**CIFG
      Assurance North America****, Inc.**






**Financial
      Statements**






**December
      31, 2006, 2005 and 2004**













**CIFG
      Assurance North America, Inc.**


**Table
      of Contents**


Report
                      of Independent Auditors
                  2Balance
                      Sheets as of December 31, 2006 and 2005
                  3Statements
                      of Operations for the years ended December 31,
                      2006,
                    2005
                      and 2004
                  4Statements
                    of Changes in Shareholder’s Equity and Comprehensive
                    (Loss)
                      Income for the years ended
                      December 31, 2006, 2005 and 2004
                  5Statements
                      of Cash Flows for the years ended December 31, 2006, 2005
                    and
                      2004
                  6Notes
                    to Financial Statements
                  7-26





**PricewaterhouseCoopers
      LLP**


PricewaterhouseCoopers
      Center


300
      Madison Avenue


New
      York
      NY 10017


Telephone  (646)
      471
      3000


Facsimile  (813)
      286
      6000













**Report
      of Independent Auditors**







To Board of
      Directors and Shareholder of


CIFG
      Assurance North America, Inc:





In
      our
      opinion, the accompanying balance sheets and the related statements of
      operations, changes in shareholder's equity and comprehensive income (loss),
      and
      cash flows present fairly, in all material respects, the financial position
      of
      CIFG Assurance North America, Inc. (the "Company") at December 31, 2006 and
      2005, and the results of its operations and its cash flows for each of the
      three
      years then ended in conformity with accounting principles generally accepted in the United States
      of
      America. 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 of these statements
      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, assessing the
      accounting principles used and significant estimates made by management, and
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our opinion.





/s/
      PricewaterhouseCoopers LLP





New
      York,
      New York


March
      27,
      2007




-2-





**CIFG
      Assurance North America, Inc.**


**Balance
      Sheets**


**($
      In '000s, except per share amount)**







**As
      of December 31,**


**2006**
            
            
            
            **2005****Assets**InvestmentsFixed
                income securities available-for-sale, at fair value(amortized
                cost of $135,985 and $134,387)
            
            
            
            
            $
            134,403
            
            
            
            
            $
            132,924Short-term
                investments, at cost
            
            
            
            
            
            39,588
            
            
            
            
            
            24,652Total
                Investments
            
            
            
            
            
            173,991
            
            
            
            
            
            157,576Cash
            
            
            
            
            
            1,068
            
            
            
            
            
            3,388Premiums
                receivable
            
            
            
            
            
            11,436
            
            
            
            
            
            7,515Receivable
                for securities sold
            
            
            
            
            
            ---
            
            
            
            
            
            4,000Investment
                income due and accrued
            
            
            
            
            
            1,748
            
            
            
            
            
            1,497Prepaid
                reinsurance premiums
            
            
            
            
            
            183,761
            
            
            
            
            
            141,827Reinsurance
                recoverable on unpaid loss and lossadjustment
                expense reserves
            
            
            
            
            
            4,670
            
            
            
            
            
            2,777Derivative
                assets
            
            
            
            
            
            10
            
            
            
            
            
            4Intangible
                asset - licenses acquired in acquisition
            
            
            
            
            
            8,331
            
            
            
            
            
            8,331Current
                income taxes recoverable
            
            
            
            
            
            42
            
            
            
            
            
            ---Total
                assets
            
            
            
            
            $
            385,057
            
            
            
            
            $
            326,915**Liabilities
                and Shareholder’s Equity****Liabilities**Deferred
                premium revenues
            
            
            
            
            $
            218,714
            
            
            
            
            $
            165,846Loss
                and loss adjustment expense reserves
            
            
            
            
            
            5,530
            
            
            
            
            
            3,306Deferred
                ceding commissions, net
            
            
            
            
            
            18,373
            
            
            
            
            
            13,267Ceded
                reinsurance balances payable
            
            
            
            
            
            6,463
            
            
            
            
            
            12,949Deferred
                fee income
            
            
            
            
            
            1,233
            
            
            
            
            
            413Ceding
                commission payable
            
            
            
            
            
            141
            
            
            
            
            
            138Current
                income taxes payable
            
            
            
            
            
            ---
            
            
            
            
            
            88Derivative
                liabilities
            
            
            
            
            
            49
            
            
            
            
            
            57Balances
                due to affiliates
            
            
            
            
            
            10,606
            
            
            
            
            
            6,798Other
                liabilities
            
            
            
            
            
            2,051
            
            
            
            
            
            1,961Total
                liabilities
            
            
            
            
            
            263,160
            
            
            
            
            
            204,823**Shareholder’s
                Equity**Common
                stock (par value $4,191.49 per share authorized, issuedand
                outstanding shares 4,700)
            
            
            
            
            
            19,700
            
            
            
            
            
            19,700Additional
                paid-in-capital
            
            
            
            
            
            122,850
            
            
            
            
            
            122,850Accumulated
                deficit
            
            
            
            
            
            (19,072
            )
            
            
            
            
            (18,995
            )Accumulated
                other comprehensive loss (net of deferredincome
                (benefit) taxes of $0, in 2006 and 2005)
            
            
            
            
            
            (1,581
            )
            
            
            
            
            (1,463
            )Total
                shareholder’s equity
            
            
            
            
            
            121,897
            
            
            
            
            
            122,092Total
                liabilities and shareholder’s equity
            
            
            
            
            $
            385,057
            
            
            
            
            $
            326,915




The
      accompanying notes are an integral part of these financial
      statements




-3-


**CIFG
          Assurance North America, Inc.**
 **Statements
          of Operations**
 **($
          In '000s)**





**Years
      Ended December 31,**


**2006**
            
            **2005**
            
            **2004****Revenues**Gross
                premiums written
            
            $
            101,665
            
            $
            94,256
            
            $
            55,146Ceded
                premiums written
            
            
            (84,163
            )
            
            (83,958
            )
            
            (48,747
            )Net
                premiums written
            
            
            17,502
            
            
            10,298
            
            
            6,399Change
                in net deferred premium
              revenue
            
            
            (10,925
            )
            
            (5,546
            )
            
            (2,588
            )Net
                premiums earned (net of ceded
              earned
                premiums of $42,322 in 2006,
              $27,267
                in 2005 and $18,529 in 2004)
            
            
            6,577
            
            
            4,752
            
            
            3,811Net
                investment income
            
            
            6,677
            
            
            4,098
            
            
            2,273Net
                realized investment (losses) gains
            
            
            (5
            )
            
            (4
            )
            
            10Net
                realized and unrealized
              gains
                (losses) on credit derivatives
            
            
            14
            
            
            (32
            )
            
            (5
            )Other
                income
            
            
            217
            
            
            47
            
            
            53Total
                revenues
            
            
            13,480
            
            
            8,861
            
            
            6,142**Expenses**Losses
                and loss adjustment
              expenses,
                net
            
            
            331
            
            
            236
            
            
            199Amortization
                of deferred ceding commissions
            
            
            (8,794
            )
            
            (3,158
            )
            
            (2,042
            )Amortization
                of deferred acquisition
              costs
            
            
            6,744
            
            
            3,641
            
            
            2,635Operating
                expenses
            
            
            14,892
            
            
            11,826
            
            
            10,822Total
                expenses
            
            
            13,173
            
            
            12,545
            
            
            11,614Income
                (loss) before income taxes
            
            
            307
            
            
            (3,684
            )
            
            (5,472
            )Provision
                for income taxes
            
            
            384
            
            
            148
            
            
            ---Net
                Loss
            
            $
            (77
            )
            $
            (3,832
            )
            $
            (
                5,472
            )






The
      accompanying notes are an integral part of these financial
      statements.




-4-


**CIFG
        Assurance North America, Inc.**
 **Statements
        of Changes in Shareholders' Equity and Comprehensive (Loss)
        Income**
 **($
        In '000s, except per share amounts)**







**Years
                ended December 31,****2006**
            
            
            
            **2005**
            
            
            
            **2004****Common
                Shares**Shares
                at beginning of period
            
            4,700
            
            
            
            4,700
            
            
            
            4,700Shares
                as of December 31
            
            4,700
            
            
            
            4,700
            
            
            
            4,700**Common
                Stock**Balance
                at beginning of period
            
            $
            19,700
            
            
            
            
            $
            19,700
            
            
            
            
            $
            19,700Balance
                as of December 31
            
            
            19,700
            
            
            
            
            
            19,700
            
            
            
            
            
            19,700**Additional
                paid-in capital**Balance
                at beginning of period
            
            
            122,850
            
            
            
            
            
            122,850
            
            
            
            
            
            112,850Capital
                contribution
            
            
            ---
            
            
            
            
            
            ---
            
            
            
            
            
            10,000Balance
                as of December 31
            
            
            122,850
            
            
            
            
            
            122,850
            
            
            
            
            
            122,850**Accumulated
                deficit**Balance
                at beginning of period
            
            
            (18,995
            )
            
            
            
            
            (15,163
            )
            
            
            
            
            (9,691
            )Net
                loss
            
            
            (77
            )
            $
            (77
            )
            
            (3,832
            )
            $
            (3,832
            )
            
            (5,472
            )
            $
            (5,472
            )Balance
                as of December 31
            
            
            (19,072
            )
            
            
            
            
            (18,995
            )
            
            
            
            
            (15,163
            )**Accumulated
                other comprehensive (loss) income**Balance
                at beginning of period
            
            
            (1,463
            )
            
            
            
            
            (53
            )
            
            
            
            
            530Net
                change in unrealized (depreciation) of AFS
              securities,
                net of deferred tax expense (benefit)
              expense
                of $0 in 2006, $28 in 2005, $(313) in 2004
            
            
            
            
            
            (118
            )
            
            
            
            
            (1,410
            )
            
            
            
            
            (583
            )Other
                comprehensive loss
            
            
            (118
            )
            
            (118
            )
            
            (1,410
            )
            
            (1,410
            )
            
            (583
            )
            
            (583
            )Total
                comprehensive loss
            
            
            
            
            $
            (195
            )
            
            
            
            $
            (5,242
            )
            
            
            
            $
            (6,055
            )Balance
                as of December 31
            
            
            (1,581
            )
            
            
            
            
            (1,463
            )
            
            
            
            
            (53
            )**Total
                Shareholder’s Equity**
            
            $
            121,897
            
            
            
            
            $
            122,092
            
            
            
            
            $
            127,334**2006**
            
            
            
            
            
            **2005**
            
            
            
            
            
            **2004****Disclosure
                of reclassification amounts**Unrealized
                (depreciation) arising during the period,
              net
                of taxes
            
            $
            (114
            )
            
            
            
            $
            (1,407
            )
            
            
            
            $
            (590
            )Less:
                reclassification adjustment for net (losses) and
              gains
                included in net income, net of taxes
            
            
            (4
            )
            
            
            
            
            (3
            )
            
            
            
            
            7Net
                unrealized (depreciation) of securities, net of taxes
            
            $
            (118
            )
            
            
            
            $
            (1,410
            )
            
            
            
            $
            (583
            )




The
      accompanying notes are an integral part of these financial
      statements.




