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UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.20549

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FORM 10-Q

(MarkOne)

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For thequarterly period ended March  31,2006

or

[    ]    TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

For the transition period from                     to                    .

Commission FileNumber: 001-32307

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PrimusGuaranty, Ltd.(Exact name of registrant asspecified in itscharter)

|                                                              |  |                                     |  |  |  |  |
|--------------------------------------------------------------|--|-------------------------------------|--|--|--|--|
| Bermuda                                                      |  | NotRequired                         |
| (State or other jurisdictionofincorporation or organization) |  | (I.R.S. EmployerIdentification No.) |
|                                                              |

Clarendon House2 ChurchStreetHamilton HM 11, Bermuda(Address of principalexecutive offices, including zipcode)

441-296-0519(Registrant’s telephonenumber, including areacode)

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Indicate by checkmark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90days.    Yes       No   

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of‘‘accelerated filer and large acceleratedfiler’’ in Rule 12b-2 of the Exchange Act). (Checkone):

Large acceleratedfiler               Acceleratedfiler               Non-acceleratedfiler   

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).    Yes       No   

As ofMay 1, 2006, the number of shares outstanding of the issuer'scommon stock, $0.08 par value, was43,285,017.

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Primus Guaranty, Ltd.Form 10-QFor the three months endedMarch  31,  2006

INDEX

|            |  |                                                                                                              |    |        |        |        |  |  |  |  |
|------------|--|--------------------------------------------------------------------------------------------------------------|----|--------|--------|--------|--|--|--|--|
| PartI.     |  | FinancialInformation                                                                                         |    |   |   |   |
| Item1.     |  | FinancialStatements                                                                                          |    |   |   |   |
|       |  | Condensed ConsolidatedStatements of Financial Condition as ofMarch 31, 2006 (Unaudited)and December 31, 2005 |    |   | 3      |   |
|       |  | Condensed ConsolidatedStatements of Operations (Unaudited) for the Three months endedMarch 31, 2006 and 2005 |    |   | 4      |   |
|       |  | Condensed ConsolidatedStatements of Cash Flows (Unaudited) for the Three months endedMarch 31, 2006 and 2005 |    |   | 5      |   |
|       |  | Notes to Condensed ConsolidatedFinancial Statements                                                          |    |   | 6      |   |
| Item2.     |  | Management’s Discussion and Analysis of FinancialCondition and Results ofOperations                    |    |   | 17     |   |
|       |  | Cautionary StatementRegarding Forward LookingInformation                                                     |    |   | 28     |   |
| Item3.     |  | Quantitative and Qualitative Disclosures about MarketRisk                                                    |    |   | 29     |   |
| Item 4.    |  | Controlsand Procedures                                                                                       |    |   | 29     |   |
| PartII.    |  | OtherInformation                                                                                             |    |   |   |   |
| Item 1.    |  | LegalProceedings                                                                                             |    |   | 30     |   |
| Item1A.    |  | Risk Factors                                                                                                 |    |   | 30     |   |
| Item2.     |  | Unregistered Sales of Equity Securities and Use ofProceeds                                                   |    |   | 30     |   |
| Item3.     |  | Defaults upon SeniorSecurities                                                                               |    |   | 30     |   |
| Item4.     |  | Submission of Matters to a Vote of SecurityHolders                                                           |    |   | 30     |   |
| Item 5.    |  | OtherInformation                                                                                             |    |   | 30     |   |
| Item6.     |  | Exhibits                                                                                                     |    |   | 30     |   |
| Signatures |  |                                                                                                         | 31 |   |
|            |

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Part I.    Financial InformationItem 1.    FinancialStatements

Primus Guaranty, Ltd.CondensedConsolidated Statements of Financial Condition(in thousandsexcept per share amounts)

|                                                                                                                                                             |  |              |         |                 |  |        |         |         |  |  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--------------|---------|-----------------|--|--------|---------|---------|--|--|
|                                                                                                                                                        |  | March31,2006 |         | December31,2005 |
|                                                                                                                                                        |  | (unaudited)  |
| Assets                                                                                                                                                      |  |         |    |            |  |   |    |    |
| Cashand cashequivalents                                                                                                                                     |  | $            | 64,884  |            |  | $      | 69,355  |    |
| Available-for-saleinvestments                                                                                                                               |  |         | 569,981 |            |  |   | 560,147 |    |
| Accruedinterestreceivable                                                                                                                                   |  |         | 5,281   |            |  |   | 5,127   |    |
| Accruedpremiums and premiums receivable on creditswaps                                                                                                      |  |         | 3,562   |            |  |   | 3,461   |    |
| Premiumsreceivable on financialguarantees                                                                                                                   |  |         | 300     |            |  |   | 300     |    |
| Unrealized gainon credit swaps, at fairvalue                                                                                                                |  |         | 47,556  |            |  |   | 25,342  |    |
| Fixed assets andsoftware costs, net                                                                                                                         |  |         | 5,421   |            |  |   | 4,993   |    |
| Debtissuance costs,net                                                                                                                                      |  |         | 3,117   |            |  |   | 3,147   |    |
| Otherassets                                                                                                                                                 |  |         | 931     |            |  |   | 1,210   |    |
| Totalassets                                                                                                                                                 |  | $            | 701,033 |            |  | $      | 673,082 |    |
| Liabilitiesand stockholders’equity                                                                                                                    |  |         |    |            |  |   |    |    |
| Accounts payable andaccruedexpenses                                                                                                                         |  | $            | 1,772   |            |  | $      | 3,035   |    |
| Compensationpayable                                                                                                                                         |  |         | 1,627   |            |  |   | 4,833   |    |
| Interestpayable                                                                                                                                             |  |         | 564     |            |  |   | 404     |    |
| Accrued premiums oncredit swaps                                                                                                                             |  |         | 19      |            |  |   | — |    |
| Taxespayable                                                                                                                                                |  |         | 65      |            |  |   | 54      |    |
| Unrealized loss oncredit swaps, at fairvalue                                                                                                                |  |         | 1,403   |            |  |   | 3,521   |    |
| Deferred creditswap premiums                                                                                                                                |  |         | 40      |            |  |   | 46      |    |
| Deferredfinancial guaranteepremiums                                                                                                                         |  |         | 300     |            |  |   | 401     |    |
| Deferred rentpayable                                                                                                                                        |  |         | 466     |            |  |   | 416     |    |
| Long-termdebt                                                                                                                                               |  |         | 200,000 |            |  |   | 200,000 |    |
| Totalliabilities                                                                                                                                            |  |         | 206,256 |            |  |   | 212,710 |    |
| Preferredsecurities ofsubsidiary                                                                                                                            |  |         | 98,521  |            |  |   | 98,521  |    |
| Stockholders’equity:                                                                                                                                  |  |         |    |            |  |   |    |    |
| Common stock, $0.08par value, 62,500,000 shares authorized, 43,283,001 and 43,176,511shares issued and outstanding at March  31,  2006 andDecember  31,2005 |  |         | 3,572   |            |  |   | 3,572   |    |
| Additionalpaid-in-capital                                                                                                                                   |  |         | 266,593 |            |  |   | 265,848 |    |
| Warrants                                                                                                                                                    |  |         | 612     |            |  |   | 612     |    |
| Accumulatedother comprehensiveloss                                                                                                                          |  |         | (5,699  | )          |  |   | (4,254  | )  |
| Retainedearnings                                                                                                                                            |  |         | 131,178 |            |  |   | 96,073  |    |
| Totalstockholders’equity                                                                                                                              |  |         | 396,256 |            |  |   | 361,851 |    |
| Totalliabilities, preferred securities of subsidiary andstockholders’equity                                                                           |  | $            | 701,033 |            |  | $      | 673,082 |    |
|                                                                                                                                                             |

Seeaccompanying notes.

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Primus Guaranty, Ltd.CondensedConsolidated Statements of Operations(in thousands except pershare amounts)

|                                                   |  |                             |        |         |  |        |         |         |  |  |
|---------------------------------------------------|--|-----------------------------|--------|---------|--|--------|---------|---------|--|--|
|                                              |  | Three months ended March31, |
|                                              |  | 2006                        |        | 2005    |
|                                              |  | (unaudited)                 |
| Revenues                                          |  |                        |   |    |  |   |    |    |
| Netcredit swaprevenue                             |  | $                           | 40,129 |    |  | $      | (8,198  | )  |
| Premiumsearned on financialguarantees             |  |                        | 100    |    |  |   | 99      |    |
| Asset managementfees                              |  |                        | 49     |    |  |   | 42      |    |
| Interestincome                                    |  |                        | 6,601  |    |  |   | 3,693   |    |
| Foreign currencyrevaluationloss                   |  |                        | (6     | )  |  |   | (564    | )  |
| Totalnetrevenues                                  |  |                        | 46,873 |    |  |   | (4,928  | )  |
|                                              |  |                        |   |    |  |   |    |    |
| Expenses                                          |  |                        |   |    |  |   |    |    |
| Compensationand employeebenefits                  |  |                        | 4,891  |    |  |   | 5,196   |    |
| Professionaland legalfees                         |  |                        | 1,215  |    |  |   | 954     |    |
| Depreciation andamortization                      |  |                        | 589    |    |  |   | 516     |    |
| Technology anddata                                |  |                        | 399    |    |  |   | 317     |    |
| Interestexpense                                   |  |                        | 2,449  |    |  |   | 493     |    |
| Other                                             |  |                        | 1,039  |    |  |   | 765     |    |
| Totalexpenses                                     |  |                        | 10,582 |    |  |   | 8,241   |    |
| Distributionson preferred securities ofsubsidiary |  |                        | 1,131  |    |  |   | 649     |    |
| Income(loss) before provision for incometaxes     |  |                        | 35,160 |    |  |   | (13,818 | )  |
| Provision forincometaxes                          |  |                        | (55    | )  |  |   | (36     | )  |
| Netincome (loss) available to commonshares        |  | $                           | 35,105 |    |  |   | (13,854 | )  |
|                                              |  |                        |   |    |  |   |    |    |
| Income(loss) per commonshare:                     |  |                        |   |    |  |   |    |    |
| Basic                                             |  | $                           | 0.81   |    |  | $      | (0.32   | )  |
| Diluted                                           |  | $                           | 0.79   |    |  | $      | (0.32   | )  |
| Averagecommon sharesoutstanding:                  |  |                        |   |    |  |   |    |    |
| Basic                                             |  |                        | 43,246 |    |  |   | 43,213  |    |
| Diluted                                           |  |                        | 44,287 |    |  |   | 43,213  |    |
|                                                   |

Seeaccompanying notes.

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Primus Guaranty, Ltd.CondensedConsolidated Statements of Cash Flows(in thousands except pershare amounts)

|                                                                                        |  |                            |         |         |  |        |         |         |  |  |
|----------------------------------------------------------------------------------------|--|----------------------------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                   |  | Threemonths ended March31, |
|                                                                                   |  | 2006                       |         | 2005    |
|                                                                                   |  | (unaudited)                |
| Cashflows from operatingactivities                                                     |  |                       |    |    |  |   |    |    |
| Net income(loss)                                                                       |  | $                          | 35,105  |    |  | $      | (13,854 | )  |
| Adjustmentsto reconcile net income (loss) to net cash provided by operatingactivities: |  |                       |    |    |  |   |    |    |
| Non-cashitems included in net income(loss):                                            |  |                       |    |    |  |   |    |    |
| Depreciation andamortization                                                           |  |                       | 589     |    |  |   | 516     |    |
| Stockcompensation                                                                      |  |                       | 1,046   |    |  |   | 982     |    |
| Netunrealized (gain) loss on credit swapportfolio                                      |  |                       | (24,332 | )  |  |   | 19,533  |    |
| Netamortization of premium and discount onsecurities                                   |  |                       | (904    | )  |  |   | — |    |
| Deferredrent                                                                           |  |                       | 50      |    |  |   | (5      | )  |
| Amortization ofdebt issuancecosts                                                      |  |                       | 43      |    |  |   | 12      |    |
| Distributions onpreferred securities ofsubsidiary                                      |  |                       | 1,131   |    |  |   | 649     |    |
| Increase(decrease) in cash resulting from changesin:                                   |  |                       |    |    |  |   |    |    |
| Accrued interestreceivable                                                             |  |                       | (154    | )  |  |   | (747    | )  |
| Accruedpremiums and premiums receivable on creditswaps                                 |  |                       | (101    | )  |  |   | 198     |    |
| Premiumsreceivable on financialguarantees                                              |  |                       | — |    |  |   | 100     |    |
| Otherassets                                                                            |  |                       | 279     |    |  |   | 137     |    |
| Accountspayable and accruedexpenses                                                    |  |                       | (1,263  | )  |  |   | 789     |    |
| Compensationpayable                                                                    |  |                       | (3,206  | )  |  |   | (3,862  | )  |
| Interestpayable                                                                        |  |                       | 160     |    |  |   | (11     | )  |
| Accruedpremiums payable on creditswaps                                                 |  |                       | 19      |    |  |   | — |    |
| Taxespayable.                                                                          |  |                       | 11      |    |  |   | 35      |    |
| Deferredcredit swappremiums                                                            |  |                       | (6      | )  |  |   | (6      | )  |
| Deferredfinancial guaranteepremiums                                                    |  |                       | (101    | )  |  |   | (98     | )  |
| Netcash provided by operatingactivities                                                |  |                       | 8,366   |    |  |   | 4,368   |    |
| Cashflows from investingactivities                                                     |  |                       |    |    |  |   |    |    |
| Fixed assetpurchases and capitalized softwarecosts.                                    |  |                       | (1,017  | )  |  |   | (176    | )  |
| Purchases ofavailable-for-saleinvestments.                                             |  |                       | (10,375 | )  |  |   | — |    |
| Maturitiesand sales of available-for-saleinvestments.                                  |  |                       | — |    |  |   | 27,496  |    |
| Netcash provided by (used in) investingactivities                                      |  |                       | (11,392 | )  |  |   | 27,320  |    |
| Cashflows from financingactivities                                                     |  |                       |    |    |  |   |    |    |
| Repurchase andretirement of commonstock                                                |  |                       | (507    | )  |  |   | (2,397  | )  |
| Proceeds fromexercise of stock options and issue ofstock                               |  |                       | 206     |    |  |   | 27      |    |
| Debt issuancecosts                                                                     |  |                       | (13     | )  |  |   | (31     | )  |
| Net preferreddistributions ofsubsidiary                                                |  |                       | (1,131  | )  |  |   | (649    | )  |
| Netcash used in financingactivities                                                    |  |                       | (1,445  | )  |  |   | (3,050  | )  |
| Netincrease (decrease) incash                                                          |  |                       | (4,471  | )  |  |   | 28,638  |    |
| Cash and cashequivalents at beginning ofperiod                                         |  |                       | 69,355  |    |  |   | 320,989 |    |
| Cashand cash equivalents at end ofperiod                                               |  | $                          | 64,884  |    |  | $      | 349,627 |    |
| Supplementaldisclosures                                                                |  |                       |    |    |  |   |    |    |
| Cash paid forinterest                                                                  |  | $                          | 2,246   |    |  | $      | 493     |    |
| Cash paid fortaxes                                                                     |  | $                          | 44      |    |  | $      | — |    |
|                                                                                        |

