Pension Benefit Guaranty Corporation
Statements of Financial Condition

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

Pension Benefit Guaranty Corporation
Statements of Financial Condition

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

Commitments and contingencies
(Notes 7, 8, 14 and 15)

Pension Benefit Guaranty Corporation
Statements of Operations and Changes in Net Position

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

Pension Benefit Guaranty Corporation
Statements of Cash Flows

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

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2006 AND 2005

Note 1 -- Organization and Purpose

The Pension Benefit Guaranty Corporation (the PBGC or the Corporation) is a federalcorporation created by Title IV of the Employee Retirement Income Security Act of 1974 (ERISA) andis subject to the provisions of the Government Corporation Control Act. Its activities are defined inERISA as amended by the Multiemployer Pension Plan Amendments Act of 1980, the Single-EmployerPension Plan Amendments Act of 1986, the Pension Protection Act of 1987, the Retirement ProtectionAct of 1994, the Consolidated Appropriations Act, 2001, the Deficit Reduction Act of 2005, and thePension Protection Act of 2006. The Corporation insures the pension benefits, within statutory limits,of participants in covered single-employer and multiemployer defined benefit pension plans.ERISA requires that the PBGC programs be self-financing. The Corporation’s principaloperational resources are premiums collected from covered plans, assets assumed from terminatedplans, collection of employer liability payments due under ERISA, and investment income. ERISAprovides that the U.S. Government is not liable for any obligation or liability incurred by the PBGC. As of September 30, 2006, the single-employer and multiemployer programs reported deficits of$18.142 billion and $739 million, respectively. The single-employer program had assets of nearly $60.0billion which is offset by total liabilities of $78.1 billion, which includes a total present value of futurebenefits (PVFB) of approximately $69.1 billion. As of September 30, 2006, the multiemployer programhad assets of approximately $1.2 billion offset by approximately $1.9 billion in present value ofnonrecoverable future financial assistance.Notwithstanding these deficits, the Corporation has sufficient liquidity to meet its obligations fora number of years; however, neither program at present has the resources to fully satisfy the PBGC’slong-term obligations to plan participants.

Single-Employer and Multiemployer Program Exposure

Measures of risk in the PBGC’s insured base of plan sponsors suggest that the single-employerdeficit may begin to abate in the short term. The PBGC’s best estimate of the total underfunding inplans sponsored by companies with credit ratings below investment grade, and classified by the PBGCas reasonably possible of termination as of September 30, 2006, was $73 billion. The comparable estimates of reasonably possible exposure for 2005 and 2004 were $108 billion and $96 billion,respectively. These estimates are measured as of December 31 of the previous year (see Note 7). For2006, this exposure is concentrated in the following sectors: manufacturing; transportation,communication and utilities; services/other; and wholesale and retail trade.The PBGC estimates that the total underfunding in single-employer plans was approximately $350 billion (unaudited), as of September 30, 2006, and exceeded $450 billion (unaudited), as ofSeptember 30, 2005. The PBGC’s exposure to loss is less than these amounts because of the statutorylimits on insured pensions. For single-employer plans sponsored by employers that do not file with thePBGC under section 4010 of ERISA, the PBGC’s estimates are based on data obtained from otherfilings and submissions with the government and from corporate annual reports for fiscal years ended incalendar 2005. Total underfunding of multiemployer plans is estimated to exceed $150 billion (unaudited) atSeptember 30, 2006. In 2005, the PBGC estimated that multiemployer underfunding exceeded $200billion (unaudited). Multiemployer plan data is much less current and complete than single-employerdata--it is generally two years older and in some cases three years older than single-employer data andcomes only from Form 5500 filings. The PBGC estimates that, as of September 30, 2006, it is reasonably possible that multiemployerplans may require future financial assistance in the amount of $83 million. As of September 30, 2005and 2004, this exposure was estimated at $418 million and $108 million, respectively. There is significant volatility in plan underfunding and sponsor credit quality over time, whichmakes long-term estimates of the PBGC’s expected claims difficult. This volatility, and theconcentration of claims in a relatively small number of terminated plans, have characterized the PBGC’sexperience to date and will likely continue. Among the factors that will influence the PBGC’s claimsgoing forward are economic conditions affecting interest rates, financial markets, and the rate ofbusiness failures.Under the single-employer program, the PBGC is liable for the payment of guaranteed benefitswith respect only to underfunded terminated plans. An underfunded plan may terminate only if thePBGC or a bankruptcy court finds that one of the four conditions for a distress termination, as definedin ERISA, is met or if the PBGC involuntarily terminates a plan under one of five specified statutorytests. The net liability assumed by the PBGC is generally equal to the present value of the future benefits payable by the PBGC less amounts provided by the plan’s assets and amounts recoverable bythe PBGC from the plan sponsor and members of the plan sponsor’s controlled group, as defined byERISA.Under the multiemployer program, if a plan becomes insolvent, it receives financial assistancefrom the PBGC to allow the plan to continue to pay participants their guaranteed benefits. The PBGCrecognizes assistance as a loss to the extent that the plan is not expected to be able to repay theseamounts from future plan contributions, employer withdrawal liability or investment earnings.

