UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.20549

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FORM10-K

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

For the fiscalyear ended December 31, 2005

OR[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the transition period from      to     .

Commission FileNumber: 001-32307

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PrimusGuaranty, Ltd.

(Exact name of registrant asspecified in itscharter)

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|-------------------------------------------------------------|--|-------------------------------------|--|--|--|--|
| Bermuda                                                     |  | NotRequired                         |
| (Stateor other jurisdiction ofincorporation ororganization) |  | (I.R.S. Employer IdentificationNo.) |
|                                                             |

Clarendon House2 ChurchStreetHamilton HM 11,Bermuda

(Address of principalexecutive offices, including zipcode)

441-296-0519

(Registrant'stelephone number, including area code)

Securitiesregistered pursuant to Section 12(b) of the ExchangeAct:

|                              |  |                                          |                        |        |  |  |
|------------------------------|--|------------------------------------------|------------------------|--------|--|--|
| Titleof each class           |  | Name on each exchange on whichregistered |
| Common Stock, $0.08 parvalue |  |                                     | New York StockExchange |   |
|                              |

Securities registered pursuant toSection 12(g) of the Exchange Act:   None

Indicate bycheck mark if the registrant is a well-known seasoned issuer as definedin Rule 405 of the Securites Act. Yes  No

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) of theAct. Yes  No 

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Act). Yes  No

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

The aggregate market value ofthe registrant’s common stock held by non-affiliates of theregistrant was approximately $289,790,545 based on the closing pricequoted by the New York Stock Exchange as of March  6,2006.

As of March  6,  2006, the number ofshares outstanding of the registrant’s common stock, $0.08 parvalue, was 43,282,173.

DOCUMENTS INCORPORATED BYREFERENCE

Portions of the registrant’s definitiveProxy Statement relating to the registrant’s 2006 annual meetingof shareholders are incorporated by reference into Part III of thisannual report.

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Primus Guaranty,Ltd.Form 10-KFor the fiscal year ended December31,2005

INDEX

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|       |  |                                                                                         |        | Page   |
| PartI.     |  |                                                                                         |   |   |        |   |   |   |
| Item1.     |  | Business                                                                                     |        |   | 4      |   |
| Item1A.    |  | Risk Factors                                                                                 |        |   | 21     |   |
| Item1B.    |  | Unresolved StaffComments                                                                     |        |   | 27     |   |
| Item 2.    |  | Properties                                                                                   |        |   | 27     |   |
| Item 3.    |  | LegalProceedings.                                                                            |        |   | 27     |   |
| Item 4.    |  | Submissionof Matters to a Vote of SecurityHolders                                            |        |   | 27     |   |
| PartII.    |  |                                                                                         |        |   |   |   |
| Item 5.    |  | Marketfor Registrant’s Common Equity and Related StockholderMatters                    |        |   | 28     |   |
| Item 6.    |  | SelectedHistorical Consolidated FinancialData                                                |        |   | 29     |   |
| Item7.     |  | Management’s Discussion and Analysis of FinancialCondition and Results of Operations   |        |   | 31     |   |
| Item7A.    |  | Quantitative and Qualitative Disclosures about MarketRisk                                    |        |   | 48     |   |
| Item 8.    |  | Financial Statementsand Supplementary Data                                                   |        |   | 49     |   |
| Item9.     |  | Changes in and Disagreements with Accountants on Accountingand Financial Disclosures         |        |   | 85     |   |
| Item9A.    |  | Controls and Procedures                                                                      |        |   | 85     |   |
| Item9B.    |  | OtherInformation                                                                             |        |   | 85     |   |
| PartIII.   |  |                                                                                         |        |   |   |   |
| Item10.    |  | Directors and Executive Officers of theRegistrant                                            |        |   | 85     |   |
| Item 11.   |  | ExecutiveCompensation                                                                        |        |   | 86     |   |
| Item 12.   |  | SecurityOwnership of Certain Beneficial Owners and Management and RelatedStockholder Matters |        |   | 86     |   |
| Item13.    |  | Certain Relationships and RelatedTransactions                                                |        |   | 86     |   |
| Item 14.   |  | PrincipalAccounting Fees andServices                                                         |        |   | 86     |   |
| PartIV.    |  |                                                                                         |        |   |   |   |
| Item 15.   |  | Exhibitsand Financial Statement Schedules                                                    |        |   | 86     |   |
| Signatures |  |                                                                                         | 89     |   |
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CAUTIONARY NOTEREGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form10-K contains forward-looking statements that involve substantial risksand uncertainties. All statements, other than statements of historicalfacts, included in this document regarding our strategy, futureoperations, future financial position, future revenues, projectedcosts, prospects, plans and objectives of management areforward-looking statements. The words‘‘anticipate,’’‘‘believe,’’‘‘estimate,’’‘‘expect,’’‘‘intend,’’‘‘may,’’‘‘plan,’’‘‘project,’’‘‘will,’’‘‘would’’ and similar expressions areintended to identify forward-looking statements, although not allforward-looking statements contain these identifying words. We may notactually achieve the plans, intentions or expectations disclosed in ourforward-looking statements and you should not place undue reliance onour forward-looking statements. Actual results or events could differmaterially from the plans, intentions and expectations disclosed in theforward-looking statements we make. We have included important factorsin the cautionary statements included in this annual report on Form10-K, particularly in the ‘‘Risk Factors’’section, that we believe could cause actual results or events to differmaterially from the forward-looking statements that we make. Ourforward-looking statements do not reflect the potential impact of anyfuture acquisitions, mergers, dispositions, joint ventures orinvestments we may make. We do not assume any obligation to update anyforward-looking statements.

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PartI.

Item 1. Business

Unless otherwise indicatedor the context requires otherwise, references to‘‘we,’’ ‘‘us,’’‘‘our",‘‘company,’’ or‘‘Primus’’ refer to the consolidatedoperations of Primus Guaranty, Ltd., or Primus Guaranty and referencesto a company name refer solely to suchcompany.

Overview

Primus Guaranty, Ltd. is a Bermudaholding company that was incorporated in 1998. Primus FinancialProducts, LLC, or Primus Financial, one of our principal subsidiariesand a AAA/Aaa rated seller of credit swaps. In exchange for a fixedquarterly premium we agree, upon a default or other credit event (e.g.,bankruptcy, failure to pay or restructuring) affecting a designatedissuer, which we refer to as a Reference Entity, to pay our customer,which we refer to as a counterparty, an agreed amount. We pay thisagreed amount, which we call a notional amount, upon ourcounterparty’s delivery to us of the Reference Entity’sdebt obligation. Credit swaps are an efficient and standardizedmechanism to transfer credit risk exposure. We seek to minimize therisk inherent in our credit swap portfolio by maintaining a highquality, highly diversified credit swap portfolio across ReferenceEntities, industries and countries. Primus Financial is also permittedto sell credit swaps referencing portfolios containing obligations ofmultiple reference entities, which we call‘‘tranches’’.

Primus AssetManagement, Inc., or Primus Asset Management, our other principaloperating subsidiary, manages Primus Financial’s credit swapbusiness and the credit swap portfolios of third parties. For suchservices, Primus Asset Management receives a management fee.

Ourregistered office is at Clarendon House, 2 Church Street, HamiltonStreet, Hamilton HM 11, Bermuda and our telephone number is441-296-0519. The offices of our principal operating subsidiaries,Primus Financial and Primus Asset Management, are located at 360Madison Avenue, 23rd Floor, New York, New York 10017 andtheir telephone number is 212-697-2227. Our stock is listed on the NewYork Stock Exchange, or NYSE.

Corporate Structure

Weare a Bermuda company that was incorporated in 1998. Primus Financialand Primus Asset Management are organized in Delaware and are ourprincipal operating subsidiaries. We own all of the voting securitiesof Primus Financial and Primus Asset Management through twointermediate holding companies, Primus (Bermuda) Ltd., (originallyPrimus (Barbados), Ltd. and Primus Group Holdings, Inc., or PrimusGroup Holdings, a Delaware company. We also have a Bermuda registeredinsurer, Primus Re, which offers financial guaranty insuranceprotection to companies that prefer insurance products to credit swaps.We incorporated Primus Re in Bermuda to take advantage ofBermuda’s status as an internationally recognized domicile forinsurers.

In July  2005, PRS Trading Strategies, LLC, orPRSTS, a Delaware limited liability company, was formed. PrimusGuaranty is the 100% owner of PRSTS. PRSTS was created todiversify the revenue streams of the company. PRSTS will engage in theactive buying and selling of credit protection on single names, indicesand tranches. PRSTS commenced operations in January2006.

In November  2005, Primus Guaranty (UK), Ltd, orPGUK, was incorporated in England to expand our presence and furtherdevelop our business and relationships across Europe. Primus Bermuda isthe 100% owner of PGUK. PGUK commenced operations during thefourth quarter of  2005.

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PrimusFinancial

Primus Financial is a AAA/Aaa rated provider of creditprotection with respect to corporate and sovereign Reference Entities.It sells credit protection to selected counterparties through creditswaps.

As of December  31,  2005, Primus Financialhad $566.7  million of capital resources to support its AAA/Aaacounterparty ratings. At December  31, 2005, the credit swaps inour portfolio had an average maturity of 3.5 years.

CreditReview and Approval Procedures

Primus Financial subjects each ofthe Reference Entities for which we are considering selling creditprotection to a standardized credit review and approval procedure thatevaluates, assesses and documents the underlying credit risk of aparticular Reference Entity. This procedure is an essential step indetermining whether we will sell protection on that Reference Entityand results in the assignment of an independent rating, or a PrimusRating, credit decision and position limit for each such entity. Inputsthat support Primus Financial’s credit decisions include thefollowing:

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|  | •  | S&P and Moody’sratings and history; |

|  |              |                                                                                             |
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|  | •  | industry andcompany specific analyses and research by major investment andcommercial banks; |

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|--|--------------|------------------------------------------------------|
|  | •  | financial statementanalysis of the Reference Entity; |

|  |              |                                                                             |
|--|--------------|-----------------------------------------------------------------------------|
|  | •  | creditrisk models based on the value of the Reference Entity’sassets; |

|  |              |                                                                                              |
|--|--------------|----------------------------------------------------------------------------------------------|
|  | •  | financial market indicatorsincluding bond spreads, stock prices and credit swap premiums;and |

|  |              |                                                       |
|--|--------------|-------------------------------------------------------|
|  | •  | current news on the Reference Entityand its industry. |

Primus Financial’s credit approvalprocess benefits from the fact that the typical Reference Entity is apublic company which has a current rating and rating history, financialperformance history and 

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substantial company and third-partyinformation on its financial status and future business prospects.Primus Financial’s experienced risk management professionals areresponsible for its credit review and approval procedures. The approachto conducting a credit review results in the designation of a PrimusRating for all approved Reference Entities and is designed to generateconsistent credit profiles and flag issues that require furtheranalysis. This iterative credit review process is also designed toresult in judgments that take advantage of all the availableinformation in the marketplace. After the initial review, all ReferenceEntities whose risks have been reviewed and for which a limit has beenapproved are periodically monitored.

Credit and Risk ManagementPolicies and Oversight

Policies governing the credit and riskmanagement processes are set by the board of directors of PrimusFinancial. The responsibilities of the board include (1) reviewing andapproving the credit-related policies and procedures of PrimusFinancial, (2) reviewing changes to its operating guidelines andcapital models and (3) reviewing capital levels and portfoliooptimization strategies.

Transaction Pricing andExecution

Investment activity is limited to Reference Entitiesapproved by, and position limits determined by, PrimusFinancial’s credit professionals. Operating within thoseconstraints, Primus Financial’s credit and investmentprofessionals make investment decisions based on their view ofrisk-adjusted returns available in the market.

PrimusFinancial’s counterparties are primarily major global financialinstitutions that act in their capacities as dealers and creditportfolio managers. Primus Financial receives bids for the purchase ofcredit swaps on a daily basis. These bids are communicated directly byits counterparties, or through Primus Financial’s access tomessages broadcast by brokers to such brokers’ subscribers.Primus Financial may also initiate an offer in the same way. PrimusFinancial receives pricing transparency and transaction opportunitiesfrom its counterparties on a daily basis.

The premiums thatPrimus Financial receives in connection with its transactions arelargely determined by market conditions affecting credit markets, andparticularly credit swap markets, both generally and with respect toparticular Reference Entities. Primus Financial’s decision toeffect a particular transaction at a particular price within theconfines of the current market range is determined by a number ofconsiderations including a comparative analysis of risk-adjustedreturns for different Reference Entities, availability of capacity inparticular Reference Entities and with particular counterparties, andthe near-term outlook for credit swap prices.

Credit SwapPortfolio

As of December  31,  2005, our portfolioof single name credit swaps sold was $13.5  billion (in notionalamount). This portfolio had a weighted average credit rating of A/Baa1(S&P/Moody’s), and represented 535 Reference Entitiesspread across 40 industries in 25 countries. The percentages of ourcredit swaps that were denominated in United States dollars and eurosat December  31,  2005 were 74% and 26%,respectively. Reference Entities that were domiciled in the UnitedStates and outside of the United States comprised 57% and43%, respectively, of our credit swap portfolio atDecember  31, 2005. The percentage of credit swaps in theportfolio relating to non-investment grade Reference Entities (at thetime of execution) was less than 1% at December  31,2005.

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The following chart provides asummary of our portfolio as of December  31, 2005:

Risk Management

PrimusFinancial monitors the Reference Entities in its credit swap portfolioon an ongoing basis. As part of the monitoring process, there is acontinuing review of the Reference Entities’ credit ratings andfinancial reporting and our modeling analyses. Additionally, eachReference Entity in Primus Financial’s credit swap portfolio isreassessed at least quarterly, at which point its Primus Rating isreconfirmed. If Primus Financial determines that the risk of a defaultor other credit event of a Reference Entity exceeds acceptable levels,Primus Financial can reduce or eliminate its credit exposure by buyingcredit protection against that Reference Entity or by terminating itscredit swaps referencing that Reference Entity.

OperatingGuidelines

Primus Financial’s operating guidelines havebeen negotiated with S&P and Moody’s and specify variousstructural, portfolio and capital constraints with which PrimusFinancial must comply in order to maintain its highest counterpartycredit ratings, including (1) maximum credit exposure limits toindustries, countries and Reference Entities, (2) credit ratingsrequirements of Reference Entities that are referenced in the creditswaps sold by Primus Financial and (3) maximum length of exposure toany single Reference Entity.

As stipulated in PrimusFinancial’s operating guidelines, upon the occurrence of certainevents Primus Financial must temporarily cease entering into new creditswaps until any such event is cured. Events that would cause PrimusFinancial to cease entering into new credit swaps include a capitalshortfall under the operating guidelines, the bankruptcy or otheranalogous event of Primus Financial, a violation of the operatingguidelines that is not cured within ten days upon the occurrence of acapital shortfall and within 30 days in all other circumstances, or adowngrade of Primus Financial to A(‘‘strong’’) or A2 (‘‘goodfinancial security’’) or below by S&P orMoody’s, respectively. If an event causing the cessation of newcredit swaps is not cured, Primus Financial will not enter into newcredit swaps and will run off its outstanding portfolio of creditswaps.

As required by our operating guidelines, Primus Financialmaintains a $37.5  million liquidity facility with Harris Trustand Savings Bank, or Harris Trust. The purpose of the liquidityfacility is to provide Primus Financial with cash in the event it isobligated to purchase a Reference Entity’s debt obligation asthe result of a credit event and cannot liquidate its investments inorder to settle a 

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purchase on a timely basis. The liquidityfacility requires that Primus Financial have United States governmentsecurities available to pledge as collateral on any advances made underthe facility. The facility is renewable on an annual basis at theoption of Primus Financial or Harris Trust. The facility has a maturitydate of March  9,  2006. We have applied to the ratingagencies for permission to terminate this facility, however, we intendto request an extension of this facility or replace it with a similarfacility with another lender at each annual maturity date so long as weare required to do so by the operating guidelines. As ofDecember  31,  2005, there have been no credit events andthere have been no borrowings under the facility.

CapitalModels and Verification Process

We have developed customizedcapital models that are cash flow-based simulations of portfolioperformance. There is a unique capital model for each of S&P andMoody’s. Under its operating guidelines, Primus Financial isrequired to have an external auditor (currently Ernst & Young LLP)provide to S&P and Moody’s an agreed-upon-procedures reporton a monthly basis. The procedures, which are specified by the ratingagencies, consist of testing the application of PrimusFinancial’s operating guidelines with respect to its credit swapportfolio. Primus Financial uses its customized capital models todetermine the sufficiency of its capital resources to meet the AAA/Aaarequirements of S&P and Moody’s. The sufficiency of capitalresources is in part determined by: (1)  the notional amount ofeach credit swap in the portfolio; (2) the term of each credit swap;(3) the credit risk of each underlying Reference Entity; (4) creditswap premiums; (5) industry concentrations within the portfolio; and(6) Primus Financial’s operating expenses and tax status. PrimusFinancial intends to continue to hold sufficient capital resources tomaintain its AAA/Aaaratings.

Counterparties

Strengthening and expandingrelationships with our counterparties is an important element of ourbusiness. We have expanded the number of counterparties to whom we sellcredit swaps from 31 at December  31,  2003 and 38 atDecember  31,  2004, to 42 at December  31,2005, primarily consisting of major global financial institutions.Primus Financial’s top counterparty, and top fivecounterparties, represented 13% and 48% of PrimusFinancial’s credit swap portfolio outstanding at December31, 2005, respectively. Three counterparties each accounted for morethan 10% of our consolidated net premium earned for the fiscalyear ended December  31,  2005, totaling $6.8million, $6.6  million and $5.8  million,respectively.

We enter into an ISDA master agreement with each ofour counterparties. These agreements govern the terms of our creditswap transactions. The ISDA master agreement allows us to conduct manyseparate transactions with a counterparty on an efficient basis, eachsubject only to a specific confirmation.

Bankruptcy Remotenessand Governance of Primus Financial

We have structured PrimusFinancial so that it should not be consolidated with Primus Guaranty orany of its affiliates in the event of its or their bankruptcy. This isan element necessary to maintain Primus Financial’s highestcounterparty credit ratings from the rating agencies. Components ofthis bankruptcy remote structure include (1) a board of directors thatincludes two independent directors who are neither employees of PrimusFinancial or its affiliates nor directors of those affiliates and(2)  a requirement that all agreements with any affiliatedcompany are effected on an arm’s-length basis.

PrimusAsset Management

We provide, through Primus Asset Management,credit risk investment advisory and asset management services to PrimusFinancial and third parties. We advise our clients on the evaluation,selection and pricing of all risks for credit protection, as well asmonitoring their credit exposure and making recommendations as tohedging their credit risks.

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Primus Asset Management has entered intotwo agreements under which it acts as an investment advisor withrespect to credit swap portfolios for third-party special purposevehicles.

Primus Asset Management is paid by Primus Financial ona cost plus basis. Advisory engagements from third parties generatefees based on a percentage of the amount of notional assets undermanagement, and may also yield contingent fees based onperformance.

PRS Trading Strategies

PRS TradingStrategies commenced operations in January  2006, with $50million of capital contributed by Primus Guaranty from the proceeds ofour IPO. PRS Trading Strategies engages in relative value anddirectional strategies in credit derivatives, buying and selling creditswaps and related instruments in order to profit from changes in marketprices over an investment horizon generally in the range of a fewmonths to a year. PRS Trading Strategies has no ratings from the ratingagencies, and supplies its swap counterparties with collateral tosupport its contractual obligations.

Primus Guaranty(UK)

Primus Guaranty (UK) was established in the fourth quarterof 2005 in London to provide a base of operations to support theexpansion of the group’s business in Europe and elsewhere.Primus Guaranty (UK) will supply services to other group companies,including Primus Financial, including marketing to counterparties andintroducing other business opportunities.

PrimusRe

Primus Re is a Bermuda company registered as a Class 3insurer under the Bermuda Insurance Act 1978, as amended, and relatedregulations, or the Bermuda Insurance Act, and operates as a financialguaranty insurance company. Financial guaranty insurance is a contractin which an insurance company receives a fee to provide creditprotection with respect to a credit obligation and therefore provides atransfer of risk economically similar to a credit swap.

PrimusRe’s business is to act as a conduit, or transformer, betweenparties interested in buying or selling protection in insurance formand other parties interested in assuming the opposite risk position inthe form of credit swaps. Primus Re generates revenue by charging ahigher insurance premium for protection sold than the swap premium itpays for the offsetting protection it purchases. Primus Re hasconducted only limited activities through December  31,2005.

Investments and Investment Policy

Our cash balanceshave been invested in short-term government securities, money-marketinstruments and other investment grade securities. Primus Financial hasengaged Evergreen Asset Management, a subsidiary of Wachovia Bank, toassist in the management of its fixed income investment portfolio andWachovia Bank to act as its custodian to hold its securities portfolio.The operating guidelines limit Primus Financial’s investmentsprimarily to United States government and agency securities, whichmature within three years.

Technology

Our platform wasbuilt specifically to effect transactions in credit swaps and managethe resulting risks. It processes and records all of our transactions,and immediately generates confirming documentation as trades are input,thereby reducing the risk of disputes and facilitating our acceptanceby counterparties as a professional market participant. Mostconstraints on our portfolio, including the operating guidelines andlimits set by our credit professionals, are maintained in the platform,so that non-conforming transactions cannot be processed and compliancewith all constraints can be monitored on a real-time basis. Theplatform contains extensive databases regarding Reference Entities,credit swap prices and other information required to generate financialand management 

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reports. Our technology has been protectedfrom failure through a variety of security measures, and through theuse of fault tolerant hardware at a separate location with fullyredundant communication and power back-ups. The platform is designed topermit the parallel processing of third party portfolios managed byPrimus Asset Management, alongside Primus Financial’s portfolioand PRS Trading Strategies. The technology allows us to expand ouractivities at relatively low incremental cost and helps us control andevaluate our business and ensure compliance with rating agencyrequirements.

Certain Bermuda Law Considerations

As aholding company, Primus Guaranty is not subject to Bermuda insuranceregulations. However, the Bermuda Insurance Act regulates the insurancebusiness of Primus Re, which is registered under that Act. In thissection, when we refer to Primus Guaranty, we are referring solely toPrimus Guaranty, Ltd. and not to any of its consolidated operations.Certain significant aspects of the Bermuda insurance regulatoryframework and other relevant matters of Bermuda law are set forthbelow.

Primus Guaranty, Primus Bermuda and Primus Re have beendesignated as non-residents for exchange control purposes by theBermuda Monetary Authority, or BMA. Common shares of a Bermuda companymay be offered or sold in Bermuda only in compliance with theprovisions of the Investment Business Act, which regulates the sale ofsecurities in Bermuda. All three companies are required to obtain theprior permission of the BMA for the issuance and transferability oftheir shares. We have received consent from the BMA for the issue andfree transferability of the common shares of Primus Guaranty, as longas the shares of Primus Guaranty are listed on an appointed stockexchange (including the NYSE), to and among persons who arenon-residents of Bermuda for exchange control purposes.

PrimusGuaranty, Primus Bermuda and Primus Re have each been incorporated inBermuda as an ‘‘exempted company.’’ UnderBermuda law, exempted companies are companies formed for the purpose ofconducting business outside Bermuda from a principal place in Bermuda.As a result, they are exempt from Bermuda laws restricting thepercentage of share capital that may be held by non-Bermudians, butthey may not participate in certain transactions, including (1) theacquisition or holding of land in Bermuda (except as may be requiredfor their business and held by way of lease or tenancy for terms of notmore than 50 years or which is used to provide accommodation orrecreational facilities for their officers and employees and held withthe consent of the Bermuda Minister of Finance, for a term notexceeding 21 years) without the express authorization of the Bermudalegislature, (2) the taking of mortgages on land in Bermuda to securean amount in excess of BD$50,000 without the consent of the BermudaMinister of Finance, (3) the acquisition of any bonds or debenturessecured by any land in Bermuda, other than certain types of Bermudagovernment securities or (4) the carrying on of business of any kind inBermuda, except in furtherance of their business carried on outsideBermuda (and certain other limited circumstances) or under licensegranted by the Bermuda Minister of Finance.

We must comply withthe provisions of the Bermuda Companies Act regulating the payment ofdividends, and making distributions from contributed surplus andrepurchases of shares. A Bermuda company shall not declare or pay adividend, or make a distribution out of contributed surplus, if thereare reasonable grounds for believing that: (a) the company is, or wouldafter the payment be, unable to pay its liabilities as they become due;or (b) the realizable value of the company’s assets wouldthereby be less than the aggregate of its liabilities and its issuedshare capital and share premium accounts. Under the Bermuda CompaniesAct, when a Bermuda company issues shares at a premium (that is for aprice above the par value), whether for cash or otherwise, a sum equalto the aggregate amount or value of the premium on those shares must betransferred to an account called ‘‘the share premiumaccount.’’ The provisions of the Bermuda Companies Actrelating to the reduction of the share capital of a company apply as ifthe share premium account were paid-up share capital of that company,except for certain matters such as premium arising on a particularclass of shares which may be used in paying up unissued shares to beissued to shareholders as fully paid bonus shares. The paid-up sharecapital may not be reduced if on the date the reduction is to be

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effected there are reasonable grounds forbelieving that the company is, or after the reduction would be, unableto pay its liabilities as they become due. Similarly, no purchase by acompany of its own shares may be effected if, on the date on which thepurchase is to be effected, there are reasonable grounds for believingthat the company is, or after the purchase would be, unable to pay itsliabilities as they become due.

Exempted companies, such asPrimus Guaranty, Primus Bermuda and Primus Re, must comply with Bermudaresident representation provisions under the Bermuda Companies Act.Under Bermuda law, non-Bermudians (other than spouses of Bermudians, orholders of a permanent resident’s certificate, or holders of aworking resident’s certificate) may not engage in any gainfuloccupation in Bermuda without an appropriate governmental work permit.A work permit may be granted or extended upon showing that, afterproper public advertisement, no Bermudian (or spouse of a Bermudian, orholder of a permanent resident’s certificate, or holder of aworking resident’s certificate) is available who meets theminimum standards reasonably required by the employer. The currentpolicy of the Bermuda government is to place a six-year term limit onindividuals with work permits, subject to certain exemptions for keyemployees. There are employee protection laws and social security lawsin Bermuda that will apply if we ever have employees based inBermuda.

The Bermuda Insurance Act. The BermudaInsurance Act imposes on insurance companies certain solvency andliquidity standards, certain restrictions on the declaration andpayment of dividends and distributions; certain restrictions on thereduction of statutory capital, and certain auditing and reportingrequirements and also the need to have a principal representative and aprincipal office (as understood under the Bermuda Insurance Act) inBermuda. Primus Re’s principal representative is currently MarshManagement Services (Bermuda) Ltd. The Bermuda Insurance Act grants tothe BMA the power to cancel licenses, supervise, investigate andintervene in the affairs of insurance companies and in certaincircumstances share information with foreign regulators. The BermudaInsurance Act distinguishes between insurers carrying on long-termbusiness and insurers carrying on general business. There are fourclassifications of insurers carrying on general business, with Class 4insurers subject to the strictest regulation and Class 3 insurerssubject to the next strictest regulation. Primus Re is registered as aClass 3 insurer and is regulated as such under the Bermuda InsuranceAct. Class 3 insurers are authorized to carry on general insurancebusiness (as understood under the Bermuda Insurance Act), subject toconditions attached to their license and to compliance with minimumcapital and surplus requirements, solvency margin, liquidity ratios andother requirements imposed by the Bermuda Insurance Act.

