8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): June 15, 2006

Piedmont Natural Gas Company, Inc.

(Exact name of registrant as specified in its charter)

North Carolina
(State or other jurisdiction of incorporation)

1-6196	56-0556998
(Commission File Number)	(IRS Employer Identification No.)
4720 Piedmont Row Drive Charlotte, North Carolina	28210
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:     (704) 364-3120

N/A
(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

     o      Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

     o      Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

     o      Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

     o      Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 7.01.      Regulation FD Disclosure.

     Piedmont Natural Gas Company, Inc. (the “Company”) plans to issue its Insured Quarterly Notes Series 2006, due June 1, 2036 (the “Notes”), which will be insured by Financial Guaranty Insurance Company (“FGIC”).

     The audited consolidated financial statements of FGIC and subsidiaries as of December 31, 2005 and 2004, and for the years ended December 31, 2005 and 2004 and the periods from December 18, 2003 through December 31, 2003 and from January 1, 2003 through December 17, 2003, are included in this Form 8-K as Exhibit 99.1. The unaudited consolidated financial statements of FGIC and subsidiaries as of March 31, 2006 and for the three month periods ended March 31, 2006 and 2005 are included in this Form 8-K as Exhibit 99.2. The audited consolidated financial statements of FGIC and subsidiaries as of December 31, 2005 and 2004 and for the years ended December 31, 2005 and 2004 and the periods from December 18, 2003 through December 31, 2003 and from January 1, 2003 through December 17, 2003 have been audited by Ernst & Young LLP. The consent of Ernst & Young LLP to the inclusion of their audit reports on such financial statements in this Form 8-K and their being named as “experts” in the Prospectus Supplement relating to the Notes is attached hereto as Exhibit 23.1.

Item 9.01.      Financial Statements and Exhibits.

(d)      Exhibits.

23.1	Consent of Ernst & Young LLP
99.1	Consolidated financial statements of FGIC and subsidiaries as of December 31, 2005 and 2004, and for each of the years in the three-year period ended December 31, 2005
99.2	Consolidated financial statements of FGIC and subsidiaries as of March 31, 2006 and for the three month periods ended March 31, 2006 and 2005

SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	Piedmont Natural Gas Company, Inc.
	By:	/s/ Robert O. Pritchard
		Robert O. Pritchard
		Treasurer
Dated:     June 15, 2006

2

INDEX TO EXHIBITS

Exhibit No.	Description
23.1	Consent of Ernst & Young LLP
99.1	Consolidated financial statements of FGIC and subsidiaries as of December 31, 2005 and 2004, and for each of the years in the three-year period ended December 31, 2005
99.2	Consolidated financial statements of FGIC and subsidiaries as of March 31, 2006 and for the three month periods ended March 31, 2006 and 2005

3

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     We consent to the reference to our firm under the caption “Experts” in the Prospectus Supplement of Piedmont Natural Gas Company, Inc. for the registration of Piedmont Natural Gas Company, Inc.’s Insured Quarterly Notes Series 2006, due June 1, 2036, in the registration statement on Form S-3 (No. 333-106268) and to the incorporation by reference therein of our report dated January 23, 2006, with respect to the financial statements of Financial Guaranty Insurance Company, appearing in the Form 8-K of Piedmont Natural Gas Company, Inc. dated June 15, 2006, filed with the Securities and Exchange Commission.

/s/ Ernst & Young LLP

New York, New York
June 15, 2006

4

EX-99.1

EXHIBIT 99.1

Consolidated Financial Statements

Financial Guaranty Insurance Company and Subsidiaries

December 31, 2005
with Report of Independent Auditors

Financial Guaranty Insurance Company and Subsidiaries

Consolidated Financial Statements

December 31, 2005

Contents

Report of Registered Public Accounting Firm	1
Consolidated Balance Sheets	2
Consolidated Statements of Income	3
Consolidated Statements of Stockholder’s Equity	4
Consolidated Statements of Cash Flows	5
Notes to Consolidated Financial Statements	6

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholder
Financial Guaranty Insurance Company

We have audited the accompanying consolidated balance sheets of Financial Guaranty Insurance Company and Subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholder’s equity and cash flows for the years ended December 31, 2005 and 2004 and the periods from December 18, 2003 through December 31, 2003 and from January 1, 2003 through December 17, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for the years ended December 31, 2005 and 2004 and the periods from December 18, 2003 through December 31, 2003 and from January 1, 2003 through December 17, 2003, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

New York, New York
January 23, 2006

1

Financial Guaranty Insurance Company and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)

	December 31
	2005			2004
Assets
Fixed maturity securities, at fair value (amortized cost of $3,277,291 in 2005 and $2,921,320 in 2004)	$	3,258,738		$	2,938,856
Short-term investments		159,334			140,473
Total investments		3,418,072			3,079,329
Cash and cash equivalents		45,077			69,292
Accrued investment income		42,576			36,580
Reinsurance recoverable on losses		3,271			3,054
Prepaid reinsurance premiums		110,636			109,292
Deferred policy acquisition costs		63,330			33,835
Receivable from related parties		9,539			802
Property and equipment, net of accumulated depreciation of $885 in 2005 and $164 in 2004		3,092			2,408
Prepaid expenses and other assets		10,354			7,826
Federal income taxes receivable		2,158			—
Total assets	$	3,708,105		$	3,342,418
Liabilities and stockholder’s equity
Liabilities:
Unearned premiums	$	1,201,163		$	1,043,334
Loss and loss adjustment expenses		54,812			39,181
Ceded reinsurance balances payable		1,615			3,826
Accounts payable, accrued expenses and other liabilities		36,359			22,874
Payable for securities purchased		—			5,715
Capital lease obligations		4,262			6,446
Federal income taxes payable		—			4,401
Deferred income taxes		42,463			38,765
Total liabilities		1,340,674			1,164,542
Stockholder’s equity:
Common stock, par value $1,500 per share; 10,000 shares authorized, issued and outstanding		15,000			15,000
Additional paid-in capital		1,894,983			1,882,772
Accumulated other comprehensive (loss) income, net of tax		(13,597	)		15,485
Retained earnings		471,045			264,619
Total stockholder’s equity		2,367,431			2,177,876
Total liabilities and stockholder’s equity	$	3,708,105		$	3,342,418

See accompanying notes to consolidated financial statements.

2

Financial Guaranty Insurance Company and Subsidiaries

Consolidated Statements of Income

(Dollars in thousands)

	Successor									Predecessor
							Period from			Period from
							December 18,			January 1,
							2003			2003
	Year ended			Year ended			through			through
	December 31,			December 31,			December 31,			December 17,
	2005			2004			2003			2003
Revenues:
Gross premiums written	$	410,202		$	323,575		$	12,213		$	248,112
Reassumed ceded premiums		—			4,959			6,300			14,300
Ceded premiums written		(29,148	)		(14,656	)		(39	)		(14,852	)
Net premiums written		381,054			313,878			18,474			247,560
Increase in net unearned premiums		(156,485	)		(138,929	)		(9,892	)		(105,811	)
Net premiums earned		224,569			174,949			8,582			141,749
Net investment income		117,072			97,709			4,269			112,619
Net realized gains		101			559			—			31,506
Net mark-to-market losses on credit derivative contracts		(167	)		—			—			—
Other income		762			736			44			580
Total revenues		342,337			273,953			12,895			286,454
Expenses:
Loss and loss adjustment expenses		18,506			5,922			236			(6,757	)
Underwriting expenses		82,064			73,426			7,622			54,481
Policy acquisition costs deferred		(38,069	)		(32,952	)		(2,931	)		(23,641	)
Amortization of deferred policy acquisition costs		8,302			2,038			10			15,563
Total expenses		70,803			48,434			4,937			39,646
Income before income tax expense (benefit)		271,534			225,519			7,958			246,808
Income tax expense (benefit):
Current		32,370			42,510			1,191			57,071
Deferred		32,738			12,923			573			(1,612	)
Total income tax expense		65,108			55,433			1,764			55,459
Income before extraordinary item		206,426			170,086			6,194			191,349
Extraordinary gain		—			—			13,852			—
Net income	$	206,426		$	170,086		$	20,046		$	191,349

See accompanying notes to consolidated financial statements.

3

Financial Guaranty Insurance Company and Subsidiaries

Consolidated Statements of Stockholder’s Equity

(Dollars in thousands)

					Accumulated Other
			Additional		Comprehensive
	Common		Paid-in		(Loss) Income,			Retained
	Stock		Capital		Net of Tax			Earnings			Total
Predecessor
Balance at January 1, 2003	$	15,000	$	383,511	$	49,499		$	1,740,885		$	2,188,895
Net income		—		—		—			191,349			191,349
Other comprehensive income (loss):
Change in fixed maturities available-for-sale		—		—		(424	)		—			(424	)
Change in foreign currency translation adjustment		—		—		4,267			—			4,267
Total comprehensive income												195,192
Dividends declared		—		—		—			(284,300	)		(284,300	)
Balance at December 17, 2003		15,000		383,511		53,342			1,647,934			2,099,787
Successor
Purchase accounting adjustments		—		1,474,261		(53,342	)		(1,573,447	)		(152,528	)
Net income		—		—		—			20,046			20,046
Other comprehensive income:
Change in fixed maturities available-for-sale		—		—		2,059			—			2,059
Total comprehensive income												22,105
Balance at December 31, 2003		15,000		1,857,772		2,059			94,533			1,969,364
Net income		—		—		—			170,086			170,086
Other comprehensive income:
Change in fixed maturities available-for-sale		—		—		9,340			—			9,340
Change in foreign currency translation adjustment		—		—		4,086			—			4,086
Total comprehensive income												183,512
Capital contribution		—		25,000		—			—			25,000
Balance at December 31, 2004		15,000		1,882,772		15,485			264,619			2,177,876
Net income		—		—		—			206,426			206,426
Other comprehensive loss:
Change in fixed maturities available-for-sale		—		—		(23,550	)		—			(23,550	)
Change in foreign currency translation adjustment		—		—		(5,532	)		—			(5,532	)
Total comprehensive income												177,344
Capital contribution		—		12,211		—			—			12,211
Balance at December 31, 2005	$	15,000	$	1,894,983	$	(13,597	)	$	471,045		$	2,367,431

See accompanying notes to consolidated financial statements.

