquisition; (ii) the six-month period ended December 31, 1992 for
      Holdings after the Acquisition and (iii) the condensed pro forma income
      statement for the year ended December 31, 1992 assuming that the
      Acquisition had occurred on January 1, 1992. The pro forma information
      reflects adjustments relating to (a) lower investment income due to the
      reduction in the investment portfolio as a result of the Distribution made
      in connection with the Acquisition; (b) higher benefits expense due to
      establishment of the Employee Stock Option Plan ("ESOP"); (c) lower policy
      acquisition costs due to the assumed write-off of deferred acquisition
      costs at January 1, 1992 and (d) lower interest expense due to
      recapitalization. The pro forma information does not purport to represent
      what the results of operations would actually have been if the Acquisition
      had occurred on January 1, 1992 or to be indicative of the future results
      of operations of Holdings.


                                       36
<PAGE>

<TABLE>
<CAPTION>
                                                                                              Holdings
                                                                                             Pro Forma
                                 Original Holdings      Holdings                          for Acquisition
                                    January 1 -         July 1 -          Acquisition        Year Ended
                                   June 30, 1992     December 31, 1992    Adjustments    December 31, 1992
-----------------------------------------------------------------------------------------------------------
                                    (Unaudited)         (Audited)         (Unaudited)       (Unaudited)
                                                              ($ in thousands)
<S>                                  <C>                 <C>               <C>                <C>    
Revenues:
Net premiums earned                  $  5,969            $ 6,253           $  --              $12,222
Net investment income                   7,519              4,823            (2,297)            10,045
Net realized gains                       --                  176              --                  176
Other income                              415              1,020               376              1,811
-----------------------------------------------------------------------------------------------------------
      Total revenues                   13,903             12,272            (1,921)            24,254
-----------------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment
  expenses                                460                422              --                  882
Underwriting and operating
  expenses                              4,979              6,154               596             11,729
Policy acquisition costs                2,911                143            (2,686)               368
Interest expense                        6,425                439            (5,676)             1,189
-----------------------------------------------------------------------------------------------------------
      Total expenses                   14,775              7,158            (7,765)            14,168
-----------------------------------------------------------------------------------------------------------
      Income before income
      taxes                              (872)             5,114             5,844             10,086
-----------------------------------------------------------------------------------------------------------
      Income taxes                      1,691              1,148             2,776              2,233
-----------------------------------------------------------------------------------------------------------
      Net Income                     $    819            $ 3,966           $ 3,068            $ 7,853
===========================================================================================================
</TABLE>

(2)   Earnings per share ("EPS") has been computed using the modified treasury
      stock method and the market value of the shares has been determined by an
      independent consulting firm in connection with an annual valuation for the
      ESOP, except for the market values at December 31, 1996 and 1995, which
      are based on the closing market price on the New York Stock Exchange on
      such dates. EPS for the six-month period ending December 31, 1992 was
      $0.62.

(3)   These ratios and statistics relate solely to CapMAC. The GAAP loss ratio
      is losses and loss adjustment expenses incurred (inclusive of additions to
      the Supplemental Loss Reserve) divided by net premiums earned. The SAP
      loss ratio is losses and loss adjustment expenses incurred (exclusive of
      additions to the Supplemental Loss Reserve) divided by net premiums
      earned. The GAAP expense ratio is underwriting and operating expenses and
      policy acquisition costs, divided by net premiums earned. The SAP expense
      ratio is SAP underwriting and operating expenses, divided by net premiums
      written. The combined ratio on both a GAAP and SAP basis is the sum of the
      applicable loss and expense ratios.

(4)   The Company changed its method of accounting for investments to adopt the
      provisions of the Financial Accounting Standards Board's Statement of
      Financial Accounting Standards No. 115, "Accounting for Certain
      Investments in Debt and Equity Securities," on December 31, 1993.

(5)   Shares outstanding do not include the common stock equivalents (i.e.,
      warrants, stock options, restricted stock units and unallocated ESOP
      shares).

(6)   Adjusted book value per share is not based on GAAP and is not a substitute
      for GAAP book value per share of Common Stock. Due to the present value of
      future revenues ("PFR") embedded in CapMAC's existing book of business,
      the book value per share has been adjusted to present additional
      information concerning the value of CapMAC. The adjusted book value is
      determined by adding to the GAAP book value the PFR per share reduced by
      the deferred acquisition costs net of the related tax effects. However,
      PFR is not earned until subsequent periods, and the amount actually
      realized may be less than the amount estimated.


                                       37
<PAGE>

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

General

CapMAC Holdings Inc. ("Holdings" or the "Company"), a Delaware corporation, is
the sole stockholder of Capital Markets Assurance Corporation ("CapMAC"), CapMAC
Financial Services, Inc. ("CFS"),and CapMAC Financial Services (Europe) Limited
("CFS (Europe)"), a subsidiary of CFS. The Company is also a lead investor in
CapMAC Asia Ltd. ("CapMAC Asia").

CapMAC insures structured asset-backed, corporate, municipal and other financial
obligations in the U.S. and international capital markets. CapMAC also provides
financial guarantee reinsurance for structured asset-backed, corporate,
municipal and other financial obligations written by other major insurance
companies. CapMAC's claims-paying ability is rated triple-A by Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Ratings Services ("S&P"), Duff &
Phelps Credit Rating Co. ("Duff & Phelps"), and Nippon Investors Service, Inc.
("Nippon"), a Japanese rating agency. Since it commenced operations, CapMAC has
issued guarantees providing credit enhancement to over $73 billion of
securities, both in the public and private capital markets.

CFS and CFS (Europe) provide advisory, consulting and structuring services to
third parties. CFS also provides various services, including underwriting,
reinsurance, marketing, data processing and other services to Holdings, CapMAC
and CFS (Europe), in connection with the operation of the business.

CapMAC Asia is a subsidiary of the Company formed for the purpose of making
investments in Asia in connection with the Company's strategy to expand its
Asian structured finance business. The Company currently owns 30.7% of the
equity of CapMAC Asia. Through its investment in CapMAC Asia and pursuant to a
shareholders' agreement among the other shareholders of CapMAC Asia, the Company
has the right to designate a majority of the board of CapMAC Asia and thereby
controls substantially all of CapMAC Asia's operations.

CapMAC Asia has invested its capital in Asia Credit Services (Pte) Ltd ("Asia
Services"), which owns all of the stock of Asian Securitization & Infrastructure
Assurance (Pte) Ltd ("ASIA Ltd"), a regional financial guarantee company located
in Singapore, rated double-A by Duff & Phelps, single-A by S&P and double-A plus
by Nippon. At December 31, 1996 and 1995, CapMAC Asia had a $33.4 million and
$30.7 million investment in Asia Services, respectively, representing 33.33% of
the outstanding shares of Asia Services. ASIA Ltd was formed to provide
guarantees of debt securities in the primary and secondary Asian fixed income
capital markets and to engage in related business activities in the Asian
capital markets and, together with Asia Services, to engage in related business
activities in the Asian capital markets and to provide technical advice and
assistance in connection with Asian securitization transactions. At December 31,
1996 and 1995, the Company's minority interest in CapMAC Asia amounted to $23.1
million and $19.6 million, respectively.

On December 19, 1995 Holdings sold 2,500,000 new shares of its common stock in
an initial public offering ("the Offering"). In conjunction with the Offering,
Holdings also sold 500,000 shares to Centre Reinsurance Limited ("Centre Re"), a
wholly-owned subsidiary of The Zurich Insurance Company in a private placement.
This investment reflects the intent of the Company and Centre Re to establish a
strategic alliance to jointly pursue the development of new financial products.

In July 1995, the Company sold 500,001 shares of common stock to ORIX USA
Corporation ("ORIX"), a subsidiary of ORIX Corporation, a leading Japanese
leasing company.


                                       38
<PAGE>

Of the proceeds received by the Company from the Offering and the private
placements, $59 million were contributed to CapMAC.

On July 5, 1996, the Company completed a secondary public offering by some of
its stockholders of 3,737,500 shares of common stock at an offering price of $28
per share. The Company did not receive any proceeds from this offering.

Results of Operations

To illustrate the growth of the Company's business, presented below are selected
financial and statistical data for calendar years 1994, 1995 and 1996.

                               Selected Statistics

                                                1996         1995        1994
                                              --------      -------     -------
                                                        ($ in thousands)

Gross premiums written                        $ 72,838      $57,476     $44,662
   Year to year change                              27%          29%         79%
Net premiums earned                             40,557       29,242      23,103
   Year to year change                              39%          27%         32%
Advisory and other fees                         27,143       16,968      11,318
   Year to year change                              60%          50%        127%
Net income                                      33,568       23,528      17,066
   Year to year change                              43%          38%         37%
Net par outstanding(1) ($ in millions)          19,655       12,628       9,397
   Year to year change                              56%          34%         68%
Gross par written(2) ($ in millions)            13,114       16,945       9,572
   Year to year change                             (23%)         77%         90%
--------------------------------------------------------------------------------

The data presented below are not recognized as financial statement measures
under generally accepted accounting principles ("GAAP"). However, the Company
considers these measures as meaningful indicators to assess business originated
in a given period as well as business which is outstanding as of the given date.

                                            1996           1995           1994
                                          --------       --------       -------
                                                     ($ in thousands)

PFR written(3),(4)                        $110,580       $ 89,585       $50,921
   Year to year change                          23%            76%           33%
PFR outstanding(3)                         232,669        155,411        98,059
   Year to year change                          50%            58%           53%

----------
(1)   The amount of principal or other obligations guaranteed and outstanding
      under an insurance policy or a reinsurance agreement, net of ceded
      reinsurance.
(2)   The amount of principal or other obligations guaranteed under an insurance
      policy or a reinsurance agreement in a given period.
(3)   CapMAC collects premiums primarily on an installment basis over the term
      of the insurance policy and, to a lesser extent, on a one-time, up-front
      basis at the time the insurance policy is issued. In 1996, 1995 and 1994,
      premiums collected on an installment basis constituted 91%, 91% and 96%,
      respectively, of net premiums earned. Due to the annuity nature of premium
      income, CapMAC has an embedded future revenue stream which will be
      collected


                                       39
<PAGE>

      and recognized as revenue not just in the year an insurance policy is
      issued, but over the full term such policy is outstanding. CapMAC reflects
      a relatively small portion of the expected future revenue on the business
      written in the current period as premium earnings in the same period. The
      total estimated present value of future revenues, "PFR," includes
      installment and up-front premiums (net of ceded premiums) and ceding
      commission income contractually due to or to be earned by CapMAC in the
      future under outstanding policies ("PFR outstanding"). PFR is not
      recognized as a financial measure under GAAP. The determination of the
      amount of PFR for a given policy is based primarily on the premium rate
      specified for such policy, the contractual term of the policy and the
      expected outstanding amount of the obligations insured under such policy
      discounted to a present value at an assumed discount rate. The Company
      believes that measuring the PFR provides useful information in evaluating
      its business growth and potential future revenue during a given period.
      However, the actual amount of future revenue may differ from the estimates
      due to various factors such as early termination, renewal of insurance
      contracts, changes in projected rates at which insured obligations are
      repaid, or variations in the utilization of insured structured programs.
(4)   Present value of future revenue stream, net of premiums ceded to
      reinsurers, embedded in the business written in a given period, which is
      expected to be recognized over the term of the book of business. A portion
      of the PFR written for a given period, as reflected above, is included in
      net premiums earned for such period.

Year Ended December 31, 1996 versus Year Ended December 31, 1995

The Company reported record net income of $33.6 million, a 43% increase over net
income of $23.5 million reported during 1995. Primary earnings per share and
earnings per share on a fully diluted basis were $1.92 and $1.89, respectively,
in 1996, compared to $1.73 and $1.65, respectively, during the same period in
1995. Operating earnings per share on a fully diluted basis for 1996 was $1.95,
an increase of 23% from $1.58 in 1995. Operating earnings exclude the impact of
realized capital gains and losses, net of tax. Earnings per share comparisons
between 1996 and 1995 are affected by the impact of Holdings' December 1995
initial public offering, which significantly increased the weighted average
number of shares outstanding.

Total revenues in 1996 were $84.0 million, an increase of 34% from $62.6 million
in 1995. This increase was primarily due to higher advisory fees, premiums
earned and investment income offset partially by realized capital losses.

In 1996 gross premiums written were $72.8 million, an increase of $15.3 million
or 27% from $57.5 million for the same period in 1995. This increase was
principally due to $9.6 million of premiums written with respect to
international transactions, $5.1 million of premiums written with respect to
domestic corporate transactions and $4.2 million of premiums written with
respect to domestic consumer transactions, offset by lower premiums written with
respect to the municipal business of $3.6 million. The amount of premiums ceded
to reinsurers decreased to $15.1 million in 1996 from $16.0 million in 1995. On
January 1, 1996, CapMAC reassumed the liability for all policies previously
reinsured by Winterthur Swiss Insurance Company ("Winterthur"). As a result,
CapMAC reassumed approximately $1.4 billion of principal insured by Winterthur
as of December 31, 1995. In connection with this reassumption of liability,
Winterthur commuted and returned to CapMAC unearned premiums, net of ceding
commission and Federal excise tax, of $2.0 million. Net premiums earned were
$40.6 million in 1996, an increase of 39% from $29.2 million in 1995. Unearned
premiums, representing premiums collected but not yet earned, increased by $22.5
million from December 31, 1995 to a total of $68.3 million at December 31, 1996
primarily due to large up-front premiums received from international
transactions and the reassumption of the reinsurance from Winterthur referred to
above.

The amount of PFR generated in any given period is based on the weighted average
life of the guarantees issued during the period and the net premium and ceding
commission expected to be received with respect to such guarantees, whereas
gross par written is based on the principal amount of guarantees issued.
Accordingly, an increase or decrease in PFR may not correspond with an increase
or decrease in gross par written. Business originated or renewed in 1996 was
estimated to generate $110.6 million of PFR, an increase of 23% over the same
period in 1995 due to higher net premium and ceding commission obtained from
certain international transactions and an increase in the weighted average life
of the guarantees issued in 1996. However, the principal amount of guarantees
issued (gross par written) was $13.1 billion in 1996 compared to $16.9 billion
in 1995, a decrease of 23%. The $16.9 billion of gross par written in 1995


                                       40
<PAGE>

included a single master surety bond in the principal amount of $6.2 billion
that was issued with respect to a conduit formed for the purpose of funding a
diverse pool of securities. Excluding this single master surety bond from the
1995 gross par written would result in a 22% increase in 1996 gross par written
as compared to 1995.

At December 31, 1996, CapMAC had 607 policies outstanding which are expected to
generate $232.7 million of PFR, up approximately 50% from $155.4 million at
December 31, 1995 relating to 476 policies outstanding at such date. The
discount rate used for purposes of the PFR calculation was 7% at December 31,
1996 and 1995.

At December 31, 1996, net par insured and outstanding was $19.7 billion, up 56%
from $12.6 billion at December 31, 1995 as a result of an increase in consumer
receivable transactions of 49% from $7.0 billion at December 31, 1995 to $10.4
billion at December 31, 1996 and an increase in trade and corporate obligations
of 72% from $4.9 billion at December 31, 1995 to $8.4 billion at December 31,
1996. The remaining weighted average life of the insured portfolio was estimated
to be 6.4 years at December 31, 1996 versus 6.0 years at December 31, 1995.

Advisory and other fees increased 60% to $27.1 million in 1996 from $17.0
million in 1995 due to the Company's continued focus on the structuring and
financial engineering business. Advisory fees are received by CFS in relation to
the closing of transactions which involve significant advisory and structuring
services provided by CFS. Fees collected for such services amounted to $21.6
million in 1996, an increase of 49% from $14.5 million in 1995. Advisory fees
related to international business were $18.1 million and $12.3 million in 1996
and 1995, respectively. Advisory fees are generally earned upon the closing of
transactions. Therefore, the timing and number of transactions generating fees
as well as the amount of such fees may result in significant fluctuations in
revenues attributable to such fees from period to period. In addition to
advisory fees, CFS also collects recurring fees payable on a monthly and
quarterly basis (other fees) primarily related to the administration of
third-party owned and managed funding vehicles. The amount related to other fees
was $5.5 million in 1996 compared to $2.4 million in 1995, an increase of 127%
over the prior year primarily due to the increased utilization of the funding
vehicles.

