10-D

================================================================================
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-D

                               ASSET-BACKED ISSUER
             DISTRIBUTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

     For the monthly distribution period from July 1, 2006 to July 31, 2006

                    Commission File Number of issuing entity:
                                  333-131196-03

                            HOME LOAN TRUST 2006-HI3
           (Exact name of issuing entity as specified in its charter)

                 Commission File Number of depositor: 333-131196

                RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
              (Exact name of depositor as specified in its charter)

                         RESIDENTIAL FUNDING CORPORATION
               (Exact name of sponsor as specified in its charter)

                     Delaware                                       None
 (State or other jurisdiction of incorporation or            (I.R.S. Employer
       organization of the issuing entity)                   Identification No.)

c/o Residential Funding Corporation, as Master Servicer
         8400 Normandale Lake Boulevard                             55437
          Minneapolis, Minnesota 55437                              (Zip Code)
    (Address of principal executive offices of
                 issuing entity)

                                 (952) 857-7000
                    (Telephone number, including area code)

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




           Title of Class            Registered/reported pursuant to (check one)        Name of exchange
                                                                                       (If Section 12(b))
                                                            
                                        Section       Section    Section 15(d)
                                         12(b)         12(g)
Home Loan-Backed Notes, Series
2006-HI3, in the classes specified
herein                                   [___]         [___]         [ X ]              _______________


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X No ___

                                       1


                        PART I - DISTRIBUTION INFORMATION

ITEM 1 - DISTRIBUTION AND POOL PERFORMANCE INFORMATION.

        The  response  to  Item 1 is set  forth  in part  herein  and in part in
Exhibit 99.1.

        Introductory and explanatory  information  regarding the material terms,
parties  and  distributions  described  in  Exhibit  99.1  is  included  in  the
Prospectus  Supplement  relating to the Home Loan-Backed Notes,  Series 2006-HI3
(the "Notes"),  dated July 20, 2006, and related  Prospectus dated July 19, 2006
(collectively,  the "Prospectus"), of the Home Loan Trust 2006-HI3 (the "Issuing
Entity")  filed with the  Securities  and Exchange  Commission  pursuant to Rule
424(b)(5) under the Securities Act of 1933. The following  classes of Notes were
offered under the Prospectus: Class A-1, Class A-2, Class A-3 and Class A-4.

                           PART II - OTHER INFORMATION

ITEM 2 - LEGAL PROCEEDINGS.

Nothing to report.


ITEM 3 - SALES OF SECURITIES AND USE OF PROCEEDS.

Nothing to report.

ITEM 4 - DEFAULTS UPON SENIOR SECURITIES.

Nothing to report.

ITEM 5 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Nothing to report.

ITEM 6 - SIGNIFICANT OBLIGORS OF POOL ASSETS.

Inapplicable.

ITEM 7 - SIGNIFICANT ENHANCEMENT PROVIDER INFORMATION.

Financial  Statements of Financial  Guaranty  Insurance Company and Subsidiaries
for the Period  Ended June 30, 2006 are  included as Exhibit 99.2 to this Report
on Form 10-D, which is incorporated by reference in its entirety herein.

ITEM 8 - OTHER INFORMATION.

Nothing to report.

                                       2


ITEM 9 - EXHIBITS.

        (a) Documents filed as part of this report.

Exhibit 99.1   August 2006 Monthly Statement to Noteholders.

Exhibit 99.2   Financial  Statements of Financial Guaranty Insurance Company and
               Subsidiaries for the Period Ended June 30, 2006

        (b) Exhibits required by Form 10-D and Item 601 of Regulation S-K.

Exhibit 4.3    Servicing Agreement,  dated as of July 21, 2006 among Residential
               Funding  Corporation,  as master  servicer,  JPMorgan Chase Bank,
               National  Association,  as indenture  trustee,  and the Home Loan
               Trust  2006-HI3,  as issuer  (incorporated  by  reference  to the
               exhibit  with  the same  numerical  designation  included  in the
               Report  on  Form  8-K  filed  by  the  Issuing  Entity  with  the
               Securities and Exchange Commission on August 4, 2006).

Exhibit 4.4    Amended and Restated Trust  Agreement,  dated as of July 21, 2006
               between  Residential  Funding  Mortgage  Securities  II, Inc., as
               depositor,   and  Wilmington  Trust  Company,  as  owner  trustee
               (incorporated by reference to the exhibit with the same numerical
               designation  included  in the  Report  on Form  8-K  filed by the
               Issuing  Entity with the  Securities  and Exchange  Commission on
               August 4, 2006).

Exhibit 4.5    Indenture,  dated as of July 21,  2006  between  Home Loan  Trust
               2006-HI3,   as  issuer,   and  JPMorgan   Chase  Bank,   National
               Association,   as  indenture  trustee,  and  Appendix  A  thereto
               (incorporated by reference to the exhibit with the same numerical
               designation  included  in the  Report  on Form  8-K  filed by the
               Issuing  Entity with the  Securities  and Exchange  Commission on
               August 4, 2006).

Exhibit 10.1   Home Loan  Purchase  Agreement,  dated as of July 1, 2006 between
               Residential  Funding Mortgage Securities II, Inc. and Residential
               Funding  Corporation  (incorporated  by  reference to the exhibit
               with the same  numerical  designation  included  in the Report on
               Form 8-K filed by the  Issuing  Entity  with the  Securities  and
               Exchange Commission on August 4, 2006).

Exhibit 10.2   Financial Guaranty Insurance Policy,  dated July 21, 2006, issued
               by  Financial  Guaranty  Insurance  Company  relating to the Home
               Loan-Backed Notes,  Series 2006-HI3,  Class A Notes (incorporated
               by reference to the exhibit with the same  numerical  designation
               included  in the Report on Form 8-K filed by the  Issuing  Entity
               with the Securities and Exchange Commission on August 4, 2006).

Exhibit 99.1   August 2006 Monthly Statement to Noteholders.

