Exhibit 99.1

NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION

FINANCIAL STATEMENTS

As of March 31, 2010 and December 31, 2009

and for the periods ended March 31, 2010 and 2009

NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION

INDEX

	PAGE
Balance Sheets – March 31, 2010 and December 31, 2009 (Unaudited)	1
Statements of Operations – Three months ended March 31, 2010 and 2009 (Unaudited)	2
Statement of Changes in Shareholder’s Equity – Three months ended March 31, 2010 (Unaudited)	3
Statements of Cash Flows – Three months ended March 31, 2010 and 2009 (Unaudited)	4
Notes to Financial Statements (Unaudited)	5-20

NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands except per share amounts)

	March 31, 2010			December 31, 2009
Assets
Investments:
Fixed-maturity securities held as available-for-sale, at fair value (amortized cost $3,202,333 and $3,316,336)		$	3,216,788		$	3,314,987
Investments pledged as collateral, at fair value (amortized cost $1,715,631 and $1,710,620)			1,741,183			1,724,548
Short-term investments, at fair value (amortized cost $382,147 and $230,350)			385,247			232,275
Total investments			5,343,218			5,271,810
Cash and cash equivalents			2,898			27,629
Securities purchased under agreements to resell			1,675,000			1,675,000
Accrued investment income			59,988			64,855
Deferred acquisition costs			642,471			661,790
Premiums receivable			336,612			344,604
Prepaid reinsurance premiums			7			8
Insurance loss recoverable			16,497			31,049
Goodwill			31,371			31,371
Property and equipment at cost (less accumulated depreciation of $262 and $0)			64,279			-
Receivable for investments sold			1,920			529
Current income taxes			-			3,297
Other assets			20,020			2,710
Total assets		$	8,194,281		$	8,114,652
Liabilities and shareholder’s equity
Liabilities:
Unearned premium revenue		$	3,170,580		$	3,280,962
Loss and loss adjustment expense reserves			208,042			172,879
Securities sold under agreements to repurchase			1,675,000			1,675,000
Current income taxes			30,062			-
Deferred income taxes, net			180,699			167,225
Payable for investments purchased			36,619			25,453
Derivative liabilities			8,742			8,667
Other liabilities			5,816			18,951
Total liabilities			5,315,560			5,349,137
Commitments and contingencies (See Note 9)
Shareholder’s equity:
Common stock, par value $30 per share; authorized, issued and outstanding shares -- 500,000 shares			15,000			15,000
Additional paid-in capital			2,368,345			2,368,831
Retained earnings			467,356			372,256
Accumulated other comprehensive income (loss), net of deferred income tax of $15,087 and $5,076			28,020			9,428
Total shareholder’s equity			2,878,721			2,765,515
Total liabilities and shareholder’s equity		$	8,194,281		$	8,114,652

The accompanying notes are an integral part of the consolidated financial statements.

1

NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands)

	For the Three Months Ended March 31,
	2010		2009
Revenues:
Premiums earned:
Scheduled premiums earned	$	87,538	$	113,699
Refunding premiums earned		26,753		36,147
Premiums earned (net of ceded premiums of $1 and $5)		114,291		149,846
Net investment income		61,740		31,100
Fees, reimbursements and other		14,612		244
Change in fair value of insured derivatives:
Realized gains and other settlements on insured derivatives		102		56
Unrealized (losses) on insured derivatives		(84)		(355)
Net change in fair value of insured derivatives		18		(299)
Net realized gains		2,473		-
Total revenues		193,134		180,891
Expenses:
Losses and loss adjustment		25,895		57,748
Amortization of deferred acquisition costs		22,419		28,256
Operating		12,948		7,790
Total expenses		61,262		93,794
Income before income taxes		131,872		87,097
Provision for income taxes		36,772		21,107
Net income	$	95,100	$	65,990

The accompanying notes are an integral part of the consolidated financial statements.

2

NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION

Consolidated Statement of Changes in Shareholder’s Equity (Unaudited)

For The Three Months Ended March 31, 2010

(In thousands except per share amounts)

	Common Stock			Additional Paid-in       Capital		Retained     Earnings		Accumulated Other Comprehensive   Income (Loss)		Total Shareholder’s   Equity
	Shares	Amount
Balance, December 31, 2009	500,000	$	15,000	$	2,368,831	$	372,256	$	9,428	$	2,765,515
Comprehensive income:
Net income	-		-		-		95,100		-		95,100
Other comprehensive income:
Change in unrealized gains and losses on investments, net of deferred tax $10,011	-		-		-		-		18,592		18,592
Total comprehensive income											113,692
Return of capital in connection with the purchase of real estate	-		-		(494)		-		-		(494)
Share-based compensation net of deferred income taxes of $51	-		-		8		-		-		8
Balance, March 31, 2010	500,000	$	15,000	$	2,368,345	$	467,356	$	28,020	$	2,878,721
								2010
Disclosure of reclassification amount:
Change in unrealized gains and losses on investments arising during the period, net of taxes								$	18,646
Reclassification adjustment, net of taxes									(54)
Change in net unrealized gains and losses, net of taxes								$	18,592

The accompanying notes are an integral part of the consolidated financial statements.

3

NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION

STATEMENTS OF CASH FLOWS

(In thousands)

	Three Months Ended March 31,
	2010			2009
Cash flows from operating activities:
Net income	$	95,100		$	65,990
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation		262			-
Amortization of bond discounts (premiums), net		5,367			2,142
(Increase) decrease in accrued investment income		4,866			(61,678	)
(Increase) decrease in deferred acquisition costs		19,319			(736,641	)
Increase (decrease) in unearned premium revenue		(110,382	)		3,706,512
Decrease in prepaid reinsurance premiums		1			341
(Increase) decrease in premiums receivable		7,992			(409,371	)
Increase in loss and loss adjustment expense reserves		35,163			239,583
(Increase) decrease in due from affiliates		(26,131	)		3,708
Increase in reinsurance premium payable		-			25
Increase in deferred fee revenue		-			608
(Increase) decrease in insurance loss recoverable		14,552			(337	)
Increase (decrease) in accrued expenses		(3,502	)		4,567
Net realized gains		(2,473	)		-
Unrealized losses on insured derivatives		84			355
Increase (decrease) in current income taxes		33,308			(132	)
Deferred income tax provision (benefit)		3,463			21,238
Share-based compensation		59			71
Other operating		(909	)		5,737
Total adjustments to net income		(18,961	)		2,776,728
Net cash provided by operating activities		76,139			2,842,718
Cash flows from investing activities:
Purchase of fixed-maturity securities		(446,159	)		(4,704,872	)
Increase in payable for investments purchased		11,166			-
Sale of fixed-maturity securities		302,303			46,171
(Increase) decrease in receivable for investments sold		(1,391	)		(884	)
Redemption of fixed-maturity securities		172			-
Purchase (sale) of short-term investments, net		98,074			(288,954	)
Purchase of real estate		(65,000	)		-
Capital expenditure		(35	)		-
Net cash used by investing activities		(100,870	)		(4,948,539	)
Cash flows from financing activities:
Securities under agreements to resell		-			530
Capital contribution from parent		-			2,113,042
Other financing		-			43,318
Net cash provided by financing activities		-			2,156,890
Net increase (decrease) in cash and cash equivalents		(24,731	)		51,069
Cash and cash equivalents - beginning of period		27,629			6,386
Cash and cash equivalents - end of period	$	2,898		$	57,455
Supplemental cash flow disclosures:
Interest paid:
Securities sold under agreements to repurchase	$	2,556		$	-
Other	$	37		$	-
Non cash items:
Share-based compensation	$	59		$	71

The accompanying notes are an integral part of the consolidated financial statements.