Other income decreased $2.0 million from $2.2 million in 1995 to $0.2 million in
1996. In 1995, the Company recorded the sale, without recourse, of its interest
in potential future cash flows from certain transactions included in its insured
portfolio for a net amount of $2.2 million.

Net investment income was $17.9 million in 1996, an increase of 39% from $12.8
million in 1995. Average assets available for investment increased to $323.1
million in 1996 from $238.4 million in 1995. The increase was primarily due to
the investment of the proceeds of the December 1995 initial public offering and
private placement of the Company's common stock to Centre Reinsurance Limited
and the July 1995 private placement to ORIX. The average annualized pre-tax
yield on the investment portfolio increased to 5.6% in 1996 from 5.5% in 1995.
The average after-tax yield on the investment portfolio was 4.5% in 1996 and
1995. The amount of tax-exempt securities held in the Company's investment
portfolio decreased to 53% at December 31, 1996 from 57% at December 31, 1995.
Net realized capital losses in 1996 were $1.8 million as compared to $1.4
million of net realized capital gains in 1995. In the fourth quarter of 1996,
the Company recorded a pre-tax capital loss of $2.0 million related to Holdings'
investment in three derivatives products subsidiaries of the Mutual Life
Assurance Company of Canada (such subsidiaries, the "TMG Group"). This
represents a partial write-off of the approximately $11 million that Holdings is
committed to invest in the TMG Group as of December 31, 1996. The Company will
continue to monitor this investment, and if any further impairment occurs, there
would be additional write-offs in the future.

Total expenses were $36.0 million in 1996, an increase of 29% from $28.0 million
in 1995. Total expenses included additions to the reserve for losses and loss
adjustment expenses, underwriting and operating expenses, policy acquisition
costs, and interest expense.


                                       41
<PAGE>

CapMAC maintains a reserve for losses and loss adjustment expenses which
consists of a supplemental loss reserve ("SLR") and, if appropriate, a case
basis loss reserve for expected levels of defaults resulting from credit
failures on currently insured issues. The SLR is based on estimates of the
portion of earned premiums required to cover those claims. A case basis loss
reserve is established for insured obligations when, in the judgment of
management, a default in the timely payment of debt service is imminent. For
defaults considered temporary, a case basis loss reserve is established in an
amount equal to the present value of the anticipated defaulted debt service
payments over the expected period of default. If the default is judged not to be
temporary, the present value of all remaining defaulted debt service payments is
recorded as a case basis loss reserve. Anticipated salvage recoveries are
considered in establishing case basis loss reserves when such amounts are
reasonably estimable. Corresponding to the growth in the insured portfolio, the
losses and loss adjustment expenses were $4.8 million in 1996 compared to $3.1
million in 1995. Apart from additions to the SLR the Company incurred no losses
in 1996.

Underwriting and operating expenses were $22.2 million in 1996, a 35% increase
from $16.4 million in 1995. Underwriting and operating expenses consisted of
gross underwriting and operating expenses, reduced by the deferral to future
periods of certain costs related to CapMAC's acquisition of new business
(Deferred Acquisition Costs - "DAC") and ceding commission income. Gross
underwriting and operating expenses were $40.2 million in 1996, a 19% increase
from $33.9 million in 1995. The increase in underwriting and operating expenses
was due to increased compensation costs and operating expenses, partially offset
by higher ceding commission income. Staff and benefit-related expenses,
including the discretionary bonuses to employees, constituted approximately 74%
of gross underwriting and operating expenses in 1996 compared to 73% in 1995.
The Company maintains a discretionary bonus plan under which annual bonuses of
$10.4 million and $7.8 million were awarded to employees in 1996 and 1995,
respectively. Underwriting and operating expenses deferred by CapMAC were $18.0
million and $17.5 million in 1996 and 1995, respectively.

Policy acquisition costs represent the amortization of DAC, which are those
expenses incurred by CapMAC in acquiring new business. The increase in policy
acquisition costs to $7.8 million in 1996 from $7.2 million in 1995 lags the
increase in premiums earned in the corresponding periods primarily due to the
increasing average life of the insured portfolio. Interest expense related to
the senior debt was $1.2 million in 1996 and 1995.

In 1996 and 1995, the Company had a net tax expense of $14.7 million and $11.1
million, respectively. The Company's effective tax rate was 30.7% and 32.1% for
1996 and 1995, respectively. The effective tax rates during these periods were
lower than the statutory tax rate of 35% in 1996 and 1995 primarily due to
tax-exempt interest income. As of December 31, 1996, tax-exempt interest income
of $9.7 million represented 20.0% of earnings before taxes ("EBT") compared to
$7.8 million which represented 22.5% of EBT in the prior year.

Year Ended December 31, 1995 versus Year Ended December 31, 1994

The Company reported net income of $23.5 million or $1.73 per share during 1995,
a 38% increase over net income of $17.1 million or $1.23 per share reported in
1994. Earnings per share on a fully diluted basis were $1.65 in 1995, a 34%
increase over $1.23 in 1994. Operating earnings per share on a fully diluted
basis for 1995 was $1.58, an increase of 27% from $1.24 in 1994.

Total revenues in 1995 were $62.6 million, an increase of 41% from $44.6 million
in 1994. This increase was primarily due to higher premiums earned and advisory
fees.

In 1995, gross premiums written were $57.5 million, an increase of 29% from
$44.7 million for the same period in 1994. Net premiums earned were $29.2
million in 1995, an increase of 27% from $23.1 million in 1994.

Business originated or renewed in 1995 was estimated to generate $89.5 million
of PFR, an increase of $38.6 million or 76% over the same period in 1994.
Correspondingly, the amount of guarantees issued


                                       42
<PAGE>

(gross par written) increased from $9.6 billion in 1994 to $16.9 billion in
1995, representing an increase of 77%. At December 31, 1995, CapMAC's
outstanding policies are expected to generate $155.4 million of PFR, up
approximately 58% from $98.1 million at December 31, 1994. The discount rate
used for purposes of the PFR calculation was 7% for 1995 and 1994. Unearned
premiums, representing premiums collected but not yet earned, increased by $19.9
million from December 31, 1994 to a total of $45.8 million at December 31, 1995.

At December 31, 1995, net par insured and outstanding was $12.6 billion, up 34%
from $9.4 billion at December 31, 1994. The remaining weighted average life of
the insured portfolio was estimated to be 6.0 years at December 31, 1995 and 5.0
years at December 31, 1994.

Advisory and other fees increased 50% from $11.3 million in 1994 to $17.0
million in 1995. The increase in fees received by CFS related to the closing of
several transactions which involved extensive advisory and structuring services
provided by CFS.

Other income increased $2.3 million from $0 in 1994 to $2.3 million in 1995. The
increase was primarily due to the Company's sale without recourse in 1995 of its
interest in potential future cash flows from certain transactions included in
its insured portfolio for a net amount of $2.2 million.

Net investment income was $12.8 million in 1995 and $10.3 million in 1994.
Average assets available for investment increased from $198.0 million in 1994 to
$238.4 million in 1995. The increase was primarily due to the investment of the
proceeds of the Offering and private placements. The average annualized pre-tax
yield on the investment portfolio increased from 5.3% in 1994 to 5.5% in 1995
due to a higher interest rate environment. The average after-tax yield on the
investment portfolio increased from 4.3% in 1994 to 4.5% in 1995. Net realized
capital gains in 1995 were $1.5 million higher than 1994. The amount of
tax-exempt securities held in the Company's investment portfolio decreased from
61% at December 31, 1994 to 57% at December 31, 1995. Total expenses were $28.0
million in 1995, an increase of 42% from $19.7 million in 1994. Total expenses
included additions to the reserve for losses and loss adjustment expenses,
underwriting and operating expenses, policy acquisition costs, and interest
expense.

Corresponding to the growth in the insured portfolio, the losses and loss
adjustment expenses were $3.1 million in 1995 compared to $1.4 million in 1994.

In September 1995, CapMAC incurred its first claim on a financial guarantee
policy. Based on its current estimate, the Company expects the aggregate amount
of the claim and related loss adjustment expenses with respect to such policy
not to exceed $2.7 million, although no assurance can be given that such claims
and related expenses will not exceed that amount. Such amount was covered
through a recovery under a quota share reinsurance agreement of $0.2 million and
a reduction in the SLR of $2.5 million. The portion of the claim and related
expenses not covered under the quota share agreement is being funded through
payments to CapMAC from the Lureco Trust Account. (See - Liquidity and Capital
Resources). At December 31, 1995, the Company had a case basis loss reserve of
$0.6 million and reinsurance recoverable of $69,000.

Underwriting and operating expenses were $16.4 million in 1995, a 31% increase
from $12.5 million in 1994. Underwriting and operating expenses consisted of
gross underwriting and operating expenses, reduced by the deferral to future
periods of certain costs related to CapMAC's acquisition of new business and
ceding commission income. Gross underwriting and operating expenses were $33.9
million and $26.7 million in 1995 and 1994, respectively. The increase in
underwriting and operating expenses was due to increased compensation costs and
other operating costs offset by increased ceding commission income. Staff and
benefit-related expenses, including payment of discretionary bonuses to
employees, constituted approximately 73% of gross underwriting and operating
expenses in 1995 compared to 69% in 1994. The Company maintains a discretionary
bonus plan under which aggregate annual bonuses of $7.8 million and $5.3 million
were awarded to employees in 1995 and 1994, respectively. Underwriting and
operating expenses deferred by CapMAC were $14.1 million and $17.5 million in
1995 and 1994, respectively.


                                       43
<PAGE>

Policy acquisition costs represent the amortization of DAC, which are those
expenses incurred by CapMAC in acquiring new business. The increase in policy
acquisition costs from $4.5 million in 1994 to $7.2 million in 1995 relates to
the increase in premiums earned in the corresponding periods. Interest expense
related to the senior debt was $1.2 million in 1995 and 1994.

In 1995 and 1994, the Company had net tax expense of $11.1 million and $7.8
million, respectively. The Company's effective tax rate was 32.0% and 31.4% for
1995 and 1994, respectively. The effective tax rates during these periods were
lower than the statutory tax rate of 35% in 1995 and 34% in 1994 primarily due
to tax-exempt interest income. As of December 31, 1995, tax-exempt interest
income of $7.8 million represented 22.5% of EBT compared to $5.7 million which
represented 22.9% of EBT in the prior year.

Liquidity and Capital Resources

The Company and Holdings. The operations of the Company are conducted primarily
through CapMAC and CFS, wholly owned subsidiaries of Holdings. The liquidity of
Holdings both on a short-term (less than twelve months) and long-term (twelve
months or longer) basis will be dependent on several factors including
borrowings, equity issuances and dividends from CFS and CapMAC. Holdings
requires liquidity for payment of dividends to shareholders, investment in
international and other business ventures and debt service. While CFS has from
time to time paid dividends to Holdings, currently no dividends are expected to
be received by Holdings from CapMAC.

Holdings is currently committed to purchase common stock in the TMG Group for
approximately $11 million. Holdings must fund its investment in TMG Group no
later than February 27, 2000 at which time the commitment amount would have
contractually increased to approximately $13 million. Holdings has also agreed
to invest, if required, an additional amount of $4.9 million in CapMAC Asia.

CapMAC, in early 1997, has made an investment of 50 million French Francs
(approximately 10 million U.S. dollars) in CapMAC Assurance, S.A., an insurance
subsidiary to be established in Paris, France. CapMAC Assurance is licensed to
write financial guarantee insurance in the European Union member states.

During the fourth quarter of 1996, the Company incorporated a wholly owned
subsidiary, CapMAC Investment Management, Inc. ("CIM"). CIM will engage in the
funds management business and will sponsor and manage funds targeted to both
domestic and international institutional investors and high net worth
individuals. Where appropriate, CapMAC may also provide credit enhancement for
these funds. CIM is expected to be initially capitalized with $2 million and
commence operations in early 1997.

Management believes that the Company's operating liquidity needs, both on a
short-term basis and long-term basis, can be funded exclusively from its
operating cash flow. The Company has a number of sources of liquidity which it
expects to have available to pay claims and other obligations on a short- and
long-term basis: the cash flow from its written premiums, advisory fees
collected, its investment portfolio and the earnings thereon, its bank line of
credit, its reinsurance arrangements with third-party reinsurers, the capital
markets and, with respect to claims under certain circumstances, realizations
from collateral underlying its insured transactions.

The Company has no material commitments for capital expenditures, although it
has the investment commitments referred to above. The total liquidity resources
of the Company represented by its investment income, its premium and advisory
fees collections and its liquidity arrangements are, in management's opinion,
adequate to meet the Company's cash needs.

CapMAC. CapMAC's primary sources of funds are from premiums received and
earnings from its investment portfolio. Currently CapMAC's primary use of funds
is to pay operating expenses. In the event of a default by an issuer of an
insured obligation and upon exhaustion of other liquidity sources in the
transaction, such as the cash flow from any assets collateralizing such
obligations, funds from CapMAC's


                                       44
<PAGE>

investment portfolio may be required to satisfy claims. The insurance policies
issued by CapMAC provide, in general, that payment of principal, interest and
other amounts insured by CapMAC may not be accelerated by the holder of the
obligation but are paid by CapMAC in accordance with the obligation's original
payment schedule or, at CapMAC's option, on an accelerated basis. These policy
provisions prohibiting acceleration of certain claims serve to reduce CapMAC's
liquidity requirements.

CapMAC has available a $150 million, standby corporate liquidity facility
presently scheduled to terminate in September 1999 which, if necessary, is
available (subject to satisfaction of customary drawing conditions) to provide
funds for any claim payments under its policies. Such drawing conditions include
a requirement that CapMAC maintain at least $165 million of "Tangible Net
Worth," which is defined as the difference between the market value of CapMAC's
portfolio of marketable securities plus the amount of its cash on hand and the
total liabilities and reserves of CapMAC determined in accordance with GAAP,
excluding any loans made under the liquidity facility. As of December 31, 1996,
CapMAC's Tangible Net Worth was $228.7 million. The liquidity facility is
provided by a consortium of banks headed by Bank of Montreal, as agent, which is
rated A1+ and P1 by S&P and Moody's, respectively. As of December 31, 1996,
CapMAC has never borrowed under this corporate liquidity facility.

The Company has a conservative investment strategy of investing in U.S.
government and agency obligations and securities that are rated "A" or better by
the major rating agencies. The Company has readily marketable, high quality,
fixed income securities and short-term investments in its investment portfolio.
The average contractual maturity of securities within the investment portfolio
was 6.1 years and 4.7 years at December 31, 1996 and December 31, 1995,
respectively. The average duration of the investment portfolio at December 31,
1996 and December 31, 1995 was 4.3 years and 3.5 years, respectively. At
December 31, 1996, the amortized cost of the Company's investment portfolio was
approximately $336.0 million (fair value of $339.2 million). The Company manages
its investments with the objectives of preserving its capital and claims-paying
ability, maintaining a high level of liquidity, minimizing taxes and, within
these constraints, optimizing long-term total return.

Reinsurance arrangements provide a further source of liquidity to CapMAC. CapMAC
actively pursues reinsurance as a means of diversifying and reducing risk,
enhancing return on capital and adding underwriting capacity. At December 31,
1996, the majority of CapMAC's reinsurance capacity was held by reinsurers who
were rated AA or better by S&P. CapMAC monitors the creditworthiness of all of
its reinsurers on a regular basis. In addition to its facultative and treaty
reinsurance agreements, CapMAC has a "stop-loss" reinsurance treaty with Mitsui
Marine and Fire Insurance Co., Ltd. ("Mitsui") which indemnifies CapMAC for up
to $50 million of incurred losses above $100 million. Effective January 1, 1997
the stop-loss reinsurance coverage increased to $75 million in excess of
incurred losses above $150 million increasing annually based on increases in
CapMAC's statutory qualified capital. The new stop-loss reinsurance is provided
by Mitsui, AXA Re Finance S.A. ("AXA Re"), and Munchener
Ruckversicherungs-Gesellschaft ("Munich Re").