                                       3


                                   SIGNATURES

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


Dated:  August 25, 2006



                                HOME LOAN TRUST 2006-HI3
                                (Issuing entity)

                                    By:  Residential Funding Corporation, as
                                         Master Servicer


                                            By:  /s/ Darsi Meyer
                                                 Name:   Darsi Meyer
                                                 Title:  Director

                                       4


                 EXHIBIT 99.1 - MONTHLY STATEMENT TO NOTEHOLDERS

                                       5


                                  EXHIBIT 99.2


FINANCIAL STATEMENTS

Financial Guaranty Insurance Company and Subsidiaries

June 30, 2006

                                       6

EX-99

RESIDENTIAL FUNDING MORTGAGE SECURITIES II, INC.
HOME EQUITY LOAN TRUST 2006-HI3
RESIDENTIAL FUNDING CORPORATION - MASTER SERVICER
STATEMENT TO CERTIFICATEHOLDERS

* DEFFERRED INTEREST - INCLUES NON-CASH ALLOCATIONS

DISTRIBUTION SUMMARY
CLASS	CUSIP	ORIGINAL FACE VALUE	PRINCIPAL BALANCE BEFORE DISTRIBUTION	CURRENT PASS-THROUGH RATE	PRINCIPAL DISTRIBUTION	INTEREST DISTRIBUTION	TOTAL DISTRIBUTION	*DEFERRED INTEREST	PRINCIPAL LOSS	ADDITIONAL BALANCE	REMAINING PRINCIPAL BALANCE
A-1	14318NAA0	91,411,000.00	91,411,000.00	5.4850 %	2,330,694.76	487,461.85	2,818,156.61	0.00	0.00	0.00	89,080,305.24
A-2	43718NAB8	21,019,000.00	21,019,000.00	5.9500 %	0.00	104,219.21	104,219.21	0.00	0.00	0.00	21,019,000.00
A-3	43718NAC6	45,586,000.00	45,586,000.00	5.9600 %	0.00	226,410.47	226,410.47	0.00	0.00	0.00	45,586,000.00
A-4	43718NAD4	65,142,000.00	65,142,000.00	6.3100 %	0.00	342,538.35	342,538.35	0.00	0.00	0.00	65,142,000.00
CERTS		3,744,023.94	3,744,023.94	0.0000 %	0.00	0.00	0.00	935,097.65	0.00	0.00	4,679,121.59
TOTAL		226,902,023.94	226,902,023.94		2,330,694.76	1,160,629.88	3,491,324.64	935,097.65	0.00	0.00	225,506,426.83

DISTRIBUTION FACTOR SUMMARY AMOUNTS PER $1,000 UNIT
CLASS	PRINCIPAL BALANCE BEFORE DISTRIBUTION	PRINCIPAL DISTRIBUTION	INTEREST DISTRIBUTION	ADDITIONAL BALANCE	TOTAL DISTRIBUTION	DEFERRED INTEREST	PRINCIPAL BALANCE AFTER DISTRIBUTION
A-1	1,000.000000	25.496874	5.332639	0.000000	30.829513	0.000000	974.503126
A-2	1,000.000000	0.000000	4.958333	0.000000	4.958333	0.000000	1,000.000000
A-3	1,000.000000	0.000000	4.966667	0.000000	4.966667	0.000000	1,000.000000
A-4	1,000.000000	0.000000	5.258333	0.000000	5.258333	0.000000	1,000.000000

DETERMINATION DATE PAYMENT DATE	21-August-2006 25-August-2006
RESIDENTIAL FUNDING CORPORTATION 2255 NORTH ONTARIO STREET, SUITE 400 BURBANK, CA 91504-2130 (818) 260-1400 www.gmacrfc.com/investors/

INTEREST DISTRIBUTION SUMMARY
CLASS	RECORD DATE	ACCRUAL DATES	INTEREST ACCRUAL METHODOLOGY	ACCRUED CERTIFICATE INTEREST	PREPAYMENT INTEREST SHORTFALL ALLOCATED	SERVICERMEMBERS CIVIL RELIEF ACT SHORTFALL ALLOCATED	PRIOR PERIOD SHORTFALLS REPAID	CERTIFICATE INTEREST DISTRIBUTION AMOUNT
A-1	08/24/06	07/21/06-08/24/06	Actual/360	487,461.85	0.00	0.00	0.00	487,461.85
A-2	07/31/06	07/01/06-07/31/06	30/360	104,219.21	0.00	0.00	0.00	104,219.21
A-3	07/31/06	07/01/06-07/31/06	30/360	226,410.47	0.00	0.00	0.00	226,410.47
A-4	07/31/06	07/01/06-07/31/06	30/360	342,538.35	0.00	0.00	0.00	342,538.35
CERTS	07/31/06	07/01/06-07/31/06	30/360	0.00	0.00	0.00	0.00	0.00
DEAL TOTALS				1,160,629.88	0.00	0.00	0.00	1,160,629.88

PREPAYMENT INTEREST SHORTFALL AMOUNTS						BASIS RISK / NET WAC SHORTFALL AMOUNTS
CLASS	CURRENT PERIOD	PRIOR PERIOD UNPAID	PRIOR UNPAID ACCRUED INTEREST	TOTAL PAID	REMAINING UNPAID	CURRENT PERIOD	PRIOR PERIOD UNPAID	PRIOR UNPAID ACCRUED INTEREST	TOTAL PAID	REMAINING UNPAID
A-1	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
A-2	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
A-3	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
A-4	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
DEAL TOTALS	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00

INDEX VALUE USED FOR THE CURRENT DISTRIBUTION
LIBOR - 1 MONTH	5.38500

COLLATERAL SUMMARY
POOL / GROUP	MASTER SERVICER FEE AMOUNT	SUBSERVICER FEE AMOUNT	WEIGHTED AVERAGE GROSS RATE	WEIGHTED AVERAGE NET RATE	WEIGHTED AVERAGE REMAINING AMORTIZATION TERM	WEIGHTED AVERAGE MONTHS TO MATURITY	WEIGHTED AVERAGE REMAINING DRAW MONTHS	PERCENTAGE OF DELINQUENT LOANS	ADDITIONAL DRAW AMOUNTS
POOL -50338	15,128.48	94,553.75	12.26271057 %	12.26271057 %	247.85	245.86	0.00	0.20902301 %	0.00
DEAL TOTALS	15,128.48	94,553.75						0.20902301 %	0.00

