FINANCIAL STATEMENTS
Financial Guaranty Insurance Company
December 31, 2003
with Report of Independent Auditors


<PAGE>


                      Financial Guaranty Insurance Company

                              Financial Statements


                                December 31, 2003




                                    CONTENTS

Report of Independent Auditors.............................................1
Independent Auditors' Report ..............................................2
Balance Sheets.............................................................3
Statements of Income.......................................................4
Statements of Stockholder's Equity.........................................5
Statements of Cash Flows...................................................6
Notes to Financial Statements..............................................7


<PAGE>

                         Report of Independent Auditors

The Board of Directors and Stockholder
Financial Guaranty Insurance Company

We have audited the accompanying  balance sheet of Financial  Guaranty Insurance
Company (the  "Company") as of December 31, 2003, and the related  statements of
income,  stockholder's  equity and cash flows for the periods from  December 18,
2003 through  December 31, 2003,  and from January 1, 2003 through  December 17,
2003.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audit.  The financial  statements of the Company for the
years ended  December  31, 2002 and 2001 were  audited by other  auditors  whose
report  dated  February  14,  2003  expressed  an  unqualified  opinion on those
statements.

We conducted our audit in accordance with auditing standards  generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. 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 audit  provides a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Financial Guaranty Insurance
Company as of December 31, 2003,  and the results of its operations and its cash
flows for the periods from December 18, 2003 through  December 31, 2003 and from
January  1,  2003  through  December  17,  2003 in  conformity  with  accounting
principles generally accepted in the United States.

                                                   /s/ Ernst & Young LLP

New York, New York
February 20, 2004



                                        1
<PAGE>




                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholder
Financial Guaranty Insurance Company:


We have audited the  accompanying  predecessor  basis balance sheet of Financial
Guaranty Insurance Company as of December 31, 2002, and the related  predecessor
basis statements of income,  stockholder's equity and cash flows for each of the
years in the two-year period ended December 31, 2002. These financial statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  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 financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Financial Guaranty Insurance
Company as of December 31, 2002 and the results of its  operations  and its cash
flows for each of the years in the two-year  period  ended  December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America.


/s/ KPMG LLP



New York, New York
February 14, 2003


                                        2
<PAGE>



                      Financial Guaranty Insurance Company

                                 Balance Sheets

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

<CAPTION>
<S><C>                                                           <C>           <C>
                                                                 SUCCESSOR    PREDECESSOR
                                                                       DECEMBER 31
                                                                   2003          2002
                                                               ----------------------------
ASSETS
Fixed maturity securities, at fair value (amortized cost of
--------------------------------------------------------------
  $2,688,459 in 2003 and $2,744,614 in 2002)                     $2,691,922    $2,825,472
Short-term investments, at cost, which approximates fair value       14,377        43,144
                                                               ----------------------------
Total investments                                                 2,706,299     2,868,616

Cash                                                                 78,645         7,260
Accrued investment income                                            32,803        33,077
Receivable for securities sold                                          170           991
Reinsurance recoverable                                               8,065         8,371
Other reinsurance receivable                                          5,295             -
Prepaid reinsurance premiums                                        123,768       129,958
Deferred policy acquisition costs                                     2,921        71,350
Receivable from related party                                         9,759             -
Property and equipment, net of accumulated depreciation
  of $8,266 in 2002)                                                      -           375
Prepaid expenses and other assets                                     6,058         7,799
Federal income taxes receivable                                         126             -
                                                               ----------------------------
Total assets                                                     $2,973,909    $3,127,797
                                                               ============================

LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
  Unearned premiums                                              $  918,882    $  683,532
  Loss and loss adjustment expenses                                  40,467        47,868
  Ceded reinsurance balances payable                                    114         2,239
  Accounts payable and accrued expenses                              19,238        11,858
  Obligations under capital lease                                     6,982
  Payable for securities purchased                                        -         5,333
  Current federal income taxes payable                                    -        97,477
  Deferred federal income tax liability                              18,862        90,595
                                                               ----------------------------
Total liabilities                                                 1,004,545       938,902

Stockholder's equity:
  Common stock, par value $1,500 per share; 10,000 shares
    authorized, issued and outstanding                               15,000        15,000
  Additional paid-in capital                                      1,857,772       383,511
  Accumulated other comprehensive income, net of tax                  2,059        49,499
  Retained earnings                                                  94,533     1,740,885
                                                               ----------------------------
Total stockholder's equity                                        1,969,364     2,188,895
                                                               ----------------------------
Total liabilities and stockholder's equity                       $2,973,909    $3,127,797
                                                               ============================
</TABLE>

See accompanying notes to financial statements.

                                        3
<PAGE>


                      Financial Guaranty Insurance Company

                              Statements of Income

                             (Dollars in thousands)


<TABLE>
<CAPTION>
<S>     <C>                        <C>           <C>             <C>            <C>
                                   SUCCESSOR                    PREDECESSOR
                                ----------------------------------------------------------
                                  PERIOD FROM   PERIOD FROM
                                   DECEMBER       JANUARY
                                   18, 2003       1, 2003
                                   THROUGH        THROUGH
                                   DECEMBER      DECEMBER
                                                                YEAR ENDED DECEMBER 31
                                                             -----------------------------
                                   31, 2003      17, 2003         2002          2001
                                ----------------------------------------------------------
Revenues:
  Gross premiums written           $12,213        $248,112     $232,579        $154,627
  Reassumed ceded premiums           6,300          14,300        2,600          3,200
  Ceded premiums written               (39)        (14,852)     (29,202)       (21,965)
                                ----------------------------------------------------------
  Net premiums written              18,474         247,560      205,977        135,862

  Increase in net unearned          (9,892)       (105,811)     (71,080)       (33,380)
     premiums
                                ----------------------------------------------------------
Net premiums earned                  8,582         141,749      134,897        102,482

Net investment income                4,269         112,619      119,595        124,992
Net realized gains                       -          31,506       68,546         77,043
Other income                            44             580        5,309          1,896
                                ----------------------------------------------------------
Total revenues                      12,895         286,454      328,347        306,413

Expenses:
  Loss and loss adjustments            236          (6,757)         501          1,752
     expenses
  Underwriting expenses              7,622          55,780       34,092         27,097
  Policy acquisition costs          (2,931)        (23,641)     (14,911)       (11,742)
     deferred
  Amortization of deferred
     policy acquisition costs           10          15,563       15,261          8,472
                                ----------------------------------------------------------
Total expenses                       4,937          40,945       34,943         25,579

Income before income taxes           7,958         245,509      293,404        280,834

Income tax expense (benefit):
  Current                            1,191          55,772       87,203         63,011
  Deferred                             573          (1,612)     (11,385)         2,555
                                ----------------------------------------------------------
Income tax expense                   1,764          54,160       75,818         65,566
                                ----------------------------------------------------------

Income before extraordinary          6,194         191,349      217,586        215,268
  item
Extraordinary gain                  13,852               -            -              -
                                ----------------------------------------------------------
Net income                         $20,046        $191,349     $217,586        $215,268
                                ==========================================================
</TABLE>


See accompanying notes to financial statements.


