Independent Auditors' Report

KPMG LLP
2001 M Street, NW
Washington, DC 20036

Inspector General of the Department of Transportation,
Federal Highway Administrator,
National Highway Traffic Safety Administrator,
Federal Transit Administrator,
Federal Motor Carrier Safety Administrator,
Federal Railroad Administrator, and
Research and Innovative Technology Administrator:

We have audited the accompanying consolidated balance sheet of the U. S. Department of Transportation (DOT) - Highway Trust Fund (HTF) as of September 30, 2006 and the related consolidated statements of net cost, changes in net position, and financing, and the combined statement of budgetary resources (hereinafter referred to as the consolidated financial statements) for the year then ended. The objective of our audit was to express an opinion on the fair presentation of these consolidated financial statements. In connection with our audit, we also considered the HTF's internal control over financial reporting, Required Supplementary Stewardship Information, and performance measures, and tested the HTF's compliance with certain provisions of applicable laws, regulations, contracts, and grant agreements that could have a direct and material effect on these consolidated financial statements.

Summary

As stated in our opinion on the consolidated financial statements, we concluded that the HTF's consolidated financial statements as of and for the year ended September 30, 2006 are presented fairly, in all material respects, in conformity with U.S generally accepted accounting principles.

As discussed in Note 1, Summary of Significant Accounting Policies, the accompanying consolidated financial statements reflect actual excise tax revenues deposited in the HTF through March 31, 2006 and excise tax receipts estimated by the Department of the Treasury's Office of Tax Analysis for the quarters ended June 30, 2006 and September 30, 2006.

Also as discussed in Note 1, the HTF adopted the provisions of Statement of Federal Financial Accounting Standards No. 27, Identifying and Reporting Earmarked Funds, effective October 1, 2005 and changed the presentation of and disclosure related to the Statement of Net Cost to more accurately present net cost by responsibility segment and major program.

Our consideration of internal control over financial reporting, Required Supplementary Stewardship Information, and performance measures resulted in the following conditions being identified as reportable conditions:

Reportable Condition Considered To Be A Material Weakness

1. Financial Management, Reporting and Oversight

Other Reportable Conditions

1. General Controls over Financial Management Systems
2. Undelivered Orders
3. Fund Balance with Treasury Reconciliations

The results of our tests of compliance with certain provisions of laws, regulations, contracts, and grant agreements, exclusive of those referred to in the Federal Financial Management Improvement Act of 1996 (FFMIA), disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards, issued by the Comptroller General of the United States, and Office of Management and Budget (OMB) Bulletin No. 06-03, Audit Requirements for Federal Financial Statements.

The results of our tests of FFMIA disclosed instances where the HTF's financial management systems did not substantially comply with Federal financial management information systems requirements.

The results of our tests of FFMIA disclosed no instances in which the HTF financial management systems did not substantially comply with the U.S. Government Standard General Ledger at the transaction level and applicable Federal accounting standards.

The following sections discuss our opinion on the HTF's consolidated financial statements, our consideration of the HTF's internal control over financial reporting, Required Supplementary Stewardship Information, and performance measures; our tests of the HTF's compliance with certain provisions of applicable laws, regulations, contracts, and grant agreements; and management's and our responsibilities.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of the Highway Trust Fund as of September 30, 2006, and the related consolidated statements of net cost, changes in net position, and financing, and the combined statement of budgetary resources for the year then ended.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Highway Trust Fund as of September 30, 2006 and its net costs, changes in net position, budgetary resources, and reconciliation of net costs to budgetary obligations for the year then ended, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1, Summary of Significant Accounting Policies, the accompanying consolidated financial statements reflect actual excise tax revenues deposited in the HTF through March 31, 2006 and excise tax receipts estimated by the Department of Treasury's Office of Tax Analysis for the quarters ended June 30, 2006 and September 30, 2006.