As aClass 3 insurer: (1) Primus Re is required to maintain the generalbusiness solvency margin which is a minimum solvency margin equal tothe greatest of: (A) $1,000,000; (B) 20% of net premiums writtenup to $6,000,000 plus 15% of net premiums written over$6,000,000; or (C) 15% of loss and other insurance reserves; (2)at any time Primus Re fails to meet its general business solvencymargin it must, within 30 days after becoming aware of that failure orhaving reason to believe that such failure has occurred, file with theBMA a written report containing particulars of the circumstancesleading to the failure and of the manner and time within which itintends to rectify the failure; (3) Primus Re is prohibited fromdeclaring or paying any dividends at any time it is in breach of itsgeneral business solvency margin or the required minimum liquidityratio, or if the declaration or payment of such dividends would causeit to fail to meet such margin or ratio, and if it has failed to meetits minimum solvency margin or minimum liquidity ratio on the last dayof any financial year, Primus Re will be prohibited, without theapproval of the BMA, from declaring or paying any dividends during thenext financial year; and (4) Primus Re is prohibited, without the priorapproval of the BMA, from reducing by 15% or more its totalstatutory capital (which includes contributed surplus, paid in capitaland share premium) as set out in its previous year’s financialstatements. Primus Re is required annually to file statutorily mandatedfinancial statements and returns, audited by an independent auditorapproved by the BMA, together with an annual loss reserve opinion of aBMA approved loss reserve specialist.

Primus Re, Ltd. Act2000. Primus Re has obtained private Bermuda legislation,entitled the ‘‘Primus Re, Ltd. Act 2000’’,or the Private Act, from the Bermuda Legislature that enables it tooperate separate accounts (as defined in the Private Act), subject tothe provisions of the Private Act. 

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The expected result is that the assets of oneseparate account are protected from the liabilities of other accounts,with the result that only the assets of a particular separate accountmay be applied to the liabilities of that separate account. Pursuant tothe Private Act, the assets and liabilities of a separate account aretreated as a separate fund from Primus Re’s own general assetsand liabilities or the assets and liabilities arising from any otherseparate accounts and, in an insolvency proceeding pursuant to Bermudalaw, it is expected that a liquidator will be bound to respect thesanctity of such separate accounts. There are no Bermuda courtdecisions on the efficacy of separateaccounts.

Competition

The business of selling creditprotection in the form of credit swaps is highly competitive.Competition is based on many factors, including the general reputation,service and perceived financial strength of the protection seller, thepricing of the credit swap protection (i.e., the premium to bepaid by the protection buyer for the credit swap) and other terms andconditions of the credit swap. While there are many participants in thecredit swap industry, we believe that Primus Financial is wellpositioned as a AAA/Aaa rated (S&P/Moody’s) companydedicated to providing credit swap protection to credit swap dealersand credit portfolio managers. Unlike most other participants in thecredit swap market, Primus Financial’s business model is basedon the differential between credit swap premiums and the underlyingrisk.

Credit Ratings

Ratings by independent agencies arean important factor in establishing the competitive position ofcounterparties in the credit swap market and are important to ourability to sell credit swaps. Rating organizations continually reviewthe financial positions of counterparties in the credit swap market,including us. S&P maintains a letter scale rating system rangingfrom ‘‘AAA’’ (‘‘extremelystrong’’) to ‘‘CC’’(‘‘currently highly vulnerable’’).Moody’s maintains a letter scale rating system ranging from‘‘Aaa’’(‘‘exceptional’’) to‘‘C’’ (‘‘lowestrated’’). Primus Financial, as a swap counterparty, hasbeen rated ‘‘AAA’’(‘‘extremely strong’’) by S&P, which isthe highest of twenty-one rating levels, and‘‘Aaa’’(‘‘exceptional’’) by Moody’s, whichis also the highest of twenty-one rating levels. The objective ofS&P’s and Moody’s rating systems is to assistcounterparties by providing an opinion of a counterparty’sfinancial strength and ability to meet ongoing obligations to itscounterparties. These ratings reflect S&P’s andMoody’s opinions of our ability to pay a counterparty upon acredit event and are not applicable to our common shares. These ratingsare subject to periodic review by, and may be revised downward orrevoked at the sole discretion of, S&P andMoody’s.

Credit Swap Documentation

The overalltrading relationship between parties to a credit swap is typicallygoverned by an ISDA Master Agreement that sets the general and ongoinglegal and credit terms between the parties and contains expressprovisions for netting of payment obligations. One of the principalbenefits of using ISDA documentation is the ease of completingindividual credit swaps with counterparties.

The ISDA MasterAgreement consists of a printed form that includes typical contractterms such as representations and warranties, covenants, events ofdefault and remedies after default and a schedule of elections andmodifications to the printed form. The ISDA Master Agreement isdesigned to allow Primus Financial and a counterparty to document allof their credit swap transactions under a singleagreement.

Individual credit swap transactions are documentedunder separate confirmations that set forth the particular terms ofsuch transaction. Each confirmation supplements and is subject to theISDA Master Agreement.

Employees

As of December31,  2005, we had 35 employees. None of our employees is party toa collective bargaining agreement or represented by any labororganization. We consider our relations with our employees to begood.

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Additional Information

We makeavailable, free of charge, access to our Annual Report on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports onForm 8-K, Section 16(a) filings, our Proxy Statement, and allamendments to those reports as soon as reasonably practicable aftersuch reports are electronically filed with, or furnished to, the SECthrough our home page atwww.primusguaranty.com.

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TAXCONSIDERATIONS

The following summary of the taxation of holdersof common shares of Primus Guaranty and the taxation of Primus Guarantyand its subsidiaries describes the material Bermuda and United Statesfederal income tax considerations as of the date of this document. Thesummary is for general information only and does not purport to be acomplete analysis or listing of all tax considerations that may beapplicable, nor does it address the effect of any potentiallyapplicable United States state or local tax laws, or the tax laws ofany jurisdiction outside the United States or Bermuda. The taxtreatment of a holder of common shares for United States federal,state, local, and non-United States tax purposes may vary depending onthe holder’s particular status. Legislative, judicial, oradministrative changes may be forthcoming, including changes that couldhave a retroactive effect that could affect this summary. PrimusGuaranty does not intend to seek a tax ruling with respect to any ofthe issues described below. All statements herein, with respect tofacts, determinations, or conclusions relating to the business oractivities of Primus Guaranty and its subsidiaries, have been providedby us. All references in the following summary with regard to Bermudataxation to Primus Guaranty do not include its combined operations.

Prospective investors are urged to consult their own tax advisorsconcerning their particular circumstances and the United Statesfederal, state, local, and non-United States tax consequences to themof owning and disposing of our common shares.

Taxation ofShareholders

Bermuda Taxation

Under current Bermudalaw, dividends paid by Primus Guaranty to holders of common shares willnot be subject to Bermuda withholding tax.

United StatesTaxation

Except as noted in this sentence, the following summaryaddresses the material United States federal income tax consequenceswith respect to common shares held as capital assets and does not dealwith the tax consequences applicable to all categories of investors,some of which (such as broker-dealers; banks; insurance companies;tax-exempt entities; investors who own, or are deemed to own,10% or more of the total combined voting power or value ofPrimus Guaranty; investors who hold or will hold common shares as partof hedging or conversion transactions; investors subject to the UnitedStates federal alternative minimum tax; investors that have a principalplace of business or ‘‘tax home’’ outsidethe United States; and investors whose functional currency is not theUnited States dollar) may be subject to special rules. Prospectiveinvestors in common shares are advised to consult their own taxadvisors with respect to their particular circumstances and withrespect to the effects of United States federal, state, local, or othercountries’ tax laws to which they may be subject.

UnitedStates Holders

Except as noted in the first sentence of thepreceding paragraph, the following discussion summarizes the materialUnited States federal income tax consequences relating to the ownershipand disposition of our common shares by a beneficial owner thereof thatis for United States federal income tax purposes (i) an individualcitizen or resident of the United States, (ii) a corporation, or otherentity taxable as a corporation, created or organized in or under thelaws of the United States or any political subdivision thereof, or(iii) an estate or trust the income of which is subject to UnitedStates federal income taxation regardless of its source.

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As discussed in greater detail below under‘‘—Passive Foreign InvestmentCompanies’’ and ‘‘Taxation of PrimusGuaranty and its Subsidiaries—United StatesTaxation—Primus Guaranty, Primus Bermuda, Primus Financial, PGUKand PRSTS’’, subject to the limitations and caveatsdescribed below, we believe that (1) neither Primus Guaranty nor PrimusBermuda should be treated as engaged in a trade or business within theUnited States and (2) Primus Guaranty and Primus Bermuda should be andcontinue to be passive foreign investment companies, or PFICs, forUnited States federal income tax purposes. This discussion assumes bothof these conclusions, unless otherwise stated.

PassiveForeign Investment Companies. Special and adverse UnitedStates federal income tax rules apply to shareholders who are direct orindirect owners of foreign corporations that are PFICs. In general, aforeign corporation will be a PFIC if 75% or more of its grossincome constitutes ‘‘passive income’’ or50% or more of its assets produce passive income. Various rulesrequire that a foreign corporation look through its ownership interestin lower-tier subsidiaries in determining whether it satisfies the‘‘asset’’ or the‘‘income’’ test. Based on the operations,assets and income of our entire group, and in particular theoperations, assets and income of Primus Financial, Primus Guarantybelieves that both Primus Guaranty and Primus Bermuda should satisfyeither or both of the ‘‘income’’ or‘‘asset’’ tests and as a result should beand continue to be PFICs. If it were determined that PrimusFinancial’s activities with respect to credit swaps constituteda United States trade or business, Primus Guaranty and Primus Bermudamight as a result not be PFICs.

Holders of common shares areurged to consult with their tax advisors as to the tax consequences ofholding shares directly and indirectly (in the case of Primus Bermuda)of PFICs and the possible advisability of electing to have each ofPrimus Guaranty and Primus Bermuda treated as a‘‘qualified electing fund’’, or QEF, or ofmaking a mark-to-market election with respect to Primus Guaranty.

If Primus Guaranty and Primus Bermuda are treated as PFICs duringyour holding period and you have not made a QEF election or amark-to-market election (as described below) with respect to each ofPrimus Guaranty and Primus Bermuda, you will be subject to thefollowing adverse tax consequences. Upon a disposition of common sharesof Primus Guaranty (or the sale of Primus Bermuda shares by PrimusGuaranty), including, under certain circumstances, pursuant to anotherwise tax-free transaction, gain recognized by you would beallocated ratably over your holding period for the common shares. Theamounts allocated to the taxable year of the sale or other exchangewould be taxed as ordinary income. The amount allocated to each othertaxable year would be subject to tax at the highest marginal federalincome tax rate in effect for individuals or corporations, asappropriate, and an interest charge would be imposed on the taxattributable to such allocated amounts. Further, any distribution inrespect of common shares of Primus Guaranty (or to Primus Guaranty inrespect of shares of Primus Bermuda) will be taxed as above if theamount of the distribution is more than 125% of the averagedistribution with respect to the common shares received by you (or byPrimus Guaranty in the case of a distribution in respect of PrimusBermuda shares) during the preceding three years or your holdingperiod, whichever is shorter. Distributions by a PFIC are not eligiblefor the reduced tax rate of 15% that applies to certaindividends paid to noncorporate United States shareholders.

IfPrimus Guaranty and Primus Bermuda are PFICs and you do not make a QEFelection or a mark-to-market election (as described below) at the timeyou purchase the common shares, the corporations will continue to betreated as PFICs with respect to the common shares held directly orindirectly by you, even if they subsequently cease to qualify as PFICs,unless an election, described below, is made to‘‘purge’’ the PFIC taint. A‘‘purging’’ election would itselfaccelerate PFIC tax treatment but would avoid PFIC tax treatment forsubsequent years when Primus Guaranty and Primus Bermuda are not PFICsand for years in which a QEF election, as discussed below, is ineffect. Different methods of ‘‘purging’’the PFIC taint are available depending on whether the corporation is aPFIC at the time the election is made and certain other facts.

Under the Internal Revenue Code of 1986, as amended, or the Code, adirect or indirect shareholder of a PFIC may elect to have the PFICtreated as a qualified electing fund with respect to such shareholder(a QEF election). If during your holding period you have always had aQEF election 

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in effect for both Primus Guaranty and PrimusBermuda while they were PFICs, you will not be subject to the PFIC taxtreatment described in the preceding paragraphs. Instead, you will berequired to include in your income each year your pro rata share oftheir capital gain and ordinary earnings for that year, and any excessobtained with respect to the common shares by disposition is generallytreated as capital gain. For this purpose, a corporation owning aninterest in an entity which is a partnership for United States federalincome tax purposes, such as Primus Bermuda owning an interest inPrimus Financial, would be allocated the share of the capital gain andordinary earnings of the partnership attributable to the interest itowns. Thus, if you make a QEF election with respect to Primus Bermuda,as well as Primus Guaranty, you will be required to include a portionof the capital gain and ordinary income of Primus Financial in yourincome. As a result, you may be subject to current tax based on theincome of Primus Guaranty or Primus Bermuda without any distribution ofcash to enable such tax to be paid. If you have made a QEF election forboth Primus Guaranty and Primus Bermuda, you may elect to defer thepayment of the tax on such income items, subject to an interest charge,until the corresponding amounts are distributed, or until you disposeof your common shares.

As discussed in more detail below, wehave determined that the credit swaps sold by Primus Financial are besttreated as the sale of options for United States federal income taxpurposes. Accordingly, Primus Financial will recognize income or lossas a protection seller only upon default or expiration of the creditswaps. There is no definitive authority in support of the treatment byPrimus Financial of its credit swaps as options for United Statesfederal income tax purposes, and we do not intend to seek a ruling fromthe IRS on this point. In addition, the IRS has been studying thetreatment of derivative transactions generally, including credit swapsand has recently issued a notice requesting submissions from taxpayersregarding the manner in which they conduct their credit swap activitiesand indicating that the United States Department of the Treasury andthe IRS are contemplating issuing specific guidance in this area. Noassurance can be given as to whether or when such guidance may beissued, whether it would be applied retroactively or whether it will beadverse to Primus Financial. The notice describes numerous potentialalternative characterizations of credit swaps, including acharacterization consistent with the treatment adopted by PrimusFinancial and other characterizations that would have adverse taxconsequences for Primus Financial. If the IRS were to assertsuccessfully that the credit swaps sold by Primus Financial should betreated other than as the sale of options, the timing of the incomerecognized by Primus Financial could be accelerated, which wouldaccelerate the inclusion of taxable income by you if you make QEFelections. In addition, because the option treatment adopted by PrimusFinancial for the tax treatment of credit swaps differs from thetreatment used for financial accounting purposes, the amount of taxableincome that you would include in a particular year as a result of a QEFelection may differ significantly from, and in particular years may besignificantly greater than, the amount that you would have includedwere taxable income calculated in the manner used for financialaccounting purposes.

Primus Guaranty intends to comply, and tocause Primus Bermuda to comply, with all record-keeping, reporting andother requirements so that you may maintain a QEF election with respectto Primus Guaranty and Primus Bermuda. If you desire to make andmaintain a QEF election, you may contact us for the PFIC annualinformation statement, which may be used to complete your annual QEFelection filings. You will need to rely on the information provided byus in the annual information statement in preparing your income taxfilings.

A QEF election is made on a shareholder-by-shareholderbasis and can be revoked only with the consent of the IRS. A QEFelection is made by attaching a completed IRS Form 8621 (using theinformation provided in the PFIC annual information statement) to yourtimely filed United States federal income tax return. Even if a QEFelection is not made, you must file a completed IRS Form 8621 everyyear.

Alternatively, if shares of a PFIC are‘‘regularly traded’’ on a‘‘qualified exchange’’ (which includescertain United States exchanges and other exchanges designated by theUnited States Treasury Department), or marketable stock, a UnitedStates holder of such shares may make a mark-to-market election. Ingeneral, a class of shares is treated as regularly traded for acalendar year if it is traded, other than in de minimis amounts, for atleast 15 days during each calendar year 

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quarter. The common shares of Primus Guarantytrade on the NYSE, a ‘‘qualifiedexchange’’, and it is anticipated that they qualify as‘‘regularly traded’’ on that exchange forthis purpose, although there can be no assurance that they actually soqualify.

If you make a valid mark-to-market election withrespect to Primus Guaranty, you will not be subject to the PFIC rulesdescribed above with respect to Primus Guaranty, and instead willinclude each year in ordinary income the excess, if any, of the fairmarket value of its PFIC shares at the end of the taxable year over itsadjusted basis in such shares. The excess, if any, of the adjustedbasis over the fair market value at the end of the taxable year will bepermitted as an ordinary loss (but only to the extent of the net amountpreviously included in income as a result of the mark-to-marketelection). If you make the election, your basis in your PFIC shareswill be adjusted to reflect any such income or loss amounts.

Even if the common shares of Primus Guaranty qualify as‘‘marketable stock’’ for this purpose, thestock of Primus Bermuda, which is expected to be a PFIC, will not be‘‘marketable stock’’ for these purposes.There is no authority on how a mark-to-market election for acorporation which is a PFIC affects that holders’ treatment of asubsidiary of that corporation which is also a PFIC. If you make amark-to-market election with respect to Primus Guaranty, you maycontinue to be subject to PFIC tax treatment with respect to PrimusBermuda, in the absence of a QEF election with respect to PrimusBermuda, and to additional inclusions of taxable income, if such a QEFelection is made. You should consult your tax advisor as to thepossibility of making a QEF election with respect to your indirectownership of the shares of Primus Bermuda, which shares will notqualify as ‘‘marketable stock’’.

Youare urged to consult with your tax advisors regarding the likelyclassification of Primus Guaranty and Primus Bermuda as PFICs and theadvisability of making QEF elections with respect to Primus Guarantyand Primus Bermuda.

AlternativeCharacterizations. If Primus Guaranty and Primus Bermudawere not PFICs, distributions with respect to the common shares wouldbe treated as ordinary dividend income to the extent of PrimusGuaranty’s current or accumulated earnings and profits asdetermined for United States federal income tax purposes. Dividendspaid by Primus Guaranty to United States corporations are not eligiblefor the dividends-received deduction and dividends paid on its commonshares to noncorporate United States shareholders would be eligible forthe reduced tax on dividends at a maximum rate of 15%, as ourcommon shares are listed on the NYSE and therefore readily tradeable onan established securities market in the United States for purposes ofSection 1(h)(11) of the Code. Distributions in excess of PrimusGuaranty’s current and accumulated earnings and profits wouldfirst be applied to reduce your tax basis in the common shares, and anyamounts distributed in excess of such tax basis would be treated asgain from the sale or exchange of the common shares.

If PrimusGuaranty and Primus Bermuda were not PFICs, you would, upon the sale orexchange of common shares, generally recognize gain or loss for federalincome tax purposes equal to the excess of the amount realized uponsuch sale or exchange over your federal income tax basis for suchcommon shares. Such long-term capital gain is currently generallysubject to a reduced rate of United States federal income tax ifrecognized by noncorporate United States holders, which rate iscurrently a maximum of 15% for years prior to 2009. Limitationsapply to the deduction of capital losses.

Non-United StatesHolders

Subject to certain exceptions, persons that are notUnited States persons will be subject to United States federal incometax on dividend distributions with respect to, and gain realized from,the sale or exchange of common shares only if such dividends or gainsare effectively connected with the conduct of a trade or businesswithin the United States.

Taxation of Primus Guaranty and ItsSubsidiaries

Bermuda Taxation

Primus Guaranty,Primus Bermuda and Primus Re. Each of Primus Guaranty,Primus Bermuda and Primus Re has received an assurance under theExempted Undertakings Tax Protection Act 1966 

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of Bermuda, or the Tax Protection Act, to theeffect that in the event of any legislation imposing tax computed onprofits or income, or computed on any capital asset, gain, orappreciation, or any tax in the nature of estate duty or inheritancetax being enacted in Bermuda, then the imposition of any such tax shallnot be applicable to Primus Guaranty, Primus Bermuda or Primus Re, orto any of their operations, or the shares, debentures, or otherobligations of Primus Guaranty, Primus Bermuda and Primus Re untilMarch  28,  2016. This assurance does not prevent theapplication of any such tax or duty to such persons who are ordinarilyresident in Bermuda or the application of any tax payable in accordancewith the provisions of the Land Tax Act 1967 of Bermuda or otherwisepayable in relation to the property leased to Primus Guaranty, PrimusBermuda or Primus Re. Primus Re is required to pay annual insurancelicense fees, and each of Primus Guaranty, Primus Bermuda and Primus Reis required to pay certain annual Bermuda government fees. In addition,all entities employing individuals in Bermuda are required to pay apayroll tax to the Bermuda government. Currently, there is no Bermudawithholding tax on dividends paid by Primus Guaranty, Primus Bermuda orPrimus Re.

United States Taxation

Primus Guaranty,Primus Bermuda, Primus Financial, PGUK and PRSTS.    Based on howPrimus Guaranty and Primus Bermuda operate and will continue to operatetheir businesses, Primus Guaranty believes that Primus Guaranty andPrimus Bermuda should not be treated as engaged in a trade or businesswithin the United States. Primus Guaranty also believes that PrimusGuaranty should not be treated as engaged in a United States trade orbusiness through its ownership interest in PRSTS and that PrimusBermuda should not be treated as engaged in a United States trade orbusiness through its ownership interest in PGUK or its indirectownership interest in Primus Financial. In reaching this view, PrimusGuaranty has concluded that, although the matter is not free from doubtand there is no governing authority on the point, PrimusFinancial’s activity of selling credit swaps and PRSTS'sactivity of buying and selling credit swaps, respectively, togetherwith its other activities, are best viewed as transactions insecurities or commodities as an investor or trader (rather than adealer) for Primus Financial’s and PRSTS's own accountrespectively, in the United States under Section 864(b)(2) of the Code,and thus PRSTS (and thus Primus Guaranty, with respect to which PRSTSis a disregarded entity for United States federal income tax purposes)and Primus Financial (and Primus Bermuda, as a non-United Statespartner in Primus Financial for United States federal income taxpurposes) should not be viewed as engaged in a United States trade orbusiness. In reaching this conclusion, Primus Guaranty is relying onstatements by the IRS that taxpayers engaged in derivative transactionsmay take any reasonable position pending the adoption of finalregulations regarding the treatment of derivative transactions forpurposes of Section 864(b)(2) of the Code. These IRS statements do nothave the force of Code provisions or adopted regulations and may berevoked or amended retroactively, subject only to review for abuse ofdiscretion. Because the determination of whether a foreign corporationis engaged in a trade or business in the United States is inherentlyfactual and there are no definitive standards for making suchdetermination, and the treatment in particular of credit swaps andPrimus Financial’s and PRSTS's current and anticipatedactivities is unsettled, there can be no assurance that the IRS willnot contend successfully that Primus Guaranty, Primus Bermuda or PrimusFinancial is engaged in a trade or business in the United States.

If the IRS successfully asserts that Primus Guaranty (eitherdirectly or through its interests in PRSTS) or Primus Bermuda (eitherdirectly or through its interest in Primus Financial or its interest inPGUK, which has elected to be treated as a disregarded entity, orbranch, of Primus Bermuda for United States federal income taxpurposes) is engaged in a trade or business in the United States, itwill be subject to United States federal income tax, as well as,potentially, the branch profits tax, on its net income that iseffectively connected with the conduct of the trade or business, unlessthe corporation is entitled to relief under an income tax treaty. Suchincome tax would be imposed on effectively connected net income, whichis computed in a manner generally analogous to that applied to the netincome of a domestic corporation. However, if a foreign corporationdoes not timely file a United States federal income tax return, even ifits failure to do so is based upon a good faith determination that itwas not engaged in a trade or business in the United States, it is notentitled to deductions and credits allocable to its effectivelyconnected income. Moreover, penalties may be assessed for failure tofile such tax returns. Primus Guaranty and Primus Bermuda intend tofile 

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‘‘protective’’United States federal income tax returns so that if they are held to beengaged in a trade or business in the United States, they would beallowed to deduct expenses and utilize credits allocable to incomedetermined to be effectively connected with such trade or business andwould not be subject to a failure to file penalty.

The maximumUnited States corporate income tax rate currently is 35% for acorporation’s effectively connected net income. If PrimusFinancial is found to be engaged in a United States trade or business,it will be required to perform United States federal income taxwithholding, at the rate of 35%, in respect of PrimusBermuda’s allocable share of Primus Financial’s incomethat is effectively connected with such United States trade or businessunder Section 1446 of the Code, regardless of whether distributions areactually made by Primus Financial to Primus Bermuda or Primus GroupHoldings. In such a circumstance, Primus Bermuda will be entitled tocredit any such withholding tax against its liability for United Statesfederal income tax.

The United States branch profits tax ratecurrently is 30%, subject to reduction by applicable taxtreaties. The branch profits tax, which is based on net income aftersubtracting the regular corporate tax and making certain otheradjustments, is imposed on the amount of net income deemed to have beenwithdrawn from the United States. If Primus Financial is found to beengaged in a United States trade or business, and as a result theUnited States branch profits tax applies to Primus Bermuda, the branchprofits tax may be imposed at a rate of 30%.

As discussedabove, we have determined that the credit swaps sold by PrimusFinancial are best treated as the sale of options for United Statesfederal income tax purposes, such that Primus Financial will recognizeincome or loss as a protection seller only upon default or expirationof the credit swaps. There is no definitive authority in support of thetreatment by Primus Financial of its credit swaps as options for UnitedStates federal income tax purposes. We do not intend to seek a rulingfrom the IRS on this point. In addition, the IRS has been studying thetreatment of derivative transactions generally, including credit swapsand has recently issued a notice requesting submissions from taxpayersregarding the manner in which they conduct their credit swap activitiesand indicating that the United States Department of the Treasury andthe IRS are contemplating issuing specific guidance in this area. Noassurance can be given as to whether or when such guidance may beissued, whether it would be applied retroactively or whether it will beadverse to Primus Financial. The notice describes numerous potentialalternative characterizations of credit swaps, including acharacterization consistent with the treatment adopted by PrimusFinancial and other characterizations that would have adverse taxconsequences for Primus Financial. If the IRS were to assertsuccessfully that the credit swaps sold by Primus Financial should betreated other than as an option, (i) the timing of the incomerecognized by Primus Financial could be accelerated, (ii) the characterof this income could be altered and (iii) Primus Bermuda, as anon-United States person, could be subject to United States income orwithholding tax at the rate of 30% on its FDAP income (discussedbelow). In addition, were these changes in character to apply and werePrimus Bermuda (through its investment in Primus Financial) found to beengaged in a United States trade or business, Primus Bermuda’srecognition of taxable income would be accelerated.

