BNP US FUNDING LLC - 10-Q Quarterly Report

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

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterended June 30, 2004

Commissionfile number: 000-23745

BNP U.S.Funding L.L.C.
(Exact name of registrantas specified in itscharter)

Delaware (State or other jurisdiction of incorporation or organization)	13-3972207 (I.R.S.Employer IdentificationNo.)
787 Seventh Avenue, New York, N.Y. (Address of principal executive offices)	10019 (Zip Code)

Registrant's telephone number, including area code:
(212) 841-2000

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 No

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

All outstanding shares of Common Stock were held by BNP PARIBAS at June 30, 2004.

Number of Shares of Common Stock outstanding on June 30, 2004: 53,011


Part I		Page
Item 1.	Financial Statements
	Balance Sheets at June 30, 2004 (Unaudited) and December 31, 2003	3
	Statements of Income (Unaudited) for the Three Months and Six Months Ended June 30, 2004 and June 30, 2003	4
	Statements of Comprehensive Income (Loss) (Unaudited) for the Three Months and Six Months Ended June 30, 2004 and June 30, 2003	5
	Statement of Changes in Redeemable Common Securities, Preferred Securities and Securityholders' Equity (Unaudited) for the Three Months Ended March 31, 2004 and June 30, 2004	6
	Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2004 and June 30, 2003	7
	Notes to Financial Statements (Unaudited)	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operation	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21
Item 4.	Controls and Procedures	24
Part II
Item 1.	Legal Proceedings	25
Item 2.	Changes in Securities, Use of the Proceeds and Issuer Purchases of Equity Securities	25
Item 3.	Defaults upon Senior Securities	25
Item 4.	Submission of Matters to a Vote of Securityholders	25
Item 5.	Other Information	25
Item 6.	Exhibits and Current Reports on Form 8-K	25

Item 1.
FINANCIAL STATEMENTS

BNP U.S. FUNDING L.L.C.
BALANCE SHEETS
(in thousands, except per share data)


		June 30, 2004		December 31, 2003
		(unaudited)		(audited)


ASSETS

Cash and cash equivalents	$	26,651	$	25,181

Investment securities (Notes 3 and 4)
Available-for-sale, at fair value		1,065,455		1,088,876

Receivable arising from payment for securities, pursuant
to the application of SFAS 125, as replaced by
SFAS 140 (Note 3)		24,732		30,663

Accounts receivable		200		54

Accrued interest receivable		8,322		8,299


TOTAL ASSETS	$	1,125,360	$	1,153,073


LIABILITIES

Accrued interest payable	$	2,724	$	2,719
Accrued expenses		440		242
Other liabilities		72,326		94,598


TOTAL LIABILITIES		75,490		97,559


Redeemable common securities, par value and redeemable
value $10,000 per security; 150,000 securities authorized,
53,011 securities issued and outstanding (Note 5)		530,110		530,110
Preferred securities, liquidation preference $10,000 per
security; 150,000 securities authorized, 50,000 securities
issued and outstanding		500,000		500,000
Additional paid-in capital		483		229
Accumulated other comprehensive income		17,017		22,969
Retained earnings		2,260		2,206


TOTAL REDEEMABLE COMMON SECURITIES,
PREFERRED SECURITIES AND
SECURITYHOLDERS' EQUITY		1,049,870		1,055,514


TOTAL LIABILITIES AND TOTAL REDEEMABLE
COMMON SECURITIES, PREFERRED
SECURITIES AND SECURITYHOLDERS' EQUITY	$	1,125,360	$	1,153,073

The accompanying Notes to Financial Statements are an integral part of these statements.

BNP U.S. FUNDING L.L.C.

STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)


		For the Three Months						For the Six Months
		Ended June 30,						Ended June 30,

INTEREST INCOME		2004			2003			2004			2003


Collateralized Mortgage Obligations:
Floating-Rate REMICs	$	28		$	108		$	62		$	238
Fixed-Rate REMICs		171			281			200			754
Mortgage Backed Securities:
Agency ARMs		96			200			205			440
Agency Hybrid ARMs		192			318			390			737
Agency DUSs		1,396			1,406			2,668			2,718
Agency Debentures		4,067			3,942			8,366			8,153
Interest on deposits		42			89			107			191


Total		5,992			6,344			11,998			13,231


NONINTEREST INCOME (EXPENSE)

Other financial instrument		310			909			(143	)		605
Fees and expenses		(385	)		(388	)		(702	)		(720	)

		(75	)		521			(845	)		(115	)



NET INCOME APPLICABLE TO PREFERRED AND
REDEEMABLE COMMON SECURITIES	$	5,917		$	6,865		$	11,153		$	13,116


NET LOSS PER REDEEMABLE
COMMON SECURITY	$	(253.31	)	$	(235.42	)	$	(154.53	)	$	(117.50	)

The accompanying Notes to Financial Statements are an integral part of these statements.

BNP U.S. FUNDING L.L.C.

STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands)


		For the Three Months					For the Six Months
		Ended June 30,					Ended June 30,

	2004			2003		2004			2003

NET INCOME	$	5,917		$	6,865	$	11,153		$	13,116

OTHER COMPREHENSIVE INCOME

Net change in unrealized gain (loss) in fair value
of available-for-sale securities that are not treated
as collateral (Note 3) and that are not hedged by
derivative instruments		(9,718	)		2,977		(5,952	)		3,463

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)		(9,718	)		2,977		(5,952	)		3,463


COMPREHENSIVE INCOME (LOSS)	$	(3,801	)	$	9,842	$	5,201		$	16,579

The accompanying Notes to Financial Statements are an integral part of these statements.

BNP U.S. FUNDING L.L.C.

STATEMENT OF CHANGES IN REDEEMABLE COMMON SECURITIES,
PREFERRED SECURITIES AND SECURITYHOLDERS' EQUITY (UNAUDITED)
(in thousands)


		For the Three Months Ended March 31, 2004 and June 30, 2004
		Redeemable Common Securities		Preferred Securities		Additional Paid-in Capital			Accumulated Other Comprehensive Income			Retained Earnings			Total Redeemable Common Securities, Preferred Securities and Securityholders' Equity





Balance at December 31, 2003	$	530,110	$	500,000	$	229		$	22,969		$	2,206		$	1,055,514

Net income												5,236			5,236
Other comprehensive income									3,766						3,766

Balance at March 31, 2004	$	530,110	$	500,000	$	229		$	26,735		$	7,442		$	1,064,516


Net income												5,917			5,917
Other comprehensive loss									(9,718	)					(9,718	)
Additional paid-in capital						8,500									8,500
Dividends paid - preferred securities						(8,246	)					(11,099	)		(19,345	)


Balance at June 30, 2004	$	530,110	$	500,000	$	483		$	17,017		$	2,260		$	1,049,870

The accompanying Notes to Financial Statements are an integral part of these statements.

BNP U.S. FUNDING L.L.C.

STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	For the Six Months Ended June 30,

	2004			2003

OPERATING ACTIVITIES


Net income	$	11,153		$	13,116
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization		432			616
(Gain) loss on other financial instrument		143			(604	)
(Gain) loss on hedge activity		(123	)		285
Changes in assets and liabilities:
Interest receivable		(23	)		237
Accounts receivable		(146	)		541
Accrued expenses		198			(11	)
Accrued interest payable		5			1,559

Net cash provided by operating activities		11,639			15,739


INVESTING ACTIVITIES

Purchase of investment securities:
Agency DUSs		-			(38,122	)
Agency Debentures		-			(20,038	)
Fixed-Rate REMICs		(20,915	)		-
Proceeds from principal payments of securities
available-for-sale, not treated as collateral		15,762			28,028
Proceeds from principal payments of securities
available-for-sale, treated as collateral		5,829			34,062

Net cash provided by investing activities		676			3,930


FINANCING ACTIVITIES

Additional paid-in capital		8,500			5,500
Cash dividends - preferred securities		(19,345	)		(19,345	)

Net cash used in financing activities		(10,845	)		(13,845	)


NET INCREASE IN CASH AND CASH EQUIVALENTS		1,470			5,824

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		25,181			40,180


CASH AND CASH EQUIVALENTS, END OF PERIOD	$	26,651		$	46,004


NONCASH FINANCING AND INVESTING ACTIVITIES

Decrease in receivable arising from payment for securities, pursuant
to the application of SFAS 125, as replaced by SFAS 140 (Note 3)	$	5,931		$	34,268

The accompanying Notes to Financial Statements are an integral part of these statements.

