Table of Contents

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UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.20549

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FORM 10-Q

(MarkOne)

    QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterlyperiod ended June  30,2006

or

    TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Forthe 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 ofprincipal executive offices, including zipcode)

441-296-0519

(Registrant’stelephone number, including area code)

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Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filingrequirements for the past 90 days.    Yes     No

Indicate by check mark whether the registrant isa large accelerated filer, an accelerated filer, or a non-acceleratedfiler. See definition of ‘‘accelerated filer and largeaccelerated filer’’ in Rule 12b-2 of the Exchange Act).(Check one):

Large accelerated filer                Accelerated filer                Non-accelerated filer

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

As of August 1,2006, the number of shares outstanding of the issuer's commonstock, $0.08 par value, was43,306,239.

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Primus Guaranty,Ltd.Form 10-QFor the three months ended June30,2006

INDEX

|            |  |  |                                                                                                                    |  |    |  |  |        |  |
|------------|--|--|--------------------------------------------------------------------------------------------------------------------|--|----|--|--|--------|--|
| PartI.     |  |  | FinancialInformation                                                                                               |  |    |  |  |   |  |
| Item1.     |  |  | FinancialStatements                                                                                                |  |    |  |  |   |  |
|       |  |  | CondensedConsolidated Statements of Financial Condition as of June30, 2006 (Unaudited) and December 31,2005        |  |    |  |  | 3      |  |
|       |  |  | Condensed ConsolidatedStatements of Operations (Unaudited) for the Three and six monthsended June 30, 2006 and2005 |  |    |  |  | 4      |  |
|       |  |  | Condensed ConsolidatedStatements of Cash Flows (Unaudited) for the Six months endedJune 30, 2006 and2005           |  |    |  |  | 5      |  |
|       |  |  | Notes to Condensed ConsolidatedFinancial Statements                                                                |  |    |  |  | 6      |  |
| Item2.     |  |  | Management’s Discussion and Analysis ofFinancial Condition and Results of Operations                         |  |    |  |  | 18     |  |
|       |  |  | Cautionary Statement Regarding ForwardLooking Information                                                          |  |    |  |  | 35     |  |
| Item3.     |  |  | Quantitative and Qualitative Disclosures about MarketRisk                                                          |  |    |  |  | 36     |  |
| Item 4.    |  |  | Controlsand Procedures                                                                                             |  |    |  |  | 36     |  |
| PartII.    |  |  | OtherInformation                                                                                                   |  |    |  |  |   |  |
| Item1.     |  |  | Legal Proceedings                                                                                                  |  |    |  |  | 37     |  |
| Item 1A.   |  |  | RiskFactors                                                                                                        |  |    |  |  | 37     |  |
| Item2.     |  |  | Unregistered Sales of Equity Securities and Use ofProceeds                                                         |  |    |  |  | 37     |  |
| Item3.     |  |  | Defaults upon Senior Securities                                                                                    |  |    |  |  | 37     |  |
| Item 4.    |  |  | Submission ofMatters to a Vote of Security Holders                                                                 |  |    |  |  | 37     |  |
| Item 5.    |  |  | OtherInformation                                                                                                   |  |    |  |  | 37     |  |
| Item6.     |  |  | Exhibits                                                                                                           |  |    |  |  | 38     |  |
| Signatures |  |  |                                                                                                                    |  | 39 |  |
|            |

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Table of Contents

PartI.    Financial Information

|              |                      |
|--------------|----------------------|
| Item1.  | Financial Statements |

PrimusGuaranty, Ltd.Condensed Consolidated Statements of FinancialCondition(in thousands except per shareamounts)

|                                                                                                                                                            |  |  |              |   |         |                  |  |  |  |   |         |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--------------|---|---------|------------------|--|--|--|---|---------|---|
|                                                                                                                                                       |  |  | June30, 2006 |   |         | December 31,2005 |
|                                                                                                                                                       |  |  | (unaudited)  |
| Assets                                                                                                                                                     |  |  |              |   |    |                  |  |  |  |   |    |   |
| Cashand cashequivalents                                                                                                                                    |  |  |              | $ | 96,648  |                  |  |  |  | $ | 69,355  |   |
| Available-for-saleinvestments                                                                                                                              |  |  |              |   | 550,160 |                  |  |  |  |   | 560,147 |   |
| Accruedinterestreceivable                                                                                                                                  |  |  |              |   | 5,340   |                  |  |  |  |   | 5,127   |   |
| Accruedpremiums and interest receivable on credit and otherswaps                                                                                           |  |  |              |   | 3,500   |                  |  |  |  |   | 3,461   |   |
| Premiumsreceivable on financialguarantees                                                                                                                  |  |  |              |   | 100     |                  |  |  |  |   | 300     |   |
| Unrealized gainon credit and other swaps, at fairvalue                                                                                                     |  |  |              |   | 50,440  |                  |  |  |  |   | 25,342  |   |
| Fixed assets andsoftware costs, net                                                                                                                        |  |  |              |   | 5,803   |                  |  |  |  |   | 4,993   |   |
| Debtissuance costs,net                                                                                                                                     |  |  |              |   | 3,074   |                  |  |  |  |   | 3,147   |   |
| Otherassets                                                                                                                                                |  |  |              |   | 1,665   |                  |  |  |  |   | 1,210   |   |
| Totalassets                                                                                                                                                |  |  |              | $ | 716,730 |                  |  |  |  | $ | 673,082 |   |
| Liabilitiesand stockholders’equity                                                                                                                   |  |  |              |   |    |                  |  |  |  |   |    |   |
| Accounts payable andaccruedexpenses                                                                                                                        |  |  |              | $ | 1,793   |                  |  |  |  | $ | 3,035   |   |
| Compensationpayable                                                                                                                                        |  |  |              |   | 3,875   |                  |  |  |  |   | 4,833   |   |
| Interestpayable                                                                                                                                            |  |  |              |   | 160     |                  |  |  |  |   | 404     |   |
| Accrued premiums oncredit swaps                                                                                                                            |  |  |              |   | 26      |                  |  |  |  |   | — |   |
| Taxespayable                                                                                                                                               |  |  |              |   | 46      |                  |  |  |  |   | 54      |   |
| Unrealized loss oncredit and other swaps, at fairvalue                                                                                                     |  |  |              |   | 4,350   |                  |  |  |  |   | 3,521   |   |
| Deferred creditswap premiums                                                                                                                               |  |  |              |   | 35      |                  |  |  |  |   | 46      |   |
| Deferredfinancial guaranteepremiums                                                                                                                        |  |  |              |   | 200     |                  |  |  |  |   | 401     |   |
| Deferred rentpayable                                                                                                                                       |  |  |              |   | 540     |                  |  |  |  |   | 416     |   |
| Long-termdebt                                                                                                                                              |  |  |              |   | 200,000 |                  |  |  |  |   | 200,000 |   |
| Totalliabilities                                                                                                                                           |  |  |              |   | 211,025 |                  |  |  |  |   | 212,710 |   |
| Preferredsecurities ofsubsidiary                                                                                                                           |  |  |              |   | 98,521  |                  |  |  |  |   | 98,521  |   |
| Stockholders’equity:                                                                                                                                 |  |  |              |   |    |                  |  |  |  |   |    |   |
| Common stock, $0.08par value, 62,500,000 shares authorized, 43,306,084 and 43,176,511shares issued and outstanding at June  30,  2006 andDecember  31,2005 |  |  |              |   | 3,572   |                  |  |  |  |   | 3,572   |   |
| Additionalpaid-in-capital                                                                                                                                  |  |  |              |   | 267,547 |                  |  |  |  |   | 265,848 |   |
| Warrants                                                                                                                                                   |  |  |              |   | 612     |                  |  |  |  |   | 612     |   |
| Accumulatedother comprehensiveloss                                                                                                                         |  |  |              |   | (6,383  | )                |  |  |  |   | (4,254  | ) |
| Retainedearnings                                                                                                                                           |  |  |              |   | 141,836 |                  |  |  |  |   | 96,073  |   |
| Totalstockholders’equity                                                                                                                             |  |  |              |   | 407,184 |                  |  |  |  |   | 361,851 |   |
| Totalliabilities, preferred securities of subsidiary andstockholders’equity                                                                          |  |  |              | $ | 716,730 |                  |  |  |  | $ | 673,082 |   |
|                                                                                                                                                            |

Seeaccompanying notes.

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Table of Contents

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

|                                                   |  |  |                            |   |         |                         |  |  |      |   |         |      |  |  |  |   |         |   |  |  |  |   |         |   |
|---------------------------------------------------|--|--|----------------------------|---|---------|-------------------------|--|--|------|---|---------|------|--|--|--|---|---------|---|--|--|--|---|---------|---|
|                                              |  |  | ThreeMonths Ended June 30, |   |         | Six Months EndedJune30, |
|                                              |  |  | 2006                       |   |         | 2005                    |  |  | 2006 |   |         | 2005 |
|                                              |  |  | (unaudited)                |   |         | (unaudited)             |
| Revenues                                          |  |  |                            |   |    |                         |  |  |      |   |    |      |  |  |  |   |    |   |  |  |  |   |    |   |
| Netcredit swap revenue(loss)                      |  |  |                            | $ | 16,831  |                         |  |  |      | $ | (3,579  | )    |  |  |  | $ | 56,960  |   |  |  |  | $ | (11,777 | ) |
| Nettotal return swaprevenue                       |  |  |                            |   | 124     |                         |  |  |      |   | — |      |  |  |  |   | 124     |   |  |  |  |   | — |   |
| Premiumsearned on financialguarantees             |  |  |                            |   | 100     |                         |  |  |      |   | 100     |      |  |  |  |   | 200     |   |  |  |  |   | 199     |   |
| Assetmanagementfees                               |  |  |                            |   | 118     |                         |  |  |      |   | 49      |      |  |  |  |   | 167     |   |  |  |  |   | 91      |   |
| Interestincome                                    |  |  |                            |   | 6,786   |                         |  |  |      |   | 2,793   |      |  |  |  |   | 13,387  |   |  |  |  |   | 6,486   |   |
| Investmentportfolio realizedgains                 |  |  |                            |   | — |                         |  |  |      |   | 23      |      |  |  |  |   | — |   |  |  |  |   | 23      |   |
| Foreigncurrency revaluationloss                   |  |  |                            |   | (18     | )                       |  |  |      |   | (955    | )    |  |  |  |   | (24     | ) |  |  |  |   | (1,519  | ) |
| Totalnetrevenues                                  |  |  |                            |   | 23,941  |                         |  |  |      |   | (1,569  | )    |  |  |  |   | 70,814  |   |  |  |  |   | (6,497  | ) |
|                                              |  |  |                            |   |    |                         |  |  |      |   |    |      |  |  |  |   |    |   |  |  |  |   |    |   |
| Expenses                                          |  |  |                            |   |    |                         |  |  |      |   |    |      |  |  |  |   |    |   |  |  |  |   |    |   |
| Compensationand employeebenefits                  |  |  |                            |   | 5,603   |                         |  |  |      |   | 3,406   |      |  |  |  |   | 10,494  |   |  |  |  |   | 8,602   |   |
| Professionaland legalfees                         |  |  |                            |   | 1,069   |                         |  |  |      |   | 796     |      |  |  |  |   | 2,284   |   |  |  |  |   | 1,750   |   |
| Depreciationandamortization                       |  |  |                            |   | 608     |                         |  |  |      |   | 525     |      |  |  |  |   | 1,197   |   |  |  |  |   | 1,041   |   |
| Technologyanddata                                 |  |  |                            |   | 421     |                         |  |  |      |   | 398     |      |  |  |  |   | 820     |   |  |  |  |   | 715     |   |
| Interestexpense                                   |  |  |                            |   | 2,653   |                         |  |  |      |   | 497     |      |  |  |  |   | 5,102   |   |  |  |  |   | 991     |   |
| Other                                             |  |  |                            |   | 1,291   |                         |  |  |      |   | 853     |      |  |  |  |   | 2,330   |   |  |  |  |   | 1,618   |   |
| Totalexpenses                                     |  |  |                            |   | 11,645  |                         |  |  |      |   | 6,475   |      |  |  |  |   | 22,227  |   |  |  |  |   | 14,717  |   |
| Distributionson preferred securities ofsubsidiary |  |  |                            |   | (1,638  | )                       |  |  |      |   | (1,127  | )    |  |  |  |   | (2,769  | ) |  |  |  |   | (1,775  | ) |
| Income(loss) before provision for incometaxes     |  |  |                            |   | 10,658  |                         |  |  |      |   | (9,171  | )    |  |  |  |   | 45,818  |   |  |  |  |   | (22,989 | ) |
| Provisionfor incometaxes                          |  |  |                            |   | — |                         |  |  |      |   | (9      | )    |  |  |  |   | (55     | ) |  |  |  |   | (45     | ) |
| Netincome (loss) available to commonshares        |  |  |                            | $ | 10,658  |                         |  |  |      | $ | (9,180  | )    |  |  |  | $ | 45,763  |   |  |  |  | $ | (23,034 | ) |
|                                              |  |  |                            |   |    |                         |  |  |      |   |    |      |  |  |  |   |    |   |  |  |  |   |    |   |
| Income(loss) per commonshare:                     |  |  |                            |   |    |                         |  |  |      |   |    |      |  |  |  |   |    |   |  |  |  |   |    |   |
| Basic                                             |  |  |                            | $ | 0.25    |                         |  |  |      | $ | (0.21   | )    |  |  |  | $ | 1.06    |   |  |  |  | $ | (0.53   | ) |
| Diluted                                           |  |  |                            | $ | 0.24    |                         |  |  |      | $ | (0.21   | )    |  |  |  | $ | 1.03    |   |  |  |  | $ | (0.53   | ) |
| Averagecommon sharesoutstanding:                  |  |  |                            |   |    |                         |  |  |      |   |    |      |  |  |  |   |    |   |  |  |  |   |    |   |
| Basic                                             |  |  |                            |   | 43,294  |                         |  |  |      |   | 43,108  |      |  |  |  |   | 43,270  |   |  |  |  |   | 43,160  |   |
| Diluted                                           |  |  |                            |   | 44,287  |                         |  |  |      |   | 43,108  |      |  |  |  |   | 44,316  |   |  |  |  |   | 43,160  |   |
|                                                   |

Seeaccompanying notes.