                                        4
<PAGE>

                      Financial Guaranty Insurance Company

                       Statements of Stockholder's Equity

                             (Dollars in thousands)
<TABLE>
<CAPTION>


                                                                                      ACCUMULATED
                                                                      ADDITIONAL         OTHER
                                                           COMMON      PAID-IN       COMPREHENSIVE      RETAINED
                                                            STOCK      CAPITAL      INCOME (LOSS),      EARNINGS         TOTAL
                                                                                      NET OF TAX
                                                       -----------------------------------------------------------------------------

PREDECESSOR
<S>                <C>                                     <C>         <C>             <C>              <C>             <C>
Balance at January 1, 2001                                 15,000      $  383,511      $23,120          $1,608,031      $2,029,662
  Net income                                                    -               -            -            215,268         215,268
  Other comprehensive loss:
    Change in fixed maturity securities                         -               -      (36,940)                 -         (36,940)
    available-for-sale
    Change in foreign currency translation adjustment           -               -       (1,112)                 -          (1,112)
                                                                                                                     ---------------
Total comprehensive income                                      -               -            -                  -         177,216
Dividend declared                                               -               -            -           (200,000)       (200,000)
                                                       -----------------------------------------------------------------------------
Balance at December 31, 2001                               15,000         383,511      (14,932)         1,623,299       2,006,878
  Net income                                                    -               -            -            217,586         217,586
  Other comprehensive income (loss):
    Change in fixed maturity securities                         -               -       67,113                  -          67,113
    available-for-sale
    Change in foreign currency translation adjustment           -               -       (2,682)                 -          (2,682)
                                                                                                                     ---------------
Total comprehensive income                                      -               -            -                  -         282,017
Dividend declared                                               -               -            -           (100,000)       (100,000)
                                                       -----------------------------------------------------------------------------
Balance at December 31, 2002                               15,000         383,511       49,499          1,740,885       2,188,895
  Net income                                                    -               -            -            191,349         191,349
  Other comprehensive income (loss):
    Change in fixed maturity securities                         -               -         (424)                 -            (424)
    available-for-sale
    Change in foreign currency translation adjustment           -               -        4,267                  -           4,267
                                                                                                                     ---------------
Total comprehensive income                                      -               -            -                  -         195,192
Dividend declared                                               -               -            -           (284,300)       (284,300)
                                                       -----------------------------------------------------------------------------
Balance at December 17, 2003                               15,000         383,511       53,342          1,647,934       2,099,787

SUCCESSOR
  Purchase accounting adjustments                               -       1,474,261      (53,342)        (1,573,447)       (152,528)
  Net income                                                    -               -            -             20,046          20,046
  Other comprehensive income:
    Change in fixed maturity securities available for           -               -        2,059                  -           2,059
    sale
                                                                                                                     ---------------
Total comprehensive income                                      -               -            -                  -          22,105
                                                       -----------------------------------------------------------------------------
Balance at December 31, 2003                              $15,000      $1,857,772      $ 2,059          $  94,533       $1,969,364
                                                       =============================================================================
</TABLE>

See accompanying notes to financial statements.




                                        5
<PAGE>

                      Financial Guaranty Insurance Company

                            Statements of Cash Flows

                             (Dollars in thousands)
<TABLE>
<CAPTION>


                                             SUCCESSOR                 PREDECESSOR
                                           ---------------------------------------------------
                                            PERIOD FROM   PERIOD FROM
                                              DECEMBER      JANUARY
                                              18, 2003      1, 2003
                                              THROUGH        THROUGH
                                              DECEMBER      DECEMBER   YEAR ENDED DECEMBER 31
                                                                      ------------------------
                                              31, 2003      17, 2003      2002        2001
                                           ---------------------------------------------------
OPERATING ACTIVITIES
<S>                                           <C>            <C>         <C>        <C>
Net income                                    $20,046        $191,349    $217,586   $215,268
Adjustments to reconcile net income to
net cash
  provided by operating activities:
    Extraordinary gain                        (13,852)             -           -          -
    Amortization of deferred policy                10         15,563      15,261      8,472
    acquisition costs
    Policy acquisition costs deferred          (2,931)       (23,641)    (14,911)   (11,742)
    Net realized gains on investments               -        (31,506)    (68,546)   (77,043)
    Change in unearned premiums                 2,460         86,250      70,741     31,406
    Change in loss and loss adjustment            236         (7,644)       (987)     2,148
    expenses
    Depreciation of property and equipment          -             22          53        198
    Change in reinsurance recoverable            (104)           410       1,269       (684)
    Change in prepaid reinsurance premiums      7,432         19,725         340      1,973
    Other reinsurance receivable               (5,295)             -           -          -
    Change in federal income taxes               (172)        (2,407)          -          -
    receivable
    Change in receivable from affiliate           (76)        (9,811)          -          -
    Change in accrued investment income,
    and payable,                               (5,065)         6,292       2,769      5,949
      prepaid expenses and other assets
    Change in ceded reinsurance balances
    and                                         6,485          1,804      (5,867)     4,014
      accounts payable and accrued
      expenses
    Deferred federal income tax liability         573         (1,612)    (11,385)     2,555
    Amortization of fixed maturity                693         21,129      12,081      5,320
    securities
    Change in current federal income                -        (97,477)      9,748     10,637
    taxes payable
                                           ---------------------------------------------------
Net cash provided by operating activities      10,440        168,446     228,152    198,471
                                           ---------------------------------------------------

INVESTING ACTIVITIES
Sales and maturities of fixed maturity          1,780      1,028,103   2,155,864  2,106,761
securities
Purchases of fixed maturity securities              -       (877,340)  (2,478,839)(1,989,270)
Purchases, sales, and maturities of
short-term                                    (12,736)        41,504     212,127   (131,339)
  investments, net
Receivable for securities sold                    538            283        (991)         -
Payable for securities purchased                    -         (5,333)     (9,334)    14,667
                                           ---------------------------------------------------
Net cash (used in) provided by investing      (10,418)       187,217    (121,173)       819
activities                                 ---------------------------------------------------

FINANCING ACTIVITIES
Dividends paid                                      -       (284,300)   (100,000)  (200,000)
                                           ---------------------------------------------------
Net cash used in financing activities               -       (284,300)   (100,000)  (200,000)
                                           ---------------------------------------------------

Net increase (decrease) in cash                    22         71,363       6,979       (710)
Cash at beginning of year                      78,623          7,260         281        991
                                           ---------------------------------------------------
Cash at end of year                           $78,645        $78,623     $ 7,260    $   281
                                           ===================================================
</TABLE>

See accompanying notes to financial statements.

                                        6
<PAGE>

                      Financial Guaranty Insurance Company

                    Notes to Financial Statements


1. BUSINESS AND ORGANIZATION

Financial   Guaranty  Insurance  Company  (the  "Company")  is  an  wholly-owned
subsidiary of FGIC  Corporation  (the  "Parent").  The Parent was a wholly-owned
subsidiary of General Electric Capital  Corporation ("GE Capital").  The Company
provides  financial guaranty insurance for public finance and structured finance
obligations.  The Company began insuring public finance  obligations in 1984 and
structured  finance  obligations  in 1988. The Company's  financial  strength is
rated "Aaa" by Moody's Investors Service, Inc. ("Moody's"),  "AAA" by Standard &
Poor's Rating Services, a division of The McGraw-Hill  Companies,  Inc. ("S&P"),
and "AAA" by Fitch Ratings, Inc. ("Fitch"). The Company is licensed to engage in
financial  guaranty  insurance in all 50 states,  the District of Columbia,  the
Commonwealth of Puerto Rico and, through a branch, in the United Kingdom.