Note 2 -- Significant Accounting Policies

Basis of Presentation:

The accompanying financial statements have been prepared inaccordance with accounting principles generally accepted in the United States of America (GAAP). Thepreparation of the financial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Estimates and assumptions may change over timeas new information is obtained or subsequent developments occur. Actual results could differ fromthose estimates.

Valuation Method:

A primary objective of the PBGC’s financial statements is to provideinformation that is useful in assessing the PBGC’s present and future ability to ensure that its planbeneficiaries receive benefits when due. Accordingly, the PBGC values its financial assets at estimatedfair value, consistent with the standards for pension plans contained in Statement of FinancialAccounting Standards (FAS) No. 35 (“Accounting and Reporting by Defined Benefit Pension Plans”). The PBGC values its liabilities for the present value of future benefits and present value ofnonrecoverable future financial assistance using assumptions derived from annuity prices from insurancecompanies, as described in the Statement of Actuarial Opinion. As described in Paragraph 21 of FASNo. 35, the assumptions are “those assumptions that are inherent in the estimated cost at the (valuation)date to obtain a contract with an insurance company to provide participants with their accumulated planbenefits.” Also, in accordance with Paragraph 21 of FAS No. 35, the PBGC selects assumptions for expected retirement ages and the cost of administrative expenses in accordance with its best estimate ofanticipated experience.

Revolving and Trust Funds:

The PBGC accounts for its single-employer and multiemployerprograms’ revolving and trust funds on an accrual basis. Each fund is charged its portion of the benefitspaid each year. The PBGC presents totals that include both the revolving and trust funds forpresentation purposes in the financial statements; however, the single-employer and multiemployerprograms are separate programs by law and, therefore, the PBGC also reports them separately.ERISA provides for the establishment of the revolving funds where premiums are collected andheld. The assets in the revolving funds are used to cover deficits incurred by plans trusteed andprovides funds for financial assistance. The Pension Protection Act of 1987 created a single-employerrevolving (7th) fund that is credited with all premiums in excess of $8.50 per participant, including allpenalties and interest charged on these amounts, and its share of earnings from investments. This fundmay not be used to pay the PBGC’s administrative costs or the benefits of any plan terminated prior toOctober 1, 1988, unless no other amounts are available.The trust funds include assets (e.g., pension plan investments) the PBGC assumes (or expects toassume) once a terminated plan has been trusteed, and related investment income. These assetsgenerally are held by custodian banks. The trust funds support the operational functions of the PBGC.The trust funds reflect accounting activity associated with: (1) trusteed plans -- plans for whichthe PBGC has legal responsibility–the assets and liabilities are reflected separately on the PBGC’sbalance sheet, the income and expenses are included in the income statement and the cash flows fromthese plans are included in the cash flow statement, and (2) plans pending termination and trusteeship --plans for which the PBGC has begun the process for termination and trusteeship by fiscal year-end --the assets and liabilities for these plans are reported as a net amount on the liability side of the balancesheet under "Present value of future benefits, net." For these plans, the income and expenses areincluded in the income statement, but the cash flows are not included in the cash flow statement, and (3)probable terminations -- plans that the PBGC determines are likely to terminate and be trusteed by thePBGC--the assets and liabilities for these plans are reported as a net amount on the liability side of thebalance sheet under "Present value of future benefits, net." The accrued loss from these plans isincluded in the income statement as part of "Losses from completed and probable terminations." Thecash flows from these plans are not included in the cash flow statement. The PBGC cannot exerciselegal control over a plan’s assets until it becomes trustee.

Allocation of Revolving and Trust Funds:

The PBGC allocates assets, liabilities, income andexpenses to each program’s revolving and trust funds to the extent that such amounts are not directly attributable to a specific fund. Revolving fund investment income is allocated on the basis of eachprogram’s average cash and investments available during the year while the expenses are allocated on thebasis of each program’s present value of future benefits. Revolving fund assets and liabilities areallocated on the basis of the year-end equity of each program’s revolving funds. Plan assets acquired bythe PBGC and commingled at the PBGC’s custodian bank are credited directly to the appropriate fundwhile the earnings and expenses on the commingled assets are allocated to each program’s trust fundson the basis of each trust fund’s value, relative to the total value of the commingled fund.

Cash and Cash Equivalents:

Cash includes cash on hand and demand deposits as well as cashcollateral retained as security for securities lent. Cash equivalents are securities with a maturity of onebusiness day.

Investment Valuation and Income:

The PBGC bases market values on the last sale of a listedsecurity, on the mean of the “bid-and-ask” for nonlisted securities or on a valuation model in the case offixed income securities that are not actively traded. These valuations are determined as of the end ofeach fiscal year. Purchases and sales of securities are recorded on the trade date. In addition, the PBGCinvests in and discloses its derivative investments in accordance with the guidance contained in FAS No.133 (“Accounting for Derivative Instruments and Hedging Activities”), as amended. Investmentincome is accrued as earned. Dividend income is recorded on the ex-dividend date. Realized gains andlosses on sales of investments are calculated using first-in, first-out for the revolving fund and averagecost for the trust fund. The PBGC marks the plan’s assets to market and any increase or decrease in themarket value of a plan’s assets occurring after the date on which the plan is terminated must, by law, becredited to or suffered by the PBGC.