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

|                                                                                        |  |  |                         |   |         |      |  |  |  |   |          |   |
|----------------------------------------------------------------------------------------|--|--|-------------------------|---|---------|------|--|--|--|---|----------|---|
|                                                                                   |  |  | Sixmonths ended June30, |
|                                                                                   |  |  | 2006                    |   |         | 2005 |
|                                                                                   |  |  | (unaudited)             |
| Cashflows from operatingactivities                                                     |  |  |                         |   |    |      |  |  |  |   |     |   |
| Net income(loss)                                                                       |  |  |                         | $ | 45,763  |      |  |  |  | $ | (23,034  | ) |
| Adjustmentsto reconcile net income (loss) to net cash provided by operatingactivities: |  |  |                         |   |    |      |  |  |  |   |     |   |
| Non-cashitems included in net income(loss):                                            |  |  |                         |   |    |      |  |  |  |   |     |   |
| Depreciation andamortization                                                           |  |  |                         |   | 1,197   |      |  |  |  |   | 1,041    |   |
| Stockcompensation                                                                      |  |  |                         |   | 2,142   |      |  |  |  |   | 1,534    |   |
| Netunrealized (gain) loss on swapportfolio                                             |  |  |                         |   | (24,269 | )    |  |  |  |   | 33,571   |   |
| Netamortization of premium and discount onsecurities                                   |  |  |                         |   | (1,806  | )    |  |  |  |   | —  |   |
| Deferredrent                                                                           |  |  |                         |   | 124     |      |  |  |  |   | (9       | ) |
| Amortization ofdebt issuancecosts                                                      |  |  |                         |   | 86      |      |  |  |  |   | 22       |   |
| Distributions onpreferred securities ofsubsidiary                                      |  |  |                         |   | 2,769   |      |  |  |  |   | 1,775    |   |
| Increase(decrease) in cash resulting from changesin:                                   |  |  |                         |   |    |      |  |  |  |   |     |   |
| Accrued interestreceivable                                                             |  |  |                         |   | (213    | )    |  |  |  |   | (3,553   | ) |
| Accruedpremiums and interest receivable on credit and otherswaps                       |  |  |                         |   | (39     | )    |  |  |  |   | 90       |   |
| Premiumsreceivable on financialguarantees                                              |  |  |                         |   | 200     |      |  |  |  |   | 300      |   |
| Otherassets                                                                            |  |  |                         |   | (455    | )    |  |  |  |   | 263      |   |
| Accountspayable and accruedexpenses                                                    |  |  |                         |   | (1,242  | )    |  |  |  |   | 484      |   |
| Compensationpayable                                                                    |  |  |                         |   | (958    | )    |  |  |  |   | (2,700   | ) |
| Interestpayable                                                                        |  |  |                         |   | (244    | )    |  |  |  |   | (5       | ) |
| Accruedpremiums payable on creditswaps                                                 |  |  |                         |   | 26      |      |  |  |  |   | —  |   |
| Taxespayable.                                                                          |  |  |                         |   | (8      | )    |  |  |  |   | 172      |   |
| Deferredcredit swappremiums                                                            |  |  |                         |   | (11     | )    |  |  |  |   | (12      | ) |
| Deferredfinancial guaranteepremiums                                                    |  |  |                         |   | (201    | )    |  |  |  |   | (199     | ) |
| Netcash provided by operatingactivities                                                |  |  |                         |   | 22,861  |      |  |  |  |   | 9,740    |   |
| Cashflows from investingactivities                                                     |  |  |                         |   |    |      |  |  |  |   |     |   |
| Fixed assetpurchases and capitalized softwarecosts.                                    |  |  |                         |   | (2,007  | )    |  |  |  |   | (356     | ) |
| Purchases ofavailable-for-saleinvestments.                                             |  |  |                         |   | (10,375 | )    |  |  |  |   | (125,551 | ) |
| Maturitiesof available-for-saleinvestments.                                            |  |  |                         |   | 20,000  |      |  |  |  |   | —  |   |
| Netcash provided by (used in) investingactivities                                      |  |  |                         |   | 7,618   |      |  |  |  |   | (125,907 | ) |
| Cashflows from financingactivities                                                     |  |  |                         |   |    |      |  |  |  |   |     |   |
| Repurchase andretirement of commonstock                                                |  |  |                         |   | (649    | )    |  |  |  |   | (2,397   | ) |
| Proceeds fromexercise of stock options and issue ofstock                               |  |  |                         |   | 206     |      |  |  |  |   | 233      |   |
| Debt issuancecosts                                                                     |  |  |                         |   | (13     | )    |  |  |  |   | (31      | ) |
| Net preferreddistributions ofsubsidiary                                                |  |  |                         |   | (2,769  | )    |  |  |  |   | (1,775   | ) |
| Netcash used in financingactivities                                                    |  |  |                         |   | (3,225  | )    |  |  |  |   | (3,970   | ) |
| Neteffect of exchange rate changes oncash                                              |  |  |                         |   | 39      |      |  |  |  |   | —  |   |
| Net increase(decrease) incash                                                          |  |  |                         |   | 27,293  |      |  |  |  |   | (120,137 | ) |
| Cash and cashequivalents at beginning ofperiod                                         |  |  |                         |   | 69,355  |      |  |  |  |   | 320,989  |   |
| Cashand cash equivalents at end ofperiod                                               |  |  |                         | $ | 96,648  |      |  |  |  | $ | 200,852  |   |
| Supplementaldisclosures                                                                |  |  |                         |   |    |      |  |  |  |   |     |   |
| Cash paid forinterest                                                                  |  |  |                         | $ | 5,260   |      |  |  |  | $ | 482      |   |
| Cash paid fortaxes                                                                     |  |  |                         | $ | 62      |      |  |  |  | $ | 4        |   |
|                                                                                        |

Seeaccompanying notes.

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Table of Contents

|          |                                       |
|----------|---------------------------------------|
| 1.  | Organizationand Basis of Presentation |

Primus Guaranty, Ltd., together withits consolidated subsidiaries (‘‘PrimusGuaranty’’ or ‘‘theCompany’’), is a Bermuda holding company, and the100% owner of Primus Bermuda, Ltd. (‘‘PrimusBermuda’’), a Bermuda holding company and PRS TradingStrategies, LLC. 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.. PRSTrading engages in relative value trading and other strategiesinvolving buying and selling of credit swaps and other financialinstruments. PRS Trading has no rating from the rating agencies and,accordingly generally provides its swap counterparties with collateralto support its contractual obligations. PRS Trading engages primarilyin relative value investing across credits and financial instruments.These investments generally have a short-term investment horizon andare subject to tight risk controls and liquidity management. PRSTrading commenced operations in January  2006.

InNovember  2005, Primus Guaranty (UK), Ltd (PGUK) was incorporatedin England to expand the Company’s presence and further developits business and relationships across Europe. Primus Bermuda is the100% owner of PGUK.

The accompanying unaudited condensedconsolidated financial statements of Primus Guaranty, Ltd. have beenprepared in accordance with U.S. generally accepted accountingprinciples for interim financial information and with the instructionsto Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do notinclude all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements. Inthe opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for a fair presentation havebeen included. 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 condensed consolidated financial statements include theaccounts of the Company and its wholly owned subsidiaries. Allsignificant intercompany balances have been eliminated.

Thecondensed consolidated financial statements represent a singlereportable segment, as defined in Statement of Financial AccountingStandards (‘‘SFAS’’) No. 131,Disclosures about Segments of an Enterprise and RelatedInformation.

The condensed consolidated financial statementsare presented in U.S. dollar equivalents. At June  30,2006 and December  31,  2005, the Company’s creditswap activities were conducted in U.S. dollars andeuros.

Certain prior year amounts have been reclassifiedto conform to current year presentation.

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|          |                                 |
|----------|---------------------------------|
| 2.  | Recent AccountingPronouncements |

In December  2004, the Financial AccountingStandards 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 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 7 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 condensed consolidated financial statements.

InJune  2006, the FASB issued Interpretation No. 48, Accountingfor Uncertainty in Income Taxes-an interpretation of FASB Statement No.109 (FIN 48). FIN 48 prescribes a recognition threshold andmeasurement attributes for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a taxreturn. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition. FIN 48 is effective for fiscal years beginning afterDecember  15,  2006. The Company is currently evaluatingthe impact that adoption of FIN 48 will have on its consolidatedfinancial statements.

|          |                               |
|----------|-------------------------------|
| 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 rated A-1 and P-1 by the respective rating agencies.Available-for-sale investments have original maturities or maturitiesat time of purchase greater than 90 days.

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The following table summarizes thecomposition of the Company’s available-for-sale investments atJune  30,  2006 and December  31,  2005 (inthousands):

|                                  |  |  |               |   |         |                 |  |  |                  |   |         |                    |  |  |  |   |         |   |  |  |  |   |         |  |
|----------------------------------|--|--|---------------|---|---------|-----------------|--|--|------------------|---|---------|--------------------|--|--|--|---|---------|---|--|--|--|---|---------|--|
|                             |  |  | June  30,2006 |
|                             |  |  | AmortizedCost |   |         | UnrealizedGains |  |  | UnrealizedLosses |   |         | EstimatedFairValue |
| U.S government agencyobligations |  |  |               | $ | 556,592 |                 |  |  |                  | $ | — |                    |  |  |  | $ | (6,432  | ) |  |  |  | $ | 550,160 |  |
| Commercialpaper                  |  |  |               |   | — |                 |  |  |                  |   | — |                    |  |  |  |   | — |   |  |  |  |   | — |  |
| Total                            |  |  |               | $ | 556,592 |                 |  |  |                  | $ | — |                    |  |  |  | $ | (6,432  | ) |  |  |  | $ | 550,160 |  |
|                                  |

|                                  |  |  |                   |   |         |                 |  |  |                  |   |         |                    |  |  |  |   |         |   |  |  |  |   |         |  |
|----------------------------------|--|--|-------------------|---|---------|-----------------|--|--|------------------|---|---------|--------------------|--|--|--|---|---------|---|--|--|--|---|---------|--|
|                             |  |  | 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 six months of 2006 and during theyear of 2005. These securities have primarily been in a loss positionfor less than 12 months. Because the decline in market value isattributable to changes in interest rates and not credit quality, andthe Company has the ability and intent to hold these investments untilmaturity, the Company does not consider these investments to beother-than-temporarily impaired at June  30,  2006 andDecember  31,  2005. These securities have maturities ofless than 3 years.

4.    Net Credit Swap Revenue and CreditSwap Portfolio

Overview

Net credit swap revenueas presented in the condensed consolidated statements of operationscomprises changes in the fair value of credit swaps, realized gains orlosses on the termination of credit swaps and premium income orexpense. The realized gains and losses on credit swaps representrealized gains and losses on unwound or assigned credit swaps. Therealization of gains or losses on credit swaps will generally result ina reduction in unrealized gains or losses and accrued premium at thepoint in time realization occurs.

Credit swaps are derivativetransactions that obligate one party to the transaction (the‘‘Seller’’) to pay an amount to the otherparty to the transaction (the ‘‘Buyer’’)should one of a specified group of events (‘‘CreditEvents’’) be incurred by an unrelated third party orportfolio of third parties (the ‘‘ReferenceEntity’’) specified in the contract. The amount to bepaid by the Seller will either be (a) the notional amount ofthe transaction, in exchange for which the Sel ler must be delivered adefined obligation of the Reference Entity (called physicalsettlement), or (b) the difference between the current market value ofa defined obligation of the Reference Entity and the notional amount ofthe transaction (called cash settlement). In exchange for incurring thepotential of a Credit Event-generated loss, the Seller will receive afixed premium for the term of the contract (or until the occurrence ofa Credit Event). The fixed premium is generally paid quarterly inarrears over the term of the transaction. Premiums are taken intoincome as they are earned over the life of the transaction. Accruedpremiums on credit swaps represent premiums earned but not yet payable.Premiums receivable on credit swaps represents premiums that are bothearned and payable. When the Company purchases credit protection fromits counterparties, the Company 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.

All creditswap transactions entered into between the Buyer and the Seller aresubject to an ISDA Master Agreement executed by both parties. TheMaster Agreement allows for the consolidation of the market exposuresand termination of all transactions between the Buyer and Seller in theevent a Default (as defined by the Master Agreement) is incurred byeither party.

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The primary risks inherent in theCompany’s activities are (a) where the Company is a Seller thatReference Entities specified in its credit swap transactions willexperience Credit Events that will require the Company to make paymentsto the Buyers of the transactions. Credit Events may include any or allof the following: bankruptcy, failure to pay, repudiation ormoratorium, and modified or original restructuring, (b) where theCompany is a Buyer of a credit swap and a Credit Event occurs, theSeller fails to make payment to the Company, and (c) that Buyers of thetransactions from the Company will default on their required premiumpayments. During the three and six months ended June  30,2006 and 2005, none of these events have occurred.

The Companyterminates a credit swap in one of two ways. The Company may negotiatean agreed termination through the original counterparty (an unwind).The Company may negotiate an assignment and novation of its rights andobligations under the credit swap to a third party (an assignment). Asan alternative to terminating a transaction, in order to reduce itsexposure, the Company may enter into an equal and opposite transactionwith a third party under which the Company purchases credit defaultprotection on terms that match the terms of the original transaction(an offset). In this last case, both sides of the position maysubsequently be unwound or assigned.

In the event of an unwind orassignment, the Company pays or receives a cash settlement negotiatedwith the counterparty or assignee, based on the fair value of thecredit swap contract and the accrued premium on the swap contract atthe time of negotiation. The amounts the Company pays or receives arerecorded as a realization of fair value and as a realization of accruedpremiums in the period in which the termination occurs.

Inaccordance with accounting principles generally accepted in the UnitedStates, the Company carries its credit swaps on its condensedconsolidated statements of financial condition at their fair value.Changes in the fair value of the Company’s credit swap portfolioare recorded as unrealized gains or losses as a component of net creditswap revenue in the Company’s consolidated statements ofoperations. If a credit swap has an increase in fair value during aperiod, the increase will add to the Company’s net credit swaprevenue for that period. Conversely, if a credit swap has a decline infair value during the period, the decline will subtract from theCompany’s net credit swap revenue for that period. Changes inthe fair value of the Company’s credit swap portfolio are afunction of the notional amount and composition of the portfolio andprevailing market credit swap premiums for comparable credit swaps. TheCompany generally holds the credit swaps it sells to maturity, at whichpoint, assuming no credit event has occurred, the cumulative unrealizedgains and losses on each credit swap would equal zero.

Ingeneral, the Company aggregates fair values of individual credit swapsby counterparty for presentation on the Company’s condensedconsolidated statements of financial condition. If the aggregate totalof fair values with a counterparty is a net gain, the total is recordedas a component of unrealized gains on credit swaps, at fair value inthe condensed consolidated statements of financial condition. If theaggregate total of fair values with a counterparty is a net loss, thetotal is recorded as a component of unrealized losses on credit swaps,at fair value in the condensed consolidated statements of financialcondition. Aggregation by counterparty is applied where a valid ISDAmaster agreement is in place with the counterparty. In instances wherethe Company 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 

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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.

PRSTrading

PRS Trading sells and buys protection through creditdefault swaps in pursuit of investment returns. Credit swaps purchasedto off-set risks do not qualify as hedges in accordance with SFAS No.133. The Company’s board limits the amount of credit swaps soldand purchased in accordance with a set of pre-established risklimits.