In 1994, CapMAC and Luxembourg European Reinsurance LURECO S.A. ("Lureco"),
entered into a Per Annum Aggregate Reinsurance Treaty (the "Lureco Treaty")
pursuant to which Lureco reinsures CapMAC for certain losses and related
expenses, including all amounts which have been incurred by CapMAC for
anticipated settlement of claims regardless of whether such amounts have been
paid by CapMAC. The Lureco Treaty provides that the annual reinsurance premium
payable by CapMAC to Lureco, after deduction of the reinsurer's fee payable to
Lureco, be deposited in a trust account (the "Lureco Trust Account") to be
applied by CapMAC, at its option, to offset losses and loss expenses incurred by
CapMAC in connection with incurred claims. Amounts on deposit in the Lureco
Trust Account which have not been applied against claims are contractually due
to CapMAC at the termination of the treaty. The agreement is renewable annually
at CapMAC's option, subject to certain conditions. The agreement was renewed for
the 1996 policy year and provides $7 million of loss coverage in excess of the
premium deposit amount of $5 million retained in the Lureco Trust Account.
Additional coverage is provided for losses incurred in excess of 200% of the net
premiums earned up to $4 million for any one agreement year. In September 1995,
claims incurred of approximately $2.5 million on an insurance policy were
applied against the Lureco Trust Account.


                                       45
<PAGE>

At December 31, 1996, CapMAC had statutory qualified capital, which consisted of
statutory capital, unassigned surplus and contingency reserves, of $260.2
million, up from $239.9 million at December 31, 1995. CapMAC's policyholders'
leverage ratio, which is measured by the ratio of net principal and interest
insured to statutory qualified capital, was 90 to 1 at December 31, 1996 and 63
to 1 at December 31, 1995. CapMAC's claims-paying resources as defined by the
Company (which includes statutory qualified capital, PFR and stop-loss
reinsurance) stood at $542.9 million and $445.3 million at December 31, 1996 and
1995, respectively.

CapMAC Financial Services. The primary sources of funds for CFS are payments by
Holdings, CapMAC and CFS (Europe) under a service agreement (the "CFS Servicing
Agreement") and the collection of advisory fees for providing advisory and
structuring services to third parties. In addition, both CFS and CFS (Europe)
generate earnings from their respective investment portfolios. At December 31,
1996, the amortized cost and fair value of the consolidated CFS portfolio was
$7.3 million. The entire portfolio was highly liquid with maturities of less
than one year. The primary use of the funds of CFS is to pay its operating
expenses. All of the Company's personnel are employed by CFS. Under the CFS
Servicing Agreement, CFS allocates expenses to Holdings, CapMAC and CFS (Europe)
for services provided to these entities. It is intended that a portion of CFS'
funds be used to pay dividends to Holdings in order that Holdings will have
funds available to pay dividends and satisfy its other obligations.


                                       46
<PAGE>

Item 8. Financial Statements and Supplementary Data.

                      CapMAC HOLDINGS INC. AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1996, 1995 and 1994

                   (With Independent Auditors' Report Thereon)


                                       47
<PAGE>

                          Independent Auditors' Report

The Board of Directors
CapMAC Holdings Inc.:


We have audited the accompanying consolidated balance sheets of CapMAC Holdings
Inc. and subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CapMAC Holdings Inc.
and subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.


/s/ KPMG Peat Marwick LLP



New York, New York
January 29, 1997


                                       48
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                           Consolidated Balance Sheets
                  (Dollars in thousands, except per share data)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                December 31     December 31
                                                                                       1996            1995
-----------------------------------------------------------------------------------------------------------
<S>                                                                               <C>               <C>    
Investments:
Bonds at fair value (amortized cost $302,284 at December 31, 1996
and $210,651 at December 31, 1995)                                                $ 305,422         215,706
Short-term investments (at amortized cost which approximates fair
value)                                                                               33,752          82,019
Investment in affiliates                                                             34,886          32,033
-----------------------------------------------------------------------------------------------------------
   Total investments                                                                374,060         329,758
-----------------------------------------------------------------------------------------------------------
Cash                                                                                    966           1,033
Accrued investment income                                                             3,847           3,136
Deferred acquisition costs                                                           45,380          35,162
Premiums receivable                                                                   5,141           3,540
Prepaid reinsurance                                                                  18,489          13,171
Other assets                                                                          9,351           5,473
-----------------------------------------------------------------------------------------------------------
   Total assets                                                                   $ 457,234         391,273
===========================================================================================================

                                     LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
Unearned premiums                                                                 $  68,262          45,767
Reserve for losses and loss adjustment expenses                                      10,985           6,548
Ceded reinsurance                                                                     1,738           2,469
Accounts payable and other accrued expenses                                          15,274          11,367
Senior notes                                                                         15,000          15,000
Current income taxes                                                                  2,890           3,264
Deferred income taxes                                                                 9,590          10,776
-----------------------------------------------------------------------------------------------------------
   Total liabilities                                                                123,739          95,191
-----------------------------------------------------------------------------------------------------------
Minority Interest                                                                    23,108          19,563
-----------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock - $0.01 par value per share; 20,000,000 shares are
authorized; none outstanding at December 31, 1996 and 1995                                -               -
Common stock - $0.01 par value per share; 50,000,000 shares are authorized;
16,425,324 and 15,966,032 shares issued December 31, 1996 and 1995; 16,425,274
and 15,965,995 shares outstanding at December 31, 1996 and 1995                         164             160
Additional paid-in capital                                                          226,428         223,400
Unrealized (depreciation) appreciation on investments, net of tax                       (71)          2,443
Retained earnings                                                                    89,310          57,029
Unallocated ESOP shares                                                              (5,430)         (6,497)
Cumulative translation adjustment, net of tax                                           (14)            (16)
-----------------------------------------------------------------------------------------------------------
   Total stockholders' equity                                                       310,387         276,519
-----------------------------------------------------------------------------------------------------------
   Total liabilities, minority interest, and stockholders' equity                 $ 457,234         391,273
===========================================================================================================
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       49
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                        Consolidated Statements of Income
                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                     Year Ended            Year Ended            Year Ended
                                              December 31, 1996     December 31, 1995     December 31, 1994
------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                      <C>                   <C>   
Revenues:
Direct premiums written                               $  71,752                56,541                43,598
Assumed premiums written                                  1,086                   935                 1,064
Ceded premiums written                                  (15,104)              (15,992)              (11,069)
------------------------------------------------------------------------------------------------------------
   Net premiums written                                  57,734                41,484                33,593
Increase in unearned premiums                           (17,177)              (12,242)              (10,490)
------------------------------------------------------------------------------------------------------------
   Net premiums earned                                   40,557                29,242                23,103
Advisory and other fees                                  27,143                16,968                11,318
Net investment income                                    17,906                12,843                10,316
Net realized capital (losses) gains                      (1,804)                1,351                  (117)
Other income (loss)                                         177                 2,228                   (69)
------------------------------------------------------------------------------------------------------------
   Total revenues                                        83,979                62,632                44,551
------------------------------------------------------------------------------------------------------------

Expenses:
Losses and loss adjustment expenses                       4,815                 3,141                 1,429
Underwriting and operating expenses                      22,200                16,421                12,532
Policy acquisition costs                                  7,824                 7,203                 4,529
Interest expense                                          1,203                 1,203                 1,203
------------------------------------------------------------------------------------------------------------
   Total expenses                                        36,042                27,968                19,693
------------------------------------------------------------------------------------------------------------
   Income before income taxes and
   minority interest                                     47,937                34,664                24,858
Income Taxes                                             14,712                11,108                 7,792
-----------------------------------------------------------------------------------------------------------
   Income before minority interest                       33,225                23,556                17,066
Minority interest                                           343                   (28)                    -
------------------------------------------------------------------------------------------------------------

   Net Income                                         $  33,568                23,528                17,066
============================================================================================================

   Primary earnings per share                         $    1.92                  1.73                  1.23
   Fully diluted earnings per share                   $    1.89                  1.65                  1.23
============================================================================================================
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       50
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                 Consolidated Statements of Stockholders' Equity
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                    Year Ended           Year Ended           Year Ended
                                             December 31, 1996    December 31, 1995    December 31, 1994
---------------------------------------------------------------------------------------------------------
<S>                                                  <C>                    <C>                  <C>
Common stock:
Balance at beginning of year                         $     160                  123                  123
Common stock issued                                          4                   37                    -
---------------------------------------------------------------------------------------------------------
   Balance at end of year                                  164                  160                  123
---------------------------------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of year                           223,400              159,728              159,718
Issuance of common stock                                 3,028               63,672                   10
---------------------------------------------------------------------------------------------------------
   Balance at end of year                              226,428              223,400              159,728
---------------------------------------------------------------------------------------------------------
Unrealized (depreciation) appreciation
on investments, net of tax:
Balance at beginning of year                             2,443               (5,522)               3,629
Unrealized (depreciation) appreciation on
investments                                             (2,514)               7,965               (9,151)
---------------------------------------------------------------------------------------------------------
   Balance at end of year                                  (71)               2,443               (5,522)
---------------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year                            57,029               33,501               16,435
Net income                                              33,568               23,528               17,066
Dividends declared - $.08 per share                     (1,287)                   -                    -
---------------------------------------------------------------------------------------------------------
   Balance at end of year                               89,310               57,029               33,501
---------------------------------------------------------------------------------------------------------
Unallocated ESOP shares:
Balance at beginning of year                            (6,497)              (7,169)              (8,477)
Allocation of ESOP shares                                1,067                  672                1,308
---------------------------------------------------------------------------------------------------------
   Balance at end of year                               (5,430)              (6,497)              (7,169)
---------------------------------------------------------------------------------------------------------
Cumulative translation adjustment, net
of tax:
Balance at beginning of year                               (16)                   -                    -
Translation adjustment                                       2                  (16)                   -
---------------------------------------------------------------------------------------------------------
   Balance at end of year                                  (14)                 (16)                   -
---------------------------------------------------------------------------------------------------------
                                                     $ 310,387              276,519              180,661
   Total stockholders' equity
=========================================================================================================
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       51
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                    Year Ended            Year Ended          Year Ended
                                             December 31, 1996     December 31, 1995   December 31, 1994
---------------------------------------------------------------------------------------------------------
<S>                                                 <C>                      <C>                 <C>   
Cash flows from operating activities:
Net income                                          $   33,568                23,528              17,066
---------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
   Reserve for losses and loss adjustment
   expenses                                              4,437                 1,357               1,429
   Unearned premiums, net                               22,496                19,862              15,843
   Deferred acquisition costs                          (10,218)              (10,302)             (9,611)
   Premiums receivable                                  (1,601)                 (161)             (2,103)
   Accrued investment income                              (711)                 (390)               (848)
   Income taxes payable                                  1,046                 3,858               5,390
   Net realized capital losses (gains)                   1,804                (1,351)                117
   Accounts payable and other accrued expenses           3,906                 1,251               3,421
   Prepaid reinsurance                                  (5,318)               (7,620)             (5,352)
   Other, net                                           (8,779)               (1,694)                558
---------------------------------------------------------------------------------------------------------
         Total adjustments                               7,062                 4,810               8,844
---------------------------------------------------------------------------------------------------------
   Net cash provided by operating activities            40,630                28,338              25,910
---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
   Purchases of investments                           (223,967)             (171,940)            (88,797)
   Purchases of investment in affiliates                (3,333)              (32,016)                  -
   Proceeds from sales of investments                   57,210                53,882              42,118
   Proceeds from maturities of investments             123,773                37,980              19,958
---------------------------------------------------------------------------------------------------------
   Net cash used in investing activities               (46,317)             (112,094)            (26,721)
---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
   Allocation of ESOP shares                             1,067                   672               1,308
   Net proceeds from sale of common stock                    -                63,699                   -
   Proceeds from sale of stock in
   CapMAC Asia                                           1,892                     -                   -
   Minority interest capital contribution
   to CapMAC Asia                                        2,123                19,535                   -
   Dividends paid                                       (1,287)                    -                   -
   Exercise of stock options                             1,980                     -                   -
   Other, net                                             (155)                    -                   -
---------------------------------------------------------------------------------------------------------
   Net cash provided by financing activities             5,620                83,906               1,308
---------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash                            (67)                  150                 497
Cash balance at beginning of year                        1,033                   883                 386
---------------------------------------------------------------------------------------------------------
   Cash balance at end of year                      $      966                 1,033                 883
=========================================================================================================
Supplemental disclosures of cash flow
information:
Income taxes paid                                   $   13,570                 7,106               2,345
Interest paid                                       $    1,128                 1,128               1,128
=========================================================================================================
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       52
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                           December 31, 1996 and 1995

1)       Background
         CapMAC Holdings Inc. ("Holdings" or the "Company"), a Delaware
         corporation, is the sole stockholder of Capital Markets Assurance
         Corporation ("CapMAC"), CapMAC Financial Services, Inc. ("CFS"), and
         CapMAC Financial Services (Europe) Ltd. ("CFS (Europe)"), a subsidiary
         of CFS, and a lead investor in CapMAC Asia Ltd. ("CapMAC Asia").

         CapMAC is a New York-domiciled monoline stock insurance company which
         engages only in the business of financial guarantee and surety
         insurance. CapMAC is licensed in all 50 states in addition to the
         District of Columbia, the Commonwealth of Puerto Rico and the territory
         of Guam. CapMAC insures structured asset-backed, corporate, municipal
         and other financial obligations in the U.S. and international capital
         markets. CapMAC also provides financial guarantee reinsurance for
         structured asset-backed, corporate, municipal and other financial
         obligations written by other major insurance companies.

         CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors
         Service, Inc. ("Moody's"), "AAA" by Standard & Poor's Ratings Group
         ("S&P"), "AAA" by Duff & Phelps Credit Rating Co. ("Duff & Phelps"),
         and "AAA" by Nippon Investors Service, Inc., a Japanese rating agency.
         Such ratings reflect only the views of the respective rating agencies,
         are not recommendations to buy, sell or hold securities and are subject
         to revision or withdrawal at any time by such rating agencies.

         CFS and CFS (Europe) receive fees for providing advisory, consulting
         and structuring services to third parties. CFS also provides various
         services, including underwriting, reinsurance, marketing, data
         processing and other services to Holdings, CapMAC and CFS (Europe).
         Holdings, CapMAC and CFS (Europe) pay CFS a fee for providing such
         services, but not in excess of CFS' cost for such services.

         In December 1995, as part of its strategy to expand into Asia, the
         Company purchased 36.3% of CapMAC Asia. As of December 31, 1996, the
         Company currently owns 30.7% of CapMAC Asia. CapMAC Asia has a 33.33%
         investment in Asia Credit Services (Pte) Ltd ("Asia Services"). Asia
         Services owns all of the stock of Asian Securitization & Infrastructure
         Assurance (Pte) Ltd ("ASIA Ltd"), a regional financial guarantee
         company located in Singapore. ASIA Ltd was formed to provide guarantees
         of high quality debt securities in the primary and secondary Asian
         fixed income capital markets and, together with Asia Services, to
         engage in related business activities in the Asian capital markets and
         to provide technical advice and assistance in connection with Asian
         securitization transactions.

         On December 19, 1995 Holdings sold 2,500,000 new shares of its common
         stock in an initial public offering ("the Offering"). In conjunction
         with the Offering, Holdings also sold 500,000 shares to Centre
         Reinsurance Limited (Centre Re), a wholly owned subsidiary of The
         Zurich Insurance Company, in a private placement (see note 16).

         In July 1995, the Company sold 500,001 shares of common stock to ORIX
         USA Corporation ("ORIX"), a subsidiary of ORIX Corporation, a leading
         Japanese leasing company (see note 16).