Sponsors of Terminated Plans, Receivables:

The amounts due from sponsors of terminatedplans or members of their controlled group represent the settled, but uncollected, claims for employerliability (underfunding as of date of plan termination) and for contributions due their plan less anallowance for estimated uncollectible amounts. The PBGC discounts any amounts expected to bereceived beyond one year for time and risk factors. Some agreements between the PBGC and plansponsors provide for contingent payments based on future profits of the sponsors. The Corporation willreport any such future amounts in the period they are realizable. Income and expenses related toamounts due from sponsors are reported in the underwriting section of the Statements of Operationsand Changes in Net Position. Interest earned on settled claims for employer liability and due and unpaid employer contributions (DUEC) is reported as “Income: Other.” The change in the allowances foruncollectible employer liability and DUEC is reported as “Expenses: Other.”

Premiums:

Premiums receivable represent the estimated earned but unpaid portion of thepremiums for plans that have a plan year commencing before the end of the PBGC’s fiscal year and pastdue premiums deemed collectible, including penalties and interest. The liability for unearned premiumsrepresents an estimate of payments received during the fiscal year that cover the portion of a plan’s yearafter the PBGC’s fiscal year-end. Premium income represents actual and estimated revenue generatedfrom self-assessments from defined benefit pension plans as required by Title IV of ERISA (see Note9).

Capitalized Assets:

Capitalized assets include furniture and fixtures, electronic processing equipment and internal-use software. This includes costs for internally developed software incurredduring the application development stage (system design including software configuration and softwareinterface, coding, testing including parallel processing phase). These costs are shown net of depreciationand amortization.

Present Value of Future Benefits (PVFB):

The PVFB is the estimated liability for futurepension benefits that the PBGC is or will be obligated to pay the participants of trusteed plans and thenet liability for plans pending termination and trusteeship. The PVFB liability (including trusteed plansas well as plans pending termination and trusteeship) is stated as the actuarial present value of estimatedfuture benefits less the present value of estimated recoveries from sponsors and members of theircontrolled group and the assets of plans pending termination and trusteeship as of the date of thefinancial statements. The PBGC also includes the estimated liabilities attributable to plans classified asprobable terminations as a separate line item in the PVFB (net of estimated recoveries and plan assets). The PBGC uses assumptions to adjust the value of those future payments to reflect the time value ofmoney (by discounting) and the probability of payment (by means of decrements, such as for death orretirement). The PBGC also includes anticipated expenses to settle the benefit obligation in thedetermination of the PVFB. The PBGC’s benefit payments to participants reduces the PVFB liability. The values of the PVFB are particularly sensitive to changes in underlying estimates andassumptions. These estimates and assumptions could change and the impact of these changes may bematerial to the PBGC’s financial statements (see Note 4).

(1) Trusteed Plans--represents the present value of future benefit payments less the present value of expected recoveries (for which a settlement agreement has not been reached withsponsors and members of their controlled group) for plans that have terminated and beentrusteed by the PBGC prior to fiscal year-end. Assets are shown separately from liabilitiesfor trusteed plans.

(2) Pending Termination and Trusteeship--represents the present value of future benefitpayments less the plans’ net assets (at fair value) anticipated to be received and the presentvalue of expected recoveries (for which a settlement agreement has not been reached withsponsors and members of their controlled group) for plans for which termination actionhas been initiated and/or completed prior to fiscal year-end. Unlike trusteed plans, theliability for plans pending termination and trusteeship is shown net of plan assets.

(3) Settlements and Judgments--represents estimated liabilities related to settled litigation.

(4) Net Claims for Probable Terminations--In accordance with Statement of FinancialAccounting Standards No. 5 (Accounting for Contingencies) the PBGC recognizes netclaims for probable terminations which represent the PBGC’s best estimate of the losses,net of plan assets and the present value of expected recoveries (from sponsors andmember controlled group) for plans that are likely to terminate within twelve months ofthe financial statement issuance date. These estimated losses are based on conditions thatexisted as of the PBGC’s fiscal year-end. Management believes it is likely that one ormore events subsequent to the PBGC’s fiscal year-end will occur, confirming the loss.Criteria used for classifying a specific plan as a probable termination include, but are notlimited to, one or more of the following conditions: the plan sponsor is in liquidation orcomparable state insolvency proceeding with no known solvent controlled groupmember; sponsor has filed or intends to file for distress plan termination; or the PBGCseeks involuntary plan termination. In addition, management takes into account othereconomic events and factors in making judgments regarding the classification of a plan asa probable termination. These events and factors may include, but are not limited to: theplan sponsor is in bankruptcy or has indicated that a bankruptcy filing is imminent; theplan sponsor has stated that plan termination is likely; the plan sponsor has received agoing concern opinion from its independent auditors; or the plan sponsor is in defaultunder existing credit agreement(s).

