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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File No. 1-12644

Financial Security Assurance Holdings Ltd.
(Exact name of registrant as specified in its charter)

New York		13-3261323
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

350 Park Avenue
New York, New York 10022
(Address of principal executive offices)

(212) 826-0100
(Registrant's telephone number, including area code)

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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

At August 12, 2003, there were 33,220,337 outstanding shares of Common Stock of the registrant (excludes 297,658 shares of treasury stock).

INDEX

		PAGE
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Unaudited Financial Statements Financial Security Assurance Holdings Ltd. and Subsidiaries Condensed Consolidated Balance Sheets—June 30, 2003 and December 31, 2002	1
	Condensed Consolidated Statements of Operations and Comprehensive Income—Three and six months ended June 30, 2003 and 2002	2
	Condensed Consolidated Statement of Changes in Shareholders' Equity—Six months ended June 30, 2003	3
	Condensed Consolidated Statements of Cash Flows—Six months ended June 30, 2003 and 2002	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
Item 4.	Controls and Procedures	20
PART II	OTHER INFORMATION
Item 4.	Submission of Matters to a Vote of Security Holders	21
Item 6.	Exhibits and Reports on Form 8-K	22
SIGNATURES		23

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)

				June 30, 2003			December 31, 2002
ASSETS
Bonds at market value (amortized cost of $2,999,595 and $2,615,173)				$	3,269,906		$	2,829,763
Short-term investments					243,091			375,688
Guaranteed investment contract bond portfolio at market value (amortized cost of $2,292,658 and $1,840,949)					2,287,560			1,827,312
Guaranteed investment contract bond portfolio pledged as collateral at market value (amortized cost of $108,066)					102,428
Guaranteed investment contract short-term investment portfolio					134,626			4,632

	Total investments				6,037,611			5,037,395
Cash					13,187			31,368
Securitized loans					424,860			437,462
Securities purchased under agreements to resell					20,000			90,000
Deferred acquisition costs					261,249			253,777
Prepaid reinsurance premiums					630,799			557,659
Reinsurance recoverable on unpaid losses					78,459			75,950
Investment in unconsolidated affiliates					127,215			115,833
Other assets					451,953			428,039

		TOTAL ASSETS		$	8,045,333		$	7,027,483

LIABILITIES AND MINORITY INTEREST AND SHAREHOLDERS' EQUITY
Deferred premium revenue				$	1,641,271		$	1,450,211
Losses and loss adjustment expenses					237,885			223,618
Guaranteed investment contracts					2,888,633			2,449,033
Deferred federal income taxes					152,068			124,310
Securities sold under agreements to repurchase					96,340
Ceded reinsurance balances payable					64,178			79,870
Notes payable					430,000			430,000
Deferred compensation					94,684			83,031
Minority interest					57,561			52,841
Payable for securities purchased					124,331			10,490
Accrued expenses and other liabilities					220,188			255,709

		TOTAL LIABILITIES AND MINORITY INTEREST			6,007,139			5,159,113

Common stock (200,000,000 shares authorized; 33,517,995 issued; par value of $.01 per share)					335			335
Additional paid-in capital					900,484			903,494
Accumulated other comprehensive income (net of deferred income taxes of $85,972 and $66,270)					173,603			134,683
Accumulated earnings					963,772			829,858
Deferred equity compensation					23,445			23,445
Less treasury stock at cost (297,658 shares held)					(23,445	)		(23,445	)

		TOTAL SHAREHOLDERS' EQUITY			2,038,194			1,868,370

			TOTAL LIABILITIES AND MINORITY INTEREST AND SHAREHOLDERS' EQUITY	$	8,045,333		$	7,027,483

See notes to condensed consolidated financial statements.

FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Dollars in thousands)

				Three Months Ended June 30,						Six Months Ended June 30,
				2003			2002			2003			2002
Revenues:
	Net premiums written			$	187,884		$	125,186		$	280,069		$	220,427

	Net premiums earned				88,158			77,053			168,248			146,751
	Net investment income				37,776			35,100			74,309			68,498
	Net realized gains				2,829			22,874			3,893			23,957
	Guaranteed investment contract net interest income				11,949			5,143			19,906			8,175
	Guaranteed investment contract net realized losses				(1,058	)					(1,096	)
	Net realized and unrealized gains (losses) on derivative instruments				2,365			(16,470	)		2,140			(24,698	)
	Other income				451			1,036			1,627			1,182

			TOTAL REVENUES		142,470			124,736			269,027			223,865

Expenses:
	Losses and loss adjustment expenses				6,595			39,207			12,895			42,119
	Interest expense				7,085			5,881			14,171			11,742
	Policy acquisition costs				13,537			13,512			26,936			25,877
	Guaranteed investment contract net interest expense				6,916			2,844			14,229			5,523
	Other operating expenses				17,339			10,721			32,939			20,984

			TOTAL EXPENSES		51,472			72,165			101,170			106,245

Minority interest					(2,293	)		(2,155	)		(4,720	)		(4,215	)
Equity in earnings of unconsolidated affiliates					58			5,836			9,386			12,880

INCOME BEFORE INCOME TAXES					88,763			56,252			172,523			126,285
Provision for income taxes					20,674			10,847			38,609			26,760

NET INCOME					68,089			45,405			133,914			99,525

Other comprehensive income, net of tax:
	Unrealized gains on securities:
		Holding gains arising during period			38,703			40,435			41,398			34,920
		Less: reclassification adjustment for gains included in net income			2,152			16,779			2,478			17,555

	Other comprehensive income				36,551			23,656			38,920			17,365

COMPREHENSIVE INCOME				$	104,640		$	69,061		$	172,834		$	116,890

See notes to condensed consolidated financial statements.

FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)

	Common Stock		Additional Paid-In Capital			Accumulated Other Comp- rehensive Income		Accumulated Earnings		Deferred Equity Compen- sation		Treasury Stock			Total
BALANCE, December 31, 2002	$	335	$	903,494		$	134,683	$	829,858	$	23,445	$	(23,445	)	$	1,868,370
Net income									133,914							133,914
Capital issuance costs				(3,010	)											(3,010	)
Net unrealized gain on investments, net of tax							38,920									38,920

BALANCE, June 30, 2003	$	335	$	900,484		$	173,603	$	963,772	$	23,445	$	(23,445	)	$	2,038,194

See notes to condensed consolidated financial statements.

FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

			Six Months Ended June 30,
			2003			2002
Cash flows from operating activities:
	Premiums received, net		$	267,276		$	221,449
	Policy acquisition and other operating expenses paid, net			(103,881	)		(90,760	)
	Recoverable advances recovered			683			3,341
	Losses and loss adjustment expenses paid, net			(1,490	)		(4,018	)
	Net investment income received			96,902			76,412
	Federal income taxes paid			(39,320	)		(52,718	)
	Interest paid			(13,102	)		(9,233	)
	Interest paid on guaranteed investment contracts			(19,490	)		(12,347	)
	Other			15,914			10,896

		Net cash provided by operating activities		203,492			143,022

Cash flows from investing activities:
	Proceeds from sales of bonds			523,963			541,205
	Proceeds from sales of guaranteed investment contract bonds			527,949
	Purchases of bonds			(861,484	)		(671,825	)
	Purchases of guaranteed investment contract bonds			(1,009,110	)		(1,085,600	)
	Purchases of property and equipment			(677	)		(4,531	)
	Securities purchased under agreements to resell			70,000
	Net decrease (increase) in guaranteed investment contract short-term investments			(129,994	)		224,640
	Net decrease in short-term investments			133,006			8,927
	Net decrease (increase) in other investments			32,811			(1,340	)

		Net cash used for investing activities		(713,536	)		(988,524	)

Cash flows from financing activities:
	Dividends paid						(11,709	)
	Capital issuance costs			(3,010	)
	Proceeds from securities sold under agreements to repurchase			96,340			165,408
	Repayment of guaranteed investment contracts			(546,087	)		(167,897	)
	Proceeds from issuance of guaranteed investment contracts			944,620			877,846

		Net cash provided by financing activities		491,863			863,648

Net increase (decrease) in cash				(18,181	)		18,146
Cash at beginning of period				31,368			7,784

Cash at end of period			$	13,187		$	25,930

See notes to condensed consolidated financial statements.

FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2003 and 2002

1. ORGANIZATION AND OWNERSHIP

Financial Security Assurance Holdings Ltd. (the Company) is an insurance holding company incorporated in the State of New York. The Company is primarily engaged (through its insurance company subsidiaries, collectively known as FSA) in the business of providing financial guaranty insurance on asset-backed and municipal obligations. The Company also offers guaranteed investment contracts (GICs) through its wholly owned subsidiaries, FSA Capital Markets Services LLC and FSA Capital Management Services LLC (collectively, CMS). The Company is an indirect subsidiary of Dexia S.A. (Dexia), a publicly held Belgian corporation.

2. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and, accordingly, do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America. These condensed consolidated statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. The accompanying condensed consolidated financial statements have not been audited by independent accountants in accordance with auditing standards generally accepted in the United States of America but, in the opinion of management, all adjustments, which include only normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows at June 30, 2003 and for all periods presented, have been made. The December 31, 2002 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the periods ended June 30, 2003 and 2002 are not necessarily indicative of the operating results for the full year. Certain prior-year balances have been reclassified to conform to the 2003 presentation.

3. LOSSES AND LOSS ADJUSTMENT EXPENSES

The Company establishes a case basis reserve for unpaid losses and loss adjustment expenses for the present value of the estimated loss when, in management's opinion, the likelihood of a future loss on a particular insured obligation is probable and determinable at the balance sheet date. The estimated loss on a transaction is discounted using the then current risk-free rates ranging from 4.77% to 6.1%. For collateralized debt obligations, a case basis reserve is recorded to the extent that the overcollateralization ratio (non-defaulted collateral at par value divided by the debt insured) has fallen below 100% and there is a projected loss when calculating the present value of cash flows.

The Company also maintains a non-specific general reserve, which is available to be applied against future additions or accretions to existing case basis reserves or to new case basis reserves to be established in the future. The general reserve is calculated by applying loss factors to the Company's total net par underwritten and discounting the result at the then current risk-free rates. The loss factors used for this purpose has been determined based upon an independent rating agency study of bond defaults and the Company's portfolio characteristics and history.

Management of the Company periodically evaluates its estimates for losses and loss adjustment expenses and establishes reserves that management believes are adequate to cover the net present value of the ultimate net cost of claims.

4. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133

FSA has insured a number of credit default swaps that it intends, in each case, to hold for the full term of the agreement. It considers these agreements to be a normal extension of its financial guaranty insurance business, although they are considered derivatives for accounting purposes. These agreements are recorded at fair value. The Company believes that the most meaningful presentation of the financial statement impact of these derivatives is to reflect premiums as installments are received, to record losses and loss adjustment expenses as incurred and to record changes in fair value as incurred. The Company recorded $12.5 million and $23.7 million in net earned premium under these agreements for the three months and six months ended June 30, 2003, respectively and $8.3 million and $15.3 million in net earned premium for the three and six months ended June 30, 2002, respectively. The changes in fair value, which were gains of $2.6 million and $4.1 million for the three and six months ended June 30, 2003, respectively, and losses of $0.5 million and $4.9 million for the three and six months ended June 30, 2002, respectively, were recorded in net realized and unrealized losses on derivative instruments in the consolidated statements of operations and comprehensive income and in other assets or liabilities. The losses or gains recognized by recording these contracts at fair value will be determined each quarter based upon market pricing of Super Triple-A (defined as having first-loss protection of 1.3 times the level required for a Triple-A rating) swap guarantees. The Company does not believe the fair value adjustments are an indication of potential claims under FSA's guarantees. The inception-to-date net unrealized loss was recorded in other liabilities and was $40.1 million and $44.2 million at June 30, 2003 and December 31, 2002, respectively.