                                       53
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

2)       Significant Accounting Policies
         Significant accounting policies used in the preparation of the
         accompanying consolidated financial statements are as follows:

         a)       Basis of Presentation
                  The accompanying consolidated financial statements are
                  prepared on the basis of generally accepted accounting
                  principles ("GAAP") and include the accounts of Holdings and
                  its wholly owned subsidiaries, principally CapMAC and CFS, and
                  its investment in CapMAC Asia. The remaining shareholders in
                  CapMAC Asia are accounted for as minority interest. All
                  significant intercompany transactions have been eliminated in
                  consolidation.

                  The preparation of financial statements in conformity with
                  generally accepted accounting principles requires management
                  to make estimates and assumptions that affect the reported
                  amounts of assets and liabilities and the disclosure of
                  contingent assets and liabilities at the date of the
                  consolidated financial statements and the reported amounts of
                  revenues and expenses during the reporting period. Management
                  believes the most significant estimates relate to deferred
                  acquisition costs, reserve for losses and loss adjustment
                  expenses and disclosures of financial guarantees outstanding.
                  Actual results could differ from those estimates.

         b)       Investments
                  As of December 31, 1996 and 1995, all of the Company's
                  securities have been classified as available-for-sale.
                  Available-for-sale securities are recorded at fair value. Fair
                  value is generally based upon quoted market prices. Unrealized
                  holding gains and losses, net of the related tax effect, on
                  available-for-sale securities are excluded from earnings and
                  are reported as a separate component of stockholders' equity
                  until realized. Transfers of securities between categories are
                  recorded at fair value at the date of transfer. A decline in
                  the fair value of any available-for-sale security below cost
                  that is deemed other than temporary is charged to earnings
                  resulting in the establishment of a new cost basis for the
                  security.

                  Short-term investments are those investments having a maturity
                  of less than one year at purchase date. Short-term investments
                  are carried at amortized cost which approximates fair value.

                  Premiums and discounts are amortized or accreted over the life
                  of the related security as an adjustment to yield using the
                  effective interest method. Dividend and interest income are
                  recognized when earned. Realized gains and losses are included
                  in earnings and are derived using the FIFO (first-in,
                  first-out) method for determining the cost of securities sold.

                  Investment in affiliates is accounted for in accordance with
                  the equity method of accounting. The investment in affiliates
                  consists of the Company's investment in Asia Services and P.T.
                  ABS Finance Indonesia (formerly P.T. Citimas Capital (Pte)
                  Ltd.) ("ABS Finance").


                                       54
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

         c)       Premium Revenue Recognition
                  Premiums which are payable monthly to CapMAC are reflected in
                  income when due, net of amounts payable to reinsurers.
                  Premiums which are payable quarterly, semi-annually or
                  annually are reflected in income, net of amounts payable to
                  reinsurers, on an equal monthly basis over the corresponding
                  policy term. Premiums that are collected as a single premium
                  at the inception of the policy and have a term longer than one
                  year are earned, net of amounts payable to reinsurers, by
                  allocating premium to each bond maturity based on the
                  principal amount and earning it straight-line over the term of
                  each bond maturity. For the years ended December 31, 1996 and
                  1995, 91% of net premiums earned were attributable to premiums
                  payable in installments and 9% were attributable to premiums
                  collected on an up-front basis.

         d)       Advisory Fee Revenue Recognition
                  CFS and CFS (Europe) collect advisory fees for advising
                  clients as to the most appropriate structure to use for a
                  given securitization transaction based on the nature of the
                  assets and financial objective of the customer. Advisory fees
                  received by CFS or CFS (Europe) are generally earned when a
                  transaction closes. Such amounts are non-refundable and are
                  for services provided prior to the close of a transaction.

         e)       Deferred Acquisition Costs
                  Certain costs incurred by CapMAC, which vary with and are
                  primarily related to the production of new business, are
                  deferred. These costs include direct and indirect expenses
                  related to underwriting, marketing and policy issuance, rating
                  agency fees and premium taxes, net of reinsurance ceding
                  commissions. The deferred acquisition costs are amortized over
                  the period in proportion to the related premium earnings. The
                  actual amount of premium earnings may differ from projections
                  due to various factors such as renewal or early termination of
                  insurance contracts or different run-off patterns of exposure
                  resulting in a corresponding change in the amortization
                  pattern of the deferred acquisition costs.

         f)       Reserve for Losses and Loss Adjustment Expenses
                  The reserve for losses and loss adjustment expenses consists
                  of a supplemental loss reserve ("SLR") and a case basis loss
                  reserve. The SLR is established for expected levels of losses
                  resulting from credit failures on currently insured issues and
                  reflects the estimated portion of earned premiums required to
                  cover those losses.

                  A case basis loss reserve is established for insured
                  obligations when, in the judgment of management, a default in
                  the timely payment of debt service is imminent. For defaults
                  considered temporary, a case basis loss reserve is established
                  in an amount equal to the present value of the anticipated
                  defaulted debt service payments over the expected period of
                  default. If the default is judged not to be temporary, the
                  present value of all remaining defaulted debt service payments
                  is recorded as a case basis loss reserve. Anticipated salvage
                  recoveries are considered in establishing case basis loss
                  reserves when such amounts are reasonably estimable. Case
                  basis loss reserves may be allocated from any SLR outstanding
                  at the time the case basis reserves are established.

                  Management believes that the current level of reserves is
                  adequate to cover the ultimate net cost of claims and the
                  related expenses with respect to financial guarantees issued
                  by CapMAC. The establishment of the appropriate level of loss
                  reserves is an


                                       55
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

                  inherently uncertain process involving estimates and
                  subjective judgments by management, and therefore there can be
                  no assurance that ultimate losses in CapMAC's insured
                  portfolio will not exceed the current estimate of loss
                  reserves.

         g)       Depreciation
                  Leasehold improvements, furniture, fixtures and electronic
                  data processing equipment are being amortized or depreciated
                  over the lease term or useful life, whichever is shorter,
                  using the straight-line method.

         h)       Income Taxes
                  Deferred income taxes are provided with respect to temporary
                  differences between the financial statement and tax basis of
                  assets and liabilities using enacted tax rates in effect for
                  the year in which the differences are expected to reverse. The
                  effect on deferred tax assets and liabilities of a change in
                  tax rates is recognized in the period that includes the
                  enactment date.

         i)       Earnings Per Share
                  Earnings per share ("EPS") has been computed using the
                  modified treasury stock method. For periods prior to the
                  offering, the average market value of the shares was
                  determined by an independent consulting firm. Total weighted
                  average number of common stock and common stock equivalents
                  used in calculating the primary earnings per share, for the
                  years ended December 31, 1996, 1995 and 1994 were
                  approximately 17,441,000, 13,636,000 and 13,645,000,
                  respectively. Total weighted average number of common stock
                  and common stock equivalents used in calculating the fully
                  diluted earnings per share, for the years ended December 31,
                  1996, 1995 and 1994 were approximately 17,792,000, 14,337,000
                  and 13,645,000, respectively.

         j)       Accounting for Stock Issued to Employees
                  In October 1995, the Financial Accounting Standards Board
                  ("FASB") issued SFAS No. 123, "Accounting for Stock-Based
                  Compensation." SFAS No. 123 establishes accounting and
                  reporting standards for stock-based employee compensation
                  plans. This Statement allows companies to choose between the
                  "fair value based method of accounting" as defined in this
                  Statement and the "intrinsic value based method of accounting"
                  as prescribed by Accounting Principles Board ("APB") Opinion
                  No. 25, "Accounting for Stock Issued to Employees." The
                  Company has elected to remain with the accounting requirements
                  under APB 25. The pro forma disclosures of net income and
                  earnings per share required by SFAS No. 123, as if the fair
                  value based method of accounting had been applied, are
                  included in note 6.

         k)       Reclassifications
                  Certain prior year balances have been reclassified to conform
                  to the current year presentation.


                                       56
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

3)       Insured Portfolio
         At December 31, 1996 and 1995, the principal amount of financial
         obligations insured by CapMAC was $24.5 billion and $16.9 billion,
         respectively, and net of reinsurance (net principal outstanding), was
         $19.7 billion and $12.6 billion, respectively, with a weighted average
         life of 6.4 years and 6.0 years, respectively. CapMAC's insured
         portfolio was broadly diversified by geographic distribution and type
         of insured obligations, with no single insured obligation in excess of
         statutory single risk limits, after giving effect to any reinsurance
         and collateral, which are a function of CapMAC's statutory qualified
         capital (the sum of statutory capital and surplus and mandatory
         contingency reserve). At December 31, 1996 and 1995, the statutory
         qualified capital was approximately $260 million and $240 million,
         respectively.

<TABLE>
<CAPTION>
                                                            Net Principal Outstanding
                                                   December 31, 1996        December 31, 1995
                                                  -------------------      -------------------
Type of Obligations Insured ($ in millions)         Amount         %          Amount         %
----------------------------------------------------------------------------------------------
<S>                                               <C>           <C>        <C>            <C> 
Consumer receivables                              $ 10,362      52.8       $   6,959      55.1
Trade and other corporate
obligations                                          8,479      43.1           4,912      38.9
Municipal/government obligations                       814       4.1             757       6.0
----------------------------------------------------------------------------------------------
   Total                                          $ 19,655     100.0        $ 12,628     100.0
==============================================================================================
</TABLE>

         At December 31, 1996 and 1995, the principal and interest amount of
         financial obligations insured by CapMAC was $29.8 billion and $20.3
         billion, respectively, and net of reinsurance (net principal and
         interest outstanding), was $23.3 billion and $15.1 billion,
         respectively. At December 31, 1996, approximately 93% of CapMAC's
         insured portfolio was comprised of structured asset-backed
         transactions. Under these structures, a pool of assets covering at
         least 100% of the principal amount guaranteed under its insurance
         contract is sold or pledged to a special purpose bankruptcy remote
         entity. CapMAC's primary risk from such insurance contracts is the
         impairment of cash flows due to delinquency or loss on the underlying
         assets. CapMAC, therefore, evaluates all the factors affecting past and
         future asset performance by studying historical data on losses,
         delinquencies and recoveries of the underlying assets. Each transaction
         is reviewed to ensure that an appropriate legal structure is used to
         protect against the bankruptcy risk of the originator of the assets.
         Along with the legal structure, an additional level of first loss
         protection is also created to protect against losses due to credit or
         dilution. This first level of loss protection is usually available from
         reserve funds, excess cash flows, overcollateralization, or recourse to
         a third party. The level of first loss protection depends upon the
         historical losses and dilution of the underlying assets, but is
         typically several times the normal historical loss experience for the
         underlying type of assets.

         During 1995, the Company sold without recourse its interest in
         potential cash flows from transactions included in its insured
         portfolio and recognized $2,200,000 of income which has been included
         in other income in the accompanying consolidated financial statements.


                                       57
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

         The following entities each accounted for, through referrals and
         otherwise, 10% or more of total revenues for each of the periods
         presented:

        Year Ended                   Year Ended                Year Ended
    December 31, 1996             December 31, 1995        December 31, 1994
--------------------------       -------------------     ---------------------
                      % of                      % of                      % of
Name              Revenues       Name       Revenues     Name         Revenues
--------------------------       -------------------     ---------------------
Bear, Stearns &       11.8       Citicorp       11.7     Citicorp         14.3
    Co. Inc.
Citicorp              10.8

4)       Investments
         The amortized cost, gross unrealized gains, gross unrealized losses and
         estimated fair value for available-for-sale securities by major
         security type at December 31, 1996 and 1995 were as follows ($ in
         thousands):

December 31, 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                 Gross          Gross      Estimated
                                              Amortized     Unrealized     Unrealized           Fair
Securities Available-for-sale                      Cost          Gains         Losses          Value
----------------------------------------------------------------------------------------------------
<S>                                         <C>                  <C>            <C>          <C>  
U.S. Treasury obligations                   $     4,059             10              -          4,069
Mortgage-backed securities of
U.S. government instrumentalities
and agencies                                    127,484            367          1,161        126,690
Obligations of states, municipalities
and political subdivisions                      177,811          4,602            555        181,858
Corporate, asset-backed and other
securities                                       26,682             36            161         26,557
----------------------------------------------------------------------------------------------------
   Total                                    $   336,036          5,015          1,877        339,174
====================================================================================================
</TABLE>


                                       58
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

December 31, 1995
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                  Gross          Gross      Estimated
                                               Amortized     Unrealized     Unrealized           Fair
Securities Available-for-sale                       Cost          Gains         Losses          Value
-----------------------------------------------------------------------------------------------------
<S>                                           <C>                 <C>              <C>        <C>    
U.S. Treasury obligations                     $    4,153             55              -          4,208
Mortgage-backed securities of
U.S. government instrumentalities
and agencies                                     110,104            313             79        110,338
Obligations of states, municipalities
and political subdivisions                       166,010          4,809             82        170,737
Corporate and asset-backed
securities                                        12,403             45              6         12,442
---------------------------------------------------------------------------------------------------------
   Total                                      $  292,670          5,222            167        297,725
=====================================================================================================
</TABLE>

         The amortized cost and estimated fair value of investments in debt
         securities at December 31, 1996 by contractual maturity are shown below
         ($ in thousands):

December 31, 1996
--------------------------------------------------------------------------------

                                                     Amortized         Estimated
Securities Available-for-sale                             Cost        Fair Value
--------------------------------------------------------------------------------
Due in one year or less                            $    16,524            16,541
Due after one year through five years                   31,821            32,815
Due after five years through ten years                  76,450            78,200
Due after ten years                                     83,757            84,928
--------------------------------------------------------------------------------
     Sub-total                                         208,552           212,484
Mortgage-backed securities                             127,484           126,690
--------------------------------------------------------------------------------
         Total                                     $   336,036           339,174
================================================================================

         Actual maturities may differ from contractual maturities because
         borrowers may call or prepay obligations with or without call or
         prepayment penalties.

         Proceeds from sales of investment securities were approximately $57.2
         million, $53.9 million and $42.1 million in 1996, 1995 and 1994,
         respectively. Gross realized capital gains of $772,000, $1,486,000, and
         $781,000, and gross realized capital losses of $536,000, $135,000 and
         $898,000 were realized on those sales for the years ended December 31,
         1996, 1995 and 1994, respectively.


                                       59
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

         Investments include bonds having a fair value of approximately
         $3,884,000 and $3,985,000 which are on deposit at December 31, 1996 and
         1995, respectively, with state regulators as required by law.

         Investment income is comprised of interest and dividends, net of
         related expenses, and is applicable to the following sources:

<TABLE>
<CAPTION>
                                         Year Ended                 Year Ended             Year Ended
$ in thousands                    December 31, 1996          December 31, 1995      December 31, 1994
-----------------------------------------------------------------------------------------------------
<S>                                        <C>                          <C>                    <C>  
Bonds                                      $ 16,091                     11,105                  9,193
Short-term investments                        2,548                      2,088                    602
Mutual funds                                      -                       (147)                   705
Investment in affiliates                       (445)                        42                      -
Investment expenses                            (288)                      (245)                  (184)
-----------------------------------------------------------------------------------------------------
  Total                                    $ 17,906                     12,843                 10,316
=====================================================================================================
</TABLE>

         In 1995, the Company purchased, for approximately $11.0 million, 36.3%
         of CapMAC Asia. In 1996, Holdings invested an additional $1.2 million
         and sold 5.6%, or $1.9 million, of its investment in CapMAC Asia to its
         employees, directors and shareholders. CapMAC Asia has a 33.33%
         investment in Asia Services which amounted to $33.4 million and $30.7
         million at December 31, 1996 and 1995, respectively. Asia Services owns
         100% of the stock of ASIA Ltd.

         In 1995, Holdings acquired three million shares of ABS Finance for
         approximately $1,350,000. ABS Finance is a corporation established to
         develop securitization in Indonesia for obligations that are backed by
         assets originated in Indonesia or that are issued by Indonesian
         entities. ABS Finance participates as a principal in the securitization
         markets in Indonesia. Simultaneously with the execution of the joint
         venture agreement with the other investors in ABS Finance, CFS entered
         into a technical assistance agreement with ABS Finance to provide
         technical and advisory assistance to ABS Finance in exchange for
         certain fees. At December 31, 1996 and 1995, Holdings' investment
         represents an equity interest of approximately 14.3% and 15%,
         respectively, in ABS Finance. At December 31, 1996 and 1995, the
         investment amounted to $1,439,000 and $1,339,000, respectively.