	BEGINNING OF PERIOD		PAYOFFS		REPURCHASES		LIQUIDATIONS		END OF PERIOD
POOL / GROUP	COUNT	AMOUNT	COUNT	AMOUNT	COUNT	AMOUNT	COUNT	AMOUNT	COUNT	AMOUNT
POOL (50338)	0	226,902,023.94	13	625,296.55	3	78,531.19	0	0.00	4,413	225,506,426.83
DEAL TOTALS	0	226,902,023.94	13	625,296.55	3	78,531.19	0	0.00	4,413	225,506,426.83

DELINQUENCY SUMMARY
CURRENT			DELINQUENT
			30-59 DAYS		60-89 DAYS		90-119 DAYS		120-149 DAYS		150-179 DAYS
POOL / GROUP	COUNT	AMOUNT	COUNT	AMOUNT	COUNT	AMOUNT	COUNT	AMOUNT	COUNT	AMOUNT	COUNT	AMOUNT
POOL (50338)	4,404	225,035,066.50	9	471,360.33	0	0.00	0	0.00	0	0.00	0	0.00
DEAL TOTALS	4,404	225,035,066.50	9	471,360.33	0	0.00	0	0.00	0	0.00	0	0.00
	180+ DAYS		FORECLOSURE		REO LOANS		PAID OFF		REPURCHASED		LIQUIDATED
POOL / GROUP	COUNT	AMOUNT	COUNT	AMOUNT	COUNT	AMOUNT	COUNT	AMOUNT	COUNT	AMOUNT	COUNT	AMOUNT
POOL (50338)	0	0.00	0	0.00	0	0.00	13	625,296.55	3	78,531.19	0	0.00
DEAL TOTALS	0	0.00	0	0.00	0	0.00	13	625,296.55	3	78,531.19	0	0.00
Delinquency information appearing on this statement has been derived using the OTS method.

COLLECTIONS SUMMARY
	POOL (50338)	DEAL TOTALS
(1) INTEREST COLLECTIONS	2,160,815.28	2,160,815.28
(2) PRINCIPAL COLLECTIONS	1,395,597.11	1,395,597.11
(3) ADDITIONAL BALANCE	0.00	0.00
(4) NET PRINCIPAL COLLECTIONS	1,395,597.11	1,395,597.11
(5) ADJUSTMENT AMOUNT	0.00	0.00
(6) INSURED PAYMENT AMOUNT	0.00	0.00
(7) TOTAL COLLECTIONS AMOUNT	3,556,412.39	3,556,412.39

ALLOCATION OF PAYMENTS
	POOL (50338)	DEAL TOTALS
TOTAL COLLECTIONS	3,556,412.39	3,556,412.39
INTEREST DISTRIBUTION AMOUNT	1,160,629.88	1,160,629.88
PRINCIPAL COLLECTION DISTRIBUTION AMOUNT	1,395,597.11	1,395,597.11
LIQUIDATION LOSS DISTRIBUTION AMOUNT	0.00	0.00
RESERVE INCREASE AMOUNT	935,097.65	935,097.65
INDENTURE TRUSTEE - UNPAID AMOUNTS OWED	0.00	0.00
REMAINING AMOUNT TO SB CERTIFICATES	0.00	0.00

PREPAYMENT FEE SUMMARY
	POOL (50338)	DEAL TOTALS
(1) PREPAYMENT FEE COLLECTED	2,429.20	2,429.20
(2) PREPAYMENT FEE PAID TO SB CERTIFICATES	2,429.20	2,429.20

LIQUIDATION LOSS SUMMARY
CURRENT PERIOD REALIZED LOSSES		DEEMED LIQUIDATIONS	CHARGE-OFFS	BANKRUPTCY	TOTAL LIQUIDATIONS
POOL (50338)	(1) LOSS COUNT	0	0	0	0
	(2) REMAINING AGGREGATE ACTUAL BALANCE	0.00	0.00	0.00	0.00
	(3) REALIZED LOSS AMOUNT	0.00	0.00	0.00	0.00
DEAL TOTAL	(1) LOSS COUNT	0	0	0	0
	(2) REMAINING AGGREGATE ACTUAL BALANCE	0.00	0.00	0.00	0.00
	(3) REALIZED LOSS AMOUNT	0.00	0.00	0.00	0.00
CUMULATIVE REALIZED LOSSES		DEEMED LIQUIDATIONS	CHARGE-OFFS	BANKRUPTCY	TOTAL LIQUIDATIONS
POOL (50338)	(1) LOSS COUNT	0	0	0	0
	(2) TOTAL REALIZED LOSS	0.00	0.00	0.00	0.00
DEAL TOTAL	(1) LOSS COUNT	0	0	0	0
	(2) TOTAL REALIZED LOSS	0.00	0.00	0.00	0.00
SUBSEQUENT RECOVERIES		CURRENT PERIOD	CUMULATIVE
POOL (50338)	(1) SUBSEQUENT RECOVERIES COUNT	0	0
	(2) SUBSEQUENT PRINCIPAL RECOVERIES	0.00	0.00
	(3) NET LOSS	0.00	0.00
	(4) NET LOSS %	***.******	***.******
DEAL TOTAL	(1) SUBSEQUENT RECOVERIES COUNT	0	0
	(2) SUBSEQUENT PRINCIPAL RECOVERIES	0.00	0.00
	(3) NET LOSS	0.00	0.00
	(4) NET LOSS %	***.******	***.******

PERFORMANCE TRIGGER SUMMARY
POOL/GROUP	TRIGGER TEST NAME	TRIGGER TEST DESCRIPTION	TRIGGER TEST RESULT
POOL (50338)	Stepdown Date (x)	Payment Date >= 2/25/2009	Fail
POOL (50338)	Stepdown Date (y)	Pool Balance < 50% of Cut-Off Balance	Fail
POOL (50338)	Stepdown Date	Later to occur of Clause (x) and Clause (y)	Stepdown Date has not occurred
POOL (50338)	Trigger Event (i)	Aggregate Liq. Loss Amount > Predetermined % * Cut-off Date Balance	Trigger not in effect
POOL (50338)	Trigger Event (ii)	6-Month Avg. Liq. Loss Amount > 50% * 6-Month Avg. Excess Spread	Trigger not in effect

