CWHEQ Revolving Home Equity Loan Asset Backed Notes, Series 2005-B
Not applicable.  See the Relief Letters.
Not applicable.
None.
Not applicable.  See the Relief Letters.
There were no material pending legal proceedings relating to the            Trust to which any of the Trust, the Trustee, the Owner Trustee,            the Master Servicer or the Company was a party or of which any of            their respective properties was the subject during the fiscal year            covered by this Report other than ordinary routine litigation            incidental to the duties of the Trust, the Trustee, the Owner            Trustee, the Master Servicer or the Company, nor is the Company            aware of any such proceedings contemplated by governmental            authorities.
No matter was submitted to a vote of Noteholders, and no Noteholder            consent was solicited during the fiscal year covered by this            Report.                                           4                                                         PART II
(a) Item 201 of Regulation S-K:                i.   Market Information. There is no established public trading                    market for the Notes.                ii.  Holders. As of December 31, 2005 there were less than 300                    holders of record of the Notes.                iii. Dividends. Not applicable. See the Relief Letters.                    (Information as to distributions to Noteholders is                    provided in the Registrant's monthly filings on Form 8-K.)                iv.  Securities Authorized for Issuance Under Equity                    Compensation Plans. Not applicable.                  Item 701 of Regulation S-K. Not applicable.             (b) Rule 463 of the Securities Act of 1933. Not applicable.             (c) Item 703 of Regulation S-K. Not applicable as the Registrant                has no class of equity securities registered pursuant to                section 12 of the Securities Exchange Act of 1934.
Not applicable.  See the Relief Letters.
Not applicable. See the Relief Letters.
Not applicable.
Not applicable. See the Relief Letters.                                         5
None.
Not applicable.
None.                                          6                                        PART III
Not applicable. See the Relief Letters.
Not applicable. See the Relief Letters.
Information required by Item 201(d) of Regulation S-K: Not            applicable.             Information required by Item 403 of Regulation S-K:             (a) Not applicable. See the Relief Letters.             (b) Not applicable. See the Relief Letters.             (c) Not applicable. See the Relief Letters.
Not applicable. See the Relief Letters.
Not applicable.                                           7                                         PART IV
(a)    (1)      Pursuant to the Sale and Servicing Agreement, the                            Master Servicer is required (i) to deliver an                            annual statement as to compliance with the                            provisions of the Sale and Servicing Agreement and                            certain other matters (the "Annual Statement of the                            Master Servicer") and (ii) to cause a firm of                            independent public accountants to deliver an annual                            report as to compliance with the servicing                            provisions of the Sale and Servicing Agreement (the                            "Annual Report of the Firm of Accountants"). The                            Annual Statement of the Master Servicer is attached                            as Exhibit 99.1 to this Report. The Annual Report                            of the Firm of Accountants is attached as Exhibit                            99.2 to this Report. See Relief Letters.                    (2)      Not applicable.                    (3)      The required exhibits are as follows:                             o        Exhibit 3(i): Copy of Company's                                     Certificate of Incorporation (Filed as an                                     Exhibit to Registration Statement on Form                                     S-3 (File No. 333-121378)).                             o        Exhibit 3(ii): Copy of Company's By-laws                                     (Filed as an Exhibit to Registration                                     Statement on Form S-3 (File No.                                     333-121378)).                             o        Exhibit 4(i): Sale and Servicing Agreement                                     (Filed as part of the Registrant's Current                                     Report on Form 8-K filed on April 13,                                     2005).                             o        Exhibit 4(ii): Indenture (Filed as part of                                     the Registrant's Current Report on Form                                     8-K filed on April 13, 2005).                             o        Exhibit 31: Rule 15d-14(a) Certification.                             o        Exhibit 99.1: Annual Statement of the                                     Master Servicer.                             o        Exhibit 99.2: Annual Report of the Firm of                                     Accountants.                             o        Exhibit 99.3: Audited Financial Statements                                     of Financial Guaranty Insurance Company                                     and subsidiaries.                             o        Exhibit 99.5: Trust Agreement (Filed as                                     part of the Registrant's Current Report on                                     Form 8-K filed on April 13, 2005).                                          8                     (b) See subparagraph (a)(3) above.                    (c) Not applicable. See the Relief Letters.                                          9                                       SIGNATURES        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.                                  CWHEQ, INC., REVOLVING HOME EQUITY LOAN TRUST,                                SERIES 2005-B, REVOLVING HOME EQUITY LOAN ASSET                                BACKED NOTES, SERIES 2005-B                                 By:      Countrywide Home Loans, Inc.,                                         as Master Servicer*                                    By:      /s/ Craig Baingo                                         ------------------------                                         Name:  Craig Baingo                                         Title:    Executive Vice President,                                                   Finance                                 Date:    March 24, 2006          ____________________  *    This Report is being filed by the Master Servicer on behalf of the Trust.      The Trust does not have any officers or directors.                                           10           SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.       