In addition, a reserve for large unidentified probable losses is recorded based on actual PBGC experience, as well as the historical industry bond default rates. This reserve hasbeen developed by segregating plan sponsors listed on the contingency list, with planfunding ratios less than or equal to 80%, with aggregate underfunding equal to or greaterthan $50 million into risk bands that reflect their level of credit risk. A reserve for smallunidentified probable losses and incurred but not reported (IBNR) claims is also recordedbased on an actuarial loss development methodology (triangulation method) (see Note

(5) The PBGC identifies certain plans as high risk if the plan sponsor is in Chapter 11proceedings or sponsor's unsecured debt is rated CCC+/Caa1 or lower by S&P orMoody’s respectively. The PBGC specifically reviews each plan identified as high risk andclassifies those plans as probable if, based on available evidence, the PBGC concludesthat plan termination is likely. Otherwise, high risk plans are classified as reasonablypossible.

(6) In accordance with Statement of Financial Accounting Standards No. 5 (Accounting forContingencies), the PBGC’s exposure to losses from plans of companies that areclassified as reasonably possible is disclosed in footnotes. In order for a plan sponsor tobe specifically classified as reasonably possible, it must first have $5 million or more ofunderfunding, as well as meet additional criteria. Criteria used for classifying a companyas reasonably possible include, but are not limited to, one or more of the followingconditions: the plan sponsor is in Chapter 11 reorganization; funding waiver pending oroutstanding with the Internal Revenue Service (IRS); sponsor missed minimum fundingcontribution; sponsor’s bond rating is below-investment-grade for Standard & Poor’s(BB+) or Moody’s (Ba1); sponsor has no bond rating but unsecured debt is belowinvestment grade; or sponsor has no bond rating but the ratio of long-term debt plusunfunded benefit liability to market value of shares is 1.5 or greater (see Note 7).

Present Value of Nonrecoverable Future Financial Assistance:

In accordance with TitleIV of ERISA, the PBGC provides financial assistance to multiemployer plans, in the form of loans, toenable the plans to pay guaranteed benefits to participants and reasonable administrative expenses. These loans, issued in exchange for interest-bearing promissory notes, constitute an obligation of eachplan.

The present value of nonrecoverable future financial assistance represents the estimatednonrecoverable payments to be provided by the PBGC in the future to multiemployer plans that willnot be able to meet their benefit obligations. The present value of nonrecoverable future financialassistance is based on the difference between the present value of future guaranteed benefits andexpenses and the market value of plan assets, including the present value of future amounts expected tobe paid by employers, for those plans that are expected to require future assistance. The amountreflects the rates at which, in the opinion of management, these liabilities (net of expenses) could besettled in the market for single-premium nonparticipating group annuities issued by private insurers(see Note 5).

A liability for a particular plan is included in the "Present Value of Nonrecoverable FutureFinancial Assistance" when it is determined that the plan is currently, or will likely become in thefuture, insolvent and will require assistance to pay the participants their guaranteed benefit. Determining insolvency requires considering several complex factors, such as an estimate of future cashflows, future mortality rates, and age of participants not in pay status.

Other Expenses:

These expenses represent an estimate of the net amount of receivablesdeemed to be uncollectible during the period. The estimate is based on the most recent status of thedebtor (e.g., sponsor), the age of the receivables and other factors that indicate the element ofuncollectibility in the receivables outstanding.

Losses from Completed and Probable Terminations:

Amounts reported as losses fromcompleted and probable terminations represent the difference as of the actual or expected date of plantermination (DOPT) between the present value of future benefits (including amounts owed underSection 4022(c) of ERISA) assumed, or expected to be assumed, by the PBGC, less related plan assetsand the present value of expected recoveries from sponsors and members of their controlled group(see Note 10). When a plan terminates, the previously recorded probable Net claim is reversed andnewly estimated DOPT plan assets, recoveries and PVFB are netted and reported on the line PVFB -Plans pending termination and trusteeship (this value is usually different from the amount previouslyreported), with any change in the estimate being recorded in the Statements of Operations and Changesin Net Position. In addition, the plan’s net income from date of plan termination to the beginning ofthe PBGC’s fiscal year is included as a component of losses from completed and probable terminationsfor plans with termination dates prior to the year in which they were added to the PBGC’s inventory of terminated plans.

Actuarial Adjustments and Charges (Credits):

The PBGC classifies actuarial adjustmentsrelated to changes in method and the effect of experience as underwriting activity; actuarial adjustmentsare the result of the movement of plans from one valuation methodology to another, e.g., nonseriatim (calculating the liability for the group) to seriatim(calculating separate liability for each person), and ofnew data (e.g., deaths, revised participant data). Actuarial charges (credits) related to changes in interestrates and passage of time are classified as financial activity. These adjustments and charges (credits)represent the change in the PVFB that results from applying actuarial assumptions in the calculation offuture benefit liabilities (see Note 4).