OVERCOLLATERALIZATION SUMMARY
	PRIOR REQUIRED OVER-COLLATERALIZATION AMOUNT	BEGINNING OVER-COLLATERALIZATION / UNDERCOLLATERALIZATION AMOUNT	OVER-COLLATERALIZATION INCREASE AMOUNT	OVER-COLLATERALIZATION REDUCTION AMOUNT	ENDING OVER-COLLATERALIZATION / UNDERCOLLATERALIZATION AMOUNT	CURRENT REQUIRED OVER-COLLATERALIZATION AMOUNT
	0.00	3,744,023.94	935,097.65	0.00	4,679,121.59	15,542,788.64
DEAL TOTALS	0.00	3,744,023.94	935,097.65	0.00	4,679,121.59	15,542,788.64

CREDIT ENHANCEMENT SUMMARY
POOL/GROUP	CREDIT ENHANCER	CREDIT ENHANCEMENT PREMIUM AMOUNT	CREDIT ENHANCEMENT DRAW AMOUNT	CREDIT ENHANCEMENT REIMBURSEMENT AMOUNT	CREDIT ENHANCEMENT UNREIMBURSED AMOUNT
POOL (50338)	Financial Guaranty Insurance Company	65,087.75	0.00	0.00	0.00
DEAL TOTALS		65,087.75	0.00	0.00	0.00

REPURCHASE SUMMARY
	BREACH OF REPS AND WARRANTIES		OPTIONAL REPURCHASE OF DEFAULTED LOANS		SELLER SERVICER REPURCHASES		TOTAL
POOL / GROUP	COUNT	AMOUNT	COUNT	AMOUNT	COUNT	AMOUNT	COUNT	AMOUNT
POOL (50338)	3	78,531.19	0	0.00	0	0.00	3	78,531.19
DEAL TOTALS	3	78,531.19	0	0.00	0	0.00	3	78,531.19

MISCELLANEOUS INFORMATION SUMMARY
	CURRENT PERIOD SERVICE MEMBERS CIVIL RELIEF ACT INTEREST SHORTFALL	CURRENT PERIOD LOAN MODIFICATION RATE REDUCTION INTEREST SHORTFALL	CURRENT YEAR LIEN RELEASE LOAN COUNT	CURRENT YEAR LIEN RELEASE LOAN AMOUNT	CUMULATIVE LIEN RELEASE LOAN COUNT	CUMULATIVE LIEN RELEASE LOAN AMOUNT
POOL (50338)	0.00	0.00	0	0.00	0	0.00
DEAL TOTALS	0.00	0.00	0	0.00	0	0.00
	LIEN RELEASE OUTSTANDING PRINCIPAL AMOUNT AS A PERCENTAGE OF POOL BALANCE	CURRENT PERIOD ADVANCES OUTSTANDING	CURRENT PERIOD ADVANCES REIMBURSED
POOL (50338)	0.00000	0.00	0.00
DEAL TOTALS	0.00000	0.00	0.00

Notes:

The servicer may in its reasonable discretion make advances to pay off a first lien mortgage so that upon the servicer's foreclosure of the second mortgage, the property will be acquired free and clear of the first lien. When the sale of the acquired property is completed, such advances will be reimbursed from the sales proceeds.

EX-99

FINANCIAL STATEMENTS

Financial Guaranty Insurance Company and Subsidiaries
June 30, 2006








              Financial Guaranty Insurance Company and Subsidiaries

                              Financial Statements


                                  June 30, 2006






                                    CONTENTS
                                                                                  

Balance Sheets at June 30, 2006 (Unaudited) and December 31, 2005..................   1
Statements of Income for the Three Months and Six Months Ended June 30, 2006
  and 2005 (Unaudited).............................................................   2
Statements of Cash Flows for the Six Months Ended June 30, 2006
  and 2005 (Unaudited).............................................................   3
Notes to Financial Statements (Unaudited)..........................................   4








              Financial Guaranty Insurance Company and Subsidiaries

                                 Balance Sheets

                (Dollars in thousands, except per share amounts)

                                                              JUNE 30      DECEMBER 31
                                                               2006            2005
                                                          --------------------------------
                                                            (Unaudited)
                                                                          
ASSETS
Fixed maturity securities, available for sale, at fair
  value (amortized cost of  $3,473,103 in 2006 and
  $3,277,291 in 2005)                                     $   3,389,501     $3,258,738
Variable interest entity fixed maturity securities, held
  to maturity at amortized cost                                 750,000              -
Short-term investments                                          167,039        159,334
                                                          --------------------------------
Total investments                                             4,306,540      3,418,072
Cash and cash equivalents                                        89,630         45,077
Accrued investment income                                        47,306         42,576
Reinsurance recoverable on losses                                 2,288          3,271
Prepaid reinsurance premiums                                    126,850        110,636
Deferred policy acquisition costs                                79,873         63,330
Receivable from related parties                                   2,306          9,539
Property and equipment, net of accumulated depreciation
  of $1,451 in 2006 and  $885 in 2005                             2,785          3,092
Prepaid expenses and other assets                                19,442         10,354
Federal income taxes                                                  -          2,158
                                                          --------------------------------
Total assets                                              $   4,677,020     $3,708,105
                                                          ================================

LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
   Unearned premiums                                       $  1,303,301     $1,201,163
   Losses and loss adjustment expenses                           48,300         54,812
   Ceded reinsurance balances payable                            19,613          1,615
   Accounts payable and accrued expenses and other
     liabilities                                                 29,931         36,359
   Payable for securities purchased                              20,381              -
   Capital lease obligations                                      3,603          4,262
   Dividend payable to FGIC Corp.                                10,000              -
   Variable interest entity floating rate notes                 750,000              -
   Accrued investment income - variable interest entity             913              -
   Federal income taxes payable                                  15,528              -
   Deferred income taxes                                         27,662         42,463
                                                          --------------------------------
Total liabilities                                             2,229,232      1,340,674
                                                          --------------------------------

Stockholder's equity:
  Common stock, par value $1,500 per share; 10,000 shares
    authorized, issued and outstanding                           15,000         15,000
  Additional paid-in capital                                  1,898,232      1,894,983
  Accumulated other comprehensive loss, net of tax              (52,411)       (13,597)
  Retained earnings                                             586,967        471,045
                                                          --------------------------------
Total stockholder's equity                                    2,447,788     $2,367,431
                                                          --------------------------------
Total liabilities and stockholder's equity                $   4,677,020     $3,708,105
                                                          ================================


See accompanying notes to unaudited interim financial statements.


