GMACM HOME EQUITY LOAN TRUST 2005-HE2
Not Applicable.
Not Applicable.
Not Applicable.
See Item 15 (a),  Exhibits 99.1, 99.2 and 99.3 for information  provided         in lieu of information required by Item 102 of Regulation S-K.
The registrant knows of no material pending legal proceedings  involving         the trust created under the Pooling and Serviving Agreement (the Trust),         the Trustee, the Servicer or the registrant with respect to the Trust.
None.  PART II
(a) The Trust does not issue stock.  There is  currently no  established         public trading market for the  securities.  As of December 31, 2005, the         number of holders of all classes of Notes was 37.                 The remaining information is not provided pursuant to a no action request.          (b) Not applicable.          (c) Information not provided pursuant to no action request.
Not Applicable.
Not Applicable.
Not applicable.
See Item 15 (a),  Exhibits 99.1, 99.2 and 99.3 for information  provided         in lieu of information required by Item 102 of Regulation S-K.
None.
Not applicable.
None.  PART III
Not Applicable.
Not Applicable.
Not Applicable.
Not Applicable.
Not applicable.  PART IV
(a) Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification       Exhibit 99.1 Annual Independent  Accountants'  Servicing Reports concerning servicing activities       Exhibit 99.2 Report of Management as to Compliance  with Minimum  Servicing Standards       Exhibit  99.3  Annual  Statements  of  Compliance  under  the  Pooling  and Servicing Agreements       Exhibit 99.4 Aggregate Statement of Principal and Interest Distributions to Certificate Holders       Exhibit 99.5 Audited  financial  statements for the year ended December 31, 2005 for Financial Guaranty Insurance Corporation  (b) Not Applicable.  (c) Not Applicable. __________________________                                          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,  there unto duly authorized,  on this 20th day of March 2006.   By:     GMAC MORTGAGE CORPORATION   /s/ Anthony N. Renzi Name: Anthony N. Renzi Title: Executive Vice President       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.  The  registrant  has not sent an annual  report or proxy  material  to  security holders.  The registrant  will not be sending an annual report or proxy material to its security holders subsequent to the filing of this form.                                        EXHIBIT INDEX  Exhibit               Description  Exhibit 31.1   Rule 13a-14(a)/15d-14(a) Certification  Exhibit  99.1  Annual  Independent  Accountants'  Servicing  Reports  concerning      servicing activities  Exhibit 99.2  Report of  Management  as to  Compliance  with  Minimum  Servicing      Standards  Exhibit 99.3 Annual  Statements  of  Compliance  under the Pooling and Servicing      Agreements  Exhibit 99.4  Aggregate  Statement of Principal  and Interest  Distributions  to      Certificate Holders  Exhibit 99.5 Audited  financial  statements for the year ended December 31, 2005      for Financial Guaranty Insurance Corporation                                         Exhibit 31.1                                     CERTIFICATION           I, Anthony N. Renzi, certify that:          1. I have  reviewed  this annual report on Form 10-K for the fiscal year ended December 31, 2005, and all reports on Form 8-K containing  distribution or servicing  reports  filed in respect of periods  included in the year covered by this annual report, of GMACM Home Equity Loan Trust 2005-HE2.          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  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 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 servicer has fulfilled its  obligations under that agreement; and          5. The reports  disclose all  significant  deficiencies  relating to the 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:  Wells Fargo Bank, N.A.  In Witness  Whereof,  I have duly  executed this  certificate  as of March 20th, 2006.  By:     GMAC MORTGAGE CORPORATION   /s/ Anthony N. Renzi Name: Anthony N. Renzi Title: Executive Vice President                                        EXHIBIT 99.1                          [PRICEWATERHOUSECOOPERS LETTERHEAD]                              REPORT OF INDEPENDENT AUDITORS   To the Board of Directors and Stockholder of GMAC Mortgage Corporation:  We have examined management's  assertion about GMAC Mortgage Corporation and its subsidiaries'  (the "Company")  compliance with the minimum servicing  standards identified  in the Mortgage  Bankers  Association  of America's  Uniform  Single Attestation  Program for Mortgage Bankers ("USAP")  exclusive of standards I.4., III.3., III.4., V.3. and V.4.,  (collectively the "Applicable Standards") solely for the purposes of  servicing  the home equity  loans  underlying  the Consumer Lending Portfolio as of and for the year ended December 31, 2005 included in the accompanying management assertion (see Exhibit I).  As the loans applicable to management's  assertion are home equity loans, rather than first mortgage loans,  certain USAP minimum servicing standards relating to escrows are not applicable.  Therefore,  USAP minimum servicing  standards I.4., III.3., III.4., V.3. and V.4., were not addressed during our examination.  Management is responsible  for the Company's  compliance  with those  Applicable Standards.   Our  responsibility  is  to  express  an  opinion   exclusively  on management's  assertion  about  the  Company's  compliance  with the  Applicable Standards based on our examination.  Our examination  was performed in accordance  with 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 Applicable  Standards  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 Applicable Standards.  In our  opinion,  management's  assertion  that the  Company  complied  with the Applicable  Standards  solely for the purpose of servicing loans  underlying the Consumer  Lending  Portfolio  as of and for the year ended  December 31, 2005 is fairly stated, in all material respects.  /s/ PricewaterhouseCoopers LLP  March 21, 2006                                       EXHIBIT 99.2                                                                         EXHIBIT 1                       [GMAC MORTGAGE CORPORATION LETTERHEAD]                      MANAGEMENT'S ASSERTION CONCERNING COMPLIANCE                       WITH USAP MINIMUM SERVICING STANDARDS  March 21, 2006   As of and for the year ended December 31, 2005,  GMAC Mortgage  Corporation  and its subsidiaries (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  Program for Mortgage  Bankers  ("USAP") exclusive of standards I.4., III.3.,  III.4.,  V.3. and V.4.,  (collectively the "Applicable  Standards")  solely for the purposes of  servicing  the home equity loans underlying the Consumer Lending Portfolio.  As of and for this same  period,  the Company had in effect a fidelity  bond and errors and  omissions  policy in the amounts of  $350,000,000  and  $100,000,000 respectively.     /s/ Jim Hillsman - ----------------------------------------------- Jim Hillsman Chief Operating Officer GMAC Residential Holding Corp  /s/ Dave Bricker - ----------------------------------------------- Dave Bricker Chief Financial Officer GMAC Residential Holding Corp  /s/ Tony Renzi - ----------------------------------------------- Tony Renzi Executive Vice President, National Servicing Administration GMAC Residential Holding Corp                                       EXHIBIT 99.3                                OFFICER'S CERTIFICATE                              GMAC MORTGAGE CORPORATION          I,  Frank  G.  Ruhl,  hereby  certify  that I am the duly  elected  Vice President of GMAC Mortgage Corporation (the "Servicer"), a corporation organized under  the laws of the  Commonwealth  of  Pennsylvania,  that I have  made  such reasonable investigation as I have deemed necessary to deliver this Certificate, including  discussions  with  responsible  officers of the  Servicer and further certify to the best of my knowledge as follows:                 1. A review of the activities of the Servicer during the calendar         year  beginning  January 1, 2005 and ending on  December  31,  2005 (the         "Calendar Year") and of its performance under the servicing  agreements,         including  the  servicing  agreement  dated  as of June  29,  2005  (the         "Servicing  Agreement"),  by and among the Servicer, the Issuer, and the         Indenture Trustee, has been made under my supervision.                 2. To the  best  of my  knowledge,  based  on  such  review,  the         Servicer  has  complied  in  all  material  respects  with  the  minimum         servicing  standards set forth in the Uniform Single Attestation Program         for Mortgage  Bankers and has fulfilled all of its material  obligations         in all material respects throughout the Calendar Year.           Capitalized  terms not defined herein have the meanings set forth in the Servicing Agreement.  IN WITNESS  WHEREOF,  I have hereunto signed my name and affixed the seal of the Servicer.  Dated:  March 31, 2006 Re: GMACM Home Equity Loan Trust 2005-HE2                                                     By: GMAC MORTGAGE CORPORATION                                                     By: /s/ Frank G. Ruhl                                                    __________________                                                     Name:  Frank G. Ruhl                                                    Title:   Vice President                                                    Date:    March 31, 2006                                          Exhibit 99.4   Schedule   of   Year-To-Date    Principal   and   Interest    Distributions   to Certificateholders  GMACM 2005-HE2  Class            Interest           Principal       Losses       Ending Balance A-1           4,880,554.86      192,971,128.01        0.00       137,259,871.99 A-2           3,273,769.87                0.00        0.00       168,243,000.00 A-3           8,283,640.86                0.00        0.00       358,444,000.00 A-4           4,209,858.90                0.00        0.00       170,820,000.00 A-5           1,077,191.52                0.00        0.00        41,784,000.00 A-6           1,076,460.00                0.00        0.00        44,000,000.00 IO            4,311,300.00                0.00        0.00       143,710,000.00 Total        27,112,776.01      192,971,128.01        0.00     1,064,260,871.99                                         EXHIBIT 99.5     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                     Financial Guaranty Insurance Company and Subsidiaries                             Consolidated Balance Sheets                  (Dollars in thousands, except per share amounts)                                                                      DECEMBER 31                                                                2005           2004                                                           ------------------------------- ASSETS    Fixed maturity securities, at fair value (amortized cost of$3,277,291 in 2005 and $2,921,320 in 2004)                $ 3,258,738    $2,938,856 Short-term investments                                          159,334       140,473                                                           ------------------------------- Total investments                                             3,418,072     3,079,329  Cash and cash equivalents                                        45,077        69,292 Accrued investment income                                        42,576        36,580 Reinsurance recoverable on losses                                 3,271         3,054 Prepaid reinsurance premiums                                    110,636       109,292 Deferred policy acquisition costs                                63,330        33,835 Receivable from related parties                                   9,539           802 Property and equipment, net of accumulated depreciation   of $885 in 2005 and $164 in 2004                                3,092         2,408 Prepaid expenses and other assets                                10,354         7,826 Federal income taxes receivable                                   2,158             -                                                           ------------------------------- Total assets                                                $ 3,708,105    $3,342,418                                                           =============================== LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities:   Unearned premiums                                         $ 1,201,163    $1,043,334   Loss and loss adjustment expenses                              54,812        39,181   Ceded reinsurance balances