4

Financial Guaranty Insurance Company and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)

	Successor									Predecessor
							Period from			Period from
							December 18,			January 1,
							2003			2003
	Year ended			Year ended			through			through
	December 31,			December 31,			December 31,			December 17,
	2005			2004			2003			2003
Operating activities
Net income	$	206,426		$	170,086		$	20,046		$	191,349
Adjustments to reconcile net income to net cash provided by operating activities:
Extraordinary gain					—			(13,852	)		—
Amortization of deferred policy acquisition costs		8,574			2,038			10			15,563
Policy acquisition costs deferred		(38,069	)		(32,952	)		(2,931	)		(23,641	)
Depreciation of property and equipment		721			164			—			22
Amortization of fixed maturity securities		31,504			37,013			693			21,129
Amortization of short-term investments		481			29
Net realized gains on investments		(101	)		(559	)		—			(31,506	)
Change in accrued investment income and prepaid expenses and other assets		(8,504	)		(5,545	)		(5,065	)		6,292
Change in net mark-to-market losses on credit derivative contracts		167			—			—			—
Change in federal income taxes receivable		—			126			(172	)		(2,407	)
Change in reinsurance recoverable on losses		(217	)		5,011			(104	)		410
Change in prepaid reinsurance premiums		(1,344	)		14,476			7,432			19,725
Changes in other reinsurance receivables		—			5,295			(5,295	)		—
Change in receivable from related parties		(8,737	)		8,957			(76	)		(9,811	)
Change in unearned premiums		157,829			124,452			2,460			86,250
Change in loss and loss adjustment expenses		15,631			(1,286	)		236			(7,644	)
Change in ceded reinsurance balances payable and accounts payable and accrued expenses		8,923			7,348			6,485			1,804
Change in current federal income taxes payable		(6,559	)		4,401			—			(97,477	)
Change in deferred federal income taxes		19,252			12,923			573			(1,612	)
Net cash provided by operating activities		385,977			351,977			10,440			168,446
Investing activities
Sales and maturities of fixed maturity securities		122,638			284,227			1,780			1,028,103
Purchases of fixed maturity securities		(520,089	)		(546,028	)		—			(877,340	)
Purchases, sales and maturities of short-term investments, net		(19,342	)		(126,125	)		(12,736	)		41,504
Receivable for securities sold		(20	)		170			538			283
Payable for securities purchased		(5,715	)		5,715			—			(5,333	)
Purchase of fixed assets		(1,405	)		(2,572	)		—			—
Net cash (used in) provided by investing activities		(423,933	)		(384,613	)		(10,418	)		187,217
Financing activities
Capital contribution		12,211			25,000			—			—
Dividends paid to common stockholders		—			—			—			(284,300	)
Net cash provided by (used in) financing activities		12,211			25,000			—			(284,300	)
Effect of exchange rate changes on cash		1,530			(1,717	)		—			—
Net (decrease) increase in cash and cash equivalents		(24,215	)		(9,353	)		22			71,363
Cash and cash equivalents at beginning of period		69,292			78,645			78,623			7,260
Cash and cash equivalents at end of period	$	45,077		$	69,292		$	78,645		$	78,623
Supplemental disclosure of cash flow information
Income taxes paid	$	49,613		$	40,890		$	—		$	156,800

See accompanying notes to consolidated financial statements.

5

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005
(Dollars in thousands, except per share amounts)

1. Business and Organization

Financial Guaranty Insurance Company (the “Company”) is a wholly owned subsidiary of FGIC Corporation (“FGIC Corp.”). The Company provides financial guaranty insurance and other forms of credit enhancement for public finance and structured finance obligations. The Company began insuring public finance obligations in 1984 and structured finance obligations in 1988. The Company’s financial strength is rated “Aaa” by Moody’s Investors Service, Inc., “AAA” by Standard & Poor’s Rating Services, a division of The McGraw-Hill Companies, Inc., and “AAA” by Fitch Ratings, Inc. The Company is licensed to engage in writing financial guaranty insurance in all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, and, through a branch, in the United Kingdom. In addition, a United Kingdom subsidiary of the Company is authorized to write financial guaranty business in the United Kingdom and has passport rights to write business in other European Union member countries. FGIC Corp. and the Company have formed subsidiaries to facilitate geographic and business expansion.

On December 18, 2003, an investor group consisting of The PMI Group, Inc. (“PMI”), affiliates of the Blackstone Group L.P. (“Blackstone”), affiliates of the Cypress Group L.L.C. (“Cypress”) and affiliates of CIVC Partners L.P. (“CIVC”), collectively, the “Investor Group”, completed the acquisition of FGIC Corp. from a subsidiary of General Electric Capital Corporation (“GE Capital”) in a transaction valued at approximately $2,200,000 (the “Transaction”). GE Capital retained 2,346 shares of FGIC Corp. Senior Preferred Mandatorily Convertible Modified Preferred Stock (“Senior Preferred Shares”) with an aggregate liquidation preference of $234,600, and approximately 5% of FGIC Corp.’s outstanding common stock. PMI is the largest stockholder of FGIC Corp., owning approximately 42% of its common stock at December 31, 2005 and 2004. Blackstone, Cypress and CIVC own approximately 23%, 23% and 7% of FGIC Corp.’s common stock, respectively, at December 31, 2005 and 2004.

2. Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances have been eliminated in consolidation.

6

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

2. Basis of Presentation (continued)

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

The accompanying financial statements have been prepared on the basis of GAAP, which differs in certain respects from the accounting practices prescribed or permitted by the New York State Insurance Department (see Note 4). Certain 2004 and 2003 information has been reclassified to conform to the 2005 presentation.

3. Summary of Significant Accounting Policies

The Company’s significant accounting policies are as follows:

a. Investments

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

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

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

b. Cash and Cash Equivalents

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

7

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

3. Summary of Significant Accounting Policies (continued)

c. Premium Revenue Recognition

Premiums are received either up-front or over time on an installment basis. The premium collection method is determined at the time the policy is issued. Up-front premiums are paid in full at the inception of the policy and are earned over the period of risk in proportion to the total amount of principal and interest amortized in the period as a proportion of the original principal and interest outstanding. Installment premiums are collected periodically and are reflected in income pro-rata over the period covered by the premium payment, including premiums received on credit default swaps (see Note 6). Unearned premiums represent the portion of premiums received applicable to future periods on insurance policies in force. When an obligation insured by the Company is refunded prior to the end of the expected policy coverage period, any remaining unearned premium is recognized at that time. A refunding occurs when an insured obligation is called or legally defeased prior to stated maturity. Premiums earned on advanced refundings were $54,795, $42,695, $5,013 and $39,858 for the years ended December 31, 2005 and 2004 and the periods from December 18, 2003 through December 31, 2003 and January 1, 2003 through December 17, 2003, respectively.

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

d. Policy Acquisition Costs

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

8

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

3. Summary of Significant Accounting Policies (continued)

e. Loss and Loss Adjustment Expenses

Provision for loss and loss adjustment expenses fall into two categories: case reserves and watchlist reserves. Case reserves are established for the value of estimated losses on particular insured obligations that are presently or likely to be in payment default and for which future loss is probable and can be reasonably estimated. These reserves represent an estimate of the present value of the anticipated shortfall between (1) payments on insured obligations plus anticipated loss adjustment expenses and (2) anticipated cash flow from, and proceeds to be received on, sales of any collateral supporting the obligation and/or other anticipated recoveries. The discount rate used in calculating the net present value of estimated losses is based upon the risk-free rate for the time period of the anticipated shortfall. As of December 31, 2005 and 2004, discounted case-basis loss and loss adjustment expense reserves totaled $33,328 and $15,700, respectively. Loss and loss adjustment expenses included amounts discounted at an approximate interest rate of 4.5% in 2005 and 2004. The amount of the discount at December 31, 2005 and 2004 was $15,015 and $2,500, respectively.

The Company establishes watchlist reserves to recognize the potential for claims against the Company on insured obligations that are not presently in payment default, but which have migrated to an impaired level, where there is a substantially increased probability of default. These reserves reflect an estimate of probable loss given evidence of impairment, and a reasonable estimate of the amount of loss given default. The methodology for establishing and calculating the watchlist reserve relies on a categorization and assessment of the probability of default, and loss severity in the event of default, of the specifically identified impaired obligations on the watchlist based on historical trends and other factors. The watchlist reserve is adjusted as necessary to reflect changes in the loss expectation inherent in the group of impaired credits. As of December 31, 2005 and 2004, such reserves were $21,484 and $23,500, respectively.