Derivative instruments, which are primarily designated as fair-value hedges, are entered into to manage the interest rate exposure of the Company's GICs and GIC bond portfolio and are recorded at fair value. These derivatives generally include interest rate futures and interest rate swap agreements, which are primarily utilized to convert the Company's fixed-rate obligations on its GICs and GIC bond portfolio into floating-rate obligations. The gains and losses relating to these fair-value hedges are included in guaranteed investment contract net interest income and net interest expense, as appropriate, along with the offsetting change in fair value of the hedged item attributable to the risk being hedged, in the consolidated statements of operations and comprehensive income. For the three months and six months ended June 30, 2003, the Company recorded a net loss of $1.9 million and $6.4 million, respectively and for the three and six months ended June 30, 2002, the Company recorded a net gain of $1.6 million and $2.2 million, respectively, relating to the ineffectiveness of these hedges. In addition, there are derivatives that were purchased for the purpose of hedging the interest rate risk on GICs that have not yet been designated to specific GICs and as a result hedge accounting is not permitted. The change in fair-value of these derivatives was a loss of $2.5 million for the three and six months ended June 30, 2003 and was recorded in net realized and unrealized losses on derivative instruments in the consolidated statements of operations and comprehensive income.

5. OUTSTANDING EXPOSURE

The Company limits its exposure to losses from writing financial guarantees by underwriting investment-grade obligations, diversifying its portfolio and maintaining rigorous collateral requirements on asset-backed obligations, as well as through reinsurance. The principal amounts of insured obligations in the asset-backed insured portfolio are backed by the following types of collateral (in millions) at June 30, 2003 and December 31, 2002:

		Net of Amounts Ceded				Ceded
		2003		2002		2003		2002
Residential mortgages		$	19,609	$	23,379	$	4,607	$	5,480
Consumer receivables			15,593		19,454		5,108		5,954
Pooled corporate obligations			79,871		78,113		12,572		13,007
Investor-owned utility obligations			545		619		312		348
Other asset-backed obligations ⁽¹⁾			4,483		4,528		3,662		3,225

	Total asset-backed obligations	$	120,101	$	126,093	$	26,261	$	28,014

(1): Excludes $3,010 million and $2,430 million, in 2003 and 2002, respectively, in "Net of Amounts Ceded" relating to FSA-insured GICs issued by CMS.

Net of amounts ceded and ceded amounts are not necessarily reflective of the risk retained by FSA since FSA employs first loss reinsurance on a material portion of its asset-backed business.

The principal amount of insured obligations in the municipal insured portfolio includes the following types of issues (in millions) at June 30, 2003 and December 31, 2002:

		Net of Amounts Ceded				Ceded
Types of Issues		Net of Amounts Ceded				Ceded
Types of Issues		2003		2002		2003		2002
General obligation bonds		$	61,127	$	54,563	$	18,986	$	18,388
Housing revenue bonds			6,934		5,833		1,848		1,687
Municipal utility revenue bonds			27,431		23,442		13,827		13,468
Health care revenue bonds			6,005		5,970		6,625		6,683
Tax-supported (non-general obligation) bonds			30,203		27,556		12,773		12,391
Transportation revenue bonds			9,622		7,640		6,865		5,748
Other municipal bonds			13,559		12,173		6,755		5,761

	Total municipal obligations	$	154,881	$	137,177	$	67,679	$	64,126

6. GUARANTEED INVESTMENT CONTRACTS

As of June 30, 2003, the interest rates on these GICs were between 0.915% and 5.95% per annum.

Payments due under these GICs, excluding mark-to-market adjustments and prepaid interest of $44.3 million, in the remainder of 2003 and each of the next five years ending December 31 and thereafter, based upon expected withdrawal dates, are as follows (in millions):

Expected Withdrawal Date	Principal Amount
2003	$	109.6
2004		531.7
2005		593.0
2006		140.9
2007		562.2
2008		147.8
Thereafter		759.1

Total	$	2,844.3

7. SEGMENT REPORTING

The Company operates in two business segments, financial guaranty and financial products. The financial guaranty segment is primarily in the business of providing financial guaranty insurance on asset-backed and municipal obligations. The financial products segment presently consists of the Company's GIC operations. The GICs provide for the return of principal and the payment of interest at a guaranteed rate. The following table is a summary of the financial information (in thousands) by segment as of and for the six months ended June 30, 2003 and 2002:

		For the Six Months Ended June 30, 2003
		Financial Guaranty		Financial Products			Inter-segment Eliminations			Total
Revenues:
	External	$	262,095	$	6,932		$			$	269,027
	Inter-segment		2,916		11,995			(14,911	)
Expenses:
	External		77,668		23,502						101,170
	Inter-segment		11,995		2,916			(14,911	)
Income (loss) before income taxes			180,014		(7,491	)					172,523
Segment assets			5,483,940		3,073,854			(512,461	)		8,045,333

	For the Six Months Ended June 30, 2002
	Financial Guaranty		Financial Products			Total
Revenues	$	215,690	$	8,175		$	223,865
Expenses		94,913		11,332			106,245
Income (loss) before income taxes		129,442		(3,157	)		126,285

The inter-segment assets are intercompany loans that are in the financial products investment portfolio. The inter-segment revenues relate to premiums charged by the financial guaranty segment for insuring GICs, and interest income and interest expense on the inter-segment loans.

8. INVESTMENTS IN UNCONSOLIDATED AFFILIATES

The Company owns a minority interest in Fairbanks Capital Holding Corp., the parent company of Fairbanks Capital Corp. (collectively with its parent, Fairbanks). Fairbanks is a servicer of single-family residential mortgage loans originated by unaffiliated third parties. Most of the mortgage loans serviced by Fairbanks are considered "sub-prime", reflecting the lower than "prime" credit quality of the borrower/homeowner. Fairbanks is owned 56.8% by The PMI Group Inc. and 29.8% by the Company, with the remainder owned by certain founders of Fairbanks. At June 30, 2003, the Company's interest in Fairbanks had a book value of $61.7 million, of which $7.5 million represented goodwill. The Company's equity in the earnings from Fairbanks for the six months ended June 30, 2003 and 2002 was $1.7 million and $5.4 million, respectively. The decrease in the Company's equity in the earnings of Fairbanks for the quarter was largely a result of restructuring and litigation settlement charges.

Fairbanks' business is subject to regulation, supervision and licensing by various federal, state and local authorities, which have recently increased their focus on lending and servicing practices in the sub-prime lending industry. In October 2002, the Federal Trade Commission (the FTC) informed Fairbanks that it was investigating whether Fairbanks' loan servicing or other practices violated the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, Section 5 of the Federal Trade Commission Act or other laws enforced by the FTC. The Company understands that, in March 2003, the U.S. Department of Housing and Urban Development initiated a criminal investigation into Fairbanks' servicing practices. Certain of Fairbanks' shareholders, including the Company, have received civil investigative demands from the FTC relating to their investments in Fairbanks and their knowledge of Fairbanks' servicing operations.

Fairbanks is also subject to private litigation, including a number of putative class action suits, alleging violations of federal and/or state laws. The publicity surrounding sub-prime lending and servicing practices may result in the filing of other putative class action suits against Fairbanks.

Fairbanks is highly leveraged and dependent upon credit facilities to make servicing and delinquency advances in the regular course of its business, to finance the acquisition of mortgage servicing rights and for other business purposes. In May 2003, Moody's Investors Service, Inc. and Standard & Poor's Ratings Services downgraded their loan servicer rankings for Fairbanks from strong to below average. These actions constituted potential events of

default under Fairbanks' credit facilities, which led to a restructuring of and amendments to the credit facilities in June 2003.

In order to address alleged violations of various federal and state laws, Fairbanks is reimbursing certain fees allegedly collected improperly, and is changing certain of its loan servicing practices, including the types and amounts of fees collected, without admitting any violations. Due to these developments, future income from Fairbanks' operations is expected to be reduced. While the impairment test done by the Company did not result in a write-down of the investment, future developments are uncertain due to the ongoing investigation and private litigation.

9. CAPITAL RESOURCES

In June 2003, $200.0 million of money market committed preferred trust securities (the CPS Securities) were issued by trusts created for the primary purpose of issuing the CPS Securities, investing the proceeds in high quality commercial paper and providing FSA with put options for selling to the trusts non-cumulative redeemable perpetual preferred stock (the Preferred Stock) of FSA. If a put option were to be exercised by FSA, the applicable trust would use the portion of the proceeds attributable to principal received upon maturity of its assets, net of expenses, and transfer such proceeds to FSA in exchange for Preferred Stock of FSA. FSA pays a floating put premium to the trusts. The cost of the structure was $3.0 million in the second quarter of 2003 and was recorded in equity. The trusts are vehicles for providing FSA access to new capital at its sole discretion through the exercise of the put options.

The Company does not consider itself to be the primary beneficiary of the trusts under Financial Accounting Standards Board (FASB) Interpretation No. 46 "Consolidation of Variable Interest Entities" (FIN No. 46) because it does not retain the majority of the residual benefits or expected losses.

10. RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2003, the FASB issued FIN No. 46, which is an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements". FIN No. 46 addresses consolidation of variable interest entities (VIEs) which have one or both of the following characteristics: (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity; and (ii) the equity investors lack the direct or indirect ability to make decisions about the entity's activities through voting rights or similar rights, the obligation to absorb the expected losses of the entity if they occur or the right to receive the expected residual returns of the entity if they occur. The provisions of FIN No. 46 will be effective immediately for VIEs created after January 31, 2003 and for VIEs in which an enterprise obtains an interest after that date. For VIEs in which an enterprise holds a variable interest that it acquired prior to February 1, 2003, the interpretation is effective in the first fiscal year or interim period beginning after June 15, 2003. The implementation of FIN No. 46, will cause the Company to consolidate for financial reporting purposes, for the first time commencing in the third quarter of 2003, FSA Global Funding Limited (FSA Global) and Canadian Global Funding Corporation (Canadian Global). FIN No. 46 requires that, upon consolidation, the Company shall initially measure the VIE's assets, liabilities and minority interest at their carrying amounts under existing GAAP as if the entity had been consolidated from the time the Company was considered its primary beneficiary (or parent). Any differences upon consolidation will be reflected as a cumulative effect of a change in accounting principle. The cumulative effect of a change in accounting principle is not expected to have a material impact on the results of operations of the Company. In addition, on July 1, 2003, the Company obtained control provisions of another VIE, Premier International Funding Co. (Premier), which will cause the Company to consolidate Premier beginning July 1, 2003. At June 30, 2003, FSA Global had total assets and total liabilities of approximately $9.6 billion and $9.6 billion, respectively. The foregoing assets and liabilities include assets and liabilities of $7.2 billion that will be eliminated with assets and liabilities of Premier, when consolidated. FSA Global had a net loss of approximately $0.1 million for the first half of 2003. FSA Global's net income is determined net of FSA Global's premium expense to FSA. For the six months ended June 30, 2003, FSA Global paid premiums to FSA of approximately $2.4 million. All amounts insured by FSA relating to FSA Global are included in the Company's outstanding exposure, included in the Notes to the Condensed Consolidated Financial Statements for June 30, 2003. As of June 30, 2003, there were no case basis reserves required for any transactions related to FSA Global. At June 30, 2003, Canadian Global had total assets of approximately $198.5 million, of which $97.6 million has been invested in GICs issued by CMS. As of June 30, 2003, the Company was carrying

gross and net case basis reserves of $17.2 million and $4.3 million, respectively, against transactions refinanced by Canadian Global. The Company will continue to analyze the effects of FIN No. 46, considering the complexity of practical application to the Company's transactions.

11. SUBSEQUENT EVENT

On July 31, 2003, the Company issued $100.0 million of 5.60% Notes due July 15, 2103 and callable on or after July 31, 2008. Debt issuance costs of approximately $3.3 million will be amortized over the life of the Notes. The Company expects to use the proceeds of the new debt offering to discharge the indenture with respect to all of its outstanding 6.950% Senior Quarterly Income Debt Securities (Senior QUIDS) due November 1, 2098 during the third quarter of 2003, and to redeem all the outstanding Senior QUIDS on or about November 1, 2003. The Senior QUIDS are callable, without premium or penalty, on or after November 1, 2003.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Management and investors consider the following measures important in analyzing the financial results of the Company: operating earnings and gross present value of originations (PV originations). However, neither of these measures is promulgated in accordance with accounting principles generally accepted in the United States of America and should not be considered a substitute for net income and gross premiums written.

2003 and 2002 Second Quarter Results

The Company's second quarter 2003 net income was $68.1 million, compared with net income of $45.4 million for the same period in 2002. Operating earnings were $66.3 million for the second quarter of 2003, compared with $45.7 million for the second quarter of 2002. In the second quarter of 2003, net income was positively affected by $1.8 million of mark-to-market adjustments for pooled credit default swaps (CDS) under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). In the second quarter of 2002, net income was negatively affected by $0.3 million of mark-to-market adjustments for CDS under SFAS No. 133.