-5-


**CIFG
        Assurance North America, Inc.**
 **Statements
        of Cash Flows**
 **($
        In '000s)**




**Years
                ended December 31,****2006**
            
            **2005**
            
            **2004****Cash
                flows from operating activities**Net
                Loss
            
            $
                (77)
            
            $
                (3,832)
            
            $
                (5,472)Adjustments
                to reconcile net loss to net cashprovided
                (used) by operating activities:Amortization
                of bond premium, net
            
            
            283
            
            
            (5
            )
            
            700Net
                realized losses (gains) on sale of investments
            
            
            5
            
            
            4
            
            
            (10
            )Increase
                in loss and loss adjustment reserves, net ofreinsurance
            
            
            331
            
            
            236
            
            
            199Increase
                in deferred premium revenues
            
            
            52,868
            
            
            62,273
            
            
            31,425Increase
                in prepaid reinsurance premiums
            
            
            (41,934
            )
            
            (56,722
            )
            
            (28,975
            )Decrease
                in deferred acquisition costs, net
            
            
            ---
            
            
            ---
            
            
            1,184(Increase)
                in premiums receivable
            
            
            (3,767
            )
            
            (2,484
            )
            
            (947
            )(Decrease)
                increase in ceded reinsurance balances payable
            
            
            (6,515
            )
            
            6,966
            
            
            (12,766
            )Increase
                (decrease) in ceding commissions payable
            
            
            3
            
            
            (107
            )
            
            (372
            )Increase
                in investment income due and accrued
            
            
            (251
            )
            
            (878
            )
            
            (37
            )Increase
                in balances due to affiliates
            
            
            3,808
            
            
            1,115
            
            
            344(Decrease)
                Increase in current income taxes payable
            
            
            (130
            )
            
            88
            
            
            ---Net
                realized and unrealized (gains) losses on credit derivatives,
                net
            
            
            (14
            )
            
            32
            
            
            5Increase
                in deferred ceding commissions, net
            
            
            5,106
            
            
            11,216
            
            
            2,051Other,
                net
            
            
            645
            
            
            1,689
            
            
            844Total
                adjustments to net loss
            
            
            10,438
            
            
            23,423
            
            
            (6,355
            )Net
                cash provided (used) by operating activities
            
            
            10,361
            
            
            19,591
            
            
            (11,827
            )**Cash
                flows from investing activities**(Purchase)
                of fixed income securities
            
            
            (38,299
            )
            
            (92,022
            )
            
            (49,454
            )(Purchase)
                sale of short-term investments, net
            
            
            (14,936
            )
            
            43,236
            
            
            21,902Proceeds
                from the sale of fixed income securities
            
            
            55
            
            
            180
            
            
            3,760Proceeds
                from the maturity of fixed income securities
            
            
            40,417
            
            
            26,098
            
            
            31,819Net
                cash (used) provided by investing activities
            
            
            (12,763
            )
            
            (22,508
            )
            
            8,027**Cash
                flows from financing activities**Capital
                contributions
            
            
            ---
            
            
            ---
            
            
            10,000Net
                cash provided by financing activities
            
            
            ---
            
            
            ---
            
            
            10,000Effect
                of exchange rates on cash
            
            
            82
            
            
            (263
            )
            
            (155
            )(Decrease)
                increase in cash
            
            
            (2,320
            )
            
            (3,180
            )
            
            6,045Cash
                at beginning of the year
            
            
            3,388
            
            
            6,568
            
            
            523Cash
                at the end of the year
            
            $
            1,068
            
            $
            3,388
            
            $
            6,568**Supplemental
                disclosures of cash flow information**Federal
                Income Taxes paid
            
            $
            294
            
            $
            60
            
            $
            ---   The
        accompanying notes are an integral part of these financial
        statements.
  -6-
 **CIFG
          Assurance North America, Inc.**
 **Notes
          to Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 **(Dollar
          Amounts in Thousands)**


**1.**
            **Business
                and Organization**




CIFG
      Assurance North America, Inc., (“CIFG NA” or the “Company”) was incorporated on
      April 11, 2002 in the State of New York. On May 24, 2002 the New York State
      Insurance Department (“NYSID”) granted the Company a license to conduct surety,
      credit, residual value and financial guaranty insurance. As of December 31,
      2006, CIFG NA was licensed to transact financial guaranty insurance in 45 states
      and the U.S. Virgin Islands, District of Columbia and the Commonwealth of Puerto
      Rico.





In
      prior
      years, the shares of CIFG NA were transferred by CIFG NA’s direct parent, CIFG
      Services, Inc. (“CIFG Services”) to a voting trust to comply with certain U.S.
      state restrictions regarding the ownership or control of U.S. insurance
      companies by a foreign government or any agency or instrumentality thereof.
      Under the terms of the Voting Trust Agreement, 80% of the trustees must be
      directors or officers of CIFG Services, or Caisse Nationale des Caisses
      d’Epargne (“CNCE”), an indirect parent of CIFG Holding. Although the shares are
      legally owned by the voting trustees in accordance with the Voting Trust
      Agreement, CIFG Services retains the economic benefits of the shares of CIFG
      NA.





CIFG
      Services is a management company that was incorporated in the state of Delaware
      during 2001. CIFG Services is a wholly-owned subsidiary of CIFG Guaranty, a
      reinsurance company that was registered in France by Registre du Commerce et
      des
      Sociétés on March 30, 2001. CIFG Guaranty is a wholly-owned subsidiary of CIFG
      Holding, a French corporation that acts as a holding company for the CIFG group
      of companies. CIFG Guaranty owns 100% of the outstanding shares of CIFG Services
      and CIFG Europe. CIFG Europe is a French licensed insurance company authorized
      to write financial guaranty business throughout 20 member states of the European
      Union.





On
      November 17, 2006, Banque Fédérale des Banques Populaires (“BFBP”) and CNCE
      combined certain of their operations, through Natexis Banques Populaires
      (“Natexis). CNCE contributed CIFG Holding and its subsidiaries, as well as
      other assets, to Natexis, which was simultaneously renamed “Natixis”.
      As of December 31, 2006, CNCE and BFBP each owned 34.44% of Natixis,
      with 8.76% owned by Caisse des Dépôts et Consignations (“CDC”) (via CDC Finance
      Holding) and 22.36 % was owned by public float and institutional
      shareholders. Until November 17, 2006, CIFG Holding was wholly-owned by
      CNCE.





In
      the
      ordinary course of business, the Company issues financial guaranty contracts
      in
      respect of certain obligations of certain variable interest entities (VIEs).
      Specifically, CIFG NA has issued contracts in respect of certain obligations
      of
      multiple distinct New York State business trusts, collectively known as the
      New
      Generation Funding Trusts. The financial guaranty contracts generally provide
      credit protection to investors who have entered into credit derivative
      transactions with the respective VIEs. Other than the transactions described
      above, the VIEs own no assets and have no outstanding debt and, by virtue of
      the
      credit support provided by the financial guaranty contracts, CIFG NA is
      considered to be the primary beneficiary of these VIEs. Accordingly, these
      VIEs
      are consolidated.





Each
      of
      CIFG Guaranty, CIFG Europe and CIFG NA has received an insurer financial
      strength rating of “AAA” from Fitch Ratings, an insurer financial strength
      rating of “Aaa” from Moody’s Investors Services Inc., and an insurer financial
      strength and financial enhancement ratings of “AAA” from Standard and Poor’s
      Rating Services (“S&P”), the highest rating assigned by each rating
      agency.




-7-





**CIFG
        Assurance North America, Inc.**
 **Notes
        to Financial Statements**
 **December
        31, 2006, 2005 and 2004**
 **(Dollar
        Amounts in Thousands)**


**2.
      Significant Accounting Policies**




The
      financial statements have been prepared in accordance with accounting principles
      generally accepted in the United States of America (U.S. GAAP), which for
      insurance and reinsurance companies differ in certain respects from the
      accounting practices prescribed or permitted by NYSID. The preparation of
      financial statements in conformity with U.S. GAAP requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosures of contingent assets and liabilities at the date
      of
      the financial statements, and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.