4

National Public Finance Guarantee Corporation

Notes to the Consolidated Financial Statements

Note 1: Business and Organization

National Public Finance Guarantee Corporation (“National”) is a wholly owned subsidiary of MBIA Inc. through an intermediary holding company, National Public Finance Guarantee Holdings, Inc. (“National Holdings”). In February 2009, after receiving the required regulatory approvals, MBIA Inc. established and capitalized National as a United States (“U.S.”) public finance-only financial guarantor. In connection with the establishment of National, MBIA Insurance Corporation (“MBIA Corp.”) paid dividends and returned capital to MBIA Inc. and entered into a reinsurance agreement and an assignment agreement with National, the latter of which was with respect to financial guarantee insurance policies that had been reinsured from Financial Guaranty Insurance Company (“FGIC”).

To provide additional protection to its policyholders, National also issued second-to-pay policies for the benefit of the policyholders covered by the above reinsurance and assignment agreements. These second-to-pay policies, which are direct obligations of National, are held by a trustee and provide that if MBIA Corp. or FGIC, as applicable, do not pay valid claims of their policyholders, the policyholders will then be able to make claims directly against National.

National provides unconditional and irrevocable guarantees of the payment of the principal of, and interest or other amounts owing on, insured obligations when due or, in the event National has the right at its discretion to accelerate insured obligations upon default or otherwise, upon National’s acceleration. National’s guarantees insure municipal bonds, including tax-exempt and taxable indebtedness of U.S. political subdivisions, as well as utility districts, airports, health care institutions, higher educational facilities, student loan issuers, housing authorities and other similar agencies and obligations issued by private entities that finance projects that serve a substantial public purpose. Municipal bonds and privately issued bonds used for the financing of public purpose projects are generally supported by taxes, assessments, fees or tariffs related to the use of these projects, lease payments or other similar types of revenue streams. In 2009, National began publishing periodic comprehensive studies on select public finance sectors, including sectors in which it has exposure.

Since 2009, National has not written any material new business. The lack of insurance writings reflects the insurance financial strength credit ratings assigned to National. National firmly believes that with the resolution of pending litigation it will be able to obtain the highest possible credit ratings and the market acceptance necessary to meet its stated objectives. The timing of any such upgrade is uncertain and will depend on a variety of quantitative and qualitative factors used by the rating agencies in their evaluation of National, including the resolution of pending litigation. Refer to “Note 9: Commitments and Contingencies” for further discussion of pending litigation.

On March 1, 2010, National established National Real Estate Holdings of Armonk, LLC, a wholly-owned subsidiary of National as a result of purchasing MBIA Corp.’s interest in its real estate it held for purposes of conducting National’s business and leasing to certain affiliates and third party tenants.

Liquidity

Liquidity risk arises in National’s operations when claims on insured exposures result in payment obligations, when operating cash inflows fall due to depressed new business writings, lower investment income, unanticipated expenses, or when invested assets experience credit defaults or significant declines in fair value.

National’s financial guarantee contracts generally cannot be accelerated, thereby mitigating liquidity risk. However, defaults, credit impairments and adverse capital markets conditions can create payment requirements as National has made irrevocable pledges to pay principal and interest, or other amounts owing on insured obligations, as they mature. Additionally, National requires cash for the payment of operating expenses. Finally, National also provides liquid assets to MBIA Inc.’s asset/liability products segment through matched repurchase and reverse repurchase agreements to support this segment’s business operations and liquidity position.

Note 2: Significant Accounting Policies

National has disclosed its significant accounting policies in “Note 2: Significant Accounting Policies” in the Notes to Financial Statements included in Exhibit 99.2 to MBIA Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. The following significant accounting policies provide an update to those included under the same captions in Exhibit 99.2 to MBIA Inc.’s Annual Report on Form 10-K.

5

National Public Finance Guarantee Corporation

Notes to the Consolidated Financial Statements

Note 2: Significant Accounting Policies (continued)

Basis of Presentation

The accompanying consolidated financial statements are unaudited and include the accounts of National and its wholly owned subsidiary. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and, accordingly, do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for annual periods. These statements should be read in conjunction with National’s financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2009. The accompanying consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with the standards of the Public Company Accounting Oversight Board (United States), but in the opinion of management such consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of National’s consolidated financial position and results of operations.

The preparation of financial statements 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. As additional information becomes available or actual amounts become determinable, the recorded estimates are revised and reflected in operating results. Actual results could differ from those estimates.

The results of operations for the three months ended March 31, 2010 may not be indicative of the results that may be expected for the year ending December 31, 2010. The December 31, 2009 balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP for annual periods. Certain amounts have been reclassified in prior years’ financial statements to conform to the current presentation.

In addition, National evaluated all events subsequent to December 31, 2009 through May 10, 2010 for inclusion in National’s consolidated financial statements and/or accompanying notes.

Consolidation

The consolidated financial statements include the accounts of National and its wholly owned subsidiary. All intercompany balances and transactions have been eliminated.

Note 3: Recent Accounting Pronouncements

Recently Adopted Accounting Standards

Improving Disclosures About Fair Value Measurements (Accounting Standards Update 2010-06)

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements,” to require additional disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. The standard also clarifies existing disclosures about the level of disaggregation, valuation techniques and inputs to fair value measurements. National adopted this standard as of January 1, 2010 except for the requirement to provide the Level 3 activity of purchases, sales issuances and settlements on a gross basis, which will be effective for National as of January 1, 2011. As this standard only affects disclosures related to fair value, the adoption of this standard did not have a material effect on National’s consolidated balance sheets, results of operations, or cash flows. Refer to “Note 4: Fair Value Measurements” for mandated disclosures.