On December  18,  2003,  an investor  group  consisting  of The PMI Group,  Inc.
("PMI"),  affiliates of the Blackstone Group L.P. ("Blackstone"),  affiliates of
the Cypress  Group L.L.C.  ("Cypress")  and  affiliates  of CIVC  Partners  L.P.
("CIVC"),  collectively  the "Investor  Group",  completed the acquisition  (the
"Transaction")  of  FGIC  Corporation  from  a  subsidiary  of GE  Capital  in a
transaction  valued  at  approximately   $2,200,000.   At  the  closing  of  the
Transaction,  the Investor Group, acting through an affiliate, paid GE Capital a
cash  purchase  price of  approximately  $1,600,000,  which was funded by equity
investments by the Investor Group and borrowings of approximately $227,300 under
a bridge loan facility within an affiliate of Bank of America  Corporation.  The
bridge loan originally was to mature on December 16, 2004;  however,  the bridge
loan was repaid with the proceeds of the Senior Notes issued on January 12, 2004
(see Note 15).  In  addition,  FGIC  Corporation  paid GE Capital  approximately
$284,300  in  pre-closing  dividends  and GE Capital  retained  2,346  shares of
Convertible  Preferred Stock (the "Senior  Preferred  Shares") with an aggregate
liquidation  preference of $234,600 and  approximately 5% of FGIC  Corporation's
common  stock.  PMI is the  largest  stockholder  of  FGIC  Corporation,  owning
approximately 42% of its common stock at December 31, 2003. Blackstone,  Cypress
and CIVC own approximately 23%, 23% and 7% of FGIC  Corporation's  common stock,
respectively, at December 31, 2003.


                                        7
<PAGE>

                      Financial Guaranty Insurance Company

                    Notes to Financial Statements (continued)


2. BASIS OF PRESENTATION

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

The accompanying  financial  statements have been prepared on the basis of GAAP,
which differs in certain  respects from the accounting  practices  prescribed or
permitted by the New York Department of Insurance (the  "Department")  (see Note
4).

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company's significant accounting policies are as follows:

A. INVESTMENTS

The   Company   classifies   all   of   its   fixed   maturity   securities   as
available-for-sale,  which  is  recorded  on  the  trade  date  at  fair  value.
Unrealized gains and losses are recorded as a separate  component of accumulated
other  comprehensive   income,  net  of  applicable  income  taxes.   Short-term
investments are carried at cost, which approximates fair value.

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

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

B. PREMIUM REVENUE RECOGNITION

Premiums are received either up-front or over time on an installment  basis. The
premium  collection  method is  determined  at the time the  policy  is  issued.
Up-front premiums are paid in full at the inception of the policy and are earned
over the  period of risk  based on total  exposure  outstanding  at any point in
time. Installment premiums are collected periodically and premiums are reflected
in income pro rata over the  period  covered by the  premium  payment.  Unearned
premiums represent the portion of premiums received that is


                                        8
<PAGE>
                      Financial Guaranty Insurance Company

                    Notes to Financial Statements (continued)



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

applicable to future periods on policies in force. When an obligation insured by
the Company has been refunded prior to the end of the expected  policy  coverage
period,  any remaining  unearned premium is recognized at that time. A refunding
occurs when an insured  obligation is repaid or fully  defeased  prior to stated
maturing.  Ceded premiums are earned in a manner  consistent with the underlying
policies.

C. POLICY ACQUISITION COSTS

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

D. LOSS AND LOSS ADJUSTMENT EXPENSES

Provision for loss and loss adjustment  expenses includes principal and interest
and other  payments due under insured risks at the balance sheet date for which,
in  management's  judgment,  the  likelihood  of future loss is probable and for
which the  expected  losses  can be  reasonably  estimated.  Case  reserves  are
established for the net present value of estimated losses on particular  insured
obligations.  These  reserves  represent an estimate of the present value of the
anticipated  shortfall,  net of  reinsurance,  between  (1)  payments on insured
obligations plus  anticipated loss adjustment  expenses and (2) anticipated cash
flow from,  and proceeds to be received on, sales of any  collateral  supporting
the obligation and/or other anticipated recoveries.  As of December 31, 2003 and
2002,  discounted  case-basis  loss and loss  adjustment  expense  reserves were
$18,900 and $21,500,  respectively.  Loss and loss adjustment  expenses included
amounts  discounted at an approximate  interest rate of 4.4% in 2003 and 3.4% in
2002.  The amount of the  discount at December  31, 2003 and 2002 was $3,400 and
$4,000,  respectively.  The discount rate used is based upon the risk-free  rate
for the average maturity of the applicable bond sector.


                                        9
<PAGE>
                      Financial Guaranty Insurance Company

                    Notes to Financial Statements (continued)



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In addition to case reserves,  the Company  establishes  reserves to cover those
impaired  credits on its credit  watch  list.  These  reserves  are  designed to
recognize  the potential for claims on credits that have migrated to an impaired
level  where there is an  increased  probability  of  default,  but that are not
presently or imminently in payment default. The methodology for establishing and
calculating the watch list reserve relies on a categorization  and assessment of
the  probability of default,  and loss severity  given default,  of the impaired
credits  on the list.  The  reserve  applies  to the group of credits at various
stages of impairment,  not each individual credit, as is the situation in a case
basis  reserve.  The watch list  reserve is  adjusted  as  necessary  to reflect
changes in the loss expectation inherent in the group of impaired credits. As of
December 31, 2003,  such reserves were $21,600.  Prior to the  Transaction,  the
Company  established  similar  reserves  based upon an evaluation of the insured
portfolio in light of current economic conditions and other relevant factors. As
of December 31, 2002, such reserves were $26,400.

The reserve for loss and loss  adjustment  expenses is based upon estimates and,
in management's  opinion, the reserves for loss and loss adjustment expenses are
adequate. However, actual results will likely differ from those estimates.

E. INCOME TAXES

Deferred  tax  assets  and   liabilities  are  recognized  for  the  future  tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases.  These temporary  differences  relate principally to unrealized gains and
losses  on  available-for-sale   fixed  maturity  securities,   premium  revenue
recognition,  deferred  acquisition costs,  discount on loss and loss adjustment
reserves and certain loss reserves,  alternative  minimum tax (AMT) credit carry
forwards and profit commission. Deferred tax assets and liabilities are measured
using  enacted  tax rates  expected  to apply to taxable  income in the years in
which those temporary  differences are expected to be recovered or settled.  The
effect  on  deferred  tax  assets  and  liabilities  of a change in tax rates is
recognized in income in the period that includes the enactment date.

Financial  guaranty  insurance  companies  are  permitted to deduct from taxable
income,  subject to certain limitations,  amounts added to statutory contingency
reserves (see Note 4). The amounts  deducted must be included in taxable  income
upon their  release  from the  reserves.  The  amounts  deducted  are allowed as
deductions  from  taxable  income  only  to  the  extent  that  U.S.  Government
non-interest  bearing  tax and loss  bonds are  purchased  and held in an amount
equal to the tax benefit attributable to such deductions.


                                       10
<PAGE>
                      Financial Guaranty Insurance Company

                    Notes to Financial Statements (continued)



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

F. PROPERTY AND EQUIPMENT

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

G. GOODWILL

Effective  January 1, 2002, the FGIC Corporation  adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142").
Under SFAS No.  142,  goodwill is no longer  amortized  but rather is tested for
impairment at least annually.