FORWARD LOOKING DISCLOSURE STATEMENT

From time to time, the Company may publish, verbally or in written form, forward-looking statements relating to such matters as anticipated financial performance, economic conditions, interest rate levels, investment prospects and similar matters. In fact, this quarterly report on Form 10-Q (or any other periodic reporting documents required by the Securities Exchange Act of 1934 Act, as amended (the "Exchange Act")) may contain forward-looking statements reflecting the current views of the Company concerning potential future events or developments. The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements. In order to comply with the terms of the "safe harbor," the Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance and that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties which may affect the operations, performance, development and results of the Company's business include, but are not limited to, the following: uncertainties relating to economic conditions and interest rate levels, and uncertainties relating to government and regulatory policies. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statements were made.

NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION

BNP U.S. Funding L.L.C. (the "Company" or the "Registrant") is a Delaware limited liability company formed on October 14, 1997, for the purpose of acquiring and holding certain types of eligible securities that generate net income for distribution to the holders of its Series A Preferred Securities (as defined below) and its redeemable Common Securities (as defined below). The Company has no subsidiaries and is a wholly owned subsidiary of the New York Branch (the "Branch") of BNP PARIBAS (formerly, Banque Nationale de Paris), a société anonyme or limited liability corporation organized under the laws of the Republic of France (the "Bank", "BNP PARIBAS" or "BNPP"). The Company was continued pursuant to the Amended and Restated Limited Liability Company Agreement of the Company (the "Company's Charter" or the "Charter") entered into on December 5, 1997, by the Branch.

The Company was initially capitalized on October 14, 1997, with the issuance to the Branch of one share of the Company's redeemable common securities, $10,000 par value (the "Common Securities"). On December 5, 1997 (inception), the Company commenced operations concurrent with the issuance of 50,000 noncumulative preferred securities, Series A, liquidation preference $10,000 per security (the "Series A Preferred Securities"), to qualified institutional buyers, and the issuance of an additional 53,010 Common Securities to the Branch. These issuances raised in the aggregate $1,030,115,873 of net capital (including $5,873 of additional paid-in capital). This entire amount was used to acquire a portfolio of debt securities (the "Initial Portfolio") at their fair values from the Branch. The Branch contributed additional paid-in capital of $3,000,000, $5,500,000, $7,500,000 and $8,500,000 on December 3, 2002, June 3, 2003, December 3, 2003, and June 3, 2004, respectively.

The Company entered into a services agreement (the "Services Agreement") with the Branch on December 5, 1997, pursuant to which the Branch maintains the securities portfolio of the Company (the "Portfolio") and performs other administrative functions. The Company has no employees. All of the Company's officers are officers or employees of the Branch or the Bank or their affiliates. The securities in the Portfolio are held by Citibank N.A., acting as trustee (the "Trustee") under the trust agreement between the Company and Citibank N.A. dated December 1, 1997 (the "Trust Agreement").

The accounting and financial reporting policies of the Company conform to U.S. generally accepted accounting principles and current industry practices. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts and disclosures and may vary from actual results.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INVESTMENT SECURITIES

Investments in debt securities are classified as available-for-sale (recorded on trade-date basis) and are carried at fair value. The debt securities can be categorized as hedged or non-hedged securities. Fair values of non hedged debt securities are based on quoted market prices. For the hedged securities, changes in the fair market value of both the securities and the derivatives used as hedging instruments (cross currency and interest rate swaps) are reported in current earnings in the Statements of Income, pursuant to application of SFAS 133, (see below, "Accounting for Derivatives and Hedging Activities"). Unrealized gains and losses on the non-hedged securities are reported as a component of "Other Comprehensive Income". The hedged securities are generally valued using discounted cash flows in a yield-curve model based on LIBOR.

Interest on securities is included in interest income and is recognized using the interest method. Premiums and discounts are amortized in a manner that approximates the constant yield method.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash and short-term deposits with original maturities of three months or less.

DIVIDENDS

Dividends on the Series A Preferred Securities, when, as and if declared by the Company's Board of Directors, are payable semi-annually in arrears on a non-cumulative basis on the fifth day of June and December of each year, commencing June 5, 1998, at a rate per annum of 7.738% of the liquidation preference through and including December 5, 2007. Thereafter, dividends, when, as and if declared by the Company's Board of Directors, will be payable quarterly in arrears on the third Wednesday of March, June, September, and December of each year and will be calculated on a weekly basis in each quarter at a rate per annum of the liquidation preference equal to 2.8% per annum above one-week LIBOR for the week concerned as determined on the related LIBOR Determination Date. Holders of Common Securities are entitled to receive dividends when, as and if declared by the Company's Board of Directors out of the Company's net income not required to be applied to fund dividends with respect to the Series A Preferred Securities. Dividends to the Preferred Securityholders may be paid out of (i) net income, determined without regard to capital gains or losses, or (ii) amounts contributed by the Bank or the Branch to the Company's capital. As of June 30, 2004, the Branch has contributed a total of $24,500,000 of additional paid-in capital, which was used to facilitate the semi-annual payments of dividends to the holders of the Series A Preferred Securities.

To date, the Company has declared and paid dividends as follows:


Security	Amount		Date Paid

Series A Preferred Securities	$	19,345,000	June 5, 1998
Common Securities	$	5,347,365	June 22, 1998
Series A Preferred Securities	$	19,345,000	December 5, 1998
Common Securities	$	8,787,127	December 15, 1998
Series A Preferred Securities	$	19,345,000	June 5, 1999
Common Securities	$	8,454,284	June 15, 1999
Series A Preferred Securities	$	19,345,000	December 5, 1999
Common Securities	$	10,352,672	December 15, 1999
Series A Preferred Securities	$	19,345,000	June 5, 2000
Common Securities	$	12,508,486	June 19, 2000
Series A Preferred Securities	$	19,345,000	December 5, 2000
Common Securities	$	14,792,297	December 19, 2000
Series A Preferred Securities	$	19,345,000	June 5, 2001
Common Securities	$	10,718,708	June 19, 2001
Series A Preferred Securities	$	19,345,000	December 5, 2001
Series A Preferred Securities	$	19,345,000	June 5, 2002
Series A Preferred Securities	$	19,345,000	December 5, 2002
Series A Preferred Securities	$	19,345,000	June 5, 2003
Series A Preferred Securities	$	19,345,000	December 5, 2003
Series A Preferred Securities	$	19,345,000	June 5, 2004

If the Bank's financial condition were to deteriorate with the consequence that a Shift Event (as defined below) were to occur, substantially all of the Common Securities would be redeemed automatically without prior redemption of the Series A Preferred Securities and dividends payable on each Series A Preferred Security could be substantially reduced or completely eliminated. In addition, if the Bank's Tier 1 risk-based capital ratio were to decline below the minimum percentage required by French banking regulations (currently 4%), the Company would pay a special dividend consisting of all of the Company's net assets (other than assets having a total market value of approximately $40,000,000) to the Branch as holder of the Common Securities.

A "Shift Event" would be deemed to have occurred if (i) the Bank's total risk-based capital ratio or Tier 1 risk-based capital ratio were to decline below the minimum percentages required by French banking regulations, (ii) the Bank were to become subject to certain specified receivership proceedings or (iii) the French Banking Commission (Commission Bancaire), in its sole discretion, were to notify the Bank and the Company that it has determined that the Bank's financial condition was deteriorating such that either of the foregoing clauses (i) or (ii) would apply in the near term. French banking regulations

currently require French banks to maintain a minimum total risk-based capital ratio of at least 8.0% and a minimum Tier 1 risk-based capital ratio of at least 4.0% .