Consolidation of Variable Interest Entities (ASU 2009-17)

In December 2009, the FASB issued accounting guidance to require the holder of a variable interest(s) in a variable interest entity (“VIE”) to determine whether it holds a controlling financial interest in a VIE. A holder of a variable interest (or combination of variable interests) that has a controlling financial interest in a VIE is considered the primary beneficiary and is required to consolidate the VIE. The accounting guidance deems controlling financial interest as both (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses or the rights to receive benefits of the VIE that could potentially be significant to the VIE. The accounting guidance eliminates the more quantitative approach for determining the primary beneficiary of a VIE. The accounting guidance requires an ongoing reassessment of whether a holder of a variable interest is the primary beneficiary of a VIE. National adopted this standard as of January 1, 2010 and the adoption did not have a material effect on National’s consolidated balance sheets, results of operations or cash flows.

6

National Public Finance Guarantee Corporation

Notes to the Consolidated Financial Statements

Note 3: Recent Accounting Pronouncements (continued)

Transfers of Financial Assets (ASU 2009-16)

In December 2009, the FASB issued accounting guidance to remove the concept of a qualified special-purpose entity. The accounting guidance also clarifies whether a transferor has surrendered control over transferred financial assets and meets the conditions to derecognize transferred financial assets or a portion of an entire financial asset that meets the definition of a participating interest. The accounting guidance requires enhanced disclosures about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. National adopted this standard as of January 1, 2010 and the adoption did not have a material effect on National’s consolidated balance sheets, results of operations or cash flows.

Note 4: Fair Value Measurements

Financial Instruments

The following table presents the carrying value and fair value of financial instruments reported on National’s balance sheets as of March 31, 2010 and December 31, 2009:

	As of March 31, 2010				As of December 31, 2009
In millions	Carrying Value		Estimated Fair     Value		Carrying Value		Estimated Fair     Value
Assets:
Fixed-maturity securities (including short-term investments) held as available-for-sale, and investments pledged as collateral	$	5,343	$	5,343	$	5,272	$	5,272
Cash and cash equivalents		3		3		28		28
Securities purchased under agreements to resell		1,675		1,675		1,675		1,675
Receivable for investments sold		2		2		1		1
Liabilities:
Securities sold under agreements to repurchase		1,675		1,675		1,675		1,675
Payable for investments purchased		37		37		25		25
Derivative liabilities		9		9		9		9
Financial Guarantees:
Gross		3,379		2,524		3,454		2,672
Ceded		0		59		0		70

Valuation Techniques

The valuation techniques for fair valuing financial instruments included in the preceding table are described below. National’s assets and liabilities recorded at fair value have been categorized according to the fair value hierarchy prescribed by fair value measurements and disclosures.

Fixed-Maturity Securities Held As Available-for-Sale

U.S. Treasury and government agency - U.S. Treasury securities are liquid and have quoted market prices. Fair value of U.S. Treasuries is based on live trading feeds. U.S. Treasury securities are categorized in Level 1 of the fair value hierarchy. Government agency securities include debentures and other agency mortgage pass-through certificates as well as to-be-announced (“TBA”) securities. TBA securities are liquid and have quoted market prices based on live data feeds. Fair value of mortgage pass-through certificates is obtained via a simulation model, which considers different rate scenarios and historical activity to calculate a spread to the comparable TBA security. Government agency securities use market-based and observable inputs. As such, these securities are classified as Level 2 of the fair value hierarchy.

Corporate obligations - The fair value of corporate bonds is obtained using recently executed transactions or market price quotations where observable. When observable price quotations are not available, fair value is determined based on cash flow models with yield curves, bond or single name credit default swap (“CDS”) spreads and diversity scores as key inputs. Corporate bonds are generally categorized in Level 2 of the fair value hierarchy.

7

National Public Finance Guarantee Corporation

Notes to the Consolidated Financial Statements

Note 4: Fair Value Measurements (continued)

Mortgage-backed securities and asset-backed securities - Mortgage-backed securities (“MBSs”) and asset-backed securities (“ABSs”) are valued based on recently executed prices. When position-specific external price data is not observable, the valuation is based on prices of comparable securities. In the absence of market prices, MBSs and ABSs are valued as a function of cash flow models with observable market-based inputs (e.g., yield curves, spreads, prepayments and volatilities). MBSs and ABSs are categorized in Level 2 as all significant inputs are observable.

State and municipal bonds - The fair value of state and municipal bonds is estimated using recently executed transactions, market price quotations and pricing models that factor in, where applicable, interest rates, bond or CDS spreads and volatility. These bonds are categorized in Level 2 of the fair value hierarchy.

Money market securities - The fair value of money market securities is based on quoted prices in an active market. These money market securities are categorized in Level 1 of the fair value hierarchy.

Cash and Cash Equivalents, Receivable for Investments Sold, Payable for Investments Purchased

The carrying amounts of cash and cash equivalents, receivable for investments sold and payable for investments purchased approximate their fair value as they are short-term in nature.

Securities Purchased Under Agreements to Resell

The fair value of securities purchased under agreements to resell are determined based on the underlying securities received that back the resell agreements.

Securities Sold Under Agreements to Repurchase

The fair value of securities sold under agreements to repurchase are determined based on the underlying securities that back the repurchase agreements.

Derivatives

For insured swaps, the fair value is calculated using internally and vendor developed models with market-based inputs (e.g., interest rate, foreign exchange rate, and spreads), and are classified as Level 2 within the fair value hierarchy.

Financial Guarantees

Gross Financial Guarantees - National estimates the fair value of its gross financial guarantee liability using a discounted cash flow model with significant inputs that include (i) an assumption of expected loss on financial guarantee policies for which case basis reserves have not been established, (ii) the amount of loss expected on financial guarantee policies for which case basis reserves have been established, (iii) the cost of capital reserves required to support the financial guarantee liability and (iv) the discount rate. The Assured Guaranty Corporation CDS spread and recovery rates are used as the discount rate for National and incorporates the nonperformance risk of National. As National’s gross financial guarantee liability represents its obligation to pay claims under its insurance policies, National’s calculation of fair value does not consider future installment premium receipts or returns on invested upfront premiums as inputs.

The carrying value of National’s gross financial guarantee liability consists of deferred premium revenue and loss and loss adjustment expense (“LAE”) reserves as reported on National’s balance sheets.

Ceded Financial Guarantees - National estimates the fair value of its ceded financial guarantee liability by calculating the portion of the gross financial guarantee liability that has been ceded to reinsurers. The carrying value of ceded financial guarantee liability consists of prepaid reinsurance premiums and reinsurance recoverable on paid and unpaid losses as reported on National’s balance sheets.