In accounting for the  acquisition of FGIC  Corporation by the Investor Group in
2003, the Company has applied purchase  accounting as prescribed by Statement of
Financial  accounting  Standards No. 141 Business  Combinations ("SFAS 141") and
Securities  and Exchange  Commission  Staff  Accounting  Bulletin 54. Under this
accounting method, the purchase price has been pushed down into the accompanying
financial statements, with the difference between the purchase price and the sum
of the fair value of tangible and identifiable  intangible  assets acquired less
liabilities  assumed  resulting in negative  goodwill of $27,300 at December 18,
2003.  In  accordance  with SFAS 141 the Company  reduced the value  assigned to
non-financial assets, the remaining negative goodwill of $13,852 was recorded as
an  extraordinary  gain in the consolidated  statement of income.  In 1989, when
FGIC Corporation was acquired by GE Capital,  FGIC Corporation did not push down
the purchase price and related goodwill to the Company.

As a result of the purchase accounting effective on December 18, 2003, the basis
of the assets and liabilities has changed,  which  necessitates the presentation
of Predecessor  Company and the Successor  Company  columns in the  Consolidated
Balance Sheet, Statements of Income, Shareholders' Equity and Cash Flows.


                                       11
<PAGE>
                      Financial Guaranty Insurance Company

                    Notes to Financial Statements (continued)



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

H. FOREIGN CURRENCY TRANSLATION

The Company has an established foreign branch in the United Kingdom and exposure
in France and determined  that the  functional  currencies of these branches are
their local currencies. Accordingly, the assets and liabilities of these foreign
branches are translated into U.S.  dollars at the rates of exchange  existing at
December 31, 2003 and 2002 and revenues and expenses are  translated  at average
monthly exchange rates.  The cumulative  translation gain (loss) at December 31,
2003 and 2002 was $0 and $(2,729), respectively, net of tax expense (benefit) of
$0 and  $(1,470),  respectively,  and is  reported  as a separate  component  of
accumulated other comprehensive income in the statement of stockholders' equity.

I. NEW ACCOUNTING PRONOUNCEMENTS

In  January  2003,  the  FASB  issued   Financial   Interpretation   Number  46,
Consolidation  of  Variable  Interest  Entities  ("FIN  46"),  which the Company
adopted on July 1, 2003. FIN 46's consolidation criteria are based upon analysis
of risks and  rewards,  not control,  and  represent a  significant  and complex
modification of previous accounting principles.  FIN 46 represents an accounting
change  not  a  change  in  the  underlying   economics   associated   with  the
transactions, which may be affected by the Interpretation.  FIN 46 clarifies the
consolidation  criteria for certain  entities in which  equity  investors do not
have the  characteristics  of a  controlling  financial  interest or do not have
sufficient  equity at risk for the  entity to  finance  its  activities  without
additional  subordinated  financial support from other parties.  FIN 46 requires
variable interest entities to be consolidated by their primary  beneficiaries if
the entities do not effectively  disperse risk among parties involved.  Variable
interest entities that effectively disperse risks will not be consolidated.  FIN
46 requires  disclosures  for entities that have either a primary or significant
variable interest in a variable interest entity.

As a  part  of  its  structured  finance  business,  the  Company  insures  debt
obligations or certificates issued by special purposes entities. At December 31,
2003,  the Company had  $1,021,000  of gross  principal  outstanding  related to
insurance  contracts  issued to  commercial  paper  conduits--variable  interest
entities under FIN 46--which the Company does not believe requires consolidation
but which  requires  disclosure.  With respect to the remainder of the municipal
finance and structured finance  transactions  insured, the Company has evaluated
the  transactions,   and  does  not  believe  any  such   transactions   require
consolidation or disclosure under FIN 46.


                                       12
<PAGE>
                      Financial Guaranty Insurance Company

                    Notes to Financial Statements (continued)



4. STATUTORY ACCOUNTING PRACTICES

The  financial  statements  are prepared on the basis of GAAP,  which differs in
certain  respects  from  accounting  practices  prescribed  or  permitted by the
Department.   The  National  Association  of  Insurance  Commissioners  ("NAIC")
approved the codification project ("Codification") effective January 1, 2001 and
the Department adopted certain but not all provisions of Codification.

The   following   are  the   significant   differences   between  the  Company's
statutory-basis accounting practices and GAAP:

(a)   premiums are earned directly in proportion to the scheduled  principal and
      interest  payments  rather  than  in  proportion  to  the  total  exposure
      outstanding at any point in time under GAAP;

(b)   policy  acquisition  costs are charged to current  operations  as incurred
      rather than as related premiums are earned under GAAP;

(c)   a contingency  reserve is computed on the basis of statutory  requirements
      for  the  security  of  all  policyholders,  regardless  of  whether  loss
      contingencies actually exist, whereas under GAAP, a reserve is established
      based on an ultimate estimate of exposure;

(d)   certain  assets  designated  as  nonadmitted  assets are charged  directly
      against surplus but are reflected as assets under GAAP, if recoverable;

(e)  deferred  tax assets are limited to 1) the amount of federal  income  taxes
     paid in prior  years that can be  recovered  through  loss carry  backs for
     existing  temporary  differences  that reverse by the end of the subsequent
     calendar  year,  plus 2) the lesser of the  remaining  gross  deferred  tax
     assets expected to be realized within one year of the balance sheet date or
     10% of capital and  surplus  excluding  any net  deferred  tax assets,  EDP
     equipment and operating software and any net positive goodwill, plus 3) the
     amount of remaining  gross  deferred tax assets that can be offset  against
     existing gross deferred tax liabilities.  The remaining deferred tax assets
     are  non-admitted.  Deferred taxes do not include  amounts for state income
     taxes.  Under GAAP,  state income taxes are included in the  computation of
     deferred  taxes,  a deferred  tax asset is recorded for the amount of gross
     deferred  tax  assets  expected  to be  realized  in  future  years,  and a
     valuation allowance is established for deferred tax assets not realizable.


                                       13
<PAGE>
                      Financial Guaranty Insurance Company

                    Notes to Financial Statements (continued)



4.    STATUTORY ACCOUNTING PRACTICES (CONTINUED)

(f)   purchases of tax and loss bonds are  reflected as admitted  assets;  while
      under GAAP they are recorded as federal income tax payments;

(g)   all fixed income  investments are carried at amortized cost rather than at
      fair value for securities classified as available-for-sale under GAAP;

(h)   profit   commissions   are   recognized  as  received   while  under  GAAP
      management's  best  estimate  of the  Company's  ultimate  recoverable  is
      accrued; and

  (i)  case reserves are discounted at the average  investment  portfolio  yield
       for statutory purposes and at the risk-free rate under GAAP.

Statutory-basis  surplus  of the  Company  at  December  31,  2003  and 2002 was
$1,153,500 and $977,573, respectively. Statutory-basis net income (loss) for the
period from  December 18, 2003 through  December 31, 2003,  from January 1, 2003
through December 17, 2003 and for the years ended December 31, 2002 and 2001 was
($1,669), $180,091, $205,476 and $206,893, respectively.

5. INVESTMENTS

Investments in fixed maturity  securities  carried at fair value of $3,900 as of
December 31, 2003 and 2002 were on deposit with various  regulatory  authorities
as required by law.