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

9

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

3. Summary of Significant Accounting Policies (continued)

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

f. Income Taxes

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

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

The Company is a financial guaranty insurance writer and is permitted a tax deduction, subject to certain limitations under Section 832(e) of the Internal Revenue Code, for amounts required to be set aside in statutory contingency reserves by state law or regulation. The deduction is allowed only to the extent the Company purchases U.S. Government non-interest bearing tax and loss bonds in an amount equal to the tax benefit attributable to such deductions. Purchases of tax and loss bonds are recorded as a reduction of current tax expense. For the years ended December 31, 2005 and 2004, the Company purchased $13,565 and $10,810, respectively, of tax and loss bonds. For the period from January 1, 2003 through December 17, 2003, there were no tax and loss bonds purchased and $102,540 of tax and loss bonds were redeemed.

g. Property and Equipment

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

10

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

3. Summary of Significant Accounting Policies (continued)

h. Goodwill

In accounting for the Transaction in 2003, the Company applied purchase accounting, as prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations (“SFAS 141”) and Securities and Exchange Commission Staff Accounting Bulletin 54. Under these accounting methods, the purchase price was pushed down into the accompanying consolidated financial statements, with the difference between the purchase price and the sum of the fair value of tangible and identifiable intangible assets acquired less liabilities assumed resulting in negative goodwill of $27,300 at December 18, 2003. In accordance with SFAS 141, the Company reduced the value assigned to non-financial assets, and the remaining negative goodwill of $13,852 was recorded as an extraordinary gain in the consolidated statement of income.

As a result of the purchase accounting, effective December 18, 2003, the basis of the Company’s assets and liabilities changed, necessitating the presentation of Predecessor Company and Successor Company columns in the consolidated statements of income, stockholder’s equity and cash flows.

i. Foreign Currency Translation

The Company has an established foreign branch and three subsidiaries in the United Kingdom and insured exposure from a former branch in France. The Company has determined that the functional currencies of these operations are their local currencies. Accordingly, the assets and liabilities of these operations are translated into U.S. dollars at the rates of exchange at December 31, 2005 and 2004, and revenues and expenses are translated at average monthly exchange rates. The cumulative translation (loss) gain at December 31, 2005 and 2004 was $(1,446) and $4,086, respectively, net of tax benefit (expense) of $723 and $(2,200), respectively, and is reported as a separate component of accumulated other comprehensive income in the consolidated statements of stockholder’s equity.

11

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

3. Summary of Significant Accounting Policies (continued)

j. Stock Compensation Plan

The Company has an incentive stock plan that provides for stock-based compensation, including stock options, restricted stock awards and restricted stock units of FGIC Corp. Stock options are granted for a fixed number of shares with an exercise price equal to or greater than the fair value of the shares at the date of the grant. Restricted stock awards and restricted stock units are valued at the fair value of the stock on the grant date, with no cost to the grantee. FGIC Corp. accounts for stock-based compensation using the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, if the exercise price is equal to the fair value of the shares at the date of the grant, no compensation expense related to stock options is allocated to the Company by FGIC Corp. For grants to employees of the Company of restricted stock and restricted stock units, unearned compensation, equivalent to the fair value of the shares at the date of grant, is allocated to the Company. The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), as amended.

Had FGIC Corp. determined compensation expense for stock options granted to employees and management based on the fair value of the options at the grant dates consistent with the method of accounting under SFAS 123, the Company’s estimated pro forma net income would have been as follows:

							Period from
							December 18,
							2003
	Year ended			Year ended			through
	December 31,			December 31,			December 31,
	2005			2004			2003
Reported net income	$	206,426		$	170,086		$	20,046
Add: Allocated stock-based compensation related to restricted stock units, net of tax included in reported net income		29			49			—
Less: Allocated total stock-based compensation determined under the fair value method for all awards, net of tax		(2,138	)		(1,249	)		(40	)
Pro forma net income	$	204,317		$	168,886		$	20,006

There were no stock options prior to December 18, 2003.

12

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

3. Summary of Significant Accounting Policies (continued)

k. Variable Interest Entities

Financial Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46-R”) provides accounting and disclosure rules for determining whether certain entities should be consolidated in the Company’s consolidated financial statements. An entity is subject to
FIN 46-R, and is called a Variable Interest Entity (“VIE”), if it has (i) equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support or (ii) equity investors that cannot make significant decisions about the entity’s operations or that do not absorb the majority of expected losses or receive the majority of expected residual returns of the entity. A VIE is consolidated by its primary beneficiary, which is the party that has a majority of the expected losses or a majority of the expected residual returns of the VIE, or both. FIN 46-R requires disclosures for companies that have either a primary or significant variable interest in a VIE. All other entities not considered VIEs are evaluated for consolidation under SFAS No. 94, Consolidation of all Majority-Owned Subsidiaries.

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

During 2004, FGIC arranged the issuance of contingent preferred trust securities by a group of special purpose trusts. These trusts are considered VIEs under FIN 46-R. However, the Company is not considered a primary beneficiary and therefore is not required to consolidate the trusts (see Note 16).

l. Derivatives

The Financial Accounting Standards Board (“FASB”) issued and subsequently amended SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). Under SFAS 133, as amended, all derivative instruments are recognized on the consolidated balance sheet at their fair value, and changes in fair value are recognized immediately in earnings unless the derivatives qualify as hedges.

13

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

3. Summary of Significant Accounting Policies (continued)

In 2005, the Company sold credit default swaps (“CDS”) to certain buyers of credit protection. It considers these agreements to be a normal extension of its financial guaranty insurance business, although they are considered derivatives for accounting purposes.
These agreements are recorded at fair value. Changes in fair value are recorded in net mark-to-market gains (losses) on credit derivative instruments in the consolidated statements of income and in other assets or other liabilities in the consolidated balance sheets. The Company uses dealer-quoted market values, when available, to determine fair value. If market prices are not available, management uses internally developed estimates of fair value.

m. New Accounting Pronouncements

On December 16, 2004, FASB issued SFAS 123(R) which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Following the effective date, pro forma disclosure is no longer an alternative. In April 2005, the SEC announced the adoption of a rule allowing public companies to defer the adoption of SFAS 123(R) until the beginning of their fiscal years beginning after June 15, 2005. Non-public entities will be required to adopt the provisions of the new standard in fiscal years beginning after December 15, 2005.

Under SFAS 123(R), the Company must determine the transition method to be used at the date of adoption, the appropriate fair value model to be used for valuing share-based payments and the amortization method for compensation cost. The transition methods include retroactive and prospective adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all outstanding share-based awards for which the requisite service has not yet been rendered. The retroactive method would record compensation for all unvested stock options and restricted stock beginning with the first period restated. The Company anticipates adopting the prospective method and expects that the adoption of SFAS 123(R) will have an impact similar to the current pro forma disclosure for existing options under SFAS 123(R). In addition, the Company does not expect that the expense associated with future grants (assuming grant levels consistent with 2005) derived from the fair value model selected will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

14

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

3. Summary of Significant Accounting Policies (continued)

n. Review of Financial Guaranty Industry Accounting Practices

The FASB staff is considering whether additional accounting guidance is necessary to address loss reserving and certain other practices in the financial guaranty industry. SFAS No. 60, Accounting and Reporting by Insurance Enterprises, was developed prior to the emergence of the financial guaranty industry. As it does not specifically address financial guaranty contracts, there has been diversity in the accounting for these contracts. In 2005, the FASB added a project to consider accounting by insurers for financial guaranty insurance. The objective of the project is to develop an accounting model for financial guaranty contracts issued by insurance companies that are not accounted for as derivative contracts under SFAS 133. A financial guaranty contract guarantees the holder of a financial obligation the full and timely payment of principal and interest when due and is typically issued in conjunction with municipal bond offerings and certain structured finance transactions. The goal of this project is to develop a single model for all industry participants to apply.

The FASB is expected to meet in 2006 to consider the accounting model for issuers of financial guaranty insurance. Proposed and final pronouncements are expected to be issued in 2006. When the FASB reaches a conclusion on this issue, the Company, along with other companies in the financial guaranty industry, may be required to change certain aspects of accounting for loss reserves, premium income and deferred acquisition costs. It is not possible to predict the impact the FASB’s review may have on the Company’s accounting practices.

4. Statutory Accounting Practices

Statutory-basis surplus of the Company at December 31, 2005 and 2004 was $1,162,904 and $1,172,600, respectively. Statutory-basis net income (loss) for the years ended December 31, 2005 and 2004 and for the periods from December 18, 2003 through December 31, 2003, and January 1, 2003 through December 17, 2003 was $192,009, $144,100, $(1,669), and $180,091, respectively.