The Company may not pay dividends or make other distributions on the Common Securities or the Series A Preferred Securities if, after giving effect to the distributions, the Company's liabilities would exceed the fair value of its assets. Additionally, as long as any Series A Preferred Securities are outstanding, except during a Shift Period (i.e., following the occurrence of a Shift Event causing a shift in dividend preference and before the termination thereof), the amount of dividends on the Common Securities in any fiscal year may not exceed the amount by which the net income of the Company for such fiscal year exceeds the stated dividends on the Series A Preferred Securities scheduled to be paid during such fiscal year irrespective of whether dividends on the Series A Preferred Securities are in fact declared and paid. Additionally, other than during a Shift Period, no dividends may be declared, paid or set apart for payment on the Common Securities (a) with respect to any period of time included in any Dividend Period unless full dividends have been or contemporaneously are declared and paid, or declared and a sum sufficient for the payment thereof is set apart for such payment on the Series A Preferred Securities for the then-current Dividend Period and (b) the Company may not declare, pay or set apart funds for any dividends or other distributions with respect to any Common Securities unless and until (x) full dividends on the Series A Preferred Securities for the two most recent preceding Dividend Periods are declared and paid, or declared and a sum sufficient for payment has been paid over to the dividend disbursing agent for payment of such dividends and (y) the Company has declared a cash dividend on the Series A Preferred Securities at the annual dividend rate for the then-current Dividend Period, and sufficient funds have been paid over to the dividend disbursing agent for payment of such cash dividends for such then-current Dividend Period.

NET INCOME PER REDEEMABLE COMMON SECURITY

Net income per redeemable common security is calculated by dividing net income after preferred dividends by the weighted average number of Common Securities outstanding.

INCOME TAXES

The Company expects to be treated as a partnership for U.S. federal income tax purposes. As a partnership is not a taxable entity, the Company will not be subject to U.S. federal, state and local income tax on its income. Instead, each securityholder is required to take into account its allocable share of items of income, gain, loss and deduction of the partnership in computing its U.S. federal tax liability. Accordingly, the Company has made no provision for income taxes in the accompanying statements of income.

ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES

Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities", requires that an entity measure all derivatives at fair value and recognize those derivatives as either assets or liabilities on the balance sheet. The change in the derivative's fair value is generally to be recognized in current period earnings. However, if certain conditions are met, a derivative may be specifically designated as a hedge of an exposure to changes in fair value, variability of cash flows, or certain foreign currency exposures.

The Company has made an assessment of all its financial instruments and concluded that it holds freestanding derivative instruments but no embedded derivative instruments at June 30, 2004. As part of its asset management activities the Company uses foreign exchange and interest rate swaps to modify the interest rate and foreign exchange characteristics of existing assets. The interest rate swaps have a high correlation between the instrument and the asset being hedged, both at inception and throughout the hedge period.

FOREIGN CURRENCY TRANSLATION

Assets denominated in foreign currencies are translated to U.S. dollars using applicable rates of exchange.

All of the Company's assets denominated in a foreign currency are included in its available-for-sale securities portfolio, and their foreign currency exchange risk is hedged by means of cross currency swaps. In accordance with the requirements of SFAS 133, the change in fair value, due to the change in the foreign currency exchange rate, of both the hedged securities and the hedging instruments is recorded in current period earnings.

Revenues and expenses are translated monthly at amounts which approximate weighted average exchange rates.

NOTE 3--RECEIVABLE ARISING FROM PAYMENT FOR SECURITIES

Statement of Financial Accounting Standards No. 140 ("SFAS 140"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" addresses the accounting for the transfer of financial assets. Under SFAS 140, transfers of financial assets that do not meet certain sale accounting requirements must be accounted for as a secured borrowing transaction with a pledge of collateral. Due to the potential consequences of a Shift Event (as described above), the Company's purchase of the Initial Portfolio from the Branch did not meet certain SFAS 125, as replaced by SFAS 140, sale accounting requirements. Therefore, the purchase of the Initial Portfolio has been accounted for as a secured borrowing transaction with a pledge of collateral. In accounting for this transaction as a secured borrowing transaction in accordance with SFAS 125, as replaced by SFAS 140, the Company has recorded a receivable in an amount equal to the remaining amount paid to the Branch to acquire the Initial Portfolio. In this case, however, having delivered the securities in the Initial Portfolio to the Company, neither the Branch nor BNPP has any further obligation to the Company to repay any part of the purchase price for the Initial Portfolio or otherwise to repurchase or redeem any securities in the Initial Portfolio.

The Company has not sold or repledged the collateral; the securities within the Initial Portfolio mature or prepay over time. As they do, the Company recognizes the cash proceeds as a reduction in the receivable arising from payment for securities. The collateral at June 30, 2004 and December 31, 2003 is reported in Note 4 below.

NOTE 4--INVESTMENT SECURITIES

The amortized cost and estimated fair value of available-for-sale securities were as follows based on management's prepayment assumptions (in thousands):

June 30, 2004


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Non-Collateral	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Collateralized Mortgage Obligations:
Floating-Rate REMICs	$	646	$	17	$	---	$	663
Fixed-Rate REMICs		30,915		2,780		---		33,695
Mortgage Backed Securities:
Agency ARMs		3,840		5		61		3,784
Agency Hybrid ARMs		7,511		91		---		7,602
Agency DUSs		427,410		34,372		---		461,782
Agency Debentures		505,947		52,290		308		557,929

Total Non-Collateral	$	976,269	$	89,555	$	369	$	1,065,455


Collateral

Collateralized Mortgage Obligations:
Floating-Rate REMICs	$	7,634	$	---	$	78	$	7,556
Fixed-Rate REMICs		---		---		---		---
Mortgage Backed Securities:
Agency ARMs		6,374		29		1		6,402
Agency Hybrid ARMs		10,724		59		134		10,649
Agency DUSs		---		---		---		---
Agency Debentures		---		---		---		---

Total Collateral	$	24,732	$	88	$	213	$	24,607


June 30, 2004 Total Portfolio	$	1,001,001	$	89,643	$	582	$	1,090,062


December 31, 2003
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Non-Collateral	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Collateralized Mortgage Obligations:
Floating-Rate REMICs	$	797	$	---	$	8	$	789
Fixed-Rate REMICs		10,000		1,276		---		11,276
Mortgage Backed Securities:
Agency ARMs		5,071		6		18		5,059


Agency Hybrid ARMs		9,442		182		15		9,609
Agency DUSs		439,905		50,006		---		489,911
Agency Debentures		506,230		66,002		---		572,232

Total Non-Collateral	$	971,445	$	117,472	$	41	$	1,088,876


Collateral

Collateralized Mortgage Obligations:
Floating-Rate REMICs	$	10,673	$	---	$	117		10,556
Fixed-Rate REMICs		298		---		---		298
Mortgage Backed Securities:
Agency ARMs		7,347		138		3		7,482
Agency Hybrid ARMs		12,345		255		42		12,558
Agency DUSs		---		---		---		---
Agency Debentures		---		---		---		---

Total Collateral	$	30,663	$	393	$	162	$	30,894


December 31, 2003 Total Portfolio	$	1,002,108	$	117,865	$	203	$	1,119,770

The breakdown of the Company's available-for-sale securities by category and weighted average life distribution (stated in terms of amortized cost) is summarized below based on management's prepayment assumptions (Actual maturities may differ from maturities shown below due to prepayments) (in thousands):


June 30, 2004		Due in 1 year or less		Due after 1 through 5 years		Due after 5 through 10 years		Due after 10 years		Total


Non-Collateral

Collateralized Mortgage Obligations:
Floating-Rate REMICs	$	---	$	646	$	---	$	---	$	646
Fixed-Rate REMICs		---		30,915		---		---		30,915
Mortgage Backed Securities:
Agency ARMs		478		3,362		---		---		3,840
Agency Hybrid ARMs		200		6,986		---		325		7,511
Agency DUSs		26,500		400,910		---		---		427,410
Agency Debentures		---		505,947		---		---		505,947

Total Non-Collateral	$	27,178	$	948,766	$	---	$	325	$	976,269

Collateral

Collateralized Mortgage Obligations:
Floating-Rate REMICs	$	1,830	$	5,804	$	---	$	---	$	7,634
Fixed-Rate REMICs		---		---		---		---		---
Mortgage Backed Securities:
Agency ARMs		---		3,634		562		2,178		6,374
Agency Hybrid ARMs		---		8,430		2,294		---		10,724
Agency DUSs		---		---		---		---		---
Agency Debentures		---		---		---		---		---

Total Collateral	$	1,830	$	17,868	$	2,856	$	2,178	$	24,732


June 30, 2004 Total Portfolio	$	29,008	$	966,634	$	2,856	$	2,503	$	1,001,001


December 31, 2003
				Due after 1		Due after 5
		Due in 1 year		through 5		through 10		Due after 10
Non-Collateral		or less		years		years		years		Total