Seeaccompanying notes.

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1.    Organizationand Basis of Presentation

Primus Guaranty, Ltd.(‘‘Primus Guaranty’’ or ‘‘theCompany’’), is a Bermuda holding company, and the100% owner of Primus Bermuda, Ltd. (‘‘PrimusBermuda’’), a Bermuda holding company. Primus Bermuda,originally Primus Barbados, Ltd., was re-domiciled in Bermuda inDecember  2004. Primus Bermuda is the 100% owner of PrimusGroup Holdings, LLC (‘‘Primus GroupHoldings’’), a Delaware limited liability company. PrimusGroup Holdings has two principal operating subsidiaries, PrimusFinancial Products, LLC (‘‘PrimusFinancial’’), and Primus Asset Management, Inc.(‘‘Primus Asset Management’’). PrimusFinancial is a Delaware financial products limited liability companythat maintains a long-term counterparty credit rating of AAA fromStandard & Poor’s (‘‘S&P’’)and Aaa from Moody’s Investors Service, Inc.(‘‘Moody’s’’ and, together withS&P, the ‘‘Rating Agencies’’). TheCompany considers its legal domicile to be where it is incorporated,Bermuda. Primus Financial is primarily a provider of credit riskprotection in the form of credit swaps, with respect to corporate andsovereign issuers. Primus Financial also sells credit swaps referencingportfolios containing obligations of multiple reference entities.Primus Asset Management is an asset manager for Primus Financial andunrelated third parties.

Primus Financial and Primus AssetManagement function as separate entities from Primus Group Holdings.Additionally, the obligations of Primus Guaranty are not theobligations of Primus Bermuda, Primus Group Holdings, or any other ofits affiliates, and vice versa. Primus Asset Management wholly ownsPrimus Re, Ltd. (‘‘Primus Re’’), a Bermudacompany that operates as a financial guaranty insurance company and islicensed as a Class 3 Insurer under the Insurance Act of 1978 ofBermuda.

In July  2005, PRS Trading Strategies, LLC (PRSTrading), a Delaware limited liability company, was formed. PrimusGuaranty is the 100% owner of PRS Trading. PRS Trading engagesin the relative value and other strategies involving buying and sellingof credit swaps. PRS Trading engages primarily in relative valueinvesting across credits, curves and instruments. These investmentsgenerally have a short-term investment horizon and are governed bytight risk controls and liquidity management. PRS Trading commencedoperations in January  2006.

In November  2005,Primus Guaranty (UK), Ltd (PGUK) was incorporated in England to expandthe Company’s presence and further develop its business andrelationships across Europe. Primus Bermuda is the 100% owner ofPGUK.

The accompanying unaudited condensed consolidatedfinancial statements of Primus Guaranty, Ltd. have been prepared inaccordance with U.S. generally accepted accounting principles forinterim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not include allof the information and footnotes required by generally acceptedaccounting principles for complete financial statements. In the opinionof management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have beenincluded. Operating results for the periods presented are notnecessarily indicative of the results that may be expected for anyother interim period or for the year ended December  31,2006. The consolidated financial statements include the accounts of theCompany and its wholly owned subsidiaries. All significant intercompanybalances have been eliminated.

The condensed consolidatedfinancial statements represent a single reportable segment, as definedin Statement of Financial Accounting Standards(‘‘SFAS’’) No. 131, Disclosures aboutSegments of an Enterprise and Related Information.

Thecondensed consolidated financial statements are presented in U.S.dollar equivalents. At March  31,  2006 and December31,  2005, the Company’s credit swap activities wereconducted in U.S. dollars and euros.

Certain prior year amountshave been reclassified to conform to current yearpresentation.

2.    Recent AccountingPronouncements

In December  2004, the FinancialAccounting Standards Board (‘FASB’) issued SFAS No.123  (R), Share-Based Payment. SFAS No. 123 (R) is arevision of SFAS No. 123 and supersedes 

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Accounting Principles Board(‘‘APB’’) Opinion No. 25, Accounting forStock Issued to Employees, and amends SFAS No. 95, Statement ofCash Flows. SFAS No. 123 (R) eliminates the ability to account forshare-based compensation transactions using APB Opinion No. 25 andrequires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the financial statementsusing a fair value-based method. In April  2005, the Securitiesand Exchange Commission (‘‘SEC’’) amendedthe effective date of SFAS No. 123 (R) until the first fiscal yearbeginning after June  15,  2005 to provide additional timefor companies to comply with the reporting requirements. EffectiveJanuary  1,  2006, the Company adopted SFAS No. 123 (R).See note 6 of notes to consolidated financial statements for furtherdetail.

In March  2005, the SEC staff issued StaffAccounting Bulletin No. 107 (‘‘SAB No.107’’) to provide supplemental implementation guidance onSFAS No. 123 (R). The Company applied the relevant provisions of SABNo. 107 in its adoption of SFAS No. 123 (R).

In May  2005,the FASB issued SFAS 154, Accounting Changes and Error Corrections– a replacement of APB Opinion No. 20 and FASB Statement No.3. This statement requires retrospective application to priorperiods’ financial statements of changes in accountingprinciple. SFAS 154 is effective for accounting changes and correctionsof errors made in fiscal years beginning after December15,  2005. The Company will apply SFAS 154 in future periods, ifapplicable.

In November  2005, the FASB issued FASB StaffPosition FSP 115-1, The Meaning of Other-Than Temporary Impairmentand Its Application to Certain Investments (FSP 115-1), whichaddresses the determination as to when an investment is consideredimpaired, whether that impairment is other-than-temporary, and themeasurement of an impairment loss. FSP 115-1 also includes accountingconsiderations subsequent to the recognition of an other-than-temporaryimpairment and requires certain disclosures about unrealized lossesthat have not been recognized as other-than-temporary impairments. Theguidance in FSP 115-1 is required to be applied to reporting periodsbeginning after December 15, 2005. The adoption did not have anyeffect on the consolidated financialstatements.

3.    Available-for-saleInvestments

Available-for-sale investments included U.S.government agency obligations (including government-sponsoredenterprises) rated AAA and Aaa by the respective rating agencies andcommercial paper. Available-for-sale investments have originalmaturities or maturities at time of purchase greater than 90 days.

The following table summarizes the composition of theCompany’s available-for-sale investments at March31,  2006 and December  31,  2005 (inthousands):

|                                  |  |               |         |                 |  |                  |         |                    |  |        |        |         |  |        |         |        |  |  |
|----------------------------------|--|---------------|---------|-----------------|--|------------------|---------|--------------------|--|--------|--------|---------|--|--------|---------|--------|--|--|
|                             |  | March31, 2006 |
|                             |  | AmortizedCost |         | UnrealizedGains |  | UnrealizedLosses |         | EstimatedFairValue |
| U.S government agencyobligations |  | $             | 555,878 |            |  | $                | — |               |  | $      | (5,686 | )  |  | $      | 550,192 |   |
| Commercialpaper                  |  |          | 19,802  |            |  |             | — |               |  |   | (13    | )  |  |   | 19,789  |   |
| Total                            |  | $             | 575,680 |            |  | $                | — |               |  | $      | (5,699 | )  |  | $      | 569,981 |   |
|                                  |

|                                  |  |                  |         |                 |  |                  |         |                    |  |        |         |         |  |        |         |        |  |  |
|----------------------------------|--|------------------|---------|-----------------|--|------------------|---------|--------------------|--|--------|---------|---------|--|--------|---------|--------|--|--|
|                             |  | December31, 2005 |
|                             |  | AmortizedCost    |         | UnrealizedGains |  | UnrealizedLosses |         | EstimatedFairValue |
| U.S government agencyobligations |  | $                | 544,824 |            |  | $                | — |               |  | $      | (4,259  | )  |  | $      | 540,565 |   |
| Commercialpaper                  |  |             | 19,577  |            |  |             | 5       |               |  |   | — |    |  |   | 19,582  |   |
| Total                            |  | $                | 564,401 |            |  | $                | 5       |               |  | $      | (4,259  | )  |  | $      | 560,147 |   |
|                                  |

Theunrealized losses on the Company’s investments in U.S.government agency obligations were primarily the result of an increasein interest rates during the first quarter of 2006 and during the yearof 2005. These securities have been in a loss position for less than 12months. Because the decline in market value is attributable to changesin interest rates and not credit quality, and the Company has

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the ability and intent to hold theseinvestments until a recovery of fair value, which may be at maturity,the Company does not consider these investments to beother-than-temporarily impaired at March  31,  2006 andDecember  31,  2005. These securities have maturities ofless than 3 years.

4.    Net Credit Swap Revenues andPortfolio

Overview

Netcredit swap revenue as presented in the condensed consolidatedstatements of operations comprises changes in the fair value of creditswaps, realized gains or losses on the termination of credit swaps andpremium income or expense. The realized gains and losses on creditswaps represent realized gains and losses on unwound or assigned creditswaps. The realization of gains or losses on credit swaps willgenerally result in a reduction in unrealized gains or losses andaccrued premium at the point in time realization occurs.

Creditswaps are derivative transactions that obligate one party to thetransaction (the ‘‘Seller’’) to pay anamount to the other party to the transaction (the‘‘Buyer’’) should one of a specified groupof events (‘‘Credit Events’’) be incurredby an unrelated third party or portfolio of third parties (the‘‘Reference Entity’’) specified in thecontract. The amount to be paid by the Seller will either be (a) thenotional amount of the transaction, in exchange for which the Sellermust be delivered a defined obligation of the Reference Entity (calledphysical settlement), or (b) the difference between the current marketvalue of a defined obligation of the Reference Entity and the notionalamount of the transaction (called cash settlement). In exchange forincurring the potential of a Credit Event-generated loss, the Sellerwill receive a fixed premium for the term of the contract (or until theoccurrence of a Credit Event). The fixed premium is generally paidquarterly in arrears over the term of the transaction. Premiums aretaken into income as they are earned over the life of the transaction.Accrued premiums on credit swaps represent premiums earned but not yetpayable. Premiums receivable on credit swaps represents premiums thatare both earned and payable. When Primus purchases credit protectionfrom its counterparties, Primus pays premiums as a series of fixed cashflows. The premium expense is recognized ratably over the life of thetransaction as a component of net credit swap revenue.

Alltransactions entered into between the Buyer and the Seller are subjectto an ISDA Master Agreement executed by both parties. The MasterAgreement allows for the consolidation of the market exposures andtermination of all transactions between the Buyer and Seller in theevent a Default (as defined by the Master Agreement) is incurred byeither party.

The primary risks inherent in the Company’sactivities are (a) where Primus is a Seller that Reference Entitiesspecified in its credit swap transactions will experience Credit Eventsthat will require Primus Financial to make payments to the Buyers ofthe transactions. Credit Events may include any or all of thefollowing: bankruptcy, failure to pay, repudiation or moratorium, andmodified or original restructuring, (b) where Primus is a Buyer of acredit swap and a Credit Event occurs, the Seller fails to make paymentto the Company, and (c) that Buyers of the transactions from Primuswill default on their required premium payments. During the threemonths ended March  31,  2006 and 2005, none of theseevents have occurred.