Significant
      accounting policies are as follows:





**Investments**


The
      Company’s investment portfolio is accounted for on a trade-date basis.
      Investments in fixed income securities that are considered available-for-sale
      (“AFS”) are carried at fair value, with unrealized gains and losses, net of
      deferred taxes, reflected in Other Comprehensive Income (“OCI”). Short-term
      investments are stated at amortized cost, which approximates fair value.
      Unrealized gains and losses are calculated using amortized cost as the basis.
      AFS investments denominated in currencies other than the U.S. dollar are
      accounted for at their U.S. dollar equivalent using exchange rates in effect
      at
      the balance sheet date. Changes in values due to currency fluctuations are
      recorded as unrealized gains or losses on AFS securities, net of deferred taxes,
      in OCI.





For
      purposes of computing amortized cost, premiums and discounts are accounted
      for
      using the effective yield method over the remaining terms of securities
      acquired. For premium on bonds that do not have call features, such premiums
      are
      amortized over the remaining terms of the securities.





The
      Company's process for identifying declines in the fair value of investments
      that
      are other than temporary involves consideration of multiple factors. These
      factors include current economic conditions, market prices, issuer-specific
      developments, the time period during which there has been a significant decline
      in value and the Company's intent and ability to hold the investment for a
      sufficient period of time for the value to recover. If the Company's analysis
      of
      these factors results in the determination that the decline is other-than
      temporary, CIFG NA writes down the carrying value of the investment to fair
      value and records a realized loss. As of December 31, 2006 and 2005, there
      were
      no declines in fair value deemed to be other than temporary.





Realized
      gains and losses on the sale of investments are determined on the basis of
      first
      in, first out (“FIFO”). Investment income is recorded when earned.





**Deferred
      Acquisition Costs (DAC) and Deferred Ceding Commissions**


Certain
      costs incurred, primarily related to and varying with the production of new
      financial guaranty business, excluding financial guaranty contracts accounted
      for as derivatives, have been deferred (DAC). These costs include direct and
      indirect expenses related to underwriting and contract origination expenses,
      rating agency fees and premium taxes.




-8-





**CIFG
        Assurance North America, Inc.**
 **Notes
        to Financial Statements**
 **December
        31, 2006, 2005 and 2004**
 **(Dollar
        Amounts in Thousands)**


The
      Company receives ceding commissions under its ceded reinsurance contracts as
      compensation for acquisition costs incurred. Ceding commissions are deferred.





The
      Company considers deferred premium revenue and the present value of future
      premiums due to the Company under installment contracts when determining the
      recoverability of DAC. DAC and deferred ceding commissions are amortized into
      the income statement over the periods in proportion to the earnings of the
      related premiums. Deferred ceding commissions are presented in the balance
      sheet
      net of DAC.





**Premium
      Revenue Recognition**


Premiums
      received at the inception of the policy, or otherwise “up-front” premiums, are
      earned pro-rata over the period of the underlying risk in proportion to the
      amount of risk outstanding over the expected period of coverage. The amount
      of
      risk outstanding is equal to the sum of the par amount of the debt insured.
      Installment premiums written are recognized ratably over each installment
      period. If a guaranteed issue is retired early, the remaining deferred premium
      will be earned, and any related unamortized DAC and deferred ceding commissions
      will be recognized immediately. Deferred premium revenue and prepaid reinsurance
      premiums represent the portion of gross and ceded premium written, respectively,
      which has been allocated to the unexpired underlying risk.





**Losses
      and Loss Adjustment Expense Reserves**


Loss
      and
      loss adjustment reserves are established for financial guaranty contracts
      subject to SFAS 60 - “Accounting and Reporting by Insurance Enterprises” (“FAS
      60”). The reserve for losses and loss adjustment expenses consists of active
      credit reserves and case basis loss and loss adjustment expense reserves. The
      development of active credit reserves is based upon estimates of the expected
      levels of debt service payment defaults on currently guaranteed issues that
      are
      not presently or imminently in default, and by reference to financial guaranty
      industry historical loss experience. The determination of the reserve is
      primarily based on an analysis of expected losses as a percentage of expected
      premium on the outstanding insured portfolio, pursuant to which, active credit
      reserves are provided on a periodic basis as a function of regular financial
      guaranty premiums earned to date.





The
      Company monitors active credit reserves on an ongoing basis and adjusts these
      reserves based on actual loss experience, considering the changes in the mix
      of
      business and economic conditions. Case basis loss reserves will be recorded
      when
      it is probable that a loss has been incurred and the amount of such loss can
      be
      reasonably estimated. When losses occur, case basis loss reserves will be
      established in an amount that is sufficient to cover the present value of the
      anticipated defaulted debt service payments over the expected period of default
      and estimated expenses associated with settling the claims, less estimated
      recoveries under salvage or subrogation rights. The active credit reserve is
      available to be applied against future case basis loss reserves and any related
      adjustments. As of December 31, 2006 and 2005, there were no case basis loss
      reserves recorded.





The
      Company’s loss reserving policy, described above, is based on guidance provided
      in FAS 60, SFAS 5 - “Accounting for Contingencies”, and analogies to Emerging
      Issues Task Force (EITF) 85-20, “Recognition of Fees for Guaranteeing a Loan.”
FAS 60 requires that, for short-duration contracts, a liability for unpaid
      claim
      costs relating to insurance contracts, including estimates of costs relating
      to
      incurred but not reported claims, be accrued when insured events occur.
      Additionally, SFAS 5 requires that a loss be recognized where it is probable
      that one or more future events will occur confirming that a liability has been
      incurred at the date of the financial statements and the amount of loss can
      be
      reasonably estimated.




-9-





**CIFG
        Assurance North America, Inc.**
 **Notes
        to Financial Statements**
 **December
        31, 2006, 2005 and 2004**
 **(Dollar
        Amounts in Thousands)**


Management
      believes that the Company’s reserves are adequate to cover the ultimate net cost
      of claims. However, because the reserves are based on management’s judgment and
      estimates, there can be no assurance that the ultimate liability will not exceed
      such estimates.





**Income
      Taxes**


The
      Company is included in the consolidated U.S. tax return of CIFG Services. The
      tax provision for CIFG NA is determined on a stand-alone-basis.





Deferred
      income taxes are provided with respect to the temporary differences between
      the
      tax bases of assets and liabilities and the reported amounts in the financial
      statements that will result in deductible or taxable amounts in future years
      when the reported amount of the asset or liability is recovered or settled.
      Such
      temporary differences relate principally to premium revenue recognition,
      deferred acquisition costs, deferred ceding commissions, net operating losses,
      and unrealized appreciation or depreciation of investments. A valuation
      allowance is established when it is more likely than not (a likelihood of more
      than 50 percent) that some portion or the entire deferred tax asset will not
      be
      realized.





**Reinsurance**


In
      the
      normal course of business, the Company seeks to reduce its financial guaranty
      exposure by reinsuring certain levels of risk with other insurance enterprises
      or reinsurers. Reinsurance premiums ceded and related commissions recorded
      are
      deferred and recognized in earnings on a pro-rata basis over the period the
      related financial guaranty coverage is provided.





**Intangible
      Assets**


In
      prior
      years, the Company's acquisition of Western Continental Insurance Company
      (“WCIC”) resulted in an intangible asset for the fair value of the insurance
      licenses acquired, which is carried in the balance sheet. The Company has
      determined that the licenses have an indefinite life and, therefore, are not
      being amortized. The recoverability of the carrying value of the intangible
      asset is evaluated annually based on a review of forecasted discounted cash
      flows and by referencing other available information. As of December 31, 2006
      and 2005, there were no adjustments to the carrying value of the intangible
      asset.





**Derivative
      Contracts**


The
      Company has issued insurance policies that do not qualify for the financial
      guaranty scope exception under FAS 133 and 149. These contracts are recorded
      at
      fair value which is determined using models developed by the Company. The models
      include various assumptions such as an expected loss projection. The valuation
      results from these models could differ materially from amounts that might
      actually be realized in the market.





The
      Company believes that the most meaningful income statement presentation of
      derivative revenues is to reflect them as premiums written when installments
      are
      received, as premium earned over the installment period, with changes in fair
      value recorded as “net realized and unrealized gains (losses) on credit
      derivatives”. Derivative assets and liabilities are presented on a gross basis
      in the balance sheet.




-10-





**CIFG
        Assurance North America, Inc.**
 **Notes
        to Financial Statements**
 **December
        31, 2006, 2005 and 2004**
 **(Dollar
        Amounts in Thousands)**


**Variable
      Interest Entities (VIE’s)**


From
      time
      to time, the Company guarantees payment obligations of counterparties, including
      VIEs that may enter into credit default swaps (“CDS”) with third parties. The
      Company provides financial guarantees covering certain obligations of these
      entities at market rates and consolidates those VIEs where the Company is
      determined to be the primary beneficiary.





**Foreign
      currency translation**


Functional
      currencies are generally the currencies of the local operating environment.
      CIFG
      NA’s functional currency is the U.S. dollar. CIFG NA’s financial statements
      include balances denominated in currencies other than the U.S. dollar which
      are
      converted to the U.S. dollar at exchange rates in effect at the balance sheet
      dates with income statement accounts converted using daily exchange rates which
      are averaged on a year-to-date basis.





Foreign
      currency transaction gains and losses, as well as gains and losses arising
      from
      the re-valuation of assets (excluding AFS investments) and liabilities
      denominated in non-functional currencies are reflected in net income.





**Recent
      Accounting Developments**


In
      February 2006, the Financial Accounting Standards Board (the “FASB”) issued SFAS
      No. 155, “Accounting for Certain Hybrid Financial Instruments” (“FAS 155”),
      which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging”
(“FAS 133”) and SFAS No. 140, “Accounting for Transfers and Servicing of
      Financial Assets and Extinguishment of Liabilities”. FAS 155 permits an election
      for hybrid instruments that contain an embedded derivative that otherwise would
      require bifurcation to irrevocably be accounted for at fair value, with changes
      in fair value recognized in the statement of operations and comprehensive
      income. The fair value election may be applied on an instrument-by-instrument
      basis. FAS 155 also eliminates a restriction on qualifying special purpose
      entities from holding passive derivative instruments. FAS 155 is effective
      for
      all financial instruments acquired or issued after December 15, 2006.