Collateralized Mortgage Obligations:
Floating-Rate REMICs	$	---	$	797	$	---	$	---	$	797
Fixed-Rate REMICs		---		10,000		---		---		10,000


Mortgage Backed Securities:
Agency ARMs		1,978		3,093		---		---		5,071
Agency Hybrid ARMs		979		8,463		---		---		9,442
Agency DUSs		---		371,653		68,252		---		439,905
Agency Debentures		---		506,230		---		---		506,230

Total Non-Collateral	$	2,957	$	900,236	$	68,252	$	---	$	971,445


Collateral

Collateralized Mortgage Obligations:
Floating-Rate REMICs	$	3,387	$	6,064	$	1,222	$	---	$	10,673
Fixed-Rate REMICs		298		---		---		---		298
Mortgage Backed Securities:
Agency ARMs		125		5,355		246		1,621		7,347
Agency Hybrid ARMs		180		8,040		4,125		---		12,345
Agency DUSs		---		---		---		---		---
Agency Debentures		---		---		---		---		---

Total Collateral	$	3,990	$	19,459	$	5,593	$	1,621	$	30,663


December 31, 2003 Total Portfolio	$	6,947	$	919,695	$	73,845	$	1,621	$	1,002,108

The breakdown of the Company's available-for-sale securities by category and yield, before the result of hedges, is summarized below:


			Due after 1		Due after 5
	Due in 1 year		through 5		through 10		Due after 10				Yield after
June 30, 2004	or less		years		years		years		Total		Hedging


Collateralized Mortgage
Obligations:
Floating-Rate REMICs	.99	%	1.40		---	%	---	%	1.29	%	1.29	%
Fixed-Rate REMICs	---		6.74		---		---		6.74		1.95
Mortgage Backed Securities:
Agency ARMs	2.93		3.89		3.18		3.37		3.70		3.70
Agency Hybrid ARMs	4.95		4.02		3.36		6.58		4.01		4.01
Agency DUSs	---		6.52		---		---		6.52		1.22
Agency Debentures	---		6.00		---		---		6.00		3.30

Total	1.89	%	6.20	%	3.32	%	3.79	%	6.16	%	2.37	%


December 31, 2003

Collateralized Mortgage
Obligations:
Floating-Rate REMICs	2.33	%	1.59	%	---	%	---	%	2.02	%	2.02	%
Fixed-Rate REMICs	6.50		6.74		---		---		6.61		4.19
Mortgage Backed Securities:
Agency ARMs	4.30		4.10		3.49		3.38		4.07		4.07
Agency Hybrid ARMs	5.25		4.47		---		---		4.35		4.35
Agency DUSs	---		6.45		6.23		---		6.41		1.34
Agency Debentures	---		5.98		---		---		5.98		3.40

Total	4.84	%	6.09	%	6.00	%	3.38	%	6.03	%	2.60	%

NOTE 5--REDEEMABLE COMMON SECURITIES AND PREFERRED SECURITIES

REDEEMABLE COMMON SECURITIES

General

The Company is authorized to issue up to 150,000 Common Securities; as of June 30, 2004 and December 31, 2003, the Company had outstanding 53,011 Common Securities, all of which were held by the Branch. The Bank has agreed with the Company in the Contingent Support Agreement that, so long as any Series A Preferred Securities are outstanding, it will maintain direct or indirect ownership of 100% of the outstanding Common Securities.

Dividends

Holders of Common Securities are entitled to receive dividends when, as and if declared by the Company's Board of Directors out of the Company's net income not required to be applied to fund dividends with respect to the Series A Preferred Securities; provided that so long as any Series A Preferred Securities are outstanding, no dividends or other distributions (including redemptions and purchases) may be made with respect to the Common Securities unless full dividends on all Series A Preferred Securities have been paid for the current and the two immediately preceding Dividend Periods (except during a Shift Period if the Bank does not distribute dividends on its common stock). As disclosed in Note 1, the Branch contributed additional paid-in capital of $24,500,000 to date. In the event the dividends to the Series A Preferred Securities can not be funded out of net income, determined without regard to capital gains or losses, or out of contributions by the Bank or the Branch to the Company's capital, such dividends would not be accrued as they are noncumulative.

Redemption Requirements

If the Bank's financial condition were to deteriorate with the consequence that a Shift Event were to occur, substantially all the Common Securities would be redeemed automatically without prior redemption of any Series A Preferred Securities.

Voting Rights

Subject to the rights, if any, of the holders of Series A Preferred Securities (in particular the right to remove and replace any Independent Director and to elect an additional director, in certain circumstances), all voting rights are vested in the Common Securities. The holders of Common Securities are entitled to one vote per security.

Rights Upon Liquidation

In the event of the dissolution, liquidation or winding up of the Company, whether voluntary or involuntary, after there shall have been paid or set aside for the holders of all Series A Preferred Securities the full preferential amounts to which such holders are entitled, the holders of Common Securities will be entitled to share equally and ratably in any assets remaining after the payment of all debts and liabilities. Upon a liquidation of the Company during a Shift Period, the Common Securities will have a preference over the Series A Preferred Securities to the extent, if any, that the liabilities of the Bank (including any debt instruments, such as titres participatifs and prêts participatifs) have not been paid in full.

PREFERRED SECURITIES

The Series A Preferred Securities will not be redeemable prior to December 5, 2007. On or after December 5, 2007, the Series A Preferred Securities will be redeemable at the option of the Company, in whole or in part, at a redemption price of $10,000 per security. Prior to December 5, 2007, the Company will also have the right to redeem the Series A Preferred Securities upon the occurrence of a Regulatory Event, which is defined as either a Change of Capital Event or a Tax Event, for a redemption price equal to the higher of $10,000 per security or a Make-Whole Amount per security. A "Change of Capital Event" means a notification to the Bank by the French Banking Commission (Commission Bancaire) of its determination that the Series A Preferred Securities do not constitute Tier 1 capital of BNP PARIBAS on a consolidated basis for purposes of the application of French banking regulations. A "Tax Event" means the receipt by the Company of an opinion of a nationally recognised law firm that there is more than an insubstantial risk that (i) the Company is, or will be subject to more than a de minimis amount of additional taxes, duties or other governmental charges or civil claims or (ii) the payments on the Series A Preferred Securities will not be respected as payments to Series A Preferred Securities for tax purposes, and, as a result, the bank is or will be subject to more than a de minimis amount of additional taxes, duties, governmental charges or civil claims. The "Make-Whole Amount" consists of the present value of the liquidation preference of the Series A Preferred Securities at December 5, 2007 together with the present values of scheduled noncumulative dividend payments from the Regulatory Event Redemption Date to December 5, 2007.

NOTE 6--RELATED PARTY TRANSACTIONS

The Company entered into a Services Agreement with the Branch on December 5, 1997 pursuant to which the Branch manages the securities portfolio of the Company and performs other administrative functions. Expenses incurred under such Agreement were $500,023 and $479,909 for the periods ended June 30, 2004 and 2003, respectively. Under a specific allocation methodology, the costs of personnel servicing the Company is based on actual man-hours devoted to the activities of the Company and remains at arms length.

The counterparty to all cross currency and interest rate swaps is BNP Paribas. The fair value of these swap transactions is disclosed in Note 7.

The Branch also serves as the dividend paying agent, registrar and transfer agent with respect to the Series A Preferred Securities. The fee is $4,000 per annum for these services.

All of the Company's officers and employees and all but one of the members of the Company's Board of Directors are officers and employees of the Branch or BNP Paribas or their affiliates.

NOTE 7--FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values of securities at June 30, 2004 and December 31, 2003 were obtained from independent market sources and are summarized in Note 4. The carrying values of securities, as shown in Note 4, approximates their fair value. The fair value of the receivable arising from payment for securities, pursuant to the application of SFAS 125, as replaced by SFAS 140, was $24,607,266 and $30,893,778 at June 30, 2004 and December 31, 2003, respectively.

The carrying value of cash and cash equivalents, accounts receivable, accrued interest receivable, accrued expenses, and accounts payable approximates fair value due to their short-term maturity of less than six months.

The fair value of the cross currency and interest rate swaps was $(72,325,789) and $(94,597,757) at June 30, 2004 and December 31, 2003, respectively, and are reflected in "Other liabilities".