payable                              1,615         3,826   Accounts payable, accrued expenses and other   liabilities                                                    36,359        22,874   Payable for securities purchased                                    -         5,715   Capital lease obligations                                       4,262         6,446   Federal income taxes payable                                        -         4,401   Deferred income taxes                                          42,463        38,765                                                           ------------------------------- Total liabilities                                             1,340,674     1,164,542                                                           ------------------------------- Stockholder's equity:   Common stock, par value $1,500 per share; 10,000   shares     authorized, issued and outstanding                           15,000        15,000   Additional paid-in capital                                  1,894,983     1,882,772   Accumulated other comprehensive (loss) income, net of   tax                                                           (13,597)       15,485   Retained earnings                                             471,045       264,619                                                           ------------------------------- Total stockholder's equity                                    2,367,431     2,177,876                                                           ------------------------------- Total liabilities and stockholder's equity                  $ 3,708,105    $3,342,418                                                           ===============================   See accompanying notes to consolidated financial statements.                                          2                    Financial Guaranty Insurance Company and Subsidiaries                          Consolidated Statements of Income                               (Dollars in thousands)                                                    SUCCESSOR                  PREDECESSOR                                  ------------------------------------------  -----------                                                               PERIOD FROM    PERIOD FROM                                                               DECEMBER 18,   JANUARY 1,                                                                   2003          2003                                   YEAR ENDED     YEAR ENDED      THROUGH       THROUGH                                  DECEMBER 31,   DECEMBER 31,  DECEMBER 31,  DECEMBER 17,                                      2005           2004          2003          2003                                   --------------------------------------------------------- Revenues:        Gross premiums written            $410,202      $323,575       $12,213       $248,112   Reassumed ceded premiums                 -         4,959         6,300         14,300   Ceded premiums written             (29,148)      (14,656)          (39)       (14,852)                                  ---------------------------------------------------------   Net premiums written               381,054       313,878        18,474        247,560   Increase in net unearned      premiums                       (156,485)     (138,929)       (9,892)      (105,811)                                  --------------------------------------------------------- Net premiums earned                  224,569       174,949         8,582        141,749  Net investment income                117,072        97,709         4,269        112,619 Net realized gains                       101           559             -         31,506 Net mark-to-market losses on   credit derivative contracts           (167)            -             -              - Other income                             762           736            44            580                                  --------------------------------------------------------- Total revenues                       342,337       273,953        12,895        286,454  Expenses:   Loss and loss adjustment      expenses                         18,506         5,922           236         (6,757)   Underwriting expenses               82,064        73,426         7,622         54,481   Policy acquisition costs      deferred                        (38,069)      (32,952)       (2,931)       (23,641)   Amortization of deferred      policy acquisition costs          8,302         2,038            10         15,563                                  --------------------------------------------------------- Total expenses                        70,803        48,434         4,937         39,646                                  --------------------------------------------------------- Income before income tax   expense (benefit)                  271,534       225,519         7,958        246,808  Income tax expense (benefit):   Current                             32,370        42,510         1,191         57,071   Deferred                            32,738        12,923           573         (1,612)                                  --------------------------------------------------------- Total income tax expense              65,108        55,433         1,764         55,459                                  --------------------------------------------------------- Income before extraordinary item     206,426       170,086         6,194        191,349 Extraordinary gain                         -             -        13,852              -                                  --------------------------------------------------------- Net income                          $206,426      $170,086       $20,046       $191,349                                  =========================================================   See accompanying notes to consolidated financial statements.                                                   