CIFG Guaranty

CIFG Guaranty

Consolidated Financial Statements

December 31, 2005, 2004 and 2003

Report of Independent Auditors

To   the Members of the Supervisory Board

and Shareholder of CIFG Guaranty:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in shareholder's equity and comprehensive income (loss), and cash flows present fairly, in all material respects, the financial position of CIFG Guaranty and its subsidiaries (the "Company") at December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company has restated the accompanying financial statements for the years ended December 31, 2004 and 2003.

New York, New York

June 15, 2006

CIFG Guaranty

Consolidated Balance Sheets

(In ‘000s except per share amounts)

(a) The financial statements are stated in euros. The translation of euros into U.S. dollars is presented solely for the convenience of the reader, using the observed exchange rate at December 31, 2005 of $1.18395 to €1.00. The convenience translation should not be construed as representation that the euro amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any rate of exchange.

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

CIFG Guaranty

Consolidated Statements of Operations

(In ‘000s)

(a) The financial statements are stated in euros. The translation of euros into U.S. dollars is presented solely for the convenience of the reader, using the observed exchange rate at December 31, 2005 of $1.18395 to €1.00. The convenience translation should not be construed as representation that the euro amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any rate of exchange.

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

CIFG Guaranty

Consolidated Statements of Changes in Shareholder’s Equity and

Comprehensive Income (Loss)- (In ‘000s)

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

CIFG Guaranty

Consolidated Statements of Cash Flows

(€ ‘000s)

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

CIFG Guaranty

Notes to Consolidated Financial Statements (continued)

December 31, 2005, 2004 (restated) and 2003 (restated)

(Amounts in thousands)

1.  Business and Organization

CIFG Guaranty, formerly known as CDC IXIS Financial Guaranty S.A. ("CIFG Guaranty" or, together with its consolidated subsidiaries, the "Company"), is a French société anonyme that is a wholly owned subsidiary of CIFG Holding ("CIFG Holding"), a French société anonyme formerly known as CDC IXIS Financial Guaranty Holding S.A., which in turn is a wholly owned subsidiary of Caisse Nationale des Caisses d’Epargne ("CNCE"), a French société anonyme . CIFG Holding and its subsidiaries (the "CIFG Group") constitute a monoline financial guaranty group engaged solely in the financial guaranty business.

The consolidated financial statements of the Company are comprised of CIFG Guaranty, CIFG Europe formerly known as CDC IXIS Financial Guaranty Europe, a French société anonyme which is a wholly-owned subsidiary of CIFG Guaranty; CIFG Services, Inc. ("CIFG Services") formerly known as CDC IXIS Financial Guaranty Services Inc., a wholly-owned subsidiary of CIFG Guaranty and CIFG Assurance North America, Inc. ("CIFG NA") formerly known as CDC IXIS Financial Guaranty North America, Inc and certain variable interest entities (described below).

The name changes referenced above were effective October 29, 2004 for CIFG Guaranty and CIFG Europe. The name changes of CIFG Services and CIFG NA were effective January 11, 2005 and February 23, 2005, respectively.

Effective September 20, 2003, CIFG NA's original direct parent, CIFG Services, transferred all of the outstanding shares of CIFG NA to five voting trustees in accordance with a voting trust agreement, dated September 17, 2003, in order to comply with certain U.S. state restrictions regarding the ownership or control of U.S. insurance companies by a foreign government or any agency or instrumentality thereof. While the voting trustees possess and shall be entitled to exercise all rights and powers of an absolute owner of such shares as provided for in CIFG NA’s charter and applicable law, CIFG Services is the beneficial owner of the Voting Trust. As such, CIFG Services is entitled to receive all dividends and distributions declared and paid by CIFG NA, and thus, the financial statements of CIFG NA are included in these consolidated financial statements.