Also as discussed in Note 1, the HTF adopted the provisions of Statement of Federal Financial Accounting Standards No. 27, Identifying and Reporting Earmarked Funds, effective October 1, 2005 and changed the presentation of and disclosure related to the Statement of Net Cost to more accurately present net cost by responsibility segment and major program.

The information in the Management Discussion and Analysis, Required Supplementary Stewardship Information, and Required Supplementary Information sections is not a required part of the financial statements, but is supplementary information required by U.S. generally accepted accounting principles or OMB Circular No. A-136, Financial Reporting Requirements. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of this information. However, we did not audit this information and, accordingly, we express no opinion on it.

Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating information on pages 88 to 93 is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, net costs, changes in net position, budgetary resources, and reconciliation of net costs to budgetary obligations of the HTF's components individually. The consolidating information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole. The remaining information in the Other Accompanying Information section on pages 94 to 96 is presented for purposes of additional analysis and is not required as part of the consolidated financial statements. This information has not been subjected to auditing procedures and, accordingly, we express no opinion on it.

Internal Control Over Financial Reporting

Our consideration of internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be reportable conditions. Under standards issued by the American Institute of Certified Public Accountants, reportable conditions are matters coming to our attention relating to significant deficiencies in the design or operation of the internal control over financial reporting that, in our judgment, could adversely affect the HTF's ability to record, process, summarize, and report financial data consistent with the assertions by management in the consolidated financial statements.

Material weaknesses are reportable conditions in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements, in amounts that would be material in relation to the consolidated financial statements being audited, may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Because of inherent limitations in internal control, misstatements due to error or fraud may nevertheless occur and not be detected.

In our audit, we noted certain matters, described in Exhibits I and II, involving internal control over financial reporting and its operation that we consider to be reportable conditions. We believe that the reportable condition presented in Exhibit I is a material weakness. Exhibit II presents the other reportable conditions. Exhibit IV presents the status of prior year reportable conditions.

We also noted certain additional matters that we will report to the management of the HTF in a separate letter dated November 6, 2006.

Internal Controls Over Required Supplementary Stewardship Information and Performance Measures

Under OMB Bulletin No. 06-03, the definition of material weaknesses is extended to other controls as follows. Material weaknesses are reportable conditions in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by error or fraud, in amounts that would be material in relation to the Required Supplementary Stewardship Information or material to a performance measure or aggregation of related performance measures, may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Because of inherent limitations in internal control, misstatements due to error or fraud may nevertheless occur and not be detected.

Our consideration of the internal control over the Required Supplementary Stewardship Information and the design and operation of internal control over the existence and completeness assertions related to key performance measures would not necessarily disclose all matters involving the internal control and its operation related to Required Supplementary Stewardship Information or the design and operation of the internal control over the existence and completeness assertions related to key performance measures that might be reportable conditions.

In our audit, we noted no matters involving the internal control and its operation related to Required Supplementary Stewardship Information that we considered to be material weaknesses as defined above.

In our audit, we noted no matters involving the design and operation of the internal control over the existence and completeness assertions related to key performance measures that we considered to be material weaknesses as defined above.

Compliance and Other Matters

Our tests of compliance described in the Responsibilities section of this report, exclusive of those referred to in FFMIA, disclosed no instances of noncompliance or other matters that are required to be reported herein under Government Auditing Standards and OMB Bulletin No. 06-03.

The results of our tests of FFMIA disclosed instances, described in Exhibit III, where the HTF financial management systems did not substantially comply with Federal financial management information systems requirements.

The results of our tests of FFMIA disclosed no instances in which the HTF financial management systems did not substantially comply with the U.S. Government Standard General Ledger at the transaction level and applicable Federal accounting standards.

Responsibilities

Management's Responsibilities.

The United States Code Title 31 Section 3515 and 9106 require agencies to report annually to Congress on their financial status and any other information needed to fairly present their financial position and results of operations. To meet these reporting requirements, the HTF prepares and submits financial statements in accordance with OMB Circular No. A-136.