The Company terminates a credit swap in oneof two ways. The Company may negotiate an agreed termination throughthe original counterparty (an unwind). The Company may negotiate anassignment and novation of its rights and obligations under the creditswap to a third party (an assignment). As an alternative to terminatinga transaction, in order to reduce its exposure, the Company may enterinto an equal and opposite transaction with a third party under whichthe Company purchases credit default protection on terms that match theterms of the original transaction (an offset). In this last case, bothsides of the position may subsequently be unwound or assigned.

Inthe event of an unwind or assignment, the Company pays or receives acash settlement negotiated with the counterparty or assignee, based onthe fair value of the credit swap contract and the accrued premium onthe swap contract at the time of negotiation. The amounts the Companypays or receives are recorded as a realization of fair value and as arealization of accrued premiums in the period in which the terminationoccurs.

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In accordance with accounting principlesgenerally accepted in the United States, the Company carries its creditswaps on its condensed consolidated statements of financial conditionat their fair value. Changes in the fair value of the Company’scredit swap portfolio are recorded as unrealized gains or losses as acomponent of net credit swap revenue in the Company’sconsolidated statements of operations. If a credit swap has an increasein fair value during a period, the increase will add to theCompany’s net credit swap revenues for that period. Conversely,if a credit swap has a decline in fair value during the period, thedecline will subtract from the Company’s net credit swaprevenues for that period. Changes in the fair value of theCompany’s credit swap portfolio are a function of the notionalamount and composition of the portfolio and prevailing market creditswap premiums for comparable credit swaps. The Company generally holdsthe credit swaps it sells to maturity, at which point, assuming nocredit event has occurred, the cumulative unrealized gains and losseson each credit swap would equal zero.

In general, the Companyaggregates fair values of individual credit swaps by counterparty forpresentation on the Company’s condensed consolidated statementsof financial condition. If the aggregate total of fair values with acounterparty is a net gain, the total is recorded as a component ofunrealized gains on credit swaps, at fair value in the condensedconsolidated statements of financial condition. If the aggregate totalof fair values with a counterparty is a net loss, the total is recordedas a component of unrealized losses on credit swaps, at fair value inthe condensed consolidated statements of financial condition.Aggregation by counterparty is applied where a valid ISDA masteragreement is in place with the counterparty. In instances where theCompany does not yet have a valid ISDA master agreement with thecounterparty, the fair values of individual swap transactions arerecorded as components of unrealized gains or losses on credit swaps,at fair value, dependent upon whether the individual contract was at again or a loss.

The Company’s portfolio of credit swaps isgenerally held by Primus Financial and PRS Trading.

PrimusFinancial

Under the terms of Primus Financial’s operatingguidelines, derivatives transactions can only include credit swaps.

Primus Financial is primarily a Seller of credit swaps, although itmay also buy credit swaps to off-set the risks it has incurred as aSeller. Credit swaps purchased to off-set risks do not qualify ashedges in accordance with SFAS No. 133. As a general rule, when PrimusFinancial sells credit protection, it intends to maintain thetransaction until maturity. However, there are two sets ofcircumstances in which the Company could elect to terminatetransactions prior to maturity, and the Company monitors its portfolioon a continuing basis to assess whether those circumstances arepresent.

First, whenever Primus Financial receives newinformation suggesting that the credit quality of the underlying riskhas deteriorated to a material degree, the Company considers thepossibility of terminating the transaction, usually at a loss, to avoidthe larger loss that could result if the credit swap were to remain inplace until a credit event occurs.

Second, Primus Financial mayelect to terminate a transaction for which it has an unrealized gain orloss based on one or more of the following considerations: thelikelihood of further gains or losses arising from the position, itsview as to whether the capital dedicated to the position would beprofitably reallocated, its total exposure to a particular ReferenceEntity, the total size of its portfolio in relation to its capital andthe total size of its swap positions and exposures with a particularcounterparty which might be reduced so that the counterparty may enterinto additional swaps with Primus Financial.

Primus Financialdistinguishes among credit swaps sold-single name, credit swapssold-tranche, credit swaps purchased as short-term investments andcredit swaps purchased to offset the credit risk on credit swapspreviously sold. Credit swaps sold-single name refers to creditprotection referencing a single entity. Credit swaps sold-trancherefers to credit protection referencing portfolios containingobligations of multiple reference entities, which Primus Financialbegan selling during the second quarter of 2005.

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PRS Trading

PRS Trading sells andbuys protection through credit default swaps in pursuit of investmentreturns.

Credit swaps purchased to off-set risks do not qualifyas hedges in accordance with SFAS No. 133. The Company’s boardlimits the amount of credit swaps sold and purchased in accordance witha set of pre-established risk limits.

Revenue and PortfolioInformation

The tables below present the components ofconsolidated net credit swap revenues for the three months endedMarch  31,  2006 and 2005 (in thousands).

|                                   |  |                           |        |         |  |        |         |         |  |  |
|-----------------------------------|--|---------------------------|--------|---------|--|--------|---------|---------|--|--|
|                              |  | Threemonths endedMarch31, |
|                              |  | 2006                      |        | 2005    |
| Netpremiumincome                  |  | $                         | 15,943 |    |  | $      | 11,202  |    |
| Realizedgains                     |  |                      | 658    |    |  |   | 140     |    |
| Realizedlosses                    |  |                      | (804   | )  |  |   | (7      | )  |
| Change inunrealized gains(losses) |  |                      | 24,332 |    |  |   | (19,533 | )  |
| Totalnet credit swaprevenue       |  | $                         | 40,129 |    |  | $      | (8,198  | )  |
|                                   |

TheCompany’s consolidated notional amount, fair value and averagefair value of open credit swap transactions entered into with thirdparties at March  31,  2006 and December  31,2005 are as follows (in thousands):

|                             |  |               |            |                 |  |        |            |        |  |  |
|-----------------------------|--|---------------|------------|-----------------|--|--------|------------|--------|--|--|
|                        |  | March31, 2006 |            | December31,2005 |
| Gross NotionalAmounts:      |  |          |       |            |  |   |       |   |
| Credit swapssold-singlename |  | $             | 14,479,763 |            |  | $      | 13,374,031 |   |
| Creditswapssold-tranche     |  |          | 150,000    |            |  |   | 50,000     |   |
| Creditswapspurchased        |  |          | (119,000   | )          |  |   | —    |   |
| Fairvalue:                  |  |          |       |            |  |   |       |   |
| Asset                       |  |          | 47,556     |            |  |   | 25,342     |   |
| Liability                   |  |          | 1,403      |            |  |   | 3,521      |   |
| Averagefairvalue:           |  |          |       |            |  |   |       |   |
| Asset                       |  |          | 38,144     |            |  |   | 28,140     |   |
| Liability                   |  |          | 2,228      |            |  |   | 3,545      |   |
|                             |

‘‘Asset’’in the table above represents unrealized gains on credit swaps while‘‘Liability’’ represents unrealized losseson credit swaps. All credit swaps are subject to netting arrangementsthat have been contractually established independently by PrimusFinancial and PRS Trading with each counterparty under an ISDA MasterAgreement. The notional amounts of the credit swap contracts in thepreceding table are presented on a gross basis and the fair values ofsuch contracts are netted by counterparty.

At March31,  2006 and December  31,  2005, Primus Financialhad three derivative transactions with its affiliate, Primus Re,totaling $87  million in notional principal which are eliminatedin consolidation.

The tables that follow summarize, by creditrating of Reference Entities and of Counterparties, the notionalamounts and fair values of credit swap transactions outstanding(excluding transactions with affiliates) for the Company as ofMarch  31,  2006 and December  31,  2005 (inthousands).

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(in thousands)

|                                      |  |                |            |                  |  |                |        |           |  |        |            |        |  |        |         |         |  |  |
|--------------------------------------|--|----------------|------------|------------------|--|----------------|--------|-----------|--|--------|------------|--------|--|--------|---------|---------|--|--|
|                                 |  | March31, 2006  |            | December 31,2005 |
| Moody’s RatingCategory         |  | NotionalAmount |            | FairValue        |  | NotionalAmount |        | FairValue |
| ReferenceEntity/Tranche              |  |           |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| CreditSwaps Sold – SingleName: |  |           |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| Aaa                                  |  | $              | 632,413    |             |  | $              | 1,094  |      |  | $      | 561,472    |   |  | $      | 1,118   |    |
| Aa                                   |  |           | 2,434,751  |             |  |           | 8,062  |      |  |   | 2,268,090  |   |  |   | 8,006   |    |
| A                                    |  |           | 5,898,190  |             |  |           | 21,245 |      |  |   | 5,270,706  |   |  |   | 15,008  |    |
| Baa                                  |  |           | 5,172,618  |             |  |           | 21,293 |      |  |   | 5,041,442  |   |  |   | 4,328   |    |
| Ba                                   |  |           | 290,791    |             |  |           | (4,420 | )    |  |   | 199,321    |   |  |   | (5,785  | )  |
| B                                    |  |           | 51,000     |             |  |           | (970   | )    |  |   | 33,000     |   |  |   | (1,539  | )  |
| Total                                |  | $              | 14,479,763 |             |  | $              | 46,304 |      |  | $      | 13,374,031 |   |  | $      | 21,136  |    |
| CreditSwaps Sold –Tranche:     |  |           |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| Aa                                   |  | $              | 150,000    |             |  | $              | 146    |      |  | $      | 50,000     |   |  | $      | 685     |    |
| Total                                |  | $              | 150,000    |             |  | $              | 146    |      |  | $      | 50,000     |   |  | $      | 685     |    |
| CreditSwapsPurchased                 |  |           |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| A                                    |  | $              | (45,000    | )           |  | $              | (138   | )    |  | $      | —    |   |  | $      | — |    |
| Baa                                  |  |           | (74,000    | )           |  |           | (159   | )    |  |   | —    |   |  |   | — |    |
| Total                                |  | $              | (119,000   | )           |  | $              | (297   | )    |  | $      | —    |   |  | $      | — |    |
| CounterpartyBuyer                    |  |           |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| CreditSwaps Sold – SingleName: |  |           |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| Aaa                                  |  | $              | 5,000      |             |  | $              | 34     |      |  | $      | 5,000      |   |  | $      | 37      |    |
| Aa                                   |  |           | 12,176,610 |             |  |           | 36,595 |      |  |   | 11,228,563 |   |  |   | 13,341  |    |
| A                                    |  |           | 2,298,153  |             |  |           | 9,675  |      |  |   | 2,140,468  |   |  |   | 7,758   |    |
| Total                                |  | $              | 14,479,763 |             |  | $              | 46,304 |      |  | $      | 13,374,031 |   |  | $      | 21,136  |    |
| CreditSwaps Sold –Tranche:     |  |           |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| Aa                                   |  | $              | 150,000    |             |  | $              | 146    |      |  | $      | 50,000     |   |  | $      | 685     |    |
| Total                                |  | $              | 150,000    |             |  | $              | 146    |      |  | $      | 50,000     |   |  | $      | 685     |    |
| CounterpartySeller                   |  |           |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| CreditSwapsPurchased:                |  |           |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| Aa                                   |  | $              | (119,000   | )           |  | $              | (297   | )    |  | $      | —    |   |  | $      | — |    |
| Total                                |  | $              | (119,000   | )           |  | $              | (297   | )    |  | $      | —    |   |  | $      | — |    |
|                                      |

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(in thousands)

|                                      |  |                |            |                  |  |                |        |           |  |        |            |        |  |        |         |         |  |  |
|--------------------------------------|--|----------------|------------|------------------|--|----------------|--------|-----------|--|--------|------------|--------|--|--------|---------|---------|--|--|
|                                 |  | March31, 2006  |            | December 31,2005 |
| S&P RatingCategory               |  | NotionalAmount |            | FairValue        |  | NotionalAmount |        | FairValue |
| ReferenceEntity/Tranche              |  |           |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| CreditSwaps Sold – SingleName: |  |           |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| AAA                                  |  | $              | 712,413    |             |  | $              | 1,327  |      |  | $      | 636,472    |   |  | $      | 1,222   |    |
| AA                                   |  |           | 1,973,987  |             |  |           | 6,219  |      |  |   | 1,862,713  |   |  |   | 6,026   |    |
| A                                    |  |           | 6,697,602  |             |  |           | 24,287 |      |  |   | 6,143,717  |   |  |   | 17,753  |    |
| BBB                                  |  |           | 4,825,442  |             |  |           | 18,833 |      |  |   | 4,513,356  |   |  |   | 4,803   |    |
| BB                                   |  |           | 232,319    |             |  |           | (3,150 | )    |  |   | 197,773    |   |  |   | (7,062  | )  |
| B                                    |  |           | 38,000     |             |  |           | (1,212 | )    |  |   | 20,000     |   |  |   | (1,606  | )  |
| Total                                |  | $              | 14,479,763 |             |  | $              | 46,304 |      |  | $      | 13,374,031 |   |  | $      | 21,136  |    |
| CreditSwaps Sold –Tranche:     |  |           |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| AA                                   |  | $              | 150,000    |             |  | $              | 146    |      |  | $      | 50,000     |   |  | $      | 685     |    |
| Total                                |  | $              | 150,000    |             |  | $              | 146    |      |  | $      | 50,000     |   |  | $      | 685     |    |
| CreditSwapsPurchased:                |  |           |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| A                                    |  | $              | (30,000    | )           |  | $              | (119   | )    |  | $      | —    |   |  | $      | — |    |
| BBB                                  |  |           | (89,000    | )           |  |           | (178   | )    |  |   | —    |   |  |   | — |    |
| Total                                |  | $              | (119,000   | )           |  | $              | (297   | )    |  | $      | —    |   |  | $      | — |    |
| CounterpartyBuyer                    |  |           |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| CreditSwaps Sold – SingleName: |  |           |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| AAA                                  |  | $              | 35,295     |             |  | $              | 8      |      |  | $      | 34,623     |   |  | $      | (57     | )  |
| AA                                   |  |           | 10,046,865 |             |  |           | 30,600 |      |  |   | 9,262,316  |   |  |   | 10,525  |    |
| A                                    |  |           | 4,397,603  |             |  |           | 15,696 |      |  |   | 4,077,092  |   |  |   | 10,668  |    |
| Total                                |  | $              | 14,479,763 |             |  | $              | 46,304 |      |  | $      | 13,374,031 |   |  | $      | 21,136  |    |
| CreditSwaps Sold –Tranche:     |  |           |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| AA                                   |  | $              | 150,000    |             |  | $              | 146    |      |  | $      | 50,000     |   |  | $      | 685     |    |
| Total                                |  | $              | 150,000    |             |  | $              | 146    |      |  | $      | 50,000     |   |  | $      | 685     |    |
| CounterpartySeller                   |  |           |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| CreditSwapsPurchased:                |  |           |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| AA                                   |  | $              | (84,000    | )           |  | $              | (257   | )    |  | $      | —    |   |  | $      | — |    |
| A                                    |  |           | (35,000    | )           |  |           | (40    | )    |  |   | —    |   |  |   | — |    |
| Total                                |  | $              | (119,000   | )           |  | $              | (297   | )    |  | $      | —    |   |  | $      | — |    |
|                                      |