                                       1






              Financial Guaranty Insurance Company and Subsidiaries

                              Statements of Income
                                   (Unaudited)

                             (Dollars in thousands)

                                                        THREE MONTHS ENDED          SIX MONTHS ENDED
                                                             JUNE 30                     JUNE 30
                                                        2006          2005          2006          2005
                                                 --------------------------------------------------------
                                                                                       
Revenues:
  Gross premiums written                           $  163,260   $   131,335    $   252,541   $   215,739
  Ceded premiums written                               (28,887)     (18,030)       (35,310)      (19,825)
                                                 --------------------------------------------------------
  Net premiums written                                 134,373      113,305        217,231       195,914
  Increase in net unearned premiums                    (62,528)     (51,398)       (85,922)      (81,374)
                                                 --------------------------------------------------------
  Net premiums earned                                   71,845       61,907        131,309       114,540
  Net investment income                                 34,038       28,389         66,357        55,829
  Net realized (losses) gains                              (11)           -            (11)          118
  Net realized and unrealized losses on credit
  derivative contracts                                    (543)           -           (771)            -
  Other income                                             506           90          1,042           516
                                                 --------------------------------------------------------
Total revenues                                         105,835       90,386        197,926       171,003
                                                 --------------------------------------------------------
Expenses:
  Losses and loss adjustment expenses                     (265)      (3,066)        (2,198)       (5,677)
  Underwriting expenses                                 22,780       17,179         46,897        37,644
  Policy acquisition costs deferred                     (8,994)      (6,956)       (21,507)      (17,627)
  Amortization of deferred policy acquisition
  costs                                                  2,364        1,852          5,556         4,001
  Other operating expenses                                (782)           -            873             -
                                                 --------------------------------------------------------
Total expenses                                          15,103        9,009         29,621        18,341
                                                 --------------------------------------------------------
Income before income taxes                              90,732       81,377        168,305       152,662
Income tax expense                                      23,521       21,385         42,383        39,364
                                                 --------------------------------------------------------
Net income                                         $    67,211  $    59,992    $   125,922   $   113,298
                                                 ========================================================



See accompanying notes to unaudited interim financial statements.

                                       2





              Financial Guaranty Insurance Company and Subsidiaries

                            Statements of Cash Flows
                                   (Unaudited)
                             (Dollars in thousands)
                                                                SIX MONTHS ENDED
                                                                    JUNE 30,
                                                              2006           2005
                                                         -------------------------------
                                                                           
OPERATING ACTIVITIES
Net income                                                  $  125,922     $  113,298
Adjustments to reconcile net income to net cash
  provided by operating activities:
    Amortization of deferred policy acquisition costs            5,556          4,001
    Policy acquisition costs deferred                          (21,507)       (17,627)
    Depreciation of property and equipment                         566            295
    Amortization of fixed maturity securities                   16,570         14,480
    Amortization of short-term investments                          57
    Net realized gains (losses) on investments                      11           (118)
    Amortization of stock compensation expense                   3,249              -
    Change in accrued investment income, prepaid
      expenses and other assets                                (13,338)        (4,505)
    Change in net realized and unrealized losses on
      credit derivative contracts                                2,614              -
    Change in reinsurance receivable                               983            441
    Change in prepaid reinsurance premiums                     (16,214)        (8,246)
    Change in unearned premiums                                102,138         89,615
    Change in losses and loss adjustment expenses               (6,512)        (6,730)
    Change in receivable from/payable to related parties         7,233            707
    Change in ceded reinsurance balances payable and
      accounts payable and accrued expenses and other
      liabilities                                                9,753         (3,869)
    Change in current federal income taxes receivable            2,158              -
    Change in current federal income taxes payable              15,528          9,109
    Change in deferred federal income taxes                      9,202          7,810
                                                         -------------------------------
Net cash provided by operating activities                      243,969        206,399
                                                         -------------------------------
INVESTING ACTIVITIES
Sales and maturities of fixed maturity securities               81,391        157,125
Purchases of fixed maturity securities                        (291,370)      (287,174)
Purchases, sales and maturities of short-term
  investments, net                                              (8,577)       (67,670)
Receivable for securities sold                                  (1,023)       (34,265)
Payable for securities purchased                                20,381         11,449
Purchases of fixed assets                                         (142)          (423)
                                                         -------------------------------
Net cash used in investing activities                         (199,340)      (220,958)
                                                         -------------------------------
FINANCING ACTIVITIES
Capital contribution                                                 -          8,049
                                                         -------------------------------
Net cash provided by financing activities                            -          8,049
                                                         -------------------------------

Effect of exchange rate changes on cash                            (76)           656
                                                         -------------------------------

Net increase (decrease) in cash and cash equivalents            44,553         (5,854)
Cash and cash equivalents at beginning of period                45,077         69,292
                                                         -------------------------------
Cash and cash equivalents at end of period                  $   89,630     $   63,438
                                                         ===============================


See accompanying notes to unaudited interim financial statements.


                                       3



              Financial Guaranty Insurance Company and Subsidiaries

                          Notes to Financial Statements
                             (Unaudited) (continued)

                             (Dollars in thousands)


1. BUSINESS AND ORGANIZATION

Financial   Guaranty  Insurance  Company  (the  "Company")  is  a  wholly  owned
subsidiary of FGIC Corporation  ("FGIC Corp.").  The Company provides  financial
guaranty  insurance and other forms of credit enhancement for public finance and
structured finance obligations.  The Company'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 StateDistrict of Columbia,  the Commonwealth of Puerto Rico, the
U.S. Virgin Islands,  and, through a branch, the United Kingdom. In addition,  a
United  Kingdom  subsidiary  of the  Company is  authorized  to write  financial
guaranty  business  in the  United  Kingdom  and has  passport  rights  to write
business in other European Union member countries.

2. BASIS OF PRESENTATION

The consolidated  financial  statements  include the accounts of the Company and
the  accounts  of all other  entities  in which the  Company  has a  controlling
financial interest. All significant intercompany balances have been eliminated.