The
      FASB’s Derivative Implementation Group (“DIG”) issued DIG Issue B40 - “Embedded
      Derivatives: Application of Paragraph 13(b) to Securitized Interests in
      Prepayable Financial Assets” (“DIG B40”) in December of 2006. DIG B40 provides a
      scope exception on performing embedded derivative tests required under FAS
      133
      related to rate of returns for certain securitized interests. DIG B40 is
      required to be applied upon adoption of FAS 155. The Company is in the process
      of evaluating the impact of FAS 155 and DIG B40 on its financial
      statements.





In
      June
      2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for
      Uncertainty in Income Taxes”, an interpretation of SFAS No. 109, “Accounting for
      Income Taxes” (“FAS 109”). FIN 48 requires that the Company determine whether a
      tax position is more likely than not to be sustained under examination,
      including resolution of any related appeals or litigation processes, based
      on
      the technical merits of the position. If a tax position does not meet the more
      likely than not threshold, the benefit is not recognized in the financial
      statements. If the Company determines that a position meets the recognition
      threshold, the position is measured to determine the amount of the benefit
      that
      may be recognized in the financial statements based on criteria set forth in
      the
      pronouncement. FIN 48 also provides guidance on derecognition, classification
      of
      interest and penalties, accounting in interim periods and disclosure. FIN 48
      is
      applicable for fiscal years beginning after December 15, 2006. The Company
      is in
      the process of evaluating the impact of FIN 48 on its financial
      statements.




-11-





**CIFG
        Assurance North America, Inc.**
 **Notes
        to Financial Statements**
 **December
        31, 2006, 2005 and 2004**
 **(Dollar
        Amounts in Thousands)**


The
      FASB
      issued FAS No. 157, “Fair Value Measurement” (“FAS 157”) in September 2006. This
      pronouncement defines fair value, establishes a framework for measuring fair
      value and enhances the footnote disclosures pertaining to fair value. Fair
      values are evaluated using a hierarchy (Levels 1, 2, & 3), which is based on
      the level of inputs used for the valuation. The input levels range from quotable
      market prices to unobservable inputs such as an entity’s own internal data. The
      disclosure requirements vary amongst the fair value hierarchy levels. FAS 157
      is
      applicable to financial statements issued for fiscal years beginning after
      November 15, 2007 and for interim periods within those fiscal years. The Company
      is in the process of evaluating the impact of FAS 157 on its financial
      statements.






On
      February 15, 2007 the FASB issued SFAS No. 159 - “The Fair Value Option for
      Financial Assets and Financial Liabilities - including an amendment of FASB
      No.
      115” (“FAS 159”), which provides companies with an option to report selected
      financial assets and liabilities at fair value. The objective of this
      pronouncement is to reduce both complexity in accounting for financial
      instruments and the volatility in earnings caused by measuring related assets
      and liabilities differently. FAS 159 also establishes presentation and
      disclosure requirements designed to facilitate comparisons between companies
      that choose different measurement attributes for similar types of assets and
      liabilities. FAS 159 is applicable for fiscal years beginning after November
      15,
      2007. The Company is in the process of evaluating the impact of FAS 159 on
      its
      financial statements.






Due
      to
      the diversity of accounting practices in the financial guaranty industry, the
      FASB undertook a project in 2005 to consider the accounting model for financial
      guaranty insurers. An exposure draft is expected in 2007. The current accounting
      model used by the Company may change significantly. Until the FASB issues
      specific guidance, the Company intends to continue to apply its existing
      accounting policies. It is not possible to predict the impact that the FASB’s
      project may have on the Company’s accounting practices.




**3.**
            **Related
                Parties**




**Administrative
      Services and Property Agreement**


The
      Company participates in a Management Services Agreement with CIFG Services,
      which has been approved by the NYSID. Under this agreement CIFG Services
      provides the Company with management services, including office space and
      furniture and equipment used by the Company. Under the terms of this agreement,
      operating expenses are allocated based on the requirements of Regulation 30
      of
      the NYSID. In 2006, 2005 and 2004, expenses charged by CIFG Services to the
      Company under this agreement were $ 33.5, $23.5, and $21.3 million,
      respectively.





**Facultative
      Reinsurance Agreements**


CIFG
      Guaranty participates in a Master Facultative Reinsurance Agreement
      (“Agreement”) with CIFG NA. Under the terms of this Agreement, CIFG Guaranty has
      the option to reinsure up to 90% of CIFG NA’s acceptable risks. CIFG Guaranty
      pays a ceding commission on premiums ceded under the terms of this Agreement.
      Premiums ceded by CIFG NA and assumed by CIFG Guaranty under this facultative
      reinsurance agreement were $84.2, $84.0, and $48.7 million for 2006, 2005 and
      2004, respectively.




-12-





**CIFG
      Assurance North America, Inc.**


**Notes
      to Financial Statements**


**December
      31, 2006, 2005 and 2004**


**(Dollar
      Amounts in Thousands)**





As
      of
      December 31, 2006 and 2005, CIFG Guaranty pledged to CIFG NA U.S. dollar
      denominated investments with a fair value of $273.0 and $168.2 million
      respectively, to support its reinsurance coverage in accordance with New York
      State insurance regulatory requirements. The assets pledged are maintained
      in a
      secured trust on behalf of CIFG NA, for its sole use and benefit in accordance
      with New York State insurance regulation 11NYCRR 126.





**Financial
      Guarantees**


In
      the
      normal course of business, CIFG NA enters into certain financial guaranty
      contracts with affiliates on terms that management believes are on an
      arms-length basis. The affiliates involved are Credit Foncier (“Foncier”) and
      IXIS Corporate & Investment Bank (“IXIS CIB”). Gross premiums written on
      policies closed with IXIS CIB during 2006, 2005 and 2004 were $2.8 million,
      $608
      thousand and $207 thousand, respectively. Gross premiums written on policies
      with Foncier during 2006, 2005 and 2004 were nil, $8.9 million and $4.5 million,
      respectively.





**Capital
      Maintenance Agreement**


The
      Company has entered into an irrevocable keep-well capital maintenance agreement
      with CIFG Guaranty. The agreement requires CIFG Guaranty to contribute capital
      to the Company if at any time the capital of the Company falls below $80
      million, so as to maintain minimum capital at that level.





**Tax
      Sharing Agreement**


The
      Company files a consolidated Federal income tax return with CIFG Services,
      and
      files separate-company state and local income tax returns. The method of
      allocation between the companies in the consolidated Federal income tax return
      is subject to a tax allocation agreement approved by the Board of Directors
      of
      CIFG NA and the NYSID. Pursuant to this tax allocation agreement between the
      companies, total Federal income tax expense is determined on a separate company
      basis. Members with losses record tax benefits to the extent such losses are
      recognizable on a separate company basis. Inter-company tax balances are settled
      on a periodic basis, no less than annually.





**4.**
            **Deferred
                Acquisition Costs and (Deferred Ceding
                Commissions)**




Acquisition
      costs and ceding commissions are deferred and amortized in proportion to the
      related premium revenue to be recognized in future periods. The commission
      income and acquisition costs deferred and related amortization are as
      follows:





**As
      of December 31,**


**2006**
            
            **2005**Deferred
                ceding commissions, net,
              beginning
                of period
            
            $
                (13,267)
            
            $
                (2,051)Current
                year costs:Deferred
                acquisition costs
            
            16,419
            
            12,715Deferred
                ceding commissions
            
            (23,575)
            
            (23,448)Net
            
            (7,156)
            
            (10,733)Net
                amortization during the period
            
            2,050
            
            (483)Deferred
                ceding commissions, net, end of
              period
            
            $
                (18,373)
            
            $
                (13,267)




-13-


**CIFG
          Assurance North America, Inc.**
 **Notes
          to Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 **(Dollar
          Amounts in Thousands)**


During
      the fourth quarter of 2006 the Company conducted its annual DAC study, which
      encompassed both a review of deferrable costs and the amortization pattern
      of
      DAC and deferred ceding commissions. In addition, the Company enhanced its
      policy systems in 2006, allowing it to update its exposure with more current
      policy information received from external parties. These modifications have
      resulted in a change in accounting estimate for DAC, the effect of which has
      been reflected on a prospective basis in these financial statements in
      accordance with SFAS No. 154 - “Accounting Changes and Error Corrections, a
      replacement of APB No. 20 and FASB Statement No. 3”. Approximately $1.5 million
      is included in the “amortization of deferred acquisition costs” as a charge to
      the income statement.





**5.**
            **Investments**




The
      Company’s investment objective is to optimize after-tax returns while
      emphasizing the preservation of capital through the maintenance of high-quality
      investments with adequate liquidity. The weighted-average credit quality of
      the
      fixed income portfolio, which excludes short-term investments, was AAA with
      no
      investment rated below BBB as rated by S&P.





Short-term
      investments consist of United States government obligations (61%) and money
      market instruments (39%).