Depreciation and Amortization:

The PBGC calculates depreciation on the straight-line basisover estimated useful lives of 5 years for equipment and 10 years for furniture and fixtures. The PBGCcalculates amortization for capitalized software, which includes certain costs incurred for purchasingand developing software for internal use, on the straight-line basis over estimated useful lives not toexceed 5 years, commencing on the date that the Corporation determines that the internal-use softwareis implemented. Routine maintenance and leasehold improvements (the amounts of which are notmaterial) are charged to operations as incurred.

Note 3 -- Investments

Premium receipts are invested in U.S. Treasurysecurities.

Premium receipts are invested through the revolving fund in U.S. Treasury securities.The trust funds include assets the PBGC assumes or expects to assume with respect to terminatedplans (e.g., recoveries from sponsors) and investment income thereon. These assets generally are heldby custodian banks. The basis and market value of the investments by type are detailed below as wellas related investment profile data. The basis indicated is cost of the asset if assumed after the date ofplan termination or the market value at date of plan termination if the asset was assumed as a result of aplan’s termination. The PBGC marks the plan’s assets to market and any increase or decrease in themarket value of a plan’s assets occurring after the date on which the plan is terminated must, by law, becredited to or suffered by the PBGC. For the PBGC's securities, unrealized holding gains and lossesare both recognized by including them in earnings. Unrealized holding gains and losses measure thetotal change in fair value--consisting of unpaid interest income earned or unpaid accrued dividend and the remaining change in fair value from holding the security. As the table below illustrates, the marketvalue of investments of the single-employer program increased significantly from September 30, 2005,to September 30, 2006.

Investments of Single-Employer Revolving Funds and Single-Employer Trusteed Plans

* This includes securities on loan at September 30, 2006, and September 30, 2005, with a market value of $6.352 billion and $6.769 billion, respectively.

Investments of Multiemployer Revolving Funds and Multiemployer Trusteed Plans

Investment Profile

In addition, the PBGC’s trusteed liability return was 9.0% and the duration (years) of these liabilities was9.95 at the end of 2006.

Derivative Instruments

Derivatives are accounted for at market value in accordance with Statement of Financial Accounting Standards No. 133, as amended. Derivatives are marked to marketwith changes in value reported within financial income. These instruments are used to mitigate riskand/or enhance the PBGC’s investment returns. The standard requires disclosure of fair value of theseinstruments. During fiscal years 2005 and 2006, the PBGC invested in investment products that usedvarious U.S. and non-U.S. derivative instruments including but not limited to: money market andgovernment bond futures and forward contracts, swap contracts, swaption contracts, stock warrants andrights, debt option contracts and foreign currency forward and option contracts. Some of thesederivatives are traded on organized exchanges and thus bear minimal counterparty risk. Thecounterparties to the PBGC’s non-exchange-traded derivative contracts are major financial institutions. The PBGC monitors its counterparty risk and has never experienced non-performance by any of itscounterparties.

Futures are exchange-traded contracts specifying a future date of delivery or receipt of a certainamount of a specific tangible or intangible product. The futures exchange’s clearinghouses clear, settle,and guarantee transactions occurring through its facilities. Futures contracts are held as efficient andliquid substitutes for purchases and sales of financial market indices and securities. Open futurespositions are marked to market daily. An initial margin of generally 1 to 6 percent is maintained with thebroker in Treasury bills or similar instruments. In addition, futures contracts require daily settlement ofvariation margin resulting from the marks to market. In periods of extreme volatility, margin calls maycreate a high liquidity demand on the underlying portfolio. To mitigate this, the PBGC maintainsadequate liquidity in its portfolio to meet these margin calls.Foreign currency forward and option contracts are used to hedge currency exposure (i.e.,minimize currency risk) of certain assets and to adjust overall currency exposure to reflect theinvestment views of the portfolio managers regarding relationships between currencies. Otherinvestments held by the Corporation include swap contracts and swaption (i.e., option on swap)contracts. A swap is an agreement between two parties to exchange different financial returns on anotional investment amount. For example, an interest rate swap involves exchanges of fixed rate and floating rate interest. There is no exchange of the underlying principal. The PBGC uses swap andswaption contracts to adjust exposure to interest rates, fixed income securities exposure and creditexposure, and to generate income based on the investment views of the portfolio managers regardinginterest rates, indices and debt issues. Stock warrants and rights allow the PBGC to purchase securitiesat a stipulated price within a specified time limit. For the fiscal years ended September 30, 2005 and2006, respectively, gains and losses from settled margin calls are reported in Investment income on theStatements of Operations and Changes in Net Position. The following table summarizes the notional amounts and fair market values of derivativefinancial instruments held or issued for trading as of September 30, 2006, and September 30, 2005.