Consolidated Net Credit Swap Revenue and Credit SwapPortfolio Information

The tables below present the components ofconsolidated net credit swap revenue for the three and six months endedJune  30,  2006 and 2005 (in thousands):

|                                    |  |  |                           |   |        |                          |  |  |      |   |         |      |  |  |  |   |        |   |  |  |  |   |         |   |
|------------------------------------|--|--|---------------------------|---|--------|--------------------------|--|--|------|---|---------|------|--|--|--|---|--------|---|--|--|--|---|---------|---|
|                               |  |  | ThreeMonths EndedJune 30, |   |        | Six Months Ended June30, |
|                               |  |  | 2006                      |   |        | 2005                     |  |  | 2006 |   |         | 2005 |
| Netpremiumincome                   |  |  |                           | $ | 17,104 |                          |  |  |      | $ | 12,396  |      |  |  |  | $ | 33,047 |   |  |  |  | $ | 23,599  |   |
| Realizedgains                      |  |  |                           |   | 284    |                          |  |  |      |   | 1,105   |      |  |  |  |   | 942    |   |  |  |  |   | 1,245   |   |
| Realizedlosses                     |  |  |                           |   | (410   | )                        |  |  |      |   | (3,042  | )    |  |  |  |   | (1,214 | ) |  |  |  |   | (3,049  | ) |
| Changein unrealized gains(losses)  |  |  |                           |   | (147   | )                        |  |  |      |   | (14,038 | )    |  |  |  |   | 24,185 |   |  |  |  |   | (33,572 | ) |
| Totalnet credit swap revenue(loss) |  |  |                           | $ | 16,831 |                          |  |  |      | $ | (3,579  | )    |  |  |  | $ | 56,960 |   |  |  |  | $ | (11,777 | ) |
|                                    |

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The Company’s consolidated notionalamount, fair value and average fair value of open credit swaptransactions (excluding the CDS index) entered into with third partiesat June  30,  2006 and December  31,  2005 areas follows (in thousands):

|                                  |  |  |              |   |            |                  |  |  |  |   |            |  |
|----------------------------------|--|--|--------------|---|------------|------------------|--|--|--|---|------------|--|
|                             |  |  | June30, 2006 |   |            | December 31,2005 |
| Gross NotionalAmounts:           |  |  |              |   |       |                  |  |  |  |   |       |  |
| Credit swapssold-singlename      |  |  |              | $ | 15,147,074 |                  |  |  |  | $ | 13,374,031 |  |
| Creditswapssold-tranche          |  |  |              |   | 350,000    |                  |  |  |  |   | 50,000     |  |
| Creditswaps purchased-singlename |  |  |              |   | (142,500   | )                |  |  |  |   | —    |  |
| Fairvalue:                       |  |  |              |   |       |                  |  |  |  |   |       |  |
| Asset                            |  |  |              |   | 50,440     |                  |  |  |  |   | 25,342     |  |
| Liability                        |  |  |              |   | 4,335      |                  |  |  |  |   | 3,521      |  |
| Averagefairvalue:                |  |  |              |   |       |                  |  |  |  |   |       |  |
| Asset                            |  |  |              |   | 48,121     |                  |  |  |  |   | 28,140     |  |
| Liability                        |  |  |              |   | 2,144      |                  |  |  |  |   | 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 June30,  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.

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The tables that follow summarize, bycredit rating of Reference Entities and of Counterparties, the notionalamounts and fair values of credit swap transactions outstanding(excluding transactions with affiliates and $15  thousand netfair value associated with total return swap and CDS index) for theCompany as of June  30,  2006 and December31,  2005 (in thousands):

(in thousands)

|                                      |  |  |                |   |            |                   |  |  |                |   |        |           |  |  |  |   |            |  |  |  |  |   |         |   |
|--------------------------------------|--|--|----------------|---|------------|-------------------|--|--|----------------|---|--------|-----------|--|--|--|---|------------|--|--|--|--|---|---------|---|
|                                 |  |  | June30,  2006  |   |            | December  31,2005 |
| Moody’sRatingCategory          |  |  | NotionalAmount |   |            | FairValue         |  |  | NotionalAmount |   |        | FairValue |
| ReferenceEntity/Tranche              |  |  |                |   |       |                   |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| CreditSwaps Sold – SingleName: |  |  |                |   |       |                   |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| Aaa                                  |  |  |                | $ | 734,772    |                   |  |  |                | $ | 1,181  |           |  |  |  | $ | 561,472    |  |  |  |  | $ | 1,118   |   |
| Aa                                   |  |  |                |   | 2,534,432  |                   |  |  |                |   | 8,525  |           |  |  |  |   | 2,268,090  |  |  |  |  |   | 8,006   |   |
| A                                    |  |  |                |   | 6,075,773  |                   |  |  |                |   | 23,096 |           |  |  |  |   | 5,270,706  |  |  |  |  |   | 15,008  |   |
| Baa                                  |  |  |                |   | 5,333,690  |                   |  |  |                |   | 23,362 |           |  |  |  |   | 5,041,442  |  |  |  |  |   | 4,328   |   |
| Ba                                   |  |  |                |   | 402,615    |                   |  |  |                |   | (3,436 | )         |  |  |  |   | 199,321    |  |  |  |  |   | (5,785  | ) |
| B                                    |  |  |                |   | 65,792     |                   |  |  |                |   | (2,611 | )         |  |  |  |   | 33,000     |  |  |  |  |   | (1,539  | ) |
| Total                                |  |  |                | $ | 15,147,074 |                   |  |  |                | $ | 50,117 |           |  |  |  | $ | 13,374,031 |  |  |  |  | $ | 21,136  |   |
| CreditSwaps Sold –Tranche:     |  |  |                |   |       |                   |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| Aa                                   |  |  |                | $ | 150,000    |                   |  |  |                | $ | 950    |           |  |  |  | $ | 50,000     |  |  |  |  | $ | 685     |   |
| A                                    |  |  |                |   | 200,000    |                   |  |  |                |   | (4,890 | )         |  |  |  |   | —    |  |  |  |  |   | — |   |
| Total                                |  |  |                | $ | 350,000    |                   |  |  |                | $ | (3,940 | )         |  |  |  | $ | 50,000     |  |  |  |  | $ | 685     |   |
| CreditSwapsPurchased                 |  |  |                |   |       |                   |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| A                                    |  |  |                | $ | (50,000    | )                 |  |  |                | $ | (16    | )         |  |  |  | $ | —    |  |  |  |  | $ | — |   |
| Baa                                  |  |  |                |   | (89,000    | )                 |  |  |                |   | (50    | )         |  |  |  |   | —    |  |  |  |  |   | — |   |
| Ba                                   |  |  |                |   | (3,500     | )                 |  |  |                |   | (6     | )         |  |  |  |   | —    |  |  |  |  |   | — |   |
| Total                                |  |  |                | $ | (142,500   | )                 |  |  |                | $ | (72    | )         |  |  |  | $ | —    |  |  |  |  | $ | — |   |
| CounterpartyBuyer                    |  |  |                |   |       |                   |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| CreditSwaps Sold – SingleName: |  |  |                |   |       |                   |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| Aaa                                  |  |  |                | $ | 5,000      |                   |  |  |                | $ | 32     |           |  |  |  | $ | 5,000      |  |  |  |  | $ | 37      |   |
| Aa                                   |  |  |                |   | 12,744,948 |                   |  |  |                |   | 40,344 |           |  |  |  |   | 11,228,563 |  |  |  |  |   | 13,341  |   |
| A                                    |  |  |                |   | 2,397,126  |                   |  |  |                |   | 9,741  |           |  |  |  |   | 2,140,468  |  |  |  |  |   | 7,758   |   |
| Total                                |  |  |                | $ | 15,147,074 |                   |  |  |                | $ | 50,117 |           |  |  |  | $ | 13,374,031 |  |  |  |  | $ | 21,136  |   |
| CreditSwaps Sold –Tranche:     |  |  |                |   |       |                   |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| Aa                                   |  |  |                | $ | 350,000    |                   |  |  |                | $ | (3,940 | )         |  |  |  | $ | 50,000     |  |  |  |  | $ | 685     |   |
| Total                                |  |  |                | $ | 350,000    |                   |  |  |                | $ | (3,940 | )         |  |  |  | $ | 50,000     |  |  |  |  | $ | 685     |   |
| CounterpartySeller                   |  |  |                |   |       |                   |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| CreditSwapsPurchased:                |  |  |                |   |       |                   |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| Aa                                   |  |  |                | $ | (142,500   | )                 |  |  |                | $ | (72    | )         |  |  |  | $ | —    |  |  |  |  | $ | — |   |
| Total                                |  |  |                | $ | (142,500   | )                 |  |  |                | $ | (72    | )         |  |  |  | $ | —    |  |  |  |  | $ | — |   |
|                                      |

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(inthousands)

|                                      |  |  |                |   |            |                   |  |  |                |   |        |           |  |  |  |   |            |  |  |  |  |   |         |   |
|--------------------------------------|--|--|----------------|---|------------|-------------------|--|--|----------------|---|--------|-----------|--|--|--|---|------------|--|--|--|--|---|---------|---|
|                                 |  |  | June30,  2006  |   |            | December  31,2005 |
| S&PRating Category               |  |  | NotionalAmount |   |            | FairValue         |  |  | NotionalAmount |   |        | FairValue |
| ReferenceEntity/Tranche              |  |  |                |   |       |                   |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| CreditSwaps Sold – SingleName: |  |  |                |   |       |                   |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| AAA                                  |  |  |                | $ | 797,772    |                   |  |  |                | $ | 1,718  |           |  |  |  | $ | 636,472    |  |  |  |  | $ | 1,222   |   |
| AA                                   |  |  |                |   | 2,191,204  |                   |  |  |                |   | 6,819  |           |  |  |  |   | 1,862,713  |  |  |  |  |   | 6,026   |   |
| A                                    |  |  |                |   | 6,806,357  |                   |  |  |                |   | 27,029 |           |  |  |  |   | 6,143,717  |  |  |  |  |   | 17,753  |   |
| BBB                                  |  |  |                |   | 5,020,456  |                   |  |  |                |   | 20,202 |           |  |  |  |   | 4,513,356  |  |  |  |  |   | 4,803   |   |
| BB                                   |  |  |                |   | 254,493    |                   |  |  |                |   | (1,905 | )         |  |  |  |   | 197,773    |  |  |  |  |   | (7,062  | ) |
| B                                    |  |  |                |   | 76,792     |                   |  |  |                |   | (3,746 | )         |  |  |  |   | 20,000     |  |  |  |  |   | (1,606  | ) |
| Total                                |  |  |                | $ | 15,147,074 |                   |  |  |                | $ | 50,117 |           |  |  |  | $ | 13,374,031 |  |  |  |  | $ | 21,136  |   |
| CreditSwaps Sold –Tranche:     |  |  |                |   |       |                   |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| AAA                                  |  |  |                | $ | 150,000    |                   |  |  |                | $ | (2,538 | )         |  |  |  | $ | —    |  |  |  |  | $ | — |   |
| AA                                   |  |  |                |   | 200,000    |                   |  |  |                |   | (1,402 | )         |  |  |  |   | 50,000     |  |  |  |  |   | 685     |   |
| Total                                |  |  |                | $ | 350,000    |                   |  |  |                | $ | (3,940 | )         |  |  |  | $ | 50,000     |  |  |  |  | $ | 685     |   |
| CreditSwapsPurchased:                |  |  |                |   |       |                   |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| A                                    |  |  |                | $ | (50,000    | )                 |  |  |                | $ | (73    | )         |  |  |  | $ | —    |  |  |  |  | $ | — |   |
| BBB                                  |  |  |                |   | (89,000    | )                 |  |  |                |   | 7      |           |  |  |  |   | —    |  |  |  |  |   | — |   |
| BB                                   |  |  |                |   | (3,500     | )                 |  |  |                |   | (6     | )         |  |  |  |   | —    |  |  |  |  |   | — |   |
| Total                                |  |  |                | $ | (142,500   | )                 |  |  |                | $ | (72    | )         |  |  |  | $ | —    |  |  |  |  | $ | — |   |
| CounterpartyBuyer                    |  |  |                |   |       |                   |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| CreditSwaps Sold – SingleName: |  |  |                |   |       |                   |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| AAA                                  |  |  |                | $ | 41,980     |                   |  |  |                | $ | 11     |           |  |  |  | $ | 34,623     |  |  |  |  | $ | (57     | ) |
| AA                                   |  |  |                |   | 11,567,342 |                   |  |  |                |   | 37,860 |           |  |  |  |   | 9,262,316  |  |  |  |  |   | 10,525  |   |
| A                                    |  |  |                |   | 3,537,752  |                   |  |  |                |   | 12,246 |           |  |  |  |   | 4,077,092  |  |  |  |  |   | 10,668  |   |
| Total                                |  |  |                | $ | 15,147,074 |                   |  |  |                | $ | 50,117 |           |  |  |  | $ | 13,374,031 |  |  |  |  | $ | 21,136  |   |
| CreditSwaps Sold –Tranche:     |  |  |                |   |       |                   |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| AA                                   |  |  |                | $ | 350,000    |                   |  |  |                | $ | (3,940 | )         |  |  |  | $ | 50,000     |  |  |  |  | $ | 685     |   |
| Total                                |  |  |                | $ | 350,000    |                   |  |  |                | $ | (3,940 | )         |  |  |  | $ | 50,000     |  |  |  |  | $ | 685     |   |
| CounterpartySeller                   |  |  |                |   |       |                   |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| CreditSwapsPurchased:                |  |  |                |   |       |                   |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| AA                                   |  |  |                | $ | (97,500    | )                 |  |  |                | $ | (105   | )         |  |  |  | $ | —    |  |  |  |  | $ | — |   |
| A                                    |  |  |                |   | (45,000    | )                 |  |  |                |   | 33     |           |  |  |  |   | —    |  |  |  |  |   | — |   |
| Total                                |  |  |                | $ | (142,500   | )                 |  |  |                | $ | (72    | )         |  |  |  | $ | —    |  |  |  |  | $ | — |   |
|                                      |