         In 1995, Holdings entered into a strategic alliance with The Mutual
         Life Assurance Company of Canada and three of its derivatives products
         subsidiaries (such subsidiaries, "TMG Group"). TMG Group provides a
         broad range of derivative products, including investment agreements and
         long dated interest rate swaps. In addition, TMG Group provides
         interest rate swaps and currency swaps. Because the obligations of TMG
         Group under its derivative transactions are guaranteed by The Mutual
         Life Assurance Company of Canada, TMG Group is rated AA by S&P and Aa3
         by Moody's.


                                       60
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

         In connection with the strategic alliance, Holdings was issued a
         warrant to purchase 17.7% of the common stock of each of the companies
         in TMG Group at an aggregate initial purchase price of $10.0 million,
         as increased over time under a LIBOR-based formula. On a monthly basis,
         the strike price will be adjusted upwards by a one-month LIBOR rate
         until the warrants are exercised. To the extent that Holdings has not
         exercised this warrant prior to February 27, 2000, TMG Group may
         require that Holdings exercise the warrant, at which time Holdings
         would be obligated to invest up to approximately $13.0 million in TMG
         Group, which amount is based upon assuming a constant LIBOR rate of 5%.
         The occurrence of certain other events involving an insolvency of TMG
         Group or a change of control of the Company that has a material adverse
         effect on TMG Group entitles TMG Group to require Holdings to exercise
         the warrants prior to February 27, 2000. The Company values the
         warrants based upon the difference between the exercise price adjusted
         by the LIBOR-based formula and the estimated fair value of its
         percentage share of ownership of TMG Group.

         During 1996, the estimated fair value of the warrants has declined from
         a loss (pre-tax) of $1.3 million at December 31, 1995 to a loss
         (pre-tax) of $5.2 million at December 31, 1996. The total decrease in
         the fair value of the warrants of $5.2 million (pre-tax) has been
         recorded as a contra asset in "Other Assets" in the accompanying
         consolidated balance sheet as of December 31, 1996. The Company
         believes that a portion of this decline in value is
         other-than-temporary, and accordingly, it has recorded a realized loss
         (pre-tax) of $2.0 million in 1996. The remaining unrealized loss
         (pre-tax) of $3.2 million is reflected as a separate component of
         stockholders' equity, or $2.1 million on a net of tax basis.

         The change in unrealized appreciation (depreciation) on
         available-for-sale securities and warrants is included as a separate
         component of stockholders' equity as shown below:

<TABLE>
<CAPTION>
                                                          Year  Ended         Year Ended
$ in thousands                                      December 31, 1996  December 31, 1995
----------------------------------------------------------------------------------------
<S>                                                          <C>                 <C>    
Balance at beginning of year                                 $ 2,443             (5,522)
Change in unrealized (depreciation) appreciation              (3,842)            12,115
Income tax effect                                              1,328             (4,150)
----------------------------------------------------------------------------------------
Net change                                                    (2,514)             7,965
----------------------------------------------------------------------------------------
   Balance at end of year                                    $   (71)             2,443
========================================================================================
</TABLE>

         No single issuer, except for investments in U.S. Treasury and U.S.
         government agency securities, exceeds 4% and 3% of stockholders' equity
         as of December 31, 1996 and 1995, respectively.


                                       61
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

5)       Deferred Acquisition Costs
         The following table reflects acquisition costs deferred by CapMAC and
         amortized in proportion to the related premium earnings:

<TABLE>
<CAPTION>
                                          Year Ended              Year Ended              Year  Ended
$ in thousands                     December 31, 1996       December 31, 1995        December 31, 1994
-----------------------------------------------------------------------------------------------------
<S>                                         <C>                       <C>                      <C>   
Balance at beginning of year                $ 35,162                  24,860                   15,249
Additions                                     18,042                  17,505                   14,140
Amortization (policy                                         
acquisition costs)                            (7,824)                 (7,203)                  (4,529)
-----------------------------------------------------------------------------------------------------
  Balance at end of year                    $ 45,380                  35,162                   24,860
=====================================================================================================
</TABLE>                                                   

6)       Employee Benefits
         The Company, through CFS, maintains an incentive compensation plan for
         its employees. The plan is an annual discretionary bonus award. For the
         years ended December 31, 1996, 1995 and 1994, the Company had provided
         approximately $10,416,000, $7,804,000 and $5,253,000, respectively, for
         the annual discretionary bonus plan. CFS also provides health and
         welfare benefits to substantially all of its employees. The Company
         incurred $884,000, $710,000 and $621,000 of expenses for the years
         ended December 31, 1996, 1995 and 1994, respectively, for such plans.
         The Company also has a defined contribution retirement plan which
         allows participants to make voluntary contributions by salary reduction
         pursuant to section 401(k) of the Internal Revenue Code. The Company
         provides for the administrative costs for the 401(k) plan.

         On June 25, 1992, certain officers of CapMAC were granted 182,633
         restricted stock units ("RSU") at $13.33 a share in respect of certain
         deferred compensation. On December 7, 1995, the RSU's were converted to
         cash in the amount of approximately $3.7 million, and such officers
         agreed to defer receipt of such cash amount in exchange for receiving
         the same number of new shares of restricted stock ("RS") as the number
         of RSU's such officers previously held. The RS's were granted under the
         Omnibus Plan discussed in the following paragraph. The cash amount is
         held by Holdings and invested in accordance with certain guidelines.
         Such amount, including the investment earnings thereon amounted to $3.7
         million at December 31, 1996 and will be paid to each officer upon the
         occurrence of certain events but no later than December 2000.
         Compensation expense related to the RS's and RSU's was approximately
         $1,401,000, $1,502,000 and $132,000 for the years ended December 31,
         1996, 1995 and 1994, respectively.

         The Company has reserved shares for grants of different types of
         awards, such as stock options, restricted stock, stock appreciation
         rights, other stock-based grants or any combination of the foregoing
         under the Omnibus Stock Incentive Plan ("Omnibus Plan"). Additionally,
         the Company has reserved shares for stock option grants under the 1992
         Stock Option Plan and the 1994 Stock Option Plan. The three
         aforementioned plans are referred to collectively as the "Plans". Key
         employees of the Company and its affiliates are eligible. The Company
         has authorized 4,425,000 options and has 1,370,366 shares remaining and
         available for grant under the Plans.


                                       62
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

         The following table sets forth the activity and terms of the Plans:

<TABLE>
<CAPTION>
                   1992 Stock Option Plan           1994 Stock Option Plan                Omnibus Plan
                 ---------------------------      ---------------------------     -----------------------------
                                    Weighted                         Weighted                          Weighted
Options and           Number         Average          Number          Average             Number        Average
Restricted                of        Exercise              of         Exercise                 of       Exercise
Stock                Options           Price         Options            Price       Options & RS          Price
---------------------------------------------------------------------------------------------------------------
<S>                <C>                <C>            <C>               <C>        <C>                    <C>   
Options
Granted            1,720,211          $13.34         195,000           $20.00            967,500         $28.93
Options
Exercised           (115,534)         $13.33         (10,750)          $20.00            (11,250)        $20.00
Options
Forfeited             (6,960)         $13.33               -                -             (3,750)        $20.00
RS's Granted               -               -               -                -            182,633              -
---------------------------------------------------------------------------------------------------------------
Outstanding at
December 31,
1996               1,597,717          $13.34         184,250           $20.00          1,135,133         $29.07
===============================================================================================================
Available for
Grant                 11,749               -               -                -          1,358,617              -
---------------------------------------------------------------------------------------------------------------
Vesting                                                                           50% in 5th year and 50% in 6th
Schedule            Immediately upon the               On date of grant           year; Accelerated vesting based
                          Offering                                                upon market value as defined in
                                                                                  the Omnibus Plan
---------------------------------------------------------------------------------------------------------------
Term                      10 years                         10 years                         10 years
---------------------------------------------------------------------------------------------------------------
</TABLE>

         The following table summarizes the options and restricted stock granted
         and outstanding for each of the last three years:

<TABLE>
<CAPTION>
                                                          Year Ended
               ------------------------------------------------------------------------------------------------

                           1996                              1995                             1994
               -----------------------------     ----------------------------     -----------------------------
                                    Weighted                         Weighted                          Weighted
Options and           Number         Average            Number        Average             Number        Average
Restricted                of        Exercise                of       Exercise                 of       Exercise
Stock           Options & RS           Price      Options & RS          Price       Options & RS          Price
---------------------------------------------------------------------------------------------------------------
<S>                <C>                <C>            <C>               <C>             <C>               <C>   
Outstanding
at beginning
of year            2,288,884          $14.58         1,888,121         $13.95          1,701,641         $13.33
Options
Granted              769,500          $31.23           220,500         $20.00            187,500         $19.57
Options
Exercised           (137,534)         $14.40                 -              -                  -              -
Options
Forfeited             (3,750)         $20.00            (2,370)        $13.33             (1,020)        $13.33
RS's
Granted                    -               -           182,633              -                  -              -
---------------------------------------------------------------------------------------------------------------
Outstanding
at end of
year               2,917,100          $19.27         2,288,884         $14.58          1,888,121         $13.95
===============================================================================================================
Exercisable
at end of
year               1,964,967          $14.59         1,908,251         $14.02                  -              -
===============================================================================================================
</TABLE>


                                       63
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

         The Company applies APB 25 in accounting for its Plans and,
         accordingly, no compensation cost has been recognized for its stock
         options in the financial statements. As described previously, the
         Company has recognized compensation expense for the restricted stock as
         per APB 25. The compensation expense would be the same if the Company
         had adopted SFAS No. 123. Under the fair value based method of
         accounting as prescribed by SFAS No. 123, the per share
         weighted-average fair value of stock options on the date of grant
         during 1996 and 1995, using the Black Scholes option-pricing model, was
         $11.17 and $6.13, respectively, with the following weighted-average
         assumptions: 1996 - expected dividend yield 0.2%, risk-free interest
         rate of 5.0%, volatility level of 0.22, and an expected life of 7
         years; 1995 - expected dividend yield 0.4%, risk-free interest rate of
         5.0%, volatility level of 0.23, and an expected life of 6 years.

         Had the Company determined compensation cost using the fair value based
         method of accounting, as defined by SFAS No. 123, for its stock
         options, the Company's net income and earnings per share would have
         been reduced to the pro forma amounts indicated below:

                                                  Year Ended         Year Ended
($ in thousands, except per share data)    December 31, 1996   December 31,1995
-------------------------------------------------------------------------------
Net income
                         As reported                $ 33,568           $ 23,528
                         Pro forma                  $ 32,162           $ 23,339
                                                                     
Earnings per share                                                   
                                                                     
   Primary               As reported                $   1.92           $   1.73
                         Pro forma                  $   1.86           $   1.72
                                                                     
   Fully diluted         As reported                $   1.89           $   1.65
                         Pro forma                  $   1.82           $   1.64
-------------------------------------------------------------------------------

         Pro forma net income reflects only options granted in 1996 and 1995.
         Therefore, the full impact of calculating compensation cost for stock
         options under SFAS No. 123 is not reflected in the pro forma net income
         amounts presented above because the estimated compensation cost will be
         recognized over the options' vesting periods and options granted prior
         to January 1, 1995 are not considered in the determination of the
         compensation cost.


                                       64
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

7)       Employee Stock Ownership Plan
         On June 25, 1992, Holdings adopted an ESOP to provide its employees the
         opportunity to obtain beneficial interests in the stock of Holdings
         through a trust (the "ESOP Trust"). The ESOP Trust purchased 750,000
         shares at $13.33 per share of Holdings' stock. The ESOP Trust financed
         its purchase of common stock with a loan from Holdings in the amount of
         $10 million. The ESOP loan is evidenced by a promissory note delivered
         to Holdings. An amount representing unearned employee compensation,
         equivalent in value to the unpaid balance of the ESOP loan, is recorded
         as a deduction from stockholders' equity (unallocated ESOP shares).

         CFS is required to make contributions to the ESOP Trust, which enables
         the ESOP Trust to service its loan to Holdings. The ESOP expense is
         calculated using the shares allocated method. Shares are released for
         allocation to the participants and held in trust for the employees
         based upon the ratio of the current year's principal and interest
         payment to the sum of principal and interest payments estimated over
         the life of the loan. As of December 31, 1996 and 1995 approximately
         343,000 shares and 263,000 shares, respectively, were allocated to the
         participants. Compensation expense related to the ESOP was
         approximately $2,402,000, $1,588,000 and $1,407,000 for the years ended
         December 31, 1996, 1995 and 1994, respectively.


                                       65
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

8)       Reserve for Losses and Loss Adjustment Expenses
         The reserve for losses and loss adjustment expenses consists of a case
         basis loss reserve and the SLR.

         In 1995, CapMAC incurred its first claim on a financial guarantee
         policy. Based on its current estimate, the Company expects the
         aggregate amount of claims and related expenses not to exceed $2.7
         million, although no assurance can be given that such claims and
         related expenses will not exceed that amount. Such loss amount was
         covered through a recovery under a quota share reinsurance agreement of
         $0.2 million and a reduction in the SLR of $2.5 million. The portion of
         such claims and expenses not covered under the quota share agreement is
         being funded through payments to CapMAC from the Lureco Trust Account
         (see note 13).

         The following is a summary of the activity in the case basis loss
         reserve account and the components of the reserve for losses and loss
         adjustment expenses ($ in thousands):

                                                        1996      1995     1994
--------------------------------------------------------------------------------
Case basis loss reserve:
Net balance at January 1                               $   620     --       --
--------------------------------------------------------------------------------
Incurred related to:
   Current year                                           --      2,473     --
   Prior years                                            --       --       --
--------------------------------------------------------------------------------
Total incurred                                            --      2,473     --
--------------------------------------------------------------------------------
Paid related to:
   Current year                                           --      1,853     --
   Prior years                                             309     --       --
--------------------------------------------------------------------------------
Total paid                                                 309    1,853     --
--------------------------------------------------------------------------------
Net balance at December 31                                 311      620     --
Reinsurance recoverable                                   --         69     --
--------------------------------------------------------------------------------
Gross balance at December 31                               311      689     --
--------------------------------------------------------------------------------
Supplemental loss reserve:
Balance at January 1                                     5,859    5,191    3,762
--------------------------------------------------------------------------------
   Additions to supplemental loss reserve                4,815    3,141    1,429
   Allocated to case basis reserve                        --     (2,473)    --
--------------------------------------------------------------------------------
Balance at December 31                                  10,674    5,859    5,191
--------------------------------------------------------------------------------
Total reserve for losses and loss adjustment
expenses                                               $10,985    6,548    5,191
================================================================================


                                       66
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

9)       Senior Notes
         On December 15, 1992, Holdings sold $15,000,000 principal amount of
         7.52% Senior Notes to certain financial institutions. The Senior Notes
         are due in equal annual installments of $3,750,000 beginning December
         15, 1999 through December 15, 2002. Interest is payable semiannually on
         the fifteenth day of June and December of each year commencing June 15,
         1993.

10)      Income Taxes
         Pursuant to a tax sharing agreement with Holdings, CapMAC and CFS file
         a consolidated U.S. Federal income tax return. Each company's annual
         Federal income tax liability is determined by computing its pro rata
         share of the consolidated group Federal income tax liability. CFS
         (Europe) files a separate income tax return with the U.K. Inland
         Revenue.

         Taxes on foreign income have been provided for at the U.S. statutory
         Federal income tax rate of 35% in 1996 and 1995 and at 34% in 1994. The
         U.K. taxes corporate income at a 33% rate. For 1996, 1995 and 1994
         income before tax for CFS (Europe) was $12.4 million, $7.5 million and
         $3.1 million, respectively. The difference between the U.S. and U.K.
         rates is provided to account for U.S. taxation (net of applicable
         foreign tax credits) on the future repatriation of these foreign
         earnings.