In December 2002, the Company revised its definition of operating earnings from that used in prior periods. Operating earnings is now defined as net income before the after-tax effects of SFAS No. 133 mark-to-market adjustments for pooled CDS. For purposes of calculating operating earnings, pooled CDS are defined as FSA-insured credit default swaps that reference pools of financial obligations and require payments by the Company if losses exceed a defined deductible providing an investment-grade level of protection to the Company. Management considers operating earnings a key measure of normal operating results, as the SFAS No. 133 adjustments for each guaranteed CDS are expected to sum to zero over the life of the transaction. Operating earnings for 2002 disclosed in this discussion differ from those previously disclosed due to the revised definition of operating earnings.

The table below shows a reconciliation of net income to operating earnings for the quarters ended June 30, 2003 and 2002:

	2003		2002
	(in millions)
Net Income	$	68.1	$	45.4
Less mark-to-market of pooled CDS ⁽¹⁾		1.8		(0.3	)

Operating Earnings ⁽¹⁾	$	66.3	$	45.7

⁽¹⁾: Amounts are after-tax

The Company employs two measures of gross premiums originated for a given period. Gross premiums written captures premiums collected in the period, whether collected up front for business originated in the period or in installments for business originated in prior periods. An alternative measure, gross present value of premiums written (PV premiums), reflects future installment premiums discounted to their present value, as well as upfront premiums, but only for business originated in the period. Business ceded through reinsurance placed by a third party is excluded from PV premiums. The Company considers PV premiums to be the better indicator of a given period's insurance origination activity because a substantial portion of the Company's premiums is collected in installments, a practice typical of the asset-backed business. To calculate PV premiums, management estimates the life of each transaction that has installment premiums and discounts the future installment premium payments. The present value of the future net interest margin from the Company's financial products business represents the present value of the difference between the estimated interest to be received on the investments of the Company's guaranteed investment contract (GIC) operations and the estimated interest to be paid on GICs issued over the estimated life of each transaction, giving effect to swaps and other derivatives which convert fixed-rate assets and liabilities to floating rates. PV premiums and the present value of the future net interest margin from the Company's financial products segment are collectively referred to as PV originations . The Company calculates the discount rate for PV originations as the average pre-tax yield on its investment portfolio for the previous three years. Accordingly, year-to-year comparisons of PV originations are affected by the application of different discount factors. The rate for both 2003 and 2002 was 5.91%. Management intends to revise the discount rate in future years according to the same formula, in order to reflect interest rate changes.

Gross premiums written increased 72.5% to $294.8 million in the second quarter of 2003 from $170.8 million for the second quarter of 2002. PV originations increased 65.5% to $330.9 million in the second quarter of 2003 from the second quarter result of $199.9 million in 2002.

The table below shows the components of PV originations for the second quarter of 2003 and 2002:

	2003		2002
	(in millions)
U.S municipal obligations ⁽¹⁾	$	144.5	$	74.9
U.S. asset-backed obligations ⁽¹⁾⁽²⁾		65.7		55.7
International obligations ⁽¹⁾		105.4		61.4
Financial products ⁽³⁾		15.3		7.9

Total	$	330.9	$	199.9

⁽¹⁾: PV premiums
⁽²⁾: U.S. asset-backed amounts for 2002 have been restated to exclude financial products originations.
⁽³⁾: Present value of future net interest margin originated

For the second quarter of 2003, the Company guaranteed a par amount of $15.8 billion of U.S. primary and secondary municipal obligations, an increase of 29.4% over the amount insured in the prior year's comparable period. FSA's U.S. municipal PV premium originations were $144.5 million for the quarter, up 92.9% from the $74.9 million produced in the second quarter of 2002. Average premium rates were strong, reflecting higher spreads and a healthy appetite for bond insurance.

For the second quarter of 2003, the Company's U.S. asset-backed par originated was $4.5 billion, compared with $12.2 billion in the second quarter of last year, while asset-backed PV premiums increased 18.0%. While the decline in volume reflects FSA's selective approach to the collateralized debt obligation (CDO) and consumer receivable sectors in the current credit environment, FSA found increasing opportunities to insure transactions that met its underwriting standards at favorable returns. The average premium rate was boosted in part by premiums related to amendments of existing business.

For the second quarter of 2003, the Company insured $2.7 billion par of international obligations, generating $105.4 million of PV premiums, versus $6.5 billion of par and $61.4 million of PV premiums in the second quarter of 2002. In the United Kingdom, the Company closed three infrastructure transactions. In the largest of these, the Company insured £515 million of public-private partnership bonds issued to finance improvements to the London Underground. The Company also completed a number of international asset-backed transactions. PV premiums increased despite the decline in par insured primarily because of a shift in the business mix. Long-tenor public infrastructure transactions represented a greater portion of par insured.

Net premiums written were $187.9 million for the second quarter of 2003, an increase of 50.1% over the comparable period in 2002. Net premiums earned for the second quarter of 2003 were $88.2 million, compared with $77.1 million in the second quarter of 2002. Net premiums earned from refundings and prepayments were $7.5 million for the second quarter of 2003 and $7.0 million for the same period of 2002, contributing $4.0 million and $3.6 million, respectively, to after-tax earnings. Net premiums earned for the quarter grew 15.2% relative to the same period in 2002, if the effects of refundings and prepayments are eliminated.

Net investment income was $37.8 million for the second quarter of 2003 and $35.1 million for the comparable period in 2002, an increase of 7.6%. The Company's effective tax rate on investment income was 9.6% for the second quarter of 2003, compared with 11.3% for the same period in 2002. In the second quarter of 2003, the Company realized $2.8 million in net capital gains, compared with $22.9 million for the same period in 2002. Capital gains and losses are generally a by-product of the normal investment management process and could vary substantially from period to period.

The provision for losses and loss adjustment expenses during the second quarter of 2003 was $6.6 million compared with $39.2 million in the second quarter of 2002. The decrease occurred primarily because reserves were increased by $31.0 million in the second quarter of 2002 to reflect adverse experience in the CDO market. Since the reserves are based upon estimates, there can be no assurance that the ultimate liability will not differ from such

estimates. The Company will continue, on an ongoing basis, to monitor these reserves and may periodically adjust such reserves, upward or downward, based on the Company's actual loss experience, its future mix of business and future economic conditions. At June 30, 2003, the general reserve totaled $89.5 million and the total losses and loss adjustment expense liability totaled $237.9 million.

Total policy acquisition and other operating expenses were $30.9 million for the second quarter of 2003 compared with $24.2 million for the same period in 2002. Excluding the effects of refundings, total policy acquisition and other operating expenses were $29.5 million for the second quarter of 2003 compared with $22.8 million for the same period in 2002. Expenses increased primarily as a result of the lowering of the percentage of expenses deferred, based upon a study performed by the Company of its origination costs, and higher personnel costs.

As of June 30, 2003, the Company's financial products group had recorded principal on GICs outstanding of $2,844.3 million. For the second quarters of 2003 and 2002, these transactions resulted in a net interest margin of $1.5 million and $2.3 million, respectively.

A portion of FSA's business has been in the form of insured CDS referencing diversified pools of corporate obligations. Many of these require periodic adjustments to reflect an estimate of fair value under SFAS No. 133. These transactions have generally been underwritten with Triple-A or higher levels of credit protection before our guaranty. For the second quarter of 2003 and 2002, these mark-to-market adjustments resulted in a benefit to net income of $1.8 million and a net charge to income of $0.3 million, respectively. The gain or loss created by estimated fair value adjustments will rise or fall each quarter based on estimated market pricing of highly rated swap guarantees and is not expected to be an indication of potential claims under FSA's guaranty. Fair value is defined as the amount at which an asset or a liability could be bought or sold in a current transaction between willing parties. The fair value is determined based upon quoted market prices, if available. If quoted market prices are not available, as is the case primarily with CDS on pools of assets, then the determination of fair value is based upon internally developed estimates. Management applies judgment when developing these estimates and considers factors such as current prices charged for similar agreements, performance of underlying assets, changes in internal shadow ratings, the level at which the deductible has been set and FSA's ability to obtain reinsurance for its insured obligations. Due to changes in these factors, the gain or loss from derivative instruments can vary substantially from period to period. Absent any claims under FSA's guaranty, any "losses" recorded in marking a guaranty to market will be reversed by an equivalent mark-to-market "gain" at or prior to the expiration of the guaranty. The gain recorded in the second quarter of 2003 was a reversal of losses recorded in prior periods. In addition, in the first half of 2002, FSA was party to a credit default swap referencing a highly diversified portfolio of 100 corporate names, with $10 million of exposure per name, to which the Company had first-loss exposure. For the second quarter of 2002, this transaction resulted in a $10.8 million after-tax charge to income as a result of marking the transaction to market. The Company terminated its exposure to this transaction in the third quarter of 2002. These amounts are included in net realized and unrealized gains (losses) on derivative instruments in the consolidated statements of operations and comprehensive income.

Total equity in earnings of unconsolidated affiliates was $0.1 million and $5.8 million for the second quarter of 2003 and 2002, respectively. The decrease is primarily related to the equity earnings in Fairbanks Capital Holding Corp. The Company owns a minority interest in Fairbanks Capital Holding Corp., the parent company of Fairbanks Capital Corp. (collectively with its parent, "Fairbanks"). Fairbanks is a servicer of single-family residential mortgage loans originated by unaffiliated third parties. Most of the mortgage loans serviced by Fairbanks are considered "sub-prime", reflecting the lower than "prime" credit quality of the borrower/homeowner. Fairbanks is owned 56.8% by The PMI Group Inc. and 29.8% by the Company, with the remainder owned by certain founders of Fairbanks. At June 30, 2003, the Company's interest in Fairbanks had a book value of $61.7 million, of which $7.5 million represented goodwill. The Company's equity in the earnings from Fairbanks for the quarter ended June 30, 2003 and 2002 was a loss of $1.7 million and income of $2.9 million, respectively. The decrease in the Company's equity in the earnings of Fairbanks for the quarter was largely a result of restructuring and litigation settlement charges.

Fairbanks' business is subject to regulation, supervision and licensing by various federal, state and local authorities, which have recently increased their focus on lending and servicing practices in the sub-prime lending industry. In October 2002, the Federal Trade Commission (the "FTC") informed Fairbanks that it was investigating whether Fairbanks' loan servicing or other practices violated the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, Section 5 of the Federal Trade Commission Act or other laws enforced by the FTC. The Company understands that, in March 2003, the U.S. Department of Housing and Urban Development initiated a criminal

investigation into Fairbanks' servicing practices. Certain of Fairbanks' shareholders, including the Company, have received civil investigative demands from the FTC relating to their investments in Fairbanks and their knowledge of Fairbanks' servicing operations.

The Company's effective tax rate for the second quarter of 2003 was 23.3% compared with 19.3% for the same period in 2002. In 2003 and 2002, the effective tax rate differs from the statutory rate of 35% due primarily to tax-exempt interest income and income from Financial Security Assurance International Ltd (FSA International). Although FSA International is subject to U.S. income taxes as a controlled foreign corporation, it nonetheless benefits from a lower overall effective tax rate than the Company's domestic insurance company subsidiaries.

2003 and 2002 First Six Months Results

The Company's 2003 first half net income was $133.9 million, compared with net income of $99.5 million for the same period in 2002. Operating earnings were $131.1 million for the first half of 2003, compared with $102.7 million for the first half of 2002. In the first half of 2003, net income was positively affected by $2.8 million of mark-to-market adjustments for pooled CDS under SFAS No. 133. In the first half of 2002, net income was negatively affected by $3.2 million of mark-to-market adjustments for CDS under SFAS No. 133.

The table below shows a reconciliation of net income to operating earnings for the first half of 2003 and 2002:

	2003		2002
	(in millions)
Net Income	$	133.9	$	99.5
Less mark-to-market of pooled CDS ⁽¹⁾		2.8		(3.2	)

Operating Earnings ⁽¹⁾	$	131.1	$	102.7

⁽¹⁾: Amounts are after-tax

Gross premiums written increased 34.5% to $424.4 million in the first half of 2003 from $315.4 million for the first half of 2002. PV originations increased 15.5% to $432.7 million in the first half of 2003 from the first half result of $374.7 million in 2002.