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

                                                       SUCCESSOR
                                --------------------------------------------------------
                                  AMORTIZED      GROSS          GROSS        FAIR VALUE
                                    COST       UNREALIZED     UNREALIZED
                                                 GAINS          LOSSES
                                --------------------------------------------------------
AT DECEMBER 31, 2003:
  Obligations of states and
<S>                               <C>             <C>          <C>           <C>
    political subdivisions        $2,363,870      $3,098       $  538        $2,366,430
  Asset and mortgage backed          245,394         630          394          245,630
  U.S. Treasury securities and
    obligations of U.S.
    Government corporations
    and agencies                       4,280           -           35            4,245
  Debt securities issued by
    foreign governments               44,405         737            -           45,142
Preferred stock                       30,510          14           49           30,475
                                --------------------------------------------------------
Total                             $2,688,459      $4,479       $1,016        $2,691,922
                                ========================================================
</TABLE>


                                       14
<PAGE>


5. INVESTMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                      PREDECESSOR
                                --------------------------------------------------------
                                                 GROSS          GROSS
                                  AMORTIZED    UNREALIZED    UNREALIZED
                                    COST         GAINS         LOSSES       FAIR VALUE
                                --------------------------------------------------------
AT DECEMBER 31, 2002:
  Obligations of states and
<S>                              <C>            <C>           <C>           <C>
    political subdivisions       $ 2,141,391    $ 73,155      $ 4,586       $2,209,960
  Asset and mortgage backed          525,607      10,900           63          536,444
  U.S. Treasury securities and
    obligations of U.S.
    Government corporations
    and agencies                       3,365         833            -            4,198
  Debt securities issued by
    foreign governments               43,653       1,127            -           44,780
Preferred stock                       30,598           7          515           30,090
                                --------------------------------------------------------
Total                            $ 2,744,614    $ 86,022      $ 5,164       $2,825,472
                                ========================================================
</TABLE>

The  following  table  shows  gross  unrealized  losses  and fair value of fixed
maturity  securities,  aggregated by investment category and length of time that
individual  securities have been in a continuous  unrealized  loss position,  at
December 31, 2003:

<TABLE>
                                                         SUCCESSOR
                               ---------------------------------------------------------------
<CAPTION>
                               LESS THAN 12 MONTHS    12 MONTHS OR MORE           TOTAL
                               ---------------------------------------------------------------
                                 FAIR     UNREALIZED FAIR VALUE UNREALIZED FAIR VALUE UNREALIZED
                                 VALUE     LOSSES                LOSSES               LOSSES
                               ---------------------------------------------------------------

Obligations of states and
<S>                              <C>        <C>        <C>         <C>     <C>          <C>
  political subdivisions         $786,381   $ 538      $ -         $-      $ 786,381    $ 538
Asset and mortgage backed         209,032     394        -          -        209,032      394
U.S. Treasury securities and
  obligations of U.S.
  government corporations and
  agencies                          4,245      35        -          -          4,245       35
Preferred stock                    13,450      49        -          -         13,450       49
                               ---------------------------------------------------------------
                               ---------------------------------------------------------------
Total temporarily impaired      $1,013,108  $1,016     $ -         $-      $1,013,108   $1,016
  securities
                               ===============================================================
</TABLE>


                                       15
<PAGE>


5. INVESTMENTS (CONTINUED)

The amortized cost and fair values of investments in fixed maturity  securities,
available-for-sale at December 31, 2003, by contractual maturity date, are shown
below.  Expected  maturities  may differ  from  contractual  maturities  because
borrowers may have the right to call or prepay  obligations with or without call
or prepayment penalties.

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

Due one year later or less                         $     19,538    $     19,803
Due after one year through five years                    53,164          53,539
Due after five years through ten years                1,050,670       1,052,355
After ten years                                       1,565,087       1,566,225
                                                 -------------------------------
Total                                              $  2,688,459    $  2,691,922
                                                 ===============================

For the period from December 18, 2003 through December 31, 2003, January 1, 2003
through  December  17,  2003 and the years  ended  December  31,  2002 and 2001,
proceeds from sales of  available-for-sale  securities were $1,780,  $1,023,378,
$2,155,829,  and $2,106,761,  respectively.  For the period from January 1, 2003
through  December 17, 2003 and the years ended December 31, 2002 and 2001, gross
gains of $31,700,  $68,600 and $78,400  respectively,  and gross losses of $200,
$100 and $1,400, respectively, were realized on such sales.

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

                                         SUCCESSOR               PREDECESSOR
<CAPTION>
                                       ---------------------------------------------------
                                          PERIOD        PERIOD
                                           FROM         FROM
                                         DECEMBER      JANUARY
                                         18, 2003     1, 2003
                                          THROUGH     THROUGH           YEAR ENDED
                                         DECEMBER      DECEMBER         DECEMBER 31
                                                                  ------------------------
                                         31, 2003      17, 2003      2002        2001
                                       ---------------------------------------------------
<S>                                       <C>          <C>          <C>         <C>
Income from fixed maturity securities     $   4,294    $ 111,075    $113,108    $ 120,162
Income from short-term investments               12        2,326       7,485        5,838
                                       ---------------------------------------------------
Total investment income                       4,306      113,401     120,593      126,000
Investment expenses                             (37)        (782)       (998)      (1,008)
                                       ---------------------------------------------------
Net investment income                     $   4,269    $ 112,619    $119,595    $ 124,992
                                       ===================================================
</TABLE>

                                       16
<PAGE>


5. INVESTMENTS (CONTINUED)

As of December 31, 2003, the Company did not have more than 3% of its investment
portfolio concentrated in a single issuer or industry;  however, the Company had
the following investment concentrations by state:

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

New York                            $  258,356
Florida                                222,205
Texas                                  212,768
New Jersey                             164,427
Illinois                               142,017
California                             128,059
Michigan                               107,879
Pennsylvania                           100,434
Maryland                                98,411
Ohio                                    80,416
                                  --------------
                                     1,514,972
All other states                       871,259
All other investments                  320,068
                                  --------------
                                   $ 2,706,299
                                  ==============

6. INCOME TAXES

For the period ending on the closing date of the Transaction,  the Company files
its federal tax return as part of the consolidated  return of GE Capital.  Under
the tax sharing agreement with GE Capital, tax is allocated to the Company based
upon its respective  contributions  to consolidated  net income.  For the period
subsequent to the closing date of the sale transaction,  the Company will become
eligible to file its own consolidated federal return.


                                       17
<PAGE>


6. INCOME TAXES (CONTINUED)

The Company's  effective  federal income tax rate is less than the corporate tax
rate on  ordinary  income  of  35%,  primarily  due to  tax-exempt  interest  on
municipal investments.