15

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

5. Investments

The amortized cost and fair values of investments in fixed maturity securities and short-term investments classified as available-for-sale are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
At December 31, 2005
Obligations of states and political subdivisions	$	2,777,807	$	12,718	$	26,410	$	2,764,115
Asset- and mortgage-backed securities		209,148		135		3,490		205,793
U.S. Treasury securities and obligations of U.S. government corporations and agencies		148,785		1,387		2,036		148,136
Corporate bonds		91,422		501		1,486		90,437
Debt securities issued by foreign governments		30,930		345		5		31,270
Preferred stock		19,199		427		639		18,987
Total fixed maturity securities		3,277,291		15,513		34,066		3,258,738
Short-term investments		159,334		—		—		159,334
Total investments	$	3,436,625	$	15,513	$	34,066	$	3,418,072
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
At December 31, 2004
Obligations of states and political subdivisions	$	2,461,087	$	19,569	$	3,090	$	2,477,566
Asset- and mortgage-backed securities		214,895		1,267		695		215,467
U.S. Treasury securities and obligations of U.S. Government corporations and agencies		131,771		559		943		131,387
Corporate bonds		54,655		663		236		55,082
Debt securities issued by foreign governments		39,713		176		21		39,868
Preferred stock		19,199		311		24		19,486
Total fixed maturities		2,921,320		22,545		5,009		2,938,856
Short-term investments		140,473		—		—		140,473
Total investments	$	3,061,793	$	22,545	$	5,009	$	3,079,329

16

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

5. Investments (continued)

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

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Obligations of states and political subdivisions	$	1,622,119	$	16,646	$	463,156	$	9,764	$	2,085,275	$	26,410
Asset- and mortgage-backed securities		133,196		1,839		56,824		1,651		190,020		3,490
U.S. Treasury securities and obligations of U.S. government corporations and agencies		47,872		520		76,380		1,516		124,252		2,036
Other		42,379		690		28,026		801		70,405		1,491
Preferred stock		12,860		639		—		—		12,860		639
Total temporarily impaired securities	$	1,858,426	$	20,334	$	624,386	$	13,732	$	2,482,812	$	34,066

The unrealized losses in the Company’s investments were caused by interest rate increases. The Company evaluated the credit ratings of these securities and noted no deterioration. Because the decline in market value is attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company did not consider these investments to be other than temporarily impaired at December 31, 2005.

Investments in fixed maturity securities carried at fair value of $4,625 and $4,049 as of December 31, 2005 and 2004, respectively, were on deposit with various regulatory authorities as required by law.

17

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

5. Investments (continued)

The amortized cost and fair values of investments in fixed maturity securities, available-for-sale at December 31, 2005, are shown below by contractual maturity date. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
	Cost		Value
Due one year later or less	$	77,668	$	77,071
Due after one year through five years		472,292		463,162
Due after five years through ten years		1,463,806		1,448,990
After ten years		1,263,525		1,269,515
Total	$	3,277,291	$	3,258,738

For the years ended December 31, 2005 and 2004 and for the periods from December 18, 2003 through December 31, 2003 and January 1, 2003 through December 17, 2003, proceeds from sales of available-for-sale securities were $31,380, $178,030, $0, and $855,761 respectively. For the years ended December 31, 2005 and 2004 and for the periods from December 18, 2003 through December 31, 2003 and January 1, 2003 through December 17, 2003, gross gains of $185, $1,900, $0, and $31,700, respectively, and gross losses of $84, $1,300, $0, and $200, respectively, were realized on such sales.

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

	Successor									Predecessor
							Period from			Period from
							December 18,			January 1,
							2003			2003
	Year ended			Year ended			through			through
	December 31,			December 31,			December 31,			December 17,
	2005			2004			2003			2003
Income from fixed maturity securities	$	112,616		$	97,720		$	4,294		$	111,075
Income from short-term investments		6,801			1,450			12			2,326
Total investment income		119,417			99,170			4,306			113,401
Investment expenses		(2,345	)		(1,461	)		(37	)		(782	)
Net investment income	$	117,072		$	97,709		$	4,269		$	112,619

18

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

5. Investments (continued)

As of December 31, 2005, the Company did not have more than 3% of its investment portfolio concentrated in a single issuer or industry; however, the Company had the following investment concentrations by state:

	Fair Value
New York	$	302,290
Florida		220,150
Texas		217,145
New Jersey		193,315
Massachusetts		169,635
Illinois		155,922
California		139,742
Michigan		113,040
		1,511,239
All other states		1,326,785
All other investments		580,048
Total investments	$	3,418,072

6. Derivative Instruments

The Company provides CDSs to certain buyers of credit protection by entering into contracts that reference collateralized debt obligations from cash and synthetic structures backed by pools of corporate, consumer or structured finance debt. It also offers credit protection on other public finance and structured finance obligations in CDS form. The Company considers these agreements to be a normal extension of its financial guaranty insurance business, although they are considered derivatives for accounting purposes. These agreements are recorded at fair value. The Company believes that the most meaningful presentation of the financial statement impact of these derivatives is to reflect premiums as installments are received, and to record losses and loss adjustment expenses and changes in fair value as incurred. The Company recorded $3,036 of net earned premium, $0 in losses and loss adjustment expenses, and net mark-to-market losses of $167 in changes in fair value under these agreements for the year ended December 31, 2005.

19

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

6. Derivative Instruments (continued)

The gains or losses recognized by recording these contracts at fair value are determined each quarter based on quoted market prices, if available. If quoted market prices are not available, the determination of fair value is based on internally developed estimates. Management applies judgments to estimate fair value which are based on changes in expected loss of the underlying assets as well as changes in current market prices for similar products.

Consideration is given to current market spreads and on evaluation of the current performance of the assets. The Company does not believe that the fair value adjustments are an indication of potential claims under the Company’s guarantees. The inception-to-date net mark-to-market loss on the CDS portfolio was $167 at December 31, 2005 and was recorded in other liabilities.

7. Income Taxes

For periods subsequent to the closing date of the Transaction, the Company files its own consolidated federal income tax returns with FGIC Corp. The method of allocation between FGIC Corp. and its subsidiaries is determined under a tax sharing agreement approved by FGIC Corp.’s Board of Directors and the New York State Insurance Department, and is based upon a separate return calculation. For periods ended on or prior to December 18, 2003, the Company filed its federal income tax return as part of the consolidated return of GE Capital. Under a tax sharing agreement with GE Capital, tax was allocated to the Company based upon its contributions to GE Capital’s consolidated net income.

20

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

7. Income Taxes (continued)

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

	Successor									Predecessor
							Period from			Period from
							December 18,			January 1,
							2003			2003
	Year ended			Year ended			through			through
	December 31,			December 31,			December 31,			December 17,
	2005			2004			2003			2003
Income taxes computed on income before provision for Federal income taxes, at the statutory income tax rate	$	95,037		$	78,932		$	2,785		$	86,383
State and local income taxes, net of Federal income taxes		453			479			—			844
Tax effect of:
Tax-exempt interest		(31,072	)		(28,015	)		(979	)		(26,112	)
Prior period adjustment		—			—			—			(4,978	)
Other, net		690			4,037			(42	)		(678	)
Provision for income taxes	$	65,108		$	55,433		$	1,764		$	55,459

21

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

7. Income Taxes (continued)

The tax effects of temporary differences that give rise to significant portions of the net deferred tax liability at December 31, 2005 and 2004 are presented below:

	2005		2004
Deferred tax assets:
Tax and loss bonds	$	24,375	$	10,810
Loss and loss adjustment expense reserves		6,180		7,472
AMT credit carryforward		7,140		8,107
Property and equipment		83		55
Deferred compensation		1,483		623
Capital lease		2,483		2,539
Net operating loss on foreign subsidiaries		2,948		—
Other		266		233
Total gross deferred tax assets		44,958		29,839
Deferred tax liabilities:
Contingency reserves		42,656		18,917
Unrealized gains on fixed maturity securities, available-for-sale		12,883		29,156
Deferred acquisition costs		19,639		11,842
Premium revenue recognition		10,359		3,076
Profit commission		1,435		2,343
Foreign currency		194		3,117
Other		255		153
Total gross deferred tax liabilities		87,421		68,604
Net deferred tax liability	$	42,463	$	38,765

The net operating losses on foreign subsidiaries of $10,863 as of December 31, 2005 were generated by FGIC Corp.’s United Kingdom subsidiaries. The United Kingdom does not allow net operating losses to be carried back, but does permit them to be carried forward indefinitely. Based upon the level of historical taxable income, projections of future taxable income over the periods in which the deferred tax assets are deductible and the estimated reversal of future taxable temporary differences, the Company believes it is more likely than not that it will realize the benefits of these deductible differences and has not established a valuation allowance at December 31, 2005 and 2004.

In the opinion of management, an adequate provision has been made for any additional taxes that may become due pending any future examinations by tax authorities.

22

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

8. Reinsurance

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

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

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

In recent years, some of the Company’s reinsurers were downgraded by the rating agencies, thereby reducing the financial benefits of using reinsurance under rating agency capital adequacy models, because the Company must allocate additional capital to the related reinsured exposure. However, the Company still receives regulatory credit for this reinsurance. In connection with such a downgrade, the Company reassumed $0, $4,959, $6,300, and $14,300 of ceded premiums for the years ended December 31, 2005 and 2004, and the periods from December 18, 2003 through December 31, 2003, and January 1, 2003 through December 17, 2003, respectively, from the reinsurers.

Under certain reinsurance agreements, the Company holds collateral in the form of letters of credit and trust agreements. Such collateral totaled $62,394 at December 31, 2005, and can be drawn on in the event of default by the reinsurer.