The table below shows the components of PV originations for the first half of 2003 and 2002:

		2003		2002
		(in millions)
U.S municipal obligations ⁽¹⁾		$	208.6	$	150.5
U.S. asset-backed obligations ⁽¹⁾⁽²⁾			87.1		112.9
International obligations ⁽¹⁾			118.7		84.7
Financial products ⁽²⁾			18.3		26.6

	Total	$	432.7	$	374.7

⁽¹⁾: PV premiums
⁽²⁾: U.S. asset-backed amounts for 2002 have been restated to exclude financial products originations.
⁽³⁾: Present value of future net interest margin originated

For the first half of 2003, FSA insured $26.6 billion par amount of U.S. primary and secondary municipal obligations, an increase of 11.0% from the amount insured in the comparable period of the prior year. FSA's first half U.S. municipal PV premiums were $208.6 million, a 38.6% increase from U.S. municipal PV premiums in the first half of 2002.

For the first half of 2003, the Company's U.S. asset-backed par originated was $6.6 billion, compared with $23.6 billion in the first half of last year. U.S. asset-backed PV premiums declined 22.9% to $87.1 million for the first half of 2003 as compared to the first half of 2002.

For the first half of 2003, FSA insured $3.5 billion par of international obligations, generating $118.7 million of PV premiums, versus $11.6 billion of par and $84.7 million of PV premiums for the first half of 2002.

Net premiums written were $280.1 million for the first half of 2003, an increase of 27.1% when compared with the comparable period result in 2002. Net premiums earned for the first half of 2003 were $168.2 million, compared with $146.8 million for the first half of 2002. Net premiums earned from refundings and prepayments were $11.9 million for the first half of 2003 and $9.3 million for the same period of 2002, contributing $6.0 million and $4.7 million, respectively, to after-tax earnings. Net premiums earned for the first half grew 13.8% relative to the same period in 2002, if the effects of refundings and prepayments are eliminated.

Net investment income was $74.3 million for the first half of 2003 and $68.5 million for the comparable period in 2002, an increase of 8.5%. The Company's effective tax rate on investment income was 9.4% for the first half of 2003, compared with 11.1% for the same period in 2002. For the first half of 2003, the Company realized $3.9 million in net capital gains, compared with $24.0 million for the same period in 2002. Capital gains and losses are generally a by-product of the normal investment management process and could vary substantially from period to period.

The provision for losses and loss adjustment expenses during the first half of 2003 was $12.9 million compared with $42.1 million in the first half of 2002.

Total policy acquisition and other operating expenses were $59.9 million for the first half of 2003 compared with $46.9 million for the same period in 2002. Excluding the effects of refundings, total policy acquisition and other operating expenses were $57.3 million for the first half of 2003 compared with $44.9 million for the same period in 2002.

For the first half of 2003 and 2002, the Company's financial products group produced a net interest margin of $2.1 million and $2.7 million, respectively.

For the first half of 2003 and 2002, the mark-to-market adjustments for CDS resulted in a benefit to net income of $2.8 million and a net charge to income of $3.2 million, respectively. In addition, in the first half of 2002, FSA was party to a credit default swap referencing a highly diversified portfolio of 100 corporate names, with $10.0 million of exposure per name, to which the Company had first-loss exposure. For the first half of 2002, this transaction resulted in a $13.4 million after-tax charge to income as a result of marking the transaction to market. The Company terminated its exposure to this transaction in the third quarter of 2002 at a loss. These amounts are

included in net realized and unrealized gains (losses) on derivative instruments in the consolidated statements of operations and comprehensive income.

The Company's effective tax rate for the first half of 2003 was 22.4% compared with 21.2% for the same period in 2002. In 2003 and 2002, the effective tax rate differs from the statutory rate of 35% due primarily to tax-exempt interest income and income from FSA International. Although FSA International is subject to U.S. income taxes as a controlled foreign corporation, it nonetheless benefits from a lower overall effective tax rate than the Company's domestic insurance company subsidiaries.

Liquidity and Capital Resources

The Company's consolidated invested assets and cash at June 30, 2003, net of unsettled security transactions, was $5,914.5 million, compared with the December 31, 2002 balance of $5,027.2 million. These balances include the change in the market value of the investment portfolio, which had an unrealized gain position of $259.6 million at June 30, 2003 and $201.0 million at December 31, 2002.

At June 30, 2003, the Company had, at the holding company level, an investment portfolio of $19.0 million available to fund the liquidity needs of its activities outside of its insurance operations. Because the majority of the Company's operations are conducted through FSA, the long-term ability of the Company to service its debt will largely depend upon the receipt of dividends or surplus note payments from FSA and upon external financings.

FSA's ability to pay dividends is dependent upon FSA's financial condition, results of operations, cash requirements, maintenance of FSA's ratings and other related factors, and is also subject to restrictions contained in the insurance laws and related regulations of New York and other states. Under the New York insurance law, FSA may pay dividends out of statutory earned surplus, provided that, together with all dividends declared or distributed by FSA during the preceding 12 months, the dividends do not exceed the lesser of (i) 10% of policyholders' surplus as of its last statement filed with the Superintendent of Insurance of the State of New York (the New York Superintendent) or (ii) adjusted net investment income during this period. FSA paid no dividends in the first half of 2003 or 2002. Based upon FSA's statutory statements for June 30, 2003, the maximum amount available for payment of dividends by FSA without regulatory approval over the following 12 months would be approximately $113.7 million.

At March 31, 2003, the Company held $212.9 million of surplus notes of FSA. During the second quarter of 2003, FSA repaid $12.5 million of such surplus notes. At June 30, 2002, the Company held $200.4 million of FSA surplus notes. Payments of principal and interest on such notes may be made only with the approval of the New York Superintendent. FSA paid $4.7 million and $4.6 million in surplus note interest in the first half of 2003 and 2002, respectively.

The Company paid no dividends in the first half of 2003. In the first half of 2002, the Company paid dividends of $11.7 million.

FSA's primary uses of funds are to pay operating expenses and to pay dividends to, or principal of or interest on surplus notes held by, its parent. FSA's funds are also required to satisfy claims under insurance policies in the event of default by an issuer of an insured obligation and the unavailability or exhaustion of other payment sources in the transaction, such as the cash flow or collateral underlying the obligations. FSA seeks to structure asset-backed transactions to address liquidity risks by matching insured payments with available cash flow or other payment sources within the transactions. The insurance policies issued by FSA provide, in general, that payments of principal, interest and other amounts insured by FSA may not be accelerated by the holder of the obligation but are paid by FSA in accordance with the obligation's original payment schedule or, at FSA's option, on an accelerated basis. These policy provisions prohibiting acceleration of certain claims absent consent of the insurer are mandatory under Article 69 of the New York insurance law and serve to reduce FSA's liquidity requirements.

FSA had a credit arrangement, aggregating $150.0 million at June 30, 2003, provided by commercial banks and intended for general application to transactions insured by FSA and its insurance company subsidiaries. At June 30, 2003, there were no borrowings under this arrangement, which expires April 23, 2004, unless extended.

FSA has a standby line of credit in the amount of $325.0 million with a group of international banks to provide loans to FSA after it has incurred, during the term of the facility, cumulative municipal losses (net of any recoveries) in excess of the greater of $325.0 million or the average annual debt service of the covered portfolio multiplied by

5.00%, which amounted to $792.5 million at June 30, 2003. The obligation to repay loans made under this agreement is a limited recourse obligation payable solely from, and collateralized by, a pledge of recoveries realized on defaulted insured obligations in the covered portfolio, including certain installment premiums and other collateral. This commitment has a seven-year term that will expire on April 30, 2010 and contains an annual renewal provision subject to approval by the banks. No amounts have been utilized under this commitment as of June 30, 2003.

The Company's financial products group has a $100 million line of credit with UBS AG, Stamford Branch, which expires December 12, 2003, unless extended. This line of credit provides an additional source of liquidity should there be unexpected draws on GICs issued by the Company. There were no borrowings under this arrangement as of June 30, 2003.

In August 1994, FSA entered into a facility agreement with Canadian Global Funding Corporation (Canadian Global) and Hambros Bank Limited. Canadian Global was established to provide a source of liquidity to refinance FSA-insured transactions that experience difficulty in meeting debt service obligations. The amount of the facility is $186.9 million, of which $125.2 million was unutilized at June 30, 2003. The facility expires in 2004.

Standard & Poor's Ratings Services (S&P), Moody's Investors Service, Inc. (Moody's) and Fitch Ratings each periodically assess the capital adequacy of FSA and other financial guarantors rated by them, and publish such assessments along with associated ratings confirmations or ratings changes. Given the importance of its ratings to its ongoing business, management of FSA considers the impact on rating agency capital adequacy an important factor in evaluating the types of risks it may insure and other activities it may pursue. In assessing the capital adequacy of a financial guarantor, rating agencies consider a number of factors, including claims-paying resources, "worst case" loss potential of the insured portfolio, and the quality and liquidity of the investment portfolio. Claims-paying resources include qualified statutory capital (policyholders' surplus and contingency reserves determined in accordance with statutory accounting principles), unearned premium reserves, loss reserves and the present value of future installment premiums, as well as credit allowed for recoveries of ceded losses from reinsurers and other capital support arrangements. The rating agencies base their estimates of "worst case" insured losses on evaluations of the default frequency and loss severity of individual insured risks in a period of severe economic stress. Credit allowed for reinsurance under these capital adequacy models is generally a function of the rating of the reinsurer providing the reinsurance, as well as any collateral provided by the reinsurer. Estimates of "worst case" losses and reinsurer ratings are subject to change by the rating agencies at any time. Any downgrade of reinsurers, increase in "worst case" loss estimates on insured transactions or other adverse changes in the factors that determine capital adequacy ratios may prompt the Company to augment FSA's paid-in capital and other capital support arrangements to maintain its rating agency capital adequacy and Triple-A ratings. In 2002 and 2003, a number of the reinsurers used by FSA were downgraded by one or more rating agencies and "worst case" loss estimates were generally increased in the CDO sector, including transactions in FSA's insured portfolio. Giving effect to these changes, FSA continues to satisfy the Triple-A standards of the rating agencies. FSA expects to augment its claims-paying resources from time to time to the extent management considers it appropriate to maintain sufficient rating agency capital adequacy.

FSA-insured GICs subject the Company to risk associated with early withdrawal of principal allowed by the terms of the GICs. The majority of municipal GICs insured by FSA relate to debt service reserve funds and construction funds in support of municipal bond transactions. Debt service reserve fund GICs may be drawn unexpectedly upon a payment default by the municipal issuer. Construction fund GICs may be drawn unexpectedly when construction of the underlying municipal project does not proceed as expected. The proceeds of FSA-insured GICs may be invested in FSA-insured obligations, including FSA-insured securities issued to refinance poorly performing transactions. Most FSA-insured GICs allow for withdrawal of GIC funds in the event of a downgrade of FSA, typically below AA- by S&P or Aa3 by Moody's, unless the GIC provider posts collateral or otherwise enhances its credit. Some FSA-insured GICs also allow for withdrawal of GIC funds in the event of a downgrade of

FSA below A- by S&P or A3 by Moody's, with no right of the GIC provider to avoid such withdrawal by posting collateral or otherwise enhancing its credit. The Company manages this risk through the maintenance of liquid collateral and bank liquidity facilities.

The Company has made no material commitments for capital expenditures as of June 30, 2003.