CIFG Guaranty, established in 2001, is a financial guaranty reinsurance company domiciled in France that provides reinsurance solely to CIFG Europe and CIFG NA. CIFG Europe, established in 2001, is a monoline financial guaranty company domiciled in France that is licensed to conduct business in all 15 original member states of the European Union. CIFG NA, established in 2002, is a monoline financial guaranty company domiciled in the State of New York that, as of December 31, 2005, was licensed to transact financial guaranty insurance in 43 U.S. states, the District of Columbia, the U.S. Virgin Islands and the Commonwealth of Puerto Rico.

In the ordinary course of business, the Company’s subsidiaries CIFG Europe and CIFG NA have issued financial guaranty contracts in respect of certain obligations of certain variable interest entities (VIEs). Specifically, CIFG Europe has issued financial guaranty contracts in respect of obligations of Mogador Ltd., a VIE that is a corporation established in Jersey, which is owned by Mogador Trust, a Jersey-based charitable trust. CIFG NA

has issued financial guaranty contracts in respect of certain obligations of multiple distinct New York State business trusts, collectively known as the New Generation Funding

Trusts. The financial guaranty contracts generally provide credit protection to investors who have entered into credit default swap (CDS) transactions with the respective VIEs. Other than the CDS transactions described above, the VIEs own no assets and have no outstanding debt and, by virtue of support provided by the financial guaranty contracts, CIFG Europe and CIFG NA consider themselves to be the primary beneficiaries of these VIEs. Accordingly, these VIEs are consolidated by these subsidiaries.

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

2.  Restatement of Previously Issued Financial Statements

The Company has restated its financial statements for the years ended December 31, 2004 and 2003. The restatement arises from the correction of an error related to the Company’s application of certain aspects of "Statement of Financial Accounting Standards ("FAS") No. 60 - "Accounting and Reporting by Insurance Enterprises" ("FAS 60") to insurance policies that do not qualify for the financial guaranty scope exception under FAS 133 - "Accounting for Derivative Instruments and Hedging" ("FAS 133") and FAS 149 - "Amendment of FAS 133 Derivative Instruments and Hedging Activities" ("FAS 149"). These financial guaranty contracts are accounted for as derivatives on a fair value basis under FAS 133. The Company considers these contracts to be generally an extension of its financial guaranty insurance contracts in that the Company compensates the guaranteed party for economic losses caused by credit events, and the risks undertaken are substantially the same as the risks in the financial guaranty form.

Financial guaranty insurance contracts that meet the scope exception under FAS 133 are subject to FAS 60, which provides for the deferral of acquisition costs that are primarily related to, and vary with, the production of new business. In addition, FAS 60 provides for the establishment of loss and loss adjustment reserves. (See Notes 3, 5 and 12 for further details). In prior years, the Company deferred acquisition costs and established loss and loss adjustment reserves for all of its financial guaranty contracts, including those accounted for as derivative contracts subject to FAS 133 and thus carried at fair value. The deferral of acquisition costs and the establishment of loss reserves and loss adjustment expenses for these credit derivative contracts which are accounted for under FAS 133 is not in accordance with U.S. GAAP. Accordingly, the Company has expensed deferred acquisition costs and has reversed the loss and loss adjustment reserves established for financial guaranty contracts carried at fair value in these restated financial statements.

The aforementioned approach was also used in years prior to 2003. Accordingly, opening accumulated deficit and other comprehensive income have been corrected by an adjustment of €4.1 million and €295 thousand, respectively.

The impact of the aforementioned adjustments on the balance sheet, income statement and statement of cash flows are as follows:

3.  Significant Accounting Policies

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

Due to diversity of the financial guaranty industry accounting practices, in 2005 the Financial Accounting Standards Board ("FASB") added a project to their agenda to consider the accounting model for financial guaranty insurers. The project’s scope is limited to financial guaranty contracts not subject to FAS 133 because the characteristics of these financial guaranty contracts have met the scope exceptions set forth in FAS 133 and are not subject to derivative accounting. The FASB’s project will consider claims liability recognition, premium recognition, and the amortization of deferred acquisition costs. Currently, the Company cannot assess the impact on the financial statements of potential changes which might occur due to the issuance of new guidance by the FASB under this project. Until the FASB issues specific guidance, the Company intends to continue to apply existing accounting policies. The FASB expects to issue an exposure draft in the third quarter of 2006.