The  following  is a  reconciliation  of federal  income  taxes  computed at the
statutory rate and the provision for federal income taxes:
<TABLE>
<CAPTION>
                                        SUCCESSOR                   PREDECESSOR
                                     ----------------------------------------------------------
                                       PERIOD FROM    PERIOD FROM
                                      DECEMBER 18,     JANUARY 1,
                                      2003 THROUGH    2003 THROUGH
                                        DECEMBER        DECEMBER      YEAR ENDED DECEMBER 31
                                                                    ---------------------------
                                        31, 2003        17, 2003        2002         2001
                                     ----------------------------------------------------------
<S>                                      <C>            <C>            <C>          <C>
   Income taxes computed on income       $ 2,785        $ 85,928       $102,691     $ 98,292
     before provision for Federal
     income taxes, at the statutory
     rate
   Tax effect of:
     Tax-exempt interest                    (979)        (26,112)       (26,788)     (32,730)
     Other, net                              (42)         (5,656)           (85)           4
                                     ----------------------------------------------------------
   Provision for income taxes            $ 1,764        $ 54,160       $ 75,818     $ 65,566
                                     ==========================================================
</TABLE>


                                       18
<PAGE>


6. INCOME TAXES (CONTINUED)

The tax effects of temporary  differences that give rise to significant portions
of the net  deferred tax  liability at December 31, 2003 and 2002 are  presented
below:

                                                      SUCCESSOR    PREDECESSOR
                                                        2003           2002
                                                    ----------------------------
Deferred tax assets:
  Loss and loss adjustment expense reserves             $ 6,026     $   7,495
  AMT credit carryforward                                   276             -
  Property and equipment                                      -           656
  Foreign currency                                            -         1,470
  Deferred compensation                                     221           319
  Premium revenue recognition                             1,129             -
  Capital lease                                           2,444             -
  Net operating loss                                      4,690             -
  Other                                                     426           934
                                                    ----------------------------
Total gross deferred tax assets                          15,212        10,874
                                                    ----------------------------

Deferred tax liabilities:
  Unrealized gains on fixed maturity securities,
    available-for-sale                                   29,462        28,123
  Deferred acquisition costs                              1,022        24,973
  Premium revenue recognition                                 -        45,640
  Profit commission                                       2,108         2,671
  Foreign currency                                          916             -
  Other                                                     566            62
                                                    ----------------------------
Total gross deferred tax liabilities                     34,074       101,469
                                                    ----------------------------
Net deferred tax liability                              $18,862     $  90,595
                                                    ============================

The Company's net operating loss carry forwards of $13,400 expire in 2023. Based
upon the level of  historical  taxable  income,  projections  of future  taxable
income over the periods in which the deferred tax assets are  deductible and the
estimated reversal of future taxable temporary differences, the Company believes
it is more likely than not that it will realize the benefits of these deductible
differences and has not  established a valuation  allowance at December 31, 2003
and 2002.


                                       19
<PAGE>


6. INCOME TAXES (CONTINUED)

Total  federal  income tax  payments  during the period from  December  18, 2003
through  December 31, 2003,  from January 1, 2003 through  December 17, 2003 and
for the years ended  December 31, 2002 and 2001 were $0,  $156,800,  $77,500 and
$38,300, respectively.

7. REINSURANCE

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

The Company uses  reinsurance  to increase its capacity to write  insurance  for
obligations  of large,  frequent  issuers,  to meet  internal,  rating agency or
regulatory  single risk limits,  to diversify  risk and to reduce capital needs.
The Company currently arranges reinsurance on only a facultative (transaction by
transaction)  basis.  Prior to 2003,  the  Company  also had treaty  reinsurance
agreements that provided  coverage for a specified portion of the exposure under
all qualifying policies issued during the term of the treaty.

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

In recent years, a number of the Company's  reinsurers  have been  downgraded by
the  rating  agencies,   thereby  reducing  the  financial   benefits  of  using
reinsurance  under the rating agency capital adequacy models because the Company
must allocate additional capital to the related reinsured exposure.  The Company
still receives statutory credit for this reinsurance.  In connection with such a
downgrade,  the Company reassumed $6,300,  $14,300,  $2,600 and $3,200, of ceded
premiums for the period from December 18, 2003 through  December 31, 2003,  from
January 1, 2003 through  December 17, 2003 and for the years ended  December 31,
2002 and 2001, respectively, from the reinsurers.



                                       20
<PAGE>


7. REINSURANCE (CONTINUED)

The Company holds collateral under reinsurance agreements in the form of letters
of credit  and trust  agreements  in various  amounts  with  various  reinsurers
totaling  $53,200  at  December  31,  2003  that can be drawn on in the event of
default by the reinsurer.

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

<TABLE>
<CAPTION>

                                     SUCCESSOR                  PREDECESSOR
                                  ----------------------------------------------------------
                                    PERIOD FROM    PERIOD FROM
                                   DECEMBER 18,     JANUARY 1,
                                   2003 THROUGH    2003 THROUGH
                                     DECEMBER        DECEMBER     YEAR ENDED DECEMBER 31
                                                                 --------------------------
                                     31, 2003        17, 2003        2002         2001
                                  ----------------------------------------------------------
<S>                                    <C>            <C>           <C>          <C>
Net premiums earned                    $ 1,236        $ 20,300      $ 27,000     $20,600
Loss and loss adjustment expenses      $     -        $  1,700      $    800     $   700


8. LOSS AND LOSS ADJUSTMENT EXPENSES

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

                                    SUCCESSOR                   PREDECESSOR
                                ------------------------------------------------------------
                                   PERIOD FROM     PERIOD FROM
                                  DECEMBER 18,      JANUARY 1,
                                  2003 THROUGH    2003 THROUGH
                                    DECEMBER        DECEMBER      YEAR ENDED DECEMBER 31
                                                                ----------------------------
                                    31, 2003        17, 2003         2002          2001
                                ------------------------------------------------------------

   Balance at beginning of                           $  47,868
     period                         $ 40,224                      $ 48,855        $46,707
   Less reinsurance recoverable       (8,058)           (8,371)     (9,640)        (8,956)
                                ------------------------------------------------------------
   Net balance                        32,166            39,497      39,215         37,751
                                ------------------------------------------------------------
   Incurred related to:
     Current period                        -             5,000       5,074              -
     Prior periods                       236            (8,337)      3,127          1,752
     Watchlist reserves                    -            (3,420)     (7,700)             -
                                ------------------------------------------------------------
   Total incurred                        236            (6,757)        501          1,752
                                ------------------------------------------------------------

   Paid related to:
     Current period                        -                 -           -              -
     Prior periods                         -              (574)       (219)          (288)
                                ------------------------------------------------------------
   Total paid                              -              (574)       (219)          (288)
                                ------------------------------------------------------------

   Net balance                        32,402            32,166      39,497         39,215
   Plus reinsurance recoverable        8,065             8,058       8,371          9,640
                                ------------------------------------------------------------
   Balance at end of period         $ 40,467         $  40,224    $ 47,868        $48,855
                                ============================================================
</TABLE>


                                       21
<PAGE>


8. LOSS AND LOSS ADJUSTMENT EXPENSES (CONTINUED)

During the period from  January 1, 2003 through  December 17, 2003,  the overall
decrease  in case  reserves  was driven by a reduction  in  reserves  previously
established on several structured finance transactions of one particular issuer.
Certain  transactions related to the issuer were identified as potential problem
credits in 2001 and 2000 and case reserves were established  during those years.
In 2002,  there was  further  adverse  development  on such  transactions  and a
determination was made by management that several other transactions  related to
that issuer also required case reserves.

9. RELATED PARTY TRANSACTIONS

The Company had various agreements with subsidiaries of General Electric Company
and GE Capital.  These business transactions included certain payroll and office
expenses,  investment  fees  pertaining  to  the  management  of  the  Company's
investment  portfolio  and  telecommunication  service  charges.   Approximately
$1,600,  $2,200 and $1,200 in expenses  were incurred in the period from January
1, 2003 through  December 17, 2003 and for the years ended December 31, 2002 and
2001,  respectively,  related  to such  transactions  and are  reflected  in the
accompanying consolidated financial statements.

As part of the  Transaction,  the Company  entered into a transitional  services
agreement with GE Capital to provide certain administrative and support services
in exchange for certain  scheduled fees during the 12 months  following the date
of the agreement.  Investment  management services continue to be provided by GE
Capital. The Company plans to transfer investment management services by the end
of the  first  quarter  of 2004 to  Blackrock  Financial  Management,  Inc.  and
Wellington Management Company, LLP.