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 six months ended June  30,  2006 and2005, respectively, two counterparties each generated greater than tenpercent of the Company’s total premium revenue. At June30,  2006, the notional and fair value amount of credit swapsoutstanding with respect to one non-rated counterparty was $5.0million and $32  thousand, respectively. The premiums on thesetransactions were fully prepaid by the counterparty, and as such, theyhave 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):

|                                     |  |  |                |   |            |                  |  |  |                |   |        |           |  |  |  |   |            |  |  |  |  |   |         |   |
|-------------------------------------|--|--|----------------|---|------------|------------------|--|--|----------------|---|--------|-----------|--|--|--|---|------------|--|--|--|--|---|---------|---|
|                                |  |  | June30, 2006   |   |            | December 31,2005 |
| Countryof Domicile                  |  |  | NotionalAmount |   |            | Fair Value       |  |  | NotionalAmount |   |        | FairValue |
| CreditSwaps Sold – SingleName |  |  |                |   |       |                  |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| ByReferenceEntity:                  |  |  |                |   |       |                  |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| NorthAmerica                        |  |  |                | $ | 9,024,480  |                  |  |  |                | $ | 32,003 |           |  |  |  | $ | 8,243,123  |  |  |  |  | $ | 12,268  |   |
| Europe                              |  |  |                |   | 5,403,594  |                  |  |  |                |   | 17,201 |           |  |  |  |   | 4,561,908  |  |  |  |  |   | 7,412   |   |
| Pacific                             |  |  |                |   | 560,000    |                  |  |  |                |   | 883    |           |  |  |  |   | 445,000    |  |  |  |  |   | 992     |   |
| Others                              |  |  |                |   | 159,000    |                  |  |  |                |   | 30     |           |  |  |  |   | 124,000    |  |  |  |  |   | 464     |   |
| Total                               |  |  |                | $ | 15,147,074 |                  |  |  |                | $ | 50,117 |           |  |  |  | $ | 13,374,031 |  |  |  |  | $ | 21,136  |   |
| ByCounterparty:                     |  |  |                |   |       |                  |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| NorthAmerica                        |  |  |                | $ | 7,848,747  |                  |  |  |                | $ | 23,994 |           |  |  |  | $ | 6,878,892  |  |  |  |  | $ | 8,754   |   |
| Europe                              |  |  |                |   | 7,193,327  |                  |  |  |                |   | 25,997 |           |  |  |  |   | 6,388,139  |  |  |  |  |   | 12,359  |   |
| Pacific                             |  |  |                |   | 75,000     |                  |  |  |                |   | 40     |           |  |  |  |   | 65,000     |  |  |  |  |   | (37     | ) |
| Others                              |  |  |                |   | 30,000     |                  |  |  |                |   | 86     |           |  |  |  |   | 42,000     |  |  |  |  |   | 60      |   |
| Total                               |  |  |                | $ | 15,147,074 |                  |  |  |                | $ | 50,117 |           |  |  |  | $ | 13,374,031 |  |  |  |  | $ | 21,136  |   |
| CreditSwaps Sold –Tranche     |  |  |                |   |       |                  |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| ByCounterparty:                     |  |  |                |   |       |                  |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| NorthAmerica                        |  |  |                | $ | 50,000     |                  |  |  |                | $ | 899    |           |  |  |  | $ | 50,000     |  |  |  |  | $ | 685     |   |
| Europe                              |  |  |                |   | 300,000    |                  |  |  |                |   | (4,839 | )         |  |  |  |   | —    |  |  |  |  |   | — |   |
| Total                               |  |  |                | $ | 350,000    |                  |  |  |                | $ | (3,940 | )         |  |  |  | $ | 50,000     |  |  |  |  | $ | 685     |   |
| CreditSwapsPurchased                |  |  |                |   |       |                  |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| ByReferenceEntity:                  |  |  |                |   |       |                  |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| NorthAmerica                        |  |  |                | $ | (127,500   | )                |  |  |                | $ | (127   | )         |  |  |  | $ | —    |  |  |  |  | $ | — |   |
| Others                              |  |  |                |   | (15,000    | )                |  |  |                |   | 55     |           |  |  |  |   | —    |  |  |  |  |   | — |   |
| Total                               |  |  |                | $ | (142,500   | )                |  |  |                | $ | (72    | )         |  |  |  | $ | —    |  |  |  |  | $ | — |   |
| ByCounterparty:                     |  |  |                |   |       |                  |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| NorthAmerica                        |  |  |                | $ | (112,000   | )                |  |  |                | $ | (47    | )         |  |  |  | $ | —    |  |  |  |  | $ | — |   |
| Europe                              |  |  |                |   | (30,500    | )                |  |  |                |   | (25    | )         |  |  |  |   | —    |  |  |  |  |   | — |   |
| Total                               |  |  |                | $ | (142,500   | )                |  |  |                | $ | (72    | )         |  |  |  | $ | —    |  |  |  |  | $ | — |   |
|                                     |

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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 June  30,  2006 andDecember  31,  2005 (in thousands):

|                                     |  |  |                |   |            |                  |  |  |                |   |        |           |  |  |  |   |            |  |  |  |  |   |         |   |
|-------------------------------------|--|--|----------------|---|------------|------------------|--|--|----------------|---|--------|-----------|--|--|--|---|------------|--|--|--|--|---|---------|---|
|                                |  |  | June30, 2006   |   |            | December 31,2005 |
|                                |  |  | NotionalAmount |   |            | Fair Value       |  |  | NotionalAmount |   |        | FairValue |
| CreditSwaps Sold – SingleName |  |  |                |   |       |                  |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| YearofMaturity                      |  |  |                |   |       |                  |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| 2006                                |  |  |                | $ | 448,336    |                  |  |  |                | $ | 189    |           |  |  |  | $ | 939,657    |  |  |  |  | $ | 588     |   |
| 2007                                |  |  |                |   | 2,494,504  |                  |  |  |                |   | 10,586 |           |  |  |  |   | 2,469,188  |  |  |  |  |   | 12,637  |   |
| 2008                                |  |  |                |   | 1,124,494  |                  |  |  |                |   | 7,724  |           |  |  |  |   | 1,129,811  |  |  |  |  |   | 7,948   |   |
| 2009                                |  |  |                |   | 2,740,128  |                  |  |  |                |   | 13,107 |           |  |  |  |   | 2,684,704  |  |  |  |  |   | 5,980   |   |
| 2010                                |  |  |                |   | 6,216,592  |                  |  |  |                |   | 16,358 |           |  |  |  |   | 6,122,897  |  |  |  |  |   | (5,963  | ) |
| 2011                                |  |  |                |   | 1,994,520  |                  |  |  |                |   | 2,387  |           |  |  |  |   | 27,774     |  |  |  |  |   | (54     | ) |
| 2012                                |  |  |                |   | 20,000     |                  |  |  |                |   | 2      |           |  |  |  |   | —    |  |  |  |  |   | — |   |
| 2015                                |  |  |                |   | 108,500    |                  |  |  |                |   | (236   | )         |  |  |  |   | —    |  |  |  |  |   | — |   |
| Total                               |  |  |                | $ | 15,147,074 |                  |  |  |                | $ | 50,117 |           |  |  |  | $ | 13,374,031 |  |  |  |  | $ | 21,136  |   |
| CreditSwaps Sold –Tranche     |  |  |                |   |       |                  |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| YearofMaturity                      |  |  |                |   |       |                  |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| 2010                                |  |  |                | $ | 50,000     |                  |  |  |                | $ | 899    |           |  |  |  | $ | 50,000     |  |  |  |  | $ | 685     |   |
| 2011                                |  |  |                |   | 50,000     |                  |  |  |                |   | 166    |           |  |  |  |   | —    |  |  |  |  |   | — |   |
| 2013                                |  |  |                |   | 250,000    |                  |  |  |                |   | (5,005 | )         |  |  |  |   | —    |  |  |  |  |   | — |   |
| Total                               |  |  |                | $ | 350,000    |                  |  |  |                | $ | (3,940 | )         |  |  |  | $ | 50,000     |  |  |  |  | $ | 685     |   |
| CreditSwapsPurchased                |  |  |                |   |       |                  |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| YearofMaturity                      |  |  |                |   |       |                  |  |  |                |   |   |           |  |  |  |   |       |  |  |  |  |   |    |   |
| 2011                                |  |  |                | $ | (137,500   | )                |  |  |                | $ | 1      |           |  |  |  | $ | —    |  |  |  |  | $ | — |   |
| 2016                                |  |  |                |   | (5,000     | )                |  |  |                |   | (73    | )         |  |  |  |   | —    |  |  |  |  |   | — |   |
| Total                               |  |  |                | $ | (142,500   | )                |  |  |                | $ | (72    | )         |  |  |  | $ | —    |  |  |  |  | $ | — |   |
|                                     |

5.    NetTotal Return Swap Revenue

During the second quarter of 2006, theCompany’s subsidiary, PRS Trading entered into a total returnswap agreement with a counterparty, which expires in May  2008.Under the terms of the agreement, PRS Trading receives interest andother payments based on certain mutually agreed reference loans, andpays a financing interest expense based on the principal amount of suchloans. PRS Trading takes the risk that the referenced loans deterioratein value and conversely receives the benefit from any appreciation inthe value of loans referenced in the total return swap. The fair valueof each swap is determined by the net fair values on the outstandingloans. PRS Trading determines the fair value of the loans based on theestimated cost to close-out the loan position. PRS Trading placesinitial margin cash collateral and ongoing mark-to-market cashcollateral with the counterparty, which is determined by the amount ofloans outstanding under the total return swap. The total return swapwith the counterparty is documented under an ISDA master agreementbetween PRS Trading and the counterparty. The net fair value of thetotal return swap is netted with the fair values of any outstandingcredit default swaps outstanding between PRS Trading and thecounterparty for presentation in the condensed consolidated statementsof financial condition.

The total notional amount of funded andunfunded loans outstanding under the total return swap was $74million at June  30,  2006. The net fair value of the loansoutstanding under the total return swap was $84  thousand atJune  30,  2006.

Net total return swap revenue aspresented in the condensed consolidated statements of operationscomprises changes in the fair value of the total return swap, realizedgains or losses on the termination of individual loan positionsunderlying the total return swap, and the net interest earned on thetotal return swap.

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6.    Earnings (Loss) perShare

Basic earnings per share(‘‘EPS’’) is calculated by dividingearnings available to common stockholders by the weighted averagenumber of common shares outstanding. Diluted EPS is similar to basicEPS, but adjusts for the effect of the potential issuance of commonshares. The following table presents the computations of basic anddiluted EPS (in thousands, except per share data):

|                                                    |  |  |                           |   |        |                         |  |  |      |   |         |      |  |  |  |   |        |     |  |  |  |   |         |     |
|----------------------------------------------------|--|--|---------------------------|---|--------|-------------------------|--|--|------|---|---------|------|--|--|--|---|--------|-----|--|--|--|---|---------|-----|
|                                               |  |  | Threemonths endedJune 30, |   |        | Six months endedJune30, |
|                                               |  |  | 2006                      |   |        | 2005                    |  |  | 2006 |   |         | 2005 |
| Netearnings (loss) available to commonstockholders |  |  |                           | $ | 10,658 |                         |  |  |      | $ | (9,180  | )    |  |  |  | $ | 45,763 |     |  |  |  | $ | (23,034 | )   |
| Weighted-averagebasic sharesoutstanding            |  |  |                           |   | 43,294 |                         |  |  |      |   | 43,108  |      |  |  |  |   | 43,270 |     |  |  |  |   | 43,160  |     |
| Effectof dilutiveinstruments                       |  |  |                           |   |   |                         |  |  |      |   |    |      |  |  |  |   |   |     |  |  |  |   |    |     |
| Employeestockoptions                               |  |  |                           |   | 38     |                         |  |  |      |   | — |      |  |  |  |   | 45     |     |  |  |  |   | — |     |
| Restrictedshareunits                               |  |  |                           |   | 190    |                         |  |  |      |   | — |      |  |  |  |   | 199    |     |  |  |  |   | — |     |
| Warrants                                           |  |  |                           |   | 765    |                         |  |  |      |   | — |      |  |  |  |   | 802    |     |  |  |  |   | — |     |
| Dilutivepotentialshares                            |  |  |                           |   | 993    |                         |  |  |      |   | — |      |  |  |  |   | 1,046  |     |  |  |  |   | — |     |
| Weighted-averagedilutedshares                      |  |  |                           |   | 44,287 | (a)                     |  |  |      |   | 43,108  | (a)  |  |  |  |   | 44,316 | (a) |  |  |  |   | 43,160  | (a) |
| BasicEPS                                           |  |  |                           | $ | 0.25   |                         |  |  |      | $ | (0.21   | )    |  |  |  | $ | 1.06   |     |  |  |  | $ | (0.53   | )   |
| DilutedEPS                                         |  |  |                           | $ | 0.24   |                         |  |  |      | $ | (0.21   | )    |  |  |  | $ | 1.03   |     |  |  |  | $ | (0.53   | )   |
|                                                    |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (a) | Forthe three months ended June  30,  2006 and 2005, securitiesof approximately 644  thousand shares and 1.4  millionshares, respectively, were excluded from the computation of diluted EPSbecause the effect was anti-dilutive for the periods presented. For thesix months ended June  30,  2006 and 2005, securities ofapproximately 835  thousand shares and 1.5  million shares,respectively, were excluded from the computation of diluted EPS becausethe effect was anti-dilutive for the periods presented. |

7.    Stock Based Compensation

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.

Prior to the adoption of SFASNo. 123(R), the Company used the fair value approach for recordingstock-based employee compensation in accordance with the fair valuemethod prescribed 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 as noted in the table thatfollows.

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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 six months ended June  30,  2006were:

|                                       |  |  |                              |
|---------------------------------------|--|--|------------------------------|
|                                  |  |  | Six months endedJune 30,2006 |
| Risk free interestrate                |  |  | 5.16%                        |
| Volatility                            |  |  | 33.80%                       |
| Expecteddividend yield                |  |  | 0.00%                        |
| Expected optionlife                   |  |  | 7 years                      |
| Weighted average fair value ofoptions |  |  | $4.02                        |
|                                       |

The following tableis a summary of stock option activity as of and for the six monthsended June  30,  2006: 

|                                 |  |  |                |  |           |                              |  |  |  |   |       |  |
|---------------------------------|--|--|----------------|--|-----------|------------------------------|--|--|--|---|-------|--|
|                            |  |  | June30,2006    |
|                            |  |  | Numberofshares |  |           | Weightedaverageexerciseprice |
| Outstandingat December  31,2005 |  |  |                |  | 710,860   |                              |  |  |  | $ | 10.43 |  |
| Granted                         |  |  |                |  | 422,122   |                              |  |  |  | $ | 12.46 |  |
| Exercised                       |  |  |                |  | (1,953    | )                            |  |  |  | $ | 6.94  |  |
| Forfeited                       |  |  |                |  | (113,202  | )                            |  |  |  | $ | 11.66 |  |
| Outstandingat June  30,2006     |  |  |                |  | 1,017,827 |                              |  |  |  | $ | 11.14 |  |
| Exercisable atJune  30,2006     |  |  |                |  | 294,373   |                              |  |  |  | $ | 9.35  |  |
|                                 |

Thefollowing table summarizes the status of the Company’s stockoptions as of June  30,  2006:

|                         |                |  |                          |                                        |           |                         |                              |  |  |                |        |  |                              |  |  |   |       |  |  |  |  |  |         |  |  |  |  |   |       |  |
|-------------------------|----------------|--|--------------------------|----------------------------------------|-----------|-------------------------|------------------------------|--|--|----------------|--------|--|------------------------------|--|--|---|-------|--|--|--|--|--|---------|--|--|--|--|---|-------|--|
| Rangeof Exercise Prices |                |  | Stock OptionsOutstanding |                                        |           | StockOptionsExercisable |
|                         | NumberofShares |  |                          | AverageRemainingContractualLife(Years) |           |                         | WeightedAverageExercisePrice |  |  | NumberofShares |        |  | WeightedAverageExercisePrice |
| $0.00–$6.94       |                |  |                          |                                        | 153,125   |                         |                              |  |  |                | 6.5    |  |                              |  |  | $ | 6.94  |  |  |  |  |  | 114,843 |  |  |  |  | $ | 6.94  |  |
| $6.95–$9.76       |                |  |                          |                                        | 236,562   |                         |                              |  |  |                | 7.5    |  |                              |  |  | $ | 9.76  |  |  |  |  |  | 125,312 |  |  |  |  | $ | 9.76  |  |
| $9.77–$13.50      |                |  |                          |                                        | 628,140   |                         |                              |  |  |                | 6.2    |  |                              |  |  | $ | 12.70 |  |  |  |  |  | 54,218  |  |  |  |  | $ | 13.50 |  |
| Total                   |                |  |                          |                                        | 1,017,827 |                         |                              |  |  |                |   |  |                              |  |  | $ | 11.14 |  |  |  |  |  | 294,373 |  |  |  |  | $ | 9.35  |  |
|                         |

TheCompany recorded stock compensation expense of approximately$2.1  million and $1.5  million during the six months endedJune  30,  2006 and 2005, respectively. Stock compensationexpense is included in compensation and employee benefits in theconsolidated statements of operations.