         Total income tax expense (benefit) consists of the following:

$ in thousands                 Federal     State & Local    Foreign       Total
--------------------------------------------------------------------------------
Year Ended
December 31, 1996
--------------------------------------------------------------------------------
Current                         $8,654         1,753         4,092        14,499
Deferred                           992          (779)         --             213
--------------------------------------------------------------------------------
  Total                         $9,646           974         4,092        14,712
================================================================================
Year Ended
December 31, 1995
--------------------------------------------------------------------------------
Current                         $3,814         1,529         2,580         7,923
Deferred                         3,244           (59)         --           3,185
--------------------------------------------------------------------------------
  Total                         $7,058         1,470         2,580        11,108
================================================================================
Year  Ended
December 31, 1994
--------------------------------------------------------------------------------
Current                         $2,561         1,473           928         4,962
Deferred                         2,868           (38)         --           2,830
--------------------------------------------------------------------------------
  Total                         $5,429         1,435           928         7,792
================================================================================


                                       67
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

         Total income tax expense differed from the amount computed by applying
         the U.S. Federal income tax rate of 35% in 1996 and 1995 and 34% in
         1994:

<TABLE>
<CAPTION>
                                                Year Ended            Year Ended          Year  Ended
                                         December 31, 1996     December 31, 1995    December 31, 1994

$ in thousands                            Amount         %       Amount        %      Amount        %
-----------------------------------------------------------------------------------------------------
<S>                                    <C>            <C>      <C>          <C>      <C>         <C> 
Expected tax expense computed
at the statutory rate                  $  16,778      35.0     $ 12,132     35.0     $ 8,452     34.0
Increase (decrease) in tax
resulting from:
   Tax-exempt interest                    (2,916)     (6.0)      (2,335)    (6.7)     (1,646)    (6.6)
   State and local income taxes,
   net of Federal benefit                    361       0.7          935      2.7         934      3.8
   Other, net                                489       1.0          376      1.1          52      0.2
-----------------------------------------------------------------------------------------------------
       Total income tax expense        $  14,712      30.7     $ 11,108     32.1     $ 7,792     31.4
=====================================================================================================
</TABLE>

The tax effects of temporary differences that give rise to significant portions
of the deferred tax liability are as follows:

$ in thousands                            December 31, 1996    December 31, 1995
--------------------------------------------------------------------------------
Deferred tax assets:
Deferred compensation                            $    4,202                2,120
Loss on investment in TMG Group warrants              1,839                  457
Losses and loss adjustment expenses                   1,527                1,002
Unearned premiums                                       866                  852
Other, net                                              108                  275
--------------------------------------------------------------------------------
   Total gross deferred tax assets                    8,542                4,706
--------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs                           15,883               12,307
Unrealized capital gains on investments               1,091                1,769
Other, net                                            1,158                1,406
--------------------------------------------------------------------------------
   Total gross deferred tax liabilities              18,132               15,482
--------------------------------------------------------------------------------
   Net deferred tax liability                    $    9,590               10,776
================================================================================

         A valuation allowance is provided when it is more likely than not that
         some portion of the deferred tax assets will not be realized.
         Management believes that the deferred tax assets will be fully realized
         in the future.


                                       68
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

11)      Insurance Regulatory Restrictions
         CapMAC is subject to insurance regulatory requirements of the State of
         New York and other states in which it is licensed to conduct business.
         Generally, New York insurance laws require that dividends be paid from
         earned surplus and restrict the amount of dividends in any year that
         may be paid without obtaining approval for such dividends from the
         Superintendent of Insurance to the lower of (i) net investment income
         as defined or (ii) 10% of statutory surplus as of December 31 of the
         preceding year. No dividends were paid by CapMAC to Holdings during the
         years ended December 31, 1996, 1995 and 1994. No dividends could be
         paid during these periods because CapMAC had negative earned surplus.
         Statutory surplus at December 31, 1996 and 1995 was approximately
         $193,726,000 and $195,018,000, respectively. Statutory surplus differs
         from stockholders' equity determined under GAAP principally due to the
         mandatory contingency reserve required for statutory accounting
         purposes and differences in accounting for investments, deferred
         acquisition costs, SLR and deferred taxes provided under GAAP.
         Statutory net income was $18,737,000, $9,000,000 and $4,543,000 for the
         years ended December 31, 1996, 1995 and 1994, respectively. Statutory
         net income differs from net income determined under GAAP principally
         due to deferred acquisition costs, SLR and deferred income taxes.

12)      Commitments and Contingencies
         Holdings' lease agreement for the space occupied in New York expires on
         November 20, 2008. Holdings also has a lease agreement for its London
         office, which expires on October 1, 2002. As of December 31, 1996,
         future minimum payments under the lease agreements are as follows:

$ in thousands                                                           Payment
--------------------------------------------------------------------------------
1997                                                                    $  2,647
1998                                                                       2,715
1999                                                                       3,077
2000                                                                       3,152
2001 and thereafter                                                       28,660
--------------------------------------------------------------------------------
   Total                                                                $ 40,251
================================================================================
                                                               
         Rent expense, commercial rent taxes and electricity for the years ended
         December 31, 1996, 1995 and 1994 amounted to $2,451,000, $2,398,000 and
         $2,374,000, respectively.

         CapMAC has available a $150,000,000 standby corporate liquidity
         facility (the "Liquidity Facility") scheduled to terminate in September
         1999. The Liquidity Facility is provided by a consortium of banks,
         headed by Bank of Montreal, as agent, which is rated "A-1+" and "P-1"
         by S&P and Moody's, respectively. Under the Liquidity Facility, CapMAC
         will be able, subject to satisfying certain conditions, to borrow funds
         from time to time in order to enable it to fund any claim payments or
         payments made in settlement or mitigation of claim payments under its
         insurance contracts. There have been no draws under the Liquidity
         Facility.


                                       69
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

         Certain officers of Dillon, Read & Co. Inc. are directors of Holdings,
         and receive no compensation from the Company. Dillon, Read & Co. Inc.,
         which serves as investment manager for Saratoga Partners II, a
         principal stockholder of the Company, received an advisory retention
         fee of $200,000 in each of the years ended December 31, 1995 and 1994.

         The Company is required to purchase common stock in TMG Group for
         approximately $13 million no later than February 27, 2000.
         Additionally, the Company has agreed, upon request of ASIA Ltd, to make
         an additional investment of up to $4.9 million in Asia Services through
         its affiliate CapMAC Asia.

         CapMAC has agreed to make an investment of 50 million French Francs
         (approximately 10 million U.S. dollars) in CapMAC Assurance, S.A., an
         insurance subsidiary to be established in Paris, France. This
         investment is anticipated to be made in 1997.

         CapMAC Investment Management, Inc. ("CIM"), a new subsidiary of
         Holdings, was incorporated in Delaware in October 1996 as a registered
         investment advisor. CIM will provide investment advice regarding
         asset-backed structures, mortgage-backed securities, foreign and
         domestic fixed income and equity securities, and other securities based
         on the client's investment objectives, financial needs and goals. CIM
         is expected to be initially capitalized with $2 million and will
         commence operations in early 1997.

13)      Reinsurance
         In the ordinary course of business, CapMAC cedes exposure under various
         treaty and facultative reinsurance contracts, both on a pro rata and
         excess of loss basis, primarily designed to minimize losses from large
         risks and protect the capital and surplus of CapMAC.

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

<TABLE>
<CAPTION>
                                                    Years Ended December 31
                          ---------------------------------------------------------------------------
                                   1996                        1995                      1994
                          -----------------------      ---------------------     --------------------
$ in thousands                 Written     Earned        Written      Earned      Written      Earned
-----------------------------------------------------------------------------------------------------
<S>                           <C>          <C>           <C>          <C>        <C>           <C>   
Direct                        $ 71,752     48,835         56,541      36,853       43,598      28,561
Assumed                          1,086      1,508            935         761        1,064         258
Ceded                          (15,104)    (9,786)       (15,992)     (8,372)    (11,0699)     (5,716)
--------------------------------------------------------------------------------
Net premiums                  $ 57,734     40,557         41,484      29,242       33,593      23,103
=====================================================================================================
</TABLE>

         The reinsurance of risk does not relieve the ceding insurer of its
         original liability to its policyholders. A contingent liability exists
         with respect to the aforementioned reinsurance arrangements, which may
         become a liability of CapMAC in the event the reinsurers are unable to
         meet obligations assumed by them under the reinsurance contracts. At
         December 31, 1996 and 1995, CapMAC had ceded loss reserves of $0 and
         $69,000, respectively, and had ceded unearned premiums of $18,489,000
         and $13,171,000, respectively.


                                       70
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

         In 1994, CapMAC entered into a reinsurance agreement (the "Lureco
         Treaty") with Luxembourg European Reinsurance LURECO S.A. ("Lureco"), a
         European-based reinsurer. The agreement is renewable annually at the
         Company's option, subject to satisfying certain conditions. The
         agreement reinsured and indemnified the Company for any loss incurred
         by CapMAC during the agreement period up to the limits of the
         agreement. The Lureco Treaty provides that the annual reinsurance
         premium payable by CapMAC to Lureco, after deduction of the reinsurer's
         fee payable to Lureco, be deposited in a trust account (the "Lureco
         Trust Account") to be applied by CapMAC, at its option, to offset
         losses and loss expenses incurred by CapMAC in connection with incurred
         claims. Amounts on deposit in the Lureco Trust Account which have not
         been applied against claims are contractually due to CapMAC at the
         termination of the treaty.

         The premium deposit amounts in the Lureco Trust Account have been
         reflected as assets by CapMAC during the term of the agreement.
         Premiums in excess of the deposit amounts have been recorded as ceded
         premiums in the consolidated statements of income. For the 1996 policy
         year, the agreement provides $7 million of loss coverage in excess of
         the premium deposit amount of $5 million retained in the Lureco Trust
         Account. Additional coverage is provided for losses incurred in excess
         of 200% of the net premiums earned up to $4 million for any one
         agreement year. In September 1995, a claim of approximately $2.5
         million on an insurance policy was applied against the Lureco Trust
         Account.

         In addition to its capital (including statutory contingency reserves)
         CapMAC has other reinsurance available to pay claims under its
         insurance contracts. Effective November 30, 1995, CapMAC entered into a
         Stop-loss Reinsurance Agreement with Mitsui Marine and Fire Insurance
         Co. (the "Mitsui Stop-loss Agreement"). Under the Mitsui Stop-loss
         Agreement, Mitsui Marine and Fire Insurance Co. ("Mitsui") will be
         required to pay any losses in excess of $100 million in the aggregate
         incurred by CapMAC during the term of the Mitsui Stop-loss Agreement on
         the insurance policies in effect on December 1, 1995 and written during
         the one-year period thereafter, up to an aggregate limit payable under
         the Mitsui Stop-loss Agreement of $50 million. The Mitsui Stop-loss
         Agreement has a term of seven years and is subject to early termination
         by CapMAC in certain circumstances. Effective January 1, 1997 the
         stop-loss reinsurance coverage increased to $75 million in excess of
         incurred losses of $150 million increasing annually based on increases
         in CapMAC's statutory qualified capital. The new stop-loss reinsurance
         is provided by Mitsui, AXA Re Finance S.A. ("AXA Re"), and Munchener
         Ruckversicherungs-Gesellschaft ("Munich Re").

         Effective November 30, 1995, CapMAC canceled the quota share
         reinsurance agreement with Winterthur Swiss Insurance Company
         ("Winterthur") pursuant to which Winterthur had the right to reinsure
         on a quota share basis 10% of each policy written by CapMAC. As a
         result, CapMAC reassumed approximately $1.4 billion of principal
         insured by Winterthur on January 1, 1996. In connection with the
         commutation, Winterthur returned $2.0 million of unearned premiums, net
         of ceding commission and Federal excise tax.


                                       71
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

14)      Foreign Operations
         The Company provides advisory services in Europe through CFS (Europe).
         The revenue generated from this business for the years ended December
         31, 1996 and 1995 was $13.4 million and $7.8 million, respectively, and
         for the period from inception of CFS (Europe) on July 14, 1994 through
         December 31, 1994 was $3.1 million. The net income for the years ended
         December 31, 1996 and 1995 was $8.3 million and $5.1 million,
         respectively, and for the period from inception of CFS (Europe) on July
         14, 1994 through December 31, 1994 was $2.0 million. The total assets
         for CFS (Europe) as of December 31, 1996 and 1995 were $4.9 million and
         $9.6 million, respectively.

15)      Disclosures About Fair Value of Financial Instruments
         The following table presents the carrying amounts and estimated fair
         values of the Company's financial instruments at December 31, 1996 and
         1995. The fair value amounts were determined by the Company using
         independent market information when available, and appropriate
         valuation methodologies when market information was not available. Such
         valuation methodologies require significant judgment and are not
         necessarily indicative of the amount the Company could recognize in a
         current market exchange.

<TABLE>
<CAPTION>
                                                  December 31, 1996             December 31, 1995

                                                Carrying     Estimated       Carrying       Estimated
$ in thousands                                    Amount    Fair Value         Amount      Fair Value
-----------------------------------------------------------------------------------------------------
<S>                                            <C>             <C>            <C>             <C>    
Financial Assets:
Available-for-sale securities                  $ 333,991       333,991        296,426         296,426
-----------------------------------------------------------------------------------------------------
Financial Liabilities:
Senior notes                                   $  15,000        14,966         15,000          15,434
-----------------------------------------------------------------------------------------------------
Off-Balance-Sheet Instruments:
Financial guarantees outstanding               $       -       219,989              -         147,840
   Less: ceding commission                             -        65,997              -          44,352
-----------------------------------------------------------------------------------------------------
Net financial guarantees outstanding           $       -       153,992              -         103,488
=====================================================================================================
</TABLE>

         The following methods and assumptions were used to estimate the fair
         value of each class of financial instruments summarized above:

         Available-for-sale Securities
         The fair values of fixed maturities are based upon quoted market
         prices. The fair value of short-term investments approximates amortized
         cost. The fair value of the warrants which is recorded as a contra
         asset in "Other Assets" is determined based upon the difference between
         the exercise price adjusted by the LIBOR-based formula and the
         estimated fair value of the Company's percentage share of ownership of
         TMG Group.


                                       72
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

         Senior Notes
         The fair value of senior notes is based on prices believed by
         management to be currently charged for similar debt issues adjusted for
         changes in interest rates and credit quality that occurred subsequent
         to its issuance.

         Financial Guarantees Outstanding
         The fair value of financial guarantees outstanding consists of (1) the
         current unearned premium reserve, net of prepaid reinsurance and (2)
         the fair value of installment revenue which is derived by calculating
         the present value of the estimated future cash inflow to CapMAC of
         policies in force having installment premiums, net of amounts payable
         to reinsurers, at a discount rate of 7% at December 31, 1996 and 1995.
         The amount calculated is assumed to be equivalent to the consideration
         that would be paid by CapMAC under market conditions prevailing at the
         reporting dates to transfer CapMAC's financial guarantee business to a
         third party under reinsurance and other agreements. Ceding commission
         represents the expected amount that would be paid to CapMAC to
         compensate CapMAC for originating and servicing the insurance
         contracts. In constructing estimated future cash inflows, management
         makes assumptions regarding prepayments for amortizing asset-backed
         securities which are consistent with relevant historical experience.
         For revolving programs, assumptions are made regarding program
         utilization based on discussions with program users. The amount of
         future installment revenue actually realized by CapMAC could be reduced
         in the future due to factors such as early termination of insurance
         contracts, accelerated prepayments of underlying obligations or lower
         than anticipated utilization of insured structured programs, such as
         commercial paper conduits. Although increases in future installment
         revenue earnings due to renewals of existing insurance contracts
         historically have been greater than reductions in future installment
         revenue due to factors such as those described above, there can be no
         assurance that future circumstances might not cause a material net
         reduction in the future installment revenue.

16)      Capitalization
         On November 27, 1995, the Company effected a 3-for-2 common stock split
         which has been reflected in the accompanying consolidated financial
         statements for all periods presented.