NOTE 8--DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to hedge the interest rate risk and foreign currency risk of fixed-income securities. As a result of interest rate or exchange rate fluctuations, hedged fixed-rate assets will appreciate or depreciate in market value. The effect of this unrealized appreciation or depreciation is expected to substantially offset the Company's gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. The Company considers its use of derivatives to be a prudent method of managing interest rate and foreign currency rate sensitivity, as it prevents earnings from being exposed to undue risk posed by changes in interest and exchange rates in compliance with the Company's policies.

Derivative instruments that are used as part of the Company's interest rate risk management strategy include interest rate and cross currency swap contracts that have indices related to the pricing of specific balance sheet assets and liabilities. As a matter of policy, the Company does not use highly leveraged derivative instruments for interest rate risk management. Interest rate swaps generally involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date.

By using derivative instruments, the Company exposes itself to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, the Company's credit risk will equal the fair value gain in a derivative. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes the Company, thus creating a repayment risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, assumes no repayment risk. The Company minimizes the credit (or repayment) risk in derivative instruments by entering into transactions with BNP PARIBAS S.A. Consequently, the Company does not require that collateral be provided by the counterparty.

Market risk is the adverse effect that a change in interest rates, currency, or implied volatility rates might have on the value of a financial instrument. The Company does not expose itself to market risk by using derivatives but rather reduces market risk since it uses derivatives only for fair value hedges that effectively offset fluctuations in the fair value of the hedged items.

The Company formally documents all relationships between derivatives and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions. This process includes linking all derivatives that are

designated as fair value or cash flow hedges to (1) assets and liabilities on the balance sheet, (2) firm commitments or (3) forecasted transactions.

Fair Value Hedges

The Company mainly enters into interest rate swaps and cross currency interest rate swaps to convert fixed rate Agency Debentures, Agency DUSs and Fixed-Rate REMICs into variable rate securities.

The fair value of the hedging instruments was $(71,838,798) and $(94,253,884) at June 30, 2004 and December 31, 2003, respectively, and has been recorded in "Other liabilities". It has been offset, except for the ineffective portion of the hedge, by the revaluation of the respective hedged investment securities. The fair value of the hedging instruments does not include accrued interest receivable and payable, which are shown separately on the balance sheet. For the six months ended June 30, 2004, the Company recognized a gain of $123,161 in earnings related to the ineffective portion of fair value hedges. The Company also recognized a loss of $(143,118) in current year's earnings related to a cross currency swap that no longer qualified as a fair value hedging instrument.

Cash Flow Hedges

For the six months ended June 30, 2004 and June 30, 2003, the Company did not enter into cash flow hedge transactions and it is not the intention of the Company to use interest rate swaps to convert floating rate financial instruments to fixed rate financial instruments as part of a cash flow hedge strategy.

At June 30, 2004 and December 31, 2003, the Company had outstanding interest rate and cross currency swap agreements with a notional principal amount of $747,726,677 and $739,305,189, respectively.

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

General

The Company was formed on October 14, 1997, and commenced operations on December 5, 1997, by the sale to qualified institutional buyers of 50,000 Series A Preferred Securities and the sale to the Branch of 53,010 Common Securities. Together, such sales raised net capital of $1,030,115,873, which the Company used to purchase the Initial Portfolio from the Branch. The Branch has contributed $8,500,000, $7,500,000, $5,500,000, and $3,000,000 of additional paid-in capital on June 3, 2004, December 3, 2003, June 3, 2003 and December 3, 2002, respectively.

All of the Company's officers and employees and all but one of the members of the Company's Board of Directors are officers and employees of the Branch or BNP Paribas or their affiliates.

The Company's sole business is to acquire, hold and manage debt instruments, largely consisting of mortgage obligations, in the Portfolio, which generate net income for distribution to securityholders. The Company's major source of income is interest generated by the securities in the Portfolio.

Results of Operations
Overview

The Company believes the factor having the greatest impact on revenues is the sustained low interest rate environment. The decrease in revenue is mainly due to an increase in net swap expense where its floating rate component has generated less income due to the decrease of interest rates. This has been offset by an increase in interest on the securities. During 2003, the Company began reinvesting prepayments mainly into fixed-rate securities.

SIX MONTH PERIOD

The following discussion pertains to the Six months ended June 30, 2004 (the "2004 Period") and the Six months ended June 30, 2003 (the "2003 Period").

For the 2004 Period and 2003 Period, the Company had revenues of $11,997,500 and $13,231,634, respectively. These amounts consisted of interest income on the investment securities, the unrealized gain/loss on hedged securities and derivatives used as hedging instruments, and interest on deposits.

For the 2004 Period and 2003 Period, interest on the securities in the Portfolio amounted to $25,066,944, and $24,053,366, respectively, representing an aggregate yield of 6.16% and 5.99%, respectively. Interest earned and average yield with respect to each category of security in the Portfolio was as follows (yield based on average amortized cost):


	2004					2003
	2004					2003

Floating-Rate REMICs		$	61,835	1.29	%	$	238,044	2.22	%
Fixed-Rate REMICs		$	690,021	6.74	%	$	1,023,517	6.58	%
Agency ARMs		$	205,284	3.70	%	$	439,750	4.30	%
Agency Hybrid ARMs		$	390,124	4.01	%	$	737,256	4.60	%
Agency DUS		$	14,229,109	6.52	%	$	12,162,775	6.38	%
Agency Debentures		$	9,490,571	6.00	%	$	9,452,024	5.97	%

The yield on Agency Debentures is based on U.S. dollar denominated securities which excludes the Japanese Yen denominated securities.

During the 2004 Period, the yields on the Agency DUSs, Agency Debentures and Fixed-Rate REMICs were approximately 1.22%, 3.30% and 1.95%, respectively, when taking into account the income and expense from the derivative products used to hedge these securities. During the 2003 Period, the yields on the Agency DUSs, Agency Debentures and Fixed-Rate REMICS were approximately 1.43%, 3.22% and 4.84%, respectively, when taking into account the income and expense from the derivative products used to hedge these securities.

The average amortized cost of the Portfolio during the 2004 Period and 2003 Period was $1,003,136,499 and $992,729,767, respectively. This reflects the following prepayments and reinvestments:


PREPAYMENTS	2004		2003


Floating-Rate REMICs	$	3,164,076	$	6,416,998
Fixed-Rate REMICs	$	298,027	$	24,650,408
Agency ARMs	$	2,160,208	$	8,138,955
Agency Hybrid ARMs	$	3,474,044	$	9,596,178
Agency DUS	$	12,493,513	$	13,287,228
Agency Debentures	$	---	$	---


REINVESTMENTS	2004		2003

Floating-Rate REMICs	$	---	$	---
Fixed-Rate REMICs	$	20,915,000	$	---
Agency ARMs	$	---	$	---
Agency Hybrid ARMs	$	---	$	---
Agency DUS	$	---	$	38,121,748
Agency Debentures	$	---	$	20,038,400

The Company also recorded interest income from short-term investments for the 2004 Period and 2003 Period of $107,251 and $191,047, respectively. These amounts are attributable to the interest earned on (i) interest payments on securities in the Portfolio, (ii) prepayments of principal pending their reinvestment and (iii) short-term investments classified as cash equivalents.

As of June 30, 2004 and 2003, as calculated by aggregate amortized cost, approximately 49.46% and 48.46%, respectively, of the Portfolio consisted of collateralized mortgage obligations (Floating-Rate REMICs and Fixed-Rate REMICs) and mortgage backed securities (Agency ARMs, Agency Hybrid ARMs and Agency DUSs), and approximately 50.54% and 51.54%, respectively, consisted of Agency Debentures. As of June 30, 2004 and 2003, floating rate securities accounted for approximately 3.67% and 6.54%, respectively, of the Portfolio's collateralized mortgage obligations and mortgage backed securities. In addition, a significant portion of the Agency Debentures and the Agency DUSs are hedged so that in all but one case, the fixed interest rates received on the bonds are converted into prevailing floating rates.

The aggregate market value of the securities in the Portfolio as of June 30, 2004 and 2003 was higher than the amortized cost by approximately 8.90% and 12.37%, respectively, due to a net decrease in interest rates from the time of their original purchase. For the hedged securities, changes in the fair market value of both the securities and the derivatives used as hedging instruments (cross currency and interest rate swaps) are reported in current earnings in the Statements of Income, pursuant to application of SFAS 133 (Note 2). Unrealized gains and losses on the non-hedged securities are reported as a component of Other Comprehensive Income.