As of June30,  2006, total unrecognized stock-based compensation expenserelated to nonvested stock awards was $8.9  million. This expenseis expected to be recognized over a weighted average period of 2.8years.

|          |                            |
|----------|----------------------------|
| 8.  | Comprehensive Income(Loss) |

Comprehensive income (loss) for thethree and six months ended June  30,  2006 and 2005 is asfollows (inthousands):

|                                                                         |  |  |                            |   |        |                         |  |  |      |   |        |      |  |  |  |   |        |   |  |  |  |   |         |   |
|-------------------------------------------------------------------------|--|--|----------------------------|---|--------|-------------------------|--|--|------|---|--------|------|--|--|--|---|--------|---|--|--|--|---|---------|---|
|                                                                    |  |  | ThreeMonths Ended June 30, |   |        | Six Months EndedJune30, |
|                                                                    |  |  | 2006                       |   |        | 2005                    |  |  | 2006 |   |        | 2005 |
| Netincome(loss)                                                         |  |  |                            | $ | 10,658 |                         |  |  |      | $ | (9,180 | )    |  |  |  | $ | 45,763 |   |  |  |  | $ | (23,034 | ) |
| Foreigncurrency translationadjustments                                  |  |  |                            |   | 39     |                         |  |  |      |   |   |      |  |  |  |   | 39     |   |  |  |  |   |    |   |
| Changein net unrealized gains (losses) on available-for-saleinvestments |  |  |                            |   | (723   | )                       |  |  |      |   | 5      |      |  |  |  |   | (2,168 | ) |  |  |  |   | 5       |   |
| Totalcomprehensive income(loss)                                         |  |  |                            | $ | 9,974  |                         |  |  |      | $ | (9,175 | )    |  |  |  | $ | 43,634 |   |  |  |  | $ | (23,029 | ) |
|                                                                         |

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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 primarily investment grade credit obligations of corporate andsovereign entities. In exchange for a fixed quarterly premium, if acredit event occurs (e.g., bankruptcy, failure to pay or restructuring)with respect to a Reference Entity upon which Primus Financial has soldcredit protection, Primus Financial agrees to pay the notional amountof the credit swap contract to its counterparty in exchange fordelivery of an unsecured credit obligation of that Reference Entity. Weseek to minimize the risk inherent in our credit swap portfolio bymaintaining a high quality, highly diversified credit swap portfolioacross Reference Entities, industries and countries. Primus Financialalso sells credit swaps referencing portfolios containing obligationsof multiple reference entities, which we call‘‘tranches’’. Primus Financial has thehighest counterparty credit ratings offered by S&P (AAA) andMoody’s (Aaa).

Primus Asset Management, Inc., or PrimusAsset Management, our other principal operating subsidiary, includes anexperienced team of professionals who have expertise in creditanalysis, investing, risk management and market analysis. Primus AssetManagement provides credit risk investment advisory and assetmanagement services to Primus Financial and unrelated third parties.For such services, Primus Asset Management receives managementfees.

Primus Re operates as a financial guaranty insurancecompany, and generates revenue by charging a higher insurance premiumfor protection sold than the premium it pays for the offsettingprotection it purchases.

PRS Trading Strategies, LLC, or PRSTrading, engages in the active buying and selling of credit swaps andother financial instruments. PRS Trading has no rating from the ratingagencies and, accordingly generally supplies its counterparties withcollateral to support its contractual obligations. PRS Trading engagesprimarily in relative value investing across credits and financialinstruments. These investments generally have a short-term investmenthorizon and are subject to tight risk controls and liquiditymanagement.

Net Credit Swap Revenue 

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 and PRS Trading. Althoughboth companies earn net credit swap revenue, the strategies of the twocompanies are different. Primus Financial generally writes credit swapprotection in order to earn premium income over the term of thecontract, whereas PRS Trading engages in the active buying and sellingof protection and generally will only hold swap contracts for a limitedportion of the swap’s full tenor.

We receive premiumincome from the credit swaps we sell. In general, premiums are receivedquarterly in arrears and are accrued daily into income. In accordancewith U.S. GAAP, we carry our credit swaps on our condensed consolidatedstatements of financial condition at their fair value. Changes in thefair value of our credit swap portfolio are included as a component ofnet credit swap revenue in our condensed consolidated statements ofoperations. If a credit swap has an increase in fair value during aperiod, the increase will add to our net credit swap revenue for thatperiod. 

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Conversely, if a credit swap has a decline infair value during the period, the decline will subtract from our netcredit swap revenue for that period. Changes in the fair value of ourcredit swap portfolio are a function of the notional amount andcomposition of the portfolio and prevailing market credit swap premiumsfor comparable credit swaps. In our experience, considerablefluctuations may occur in the fair values of credit swaps from periodto period and, as a result, the reader of our financial statementsshould not infer future results from historical net credit swaprevenues or losses.

In general, the fair values of individualcredit swaps are aggregated by counterparty for presentation in ourcondensed consolidated statements of financial condition. If theaggregate total of fair values for a counterparty is a net gain, thetotal is recorded as a component of unrealized gains on credit swaps,at fair value in our condensed consolidated statements of financialcondition. If the aggregate total of fair values for a counterparty isa net loss, the total is recorded as a component of unrealized losseson credit swaps, at fair value in our condensed consolidated statementsof financial condition. Aggregation by counterparty is applied where anexecuted ISDA master agreement is in place with the counterparty. Ininstances where we do not yet have an executed ISDA master agreementwith the counterparty, the fair values of individual swap transactionsare recorded as components of unrealized gains or losses on creditswaps, at fair value, dependent upon whether the individual contractwas at a gain or a loss. As of June  30,  2006, we had nooutstanding credit swaps with any counterparties with whom we had notyet executed ISDA master agreements.

As a general rule, whenPrimus Financial sells credit default protection, it is our intentionto maintain the transaction until maturity. However, there are two setsof circumstances in which we could elect to terminate transactionsprior to maturity, and we monitor our portfolio on a continuing basisto assess whether those circumstances are present.

First,whenever we receive new information suggesting that the credit qualityof the underlying risk has deteriorated to a material degree, weconsider the possibility of terminating the transaction, usually at aloss, to avoid a larger loss that could result if the credit swap wereto remain in place until a credit event occurs. The principal factorthat governs our decision regarding termination in these circumstancesis whether we believe that the underlying risk has become substantiallygreater than the level of risk we would choose to assume in enteringinto a new sale of credit default protection. Since inception, we haveterminated due to credit considerations less than 1% of thenotional amount of credit swaps under which we sold credit defaultprotection.

Second, we may elect to terminate a transaction forreasons other than credit considerations. Terminations of this type maygenerate gains or losses. In making a decision to terminate atransaction for reasons other than credit considerations, we consider anumber of different factors, including the absolute amount of theunrealized gain or loss we could realize, the likelihood of additionalgains or losses arising from the position, our view as to whether thecapital dedicated to the position could be profitably reallocated toother opportunities over a foreseeable horizon, the total size of ourportfolio in relation to our capital and the total size of our swappositions and exposures with a particular counterparty. We refer toterminations effected under these circumstances 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 six months ended June  30,  2006pursuant to its predominantly relative value investment strategy.

Net Total Return Swap Revenue 

During the secondquarter of 2006, the Company’s subsidiary, PRS Trading enteredinto a total return swap agreement with a counterparty, which expiresin May  2008. Under the terms of the agreement, PRS Tradingreceives interest and other payments based on certain mutually agreedreference loans, and pays a financing interest expense based on theprincipal amount of such loans. PRS Trading takes the risk that thereferenced loans deteriorate in value and conversely receives thebenefit from any appreciation in the value of loans referenced in thetotal return swap. The fair value of each swap is determined by the netfair values on the outstanding loans. PRS Trading determines the fairvalue of the loans based on the estimated cost to close-out the loanposition. PRS Trading places initial margin cash collateral and ongoingmark-to-market cash collateral with the counterparty, which isdetermined by the amount of loans outstanding under the total returnswap. The total return swap with the counterparty is documented underan ISDA master agreement between PRS Trading and the counterparty. Thenet fair value of the total return swap is netted with the fair valuesof any outstanding credit default swaps outstanding between PRS Tradingand the counterparty for presentation in the condensed consolidatedstatements of financial condition.

Critical AccountingPolicies

Valuation of Credit Swaps 

From theinception of our business, we have applied Statement of FinancialAccounting Standards, or SFAS, 133, Accounting for DerivativeInstruments and Hedging Activities, which established accountingand reporting standards for derivative instruments. SFAS 133 requiresrecognition of all credit swaps on the condensed consolidatedstatements of financial condition at fair value.

The fair valueof the credit swaps depends on a number of factors, primarily themarket level of credit swap premiums associated with individualReference Entities. Credit swaps are valued using market-standardpricing models which calculate the net present value of differencesbetween future premiums on currently quoted market credit swaps and thecontractual future credit swap premiums on contracts we haveundertaken. 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 

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particular industries and companies.Additional factors include the magnitude of debt outstanding and debtpaying capacity 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.

Prior to the adoption of SFASNo. 123(R), the Company used the fair value approach for recordingstock-based employee compensation in accordance with the fair valuemethod prescribed 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

    Three months ended June  30,2006 compared with three months ended June  30,2005

    Overview 

Our net income forthe three months ended June  30,  2006 was $10.7million compared with a net loss of $9.2  million for the threemonths ended June  30,  2005. The change in net income isprincipally due to increased net credit swap revenues, which were$16.8  million in the second quarter of 2006, compared with netcredit swap loss of $3.6  million in the second quarter of 2005.The improvement in net credit swap revenues were primarily as a resultof a decline in unrealized losses on our portfolio of credit swaps soldand an increase in net credit swap premiums in the second quarter of2006, compared with the second quarter of 2005. Net credit swaprevenues are discussed separately below for Primus Financial and PRSTrading.

Interest income on our portfolio of investments was$6.8  million in the second quarter of 2006, compared with$2.8  million, as adjusted in the second quarter of 2005. Theincrease is due to higher market interest rates, together withincreased invested balances, mainly arising from the investment of theproceeds of the $125  million debt issuance by Primus Financialin December  2005.

Interest expense and distributions onpreferred stock issued by Primus Financial were $4.3  million inthe second quarter of 2006, compared with $1.6  million in thesecond quarter of 2005. The increase is due to higher market interestrates in 2006, together with the interest expense associated with the$125  million debt issuance in December2005.

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Our operating expenses were $9.0million in the second quarter of 2006, compared with $6.0million in the second quarter of 2005, primarily due to highercompensation and employee benefits as a result of increased headcountand higher professional fees.

    Net Credit Swap Revenue– Primus Financial

Net credit swap revenue (loss) was$16.9  million and $(3.6) million for the three months endedJune  30,  2006 and 2005, respectively. Net credit swaprevenue for Primus Financial excludes $84  thousand of netrevenue earned on three credit swap transactions with its affiliate,Primus Re, as this amount is eliminated in consolidation.

Netcredit swap revenue (loss) 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 (loss) for the three monthsended June  30,  2006 and 2005 (inthousands):

|                                     |  |  |                          |   |        |      |  |  |  |   |         |   |
|-------------------------------------|--|--|--------------------------|---|--------|------|--|--|--|---|---------|---|
|                                |  |  | Threemonths endedJune30, |
|                                |  |  | 2006                     |   |        | 2005 |
| Netpremiums earned                  |  |  |                          | $ | 17,089 |      |  |  |  | $ | 12,396  |   |
| Netrealized losses on creditswaps   |  |  |                          |   | (108   | )    |  |  |  |   | (1,937  | ) |
| Net unrealizedlosses on creditswaps |  |  |                          |   | (121   | )    |  |  |  |   | (14,038 | ) |
| Totalnet credit swap revenue(loss)  |  |  |                          | $ | 16,860 |      |  |  |  | $ | (3,579  | ) |
|                                     |

    NetPremiums Earned – Primus Financial

Net premiums earnedwere $17.1  million and $12.4  million for the three monthsended June  30,  2006 and 2005, respectively. Net premiumsearned include:

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

|  |              |                                 |
|--|--------------|---------------------------------|
|  | •  | Premium income on tranchessold; |

|  |              |                                                                        |
|--|--------------|------------------------------------------------------------------------|
|  | •  | Premium expense on credit swapspurchased as short-term investments;and |

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

Thetable below shows the components of net premiums earned for the threemonths ended June  30,  2006 and 2005 (inthousands):

|                                                                                    |  |  |                           |   |         |      |  |  |  |   |        |   |
|------------------------------------------------------------------------------------|--|--|---------------------------|---|---------|------|--|--|--|---|--------|---|
|                                                                               |  |  | Threemonths ended June30, |
|                                                                               |  |  | 2006                      |   |         | 2005 |
| Premiumincome on credit swapssold                                                  |  |  |                           | $ | 16,637  |      |  |  |  | $ | 12,652 |   |
| Premium incomeon tranches sold                                                     |  |  |                           |   | 452     |      |  |  |  |   | 96     |   |
| Premiumexpense on credit swaps purchased as short-terminvestments                  |  |  |                           |   | — |      |  |  |  |   | (329   | ) |
| Premiumexpense on credit swaps purchased to offset credit risk on certainswapssold |  |  |                           |   | — |      |  |  |  |   | (23    | ) |
| Totalnet premiumsearned                                                            |  |  |                           | $ | 17,089  |      |  |  |  | $ | 12,396 |   |
|                                                                                    |

Premiumincome on credit swaps sold was $16.6  million and $12.7million during the three months ended June  30,  2006 and2005, respectively. The increase was primarily as a result of theexpansion in our credit swap portfolio. The average notional amountsoutstanding of credit swaps sold were $14.9  billion and$11.7  billion for the three months ended June  30,2006 and 2005, respectively.

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We began to sell protection in trancheformat during the second quarter of 2005, whereby we sell credit swapsreferencing portfolios containing obligations of multiple referenceentities. Premium income from the tranches sold was $452thousand and $96  thousand for the three months ended June30,  2006 and 2005, respectively. The average notional amountoutstanding was $233.3  million and $50.0  million for thethree months ended June  30,  2006 and 2005,respectively.

The portfolio of credit swaps purchased forshort-term investment purposes had been wound down to zero during 2005and there was no premium expense for swaps of this type in2006.