The accompanying  unaudited interim consolidated  financial statements have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States ("GAAP") for interim financial information.  Accordingly,  they do
not include all of the information  and footnotes  required by GAAP for complete
financial statements. In the opinion of management,  all adjustments (consisting
of normal recurring  accruals)  considered  necessary for fair presentation have
been included. Operating results for the three- and six-month periods ended June
30, 2006 are not necessarily  indicative of results that may be expected for the
year ending December 31, 2006. These unaudited  interim  consolidated  financial
statements should be read in conjunction with the audited consolidated financial
statements for the year ended December 31, 2005, including accompanying notes.

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

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


                                       4



             Financial Guaranty Insurance Company and Subsidiaries

                          Notes to Financial Statements
                             (Unaudited) (continued)

                             (Dollars in thousands)


3. REVIEW OF FINANCIAL GUARANTY INDUSTRY ACCOUNTING PRACTICES

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

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

4. PREMIUM REFUNDINGS

When an  obligation  insured by the Company is refunded  prior to the end of the
expected policy coverage period, any remaining unearned premium is recognized. A
refunding occurs when an insured  obligation is called or legally defeased prior
to the stated maturity. Premiums earned for the three months ended June 30, 2006
and 2005 include $15,455 and $20,417,  respectively, and $22,766 and $35,956 for
the six  months  ended  June 30,  2006 and 2005,  respectively,  related  to the
accelerated recognition of unearned premiums in connection with refundings.

5. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

Loss reserves and loss  adjustment  expenses are regularly  reviewed and updated
based on claim payments and the results of ongoing  surveillance.  The Company's
insured portfolio  surveillance is designed to identify impaired obligations and
thereby provide a materially complete  recognition of losses for each accounting
period.  The  reserves  are  necessarily  based upon  estimates  and  subjective
judgments  about the outcome of future  events,  and actual  results will likely
differ from these estimates.  At June 30, 2006, the Company had case reserves of
$28,316, credit watchlist reserves of $18,637 and an unallocated loss adjustment
expense reserve of $1,347.


                                       5



             Financial Guaranty Insurance Company and Subsidiaries

                          Notes to Financial Statements
                             (Unaudited) (continued)

                             (Dollars in thousands)


5. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES (CONTINUED)

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

Case reserves and credit watchlist reserves at June 30, 2006 included $5,307 and
$12,801,  respectively,  of estimated losses related to obligations  impacted by
Hurricane  Katrina.  Case reserves and credit watchlist reserves at December 31,
2005 included $8,511 and $13,322,  respectively,  of estimated losses related to
obligations impacted by Hurricane Katrina. Given the unprecedented nature of the
events and  magnitude  of damage in the  affected  areas  related  to  Hurricane
Katrina,  the loss reserves were necessarily based upon estimates and subjective
judgments about the outcomes 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.

6. INCOME TAXES

The Company's  effective  federal corporate tax rates of 25.7% and 26.0% for the
three months ended June 30, 2006 and 2005, respectively, and 25.0% and 25.5% for
the six months  ended June 30,  2006 and 2005,  respectively,  are less than the
statutory  corporate  tax rate  (35%) on  income  due to  permanent  differences
between financial and taxable income, principally tax-exempt interest.

7. REINSURANCE

Net premiums  earned are shown net of ceded premiums earned of $6,484 and $5,465
for the three months ended June 30, 2006 and 2005, respectively, and $11,352 and
$11,638 for the six months ended June 30, 2006 and 2005, respectively.

8. VARIABLE INTEREST ENTITIES

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


                                       6



             Financial Guaranty Insurance Company and Subsidiaries

                          Notes to Financial Statements
                             (Unaudited) (continued)

                             (Dollars in thousands)


8. VARIABLE INTEREST ENTITIES (CONTINUED)

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

As part of its structured finance business, the Company insures debt obligations
or certificates issued by special purpose entities.  During the first quarter of
2006,  the  Company  consolidated  a third  party VIE as a result  of  financial
guarantees   provided  by  the  Company  on  one  transaction   related  to  the
securitization  of life insurance  reserves.  This third party VIE had assets of
$750,000 and an equal amount of  liabilities  at June 30, 2006,  which are shown
under "Assets - Variable  interest  entity fixed  maturity  securities,  held to
maturity at amortized cost" and "Liabilities - Variable interest entity floating
rate notes," respectively,  on the Company's  consolidated balance sheet at June
30, 2006. In addition,  accrued  investment  income includes $913 related to the
variable interest entity fixed income maturity  securities and the corresponding
liability is shown under "Accrued investment  expense-variable  interest entity"
on the Company's consolidated balance sheet at June 30, 2006. Although the third
party VIE is included in the consolidated financial statements, its creditors do
not have recourse to the general assets of the Company  outside of the financial
guaranty  policy  provided  to the VIE.  The  Company  has  evaluated  its other
structured  finance  transactions  and does not  believe  any of the third party
entities  involved in these  transactions  requires  consolidation or disclosure
under FIN 46-R.

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

9. DERIVATIVE INSTRUMENTS

The Company  provides  credit default swaps ("CDSs") to certain buyers of credit
protection  by  entering  into  contracts  that  reference  collateralized  debt
obligations  from cash and  synthetic  structures  backed by pools of corporate,
consumer or structured  finance debt. It also offers credit protection on public
finance and structured finance obligations in CDS form. The Company


                                       7



             Financial Guaranty Insurance Company and Subsidiaries

                          Notes to Financial Statements
                             (Unaudited) (continued)

                             (Dollars in thousands)


9. DERIVATIVE INSTRUMENTS (CONTINUED)

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 net earned premium under these agreements of $3,695 and $7,930
for the three and six months ended June 30, 2006,  respectively.  No premium was
recorded for these contracts for the three and six months ended June 30, 2005.

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.  For the three and six  months  ended June 30,
2006, net realized and unrealized losses on credit  derivative  contracts in the
consolidated  statements of income  includes  unrealized  losses of ($1,840) and
($2,614),  respectively,  related to changes in fair  value.  Net  realized  and
unrealized  losses  gains on credit  derivative  contracts  in the  consolidated
statements of income also includes  realized  gains of $1,297 and $1,843 for the
three and six months  ended June 30,  2006,  respectively.  No  market-to-market
activity was recorded for the three and six months ended June 30, 2005.