Operating expenses for the 2004 Period and 2003 Period totaled $701,852 and $719,993, respectively. Operating expenses consisted largely of fees paid to the Branch under the Services Agreement, fees to Citibank as Trustee, consulting fees and audit fees. The cost of Branch personnel servicing the Company is based on actual man-hours devoted to the activities of the Company and remains at arms length. Expenses incurred under the Services Agreement for the 2004 and 2003 Period totaled $500,023 and $479,909, respectively.

The Company's net income for the 2004 Period and 2003 Period was $11,152,519 and $13,116,188, respectively. As of June 30, 2004, the Company has declared and paid dividends as follows:


Security		Amount	Date Paid
Series A Preferred	$	19,345,000	June 5, 2004
Series A Preferred	$	19,345,000	December 5, 2003
Series A Preferred	$	19,345,000	June 5, 2003

THREE MONTH PERIOD

The following discussion pertains to the Three months ended June 30, 2004 (the "2004 Quarter") and the Three months ended June 30, 2003 (the "2003 Quarter").

For the 2004 Quarter and 2003 Quarter, the Company had revenues of $5,991,944 and $6,344,728, respectively. These amounts consisted of interest income on the investment securities, the unrealized gain/loss on hedged securities and derivatives used as hedging instruments, and interest on deposits.

For the 2004 Quarter and 2003 Quarter, interest on the securities in the Portfolio amounted to $12,740,487, and $12,082,830, respectively, representing an aggregate yield of 6.11% and 6.01%, respectively. Interest earned and average yield with respect to each category of security in the Portfolio was as follows (yield based on average amortized cost):


	2004					2003
	2004					2003

Floating-Rate REMICs	$	27,920	1.28	%	$	108,464	2.17	%
Fixed-Rate REMICs	$	520,918	6.74	%	$	416,534	6.59	%
Agency ARMs	$	96,316	3.63	%	$	199,998	4.29	%
Agency Hybrid ARMs	$	192,145	4.21	%	$	318,219	4.30	%
Agency DUS	$	7,157,902	6.60	%	$	6,294,579	6.40	%
Agency Debentures	$	4,745,286	6.00	%	$	4,745,036	6.00	%

The yield on Agency Debentures is based on U.S. dollar denominated securities which excludes the Japanese Yen denominated securities.

During the 2004 Quarter, the yields on the Agency DUSs, Agency Debentures and Fixed-Rate REMICs were approximately 1.29%, 3.21% and 2.21%, respectively, when taking into account the income and expense from the derivative products used to hedge these securities. During the 2003 Quarter, the yields on the Agency DUSs, Agency Debentures and Fixed-Rate REMICS were approximately 1.43%, 3.09% and 4.45. %, respectively, when taking into account the income and expense from the derivative products used to hedge these securities.

The average amortized cost of the Portfolio during the 2004 Quarter and 2003 Quarter was $1,009,002,115 and $993,655,701, respectively. This reflects the following prepayments and reinvestments:


PREPAYMENTS	2004		2003
PREPAYMENTS	2004		2003
Floating-Rate REMICs	$	1,521,902	$	3,029,814
Fixed-Rate REMICs	$	---	$	11,078,024
Agency ARMs	$	1,024,999	$	3,397,790
Agency Hybrid ARMs	$	1,415,624	$	5,061,559
Agency DUS	$	11,075,265	$	12,232,739
Agency Debentures	$	---	$


REINVESTMENTS	2004		2003
REINVESTMENTS	2004		2003
Floating-Rate REMICs	$	---	$	---
Fixed-Rate REMICs	$	20,915,000	$	---
Agency ARMs	$	---	$	---
Agency Hybrid ARMs	$	---	$	---
Agency DUS	$	---	$	11,032,204
Agency Debentures	$	---	$	---

The Company also recorded interest income from short-term investments for the 2004 Quarter and 2003 Quarter of $42,025 and $88,680, respectively. These amounts are attributable to the interest earned on (i) interest payments on securities in the Portfolio, (ii) prepayments of principal pending their reinvestment and (iii) short-term investments classified as cash equivalents.

Operating expenses for the 2004 Quarter and 2003 Quarter totaled $385,249 and $387,951, respectively. Operating expenses consisted largely of fees paid to the Branch under the Services Agreement, fees to Citibank as Trustee, consulting fees and audit fees. The cost of Branch personnel servicing the Company is based on actual man-hours devoted to the activities of the Company and remains at arms length. Expenses incurred under the Services Agreement for the 2004 and 2003 Quarter totaled $296,147 and $237,968, respectively.

The Company's net income for the 2004 Quarter and 2003 Quarter was $5,916,526 and $6,865,385, respectively.

Investment Income

The interest income on the investment securities includes interest income on the remaining securities in the Initial Portfolio, which are considered to be collateral held by the Company and which are no longer recognized on the balance sheet pursuant to guidance in Statement of Financial Accounting Standards No. 140 ("SFAS 140"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS 125", which modified SFAS 125 in this respect, as explained in Note 3 to the financial statements. The receivable for the consideration paid to the Branch for the Initial Portfolio is recognized on the balance sheet and is an asset of similar size as the remaining securities in the Initial Portfolio. The balance sheet presentation results from compliance with SFAS 140 but does not reflect the economic substance of the transaction, as further explained in the section on the application of SFAS 125, as replaced by SFAS 140, below. For all economic intent and purposes, the securities in the Initial Portfolio are owned by the Company and managed as any other investment security, with related revenues belonging to the Company and recorded as such in the income statements.

Receivable Arising from Payment for Securities

Due to the potential consequences of a Shift Event (as defined in Item 1 Note 2 herein), the Company's purchase of the Initial Portfolio (as defined in Item 1 herein) from the Branch did not meet certain SFAS 125, as replaced by SFAS 140, sale accounting requirements. Accordingly, the Company recorded at December 5, 1997 a receivable for the consideration paid to the Branch for the Initial Portfolio treated as collateral. As a legal and economic matter, however, there is no such receivable since (a) neither the Bank nor the Branch has any obligation to repay any part of the purchase price for the Initial Portfolio or to repurchase or redeem any of the securities included therein, and (b) the Company has no obligation to return any of such securities to the Bank or the Branch (except in the limited circumstances and to the extent that the occurrence of a Shift Event under the Charter would require the transfer of any assets held by the Company at the time). As the securities in the Initial Portfolio are paid, the receivable will be deemed to be realized by an amount corresponding to the amount of the payments received. At June 30, 2004 and December 31, 2003, the receivable arising from payment for securities amounted to $24,732,495 and $30,662,719, respectively. The decrease in the amount of such receivable between the two dates reflects the prepayment of securities in the Initial Portfolio. The Company recognized the cash proceeds of such prepayments as a reduction in the receivable. Such decreases in the receivable did not affect the Company's results of operations or cash flow. Disclosures required under SFAS 125, as replaced by SFAS 140, are included in Note 3.

Liquidity and Capital Resources

The objective of liquidity management is to ensure the availability of sufficient cash flows to meet all of the Company's financial commitments. The Company's sole liquidity needs are to acquire reinvestment securities as original securities repay or prepay and to pay dividends on the Series A Preferred Securities. The acquisition of reinvestment securities is funded with the proceeds of principal repayments or prepayments on original securities, and the payments of dividends on the Series A Preferred Securities are funded through interest income from the securities in the Portfolio.

The low interest rate environment has adversely affected the Company's income. The Company has not declared dividends on the Common Securities since June 2001 in order to retain earnings available for the payment of dividends to the holders of the

Series A Preferred Securities. Dividends to the Preferred Securityholders may be paid out of (i) net income, determined without regard to capital gains or losses, or (ii) amounts contributed by the Bank or the Branch to the Company's capital. As of June 30, 2004, the Branch has contributed a total of $24,500,000 of additional paid-in capital, which was used to facilitate the semi-annual payments of dividends to the holders of the Series A Preferred Securities.

Based on 2004 projected earnings, the Company may require an additional cash contribution from the Branch to ensure payment of preferred dividends. The Company cannot make any assurances that further decreases in interest rates or a sustained low interest rate environment will not have a further adverse effect on the Company's income.