No such annual report, proxy statement, form of proxy or other soliciting material has been, or will be, sent to Noteholders. See the Relief Letters.                                            11                                         EXHIBIT INDEX    Exhibit           Document - -------           --------   3(i)              Company's Certificate of Incorporation (Filed as an Exhibit                   to Registration Statement on Form S-3 (File No.                   333-121378))*  3(ii)             Company's By-laws (Filed as an Exhibit to Registration                   Statement on Form S-3 (File No. 333-121378))*  4(i)              Sale and Servicing Agreement (Filed as part of the Company's                   Current Report on Form 8-K filed on April 13, 2005)*  4(ii)             Indenture (Filed as part of the Company's Current Report on                   Form 8-K filed on April 13, 2005)*  31                Rule 15d-14(a) Certification  99.1              Annual Statement of the Master Servicer  99.2              Annual Report of the Firm of Accountants  99.3              Audited financial statements for the year ended December 31,                   2005 for Financial Guaranty Insurance Company and                   subsidiaries  99.5              Trust Agreement (Filed as part of the Registrant's Current                   Report on Form 8-K filed on April 13, 2005)*       _______________  *        Incorporated herein by reference.                                          12    EX-3.1 2 efc6-0735_exh31.txt                                    Exhibit 31                                   ----------                                         CERTIFICATION                I, Steve Bailey, certify that:               1. I have reviewed this annual report on Form 10-K, and all              reports on Form 8-K containing distribution and servicing reports              filed in respect of periods included in the year covered by this              annual report, of CWHEQ Revolving Home Equity Loan Trust, Series              2005-B;               2. Based on my knowledge, the information in these reports, taken              as a whole, does not contain any untrue statement of a material              fact or omit to state a material fact necessary to make the              statements made, in light of the circumstances under which such              statements were made, not misleading as of the last day of the              period covered by this annual report;               3. Based on my knowledge, the distribution or servicing              information required to be provided to the trustee by the master              servicer under the pooling and servicing, or similar, agreement,              for inclusion in these reports is included in these reports;               4. I am responsible for reviewing the activities performed by the              master servicer under the pooling and servicing, or similar,              agreement and based upon my knowledge and the annual compliance              review required under that agreement, and except as disclosed in              the reports, the master servicer has fulfilled its obligations              under that agreement; and               5. The reports disclose all significant deficiencies relating to              the master servicer's compliance with the minimum servicing              standards based upon the report provided by an independent public              accountant, after conducting a review in compliance with the              Uniform Single Attestation Program for Mortgage Bankers or              similar procedure, as set forth in the pooling and servicing, or              similar, agreement, that is included in these reports.               In giving the certifications above, I have reasonably relied on              information provided to me by the following unaffiliated parties:              JPMorgan Chase Bank, N.A., as indenture trustee.                Date: March 24, 2006                                                    /s/ Steve Bailey                                                  ----------------                                                  Steve Bailey                                                  Senior Managing Director    EX-99.1 3 efc6-0735_exh991.txt                                   Exhibit 99.1                                  ------------                               COUNTRYWIDE HOME LOANS, INC.                                OFFICERS' CERTIFICATE                     ANNUAL STATEMENT OF THE MASTER SERVICER             CWHEQ, INC. REVOLVING HOME EQUITY LOAN TRUST, SERIES 2005-B          REVOLVING HOME EQUITY LOAN ASSET BACKED NOTES, SERIES 2005-B            The undersigned do hereby certify that they are each an officer of Countrywide Home Loans, Inc. (the "Master Servicer"), and do hereby further certify pursuant to Section 3.09 of the Sale and Servicing Agreement for the above-captioned Series (the "Agreement") that:  (i) A review of the activities of the Master Servicer during the preceding calendar year and of the performance of the Master Servicer under the Agreement has been made under our supervision; and  (ii) To the best of our knowledge, based on such review, the Master Servicer has fulfilled all its obligations under the Agreement throughout such year.     /s/ Craig Baingo                                        Dated: March 24, 2006 - ------------------  CRAIG BAINGO EXECUTIVE VICE PRESIDENT, FINANCE    /s/ Kevin Meyers                                        Dated: March 24, 2006 - ------------------  KEVIN MEYERS MANAGING DIRECTOR, CHIEF FINANCIAL OFFICER, LOAN ADMINISTRATION        EX-99.2 4 exh-0735_exh992.txt                                                                      Exhibit 99.2                                                                     ------------  [KPMG Logo]                       KPMG LLP                          Telephone 213 972 4000                      Suite 2000                        Fax       213 622 1217                      355 South Grand Avenue            Internet  www.us.kpmg.com                      Los Angeles, CA 90071-1568                         Independent Accountants' Report,                        --------------------------------  The Board of Directors Countrywide Financial Corporation:  We have examined management's assertion, included in the accompanying Management Assertion, that Countrywide Financial Corporation and subsidiaries, including its wholly-owned subsidiary, Countrywide Home Loans, Inc. ("CHL"), and Countrywide Home Loans Servicing, L.P., a wholly-owned subsidiary of CHL, (collectively, the "Company") complied with the minimum servicing standards set forth in the Mortgage Bankers Association of America's Uniform Single Attestation Program for Mortgage Bankers (USAP) as of and for the year ended December 31, 2005. Management is responsible for the Company's compliance with those minimum servicing standards. Our responsibility is to express an opinion on management's assertion about the Company's compliance based on our examination.  Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included examining, on a test basis, evidence about the Company's compliance with the minimum servicing standards specified above and performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. Our examination does not provide a legal determination on the Company's compliance with the minimum servicing standards.  In our opinion, management's assertion that Countrywide Financial Corporation and subsidiaries, including its wholly-owned subsidiary, Countrywide Home Loans, Inc. ("CHL"), and Countrywide Home Loans Servicing, L.P., a wholly-owned subsidiary of CHL, complied with the aforementioned minimum servicing standards as of and for the year ended December 31, 2005 is fairly stated, in all material respects.                                         KPMG LLP  March 3, 2006             KPMG LLP, a U.S. limited liability partnersnip, is the U S.            member firm of KPMG International, a Swiss cooperative.                                                [LOGO]Countrywide(R)                                             --------------------                                                     HOME LOANS                                              2900 MADERA ROAD                                             SIMI VALLEY, CALIFORNIA 93065-6298                                              (805) 955-1000                               Management Assertion  March 3, 2005  As of and for the year ended December 31, 2005, Countrywide Financial Corporation and subsidiaries, including its wholly-owned subsidiary, Countrywide Home Loans, Inc. ("CHL"), and Countrywide Home Loans Servicing, L.P., a wholly-owned subsidiary of CHL, (collectively, the "Company") have complied in all material respects with the minimum servicing standards set forth in the Mortgage Bankers Association of America's Uniform Single Attestation for Mortgage Bankers. As of and for this same period, the Company had in effect a mortgage bankers' (fidelity) bond in the amount of $200 million and an errors and omissions policy in the amount of $100 million and $130 million for the period January 1, 2005 to August 1, 2005 and for the period from August 1, 2005 to December 31, 2005, respectively.  /s/ Steve Bailey - ------------------------------------- Steve Bailey Senior Managing Director and Chief Executive Officer, Loan Administration    /s/ Kevin Meyers - ------------------------------------- Kevin Meyers Managing Director and Chief Financial Officer, Loan Administration     EX-99.3 5 efc6-0735_exh993.txt                                   Exhibit 99.3                                  ------------      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 December      through                                           December 31,      December 31,          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                  (423,933)       (384,613)        (10,418)        187,217   activities                                                       ----------------------------------------------------------------  Financing activities Capital contribution                                        12,211          25,000               -               - Dividends paid to common stockholders                            -               -               -        (284,300)                                                       ---------------------------------------------------------------- Net cash provided by (used in) financing                    12,211          25,000               -        (284,300) activities                                                       ---------------------------------------------------------------- Effect of exchange rate changes on cash                      1,530          (1,717)              -               -                                                       ---------------------------------------------------------------- Net (decrease) increase in cash and cash                   (24,215)         (9,353)             22          71,363 equivalents 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,                                                          Year ended        Year ended     2003 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           $1,622,119     $16,646   $463,156    $ 9,764     $2,085,275    $26,410    political subdivisions 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          $1,858,426     $20,334   $624,386    $13,732     $2,482,812    $34,066    securities                                    =========================================================================   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          January                                                                                      18, 2003          1, 2003                                                   Year ended       Year ended    through December      through                                                  December 31,     December 31,          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             $   95,037          $   78,932           $ 2,785           $  86,383      before provision for Federal      income taxes, at the statutory      income tax rate    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    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         Tax          Net of                                                                       Tax                          Tax                                                                      Amount                      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         Tax          Net of                                                                       Tax                          Tax                                                                      Amount                      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         Tax          Net of                                                                       Tax                          Tax                                                                      Amount                      Amount                                                                   ------------------------------------------  Unrealized holding gains arising during the period                 $   30,853    $  (10,798)    $   20,055 Less reclassification adjustment for gains realized    in net income                                                      (31,506)       11,027        (20,479) Unrealized 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,                                           2005           2005          2005         2005         2005                                      ----------------------------------------------------------------------        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,                                           2004           2004          2004         2004         2004                                      ----------------------------------------------------------------------  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     -----END PRIVACY-ENHANCED MESSAGE-----