Certain prior year balances have been reclassified to conform to the current year presentation.

Significant accounting policies are as follows:

Consolidation

The consolidated financial statements include the accounts of CIFG Guaranty, CIFG Europe, CIFG Services, CIFG NA and certain VIEs for which the Company is the primary beneficiary. The financial statements of CIFG NA are consolidated because CIFG Services retains all of the beneficial interest in the shares of CIFG NA.

All inter-company balances have been eliminated.

Investments

Investments in the Company’s investment portfolio are accounted for on a trade-date basis and consist of investments in fixed income securities that are considered available-for-sale and are carried at fair value. Short-term investments are carried at cost, which approximates fair value. Unrealized gains and losses, net of deferred income taxes, are included as a component of "Accumulated Other Comprehensive Income (Loss)" in shareholder's equity. For purposes of computing amortized cost, premiums and discounts are accounted for using the effective yield method over the remaining terms of securities acquired. For premium bonds that do not have call features, such premiums are amortized over the remaining terms of the securities. Premium and discounts on mortgage-backed and asset-backed securities are adjusted for the effects of actual and anticipated prepayments.

The Company's process for identifying declines in the fair value of investments that are other than temporary involves consideration of multiple factors. These factors include current economic conditions, market prices, issuer-specific developments, the time period during which there has been a significant decline in value and the Company's intent and ability to hold the investment for a sufficient period of time for the value to recover. If the Company's analysis of these factors results in the determination that the decline is other-than temporary, the Company writes down the carrying value of the investment to fair value and records a realized loss. As of December 31, 2005, 2004 and 2003, there were no declines in fair value deemed to be other than temporary.

Realized gains and losses on the sale of investments are determined on the basis of specific identification. Investment income is recorded when earned.

Effective January 1, 2004, the Company adopted the Emerging Issues Task Force (EITF) Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("EITF 03-01"). EITF 03-01 requires the Company to disclose certain information about unrealized losses on its investment portfolio that have not been recognized as other-than-temporary impairments.

In November 2005, FASB Staff Position No. 115-1 and 124-1 ("FSP 115") was issued, effective for reporting periods beginning after December 15, 2005. FSP 115 nullifies paragraphs 10-18 of EITF 03-01 and refers to other guidance such as FAS No. 115- "Accounting for Certain Investments in Debt and Equity Securities" to evaluate whether an impairment is considered other than temporary. However, the disclosure requirements from EITF 03-01 have been brought forward into FSP 115.

The Company does not anticipate that the adoption in 2006 of the new guidance under FSP 115 will have a material effect on the financial statements.

Deferred Acquisition Costs

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

The Company receives ceding commissions under the ceded reinsurance contracts as compensation for acquisition costs incurred. Ceding commissions are deferred and offset against deferred acquisition costs (DAC). The Company considers deferred premium revenue and the present value of future premiums due to the Company under installment contracts when determining the recoverability of DAC. DAC and deferred ceding commissions,net, are amortized into the income statement over the periods in proportion to the earnings of the related premiums. DAC is presented in the balance sheet net of deferred ceding commissions.

Premium Revenue Recognition

Up-front financial guaranty premiums written are earned pro-rata over the duration of the underlying risk in proportion to the amount of risk outstanding over the expected period of coverage. The amount of risk outstanding is equal to the sum of the par amount of the debt insured. Installment premiums written are recognized on a straight-line basis over each installment period. If a guaranteed issue is retired early, the remaining deferred premium will be earned and any related unamortized DAC will be expensed immediately. Deferred premium revenue and prepaid reinsurance premiums represent the portion of gross and ceded premium written, respectively, which has been allocated to the unexpired underlying risk.