         On July 21, 1995, the Company sold 500,001 shares of common stock to
         ORIX for $10.0 million, or $20 per share. In August 1995, net proceeds
         of $9.0 million from such transaction were contributed to CapMAC. In
         connection with the ORIX investment, the Company paid Dillon, Read &
         Co. Inc. an advisory fee of $500,000.

         On December 19, 1995, Holdings sold 3,710,000 shares of its common
         stock at a price of $20.00 per share in the Offering. Of the 3,710,000
         common shares, 2,500,000 shares were sold by the Company and 1,210,000
         shares by certain existing stockholders. Proceeds to the Company, net
         of underwriting and other expenses, were $45.2 million. Dillon, Read &
         Co. Inc. was the managing underwriter of the Offering and has in that
         capacity received $3,500,000 from the Company. Concurrent with the
         Offering, the Company also issued 500,000 shares to Centre Re for a
         price per share that was 5% less than the Offering price of $20 per
         share. Net proceeds to the Company were $9.5 million. A portion of the
         net proceeds from the Offering and the private placement in the amount
         of $50.0 million was contributed to CapMAC in December 1995.


                                       73
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

         On July 5, 1996, Holdings completed a secondary public offering by some
         of its stockholders of 3,737,500 shares of common stock at an offering
         price of $28. The Company did not receive any proceeds from the
         offering but incurred costs of approximately $360,000.

         On June 25, 1992, Holdings granted approximately 2,250,000 warrants to
         non-employee stockholders of Holdings to purchase common stock at an
         exercise price of $13.33 per share. The warrants expire on June 25,
         1999. During 1996, 551,390 warrants were exercised. The exercise of the
         warrants being cashless resulted in the issuance of 321,758 shares of
         common stock.

17)      Quarterly Financial Information (Unaudited)

         Selected quarterly financial data for 1996 and 1995 are presented
         below:

$ in thousands                       First    Second   Third   Fourth  Full Year
-------------------------------------------------------------------------------
1996
Gross premiums written              $15,029   18,772   17,214   21,823   72,838
Net premiums written                 13,119   13,669   13,085   17,861   57,734
Net premiums earned                   8,828    9,988   10,043   11,698   40,557
Advisory and other fees               9,872    5,705    5,750    5,816   27,143
Net investment income                 4,111    3,808    4,485    5,502   17,906
Losses and loss adjustment
   expenses                           1,075    1,109    1,248    1,383    4,815
Income before income taxes
   and minority interest             14,738   11,825   11,683    9,691   47,937
Net income                            9,900    8,335    8,239    7,094   33,568
-------------------------------------------------------------------------------
1995
Gross premiums written              $16,992   16,669   12,306   11,509   57,476
Net premiums written                 13,899   14,116    6,118    7,351   41,484
Net premiums earned                   7,101    7,303    7,311    7,527   29,242
Advisory and other fees               2,286    2,869    7,239    4,574   16,968
Net investment income                 2,811    3,088    3,329    3,615   12,843
Losses and loss adjustment
   expenses                             696      762      821      862    3,141
Income before income taxes
   and minority interest              5,405    6,023   12,186   11,050   34,664
Net income                            3,840    4,480    8,033    7,175   23,528
-------------------------------------------------------------------------------


                                       74
<PAGE>

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

      None.


                                       75
<PAGE>

                                    Part III

Item 10. Directors and Executive Officers of the Registrant.

      Certain Information relating to the Company's executive officers is set
forth under the heading "Executive officers of the registrant" in Part I of this
report. Information relating to the Company's directors is set forth under the
heading "Election of Directors" appearing in the definitive Proxy Statement for
the Company's annual meeting to be held on May 7, 1997. Such information is
incorporated herein by reference.

Item 11. Executive Compensation.

      The section titled "Executive Compensation and Other Information"
appearing in the definitive Proxy Statement for the Company's annual meeting to
be held on May 7, 1997 sets forth certain information with respect to
compensation of management and such information is incorporated herein by
reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

      The section titled "Ownership of the Company" appearing in the definitive
Proxy Statement for the Company's annual meeting to be held on May 7, 1997 sets
forth certain information with respect to the ownership of the Company's common
stock. Such information is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

      The section titled "Certain Relationships and Related Transactions"
appearing in the definitive Proxy Statement for the Company's annual meeting to
be held on May 7, 1997 sets forth certain information with respect to certain
relationships and related transactions. Such information is incorporated herein
by reference.


                                       76
<PAGE>

                                     Part IV

Item 14.

            (a)   Financial Statements and Financial Statement Schedules and
                  Exhibits.

            1.    Financial Statements

            The Registrant has included in this Form 10-K the following
consolidated financial statements of CapMAC Holdings Inc. and Subsidiaries:

                                                            Pages in Form 10-K
                                                            ------------------

Independent Auditors' Report                                        48
Consolidated Balance Sheets
at December 31, 1996 and 1995                                       49
Consolidated Statements of Income
for the Years ended December 31,
1996, 1995 and 1994                                                 50
Consolidated Statements of Stockholders' Equity
for the Years ended December 31, 1996, 1995
and 1994                                                            51
Consolidated Statements of Cash Flows
for the Years ended December 31, 1996, 1995
and 1994                                                            52
Notes to Consolidated Financial Statements                          53-74

            2.    Financial Statement Schedules

Schedule Number        Description of Schedule             Page(s) in Form 10-K
---------------        -----------------------             --------------------

     I                 Summary of Investments--                     84
                       Other Than Investments in
                       Related Parties
     II                Condensed Financial                          85-87
                       Information of Registrant
     IV                Reinsurance                                  88
                    
The report of the Registrant's independent auditors with respect to the above
listed financial statement schedules is set forth on page 83 of this Report.

All other schedules are omitted because they are either inapplicable or the
required information is presented in the consolidated financial statements of
the Company or the notes thereto.


                                       77
<PAGE>

            3.    Exhibits.

            The following are annexed as exhibits to this Report:

Exhibit
No.               Description                                                
---               -----------                                                
3.1               Amended and Restated Certificate of Incorporation.(1)
3.2               Amended and Restated Bylaws.(1)
4                 Specimen Common Stock Certificate.(1)
10.1              Service Agreement dated as of June 25, 1992 between CapMAC and
                  CapMAC Management Services Corporation (predecessor to CFS).*
10.2              Credit Agreement as amended, dated as of June 25, 1992 by and
                      among CapMAC, Bank of Montreal, individually and as agent,
                      and the banks from time to time party thereto.*
10.3              Stockholder Agreement dated as of June 9, 1992 among CapMAC
                      Acquisition Corp. (predecessor corporation to Holdings)
                      and each of the Shareholders listed on Schedule A attached
                      thereto, together with Amendments No. 1 and No. 2.*
10.4              Stop Loss Reinsurance Agreement dated June 25, 1992 between
                      CapMAC and Winterthur Swiss Reinsurance Company.*
10.5              Note Purchase Agreement dated as of December 15, 1992 between
                      CapMAC Holdings Inc. and the Purchasers listed on Annex 1
                      attached thereto.*
10.6              Subscription Agreement dated as of June 30, 1995 between Orix
                      USA Corporation and Holdings.*
10.7              Employment Agreement dated as of June 25, 1992 between CapMAC
                  Acquisition Corp. and John B. Caouette.* +
10.8              Employment Agreement dated as of June 25, 1992 between CapMAC
                  Acquisition Corp. and Michael L. Hein.* +
10.9              [Intentionally omitted]
10.10             Employment Agreement dated as of June 25, 1992 between CapMAC
                  Acquisition Corp. and Charles Jackson Lester.* +
10.11             Employment Agreement dated as of June 25, 1992 between CapMAC
                  Acquisition Corp. and C. Thomas Meyers.* +
10.12             Employment Agreement dated as of June 25, 1992 between CapMAC
                  Acquisition Corp. and Paul V. Palmer.* +
10.13             Employment Agreement dated as of June 25, 1992 between CapMAC
                  Acquisition Corp. and Joyce S. Richardson.* +
10.14             Employment Agreement dated as of June 25, 1992 between CapMAC
                  Acquisition Corp. and Ram D. Wertheim.* +
10.15             1992 Stock Option Plan of Holdings.* +
10.16             1994 Stock Option Plan of Holdings.* +
10.17             Omnibus Stock Incentive Plan.* +
10.18             CapMAC Employee Stock Ownership Plan.* +
10.19             CapMAC Employee Stock Ownership Plan Trust Agreement.* +
10.20             ESOP Loan Agreement by and between CapMAC Acquisition Corp.
                      (predecessor corporation to Holdings) and the ESOP Trust
                      dated as of June 25, 1992.* +


                                       78
<PAGE>

10.21             Supplemental Executive Retirement Plan.* +
10.22             Subscription Agreement dated as of November 27, 1995, between
                      CapMAC Holdings Inc. and Centre Reinsurance Limited.*
10.23             Promissory Note of John B. Caouette dated April 24, 1996.(2) +
10.24             Stop Loss Reinsurance Agreement dated December 1, 1995 between
                      CapMAC and Mitsui Marine & Fire Insurance Co., Ltd.*
10.25             Amendment No. 3 to Stockholder Agreement dated as of June 9,
                      1992.(2)
10.26             Letter Agreement dated January 1, 1996 between CapMAC Holdings
                      Inc. and Winterthur Swiss Insurance Company terminating
                      Consumer Product and Trade Receivables Quota Share
                      Reinsurance Treaty, Quota Share Reinsurance Agreement and
                      Facultative Reinsurance Agreements.(1)
10.27             Letter dated November 30, 1995 from CapMAC to Winterthur Swiss
                      Insurance Company terminating the Stop Loss Reinsurance
                      Agreement.(1)
10.28             Deferred Compensation and Restricted Stock Agreement dated as
                      of December 7, 1995 between John B. Caouette and
                      Holdings.(1) +
10.29             Deferred Compensation and Restricted Stock Agreement dated as
                      of December 7, 1995 between Michael L. Hein and
                      Holdings.(1) +
10.30.            [Intentionally omitted]
10.31             Deferred Compensation and Restricted Stock Agreement dated as
                      of December 7, 1995 between Charles Jackson Lester and
                      Holdings.(1) +
10.32             Deferred Compensation and Restricted Stock Agreement dated as
                      of December 7, 1995 between C. Thomas Meyers and
                      Holdings.(1) +
10.33             Deferred Compensation and Restricted Stock Agreement dated as
                      of December 7, 1995 between Paul V. Palmer and
                      Holdings.(1) +
10.34             Deferred Compensation and Restricted Stock Agreement dated as
                      of December 7, 1995 between Joyce S. Richardson and
                      Holdings.(1) +
10.35             Deferred Compensation and Restricted Stock Agreement dated as
                      of December 7, 1995 between Ram D. Wertheim and
                      Holdings.(1) +
10.36             Promissory Note of Ram D. Wertheim dated May 13, 1996.(2) +
10.37             Promissory Note of Paul V. Palmer dated May 13, 1996.(2) +
10.38             Fifth Amendment dated July 30, 1996 and Sixth Amendment dated
                      September 25, 1996 to Credit Agreement, dated June 25,
                      1992, among CapMAC, Bank of Montreal individually and as
                      agent, and the banks from time to time party thereto.(3)
10.39             Amended and Restated Stop Loss Reinsurance Agreement effective
                      January 1, 1997 between CapMAC and Mitsui Marine and Fire
                      Insurance Co., Ltd. #
10.40             Stop Loss Reinsurance Agreement effective January 1, 1997
                      between CapMAC and
                      Munchener-Ruckverischerungs-Gesellschaft. #
10.41             Stop Loss Reinsurance Agreement effective January 1, 1997
                      between CapMAC and AXA Re Finance S.A. #
10.42             Reinsurance Agreement effective May 15, 1996 between CapMAC
                      and CapMAC Assurance S.A.
10.43             Promissory Note of Paul V. Palmer dated January 13, 1997. +
11                Computation of Earnings Per Share Assuming Full Dilution.
21                Subsidiaries of Registrant.
23.1              Consent of KPMG Peat Marwick LLP
24                Powers of Attorney of Directors.
27                Financial Data Schedule.
28                Information from reports furnished to state insurance
                      regulatory authorities of SEC Item 601(b)(28).(4)
99                Capital Markets Assurance Corporation 1996 Financial
                      Statements and Report of Independent Accountants.
99(A)             Press Release of Holdings dated March 20, 1997.

----------


                                       79
<PAGE>

*     Previously filed as an exhibit, under the same exhibit number, to the
      Company's Registration Statement on Form S-1 (Reg. No. 33-98254), as such
      Registration Statement has been amended, and incorporated herein by
      reference.

+     Management contract or compensatory plan or arrangement required to be
      filed as an exhibit to this Form 10-K pursuant to item 14(c).

#     Confidential treatment has been granted or requested for certain portions
      of this document.

(1)   Previously filed as an exhibit, under the same exhibit number, to the
      Company's Annual Report on Form 10-K for the year ended December 31, 1995
      and incorporated herein by reference.

(2)   Previously filed as an exhibit, under the same exhibit number, to the
      Company's Registration Statement on Form S-1 (Reg. No. 333-05211), as such
      Registration Statement has been amended, and incorporated herein by
      reference.

(3)   Previously filed as an exhibit, under the same exhibit number, to the
      Company's Quarterly Report on Form 10-Q for the quarter ended September
      30, 1996 and incorporated herein by reference.

(4)   Previously filed as an exhibit, under exhibit number 28.1, to the
      Company's Registration Statement on Form S-8 (Registration No. 333-05429)
      and incorporated herein by reference.

      (b) Reports on Form 8-K

            The Company did not file any reports on Form 8-K during 1996.


                                       80
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on March 27, 1997.


                                   CAPMAC HOLDINGS INC.

                                   By /s/ John B. Caouette
                                      --------------------------------------
                                               John B. Caouette
                                      Chairman of the Board of Directors,
                                      President and Chief Executive Officer

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
registration statement has been signed by the following persons in the
capacities indicated on March 27, 1997.


      Signature                                   Title
      ---------                                   -----

                                       Chairman of the Board of Directors,
/s/ John B. Caouette                  President and Chief Executive Officer
--------------------------                (Principal Executive Officer)
    John B. Caouette      


/s/ Paul V. Palmer                    Managing Director and Chief Financial
--------------------------            Officer (Principal Financial Officer)
    Paul V. Palmer        


/s/ Gerard Edward Murray
--------------------------          Controller (Principal Accounting Officer)
    Gerard Edward Murray            


           *
--------------------------          
     Bryan A. Bowers                              Director


           *
--------------------------          
      Todd G. Cole                                Director


           *
--------------------------          
 Charles P. Durkin, Jr.                           Director


           *
--------------------------          
      David Elliman                               Director


           *
--------------------------          
    Stephen L. Green                              Director


                                       81
<PAGE>

      Signature                                   Title
      ---------                                   -----


           *
--------------------------          
    Michael J. Horgan                             Director


           *
--------------------------          
 George Merritt Jenkins                           Director


           *
--------------------------          
     James H. Laird                               Director


__________________________          
 Dr. Rosita Leong, M.D.                           Director


           *
--------------------------          
      Robert Model                                Director


           *
--------------------------          
         Lief H. Olsen                            Director


           *
--------------------------          
     Arthur S. Penn                               Director


           *
--------------------------          
     Homer McK. Rees                              Director


           *
__________________________          
    Doren W. Russler                              Director


           *
--------------------------          
       Akira Seko                                 Director


           *
--------------------------          
      John T. Shea                                Director


    /s/ Richard Yancey
--------------------------          
        Richard Yancey                            Director

By: /s/ John B. Caouette
--------------------------          
        John B. Caouette
        Attorney-in-fact


                                       82
<PAGE>

                          Independent Auditors' Report

The Board of Directors
CapMAC Holdings Inc.:

Under the date of January 29, 1997, we reported on the consolidated balance
sheets of CapMAC Holdings Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1996 as included in the 1996 annual report on Form 10-K. In connection with our
audits of the aforementioned consolidated financial statements, we also have
audited the related financial statement schedules as listed in the accompanying
index. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits.