PrimusFinancial’s and PRS Trading’s counterparties aregenerally financial institutions with whom it has entered into MasterAgreements that consolidate the counterparty risk to one office of thatcounterparty. For the three months ended March  31,  2006and 2005, respectively, two counterparties each generated greater thanten percent of the Company’s total premium revenue. AtMarch  31,  2006, the notional and fair value amount ofcredit swaps outstanding with respect to one non-rated counterparty was$5.0  million and $35  thousand, respectively. The premiumson these transactions were fully prepaid by the counterparty, and assuch, they have been categorized as triple A rating in our credit swapportfolio.

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The table below shows the geographicaldistribution of the Company’s credit swap portfolio (excludingtransactions with affiliates) by domicile of the Reference Entity anddomicile of the counterparty (in thousands):

|                                     |  |                |            |                  |  |                |        |            |  |        |            |        |  |        |         |         |  |  |
|-------------------------------------|--|----------------|------------|------------------|--|----------------|--------|------------|--|--------|------------|--------|--|--------|---------|---------|--|--|
|                                |  | March31, 2006  |            | December 31,2005 |
| Country ofDomicile                  |  | NotionalAmount |            | Fair Value       |  | NotionalAmount |        | Fair Value |
| CreditSwaps Sold – SingleName |  |           |       |             |  |           |   |       |  |   |       |   |  |   |    |    |
| ByReferenceEntity:                  |  |           |       |             |  |           |   |       |  |   |       |   |  |   |    |    |
| NorthAmerica                        |  | $              | 8,748,295  |             |  | $              | 31,935 |       |  | $      | 8,243,123  |   |  | $      | 12,268  |    |
| Europe                              |  |           | 5,082,468  |             |  |           | 13,050 |       |  |   | 4,561,908  |   |  |   | 7,412   |    |
| Pacific                             |  |           | 510,000    |             |  |           | 1,062  |       |  |   | 445,000    |   |  |   | 992     |    |
| Others                              |  |           | 139,000    |             |  |           | 257    |       |  |   | 124,000    |   |  |   | 464     |    |
| Total                               |  | $              | 14,479,763 |             |  | $              | 46,304 |       |  | $      | 13,374,031 |   |  | $      | 21,136  |    |
| ByCounterparty:                     |  |           |       |             |  |           |   |       |  |   |       |   |  |   |    |    |
| NorthAmerica                        |  | $              | 7,525,733  |             |  | $              | 22,795 |       |  | $      | 6,878,892  |   |  | $      | 8,754   |    |
| Europe                              |  |           | 6,857,030  |             |  |           | 23,417 |       |  |   | 6,388,139  |   |  |   | 12,359  |    |
| Pacific                             |  |           | 65,000     |             |  |           | 7      |       |  |   | 65,000     |   |  |   | (37     | )  |
| Others                              |  |           | 32,000     |             |  |           | 85     |       |  |   | 42,000     |   |  |   | 60      |    |
| Total                               |  | $              | 14,479,763 |             |  | $              | 46,304 |       |  | $      | 13,374,031 |   |  | $      | 21,136  |    |
| CreditSwaps Sold –Tranche     |  |           |       |             |  |           |   |       |  |   |       |   |  |   |    |    |
| ByCounterparty:                     |  |           |       |             |  |           |   |       |  |   |       |   |  |   |    |    |
| NorthAmerica                        |  | $              | 50,000     |             |  | $              | 1,166  |       |  | $      | 50,000     |   |  | $      | 685     |    |
| Europe                              |  |           | 100,000    |             |  |           | (1,020 | )     |  |   | —    |   |  |   | — |    |
| Total                               |  | $              | 150,000    |             |  | $              | 146    |       |  | $      | 50,000     |   |  | $      | 685     |    |
| CreditSwapsPurchased                |  |           |       |             |  |           |   |       |  |   |       |   |  |   |    |    |
| ByReferenceEntity:                  |  |           |       |             |  |           |   |       |  |   |       |   |  |   |    |    |
| NorthAmerica                        |  | $              | (104,000   | )           |  | $              | (277   | )     |  | $      | —    |   |  | $      | — |    |
| Others                              |  |           | (15,000    | )           |  |           | (20    | )     |  |   | —    |   |  |   | — |    |
| Total                               |  | $              | (119,000   | )           |  | $              | (297   | )     |  | $      | —    |   |  | $      | — |    |
| ByCounterparty:                     |  |           |       |             |  |           |   |       |  |   |       |   |  |   |    |    |
| NorthAmerica                        |  | $              | (92,000    | )           |  | $              | (244   | )     |  | $      | —    |   |  | $      | — |    |
| Europe                              |  |           | (27,000    | )           |  |           | (53    | )     |  |   | —    |   |  |   | — |    |
| Total                               |  | $              | (119,000   | )           |  | $              | (297   | )     |  | $      | —    |   |  | $      | — |    |
|                                     |

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The table below shows the distribution ofthe Company’s credit swap portfolio (excluding related partytransactions) by year of maturity as of March  31,  2006and December  31,  2005 (in thousands):

|                                     |  |                |            |                  |  |                |         |            |  |        |            |        |  |        |         |         |  |  |
|-------------------------------------|--|----------------|------------|------------------|--|----------------|---------|------------|--|--------|------------|--------|--|--------|---------|---------|--|--|
|                                |  | March31, 2006  |            | December 31,2005 |
|                                |  | NotionalAmount |            | Fair Value       |  | NotionalAmount |         | Fair Value |
| CreditSwaps Sold – SingleName |  |           |       |             |  |           |    |       |  |   |       |   |  |   |    |    |
| YearofMaturity                      |  |           |       |             |  |           |    |       |  |   |       |   |  |   |    |    |
| 2006                                |  | $              | 642,635    |             |  | $              | 392     |       |  | $      | 939,657    |   |  | $      | 588     |    |
| 2007                                |  |           | 2,486,416  |             |  |           | 12,488  |       |  |   | 2,469,188  |   |  |   | 12,637  |    |
| 2008                                |  |           | 1,123,734  |             |  |           | 8,283   |       |  |   | 1,129,811  |   |  |   | 7,948   |    |
| 2009                                |  |           | 2,691,937  |             |  |           | 12,328  |       |  |   | 2,684,704  |   |  |   | 5,980   |    |
| 2010                                |  |           | 6,130,877  |             |  |           | 12,337  |       |  |   | 6,122,897  |   |  |   | (5,963  | )  |
| 2011                                |  |           | 1,404,164  |             |  |           | 476     |       |  |   | 27,774     |   |  |   | (54     | )  |
| Total                               |  | $              | 14,479,763 |             |  | $              | 46,304  |       |  | $      | 13,374,031 |   |  | $      | 21,136  |    |
| CreditSwaps Sold –Tranche     |  |           |       |             |  |           |    |       |  |   |       |   |  |   |    |    |
| YearofMaturity                      |  |           |       |             |  |           |    |       |  |   |       |   |  |   |    |    |
| 2010                                |  | $              | 50,000     |             |  | $              | 1,166   |       |  | $      | 50,000     |   |  | $      | 685     |    |
| 2011                                |  |           | 50,000     |             |  |           | (149    | )     |  |   | —    |   |  |   | — |    |
| 2012                                |  |           | —    |             |  |           | — |       |  |   | —    |   |  |   | — |    |
| 2013                                |  |           | 50,000     |             |  |           | (871    | )     |  |   | —    |   |  |   | — |    |
| Total                               |  | $              | 150,000    |             |  | $              | 146     |       |  | $      | 50,000     |   |  | $      | 685     |    |
| CreditSwapsPurchased                |  |           |       |             |  |           |    |       |  |   |       |   |  |   |    |    |
| YearofMaturity                      |  |           |       |             |  |           |    |       |  |   |       |   |  |   |    |    |
| 2011                                |  | $              | (114,000   | )           |  | $              | (228    | )     |  | $      | —    |   |  | $      | — |    |
| 2012                                |  |           | —    |             |  |           | — |       |  |   | —    |   |  |   | — |    |
| 2013                                |  |           | —    |             |  |           | — |       |  |   | —    |   |  |   | — |    |
| 2014                                |  |           | —    |             |  |           | — |       |  |   | —    |   |  |   | — |    |
| 2015                                |  |           | —    |             |  |           | — |       |  |   | —    |   |  |   | — |    |
| 2016                                |  |           | (5,000     | )           |  |           | (69     | )     |  |   | —    |   |  |   | — |    |
| Total                               |  | $              | (119,000   | )           |  | $              | (297    | )     |  | $      | —    |   |  | $      | — |    |
|                                     |

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5.    Earnings per Share

Basicearnings per share (‘‘EPS’’) is calculatedby dividing earnings available to common stockholders by the weightedaverage number of common shares outstanding. Diluted EPS is similar tobasic EPS, but adjusts for the effect of the potential issuance ofcommon shares. The following table presents the computations of basicand diluted EPS (in thousands, except per share data):

|                                                    |  |                             |        |           |  |        |         |           |  |  |
|----------------------------------------------------|--|-----------------------------|--------|-----------|--|--------|---------|-----------|--|--|
|                                               |  | Threemonths ended March 31, |
|                                               |  | 2006                        |        | 2005      |
| Netearnings (loss) available to commonstockholders |  | $                           | 35,105 |      |  | $      | (13,854 | )    |
| Weighted-averagebasic sharesoutstanding            |  |                        | 43,246 |      |  |   | 43,213  |      |
| Effectof dilutiveinstruments                       |  |                        |   |      |  |   |    |      |
| Employee stockoptions                              |  |                        | 33     | (a)  |  |   | — | (a)  |
| Restrictedshareunits                               |  |                        | 173    | (a)  |  |   | — | (a)  |
| Warrants                                           |  |                        | 835    | (a)  |  |   | — | (a)  |
| Dilutivepotentialshares                            |  |                        | 1,041  |      |  |   | — |      |
| Dilutedshares                                      |  |                        | 44,287 |      |  |   | 43,213  |      |
| BasicEPS                                           |  | $                           | 0.81   |      |  | $      | (0.32   | )    |
| DilutedEPS                                         |  | $                           | 0.79   |      |  | $      | (0.32   | )    |
|                                                    |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (a) | Securities(including those issuable pursuant to contingent stock agreements) thatcould potentially dilute basic EPS were not included in the computationof diluted EPS because to do so would have been anti-dilutive for theperiods presented. In 2006, employee stock options of approximately221  thousand shares and restricted share units of approximately231  thousand shares were excluded. In 2005, employee stockoptions totaling approximately 100  thousand shares, restrictedshare units equal to approximately 223  thousand shares andwarrants representing approximately 852  thousand shares ofcommon stock were excluded. |

6.    Stock BasedCompensation

Effective January  1,  2006, theCompany adopted SFAS No. 123(R), Share-Based Payment using themodified prospective transition method. SFAS No. 123(R) requires themeasurement and recognition of compensation expense for all stock-basedpayment awards made to employees and directors including employee stockoptions and other forms of equity compensation based on estimated fairvalues.

Prior to the adoption of SFAS No. 123(R), the Companyused the fair value approach for recording stock-based employeecompensation in accordance with the fair value method prescribed bySFAS No. 123, Accounting for Stock-based Compensation, asamended by SFAS No. 148, Accounting for Stock Based Compensation– Transition and Disclosure. The approach to accounting forshare-based payments in SFAS No. 123(R) is similar to the approachdescribed in SFAS 123; therefore, there were no material changes madeto our recognition method upon adoption of SFAS No. 123(R). Under thefair value method, stock-based compensation expense had been recognizedin our results of operations in prior periods.