8

National Public Finance Guarantee Corporation

Notes to the Consolidated Financial Statements

Note 4: Fair Value Measurements (continued)

Fair Value Measurements

The following fair value hierarchy tables present information about National’s assets (including short-term investments) and liabilities measured at fair value on a recurring basis as of March 31, 2010 and December 31, 2009:

	Fair Value Measurements at Reporting Date Using
In millions	Quoted Prices in Active Markets for Identical   Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable   Inputs (Level 3)		Balance as of   March 31, 2010
Assets:
Investments:
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	87	$	17	$	-	$	104
Corporate obligations		-		334		-		334
Mortgage-backed securities:
Residential mortgage-backed agency		-		1,453		-		1,453
Asset-backed securities
Other asset-backed		-		46		-		46
Total		87		1,850		-		1,937
State and municipal bonds:
Tax-exempt bonds		-		2,824		-		2,824
Taxable bonds		-		395		-		395
Total state and municipal bonds		-		3,219		-		3,219
Total fixed-maturity investments		87		5,069		-		5,156
Other investments:
Money market securities		187		-		-		187
Total other investments		187		-		-		187
Total assets	$	274	$	5,069	$	-	$	5,343
Liabilities:
Derivative liabilities	$	-	$	9	$	-	$	9
Total liabilities	$	-	$	9	$	-	$	9

9

National Public Finance Guarantee Corporation

Notes to the Consolidated Financial Statements

Note 4: Fair Value Measurements (continued)

	Fair Value Measurements at Reporting Date Using
In millions	Quoted Prices in Active Markets for Identical   Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable   Inputs (Level 3)		Balance as of   December 31,   2009
Assets:
Investments:
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	199	$	12	$	-	$	211
Corporate obligations		-		346		-		346
Mortgage-backed securities
Residential mortgage-backed agency		-		1,492		-		1,492
Asset-backed securities
Other asset-backed		-		12		-		12
Total		199		1,862		-		2,061
State and municipal bonds:
Tax-exempt bonds		-		2,702		-		2,702
Taxable bonds		-		411		-		411
Total state and municipal bonds		-		3,113		-		3,113
Total fixed-maturity investments		199		4,975		-		5,174
Other investments:
Money market securities		98		-		-		98
Total other investments		98		-		-		98
Total assets	$	297	$	4,975	$	-	$	5,272
Liabilities:
Derivative liabilities	$	-	$	9	$	-	$	9
Total liabilities	$	-	$	9	$	-	$	9

There were no transfers in or out of Level 1 or Level 2 during the first quarter 2010 or the first quarter 2009. All fair value hierarchy designations are made at the end of each accounting period.

10

National Public Finance Guarantee Corporation

Notes to the Consolidated Financial Statements

Note 5: Investments

National’s fixed-maturity portfolio consists of high-quality (average rating double-A) taxable and tax-exempt investments of diversified maturities. Other investments comprise money market securities. The following tables present the amortized cost and fair value of available-for-sale fixed-maturity and other investments included in the investment portfolio of National as of March 31, 2010 and December 31, 2009:

	March 31, 2010
In millions	Amortized     Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	107	$	1	$	(4)	$	104
Corporate obligations		321		14		(1)		334
Mortgage-backed securities:
Residential mortgage-backed agency		1,408		46		(1)		1,453
Asset-backed securities:
Other asset-backed		45		1		-		46
Total		1,881		62		(6)		1,937
State and municipal bonds:
Tax-exempt bonds		2,830		28		(34)		2,824
Taxable bonds		402		2		(9)		395
Total state and municipal bonds		3,232		30		(43)		3,219
Total fixed-maturity investments		5,113		92		(49)		5,156
Other investments:
Money market securities		187		-		-		187
Total other investments		187		-		-		187
Total available-for-sale investments	$	5,300	$	92	$	(49)	$	5,343

11

National Public Finance Guarantee Corporation

Notes to the Consolidated Financial Statements

Note 5: Investments (continued)

	December 31, 2009
In millions	Amortized     Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	215	$	1	$	(5)	$	211
Corporate obligations		336		11		(1)		346
Mortgage-backed securities:
Residential mortgage-backed agency		1,457		37		(2)		1,492
Asset-backed securities:
Other asset-backed		12		-		-		12
Total		2,020		49		(8)		2,061
State and municipal bonds:
Tax-exempt bonds		2,715		27		(40)		2,702
Taxable bonds		424		1		(14)		411
Total state and municipal bonds		3,139		28		(54)		3,113
Total fixed-maturity investments		5,159		77		(62)		5,174
Other investments:
Money market securities		98		-		-		98
Total other investments		98		-		-		98
Total available-for-sale investments	$	5,257	$	77	$	(62)	$	5,272

Fixed-maturity investments carried at fair value of $8 million as of March 31, 2010 and December 31, 2009, were on deposit with various regulatory authorities to comply with insurance laws.

The following table presents the distribution by contractual maturity of available-for-sale fixed-maturity investments at amortized cost and fair value as of March 31, 2010. Contractual maturity may differ from expected maturity because borrowers may have the right to call or prepay obligations.

In millions	Amortized Cost		Fair Value
Due in one year or less	$	107	$	109
Due after one year through five years		422		440
Due after five years through ten years		246		251
Due after ten years through fifteen years		288		287
Due after fifteen years		2,597		2,570
Mortgage-backed		1,408		1,453
Asset-backed		45		46
Total fixed-maturity investments	$	5,113	$	5,156

12

National Public Finance Guarantee Corporation

Notes to the Consolidated Financial Statements

Note 5: Investments (continued)

As of March 31, 2010 and December 31, 2009, National had recorded net unrealized gains of $43 million and $15 million, respectively, on available-for-sale fixed-maturity investments, which included $49 million and $62 million, respectively, of gross unrealized losses. The following tables present the gross unrealized losses included in accumulated other comprehensive income (loss) as of March 31, 2010 and December 31, 2009 related to available-for-sale fixed-maturity investments. These tables segregate investments that have been in a continuous unrealized loss position for less than twelve months from those that have been in a continuous unrealized loss position for twelve months or longer.