The  mark-to-market  gain and (loss) on the CDS portfolio was $0 and ($2,781) at
June 30, 2006 and $545 and ($712) at December  31, 2005 and is recorded in other
assets and in other liabilities, respectively.

10. STOCK COMPENSATION PLAN

Employees of the Company may receive stock-based compensation under a FGIC Corp.
stock incentive plan that provides for stock-based compensation, including stock
options,  restricted stock awards and restricted stock units of FGIC Corp. Stock
options are granted for a fixed number of shares with an exercise price equal to
or  greater  than  the  fair  value  of the  shares  at the  date of the  grant.
Restricted  stock awards and restricted stock units are valued at the fair value
of the stock on the grant  date.  Prior to January 1, 2006,  FGIC Corp.  and the
Company  accounted  for  those  plans  under  the  recognition  and  measurement
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees,  and
related   interpretations,   as  permitted  by  SFAS  No.  123,  Accounting  for
Stock-Based  Compensation.  No stock-based employee compensation cost related to
stock  options  was  allocated  to the Company by FGIC Corp.  for the  six-month
period  ended June 30,  2005,  as all options  granted  through that date had an
exercise price equal to the market value of the  underlying  common stock on the
date of grant.  For grants of restricted stock and restricted stock units to the
employees of the Company, unearned compensation, equivalent to the fair value of
the shares at the date of grant, is allocated to the Company.


                                       8



             Financial Guaranty Insurance Company and Subsidiaries

                          Notes to Financial Statements
                             (Unaudited) (continued)

                             (Dollars in thousands)


10. STOCK COMPENSATION PLAN (CONTINUED)

Effective  January 1, 2006,  FGIC Corp.  and the Company  adopted the fair value
recognition  provisions  of SFAS No.  123(R),  Share-Based  Payment,  using  the
modified-prospective-transition  method.  Under that method,  compensation  cost
allocated  to the Company for the three- and  six-month  periods  ended June 30,
2006 included  compensation cost for all share-based  payments granted prior to,
but not yet vested as of,  January  1, 2006,  based on the grant date fair value
estimated  in  accordance  with SFAS No.  123(R).  FGIC  Corp.  and the  Company
estimated  the fair value for all stock  options at the date of grant  using the
Black-Scholes-Merton  option pricing  model.  Results for prior periods have not
been restated.

As a result of adopting SFAS No. 123(R) effective January 1, 2006, the Company's
income before  income taxes and net income for the three- and six-month  periods
ended June 30, 2006 was impacted as follows:


                                           THREE MONTHS      SIX MONTHS
                                              ENDED             ENDED
                                          JUNE 30, 2006     JUNE 30, 2006

Income before income taxes                 $  (1,583)       $  (2,891)

   Income tax benefit                            554            1,012
                                         --------------------------------
Net income                                 $  (1,029)       $   1,879
                                         ================================


The  following  table  illustrates  the effect on net income if the  Company had
applied  the fair  value  recognition  provisions  of SFAS No.  123(R)  to stock
options granted during the three- and six-month periods ended June 30, 2005. For
purposes  of this pro  forma  disclosure,  the  value of the  stock  options  is
amortized to expense over the stock options' vesting periods.


                                             THREE MONTHS     SIX MONTHS
                                                ENDED           ENDED
                                            JUNE 30, 2005    JUNE 30, 2005

Net income, as reported                      $   56,097       $  105,482

   Stock option compensation expense
   determined under fair value-based
   method, net of related tax effects              (576)         (1,029)
                                           ------------------------------
Pro forma  net income                        $   55,521       $  104,483
                                           ===============================


                                       9



             Financial Guaranty Insurance Company and Subsidiaries

                          Notes to Financial Statements
                             (Unaudited) (continued)

                             (Dollars in thousands)


10. STOCK COMPENSATION PLAN (CONTINUED)

A summary of option activity for the three- and six-month periods ended June 30,
2006 is as follows:


                                               NUMBER OF        WEIGHTED
                                                 SHARES          AVERAGE
                                               SUBJECT TO    EXERCISE PRICE
                                                OPTIONS         PER SHARE
                                           --------------- ----------------
        Balance at December 31, 2005:             139,422      $    804
           Granted                                 38,113           850
           Exercised                                    -             -
           Forfeited                               (1,274)          753
           Expired                                      -             -
                                           --------------- ----------------
        Balance at March 31, 2006:                176,261           805
           Granted                                      -             -
           Exercised                                    -             -
           Forfeited                               (4,224)          783
           Expired                                      -             -
                                           --------------- ----------------
        Balance at June 30, 2006:                 172,037           805
                                           =============== ================
        Shares subject to options
           exercisable at:
        June 30,  2006                             46,923           812
        December 31, 2005                          42,630           840

Exercise  prices for the stock options  outstanding  at June 30, 2006 range from
$600 to $1,080 per share. The weighted average remaining contractual life of the
outstanding  options is  approximately  seven years.  Stock options granted from
January 1, 2006  through  June 30, 2006 vest  ratably over four years and expire
seven from the date of grant.  All stock  options  granted prior to December 31,
2005 vest ratably over five years and expire ten years from the date of grant.

The weighted per share fair value of the stock  options  granted  during the six
months  ended June 30,  2006 and 2005 was  $238.00  and  $211.94,  respectively,
estimated at the date of grant, using the Black-Scholes-Merton  option valuation
model based on the following assumptions:


                                       SIX MONTHS      SIX MONTHS
                                          ENDED           ENDED
                                      JUNE 30, 2006   JUNE 30, 2005
                                     --------------- ---------------

           Expected life                 4 YEARS         5 Years
           Risk-free interest rate         4.46%          3.691%
           Volatility factor               25.0%           25.0%
           Dividend yield                      -               -


                                       10



              Financial Guaranty Insurance Company and Subsidiaries

                          Notes to Financial Statements
                             (Unaudited) (continued)

                             (Dollars in thousands)


10. STOCK COMPENSATION PLAN (CONTINUED)

The total fair value of stock options  granted  during the six months ended June
30, 2006 and 2005 was approximately $9,071 and $5,753, respectively.