Compensationexpense is recognized based on the fair value of stock options,performance shares, restricted shares and restricted share units(‘‘RSU’’) as determined on the date ofgrant and is being expensed over the related vesting period. The fairvalue of the stock options granted is determined using theBlack-Scholes option-pricing model. Upon the adoption of SFAS No.123(R), the Company continues to apply the Black-Scholes option pricingmodel for determining the estimated fair value for stock awards as itdeems it to be the most appropriate model. The use of the Black-Scholesmodel requires certain estimates for values of variables used in themodel as noted in the table that follows.

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The fair value of each option grant isestimated on the date of grant using the Black-Scholes option-pricingmodel. The weighted average fair value and assumptions used for optionsgranted during the three months ended March  31,  2006were:

|                        |  |                                  |  |  |  |  |
|------------------------|--|----------------------------------|--|--|--|--|
|                   |  | Threemonths ended March 31, 2006 |
| Risk free interestrate |  | 5.21%                            |
| Volatility             |  | 33.70%                           |
| Expecteddividend yield |  | 0.00%                            |
| Expected optionlife    |  | 7 years                          |
| Fair value ofoption    |  | $4.05                            |
|                        |

The following table is asummary of stock option activity for the three months endedMarch  31,  2006: 

|                                 |  |                |           |                              |  |   |       |        |  |  |
|---------------------------------|--|----------------|-----------|------------------------------|--|---|-------|--------|--|--|
|                            |  | March31, 2006  |
|                            |  | Numberofshares |           | Weightedaverageexerciseprice |
| Outstandingat December  31,2005 |  |           | 710,860   |                         |  | $ | 10.43 |   |
| Granted                         |  |           | 394,572   |                         |  | $ | 12.60 |   |
| Exercised                       |  |           | (1,953    | )                       |  | $ | 6.94  |   |
| Forfeited                       |  |           | (57,344   | )                       |  | $ | 11.10 |   |
| Outstandingat March  31,2006    |  |           | 1,046,135 |                         |  | $ | 11.22 |   |
| Exercisable atMarch  31,2006    |  |           | 294,609   |                         |  | $ | 9.35  |   |
|                                 |

Thefollowing table summarizes the status of the Company’s stockoptions as of March  31,2006:

|                         |  |                          |           |                                          |  |                              |        |                 |  |                              |        |        |  |        |         |        |  |        |        |        |  |  |
|-------------------------|--|--------------------------|-----------|------------------------------------------|--|------------------------------|--------|-----------------|--|------------------------------|--------|--------|--|--------|---------|--------|--|--------|--------|--------|--|--|
|                    |  | StockOptions Outstanding |           | StockOptionsExercisable                  |
| Range ofExercise Prices |  | Number ofShares          |           | Average RemainingContractual Life(Years) |  | WeightedAverageExercisePrice |        | Number ofShares |  | WeightedAverageExercisePrice |
| $0.00 –$6.94      |  |                     | 153,125   |                                     |  |                         | 6.7    |            |  | $                            | 6.94   |   |  |   | 114,843 |   |  | $      | 6.94   |   |
| $6.95–$9.76       |  |                     | 250,625   |                                     |  |                         | 7.7    |            |  | $                            | 9.76   |   |  |   | 125,313 |   |  | $      | 9.76   |   |
| $9.77–$13.50      |  |                     | 642,385   |                                     |  |                         | 6.4    |            |  | $                            | 12.80  |   |  |   | 54,453  |   |  | $      | 13.50  |   |
| Total                   |  |                     | 1,046,135 |                                     |  |                         |   |            |  |                         |   |   |  |   | 294,609 |   |  |   |   |   |
|                         |

TheCompany recorded stock compensation expense of approximately$1.0  million during each of the three months ended March31,  2006 and 2005, respectively. Stock compensation expense isincluded in compensation and employee benefits in the consolidatedstatements of operations.

As of March  31,  2006,total unrecognized stock-based compensation expense related tononvested stock awards was $10.6  million. This expense isexpected to be recognized over a weighted average period of 1.3years.

7.    Comprehensive Income (Loss)

Comprehensiveincome (loss) for the three months ended March  31,  2006and 2005 is as follows (in thousands):

|                                                                 |  |                            |        |         |  |        |         |         |  |  |
|-----------------------------------------------------------------|--|----------------------------|--------|---------|--|--------|---------|---------|--|--|
|                                                            |  | Threemonths ended March31, |
|                                                            |  | 2006                       |        | 2005    |
| Netincome(loss)                                                 |  | $                          | 35,105 |    |  | $      | (13,854 | )  |
| Change innet unrealized losses on available-for-saleinvestments |  |                       | (1,445 | )  |  |   | — |    |
| Totalcomprehensive income(loss)                                 |  | $                          | 33,660 |    |  | $      | (13,854 | )  |
|                                                                 |

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|              |                                                                                      |
|--------------|--------------------------------------------------------------------------------------|
| Item2.  | Management's Discussion and Analysis ofFinancial Condition and Results of Operations |

The followingis a discussion and analysis of our financial condition and results ofoperations. This discussion should be read in conjunction with ourconsolidated financial statements and accompanying notes which appearin the Company’s Annual Report on Form 10-K. It containsforward-looking statements that involve risks and uncertainties. Ouractual results could differ materially from those anticipated in theseforward-looking statements as a result of various factors, includingthose discussed below and in the Company’s Annual Report on Form10-K, particularly under Item 1A ‘‘RiskFactors’’ and the heading ‘‘Cautionary NoteRegarding Forward-Looking Statements.’’

Business Overview

We, through Primus Financial, one of ourprincipal subsidiaries, are engaged in selling credit protectionagainst investment grade credit obligations of corporate and sovereignentities. In exchange for a fixed quarterly premium, if a credit eventoccurs (e.g., bankruptcy, failure to pay or restructuring) with respectto a Reference Entity upon which Primus Financial has sold creditprotection, Primus Financial agrees to pay the notional amount of thecredit swap contract to its counterparty in exchange for delivery of anunsecured credit obligation of that Reference Entity. We seek tominimize the risk inherent in our credit swap portfolio by maintaininga high quality, highly diversified credit swap portfolio acrossReference Entities, industries and countries. Primus Financial alsosells credit swaps referencing portfolios containing obligations ofmultiple reference entities, which we call‘‘tranches’’.

Primus Financial hasthe highest counterparty credit ratings offered by S&P (AAA) andMoody’s (Aaa) and is managed by an experienced team ofprofessionals who have expertise in credit analysis, investing, riskmanagement and market analysis.

Primus Asset Management, Inc., orPrimus Asset Management, our other principal operating subsidiary,manages Primus Financial’s credit swap business and the creditswap portfolios of unrelated third parties. For such services, PrimusAsset Management receives a management fee.

Primus Re operates asa financial guaranty insurance company, and generates revenue bycharging a higher insurance premium for protection sold than thepremium it pays for the offsetting protection it purchases.

PRSTrading Strategies, LLC, or PRS Trading, engages in the active buyingand selling of credit swaps. PRS Trading engages primarily in relativevalue investing across credits, curves and instruments. Theseinvestments generally have a short-term investment horizon and aregoverned by tight risk controls and liquiditymanagement.

Net Credit Swap Revenues

Net creditswap revenue in our condensed consolidated statements of operations,comprises the premiums earned and premium expense on credit swaps,gains or losses realized as a result of the termination of credit swapsand changes in the fair value of our credit swaps. Net credit swaprevenue is earned by both Primus Financial Products and PRS Trading.Although both companies earn net credit swap revenue, the strategies ofthe two companies are different. Primus Financial Products generallywrites credit swap protection in order to earn premium income over theterm of the contract, whereas PRS Trading engages in the active buyingand selling of protection and generally will only hold swap contractsfor a limited portion of the swap’s full tenor.

We receivepremium income from the credit swaps we sell. In general, premiums arereceived quarterly in arrears and are accrued daily into income. Inaccordance with U.S. GAAP, we carry our credit swaps on our condensedconsolidated statements of financial condition at their fair value.Changes in the fair value of our credit swap portfolio are included asa component of net credit swap revenue (loss) in our condensedconsolidated statements of operations. If a credit swap has an increasein fair value during a period, the increase will add to our net creditswap revenues for that period. Conversely, if a credit swap has adecline in fair value during the period, the decline will 

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subtract from our net credit swap revenuesfor that period. Changes in the fair value of our credit swap portfolioare a function of the notional amount and composition of the portfolioand prevailing market credit swap premiums for comparable credit swaps.In our experience, considerable fluctuations may occur in the fairvalues of credit swaps from period to period and, as a result, thereader of our financial statements should not infer future results fromhistorical net credit swap revenues or losses.

In general, thefair values of individual credit swaps are aggregated by counterpartyfor presentation in our condensed consolidated statements of financialcondition. If the aggregate total of fair values for a counterparty isa net gain, the total is recorded as a component of unrealized gains oncredit swaps, at fair value in our condensed consolidated statements offinancial condition. If the aggregate total of fair values for acounterparty is a net loss, the total is recorded as a component ofunrealized losses on credit swaps, at fair value in our condensedconsolidated statements of financial condition. Aggregation bycounterparty is applied where an executed ISDA master agreement is inplace with the counterparty. In instances where we do not yet have anexecuted ISDA master agreement with the counterparty, the fair valuesof individual swap transactions are recorded as components ofunrealized gains or losses on credit swaps, at fair value, dependentupon whether the individual contract was at a gain or a loss. As ofMarch  31,  2006, we had no outstanding credit swaps withany counterparties with whom we had not yet executed ISDA masteragreements.

As a general rule, when Primus Financial sells creditdefault protection, it is our intention to maintain the transactionuntil maturity. However, there are two sets of circumstances in whichwe could elect to terminate transactions prior to maturity, and wemonitor our portfolio on a continuing basis to assess whether thosecircumstances are present.

First, whenever we receive newinformation suggesting that the credit quality of the underlying riskhas deteriorated to a material degree, we consider the possibility ofterminating the transaction, usually at a loss, to avoid a larger lossthat could result if the credit swap were to remain in place until acredit event occurs. The principal factor that governs our decisionregarding termination in these circumstances is whether we believe thatthe underlying risk has become substantially greater than the level ofrisk we would choose to assume in entering into a new sale of creditdefault protection. Since inception, we have terminated due to creditconsiderations less than 1% of the notional amount of creditswaps under which we sold credit default protection.

Second, wemay elect to terminate a transaction for reasons other than creditconsiderations. Terminations of this type may generate gains or losses.In making a decision to terminate a transaction for reasons other thancredit considerations, we consider a number of different factors,including the absolute amount of the unrealized gain or loss we couldrealize, the likelihood of additional gains or losses arising from theposition, our view as to whether the capital dedicated to the positioncould be profitably reallocated to other opportunities over aforeseeable horizon, the total size of our portfolio in relation to ourcapital and the total size of our swap positions and exposures with aparticular counterparty. We refer to terminations effected under thesecircumstances as ‘‘resizing’’ or‘‘rebalancing’’. The majority of ourresizing occurred during the second and third quarters of 2003, whenmarket credit swap premium levels had dropped dramatically from theirhistoric 2002 highs. Since inception, we have terminated approximately10% of credit swaps under which we sold credit defaultprotection based on resizing or rebalancing considerations.

Wemay terminate a credit swap in one of two ways. We may negotiate anagreed termination through the original counterparty (an unwind). Wemay negotiate an assignment and novation of our rights and obligationsunder the credit swap to a third party (an assignment). As analternative to terminating a transaction, we may enter into an equaland opposite transaction with a third party under which we purchasecredit default protection on terms that match the terms of the originaltransaction (an offset). In this last case, both sides of the positionmay subsequently be unwound or assigned.

In the event of anunwind or assignment, we pay or receive a cash settlement negotiatedwith the counterparty or assignee, based on the fair value of thecredit swap contract and the accrued premium 

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on the swap contract at the time ofnegotiation. The amounts we pay or receive are recorded as arealization of fair value and as a realization of accrued premiums inthe period in which the termination occurs.

In the past, PrimusFinancial purchased a limited amount of credit protection as short-terminvestments, and incurred the cost of paying premiums until thepurchased swaps were terminated. Primus Financial undertook thesetransactions with the expectation that the market credit swap premiumlevel for the Reference Entity would rise subsequent to our purchase ofprotection and that we would be able to terminate the swap at arealized net gain. We did not achieve the results we expected from thisstrategy and wound down the portfolio to zero during the last quarterof 2005.

PRS Trading both sold and purchased credit swapprotection during the three months ended March  31,  2006pursuant to its predominantly relative value investment strategy.

Critical Accounting Policies

Valuation of Credit Swaps

From the inception of our business, we have appliedStatement of Financial Accounting Standards, or SFAS, 133,Accounting for Derivative Instruments and Hedging Activities,which established accounting and reporting standards for derivativeinstruments. SFAS 133 requires recognition of all credit swaps on thecondensed consolidated statements of financial condition at fairvalue.