In connection  with the  Transaction,  the Company  entered into a capital lease
agreement with a subsidiary of GE Capital.  The lease agreement covers leasehold
improvements  made  to the  Company's  headquarters  as well  as  furniture  and
fixtures, computer hardware and software used by the Company (see Note 13).


                                       22
<PAGE>


9. RELATED PARTY TRANSACTIONS (CONTINUED)

In connection with the  Transaction,  the Company entered into the $300,000 Soft
Capital  Facility with GE Capital as lender and  administrative  agent. The Soft
Capital  Facility,  which replaced the capital support facility that the Company
previously  had  with GE  Capital,  has an  initial  term of  eight  years.  The
commitment  of GE Capital or any other lender which GE Capital may  syndicate to
under the Soft  Capital  Facility  can be  extended  for  one-year  terms at the
request of the Company and with the consent of such  lender.  During the term of
the Soft Capital  Facility,  the Company may borrow thereunder if the cumulative
losses (net of  reinsurance  and net of recoveries) it incurs with regard to its
public finance insured  portfolio exceed certain  predetermined  amounts,  which
amount  initially is the greater of $500,000 and 3.6% of the  Company's  average
annual debt service on its public finance  insured  portfolio and escalates each
year during the term of the Soft Capital  Facility.  The amount that the Company
may borrow at any given time cannot exceed the lesser of such excess  cumulative
loss and the  unutilized  commitments  of the  lender  under  the  Soft  Capital
Facility.  Any  repayment of amounts  drawn under the Soft  Capital  Facility is
limited  primarily to the amount of any  recoveries of losses  related to policy
obligations  in the covered  public finance  insured  portfolio.  No amounts are
currently outstanding under this facility.  The Soft Capital Facility replaced a
prior  agreement  with  GE  Capital  which  was  cancelled  on the  date  of the
Transaction.  Under the terms of an  agreement  dated May 14,  1993 and  renewed
through December 17, 2003, GE Capital had agreed to purchase common shares up to
an aggregate fair value of $300,000 in the event that a rating  downgrade of the
Company and its subsidiary, FGIC, are imminent. In exchange for this commitment,
the  Company  paid an  annual  commitment  fee of 0.60% of the then  outstanding
commitment at each quarter end.

As  part  of  the  Transaction,  GE  Capital  and  the  Company  entered  into a
reimbursement  agreement,  which  covers  losses  incurred  in  excess of $5,000
related to several structured finance transactions of one particular issuer. The
agreement is subject to a maximum of $25,000.

The Company also insured certain nonmunicipal issues with GE Capital involvement
as sponsor of the  insured  securitization  and/or  servicer  of the  underlying
assets. For some of these issues, GE Capital also provides first loss protection
in the event of default.  Gross premiums written on these issues amounted to $20
for the period from January 1, 2003 through  December 18, 2003,  $50 in 2002 and
$100 in 2001.  As of December 31, 2003,  par  outstanding  on these deals before
reinsurance was $35,000.


                                       23
<PAGE>


9. RELATED PARTY TRANSACTIONS (CONTINUED)

The Company  insures bond issues and securities in trusts that were sponsored by
affiliates of GE  (approximately 1% of gross premiums written) in 2003, 2002 and
2001.

As of December 31, 2003,  receivable from related parties of $9,759 are due from
GE Capital and its affiliates for prepaid taxes.

10. COMPENSATION PLANS

Officers and other key  employees of the Company  participate  in the  incentive
compensation and deferred  compensation plans.  Expenses incurred by the Company
under  compensation  plans and bonuses amounted to $3,996,  $10,087,  $3,800 and
$2,700 for the period from  December  18, 2003 through  December  31, 2003,  the
period  from  January 1, 2003  through  December  17,  2003 and the years  ended
December 31, 2002 and 2001,  respectively  and are reflected in the accompanying
financial  statements.  The  increase in 2003 is driven by  transaction  related
costs  which  include  retention  bonuses  and  sign-on  bonuses  to  new  hires
post-acquisition.

11. DIVIDENDS

Under New York insurance law, the Company may pay a dividend to FGIC Corporation
only from earned  surplus  subject to the following  limitations:  (a) statutory
surplus  after such dividend may not be less than the minimum  required  paid-in
capital,  which was $72,500 in 2003 and 2002,  and (b)  dividends may not exceed
the lesser of 10% of its surplus or 100% of adjusted net investment  income,  as
defined by New York  insurance  law,  for the  twelve-month  period ended on the
preceding  December  31,  without  the  prior  approval  of the New  York  State
Superintendent   of  Insurance.   In  connection  with  the  Transaction,   FGIC
Corporation  agreed that no dividends will be paid by the Company until December
18, 2005, without prior approval of the New York State Insurance Department.

During the period from  January 1, 2003  through  December  17, 2003 and for the
years ended December 31, 2002 and 2001, the Company  declared and paid dividends
to FGIC  Corporation  of $284,300,  $100,000  and  $200,000,  respectively.  The
$284,300 and $200,000 in dividends declared in 2003 and 2001, respectively, were
approved by the New York State  Superintendent  of  Insurance  as  extraordinary
dividends.


                                       24
<PAGE>


12. FINANCIAL INSTRUMENTS

  (A)  FAIR VALUE OF FINANCIAL INSTRUMENTS
       The  following  methods  and  assumptions  were  used by the  Company  in
       estimating fair values of financial instruments:

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

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

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

       The  estimated  fair values of the  Company's  financial  instruments  at
       December 31, 2003 and 2002 are as follows:

                                     SUCCESSOR            PREDECESSOR
                             ------------------------------------------------
                                       2003                   2002
                             ------------------------------------------------
                               CARRYING      FAIR     CARRYING      FAIR
                                AMOUNT      VALUE      AMOUNT      VALUE
                             ------------------------------------------------
Financial assets:
  Cash:
    On hand and in-demand
     accounts                  $  78,645   $  78,645   $   7,260  $   7,260
    Short-term investments        14,377      14,377      43,144     43,144
    Fixed maturity securities  2,691,922   2,691,922   2,825,472  2,825,472


                                       25
<PAGE>


12. FINANCIAL INSTRUMENTS (CONTINUED)

           Financial  Guaranties:  The carrying value of the Company's financial
           guaranties is represented  by the unearned  premium  reserve,  net of
           deferred acquisition costs, loss and loss adjustment expense reserves
           and  prepaid  reinsurance  premiums.  Estimated  fair values of these
           guaranties  are based on an estimate of the balance that is necessary
           to bring  the  future  returns  for the  Company's  embedded  book of
           business  to a market  return.  The  estimated  fair  values  of such
           financial  guaranties  is $830,881  compared  to a carrying  value of
           $824,595  as of  December  31,  2003 and is  $581,764  compared  to a
           carrying value of $521,721 as of December 31, 2002.

           As of  December  31, 2003 and 2002,  the net present  value of future
           installment   premiums  was  $111,200  and  $100,200,   respectively,
           discounted at 5% at December 31, 2003 and 2002.