A foreigncorporation not engaged in a trade or business in the United States isgenerally subject to United States income tax at the rate of 30%on its ‘‘fixed or determinable annual or periodic gains,profits and income’’, or FDAP income, derived fromsources within the United States (for example, dividends and certaininterest income). Thus, even if Primus Guaranty and Primus Bermuda arenot engaged in a trade or business in the United States, they could besubject to the 30% tax on certain FDAP income, depending uponthe types of instruments in which they invest. Premium income fromcredit swap sales does not constitute FDAP income, assuming asdiscussed above that the credit swaps sold by Primus Financial aretreated as the sale of options for United States federal income taxpurposes.

The above analysis generally assumes that PrimusFinancial is and continues to be a partnership other than a publiclytraded partnership for United States federal income tax purposes.Generally, a partnership with fewer than 100 partners at all times istreated as a partnership that is not a publicly traded partnership.Because of restrictions on the ownership composition of PrimusFinancial, we 

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believe that Primus Financial is not and willnot become a publicly traded partnership and thus will not be requiredto pay United States federal income tax on its income. However, therecan be no assurance that Primus Financial is not or will not become apublicly traded partnership, which could have a materially adverseeffect on our financial condition and results of operations. WerePrimus Financial to be a publicly-traded partnership for United Statesfederal income tax purposes, it could be required to pay United Statesfederal income tax on its income (without regard to whether it isengaged in a United States trade or business), instead of passingthrough its income and loss to its partners, and it will be required toperform United States federal income tax withholding, at the rate of30%, in respect of amounts paid to Primus Bermuda.

Primus Asset Management. Primus Asset Management is aUnited States corporation which owns 100% of the shares ofPrimus Re and is owned by Primus Bermuda through Primus Group Holdings,a disregarded entity for United States federal income tax purposes.Primus Asset Management is expected to be subject to United Statesfederal income tax on a net basis on its income. At present theprincipal activity of Primus Asset Management is providing managementservices to Primus Guaranty and its subsidiaries, principally PrimusFinancial, under a services agreement. In 2004, Primus Asset Managemententered into agreements to act as a portfolio manager for thirdparties.

Primus Asset Management has reported on its UnitedStates federal income tax returns a net operating loss carryforward andother tax attributes reflecting various items of loss and deduction,including with respect to predecessor companies. Various restrictionsmay apply to these tax attributes, including under Section 382 of theCode, and no assurance can be given that the availability of some orall of these tax attributes will not be successfully challenged by theIRS.

Any dividends paid by Primus Asset Management to PrimusBermuda through Primus Group Holdings from its earnings or fromdistributions received from Primus Re, will be subject to United Statesfederal income tax withholding at a rate of 30%.

Primus Re. Primus Re has to date conducted onlylimited operations. Depending on the nature of Primus Re’soperations, it may be treated as an insurance company, in which case itmay elect under Section 953(d) of the Code to be treated as a UnitedStates corporation for United States federal income tax purposes, or asengaged in investment activities, which could require the inclusion oftaxable income by its parent, Primus Asset Management, each year. Inaddition, if Primus Re is treated for United States federal income taxpurposes as an insurance company and a non-United States person, UnitedStates insurance excise tax could apply to premiums it receives withrespect to its policies covering United States risks.

Personal Holding Company Tax and Accumulated EarningsTax. A personal holding company tax is imposed at a currentrate of 15% on the undistributed personal holding company income(subject to certain adjustments) of a personal holding company. Theaccumulated earnings tax is imposed on corporations (including foreigncorporations with direct or indirect shareholders subject to UnitedStates tax) that accumulate earnings in excess of the reasonablyanticipated needs of the business, generally at a current rate of15% on a corporation’s excess accumulated earnings. Thesetaxes only apply in certain circumstances, but, in any case, neithertax applies to a corporation that is a PFIC. Because Primus Guarantyand Primus Bermuda likely are and will continue to be PFICs, thesetaxes should not apply to them.

BackupWithholding. Payment of dividends and sales proceeds thatare made within the United States or through certain U.S.-relatedfinancial intermediaries generally are subject to backup withholdingunless you (i) are a corporation or come within certain other exemptcategories and, when required, demonstrate this fact, or (ii) provide ataxpayer identification number, certify as to no loss of exemption frombackup withholding and otherwise comply with applicable requirements ofthe backup withholding rules. The backup withholding tax is not anadditional tax and may be credited against your regular United Statesfederal income tax liability.

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Item 1A. Risk Factors

RisksRelated to our Business

The failure to manage effectively therisk of credit losses could have a material adverse effect on ourfinancial condition, results of operations and credit ratings.

We cannot assure you that any of the loss mitigation methods we usein managing our credit swap portfolio will be effective. If, forexample, multiple credit defaults or other credit events that exceedour expectations occur within a short time period, the payments wewould be required to make under the related credit swaps couldmaterially and adversely affect our financial condition, results ofoperations and credit ratings. Many of Primus Financial’s creditswaps are new and the underlying Reference Entities may not have hadtime to exhibit problems. Moreover, even though we may identify aheightened risk of default with respect to a particular ReferenceEntity, our ability to limit our losses, such as through hedging orterminating the credit swap, before a default or other credit eventactually occurs could be limited by inadequate liquidity in the creditswap market. As we assume other types of exposure, such as credit swapsreferencing obligations of Reference Entities that are below investmentgrade, we may not have the same or similar loss limitation methods.There can be no assurance that we will be able to manage higher risksof credit losses effectively or that any of our existing lossmitigation methods will be effective in any of these newareas.

Primus Financial’s operating guidelines andS&P’s and Moody’s capital requirements are subject tochange and may limit our growth. Additionally, a decline in our currentcounterparty credit ratings from S&P and Moody’s wouldlikely have a material adverse impact on our business and cause ourrevenues and earnings to decrease.

In order to obtain andmaintain its counterparty credit ratings, Primus Financial has adoptedoperating guidelines, the terms of which have been agreed upon withS&P and Moody’s. We cannot assure you that S&P andMoody’s will not require changes to Primus Financial’soperating guidelines or that, if such changes are made, PrimusFinancial will be able to comply with them. For example, if S&P orMoody’s were to require Primus Financial to maintain additionalcapital to retain its AAA/Aaa ratings, we cannot be certain that wecould raise additional capital when needed. Moreover, if PrimusFinancial suffers losses to such an extent that it is not in compliancewith the capital criteria of its operating guidelines and it is notable to cure the capital deficiency in a timely manner, its operatingguidelines require it to cease entering into new credit swaps (exceptfor limited hedging transactions, as described in the operatingguidelines). If the foregoing occur, S&P or Moody’s couldreduce or withdraw their AAA/Aaa credit ratings of Primus Financialwhich, in turn, would likely have a material adverse effect on ourbusiness and our financial performance.

We may requireadditional capital in the future which may not be available onfavorable terms or at all.

If we require additional capital, wemay need to raise additional funds through financings or curtail ourgrowth and reduce our assets. Any equity or debt financing, ifavailable at all, may be on terms that are not favorable to us. In thecase of equity financings, dilution to our shareholders could result,and in any case such securities may have rights, preferences andprivileges that are senior to those of our common shares. If we cannotobtain adequate capital, our business, results of operations andfinancial condition could be adversely affected. Rating agencies couldchange their rules making it extremely difficult for us to raisecapital.

We are dependent upon counterparties’perception of our creditworthiness.

In establishingrelationships, Primus Financial’s counterparties generallyanalyze its financial condition prior to entering into a credit swap,establish credit limits, and monitor the appropriateness of theselimits on an ongoing basis in order to limit the risk that PrimusFinancial will be financially unable to make payments in accordancewith its credit swap. Once a counterparty reaches its credit exposurelimit to Primus Financial, the counterparty may not enter into anyadditional transactions with Primus Financial until the counterpartycredit limit is increased. In the event these counterparty

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credit limits are not increased as PrimusFinancial’s credit swap portfolio expands, or if limits arereduced, our financial performance would suffer. In addition, whilethere are buyers of credit swaps, such as our existing counterparties,that do not require us to post collateral, there are some buyers,including some of the leading participants in the credit swap market,that require even the highest rated counterparties from which theypurchase credit swaps to post collateral. Under the operatingguidelines, Primus Financial cannot enter into credit swaps with anycounterparty that would require it to post collateral. If our existingcounterparties were to require us to post collateral, it may have amaterial adverse effect on us and our financial condition and restrictour growth.

We depend on a limited number of keyexecutives.

The loss of any of our key personnel, includingThomas Jasper, our chief executive officer, other directors, executiveofficers, or other key employees, many of whom have long-standingrelationships with our counterparties, could have a material adverseeffect on us. As our business develops and expands, we believe that oursuccess will depend greatly on our continued ability to attract andretain highly skilled and qualified personnel. We cannot assure youthat we will continue to be able to employ key personnel or that wewill be able to attract and retain qualified personnel in the future.We do not have ‘‘key person’’ lifeinsurance to cover our executive officers. We do not have employmentcontracts with all of our executive officers and key employees. Failureto retain or attract key personnel could have a material adverse effecton us.

Our financial results depend on certain marketconditions and growth in the credit swap market, which are not withinour control.

Our financial results depend to a significant degreeupon the premiums that we receive on credit swaps in our portfolio.Historically, these premiums have been a function of credit spreadsthat change over time as a result of a variety of factors that we donot control, including changes in the overall economy, supply anddemand conditions in the credit swap market and other factors affectingthe corporate credit markets in general. If an unusually low creditswap premium environment develops and persists, we may not be able toachieve profitable growth, which may have a material adverse effect onour financial condition and our results of operations. In addition,there can be no assurance that the credit swap market will continue togrow as it has historically, or at all, or that it will not decline.Any such decline could have a material adverse effect on our businessand financial condition and restrict ourgrowth.

Variations in credit swap premiums could cause ourearnings to be inconsistent and our share price to fluctuatesignificantly.

Any event causing credit swap premiums to widen ortighten on an underlying Reference Entity in our portfolio will affectthe fair value of related credit swaps and may increase the volatilityof our reported U.S. GAAP earnings and, in turn, our share price.Common events that may cause our credit swap premiums to fluctuateinclude changes in national or regional economic conditions, industrycyclicality, credit events within an industry, changes in a ReferenceEntity’s operating results, credit rating, cost of funds,management or any other factors leading investors to reviseexpectations about a Reference Entity’s ability to pay principaland interest on its debt obligations when due. Changes in fair value ofour credit swaps are recorded as unrealized gains or losses in ourconsolidated income statement. Wide fluctuations in the premium levelsthat we receive on credit swaps in our portfolio may have a materialeffect on our reported results of operations.

Certain ofour principal shareholders control us.

At December31,  2005, our principal shareholders (by which we mean thoseinstitutions that owned shares prior to our initial public offering inOctober  2004), directors and executive officers and entitiesaffiliated with them own approximately 46% of our outstandingcommon shares. As a result, these shareholders, collectively, are ableto control the election of our directors, determine our corporate andmanagement policies and determine, without the consent of our othershareholders, the outcome of any corporate action submitted to ourshareholders for approval, including potential mergers, amalgamationsor acquisitions, asset sales and other significant corporatetransactions. These shareholders also have sufficient voting power toamend our organizational documents. We cannot 

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assure you that the interests of ourprincipal shareholders will coincide with the interests of otherholders of our common shares. This concentration of ownership maydiscourage, delay or prevent a change in control of our company, whichcould deprive our shareholders of an opportunity to receive a premiumfor their common shares as part of a sale of our company and mightreduce our share price.

The commercial and investment activitiesof some of our principal shareholders may compete with ourbusiness.

Certain of our principal shareholders or theiraffiliates engage in commercial activities and enter into transactionsor agreements with us or in competition with us. Some of our principalshareholders or their affiliates may in the future sponsor otherentities engaged in the credit swap business, some of which may competewith us. Certain of our shareholders and their affiliates have alsoentered into agreements with and made investments in numerous companiesthat may compete with us. Our shareholders may also pursue acquisitionopportunities that may be complementary to our business, and as aresult, those acquisition opportunities may not be available to us. Solong as our principal shareholders continue to own a significant amountof our outstanding common shares, they will continue to be able toinfluence strongly or effectively control ourdecisions.

We do not intend to pay cash dividends on ourcommon shares for the foreseeable future.

We do not intend topay cash dividends on our common shares for the foreseeable future. Weintend to retain all available funds for use in the operation andexpansion of our business. Additionally, we are a holding company withno operations or significant assets other than our ownership of all ofour subsidiaries. There are certain restrictions on Primus Financialcontained in its operating guidelines, which could affect our abilityto pay dividends in future years. The payment of dividends and makingof distributions by each of Primus Guaranty, Primus Bermuda and PrimusRe is limited under Bermuda law and regulations. Any determination topay cash dividends will be at the discretion of our board of directorsand will be dependent upon our results of operations and cash flows,our financial position and capital requirements, general businessconditions, legal, tax, regulatory and any contractual restrictions onthe payment of dividends and any other factors our board of directorsdeems relevant.

We may not be able to continue to competein the credit swap market.

The credit swap market is highlycompetitive. We face competition from providers of similar products,including credit swap dealers of commercial and investment banks. Manyof these competitors are more established, have substantially greaterfinancial resources than we do and have established ongoingrelationships with market participants giving them ready access to thecredit swap marketplace. In addition, while there are significantbusiness obstacles to overcome in establishing a similar enterprise toours, there are no regulatory impediments for any new entrants to thecredit swap market. To the extent new participants enter the creditswap market, competition may intensify. While we believe we have anumber of competitive advantages over new entrants, there can be noassurance that increased competition will not materially adverselyaffect our business and financial condition.

There can beno assurance that our diversification strategy will be effective orprofitable.

We plan to diversify through the development andmarketing of ancillary businesses, such as asset management for thirdparties and, in select instances, by acquisition. Each new businessline may require the investment of additional capital and thesignificant involvement of our senior management to acquire or developa new line of business and integrate it with our operations. We mayexperience delays, regulatory impediments and other complications inimplementing our diversification strategy that could reduce ourprofitability and ultimately cause the strategy to fail. Thesecomplications may include obtaining rating agency approvals andrequired licenses and registrations, adapting our technology platform,hiring personnel and raising capital.

Our operations maybecome subject to increased regulation under federal and state law orexisting regulations may change, which may result in administrativeburdens, increased costs or other adverse consequences forus.

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There can be no assurance that new legalor administrative interpretations or regulations under the UnitedStates commodities and securities laws, or other applicable legislationon the federal or state levels, or in Bermuda, or in the UnitedKingdom, or other applicable jurisdictions, will not result inadministrative burdens, increased costs, or other adverse consequencesfor us. Periodically, proposals have been made in Congress to enactlegislation that would increase regulation of the credit swap market.We cannot predict what restrictions any such legislation, if adopted,would impose and the effect those restrictions would have on ourbusiness. In addition, federal statutes allocate responsibility forinsurance regulation to the states and state insurance regulators mayseek to assert jurisdiction over our credit swaps. Again, we cannotpredict what effect any such regulation would have on ourbusiness.

Credit swap buyers typically use credit swaps to managerisk and regulatory capital requirements that limit their creditexposure to a Reference Entity. Regulatory changes that modify thepermissible limits of credit risk exposure, or affect the use of creditswaps to reduce risk, may have a material adverse effect on ourbusiness.

We believe that we are not required to be registered asan ‘‘investment company’’ under theInvestment Company Act of 1940. If we are required to so register as aninvestment company, we would have to comply with a variety ofrestrictions, including limitations on our capital structure,restrictions on our investments, prohibitions on transactions withaffiliates and compliance requirements that could limit our growth andincrease our costs. There is no assurance that we could functioneffectively if we are required to register as an investmentcompany.

Risks Related to Taxation

Our status as aPFIC may result in significant additional tax costs for shareholderswho are United  States taxpayers.

Primus Guaranty andPrimus Bermuda are likely to be and remain passive foreign investmentcompanies, or PFICs, for United States federal income tax purposes.There are potentially adverse United States federal income taxconsequences of investing in a PFIC for a shareholder who is a UnitedStates taxpayer. These consequences include the following: (1) if ashareholder makes a ‘‘qualified electingfund’’, or QEF, election with respect to Primus Guarantyand Primus Bermuda, the shareholder will have to include annually inhis or her taxable income an amount reflecting an allocable share ofthe income of Primus Guaranty or Primus Bermuda, regardless of whetherdividends are paid by Primus Guaranty to the shareholder, (2) if ashareholder makes a mark-to-market election with respect to PrimusGuaranty, the shareholder will have to include annually in his or hertaxable income an amount reflecting any year-end increases in the priceof our common shares, regardless of whether dividends are paid byPrimus Guaranty to the shareholder (moreover, it is unclear how such anelection would affect the shareholder with respect to Primus Bermuda),and (3) if a shareholder does not make a QEF election or amark-to-market election, he or she may incur significant additionalUnited States federal income taxes with respect to dividends on, orgain from, the sale or other disposition of, our common shares, or withrespect to dividends from Primus Bermuda to us, or with respect to ourgain on any sale or other disposition of Primus Bermuda shares.

If we are found to be engaged in a United States business, wemay be liable for significant United  States taxes.

Webelieve that Primus Guaranty and Primus Bermuda, both directly andthrough Primus Guaranty's ownership interest in PRSTS (which forUnited States federal income tax purposes is treated as a disregardedentity, or branch, of Primus Guaranty), Primus Bermuda’sindirect ownership interest in Primus Financial (which, for UnitedStates federal income tax purposes, is treated as a partnershipinterest), and Primus Bermuda's ownership interest in PGUK (whichfor United States federal income tax purposes is treated as adisregarded entity, or branch, of Primus Bermuda), will operate theirbusinesses in a manner that should not result in their being treated asengaged in a trade or business within the United States. In particular,we believe that the sales of credit swaps by Primus Financial and thepurchase and sale of credit swaps by PRSTS are best treated astransactions of an 

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investor or trader and thus should not betreated as the conduct of a United States trade or business.Consequently, we do not expect to pay United States corporate income orbranch profits tax on Primus Financial’s or PRSTS'sincome. However, because the determination of whether a foreigncorporation is engaged in a trade or business in the United States isinherently factual and there are no definitive standards for makingsuch a determination, there can be no assurance that the United StatesInternal Revenue Service, or IRS, will not contend successfully thatPrimus Guaranty, Primus Bermuda or Primus Financial are engaged in atrade or business in the United States. The maximum combined rate ofUnited States corporate federal, state and local income tax that couldapply to Primus Financial or Primus Bermuda, or to Primus Guaranty orPRSTS, were they found to be engaged in a United States business in NewYork City and subject to income tax, is approximately 46%. Thiscombined income tax rate does not include United States branch profitstax that would be imposed on Primus Bermuda or Primus Guaranty,respectively, were Primus Financial or PRSTS, respectively, found to beengaged in a United States business and deemed to be makingdistributions to Primus Bermuda or Primus Guaranty, respectively. Thebranch profits tax, were it to apply, would apply at the rate of30% on amounts deemed distributed.

If the IRSsuccessfully challenges the treatment Primus Financial has adopted forits credit swap transactions, the timing and character of taxableincome recognized by Primus Financial could be adverselyaffected.

Consistent with its treatment of the credit swapssold by Primus Financial as the sale of options for United Statesfederal income tax purposes, we have determined that in general PrimusFinancial will recognize income or loss as a protection seller onlyupon occurrence of a credit event under or termination of the creditswaps. There is no definitive authority in support of the treatment byPrimus Financial of its credit swaps as options for United Statesfederal income tax purposes, and we do not intend to seek a ruling fromthe IRS on this point. In addition, the IRS has been studying thetreatment of derivative transactions generally, including credit swaps,and has recently issued a notice requesting submissions from taxpayersregarding the manner in which they conduct their credit swap activitiesand indicating that the United States Department of the Treasury andthe IRS are contemplating issuing specific guidance in this area. Noassurance can be given as to whether or when such guidance may beissued, whether it would be applied retroactively or whether it will beadverse to Primus Financial. Certain proposals under discussion couldbe inconsistent with the tax treatment adopted by Primus Financial. Ifthe IRS were to assert successfully that the credit swaps sold byPrimus Financial should be treated differently or these proposals wereadopted, (1) the timing of the income recognized by Primus Financialcould be accelerated, (2) the character of this income could be alteredand (3) Primus Bermuda, as a non-United States person, could be subjectto United States income or withholding tax at the rate of 30%.In addition, were these changes in character to apply and were PrimusBermuda (through its investment in Primus Financial) found to beengaged in a United States trade or business, Primus Bermuda’srecognition of taxable income would be accelerated.

RisksRelated to our Status as a Bermuda Company

It may bedifficult to effect service of process and enforcement of judgmentsagainst us and our officers and directors.

Because PrimusGuaranty is organized under the laws of Bermuda, it may not be possibleto enforce court judgments obtained in the United States against PrimusGuaranty based on the civil liability provisions of the federal orstate securities laws of the United States in Bermuda or in countriesother than the United States where Primus Guaranty has assets. Inaddition, there is some doubt as to whether the courts of Bermuda andother countries would recognize or enforce judgments of United Statescourts obtained against Primus Guaranty or its directors or officersbased on the civil liabilities provisions of the federal or statesecurities laws of the United States, or would hear actions againstPrimus Guaranty or those persons based on those laws. We have beenadvised by our legal advisors in Bermuda that the United States andBermuda do not currently have a treaty providing for the reciprocalrecognition and enforcement of judgments in civil and commercialmatters. Therefore, a final judgment for the payment of money renderedby any federal or state court in the United States 

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based on civil liability, whether or notbased solely on United States federal or state securities law, wouldnot automatically be enforceable in Bermuda. There are grounds uponwhich a Bermuda court may not enforce the judgments of United Statescourts and some remedies available under the laws of United Statesjurisdictions, including some remedies available under United Statesfederal securities laws, may not be permitted under Bermuda courts ascontrary to public policy in Bermuda. Similarly, those judgments maynot be enforceable in countries other than the United States wherePrimus Guaranty has assets. Further, no claim may be brought in Bermudaby or against Primus Guaranty or its directors and officers in thefirst instance for violation of United States federal securities lawsbecause these laws have no extraterritorial application under Bermudalaw and do not have force of law in Bermuda; however, a Bermuda courtmay impose civil liability, including the possibility of monetarydamages, on Primus Guaranty or its directors and officers if the factsalleged in a complaint constitute or give rise to a cause of actionunder Bermuda law.

United States persons who own ourcommon shares may have more difficulty in protecting their intereststhan United States persons who are shareholders of a United Statescorporation.

The Companies Act 1981, as amended, of Bermuda, orthe Bermuda Companies Act, which applies to Primus Guaranty, PrimusBermuda and Primus Re, differs in certain material respects from lawsgenerally applicable to United States corporations and theirshareholders. As a result of these differences, United States personswho own our common shares may have more difficulty protecting theirinterests than would United States persons who own common shares of aUnited States corporation.

We may become subject to taxesin Bermuda after 2016, which may have a material adverse effect on ourfinancial condition and operating results and on an investment in ourcommon shares.

The Bermuda Minister of Finance, under theExempted Undertakings Tax Protection Act 1966, as amended, of Bermuda,has given each of Primus Guaranty, Primus Bermuda and Primus Re anassurance that if any legislation is enacted in Bermuda that wouldimpose tax computed on profits or income, or computed on any capitalasset, gain or appreciation, or any tax in the nature of estate duty orinheritance tax, then, subject to certain limitations, the impositionof any such tax will not be applicable to Primus Guaranty, PrimusBermuda, Primus Re or any of their respective operations, shares,debentures or other obligations until March  28,  2016.Given the limited duration of the Minister of Finance’sassurance, we cannot be certain that we will not be subject to anyBermuda tax after March  28,  2016. Since we areincorporated in Bermuda, we will be subject to changes of law orregulation in Bermuda that may have an adverse impact on ouroperations, including imposition of tax liability.

Theeffect of Bermuda’s letter of commitment to the OECD toeliminate harmful tax practices is uncertain and could adversely affectour tax status in Bermuda.

A number of multinationalorganizations, including the European Union, the Organization forEconomic Cooperation and Development, also referred to in thisprospectus as OECD, the Financial Action Task Force and the FinancialStability Forum, also referred to in this prospectus as FSF, have allrecently identified some countries as not participating in adequateinformation exchange, engaging in harmful tax practices or notmaintaining adequate controls to prevent corruption, such as moneylaundering activities. Recommendations to limit such harmful practicesare under consideration by these organizations, and a report publishedon November  27,  2001 by the OECD at the behest of FSFtitled ‘‘Behind the Corporate Veil: Using CorporateEntities for Illicit Purposes,’’ contains an extensivediscussion of specific recommendations. The OECD has threatenednon-member jurisdictions that do not agree to cooperate with the OECDwith punitive sanctions by OECD member countries, though specificsanctions have yet to be adopted by OECD member countries. It is as yetunclear what these sanctions will be, who will adopt them and when orif they will be imposed. In a June  26,  2000 report,Bermuda was not listed as a tax haven jurisdiction by the OECD.However, we cannot assure you that this situation will not change. TheOECD can adopt measures that could adversely affect Bermudacompanies.

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Item 1B.    Unresolved StaffComments

Not applicable.

Item2.    Properties

Primus Financial occupies approximately12,000 square feet in New York, New York under a lease that expires in2016. We recently agreed to lease an additional 5,500 square feet inthe same building to be occupied in 2006. We believe that with theadditional space, our facilities are adequate to meet our current needsand that suitable additional or substitute space will be available toaccommodate any foreseeable expansion of our operations. In addition,in 2006, we leased approximately 2,900 square feet of office space inLondon under a lease that expires in 2012. We do not lease or own realproperty in Bermuda.

Item 3.    Legal Proceedings

Inthe ordinary course of operating our business, we may encounter asignificant risk of litigation from time to time. However, we are notparty to nor currently aware of any material pending or threatenedlitigation.

Item 4.    Submission of Matters to a Vote ofSecurity Holders

We did not submit any matters to a vote ofsecurity holders during the fourth quarter of2005.