23

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

8. Reinsurance (continued)

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

	Successor								Predecessor
							Period from		Period from
							December 18,		January 1,
							2003		2003
	Year ended			Year ended			through		through
	December 31,			December 31,			December 31,		December 17,
	2005			2004			2003		2003
Net premiums earned	$	25,921		$	24,173		$	1,236	$	20,300
Loss and loss adjustment expenses		(416	)		(4,759	)		—		1,700

9. Loss and Loss Adjustment Expenses

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

	Successor									Predecessor
							Period from			Period from
							December 18,			January 1,
							2003			2003
	Year ended			Year ended			through			through
	December 31,			December 31,			December 31,			December 17,
	2005			2004			2003			2003
Balance at beginning of period	$	39,181		$	40,467		$	40,224		$	47,868
Less reinsurance recoverable		(3,054	)		(8,065	)		(8,058	)		(8,371	)
Net balance		36,127			32,402			32,166			39,497
Incurred related to:
Current period		23,985			11,756			—			20,843
Prior periods		(5,479	)		(5,834	)		236			(27,600	)
Total incurred		18,506			5,922			236			(6,757	)
Paid related to:
Current period		(1,993	)		—			—			—
Prior periods		(1,099	)		(2,197	)		—			(574	)
Total paid		(3,092	)		(2,197	)		—			(574	)
Net balance		51,541			36,127			32,402			32,166
Plus reinsurance recoverable		3,271			3,054			8,065			8,058
Balance at end of period	$	54,812		$	39,181		$	40,467		$	40,224

24

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

9. Loss and Loss Adjustment Expenses (continued)

During the year ended December 31, 2005, the increase in incurred expense was primarily related to issuers impacted by Hurricane Katrina. Case reserves and credit watchlist reserves at December 31, 2005 include $8,511 and $13,322, respectively, of estimated losses related to obligations impacted by Hurricane Katrina (see Note 10).

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

During the period from January 1, 2003 through December 17, 2003, the overall decrease in incurred expense was driven by a reduction in reserves previously established on several structured finance transactions of one particular issuer. In addition, prior to the closing of the Transaction, rather than watchlist reserves, the Company established portfolio reserves based upon the aggregate average net par outstanding of the Company’s insured mortgage-backed securities portfolio.

10. Hurricane Katrina

At December 31, 2005, the Company insured public finance obligations with a net par in force (“NPIF”) of approximately $4,011,871 in locations impacted by Hurricane Katrina. Approximately $2,023,315 of these obligations relate to locations designated by the U.S. Federal Emergency Management Administration (“FEMA”) as eligible for both public and individual assistance (“FEMA-dual designated locations”); the remainder, or $1,988,556, of these obligations relate to locations designated by FEMA as eligible for individual assistance only. The Company believes that insured obligations in FEMA-dual designated locations are more likely to be impaired than obligations eligible for individual assistance only. Consequently, since the occurrence of Hurricane Katrina, the Company has focused its portfolio surveillance efforts related to Hurricane Katrina on evaluating its insured public finance obligations in the FEMA-dual designated locations. These FEMA-dual designated locations consist primarily of counties and parishes in Alabama, Mississippi and Louisiana.

25

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

10. Hurricane Katrina (continued)

As a result of this evaluation, the Company placed insured public finance obligations with an NPIF totaling $979,153 on its credit watchlist of which reserves were recorded on obligations with an NPIF of $585,303. These obligations relate to locations in the Parish of Orleans (in which New Orleans is located) and the immediately surrounding parishes. At December 31, 2005, the Company recorded case reserves of $8,511, watchlist reserves of $13,322 and estimated reinsurance recoverables of $1,740 related to insured public finance obligations placed on the credit watchlist. The case reserves of $8,511 relate to an investor-owned utility, for which the Company has insured public finance obligations with an NPIF of $75,000, that has entered into bankruptcy proceedings. The watchlist reserves of $13,322 were based on management’s assessment that the associated insured public finance obligations have experienced impairment due to diminished revenue sources. The NPIF for the insured public finance obligations for which watchlist reserves of $13,322 have been established totals $510,303. The $510,303 (a subset of the $979,153) is supported by the revenue sources below:

	Net Par
Revenue Source	in Force
General obligation	$	90,079
Hotel tax		165,000
Sales tax		117,141
Municipal utility		119,657
Public higher education		18,426
Total	$	510,303

Given the unprecedented nature of the events and magnitude of damage in the affected areas, the loss reserves were necessarily based upon estimates and subjective judgments about the outcome of future events, including without limitation the amount and timing of any future federal and state aid. The loss reserves will likely be adjusted as additional information becomes available, and such adjustments may have a material impact on future results of operations. However, the Company believes that the losses ultimately incurred as result of Hurricane Katrina will not have a material impact on the Company’s consolidated financial position.

26

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

10. Hurricane Katrina (continued)

For the year ended December 31, 2005, the Company paid claims totaling $5,910 related to insured public finance obligations impacted by Hurricane Katrina. During 2005, the Company subsequently received reimbursements of $4,855 for these claims payments.

The Company’s structured finance insured portfolio was not significantly impacted by Hurricane Katrina, reflecting the geographic diversification of the credits comprising the insured structured finance obligations.

11. Related Party Transactions

Prior to the Transaction, the Company had various service agreements with subsidiaries of General Electric Company and GE Capital. These agreements provided for the payment by the Company of certain payroll and office expenses, investment fees pertaining to the management of the Company’s investment portfolio and telecommunication service charges. In addition, as part of the Transaction, the Company entered into a transitional services agreement under which GE Capital continued to provide certain administrative and support services, in exchange for certain scheduled fees during the 12 months following the date of the agreement. Approximately $0, $179, $0 and $1,600 in expenses were incurred during the years ended December 31, 2005 and 2004 and for the periods from December 18, 2003 through December 31, 2003 and January 1, 2003 through December 17, 2003, respectively, related to such agreements and are reflected in the accompanying consolidated financial statements.

At the end of the first quarter of 2004, the Company transferred investment management services from GE Capital to Blackrock Financial Management, Inc. and Wellington Management Company, LLP.

In connection with the Transaction, the Company entered into a capital lease agreement with a subsidiary of GE Capital. The lease agreement covers leasehold improvements made to the Company’s headquarters as well as furniture and fixtures, computer hardware and software used by the Company (see Note 17).

27

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

11. Related Party Transactions (continued)

In connection with the Transaction, FGIC entered into a $300,000 soft capital facility, with GE Capital as lender and administrative agent. The soft capital facility, which replaced the capital support facility that FGIC previously had with GE Capital, had an initial term of eight years. FGIC paid GE Capital $1,132 and $70 under this agreement for the year ended December 31, 2004 and the period from December 18, 2003 through December 31, 2003, respectively. This agreement was terminated by FGIC in July 2004 and was replaced by a new soft capital facility (see Note 15).

The Company also insures certain non-municipal issues with GE Capital involvement as sponsor of the insured securitization and/or servicer of the underlying assets. For some of these issues, GE Capital also provides first loss protection in the event of default. Gross premiums written on these issues amounted to $3, $6, $0 and $20 for the year ended December 31, 2005 and 2004 and for the periods from December 18, 2003 through December 31, 2003 and January 1, 2003 through December 17, 2003, respectively. As of December 31, 2005, par outstanding on these deals before reinsurance was $6,142. Issues sponsored by affiliates of GE accounted for approximately 1% of gross premiums written in 2003.

During 2005 FGIC, in the normal course of operations, entered into reinsurance transactions with PMI-affiliated companies. Ceded premiums were $582 for the year ended December 31, 2005 and accounts payable due to PMI were $102 at December 31, 2005.

As of December 31, 2005 and 2004, there were no receivables due from GE Capital.

During 2005 and 2004, the Company allocated certain overhead costs to FGIC Corp. which amounted to $540 and $317, respectively.

28

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

12. Compensation Plans

All employees of the Company participate in an incentive compensation plan. In addition, the Company offers a deferred compensation plan for eligible employees. Expenses incurred by the Company under compensation plans amounted to $21,824, $15,493, $3,996, and $10,087 for the years ended December 31, 2005 and 2004 and for the periods from December 18, 2003 through December 31, 2003 and January 1, 2003 through December 17, 2003, respectively, and are reflected in the accompanying consolidated financial statements. During 2005 and 2004, compensation increased primarily due to an increase in employee headcount. For 2003, compensation for certain employees was part of an allocation of expenses of affiliates and was therefore recorded as an allocated expense rather than compensation expense. In 2005 and 2004, these expenses were directly recorded by the Company. In 2003, compensation levels were driven in part by Transaction-related costs, including retention bonuses and sign-on bonuses to new hires post-acquisition.

Commencing effective January 1, 2004, the Company has offered a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis (for 2005, up to $14 for employees under age 50, plus an additional “catch up” contribution of up to $4 for employees 50 and older). The Company may also make discretionary contributions to the plan on behalf of employees. The Company contributed $3,429 and $2,532 to the plan on behalf of employees for the years ended December 31, 2005 and 2004, respectively.

13. Dividends

Under New York insurance law, the Company may pay dividends to FGIC Corp. only from earned surplus, subject to the following limitations: (a) statutory surplus after any dividend may not be less than the minimum required paid-in capital, which was $72,500 in 2005, 2004 and 2003, and (b) dividends may not exceed the lesser of 10% of the Company’s surplus or 100% of adjusted net investment income, as defined by New York insurance law, for the twelve-month period ended on the preceding December 31, without the prior approval of the New York State Superintendent of Insurance.