  (B)  CONCENTRATIONS OF CREDIT RISK
       The  Company  considers  its role in  providing  insurance  to be  credit
       enhancement  rather than credit  substitution.  The Company  insures only
       those securities that, in its judgment,  are of investment grade quality.
       The Company has established and maintains its own underwriting  standards
       that  are  based on those  aspects  of  credit  that  the  Company  deems
       important  for the  particular  category of  obligations  considered  for
       insurance.  Credit  criteria  include  economic and social  trends,  debt
       management,  financial  management and legal and administrative  factors,
       the adequacy of  anticipated  cash flows,  including the  historical  and
       expected  performance of assets  pledged for payment of securities  under
       varying  economic  scenarios and underlying  levels of protection such as
       insurance or over-collateralization.

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



                                       26
<PAGE>


12. FINANCIAL INSTRUMENTS (CONTINUED)

       As of December 31, 2003, the Company's total insured  principal  exposure
       to credit loss in the event of default by bond  issues was  $206,745,000,
       net of reinsurance of $27,359,000.  The Company's insured portfolio as of
       December 31, 2003 was broadly  diversified  by geography  and bond market
       sector  with no  single  debt  issuer  representing  more  than 1% of the
       Company's principal exposure outstanding, net of reinsurance.

As of December 31, 2003, the composition of principal exposure by type of issue,
net of reinsurance, was as follows:

                                                       SUCCESSOR
                                                    -----------------
                                                     NET PRINCIPAL
                                                      OUTSTANDING
                                                    -----------------
Municipal:
  General obligation                                  $ 103,236,000
  Special revenue                                        85,696,000
  Industrial revenue                                        397,000
  Nonmunicipal                                           17,416,000
                                                    -----------------
Total                                                 $ 206,745,000
                                                    =================

As of  December  31,  2003,  the  composition  of  principal  exposure  ceded to
reinsurers was as follows:

                                                        SUCCESSOR
                                                    -------------------
                                                     CEDED PRINCIPAL
                                                       OUTSTANDING
                                                    -------------------
Reinsurer:
  Ace Guaranty Inc.                                    $  9,755,000
  Radian Reinsurance Company                              6,742,000
  American Re-Insurance Company                           2,876,000
  RAM Reinsurance Company                                 2,443,000
  Other                                                   5,543,000
                                                    -------------------
Total                                                  $ 27,359,000
                                                    ===================

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


                                       27
<PAGE>


12. FINANCIAL INSTRUMENTS (CONTINUED)

The Company's gross and net exposure  outstanding,  which includes principal and
interest,  was $392,200,000 and $343,400,000,  respectively,  as of December 31,
2003.

The Company is authorized to do business in 50 states, the District of Columbia,
and in the United Kingdom.  Principal exposure  outstanding at December 31, 2003
by state, net of reinsurance, was as follows:

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

                        California                     $  24,821,600
                        New York                          18,630,900
                        Pennsylvania                      15,992,600
                        Florida                           14,975,600
                        Illinois                          13,933,900
                        Texas                             10,556,500
                        New Jersey                         9,428,500
                        Michigan                           7,834,900
                        Ohio                               5,945,700
                        Washington                         5,928,100
                                                     ------------------
                        Subtotal                         128,048,300
                        Other states                      64,480,100
                        Mortgage and asset backed         14,047,800
                        International                        168,600
                                                     ------------------
                        Total                          $ 206,744,800
                                                     ==================


                                       28
<PAGE>


13. COMMITMENTS

The Company leases office space under an operating lease agreement. Rent expense
under the operating lease for the period from December 18, 2003 through December
31, 2003, from January 1, 2003 through December 17, 2003 and for the years ended
December 31, 2002 and 2001 was $90, $3,210, $4,300 and $2,200, respectively.

                                            AMOUNT
                                          ------------
Year:
  2004                                      $ 1,910
  2005                                        1,983
  2006                                        2,085
  2007                                        2,085
  2008                                        1,216
                                          ------------
Total minimum future rental payments        $ 9,279
                                          ============

In connection  with the  transaction,  the Company  entered into a capital lease
with a related party, covering leasehold  improvements and computer equipment to
be used at its home office.  At the lease termination date of June 30, 2009, the
Company will own the leased  equipment.  Future  payments  associated  with this
lease are as follows:

                                               SUCCESSOR
                                               ----------
                                                AMOUNT
                                               ----------
Year ending December 31:
   2004                                           $1,750
   2005                                            1,646
   2006                                            1,570
   2007                                            1,545
   2008                                            1,390
Thereafter                                           265
                                               ----------
                                               ----------
Total                                              8,166
Less: interest                                     1,184
                                               ----------
                                               ----------
Present value of minimum lease payments           $6,982
                                               ==========



                                       29
<PAGE>


14. COMPREHENSIVE INCOME

Accumulated  other  comprehensive  income (loss) of the Company  consists of net
unrealized  gains on  investment  securities  and foreign  currency  transaction
adjustments.

The  components of other  comprehensive  income for the period from December 18,
2003 through December 31, 2003, period from January 1, 2003 through December 17,
2003 and the years ended December 31, 2002 and 2001 or as follows:

<TABLE>
<CAPTION>
                                                                      SUCCESSOR
                                                          -----------------------------------
                                                            PERIOD FROM DECEMBER 18, 2003
                                                               THOUGH DECEMBER 31, 2003
                                                          -----------------------------------
                                                            BEFORE       TAX       NET OF
                                                             TAX                     TAX
                                                            AMOUNT                 AMOUNT
                                                          -----------------------------------
<S>                                                         <C>         <C>        <C>
Unrealized holding gains arising during the period          $ 3,168     $(1,109)   $ 2,059
Less reclassification adjustment for gains realized in
  net income                                                      -          -           -
                                                          -----------------------------------
Unrealized gains on investments                               3,168     (1,109)      2,059
Foreign currency translation adjustment                           -          -           -
                                                          -----------------------------------
Total other comprehensive income                            $ 3,168     $(1,109)   $ 2,059
                                                          ===================================

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



                                       30
<PAGE>


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

                                                                     PREDECESSOR
                                                          -----------------------------------
                                                                         2002
                                                          -----------------------------------
                                                            BEFORE        TAX       NET OF
                                                              TAX                    TAX
                                                            AMOUNT                  AMOUNT
                                                          -----------------------------------
<S>                                                         <C>         <C>         <C>
Unrealized holding gains arising during the period          $171,797    $(60,129)   $111,668
Less reclassification adjustment for gains realized in
  net income                                                (68,546)      23,991     (44,555)
                                                          -----------------------------------
Unrealized gains on investments                             103,251      (36,138)     67,113
Foreign currency translation adjustment                      (4,127)       1,445      (2,682)
                                                          -----------------------------------
Total other comprehensive income                            $ 99,124    $(34,693)   $ 64,431
                                                          ===================================

                                                                      PREDECESSOR
                                                          ------------------------------------
                                                                         2001
                                                          ------------------------------------
                                                            BEFORE        TAX        NET OF
                                                              TAX                     TAX
                                                            AMOUNT                   AMOUNT
                                                          ------------------------------------

Unrealized holding gains arising during the period          $ 20,213    $ (7,075)    $ 13,138
Less reclassification adjustment for gains realized in
  net income                                                 (77,043)     26,965      (50,078)
                                                          ------------------------------------
                                                          ------------------------------------
Unrealized losses on investments                             (56,830)     19,890      (36,940)
Foreign currency translation adjustment                       (1,711)        599       (1,112)
                                                          ------------------------------------
                                                          ------------------------------------
Total other comprehensive loss                              $(58,541)   $ 20,489     $(38,052)
                                                          ====================================
</TABLE>




                                       31
<PAGE>