As of June 30, 2006, there was $8,837 of total  unrecognized  compensation costs
related to  unvested  stock  options  granted.  These  costs are  expected to be
recognized over a weighted average period of 3.8 years.

Restricted Stock Units

The Company  recorded $230 and $15 in compensation  expense related to the grant
of restricted  stock units for the  three-month  periods ended June 30, 2006 and
2005,  respectively,  and $400 and $45 for the six-month  periods ended June 30,
2006 and 2005, respectively.

A summary of restricted  stock units for the three- and  six-month  period is as
follows:

                                                                WEIGHTED
                                                              AVERAGE GRANT
                                                                DATE FAIR
                                                SHARES            VALUE
                                             --------------  --------------
        Balance at December 31, 2005:             237          $     617
           Granted                              3,275                850
           Delivered                            (237)                617
           Forfeited                                -                  -
                                             --------------  --------------
        Balance at March 31, 2006:              3,275                850
           Granted                                  -                  -
           Delivered                                -                  -
           Forfeited                             (213)               850
                                             --------------  --------------
        Balance at June 30, 2006:                3,062               850
                                             ==============  ==============

As of June 30, 2006 there was $2,087 of total  unrecognized  compensation  costs
related to unvested restricted stock awards granted. These costs are expected to
be recognized over the seven months ending January 31, 2007.

11. COMPREHENSIVE INCOME

Accumulated other  comprehensive  loss of the Company consists of net unrealized
gains  (losses)  on  investment  securities  and  foreign  currency  translation
adjustments.  The components of total comprehensive income (loss) for the three-
and six-month periods ended June 30, 2006 and 2005 were as follows:


                                       11



              Financial Guaranty Insurance Company and Subsidiaries

                          Notes to Financial Statements
                             (Unaudited) (continued)

                             (Dollars in thousands)


                                       THREE MONTHS ENDED
                                             JUNE 30,
                                       2006           2005
                                  --------------- -------------
Net income                           $ 67,211       $ 59,992
Other comprehensive income            (18,661)       (39,203)
                                  --------------- -------------
Total comprehensive income           $ 85,872       $ 99,195
                                  =============== =============


                                        SIX MONTHS ENDED
                                            JUNE 30,
                                       2006           2005
                                  --------------- -------------
Net income                           $125,922       $113,298
Other comprehensive loss              (38,814)        (6,981)
                                  --------------- -------------
Total comprehensive income           $164,736       $120,279
                                  =============== =============

The components of other  comprehensive loss for the three- and six-month periods
ended June 30, 2006 and 2005 were as follows:





                                                                       THREE MONTHS ENDED JUNE 30, 2006
                                                                --------------------------------------------
                                                                     BEFORE                       NET OF
                                                                     TAX                           TAX
                                                                     AMOUNT         TAX           AMOUNT
                                                                -------------- ------------- ---------------
                                                                                            
Unrealized holding losses arising during the period               $ (33,406)      $  11,694     $  (21,712)
Less reclassification adjustment for losses realized
  in net income                                                          11             (4)              7
                                                                -------------- ------------- ---------------
Unrealized losses on investments                                    (33,395)         11,690        (21,715)
Foreign currency translation adjustment                               4,684          (1,640)         3,044
                                                                -------------- ------------- ---------------
Total other comprehensive loss                                    $ (28,711)      $  10,050     $  (18,661)
                                                                ============== ============= ===============


                                                                       Three months ended June 30, 2005
                                                                --------------------------------------------
                                                                     Before                        Net of
                                                                     Tax                            Tax
                                                                     Amount          Tax           Amount
                                                                ---------------- ------------- -------------
Unrealized holding gains arising during the period                $  64,368       $ (22,528)    $   41,840
Less reclassification adjustment for gains  realized
  in net income                                                           -               -              -
                                                                ---------------- ------------- --------------
Unrealized gains on investments                                      64,368         (22,528)        41,840
Foreign currency translation adjustment                              (4,056)          1,419         (2,637)
                                                                ---------------- ------------- --------------
Total other comprehensive income                                  $  60,312       $ (21,109)    $   39,203
                                                                ================ ============= ==============



                                       12



              Financial Guaranty Insurance Company and Subsidiaries

                          Notes to Financial Statements
                             (Unaudited) (continued)

                             (Dollars in thousands)




                                                                        SIX MONTHS ENDED JUNE 30, 2006
                                                                --------------------------------------------
                                                                    BEFORE                        NET OF
                                                                     TAX                           TAX
                                                                    AMOUNT          TAX           AMOUNT
                                                                -------------- ------------- ---------------
                                                                                          
Unrealized holding losses arising during  the period              $  (64,903)     $  22,716     $  (42,187)
Less reclassification adjustment for losses realized
  in net income                                                           11             (4)             7
                                                                -------------- ------------- ---------------
Unrealized losses on investments                                     (64,892)        22,712        (42,180)
Foreign currency translation adjustment                                5,178         (1,812)         3,366
                                                                -------------- ------------- ---------------
Total other comprehensive loss                                    $  (59,714)        20,900     $  (38,814)
                                                                ============== ============= ===============


                                                                        Six months ended June 30, 2005
                                                                --------------- -------------- --------------
                                                                     Before                         Net of
                                                                      Tax                            Tax
                                                                     Amount           Tax           Amount
                                                                --------------- -------------- --------------
Unrealized holding gains arising during the period                   $15,832      $  (5,540)     $  10,292
Less reclassification adjustment for gains realized
  in net income                                                         (118)            41            (77)
                                                                --------------- -------------- --------------
Unrealized gains on investments                                       15,714         (5,499)        10,215
Foreign currency translation adjustment                               (4,974)         1,740         (3,234)
                                                                --------------- -------------- --------------
Total other comprehensive income                                  $   10,740      $  (3,759)     $   6,981
                                                                =============== ============== ==============



12.  DIVIDEND

During the six-month period ended June 30, 2006, the Company declared a dividend
on its common stock in the aggregate amount of $10,000. The dividend was paid on
July 5, 2006 to FGIC Corp.,  the Company's  sole  stockholder.  The dividend was
permissible under and computed in accordance with New York State law. During the
six-month  period  ended June 30,  2005,  the Company did not declare or pay any
dividends.


                                       13