29

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

13. Dividends (continued)

During the years ended December 31, 2005 and 2004 and for the period from December 18, 2003 through December 31, 2003, the Company did not declare and pay dividends. During the period from January 1, 2003 through December 17, 2003, the Company declared and paid dividends to FGIC Corp. of $284,300. These dividends were approved by the New York State Superintendent of Insurance.

14. Revolving Credit Facility

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

15. Preferred Trust Securities

On July 19, 2004, the Company closed a $300,000 facility, consisting of Money Market Committed Preferred Custodial Trust Securities (“CPS Securities”). This facility replaced a $300,000 “Soft Capital” facility previously provided by GE Capital. Under the new facility, each of six separate newly organized Delaware trusts (the “Trusts”), issues $50,000 in perpetual CPS Securities on a rolling 28-day auction rate basis. Proceeds from these securities are invested in high quality, short-term securities and are held in the respective Trusts. Each Trust is solely responsible for its obligations and has been established for the purpose of entering into a put agreement with the Company, which obligates the Trusts, at the Company’s discretion, to purchase perpetual Preferred Stock of the Company. In this way, the program provides capital support to the Company by allowing it to obtain immediate access to new capital at its sole discretion at any time through the exercise of the put options. In connection with the establishment of the Trusts, the Company incurred $4,638 of expenses which is included in other operating expenses for the year ended December 31, 2004. The Company recorded expenses for the right to put its shares to the Trusts of $1,806 and $905 for the years ended December 31, 2005 and 2004, respectively.

30

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

16. Financial Instruments

(a)	Fair Value of Financial Instruments
	The following methods and assumptions were used by the Company in estimating the fair values of financial instruments:
	Fixed Maturity Securities: Fair values for fixed maturity securities are based on quoted market prices, if available. If a quoted market price is not available, fair values are estimated using quoted market prices for similar securities. Fair value disclosure for fixed maturity securities is included in the consolidated balance sheets and in Note 5.
	Short-Term Investments: Short-term investments are carried at cost, which approximates fair value.
	Cash and Cash Equivalents, Accrued Investment Income, Prepaid Expenses and Other Assets, Receivable from Related Parties, Ceded Reinsurance Balances Payable, Accounts Payable and Accrued Expenses and Payable for Securities Purchased: The carrying amounts of these items approximate their fair values.
	The estimated fair values of the Company’s financial instruments at December 31, 2005 and 2004 were as follows:

	2005				2004
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash on hand and in-demand accounts	$	45,077	$	45,077	$	69,292	$	69,292
Short-term investments		159,334		159,334		140,473		140,473
Fixed maturity securities		3,258,738		3,258,738		2,938,856		2,938,856

Financial Guaranties: The carrying value of the Company’s financial guaranties is represented by the unearned premium reserve, net of deferred acquisition costs, loss and loss adjustment expense reserves and prepaid reinsurance premiums. Estimated fair values of these guaranties are based on an estimate of the balance that is necessary to bring the future returns for the Company’s embedded book of business to a market return. The estimated fair values of such financial guaranties was $1,098,165 compared to a carrying value of $1,099,045 as of December 31, 2005, and is $965,992 compared to a carrying value of $936,334 as of December 31, 2004.

31

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

16. Financial Instruments (continued)

	As of December 31, 2005 and 2004, the net present value of future installment premiums was approximately $393,000 and $192,000, respectively, both discounted at 5%.
	Derivatives: For fair value adjustments on derivatives, the carrying amount represents fair value. The Company uses quoted market prices when available, but if quoted market prices are not available, management uses internally developed estimates.
(b)	Concentrations of Credit Risk
	The Company considers its role in providing insurance to be credit enhancement rather than credit substitution. The Company insures only those securities that, in its judgment, are of investment grade quality. The Company has established and maintains its own underwriting standards that are based on those aspects of credit that the Company deems important for the particular category of obligations considered for insurance. Credit criteria include economic and social trends, debt management, financial management and legal and administrative factors, the adequacy of anticipated cash flows, including the historical and expected performance of assets pledged to secure payment of securities under varying economic scenarios, and underlying levels of protection such as insurance or over-collateralization.
	In connection with underwriting new issues, the Company sometimes requires, as a condition to insuring an issue, that collateral be pledged or, in some instances, that a third-party guaranty be provided for a term of the obligation issued by a party of acceptable credit quality obligated to make payment prior to any payment by the Company. The types and extent of collateral varies, but may include residential and commercial mortgages, corporate debt, government debt and consumer receivables.
	As of December 31, 2005, the Company’s total outstanding principal insured was $275,327,000, net of reinsurance of $22,711,000. The Company’s insured portfolio as of December 31, 2005 was broadly diversified by geographic and bond market sector, with no single obligor representing more than 1% of the Company’s insured principal outstanding, net of reinsurance. The insured portfolio includes exposure under credit derivatives. The par written for credit derivatives was $15,640,000 at December 31, 2005.

32

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

16. Financial Instruments (continued)

As of December 31, 2005, the composition of principal insured by type of issue, net of reinsurance, was as follows:

	Net Principal
	Outstanding
Municipal:
Tax supported	$	134,762,000
Water and sewer		34,859,000
Healthcare		4,216,000
Transportation		24,956,000
Education		9,939,000
Housing		1,234,000
Other		5,153,000
Non-municipal and international		60,208,000
Total	$	275,327,000

As of December 31, 2005, the composition of principal insured ceded to reinsurers was as follows:

	Ceded Principal
	Outstanding
Reinsurer:
Radian Reinsurance Company	$	7,808,000
Ace Guaranty Inc.		6,367,000
American Re-Insurance Company		2,231,000
RAM Reinsurance Company		2,024,000
Other		4,281,000
Total	$	22,711,000

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

The Company’s insured gross and net principal and interest outstanding was $472,161,000 and $433,587,000, respectively, as of December 31, 2005.

33

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

16. Financial Instruments (continued)

FGIC is authorized to do business in 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands and in the United Kingdom. Principal insured outstanding at December 31, 2005 by state, net of reinsurance, was as follows:

	Net Principal
	Outstanding
California	$	32,882,000
New York		21,265,000
Pennsylvania		15,952,000
Florida		15,483,000
Illinois		13,049,000
Texas		12,223,000
New Jersey		10,883,000
Michigan		8,311,000
Ohio		6,903,000
Washington		6,359,000
		143,310,000
All other states		71,809,000
Mortgage and asset-backed		54,262,000
International		5,946,000
Total	$	275,327,000

34

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

17. Commitments

The Company leases office space and equipment under operating lease agreements in the United States and the United Kingdom. Rent expense under operating leases for the years ended December 31, 2005 and 2004 and for the period from December 18, 2003 through December 31, 2003 and January 1, 2003 through December 17, 2003 was $3,631, $3,070, $90, and $3,210, respectively. Future payments associated with these leases are as follows:

	Operating Lease
	Commitment
	Amount
Year:
2006	$	3,141
2007		3,119
2008		1,968
2009		412
2010		412
2011 and thereafter		1,496
Total minimum future rental payments	$	10,548

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

	Operating Lease
	Commitment
	Amount
Year ending December 31:
2006	$	1,570
2007		1,545
2008		1,391
2009		265
Total		4,771
Less interest		509
Present value of minimum lease payments	$	4,262

35

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

18. Comprehensive Income

Accumulated other comprehensive (loss) income of the Company consists of net unrealized gains on investment securities, foreign currency translation adjustments, and a cash flow hedge. The components of other comprehensive income for the years ended December 31, 2005 and 2004 and for the periods from December 18, 2003 through December 31, 2003, and January 1, 2003 through December 17, 2003 are as follows:

	Year ended December 31, 2005
	Before						Net of
	Tax						Tax
	Amount			Tax			Amount
Unrealized holding losses arising during the year	$	(36,050	)	$	12,566		$	(23,484	)
Less reclassification adjustment for gains realized in net income		(101	)		35			(66	)
Unrealized losses on investments		(36,151	)		12,601			(23,550	)
Foreign currency translation adjustment		(8,454	)		2,922			(5,532	)
Total other comprehensive loss	$	(44,605	)	$	15,523		$	(29,082	)
	Year ended December 31, 2004
	Before						Net of
	Tax						Tax
	Amount			Tax			Amount
Unrealized holding gains arising during the year	$	14,928		$	(5,225	)	$	9,703
Less reclassification adjustment for gains realized in net income		(559	)		196			(363	)
Unrealized gains on investments		14,369			(5,029	)		9,340
Foreign currency translation adjustment		6,286			(2,200	)		4,086
Total other comprehensive income	$	20,655		$	(7,229	)	$	13,426

36

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

18. Comprehensive Income (continued)

	Period from December 18, 2003
	through December 31, 2003
	Before						Net of
	Tax						Tax
	Amount			Tax			Amount
Unrealized holding gains arising during the period	$	3,168		$	(1,109	)	$	2,059
Less reclassification adjustment for gains realized in net income		—			—			—
Unrealized gains on investments		3,168			(1,109	)		2,059
Total other comprehensive income	$	3,168		$	(1,109	)	$	2,059
	Period from January 1, 2003
	through December 17, 2003
	Before						Net of
	Tax						Tax
	Amount			Tax			Amount
Unrealized holding gains arising during the period	$	30,853		$	(10,798	)	$	20,055
Less reclassification adjustment for gains realized in net income		(31,506	)		11,027			(20,479	)
Unrealized losses on investments		(653	)		229			(424	)
Foreign currency translation adjustment		6,565			(2,298	)		4,267
Total other comprehensive income	$	5,912		$	(2,069	)	$	3,843