BNP PARIBAS Group's total and Tier 1 risk-based capital ratios at June 30, 2004 were 11.4% and 8.4%, and at December 31, 2003 were 12.9% and 9.4%, which are well above the minimum standards required by French banking regulations, currently 8% for total risk-based capital and 4% for Tier 1 risk-based capital. A "Shift Event" would occur if BNP PARIBAS' risk-based capital fell below these minimum standards of 8% and 4%, respectively. See Note 2 of the attached financial statements for a detailed explanation of "Shift Events".

Critical Accounting Policies

Management believes its critical accounting policies relate to recognition and valuation of financial instruments, as further defined in Item 1, Note 2.

Accounting and Reporting Developments

In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 150 ("SFAS No. 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". The statement requires that an issuer classify financial instruments that are within its scope as a liability. Many of those instruments were classified as equity under previous guidance. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003. Otherwise, it is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have an impact on the Company's Balance Sheet or Statement of Income.

In April 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS No. 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, and decisions made in connection with other FASB projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that contains financing components. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. We do not anticipate SFAS 149 having a material impact on our Balance Sheet or Statement of Income.

SFAS 133 requires that an entity measure all derivatives at fair value and recognize those derivatives as either assets or liabilities on the balance sheet. The change in the derivative's fair value is generally to be recognized in current period earnings. However, if certain conditions are met, a derivative may be specifically designated as a hedge of an exposure to changes in fair value, variability of cash flows, or certain foreign currency exposures.

All of the Company's outstanding hedging transactions are fair value hedges. For the six months ended June 30, 2004 and 2003, the Company recognized gain (loss) of $123,161 and $(285,907), respectively, in earnings related to the ineffective portion of fair value hedges. The fair value of these hedging instruments was $(71,838,798) and $(94,253,884) at June 30, 2004 and December 31, 2003, respectively, and has been recorded in "Other liabilities". It has been offset, except for the ineffective portion of the hedge, by the revaluation of the respective hedged investment securities. The fair value of the hedging instruments does not include accrued interest receivable and payable, which are shown separately on the balance sheet.

For a further discussion on derivative instruments and hedging activities, see Note 8 to the financial statements.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

The Company's principal market risk exposure is to changes in interest rates. This exposure arises from its investments in collateralized mortgage obligations, mortgage-backed securities, agency debentures, agency DUSs and certain derivative instruments used by the Company to modify interest rate exposure.

The outstanding principal amount and estimated fair value as of June 30, 2004, by each category of investment, is depicted in Item 1.

Interest Rate Risk

The Company's income consists primarily of interest payments on collateralized mortgage obligations, mortgage-backed securities, agency debentures and agency DUSs. Currently, the Company uses derivative products to manage a portion of its interest rate risk.

For the quarter ended June 30, 2004, the interest rate environment remained at a low level. This situation continues to affect the Company's income through the floating rate component of the portfolio (floating-rate securities and fixed-rate securities converted to floating-rate instruments through interest rate swaps). This situation will prevail as long as interest rates remain low.

The Company regularly reviews its hedging requirements. In the future, the Company expects to enter into additional swaps and unwind part or all of the initial and any future swaps. This strategy is implemented in order to rebalance the fixed and floating mix of interest obligations (including those arising as a result of previous interest rate swaps entered into) and the fixed and floating mix of interest payments.

The Company's interest rate management strategy will continue to be rebalanced with any purchases of new investments. There can be no assurance, however, that the Company's interest rate risk management strategies will be effective in this regard.

The Company is a party to thirty one interest rate swaps and six cross currency swaps with BNP PARIBAS, as set out in the table below. In all but one of these swaps, the Company pays a fixed coupon and receives floating rate payments on the notional balances. The notional amount of each swap is tied to the outstanding principal of the securities they hedge. The maturity dates of the swaps reflect the maturity of these securities. However, the maturity date maybe earlier due to prepayments on some of these securities.


Value Date	Maturity Date	Fixed Rate	Receive Rate	Fair Value at June 30, 2004 (in 000's)		Notional Balance (in 000's)
Value Date	Maturity Date	Fixed Rate	Receive Rate	Fair Value at June 30, 2004 (in 000's)		Notional Balance (in 000's)


November 25, 1998	March 26, 2008	JPY 1.75	U.S. Three Month LIBOR	$ (5,998	)	$ 42,000
			Plus Six Basis Points
November 25, 1998	October 9, 2007	JPY 2.125	U.S. Three Month LIBOR	(9,457	)	58,000
			Plus Six Basis Points
November 25, 1998	August 25, 2008	U.S. 6.15	U.S. One Month LIBOR	(1,436	)	18,516
			Plus Five Basis Points
February 11, 1999	March 14, 2007	U.S. 6.80	U.S. Three Month LIBOR	(5,051	)	50,000
			Minus Two Basis Points
February 12, 1999	March 5, 2007	U.S. 6.68	U.S. Three Month LIBOR	(5,171	)	50,000
			Minus Two Basis Points
February 25, 1999	February 25, 2009	U.S. 5.95	U.S. One Month LIBOR	(1,461	)	20,148
			Plus Three Basis Points
March 29, 1999	October 9, 2007	JPY 2.125	U.S. Three Month LIBOR	(3,956	)	30,000
			Minus Two and Half Basis
			Points
April 6, 1999	October 9, 2007	JPY 2.125	U.S. Three Month LIBOR	(4,343	)	26,400
			Minus One Basis Point


Value Date	Maturity Date	Fixed Rate	Receive Rate	Fair Value at June 30, 2004 (in 000's)		Notional Balance (in 000's)
Value Date	Maturity Date	Fixed Rate	Receive Rate	Fair Value at June 30, 2004 (in 000's)		Notional Balance (in 000's)


May 25, 1999	May 25, 2009	U.S. 6.23	U.S. One Month LIBOR	(1,076	)	12,180
			Plus One and Half Basis
			Points
June 25, 1999	June 25, 2009	U.S. 6.06	U.S. One Month LIBOR	(1,988	)	25,378
			Plus Three and Half Basis
			Points
July 1, 1999	June 25, 2009	U.S. 6.39	U.S. One Month LIBOR	(1,422	)	15,294
			Plus Three and Half Basis
			Points
September 27, 1999	March 25, 2008	U.S. 6.29	U.S. One Month LIBOR	(3,336	)	41,803
			Plus Five Basis Points
September 27, 1999	March 25, 2009	U.S. 5.858	U.S. One Month LIBOR	(1,881	)	27,421
			Plus Four Basis Points
November 26, 1999	April 25, 2009	U.S. 6.04	U.S. One Month LIBOR	(1,147	)	15,032
			Plus Four Basis Points
June 26, 2000	October 1, 2007	U.S. 6.68	U.S. One Month LIBOR	(807	)	8,065
			Plus One and Half Basis
			Points
June 26, 2000	October 1, 2008	U.S. 6.26	U.S. One Month LIBOR	(764	)	9,052
August 1, 2000	December 1, 2007	U.S. 6.42	U.S. One Month LIBOR	(596	)	7,000
August 1, 2000	October 1, 2006	U.S. 7.20	U.S. One Month LIBOR	(2,458	)	28,226
			Minus Two Basis Points
October 2, 2000	June 1, 2007	U.S. 7.007	U.S. One Month LIBOR	(632	)	6,664
			Minus Two Basis Points
October 2, 2000	July 1, 2007	U.S. 7.405	U.S. One Month LIBOR	(811	)	7,453
			Minus Two Basis Points
November 2, 2000	October 9, 2007	JPY 2.125	U.S. Three Month LIBOR	(712	)	15,000
			Minus Two Basis Points
March 25, 2001	October 25, 2007	U. S. 6.94	U.S. One Month LIBOR	(729	)	7,447
			Plus Two Basis Points
September 4, 2001	October 16, 2006	U.S. 7.20	U.S. One Month LIBOR	(1,622	)	18,817
			Plus Two Basis Points
October 2, 2001	October 16, 2006	U.S. 7.20	U.S. One Month LIBOR	(800	)	9,409
			Plus Seven Basis Points
January 2, 2002	October 16, 2006	U.S. 7.20	U.S. One Month LIBOR	(794	)	9,409
			Plus Ten Basis Points
May 1, 2002	October 25, 2007	U.S. 6.63	U.S. One Month LIBOR	(792	)	9,026
			Plus One Basis Point
May 3, 2002	August 25, 2007	U.S. 6.74	U.S. One Month LIBOR	(907	)	10,000
			Plus One Basis Point
August 25, 2002	August 25, 2007	U.S. 4.90	U.S. One Month LIBOR	(938	)	26,500
			Plus Five Basis Points
September 25, 2002	June 25, 2007	U.S. 7.007	U.S. One Month LIBOR	(1,062	)	11,524
			Plus Seven Basis Points
October 25, 2002	May 25, 2006	U.S. 6.83	U.S. One Month LIBOR	(609	)	9,058
			Plus Seven Basis Points
March 21, 2003	February 25, 2009	U.S. 5.945	U.S. One Month LIBOR	(1,362	)	19,580
			Plus Nine Basis Points
May 8, 2003	July 25, 2006	U.S. 7.239	U.S. One Month LIBOR	(860	)	10,851
			Plus Seven Basis Points
August 1, 2003	April 1, 2008	U.S. 6.568	U.S. One Month LIBOR	(1,173	)	12,950
			Plus Ten Basis Points
August 1, 2003	October 1, 2007	U.S. 6.812	U.S. One Month LIBOR	(2,238	)	24,463
			Plus Seven Basis Points
October 9, 2003	October 1, 2007	U.S. 6.96	U.S. One Month LIBOR	(1,578	)	16,146
			Plus Five Basis Points
April 1, 2004	August 25, 2007	U.S. 6.74	U.S. One Month LIBOR	(1,872	)	20,915
			Plus Five Basis Points