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PartII.

|               |                                                                            |
|---------------|----------------------------------------------------------------------------|
| Item 5.  | Market for Registrant’sCommon Equity and Related Stockholder Matters |

MarketInformation

Our common stock trades on the NYSE under the symbol‘‘PRS.’’ The following table sets forth,for the indicated periods, the high and low sales prices per commonstock in U.S. dollars, as reported on the NYSE:

|                            |  |        |       |        |  |        |       |        |  |  |
|----------------------------|--|--------|-------|--------|--|--------|-------|--------|--|--|
| Yearended December 31,2005 |  | High   |       | Low    |
| FirstQuarter               |  | $      | 16.55 |   |  | $      | 12.85 |   |
| SecondQuarter              |  | $      | 15.12 |   |  | $      | 11.40 |   |
| ThirdQuarter               |  | $      | 14.78 |   |  | $      | 10.33 |   |
| FourthQuarter              |  | $      | 13.05 |   |  | $      | 8.65  |   |
| Yearended December 31,2004 |  |   | High  |   |  |   | Low   |   |
| FourthQuarter              |  | $      | 17.01 |   |  | $      | 12.24 |   |
| September30,2004*          |  | $      | 13.60 |   |  | $      | 13.50 |   |
|                            |

|  |
|--|
|  |  |
|  |

|   |                                                      |
|---|------------------------------------------------------|
| * | Ourcommon stock began trading on September  30,2004. |

Shareholder Information

As of March6,  2006, 43,282,173 shares of our common stock were issued andoutstanding, and held by approximately 38 shareholders ofrecord.

Dividend and Distribution Information

We have notpaid dividends on our common shares in the past and do not intend tofor the foreseeable future. We plan to retain our earnings for use inthe operation of our business and to fund future growth. Anydetermination to pay cash dividends in the future will be at thediscretion of the board of directors and will be dependent upon lenderapproval as well as our results of operations, financial condition,contractual restrictions and other factors deemed relevant by the boardof directors.

Recent Sale of Unregistered Securities

OnDecember  19,  2005, Primus Financial issued in aggregate$125.0  million of subordinated deferrable interest notes,consisting of $75.0  million of Series A notes and $50.0million of Series B notes. Lehman Brothers Inc. acted as the soleinitial purchaser in connection with such offering and was paid a feeof approximately $1.6  million for such services. This issuancewas deemed to be exempt from registration under Section 4(2) of theSecurities Act.

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|               |                                                |
|---------------|------------------------------------------------|
| Item 6.  | SelectedHistorical Consolidated Financial Data |

The following tablespresent our historical financial and operating data as of the dates orfor the periods indicated. We derived the data for years endedDecember  31,  2005, 2004, 2003 and 2002 from ourconsolidated financial statements, which have been prepared inaccordance with U.S. generally accepted accounting principles, or U.S.GAAP, and audited by Ernst & Young LLP. Until March  2002, wewere in a development stage. We were capitalized on March14,  2002 and began to sell credit swaps in June  2002. Thefollowing information should be read in conjunction with‘‘Management’s Discussion and Analysis ofFinancial Condition and Results of Operations’’ and ourfinancial statements and the related notes appearing elsewhere in thisAnnual Report on Form 10-K.

|                                                         |  |                       |        |         |  |        |        |         |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|---------------------------------------------------------|--|-----------------------|--------|---------|--|--------|--------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                    |  | YearEnded December31, |
|                                                    |  | 2005                  |        | 2004    |  | 2003   |        | 2002    |  | 2001   |
| (amountsin thousands, except per sharedata)             |  |                  |        |    |  |   |        |    |  |   |
| Consolidated Statement ofOperations:                    |  |                  |   |    |  |   |   |    |  |   |    |    |  |   |    |    |  |   |    |    |
| Revenues:                                               |  |                  |   |    |  |   |   |    |  |   |    |    |  |   |    |    |  |   |    |    |
| Netcredit swaprevenue                                   |  |                  | 23,106 |    |  | $      | 47,729 |    |  | $      | 103,326 |    |  | $      | 14,761  |    |  | $      | — |    |
| Premiumsearned on financialguarantees                   |  |                  | 405    |    |  |   | 395    |    |  |   | — |    |  |   | — |    |  |   | — |    |
| Interestincomeearned                                    |  |                  | 16,047 |    |  |   | 4,850  |    |  |   | 2,617   |    |  |   | 1,610   |    |  |   | 2       |    |
| Foreigncurrencyrevaluation                              |  |                  | (1,546 | )  |  |   | 726    |    |  |   | — |    |  |   | — |    |  |   | — |    |
| Otherincome                                             |  |                  | 190    |    |  |   | 55     |    |  |   | 107     |    |  |   | 12      |    |  |   | — |    |
| Totalrevenues                                           |  | $                     | 38,202 |    |  | $      | 53,755 |    |  | $      | 106,050 |    |  | $      | 16,383  |    |  | $      | 2       |    |
| Expenses:                                               |  |                  |   |    |  |   |   |    |  |   |    |    |  |   |    |    |  |   |    |    |
| Compensationand employeebenefits                        |  | $                     | 15,935 |    |  | $      | 17,801 |    |  | $      | 11,701  |    |  | $      | 8,156   |    |  | $      | 1,020   |    |
| Otherexpenses                                           |  |                  | 14,273 |    |  |   | 10,085 |    |  |   | 14,196  |    |  |   | 11,042  |    |  |   | 1,769   |    |
| Totalexpenses                                           |  | $                     | 30,208 |    |  | $      | 27,886 |    |  | $      | 25,897  |    |  | $      | 19,198  |    |  | $      | 2,789   |    |
| Distributionson preferred securities ofsubsidiary       |  | $                     | (3,865 | )  |  | $      | (2,138 | )  |  | $      | (1,854  | )  |  | $      | — |    |  | $      | — |    |
| Income(loss) before benefit (provision) for incometaxes |  | $                     | 4,129  |    |  | $      | 23,731 |    |  | $      | 78,299  |    |  | $      | (2,815  | )  |  | $      | (2,787  | )  |
| Benefit(provision) for incometax                        |  |                  | (46    | )  |  |   | (46    | )  |  |   | 172     |    |  |   | (254    | )  |  |   | — |    |
| Netincome(loss)                                         |  | $                     | 4,083  |    |  | $      | 23,685 |    |  | $      | 78,471  |    |  | $      | (3,069  | )  |  | $      | (2,787  | )  |
| Basicearnings (loss) pershare.                          |  | $                     | 0.09   |    |  | $      | 1.44   |    |  | $      | 31.18   |    |  | $      | (1.22   | )  |  | $      | (1.12   | )  |
| Dilutedearnings (loss) pershare                         |  | $                     | 0.09   |    |  | $      | 0.59   |    |  | $      | 2.33    |    |  | $      | (1.22   | )  |  | $      | (1.12   | )  |
| Weightedaverage number of common sharesoutstanding:     |  |                  |   |    |  |   |   |    |  |   |    |    |  |   |    |    |  |   |    |    |
| Basic                                                   |  |                  | 43,150 |    |  |   | 16,486 |    |  |   | 2,517   |    |  |   | 2,510   |    |  |   | 2,479   |    |
| Diluted                                                 |  |                  | 44,645 |    |  |   | 40,256 |    |  |   | 33,737  |    |  |   | 2,510   |    |  |   | 2,479   |    |
|                                                         |

29

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|                                                                                   |  |                  |         |         |  |        |         |        |  |        |         |        |  |        |         |         |  |        |         |         |  |  |
|-----------------------------------------------------------------------------------|--|------------------|---------|---------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                              |  | Asof December31, |
|                                                                              |  | 2005             |         | 2004    |  | 2003   |         | 2002   |  | 2001   |
| Balance SheetData:                                                                |  |             |    |    |  |   |    |   |  |   |    |   |  |   |    |    |  |   |    |    |
| Assets                                                                            |  |             |    |    |  |   |    |   |  |   |    |   |  |   |    |    |  |   |    |    |
| Cashand cashequivalents                                                           |  | $                | 69,355  |    |  | $      | 320,989 |   |  | $      | 257,967 |   |  | $      | 220,975 |    |  | $      | 136     |    |
| Available-for-saleinvestments                                                     |  |             | 560,147 |    |  |   | 161,101 |   |  |   | 3,968   |   |  |   | — |    |  |   | — |    |
| Unrealizedgain on credit swaps, at fairvalue                                      |  |             | 25,342  |    |  |   | 46,517  |   |  |   | 46,594  |   |  |   | 5,705   |    |  |   | — |    |
| Fixedassets and capitalizedsoftware                                               |  |             | 4,993   |    |  |   | 6,097   |   |  |   | 7,124   |   |  |   | 12,322  |    |  |   | — |    |
| Otherassets                                                                       |  |             | 13,245  |    |  |   | 8,014   |   |  |   | 5,776   |   |  |   | 5,859   |    |  |   | — |    |
| Totalassets                                                                       |  | $                | 673,082 |    |  | $      | 542,718 |   |  | $      | 321,429 |   |  | $      | 244,861 |    |  | $      | 136     |    |
| Liabilitiesand shareholders’equity                                          |  |             |    |    |  |   |    |   |  |   |    |   |  |   |    |    |  |   |    |    |
| Unrealizedloss on credit swaps, at fairvalue                                      |  | $                | 3,521   |    |  | $      | 259     |   |  | $      | 68      |   |  | $      | 5,918   |    |  | $      | — |    |
| Long-termdebt                                                                     |  |             | 200,000 |    |  |   | 75,000  |   |  |   | — |   |  |   | — |    |  |   | — |    |
| Otherliabilities                                                                  |  |             | 9,189   |    |  |   | 7,941   |   |  |   | 8,002   |   |  |   | 5,191   |    |  |   | 6,981   |    |
| Totalliabilities                                                                  |  | $                | 212,710 |    |  | $      | 83,200  |   |  | $      | 8,070   |   |  | $      | 11,109  |    |  | $      | 6,981   |    |
| Preferredsecurities ofsubsidiary                                                  |  | $                | 98,521  |    |  | $      | 98,521  |   |  | $      | 98,521  |   |  | $      | 98,521  |    |  | $      | — |    |
| Shareholders’equity                                                         |  |             |    |    |  |   |    |   |  |   |    |   |  |   |    |    |  |   |    |    |
| Commonstock                                                                       |  | $                | 3,572   |    |  | $      | 3,535   |   |  | $      | 230     |   |  | $      | 208     |    |  | $      | 240     |    |
| Additionalpaid-in-capital                                                         |  |             | 265,848 |    |  |   | 264,860 |   |  |   | 1,325   |   |  |   | 211     |    |  |   | — |    |
| Convertiblepreferredstock                                                         |  |             | — |    |  |   | — |   |  |   | 143,908 |   |  |   | 143,908 |    |  |   | 12      |    |
| Warrants                                                                          |  |             | 612     |    |  |   | 612     |   |  |   | 1,070   |   |  |   | 1,070   |    |  |   | — |    |
| Accumulatedother comprehensiveloss                                                |  |             | (4,254  | )  |  |   | — |   |  |   | — |   |  |   | — |    |  |   | — |    |
| Retainedearnings (accumulated deficit)                                            |  |             | 96,073  |    |  |   | 91,990  |   |  |   | 68,305  |   |  |   | (10,166 | )  |  |   | (7,097  | )  |
| Totalshareholders’ equity(deficit)                                          |  | $                | 361,851 |    |  | $      | 360,997 |   |  | $      | 214,838 |   |  | $      | 135,231 |    |  | $      | (6,845  | )  |
| Totalliabilities, preferred securities of subsidiary andshareholders’equity |  | $                | 673,082 |    |  | $      | 542,718 |   |  | $      | 321,429 |   |  | $      | 244,861 |    |  | $      | 136     |    |
| PerShareData:                                                                     |  |             |    |    |  |   |    |   |  |   |    |   |  |   |    |    |  |   |    |    |
| Bookvalue pershare(1)                                                             |  | $                | 8.38    |    |  | $      | 8.44    |   |  | $      | 82.63   |   |  | $      | 51.95   |    |  | $      | (2.28   | )  |
| Dilutedbook value pershare(2)                                                     |  | $                | 8.13    |    |  | $      | 8.03    |   |  | $      | 6.41    |   |  | $      | 4.23    |    |  | $      | (2.28   | )  |
|                                                                                   |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                     |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Bookvalue per share is based on total shareholders’ equity dividedby basic common shares outstanding. The amounts from 2001, 2002 and2003 have not been adjusted for the reverse share split. |

|     |                                                                                                                                                                                     |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Diluted book value per share is based ontotal shareholders’ equity plus the assumed exercise of alldilutive options and warrants divided by diluted common sharesoutstanding. |

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|              |                                                                                            |
|--------------|--------------------------------------------------------------------------------------------|
| Item7.  | 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 appearelsewhere in this Annual Report on Form 10-K. This discussion 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 elsewhere in this Annual Report on Form 10-K,particularly in ‘‘Risk Factors’’ under Item1A of this Report and under the heading ‘‘Cautionary NoteRegarding Forward-Looking Statements.’’

Business Overview

We, through our principal operatingsubsidiary, Primus Financial, are primarily engaged in selling creditprotection against 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.

PrimusFinancial has the highest counterparty credit ratings offered byS&P (AAA) and Moody’s (Aaa) and is managed by an experiencedteam of professionals who have expertise in credit analysis, investing,risk management and market analysis.

Primus Asset Managementmanages the credit swap portfolios of Primus Financial and thirdparties. For such services, Primus Asset Management receives amanagement fee.

Primus Re operates as a financial guarantyinsurance company, and generates revenue by charging a higher insurancepremium for protection sold than the premium it pays for the offsettingprotection it purchases.

Credit Swap Revenues

Net credit swap revenue in our consolidated statements ofoperations, comprises the premiums earned and premium expense on creditswaps, gains or losses realized as a result of the termination ofcredit swaps and changes in the fair value of our credit swaps. In ourexperience, considerable fluctuations may occur in the fair values ofcredit swaps from period to period and, as a result, the reader of ourfinancial statements should not infer future results from historicalnet credit swap revenues or losses.

We receive premium incomefrom 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 balance sheet at theirfair value. Changes in the fair value of our credit swap portfolio areincluded as a component of net credit swap revenue (loss) in ourconsolidated income statement. If a credit swap has an increase in fairvalue during a period, the increase will add to our net credit swaprevenues for that period. Conversely, if a credit swap has a decline infair value during the period, the decline will subtract from our netcredit swap revenues 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 general, the fair values of individualcredit swaps are aggregated by counterparty for presentation in ourstatement of condition. If the aggregate total of fair values for acounterparty is a net gain, the total is recorded as a component ofunrealized gains on credit swaps, at fair value in our statement ofcondition. 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 statement of condition.Aggregation by counterparty is applied where an executed ISDA masteragreement is in place with the counterparty. In instances where we donot yet have an executed ISDA master agreement with the counterparty,the 

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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 December  31,  2005, we hadno outstanding credit swaps with any counterparties with whom we hadnot yet executed ISDA master agreements.

As a general rule, whenwe sell credit default protection, it is our intention to maintain thetransaction until maturity. However, there are two sets ofcircumstances in which we could elect to terminate transactions priorto maturity, and we monitor our portfolio on a continuing basis toassess whether those circumstances are present.

First, wheneverwe receive new information suggesting that the credit quality of theunderlying risk has deteriorated to a material degree, we consider thepossibility of terminating the transaction, usually at a loss, to avoida larger loss that could result if the credit swap were to remain inplace until a credit event occurs. The principal factor that governsour decision regarding termination in these circumstances is whether webelieve that the underlying risk has become substantially greater thanthe level of risk we would choose to assume in entering into a new saleof credit default protection. As of December  31,  2005, wehave terminated 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. As of December  31,  2005, we haveterminated approximately 10% of credit swaps under which we soldcredit default protection based on resizing or rebalancingconsiderations.

We may terminate a credit swap in one of twoways. We may negotiate an agreed termination through the originalcounterparty (an unwind). We may negotiate an assignment and novationof our rights and obligations under the credit swap to a third party(an assignment). As an alternative to terminating a transaction, we mayenter into an equal and opposite transaction with a third party underwhich we purchase credit default protection on terms that match theterms of the original transaction (an offset). In this last case, bothsides of the position may subsequently be unwound or assigned.

Inthe event of an unwind or assignment, we pay or receive a cashsettlement negotiated with the counterparty or assignee, based on thefair value of the credit swap contract and the accrued premium on theswap contract at the time of negotiation. The amounts we pay or receiveare recorded as a realization of fair value and as a realization ofaccrued premiums in the period in which the terminationoccurs.

In the past, where we have purchased credit protection asshort-term investments, we incurred the cost of paying premiums untilwe terminated the purchased protection. We undertook these transactionswith the expectation that the market credit swap premium level for theReference Entity would rise subsequent to our purchase of protection,but any gains upon termination may not have sufficed to offset thepremium expense we had incurred while holding the purchased protection.Furthermore, the market credit swap premium level for the ReferenceEntity may have fallen and we may have incurred termination losses aswell as premium expenses as a result. The fair value of our creditswaps purchased would have been affected by market credit swap premiumlevels.

Expenses 

Our expenses are primarilyemployee compensation and other administrative expenses, including rentfor our premises, professional fees and depreciation of our softwareand fixtures. Compensation expense includes salaries and employeebenefits, cash bonuses and stock-based compensation.

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Distributions on Preferred Securitiesand Debt Securities 

Primus Financial has issued PrimusFinancial Cumulative Preferred Stock that pays periodic distributions.The cost of these distributions is included in our consolidatedstatements of operations as distributions on preferred securities of asubsidiary. Further details of the nature and cost of these securitiesis included in our discussion of liquidity and capital resources.Primus Financial completed the issuance of $75.0  million ofsubordinated deferrable interest notes on July  23,  2004and the issuance of $125.0  million of subordinated deferrableinterest notes on December  19,  2005. The interest costassociated with these debt issuances is recorded as interest expense inour consolidated statements of operations.

Income Taxes

Primus Guaranty, Primus Bermuda and Primus Financial arenot expected to be engaged in the active conduct of a trade or businessin the United States and as a result are not expected to be subject toUnited States federal, state or local income tax. Primus AssetManagement is a United States domiciled corporation and is subject toUnited States federal, state and local income tax on its income,including on fees received from Primus Financial. Primus Re may besubject to United States federal, state or local income tax, or PrimusAsset Management may be required to include all or part of PrimusRe’s income in calculating its liability for United Statesfederal, state or local income tax, depending on the manner in whichPrimus Re conducts its business and the tax elections it makes. Themaximum combined rate of United States corporate federal, state andlocal income tax that could apply to Primus Financial or PrimusBermuda, were they found to be engaged in a United States business inNew York City and subject to income tax, is approximately 46%(not including United States branch profits tax that would be imposedon Primus Bermuda were Primus Financial deemed to be makingdistributions to Primus Bermuda). For United States federal income taxpurposes, Primus Guaranty and Primus Bermuda are likely to be treatedas PFICs.

Critical Accounting Policies

Valuation ofCredit Swaps 

From the inception of our business, we haveapplied Statement of Financial Accounting Standards, or SFAS, 133,‘‘Accounting for Derivative Instruments and HedgingActivities,’’ which established accounting and reportingstandards for derivative instruments. SFAS 133 requires recognition ofall credit swaps on the balance sheet at fair value.

The fairvalue of 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 market credit swap premium quotes on specificReference Entities.

We believe there are a variety of factorsthat may influence market credit swap premium levels. The principalfactor is the market’s view of the probability that a ReferenceEntity will default over the multi-year horizon typical for a creditswap contract. Those views in turn are influenced by the state of theeconomy, the outlook for corporate financial health in general as wellas the outlook for particular industries and companies. Additionalfactors include the magnitude of debt outstanding and debt payingcapacity within those same industries and companies. One factorspecific to the credit swap market is the capacity of credit swapmarket participants to sell credit swaps. If, for example, commercialbanks are actively buying protection to manage their regulatorycapital, this will tend, other factors being equal, to absorb thecapacity of protection sellers and cause an increase in market

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credit swap premiums. Conversely, creation ofspecial purpose vehicles that sell protection create additionalprotection seller capacity and, absent additional demand, can cause adecrease in market premiums. Absent rapid and steep changes, interestrates have, at most, a limited effect on market credit swap premiumlevels.

Financial Guarantees 

We haveundertaken a limited amount of financial guarantee business through oursubsidiary, Primus Re. Financial guarantees are insurance contractsthat contingently require the guarantor to make payments to theguaranteed party. Primus Re designs its guarantee contracts to qualifyas non-derivatives in accordance with the scope exception underparagraph 10d of SFAS 133, as amended by SFAS No. 149,‘‘Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities’’. We account for our financialguarantee contracts in accordance with SFAS No. 60,‘‘Accounting and Reporting by InsuranceEnterprises’’. This requires that premiums are deferredand recognized over the life of the contract and that losses arerecorded in the period that they occur based on an estimate of theultimate cost of losses incurred. Policy acquisition costs include onlythose expenses that relate primarily to, and vary with, premiumproduction. No policy acquisition costs have been deferred by us as ofDecember  31,  2005, as any such amounts have beenimmaterial. As of December  31,  2005, only three contractshad been written.

We do not actively offer financial guaranteeinsurance. Rather, it is an alternative we have available when acounterparty requests an insurance contract instead of a credit swap.Generally, a counterparty’s choice of a financial guaranteeinsurance contract versus a credit swap is determined by economic termsavailable in the marketplace as well as regulatory and accountingconsiderations. Also, the purchaser of an insurance contract cannotsubmit a claim for payment unless it has an insurable loss, whereas thepurchaser of a credit swap need not have actual exposure to theunderlying risk.

Internal Use Software Costs and FormationExpenses 

During our development stage (throughMarch  13,  2002), we were developing our proprietarytechnology. The primary applications developed were (1) capital modelsto support Primus Financial’s AAA/Aaa counterparty ratings and(2) a transactional platform to control our credit swap activities,ranging from trade administration to support for financial accountingand reporting.

The software and related costs of developing thecapital model and control platform of approximately $12.4million were capitalized in accordance with AICPA Statement of Position(SOP) 98-1, ‘‘Accounting for the Costs of ComputerSoftware Developed or Obtained for Internal Use,’’ asof December  31,  2003. During 2005 and 2004, softwaredevelopment costs of $865  thousand and $541  thousand werecapitalized, respectively. These costs are being amortized over fiveyears on a straight-line basis. Capitalized costs are reviewedperiodically for impairment.

Stock-Based EmployeeCompensation Plans 

In 2003, we adopted the fair valueapproach on a prospective basis for recording stock-based employeecompensation in accordance with the fair value method prescribed inSFAS 123, ‘‘Accounting for Stock-BasedCompensation’’, as amended by SFAS 148,‘‘Accounting for Stock-Based Compensation –Transition and Disclosure’’. Under these rules,compensation expense is recognized based on the fair value of stockoptions, restricted shares and restricted share units at the time of anaward, adjusted and amortized over the related vesting period. The fairvalue of the stock options granted is determined through the use of amarket-standard option-pricing model, which requires judgment as toappropriate volatility and interest rate factors. Prior to our IPO, inthe absence of a public market for our common shares, management andthe board of directors estimated the market value of our common sharesfor all options, restricted share units and share issuances based onvaluation opinions from independent valuation consultants. After theIPO, the fair value used is the current market value of our commonshares at the grant date.

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Results of Operations

Overview

We observed fluctuations in market creditswap premium levels during 2005. In the first quarter, premium levelson credit swaps were relatively unchanged from levels as ofDecember  31,  2004. In the first quarter, we sold$1.0  billion of new credit swaps. In the second quarter, weobserved significant increases in market premium levels, particularlyin certain reference entity industry sectors, such as automobiles andinsurance. We increased the volume of new credit swaps sold in thesecond quarter to take advantage of the higher premium levels. Duringthis quarter we sold $2.3  billion of new credit swaps, partlyoffset by maturities of $431  million. During the second quarterwe also terminated a number of credit swaps sold in order to mitigateour credit risk on certain entities which had become the targets ofleveraged buy-outs, resulting in realized losses of approximately$2.9  million. In the third and fourth quarters, we observeddeclines in the level of market premiums falling back to levels similarto those prevailing in the first quarter of the year. We sold$1.6  billion of new credit swaps in each of the third and fourthquarters as we tempered our growth to reflect the lower levels ofmarket premiums. We incurred credit mitigation costs of $1.3million in the third quarter and $318  thousand in the fourthquarter as we further reduced our exposures to reference entities whichhad become leveraged buy-out targets.

During 2005, we expandedthe range of our activities. In April, we wrote our first tranchetransaction, whereby we sold credit protection referencing a portfoliocontaining obligations of multiple reference entities. Subsequent tothis transaction, market premium levels for most investment gradetranches have fallen and we did not enter into any other tranchetransactions in 2005. We recorded premium income from, as well as anunrealized gain, on the tranche sold during 2005. In the third quarterof 2005, we obtained rating agency permission to write a limited amountof protection against reference entities in the BB/Ba rating category.We sold $78.0  million of credit swaps in this category duringthe fourth quarter of 2005.

During 2005, we reduced andultimately terminated our portfolio of swaps where we had boughtprotection in anticipation of subsequent increases in market premiumson specific reference entities.

Our interest income in 2005 wassignificantly higher than in the previous year as a result of threefactors. Market interest rates increased generally during the year. Weextended the average duration of our investment portfolio in 2005,which further increased the yield on our investments. In addition,average invested balances were higher in 2005 as a result of retainedcash earnings and the investment of proceeds from our IPO and PrimusFinancial debt issuances during 2004 and 2005.

A portion of ourcredit swap portfolio is denominated in euros and we earn net europremiums as a result. During 2005 we changed our previous policy ofholding the net cash premiums in euros. We now retain only a small euroworking balance and sell the balance of euro premiums received for USdollars. We incurred a net revaluation loss of $1.5  million onthe euro balances we held during 2005.

Year endedDecember  31,  2005 compared with year endedDecember  31,  2004

On a U.S. GAAP basis, wehad net income of $4.1  million and $23.7  million for theyears ended December  31,  2005 and 2004, respectively. Thereduction in net income in 2005 was primarily driven by unrealizedlosses on our portfolio of credit swaps sold, coupled with lossesrealized from the early termination of credit swaps. These reductionsin revenues were offset in part by increased premium revenues from alarger credit swap portfolio and higher interestincome.