3                   Financial Guaranty Insurance Company and Subsidiaries                   Consolidated Statements of Stockholder's Equity                               (Dollars in thousands)                                                                                   ACCUMULATED                                                                   ADDITIONAL        OTHER                                                        COMMON      PAID-IN      COMPREHENSIVE     RETAINED                                                        STOCK       CAPITAL     (LOSS) INCOME,     EARNINGS        TOTAL                                                                                  NET OF TAX                                                       ---------------------------------------------------------------------- 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    JANUARY 1,                                                                          18, 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                 385,977       351,977       10,440      168,446 activities                                            -----------------------------------------------------  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                (423,933)     (384,613)     (10,418)     187,217   investing activities                                             -----------------------------------------------------  FINANCING ACTIVITIES Capital contribution                            12,211        25,000            -            - Dividends paid to common stockholders                -             -            -     (284,300)                                             ----------------------------------------------------- Net cash provided by (used in)                  12,211        25,000            -     (284,300) financing activities                                             ----------------------------------------------------- Effect of exchange rate changes on cash          1,530        (1,717)           -            -                                             ----------------------------------------------------- Net (decrease) increase in cash and            (24,215)       (9,353)          22       71,363 cash equivalents Cash and cash equivalents at beginning of period                                       69,292        78,645       78,623        7,260                                             ----------------------------------------------------- Cash and cash equivalents at end of           $ 45,077      $ 69,292      $78,645     $ 78,623 period                                             ===================================================== 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    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    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    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    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    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:                                               YEAR ENDED    YEAR ENDED    PERIOD FROM                                                                        DECEMBER 18,                                                                            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     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    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    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    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             3,277,291      15,513       34,066     3,258,738   securities  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     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    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       THROUGH                                        DECEMBER 31,  DECEMBER 31,  DECEMBER 31,  DECEMBER 17,                                            2005          2004          2003          2003                                       ---------------------------------------------------------    Income from fixed maturity           securities                         $  112,616       $ 97,720     $ 4,294      $ 111,075    Income from short-term investments        6,801          1,450          12          2,326                                       ---------------------------------------------------------    Total investment income                 119,417         99,170       4,306        113,401    Investment expenses                      (2,345)        (1,461)        (37)          (782)                                       ---------------------------------------------------------    Net investment income                $  117,072       $ 97,709     $ 4,269      $ 112,619                                       =========================================================                                            18     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    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     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         $  95,037        $ 78,932         $2,785         $ 86,383     income 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     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    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    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    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    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    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    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    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    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     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    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    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    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    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       TAX       NET OF                                                          TAX                     TAX                                                         AMOUNT                 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     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     19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)                                                  THREE MONTHS ENDED              YEAR ENDED                               -----------------------------------------------                                 MARCH 31,   JUNE 30,   SEPTEMBER  DECEMBER   DECEMBER                                   2005        2005      30, 2005   31, 2005  31, 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  DECEMBER   DECEMBER                                   2004        2004      30, 2004   31, 2004  31, 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-----