Variable Interest Entities

Asset-backed and, to a lesser extent, municipal transactions insured by FSA may employ variable interest entities (VIEs) for a variety of purposes. A typical asset-backed transaction, for example, employs a VIE as the purchaser of the securitized assets and as the issuer of the obligations insured by FSA. FSA's participation is typically requested by the sponsor of the VIE or the underwriter, either via a bid process or on a sole source basis. VIEs are typically owned by transaction sponsors or charitable trusts, although FSA may have an ownership interest in some cases. FSA maintains certain contractual rights and exercises varying degrees of influence over VIE issuers of FSA-insured obligations. FSA also bears some of the "risks and rewards" associated with the performance of the VIE's assets, but in most situations FSA's financial guaranty policy will not expose it to significant variability due to the significant level of other credit protection. Specifically, as issuer of a financial guaranty insurance policy insuring the VIE's obligations, FSA bears the risk of asset performance (typically, but not always, after a significant depletion of overcollateralization, excess spread, a deductible or other credit protection). FSA's underwriting policy is to insure only obligations that are otherwise investment grade. In addition, the VIE typically pays a periodic premium to FSA in consideration of the issuance by FSA of its insurance policy, with the VIE's assets typically serving as the source of such premium, thus providing some of the "rewards" of the VIE's assets to FSA. VIEs are also employed by FSA in connection with "repackaging" of outstanding securities into new securities insured by FSA and with refinancing underperforming non-investment grade transactions insured by FSA. The degree of influence exercised by FSA over these VIEs varies from transaction to transaction, as does the degree to which "risks and rewards" associated with asset performance are assumed by FSA. While all transactions insured by FSA are included in the Company's outstanding exposure, and losses under these obligations are reflected in the Notes to Consolidated Financial Statements for June 30, 2003, the assets and liabilities of these VIEs have not been consolidated with those of the Company for financial reporting purposes and are considered "off-balance sheet" obligations. Two such VIEs, Canadian Global and FSA Global Funding Limited (FSA Global), will be consolidated with the Company for financial accounting purposes beginning in the third quarter of 2003 under the consolidation guidance recently issued by the Financial Accounting Standards Board (FASB) under FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN No. 46). In addition, on July 1, 2003, the Company obtained control provisions of another VIE, Premier International Funding Co. (Premier), which will cause the Company to consolidate Premier beginning July 1, 2003.

In August 1994, Canadian Global was capitalized with $180.6 million of debt securities (which were effectively converted to U.S. dollar LIBOR rate through a cross-currency swap with terms matching the underlying debt instrument) and $6.3 million in preferred equity sold to third-party investors. Under the agreement, FSA pays an annual fee to Canadian Global to compensate it for making its liquidity available and can arrange financing for transactions subject to certain conditions. When Canadian Global purchases an FSA-insured obligation, the new obligation is insured by FSA for a premium, and case basis reserves are established when required. As of June 30, 2003, FSA was carrying gross and net case basis reserves of $17.2 million and $4.3 million, respectively, against transactions refinanced by Canadian Global. At June 30, 2003, Canadian Global had total assets of approximately $198.5 million, of which $97.6 million has been invested in a GIC issued by CMS.

The Company owns 29% of the equity of FSA Global, a Cayman Islands domiciled issuer of FSA-insured notes and other obligations sold in international markets (generally referred to as medium term notes or "MTNs"). FSA Global issues securities at the request of interested purchasers in a process known as "reverse inquiry," which generally results in lower interest rates and borrowing costs than would apply to direct borrowings. FSA Global also issues securities in traditional private placements to institutional investors and to participants in lease financings in which Company affiliates may play a number of financing roles. FSA Global is managed as a "matched funding vehicle," in which the proceeds from the sale of FSA Global notes are invested in obligations chosen to provide cash flows substantially matched to those of the FSA Global notes (taking into account, in some cases, dedicated third- party liquidity). The matched funding structure minimizes the market risks borne by FSA Global and FSA. FSA Global raises funds in U.S. dollars at LIBOR-based floating borrowing rates and invests its funds in obligations insured by FSA, maturing prior to the maturity of the related FSA Global notes and paying a higher interest rate than the interest rate on the related FSA Global notes. At June 30, 2003, FSA Global had total assets and total liabilities of $9.6 billion and $9.6 billion, respectively. The foregoing assets and liabilities include assets and liabilities of $7.2 billion that will be eliminated with assets and liabilities of Premier, when both FSA Global and Premier are

consolidated with the Company. FSA Global had a net loss of approximately $0.1 million for the first half of 2003. FSA Global's net income is determined net of FSA Global's premium expense to FSA. For the six months ended June 30, 2003, FSA Global paid premiums to FSA of approximately $2.4 million. All amounts insured by FSA relating to FSA Global are included in the Company's outstanding exposure, included in the Notes to the Condensed Consolidated Financial Statements for June 30, 2003. As of June 30, 2003, there were no case basis reserves required for any transactions related to FSA Global.

In January 2003, the FASB issued FIN No. 46, which is an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN No. 46 addresses consolidation of VIEs that have one or both of the following characteristics: (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity; and (ii) the equity investors lack the direct or indirect ability to make decisions about the entity's activities through voting rights or similar rights, the obligation to absorb the expected losses of the entity if they occur or the right to receive the expected residual returns of the entity if they occur. The provisions for FIN No. 46 will be effective immediately for VIEs created after January 31, 2003 and for VIEs in which an enterprise obtains an interest after that date. For VIEs in which an enterprise holds a variable interest that it acquired prior to February 1, 2003, the interpretation is effective in the first fiscal year or interim period beginning after June 15, 2003. FIN No. 46 requires that, upon consolidation, the Company initially measure the VIEs' assets, liabilities and minority interest at their carrying amounts under existing GAAP as if the entity had been consolidated from the time the Company was considered its primary beneficiary (or parent). Any differences upon consolidation on July 1, 2003 will be reflected as a cumulative effect of a change in accounting principle. The cumulative effect of a change in accounting principle is not expected to have a material impact on the results of operations of the Company. The Company will continue to analyze the effects of the standard, considering the complexity of practical application to the Company's transactions.

Subsequent Events

On July 31, 2003, the Company issued $100.0 million of 5.60% Notes due July 15, 2103 and callable on or after July 31, 2008. Debt issuance costs of approximately $3.3 million will be amortized over the life of the Notes. The Company expects to use the proceeds of the new debt offering to discharge the indenture with respect to all of its outstanding 6.950% Senior Quarterly Income Debt Securities (Senior QUIDS) due November 1, 2098 during the third quarter of 2003, and to redeem all the outstanding Senior QUIDS on or about November 1, 2003 . The Senior QUIDS are callable, without premium or penalty, on or after November 1, 2003.

On August 12, 2003, FSA, with the approval of the New York Superintendent, repaid $37.5 million of surplus notes to the Company.

Forward-Looking Statements

The Company relies upon the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. This safe harbor requires that the Company specify important factors that could cause actual results to differ materially from those contained in forward-looking statements made by or on behalf of the Company. Accordingly, forward-looking statements by the Company and its affiliates are qualified by reference to the following cautionary statements.

In its filings with the SEC, reports to investors, press releases and other written and oral communications, the Company from time to time makes forward-looking statements. Such forward-looking statements include, but are not limited to, (i) projections of revenues, income (or loss), earnings (or loss), dividends, market share or other financial forecasts; (ii) statements of plans, objectives or goals of the Company or its management, including those related to growth in adjusted book value or return on equity; and (iii) expected losses on, and adequacy of loss reserves for, insured transactions. Words such as "believes", "anticipates", "expects", "intends" and "plans" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

The Company cautions that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in forward-looking statements made by the Company. These factors include: (i) changes in capital requirements or other criteria of securities rating agencies applicable to financial guaranty insurers in general or to FSA specifically; (ii) competitive forces, including the conduct of other financial guaranty insurers in general; (iii) changes in domestic or foreign laws or regulations applicable to the Company, its competitors or its clients; (iv) changes in accounting principles or practices that may result in a decline in securitization transactions; (v) an economic downturn or other economic conditions (such as a rising interest rate environment) adversely affecting transactions insured by FSA or its investment portfolio; (vi) inadequacy of loss reserves established by the Company; (vii) temporary or permanent disruptions in cash flow on FSA-insured structured transactions attributable to legal challenges to such structures; (viii) downgrade or default of

one or more of FSA's reinsurers; (ix) the amount and nature of business opportunities that may be presented to the Company; (x) market conditions, including the credit quality and market pricing of securities issued; (xi) capacity limitations that may impair investor appetite for FSA-insured obligations; (xii) market spreads and pricing on insured credit default swap exposures, which may result in gain or loss due to mark-to-market accounting requirements; (xiii) prepayment speeds on FSA-insured asset-backed securities and other factors that may influence the amount of installment premiums paid to FSA; (xiv) changes in the value or performance of strategic investments made by the Company; and (xv) other factors, most of which are beyond the Company's control. The Company cautions that the foregoing list of important factors is not exhaustive. In any event, such forward-looking statements made by the Company speak only as of the date on which they are made, and the Company does not undertake any obligation to update or revise such statements as a result of new information, future events or otherwise.

Item 4. Controls and Procedures

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of June 30, 2003. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon and as of the date of the evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required. Such evaluation did not identify any change in the Company's internal control over financial reporting that occurred during the quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Securities Holders

On May 16, 2003, the Company's shareholders executed a Written Consent of Shareholders in Lieu of Annual Meeting. Under the Written Consent, the Company's shareholders unanimously approved:

(1) the number of directors constituting the Board of Directors being fixed at ten, and the election of the following persons to serve as members of the Board of Directors of the Company until the later of the next annual meeting of shareholders or their successors having been duly elected and qualified:

Robert P. Cochran
Pierre Richard
Dirk Bruneel
Bruno Deletre
Robert N. Downey
Jacques Guerber
David O. Maxwell
Séan W. McCarthy
Roger K. Taylor
Rembert von Lowis;

(2) the approval of the selection by the Company's Board of Directors of PricewaterhouseCoopers LLP as the independent public accountants of the Company to audit the accounts of the Company for the year 2003; and

(3) the approval of the Company's 1993 Equity Participation Plan, as amended, and the Company's Director Share Purchase Program.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

99.1		Condensed consolidated financial statements of Financial Security Assurance Inc. ("FSA") for the six month period ended June 30, 2003.
99.2		Amendment No. 5 to the Credit Agreement, dated as of April 25, 2003, among FSA, the additional borrowers party thereto, various banks, ABN AMRO Bank N.V., The Bank of Nova Scotia, Norddeutsche Landesbank Girozentrale, New York and/or Cayman Islands Branch, KeyBank National Association and Deutsche Bank AG, New York Branch, as agent (providing, among other things, for The Bank of New York to become the successor Agent).
99.3		Fourth Amendment to Second Amended and Restated Credit Agreement dated April 30, 2003 among FSA and FSA Insurance Company, the Banks party thereto and Bayerische Landesbank, acting through its New York Branch in its capacity as Agent.
99.4		Deferred Compensation Plan (amended and restated as of May 16, 2003).
99.5		Put Option Agreement, dated as of June 23, 2003, between FSA and Sutton Capital Trust I.
99.6		Put Option Agreement, dated as of June 23, 2003, between FSA and Sutton Capital Trust II.
99.7		Put Option Agreement, dated as of June 23, 2003, between FSA and Sutton Capital Trust III.
99.8		Put Option Agreement, dated as of June 23, 2003, between FSA and Sutton Capital Trust IV.
99.9		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
99.10		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
99.11		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.12		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

On April 8, 2003, the Company filed with the Securities and Exchange Commission (the "SEC") a current report on Form 8-K dated April 2, 2003, pursuant to which it furnished to the SEC (i) an Investor Relations Presentation intended primarily for fixed-income investors, entitled "Financial Security Assurance Investors' Overview dated April 2, 2003", and (ii) its Quarterly Operating Supplement for the quarterly period ended December 31, 2002; and stating that the Company was posting such documents to its website, http://www.fsa.com .

On May 7, 2003, the Company filed with the SEC a current report on Form 8-K dated May 5, 2003, pursuant to which it furnished to the SEC (i) a press release announcing its first quarter 2003 results; (ii) the Company's current Quarterly Operating Supplement; and (iii) a quarterly letter from its Chairman and Chief Executive Officer; and stating that the Company was posting such materials on May 5, 2003, to its website, http://www.fsa.com .

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.

	FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
	By	/s/ JEFFREY S. JOSEPH
August 13, 2003		Jeffrey S. Joseph Managing Director & Controller (Chief Accounting Officer)

Exhibit Index

Exhibit No.		Exhibit
99.1		Condensed consolidated financial statements of Financial Security Assurance Inc. ("FSA") for the six month period ended June 30, 2003.
99.2		Amendment No. 5 to the Credit Agreement, dated as of April 25, 2003, among FSA, the additional borrowers party thereto, various banks, ABN AMRO Bank N.V., The Bank of Nova Scotia, Norddeutsche Landesbank Girozentrale, New York and/or Cayman Islands Branch, KeyBank National Association and Deutsche Bank AG, New York Branch, as agent (providing, among other things, for The Bank of New York to become the successor Agent).
99.3		Fourth Amendment to Second Amended and Restated Credit Agreement dated April 30, 2003 among FSA and FSA Insurance Company, the Banks party thereto and Bayerische Landesbank, acting through its New York Branch in its capacity as Agent.
99.4		Deferred Compensation Plan (amended and restated as of May 16, 2003).
99.5		Put Option Agreement, dated as of June 23, 2003, between FSA and Sutton Capital Trust I.
99.6		Put Option Agreement, dated as of June 23, 2003, between FSA and Sutton Capital Trust II.
99.7		Put Option Agreement, dated as of June 23, 2003, between FSA and Sutton Capital Trust III.
99.8		Put Option Agreement, dated as of June 23, 2003, between FSA and Sutton Capital Trust IV.
99.9		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
99.10		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
99.11		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.12		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

QuickLinks

INDEX
PART I—FINANCIAL INFORMATION
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Dollars in thousands)
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in thousands)
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the Six Months Ended June 30, 2003 and 2002
PART II - OTHER INFORMATION
SIGNATURES
Exhibit Index

EXHIBIT 99.1

FINANCIAL SECURITY ASSURANCE INC.

AND SUBSIDIARIES

Condensed Consolidated Financial Statements

June 30, 2003

FINANCIAL SECURITY ASSURANCE INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2003 and 2002

INDEX

FINANCIAL STATEMENTS:

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Operations and Comprehensive Income

Condensed Consolidated Statements of Cash Flows

Notes to Condensed Consolidated Financial Statements

The New York State Insurance Department recognizes only statutory accounting practices for determining and reporting the financial condition and results of operations of an insurance company, for determining its solvency under the New York Insurance Law, and for determining whether its financial condition warrants the payment of a dividend to its stockholders. No consideration is given by the New York State Insurance Department to financial statements prepared in accordance with accounting principles generally accepted in the United States of America in making such determinations.

FINANCIAL SECURITY ASSURANCE INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

	June 30, 2003		December 31, 2002
ASSETS

Bonds at market value (amortized cost of $2,990,157 and $2,597,599)	$	3,259,781	$	2,811,747
Short-term investments	235,592		364,565

Total investments	3,495,373		3,176,312
Cash	9,443		27,560
Securitized loans at cost	408,475		431,718
Deferred acquisition costs	261,249		253,777
Prepaid reinsurance premiums	630,799		557,659
Reinsurance recoverable on unpaid losses	78,459		75,950
Investment in unconsolidated affiliate	59,848		52,206
Other assets	247,006		206,458

TOTAL ASSETS	$	5,190,652	$	4,781,640

LIABILITIES AND MINORITY INTEREST AND SHAREHOLDER’S EQUITY

Deferred premium revenue	$	1,641,271	$	1,450,211
Losses and loss adjustment expenses	237,885		223,618
Deferred federal income taxes	181,024		153,333
Ceded reinsurance balances payable	64,178		79,870
Notes payable to affiliate	407,613		431,360
Surplus notes	200,350		212,850
Minority interest	57,561		52,841
Accrued expenses and other liabilities	248,223		206,232

TOTAL LIABILITIES AND MINORITY INTEREST	3,038,105		2,810,315

Preferred stock (5,000.1 and 0 shares authorized; 0 shares issued and outstanding; par value of $1,000 per share)
Common stock (400 shares authorized, issued and outstanding; par value of $37,500 per share)	15,000		15,000
Additional paid-in capital	814,818		813,002
Accumulated other comprehensive income (net of deferred income taxes of $89,489 and $70,889)	180,135		143,260
Accumulated earnings	1,142,594		1,000,063

TOTAL SHAREHOLDER’S EQUITY	2,152,547		1,971,325

TOTAL LIABILITIES AND MINORITY INTEREST AND SHAREHOLDER’S EQUITY	$	5,190,652	$	4,781,640

See notes to condensed consolidated financial statements.

FINANCIAL SECURITY ASSURANCE INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(Dollars in thousands)

	Six Months Ended June 30,
	2003			2002
REVENUES:
Net premiums written	$	282,985		$	220,427
Net premiums earned	171,164			146,751
Net investment income	74,006			67,644
Net realized gains	4,615			24,077
Net realized and unrealized gains (losses) on derivative instruments	4,195			(24,698		)
Other income	10,554			532
TOTAL REVENUES	264,534			214,306

EXPENSES:
Losses and loss adjustment expenses	12,895			42,119
Interest expense	14,946			3,604
Policy acquisition costs	26,936			25,877
Other operating expenses	26,756			19,914
TOTAL EXPENSES	81,533			91,514

Minority interest	(4,720		)	(4,216		)
Equity in earnings of unconsolidated affiliate	7,641			3,522
INCOME BEFORE INCOME TAXES	185,922			122,098
Provision for income taxes	43,391			25,293
NET INCOME	142,531			96,805

Other comprehensive income, net of tax:
Unrealized gains on securities:
Holding gains arising during period	39,936			36,307
Less: reclassification adjustment for gains included in net income	3,061			17,630
Other comprehensive income	36,875			18,677
COMPREHENSIVE INCOME	$	179,406		$	115,482

See notes to condensed consolidated financial statements.

FINANCIAL SECURITY ASSURANCE INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	Six Months Ended June 30,
	2003			2002
Cash flows from operating activities:
Premiums received, net	$	270,567		$	221,449
Policy acquisition and other operating expenses paid, net	(98,969		)	(89,958		)
Recoverable advances recovered	683			3,341
Loss and loss adjustment expenses paid, net	(1,490		)	(4,018		)
Net investment income received	68,497			64,055
Federal income taxes paid	(40,645		)	(45,477		)
Interest paid	(14,393		)	(4,562		)
Other, net	9,300			(3,856		)
Net cash provided by operating activities	193,550			140,974

Cash flows from investing activities:
Proceeds from sales of bonds	502,385			525,741
Purchases of bonds	(828,076		)	(651,050		)
Purchases of property and equipment	(348		)	(4,440		)
Net decrease in short-term securities	129,366			5,752
Other investments, net	516			295
Net cash used for investing activities	(196,157		)	(123,702		)

Cash flows from financing activities:
Repayment of surplus notes	(12,500		)
Capital issuance cost	(3,010		)
Net cash used for financing activities	(15,510		)
Net increase (decrease) in cash	(18,117		)	17,272

Cash at beginning of period	27,560			5,882

Cash at end of period	$	9,443		$	23,154

(a) In the first six months of 2003 and 2002, the Company received a tax benefit of $4,826 and $2,859, respectively, by utilizing its Parent’s losses. These amounts were recorded as capital contributions.

See notes to condensed consolidated financial statements.

FINANCIAL SECURITY ASSURANCE INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2003 and 2002

1. ORGANIZATION AND OWNERSHIP

Financial Security Assurance Inc. (the Company), a wholly owned subsidiary of Financial Security Assurance Holdings Ltd. (the Parent), is an insurance company domiciled in the State of New York. The Company and its subsidiaries are primarily engaged in the business of providing financial guaranty insurance on asset-backed and municipal obligations. In addition, the Company insures guaranteed investment contracts (GICs) issued by FSA Capital Markets Services LLC and FSA Capital Management Services LLC (collectively, CMS), wholly owned subsidiaries of the Parent.

2. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared by the Company and are unaudited. In the opinion of management, all adjustments, which include only normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows at June 30, 2003 and for all periods presented, have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These statements should be read in conjunction with the Company’s December 31, 2002 consolidated financial statements and notes thereto. The year-end condensed balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the periods ended June 30, 2003 and 2002 are not necessarily indicative of the operating results for the full year. Certain prior-year balances have been reclassified to conform to the 2003 presentation.

3. LOSSES AND LOSS ADJUSTMENT EXPENSES

The Company establishes a case basis reserve for unpaid losses and loss adjustment expenses for the present value of the estimated loss when, in management’s opinion, the likelihood of a future loss on a particular insured obligation is probable and determinable at the balance sheet date. The estimated loss on a transaction is discounted using the then current risk-free rates ranging from 4.77% to 6.1%. For collateralized debt obligations, a case basis reserve is recorded to the extent that the overcollateralization ratio (non-defaulted collateral at par value divided by the debt insured) has fallen below 100%.

The Company also maintains a non-specific general reserve, which is available to be applied against future additions or accretions to existing case basis reserves or to new case basis reserves to be established in the future. The general reserve is calculated by applying a loss factor to the Company’s total net par underwritten and discounting the result at the then current risk-free rates. The loss factor used for this purpose has been determined based upon an independent rating agency study of bond defaults and the Company’s portfolio characteristics and history.

4. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133

The Company has insured a number of credit default swaps that it intends, in each case, to insure for the full term of the swap agreements. It considers these agreements to be a normal extension of its financial guaranty insurance business, although they are considered derivatives for accounting purposes. These agreements are recorded at fair value. The Company believes that the most meaningful presentation of the financial statement impact of these derivatives is to reflect premiums as installments are received, to record losses and loss adjustment expenses as incurred and to record changes in fair value as incurred. The Company recorded $23.7 million and $15.3 million in net earned premium under these agreements for the first half of 2003 and 2002, respectively. The changes in fair value, which were gains of $4.1 million and losses of $4.9 million for the first half of 2003 and 2002, respectively, were recorded in net realized and unrealized losses on derivative instruments in the consolidated statements of operations and comprehensive income and in other assets or liabilities. The losses or gains recognized by recording these contracts at fair value will be determined each quarter based upon market pricing of Super Triple-A (defined as having first-loss protection of 1.3 times the level required for a Triple-A rating) swap guarantees. The Company does not believe the fair value adjustments are an indication of potential claims under FSA’s guarantees.

5. SECURITIZED LOANS AND NOTES PAYABLE TO AFFILIATE

In 2002, the Company exercised certain rights available under its financial guaranty policies and the indentures relating to certain loan-backed notes issued by trusts. Those rights allowed the Company to accelerate the insured notes and pay claims under its insurance policies on an accelerated basis. Refinancing vehicles reimbursed the Company in whole for its claims payment in exchange for an assignment of certain of the Company’s rights against the capital of the trusts. The refinancing vehicles secured the funds to purchase the notes by issuing refinanced notes, with interest rates ranging from 2.898% to 5.718%. These notes were purchased by FSA Asset Management LLC (AMC), a wholly owned subsidiary of the Parent. The Company maintains significant reinsurance, first loss and quota share, in respect of these transactions.

Principal payments due under these refinanced notes for the remainder of 2003 and each of the next five years ending December 31 and thereafter, are as follows (in millions):

Year	Principal Amount
2003	$	—
2004	40.8
2005	37.1
2006	35.0
2007	33.0
2008	32.2
Thereafter	229.5
Total	$	407.6

6. OUTSTANDING EXPOSURE

The Company limits its exposure to losses from writing financial guaranties by underwriting investment-grade obligations, diversifying its portfolio and maintaining rigorous collateral requirements on asset-backed obligations, as well as through reinsurance. The principal amounts of insured obligations in the asset-backed insured portfolio are backed by the following types of collateral (in millions) at June 30, 2003 and December 31, 2002:

	Net of Amounts Ceded				Ceded
	2003		2002		2003		2002
Residential mortgages	$	19,609	$	23,379	$	4,607	$	5,480
Consumer receivables	15,593		19,454		5,108		5,954
Pooled corporate obligations	79,871		78,113		12,572		13,007
Investor-owned utility obligations	545		619		312		348
Other asset-backed obligations(1)	7,493		6,958		3,662		3,225

Total asset-backed obligations	$	123,111	$	128,523	$	26,261	$	28,014

(1) Includes $3,010 million and $2,430 million, in 2003 and 2002, respectively, in “Net of Amounts Ceded” relating to FSA-insured GICs issued by CMS.

Net of amount ceded and ceded amounts are not necessarily reflective of the risk retained by FSA since FSA employs first loss reinsurance on a material portion of its asset-backed business.