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Net Credit Swap Revenue

Net creditswap revenue was $23.1  million and $47.7  million for theyears ended December  31, 2005 and 2004, respectively. Net creditswap revenue includes:

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

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

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

The table below shows the componentparts of net credit swap revenue for the years ended December31,  2005 and 2004,respectively:

|                                            |  |                       |         |         |  |        |        |         |  |  |
|--------------------------------------------|--|-----------------------|---------|---------|--|--------|--------|---------|--|--|
| ($in thousands)                            |  | Year endedDecember31, |
|                                       |  | 2005                  |         | 2004    |
| Netpremiums earned                         |  | $                     | 52,705  |    |  | $      | 42,475 |    |
| Netrealized (losses)/ gains on creditswaps |  |                  | (5,162  | )  |  |   | 5,522  |    |
| Net unrealizedlosses on creditswaps        |  |                  | (24,437 | )  |  |   | (268   | )  |
| TotalNet Credit SwapRevenue                |  | $                     | 23,106  |    |  | $      | 47,729 |    |
|                                            |

NetPremiums Earned

Net premiums earned were $52.7  millionand $42.5  million for the years ended December  31, 2005and 2004, respectively. Net premiums earnedinclude:

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

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

|  |              |                                                                        |
|--|--------------|------------------------------------------------------------------------|
|  | •  | Premium expense on creditswaps purchased as short-term investments;and |

|  |              |                                                                                             |
|--|--------------|---------------------------------------------------------------------------------------------|
|  | •  | Premium expense on creditswaps purchased to offset credit risk on certain credit swapssold. |

The increase in net premiums earned was primarily driven bythe increase in the size of the credit swaps sold portfolio from the2004 period, slightly offset by an increase in the premiums paid forcredit swaps purchased for short-term investment purposes. The tablebelow shows the component parts of net premiums earned for the yearsended December  31,  2005 and 2004respectively:

|                                                                                    |  |                       |        |         |  |        |         |         |  |  |
|------------------------------------------------------------------------------------|--|-----------------------|--------|---------|--|--------|---------|---------|--|--|
| ($in thousands)                                                                    |  | Year endedDecember31, |
|                                                                               |  | 2005                  |        | 2004    |
| Premium income on credit swapssold                                                 |  | $                     | 53,702 |    |  | $      | 43,494  |    |
| Premium incomeon tranche sold                                                      |  |                  | 324    |    |  |   | — |    |
| Premiumexpense on credit swaps purchased as short-terminvestments                  |  |                  | (1,254 | )  |  |   | (927    | )  |
| Premiumexpense on credit swaps purchased to offset credit risk on certainswapssold |  |                  | (67    | )  |  |   | (92     | )  |
| TotalNet PremiumsEarned                                                            |  | $                     | 52,705 |    |  | $      | 42,475  |    |
|                                                                                    |

Premiumincome on credit swaps sold increased primarily as a result of theexpansion in our credit swap portfolio. The quarterly average notionalamounts outstanding of credit swaps sold were $12.0  billion and$8.6  billion in 2005 and 2004, respectively.

We began tosell protection in tranche format during the second quarter of 2005,whereby we sell credit swaps referencing portfolios containingobligations of multiple reference entities. Premium income from thetranche sold was $324  thousand for the year endedDecember  31,  2005, and the notional amount outstandingwas $50  million at December  31,  2005.

Thepremium expense on credit swaps purchased as short-term investments was$1.3  million and $927  thousand for the years endedDecember  31,  2005 and 2004, respectively. AtDecember  31,  2005, we had no outstanding credit swapspurchased as short-term investments, whereas the notional 

36

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amount outstanding at December31,  2004 was $468.2  million. The average outstandingbalance was higher during 2005 than in 2004, resulting in higherpremium expense in 2005.

The notional amounts of credit swapsthat we had purchased to offset credit risk on certain credit swapssold were $0 and $5.0  million at December  31,  2005and 2004.

Net Realized Gains (Losses) on Credit Swaps

Our business strategy, for Primus Financial, is generally to holdswaps we sell until maturity. However, there are circumstances in whichwe may terminate a credit swap prior to maturity, either as a result ofcredit considerations or portfolio rebalancing considerations. Wecannot identify at the outset of any credit swap transaction whetherthe credit swap will be terminated or otherwise disposed of prior toits maturity. If the credit swaps we terminate are at attractive marketvalues, we are able to realize gains.

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

We terminated $428.0  million and $804.5  millionnotional amount of credit swaps sold during the years endedDecember  31,  2005 and 2004, respectively. Net realizedgains (losses) on the early termination of credit swaps sold were$(3.5) million and $4.4  million for the years endedDecember  31,  2005 and 2004, respectively.

The netrealized losses incurred during 2005 were primarily the result of ourdecision to mitigate our exposure to a limited number of referenceentities, which had become the subject of leveraged buy-outs, whichincreased the credit risk of those reference entities.

In thepast we also purchased credit protection as a short-term investment,and, in that case, early termination of the credit swaps was afundamental part of our business strategy. In the course of 2005, weterminated the portfolio of swaps purchased as short-term investmentsbecause results had not met our expectations. We terminated$484.0  million and $257.7  million notional amount ofcredit swaps purchased during the years ended December31,  2005 and 2004, respectively. We realized a net loss of$1.5  million and a net gain of $1.1  million from theearly termination of credit swaps purchased as short-term investmentsfor the years ended December  31,  2005 and 2004,respectively. Net realized gains (losses) for the years endedDecember  31,  2005 and 2004 are summarized below:

|                                                                                               |  |                       |        |         |  |        |         |         |  |  |
|-----------------------------------------------------------------------------------------------|--|-----------------------|--------|---------|--|--------|---------|---------|--|--|
| ($in thousands)                                                                               |  | Year endedDecember31, |
|                                                                                          |  | 2005                  |        | 2004    |
| Realized gains on terminated credit swapssold                                                 |  | $                     | 1,090  |    |  | $      | 5,533   |    |
| Realized losseson terminated credit swapssold                                                 |  |                  | (4,601 | )  |  |   | (1,139  | )  |
| Realized gainson terminated credit swaps purchased as short-terminvestments                   |  |                  | 719    |    |  |   | 1,260   |    |
| Realizedlosses on terminated credit swaps purchased as short-terminvestments                  |  |                  | (2,196 | )  |  |   | (132    | )  |
| Realizedlosses on terminated credit swaps purchased to offset credit risk oncertain swapssold |  |                  | (174   | )  |  |   | — |    |
| TotalNet Realized Gains/ (Losses) on terminated creditswaps                                   |  | $                     | (5,162 | )  |  | $      | 5,522   |    |
|                                                                                               |

NetUnrealized Gains (Losses) on Credit Swaps

Net unrealized losseson credit swaps were $24.4 million for the year endedDecember  31,  2005 as compared with a loss of $268thousand for the year ended December  31,  2004. The changein unrealized losses on credit swaps reflects the change in the fairvalue of our credit swap portfolio during these periods. The loss in2005 on credit swaps sold is partly attributable to an erosion of fair

37

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value as a result of the credit swaps withpositive fair values having shorter remaining maturities and partly dueto unrealized losses on credit swaps on certain reference entitieswhich were downgraded and/or the subject of leveraged buy-outs duringthe period. The unrealized gain on credit swaps purchased as short-terminvestments in 2005 is due to the termination of our positions in thisportfolio, with the result that unrealized losses were converted froman unrealized to a realized status. The unrealized gains and losses oncredit swaps sold, tranches sold and credit swaps purchased asshort-term investments and for credit risk offset purposes for theyears ended December  31,  2005 and 2004 are summarizedbelow:

|                                                                                                |  |                       |         |         |  |        |         |         |  |  |
|------------------------------------------------------------------------------------------------|--|-----------------------|---------|---------|--|--------|---------|---------|--|--|
| ($in thousands)                                                                                |  | Year endedDecember31, |
|                                                                                           |  | 2005                  |         | 2004    |
| Net unrealized gains (losses) on credit swapssold                                              |  | $                     | (27,530 | )  |  | $      | 1,899   |    |
| Net unrealizedgains on tranchessold                                                            |  |                  | 685     |    |  |   | — |    |
| Net unrealizedgains (losses) on credit swaps purchased as short-terminvestments                |  |                  | 2,202   |    |  |   | (2,225  | )  |
| Netunrealized gains on credit swaps purchased to offset credit riskon certain credit swapssold |  |                  | 206     |    |  |   | 58      |    |
| NetUnrealized Losses on creditswaps                                                            |  | $                     | (24,437 | )  |  | $      | (268    | )  |
|                                                                                                |

AssetManagement Fees

We commenced our third party asset managementactivity during 2004. We recognized $190  thousand and $15thousand of asset management fees for the years ended December31,  2005 and 2004, respectively. Our asset management contractsalso provide for contingent performance fees, none of which have beenearned or accrued at December  31,  2005 or 2004,respectively.

Interest Income Earned

We earned interestincome of $16.0  million and $4.9  million for the yearsended December  31, 2005 and 2004, respectively. The increase ininterest income is attributable to higher average invested balancesderived from the July  2004 issuance of $75  million ofsubordinated debt by Primus Financial and the raising of additionalequity through our IPO in October  2004, retained cash earnings,and higher yields on our investment portfolio. The increase in yieldsis attributable to generally higher market rates of interest prevailingduring 2005, coupled with an extension in the duration of ourinvestment portfolio. Weighted average yields on the cash equivalentsand available-for-sale investments were 3.22% in the year endedDecember  31,  2005 compared with 1.42% for the yearended December  31,  2004. Our total cash, cash equivalentsand available-for-sale investments were approximately $629.5million and $482.1  million as of December  31,  2005and 2004, respectively.

Foreign Currency Revaluation

Wesell and buy credit swaps denominated in U.S. dollars and euros.Euro-denominated credit swaps comprised 26% of the notionalamount of our credit swaps sold portfolio at December  31,2005. Net premiums received from swaps denominated in euros wereretained in euros during 2004 and until the fourth quarter of 2005.During 2004, the euro increased in value against the U.S. dollarresulting in a revaluation gain of $726  thousand on the eurocash holdings during that year. In 2005, the euro lost value againstthe U.S. dollar resulting in revaluation losses of $1.5  million.During 2005, we changed our policy with regard to holding euro cash. Wenow sell the majority of our net euro premium receipts as they arereceived for U.S. dollars, retaining only a small working cash balancein euros.

38

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Operating Expenses

Our operatingexpenses were $27.5 million and $27.0  million for theyears ended December  31,  2005 and 2004, respectively, assummarized below:

|                                          |  |                       |        |        |  |        |        |        |  |  |
|------------------------------------------|--|-----------------------|--------|--------|--|--------|--------|--------|--|--|
| ($in thousands)                          |  | Year endedDecember31, |
|                                     |  | 2005                  |        | 2004   |
| Compensation and employeebenefits        |  | $                     | 15,935 |   |  | $      | 17,801 |   |
| Professionaland legalfees                |  |                  | 4,534  |   |  |   | 2,414  |   |
| Depreciation andamortization             |  |                  | 2,123  |   |  |   | 1,951  |   |
| Technologyand datafeeds                  |  |                  | 1,630  |   |  |   | 1,363  |   |
| Other                                    |  |                  | 3,326  |   |  |   | 3,476  |   |
| TotalOperatingExpenses                   |  | $                     | 27,548 |   |  | $      | 27,005 |   |
| Numberof full-time employees, at yearend |  |                  | 35     |   |  |   | 33     |   |
|                                          |

Employeecompensation in 2004 includes $3.3  million of compensation costdue to accelerated vesting of employee stock associated with the IPO.Excluding this accelerated vesting cost, employee compensationincreased in 2005 by $1.4  million. This increase was due in partto the increase in our number of employees as our business expanded itsoperations. In addition, in the first quarter of 2005 we accrued anadditional expense of approximately $800  thousand for theaccelerated compensation expenses and accelerated vesting of stockrelated to the departure of former employees. Professional and legalfees expense includes audit and tax advisor expenses, legal costs anddirector and officer insurance expense. The increase in professionaland legal fees is primarily related to the requirements of being apublic company. Other operating expenses include rent, bank fees andinvestment management fees, rating agency fees, brokerage expense,travel and entertainment, exchange fees and other administrativeexpenses.

Interest Expense and PreferredDistributions

For the years ended December  31,2005 and 2004, we incurred $2.7  million and $0.9  millionof interest expense, respectively. The interest expense was primarilyincurred on the $75.0  million 30-year subordinated debt that wasissued by Primus Financial in July  2004. The interest rate forthe 30-year subordinated debt was fixed at 2.57% for a period ofone year from the issuance date, and thereafter has been reset at28-day intervals. The interest rate on this instrument averaged2.57% in the period from July  2004 throughDecember  2004 and 3.11% in 2005.

OnDecember  19,  2005, Primus Financial issued in aggregate$125.0  million of subordinated deferrable interest notes,consisting of $75.0  million of Series A notes and $50.0million of Series B notes, which mature in June  2021. Theinterest rate on the Series A notes was fixed on the issuance date at arate of 4.57% for 25 days and then subsequently the rate will beset every 28 days through a monthly auction process. The interest rateon the Series B notes was fixed on the issuance date at a rate of5.60% for one year and then subsequently, the rate will be setevery 28 days through a monthly auction process.

PrimusFinancial also made net distributions of $3.9  million and$2.1  million during the years ended December  31,2005 and 2004, respectively, on the Primus Financial CumulativePreferred Stock issued in December  2002. The average rate paidon these securities was 3.95% and 2.06% during the yearsended December  31,  2005 and 2004,respectively.

Income Taxes

Provision for income taxeswas $46  thousand for each of the years ended December31,  2005 and 2004, respectively. Primus Guaranty had a net U.S.deferred tax asset fully offset by a valuation allowance of $4.8million and $9.3  million as of December  31,  2005and 2004, respectively. As previously discussed, it is expected thatonly the income of Primus Asset Management and its subsidiary, PrimusRe, are likely to be subject to United States federal and local incometaxes. 

39

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However, were Primus Bermuda to be subjectto income tax, at a combined United States federal, New York State andNew York City income tax rate of 46% on its U.S. GAAP income,then its income tax expense (excluding interest and penalties) wouldhave been approximately $3.7  million and $13.1  millionfor the years ended December  31,  2005 and 2004,respectively. These figures assume that Primus Financial is not deemedto be making distributions to Primus Bermuda; such distributions wouldsubject Primus Bermuda to an additional United States federal branchprofits tax.

Year Ended December  31,  2004Compared with Year Ended December  31,  2003

Wehad net income of $23.6  million and $78.5  million for theyears ended December  31,  2004 and 2003, respectively. Thedecrease in net income in 2004 was primarily driven by the lowerunrealized gains in the value of the portfolio of credit swaps sold,coupled with increased expenses and unrealized losses in our portfolioof credit swaps purchased for short term appreciation.

NetCredit Swap Revenue

Net credit swap revenue was$47.7 million and $103.3 million for the years endedDecember  31,  2004 and 2003, respectively. Net credit swaprevenue includes:

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

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

|  |              |                                               |
|--|--------------|-----------------------------------------------|
|  | •  | Net unrealized gains (losses) oncredit swaps. |

The table below shows the component parts of netcredit swap revenue for the years ended December  31,  2004and2003:

|                                             |  |                        |        |         |  |        |         |        |  |  |
|---------------------------------------------|--|------------------------|--------|---------|--|--------|---------|--------|--|--|
| ($in thousands)                             |  | Year ended December31, |
|                                        |  | 2004                   |        | 2003    |
| Net premiumsearned                          |  | $                      | 42,475 |    |  | $      | 38,958  |   |
| Net realizedgains on creditswaps            |  |                   | 5,522  |    |  |   | 17,629  |   |
| Net unrealizedgains (losses) on creditswaps |  |                   | (268   | )  |  |   | 46,739  |   |
| TotalNet Credit SwapRevenue                 |  | $                      | 47,729 |    |  | $      | 103,326 |   |
|                                             |

NetPremiums Earned

Net premiums earned were $42.5  millionand $39.0  million for the years ended December  31,2004 and 2003, respectively. Net premiums earned include:

|  |              |                                      |
|--|--------------|--------------------------------------|
|  | •  | Premium income on credit swaps sold; |

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

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

The increase in net premiums earned was primarily driven by theincrease in the portfolio of credit swaps sold in 2004 as compared to2003, slightly offset by an increase in the premiums paid for creditswaps purchased for short-term investment purposes in 2004. The tablebelow shows the component parts of net premiums earned for the yearsended December  31,  2004 and 2003:

|                                                                                    |  |                        |        |         |  |        |        |         |  |  |
|------------------------------------------------------------------------------------|--|------------------------|--------|---------|--|--------|--------|---------|--|--|
| ($in thousands)                                                                    |  | Year ended December31, |
|                                                                               |  | 2004                   |        | 2003    |
| Premium income on credit swapssold                                                 |  | $                      | 43,494 |    |  | $      | 39,112 |    |
| Premium expenseon credit swaps purchased as short-terminvestments                  |  |                   | (927   | )  |  |   | (19    | )  |
| Premiumexpense on credit swaps purchased to offset credit risk on certainswapssold |  |                   | (92    | )  |  |   | (135   | )  |
| TotalNet PremiumsEarned                                                            |  | $                      | 42,475 |    |  | $      | 38,958 |    |
|                                                                                    |

40

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Premium income on credit swapssold was higher for the year ended December  31,  2004primarily as a result of the expansion in our credit swap portfolio.The quarterly average notional amounts outstanding of credit swaps wesold were $8.6  billion and $5.8  billion in 2004 and 2003,respectively. The increase in premium income due to the expansion inthe swap portfolio was tempered by the lower average premiums earnedduring 2004, a result of general declines in the market levels of swappremiums during 2003 and 2004, and the early termination of certainswaps during this period.

The premium expense on credit swapspurchased as short-term investments was $927  thousand and$19  thousand for the years ended December  31,  2004and 2003, respectively. This activity commenced late in 2003. Thenotional amounts outstanding on credit swaps purchased as short-terminvestments were $468.2  million and $130.0  million atDecember  31,  2004 and 2003, respectively.

Thenotional amounts of credit swaps that we had purchased to offset creditrisk on certain swaps sold were $5.0  million at December31,  2004 and December  31,  2003, representing thesame transaction. No additional transactions of this nature occurred inthe 2004 period.

Net Realized Gains (Losses) on CreditSwaps

We terminated $804.5  million and $977.0million notional amount of credit swaps sold during 2004 and 2003,respectively. Net realized gains on the early termination of creditswaps were $5.5  million and $17.6  million for the yearsended December  31,  2004 and 2003, respectively.

Werealized losses of $1.1  million and $264  thousand for theyears ended December  31,  2004 and 2003, respectively,through the termination of credit swaps to mitigate our creditexposure.

We terminated $257.7  million and $5.0million notional amount of credit swaps purchased during 2004 and 2003,respectively, realizing a net gain of $1.1  million and$28  thousand, respectively.

Terminations of credit swapspurchased to offset credit risk on credit swaps sold created realizedlosses of $448  thousand during 2003, with no like transactionsoccurring during 2004.

Net realized gains (losses) for the yearsended December  31,  2004 and 2003 are summarizedbelow:

|                                                                                                      |  |                        |         |         |  |        |         |         |  |  |
|------------------------------------------------------------------------------------------------------|--|------------------------|---------|---------|--|--------|---------|---------|--|--|
| ($in thousands)                                                                                      |  | Year ended December31, |
|                                                                                                 |  | 2004                   |         | 2003    |
| Realized gains on terminated credit swapssold                                                        |  | $                      | 5,533   |    |  | $      | 18,313  |    |
| Realized losseson terminated credit swapssold                                                        |  |                   | (1,139  | )  |  |   | (264    | )  |
| Realized gains onterminated credit swaps purchased as short-terminvestments                          |  |                   | 1,260   |    |  |   | 28      |    |
| Realized losseson terminated credit swaps purchased as short-terminvestments                         |  |                   | (132    | )  |  |   | — |    |
| Realizedlosses on terminated credit swaps purchased to offset credit risk oncertain credit swapssold |  |                   | — |    |  |   | (448    | )  |
| TotalNet Realized Gains on creditswaps                                                               |  | $                      | 5,522   |    |  | $      | 17,629  |    |
|                                                                                                      |

NetUnrealized Gains (Losses) on Credit Swaps

Net unrealized losseson credit swaps were $268 thousand for the year endedDecember  31,  2004 as compared with a net unrealized gainon credit swaps of $46.7 million for the year endedDecember  31,  2003. Net unrealized gains or losses oncredit swaps reflect the change in the fair value of our credit swapportfolio. The absence of significant unrealized gains on credit swapsfor the year ended December  31,  2004 is a result of themuch smaller increase in the fair value of the portfolio of creditswaps sold during 2004 as compared with 2003, primarily due to muchgreater net decreases in market credit swap premium levels during 2003.For the year ended December  31,  2004, we incurred anunrealized loss of $2.2  million on the portfolio of credit swapspurchased as short-term investments, as compared with a gain of$23  thousand for the year ended December  31,2003.

41

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The unrealized gains (losses) on creditswaps sold and credit swaps purchased as short-term investments and forcredit risk offset purposes for 2004 and 2003 are summarized below:

|                                                                                                |  |                        |        |         |  |        |        |        |  |  |
|------------------------------------------------------------------------------------------------|--|------------------------|--------|---------|--|--------|--------|--------|--|--|
| ($in thousands)                                                                                |  | Year ended December31, |
|                                                                                           |  | 2004                   |        | 2003    |
| Net unrealized gains on credit swapssold                                                       |  | $                      | 1,899  |    |  | $      | 46,663 |   |
| Net unrealizedgains (losses) on credit swaps purchased as short-terminvestments                |  |                   | (2,225 | )  |  |   | 23     |   |
| Netunrealized gains on credit swaps purchased to offset credit riskon certain credit swapssold |  |                   | 58     |    |  |   | 53     |   |
| TotalNet Unrealized Gains (Losses) on creditswaps                                              |  | $                      | (268   | )  |  | $      | 46,739 |   |
|                                                                                                |

AssetManagement Fees

We commenced our third party asset managementactivity during 2004 and earned fees of $15  thousand throughDecember  31,  2004. The fees earned represent the accrualof annual management fees. Our asset management contracts also providefor contingent performance fees, none of which have been earned oraccrued at December  31,  2004.

Interest IncomeEarned

We had interest income of $4.9 million and$2.6 million for the years ended December  31,  2004and 2003, respectively. The increased interest income is attributableto average higher invested balances and higher yields in the cashequivalents and short-term investment accounts as compared with theyear ended December  31,  2003. Average yields on the cashequivalent and short-term investments were 1.3% in the yearended December  31,  2004 and 1.1% in the year endedDecember  31,  2003. This increase is primarily due to ageneral increase in market interest rates in the latter part of 2004.Our cash, cash equivalents and short-term investments wereapproximately $482.1  million and $261.9  million as ofDecember  31,  2004 and 2003, respectively.

Foreigncurrency revaluation

We started selling euro-denominated creditswaps in February  2003 and by December  31,  2004,euro-denominated credit swaps comprised 29.3% of the notionalamount of our credit swaps sold portfolio. The euro appreciated invalue against the U.S. dollar during 2004, and this appreciationresulted in a net gain of $726  thousand for the year endedDecember  31,  2004. For the year ended December31,  2003, the foreign currency revaluation was not significant,and is included in net credit swap revenue in our consolidatedstatements of operations.

Operating Expenses

Ouroperating expenses were $27.0 million and $25.9  millionfor the years ended December  31,  2004 and 2003,respectively, as summarized below:

|                                          |  |                        |         |        |  |        |        |        |  |  |
|------------------------------------------|--|------------------------|---------|--------|--|--------|--------|--------|--|--|
| ($in thousands)                          |  | Year ended December31, |
|                                     |  | 2004                   |         | 2003   |
| Employeecompensation                     |  | $                      | 17,801  |   |  | $      | 11,701 |   |
| Professionaland legalfees                |  |                   | 2,414   |   |  |   | 3,369  |   |
| Depreciation andamortization             |  |                   | 1,951   |   |  |   | 5,831  |   |
| Technologyand datafeeds                  |  |                   | 1,363   |   |  |   | 1,336  |   |
| Excess-of-lossinsurancepremium           |  |                   | — |   |  |   | 727    |   |
| Other                                    |  |                   | 3,476   |   |  |   | 2,933  |   |
| TotalOperatingExpenses                   |  | $                      | 27,005  |   |  | $      | 25,897 |   |
| Numberof full-time employees, at yearend |  |                   | 33      |   |  |   | 29     |   |
|                                          |

42

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The increase in employeecompensation over these periods was primarily due to the increase inthe number of employees as the business expanded its operations,coupled with the increased expense associated with the vesting ofemployee stock and option awards. The IPO resulted in the acceleratedvesting of employee stock and option grants which resulted inadditional expense of $3.3  million in the last quarter of 2004.Professional and legal fees relate to audit and tax advisor expenses,legal costs and director and officer insurance expense. The primaryreason for the decrease in professional and legal fees in 2004 is loweraudit fees incurred during 2004, as compared with 2003, when wecompleted our initial audit. Depreciation and amortization principallyrelates to the amortization of our internally developed software andthe depreciation of our furniture and fixtures. Software amortizationdecreased by approximately $3.9  million for the year endedDecember  31,  2004, compared with the year endedDecember  31,  2003, as a result of a write-off during 2003of approximately $3.2  million relating to previously capitalizedsoftware that was no longer in active use by the company. Technologyand data feed expense relates to the maintenance of our technologyplatform and the cost of providing electronic data to our credit andinvesting teams, and remained consistent with the prior year. Theexcess-of-loss insurance policy premium expense in 2003 relates to asurety policy to cover excess credit losses, which Primus Financialacquired in March  2002 and terminated in March  2003, asit was no longer required as support for its ratings by the ratingagencies. Other operating expenses include rent, bank fees, ratingagency fees, brokerage expense, travel and entertainment, exchange feesand other administrative expenses, which increased over the prior yeardue to the expansion of our operations, and our listing on theNYSE.

Interest Expense and Preferred Distributions

Forthe year ended December  31,  2004, we incurred $0.9million of interest expense primarily on the $75.0  million30-year subordinated debt that was issued by Primus Financial inJuly  2004. The interest rate for the 30-year subordinated debtwas fixed at 2.57% for a period of one year from the issuancedate. Primus Financial also made net distributions of $2.1million and $1.9  million during 2004 and 2003, respectively, onthe Primus Financial Cumulative Preferred Stock issued inDecember  2002. The average rate paid on these securities was2.06% and 1.84%, during the years ended December31,  2004 and 2003, respectively.

Income Taxes

Benefit (provisions) for income taxes were $(46) thousand and$172  thousand for the years ended December  31,2004 and 2003, respectively. Primus Guaranty had a net deferred taxasset fully offset by a valuation allowance of $9.3  million and$5.9  million as of December  31,  2004 and 2003,respectively. The change in the deferred tax asset and valuationallowance between 2003 and 2004 results from Primus AssetManagement’s estimated net operating loss. As previouslydiscussed, it is expected that only the income of Primus AssetManagement and its subsidiary, Primus Re, are likely to be subject toUnited States federal and local income taxes. However, were PrimusBermuda to be subject to income tax, at a combined United Statesfederal, New York State and New York City income tax rate of46%, on its U.S. GAAP income, then its income tax expense(excluding interest and penalties) would have been approximately$13.1  million for 2004 and $37.0  million for 2003. Thesefigures assume that Primus Financial is not deemed to be makingdistributions to Primus Bermuda; such distributions would subjectPrimus Bermuda to an additional United States federal branch profitstax.