Losses and Loss Adjustment Expense Reserves

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

The Company monitors active credit reserves on an ongoing basis and adjusts these reserves based on actual loss experience, considering changes in the mix of business and economic conditions. Case basis loss reserves will be recorded when it is probable that a loss has been incurred and it can be reasonably estimated. When losses occur, case basis loss reserves will be established in an amount that is sufficient to cover the present value of the anticipated defaulted debt service payments over the expected

period of default and estimated expenses associated with settling the claims, less estimated recoveries under salvage or subrogation rights. The active credit reserve is available to be applied against future case basis loss reserves and any related adjustments. As of December 31, 2005 and 2004, there were no case basis loss reserves recorded.

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

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

Income Taxes

CIFG Guaranty has two separate consolidated groups for tax return purposes: the French tax group (CIFG Holding, CIFG Guaranty and CIFG Europe, each participate individually in the CNCE French consolidated tax return) and the U.S. tax group (whereby CIFG Services and CIFG NA file a consolidated U.S. tax return).  Current income taxes are calculated in accordance with the local income tax rules applicable to each entity within their respective jurisdiction.

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

Reinsurance

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

Property and Equipment

Property and equipment consists of office furniture, fixtures, computer equipment, software and leasehold improvements which are reported at cost less accumulated

depreciation.  Office furniture and fixtures are depreciated straight-line over seven years.  Leasehold improvements are amortized over their estimated service life or over the life of the lease, whichever is shorter.  Computer equipment and software are depreciated over five years.  Maintenance and repairs are charged to expense as incurred. 

Rent Expense

Rent expense, net of lease incentives is recognized on a straight-line basis over the lives of the leases.

Intangible Assets

In February 2003, CIFG NA purchased 100% of the stock of Western Continental Insurance Company ("WCIC") which resulted in recording an intangible asset related to the fair value of the insurance licenses acquired. The Company has determined that the licenses have an indefinite life and, therefore, are not being amortized. The recoverability of the carrying value of the intangible asset is evaluated at least annually based on a review of forecasted discounted cash flows and by referencing other available information. As of December 31, 2005 and 2004 there were no adjustments to the carrying value of the intangible asset.

Derivatives

The Company has issued insurance policies that do not qualify for the financial guaranty scope exception under FAS 133 and 149. These contracts are recorded at fair value which is determined using models developed by the Company. The model includes various assumptions such as an expected loss projection. The Company believes that the most meaningful financial statement presentation of derivative revenues is to reflect them as premiums written when installments are received, to record losses and loss adjustment expenses incurred as loss and loss adjustment expense, and to record changes in fair value as incurred in net unrealized gains (losses) on financial guarantees at fair value. This presentation is consistent with the financial guaranty industry presentation.

Variable Interest Entities (VIE’s)

From time to time, the Company provides financial guarantees on structured transactions backed by pools of assets of specified types. The guaranteed obligations are frequently supported by assets which have been securitized through VIEs. In certain other transactions, the Company guarantees payment obligations of counterparties, including VIEs, that may enter into credit default swaps with third parties. The Company provides financial guarantees covering certain obligations of these entities at market rates and consolidates those VIEs where it is determined to be the primary beneficiary.

Foreign Currency

Functional currencies are generally the currencies of the local operating environment. On a consolidated basis the Company’s functional currency is euros.  The only subsidiaries with a functional currency other than euros within the Company are CIFG Services and CIFG NA, whose functional currency is U.S. dollars.  The consolidated CIFG Guaranty financial statements include translation adjustments for the conversion of the CIFG Services and CIFG NA balance sheets from U.S. dollars to euros, at exchange rates in

effect at the balance sheet dates and the income statement accounts are translated using daily exchange rates averaged on a year to date basis. The related translation adjustments are included as a component of "Accumulated Other Comprehensive Income" in Stockholders' Equity in accordance with FAS Statement 52, "Foreign Currency Translation" ("FAS 52").

Foreign currency transaction gains and losses arising from the re-valuation of assets