37

Financial Guaranty Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Dollars in thousands, except per share amounts)

19. Quarterly Financial Information (Unaudited)

	Three months ended
												Year ended
	March 31,			June 30,			September 30,		December 31,			December 31,
Gross premiums written	$	84,404		$	131,335		$	96,787	$	97,676		$	410,202
Net premiums written		82,609			113,305			92,331		92,809			381,054
Net premiums earned		52,633			61,907			54,794		55,235			224,569
Net investment income and net realized gains		27,558			28,389			30,117		31,109			117,173
Other income (expense)		426			90			402		(323	)		595
Total revenues		80,617			90,386			85,313		86,021			342,337
Losses and loss adjustment expenses		(2,611	)		(3,066	)		20,693		3,490			18,506
Income before taxes		71,100			81,377			48,783		70,274			271,534
Net income		53,306			59,992			39,407		53,721			206,426

	Three months ended
											Year ended
	March 31,		June 30,			September 30,		December 31,			December 31,
Gross premiums written	$	56,395	$	106,457		$	87,869	$	72,854		$	323,575
Net premiums written		53,649		105,645			87,072		67,512			313,878
Net premiums earned		31,202		53,151			49,760		40,836			174,949
Net investment income and net realized gains		24,198		22,611			24,466		26,993			98,268
Other income (expense)		317		240			117		62			736
Total revenues		55,717		76,002			74,343		67,891			273,953
Losses and loss adjustment expenses		664		(1,070	)		6,725		(397	)		5,922
Income before taxes		48,208		64,839			56,713		55,759			225,519
Net income		38,304		48,393			41,954		41,435			170,086

38

EX-99.2

EXHIBIT 99.2

Financial Statements

Financial Guaranty Insurance Company and Subsidiaries

March 31, 2006

Financial Guaranty Insurance Company and Subsidiaries

Financial Statements

March 31, 2006

Contents

Balance Sheets at March 31, 2006 (Unaudited) and December 31, 2005	1
Statements of Income for the Three Months Ended March 31, 2006 and 2005 (Unaudited)	2
Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 (Unaudited)	3
Notes to Financial Statements (Unaudited)	4

Financial Guaranty Insurance Company and Subsidiaries

Balance Sheets

(Dollars in thousands, except per share amounts)

	March 31			December 31
	2006			2005
	(Unaudited)
Assets
Fixed maturity securities, available for sale, at fair value (amortized cost of $3,355,155 in 2006 and $3,277,291 in 2005)	$	3,302,181		$	3,258,738
Variable interest entity fixed maturity securities, held to maturity at amortized cost		750,000			—
Short-term investments		151,806			159,334
Total investments		4,203,987			3,418,072
Cash and cash equivalents		70,719			45,077
Accrued investment income		46,465			42,576
Reinsurance recoverable on losses		2,341			3,271
Prepaid reinsurance premiums		112,546			110,636
Deferred policy acquisition costs		72,754			63,330
Receivable from related parties		—			9,539
Property and equipment, net of accumulated depreciation of $1,151 in 2006 and $885 in 2005		2,850			3,092
Prepaid expenses and other assets		17,637			10,354
Federal income taxes		—			2,158
Total assets	$	4,529,300		$	3,708,105
Liabilities and stockholder’s equity
Liabilities:
Unearned premiums	$	1,226,597		$	1,201,163
Losses and loss adjustment expenses		50,228			54,812
Ceded reinsurance balances payable		3,968			1,615
Accounts payable and accrued expenses and other liabilities		20,229			36,359
Payable for securities purchased		19,366			—
Capital lease obligations		4,328			4,262
Variable interest entity floating rate notes		750,000			—
Accrued investment income — variable interest entity		1,176			—
Federal income taxes payable		16,585			—
Deferred income taxes		29,350			42,463
Total liabilities		2,121,826			1,340,674
Stockholder’s equity:
Common stock, par value $1,500 per share; 10,000 shares authorized, issued and outstanding		15,000			15,000
Additional paid-in capital		1,896,460			1,894,983
Accumulated other comprehensive loss, net of tax		(33,750	)		(13,597	)
Retained earnings		529,763			471,045
Total stockholder’s equity		2,407,473		$	2,367,431
Total liabilities and stockholder’s equity	$	4,529,300		$	3,708,105

See accompanying notes to unaudited interim financial statements.

1

Financial Guaranty Insurance Company and Subsidiaries

Statements of Income
(Unaudited)

(Dollars in thousands)

	Three months ended
	March 31,
	2006			2005
Revenues:
Gross premiums written	$	89,281		$	84,404
Ceded premiums written		(6,423	)		(1,795	)
Net premiums written		82,858			82,609
Increase in net unearned premiums		(23,394	)		(29,976	)
Net premiums earned		59,464			52,633
Net investment income		32,319			27,440
Net realized gains		—			118
Net mark to market losses on credit derivative contracts		(228	)		—
Other income		536			426
Total revenues		92,091			80,617
Expenses:
Losses and loss adjustment expenses		(1,933	)		(2,611	)
Underwriting expenses		24,117			20,650
Policy acquisition cost deferred		(12,513	)		(10,671	)
Amortization of deferred policy acquisition costs		3,192			2,149
Other operating expenses		1,655			—
Total expenses		14,518			9,517
Income before income taxes		77,573			71,100
Income tax expense		18,862			17,794
Net income	$	58,711		$	53,306

See accompanying notes to unaudited interim financial statements.

2

Financial Guaranty Insurance Company and Subsidiaries

Statements of Cash Flows
(Unaudited)

(Dollars in thousands)

	Three months ended
	March 31,
	2006			2005
Operating activities
Net income	$	58,711		$	53,306
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred policy acquisition costs		3,192			2,149
Policy acquisition costs deferred		(12,513	)		(10,671	)
Depreciation of property and equipment		266			143
Amortization of fixed maturity securities		8,314			9,600
Amortization of short-term investments		28
Net realized gains on investments		—			(118	)
Amortization of stock compensation expense		1,476
Change in accrued investment income, prepaid expenses and other assets		(11,251	)		(6,716	)
Change in mark-to-market losses on credit derivative contracts		228
Change in reinsurance receivable		931			265
Change in prepaid reinsurance premiums		(1,910	)		4,378
Change in unearned premiums		25,434			25,593
Change in losses and loss adjustment expenses		(4,584	)		(3,183	)
Change in receivable from related parties		9,539			802
Change in ceded reinsurance balances payable and accounts payable and accrued expenses and other liabilities		(12,763	)		(10,936	)
Change in current federal income taxes receivable		2,158			—
Change in current federal income taxes payable		16,585			12,676
Change in deferred federal income taxes		110			4,907
Net cash provided by operating activities		83,951			82,195
Investing activities
Sales and maturities of fixed maturity securities		34,741			68,181
Purchases of fixed maturity securities		(120,095	)		(166,715	)
Purchases, sales and maturities of short-term investments, net		7,528			22
Receivable for securities sold					(171	)
Payable for securities purchased		19,366			9,320
Purchases of fixed assets		(24	)		(86	)
Net cash used in investing activities		(58,484	)		(89,449	)
Financing activities
Capital contribution		—			8,049
Net cash provided by financing activities		—			8,049
Effect of exchange rate changes on cash		175
Net increase (decrease) in cash and cash equivalents		25,642			795
Cash and cash equivalents at beginning of period		45,077			69,292
Cash and cash equivalents at end of period	$	70,719		$	70,087

See accompanying notes to unaudited interim financial statements.

3

Financial Guaranty Insurance Company and Subsidiaries

Notes to Financial Statements
(Unaudited)

(Dollars in thousands)

1. Business and Organization

Financial Guaranty Insurance Company (the “Company”) is a wholly owned subsidiary of FGIC Corporation (“FGIC Corp.”). The Company provides financial guaranty insurance and other forms of credit enhancement for public finance and structured finance obligations. The Company began insuring public finance obligations in 1984 and structured finance obligations in 1988. The Company’s financial strength is rated “Aaa” by Moody’s Investors Service, Inc., “AAA” by Standard & Poor’s Rating Services, a division of The McGraw-Hill Companies, Inc., and “AAA” by Fitch Ratings, Inc. The Company is licensed to engage in writing financial guaranty insurance in all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, and, through a branch, the United Kingdom. In addition, a United Kingdom subsidiary of the Company is authorized to write financial guaranty business in the United Kingdom and has passport rights to write business in other European Union member countries.

2. Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances have been eliminated.

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three-month period ended March 31, 2006 are not necessarily indicative of results that may be expected for the year ending December 31, 2006. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2005, including accompanying notes.

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

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

4

Financial Guaranty Insurance Company and Subsidiaries

Notes to Financial Statements
(Unaudited) (continued)

(Dollars in thousands)

3. Review of Financial Guaranty Industry Accounting Practices

The Financial Accounting Standards Board (“FASB”) staff is considering whether additional accounting guidance is necessary to address loss reserving and certain other practices in the financial guaranty industry. Statement of Financial Accounting Standards (“SFAS”) No. 60, Accounting and Reporting by Insurance Enterprises, was developed prior to the emergence of the financial guaranty industry. As it does not specifically address financial guaranty contracts, there has been diversity in the accounting for these contracts. In 2005, the FASB added a project to consider accounting by providers of financial guaranty insurance. The objective of the project is to develop an accounting model for financial guaranty contracts issued by insurance companies that are not accounted for as derivative contracts under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The goal of this project is to develop a single model for all industry participants to apply.