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Contractual Obligations

Thefollowing table summarizes our contractual obligations atDecember  31,  2005 and the effect that those obligationsare expected to have on our liquidity and cash flows in futureperiods:

|                                      |  |                      |         |                 |  |           |         |           |  |                  |         |           |  |        |         |           |  |        |         |        |  |  |
|--------------------------------------|--|----------------------|---------|-----------------|--|-----------|---------|-----------|--|------------------|---------|-----------|--|--------|---------|-----------|--|--------|---------|--------|--|--|
| (inthousands)                        |  | Payment due byperiod |
|                                 |  | Total                |         | Lessthan 1 year |  | 1-3 years |         | 3-5 years |  | Morethan 5 years |
| Propertylease                   |  | $                    | 5,022   |            |  | $         | 756     |      |  | $                | 1,512   |      |  | $      | 1,566   |      |  | $      | 1,188   |   |
| Subordinateddeferrable interestnotes |  |                 | 200,000 |            |  |      | — | (a)  |  |             | — | (a)  |  |   | — | (a)  |  |   | 200,000 |   |
| Total                           |  | $                    | 205,022 |            |  | $         | 756     |      |  | $                | 1,512   |      |  | $      | 1,566   |      |  | $      | 201,188 |   |
|                                      |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                              |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------|
| (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 on terms and conditions for an amendment to the lease that wouldextend its term to 2016 and add approximately 5,500 square feet ofadditional space. There are no material restrictions imposed by thelease agreement and the lease is categorized as an operatinglease.

Subordinated deferrable interest notes:    Forinformation on the terms of our subordinated deferrable interest notes,see Note 9 of our notes to consolidated financial statements.

Wehave no other material long-term contractualobligations.

Liquidity and Capital Resources

CapitalStrategy

Primus Financial, in order to support its AAA/Aaaratings, is required to maintain capital in an amount determined by thecapital models it has agreed upon with S&P and Moody’s. Thecapital required is primarily a function of Primus Financial’scredit swap portfolio characteristics, operating expenses and taxposition. Retained cash flow and proceeds from financings are utilizedto increase our capital resources to support our credit swapbusiness.

We receive cash from the receipt of credit swappremiums, realized gains from the early termination of credit swaps,interest income earned on our investment portfolio and capital raisingactivities. Cash is used to pay our operating expenses, administrativeexpenses, premiums on credit swaps we have purchased, realized lossesfrom the early termination of credit swaps, interest on debt andpreferred share distributions. Our cash, cash equivalents andavailable-for-sale investments were $629.5  million and$482.1 million as of December  31,  2005 and 2004,respectively.

In connection with the commencement of ouroperations on March  14,  2002, we were capitalized with$155.0  million from the issuance of our Series A preferred stockto two subsidiaries of XL Capital Ltd, or XL, Transamerica LifeInsurance Company, a subsidiary of AEGON USA, Pacific CorporateGroup/CalPERS and Radian Group Inc., or Radian. In connection with theissuance of the Series A preferred stock, we issued warrants to Radianenabling them to purchase 1,061,059 common shares at a exercise priceof $5.18 per share. On May  15,  2004, Radian exercisedthese warrants and, as result of, we received $5.5  million. Uponcompletion of our IPO, all of the Series A preferred stock wereconverted into common shares of the company.

Primus Guarantycompleted the IPO on October  5,  2004, listing its shareson the NYSE. The company issued 9,143,493 shares at a price of $13.50.Proceeds to the company were $110.7  million, net of theunderwriting discount and offering expenses. Primus Guarantyconcurrently contributed $60.0  million of the IPO proceeds toPrimus Financial to support the growth of its credit swap business.Primus Guaranty invested the remaining net proceeds in short-term moneymarket 

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instruments, pending utilization in itscredit swap business and/or other businesses related to the creditmarkets. In January  2006, Primus Guaranty contributed$50.0  million to PRS Trading Strategies, Inc., a subsidiarycompany established to trade credit swaps and similar instruments.

Primus Financial issued $110.0  million of Primus FinancialCumulative Preferred Stock on December  19,  2002 in twoseries, Series I and Series II, to a trust, or the Trust. Inconjunction with the receipt of the securities, the Trust issued$100.0  million of Money Market Preferred Securities CustodialReceipts, or MMP Receipts, in two series, Series A and Series B, tovarious institutional investors in a private placement. The Trust alsoissued $10.0  million of Variable Inverse Preferred SecuritiesCustodial Receipts that were retained by Primus Financial. One seriesof MMP Receipts pays distributions every 28 days based on an auctionrate set on the prior business day and the other series makes paymentsquarterly, based on an auction rate, which is currently set annually,and was last set in January  2006. After December19,  2012, Primus Financial may redeem the securities, in wholeor in part, on any distribution date at the face amount plusaccumulated and unpaid dividends. However, Primus Financial is notrequired to redeem the securities, nor is it required to establish asinking fund. For the years ended December  31,  2005, 2004and 2003, Primus Financial made net distributions to holders of theTrust’s MMP Receipts in an amount equal to $3.9  million,$2.1  million and $1.9  million, respectively.

PrimusFinancial issued $75.0  million of subordinated deferrableinterest notes on July  23,  2004. The notes aresubordinated in right of payment to the prior payment in full of allexisting and future senior indebtedness of the company, includingcounterparty claims. The notes are redeemable at the option of PrimusFinancial, in whole or in part, on any auction date, at a redemptionprice equal to 100% of the principal amount of the notes to beredeemed, plus any accrued and unpaid interest thereon to theredemption date. The interest rate on the notes was fixed at a rate of2.57% until July  2005, from which point the rate is setevery 28 days through a monthly auction process. The notes mature inJuly  2034.

On December  19,  2005, PrimusFinancial issued in aggregate $125.0  million of subordinateddeferrable interest notes, consisting of $ 75.0  million ofSeries A and $50.0  million of Series B notes, which mature inJune  2021. The notes are subordinated in right of payment to theprior payment in full of all existing and future senior indebtedness ofthe company, including counterparty claims, and to the subordinateddeferrable interest notes issued in July  2004. The notes areredeemable at the option of Primus Financial, in whole or in part, onany auction date, at a redemption price equal to 100% of theprincipal amount of the notes to be redeemed, plus any accrued andunpaid interest thereon to the redemption date. The interest rate onthe Series A notes was fixed on the issue date at a rate of4.57% for 25 days and then subsequently, the rate will be setevery 28 days through a monthly auction process. The interest rate onthe Series B notes was fixed on the issue date at a rate of5.60% for one year and then subsequently, the rate will be setevery 28 days through a monthly auction process.

Additionally,as required by our operating guidelines, Primus Financial maintains a$37.5  million liquidity facility with Harris Trust and SavingsBank, or Harris Trust. The purpose of the liquidity facility is toprovide Primus Financial with cash in the event it is obligated topurchase a Reference Entity’s debt obligation as the result of acredit event and cannot liquidate its investments in order to settle apurchase on a timely basis. The liquidity facility requires that PrimusFinancial have United States government securities available to pledgeas collateral on any advances made under the facility. The LiquidityFacility is subject to a commitment fee of 0.25% per annum. Thefacility is renewable on an annual basis at the option of PrimusFinancial or Harris Trust. We have applied to the rating agencies forpermission to terminate this facility. At December  31,2005, the facility had a maturity date of March  9,  2006.As of December  31,  2005, there have been no credit eventsand there have been no borrowings under the facility.

CashFlows

Cash flows from operating activities –Net cash provided by operating activities was $36.3  million and$33.1  million for the years ended December  31,2005 and 2004, respectively. This increase is 

45

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primarily attributable to higher premiumincome on swaps sold during 2005 compared to 2004, as a result of thecontinued growth of our credit swap portfolio.

Net cash providedby operating activities was $33.1  million and $43.5million for the years ended December  31,  2004 and 2003,respectively. This decrease is primarily attributable to lower realizedgains for the year ended December  31,  2004 as compared tothe year ended December  31,  2003, partially offset by theincrease in premiums received from credit swaps sold.

Cashflows from investing activities – Net cash used in investingactivities was $404.3  million and $158.1  million for theyears ended December  31,  2005 and 2004, respectively. Theincrease was primarily due to higher purchases of available-for-saleinvestments during 2005 compared with the 2004, as a result of theproceeds from the issuance of deferrable notes and the IPO.

Netcash used in investing activities was $158.1  million and$4.6  million for the years ended December  31,  2004and 2003, respectively. During 2004, we invested $157.1  millionin short-term investments as compared with $4.0  million in 2003.The additional cash invested was derived from our IPO in October2004, as well as proceeds from the issuance of subordinated deferrableinterest notes in July  2004.

Cash flows from financingactivities – Net cash provided by financing activities was$116.4  million and $188.0  million for the years endedDecember  31,  2005 and 2004, respectively. The decreasewas primarily due to our IPO in October  2004, from whichproceeds of $110.7  million, net of expenses, were received, aswell as the issuance of our $75.0  million of subordinateddeferrable interest notes in July  2004. This decrease waspartially offset by the issuance of our $125.0  million ofsubordinated deferrable interest notes in December  2005.

Net cash provided by (used in) financing activities was$188.0  million and $(1.9) million for the years endedDecember  31,  2004 and 2003, respectively. This increasewas due to our IPO in October  2004, from the proceeds of whichwere $110.7  million, net of underwriting discounts and offeringexpenses, as well as the issuance of subordinated deferrable interestnotes in 2004 of $75.0  million. In addition, Radian exercisedwarrants in 2004, yielding proceeds to the company of $5.5million. This increase was partially offset by preferred distributionsof $2.1  million in 2004, as compared to $1.9  milliondistributed in 2003.

With our current capital resources andanticipated future credit swap premium receipts and interest income, webelieve we have sufficient liquidity to pay our operating and financingexpenses (including preferred distributions) over at least the nexttwelve months.

Recent Accounting Pronouncements

In December  2004, the FASB issued SFAS No. 123 (R),Share-Based Payment. SFAS No. 123 (R) is a revision of SFAS No. 123 andsupersedes Accounting Principles Board(‘‘APB’’) Opinion No. 25, Accounting forStock Issued to Employees, and amends SFAS No. 95 Statement of CashFlows. SFAS No. 123 (R) eliminates the ability to account forshare-based compensation transactions using APB Opinion No. 25 andrequires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the financial statementsusing a fair value-based method. In April  2005, the Securitiesand Exchange Commission (‘‘SEC’’) amendedthe effective date of SFAS No. 123 (R) to provide additional time forcompanies to comply with the reporting requirements. The Company willadopt SFAS No. 123 (R) during the first quarter of 2006, and does notexpect its adoption to have a material impact on the consolidatedfinancial statements.

In March  2005, the SEC staff issuedStaff Accounting Bulletin No. 107 (‘‘SAB No.107’’) to provide guidance on SFAS No. 123 (R). SAB No.107 provides the staff’s view regarding the valuation ofshare-based payment arrangements for public companies. In particular,this SAB provides guidance related to share-based payment transactionswith non-employees, the transition from non public to public entitystatus, valuation methods (including assumptions such as expectedvolatility and expected term), the accounting for certain redeemablefinancial instruments issued under share-based payment arrangements,the classification of compensation expense, non-GAAP financialmeasures, first time adoption of SFAS No. 123 (R), the modification ofemployee share options prior to the adoption of 

46

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SFAS No. 123 (R) and disclosure inManagement’s Discussion and Analysis subsequent to adoption ofSFAS No. 123 (R). The Company does not expect its adoption of thisguidance to have a material impact on the consolidated financialstatements.

In May  2005, the Financial AccountingStandards Board (‘‘FASB’’) issued SFAS 154,Accounting Changes and Error Corrections – a replacement ofAPB 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 when it becomes applicable.

InNovember  2005, the FASB issued FASB Staff Position FSP 115-1,The Meaning of Other-Than Temporary Impairment and Its Applicationto Certain Investments (FSP 115-1), which addresses thedetermination as to when an investment is considered impaired, whetherthat impairment is other-than-temporary, and the measurement of animpairment loss. FSP 115-1 also includes accounting considerationssubsequent to the recognition of an other-than-temporary impairment andrequires certain disclosures about unrealized losses that have not beenrecognized as other-than-temporary impairments. The guidance in FSP115-1 is required to be applied to reporting periods beginning afterDecember 15, 2005. The Company does not expect its adoption tohave a material effect on the consolidated financialstatements.

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Item 7A.    Quantitative andQualitative Disclosures about Market Risk

Market risk representsthe potential for losses that may result from changes in the value of afinancial instrument as a consequence of market conditions. Our primarymarket risk is increasing or decreasing market credit swap premiumlevels, which increase or decrease the fair value of our credit swapportfolio. Market credit swap premium levels change as a result ofspecific events or news related to a Reference Entity, such as a changein a credit rating by any of the rating agencies. Additionally, marketcredit swap premium levels can vary as a result of changes in marketsentiment. As a general matter, given our strategy of holding creditswaps sold until maturity, we do not seek to manage our overallexposure to market credit swap premium levels, and we expectfluctuations in the fair value of our credit swap portfolio as a resultof these changes. As of December  31,  2005, each one basispoint increase or decrease in market credit swap premiums woulddecrease or increase the fair value of our credit swap portfolio byapproximately $4.2  million. We face other market risks, whichare likely to have a lesser impact upon our net income than thoseassociated with market credit swap premium level risk. These otherrisks include interest rate risk associated with market interest ratemovements. These movements may affect the value of our credit swapportfolio as our pricing model includes an interest rate component,which is used to discount future expected cash flows. Interest ratemovements may also affect the carrying value of and yield on ourinvestments. The Primus Financial Cumulative Preferred Stock paysdistributions that are based upon the auction rate preferred market. Adifference between the rates we pay in the auction rate preferredmarket and the interest rates we receive on our investments may resultin an additional cost to our company. Assuming that auction resultswith respect to the Primus Financial Cumulative Preferred Stock reflectprevailing short-term interest rates, each 25 basis point increase ordecrease in the level of those rates would increase or decrease PrimusFinancial’s annual distribution cost by approximately $125,000for each of the Series A and Series B MMP Receipts, but would notaffect distributions on the Series B MMP Receipts as the interest andauction rate for such MMP Receipts were set for a one year period onJanuary  20,  2006. In addition, interest rate movementsmay increase or decrease the interest expense we incur on our$200  million of subordinated deferrable interest notes. A 25basis point increase in the level of those rates would increase PrimusFinancial’s interest expense by $500,000 annually, however atDecember  31,  2005, the interest rate on the $50million Series B subordinated deferrable interest notes was set for aone year period expiring in December of 2006.

Counterparty riskrepresents the potential for loss should one or more of ourcounterparties be unable to meet its obligations due to bankruptcy or asimilar event, which could adversely affect our results of operations.Our counterparties generally have investment grade credit ratings. AtDecember  31,  2005, the notional and fair value amount ofcredit swaps outstanding with respect to our counterparties that hadcredit ratings of below investment grade were $5.0  million and$37  thousand, respectively. The premiums on these transactionswere fully prepaid by the counterparties.

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|                |                                            |
|----------------|--------------------------------------------|
| Item 8.   | FinancialStatements and Supplementary Data |

Primus Guaranty,Ltd.Index to Consolidated FinancialStatements

|                                                                                                          |  |    |  |  |  |  |
|----------------------------------------------------------------------------------------------------------|--|----|--|--|--|--|
| Reportsof Independent Registered Public AccountingFirm                                                   |  | 50 |
| Management’s Report onInternal Control over FinancialReporting                                     |  | 52 |
| Consolidated Statements ofFinancial Condition as of December  31,  2005 and2004                          |  | 53 |
| Consolidated Statements ofOperations for the years ended December  31,  2005, 2004and 2003               |  | 54 |
| Consolidated Statements ofStockholders’ Equity for the years ended December31,  2005, 2004 and2003 |  | 55 |
| Consolidated Statements of CashFlows for the years ended December  31,  2005, 2004 and2003               |  | 56 |
| Notes to Consolidated FinancialStatements                                                                |  | 57 |
|                                                                                                          |

All FinancialStatement Schedules are omitted because they are not applicable or therequired information is shown in the Consolidated Financial Statementsor the Notes thereto.

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Reportof Independent Registered Public Accounting Firm

To theBoard of Directors and Shareholders’ ofPrimus Guaranty,Ltd.

We have audited the accompanying consolidatedstatements of financial condition of Primus Guaranty, Ltd. (the‘‘Company’’) as of December31,  2005 and 2004, and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for each of thethree years in the period ended December  31,  2005. Thesefinancial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conductedour audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. Anaudit includes consideration of internal control over financialreporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressingan opinion on the effectiveness of the Company’s internalcontrol over financial reporting. Accordingly, we express no suchopinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates madeby management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis forour opinion.

In our opinion, the financial statementsreferred to above present fairly, in all material respects, theconsolidated financial position of Primus Guaranty, Ltd. atDecember  31,  2005 and 2004, and the consolidated resultsof its operations and its cash flows for each of the three years in theperiod ended December  31,  2005, in conformity with U.S.generally accepted accounting principles.

We also haveaudited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States) the effectiveness of PrimusGuaranty, Ltd’s internal control over financial reporting as ofDecember  31,  2005, based on criteria established inInternal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our reportdated March  3,  2006 expressed an unqualified opinionthereon.

/s/ Ernst & Young LLPNew York,NY

March  3,  2006

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Report of IndependentRegistered Public Accounting Firm

To the Board ofDirectors and Shareholders’ of Primus Guaranty, Ltd.

We have audited management's assessment, included inthe accompanying Management's Assessment of Internal Controlover Financial Reporting, that Primus Guaranty, Ltd. (the‘‘Company’’) maintained effective internalcontrol over financial reporting as of December  31,  2005,based on criteria established in Internal Control—IntegratedFramework, issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (the ‘‘COSOcriteria’’). Primus Guaranty, Ltd.'s management isresponsible for maintaining effective internal control over financialreporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express anopinion on management's assessment and an opinion on theeffectiveness of the Company's internal control over financialreporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we planand perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained inall material respects. Our audit included obtaining an understanding ofinternal control over financial reporting, evaluatingmanagement's assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinion.

A company's internal control over financial reportingis a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally acceptedaccounting principles. A company's internal control overfinancial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositionsof the assets of the company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, ordisposition of the company's assets that could have a materialeffect on the financial statements.

Because of itsinherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controlsmay become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures maydeteriorate.

In our opinion, management'sassessment that Primus Guaranty, Ltd. maintained effective internalcontrol over financial reporting as of December  31,  2005,is fairly stated, in all material respects, based on the COSO criteria.Also, in our opinion, Primus Guaranty, Ltd. maintained, in all materialrespects, effective internal control over financial reporting as ofDecember  31,  2005, based on the COSO criteria.

We also have audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), theconsolidated statement of financial condition of Primus Guaranty, Ltd.as of December  31,  2005 and 2004 and the relatedconsolidated statements of income, changes in stockholders'equity and cash flows for each of the three years in the period endedDecember  31,  2005 and our report dated March 3,2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLPNew York, NewYork

March 3, 2006

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Management’s Reporton Internal Control over Financial Reporting

Ourmanagement is responsible for establishing and maintaining adequateinternal control over financial reporting for the Company. Internalcontrol over financial reporting is defined in Rule 13a-15(f) or15d-15(f) under the Securities Exchange Act of 1934 as a processdesigned by, or under the supervision of, our principal executive andprincipal financial officers and effected by our board of directors,management and other personnel, to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles.

Because of its inherentlimitations, internal control over financial reporting may not preventor detect misstatements. Also projections of any evaluation ofeffectiveness to future periods are subject to the risk that controlsmay become inadequate because changes in conditions, or that the degreeof compliance with the policies or procedures maydeteriorate.

Management assessed the effectiveness of theCompany’s internal control over financial reporting as atDecember  31,  2005. In making this assessment, it used thecriteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) Internal Control-Integrated Framework. Basedon our assessment, we believe that as of December  31,2005, the Company’s internal control over financial reporting iseffective based on that criteria.

Ernst & Young LLP,an independent registered public accounting firm has issued a report onour assessment of the Company's internal control over financialreporting. This report appears on page51.

|                        |  |                        |  |  |  |  |
|------------------------|--|------------------------|--|--|--|--|
| /s/Thomas W. Jasper    |  | /s/ Richard Claiden    |
| ThomasW. Jasper        |  | Richard Claiden        |
| Chief ExecutiveOfficer |  | Chief FinancialOfficer |
|                        |

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Primus Guaranty,Ltd.Consolidated Statements of Financial Condition(dollarsin 000s except per shareamounts)

|                                                                                                                                                   |  |             |         |         |  |        |         |        |  |  |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--|-------------|---------|---------|--|--------|---------|--------|--|--|
|                                                                                                                                              |  | December31, |
|                                                                                                                                              |  | 2005        |         | 2004    |
| **Assets**                                                                                                                                        |  |        |    |    |  |   |    |   |
| Cashand cashequivalents                                                                                                                           |  | $           | 69,355  |    |  | $      | 320,989 |   |
| Available-for-saleinvestments                                                                                                                     |  |        | 560,147 |    |  |   | 161,101 |   |
| Accruedinterestreceivable                                                                                                                         |  |        | 5,127   |    |  |   | 1,381   |   |
| Accruedpremiums on creditswaps                                                                                                                    |  |        | 3,369   |    |  |   | 3,349   |   |
| Premiumsreceivable on creditswaps                                                                                                                 |  |        | 92      |    |  |   | 197     |   |
| Premiums receivable onfinancial guarantees                                                                                                        |  |        | 300     |    |  |   | 800     |   |
| Assetmanagement feereceivable                                                                                                                     |  |        | 2       |    |  |   | 15      |   |
| Prepaidexpenses                                                                                                                                   |  |        | 954     |    |  |   | 868     |   |
| Unrealized gain oncredit swaps, at fairvalue                                                                                                      |  |        | 25,342  |    |  |   | 46,517  |   |
| Fixed assets,net                                                                                                                                  |  |        | 1,682   |    |  |   | 1,800   |   |
| Internal usesoftware costs, less accumulated amortization of $7,744 in 2005 and$5,893 in 2004                                                     |  |        | 3,311   |    |  |   | 4,297   |   |
| Otherreceivables                                                                                                                                  |  |        | 254     |    |  |   | 279     |   |
| Debt issuancecosts,net                                                                                                                            |  |        | 3,147   |    |  |   | 1,125   |   |
| Totalassets                                                                                                                                       |  | $           | 673,082 |    |  | $      | 542,718 |   |
| **Liabilitiesand stockholders’equity**                                                                                                      |  |        |    |    |  |   |    |   |
| Accounts payable andaccruedexpenses                                                                                                               |  | $           | 3,026   |    |  | $      | 904     |   |
| Compensationpayable                                                                                                                               |  |        | 4,833   |    |  |   | 5,317   |   |
| Brokerage feespayable                                                                                                                             |  |        | 9       |    |  |   | 14      |   |
| Taxespayable                                                                                                                                      |  |        | 54      |    |  |   | 12      |   |
| Interestpayable                                                                                                                                   |  |        | 404     |    |  |   | 364     |   |
| Long-termdebt                                                                                                                                     |  |        | 200,000 |    |  |   | 75,000  |   |
| Unrealized losson credit swaps, at fairvalue                                                                                                      |  |        | 3,521   |    |  |   | 259     |   |
| Deferred rentpayable                                                                                                                              |  |        | 416     |    |  |   | 455     |   |
| Deferred financialguarantee premiums                                                                                                              |  |        | 401     |    |  |   | 806     |   |
| Deferredcredit swappremiums                                                                                                                       |  |        | 46      |    |  |   | 69      |   |
| Totalliabilities                                                                                                                                  |  |        | 212,710 |    |  |   | 83,200  |   |
| Preferredsecurities ofsubsidiary                                                                                                                  |  |        | 98,521  |    |  |   | 98,521  |   |
| Commitmentsand contingencies (Note14)                                                                                                             |  |        |    |    |  |   |    |   |
| Stockholders’equity:                                                                                                                        |  |        |    |    |  |   |    |   |
| Common stock, $0.08par value, 62,500,000 shares authorized, 43,176,511 and 42,780,033shares issued and outstanding at December  31,  2005 and2004 |  |        | 3,572   |    |  |   | 3,535   |   |
| Additionalpaid-in-capital                                                                                                                         |  |        | 265,848 |    |  |   | 264,860 |   |
| Warrants                                                                                                                                          |  |        | 612     |    |  |   | 612     |   |
| Accumulatedother comprehensiveloss                                                                                                                |  |        | (4,254  | )  |  |   | — |   |
| Retainedearnings                                                                                                                                  |  |        | 96,073  |    |  |   | 91,990  |   |
| Totalstockholders’equity                                                                                                                    |  |        | 361,851 |    |  |   | 360,997 |   |
| Totalliabilities, preferred securities of subsidiary andstockholders’equity                                                                 |  | $           | 673,082 |    |  | $      | 542,718 |   |
|                                                                                                                                                   |

Seeaccompanying notes.

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Primus Guaranty, Ltd.ConsolidatedStatements of Operations(amounts in 000s except per shareamounts)

|                                                   |  |                       |         |         |  |        |         |         |  |        |         |         |  |  |
|---------------------------------------------------|--|-----------------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                              |  | YearEnded December31, |
|                                              |  | 2005                  |         | 2004    |  | 2003   |
| **Revenues**                                      |  |                  |    |    |  |   |    |    |  |   |    |    |
| Netcredit swaprevenue                             |  | $                     | 23,106  |    |  | $      | 47,729  |    |  | $      | 103,326 |    |
| Premiumsearned on financialguarantees             |  |                  | 405     |    |  |   | 395     |    |  |   | — |    |
| Interestincome                                    |  |                  | 16,047  |    |  |   | 4,850   |    |  |   | 2,617   |    |
| Rentalincome                                      |  |                  | — |    |  |   | 40      |    |  |   | 107     |    |
| Assetmanagementfees                               |  |                  | 190     |    |  |   | 15      |    |  |   | — |    |
| Foreigncurrency revaluation income(loss)          |  |                  | (1,546  | )  |  |   | 726     |    |  |   | — |    |
| Totalnetrevenues                                  |  |                  | 38,202  |    |  |   | 53,755  |    |  |   | 106,050 |    |
| **Expenses**                                      |  |                  |    |    |  |   |    |    |  |   |    |    |
| Compensationand employeebenefits                  |  |                  | 15,935  |    |  |   | 17,801  |    |  |   | 11,701  |    |
| Excess-of-lossinsurance policypremium             |  |                  | — |    |  |   | — |    |  |   | 727     |    |
| Professionaland legalfees                         |  |                  | 4,534   |    |  |   | 2,414   |    |  |   | 3,369   |    |
| Depreciationandamortization                       |  |                  | 2,123   |    |  |   | 1,951   |    |  |   | 5,831   |    |
| Technologyand datafeeds                           |  |                  | 1,630   |    |  |   | 1,363   |    |  |   | 1,336   |    |
| Rent                                              |  |                  | 765     |    |  |   | 744     |    |  |   | 702     |    |
| Bankfees                                          |  |                  | 878     |    |  |   | 576     |    |  |   | 532     |    |
| Ratingagencyfees                                  |  |                  | 266     |    |  |   | 346     |    |  |   | 494     |    |
| Brokerageexpense                                  |  |                  | 129     |    |  |   | 602     |    |  |   | 442     |    |
| Interestexpense                                   |  |                  | 2,660   |    |  |   | 881     |    |  |   | — |    |
| Other                                             |  |                  | 1,288   |    |  |   | 1,208   |    |  |   | 763     |    |
| Totalexpenses                                     |  |                  | 30,208  |    |  |   | 27,886  |    |  |   | 25,897  |    |
| Distributionson preferred securities ofsubsidiary |  |                  | (3,865  | )  |  |   | (2,138  | )  |  |   | (1,854  | )  |
| Incomebefore (provision) benefit for incometaxes  |  |                  | 4,129   |    |  |   | 23,731  |    |  |   | 78,299  |    |
| Benefit(provision) for incometaxes                |  |                  | (46     | )  |  |   | (46     | )  |  |   | 172     |    |
| **NetIncome available to commonshares**           |  | $                     | 4,083   |    |  | $      | 23,685  |    |  | $      | 78,471  |    |
| Earningsper commonshare:                          |  |                  |    |    |  |   |    |    |  |   |    |    |
| Basic                                             |  | $                     | 0.09    |    |  | $      | 1.44    |    |  | $      | 31.18   |    |
| Diluted                                           |  | $                     | 0.09    |    |  | $      | 0.59    |    |  | $      | 2.33    |    |
| Averagecommon sharesoutstanding:                  |  |                  |    |    |  |   |    |    |  |   |    |    |
| Basic                                             |  |                  | 43,150  |    |  |   | 16,486  |    |  |   | 2,517   |    |
| Diluted                                           |  |                  | 44,645  |    |  |   | 40,256  |    |  |   | 33,737  |    |
|                                                   |

Seeaccompanying notes.