In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.


                                             KPMG PEAT MARWICK LLP


New York, New York
January 29, 1997


                                       83
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                       Schedule I - Summary of Investments
                    Other Than Investments in Related Parties
                                December 31, 1996
                             (Dollars in thousands)

                                                                 Amount at which
                                                     Estimated    shown in the
Type of Investment                   Amortized Cost  Fair Value   balance sheet
--------------------------------------------------------------------------------
U.S. Treasury obligations                $  4,059        4,069          4,069
Mortgage-backed securities of U.S.                    
government instrumentalities and                      
agencies                                  127,484      126,690        126,690
Obligations of states, municipalities                 
and political subdivisions                177,811      181,858        181,858
Corporate, asset-backed securities                    
and other securities                       26,682       26,557         26,557
--------------------------------------------------------------------------------
   Total                                 $336,036      339,174        339,174
================================================================================


                                       84
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                  Schedule II - Condensed Financial Information
                       of Registrant (Parent Company Only)
                            Condensed Balance Sheets
                    (Dollars in thousands, except share data)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                       December 31, 1996   December 31, 1995
------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                   <C>    
Investments:
Bonds at fair value (amortized cost $7,423 at December 31, 1996)               $   7,529                   -
Short-term investments (at amortized cost which approximates fair                              
value)                                                                             9,660               8,984
Investment in affiliates                                                           1,439               1,339
------------------------------------------------------------------------------------------------------------
   Total investments                                                              18,628              10,323
------------------------------------------------------------------------------------------------------------
Cash                                                                                 205                 187
Investments in subsidiaries                                                      304,926             290,089
Deferred income taxes                                                              4,116                 491
Other assets                                                                       8,673               2,540
------------------------------------------------------------------------------------------------------------
   Total assets                                                                $ 336,548             303,630
============================================================================================================
                                                                                               
                                     LIABILITIES AND STOCKHOLDERS' EQUITY                      
                                                                                               
Liabilities:                                                                                   
Accounts payable and other accrued expenses                                    $  11,161              12,111
Senior notes                                                                      15,000              15,000
------------------------------------------------------------------------------------------------------------
   Total liabilities                                                              26,161              27,111
------------------------------------------------------------------------------------------------------------
Stockholders' Equity:                                                                          
Preferred stock - $0.01 par value per share; 20,000,000 shares are
authorized; none outstanding at December 31, 1996 and 1995                             -                   -
                                                                                               
Common stock - $0.01 par value per share; 50,000,000 shares are
authorized; 16,425,324 and 15,966,032 shares issued December
31, 1996 and 1995; 16,425,274 and 15,965,995 shares
outstanding at December 31, 1996 and 1995                                            164                 160
Additional paid-in capital                                                       226,428             223,400
Unrealized (depreciation) appreciation on investments, net of tax                   (71)               2,443
Retained earnings                                                                 89,310              57,029
Unallocated ESOP shares                                                           (5,430)             (6,497
Cumulative translation adjustment, net of tax                                        (14)                (16)
------------------------------------------------------------------------------------------------------------
   Total stockholders' equity                                                    310,387             276,519
------------------------------------------------------------------------------------------------------------
   Total liabilities and stockholders' equity                                  $ 336,548             303,630
============================================================================================================
</TABLE>


                                       85
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                  Schedule II - Condensed Financial Information
                       Of Registrant (Parent Company Only)
            Condensed Statements of Operations and Retained Earnings
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                    Year Ended            Year Ended            Year Ended
                                             December 31, 1996     December 31, 1995      December 31,1994
----------------------------------------------------------------------------------------------------------
<S>                                                  <C>                      <C>                   <C>   
Revenues:
Net investment income                                $     862                   278                    67
Net realized losses                                     (2,039)                  (10)                  (50)
Other income from subsidiaries                             519                   626                     -
Other income                                                17                     -                     -
----------------------------------------------------------------------------------------------------------
     Total revenues                                       (641)                  894                    17
----------------------------------------------------------------------------------------------------------
Expenses:
Interest expense                                         1,203                 1,203                 1,203
Operating expenses                                       2,149                   497                   175
----------------------------------------------------------------------------------------------------------
     Total expenses                                      3,352                 1,700                 1,378
----------------------------------------------------------------------------------------------------------
Loss before income taxes and equity
in undistributed net income of
subsidiaries                                            (3,993)                 (806)               (1,361)
     Income tax (benefit) expense                       (1,885)                  192                  (471)
----------------------------------------------------------------------------------------------------------
Loss before equity in undistributed net
income of subsidiaries                                  (2,108)                 (998)                 (890)
----------------------------------------------------------------------------------------------------------
Equity in undistributed net income
of subsidiaries                                         35,676                24,526                17,956
----------------------------------------------------------------------------------------------------------
Net Income                                              33,568                23,528                17,066
Retained earnings at beginning of
period                                                  57,029                33,501                16,435
Dividends declared                                      (1,287)                    -                     -
----------------------------------------------------------------------------------------------------------
Retained earnings at end of period                   $  89,310                57,029                33,501
==========================================================================================================
</TABLE>


                                       86
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                  Schedule II - Condensed Financial Information
                       Of Registrant (Parent Company Only)
                       Condensed Statements of Cash Flows
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                     Year Ended           Year Ended           Year Ended
                                              December 31, 1996    December 31, 1995    December 31, 1994
---------------------------------------------------------------------------------------------------------
<S>                                                    <C>                   <C>                  <C>   
Cash flows from operating activities:
Net income                                             $ 33,568               23,528               17,066
---------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Equity in undistributed net income of
subsidiaries                                            (35,676)             (24,526)             (17,956)
(Decrease) increase in income taxes
payable                                                  (3,996)                 170                 (389)
Net realized capital loss                                 2,039                   10                   50
Other, net                                               (9,194)              10,326                   (7)
---------------------------------------------------------------------------------------------------------
Total adjustments                                       (46,827)             (14,020)             (18,302)
---------------------------------------------------------------------------------------------------------
   Net cash (used) provided by operating
   activities                                           (13,259)               9,508               (1,236)
---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments                                (16,926)              (8,897)              (1,795)
Purchases of investment in affiliates                         -               (1,350)                   -
Proceeds from sales of investments                            -                1,414                1,642
Proceeds from maturities of investments                   9,083                  713                  130
---------------------------------------------------------------------------------------------------------
   Net cash used by investing activities                 (7,843)              (8,120)                 (23)
---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Allocation of ESOP                                        1,067                  672                1,308
Net proceeds from sale of common stock                        -               63,699                    -
Proceeds from sale of stock in
CapMAC Asia                                               1,892                    -                    -
Dividends paid                                           (1,287)                   -                    -
Investment in subsidiaries                               (1,210)             (70,131)                   -
Dividend from subsidiary                                 21,500                4,500                    -
Exercise of stock options                                 1,980                    -                    -
Other, net                                               (2,822)                   -                    -
---------------------------------------------------------------------------------------------------------
   Net cash provided (used) by financing
   activities                                            21,120               (1,260)               1,308
---------------------------------------------------------------------------------------------------------
Net increase in cash                                         18                  128                   49
Cash at beginning of year                                   187                   59                   10
---------------------------------------------------------------------------------------------------------
   Cash at end of year                                 $    205                  187                   59
---------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow
information:
Cash paid during year for:
Income taxes                                           $ 13,570                7,106                2,345
Interest                                               $  1,128                1,128                1,128
Cash received during the year for:
Income taxes                                           $  9,775                6,415                2,455
=========================================================================================================
</TABLE>


                                       87
<PAGE>

                      CapMAC Holdings Inc. and Subsidiaries
                            Schedule IV- Reinsurance
                    (Dollars in thousands except percentages)

<TABLE>
<CAPTION>
                                                                                   Percentage of
                                              Ceded to     Assumed                    Amount
                                  Gross        Other      from Other    Net          Assumed
Insurance Premiums Written        Amount      Companies   Companies    Amount         to Net
----------------------------      -------     ---------   ---------    -------     -------------
<S>                               <C>         <C>          <C>         <C>            <C>  
Year ended December 31, 1994      $43,598     $11,069      $1,064      $33,593        3.17%
Year ended December 31, 1995      $56,541     $15,992      $  935      $41,484        2.25%
Year ended December 31, 1996      $71,752     $15,104      $1,086      $57,734        1.88%
</TABLE>


                                       88
<PAGE>

                                INDEX TO EXHIBITS

Exhibit No.       Description                                               
-----------       -----------                                               

3.1               Amended and Restated Certificate of Incorporation.(1)

3.2               Amended and Restated Bylaws.(1)

4                 Specimen Common Stock Certificate.(1)

10.1              Service Agreement dated as of June 25, 1992 between CapMAC and
                  CapMAC Management Services Corporation (predecessor to CFS).*

10.2              Credit Agreement as amended, dated as of June 25, 1992 by and
                  among CapMAC, Bank of Montreal, individually and as agent, and
                  the banks from time to time party thereto.*

10.3              Stockholder Agreement dated as of June 9, 1992 among CapMAC
                  Acquisition Corp. (predecessor corporation to Holdings) and
                  each of the Shareholders listed on Schedule A attached
                  thereto, together with Amendments No. 1 and No. 2.*

10.4              Stop Loss Reinsurance Agreement dated June 25, 1992 between
                  CapMAC and Winterthur Swiss Reinsurance Company.*

10.5              Note Purchase Agreement dated as of December 15, 1992 between
                  CapMAC Holdings Inc. and the Purchasers listed on Annex 1
                  attached thereto.*

10.6              Subscription Agreement dated as of June 30, 1995 between Orix
                  USA Corporation and Holdings.*

10.7              Employment Agreement dated as of June 25, 1992 between CapMAC
                  Acquisition Corp. and John B. Caouette.* +

10.8              Employment Agreement dated as of June 25, 1992 between CapMAC
                  Acquisition Corp. and Michael L. Hein.* +

10.9              [Intentionally omitted]

10.10             Employment Agreement dated as of June 25, 1992 between CapMAC
                  Acquisition Corp. and Charles Jackson Lester.* +

10.11             Employment Agreement dated as of June 25, 1992 between CapMAC
                  Acquisition Corp. and C. Thomas Meyers.* +

10.12             Employment Agreement dated as of June 25, 1992 between CapMAC
                  Acquisition Corp. and Paul V. Palmer.* +

10.13             Employment Agreement dated as of June 25, 1992 between CapMAC
                  Acquisition Corp. and Joyce S. Richardson.* +

10.14             Employment Agreement dated as of June 25, 1992 between CapMAC
                  Acquisition Corp. and Ram D. Wertheim.* +

10.15             1992 Stock Option Plan of Holdings.* +

10.16             1994 Stock Option Plan of Holdings.* +


                                       89
<PAGE>

10.17             Omnibus Stock Incentive Plan.* +

10.18             CapMAC Employee Stock Ownership Plan.* +

10.19             CapMAC Employee Stock Ownership Plan Trust Agreement.* +

10.20             ESOP Loan Agreement by and between CapMAC Acquisition Corp.
                  (predecessor corporation to Holdings) and the ESOP Trust dated
                  as of June 25, 1992.* +

10.21             Supplemental Executive Retirement Plan.* +

10.22             Subscription Agreement dated as of November 27, 1995, between
                  CapMAC Holdings Inc. and Centre Reinsurance Limited.*

10.23             Promissory Note of John B. Caouette dated April 24, 1996.(2)+

10.24             Stop Loss Reinsurance Agreement dated December 1, 1995 between
                  CapMAC and Mitsui Marine & Fire Insurance Co., Ltd.*

10.25             Amendment No. 3 to Stockholder Agreement dated as of June 9,
                  1992.(2)

10.26             Letter Agreement dated January 1, 1996 between CapMAC Holdings
                  Inc. and Winterthur Swiss Insurance Company terminating
                  Consumer Product and Trade Receivables Quota Share Reinsurance
                  Treaty, Quota Share Reinsurance Agreement and Facultative
                  Reinsurance Agreements.(1)

10.27             Letter dated November 30, 1995 from CapMAC to Winterthur Swiss
                  Insurance Company terminating the Stop Loss Reinsurance
                  Agreement.(1)

10.28             Deferred Compensation and Restricted Stock Agreement dated as
                  of December 7, 1995 between John B. Caouette and Holdings.(1)
                  +

10.29             Deferred Compensation and Restricted Stock Agreement dated as
                  of December 7, 1995 between Michael L. Hein and Holdings.(1) +

10.30.            [Intentionally omitted]

10.31             Deferred Compensation and Restricted Stock Agreement dated as
                  of December 7, 1995 between Charles Jackson Lester and
                  Holdings.(1) +

10.32             Deferred Compensation and Restricted Stock Agreement dated as
                  of December 7, 1995 between C. Thomas Meyers and Holdings.(1)
                  +

10.33             Deferred Compensation and Restricted Stock Agreement dated as
                  of December 7, 1995 between Paul V. Palmer and Holdings.(1) +

10.34             Deferred Compensation and Restricted Stock Agreement dated as
                  of December 7, 1995 between Joyce S. Richardson and
                  Holdings.(1) +

10.35             Deferred Compensation and Restricted Stock Agreement dated as
                  of December 7, 1995 between Ram D. Wertheim and Holdings.(1) +

10.36             Promissory Note of Ram D. Wertheim dated May 13, 1996.(2) +

10.37             Promissory Note of Paul V. Palmer dated May 13, 1996.(2) +


                                       90
<PAGE>

10.38             Fifth Amendment dated July 30, 1996 and Sixth Amendment dated
                  September 25, 1996 to Credit Agreement, dated June 25, 1992,
                  among CapMAC, Bank of Montreal individually and as agent, and
                  the banks from time to time party thereto.(3)

10.39             Amended and Restated Stop Loss Reinsurance Agreement effective
                  January 1, 1997 between CapMAC and Mitsui Marine and Fire
                  Insurance Co., Ltd. #

10.40             Stop Loss Reinsurance Agreement effective January 1, 1997
                  between CapMAC and Munchener-Ruckverischerungs-Gesellschaft. #

10.41             Stop Loss Reinsurance Agreement effective January 1, 1997
                  between CapMAC and AXA Re Finance S.A. #

10.42             Reinsurance Agreement effective as of May 15, 1996 between
                  CapMAC and CapMAC Assurance, S.A.

10.43             Promissory Note of Paul V. Palmer dated January 13, 1997.

11                Computation of Earnings Per Share Assuming Full Dilution.

21                Subsidiaries of Registrant.

23.1              Consent of KPMG Peat Marwick LLP.

24                Powers of Attorney of Directors.

27                Financial Data Schedule


28                Information from reports furnished to state insurance
                  regulatory authorities of SEC Item 601(b)(28).(4)

99                Capital Markets Assurance Corporation 1996 Financial
                  Statements and Report of Independent Accountants.

99(A)             Press release of Holdings dated March 20, 1997.

----------

*     Previously filed as an exhibit, under the same exhibit number, to the
      Company's Registration Statement on Form S-1 (Reg. No. 33-98254), as such
      Registration Statement has been amended, and incorporated herein by
      reference.

+     Management contract or compensatory plan or arrangement required to be
      filed as an exhibit to this Form 10-K pursuant to item 14(c).

#     Confidential treatment has been granted or requested for certain portions
      of this document.

(1)   Previously filed as an exhibit, under the same exhibit number, to the
      Company's Annual Report on Form 10-K for the year ended December 31, 1995
      and incorporated herein by reference.

(2)   Previously filed as an exhibit, under the same exhibit number, to the
      Company's Registration Statement on Form S-1 (Reg. No. 333-05211), as such
      Registration Statement has been amended, and incorporated herein by
      reference.

(3)   Previously filed as an exhibit, under the same exhibit number, to the
      Company's Quarterly Report on Form 10-Q for the quarter ended September
      30, 1996 and incorporated herein by reference.

(4)   Previously filed as an exhibit, under exhibit number 28.1, to the
      Company's Registration Statement on Form S-8 (Registration No. 333-05429)
      and incorporated herein by reference.


                                       91