The principal amount of insured obligations in the municipal insured portfolio includes the following types of issues (in millions) at June 30, 2003 and December 31, 2002:

	Net of Amounts Ceded				Ceded
Types of Issues	2003		2002		2003		2002
General obligation bonds	$	61,127	$	54,563	$	18,986	$	18,388
Housing revenue bonds	6,934		5,833		1,848		1,687
Municipal utility revenue bonds	27,431		23,442		13,827		13,468
Health care revenue bonds	6,005		5,970		6,625		6,683
Tax-supported bonds (non-general obligation)	30,203		27,556		12,773		12,391
Transportation revenue bonds	9,622		7,640		6,865		5,748
Other municipal bonds	13,559		12,173		6,755		5,761

Total municipal obligations	$	154,881	$	137,177	$	67,679	$	64,126

7. CAPITAL RESOURCES

In June 2003, $200.0 million of money market committed preferred trust securities (the CPS Securities) were issued by trusts created for the primary purpose of issuing the CPS Securities, investing the proceeds in high quality commercial paper and providing the Company with a put option for selling to the trust non-cumulative redeemable perpetual preferred stock (the Preferred Stock) of the Company. If a put option were to be exercised by the Company, the applicable trust would use the portion of the proceeds attributable to principal received upon maturity of its assets, net of expenses, and transfer such proceeds to the Company in exchange for Preferred Stock of the Company. The Company pays a floating put premium to the trusts. The cost of the structure was $3.0 million in the second quarter of 2003 and was recorded in equity. The trusts are vehicles for providing the Company access to new capital at its sole discretion through the exercise of the put option.

The Company does not consider itself to be the primary beneficiary of the trusts under Financial Accounting Standards Board (FASB) Interpretation No. 46 “Consolidation of Variable Interest Entities” (FIN No. 46) because it does not retain the majority of the residual benefits or expected losses.

8. RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2003, the FASB issued FIN No. 46, which is an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”. FIN No. 46 addresses consolidation of VIEs which have one or both of the following characteristics: (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity; and (ii) the equity investors lack the

direct or indirect ability to make decisions about the entity’s activities through voting rights or similar rights, the obligation to absorb the expected losses of the entity if they occur or the right to receive the expected residual returns of the entity if they occur. The provisions of FIN No. 46 will be effective immediately for VIEs created after January 31, 2003 and for VIEs in which an enterprise obtains an interest after that date. For VIEs in which an enterprise holds a variable interest that it acquired prior to February 1, 2003, the interpretation is effective in the first fiscal year or interim period beginning after June 15, 2003. The implementation of FIN No. 46, will require the Company to consolidate for financial reporting purposes, for the first time, FSA Global Funding Limited (FSA Global) and Canadian Global Funding Corporation (Canadian Global). FIN No. 46 requires that, upon consolidation, the Company shall initially measure the VIE’s assets, liabilities and minority interest at their carrying amounts under existing GAAP as if the entity had been consolidated from the time the Company was considered its primary beneficiary (or parent). Any differences upon consolidation will be reflected as a cumulative effect of a change in accounting principle. The cumulative effect of a change in accounting principle is not expected to have a material impact on the results of operations of the Company. In addition, on July 1, 2003, the Company obtained control provisions of another VIE, Premier International Funding Co. (Premier), which will require the Company to consolidate Premier beginning July 1, 2003. At June 30, 2003, FSA Global had total assets and total liabilities of approximately $9.6 billion and $9.6 billion, respectively. The foregoing assets and liabilities include assets and liabilities of $7.2 billion that will be eliminated with assets and liabilities of Premier, when consolidated. FSA Global had a net loss of approximately $0.1 million for the first half of 2003. FSA Global’s net income is determined net of FSA Global’s premium expense to FSA. For the six months ended June 30, 2003, FSA Global paid premiums to FSA of approximately $2.4 million. All amounts insured by FSA relating to FSA Global are included in the Company’s outstanding exposure, included in the Notes to the Condensed Consolidated Financial Statements for June 30, 2003. As of June 30, 2003, there were no case basis reserves required for any transactions related to FSA Global. At June 30, 2003, Canadian Global had total assets of approximately $198.5 million, of which $97.6 million has been invested in GICs issued by CMS. As of June 30, 2003, the Company was carrying gross and net case basis reserves of $17.2 million and $4.3 million, respectively, against transactions refinanced by Canadian Global. The Company will continue to analyze the effects of FIN No. 46, considering the complexity of practical application to the Company’s transactions.

9. SUBSEQUENT EVENT

On August 12, 2003, the Company, with the approval of the Superintendent of Insurance of the State of New York, repaid $37.5 million of surplus notes to the Parent.

Exhibit 99.2

AMENDMENT NO. 5 TO THE CREDIT AGREEMENT

AMENDMENT NO. 5 TO THE CREDIT AGREEMENT (this “Amendment”), dated as of April 25, 2003, among Financial Security Assurance Inc. (“FSA”), the additional borrowers party hereto (together with FSA, the “Borrowers”), various banks (the “Banks”), ABN AMRO Bank N.V. (“ABN”), The Bank of Nova Scotia (“Scotia”), Norddeutsche Landesbank Girozentrale, New York and/or Cayman Islands Branch (“NordLB”), KeyBank National Association (“KeyBank” and, together with ABN, Scotia and NordLB, the “New Banks”) and Deutsche Bank AG, New York Branch, as agent (the “Agent”). All capitalized terms defined in the hereinafter defined Credit Agreement shall have the same meaning when used herein unless otherwise defined herein.

W I T N E S S E T H :

WHEREAS, the Borrowers, the Banks and the Agent entered into a Credit Agreement, dated as of August 31, 1998 (as amended to date, the “Credit Agreement”); and

WHEREAS, each of the New Banks desires to become a Bank, and KeyBank desires to become the syndication agent, under the Credit Agreement; and

WHEREAS, the Borrowers, the Banks and the Agent desire that The Bank of New York become the successor Agent with respect to the Credit Agreement; and

WHEREAS, The Bank of New York desires to become the successor Agent with respect to the Credit Agreement; and

WHEREAS, the parties hereto wish to amend the Credit Agreement as herein provided;

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows:

1. New Banks; Syndication Agent . Upon execution and delivery of this Amendment by the parties hereto, each of the New Banks shall become a Bank, and KeyBank shall become the syndication agent, for all purposes of the Credit Agreement.

2. Exiting Banks . As of the open of business on April 25, 2003, neither Bayerische Landesbank Girozentrale, New York Branch, nor Deutsche Bank AG, New York and Cayman Islands Branches (each an “Exiting Bank”), shall have any further obligations under, or be a Bank for purposes of, the Credit Agreement. Each Exiting Bank shall, however, be entitled to receive its Commitment Commission to, but excluding, April 25, 2003, and any other amounts, if any, owing to it under the Credit Agreement, including, without limitation, any indemnities it may be entitled to pursuant to Section 12.01 of the Credit Agreement at any time in the future.

3. Successor Agent . Effective upon the execution and delivery of this Amendment, Deutsche Bank AG, New York Branch, shall cease to be, and The Bank of New

York shall become, the Agent under the Credit Facility, all references in the Credit Facility or any Exhibit or Schedule thereto to “Deutsche Bank AG, New York Branch” shall be deemed references to “The Bank of New York” and all references in any Exhibit to the address “31 West 52 ^nd Street, New York, New York 10019” shall be deemed references to the address “1 Wall Street, New York, New York 10286”.

4. Amendments to the Credit Agreement . (a) Section 1.01 of the Credit Agreement is hereby amended by deleting the defined term “Notice Office” and replacing it with the following:

“Notice Office” shall mean the office of the Agent located at 1 Wall Street, New York, New York 10286, Attention: Ms. Susan Baratta and Mr. David Trick, or such other office as the Agent may hereafter designate in writing as such to the other parties hereto.

(b) Section 1.01 of the Credit Agreement is hereby amended by deleting the defined term “Payment Office” and replacing it with the following:

“Payment Office” shall mean the office of the Agent located at 1 Wall Street, New York, New York 10286, or such other office as the Agent may hereafter designate in writing as such to the other parties hereto.

(c) The defined term “Prime Lending Rate” in Section 1.01 of the Credit Agreement is hereby amended by deleting the words “Deutsche Bank AG, New York Branch” each time they appear, and in each instance replacing them with the words “The Bank of New York”.

(d) Section 1.01 of the Credit Agreement is hereby amended by deleting the defined term “Reference Banks” and replacing it with the following:

“Reference Banks” shall mean The Bank of New York, KeyBank National Association and WestLB AG.

(e) The first sentence of Section 2.01(a) of the Credit Agreement is hereby amended by adding the words “, but excluding,” immediately prior to the words “the Revolving Loan Expiry Date”.

(f) The first sentence of Section 3.01(a) of the Credit Agreement is hereby amended in its entirety to read as follows:

FSA agrees to pay to the Agent for distribution to each Bank a commitment commission (the “Commitment Commission”) for the period from (and including) the Effective Date to (but excluding) the Expiry Date (or such earlier date as the Total Commitment shall have been terminated), computed at a rate equal to 0.125% per annum on the daily average Unutilized Commitment of such Bank.

(g) The first sentence of Section 3.04(a) of the Credit Agreement is hereby amended in its entirety to read as follows:

The expiration of the Commitments of the Banks to make Revolving Loans shall be April 23, 2004 (the “Revolving Loan Expiry Date”); provided, however, that before (but not earlier than 60 days nor later than 30 days before) the Revolving Loan Expiry Date then in effect, FSA may make a written request (an “Extension Request”) to the Agent at its Notice Office and to each of the Banks that the Revolving Loan Expiry Date be extended by 364 days.

(h) Section 10.03 of the Credit Agreement is hereby amended by deleting the word “on” the penultimate time it appears therein and replacing it with the word “or”.

(i) Section 11.01 of the Credit Agreement is hereby amended by deleting the first sentence thereof in its entirety, and replacing it with the following:

The Banks hereby designate The Bank of New York as Agent to act as specified herein and in the other Credit Documents.

(j) Section 12.03 of the Credit Agreement is hereby amended by inserting the words “(with telephonic confirmation in the case of any notice to the Agent)” immediately following the word “telecopied” the first time it appears therein.

(k) Section 12.04(c) of the Credit Agreement is hereby amended by inserting the words “and payment of a $3,500 assignment fee to the Agent by the relevant assignor or assignee,” immediately following the words “subject to the restrictions of, Section 12.04(b),”.

(l) Section 12.12 of the Credit Agreement is hereby amended by adding “FSA,” immediately following the words “in writing signed by”.

(m) Schedule II of the Credit Agreement is hereby deleted in its entirety and replaced with Exhibit A hereto attached.

(n) Schedule III of the Credit Agreement is hereby deleted in its entirety and replaced with Exhibit B hereto attached.

(o) Exhibit A of the Credit Agreement is hereby amended by deleting the addressee block in its entirety and replacing it with the following:

The Bank of New York, as Agent

1 Wall Street

New York, New York 10286

Attention: Ms. Susan Baratta and Mr. David Trick

5. Representations and Warranties . In order to induce the Banks, the New Banks, the Agent and the successor Agent to enter into this Amendment, each Borrower hereby represents and warrants that:

(a) no Default or Event of Default exists or will exist as of the date hereof and after giving effect to this Amendment; and

(b) as of the date hereof, and after giving effect to this Amendment, all representations, warranties and agreements of such Borrower contained in the Credit Agreement will be true and correct in all material respects.

6. GOVERNING LAW . THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CHOICE OF LAW PROVISIONS THEREOF.

7. Agreement Not Otherwise Amended . This Amendment is limited precisely as written and shall not be deemed to be an amendment, consent, waiver or modification of any other term or condition of the Credit Agreement or any of the instruments or agreements referred to therein, or prejudice any right or rights which the Banks, the New Banks, the Agent, the successor Agent or any of them may now have or may have in the future under or in connection with the Credit Agreement or any of the instruments or agreements referred to therein. Except as expressly modified hereby, the terms and provisions of the Credit Agreement shall continue in full force and effect. Whenever the Credit Agreement is referred to in the Credit Agreement or any of the instruments, agreements or other documents or papers executed and delivered in connection therewith, it shall be deemed to be a reference to the Credit Agreement as modified hereby.

8. Counterparts . This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective duly authorized officers as of the date first above written.

FINANCIAL SECURITY ASSURANCE INC.