The FASB is expected to issue proposed and final pronouncements on this matter in 2006. When the FASB issues a final pronouncement, the Company, along with other companies in the financial guaranty industry, may be required to change certain aspects of accounting for loss reserves, premium income and deferred acquisition costs. It is not possible to predict the impact the FASB’s review may have on the Company’s accounting practices.

5. Premium Refundings

When an obligation insured by the Company is refunded prior to the end of the expected policy coverage period, any remaining unearned premium is recognized. A refunding occurs when an insured obligation is called or legally defeased prior to the stated maturity. Premiums earned for the three months ended March 31, 2006 and 2005 include $7,311 and $15,539, respectively, related to the accelerated recognition of unearned premiums in connection with refundings.

6. Loss and Loss Adjustment Expense Reserves

Loss reserves and loss adjustment expenses are regularly reviewed and updated based on claim payments and the results of ongoing surveillance. The Company’s insured portfolio surveillance is designed to identify impaired obligations and thereby provide a materially complete recognition of losses for each accounting period. The reserves are necessarily based upon estimates and subjective judgments about the outcome of future events, and actual results will likely differ from these estimates. At March 31, 2006, the Company had case reserves of $30,278, credit watchlist reserves of $18,603 and an unallocated loss adjustment expense reserve of $1,347.

5

Financial Guaranty Insurance Company and Subsidiaries

Notes to Financial Statements
(Unaudited) (continued)

(Dollars in thousands)

6. Loss and Loss Adjustment Expense Reserves (continued)

At December 31, 2005, the Company had case reserves of $31,981, credit watchlist reserves of $21,484 and a loss adjustment expense reserve of $1,347.

Case reserves and credit watchlist reserves at March 31, 2006 included $6,855 and $12,672, respectively, of estimated losses related to obligations impacted by Hurricane Katrina. Case reserves and credit watchlist reserves at December 31, 2005 included $8,511 and $13,322, respectively, of estimated losses related to obligations impacted by Hurricane Katrina. Given the unprecedented nature of the events and magnitude of damage in the affected areas, the loss reserves were necessarily based upon estimates and subjective judgments about the outcome of future events, including without limitation the amount and timing of any future federal and state aid. The loss reserves will likely be adjusted as additional information becomes available, and such adjustments may have a material impact on future results of operations. However, the Company believes that the losses ultimately incurred as result of Hurricane Katrina will not have a material impact on the Company’s consolidated financial position.

7. Income Taxes

The Company’s effective federal corporate tax rates of 24.3% and 25.0% for the three months ended March 31, 2006 and 2005, respectively, were less than the statutory corporate tax rate (35%) on income due to permanent differences between financial and taxable income, principally tax-exempt interest.

8. Reinsurance

Net premiums earned are shown net of ceded premiums earned of $4,868 and $6,200 for the three months ended March 31, 2006 and 2005, respectively.

9. Variable Interest Entities

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

6

Financial Guaranty Insurance Company and Subsidiaries

Notes to Financial Statements
(Unaudited) (continued)

(Dollars in thousands)

9. Variable Interest Entities (continued)

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

As part of its structured finance business, the Company insures debt obligations or certificates issued by special purpose entities. During the first quarter of 2006, the Company consolidated a third party VIE as a result of financial guarantees provided by the Company on one transaction related to the securitization of life insurance reserves. This third party VIE had assets of $750,000 and an equal amount of liabilities at March 31, 2006, which are shown under “Assets — Variable interest entity fixed maturity securities, held to maturity at amortized cost” and “Liabilities — Variable interest entity floating rate notes,” respectively, on the Company’s consolidated balance sheet at March 31, 2006. In addition, accrued investment income includes $1,176 related to the variable interest entity fixed income maturity securities and the corresponding liability is shown under “Accrued investment expense-variable interest entity” on the Company’s consolidated balance sheet at March 31, 2006. Although the third party VIE is included in the consolidated financial statements, its creditors do not have recourse to the general assets of the Company outside of the financial guaranty policy provided to the VIE. The Company has evaluated its other structured finance transactions and does not believe any of the third party entities involved in these transactions requires consolidation or disclosure under FIN 46-R.

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

9. Derivative Instruments

The Company provides credit default swaps (“CDSs”) to certain buyers of credit protection by entering into contracts that reference collateralized debt obligations from cash and synthetic structures backed by pools of corporate, consumer or structured finance debt. It also offers credit protection on public finance and structured finance obligations in CDS form. The Company considers these agreements to be a normal extension of its financial guaranty insurance business,

7

Financial Guaranty Insurance Company and Subsidiaries

Notes to Financial Statements
(Unaudited) (continued)

(Dollars in thousands)

9. Derivative Instruments (continued)

although they are considered derivatives for accounting purposes. These agreements are recorded at fair value. The Company believes that the most meaningful presentation of the financial statement impact of these derivatives is to reflect premiums as installments are received, and to record losses and loss adjustment expenses and changes in fair value as incurred. The Company recorded $4,235 of net earned premium, $0 in losses and loss adjustment expenses, and net mark-to-market losses of $228 in changes in fair value under these agreements for the three months ended March 31, 2006. The gains or losses recognized by recording these contracts at fair value are determined each quarter based on quoted market prices, if available. If quoted market prices are not available, the determination of fair value is based on internally developed estimates. The inception-to-date mark-to-market gain and (loss) on the CDS portfolio were $890 and $(1,831) at March 31, 2006 and $545 and ($712) at December 31, 2005, recorded in other assets and in other liabilities, respectively. The Company did not enter into any CDS contracts during the three months ended March 31, 2005.

10. Stock Compensation Plan

Employees of the Company participate in a stock incentive plan that provides for stock-based compensation, including stock options, restricted stock awards and restricted stock units of FGIC Corp. Stock options are granted for a fixed number of shares with an exercise price equal to or greater than the fair value of the shares at the date of the grant. Restricted stock awards and restricted stock units are valued at the fair value of the stock on the grant date, with no cost to the grantee. Prior to January 1, 2006, FGIC Corp. and the Company accounted for those plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation. No stock-based employee compensation cost related to stock options was allocated to the Company by FGIC Corp. for the three-month period ended March 31, 2005, as all options granted through that date had an exercise price equal to the market value of the underlying common stock on the date of grant. For grants of restricted stock and restricted stock units to employees of the Company, unearned compensation, equivalent to the fair value of the shares at the date of grant, is allocated to the Company.

Effective January 1, 2006, the FGIC Corp. and the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment, using the modified-prospective-transition method. Under that transition method, compensation cost allocated to the Company for the three-month period ended March 31, 2006 included compensation cost for all share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with SFAS No. 123(R). Results for prior periods have not been

8

Financial Guaranty Insurance Company and Subsidiaries

Notes to Financial Statements
(Unaudited) (continued)

(Dollars in thousands)

10. Stock Compensation Plan (continued)

restated. As a result of adopting SFAS No. 123(R) effective January 1, 2006, the Company’s income before income taxes and net income for the three-month period ended March 31, 2006 were reduced by $1,308 and $850, respectively, than if it had continued to account for share-based compensation under Opinion 25.

The following table illustrates the effect on net income of the Company if the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted under the Company’s plan for all periods presented. For purposes of this pro forma disclosure, the value of
the options is estimated using a Black-Scholes-Merton option pricing formula and amortized to expense over the options’ vesting periods.

	March 31, 2005
Net Income, as reported	$	53,306
Add: Stock-based director compensation expense included in reported net income, net of related tax effects		20
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects		(443	)
Pro Forma Net Income	$	52,883

12. Comprehensive Income

Accumulated other comprehensive loss of the Company consists of net unrealized gains (losses) on investment securities, foreign currency translation adjustments and a cash flow hedge. The components of total comprehensive income for the three-month period ended March 31, 2006 and 2005 were as follows:

	Three Months Ended
	March 31,
	2006			2005
Net Income	$	58,711		$	53,306
Other comprehensive loss		(20,153	)		(32,222	)
Total comprehensive income	$	38,558		$	21,804

9

Financial Guaranty Insurance Company and Subsidiaries

Notes to Financial Statements
(Unaudited) (continued)

(Dollars in thousands)

12. Comprehensive Income (continued)

The components of other comprehensive loss for the three-month period ended March 31, 2006 and 20045 were as follows:

	Three Months Ended March 31, 2006
	Before						Net of
	Tax						Tax
	Amount			Tax			Amount
Unrealized holding losses arising during the period	$	(31,497	)	$	11,022		$	(20,475	)
Foreign currency translation adjustment		494			(172	)		322
Total other comprehensive loss	$	(31,003	)	$	10,850		$	(20.153	)

	Three Months Ended March 31, 2005
	Before					Net of
	Tax					Tax
	Amount			Tax		Amount
Unrealized holding losses arising during the period	$	(48,536	)	$	16,988	$	(31,548	)
Less reclassification adjustment for gains realized in net income		(118	)		41		(77	)
Unrealized losses on investments		(48,654	)		17,029		(31,625	)
Foreign currency translation adjustment		(918	)		321		(597	)
Total other comprehensive loss	$	(49,572	)	$	17,350	$	(32,222	)

10