    Net Realized Gains (Losses) on Credit Swaps– Primus Financial

Net realized gains (losses) for thethree months ended June  30,  2006 and 2005 are summarizedbelow (inthousands):

|                                                                              |  |  |                          |   |         |      |  |  |  |   |        |   |
|------------------------------------------------------------------------------|--|--|--------------------------|---|---------|------|--|--|--|---|--------|---|
|                                                                         |  |  | Threemonths endedJune30, |
|                                                                         |  |  | 2006                     |   |         | 2005 |
| Realizedgains on terminated credit swapssold                                 |  |  |                          | $ | 111     |      |  |  |  | $ | 470    |   |
| Realized losses onterminated credit swapssold                                |  |  |                          |   | (219    | )    |  |  |  |   | (3,019 | ) |
| Realized gains onterminated credit swaps purchased as short-terminvestments  |  |  |                          |   | — |      |  |  |  |   | 635    |   |
| Realizedlosses on terminated credit swaps purchased as short-terminvestments |  |  |                          |   | — |      |  |  |  |   | (23    | ) |
| Totalnet realized losses on creditswaps                                      |  |  |                          | $ | (108    | )    |  |  |  | $ | (1,937 | ) |
|                                                                              |

Weterminated $22.8  million and $245.1  million notionalamount of credit swaps sold during the three months ended June30,  2006 and 2005, respectively. We received $111thousand and $470  thousand from the early termination of swapsat a realized gain during the three months ended June  30,2006 and 2005, respectively, due to portfolio rebalancing. We incurredrealized losses of $219  thousand during the three months endedJune  30,  2006 from the early termination of swaps inorder to mitigate credit risk. We incurred $3.0  million ofrealized losses, of which $2.9  million was due to the mitigationof our credit risk during the three months ended June  30,2005.

    Net Unrealized Gains (Losses) on Credit Swaps– Primus Financial

The unrealized gains (losses) oncredit swaps sold and credit swaps purchased as short-term investmentsand for credit risk offset purposes for the three months endedJune  30,  2006 and 2005 are summarized below (inthousands):

|                                                                                                |  |  |                          |   |         |      |  |  |  |   |         |   |
|------------------------------------------------------------------------------------------------|--|--|--------------------------|---|---------|------|--|--|--|---|---------|---|
|                                                                                           |  |  | Threemonths endedJune30, |
|                                                                                           |  |  | 2006                     |   |         | 2005 |
| Netunrealized losses on credit swapssold                                                       |  |  |                          | $ | (121    | )    |  |  |  | $ | (14,297 | ) |
| Net unrealizedgains on credit swaps purchased as short-terminvestments                         |  |  |                          |   | — |      |  |  |  |   | 219     |   |
| Netunrealized gains on credit swaps purchased to offset credit riskon certain credit swapssold |  |  |                          |   | — |      |  |  |  |   | 40      |   |
| Totalnet unrealized losses on creditswaps                                                      |  |  |                          | $ | (121    | )    |  |  |  | $ | (14,038 | ) |
|                                                                                                |

Netunrealized losses on Primus Financial’s credit swaps were$121 thousand and $14.0  million for the three monthsended June  30,  2006 and 2005, respectively. The change inunrealized losses on credit swaps reflects the change in the fair valueof our credit swap portfolio during these periods. Market premiumlevels at June  30,  2006 were similar to those prevailingat March  31,  2006, which resulted in relatively smallchange in the value of the portfolio of credit swaps sold in the secondquarter of 2006. There was a marked increase in market premiums in thesecond quarter of 2005, which resulted in a significant unrealized lossin the portfolio of credit swaps sold.

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    Net Credit Swap Revenue –PRS Trading

PRS Trading commenced operations inJanuary  2006 and therefore prior year comparison information isnot available. There was limited volatility in the credit market in thesecond quarter of 2006, which restricted the opportunities for PRSTrading to put on attractive credit swap positions. In the secondquarter, PRS Trading sold notional principal of $32.5  million ofnew credit swaps and purchased $55.5  million of notionalprincipal. Net credit swap revenue (loss) for PRS Trading was $(29)thousand for the three months ended June  30,  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 (loss) for the three monthsended June  30,  2006 (inthousands):

|                                      |  |  |                                 |   |     |   |
|--------------------------------------|--|--|---------------------------------|---|-----|---|
|                                 |  |  | Threemonths ended June 30, 2006 |
| Net premiumsearned                   |  |  |                                 | $ | 14  |   |
| Net realized losses on creditswaps   |  |  |                                 |   | (17 | ) |
| Net unrealized losses on creditswaps |  |  |                                 |   | (26 | ) |
| Total netcredit swap revenue(loss)   |  |  |                                 | $ | (29 | ) |
|                                      |

NetPremiums Earned – PRS Trading

Net premiums earned were$14  thousand for the three months ended June  30,2006. Net premiums earned include premiums on credit swaps sold andpurchased. The table below shows the components of net premiums earnedby PRS Trading for the three months ended June  30,  2006(inthousands):

|                                         |  |  |                                |   |      |   |
|-----------------------------------------|--|--|--------------------------------|---|------|---|
|                                    |  |  | Threemonths endedJune 30, 2006 |
| Premium income oncredit swaps sold      |  |  |                                | $ | 158  |   |
| Premium expense oncredit swapspurchased |  |  |                                |   | (144 | ) |
| Totalnet premiumsearned                 |  |  |                                | $ | 14   |   |
|                                         |

    NetRealized Gains (Losses) on Credit Swaps – PRSTrading

Net realized gains (losses) for the three monthsended June  30,  2006 are summarized below (inthousands):

|                                                       |  |  |                                 |   |     |   |
|-------------------------------------------------------|--|--|---------------------------------|---|-----|---|
|                                                  |  |  | Threemonths ended June 30, 2006 |
| Net realized losseson terminated credit swaps sold    |  |  |                                 | $ | (80 | ) |
| Netrealized gains on terminated credit swapspurchased |  |  |                                 |   | 54  |   |
| Net realized gains on creditswap index                |  |  |                                 |   | 9   |   |
| Total netrealized losses on creditswaps               |  |  |                                 | $ | (17 | ) |
|                                                       |

Ourbusiness strategy, for PRS Trading, is generally to hold swaps we buyand sell with the expectation that we will be able to terminate theposition after a limited period of time at a net realized gain. Weterminated $14.5  million notional amount of credit swaps soldduring the three months ended June  30,  2006, resulting innet realized losses of $80  thousand. We terminated $22.0million notional amount of credit swaps purchased during the threemonths ended June  30,  2006, resulting in net realizedgains of $54  thousand.

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    Net Unrealized Gains (Losses) onCredit Swaps – PRS Trading

The unrealized gains andlosses on credit swaps sold and purchased for the three months endedJune  30,  2006 are summarizedbelow:

|                                              |  |  |                                |   |      |   |
|----------------------------------------------|--|--|--------------------------------|---|------|---|
|                                         |  |  | Threemonths endedJune 30, 2006 |
| Net unrealized losseson credit swaps sold    |  |  |                                | $ | (152 | ) |
| Net unrealizedgains on credit swapspurchased |  |  |                                |   | 126  |   |
| Netunrealized losses on creditswaps          |  |  |                                | $ | (26  | ) |
|                                              |

Netunrealized losses on PRS Trading credit swaps were $26thousand for the three months ended June  30,  2006.The change in unrealized losses on credit swaps reflects the change inthe fair value of our credit swap portfolio during the period. The fairvalue of the portfolio reflects the mid-market value with an adjustmentfor the estimated cost to close the position.

    Net TotalReturn Swap Revenue – PRS Trading

As previouslydiscussed, we entered in a total return swap agreement with acounterparty in the second quarter of 2006. The total return swap isbased on the returns on certain mutually agreed reference loans.

Net total return swap revenue as presented in the condensedconsolidated statements of operations comprises changes in the fairvalue of total return swap, realized gains or losses on the terminationof individual loan positions underlying the total return swap and thenet interest earned on the total return swaps.

During the threemonths ended June  30,  2006, net total return swap revenuewas $124  thousand. PRS Trading earned net interest of $30thousand, realized a gain of $10  thousand and recorded a netunrealized gain of $84  thousand under the total return swap. Thefair value of loans under the total return swap was $84  thousandat June  30,  2006.

    Asset ManagementFees

During the three months ended June  30,2006, we closed on our third credit swap asset management transaction,in which we manage a portfolio of credit default swaps on behalf ofthird parties in exchange for management fees. We recognized$118  thousand and $49  thousand of asset management feesfor the three months ended June  30,  2006 and 2005,respectively. Some of our asset management contracts also provide forthe receipt of contingent performance fees at maturity, none of whichhas been earned or accrued at June  30,  2006 or 2005,respectively.

    Interest Income

We earnedinterest income of $6.8  million and $2.8  million (asadjusted) for the three months ended June  30,  2006 and2005, respectively. The increase in interest income is attributable tohigher average invested balances resulting from the December2005 issuance of $125  million of subordinated debt by PrimusFinancial, retained cash earnings and higher yields on our investmentportfolio. The increase in yields is attributable to generallyincreasing market rates of interest during 2005 and 2006, coupled withan extension in the duration of our investment portfolio.

Weighted average yields on the cash equivalents andavailable-for-sale investments were 4.26% in the three monthsended June  30,  2006 compared with an adjusted2.79% for the three months ended June  30,2005.

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The table below summarizes our interestincome for the three months ended June  30,  2006 and 2005and our total cash, cash equivalent and investments at June30,  2006 and 2005, respectively (inthousands):

|                                             |  |  |                          |   |         |      |  |  |  |   |         |  |
|---------------------------------------------|--|--|--------------------------|---|---------|------|--|--|--|---|---------|--|
|                                        |  |  | Threemonths endedJune30, |
|                                        |  |  | 2006                     |   |         | 2005 |
| Interestincome                              |  |  |                          | $ | 6,786   |      |  |  |  | $ | 2,793   |  |
| Cashand cashequivalents                     |  |  |                          |   | 96,648  |      |  |  |  |   | 200,852 |  |
| Available-for-saleand short-terminvestments |  |  |                          |   | 550,160 |      |  |  |  |   | 286,657 |  |
| Totalcash, cash equivalents andinvestments  |  |  |                          | $ | 646,808 |      |  |  |  | $ | 487,509 |  |
|                                             |

    ForeignCurrency Revaluation

We buy and sell credit swapsdenominated in U.S. dollars and euros. Euro-denominated credit swapscomprised 28% of the notional amount of our Primus Financialcredit swaps sold portfolio at June  30,  2006. Until thefourth quarter of 2005, net premiums received from swaps denominated ineuros were retained in euros. We now sell the majority of our europremium receipts as they are received for U.S dollars, retaining only asmall working cash balance in euros. During the three months endedJune  30,  2005, the euro lost value against the U.S.dollar resulting in currency revaluation losses of $955  thousandon our holdings of euro compared with a revaluation loss of $18thousand on a significantly reduced holding of euro for the threemonths ended June  30,  2006.

    OperatingExpenses

Our operating expenses were $9.0 million and$6.0  million for the three months ending June  30,2006 and 2005, respectively, as summarized below (in thousands):

|                                               |  |  |                          |   |       |      |  |  |  |   |       |  |
|-----------------------------------------------|--|--|--------------------------|---|-------|------|--|--|--|---|-------|--|
|                                          |  |  | Threemonths endedJune30, |
|                                          |  |  | 2006                     |   |       | 2005 |
| Compensationand employeebenefits              |  |  |                          | $ | 5,603 |      |  |  |  | $ | 3,406 |  |
| Professionaland legalfees                     |  |  |                          |   | 1,069 |      |  |  |  |   | 796   |  |
| Depreciation andamortization                  |  |  |                          |   | 608   |      |  |  |  |   | 525   |  |
| Technology anddata                            |  |  |                          |   | 421   |      |  |  |  |   | 398   |  |
| Other                                         |  |  |                          |   | 1,291 |      |  |  |  |   | 853   |  |
| Totaloperatingexpenses                        |  |  |                          | $ | 8,992 |      |  |  |  | $ | 5,978 |  |
| Numberof full-time employees, at end ofperiod |  |  |                          |   | 44    |      |  |  |  |   | 34    |  |
|                                               |

Compensation expensefor the three months ended June  30,  2006 increasedapproximately $2.2  million over the comparable prior period.This increase was primarily the result of an increase in headcount aswe expand our business operations and higher performance basedincentives. Our accrued cash incentive compensation expense was$2.2  million in the second quarter of 2006, compared with anaccrued expense of $1.2  million for the second quarter of 2005.Stock compensation expense was approximately $1.1  million and$0.5  million for the three months ended June  30,2006 and 2005, respectively.

Professional and legal fees expenseincludes audit and tax advisor expenses, legal costs, employeerecruiting costs and director and officer insurance expense. Theincrease in professional fees is primarily related to an increasedprovision for audit fees and higher employee recruiting costsassociated with the increase in headcount in the second quarter of2006. Depreciation and amortization principally relate to thedepreciation of our computer equipment and furniture and fixtures, andthe amortization of our internally developed software. The increase indepreciation and amortization expense is due to the increase inpurchases of fixed assets and higher software costs. Technology anddata expense relates to the maintenance of our technology platform andthe cost of 

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providing electronic data to our credit andinvesting teams, and remained broadly consistent with the comparableperiod in the prior year. Other operating expenses include rent, bankfees, rating agency fees, brokerage expense, travel and entertainment,exchange fees and other administrative expenses. The increase in otherexpenses was primarily due to higher travel related costs and rentexpense associated with the leases of additional office space in NewYork and in London.

    Interest Expense and PreferredDistributions

For the three months ended June30,  2006 and 2005, we incurred $2.7  million and$497  thousand of interest expense, respectively. The interestexpense was primarily incurred on the $75.0  million 30-yearsubordinated debt and the $125.0  million of 15.5 yearsubordinated deferrable interest notes that were issued by PrimusFinancial in July  2004 and December  2005, respectively.The interest rate for the 30-year subordinated debt averaged5.05% and 2.57% for the three months ended June30,  2006 and 2005, respectively.

On December19,  2005, Primus Financial issued $125.0  million ofsubordinated deferrable interest notes, which mature in June2021. The average interest rate paid on these notes was 5.35%for the three months ended June  30,  2006.

PrimusFinancial also made net distributions of $1.6  million and$1.1  million during the three months ended June30,  2006 and 2005, respectively, on the Primus FinancialCumulative Preferred Stock issued in December  2002. The averagerate paid on these securities was 5.71% and 3.97% duringthe three months ended June  30,  2006 and 2005,respectively.

    Income Taxes

Provision forincome taxes was zero and $9  thousand for the three months endedJune  30,  2006 and 2005, respectively. Primus Guaranty hada net deferred tax asset, fully offset by a valuation allowance, of$5.5  million and $4.8  million as of June30,  2006 and December  31,  2005, respectively. Thechange in the deferred tax asset and valuation allowance resultedprimarily from Primus Asset Management’s estimated net operatingloss. It is expected that only the income of Primus Asset Managementand its subsidiary, Primus Re, are likely to be subject to UnitedStates federal and local income taxes. However, were Primus Bermuda tobe subject to income tax, at a combined United States federal, New YorkState and New York City income tax rate of 46%, on its UnitedStates GAAP income, then its income tax expense (excluding interest andpenalties) would have been approximately $6.3  million and a taxbenefit of $3.6  million for the three months ended June30,  2006 and 2005, respectively. These figures assume thatPrimus Financial is not deemed to be making distributions to PrimusBermuda; such distributions would subject Primus Bermuda to anadditional United States federal branch profits tax.

    Six months ended June  30,  2006 comparedwith six months ended June  30,2005

    Overview

On a U.S.GAAP basis, we reported net income (loss) of $45.8  million and$(23.0) million for the six months ended June  30,  2006and 2005, respectively. The increase in net income was primarily due tothe mark-to-market unrealized gains on credit swaps from the portfolioof credit protection sold by Primus Financial in the 2006 period,compared with unrealized losses in the portfolio in the correspondingperiod of 2005.