Security Lending

The PBGC participates in a security lending program administered by its custodian bank. The custodian bank requires collateral that equals 102 percent to 105 percent of thesecurities lent. The collateral is held by the custodian bank. In addition to the lending programmanaged by the custodian bank, some of the PBGC’s investment managers are authorized to invest inrepurchase agreements and reverse repurchase agreements. The manager either receives cash ascollateral or pays cash out to be used as collateral. Any cash collateral received is invested. The totalvalue of securities on loan at September 30, 2006, and September 30, 2005, was $6.352 billion and$6.769 billion, respectively. Although securities on loan have decreased slightly since September 30,2005, there continues to be an ongoing demand for fixed income securities to lend.The amount of cash collateral received for these loaned securities was $6.491 billion atSeptember 30, 2006, and $6.939 billion at September 30, 2005. These amounts are recorded in cash andare offset with a corresponding liability. The PBGC had earned income from securities lending of $5.2 million as of September 30, 2006 and $4.0 million as of September 30, 2005.

Of the $6.352 billion market value of securities on loan at September 30, 2006, approximately88% are invested in U.S. government securities and 9% in U.S. corporate securities. The PBGC hadapproximately $16.588 billion of securities available for securities lending at September 30, 2006.

Note 4 -- Present Value of Future Benefits

The following table summarizes the actuarial adjustments, charges and credits that explain howthe Corporation’s single-employer program liability for the present value of future benefits changed forthe years ended September 30, 2006 and 2005.

For FY 2006, the PBGC used a 25-year select interest factor of 4.85% followed by an ultimatefactor of 4.82% for the remaining years. For FY 2005, the PBGC used a 25-year select interest factor of5.2% followed by an ultimate factor of 4.5% for the remaining years. These factors were determined tobe those needed, given the mortality assumptions, to continue to match the survey of annuity pricesprovided by the American Council of Life Insurers (ACLI). Both the interest factor and the length of theselect period may vary to produce the best fit with these prices. The prices reflect rates at which, in theopinion of management, the liabilities (net of administrative expenses) could be settled in the market at September 30, for the respective year, for single-premium nonparticipating group annuities issued byprivate insurers. Many factors, including Federal Reserve policy, changing expectations about longevityrisk, and competitive market conditions may affect these rates.

For FY 2005, the surveys of annuity prices were used in conjunction with a Moody’s bond index,averaged over the last five days of each month. For FY 2006, a Lehman’s bond index is used instead;this index is as of only the last day of the month, and is applied to both the select and ultimate factorsinstead of the select factor only as had been prior practice. Finally, interest factors for FY 2006 are nowrounded to two decimal places instead of one so as to be able to state to the level of a single basis point. For FY 2005 and prior years, the select factor was rounded to ten basis points, and the ultimate factorwas rounded to 25 basis points.

For September 30, 2006, the PBGC used the 1994 Group Annuity Mortality (GAM) 94 StaticTable (with margins), set forward one year and projected 22 years to 2016 using Scale AA, the same asthe table used in the September 30, 2005 valuation. The number of years that the PBGC projects themortality table reflects the number of years from the 1994 base year of the table to the end of the fiscalyear (12 years in 2006 versus 11 years in 2005) plus the PBGC’s calculated duration of its liabilities (10years in 2006 versus 11 years in 2005). The PBGC’s procedure is based on the proceduresrecommended by the Society of Actuaries UP-94 Task Force (which developed the GAM94 table) fortaking into account future mortality improvements.

The PBGC continues to utilize the results of its 2004 mortality study. The study showed thatthe mortality assumptions used in FY 2003 reflected higher mortality than was realized in the PBGC’sseriatim population. Therefore, the PBGC adopted a base mortality table (i.e., GAM94 set forward oneyear instead of GAM94 set forward two years) that better reflects past mortality experience. The ACLIsurvey of annuity prices, when combined with that mortality table, provides the basis for determiningthe interest factors used in calculating the PVFB. The insurance annuity prices, when combined withthe stronger mortality table, result in a higher interest factor.

The reserve for administrative expenses in the 2006 and 2005 valuations were assumed to be1.18 percent of benefit liabilities plus additional reserves for cases whose plan asset determinations,participant database audits and actuarial valuations were not yet complete. The expense assumption wasbased on a study performed for the PBGC in 2000 by a major accounting firm. The factors todetermine the additional reserves were based on case size, number of participants and time since trusteeship.

The present values of future benefits for trusteed multiemployer plans for 2006 and 2005 reflectthe payment of assistance and the changes in interest and mortality assumptions, the passage of time andthe effect of experience. The resulting liability represents the PBGC’s best estimate of the measure of anticipatedexperience under these programs.

Reconciliation of the Present Value of Future Benefits for the Years Ended September 30, 2006 and 2005

The benefit payments of $4,082 million and $3,685 million include $76 million in 2006 and $384 million in 2005 for benefits paid from plan assets by plans priorto trusteeship.

**The future benefits for probable terminations of $17,430 million and $23,918 million for fiscal years 2006 and 2005, respectively, include $87 million and $137 million, respectively, in net claims (future benefits less estimated plan assets and recoveries) for probable terminations not specifically identified and $17,343 million and $23,781 million, respectively, in net claims for specifically identified probables.

The following table details the assets that make up single-employer terminated plans pending terminationand trusteeship:

Assets of Single-Employer Terminated Plans Pending Trusteeship, Net

Net Claims for Probable Terminations: Factors that are presently not fully determinable maybe responsible for these claim estimates differing from actual experience. Included in net claims forprobable terminations is a provision for future benefit liabilities for plans not specifically identified.