54

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Primus Guaranty, Ltd.ConsolidatedStatements of Stockholders’ Equity(dollars in000s)

|                                                                 |  |                       |         |         |  |        |          |         |  |        |         |         |  |  |
|-----------------------------------------------------------------|--|-----------------------|---------|---------|--|--------|----------|---------|--|--------|---------|---------|--|--|
|                                                            |  | YearEnded December31, |
|                                                            |  | 2005                  |         | 2004    |  | 2003   |
| **Commonstock**                                                 |  |                  |    |    |  |   |     |    |  |   |    |    |
| Balance atbeginning ofyear                                      |  | $                     | 3,535   |    |  | $      | 230      |    |  | $      | 208     |    |
| Conversionof warrants to commonstock                            |  |                  | — |    |  |   | 85       |    |  |   | — |    |
| Sharesrepurchased andretired                                    |  |                  | (15     | )  |  |   | —  |    |  |   | (1      | )  |
| Sharesvested under employee compensationplans                   |  |                  | 47      |    |  |   | 91       |    |  |   | 23      |    |
| Issuance ofcommon stock from exercise of stockoptions           |  |                  | 5       |    |  |   |     |    |  |   |    |    |
| Shares issued inInitial PublicOffering                          |  |                  | — |    |  |   | 731      |    |  |   | — |    |
| Conversionof Series A preferredstock                            |  |                  | — |    |  |   | 2,398    |    |  |   | — |    |
| Balanceat end ofyear                                            |  |                  | 3,572   |    |  |   | 3,535    |    |  |   | 230     |    |
| **Additionalpaid-in-capital**                                   |  |                  |    |    |  |   |     |    |  |   |    |    |
| Balanceat beginning ofyear                                      |  |                  | 264,860 |    |  |   | 1,325    |    |  |   | 211     |    |
| Conversionof warrants to commonstock                            |  |                  | — |    |  |   | 5,875    |    |  |   | — |    |
| Sharesrepurchased andretired                                    |  |                  | (3,139  | )  |  |   | —  |    |  |   | (10     | )  |
| Sharesvested under employee compensationplans                   |  |                  | 3,639   |    |  |   | 6,140    |    |  |   | 1,124   |    |
| Issuanceof common stock from exercise of stockoptions           |  |                  | 488     |    |  |   | —  |    |  |   | — |    |
| Sharesissued in Initial PublicOffering                          |  |                  | — |    |  |   | 110,010  |    |  |   | — |    |
| Conversionof Series A preferredstock                            |  |                  | — |    |  |   | 141,510  |    |  |   | — |    |
| Balanceat end ofyear                                            |  |                  | 265,848 |    |  |   | 264,860  |    |  |   | 1,325   |    |
| **Convertiblepreferredstock**                                   |  |                  |    |    |  |   |     |    |  |   |    |    |
| Balance atbeginning ofyear                                      |  |                  | — |    |  |   | 143,908  |    |  |   | 143,908 |    |
| Conversionof Series A to commonstock                            |  |                  | — |    |  |   | (143,908 | )  |  |   | — |    |
| Balanceat end ofyear                                            |  |                  | — |    |  |   | —  |    |  |   | 143,908 |    |
| **Warrants**                                                    |  |                  |    |    |  |   |     |    |  |   |    |    |
| Balanceat beginning ofyear                                      |  |                  | 612     |    |  |   | 1,070    |    |  |   | 1,070   |    |
| Conversionof warrants to commonstock                            |  |                  | — |    |  |   | (458     | )  |  |   | — |    |
| Balanceat end ofyear                                            |  |                  | 612     |    |  |   | 612      |    |  |   | 1,070   |    |
| **Accumulatedother comprehensiveloss**                          |  |                  |    |    |  |   |     |    |  |   |    |    |
| Balance atbeginning ofyear                                      |  |                  | — |    |  |   | —  |    |  |   | — |    |
| Netunrealized holding losses on available-for-salesecurities    |  |                  | (4,254  | )  |  |   | —  |    |  |   | — |    |
| Balanceat end ofyear                                            |  |                  | (4,254  | )  |  |   | —  |    |  |   | — |    |
| **Retainedearnings**                                            |  |                  |    |    |  |   |     |    |  |   |    |    |
| Balance atbeginning ofyear                                      |  |                  | 91,990  |    |  |   | 68,305   |    |  |   | (10,166 | )  |
| Netincome                                                       |  |                  | 4,083   |    |  |   | 23,685   |    |  |   | 78,471  |    |
| Balanceat end ofyear                                            |  |                  | 96,073  |    |  |   | 91,990   |    |  |   | 68,305  |    |
| Totalstockholders’ equity at end ofyear                   |  | $                     | 361,851 |    |  | $      | 360,997  |    |  | $      | 214,838 |    |
| **Comprehensiveincome (loss)**                                  |  |                  |    |    |  |   |     |    |  |   |    |    |
| Netincome                                                       |  | $                     | 4,083   |    |  | $      | 23,685   |    |  | $      | 78,471  |    |
| Changein net unrealized losses on available-for-saleinvestments |  |                  | (4,254  | )  |  |   | —  |    |  |   | — |    |
| Comprehensiveincome(loss)                                       |  | $                     | (171    | )  |  | $      | 23,685   |    |  | $      | 78,471  |    |
|                                                                 |

Seeaccompanying notes.

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Primus Guaranty, Ltd.ConsolidatedStatements of Cash Flows(dollars in 000s except per shareamounts)

|                                                                                 |  |                       |          |         |  |        |          |         |  |        |         |         |  |  |
|---------------------------------------------------------------------------------|--|-----------------------|----------|---------|--|--------|----------|---------|--|--------|---------|---------|--|--|
|                                                                            |  | YearEnded December31, |
|                                                                            |  | 2005                  |          | 2004    |  | 2003   |
| **Cashflows from operatingactivities**                                          |  |                  |     |    |  |   |     |    |  |   |    |    |
| Netincome                                                                       |  | $                     | 4,083    |    |  | $      | 23,685   |    |  | $      | 78,471  |    |
| Adjustmentsto reconcile net income to net cash provided by operatingactivities: |  |                  |     |    |  |   |     |    |  |   |    |    |
| Non-cashitems included in netincome:                                            |  |                  |     |    |  |   |     |    |  |   |    |    |
| Depreciationand amortization of fixedassets                                     |  |                  | 272      |    |  |   | 234      |    |  |   | 214     |    |
| Amortizationof internal use software costs                                      |  |                  | 1,851    |    |  |   | 1,717    |    |  |   | 5,617   |    |
| Stockcompensation                                                               |  |                  | 3,686    |    |  |   | 6,230    |    |  |   | 1,146   |    |
| Netunrealized (gain) loss on credit swapportfolio                               |  |                  | 24,437   |    |  |   | 268      |    |  |   | (46,739 | )  |
| Unrealizedgain onsublease                                                       |  |                  | —  |    |  |   | (39      | )  |  |   | (22     | )  |
| Deferredrent                                                                    |  |                  | (39      | )  |  |   | (18      | )  |  |   | 163     |    |
| Amortizationof debt issuancecosts                                               |  |                  | 64       |    |  |   | 14       |    |  |   | — |    |
| Distributionson preferred securities ofsubsidiary                               |  |                  | 3,865    |    |  |   | 2,138    |    |  |   | 1,854   |    |
| Increase(decrease) in cash resulting from changesin:                            |  |                  |     |    |  |   |     |    |  |   |    |    |
| Premiumsreceivable on creditswaps                                               |  |                  | 105      |    |  |   | (57      | )  |  |   | 196     |    |
| Accruedpremiums on creditswaps                                                  |  |                  | (20      | )  |  |   | 293      |    |  |   | 728     |    |
| Deferredcredit swappremiums                                                     |  |                  | (23      | )  |  |   | (43      | )  |  |   | 112     |    |
| Accountreceivable –sublease                                               |  |                  | —  |    |  |   | —  |    |  |   | 9       |    |
| Deferredfinancial guaranteepremiums                                             |  |                  | (405     | )  |  |   | (395     | )  |  |   | 1,201   |    |
| Brokeragefeespayable                                                            |  |                  | (5       | )  |  |   | (36      | )  |  |   | (14     | )  |
| Accruedinterestreceivable                                                       |  |                  | (3,746   | )  |  |   | (1,252   | )  |  |   | 55      |    |
| Prepaidexcess-of-loss insurance policypremium                                   |  |                  | —  |    |  |   | —  |    |  |   | 618     |    |
| Premiumsreceivable on financialguarantees                                       |  |                  | 500      |    |  |   | 401      |    |  |   | (1,201  | )  |
| Prepaidexpenses                                                                 |  |                  | (86      | )  |  |   | (473     | )  |  |   | (53     | )  |
| Assetmanagement feereceivable                                                   |  |                  | 13       |    |  |   | (15      | )  |  |   | — |    |
| Otherreceivables                                                                |  |                  | 25       |    |  |   | (10      | )  |  |   | (269    | )  |
| Accountspayable and accruedexpenses                                             |  |                  | 2,122    |    |  |   | 251      |    |  |   | (60     | )  |
| Compensationpayable                                                             |  |                  | (484     | )  |  |   | (157     | )  |  |   | 1,686   |    |
| Interestpayable                                                                 |  |                  | 40       |    |  |   | 364      |    |  |   | — |    |
| Taxespayable.                                                                   |  |                  | 42       |    |  |   | 12       |    |  |   | (254    | )  |
| Netcash provided by operatingactivities                                         |  |                  | 36,297   |    |  |   | 33,112   |    |  |   | 43,458  |    |
| **Cashflows from investingactivities**                                          |  |                  |     |    |  |   |     |    |  |   |    |    |
| Fixedassetpurchases.                                                            |  |                  | (154     | )  |  |   | (383     | )  |  |   | (92     | )  |
| Purchasesof available-for-sale and otherinvestments                             |  |                  | (755,659 | )  |  |   | (157,133 | )  |  |   | (3,968  | )  |
| Maturitiesand sales of available-for-saleinvestments                            |  |                  | 352,359  |    |  |   | —  |    |  |   | — |    |
| Developmentand purchase of internal usesoftware                                 |  |                  | (865     | )  |  |   | (541     | )  |  |   | (541    | )  |
| Netcash used in investingactivities                                             |  |                  | (404,319 | )  |  |   | (158,057 | )  |  |   | (4,601  | )  |
| **Cashflows from financingactivities**                                          |  |                  |     |    |  |   |     |    |  |   |    |    |
| Proceedsfrom issuance of commonshares                                           |  |                  | —  |    |  |   | 110,744  |    |  |   | — |    |
| Repurchaseand retirement of common stock                                        |  |                  | (3,154   | )  |  |   | —  |    |  |   | (11     | )  |
| Proceedsfrom exercise of stockoptions                                           |  |                  | 493      |    |  |   | —  |    |  |   | — |    |
| Proceedsfrom exercise ofwarrants                                                |  |                  | —  |    |  |   | 5,500    |    |  |   | — |    |
| Proceedsfrom issuance of subordinateddebt                                       |  |                  | 125,000  |    |  |   | 75,000   |    |  |   | — |    |
| Debtissuancecosts                                                               |  |                  | (2,086   | )  |  |   | (1,139   | )  |  |   | — |    |
| Netpreferred distributions ofsubsidiary                                         |  |                  | (3,865   | )  |  |   | (2,138   | )  |  |   | (1,854  | )  |
| Netcash provided by (used in) financingactivities                               |  |                  | 116,388  |    |  |   | 187,967  |    |  |   | (1,865  | )  |
| Netincrease (decrease) incash                                                   |  |                  | (251,634 | )  |  |   | 63,022   |    |  |   | 36,992  |    |
| Cashand cash equivalents at beginning ofyear                                    |  |                  | 320,989  |    |  |   | 257,967  |    |  |   | 220,975 |    |
| Cashand cash equivalents at end ofyear                                          |  | $                     | 69,355   |    |  | $      | 320,989  |    |  | $      | 257,967 |    |
| **Supplementaldisclosures**                                                     |  |                  |     |    |  |   |     |    |  |   |    |    |
| Cash paidforinterest                                                            |  | $                     | 2,572    |    |  | $      | 503      |    |  | $      | — |    |
| Cashpaid fortaxes                                                               |  |                  | 4        |    |  |   | 44       |    |  |   | 347     |    |
|                                                                                 |

Seeaccompanying notes.

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

1.    Organization

Primus Guaranty, Ltd. (‘‘PrimusGuaranty’’ or ‘‘theCompany’’), is a Bermuda holding company, and the100% owner of Primus Bermuda, Ltd. (‘‘PrimusBermuda’’), a Bermuda holding company. Primus Bermuda,originally Primus Barbados, Ltd., was re-domiciled in Bermuda inDecember  2004. Primus Bermuda is the 100% owner of PrimusGroup Holdings, LLC (‘‘Primus GroupHoldings’’), a Delaware limited liability company. PrimusGroup Holdings has two principal operating subsidiaries, PrimusFinancial Products, LLC (‘‘PrimusFinancial’’), and Primus Asset Management, Inc.(‘‘Primus Asset Management’’). PrimusFinancial is a Delaware financial products limited liability companythat maintains a long-term counterparty credit rating of AAA fromStandard & Poor’s (‘‘S&P’’)and Aaa from Moody’s Investors Service, Inc.(‘‘Moody’s’’ and, together withS&P, the ‘‘Rating Agencies’’). TheCompany considers its legal domicile to be where it is incorporated,Bermuda. Primus Financial is primarily a provider of credit riskprotection in the form of credit swaps, covering single name,investment grade corporate and sovereign financial obligations. PrimusFinancial is also permitted to sell credit swaps referencing portfolioscontaining obligations of multiple reference entities. Primus AssetManagement is a provider of administrative and technology support toPrimus Financial and an asset manager for Primus Financial and thirdparties.

Primus Financial and Primus Asset Management function asseparate entities from Primus Group Holdings. Additionally, theobligations of Primus Guaranty are not the obligations of PrimusBermuda, Primus Group Holdings, or any other of its affiliates, andvice versa. Primus Asset Management wholly owns Primus Re, Ltd.(‘‘Primus Re’’), a Bermuda company thatoperates as a financial guaranty insurance company and is licensed as aClass 3 Insurer under the Insurance Act of 1978 of Bermuda.

InJuly  2005, PRS Trading Strategies, LLC (PRSTS), a Delawarelimited liability company, was formed. Primus Guaranty is the100% owner of PRSTS. PRSTS was created to diversify the revenuestreams of the Company. PRSTS will engage in the buying and selling ofcredit protection on single names, indices and tranches. PRSTS had noactivity during 2005.

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

2.    Summary of Significant AccountingPolicies

Basis of Presentation

The consolidatedfinancial statements include the accounts of Primus Guaranty and itssubsidiaries and are presented in accordance with U.S. generallyaccepted accounting principles. Significant intercompany transactionshave been eliminated in consolidation.

The consolidated financialstatements represent a single reportable segment, as defined inStatement of Financial Accounting Standards(‘‘SFAS’’) No. 131, Disclosures aboutSegments of an Enterprise and Related Information.

Theconsolidated financial statements are presented in U.S. dollarequivalents. At December  31,  2005 and 2004, PrimusFinancial’s credit swap activities were conducted in U.S.dollars and Euros.

Certain prior year amounts have beenreclassified to conform to current year presentation.

Use ofEstimates

The preparation of financial statements in conformitywith accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

amounts reported in the financial statementsand accompanying notes. Actual results could differ from thoseestimates. Management’s estimates and assumptions are usedmainly in estimating the fair value of credit swaps and the deferredtax asset valuation.

Cash and Cash Equivalents

PrimusGuaranty defines cash equivalents as short term, highly liquidsecurities and interest earning deposits with original maturities ormaturities at time of purchase of 90 days orless.

Investments

The Company has investments in debtsecurities that are classified as available-for-sale investments.Available-for-sale investments have original maturities or maturitiesat time of purchase greater than 90 days. Available-for-saleinvestments are carried at fair value with the unrealized gains orlosses, net of tax, reported in accumulated other comprehensive loss asa separate component of stockholders’ equity. The Company doesnot have any investments classified as held-to-maturity or tradingsecurities.

Interest Income

The Company earns interestincome on its cash and cash equivalents, including commercial paper andother securities, and on investments, which include the accretion ofdiscount and amortization of the premium recorded upon the acquisitionof such securities.

Credit Swaps

Credit swaps areover-the-counter (‘‘OTC’’) derivativefinancial instruments and are recorded at fair value in accordance withSFAS No. 133, Accounting for Derivative Instruments and HedgingActivities. Obtaining the fair value (as such term is defined inSFAS No. 133) for such instruments requires the use of managementjudgment. These instruments are valued using pricing models based onthe net present value of expected future cash flows and observed pricesfor other OTC transactions bearing similar risk characteristics. Thefair value of these instruments appears on the consolidated statementof financial condition as unrealized gains or losses on credit swaps.The Company does not believe that its credit swaps fall outside thescope of the guidance of SFAS No. 133 paragraph 10d, as amended by SFASNo. 149, Amendment of Statement 133 on Derivative Instruments andHedging Activities, because there is no contractual requirementthat the protection purchaser be exposed to the underlying risk.

Net credit swap revenue includes realized and unrealized gains andlosses on credit swaps and net premiums earned.

Premiums aretaken into income as they are earned over the life of the transaction.Accrued premiums on credit swaps represent net premiums earned but notyet payable by Primus Financial’s counterparty. Premiumsreceivable on credit swaps represents net premiums that are both earnedby and payable to Primus Financial.

ForeignCurrency

Assets and liabilities denominated in non-U.S. dollarcurrencies are translated into U.S. dollar equivalents using year-endspot foreign exchange rates. Gains and losses resulting fromtranslation to U.S. dollar equivalents are reflected in foreignexchange revaluation in the statement of operations for the year endedDecember  31,  2005 and 2004. For the year endedDecember  31,  2003, the foreign currency revaluation wasnot significant and is included in net credit swap revenue in ourconsolidated statements of operations.

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

Financial Guarantee InsuranceContracts

The Company has undertaken a limited amount offinancial guarantee business through its subsidiary Primus Re.Financial guarantees are insurance contracts that contingently requirethe guarantor to make payments to the guaranteed party. The Companydesigns its guarantee contracts to qualify as non-derivatives inaccordance with the scope exception under paragraph 10d of SFAS 133 asamended by SFAS No. 149, Amendment of Statement 133 on DerivativeInstruments and Hedging Activities. This scope exception requiresthat the guaranteed party be exposed to loss both at inception and overthe life of the contract, and incurrence of loss must be preconditionsfor payment under the contract and that these losses are based onpayments to be made solely to reimburse the guaranteed party forfailure of the debtor to satisfy its required payment obligations undera nonderivative contract, either at pre-specified payment dates oraccelerated payment dates as a result of the occurrence of an event ofdefault (as defined in the financial obligation covered by theguarantee contract) or notice of acceleration being made to the debtorby the creditor. Thus, the Company accounts for its financial guaranteecontracts in accordance with SFAS No. 60, Accounting and Reportingby Insurance Enterprises. This requires that premiums are deferredand recognized over the life of the contract and that losses arerecorded in the period that they occur based on an estimate of theultimate cost of losses incurred.

The Company does not activelyoffer financial guarantee insurance. Rather, it is an alternative theCompany has available when a counterparty requests an insurancecontract instead of a credit swap. Generally, a counterparty’schoice of a financial guarantee insurance contract versus a credit swapis determined by economic terms available in the marketplace as well asregulatory and accounting considerations. Also, the purchaser of aninsurance contract cannot submit a claim for payment unless it has aninsurable loss, whereas the purchaser of a credit swap need not haveactual exposure to the underlying risk.

Insurance PremiumsEarned and Receivable and Related Expenses

In exchange forproviding financial guarantee protection to counterparties, Primus Rereceives premiums over the life of the contract. The amount expectedover the life of the policy is reflected in the statement of financialcondition and will be reduced as payments are received quarterly inadvance.

The accounts of Primus Re are not deemed to be separateaccounts under SOP 03-01, Accounting & Reporting by InsuranceEnterprises for Certain Nontraditional Long-Duration Contracts forSeparate Accounts, since investment performance is not passedthrough to the contract holder.

Policy acquisition costs includeonly those expenses that relate primarily to, and vary with, premiumproduction. Such costs generally include compensation of employeesinvolved in underwriting and policy issuance functions, certain ratingagency fees, state premium taxes and certain other underwritingexpenses. As of December  31,  2005 and 2004, no costs havebeen deferred by the Company, as any such amounts have beenimmaterial.

Deferred Financial GuaranteePremiums

Unearned premiums related to the financial guaranteeprotection provided are used to establish the liability at inception.This liability is reflected in income on a straight-line basis over theperiod the risk protection is provided.

Unpaid Losses and LossExpenses on Financial Guarantees

Liabilities for unpaid lossesand loss expenses include the accumulation of individual case estimatesfor claims reported as well as estimates of incurred but not reportedclaims and estimates of 

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

loss settlement expenses on the obligationsit has insured. Estimates will be based upon historical industry lossexperience modified for current trends as well as prevailing economic,legal and social conditions. Any changes in estimates are reflected inoperating results in the period in which the estimates changed. AtDecember  31,  2005 and 2004, the Company had no lossreserves recorded.

Property, Plant and Equipment

Fixedassets are stated at cost less accumulated depreciation andamortization. Fixed assets include computer hardware, telephoneequipment, furniture and fixtures and office equipment, which aredepreciated using a straight-line method over the estimated usefullives of the assets. Leasehold improvements are amortized using thestraight-line method over the shorter of the lease term or estimateduseful life.

Internal Use Software Costs

During theCompany’s development stage, the Company had various aspects ofits proprietary technology platform under applications development. Theprimary applications related to (1) the development of the capitalmodels on which Primus Financial in part has its public ratings based,and (2) the transactional platform which maintains the records of eachtransaction, provides pricing and analytical support for PrimusFinancial’s credit swap business, and provides additionalsupport in the form of automated documentation creation and financialdata necessary to run Primus Financial’s business. The softwareand related costs of developing the capital model and transactionalplatform were capitalized in accordance with Statement of Position(SOP) 98-1, Accounting for the Costs of Computer Software Developedor Obtained for Internal Use (Statement 98-1). These costs arebeing amortized over five years on a straight-line basis.

Inaccordance with Statement 98-1, the Company capitalizes qualifyingcomputer software costs and expenses maintenance and other costs thatdo not qualify for capitalization. The Company amortizes capitalizedsoftware costs using the straight-line method over the estimated usefullives of the software, which is five years.

During 2005 and2004, the Company capitalized software development costs of $865thousand and $541  thousand, respectively. Amortization expenseof internal use software costs was $1.9  million, $1.7million and $5.6  million for the years ended December31,  2005, 2004 and 2003, respectively. During 2003, it wasdetermined that $3.2  million of certain assets were no longernecessary for the Company’s business and were written off andincluded in depreciation and amortization expense in the consolidatedstatements of operations.

Income Taxes

Income tax expenseis computed in accordance with the requirements of SFAS No. 109,Accounting for Income Taxes, which prescribes the asset andliability approach to accounting for income taxes. The asset andliability approach requires the recognition of deferred tax liabilitiesand assets for the expected future tax consequences of temporarydifferences between the carrying amounts and the tax bases of assetsand liabilities. The Company establishes a valuation allowance againstdeferred tax assets when it is more likely than not that some portionor all of those deferred tax assets will not berealized.

Employee Compensation Plans

In 2003, theCompany adopted the fair value approach on a prospective basis forrecording stock-based employee compensation in accordance with the fairvalue method prescribed by SFAS No. 123, Accounting for Stock-basedCompensation, as amended by SFAS No. 148, Accounting for Stock

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

Based Compensation – Transition andDisclosure. Compensation expense is recognized based on the fairvalue of stock options, restricted shares and restricted share units(‘‘RSU’’) granted over the related vestingperiod. The fair value of the stock options granted is determinedthrough the use of an option-pricing model.

See‘‘Recent Accounting Pronouncements’’ for adiscussion of SFAS 123R, ‘‘Share-BasedPayment’’ (‘‘SFAS123R’’), which was issued in December2004.

Recent Accounting Pronouncements

InDecember  2004, the FASB issued SFAS No. 123 (R),‘‘Share-Based Payment’’. SFAS No.123 (R) is a revision of SFAS No. 123 and supersedes AccountingPrinciples Board (‘‘APB’’) Opinion No. 25,Accounting for Stock Issued to Employees, and amends SFAS No.95, Statement of Cash Flows. SFAS No. 123 (R) eliminates theability to account for share-based compensation transactions using APBOpinion No. 25 and requires all share-based payments to employees,including grants of employee stock options, to be recognized in thefinancial statements using a fair value-based method. In April2005, the Securities and Exchange Commission(‘‘SEC’’) amended the effective date ofSFAS No. 123 (R) until the first fiscal year beginning afterJune  15,  2005 to provide additional time for companies tocomply with the reporting requirements. As a result, the Company willadopt SFAS No. 123 (R) during the first quarter of 2006 and does notexpect its adoption to have a material impact on the consolidatedfinancial statements.

In March  2005, the SEC staff issuedStaff Accounting Bulletin No. 107 (‘‘SAB No.107’’) to provide guidance on SFAS No. 123 (R). SAB No.107 provides the staff’s view regarding the valuation ofshare-based payment arrangements for public companies. In particular,this SAB provides guidance related to share-based payment transactionswith non-employees, the transition from non-public to public entitystatus, valuation methods (including assumptions such as expectedvolatility and expected term), the accounting for certain redeemablefinancial instruments issued under share-based payment arrangements,the classification of compensation expense, non-GAAP financialmeasures, first time adoption of SFAS No. 123 (R), the modification ofemployee share options prior to the adoption of SFAS No. 123 (R) anddisclosure in Management’s Discussion and Analysis subsequent toadoption of SFAS No. 123 (R). The Company does not expect its adoptionof this guidance to have a material impact on the consolidatedfinancial statements.