    Net credit swap revenue (loss)– Primus Financial

Net credit swap revenue (loss) was$57.2  million and $(11.8) million for the six months endedJune  30,  2006 and 2005, respectively. Net credit swaprevenue (loss) for Primus Financial excludes $161  thousand ofnet revenue earned on three credit swap transactions with itsaffiliate, Primus Re, as this amount is eliminated inconsolidation.

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Net credit swap revenue (loss)includes:

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

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

|  |              |                                               |
|--|--------------|-----------------------------------------------|
|  | •  | Net unrealized gains(losses) on credit swaps. |

The table below shows the components ofnet credit swap revenue (loss) for the six months ended June30,  2006 and 2005 (inthousands):

|                                             |  |  |                        |   |        |      |  |  |  |   |         |   |
|---------------------------------------------|--|--|------------------------|---|--------|------|--|--|--|---|---------|---|
|                                        |  |  | Sixmonths endedJune30, |
|                                        |  |  | 2006                   |   |        | 2005 |
| Netpremiums earned                          |  |  |                        | $ | 33,014 |      |  |  |  | $ | 23,599  |   |
| Netrealized losses on creditswaps           |  |  |                        |   | (383   | )    |  |  |  |   | (1,804  | ) |
| Net unrealizedgains (losses) on creditswaps |  |  |                        |   | 24,590 |      |  |  |  |   | (33,572 | ) |
| Totalnet credit swap revenue(loss)          |  |  |                        | $ | 57,221 |      |  |  |  | $ | (11,777 | ) |
|                                             |

Thecomponents of net credit swap revenue are discussed furtherbelow:

    Net Premiums Earned – PrimusFinancial

Net premiums earned were $33.0  million and$24.6  million for the six months ended June  30,2006 and 2005, respectively. Net premiums earnedinclude:

|  |              |                                     |
|--|--------------|-------------------------------------|
|  | •  | Premium income on credit swapssold; |

|  |              |                                 |
|--|--------------|---------------------------------|
|  | •  | Premium income on tranchessold; |

|  |              |                                                                        |
|--|--------------|------------------------------------------------------------------------|
|  | •  | Premium expense on credit swapspurchased as short-term investments;and |

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

Thetable below shows the components of net premiums earned for the sixmonths ended June  30,  2006 and 2005 (inthousands):

|                                                                                    |  |  |                        |   |         |      |  |  |  |   |        |   |
|------------------------------------------------------------------------------------|--|--|------------------------|---|---------|------|--|--|--|---|--------|---|
|                                                                               |  |  | Sixmonths endedJune30, |
|                                                                               |  |  | 2006                   |   |         | 2005 |
| Premiumincome on credit swapssold                                                  |  |  |                        | $ | 32,354  |      |  |  |  | $ | 24,281 |   |
| Premium incomeon tranches sold                                                     |  |  |                        |   | 660     |      |  |  |  |   | 96     |   |
| Premiumexpense on credit swaps purchased as short-terminvestments                  |  |  |                        |   | — |      |  |  |  |   | (732   | ) |
| Premiumexpense on credit swaps purchased to offset credit risk on certainswapssold |  |  |                        |   | — |      |  |  |  |   | (46    | ) |
| Totalnet premiumsearned                                                            |  |  |                        | $ | 33,014  |      |  |  |  | $ | 23,599 |   |
|                                                                                    |

Premiumincome on credit swaps sold was $32.4  million and $24.3million during the six months ended June  30,  2006 and2005, respectively. The increase was primarily as a result of theexpansion in our credit swap portfolio. The average notional amountsoutstanding of credit swaps sold were $14.5  billion and$11.2  billion for the six months ended June  30,2006 and 2005, respectively.

We began to sell protection intranche format during the second quarter of 2005, whereby we sellcredit swaps referencing portfolios containing obligations of multiplereference entities. Premium income from the tranches sold was$660  thousand and $96  thousand for the six months endedJune  30,  2006. The average notional amount outstandingwas $175.0  million and $25.0  million for the six monthsended June  30,  2006 and 2005, respectively.

Theportfolio of credit swaps purchased for short-term investment purposeshad been wound down to zero during 2005 and there was no premiumexpense for swaps of this type in 2006.

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    Net Realized Gains (Losses) onCredit Swaps – Primus Financial

Net realized gains(losses) for the six months ended June  30,  2006 and 2005are summarized below (inthousands):

|                                                                              |  |  |                        |   |         |      |  |  |  |   |        |   |
|------------------------------------------------------------------------------|--|--|------------------------|---|---------|------|--|--|--|---|--------|---|
|                                                                         |  |  | Sixmonths endedJune30, |
|                                                                         |  |  | 2006                   |   |         | 2005 |
| Realizedgains on terminated credit swapssold                                 |  |  |                        | $ | 613     |      |  |  |  | $ | 589    |   |
| Realized losses onterminated credit swapssold                                |  |  |                        |   | (996    | )    |  |  |  |   | (3,019 | ) |
| Realized gains onterminated credit swaps purchased as short-terminvestments  |  |  |                        |   | — |      |  |  |  |   | 656    |   |
| Realizedlosses on terminated credit swaps purchased as short-terminvestments |  |  |                        |   | — |      |  |  |  |   | (30    | ) |
| Totalnet realized losses on creditswaps                                      |  |  |                        | $ | (383    | )    |  |  |  | $ | (1,804 | ) |
|                                                                              |

Netrealized losses on the early termination of credit swaps sold were$383  thousand and $1.8  million for the six months endedJune  30,  2006 and 2005, respectively We terminated$137.5  million and $250.1  million notional amount ofcredit swaps sold during the six months ended June  30,2006 and 2005, respectively. We received $613  thousand and$589  thousand from the early termination of swaps at a realizedgain during the six months ended June  30,  2006 and 2005,respectively. We incurred realized losses of $996  thousandduring the six months ended June  30,  2006 from the earlytermination of swaps in order to mitigate credit risk. We incurred$3.0  million of realized losses, of which $2.9  millionwas due to the mitigation of our credit risk during the six monthsended June  30,  2005.

We terminated $93.0million notional amount of credit swaps purchased during the six monthsended June  30,  2005 resulting in a net realized gain of$626  thousand. During the course of 2005 we wound down ourportfolio of credit swaps purchased and, as a consequence, there wereno realized gains or losses on this portfolio in2006.

    Net Unrealized Gains (Losses) on Credit Swaps– Primus Financial

The unrealized gains (losses) oncredit swaps sold and credit swaps purchased as short-term investmentsand for credit risk offset purposes for the six months endedJune  30,  2006 and 2005 are summarized below (inthousands):

|                                                                                                |  |  |                        |   |         |      |  |  |  |   |         |   |
|------------------------------------------------------------------------------------------------|--|--|------------------------|---|---------|------|--|--|--|---|---------|---|
|                                                                                           |  |  | Sixmonths endedJune30, |
|                                                                                           |  |  | 2006                   |   |         | 2005 |
| Netunrealized gains (losses) on credit swapssold                                               |  |  |                        | $ | 24,590  |      |  |  |  | $ | (34,261 | ) |
| Netunrealized gains on credit swaps purchased as short-terminvestments                         |  |  |                        |   | — |      |  |  |  |   | 626     |   |
| Netunrealized gains on credit swaps purchased to offset credit riskon certain credit swapssold |  |  |                        |   | — |      |  |  |  |   | 63      |   |
| Totalnet unrealized gains (losses) on creditswaps                                              |  |  |                        | $ | 24,590  |      |  |  |  | $ | (33,572 | ) |
|                                                                                                |

Netunrealized gains (losses) on Primus Financial’s credit swapswere $24.6 million and $(33.6) million for the six months endedJune  30,  2006 and 2005. The change in unrealized losseson credit swaps reflects the change in the fair value of our creditswap portfolio during these periods. The gain during the first sixmonths of 2006 on credit swaps sold is primarily attributable to theincrease in the fair value of the portfolio as market premiums fellduring that period. The unrealized loss in the six months endedJune  30,  2005 is attributable to the general increase inmarket premiums in the first half of 2005.

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    Net Credit Swap Revenue– PRS Trading

PRS Trading commenced operations inJanuary  2006 and therefore prior year comparison information isnot available. There was limited volatility in the credit market duringthe first six months of 2006, which restricted the opportunities forPRS Trading to put on attractive swap positions. During the first sixmonths of 2006, PRS Trading sold notional principal of $178.0million of new credit swaps and purchased $204.5  million ofnotional principal. Net credit swap revenue (loss) for PRS Trading was$(261) thousand for the six months ended June  30,  2006.Net credit swap revenue (loss)includes:

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

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

|  |              |                                               |
|--|--------------|-----------------------------------------------|
|  | •  | Net unrealized gains(losses) on credit swaps. |

The table below shows the components ofnet credit swap revenue (loss) for the six months ended June30,  2006 (inthousands):

|                                      |  |  |                               |   |      |   |
|--------------------------------------|--|--|-------------------------------|---|------|---|
|                                 |  |  | Sixmonths ended June 30, 2006 |
| Net premiumsearned                   |  |  |                               | $ | 32   |   |
| Net realized gains on creditswaps    |  |  |                               |   | 112  |   |
| Net unrealized losses on creditswaps |  |  |                               |   | (405 | ) |
| Total netcredit swap revenue(loss)   |  |  |                               | $ | (261 | ) |
|                                      |

    NetPremiums Earned – PRS Trading

Net premiums earned were$32  thousand for the six months ended June  30,2006. Net premiums earned include premiums on credit swaps sold andpurchased. The table below shows the components of net premiums earnedby PRS Trading for the six months ended June  30,  2006 (inthousands):

|                                         |  |  |                               |   |      |   |
|-----------------------------------------|--|--|-------------------------------|---|------|---|
|                                    |  |  | Sixmonths ended June 30, 2006 |
| Premium income oncredit swaps sold      |  |  |                               | $ | 235  |   |
| Premium expense oncredit swapspurchased |  |  |                               |   | (203 | ) |
| Totalnet premiumsearned                 |  |  |                               | $ | 32   |   |
|                                         |

    NetRealized Gains (Losses) on Credit Swaps – PRSTrading

Net realized gains (losses) for the six months endedJune  30,  2006 are summarized below (inthousands):

|                                                       |  |  |                               |   |     |  |
|-------------------------------------------------------|--|--|-------------------------------|---|-----|--|
|                                                  |  |  | Sixmonths ended June 30, 2006 |
| Net realized gainson terminated credit swaps sold     |  |  |                               | $ | 59  |  |
| Netrealized gains on terminated credit swapspurchased |  |  |                               |   | 44  |  |
| Realized gains on credit swapindex                    |  |  |                               |   | 9   |  |
| Total netrealized gains on creditswaps                |  |  |                               | $ | 112 |  |
|                                                       |

Weterminated $49.5  million notional amount of credit swaps soldduring the six months ended June  30,  2006, resulting innet realized gains of $59  thousand. We terminated $52.0million notional amount of credit swaps purchased during the six monthsended June  30,  2006, resulting in net realized gains of$44  thousand.

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    Net Unrealized Gains (Losses)on Credit Swaps – PRS Trading

The unrealized gains andlosses on credit swaps sold and purchased for the six months endedJune  30,  2006 are summarizedbelow:

|                                               |  |  |                               |   |      |   |
|-----------------------------------------------|--|--|-------------------------------|---|------|---|
|                                          |  |  | Sixmonths ended June 30, 2006 |
| Net unrealizedlosses on credit swaps sold     |  |  |                               | $ | (234 | ) |
| Netunrealized losses on credit swapspurchased |  |  |                               |   | (171 | ) |
| Netunrealized losses on creditswaps           |  |  |                               | $ | (405 | ) |
|                                               |

Netunrealized losses on PRS Trading credit swaps were $405thousand for the six months ended June  30,  2006.The change in unrealized losses on credit swaps reflects the change inthe fair value of our credit swap portfolio during the period. The fairvalue of the portfolio reflects the mid-market value with an adjustmentfor the estimated cost to close the position.

    NetTotal Return Swap Revenue – PRS Trading

As previouslydiscussed, we entered in a total return swap agreement with acounterparty in the second quarter of 2006. The total return swap isbased on the returns on certain mutually agreed reference loans.

During the six months ended June  30,  2006, net totalreturn swap revenue was $124  thousand. PRS Trading earned netinterest of $30  thousand, realized a gain of $10  thousandand recorded a net unrealized gain of $84  thousand under thetotal return swap. The fair value of loans under the total return swapwas $84  thousand at June  30,2006.

    Asset Management Fees

During thesecond quarter of 2006, we closed on our third credit swap assetmanagement transaction, in which we manage a portfolio of creditdefault swaps on behalf of third parties in exchange for managementfees. We recognized $167  thousand and $91  thousand ofasset management fees for the six months ended June  30,2006 and 2005, respectively. Some of our asset management contractsalso provide for the receipt of contingent performance fees atmaturity, none of which has been earned or accrued at June30,  2006 and 2005, respectively.

    InterestIncome

We earned interest income of $13.4  millionand $6.5  million for the six months ended June  30,2006 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, retained cash earnings and higher yields onour investment portfolio. The increase in yields is attributable togenerally increasing market rates of interest during 2005 and 2006,coupled with an extension in the duration of our investmentportfolio.

Weighted average yields on the cash equivalents andavailable-for-sale investments were 4.23% during the six monthsended June  30,  2006 compared with 2.92% for thesix months ended June  30,  2005.

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The table below summarizes our interestincome for the six months ended June  30,  2006 and 2005and our total cash, cash equivalent and investments at June30,  2006 and 2005, respectively (inthousands):

|                                             |  |  |                         |   |         |      |  |  |  |   |         |  |
|---------------------------------------------|--|--|-------------------------|---|---------|------|--|--|--|---|---------|--|
|                                        |  |  | Sixmonths ended June30, |
|                                        |  |  | 2006                    |   |         | 2005 |
| Interestincome                              |  |  |                         | $ | 13,387  |      |  |  |  | $ | 6,486   |  |
| Cashand cashequivalents                     |  |  |                         |   | 96,648  |      |  |  |  |   | 200,852 |  |
| Available-for-saleand short-terminvestments |  |  |                         |   | 550,160 |      |  |  |  |   | 286,657 |  |
| Totalcash, cash equivalents andinvestments  |  |  |                         | $ | 646,808 |      |  |  |  | $ | 487,509 |  |
|                                             |

    ForeignCurrency Revaluation

We buy and sell credit swapsdenominated in U.S. dollars and euros. Euro-denominated credit swapscomprised 28% of the notional amount of our Primus Financialcredit swaps sold portfolio at June  30,  2006. Until thefourth quarter of 2005, net premiums received from swaps denominated ineuros were retained in euros. We now sell the majority of our europremium receipts as they are received for U.S dollars, retaining only asmall working cash balance in euros. During the six months endedJune  30,  2005, the euro lost value against the U.S.dollar resulting in currency revaluation losses of $1.5  millionon our holdings of euro compared to a revaluation loss of $24thousand, on significantly reduced holdings of euros, for the sixmonths ended June  30,  2006.