Management is responsible for the consolidated financial statements, including:

• Preparing the consolidated financial statements in conformity with U.S. generally accepted accounting principles;
• Preparing the Management Discussion and Analysis (including the performance measures), Required Supplementary Information, and Required Supplementary Stewardship Information;
• Establishing and maintaining effective internal control; and
• Complying with laws, regulations, contracts, and grant agreements applicable to the HTF, including FFMIA.

In fulfilling this responsibility, management is required to make estimates and judgments to assess the expected benefits and related costs of internal control policies.

Auditors' Responsibilities.

Our responsibility is to express an opinion on the fiscal year 2006 consolidated financial statements of the HTF based on our audit. We conducted our audit in accordance with U.S. generally accepted auditing standards, the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Bulletin No. 06-03. Those standards and OMB Bulletin No. 06-03 require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the HTF's internal control over financial reporting. Accordingly, we express no such opinion.

An audit also includes:

• Examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements;

• Assessing the accounting principles used and significant estimates made by management; and

• Evaluating the overall consolidated financial statement presentation.

We believe that our audit provides a reasonable basis for our opinion.

In planning and performing our audit, we considered the HTF's internal control over financial reporting by obtaining an understanding of the HTF's internal control, determining whether internal controls had been placed in operation, assessing control risk, and performing tests of controls in order to determine our auditing procedures for the purpose of expressing our opinion on the consolidated financial statements. We limited our internal control testing to those controls necessary to achieve the objectives described in Government Auditing Standards and OMB Bulletin No. 06-03. We did not test all internal controls relevant to operating objectives as broadly defined by the Federal Managers' Financial Integrity Act of 1982. The objective of our audit was not to provide assurance on the HTF's internal control over financial reporting. Consequently, we do not provide an opinion thereon.

As required by OMB Bulletin No. 06-03, in our audit, we considered the HTF's internal control over the Required Supplementary Stewardship Information by obtaining an understanding of the HTF's internal control, determining whether these internal controls had been placed in operation, assessing control risk, and performing tests of controls. We limited our testing to those controls necessary to test and report on the internal control over Required Supplementary Stewardship Information in accordance with OMB Bulletin No. 06-03. However, our procedures were not designed to provide an opinion on internal control over the Required Supplementary Stewardship Information and, accordingly, we do not provide an opinion thereon.

As further required by OMB Bulletin No. 06-03, in our audit, with respect to internal control related to performance measures determined by management to be key and reported in the Management Discussion and Analysis and Performance sections, we obtained an understanding of the design of internal controls relating to the existence and completeness assertions and determined whether these internal controls had been placed in operation. We limited our testing to those controls necessary to test and report on the internal control over key performance measures in accordance with OMB Bulletin No. 06-03. However, our procedures were not designed to provide assurance on internal control over reported performance measures and, accordingly, we do not provide an opinion thereon.

As part of obtaining reasonable assurance about whether the HTF's fiscal year 2006 consolidated financial statements are free of material misstatement, we performed tests of the HTF's compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of consolidated financial statement amounts, and certain provisions of other laws and regulations specified in OMB Bulletin No. 06-03, including certain provisions referred to in FFMIA. We limited our tests of compliance to the provisions described in the preceding sentence, and we did not test compliance with all laws, regulations, contracts, and grant agreements applicable to the HTF. However, providing an opinion on compliance with laws, regulations, contracts, and grant agreements was not an objective of our audit and, accordingly, we do not express such an opinion.

Under OMB Bulletin No. 06-03 and FFMIA, we are required to report whether the HTF's financial management systems substantially comply with (1) Federal financial management systems requirements, (2) applicable Federal accounting standards, and (3) the United States Government Standard General Ledger at the transaction level. To meet this requirement, we performed tests of compliance with FFMIA Section 803(a) requirements.

Restricted Use

This report is intended solely for the information and use of the HTF and DOT management, DOT's Office of Inspector General, OMB, the Government Accountability Office, and the U.S. Congress and is not intended to be and should not be used by anyone other than these specified parties.

KPMG LLP

November 6, 2006

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