The fair value of the credit swaps depends on a number offactors, primarily the market level of credit swap premiums associatedwith individual Reference Entities. Credit swaps are valued usingmarket-standard pricing models which calculate the net present value ofdifferences between future premiums on currently quoted market creditswaps and the contractual future credit swap premiums on contracts wehave undertaken. Our pricing model has been internally developed but isbenchmarked against a market-standard model. Generally, our model usesquoted market credit swap premium data that we purchase from anindependent pricing service. This service takes pricing informationfrom a number of prominent dealers and brokers in the credit swapmarket across a range of standard maturities and restructuring terms,and creates average mid-market credit swap premium quotes on specificReference Entities. We adjust the mid-market pricing we receive fromthe pricing service to reflect an estimate of the cost to close theposition.

We believe there are a variety of factors that mayinfluence market credit swap premium levels. The principal factor isthe market’s view of the probability that a Reference Entitywill default over the multi-year horizon typical for a credit swapcontract. Those views in turn are influenced by the state of theeconomy, the outlook for corporate financial health in general as wellas the outlook for particular industries and companies. Additionalfactors include the magnitude of debt outstanding and debt payingcapacity within those same industries and companies. One factorspecific to the credit swap market is the capacity of credit swapmarket participants to sell credit swaps. If, for example, commercialbanks are actively buying protection to manage their regulatorycapital, this will tend, other factors being equal, to absorb thecapacity of protection sellers and cause an increase in market creditswap premiums. Conversely, creation of special purpose vehicles thatsell protection create additional protection seller capacity and,absent additional demand, can cause a decrease in market premiums.Absent rapid and steep changes, interest rates have, at most, a limitedeffect on market credit swap premium levels.

Stock-BasedEmployee Compensation Plans 

Effective January1,  2006, the Company adopted SFAS No. 123(R), Share-BasedPayment using the modified prospective transition method. SFAS No.123(R) requires the measurement and recognition of compensation expensefor all stock-based payment awards made to employees and directorsincluding employee stock options and other forms of equity compensationbased on estimated fair values.

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Prior to the adoption of SFAS No. 123(R),the Company used the fair value approach for recording stock-basedemployee compensation in accordance with the fair value methodprescribed by SFAS No. 123, Accounting for Stock-basedCompensation, as amended by SFAS No. 148, Accounting for StockBased Compensation – Transition and Disclosure. The approachto accounting for share-based payments in SFAS No. 123(R) is similar tothe approach described in SFAS 123, therefore, there were no materialchanges made to our recognition method upon adoption of SFAS No.123(R). Under the fair value method, stock-based compensation expensehad been recognized in our results of operations in priorperiods.

Compensation expense is recognized based on the fairvalue of stock options, performance shares, restricted shares andrestricted share units (‘‘RSU’’) asdetermined on the date of grant and is being expensed over the relatedvesting period. The fair value of the stock options granted isdetermined using the Black-Scholes option-pricing model. Upon theadoption of SFAS No. 123(R), the Company continues to apply theBlack-Scholes option pricing model for determining the estimated fairvalue for stock awards as it deems it to be the most appropriate model.The use of the Black-Scholes model requires certain estimates forvalues of variables used in the model.

Results ofOperations

    Overview 

Our net income forthe three months ended March  31,  2006 was $35.1million compared with a net loss of $13.9  million for the threemonths ended March  31,  2005. The change in net income isprincipally due to increased net credit swap revenues, primarily as aresult of net unrealized gains of $24.3  million on our portfolioof credit swaps sold in the quarter of 2006, compared with anunrealized loss of $19.5  million in the first quarter of 2005.Generally, market credit swap premium levels declined in the firstquarter of 2006, whereas they increased in the first quarter of 2005.Net credit swap premiums were $ 15.9  million in the firstquarter of 2006, compared with $11.2  million in the firstquarter of 2005. The increase in net premiums is attributable to thegrowth in our portfolio of credit swaps sold.

Interest income onour portfolio of investments was $6.6  million in the firstquarter of 2006, compared with $3.7  million in the first quarterof 2005. The increase is due to higher market interest rates, togetherwith increased invested balances, mainly arising from the investment ofthe proceeds of the $125  million debt issuance by PrimusFinancial in December  2005.

Interest expense anddistributions on preferred stock issued by Primus Financial were$3.6  million in the first quarter of 2006, compared with$1.1  million in the first quarter of 2005. The increase is dueto higher market interest rates in 2006, together with the interestexpense associated with the $125  million debt issuance inDecember  2005.

Our operating expenses were $8.1million in the first quarter of 2006, compared with $7.7  millionin the first quarter of 2005, primarily due to increased headcount andhigher professional fees.

    Three months endedMarch  31,  2006 compared with three months endedMarch  31,  2005

On a U.S. GAAP basis, wereported net income (loss) of $35.1  million and $(13.9) millionfor the three months ended March  31,  2006 and 2005,respectively. The increase in net income in the first quarter of 2006was primarily due to the mark-to-market unrealized gains on creditswaps from the portfolio of credit protection sold by Primus Financial.Net credit swap revenues are discussed separately below for PrimusFinancial and PRS Trading.

    Net credit swap revenue– Primus Financial

Net credit swap revenue was$40.4  million and $(8.2) million for the three months endedMarch  31,  2006 and 2005, respectively. Net credit swaprevenue for Primus Financial excludes $77  thousand of netrevenue earned on three credit swap transactions with its affiliate,Primus Re, as 

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this amount is eliminated in consolidation.Premium income earned from our portfolio of single name credit swapssold was $15.7  million in the quarter. In the quarter PrimusFinancial received $502  thousand from the early termination ofswaps at a realized gain, whereas Primus Financial incurred creditmitigation costs of $777  thousand from the early termination ofswaps at a realized loss. The general decline in market premiums duringthe first quarter led to a net appreciation of $25.3  million inthe unrealized market value of Primus Financial’s portfolio ofcredit swaps sold.

During 2005, we obtained rating agencypermission to sell a limited amount of protection against referenceentities in the BB/Ba rating category. Primus Financial sold $20million of credit swaps in this category during the first quarter of2006 at an average premium of 93 basis points.

Net credit swaprevenue includes:

|              |                     |
|--------------|---------------------|
| •  | Net premiumsearned; |

|              |                                                 |
|--------------|-------------------------------------------------|
| •  | Net realized gains (losses)on credit swaps; and |

|              |                                               |
|--------------|-----------------------------------------------|
| •  | Net unrealizedgains (losses) on credit swaps. |

The table below shows thecomponents of net credit swap revenue for the three months endedMarch  31,  2006 and 2005 (inthousands):

|                                             |  |                            |        |         |  |        |         |         |  |  |
|---------------------------------------------|--|----------------------------|--------|---------|--|--------|---------|---------|--|--|
|                                        |  | Threemonths ended March31, |
|                                        |  | 2006                       |        | 2005    |
| Netpremiums earned                          |  | $                          | 15,925 |    |  | $      | 11,202  |    |
| Netrealized gains (losses) on creditswaps   |  |                       | (275   | )  |  |   | 133     |    |
| Net unrealized gains(losses) on creditswaps |  |                       | 24,711 |    |  |   | (19,533 | )  |
| Totalnet credit swaprevenue                 |  | $                          | 40,361 |    |  | $      | (8,198  | )  |
|                                             |

NetPremiums Earned

Net premiums earned were $15.9  millionand $11.2  million for the three months ended March31,  2006 and 2005, respectively. Net premiums earnedinclude:

|              |                                     |
|--------------|-------------------------------------|
| •  | Premium income on creditswaps sold; |

|              |                                 |
|--------------|---------------------------------|
| •  | Premium income ontranches sold; |

|              |                                                                        |
|--------------|------------------------------------------------------------------------|
| •  | Premium expense oncredit swaps purchased as short-term investments;and |

|              |                                                                                              |
|--------------|----------------------------------------------------------------------------------------------|
| •  | Premium expense on credit swapspurchased to offset credit risk on certain credit swaps sold. |

Theincrease in net premiums earned was primarily driven by the increase inthe size of the credit swaps sold portfolio from the correspondingperiod in 2005. The portfolio of credit swaps purchased for short-terminvestment purposes had been wound down to zero during 2005 and therewas no premium expense for swaps of this type in 2006. The table belowshows the components of net premiums earned for the three months endedMarch  31,  2006 and 2005 (inthousands).

|                                                                                    |  |                            |         |        |  |        |         |         |  |  |
|------------------------------------------------------------------------------------|--|----------------------------|---------|--------|--|--------|---------|---------|--|--|
|                                                                               |  | Threemonths ended March31, |
|                                                                               |  | 2006                       |         | 2005   |
| Premiumincome on credit swapssold                                                  |  | $                          | 15,717  |   |  | $      | 11,628  |    |
| Premium incomeon tranche sold                                                      |  |                       | 208     |   |  |   | — |    |
| Premiumexpense on credit swaps purchased as short-terminvestments                  |  |                       | — |   |  |   | (403    | )  |
| Premiumexpense on credit swaps purchased to offset credit risk on certainswapssold |  |                       | — |   |  |   | (23     | )  |
| Totalnet premiumsearned                                                            |  | $                          | 15,925  |   |  | $      | 11,202  |    |
|                                                                                    |

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Premium income on credit swaps soldincreased primarily as a result of the expansion in our credit swapportfolio. The quarterly average notional amounts outstanding of creditswaps sold were $14.2  billion and $10.8  billion for thethree months ended March  31,  2006 and 2005,respectively.

We began to sellprotection in tranche format during the second quarter of 2005, wherebywe sell credit swaps referencing portfolios containing obligations ofmultiple reference entities. Premium income from the tranches sold was$208  thousand for the three months ended March  31,2006, and the average notional amount outstanding was $116.7million for the three months ended March  31,2006.

The notional amounts of credit swaps that we had purchasedto offset credit risk on certain credit swaps sold were $0 and$5.0  million at March  31,  2006 and2005.

Net Realized Gains (Losses) on Credit Swaps

Ourbusiness strategy, for Primus Financial, is generally to hold swaps wesell until maturity. However, there are circumstances in which we mayterminate a credit swap prior to maturity, either as a result of creditconsiderations or portfolio rebalancing considerations. We cannotidentify at the outset of any credit swap transaction whether thecredit swap will be terminated or otherwise disposed of prior to itsmaturity. If the credit swaps we terminate are at attractive marketvalues, we are able to realize gains.

In certain circumstanceswe will terminate a credit swap at a realized loss. In general, weterminate credit swaps at a loss where we perceive that the creditquality of the underlying reference entity risk has deteriorated, andwe wish to reduce or eliminate our exposure to the reference entity. Wemay also terminate a credit swap at a loss in order to createopportunities to rebalance our exposure to a reference entity.

Net realized gains (losses) for the three months ended March31,  2006 and 2005 are summarized below (inthousands):

|                                                                              |  |                            |         |         |  |        |         |         |  |  |
|------------------------------------------------------------------------------|--|----------------------------|---------|---------|--|--------|---------|---------|--|--|
|                                                                         |  | Threemonths ended March31, |
|                                                                         |  | 2006                       |         | 2005    |
| Realizedgains on terminated credit swapssold                                 |  | $                          | 502     |    |  | $      | 119     |    |
| Realized losses onterminated credit swapssold                                |  |                       | (777    | )  |  |   | — |    |
| Realized gainson terminated credit swaps purchased as short-terminvestments  |  |                       | — |    |  |   | 21      |    |
| Realizedlosses on terminated credit swaps purchased as short-terminvestments |  |                       | — |    |  |   | (7      | )  |
| Totalnet realized gains (losses) on creditswaps                              |  | $                          | (275    | )  |  | $      | 133     |    |
|                                                                              |

Weterminated $115  million and $5  million notional amount ofcredit swaps sold during the three months ended March  31,2006 and 2005, respectively. Net realized gains (losses) on the earlytermination of credit swaps sold were $(275) thousand and $119thousand for the three months ended March  31,  2006 and2005, respectively. The realized losses incurred during 2006 wereprimarily the result of our decision to reduce our exposure to alimited number of reference entities against which we had sold creditprotection.

We terminated $10  million notional amount ofcredit swaps purchased during the three months ended March31,  2005 resulting in a net realized gain of $14thousand. During the course of 2005 we wound down our portfolio ofcredit swaps purchased and, as a consequence, there were no realizedgains or losses on this portfolio in 2006.

Net Unrealized Gains(Losses) on Credit Swaps

Net unrealized gains (losses) onPrimus Financial’s credit swaps were $24.7 million and($19.5)  million for the three months ended March31,  2006 and 2005. The change in unrealized losses on creditswaps reflects the change in the fair value of our credit swapportfolio during these periods. The gain in the first quarter of 2006on credit swaps sold is primarily attributable to the increase in thefair value of the portfolio as market premiums fell during thatquarter.