By		/s/ Joseph W. Simon
	Name:	Joseph W. Simon
	Title:	Chief Financial Officer


FSA INSURANCE COMPANY


By		/s/ Joseph W. Simon
	Name:	Joseph W. Simon
	Title:	Chief Financial Officer

FINANCIAL SECURITY ASSURANCE (U.K.) LIMITED


By		/s/ Bruce E. Stern
	Name:	Bruce E. Stern
	Title:	Senior Manager


THE BANK OF NEW YORK, individually and as successor Agent


By		/s/ Evan Glass
	Name:	Evan Glass
	Title:	Vice President


DEUTSCHE BANK AG, NEW YORK BRANCH, as withdrawing Agent


By		/s/ Ruth Leung
	Name:	Ruth Leung
	Title:	Director


By		/s/ Clinton M. Johnson
	Name:	Clinton M. Johnson
	Title:	Managing Director


ABN AMRO BANK N.V.


By		/s/ Neil R. Stein
	Name:	Neil R. Stein
	Title:	Group Vice President


By		/s/ Michael DeMarco
	Name:	Michael DeMarco
	Title:	Assistant Vice President

KBC BANK N.V.


By		/s/ Robert Snauffer
	Name:	Robert Snauffer
	Title:	First Vice President


By		/s/ Edward Eijlers
	Name:	Edward Eijlers
	Title:	Assistant Vice President


KEYBANK NATIONAL ASSOCIATION


By		/s/ Mary K. Young
	Name:	Mary K. Young
	Title:	Vice President


NORDDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK AND/OR CAYMAN ISLANDS BRANCH


By		/s/ Georg L. Peters
	Name:	Georg L. Peters
	Title:	Vice President


By		/s/ Jan de Jonge
	Name:	Jan de Jonge
	Title:	Vice President


THE BANK OF NOVA SCOTIA


By		/s/ J. W. Campbell
	Name:	J. W. Campbell
	Title:	Managing Director

WESTLB AG, NEW YORK BRANCH


By		/s/ Lillian Tung Lum
	Name:	Lillian Tung Lum
	Title:	Executive Director


By		/s/ David J. Sellers
	Name:	David J. Sellers
	Title:	Director

EXHIBIT A

SCHEDULE II

SCHEDULE OF COMMITMENTS

Bank	Commitment

The Bank of New York	$	25,000,000

KBC Bank N.V.	25,000,000

KeyBank National Association	25,000,000

WestLB AG, New York Branch	25,000,000

The Bank of Nova Scotia	20,000,000

ABN AMRO Bank N.V.	15,000,000

Norddeutsche Landesbank Girozentrale, New York and/or Cayman Islands Branch	15,000,000

Total	$	150,000,000

EXHIBIT B

SCHEDULE III

LENDING OFFICES

Bank	Bank Rate Office	Eurodollar Lending Office

The Bank of New York	1 Wall Street New York, NY 10286	1 Wall Street New York, NY 10286

KBC Bank N.V.	125 West 55 ^th Street New York, NY 10019	125 West 55 ^th Street New York, NY 10019

KeyBank National Association	127 Public Square Cleveland, OH 44114	127 Public Square Cleveland, OH 44114

WestLB AG, New York Branch	1211 Avenue of the Americas New York, NY 10036	1211 Avenue of the Americas New York, NY 10036

The Bank of Nova Scotia	One Liberty Plaza New York, NY 10006	One Liberty Plaza New York, NY 10006

ABN AMRO Bank N.V.	208 South LaSalle Street Suite 1500 Chicago, IL 60604	208 South LaSalle Street Suite 1500 Chicago, IL 60604

Norddeutsche Landesbank Girozentrale, New York and/or Cayman Islands Branch	NORD/LB New York Branch 1114 Avenue of the Americas 37 ^th Floor New York, NY 10036	NORD/LB Cayman Islands Branch 1114 Avenue of the Americas 37 ^th Floor New York, NY 10036

Exhibit 99.3

FOURTH AMENDMENT TO SECOND AMENDED AND
RESTATED CREDIT AGREEMENT

THIS FOURTH AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT (the “Fourth Amendment”) dated as of the 30th day of April, 2003 is entered into among FINANCIAL SECURITY ASSURANCE INC. (“FSA”) and FSA INSURANCE COMPANY (“FSAIC”) (each a “Borrower” and collectively, the “Borrowers”), the BANKS party hereto and BAYERISCHE LANDESBANK (formerly known as Bayerische Landesbank Girozentrale), acting through its New York Branch in its capacity as Agent pursuant to Article XI of the Second Amended and Restated Credit Agreement (as hereinafter defined).

W I T N E S S E T H :

WHEREAS, Bayerische Landesbank Girozentrale (now known as Bayerische Landesbank), in its capacity as Bank and as Agent, Financial Security Assurance Inc., Financial Security Assurance of Maryland Inc., Financial Security Assurance of Oklahoma, Inc., Landesbank Hessen-Thüringen Girozentrale and Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland”, New York Branch (“RaboBank”) have entered into that First Amended and Restated Credit Agreement dated as of April 30, 1997 (the “First Amended and Restated Credit Agreement”), thereby amending and restating the 1996 Credit Agreement, and that First Amendment to First Amended and Restated Credit Agreement dated as of April 30, 1998 (the “First Amendment” which together with the First Amended and Restated Credit Agreement is herein referred to as the “1997 Credit Agreement”);

WHEREAS, Bayerische Landesbank Girozentrale (now known as Bayerische Landesbank), acting through its New York Branch acting in its capacity as Bank (“BLB”) and as Agent (“Agent”), FSA and FSAIC, Landesbank Hessen-Thüringen Girozentrale, acting through its New York Branch (“Helaba”), RaboBank, Westdeutsche Landesbank Girozentrale (now known as WestLB AG), New York Branch (“WestLB”), Deutsche Bank AG, New York Branch (“DB”), KBC Bank N.V. (“KBC”), First Union National Bank of North Carolina (“First Union”) and Norddeutsche Landesbank Girozentrale, New York Branch (“NordLB”) have entered into that Second Amended and Restated Credit Agreement dated as of April 30, 1999 (the “Second Amended and Restated Credit Agreement”), thereby amending and restating the 1997 Credit Agreement;

WHEREAS, FSA, FSAIC, the Agent, BLB, RaboBank, Helaba, WestLB, DB, KBC, First Union and NordLB entered into the First Amendment to Second Amended and Restated Credit Agreement dated as of April 30, 2000 (the “First Amendment”);

WHEREAS, FSA, FSAIC, the Agent, BLB, RaboBank, Helaba, WestLB, DB, KBC, First Union, NordLB, Landesbank Baden-Württemberg, acting through its New York Branch (“LBBW”) and The Bank of New York (“BNY”) entered into the Second Amendment to Second Amended and Restated Credit Agreement dated as of April 30, 2001 (the “Second Amendment”) to further amend the Second Amended and Restated Credit Agreement in order to terminate the commitment of First Union, to establish commitments by LBBW and BNY, to adjust the commitments of RaboBank and DB and to adjust the Contingent Commitments of the Part C Banks;

WHEREAS, FSA, FSAIC, the Agent, BLB, RaboBank, Helaba, WestLB, DB, KBC, NordLB, LBBW and BNY entered into the Third Amendment to Second Amended and Restated Credit Agreement dated as of April 30,2002 (the “Third Amendment”) to further amend the Second Amended and Restated Credit Agreement in order to amend the definition of Loss Threshold Amount and extend the Expiry Date; and

WHEREAS, the parties hereto wish to further amend the Second Amended and Restated Credit Agreement as provided herein.

NOW, THEREFORE, in consideration of the foregoing and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to amend the Second Amended and Restated Credit Agreement as follows:

SECTION 1. AMENDMENTS .

1.1. Loss Threshold Amount Definition . The definition of Loss Threshold Amount in the Second Amended and Restated Credit Agreement is hereby amended by deleting “$240 Million” in the second line and inserting “$325 Million” in its place.

1.2 Establishment of Commitment of The Bank of Nova Scotia . The signature of The Bank of Nova Scotia, New York Agency (“Scotia”) attached hereto is hereby added to the Second Amended and Restated Credit Agreement following the signature page thereto of BNY. Scotia shall be a Bank under the Second Amended and Restated Credit Agreement with the commitment reflected in Schedule I thereto as hereby amended.

1.3. Amendments to Commitments . Schedule I to the Second Amended and Restated Credit Agreement is hereby deleted and in place thereof Schedule I hereto is inserted. On the date hereof the Borrowers shall execute and deliver Notes in the form of Exhibits A, B, C, D, E, F and G hereto to BLB, Helaba, RaboBank, Scotia, WestLB, NordLB and DB respectively, such Notes constituting “Notes” under the Second Amended and Restated Credit Agreement. Promptly following such delivery BLB, Helaba, RaboBank, WestLB, NordLB and DB shall return to the Borrowers the Notes previously made by the Borrowers in their favor pursuant to the Second Amended and Restated Credit Agreement.

SECTION 2. EXTENSION OF EXPIRY DATE .

By executing this Fourth Amendment each Bank agrees to extend the Expiry Date to April 30, 2010 and the Expiry Date is hereby so extended.

SECTION 3. FULL FORCE AND EFFECT .

The Second Amended and Restated Credit Agreement, as heretofore amended, is hereby amended to the extent provided in this Fourth Amendment and, except as specifically provided herein, the Second Amended and Restated Credit Agreement shall remain in full force and effect in accordance with its terms.

SECTION 4. DEFINITIONS .

All capitalized terms used in this Fourth Amendment and not otherwise defined shall have the meanings set forth in the Second Amended and Restated Credit Agreement, as amended.

SECTION 5. GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE .

(a) This Fourth Amendment and the other Credit Documents and the rights and obligations of the parties hereunder and thereunder shall be construed in accordance with and be governed by the law of the State of New York. Any legal action or proceeding against any Borrower with respect to this Fourth Amendment or any other Credit Document may be brought in the courts of the State of New York or of the United States for the Southern District of New York, and, by execution and delivery of this Fourth Amendment, any Borrower hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The Borrowers irrevocably consent to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the Borrowers at their addresses set forth opposite its signature below, such service to become effective 30 days after such mailing. Except as otherwise provided in Section 4.05 of the Second Amended and Restated Credit Agreement, nothing herein shall affect the right of the Agent or any Bank under this Fourth Amendment to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against any Borrower in any other jurisdiction.

(b) Each Borrower hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Fourth Amendment or any other Credit Document brought in the courts referred to in clause (a) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum.

SECTION 6. HEADINGS .

Section headings in this Fourth Amendment are included herein for convenience of reference only and shall not have any effect for purposes of interpretation or construction of the terms of this Fourth Amendment.

SECTION 7. COUNTERPARTS .

This Fourth Amendment may be signed in any number of counterpart copies, but all such copies shall constitute one and the same instrument.

SECTION 8. REPRESENTATIONS .

Each party hereto hereby represents and warrants to the other that this Fourth Amendment has been duly authorized and validly executed by it and that the Second Amended and Restated Credit Agreement as heretofore amended and as hereby amended constitutes its valid obligation enforceable in accordance with its terms.

SECTION 9. CONDITIONS PRECEDENT .

As conditions precedent to the effectiveness of this Fourth Amendment, the Borrower shall:

(a) execute and deliver to the Agent the Notes referred to herein in Section 1.3; and

(b) pay an upfront fee in the amount of $21,250, for distribution by the Agent to the following Banks in the amounts set forth opposite the names of such Bank:

Bank	Upfront Fee

BLB	$	2,500
Helaba	$	1,250
WestLB	$	2,500
DB	$	6,250
NordLB	$	3,750
Scotia	$	5,000

SECTION 10. EXPENSES.

FSA shall pay to the Agent the fees and expenses of counsel to the Agent in connection with this Fourth Amendment.

[Remainder of Page Left Intentionally Blank]

IN WITNESS WHEREOF , the parties hereto have caused this Fourth Amendment to be duly executed and delivered as of the date and year first written above.

	BORROWERS:

	FINANCIAL SECURITY ASSURANCE INC.


	By		/s/ Joseph W. Simon
	Name:		Joseph W. Simon
	Title:		Managing Director and
			Chief Financial Officer


	FSA INSURANCE COMPANY


	By		/s/ Joseph W. Simon
	Name:		Joseph W. Simon
	Title:		Managing Director and Chief Financial Officer

[Signatures continued on following page]