The values recorded in the following reconciliation table have been adjusted to the expected datesof termination.

Reconciliation of Net Claims for Probable Terminations

The following table itemizes the probable exposure by industry:

Probables Exposure By Industry (Principal Categories)?

For further detail, see Note 2 subpoint (4)

The following table shows what has happened to plans classified as probables. This tabledoes not capture or include those plans that were not previously classified as probable before theyterminated. This table incorporates the impact of the PPA legislation which was an unpredictablefactor impacting the PBGC's ability to predict probables as terminations.

Probables Experience -Actual as Initially Recorded Beginning in 1987?

* "Probables deleted" in the above table includes 5 plans deleted due to airline relief provisions pursuant to PPA, causing the percent of plans to increase from 19% to 20% and the percent of net claims to increase
from 3% to 28%.

Note 5 -- Multiemployer Financial Assistance

The PBGC provides financial assistance to multiemployer defined benefit pension plans in the form
of loans. An allowance is set up to the extent that repayment of these loans is not expected.

Notes Receivable Multiemployer Financial Assistance

The losses from financial assistance reflected in the Statements of Operations and Changes
in Net Position include period changes in the estimated present value of nonrecoverable future
financial assistance.

Present Value of Nonrecoverable Future Financial Assistance and Losses From Financial Assistance

Note 6 -- Accounts Payable and Accrued Expenses

The following table itemizes accounts payable and accrued expenses reported in the
Statements of Financial Condition:

Accounts Payable and Accrued Expenses

Note 7 -- Contingencies

Single-employer plans sponsored by companies whose credit quality is below investmentgrade pose a greater risk of being terminated. In addition, there are some multiemployer plans thatmay require future financial assistance. The amounts disclosed below represent the Corporation’sbest estimates of the reasonably possible losses in these plans given the inherent uncertainties aboutthese plans.

In accordance with Statement of Financial Accounting Standards No. 5, the PBGC classifieda number of these companies as reasonably possible terminations as the sponsors’ financialcondition and other factors did not indicate that termination of their plans was likely as of year-end. The best estimate of aggregate unfunded vested benefits exposure to the PBGC for the companies’single-employer plans classified as reasonably possible as of September 30, 2006, was $73 billion. The drop from $108 billion in FY 2005 to $73 billion in FY 2006 is primarily attributable to a netreduction in the unfunded vested benefit liabilities of the plans whose sponsors remained at risk.

The estimated unfunded vested benefits exposure has been calculated as of December 31,2005, and is not based on the PBGC guaranteed levels. The PBGC calculated this estimate as inprevious years by using data obtained from filings and submissions to the government and fromcorporate annual reports for fiscal years ending in calendar 2005. The Corporation adjusted thevalue reported for liabilities to a December 31, 2005, PBGC select rate of 4.5% that was derivedusing 83 GAM mortality. When available, data were adjusted to a consistent set of mortalityassumptions. The underfunding associated with these plans would generally tend to be greater atSeptember 30, 2006, because of the economic conditions that existed between December 31, 2005,and September 30, 2006. During this nine month period, the PBGC estimates that the aggregate Unfunded Vested Benefits increased approximately within a range of 15% to 25%. The Corporationdid not adjust the estimate for events that occurred between December 31, 2005, and September 30,2006.

The following table itemizes the reasonably possible exposure by industry:

Reasonably Possible Exposure By Industry (Principal Categories)?

The PBGC included amounts in the liability for the present value of nonrecoverable futurefinancial assistance (see Note 5) for multiemployer plans that the PBGC estimated may requirefuture financial assistance. In addition, the PBGC currently estimates that it is reasonably possiblethat other multiemployer plans may require future financial assistance in the amount of $83 million.

The Corporation calculated the future financial assistance liability for each multiemployer planidentified as probable (see Note 5), or reasonably possible as the present value of guaranteed futurebenefit and expense payments net of any future contributions or withdrawal liability payments as ofthe later of September 30, 2006, or the projected (or actual, if known) date of plan insolvency,discounted back to September 30, 2006. The Corporation’s identification of plans that are likely torequire such assistance and estimation of related amounts required consideration of many complexfactors, such as an estimate of future cash flows, future mortality rates, and age of participants not inpay status. These factors are affected by future events, including actions by plans and theirsponsors, most of which are beyond the Corporation’s control.

The PBGC used select and ultimate interest rate assumptions of 4.85% for the first 25 yearsafter the valuation date and 4.82% thereafter. The Corporation also used the 1994 Group AnnuityMortality Static Table (with margins), set forward one year, projected 22 years to 2016 using ScaleAA.