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The unrealized gains (losses) on creditswaps sold and credit swaps purchased as short-term investments and forcredit risk offset purposes for the three months ended March31,  2006 and 2005 are summarized below (inthousands):

|                                                                                                |  |                            |         |        |  |        |         |         |  |  |
|------------------------------------------------------------------------------------------------|--|----------------------------|---------|--------|--|--------|---------|---------|--|--|
|                                                                                           |  | Threemonths ended March31, |
|                                                                                           |  | 2006                       |         | 2005   |
| Netunrealized gains (losses) on credit swapssold                                               |  | $                          | 24,711  |   |  | $      | (19,963 | )  |
| Netunrealized gains on credit swaps purchased as short-terminvestments                         |  |                       | — |   |  |   | 407     |    |
| Netunrealized gains on credit swaps purchased to offset credit risk oncertain credit swapssold |  |                       | — |   |  |   | 23      |    |
| Totalnet unrealized gains (losses) on creditswaps                                              |  | $                          | 24,711  |   |  | $      | (19,533 | )  |
|                                                                                                |

    NetCredit Swap Revenue – PRS Trading

PRS Tradingcommenced operations in January  2006 and therefore prior yearcomparison information is not available. There was limited volatilityin the credit market in the first quarter of 2006 which restricted theopportunities for PRS Trading to put on attractive swap positions. Inthe quarter, PRS Trading sold notional principal of $145.5million of new credit swaps and purchased $149  million ofnotional principal. Net credit swap revenue for PRS Trading was $(232)thousand for the three months ended March  31,  2006. Netcredit swap revenue includes:

|              |                     |
|--------------|---------------------|
| •  | Netpremiums earned; |

|              |                                                 |
|--------------|-------------------------------------------------|
| •  | Net realized gains(losses) on credit swaps; and |

|              |                                               |
|--------------|-----------------------------------------------|
| •  | Netunrealized gains (losses) on credit swaps. |

The table below showsthe components of net credit swap revenue for the three months endedMarch  31,  2006 (inthousands):

|                                      |  |                                  |      |         |  |  |
|--------------------------------------|--|----------------------------------|------|---------|--|--|
|                                 |  | Threemonths ended March 31, 2006 |
| Net premiumsearned                   |  | $                                | 18   |    |
| Net realized gains on creditswaps    |  |                             | 129  |    |
| Net unrealized losses on creditswaps |  |                             | (379 | )  |
| Total netcredit swaprevenue          |  | $                                | (232 | )  |
|                                      |

NetPremiums Earned

Net premiums earned were $18  thousand forthe three months ended March  31,  2006. Net premiumsearned include premiums on credit swaps sold and purchased. The tablebelow shows the components of net premiums earned by PRS Trading forthe three months ended March  31,  2006 (inthousands):

|                                         |  |                                  |     |         |  |  |
|-----------------------------------------|--|----------------------------------|-----|---------|--|--|
|                                    |  | Threemonths ended March 31, 2006 |
| Premium income oncredit swaps sold      |  | $                                | 77  |    |
| Premium expense oncredit swapspurchased |  |                             | (59 | )  |
| Totalnet premiumsearned                 |  | $                                | 18  |    |
|                                         |

NetRealized Gains (Losses) on Credit Swaps

Our business strategy,for PRS Trading, is generally to hold swaps we buy and sell for alimited portion of the swap’s full tenor with the expectationthat we will be able to terminate the position at a net realized gain.We terminated $35  million notional amount of credit swaps soldduring the three 

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months ended March  31,  2006,resulting in net realized gains of $138  thousand. We terminated$30  million notional amount of credit swaps purchased during thethree months ended March  31,  2006, resulting in netrealized losses of $9  thousand.

Net realized gains(losses) for the three months ended March  31,  2006 aresummarized below (inthousands):

|                                                    |  |                                  |         |         |  |  |
|----------------------------------------------------|--|----------------------------------|---------|---------|--|--|
|                                               |  | Threemonths ended March 31, 2006 |
| Realized gains onterminated credit swaps sold      |  | $                                | 138     |    |
| Realizedlosses on terminated credit swapssold      |  |                             | — |    |
| Realized gains on terminatedcredit swaps purchased |  |                             | 17      |    |
| Realized losses onterminated credit swapspurchased |  |                             | (26     | )  |
| Totalnet realized gains on terminated creditswaps  |  | $                                | 129     |    |
|                                                    |

NetUnrealized Gains (Losses) on Credit Swaps

Net unrealized losseson PRS Trading credit swaps were $379 thousand for the threemonths ended March  31,  2006. The change in unrealizedlosses on credit swaps reflects the change in the fair value of ourcredit swap portfolio during the period. The fair value of theportfolio reflects the mid-market value with an adjustment for theestimated cost to close the position.

The unrealized gains andlosses on credit swaps sold and purchased for the three months endedMarch  31,  2006 are summarizedbelow:

|                                               |  |                                  |      |         |  |  |
|-----------------------------------------------|--|----------------------------------|------|---------|--|--|
|                                          |  | Threemonths ended March 31, 2006 |
| Net unrealizedlosses on credit swaps sold     |  | $                                | (82  | )  |
| Netunrealized losses on credit swapspurchased |  |                             | (297 | )  |
| Netunrealized losses on creditswaps           |  | $                                | (379 | )  |
|                                               |

AssetManagement Fees

Currently we manage two portfolios of creditswaps on behalf of third parties in exchange for management fees. Werecognized $49  thousand and $42  thousand of assetmanagement fees for the three months ended March  31,  2006and 2005, respectively. Our asset management contracts also provide forcontingent performance fees, none of which have been earned or accruedat March  31,  2006 or 2005, respectively.

InterestIncome

We earned interest income of $6.6  million and$3.7  million for the three months ended March  31,2006 and 2005, respectively. The increase in interest income isattributable to higher average invested balances resulting from theDecember  2005 issuance of $125  million of subordinateddebt by Primus Financial and retained cash earnings, and higher yieldson our investment portfolio. The increase in yields is attributable togenerally increasing market rates of interest during 2005, coupled withan extension in the duration of our investment portfolio.

Weighted average yields on the cash equivalents andavailable-for-sale investments were 4.20% in the three monthsended March  31,  2006 compared with 3.07% for thethree months ended March  31,  2005.

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The table below summarizes our interestincome for the three months ended March  31,  2006 and 2005and our total cash, cash equivalent and investments at March31,  2006 and 2005 (inthousands).

|                                             |  |                            |         |        |  |        |         |        |  |  |
|---------------------------------------------|--|----------------------------|---------|--------|--|--------|---------|--------|--|--|
|                                        |  | Threemonths ended March31, |
|                                        |  | 2006                       |         | 2005   |
| Interestincome                              |  | $                          | 6,601   |   |  | $      | 3,693   |   |
| Cashand cashequivalents                     |  |                       | 64,884  |   |  |   | 349,627 |   |
| Available-for-saleand short-terminvestments |  |                       | 569,981 |   |  |   | 133,606 |   |
| Totalcash, cash equivalents andinvestments  |  | $                          | 634,865 |   |  | $      | 483,233 |   |
|                                             |

Foreigncurrency revaluation

We buy and sell credit swaps denominated inU.S. dollars and euros. Euro-denominated credit swaps comprised28% of the notional amount of our Primus Financial credit swapssold portfolio at March  31,  2006. Until the fourthquarter of 2005, net premiums received from swaps denominated in euroswere retained in euros. During the three months ended March31,  2005, the euro lost value against the U.S. dollar resultingin currency revaluation losses of $564  thousand on our holdingsof euro compared to a revaluation loss of $6  thousand for thethree months ended March  31,  2006.

OperatingExpenses

Our operating expenses were $8.1 million and$7.7  million for the three months ending March  31,2006 and 2005, respectively, as summarized below (in thousands):

|                                          |  |                            |       |        |  |        |       |        |  |  |
|------------------------------------------|--|----------------------------|-------|--------|--|--------|-------|--------|--|--|
|                                     |  | Threemonths ended March31, |
|                                     |  | 2006                       |       | 2005   |
| Compensationand employeebenefits         |  | $                          | 4,891 |   |  | $      | 5,196 |   |
| Professionaland legalfees                |  |                       | 1,215 |   |  |   | 954   |   |
| Depreciation andamortization             |  |                       | 589   |   |  |   | 516   |   |
| Technology anddatafeeds                  |  |                       | 399   |   |  |   | 317   |   |
| Other                                    |  |                       | 1,039 |   |  |   | 765   |   |
| Totaloperatingexpenses                   |  | $                          | 8,133 |   |  | $      | 7,748 |   |
| Numberof full-time employees, at March31 |  |                       | 41    |   |  |   | 31    |   |
|                                          |

Compensation expense forthe three months ended March  31,  2005 includedapproximately $800  thousand related to the acceleratedcompensation expenses and accelerated vesting of stock related to thedeparture of former employees. Excluding this accelerated cost,compensation expense for the three months ended March  31,2006 increased by approximately $500  thousand over thecomparable prior period. This increase was primarily the result of anincrease in headcount as we expand our business operations. Stockcompensation expense was approximately $1.0  million in each ofthree month periods ended March  31,  2006 and 2005,respectively.

Professional and legal fees expense includes auditand tax advisor expenses, legal costs and director and officerinsurance expense. The increase in professional fees is primarilyrelated to audit fees and employee recruiting costs. Depreciation andamortization principally relate to the depreciation of our computerequipment and furniture and fixtures, and the amortization of ourinternally developed software. The increase in depreciation andamortization expense is due to the increase in purchases of fixedassets and capitalization of software costs. Technology and dataexpense relates to the maintenance of our technology platform and thecost of providing electronic data to our credit and investing teams,and remained fairly consistent with the prior period. Other operatingexpenses include rent, bank fees, rating agency fees, brokerageexpense, travel and entertainment, exchange fees and otheradministrative expenses. The increase in other expenses was primarilydue to rent expense associated with our additional office space and ournew London office lease.

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Interest Expense and PreferredDistributions

For the three months ended March  31,2006 and 2005, we incurred $2.4  million and $493  thousandof interest expense, respectively. The interest expense was primarilyincurred on the $75.0  million 30-year subordinated debt and the$125.0  million of 15.5 year subordinated deferrable interestnotes that were issued by Primus Financial in July  2004 andDecember, 2005, respectively. The interest rate for the 30-yearsubordinated debt averaged 4.48% and 2.57% for the threemonths ended March  31,  2006 and 2005, respectively.

On December  19,  2005, Primus Financial issued inaggregate $125.0  million of subordinated deferrable interestnotes, consisting of $75.0  million of Series A notes and$50.0  million of Series B notes, which mature in June2021. The interest rate on the Series A notes is set every 28 daysthrough a monthly auction process. The interest rate on the Series Bnotes was fixed on the issuance date at a rate of 5.60% for oneyear and then subsequently, the rate will be set every 28 days througha monthly auction process. The average rate on the $75  millionof Series A notes was 4.62% and the average rate on the Series Bnotes was 5.60% in the three months ended March31,  2006.

Primus Financial also made net distributions of$1.1  million and $649  thousand during the three monthsended March  31,  2006 and 2005, respectively, on thePrimus Financial Cumulative Preferred Stock issued in December2002. The average rate paid on these securities was 4.95% and2.96% during the three months ended March  31,  2006and 2005, respectively.

Income Taxes

Provision forincome taxes was $55  thousand and $36  thousand for thethree months ended March  31,  2006 and 2005, respectively.Primus Guaranty had a net deferred tax asset, fully offset by avaluation allowance, of $4.9  million and $4.8  million asof March  31,  2006 and December  31,  2005,respectively. The change in the deferred tax asset and valuationallowance resulted primarily from Primus Asset Management’sestimated net operating loss. It is expected that only the income ofPrimus Asset Management and its subsidiary, Primus Re, are likely to besubject to United States federal and local income taxes. However, werePrimus Bermuda to be subject to income tax, at a combined United Statesfederal, New York State and New York City income tax rate of46%, on its United States GAAP income, then its income taxexpense (excluding interest and penalties) would have beenapproximately $17.5  million and $5.8  million for thethree months ended March  31,  2006 and 2005, respectively.These figures assume that Primus Financial is not deemed to be makingdistributions to Primus Bermuda; such distributions would subjectPrimus Bermuda to an additional United States federal branch profitstax.

Contractual Obligations

The following tablesummarizes our contractual obligations at March  31,  2006and the effect that those obligations are expected to have on ourliquidity and cash flows in future periods (inthousands):

|                                      |  |                     |         |                 |  |           |                     |           |  |                  |                     |           |  |        |                     |           |  |        |         |        |  |  |
|--------------------------------------|--|---------------------|---------|-----------------|--|-----------|---------------------|-----------|--|------------------|---------------------|-----------|--|--------|---------------------|-----------|--|--------|---------|--------|--|--|
|                                 |  | Paymentdue byperiod |
|                                 |  | Total               |         | Lessthan 1 year |  | 1-3 years |                     | 3-5 years |  | Morethan 5 years |
| Propertylease                        |  | $                   | 9,068   |            |  | $         | 1,049               |      |  | $                | 2,648               |      |  | $      | 2,702               |      |  | $      | 2,669   |   |
| Subordinateddeferrable interestnotes |  |                | 200,000 |            |  |      | —   | (a)  |  |             | —   | (a)  |  |   | —   | (a)  |  |   | 200,000 |   |
| Total            |  | $                   | 209,068 |            |  | $         | 1,049               |      |  | $                | 2,648               |      |  | $      | 2,702               |      |  | $      | 202,669 |   |
|                                      |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                              |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------|
| (a) | Paymentson the subordinated deferrable interest notes for the next five yearscannot be determined, as the notes are auction rateobligations. |

Property lease:    Primus Financialhas leased its premises at 360 Madison Avenue, New York, New York fromMadison 45 LLC at a fixed yearly rental (subject to certain escalationsspecified in the lease) until August  1,  2012. We haveagreed to an amendment to the lease that extends its term to

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2016 and adds approximately 5,500 squarefeet of additional space. There are no material restrictions imposed bythe lease agreement and the lease is categorized as an operating lease.In addition, in 2006, we leased approximately 2,900 square feet ofoffice space in London under a lease that expires in 2012.