	March 31, 2010
	Less than 12 Months				12 Months or Longer				Total
In millions	Fair Value		Unrealized   Losses		Fair Value		Unrealized   Losses		Fair Value		Unrealized   Losses
Taxable bonds:
U.S. Treasury and government agency	$	78	$	(4)	$	-	$	-	$	78	$	(4)
Corporate obligations		18		(1)		-		-		18		(1)
Mortgage-backed securities:
Residential mortgage-backed agency		138		(1)		2		0		140		(1)
Total		234		(6)		2		0		236		(6)
State and municipal bonds:
Tax-exempt bonds		989		(15)		327		(19)		1,316		(34)
Taxable bonds		256		(8)		21		(1)		277		(9)
Total state and municipal bonds		1,245		(23)		348		(20)		1,593		(43)
Total	$	1,479	$	(29)	$	350	$	(20)	$	1,829	$	(49)
	December 31, 2009
	Less than 12 Months				12 Months or Longer				Total
In millions	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Taxable bonds:
U.S. Treasury and government agency	$	186	$	(5)	$	-	$	-	$	186	$	(5)
Corporate obligations		23		(1)		22		-		45		(1)
Mortgage-backed securities:
Residential mortgage-backed agency		275		(2)		2		-		277		(2)
Asset-backed securities:
Other asset-backed		-		-		-		-		-		-
Total		484		(8)		24		-		508		(8)
State and municipal bonds:
Tax-exempt bonds		1,071		(16)		324		(24)		1,395		(40)
Taxable bonds		309		(13)		21		(1)		330		(14)
Total state and municipal bonds		1,380		(29)		345		(25)		1,725		(54)
Total	$	1,864	$	(37)	$	369	$	(25)	$	2,233	$	(62)

The weighted average contractual maturity of securities in an unrealized loss position as of March 31, 2010 and December 31, 2009 was 22 years. As of March 31, 2010, there were 57 securities that were in an unrealized loss position for a continuous twelve-month period or longer with aggregate unrealized losses of $20 million. Among the 57 securities, the book value of 21 securities exceeded market value by more than 5%. As of December 31, 2009, there were 59 securities that were in an unrealized loss position for a continuous twelve-month period or longer with aggregate unrealized losses of $25 million. Among the 59 securities, the book value of 32 securities exceeded market value by more than 5%.

13

National Public Finance Guarantee Corporation

Notes to the Consolidated Financial Statements

Note 5: Investments (continued)

National has evaluated whether the unrealized losses in its investment portfolios were other-than-temporary considering the circumstances that gave rise to the unrealized losses, and whether National has the intent to sell the securities or more likely than not will be required to sell the securities before their anticipated recovery. Based on its evaluation, National determined that the unrealized losses on these securities were temporary in nature because its impairment analysis, including projected future cash flows, indicated that National would be able to recover the amortized cost of impaired assets. National also concluded that it does not have the intent to sell these securities and it is more likely than not that it will not have to sell these securities before recovery of their cost basis. In making this conclusion, National examined the cash flow projections for its investment portfolios, the potential sources and uses of cash in its businesses, and the cash resources available to its business other than sales of securities. It also considered the existence of any risk management, or other plans as of March 31, 2010 that would require the sale of impaired securities. On a quarterly basis, National will reevaluate the unrealized losses in its investment portfolios and determine whether an impairment loss should be realized in current earnings.

Note 6: Investment Income and Gains and Losses

The following table includes National’s total investment income:

	Three Months Ended March 31,
In millions	2010		2009
Fixed-maturity	$	60	$	29
Other investments		3		3
Gross investment income		63		32
Investment expenses		1		1
Net investment income		62		31
Fixed-maturity
Gains		2		-
Net		2		-
Total investment income	$	64	$	31

Net realized gains (losses) from fixed-maturity investments were generated as a result of the ongoing management of National’s investment portfolios for the three months ended March 31, 2010 and 2009.

Net unrealized gains (losses), including related deferred income taxes, reported in accumulated other comprehensive income (loss) within shareholder’s equity consisted of:

In millions	As of March 31,       2010		As of December 31,     2009
Fixed-maturity:
Gains	$	92	$	77
Losses		(49)		(62)
Net		43		15
Deferred income taxes provision (benefit)		15		5
Unrealized gains (losses), net	$	28	$	10

The change in net unrealized gains (losses), presented in the table above, consisted of:

In millions	As of March 31,     2010		As of December 31,     2009
Fixed-maturity	$	28	$	8
Deferred income tax charged (credited)		10		3
Change in unrealized gains (losses), net	$	18	$	5

14

National Public Finance Guarantee Corporation

Notes to the Consolidated Financial Statements

Note 7: Income Taxes

National’s income taxes and the related effective tax rates for the three months ended March 31, 2010 and 2009 are as follows:

	Three Months Ended March 31,
In millions	2010			2009
Pre-tax income (loss)	$	132		$	87
Provision (benefit) for income taxes	$	37	28.0%	$	21	24.2%

National’s effective tax rate is lower than the statutory tax rate of 35% for the three months ended March 31, 2010 and 2009 primarily due to tax-exempt interest income. The increase in the effective tax rate related to pre-tax income from the three months ended March 31, 2010 to 2009 was primarily a result of a decrease in the amount of tax-exempt interest income relative to underwriting and other income that is taxed at the statutory rate of 35%.

As of March 31, 2010, National reported a deferred tax liability of $181 million.

As of March 31, 2010, National does not have any uncertain tax positions with respect to the accounting guidance for uncertainty in income taxes. National is a member of MBIA Inc.’s consolidated U.S. tax group and its only tax jurisdiction is the U.S. The Internal Revenue Service is currently examining tax years 2005 through 2008.

Note 8: Loss and Loss Adjustment Expense Reserves

For the three months ended March 31, 2010, National incurred $26 million of loss and LAE principally related to student loan and health care credits. Total net paid activity for the three months ended March 31, 2010 of $7 million primarily related to a gaming revenue credit for which National expects to be fully reimbursed. Total expected insurance loss recoveries on paid losses for the three months ended March 31, 2010 were $16 million and were primarily related to a health care and gaming revenue transaction.

National’s Portfolio Surveillance Division (“PSD”) monitors National’s outstanding insured obligations with the objective of minimizing losses. PSD meets this objective by identifying issuers that, because of deterioration in credit quality or changes in the economic, regulatory or political environment, are at a heightened risk of defaulting on debt service of obligations insured by National. In such cases, PSD works with the issuer, trustee, bond counsel, servicer, underwriter and other interested parties in an attempt to alleviate or remedy the problem and avoid defaults on debt service payments. PSD works closely with National’s Risk Management function and the applicable business unit to analyze insured obligation performance and credit risk parameters, both before and after an obligation is insured.

Once an obligation is insured, National typically requires the issuer, servicer (if applicable) and the trustee to furnish periodic financial and asset-related information, including audited financial statements, to PSD for review. PSD also monitors publicly available information related to insured obligations. Potential problems uncovered through this review include poor financial results, low fund balances, covenant violations and trustee or servicer problems or other events that could have an adverse impact on the insured obligation. Any one of these problems may trigger an immediate surveillance review and an evaluation of possible remedial actions. PSD also monitors and evaluates the impact on issuers of general economic conditions, current and proposed legislation and regulations, as well as state and municipal finances and budget developments.