Note 8 -- Commitments

The PBGC leases its office facility under a new commitment that began on January 1, 2005, andexpires December 10, 2018. The new lease agreement was entered into because of the need for additional office space. This lease provides for periodic rate increases based on increases in operatingcosts and real estate taxes over a base amount. In addition, the PBGC is leasing space for field benefitadministrators. These leases began in 1996 and expire in 2013. The minimum future lease payments foroffice facilities having noncancellable terms in excess of one year as of September 30, 2006, are asfollows:

Commitments: Future Lease Payments

Lease expenses were $18.7 million in 2006 and $18.0 million in 2005.

Note 9 -- Premiums

For both the single-employer and multiemployer programs, ERISA provides that the PBGC shallcontinue to guarantee basic benefits despite the failure of a plan administrator to pay premiums whendue. The PBGC assesses interest and penalties on the unpaid portion of or underpayment of premiums. Interest continues to accrue until the premium and the interest due are paid. Due to the enactment ofthe Deficit Reduction Act of 2005, flat-rate premiums for single-employer pension plans increased from$19 to $30 per participant and the multiemployer plans yearly premium increased from $2.60 to $8 perparticipant. The new rates are effective for plan year 2006, and will be indexed for wage inflationbeginning in plan year 2007. The PBGC recorded premium income, excluding interest and penalty, ofapproximately $941 million in flat-rate premiums and $550 million in variable-rate premiums for fiscalyear 2006, and approximately $670 million in flat-rate premiums and $787 million in variable-ratepremiums for fiscal year 2005.

Since premium income for FY 2006 primarily consists of plan year 2006 and 2005 premiums, andrevenue recognition accounting principles require partial recognition of plan year 2006 premiums as ofSeptember 30, 2006, the 2006 increase in flat-rate premium income represents approximately 65% of thefull impact to the plan year 2006 flat-rate premiums due for all plans.

Note 10 -- Losses from Completed and Probable Terminations

Amounts reported as losses are the present value of future benefits less related plan assets and thepresent value of expected recoveries from sponsors. The following table details the components thatmake up the losses:

Losses From Completed And Probable Terminations Single-Employer Program

* gross amounts for plans terminated during the year

** see Note 4 - includes $288 million at September 30, 2006, and $10,637 million at September 30, 2005, previously recorded relating to plans that terminated during the period

Note 11 -- Financial Income

The following table details the combined financial income by type of investment for both the single-employer and multiemployer programs:

Investment Income - Single-Employer and Multiemployer Program

Note 12 -- Employee Benefit Plans

All permanent full-time and part-time the PBGC employees are covered by the CivilService Retirement System (CSRS) or the Federal Employees Retirement System (FERS). Full-time andpart-time employees with less than five years service under CSRS and hired after December 31, 1983,are automatically covered by both Social Security and FERS. Employees hired before January 1, 1984,participate in CSRS unless they elected and qualified to transfer to FERS.

The Corporation’s contribution to the CSRS plan for both 2006 and 2005 was 7.0 percent of base pay for those employees covered by that system. For those employees covered byFERS, the Corporation’s contribution was 10.7 percent of base pay for both 2006 and 2005. Inaddition, for FERS-covered employees, the PBGC automatically contributes one percent of base pay tothe employee’s Thrift Savings account, matches the first three percent contributed by the employee andmatches one-half of the next two percent contributed by the employee. Total retirement plan expensesamounted to $13 million in 2006 and $11 million in 2005.

These financial statements do not reflect CSRS or FERS assets or accumulated plan benefits applicable to the PBGC employees. These amounts are reported by the U.S. Office ofPersonnel Management (OPM) and are not allocated to the individual employers. OPM accounts forfederal health and life insurance programs for those eligible retired PBGC employees who had selectedfederal government-sponsored plans. The PBGC does not offer other supplemental health and lifeinsurance benefits to its employees.

Note 13 -- Cash Flows

The following two tables, one for Sales and one for Purchases, provide further details on cashflows from investment activity. Sales and purchases of investments are driven by the level of newlytrusteed plans, the unique investment strategies implemented by the PBGC’s investment managers, andthe varying capital market conditions in which they invest during the year. Several investment strategiesin use in 2006 involved higher volume short term investments, particularly in the fixed income area, asshown in the Investing Activities table below. These cash flow numbers can vary significantly from yearto year based on the fluctuation in these three variables.

INVESTING ACTIVITIES

The following is a reconciliation between the net income as reported in the Statements of Operationsand Changes in Net Position and net cash provided by operating activities as reported in the Statementsof Cash Flows.

RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES

Note 14 -- Litigation

The PBGC was involved in numerous litigation matters in 2006. At the end of the fiscal year, thePBGC had 487 open, active bankruptcy cases and 64 active litigation matters (other than in bankruptcycourt). The PBGC records as a liability on its financial statements an estimated cost for unresolvedlitigation to the extent that losses in such cases are probable and estimable in amount. At September 30,2006, the PBGC estimated that possible losses of up to $269.2 million could be incurred in the event thatthe PBGC does not prevail in these matters. In October 2006, the PBGC received a favorable decision inone of these litigation matters in the amount of $84.2 million. These possible losses are not recognized inthe financial statements.

Note 15 -- Subsequent Events

For the year ended September 30, 2006, there were no subsequent events to report on either thesingle-employer or multiemployer program.

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