The
      following tables set forth the amortized cost and fair value of the fixed income
      securities and short-term investments included in the investment portfolio
      of
      CIFG NA:




**December
      31, 2006**


**Amortized**
              **Cost**
            
            **Gross**
              **Unrealized
                Gains**
            
            **Gross**
              **Unrealized**
              **Losses**
            
            **Fair**
              **Value**United
                States government obligations
            
            $
                68,453
            
            $
                8
            
            $
                (897)
            
            $
                67,564State
                and municipal obligations
            
            16,642
            
            ---
            
            (452)
            
            16,190US
                Agencies
            
            43,027
            
            3
            
            (347)
            
            42,683Corporate
                obligations
            
            
            4,118
            
            
            ---
            
            
            (26
            )
            
            4,092Non-
                US *
            
            
            3,744
            
            
            130
            
            
            ---
            
            
            3,874Short
                term
            
            
            39,588
            
            
            ---
            
            
            ---
            
            
            39,588Total
            
            $
            175,572
            
            $
            141
            
            $
            (1,722
            )
            $
            173,991








**** **December
      31, 2005**


**Amortized**
              **Cost**
            
            **Gross**
              **Unrealized
                Gains**
            
            **Gross**
              **Unrealized**
              **Losses**
            
            **Fair**
              **Value**United
                States government obligations
            
            $
            99,307
            
            $
            27
            
            $
            (1,050
            )
            $
            98,284State
                and municipal obligations
            
            
            15,682
            
            
            21
            
            
            (246
            )
            
            15,457US
                Agencies
            
            
            14,070
            
            
            46
            
            
            (241
            )
            
            13,875Corporate
                obligations
            
            
            4,144
            
            
            4
            
            
            ---
            
            
            4,148Non-
                US *
            
            
            1,184
            
            
            ---
            
            
            (24
            )
            
            1,160Short
                term
            
            
            24,652
            
            
            ---
            
            
            ---
            
            
            24,652Total
            
            $
            159,039
            
            $
            98
            
            $
            (1,561
            )
            $
            157,576





***** Principally
      euro-denominated debt securities issued by European governments and European
      municipalities. ****





Fixed
      income investments carried at fair value of approximately of $9.1 and $9.2
      million as of December 31, 2006 and 2005, respectively, were on deposit with
      various regulatory authorities to comply with insurance laws.




-14-





**CIFG
        Assurance North America, Inc.**
 **Notes
        to Financial Statements**
 **December
        31, 2006, 2005 and 2004**
 **(Dollar
        Amounts in Thousands)**


The
      Company maintains a portion of its cash and investments under a custody
      agreement with one financial institution that the Company considers of high
      quality.





The
      following table sets forth the distribution by contractual maturity of
      investments at amortized cost and fair value at December 31, 2006 and 2005.
      Actual maturities may differ from contractual maturities because borrowers
      may
      have the right to call or prepay obligations.





**December
      31,**


**2006**
            
            
            
            
            
            **2005****Amortized
                Cost**
            
            
            
            **Fair
                Value**
            
            **Amortized
                Cost**
            
            
            
            **Fair
                Value**Due
                in one year or less
            
            $
                73,829
            
            
            
            $
                73,730
            
            $
                61,110
            
            
            
            $
                60,986Due
                after one year through five years
            
            76,219
            
            
            
            75,086
            
            75,725
            
            
            
            74,594Due
                after five years through ten years
            
            
            22,484
            
            
            
            
            
            22,337
            
            
            19,164
            
            
            
            
            
            19,072Due
                over ten years
            
            
            3,040
            
            
            
            
            
            2,838
            
            
            3,040
            
            
            
            
            
            2,924Total
            
            $
            175,572
            
            
            
            
            $
            173,991
            
            $
            159,039
            
            
            
            
            $
            157,576





As
      of
      December 31, 2006 and 2005 no single issuer, excluding U.S. government
      obligations, exceeds 10% of shareholder’s equity.





The
      following investment table presents the Company's gross unrealized losses and
      fair value, aggregated by investment category and length of time that individual
      securities have been in a continuous unrealized loss position at December 31,
      2006 and 2005:





**Greater
      than 12 months   Less
      than 12 months
      Total**


**2006**
            
            Fair
              Value
            
            Unrealized
              Losses
            
            Fair
              Value
            
            Unrealized
              Losses
            
            Fair
              Value
            
            Unrealized
                LossesUnited
                States government obligations
            
            $
                58,263
            
            $
                (879)
            
            $
                8,578
            
            $
                      (18)
            
            $
                66,841
            
            $
                (897)State
                and municipal obligations
            
            
            15,166
            
            
            (442
            )
            1,023
            (10)
            16,189
            
            (452
            )US
                Agencies
            
            
            10,250
            
            
            (237
            )
            28,974
            (110)
            39,224
            
            (347
            )Corporate
                obligations
            
            
            ---
            
            
            ---
            
            4,093
            (26)
            4,093
            
            (26
            )Non-US
                *
            
            
            ---
            
            
            ---
            
            ---
            ---
            ---
            
            ---Total
                temporarily impaired fixed income securities
            
            $
            83,679
            
            $
            (1,558
            )
            
            
            
            $
                42,668
            $
            (164
            )
            $
            126,347
            
            $
                (1,722)





**Greater
      than 12 months   Less
      than 12 months
      Total**


**2005**
            
            Fair
              Value
            
            Unrealized
              Losses
            
            Fair
              Value
            
            Unrealized
              Losses
            
            Fair
              Value
            
            Unrealized
                LossesUnited
                States government obligations
            
            $
                46,792
            
            $
                (559)
            
            $
                42,714
            
            $
                (491)
            
            $
                89,506
            
            $
                (1,050)State
                and municipal obligations
            
            
            ---
            
            
            ---
            
            9,197
            (246)
            9,197
            
            (246
            )US
                Agencies
            
            
            ---
            
            
            ---
            
            10,377
            (241)
            10,377
            
            (241
            )Corporate
                obligations
            
            
            ---
            
            
            ---
            
            ---
            ---
            ---
            
            ---Non-US
                *
            
            
            ---
            
            
            ---
            
            1,160
            (24)
            1,160
            
            (24
            )Total
                temporarily impaired fixed income securities
            
            $
            46,792
            
            $
            (559
            )
            
            
            
            $
                63,448
            $
            (1,002
            )
            $
            110,240
            
            $
                (1,561)





***** Principally
      euro-denominated debt securities issued by European governments and European
      municipalities.




-15-





**CIFG
        Assurance North America, Inc.**
 **Notes
        to Financial Statements**
 **December
        31, 2006, 2005 and 2004**
 **(Dollar
        Amounts in Thousands)**


The
      unrealized losses in the Company’s investment portfolio were caused by increases
      in interest rates. The Company evaluated the credit rating of these securities
      and noted no significant credit deterioration. Since the decline in market
      value
      is related to changes in interest rates and not credit quality, and the Company
      has the intent and ability to hold the investments until the value recovers,
      the
      Company does not consider these investments to be other than temporarily
      impaired as of December 31, 2006 and 2005.





Net
      investment income was comprised of the following:





**December
                31,****2006**
            
            **2005**
            
            **2004**Fixed
                income securities
            
            $
            4,815
            
            $
            3,511
            
            $
            1,086Short-term
                investments
            
            
            2,064
            
            
            729
            
            
            1,326Total
                Investment income
            
            
            6,879
            
            
            4,240
            
            
            2,412Investment
                expenses
            
            
            (202
            )
            
            (142
            )
            
            (139
            )Net
                investment income
            
            $
            6,677
            
            $
            4,098
            
            $
            2,273





Net
      realized (losses) gains from fixed income securities were comprised of the
      following:





**December
                31,****2006**
            
            **2005**
            
            **2004**Gross
                gains
            
            $
            ---
            
            $
            ---
            
            $
            10Gross
                losses
            
            
            (5
            )
            
            (4
            )
            
            ---Net
                realized capital (loss) gains
            
            $
            (5
            )
            $
            (4
            )
            $
            10





Proceeds
      from the sale of fixed income securities were $55 thousand, $180 thousand,
      and
      $3.8 million for the periods ended December 31, 2006, 2005 and 2004,
      respectively.





**6.**
            **Reinsurance**




The
      Company participates in a Facultative Reinsurance Agreement with CIFG Guaranty.
      The Company utilizes reinsurance principally to increase capacity and to reduce
      the risk of loss on financial guaranty business underwritten. The Company is
      liable with respect to reinsurance ceded to the extent that CIFG Guaranty fails
      to meet its obligation to the Company. CIFG NA regularly monitors the financial
      condition of CIFG Guaranty and believes there is no material unrecoverable
      reinsurance.




-16-


**CIFG
          Assurance North America, Inc.**
 **Notes
          to Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 **(Dollar
          Amounts in Thousands)**


The
      effect of reinsurance on premiums written was as follows:





**December
                31,****2006**
            
            **2005**
            
            **2004**Direct
                premium written
            
            $
            98,808
            
            $
            84,408
            
            $
            45,058Assumed
                premium written
            
            
            2,857
            
            
            9,848
            
            
            10,088Ceded
                premium written
            
            
            (84,163
            )
            
            (83,958
            )
            
            (48,747
            )Net
                premiums written
            
            
            17,502
            
            
            10,298
            
            
            6,399Change
                in direct deferred premium revenue
            
            
            (56,116
            )
            
            (60,054
            )
            
            (29,625
            )Change
                in assumed deferred premium
              revenue
            
            
            3,350
            
            
            (2,184
            )
            
            (3,181
            )Change
                in ceded deferred premiums revenue
            
            
            41,841
            
            
            56,692
            
            
            30,218Net
                premiums earned
            
            $
            6,577
            
            $
            4,752
            
            $
            3,811





Net
      earned premium in 2006, 2005 and 2004 does not include any refunded earned
      amounts.





Ceding
      commissions on reinsurance ceded to CIFG Guaranty was $25.2, $25.2, and $14.6
      million during 2006, 2005 and 2004, respectively.





**7.**
            **Income
                Taxes**




The
      current provision for federal income taxes was $82 thousand, $148 thousand,
      and
      nil for the years ended December 31, 2006, 2005 and 2004. During 2006, an
      estimated tax payment of $294 thousand was made for alternative minimum taxes
      (“AMT”).