Insured obligations are monitored periodically. The frequency and extent of such monitoring is based on the criteria and categories described below. Insured obligations that are judged to merit more frequent and extensive monitoring or remediation activities due to a deterioration in the underlying credit quality of the insured obligation or the occurrence of adverse events related to the underlying credit of the issuer are assigned to a surveillance category (“Caution List-Low,” “Caution List-Medium,” “Caution List-High,” or “Classified List”) depending on the extent of credit deterioration or the nature of the adverse events. PSD monitors insured obligations assigned to a surveillance category more frequently and, if needed, develops a remediation plan to address any credit deterioration.

National does not establish any case basis reserves for insured obligations that are assigned to “Caution List-Low,” “Caution List-Medium,” or “Caution List-High,” as credits assigned to those classifications do not result in loss expectations, if any, that exceed the unearned premium revenue for the respective credits. In the event National expects to pay a claim in excess of the unearned premium revenue with respect to an insured transaction, it places the insured transaction on its “Classified List” and establishes a case basis reserve. The following provides a description of each surveillance category:

“Caution List – Low”—Includes issuers where debt service protection is adequate under current and anticipated circumstances. However, debt service protection and other measures of credit support and stability may have declined since the transaction was underwritten and the issuer is less able to withstand further adverse events. Transactions in this category generally require more frequent monitoring than transactions that do not appear within a surveillance category. PSD subjects issuers in this category to heightened scrutiny.

15

National Public Finance Guarantee Corporation

Notes to the Consolidated Financial Statements

Note 8: Loss and Loss Adjustment Expense Reserves (continued)

“Caution List – Medium”—Includes issuers where debt service protection is adequate under current and anticipated circumstances, although adverse trends have developed and are more pronounced than for “Caution List – Low.” Issuers in this category may have breached one or more covenants or triggers. These issuers are more closely monitored by PSD but generally take remedial action on their own.

“Caution List – High”—Includes issuers where more proactive remedial action is needed but where no defaults on debt service payments are expected. Issuers in this category exhibit more significant weaknesses, such as low debt service coverage, reduced or insufficient collateral protection or inadequate liquidity, which could lead to debt service defaults in the future. Issuers in this category have breached one or more covenants or triggers and have not taken conclusive remedial action. For these issuers PSD adopts a remediation plan and takes more proactive remedial actions.

“Classified List”—Includes all insured obligations where National has paid a claim or where a claim payment is expected to exceed its unearned premium revenue. Generally, PSD is actively remediating these credits where possible, including restructurings through legal proceedings, often with the assistance of specialist counsel and advisors.

The following table provides information about the financial guarantees and related claim liability included in each of National’s surveillance categories as of March 31, 2010:

	Surveillance Categories
$ in millions	Caution List  Low		Caution List  Medium		Caution List  High		Classified       List		Total
Number of policies		154		41		3		37		235
Number of issues(1)		8		11		3		13		35
Remaining weighted average contract period (in years)		17.5		13.9		14.9		4.8		12.4
Gross insured contractual payments outstanding:(2)
Principal	$	789	$	1,215	$	50	$	794	$	2,848
Interest		1,482		1,308		41		249		3,080
Total	$	2,271	$	2,523	$	91	$	1,043	$	5,928
Gross claim liability	$	-	$	-	$	-	$	367	$	367
Less:
Gross potential recoveries		-		-		-		191		191
Discount, net		-		-		-		(5)		(5)
Net claim liability (recoverable)	$	-	$	-	$	-	$	181	$	181
Unearned premium revenue	$	-	$	-	$	-	$	2	$	2

    (1) - An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments.

    (2) - Represents contractual principal and interest payments due by the issuer of the obligations insured by National.

16

National Public Finance Guarantee Corporation

Notes to the Consolidated Financial Statements

Note 8: Loss and Loss Adjustment Expense Reserves (continued)

The following table provides information about the components of National’s insurance loss reserves and recoverable included in each of National’s surveillance categories as of March 31, 2010:

In millions	Classified     List
Loss reserves (claim liability)	$	196
LAE reserves		12
Loss and LAE reserves	$	208
Insurance claim loss recoverable	$	16
LAE insurance loss recoverable		-
Insurance loss recoverable	$	16

The following table presents changes in National’s loss and LAE reserve for the three months ended March 31, 2010. Changes in the loss and LAE reserve attributable to the accretion of the discount on the loss reserves, changes in discount rates, and changes in the timing and amounts of estimated payments and recoveries are recorded in “Losses and loss adjustment expenses” in National’s consolidated statements of operations. LAE reserves are expected to be settled within a one-year period and are not discounted. As of March 31, 2010, the weighted average risk-free rate used to discount the claim liability was 1.44%.

In millions

Gross Loss and LAE Reserve as of December 31, 2009	Gross Loss Payments for Cases with   Reserves	Accretion of Claim Liability  Discount		Changes in  Discount Rates		Changes in Timing of   Payments		Changes in Amount of Net Payments		Changes in   Assumptions		Changes in Unearned Premium Revenue	Change in LAE Reserves		Gross Loss and LAE Reserve as of March 31, 2010
$        173	$    (1)	$	-	$	-	$	-	$	-	$	25	$    (1)	$	12	$	208

The following table presents changes in National’s insurance loss recoverable as of March 31, 2010. Changes in the insurance loss recoverable attributable to the accretion of the discount on the recoverable, changes in discount rates, and changes in the timing and amounts of estimated collections are recorded in “Loss and loss adjustment expenses” in National’s consolidated statements of operations.

In millions

Insurance Loss Recoverable as of December 31, 2009		Collections for Cases with   Recoverables		Accretion of  Insurance Loss  Recoverable		Changes in  Discount Rates		Changes in Timing of     Collections		Changes in   Assumptions		Change in LAE  Recoverable		Insurance Loss  Recoverable as of March 31, 2010
$	31	$	-	$	-	$	-	$	-	$	16	$	(31)	$	16

Remediation actions may involve, among other things, waivers or renegotiations of financial covenants or triggers, waivers of contractual provisions, the granting of consents, transfer of servicing, consideration of restructuring plans, acceleration, security or collateral enforcement, actions in bankruptcy or receivership, litigation and similar actions. The types of remedial actions pursued are based on the insured obligation’s risk type and the nature and scope of the event giving rise to the remediation. As part of any such remedial actions, National seeks to improve its security position and to obtain concessions from the issuer of the insured obligation. From time to time, the issuer of a National insured obligation may, with the consent of National, restructure the insured obligation by extending the term, increasing or decreasing the par amount or decreasing the related interest rate, with National insuring the restructured obligation.