Wehave no other material long-term contractualobligations.

Liquidity and CapitalResources

Capital Strategy

Primus Financial, inorder to support its AAA/Aaa ratings, is required to maintain capitalin an amount determined by the capital models it has agreed upon withS&P and Moody’s. The capital required is primarily afunction of Primus Financial’s credit swap portfoliocharacteristics, operating expenses and tax position. Retained cashflow and proceeds from financings are utilized to increase our capitalresources to support our credit swap business.

We receive cashfrom the receipt of credit swap premiums, realized gains from the earlytermination of credit swaps, interest income earned on our investmentportfolio and capital raising activities. Cash is used to pay ouroperating expenses, administrative expenses, premiums on credit swapswe have purchased, realized losses from the early termination of creditswaps, interest on debt and preferred share distributions. Our cash,cash equivalents and available-for-sale investments were $634.9million and $629.5 million as of March  31,  2006and December  31,  2005, respectively.

Prior toMarch  23,  2006, Primus Financial maintained a$37.5  million liquidity facility with Harris Trust and SavingsBank, or Harris Trust. Effective on that date, with the consent ofS&P and Moody’s, the liquidity facility was terminated. Asof March  31,  2006 and December  31,  2005,there have been no credit events and there have been no borrowingsunder the facility.

Cash Flows

Cash flows fromoperating activities – Net cash provided by operatingactivities were $8.4  million and $4.4  million for thethree months ended March  31,  2006 and 2005, respectively.This increase is primarily attributable to higher premium income on alarger credit swap portfolio during 2006 compared with 2005, as aresult of the continued growth of our credit swap portfolio.

Cash flows from investing activities – Net cashprovided by (used in) investing activities was $(11.4) million and27.3  million for the three months ended March  31,2006 and 2005, respectively. This decrease was primarily due toincreased purchases of available-for-sale-investments in 2006 comparedwith net maturities and sales of available-for-sale-investments in2005.

Cash flows from financing activities – Netcash used in financing activities was $1.4  million and$3.1  million for the three months ended March  31,2006 and 2005, respectively. This decrease is primarily due to lowerrepurchase and retirement of our common stock as a result of less stockvesting activity in the period. During the first quarter of 2005, weissued stock to employees in connection with the vesting of stockcompensation plans, and concurrently repurchased and retiredapproximately $2.4  million of stock in order to pay the requiredwithholding taxes. The decrease was offset by an increase in preferreddistributions of our subsidiary.

With our current capitalresources and anticipated future credit swap premium receipts andinterest income, we believe we have sufficient liquidity to pay ouroperating expenses and preferred distributions over at least the nexttwelve months.

Recent Accounting Pronouncements

InDecember  2004, the Financial Accounting Standards Board(‘‘FASB’’) issued SFAS No. 123(R),Share-Based Payment. SFAS No. 123(R) is a revision of SFAS No.123 and supersedes Accounting Principles Board(‘‘APB’’) Opinion No. 25, Accounting forStock Issued to Employees, and 

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amends SFAS No. 95, Statement of CashFlows. SFAS No. 123 (R) eliminates the ability to account forshare-based compensation transactions using APB Opinion No. 25 andrequires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the financial statementsusing a fair value-based method. In April  2005, the Securitiesand Exchange Commission (‘‘SEC’’) amendedthe effective date of SFAS No. 123 (R) until the first fiscal yearbeginning after June  15,  2005 to provide additional timefor companies to comply with the reporting requirements. EffectiveJanuary  1,  2006, the Company adopted SFAS No. 123 (R).See note 6 of notes to condensed consolidated financial statements forfurther detail.

In March  2005, the SEC staff issued StaffAccounting Bulletin No. 107 (‘‘SAB No.107’’) to provide supplemental implementation guidance onSFAS No. 123 (R). The Company applied the relevant provisions of SABNo. 107 in its adoption of SFAS No. 123 (R).

In May  2005,the FASB issued SFAS 154, Accounting Changes and Error Corrections– a replacement of APB Opinion No. 20 and FASB Statement No.3. This statement requires retrospective application to priorperiods’ financial statements of changes in accountingprinciple. SFAS 154 is effective for accounting changes and correctionsof errors made in fiscal years beginning after December15,  2005. The Company will apply SFAS 154 in future periods, ifapplicable.

In November  2005, the FASB issued FASB StaffPosition FSP 115-1, The Meaning of Other-Than Temporary Impairmentand Its Application to Certain Investments (FSP 115-1), whichaddresses the determination as to when an investment is consideredimpaired, whether that impairment is other-than-temporary, and themeasurement of an impairment loss. FSP 115-1 also includes accountingconsiderations subsequent to the recognition of an other-than-temporaryimpairment and requires certain disclosures about unrealized lossesthat have not been recognized as other-than-temporary impairments. Theguidance in FSP 115-1 is required to be applied to reporting periodsbeginning after December 15, 2005. The adoption did not have anyeffect on the consolidated financial statements.

Cautionary NoteRegarding Forward-Looking Statements

This quarterly report ofPrimus Guaranty includes statements that are not historical or currentfacts and are ‘‘forward-lookingstatements’’ made pursuant to the safe harbor provisionsof the Private Securities Litigation Reform Act of 1995. The words‘‘believe,’’‘‘anticipate,’’‘‘project,’’‘‘plan,’’‘‘expect,’’‘‘intend,’’ ‘‘will likelyresult,’’ ‘‘looking forward’’or ‘‘will continue,’’ and similarexpressions identify forward-looking statements. These statements aresubject to certain risks and uncertainties that could cause actualresults to differ materially from historical earnings and thosepresently anticipated or projected. Primus Guaranty cautions readersnot to place undue reliance on any such forward-looking statements,which speak only to their respective dates. The following are some ofthe factors that could affect financial performance or could causeactual results to differ materially from estimates contained in orunderlying the Company’s forward-looking statements:

|              |                                                                                                                           |
|--------------|---------------------------------------------------------------------------------------------------------------------------|
| •  | fluctuations in the economic, credit,interest rate or foreign currency environment in the United States(U.S.) and abroad; |

|              |                                                                            |
|--------------|----------------------------------------------------------------------------|
| •  | the level ofactivity within the national and international credit markets; |

|              |                                           |
|--------------|-------------------------------------------|
| •  | competitive conditions and pricinglevels; |

|              |                                         |
|--------------|-----------------------------------------|
| •  | legislative and regulatorydevelopments; |

|              |                            |
|--------------|----------------------------|
| •  | technologicaldevelopments; |

|              |                      |
|--------------|----------------------|
| •  | changes in tax laws; |

|              |                                                                                                        |
|--------------|--------------------------------------------------------------------------------------------------------|
| •  | changes in international or nationalpolitical or economic conditions, including any terrorist attacks; |

|              |                                                          |
|--------------|----------------------------------------------------------|
| •  | uncertainties that have not beenidentified at this time. |

The Company undertakes no obligation topublicly correct or update any forward-looking statement if it laterbecomes aware that such results are not likely to beachieved.

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Item3.    Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the potential for losses that may result fromchanges in the value of a financial instrument as a consequence ofmarket conditions. Our primary market risk is increasing or decreasingmarket credit swap premium levels, which increase or decrease the fairvalue of our credit swap portfolio. Market credit swap premium levelschange as a result of specific events or news related to a ReferenceEntity, such as a change in a credit rating by any of the ratingagencies. Additionally, market credit swap premium levels can vary as aresult of changes in market sentiment. As a general matter, given ourstrategy of holding credit swaps sold until maturity, we do not seek tomanage our overall exposure to market credit swap premium levels, andwe expect fluctuations in the fair value of our credit swap portfolioas a result of these changes. As of March  31,  2006, eachone basis point increase or decrease in market credit swap premiumswould decrease or increase the fair value of our credit swap portfolioby approximately $5.0  million. We face other market risks, whichare likely to have a lesser impact upon our net income than thoseassociated with market credit swap premium level risk. These otherrisks include interest rate risk associated with market interest ratemovements. These movements may affect the value of our credit swapportfolio as our pricing model includes an interest rate component,which is used to discount future expected cash flows. Interest ratemovements may also affect the carrying value of and yield on ourinvestments. The Primus Financial Cumulative Preferred Stock paysdistributions that are based upon the auction rate preferred market. Adifference between the rates we pay in the auction rate preferredmarket and the interest rates we receive on our investments may resultin an additional cost to our company. Assuming that auction resultswith respect to the Primus Financial Cumulative Preferred Stock reflectprevailing short-term interest rates, each 25 basis point increase ordecrease in the level of those rates would increase or decrease PrimusFinancial’s annual distribution cost by approximately $125,000for each of the Series A and Series B MMP Receipts, but would notaffect distributions on the Series B MMP Receipts as the interest andauction rate for such MMP Receipts were set for a one year period onJanuary  20,  2006. In addition, interest rate movementsmay increase or decrease the interest expense we incur on our$200  million of subordinated deferrable interest notes. A 25basis point increase in the level of those rates would increase PrimusFinancial’s interest expense by $500,000 annually; however, atDecember  31,  2005, the interest rate on the $50million Series B subordinated deferrable interest notes was set for aone year period expiring in December of 2006.

Counterparty riskrepresents the potential for loss should one or more of ourcounterparties be unable to meet its obligations due to bankruptcy or asimilar event, which could adversely affect our results of operations.Our counterparties generally have investment grade credit ratings. AtMarch  31,  2006, the notional and fair value amount ofcredit swaps outstanding with respect to one non-rated counterpartywere $5.0  million and $35  thousand, respectively. Thepremiums on these transactions were fully prepaid by the counterparty,and as such, they have been categorized as triple A rating in ourcredit swap portfolio.

Item 4.    Controls and Procedures

The company has carried out an evaluation, under the supervision andwith the participation of the company’s management, includingthe Chief Executive Officer and Chief Financial Officer, of theeffectiveness of disclosure controls and procedures pursuant to rules13a-15 and 15-15d promulgated under the Securities and Exchange Act of1934 as of the end of the period covered by this report. Based on thatevaluation, the Chief Executive Officer and the Chief Financial Officerconcluded that the disclosure controls and procedures are effective toprovide reasonable assurance that all material information relating tothe company required to be filed in this report have been made known tothem in a timely fashion. There have been no changes in internalcontrol over financial reporting that occurred during the most recentfiscal quarter that have materially affected, or are reasonably likelyto affect, internal control over financial reporting.

Thecompany’s management, including the Chief Executive Officer andthe Chief Financial Officer, does not expect that the company’sdisclosure controls or its internal controls can prevent all errors andall fraud. Further, the design of a control system must reflect thefact that there are resource constraints, and the benefits of controlsmust be considered relative to their costs. As a result 

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of the inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, within the companyhave been detected. These inherent limitations include the realitiesthat judgments in decision-making are faulty, and that breakdowns canoccur because of simple error or mistake. As a result of the inherentlimitations in a cost-effective control system, misstatements due toerror or fraud may occur and not be detected. Accordingly, thecompany’s disclosure controls and procedures are designed toprovide reasonable, not absolute, assurance that the disclosurecontrols and procedures are met.

Part II.    OtherInformation

Item 1.    Legal Proceedings

In theordinary course of operating our business, we may encounter asignificant risk of litigation from time to time. However, we are notparty to or currently aware of any material pendinglitigation.

Item 1A.    Risk Factors

There have notbeen any material changes from the risk factors previously disclosed inour Annual Report on Form 10-K for the year ended December31,  2005.

Item 2.    Unregistered Sales of EquitySecurities and Use of Proceeds

None.

Item3.    Defaults upon Senior Securities

None.

Item4.    Submission of Matters to a Vote of Security Holders

Wedid not submit any matters to a vote of security holders during thefirst quarter of 2006.

Item 5.    OtherInformation

None.

Item 6.    Exhibits

|      |  |                                                                                                                                                                   |  |  |  |  |
|------|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| 31.1 |  | Certificationof Chief Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of2002                                                                   |
| 31.2 |  | Certification of Chief FinancialOfficer pursuant to Section 302 of the Sarbanes-Oxley Act of2002                                                                  |
| 32   |  | Certification of Chief ExecutiveOfficer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350,as adopted by Section 906 of the Sarbanes-Oxley Act of2002 |
|      |

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SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Report to be signed on its behalf by the undersigned,thereunto dulyauthorized.

|        |  |                                                                                                 |  |  |  |  |
|--------|--|-------------------------------------------------------------------------------------------------|--|--|--|--|
|   |  | PRIMUSGUARANTY, LTD.                                                                            |
|   |  | /s/ RichardClaiden                                                                              |
|   |  | RichardClaiden Chief Financial Officer (Duly Authorized Officer andPrincipal Financial Officer) |
|        |

Date: May 10,2006

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