AMT
      paid
      in current and prior years of $354 thousand are available as AMT credits to
      be
      carried-forward and utilized in the event that regular tax exceeds AMT tax
      in
      the future.





The
      Company’s total tax provision differs from the amount that would be obtained by
      applying the tax rate to pre-tax book income due to the impact of disallowed
      expenses, tax exempt interest and the establishment of a valuation
      allowance.




-17-


**CIFG
          Assurance North America, Inc.**
 **Notes
          to Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 **(Dollar
          Amounts in Thousands)**


The
      tax
      effects of temporary differences that give rise to deferred tax assets and
      liabilities as of December 31, 2006 and 2005 are presented below:








**As
                of December 31,****2006****2005**Deferred
                tax assets:Net
                operating loss carry-forward
            
            $
            599
            
            $
            2,002Deferred
                premium revenue
            
            
            141
            
            
            203Deferred
                ceding commission, net
            
            
            6,431
            
            
            4,644Unrealized
                loss on investments
            
            
            687
            
            
            512Other
            
            
            669
            
            
            529Less:
                valuation allowance
            
            
            (7,604
            )
            
            (7,220
            )Total
                deferred tax assets
            
            
            923
            
            
            670Deferred
                tax liabilities:Accretion
                of discount
            
            
            169
            
            
            119License
                amortization
            
            
            745
            
            
            551Other
            
            
            9
            
            
            ---Total
                deferred tax liabilities
            
            
            923
            
            
            670Net
                deferred tax assets
            
            $
            ---
            
            $
            ---




In
      2006,
      the Company used approximately $4.1 million in net operating loss carry-forwards
      generated in prior years to offset taxable income in the current
      year .
      At
      December 31, 2006, the Company had net operating loss carry-forwards available
      to offset future taxable income of $1.7 million which will expire in
      2024.





The
      Company recognizes deferred tax assets and liabilities for the expected future
      tax consequences of events that have been included in the financial statements
      or tax returns. Deferred tax assets and liabilities are determined based on
      the
      difference between the financial statement and tax bases of assets and
      liabilities using enacted tax rates in effect for the year in which the
      differences are expected to reverse. The effect on tax assets and liabilities
      for a change in tax rates is recognized in income in the period that includes
      the enactment date.





The
      Company has yet to establish an earnings history. As a result, management has
      established a valuation allowance to offset net deferred tax
      assets.





**8.**
            **Dividend
                Restrictions**




Under
      New
      York State insurance law, CIFG NA may pay a dividend only from earned surplus
      subject to the maintenance of a minimum capital requirement. Any dividends
      declared or paid may not exceed, together with all other dividends declared
      or
      distributed by CIFG NA during the next preceding twelve months, the lesser
      of
      (i) 10% of its shareholder’s surplus shown on its last filed statement, or (ii)
      one hundred percent of adjusted net investment income (as defined under New
      York
      Insurance Law), for such 12-month period without prior approval of the
      Superintendent of the NYSID. The Company has not declared or paid any dividends
      since its inception given that it has no earned surplus and is therefore
      ineligible to pay a dividend.




-18-





**CIFG
        Assurance North America, Inc.**
 **Notes
        to Financial Statements**
 **December
        31, 2006, 2005 and 2004**
 **(Dollar
        Amounts in Thousands)**


**9.**
            **Statutory
                Accounting Practices**




U.S.
      GAAP
      differs in certain significant respects from accounting practices prescribed
      or
      permitted by the NYSID. In 2006, the NYSID performed a routine triennial
      examination of the Company; an examination report has not been issued yet.
      The
      Company does not anticipate any material adjustments to its statutory capital
      and surplus as a result of this examination.





The
      following summarizes the significant differences between the statutory annual
      statement as filed and U.S. GAAP.





**As
                of December 31,****2006    2005****U.S.
                GAAP Shareholder’s Equity**
            
            $
                121,897
            
            $
                122,092Statutory
                Adjustments:Premium
                revenue recognition
            
            
            (3,991
            )
            
            (2,521
            )Intangible
                asset
            
            
            (8,331
            )
            
            (8,373
            )Loss
                and loss adjustment expense reserves, net
            
            
            860
            
            
            529Contingency
                reserves, net
            
            
            (10,597
            )
            
            (6,316
            )Deferred
                income taxes
            
            
            14,123
            
            
            11,824Unrealized
                losses, net
            
            
            1,838
            
            
            1,463Fair
                value of derivatives, net
            
            
            39
            
            
            53Deferred
                Ceding commission income
            
            
            891
            
            
            1,712Other
                liabilities
            
            
            59
            
            
            22Non
                admitted assets
            
            
            (12,968
            )
            
            (11,910
            )**Statutory
                capital and surplus**
            
            $
            103,820
            
            $
            108,575





The
      principal differences result from the following statutory accounting
      practices:





·
            Upfront
                premiums are recognized as earned when related principal and interest
                have
                expired while under GAAP, premiums are recognized as earned over
                the
                expected coverage period;





·
            Liabilities
                for deferred premium revenues are shown net of amounts ceded under
                reinsurance contracts while under GAAP, they are recorded at their
                gross
                amounts;





·
            Acquisition
                costs are charged to operations as incurred. Under GAAP, certain
                costs are
                deferred and amortized as the related premiums are
                earned;





·
            Intangible
                assets were charged directly to surplus as a result of the statutory
                mergers while under GAAP the Company established an intangible asset
                representing the value of state licenses, which is subject to impairment
                tests;





·
            A
                contingency reserve is computed on the basis of statutory requirements,
                and reserves for case basis losses and LAE are established, at present
                value, for specific insured issues that are identified as currently
                or
                likely to be in default. Under GAAP, case basis loss reserves are
                established at present value based on CIFG NA’s reasonable estimate of the
                identified losses and LAE, plus estimates for reserves for the portfolio
                of active credits on the insured obligations
                written;




-19-


**CIFG
            Assurance North America, Inc.**
 **Notes
            to Financial Statements**
 **December
            31, 2006, 2005 and 2004**
 **(Dollar
            Amounts in Thousands)**




·
            If
                applicable, a provision is made for ceded unearned premiums and losses
                recoverable in excess of funds held plus other qualifying collateral,
                on
                business reinsured with companies not qualified or licensed in the
                State
                of New York through a direct charge to surplus, while under GAAP
                there is
                no such provision;





·
            Fixed
                income securities are carried at amortized cost; under GAAP these
                securities are designated as available-for-sale and carried at fair
                value,
                with the related unrealized gains or losses recognized as a separate
                component of shareholder’s equity net of applicable deferred federal
                income tax;





·
            Deferred
                tax assets in excess of certain defined limitations are excluded
                from the
                balance sheet and charged to surplus as a non-admitted asset. Under
                GAAP,
                deferred federal income taxes reflect the net tax effect of temporary
                differences between the carrying amount of GAAP basis assets and
                liabilities and the amounts used for federal income tax purposes.
                The
                change in net deferred taxes, excluding the amount related to unrealized
                gains and losses, is a component of net
                income;





·
            Financial
                guarantees are accounted for as insurance contracts, while under
                GAAP,
                certain financial guarantees that do not qualify as insurance contracts
                under FAS 133 are recorded at fair value;





·
            Ceding
                commission income is recognized in income when earned and can offset
                acquisition costs, but a liability is established for any amount
                of ceding
                commissions in excess of acquisition expenses. Under GAAP, ceding
                commission income is deferred and amortized as the related ceded
                premiums
                are expensed.




·
            Certain
                assets classified as non-admitted are charged directly to surplus
                but are
                reflected as assets under GAAP.





The
      NYSID
      has recently undertaken a review of the industry practice to record contingency
      reserves on a net basis specifically in the case where an unauthorized reinsurer
      has provided appropriate collateral to secure the ceded contingency reserve.
      Currently, the NYSID has not concluded their review nor have they issued any
      new
      statutory guidance on this subject. As a result, the Company will maintain
      its
      current treatment of the ceded contingency reserve until the NYSID has concluded
      their review and issued final statutory guidance, which is expected to be
      applied prospectively, if different than the Company’s current statutory
      accounting treatment. As of December 31, 2006 the Company has recorded a gross
      contingency reserve of $76.3 million which is offset by a ceded contingency
      reserve of $65.7 million in its statutory financial statements.





CIFG
      NA’s
      statutory financial statements are prepared in conformity with accounting
      practices prescribed or permitted by the NYSID. Prescribed statutory accounting
      principles include state laws, regulations and general administrative rules,
      as
      well as a variety of the National Association of Insurance Commissioners (NAIC)
      publications. The NAIC Statements of Statutory Accounting Principles (SSAP)
      have
      been adopted as a component of prescribed or permitted practices by the State
      of
      New York. The State of New York has adopted certain prescribed practices which
      vary from those found in SSAP. These differences have no impact on the net
      income and the determination of statutory surplus. Statutory capital and surplus
      was $103.8 million and $108.6 million at December 31, 2006 and 2005,
      respectively, which meets New York State minimum capital requirements. Qualified
      statutory capital (statutory capital and surplus plus contingency reserve)
      was
      $114.4 and $114.9 million at December 31, 2006 and 2005, respectively. Statutory
      net loss for CIFG NA was $(2.1), $(2.5) and $(5.2) million for the periods
      ending December 31, 2006, 2005 and 2004, respectively.




-20-


**CIFG
          Assurance North America, Inc.**
 **Notes
          to Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 **(Dollar
          Amounts in Thousands)**





**10.**
            **Net
                Insurance in Force**




The
      financial guaranty contracts issued by CIFG NA guaranty the scheduled payments
      of principal and interest on municipal and structured obligations. The net
      exposure retained on any risk is subject to formalized underwriting
      guidelines.