17

National Public Finance Guarantee Corporation

Notes to the Consolidated Financial Statements

Note 8: Loss and Loss Adjustment Expense Reserves (continued)

Costs associated with remediating insured obligations assigned to National’s “Caution List—Low,” “Caution List—Medium,” “Caution List—High” and “Classified List” are recorded as LAE. LAE is recorded as part of National’s provision for its loss reserves and included in “Losses and loss adjustment expense” on National’s consolidated statements of operations. The following table provides information about the expenses (gross and net of reinsurance) related to remedial actions for insured obligations included in National’s surveillance categories:

	Three Months Ended March 31,
In millions	2010		2009
Loss adjustment expense incurred, gross	$	11	$	1
Loss adjustment expense incurred, net	$	11	$	1

Note 9: Commitments and Contingencies

In the normal course of operating its business, National may be involved in various legal proceedings. Additionally, MBIA Inc. may be involved in various legal proceedings that directly or indirectly impact National.

MBIA Inc. has received subpoenas or informal inquiries from a variety of regulators, including the Securities and Exchange Commission (“SEC”), the Securities Division of the Secretary of the Commonwealth of Massachusetts, the Attorney General of the State of California, and other states’ regulatory authorities, regarding a variety of subjects, including soft capital instruments, disclosures made by MBIA Inc. to underwriters and issuers of certain bonds, disclosures regarding MBIA Inc.’s structured finance exposure, trading and valuation of managed collateral, MBIA Inc.’s communications with rating agencies, and the methodologies used by rating agencies for determining the credit rating of municipal debt. MBIA Inc. is cooperating fully with each of these regulators and is in the process of satisfying all such requests. MBIA Inc. may receive additional inquiries from these or other regulators and expects to provide additional information to such regulators regarding their inquiries in the future.

On July 23, 2008, the City of Los Angeles filed two complaints in the Superior Court of the State of California, County of Los Angeles, against MBIA Inc. and others. The first complaint, against MBIA Inc., AMBAC Financial Group, Inc., XL Capital Assurance Inc., ACA Financial Guaranty Corp., Financial Guaranty Insurance Company, and CIFG Assurance North America, Inc., alleged (i) participation in a conspiracy in violation of California’s antitrust laws to maintain a dual credit rating scale that misstated the credit default risk of municipal bond issuers and created market demand for municipal bond insurance and (ii) participation in risky financial transactions in other lines of business that damaged each bond insurer’s financial condition (thereby undermining the value of each of their guaranties), and a failure to adequately disclose the impact of those transactions on their financial condition. These latter allegations form the predicate for five separate causes of action against each of the Insurers: breach of contract, breach of the covenant of good faith and fair dealing, fraud, negligence and negligent misrepresentation. Complaints making the same allegations against MBIA Inc. and nearly all of the same co-defendants were filed in Superior Court, San Francisco County, by the City of Stockton, the City of Oakland, the City and County of San Francisco, the County of San Mateo, the County of Alameda, the City of Los Angeles Department of Water and Power, by the Sacramento Municipal Utility District, and the City of Sacramento between July 23, 2008 and January 6, 2009. These cases are now part of a coordinated proceeding referred to as Ambac Bond Insurance Cases. On April 8, 2009, The Olympic Club filed a complaint against MBIA Inc. in the Superior Court of the State of California, County of San Francisco, making similar allegations of participation in risky financial transactions in other lines of business that allegedly damaged MBIA Inc.’s financial condition, and of a failure to adequately disclose the impact of those transactions on MBIA Inc.’s financial condition. These allegations form the predicate for the same initial five common law causes of action as those in the Ambac Bond Insurance Cases, as well as a California unfair competition cause of action. The Olympic Club does not include an antitrust or unjust enrichment cause of action. The Olympic Club case is being coordinated with the Ambac Bond Insurance Cases in San Francisco Superior Court. On August 31, 2009, the aforementioned plaintiffs, excluding the City of Sacramento and the Olympic Club, filed amended complaints identifying specific variable rate bond transactions with respect to the existing contract, fraud and negligence claims, and adding claims for unjust enrichment with respect to insured bonds issued by the plaintiffs during an unspecified period of time. A similar complaint alleging the same causes of action was filed by the City of Riverside. On the same day, the County of Contra Costa and Los Angeles World Airports filed new complaints and the City of Sacramento filed an amended complaint alleging the antitrust violation and unjust enrichment causes of action only. On March 1, 2010 Judge Richard A. Kramer struck the various complaints in their entirety, determining that they had not been pled with requisite specificity. Plaintiffs were given leave to re-plead.

The City of Los Angeles’s second complaint named as defendants certain other financial institutions as well as bond insurers, including MBIA Inc., AMBAC Financial Group, Inc., Financial Security Assurance, Inc., Financial Guaranty Insurance Company and Security Capital Assurance Inc., and alleged fraud and violations of California’s antitrust laws through bid-rigging in the sale of municipal derivatives to municipal bond issuers. Complaints making the same allegations against MBIA Inc. and nearly all of the same co-defendants were filed in Superior Court, Los Angeles County, by the

18

National Public Finance Guarantee Corporation

Notes to the Consolidated Financial Statements

Note 9: Commitments and Contingencies (continued)

County of San Diego on August 28, 2008, and in Superior Court, San Francisco County, by the City of Stockton on July 23, 2008, by the County of San Mateo on October 7, 2008, and by the County of Contra Costa on October 8, 2008. The City of Los Angeles and City of Stockton actions were removed to federal court and transferred by order dated November 26, 2008, to the Southern District of New York for inclusion in the multidistrict litigation In re Municipal Derivatives Antitrust Litigation, M.D.L. No. 1950; the San Diego County, San Mateo County, and Contra Costa County actions were removed to federal court and transferred to the Southern District of New York for inclusion in that proceeding by order dated February 4, 2009. All five plaintiffs filed amended complaints on September 15, 2009 alleging violations of both federal and California state antitrust laws. On December 10, 2009, four additional complaints were filed against MBIA Inc. and the other defendants by the Los Angeles World Airports, the Redevelopment Agency of the City of Stockton and the Public Financing Authority of the City of Stockton (filed jointly), the County of Tulare and the Sacramento Suburban Water District. On April 28, 2010, Judge Victor Marreo denied MBIA Inc.’s motion to dismiss. MBIA Inc.’s motion for reconsideration of that decision was denied on May 3, 2010.

On March 12, 2010, the City of Phoenix, Arizona filed a complaint in the United States District Court for the District of Arizona against MBIA Inc., Ambac Financial Group, Inc. and Financial Guaranty Insurance Company relating to insurance premiums charged on municipal bonds issued by the City of Phoenix between 2004 and 2007. Plaintiff’s complaint alleges pricing discrimination under Arizona insurance law and unjust enrichment. MBIA Inc.’s response is due May 28, 2010.