    OperatingExpenses

Our operating expenses were $17.1 millionand $13.7  million for the six months ending June30,  2006 and 2005, respectively, as summarized below (inthousands):

|                                               |  |  |                        |   |        |      |  |  |  |   |        |  |
|-----------------------------------------------|--|--|------------------------|---|--------|------|--|--|--|---|--------|--|
|                                          |  |  | Sixmonths endedJune30, |
|                                          |  |  | 2006                   |   |        | 2005 |
| Compensationand employeebenefits              |  |  |                        | $ | 10,494 |      |  |  |  | $ | 8,602  |  |
| Professionaland legalfees                     |  |  |                        |   | 2,284  |      |  |  |  |   | 1,750  |  |
| Depreciation andamortization                  |  |  |                        |   | 1,197  |      |  |  |  |   | 1,041  |  |
| Technologyanddata                             |  |  |                        |   | 820    |      |  |  |  |   | 715    |  |
| Other                                         |  |  |                        |   | 2,330  |      |  |  |  |   | 1,618  |  |
| Totaloperatingexpenses                        |  |  |                        | $ | 17,125 |      |  |  |  | $ | 13,726 |  |
| Numberof full-time employees, at end ofperiod |  |  |                        |   | 44     |      |  |  |  |   | 34     |  |
|                                               |

Compensation expensefor the six months ended June  30,  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 six months ended June  30,2006 increased by approximately $2.7  million over the comparableprior period. This increase was primarily the result of an increase inheadcount as we expand our business operations and higher performancebased incentives. Our accrued cash incentive compensation expense was$3.9  million in the first half of 2006, compared with an accruedexpense of $2.6  million in the corresponding period of 2005.Stock compensation expense was approximately $2.1  million and$1.5  million for the six-month period ended June30,  2006 and 2005, respectively.

The increase inprofessional fees is primarily related to audit fees and employeerecruiting costs. The increase in depreciation and amortization expenseis due to the increase in purchases of fixed assets and capitalizationof software costs. The increase in technology and data expense wasprimarily attributable to the expansion of our technology platform toaccommodate new trading strategies associated with our asset managementbuild out. The increase in other expenses was primarily due to travelrelated costs and rent expense associated with the leases of additionaloffice space in New York and London.

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    Interest Expense and PreferredDistributions

For the six months ended June30,  2006 and 2005, we incurred $5.1  million and$991  thousand of interest expense, respectively. The interestexpense was primarily incurred on the $75.0  million 30-yearsubordinated debt and the $125.0  million of 15.5 yearsubordinated deferrable interest notes that were issued by PrimusFinancial in July  2004 and December  2005, respectively.The interest rate for the 30-year subordinated debt averaged4.76% and 2.57% for the six months ended June30,  2006 and 2005, respectively.

On December19,  2005, Primus Financial issued $125.0  million ofsubordinated deferrable interest notes, which mature in June2021. The average interest rate paid on these notes was 5.23%during the six months ended June  30,  2006.

PrimusFinancial also made net distributions of $2.8  million and$1.8  million during the six months ended June  30,2006 and 2005, respectively, on the Primus Financial CumulativePreferred Stock issued in December  2002. The average rate paidon these securities was 5.37% and 3.46% during the sixmonths ended June  30,  2006 and 2005,respectively.

    Income Taxes

Provision forincome taxes was $55  thousand and $45  thousand for thesix months ended June  30,  2006 and 2005, respectively.Primus Guaranty had a net deferred tax asset, fully offset by avaluation allowance, of $5.5  million and $4.8  million asof June  30,  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 $23.8  million and a tax benefit of approximately$9.4  million for the six months ended June  30,2006 and 2005, respectively. These figures assume that Primus Financialis not deemed to be making distributions to Primus Bermuda; suchdistributions would subject Primus Bermuda to an additional UnitedStates federal branch profits tax.

Contractual Obligations

The following table summarizes our contractual obligations atJune  30,  2006 and the effect that those obligations areexpected to have on our liquidity and cash flows in future periods (inthousands):

|                                       |  |  |                     |   |         |                 |  |  |           |   |         |             |  |  |                  |   |         |             |  |  |  |   |         |             |  |  |  |   |         |  |
|---------------------------------------|--|--|---------------------|---|---------|-----------------|--|--|-----------|---|---------|-------------|--|--|------------------|---|---------|-------------|--|--|--|---|---------|-------------|--|--|--|---|---------|--|
|                                  |  |  | Paymentdue byperiod |
|                                  |  |  | Total               |   |         | Lessthan 1 year |  |  | 1-3 years |   |         | 3-5 years   |  |  | Morethan 5 years |
| Propertylease     |  |  |                     | $ | 9,144   |                 |  |  |           | $ | 1,198   |             |  |  |                  | $ | 2,673   |             |  |  |  | $ | 2,727   |             |  |  |  | $ | 2,546   |  |
| Subordinateddeferrable interestnotes  |  |  |                     |   | 200,000 |                 |  |  |           |   | — |  (a) |  |  |                  |   | — |  (a) |  |  |  |   | — |  (a) |  |  |  |   | 200,000 |  |
| Total             |  |  |                     | $ | 209,144 |                 |  |  |           | $ | 1,198   |             |  |  |                  | $ | 2,673   |             |  |  |  | $ | 2,727   |             |  |  |  | $ | 202,546 |  |
|                                       |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                              |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------|
| (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 2016 andadds approximately 5,500 square feet of additional space. There are nomaterial restrictions imposed by the lease agreement and the lease iscategorized as an operating lease. In addition, in 2006, we leasedapproximately 2,900 square feet of office space in London under a leasethat expires in 2012.

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We have no other material long-termcontractual obligations.

Liquidity and CapitalResources

    Capital Strategy

PrimusFinancial, in order to support its AAA/Aaa ratings, is required tomaintain capital in an amount determined by the capital models it hasagreed upon with S&P and Moody’s. The capital required isprimarily a function 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 $646.8million and $629.5 million as of June  30,  2006 andDecember  31,  2005, respectively.

    CashFlows

Cash flows from operating activities –Net cash provided by operating activities were $22.8  million and$9.7  million for the six months ended June  30,2006 and 2005, respectively. This increase is primarily attributable tohigher premium income on a larger credit swap portfolio during 2006compared with 2005, as a result of the continued growth of our creditswap portfolio.

Cash flows from investing activities– Net cash provided by (used in) investing activities were$7.6  million and $(125.9) million for the six months endedJune  30,  2006 and 2005, respectively. The change wasprimarily due to reduced purchases of available-for-sale-investments in2006 compared with 2005 and securities maturing in 2006.

Cashflows from financing activities – Net cash used in financingactivities were $3.2  million and $4.0  million for the sixmonths ended June  30,  2006 and 2005, respectively. Thisdecrease is primarily due to lower repurchase and retirement of ourcommon stock as a result of less stock vesting activity in the period.During the first quarter of 2005, we issued stock to employees inconnection with the vesting of stock compensation plans, andconcurrently repurchased and retired approximately $2.4  millionof stock in order to pay the required withholding taxes. The decreasewas offset by an increase in preferred distributions of oursubsidiary.

With our current capital resources and anticipatedfuture credit swap premium receipts and interest income, we believe wehave sufficient liquidity to pay our operating expenses and preferreddistributions over at least the next twelvemonths.

    Recent Accounting Pronouncements

In December  2004, the Financial AccountingStandards Board (‘‘FASB’’) issued SFAS No.123(R), Share-Based Payment. SFAS No. 123(R) is a revision ofSFAS No. 123 and supersedes 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 7 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).

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In May  2005, the FASB issued SFAS154, Accounting Changes and Error Corrections – a replacementof APB Opinion No. 20 and FASB Statement No. 3. This statementrequires retrospective application to prior periods’ financialstatements of changes in accounting principle. SFAS 154 is effectivefor accounting changes and corrections of errors made in fiscal yearsbeginning after December  15,  2005. The Company will applySFAS 154 in future periods, if applicable.

In November2005, the FASB issued FASB Staff Position FSP 115-1, The Meaning ofOther-Than Temporary Impairment and Its Application to CertainInvestments (FSP 115-1), which addresses the determination as towhen an investment is considered impaired, whether that impairment isother-than-temporary, and the measurement of an impairment loss. FSP115-1 also includes accounting considerations subsequent to therecognition of an other-than-temporary impairment and requires certaindisclosures about unrealized losses that have not been recognized asother-than-temporary impairments. The guidance in FSP 115-1 is requiredto be applied to reporting periods beginning after December 15,2005. The adoption did not have any effect on the condensedconsolidated financial statements.

In June  2006, the FASBissued Interpretation No. 48, Accounting for Uncertainty in IncomeTaxes-an interpretation of FASB Statement No. 109 (FIN 48). FIN 48prescribes a recognition threshold and measurement attributes for thefinancial statement recognition and measurement of a tax position takenor expected to be taken in a tax return. FIN 48 also provides guidanceon derecognition, classification, interest and penalties, accounting ininterim periods, disclosure and transition. FIN 48 is effective forfiscal years beginning after December  15,  2006. TheCompany is currently evaluating the impact that adoption of FIN 48 willhave on its 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 of activitywithin 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 been identifiedat this time. |

The Company undertakes no obligation to publiclycorrect or update any forward-looking statement if it later becomesaware that such results are not likely to beachieved.

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|              |                                                           |
|--------------|-----------------------------------------------------------|
| Item3.  | Quantitative and Qualitative Disclosures aboutMarket Risk |

Market risk represents the potential for lossesthat may result from changes in the value of a financial instrument asa consequence of market conditions. Our primary market risk isincreasing or decreasing market credit swap premium levels, whichincrease or decrease the fair value of our credit swap portfolio.Market credit swap premium levels change as a result of specific eventsor news related to a Reference Entity, such as a change in a creditrating by any of the rating agencies. Additionally, market credit swappremium levels can vary as a result of changes in market sentiment. Asa general matter, given our strategy of holding credit swaps sold untilmaturity, we do not seek to manage our overall exposure to marketcredit swap premium levels, and we expect fluctuations in the fairvalue of our credit swap portfolio as a result of these changes. As ofJune  30,  2006, each one basis point increase or decreasein market credit swap premiums would decrease or increase the fairvalue of our credit swap portfolio by approximately $5.5million. We face other market risks, which are likely to have a lesserimpact upon our net income than those associated with market creditswap premium level risk. These other risks include interest rate riskassociated with market interest rate movements. These movements mayaffect the value of our credit swap portfolio as our pricing modelincludes an interest rate component, which is used to discount futureexpected cash flows. Interest rate movements may also affect thecarrying value of and yield on our investments. The Primus FinancialCumulative Preferred Stock pays distributions that are based upon theauction rate preferred market. A difference between the rates we pay inthe auction rate preferred market and the interest rates we receive onour investments may result in an additional cost to our company.Assuming that auction results with respect to the Primus FinancialCumulative Preferred Stock reflect prevailing short-term interestrates, each 25 basis point increase or decrease in the level of thoserates would increase or decrease Primus Financial’s annualdistribution cost by approximately $125,000 for each of the Series Aand Series B MMP Receipts, but would not affect distributions on theSeries B MMP Receipts as the interest and auction rate for such MMPReceipts were set for a one year period on January  20,2006. In addition, interest rate movements may increase or decrease theinterest expense we incur on our $200  million of subordinateddeferrable interest notes. A 25 basis point increase in the level ofthose rates would increase Primus Financial’s interest expenseby $500,000 annually; however, at December  31,  2005, theinterest rate on the $50  million Series B subordinateddeferrable interest notes was set for a one year period expiring inDecember of 2006.

Counterparty risk represents the potential forloss should one or more of our counterparties be unable to meet itsobligations due to bankruptcy or a similar event, which could adverselyaffect our results of operations. Our counterparties generally haveinvestment grade credit ratings. At June  30,  2006, thenotional and fair value amount of credit swaps outstanding with respectto one non-rated counterparty were $5.0  million and $32thousand, respectively. The premiums on these transactions were fullyprepaid by the counterparty, and as such, they have been categorized astriple A rating in our credit swap portfolio.

|              |                         |
|--------------|-------------------------|
| Item4.  | Controls and Procedures |

The company hascarried out an evaluation, under the supervision and with theparticipation of the company’s management, including the ChiefExecutive Officer and Chief Financial Officer, of the effectiveness ofdisclosure controls and procedures pursuant to rules 13a-15 and 15-15dpromulgated under the Securities and Exchange Act of 1934 as of the endof the period covered by this report. Based on that evaluation, theChief Executive Officer and the Chief Financial Officer concluded thatthe disclosure controls and procedures are effective to providereasonable assurance that all material information relating to thecompany 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.  | LegalProceedings |

In the ordinary course of operating our business, wemay encounter a significant risk of litigation from time to time.However, we are not party 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 Salesof Equity Securities and Use of Proceeds |

None.

|              |                                |
|--------------|--------------------------------|
| Item3.  | Defaults upon SeniorSecurities |

None.

Item 4.    Submission of Matters toa Vote of Security Holders

On May  3,  2006, we heldour 2006 Annual General Meeting of Stockholders. At the meeting, thefollowing matters were submitted to a vote of ourstockholders.

(1) The election of three Class II directors toserve three-year terms expiring at the Annual General Meeting in 2009and until their successors have been duly elected andqualified.

|                   |  |  |     |  |            |          |  |  |  |  |        |  |
|-------------------|--|--|-----|--|------------|----------|--|--|--|--|--------|--|
| Nomineedirectors: |  |  | For |  |            | Withheld |
| FrankP. Filipps   |  |  |     |  | 39,296,965 |          |  |  |  |  | 68,825 |  |
| ThomasJ. Hartlage |  |  |     |  | 39,296,965 |          |  |  |  |  | 68,825 |  |
| JamesK. Hunt      |  |  |     |  | 39,296,965 |          |  |  |  |  | 68,825 |  |
|                   |

(2) There-appointment of Ernst & Young LLP as the Company’sindependent auditors for the fiscal year ending December31,  2006 and to authorize the audit Committee of the Board ofDirectors to set the auditors’remuneration.

|         |  |  |  |  |            |  |
|---------|--|--|--|--|------------|--|
| For     |  |  |  |  | 39,359,792 |  |
| Against |  |  |  |  | 3,998      |  |
| Abstain |  |  |  |  | 2,000      |  |
|         |

|              |                  |
|--------------|------------------|
| Item5.  | OtherInformation |

None.

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|               |          |
|---------------|----------|
| Item 6.  | Exhibits |

|                                  |                                                                                     |
|----------------------------------|-------------------------------------------------------------------------------------|
|     12  | Ratio of Earnings to CombinedFixed Charges and Preferred Share DividendRequirements |

|                                    |                                                                                                 |
|------------------------------------|-------------------------------------------------------------------------------------------------|
|     31.1  | Certificationof Chief Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of2002 |

|                                    |                                                                                                  |
|------------------------------------|--------------------------------------------------------------------------------------------------|
|     31.2  | Certification of ChiefFinancial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002 |

|                                  |                                                                                                                                                                   |
|----------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     32  | Certification of ChiefExecutive Officer 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

Pursuantto the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this Report to be signed on its behalf bythe undersigned, thereunto dulyauthorized.

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

Date: August9, 2006

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