As
      of
      December 31, 2006, insurance in force, net of cessions, had a range of legal
      maturities of 1-74 years. However, the expected life of these transactions
      may
      vary substantially from the legal final maturities, and are influenced by actual
      performance, market conditions and business objectives of the issuers. The
      expected maturities of these policies are between 1-46 years which are
      diversified among 1,430 outstanding policies. The weighted-average (based on
      par) expected life of the guaranteed portfolio is 10.57 years.




-21-


**CIFG
          Assurance North America, Inc.**
 **Notes
          to Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 **(Dollar
          Amounts in Thousands)**


The
      distribution of gross and net par in force by bond type is presented in the
      following table:





**Insurance
                Inforce**
            
            
            
            **2006**
            
            
            
            
            
            **2005****Gross**
            
            
            
            **Net**
            
            **Gross**
            
            
            
            **Net****Global
                Public Finance and Infrastructure**State
                GO And Appropriation
            
            $
                5,606,167
            
            
            
            $
                760,469
            
            $
                3,716,422
            
            
            
            $
                572,445City
                And County GO
            
            3,977,717
            
            
            
            541,329
            
            1,186,237
            
            
            
            168,286Utility
                Systems
            
            1,123,985
            
            
            
            274,201
            
            680,533
            
            
            
            83,185Airports
            
            1,471,021
            
            
            
            253,390
            
            1,406,341
            
            
            
            188,661Health
                Care
            
            1,491,191
            
            
            
            246,967
            
            880,507
            
            
            
            130,631State
                Tax Backed
            
            1,518,447
            
            
            
            216,326
            
            1,183,155
            
            
            
            155,092Higher
                Education
            
            1,309,316
            
            
            
            194,245
            
            553,572
            
            
            
            80,973Sovereign/Sub
                Sovereign
            
            
            1,374,633
            
            
            
            
            
            182,494
            
            
            1,232,554
            
            
            
            
            
            183,187Public
                Power
            
            
            739,047
            
            
            
            
            
            171,468
            
            
            348,752
            
            
            
            
            
            62,857Special
                Revenue
            
            
            725,562
            
            
            
            
            
            140,056
            
            
            244,910
            
            
            
            
            
            48,860Toll
                Roads
            
            
            849,642
            
            
            
            
            
            106,306
            
            
            822,846
            
            
            
            
            
            88,051Local
                Tax Backed
            
            
            387,624
            
            
            
            
            
            78,745
            
            
            228,134
            
            
            
            
            
            24,491Municipal
                Housing
            
            
            748,649
            
            
            
            
            
            74,865
            
            
            177,794
            
            
            
            
            
            17,779Transportation
            
            
            527,218
            
            
            
            
            
            52,722
            
            
            489,794
            
            
            
            
            
            76,495Investor-Owned
                Utilities
            
            
            230,654
            
            
            
            
            
            23,065
            
            
            314,947
            
            
            
            
            
            48,979Project
                Finance
            
            
            87,244
            
            
            
            
            
            8,724
            
            
            77,852
            
            
            
            
            
            7,785Total
            
            
            22,168,117
            
            
            
            
            
            3,325,372
            
            
            13,544,350
            
            
            
            
            
            1,937,757**Global
                Structured Finance**CDO
                High Yield
            
            
            10,900,485
            
            
            
            
            
            1,096,113
            
            
            4,579,475
            
            
            
            
            
            596,952CDO
                Asset Backed
            
            
            7,373,885
            
            
            
            
            
            863,411
            
            
            4,373,598
            
            
            
            
            
            472,023CDO
                Investment Grade
            
            
            4,746,055
            
            
            
            
            
            616,197
            
            
            3,304,315
            
            
            
            
            
            471,898Home
                Equity
            
            
            2,882,048
            
            
            
            
            
            288,205
            
            
            2,510,373
            
            
            
            
            
            251,037Commercial
                Mortgage Backed
            
            
            2,426,124
            
            
            
            
            
            242,612
            
            
            1,061,265
            
            
            
            
            
            106,126Student
                Loans
            
            
            1,672,960
            
            
            
            
            
            167,296
            
            
            631,674
            
            
            
            
            
            63,167Lease
                Assets
            
            
            804,747
            
            
            
            
            
            124,039
            
            
            1,061,992
            
            
            
            
            
            190,425Commercial
                Asset Backed
            
            
            656,164
            
            
            
            
            
            65,616
            
            
            466,517
            
            
            
            
            
            46,652Residential
                Mortgage Backed
            
            
            570,573
            
            
            
            
            
            57,057
            
            
            778,698
            
            
            
            
            
            77,870Other
            
            
            179,407
            
            
            
            
            
            17,941
            
            
            288,658
            
            
            
            
            
            44,649Credit
                Cards
            
            
            101,000
            
            
            
            
            
            10,100
            
            
            101,000
            
            
            
            
            
            10,100Auto
                Loans
            
            
            71,822
            
            
            
            
            
            7,182
            
            
            307,822
            
            
            
            
            
            37,500Total
            
            
            32,385,270
            
            
            
            
            
            3,555,769
            
            
            19,465,387
            
            
            
            
            
            2,368,399Grand
                Total
            
            $
            54,553,387
            
            
            
            
            $
            6,881,141
            
            $
            33,009,737
            
            
            
            
            $
            4,306,156





The
      Company limits its exposure to losses under its financial guarantees through
      a
      formal credit approval process and by maintaining a surveillance function which
      monitors insured transactions. Additionally, the Company mitigates credit risk
      by underwriting investment grade transactions and maintaining collateral quality
      requirements on asset-backed obligations, as well as through reinsurance. As
      of
      December 31, 2006, there were no guaranteed transactions rated below investment
      grade.





Included
      in the table above is $0.2 billion of direct net par exposure related to
      securitization transactions supported by sub-prime mortgage assets. As of
      December 31, 2006, all of this exposure has underlying ratings of triple-A
      by at
      least two rating agencies prior to the benefit of financial guaranty provided
      by
      the Company, except for $5.9 million which was issued in 2004 and is rated
      in
      the A-minus rating category.




-22-


**CIFG
          Assurance North America, Inc.**
 **Notes
          to Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 **(Dollar
          Amounts in Thousands)**





In
      addition, CIFG NA has indirect net exposure to sub-prime mortgage assets as
      a
      result of guarantees of $0.8 billion of senior tranches of multi-sector
      collateralized debt obligations that include varying proportions of sub-prime
      mortgage assets in their collateral pools. As of December 31, 2006, all of
      this
      exposure has underlying ratings of triple-A by at least two rating agencies
      prior to the benefit of the financial guaranty provided by the
      Company.




Gross
      par
      written includes $250 million, $505 million and $2.3 billion of assumed premium
      business for each of the three years ended December 31, 2006, 2005 and 2004,
      respectively.





Gross
      par
      outstanding includes $3.9 billion and $5.0 billion of assumed business, at
      December 31, 2006 and December 31, 2005, respectively.





Gross
      and
      net par outstanding includes financial guaranty contracts treated as derivatives
      under FAS 133.





The
      distribution of gross and net par in force by geographical location is presented
      in the following table:





**2006**
            
            
            
            **%
                of**
            
            
            
            **2005**
            
            
            
            **%
                of****Gross**
            
            
            
            **Net**
            
            **Net**
            
            **Gross**
            
            
            
            **Net**
            
            **Net****United
                States:**Florida
            
            $1,538,190
            
            
            
            $683,957
            
            9.9
            %
            $681,672
            
            
            
            $68,167
            
            1.6
            %New
                York
            
            
            3,870,534
            
            
            
            
            
            613,447
            
            
            8.9
            %
            
            3,264,855
            
            
            
            
            
            556,215
            
            
            12.9
            %Puerto
                Rico
            
            
            1,368,371
            
            
            
            
            
            236,955
            
            
            3.4
            %
            
            1,168,357
            
            
            
            
            
            217,496
            
            
            5.1
            %Illinois
            
            
            1,795,392
            
            
            
            
            
            179,539
            
            
            2.6
            %
            
            1,325,550
            
            
            
            
            
            132,555
            
            
            3.1
            %California
            
            
            1,054,063
            
            
            
            
            
            165,509
            
            
            2.4
            %
            
            901,917
            
            
            
            
            
            151,317
            
            
            3.5
            %New
                Jersey
            
            
            1,249,406
            
            
            
            
            
            152,441
            
            
            2.2
            %
            
            835,701
            
            
            
            
            
            111,070
            
            
            2.6
            %Texas
            
            
            880,098
            
            
            
            
            
            136,037
            
            
            2.0
            %
            
            544,034
            
            
            
            
            
            102,431
            
            
            2.4
            %Pennsylvania
            
            
            1,020,536
            
            
            
            
            
            102,054
            
            
            1.5
            %
            
            165,159
            
            
            
            
            
            16,516
            
            
            0.4
            %Louisiana
            
            
            961,475
            
            
            
            
            
            96,148
            
            
            1.4
            %
            
            4,800
            
            
            
            
            
            480
            
            
            0.0
            %Massachusetts
            
            
            297,565
            
            
            
            
            
            78,507
            
            
            1.1
            %
            
            100,587
            
            
            
            
            
            58,809
            
            
            1.4
            %Other
                states
            
            
            5,940,820
            
            
            
            
            
            616,582
            
            
            9.0
            %
            
            2,599,691
            
            
            
            
            
            282,468
            
            
            6.5
            %US
                diversified*
            
            
            25,316,946
            
            
            
            
            
            2,822,686
            
            
            41.0
            %
            
            13,950,086
            
            
            
            
            
            1,790,619
            
            
            41.5
            %Total
                United States
            
            
            45,293,396
            
            
            
            
            
            5,883,862
            
            
            85.4
            %
            
            25,542,409
            
            
            
            
            
            3,488,143
            
            
            81.0
            %**Non
                United States:**Italy
            
            
            1,155,563
            
            
            