Total Swaps - FairValue Hedges				$ (71,839	)	729,727

January 17, 2001	March 26, 2008	JPY 1.750	U.S. 5.80	(487	)	18,000

Other Swap				$ (487	)	18,000

Total Swap Portfolio(Other liabilities)				$ (72,326	)	747,727

The fair value of the swap portfolio was $(72,325,789) and $(94,597,757) at June 30, 2004 and December 31, 2003, respectively. The change in fair value was primarily due to changes in prevailing market interest rates.

The main feature of the mortgage securities is their sensitivity to the prepayment of mortgage loans, creating a contraction risk when interest rates decline and an extension risk when interest rates increase. The estimate of the prepayment rate is given either by the CPR (Conditional Prepayment Rate) or the PSA (Public Securities Association) prepayment model. Because of this risk, the securities are valued based on their average life rather than on their stated maturity date. The prepayment risk is evaluated and analyzed as this impacts the structure of the portfolio and the re-investment policy.

The breakdown of the Company's available-for-sale securities by category and weighted average life distribution (stated in terms of amortized cost) is summarized below based on management's prepayment assumptions (see Note 4 under Item 1 for yield information) (actual maturities may differ from maturities shown below due to prepayments) (in thousands):



June 30, 2004
		Due		Due								Due		Due
		In		after		Due after		Due after		Due after		After		After
Non-Collateral		2004		2004		2005		2006		2007		2008		2009		Total


Fixed-Rate Instruments:
Fixed-Rate REMICs	$	---	$	---	$	---	$	30,915	$	---	$	---	$	---	$	30,915
Agency DUS		26,500		---		85,770		102,401		133,424		79,315		---		427,410
Agency Debentures		---		---		---		374,345		131,602		---		---		505,947

Total Fixed-Rate Instruments		26,500		---		85,770		507,661		265,026		79,315		---		964,272


Floating-Rate Instruments:
Floating-Rate REMICs		---		---		---		646		---		---		---		646
Agency ARMs		---		478		2,797		565		---		---		---		3,840
Agency Hybrid ARMs		200		1,251		988		1,502		3,245		---		325		7,511

Total Floating-Rate Instruments		200		1,729		3,785		2,713		3,245		---		325		11,997


Total Non-Collateral	$	26,700	$	1,729	$	89,555	$	510,374	$	268,271	$	79,315	$	325	$	976,269


Collateral

Fixed-Rate Instruments:
Fixed-Rate REMICs	$	---	$	---	$	---	$	---	$	---	$	---	$	---	$	---
Agency DUS		---		---		---		---		---		---		---		---
Agency Debentures		---		---		---		---		---		---		---		---

Total Fixed-Rate Instruments		---		---		---		---		---		---		---		---

Floating-Rate Instruments:
Floating-Rate REMICs		---		2,223		1,782		3,629		---		---		---		7,634
Agency ARMs		---		26		2,562		1,046		---		---		2,740		6,374
Agency Hybrid ARMs		---		---		3,717		---		3,147		1,566		2,294		10,724

Total Floating-Rate Instruments		---		2,249		8,061		4,675		3,147		1,566		5,034		24,732

Total Collateral	$	---	$	2,249	$	8,061	$	4,675	$	3,147	$	1,566	$	5,034	$	24,732


June 30, 2004 Total Portfolio	$	26,700	$	3,978	$	97,616	$	515,049	$	271,418	$	80,881	$	5,359	$	1,001,001


December 31, 2003
		Due		Due										Due
		in		after		Due after		Due after		Due after		Due after		After
Non-Collateral		2003		2003		2004		2005		2006		2007		2008		Total

Fixed-Rate Instruments:
Fixed-Rate REMICs	$	---	$	---	$	---	$	10,000	$	---	$	---	$	---	$	10,000
Agency DUS		---		---		111,830		106,861		152,963		68,251		---		439,905
Agency Debentures		---		---		109,974		335,760		60,496		---		---		506,230

Total Fixed-Rate Instruments		---		---		221,804		452,621		213,459		68,251		---		956,135

Floating-Rate Instruments:
Floating-Rate REMICs		---		---		797		---		---		---		---		797
Agency ARMs		1,978		2,505		588		---		---		---		---		5,071
Agency Hybrid ARMs		979		3,430		644		772		3,617		---		---		9,442

Total Floating-Rate Instruments		2,957		5,935		2,029		772		3,617		---		---		15,310

Total Non-Collateral	$	2,957	$	5,935	$	223,833	$	453,393	$	217,076	$	68,251	$	---	$	971,445

Collateral

Fixed-Rate Instruments:
Fixed-Rate REMICs	$	298	$	---	$	---	$	---	$	---	$	---	$	---	$	298
Agency DUS		---		---		---		---		---		---		---		---
Agency Debentures		---		---		---		---		---		---		---		---

Total Fixed-Rate Instruments		298		---		---		---		---		---		---		298

Floating-Rate Instruments:
Floating-Rate REMICs		3,387		552		5,511		---		---		1,223		---		10,673
Agency ARMs		125		2,608		920		1,008		819		245		1,622		7,347
Agency Hybrid ARMs		180		4,541		---		---		3,499		4,125		---		12,345

Total Floating-Rate Instruments		3,692		7,701		6,431		1,008		4,318		5,593		1,622		30,365

Total Collateral	$	3,990	$	7,701	$	6,431	$	1,008	$	4,318	$	5,593	$	1,622	$	30,663

December 31, 2003 Total Portfolio	$	6,947	$	13,636	$	230,264	$	454,401	$	221,394	$	73,844	$	1,622	$	1,002,108

Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of June 30, 2004, the Company carried out an evaluation under the supervision and with the participation of the Company's management, including the President and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. 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 Company's evaluation, the President and Chief Financial Officer concluded that the disclosure controls and procedures are effective in all material respects to provide reasonable assurance that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as when required. There have been no significant changes in the Company's internal control over financial reporting that occurred during the second fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


Part II
Item 1:		Legal Proceedings
None.
Item 2:		Changes in Securities Use of the Proceeds and Issuer Purchases of Equity Securities
None.
Item 3:		Defaults upon Senior Securities
None.
Item 4:		Submission of Matters to a Vote of Securityholders
None.
Item 5:		Other Information
None.
Item 6:		Exhibits and Current Reports on Form 8-K

EXHIBITS AND CURRENT REPORTS ON FORM 8-K

A)	Exhibits:

	11)	Computation of net income per common security

	12)	(a) Computation of ratio of earnings to fixed charges
		(b) Computation of ratio of earnings to fixed charges and preferred security dividends

	31.1)	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2)	Certification of President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32)	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:NONE

Signature

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 thereto duly authorized.

	BNP U.S. FUNDING L.L.C. Registrant

Date: August 13, 2004	By /s/ Oliver Meisel Olivier Meisel President and Director

Date: August 13, 2004	By /s/ Thomas Clyne Thomas Clyne Chief Financial Officer and Director