On April 5, 2010, Tri-City Healthcare District, a California public healthcare legislative district, filed a complaint in the Superior Court of California, County of San Francisco, against MBIA Inc., MBIA Corp., National, and certain MBIA Inc. employees, among other parties (various financial institutions and law firms). The complaint purports to state 19 causes of action (12 against MBIA Inc.) for fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, economic duress and statutory claims for unfair business practices and violation of the California False Claims Act arising from Tri-City Healthcare District’s investment in auction rate securities. MBIA Inc.’s response is due May 21, 2010.

On March 11, 2009, a complaint was filed in the United States District Court of the Southern District of New York against MBIA Inc. and its subsidiaries, MBIA Corp. and National, entitled Aurelius Capital Master, Ltd. et al. v. MBIA Inc. et al., 09-cv-2242 (S.D.N.Y.). The lead plaintiffs, Aurelius Capital Master, Ltd., Aurelius Capital Partners, LP, Fir Tree Value Master Fund, L.P., Fir Tree Capital Opportunity Master Fund, L.P., and Fir Tree Mortgage Opportunity Master Fund, L.P. (the “Aurelius Plaintiffs”), purport to be acting as representatives for a class consisting of all holders of securities, instruments, or other obligations for which MBIA Corp., before February 18, 2009, issued financial guarantee insurance other than United States municipal/governmental bond securities. The complaint alleges that certain of the terms of the transactions entered into by MBIA Inc. and its subsidiaries, which were approved by the New York State Department of Insurance, constituted fraudulent conveyances under §§ 273, 274 and 276 of New York Debtor and Creditor Law and a breach of the implied covenant of good faith and fair dealing under New York common law. The Complaint seeks, inter alia, (a) a declaration that the alleged fraudulent conveyances are null and void and set aside, (b) a declaration that National is responsible for the insurance polices issued by MBIA Corp. up to February 17, 2009, and (c) an award of damages in an unspecified amount together with costs, expenses and attorneys’ fees in connection with the action. On February 11, 2010, Judge Sullivan entered an order denying MBIA Inc.’s motion to dismiss.

On April 6, 2009, a complaint was filed in the Court of Chancery for the State of Delaware entitled Third Avenue Trust and Third Avenue Variable Series Trust v. MBIA Insurance Corp. and MBIA Insurance Corp. of Illinois, CA 4486-UCL. Plaintiffs allege that they are holders of approximately $400 million of surplus notes issued by MBIA Corp. (for purposes of this section, the “Notes”) in January 2008. The complaint alleges (Count I) that certain of the Transactions breached the terms of the Notes and the Fiscal Agency Agreement dated January 16, 2008 pursuant to which the Notes were issued. The complaint also alleges that certain transfers under the Transactions were fraudulent in that they allegedly left MBIA Corp. with “unreasonably small capital” (Count II), “insolvent” (Count III), and were made with an “actual intent to defraud” (Count IV). The complaint seeks a judgment (a) ordering the defendants to unwind the Transactions (b) declaring that the Transactions constituted a fraudulent conveyance, and (c) damages in an unspecified amount. On October 28, 2009, Vice Chancellor Strine entered an order dismissing the case without prejudice. On December 21, 2009, plaintiffs re-commenced the action in New York State Supreme Court, and it has been assigned to Justice James A. Yates.

On May 13, 2009, a complaint was filed in the New York State Supreme Court against MBIA Inc. and its subsidiaries, MBIA Corp. and National, entitled ABN AMRO Bank N.V. et al. v. MBIA Inc. et al. The plaintiffs, a group of 19 domestic and international financial institutions, purport to be acting as holders of insurance policies issued by MBIA Corp. directly or indirectly guaranteeing the repayment of structured finance products. The complaint alleges that certain of the terms of the transactions entered into by MBIA Inc. and its subsidiaries, which were approved by the New York State Department of Insurance, constituted fraudulent conveyances and a breach of the implied covenant of good faith and fair dealing under New York law. The complaint seeks a judgment (a) ordering the defendants to unwind the Transactions, (b) declaring that the Transactions constituted a fraudulent

19

National Public Finance Guarantee Corporation

Notes to the Consolidated Financial Statements

Note 9: Commitments and Contingencies (continued)

conveyance, (c) declaring that MBIA Inc. and National are jointly and severally liable for the insurance policies issued by MBIA Corp., and (d) ordering damages in an unspecified amount. On February 17, 2010, Justice Yates denied defendants’ motion to dismiss. On February 25, 2010, MBIA Inc. filed its Notice of Appeal of the denial to the Appellate Division of the New York State Supreme Court. On April 1, 2010, MBIA Inc.’s motion to stay the case pending appeal was denied. On April 7 and April 22, 2010, respectively, the New York State Insurance Department and the Aurelius Plaintiffs each filed a motion for leave to file an amicus brief in MBIA Inc.’s appeal. On March 22, 2010, MBIA Inc. filed its opening brief with the Appellate Division. On April 21, 2010, plaintiffs filed their opposition brief. MBIA Inc. filed its reply brief on April 30, 2010. On May 6, 2010 the Appellate Division granted the New York State Insurance Department’s motion to file an amicus brief. Argument has been scheduled for June 2, 2010.

On June 15, 2009, the same group of 19 domestic and international financial institutions who filed the above described plenary action in New York State Supreme Court filed a proceeding pursuant to Article 78 of New York’s Civil Practice Law and Rules in New York State Supreme Court, entitled ABN AMRO Bank N.V. et al. v. Eric Dinallo, in his capacity as Superintendent of the New York Insurance State Department, the New York State Insurance Department, MBIA Inc. et al. In its motions to dismiss the three above-referenced plenary actions, MBIA Inc. argued that an Article 78 proceeding is the exclusive forum in which a plaintiff may raise any challenge to the Transformation approved by the Superintendent of the Department of Insurance. The petition seeks a judgment (a) declaring void and to annul the approval letter of the Superintendent of the Department of Insurance, (b) to recover dividends paid in connection with the Transactions, (c) declaring that the approval letter does not extinguish plaintiffs’ direct claims against MBIA Inc. and its subsidiaries in the plenary action described above. MBIA Inc. and the New York State Insurance Department filed their answering papers to the Article 78 Petition on November 24, 2009 and argued that based on the record and facts, approval of Transformation and its constituent transactions was neither arbitrary nor capricious nor in violation of New York Insurance Law. On April 7, 2010, Justice Yates ordered that the Article 78 proceeding continue on a separate, expedited schedule from the other three Transformation-related litigations.

MBIA Inc. and National are defending against the aforementioned actions and expect ultimately to prevail on the merits. There is no assurance, however, that they will prevail in these actions. Adverse rulings in these actions could have a material adverse effect on National’s ability to implement its strategy and on its business, results of operations and financial condition.

There are no other material lawsuits pending or, to the knowledge of National, threatened, to which National is a party.

Note 10: Subsequent Events

Refer to “Note 9: Commitments and Contingencies” for information about legal proceedings that developed after December 31, 2009.

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