            
            
            115,556
            
            
            1.7
            %
            
            1,014,215
            
            
            
            
            
            101,422
            
            
            2.4
            %Canada
            
            
            228,594
            
            
            
            
            
            67,890
            
            
            1.0
            %
            
            221,813
            
            
            
            
            
            67,212
            
            
            1.6
            %United
                Kingdom
            
            
            424,617
            
            
            
            
            
            42,462
            
            
            0.6
            %
            
            427,407
            
            
            
            
            
            42,741
            
            
            1.0
            %Greece
            
            
            328,588
            
            
            
            
            
            32,859
            
            
            0.5
            %
            
            295,988
            
            
            
            
            
            29,599
            
            
            0.7
            %Brazil
            
            
            316,860
            
            
            
            
            
            31,686
            
            
            0.5
            %
            
            316,860
            
            
            
            
            
            31,686
            
            
            0.7
            %France
            
            
            263,006
            
            
            
            
            
            26,301
            
            
            0.4
            %
            
            241,307
            
            
            
            
            
            24,131
            
            
            0.6
            %Germany
            
            
            187,763
            
            
            
            
            
            18,776
            
            
            0.3
            %
            
            176,911
            
            
            
            
            
            17,691
            
            
            0.4
            %Turkey
            
            
            150,000
            
            
            
            
            
            15,000
            
            
            0.2
            %
            
            150,000
            
            
            
            
            
            15,000
            
            
            0.3
            %Switzerland
            
            
            81,823
            
            
            
            
            
            8,182
            
            
            0.1
            %
            
            55,131
            
            
            
            
            
            5,513
            
            
            0.1
            %Australia
            
            
            21,549
            
            
            
            
            
            2,155
            
            
            0.0
            %
            
            19,814
            
            
            
            
            
            1,981
            
            
            0.0
            %Spain
            
            
            3,470
            
            
            
            
            
            347
            
            
            0.0
            %
            
            3,126
            
            
            
            
            
            313
            
            
            0.0
            %Europe
                diversified**
            
            
            2,195,950
            
            
            
            
            
            219,595
            
            
            3.2
            %
            
            1,555,414
            
            
            
            
            
            155,541
            
            
            3.6
            %Global
            
            
            3,902,208
            
            
            
            
            
            416,470
            
            
            6.1
            %
            
            2,989,342
            
            
            
            
            
            325,183
            
            
            7.6
            %Total
                Non United States
            
            
            9,259,991
            
            
            
            
            
            997,279
            
            
            14.6
            %
            
            7,467,328
            
            
            
            
            
            818,013
            
            
            19.0
            %Grand
                Total
            
            $
            54,553,387
            
            
            
            
            $
            6,881,141
            
            
            100.0
            %
            $
            33,009,737
            
            
            
            
            $
            4,306,156
            
            
            100
            %








*
      Includes financial guaranties with obligations in multiple states.





**
      Includes financial guaranties with obligations in multiple
      countries.




-23-





**CIFG
      Assurance North America, Inc.**


**Notes
      to Financial Statements**


**December
      31, 2006, 2005 and 2004**


**(Dollar
      Amounts in Thousands)**








**11.**
            **Loss
                and Loss Adjustment
                Reserves**




The
      Company’s reserve for losses and loss adjustment expenses consists of active
      credit reserves only. There were no case basis reserves recorded during 2006
      and
      2005. Activity in the losses and loss adjustment reserves, gross of reinsurance,
      are summarized as follows:





**2006**
            
            
            **2005**Gross
                active
                credit reserves:Balance,
                beginning of period
            
            $
            3,306
            
            $
            1,677Incurred
                losses and loss adjustment expensereserves
            
            
            2,224
            
            
            1,629Balance,
                end of period
            
            $
            5,530
            
            $
            3,306





Gross
      incurred loss and loss adjustment expenses are presented in the income statement
      net of ceded amounts of $1,893, $1,393, and $1,044 for the years ended December
      31, 2006, 2005 and 2004, respectively.




**12.**
            **Fair
                Value of Financial
                Instruments**




The
      following fair value amounts were determined by using independent market
      information when available, and internal valuation methodologies when market
      quotes were not available. In cases where specific market quotes were
      unavailable, interpreting market data and estimating market values requires
      considerable judgment by management. Accordingly, the estimates presented are
      not necessarily indicative of the amount CIFG NA could realize in a current
      market exchange. The use of different market assumptions and/or estimation
      methodologies may have a material effect on the estimated fair value
      amounts.





The
      following methods and assumptions were used to estimate the fair value of each
      class of financial instruments for which it is practicable to estimate that
      value:





**Fixed
      income securities:** The fair
      values of fixed income securities are based primarily on quoted market
      prices.





**Short-Term
      Investments and Cash:** The
      carrying value of these items approximate fair value.





**Investment
      Income Due and Accrued:** The fair
      value of investment income due and accrued is assumed to approximate carrying
      value.





**Deferred
      Premium Revenue:** The fair
      value of the deferred premium revenue is based upon the estimated cost to
      reinsure those exposures at current market rates, which amount consists of
      the
      current deferred premium revenue, less an estimated ceding commission thereon.





Certain
      other financial guaranty insurance contracts have been written on an installment
      premium basis, where the future premiums to be received by the Company are
      determined based on the outstanding exposure at the time these premiums are
      due.
      The fair value of the Company’s future premium revenue under its installment
      contracts is measured using the present value of estimated future installment
      premiums, less an estimated ceding commission thereon, discounted at 7%. The
      estimate of the amounts and timing of the future installment premiums is based
      on contractual premium rates, debt service schedules and expected run-off
      scenarios. This measure is used as an estimate of the cost to reinsure the
      Company’s exposures under these policies.




-24-


**CIFG
          Assurance North America, Inc.**
 **Notes
          to Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 **(Dollar
          Amounts in Thousands)**





The
      carrying amount and estimated fair value of financial instruments are presented
      below:





**December
                31,****2006**
            
            
            
            
            
            **2005****Carrying
                Amount**
            
            
            
            **Estimated
                fair value**
            
            **Carrying
                Amount**
            
            
            
            **Estimated
                fair value****Financial
                Assets:**Fixed
                income securities
            
            $
            134,403
            
            
            
            
            $
            134,403
            
            $
            132,924
            
            
            
            
            $
            132,924Short-term
                investments
            
            
            39,588
            
            
            
            
            
            39,588
            
            
            24,652
            
            
            
            
            
            24,652Cash
            
            
            1,068
            
            
            
            
            
            1,068
            
            
            3,388
            
            
            
            
            
            3,388Investment
                income due and accrued
            
            
            1,748
            
            
            
            
            
            1,748
            
            
            1,497
            
            
            
            
            
            1,497Derivative
                assets
            
            
            10
            
            
            
            
            
            10
            
            
            4
            
            
            
            
            
            4**Financial
                Liabilities**:Deferred
                premium revenue:Gross
            
            
            218,714
            
            
            
            
            
            153,100
            
            
            165,846
            
            
            
            
            
            116,092Net
                of reinsurance
            
            
            34,953
            
            
            
            
            
            24,467
            
            
            24,019
            
            
            
            
            
            16,812Derivative
                liabilities
            
            
            49
            
            
            
            
            
            49
            
            
            57
            
            
            
            
            
            57**Off-balance
                sheet instruments:**Installment
                premium receivableGross
            
            
            ---
            
            
            
            
            
            124,159
            
            
            ---
            
            
            
            
            
            82,973Net
                of reinsurance
            
            
            ---
            
            
            
            
            
            13,063
            
            
            ---
            
            
            
            
            
            9,581





**13.**
            **Credit
                Derivatives**




Certain
      financial guaranty contracts meet the definition of a derivative under FAS
      133
      as amended by FAS 149. All of these direct contracts provide credit protection
      to investors who have entered into credit derivative transactions with New
      Generation Funding Trusts. The Company records these contracts at Management’s
      estimate of fair value based on valuation models. The models contain an expected
      loss assumption. These contracts are considered by the Company to be, in
      substance, financial guaranty contracts and the Company generally intends to
      hold them to maturity. The level of fair value adjustments is dependent upon
      a
      number of factors including changes in credit spreads and other market factors.





As
      of
      December 31, 2006 and 2005, the distribution of par exposure by form of credit
      enhancement is set forth in the following table on a gross (direct and assumed)
      basis and net of reinsurance:


**** **December 31,**


**2006**
            
            
            
            
            
            **2005****Gross**
            
            
            
            
            
            
            
            
            **Net**
            
            
            **Gross**
            
            
            
            
            
            **Net**Financial
                guarantees
            
            $
            27,200,799
            
            
            
            
            $
            3,879,324
            
            $
            17,605,496
            
            
            
            
            $
            2,424,333Credit
                Derivatives
            
            
            27,352,588
            
            
            
            
            
            3,001,817
            
            
            15,404,241
            
            
            
            
            
            1,881,823Total
            
            $
            54,553,387
            
            
            
            
            $
            6,881,141
            
            $
            33,009,737
            
            
            
            
            $
            4,306,156


-25-


**CIFG
          Assurance North America, Inc.**
 **Notes
          to Financial Statements**
 **December
          31, 2006, 2005 and 2004**
 **(Dollar
          Amounts in Thousands)**


**14.
      Variable Interest Entities**





The
      Company’s financial statements include the consolidation of New Generation
      Funding Trusts (VIEs) as disclosed in Note 1. For each of the three years ended
      December 31, 2006, 2005 and 2004 gross direct premium written by these VIEs
      was
      approximately $27.1, $20.8, $10.5 million, respectively, and gross par
      outstanding at December 31, 2006 and 2005 includes $27.1 and $15.2 billion,
      respectively, underwritten through these VIEs.




-26-