In May  2005, the FinancialAccounting Standards Board (‘‘FASB’’)issued SFAS 154, Accounting Changes and Error Corrections – areplacement of APB Opinion No. 20 and FASB Statement No. 3. Thisstatement requires retrospective application to prior periods’financial statements of changes in accounting principle. SFAS 154 iseffective for accounting changes and corrections of errors made infiscal years beginning after December  15,  2005. TheCompany will apply SFAS 154 in future periods when it becomesapplicable.

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 Company does not expectits adoption to have a material effect on the consolidated financialstatements.

3.    Initial Public Offering

PrimusGuaranty completed an initial public offering(‘‘IPO’’) on October  5,  2004,listing its shares on the NYSE. The Company issued 9,143,493 shares ata price of $13.50. The proceeds to the 

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Company were $110.7  million, net ofthe underwriting discount and offering expenses. Primus Guaranty hassubsequently contributed $60.0  million of the IPO proceeds toPrimus Financial to support the growth of its credit swap business.Primus Guaranty invested the remaining net proceeds in short-term moneymarket instruments, pending utilization in businesses related to thecredit markets. The completion of the IPO caused the Company to vestone-half of the remaining unvested stock, restricted stock units andoptions held by employees at the date of the IPO. The Companyrecognized an expense of approximately $3.3  million in thefourth quarter of 2004 as a result of this acceleratedvesting.

4.    Cash and Cash Equivalents

As ofDecember  31,  2005 and 2004, the Company’s cash andcash equivalents included U.S. government agency obligations (includinggovernment-sponsored enterprises) rated AAA and Aaa by the respectiverating agencies, interest bearing bank deposits, commercial paper andmoney market funds. All outstanding obligations in this category maturewithin 90 days.

5.    Available-for-sale investments

Available-for-sale investments included U.S. government agencyobligations (including government-sponsored enterprises) rated AAA andAaa by the respective rating agencies and commercial paper.Available-for-sale investments have original maturities or maturitiesat time of purchase greater than 90 days.

At December31,  2005, available-for-sale investments consisted of U.S.government agency obligations (including government-sponsoredenterprises) of $540.5  million and commercial paper of$19.6  million, which have an original maturity or maturity attime of purchase greater than 90 days and less than 3 years.

TheCompany recorded unrealized losses of $4.3  million related toU.S government agency obligations (including government-sponsoredenterprises) and unrealized gains of $5  thousand related tocommercial paper, which are recorded in accumulated other comprehensiveloss as a component of stockholders’ equity.

Theunrealized losses on the Company’s investments related to U.S.government agency obligations (including government-sponsoredenterprises) and were primarily the result of an increase in interestrates during 2005. These securities have been in a loss position forless 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 untila recovery of fair value, which may be at maturity, the Company doesnot consider these investments to be other-than-temporarily impaired atDecember  31,  2005.

As of December  31,2004, the Company’s investments consisted entirely of short-termU.S. government agency obligations (including government-sponsoredenterprises), which mature within two years.

6. Primus ReFinancial Guarantee Transactions

On December  31,2003, Primus Re wrote three-year financial guarantee insurance policieson three separate reference entities. Primus Re then transferred all ofits risk to Primus Financial through back-to-back credit swapsreferencing the same reference entities as the financial guaranteecontracts and with the same maturities. Any payments required to bemade under the financial guarantee contracts to the insured will becovered by a payment received by Primus Re from Primus Financial. Thesecredit swaps and the related effects on results of operations areeliminated in consolidation. The aggregate notional amount of thecredit swaps is $87.0  million at December  31,  2005and 2004. 

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

Primus Re’s obligation to pay on theinsurance policies requires that (i) the insured suffers a default,(ii) all premiums are paid up until the date that the insured deliversa Notice of Payment to Primus Re and (iii) the Notice of Payment ismade to Primus Re in writing. The maximum payout under the threeguarantee insurance contracts would be $56.5  million. Thisamount is equal to the maximum amount receivable under the offsettingcredit swaps, after deducting stipulated amounts representing theassumed recoveries on reference entity obligations with a notionalamount of $87.0  million.

7.  Credit Swap Revenuesand Portfolio

Net credit swap revenue as presented in theconsolidated statement of operations comprises changes in the fairvalue of credit swaps, realized gains or losses on the termination ofcredit swaps and premium income or expense. The realized gains andlosses on credit swaps represent realized gains and losses on unwoundor assigned credit swaps. The realization of gains or losses on creditswaps will generally result in a reduction in unrealized gains orlosses and accrued premium at the point in time realizationoccurs.

In exchange for providing credit protection to itscounterparties, Primus Financial receives premium payments as a seriesof fixed cash flows. Premiums are taken into income as they are earnedover the life of the transaction. Accrued premiums on credit swapsrepresent premiums earned but not yet payable by PrimusFinancial’s counterparty. Premiums receivable on credit swapsrepresents premiums that are both earned by and payable to PrimusFinancial. When Primus Financial purchases credit protection from itscounterparties, Primus Financial pays premiums as a series of fixedcash flows. The premium expense is recognized ratably over the life ofthe transaction as a component of net credit swap revenue.

Underthe terms of Primus Financial’s operating guidelines,derivatives transactions can only include credit swaps. Credit swapsare derivative transactions that obligate one party to the transaction(the ‘‘Seller’’) to pay an amount to theother party to the transaction (the‘‘Buyer’’) should one of a specified groupof events (‘‘Credit Events’’) be incurredby an unrelated third party or portfolio of third parties (the‘‘Reference Entity’’) specified in thecontract. The amount to be paid by the Seller will either be (a) thenotional amount of the transaction, in exchange for which the Sellermust be delivered a defined obligation of the Reference Entity (calledphysical settlement), or (b) the difference between the current marketvalue of a defined obligation of the Reference Entity and the notionalamount of the transaction (called cash settlement). In exchange forincurring the potential of a Credit Event-generated loss, the Sellerwill receive a fixed premium for the term of the contract (or until theoccurrence of a Credit Event). The fixed premium is generally paidquarterly in arrears over the term of the transaction.

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

Primus Financial is primarily a Seller of creditswaps, although it may also buy credit swaps to off-set the risks ithas incurred as a Seller. Credit swaps purchased to off-set risks donot qualify as hedges in accordance with SFAS No. 133. In addition,Primus Financial is permitted to purchase credit swaps as a limitedpercentage of its overall portfolio (represented as Credit SwapsPurchased in the tables that follow). The company’s operatingguidelines and board authorization limit the notional amount of creditswaps purchased as short term investments to seven and a half percentof the notional amount of credit swaps sold. The primary risks inherentin the Company’s activities are (a) where Primus Financial is aSeller that Reference Entities specified in its credit swaptransactions will experience Credit Events (Credit Events may includeany or all of the following: bankruptcy, failure to pay, repudiation ormoratorium, and modified or original restructuring) that will requirePrimus 

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

Financial to make payments to the Buyers ofthe transactions, (b) where Primus Financial is a Buyer of a creditswap and a Credit Event occurs, the Seller fails to make payment to theCompany, and (c) that Buyers of the transactions from Primus Financialwill default on their required premium payments. During 2005, 2004 and2003, none of these events occurred.

In accordance withaccounting principles generally accepted in the United States, theCompany carries its credit swaps on its balance sheet at their fairvalue. Changes in the fair value of the Company’s credit swapportfolio are recorded as unrealized gains or losses as a component ofnet credit swap revenue in the Company’s consolidated statementsof operations. If a credit swap has an increase in fair value during aperiod, the increase will add to the Company’s net credit swaprevenues 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 revenues 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 consolidatedstatements of financial condition. If the aggregate total of fairvalues with a counterparty is a net gain, the total is recorded as acomponent of unrealized gains on credit swaps, at fair value in thestatement of financial condition. If the aggregate total of fair valueswith a counterparty is a net loss, the total is recorded as a componentof unrealized losses on credit swaps, at fair value in the statement offinancial condition. Aggregation by counterparty is applied where avalid ISDA master agreement is in place with the counterparty. Ininstances where the Company does not yet have a valid ISDA masteragreement with the counterparty, the fair values of individual swaptransactions are recorded as components of unrealized gains or losseson credit swaps, at fair value, dependent upon whether the individualcontract was at a gain or a loss.

As a general rule, when theCompany sells credit protection, it intends to maintain the transactionuntil maturity. However, there are two sets of circumstances in whichthe Company could elect to terminate transactions prior to maturity,and the Company monitors its portfolio on a continuing basis to assesswhether those circumstances are present.

First, whenever theCompany receives new information suggesting that the credit quality ofthe underlying risk has deteriorated to a material degree, the Companyconsiders the possibility of terminating the transaction, usually at aloss, to avoid the larger loss that could result if the credit swapwere to remain in place until a credit event occurs. The principalfactor that governs the Company’s decision regarding terminationin these circumstances is whether the Company believes that theunderlying risk has become substantially greater than the level of riskthe Company would choose to assume in entering into a new sale ofcredit default protection.

Second, the Company may elect toterminate a transaction for which it has an unrealized gain or lossbased on one or more of the following considerations: the likelihood offurther gains or losses arising from the position, its view as towhether the capital dedicated to the position would be profitablyreallocated, its total exposure to a particular Reference Entity, thetotal size of its portfolio in relation to its capital and the totalsize of its swap positions and exposures with a particular counterpartywhich might be reduced so that the counterparty may enter intoadditional swaps with the Company.

The Company terminates acredit swap in one of two ways. The Company may negotiate an agreedtermination through the original counterparty (an unwind). The Companymay negotiate an assignment and novation of its rights and obligationsunder the credit swap to a third party (an assignment). As analternative to terminating a transaction, the Company may enter into anequal and opposite transaction with a third party under which theCompany purchases credit default protection 

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

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, the Company pays or receives a cash settlementnegotiated with the counterparty or assignee, based on the fair valueof the credit swap contract and the accrued premium on the swapcontract at the time of negotiation. The amounts the Company pays orreceives are recorded as a realization of fair value and as arealization of accrued premiums in the period in which the terminationoccurs.

The Company distinguishes among credit swaps sold-singlename, credit swaps sold-tranche, credit swaps purchased as short-terminvestments and credit swaps purchased to offset the credit risk oncredit swaps previously sold. Credit swaps sold-single name refers tocredit protection referencing a single entity. Credit swapssold-tranche refers to credit protection referencing portfolioscontaining obligations of multiple reference entities, which we beganselling during the second quarter of 2005. We have only purchasedcredit swap protection against single name referenceentities.

The tables below present the components of credit swaprevenues for the years ended December  31,  2005, 2004 and2003.

Net credit swap revenues for the year endedDecember  31,  2005 (inthousands)

|                                                                  |  |                         |        |                |  |                  |         |                                   |  |        |         |         |  |        |         |         |  |        |        |         |  |  |
|------------------------------------------------------------------|--|-------------------------|--------|----------------|--|------------------|---------|-----------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|--------|---------|--|--|
|                                                             |  | Premiumincome/(expense) |        | Realized gains |  | Realized(losses) |         | Change inunrealizedgains/(losses) |  | Total  |
| Credit swapssold-singlename                                      |  | $                       | 53,702 |           |  | $                | 1,090   |                              |  | $      | (4,601  | )  |  | $      | (27,530 | )  |  | $      | 22,661 |    |
| Creditswapssold-tranche                                          |  |                    | 324    |           |  |             | — |                              |  |   | — |    |  |   | 685     |    |  |   | 1,009  |    |
| Creditswaps purchased as short-terminvestments                   |  |                    | (1,254 | )         |  |             | 719     |                              |  |   | (2,196  | )  |  |   | 2,202   |    |  |   | (529   | )  |
| Creditswaps purchased to offset credit risk on certain swapssold |  |                    | (67    | )         |  |             | — |                              |  |   | (174    | )  |  |   | 206     |    |  |   | (35    | )  |
| Total                                                            |  | $                       | 52,705 |           |  | $                | 1,809   |                              |  | $      | (6,971  | )  |  | $      | (24,437 | )  |  | $      | 23,106 |    |
|                                                                  |

Netcredit swap revenues for the year ended December  31,  2004(inthousands)

|                                                                  |  |                        |        |                |  |                  |         |                                   |  |        |         |         |  |        |        |         |  |        |        |         |  |  |
|------------------------------------------------------------------|--|------------------------|--------|----------------|--|------------------|---------|-----------------------------------|--|--------|---------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                                             |  | Premiumincome(expense) |        | Realized gains |  | Realized(losses) |         | Change inunrealizedgains/(losses) |  | Totals |
| Credit swapssold                                                 |  | $                      | 43,494 |           |  | $                | 5,533   |                              |  | $      | (1,139  | )  |  | $      | 1,899  |    |  | $      | 49,787 |    |
| Creditswaps purchased as short-terminvestments                   |  |                   | (927   | )         |  |             | 1,260   |                              |  |   | (132    | )  |  |   | (2,225 | )  |  |   | (2,024 | )  |
| Creditswaps purchased to offset credit risk on certain swapssold |  |                   | (92    | )         |  |             | — |                              |  |   | — |    |  |   | 58     |    |  |   | (34    | )  |
| Totals                                                           |  | $                      | 42,475 |           |  | $                | 6,793   |                              |  | $      | (1,271  | )  |  | $      | (268   | )  |  | $      | 47,729 |    |
|                                                                  |

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

Net credit swap revenues for the yearended December  31,  2003 (inthousands)

|                                                                  |  |                        |        |                |  |                  |         |                                   |  |        |         |         |  |        |        |        |  |        |         |         |  |  |
|------------------------------------------------------------------|--|------------------------|--------|----------------|--|------------------|---------|-----------------------------------|--|--------|---------|---------|--|--------|--------|--------|--|--------|---------|---------|--|--|
|                                                             |  | Premiumincome(expense) |        | Realized gains |  | Realized(losses) |         | Change inunrealizedgains/(losses) |  | Totals |
| Credit swapssold                                                 |  | $                      | 39,112 |           |  | $                | 18,313  |                              |  | $      | (264    | )  |  | $      | 46,663 |   |  | $      | 103,824 |    |
| Creditswaps purchased as short-terminvestments                   |  |                   | (19    | )         |  |             | 28      |                              |  |   | — |    |  |   | 23     |   |  |   | 32      |    |
| Creditswaps purchased to offset credit risk on certain swapssold |  |                   | (135   | )         |  |             | — |                              |  |   | (448    | )  |  |   | 53     |   |  |   | (530    | )  |
| Totals                                                           |  | $                      | 38,958 |           |  | $                | 18,341  |                              |  | $      | (712    | )  |  | $      | 46,739 |   |  | $      | 103,326 |    |
|                                                                  |

Thenotional amount, fair value and average fair value of open credit swaptransactions entered into with third parties at December31,  2005 and December  31,  2004 are as follows (inthousands):

|                             |  |                  |            |                 |  |        |            |        |  |  |
|-----------------------------|--|------------------|------------|-----------------|--|--------|------------|--------|--|--|
|                        |  | December31, 2005 |            | December31,2004 |
| GrossNotional Amounts:      |  |             |            |            |
| Credit swapssold-singlename |  | $                | 13,374,031 |            |  | $      | 10,544,728 |   |
| Creditswapssold-tranche     |  |             | 50,000     |            |  |   | —    |   |
| Creditswapspurchased        |  |             | —    |            |  |   | 468,175    |   |
| Fairvalue:                  |  |             |       |            |  |   |       |   |
| Asset                       |  |             | 25,342     |            |  |   | 46,517     |   |
| Liability                   |  |             | 3,521      |            |  |   | 259        |   |
| Averagefairvalue:           |  |             |       |            |  |   |       |   |
| Asset                       |  |             | 28,140     |            |  |   | 33,778     |   |
| Liability                   |  |             | 3,545      |            |  |   | 392        |   |
|                             |

‘‘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 with each counterparty underan ISDA Master Agreement. The notional amounts of the credit swapcontracts in the preceding table are presented on a gross basis and thefair values of such contracts are netted by counterparty. AtDecember  31,  2005 and 2004, Primus Financial had threederivative transactions with its affiliate, Primus Re, totaling$87  million in notional principal.

The tables that followsummarize, by credit rating of Reference Entities and ofCounterparties, the notional amounts and fair values of credit swaptransactions outstanding as of December  31,  2005 and2004.

Risk off-set transactions are reflected in the tablesbelow as part of Credit Swaps Sold. The total notional amounts of riskoff-set transactions were zero and $5  million at December31,  2005 and December  31,  2004, respectively. Fairvalue of the risk offset transactions equaled zero and $(206) thousandat December  31,  2005 and 2004,respectively.

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|                              |  |                 |            |                 |  |                |         |           |  |        |            |        |  |        |         |         |  |  |
|------------------------------|--|-----------------|------------|-----------------|--|----------------|---------|-----------|--|--------|------------|--------|--|--------|---------|---------|--|--|
| (inthousands)                |  |            |            |            |  |           |         |      |
|                         |  | December31,2005 |            | December31,2004 |
| Moody’sRating Category |  | NotionalAmount  |            | Fair Value      |  | NotionalAmount |         | FairValue |
| **ReferenceEntity/Tranche**  |  |            |       |            |  |           |    |      |  |   |       |   |  |   |    |    |
| CreditSwaps Sold-SingleName: |  |            |       |            |  |           |    |      |  |   |       |   |  |   |    |    |
| Aaa                          |  | $               | 561,472    |            |  | $              | 1,118   |      |  | $      | 651,270    |   |  | $      | 866     |    |
| Aa                           |  |            | 2,268,090  |            |  |           | 8,006   |      |  |   | 1,917,131  |   |  |   | 5,609   |    |
| A                            |  |            | 5,270,706  |            |  |           | 15,008  |      |  |   | 4,310,452  |   |  |   | 22,511  |    |
| Baa                          |  |            | 5,041,442  |            |  |           | 4,328   |      |  |   | 3,642,330  |   |  |   | 19,295  |    |
| Ba                           |  |            | 199,321    |            |  |           | (5,785  | )    |  |   | 23,545     |   |  |   | 179     |    |
| B                            |  |            | 33,000     |            |  |           | (1,539  | )    |  |   | —    |   |  |   | — |    |
| Total                        |  | $               | 13,374,031 |            |  | $              | 21,136  |      |  | $      | 10,544,728 |   |  | $      | 48,460  |    |
| CreditSwapsSold-Tranche:     |  |            |       |            |  |           |    |      |  |   |       |   |  |   |    |    |
| Aa                           |  | $               | 50,000     |            |  | $              | 685     |      |  | $      | —    |   |  | $      | — |    |
| Total                        |  | $               | 50,000     |            |  | $              | 685     |      |  | $      | —    |   |  | $      | — |    |
| CreditSwapsPurchased:        |  |            |       |            |  |           |    |      |  |   |       |   |  |   |    |    |
| Aaa                          |  | $               | —    |            |  | $              | — |      |  | $      | 47,090     |   |  | $      | (158    | )  |
| Aa                           |  |            | —    |            |  |           | — |      |  |   | 13,545     |   |  |   | (44     | )  |
| A                            |  |            | —    |            |  |           | — |      |  |   | 209,815    |   |  |   | (803    | )  |
| Baa                          |  |            | —    |            |  |           | — |      |  |   | 160,635    |   |  |   | (969    | )  |
| NR                           |  |            | —    |            |  |           | — |      |  |   | 37,090     |   |  |   | (228    | )  |
| Total                        |  | $               | —    |            |  | $              | — |      |  | $      | 468,175    |   |  | $      | (2,202  | )  |
| **CounterpartyBuyer**        |  |            |       |            |  |           |    |      |  |   |       |   |  |   |    |    |
| CreditSwaps Sold-SingleName: |  |            |       |            |  |           |    |      |  |   |       |   |  |   |    |    |
| Aaa                          |  | $               | 5,000      |            |  | $              | 37      |      |  | $      | 5,000      |   |  | $      | 49      |    |
| Aa                           |  |            | 11,228,563 |            |  |           | 13,341  |      |  |   | 8,304,867  |   |  |   | 35,922  |    |
| A                            |  |            | 2,140,468  |            |  |           | 7,758   |      |  |   | 2,234,861  |   |  |   | 12,489  |    |
| Total                        |  | $               | 13,374,031 |            |  | $              | 21,136  |      |  | $      | 10,544,728 |   |  | $      | 48,460  |    |
| CreditSwapsSold-Tranche:     |  |            |       |            |  |           |    |      |  |   |       |   |  |   |    |    |
| Aa                           |  | $               | 50,000     |            |  | $              | 685     |      |  | $      | —    |   |  | $      | — |    |
| Total                        |  | $               | 50,000     |            |  | $              | 685     |      |  | $      | —    |   |  | $      | — |    |
| **CounterpartySeller**       |  |            |       |            |  |           |    |      |  |   |       |   |  |   |    |    |
| CreditSwapsPurchased:        |  |            |       |            |  |           |    |      |  |   |       |   |  |   |    |    |
| Aa                           |  | $               | —    |            |  | $              | — |      |  | $      | 387,858    |   |  | $      | (1,699  | )  |
| A                            |  |            | —    |            |  |           | — |      |  |   | 80,317     |   |  |   | (503    | )  |
| Total                        |  | $               | —    |            |  | $              | — |      |  | $      | 468,175    |   |  | $      | (2,202  | )  |
|                              |

67

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31, 2005

|                              |  |                 |            |                 |  |                |         |           |  |        |            |        |  |        |         |         |  |  |
|------------------------------|--|-----------------|------------|-----------------|--|----------------|---------|-----------|--|--------|------------|--------|--|--------|---------|---------|--|--|
| (inthousands)                |  |            |            |            |  |           |         |      |
|                         |  | December31,2005 |            | December31,2004 |
| S&P RatingCategory       |  | NotionalAmount  |            | Fair Value      |  | NotionalAmount |         | FairValue |
| **ReferenceEntity/Tranche**  |  |            |       |            |  |           |    |      |  |   |       |   |  |   |    |    |
| CreditSwaps Sold-SingleName: |  |            |       |            |  |           |    |      |  |   |       |   |  |   |    |    |
| AAA                          |  | $               | 636,472    |            |  | $              | 1,222   |      |  | $      | 627,725    |   |  | $      | 822     |    |
| AA                           |  |            | 1,862,713  |            |  |           | 6,026   |      |  |   | 1,826,628  |   |  |   | 4,462   |    |
| A                            |  |            | 6,143,717  |            |  |           | 17,753  |      |  |   | 4,863,204  |   |  |   | 25,569  |    |
| BBB                          |  |            | 4,513,356  |            |  |           | 4,803   |      |  |   | 3,217,171  |   |  |   | 17,536  |    |
| BB                           |  |            | 197,773    |            |  |           | (7,062  | )    |  |   | 10,000     |   |  |   | 71      |    |
| B                            |  |            | 20,000     |            |  |           | (1,606  | )    |  |   | —    |   |  |   | — |    |
| Total                        |  | $               | 13,374,031 |            |  | $              | 21,136  |      |  | $      | 10,544,728 |   |  | $      | 48,460  |    |
| CreditSwapsSold-Tranche:     |  |            |       |            |  |           |    |      |  |   |       |   |  |   |    |    |
| AA                           |  | $               | 50,000     |            |  | $              | 685     |      |  | $      | —    |   |  | $      | — |    |
| Total                        |  | $               | 50,000     |            |  | $              | 685     |      |  | $      | —    |   |  | $      | — |    |
| CreditSwapsPurchased:        |  |            |       |            |  |           |    |      |  |   |       |   |  |   |    |    |
| AAA                          |  | $               | —    |            |  | $              | — |      |  | $      | 57,090     |   |  | $      | (198    | )  |
| AA                           |  |            | —    |            |  |           | — |      |  |   | 27,090     |   |  |   | (109    | )  |
| A                            |  |            | —    |            |  |           | — |      |  |   | 216,270    |   |  |   | (940    | )  |
| BBB                          |  |            | —    |            |  |           | — |      |  |   | 167,725    |   |  |   | (955    | )  |
| N/R                          |  |            | —    |            |  |           | — |      |  |   | —    |   |  |   | — |    |
| Total                        |  | $               | —    |            |  | $              | — |      |  | $      | 468,175    |   |  | $      | (2,202  | )  |
| **CounterpartyBuyer**        |  |            |       |            |  |           |    |      |  |   |       |   |  |   |    |    |
| CreditSwaps Sold-SingleName: |  |            |       |            |  |           |    |      |  |   |       |   |  |   |    |    |
| AAA                          |  | $               | 34,623     |            |  | $              | (57     | )    |  | $      | 5,000      |   |  | $      | 49      |    |
| AA                           |  |            | 9,262,316  |            |  |           | 10,525  |      |  |   | 6,643,559  |   |  |   | 27,941  |    |
| A                            |  |            | 4,077,092  |            |  |           | 10,668  |      |  |   | 3,896,169  |   |  |   | 20,470  |    |
| Total                        |  | $               | 13,374,031 |            |  | $              | 21,136  |      |  | $      | 10,544,728 |   |  | $      | 48,460  |    |
| CreditSwapsSold-Tranche:     |  |            |       |            |  |           |    |      |  |   |       |   |  |   |    |    |
| AA                           |  | $               | 50,000     |            |  | $              | 685     |      |  | $      | —    |   |  | $      | — |    |
| Total                        |  | $               | 50,000     |            |  | $              | 685     |      |  | $      | —    |   |  | $      | — |    |
| **CounterpartySeller**       |  |            |       |            |  |           |    |      |  |   |       |   |  |   |    |    |
| CreditSwapsPurchased:        |  |            |       |            |  |           |    |      |  |   |       |   |  |   |    |    |
| AA                           |  | $               | —    |            |  | $              | — |      |  | $      | 290,768    |   |  | $      | (1,433  | )  |
| A                            |  |            | —    |            |  |           | — |      |  |   | 177,407    |   |  |   | (769    | )  |
| Total                        |  | $               | —    |            |  | $              | — |      |  | $      | 468,175    |   |  | $      | (2,202  | )  |
|                              |

PrimusFinancial’s operating guidelines impose various limits on thegeographical concentration of its business based on the country ofdomicile of each Reference Entity. Additionally, PrimusFinancial’s counterparties are generally financial institutionswith whom it has entered into Master Agreements that consolidate thecounterparty risk to one office of that counterparty. For the yearsended December  31,  2005 and 2004, respectively, threecounterparties each generated greater than ten percent of theCompany’s total premium revenue.

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31, 2005

The table below shows the geographicaldistribution of Primus Guaranty’s credit swap portfolio bydomicile of the Reference Entity and domicile of the counterparty (inthousands):

|                                 |  |                  |            |                  |  |                |         |           |  |        |            |        |  |        |         |         |  |  |
|---------------------------------|--|------------------|------------|------------------|--|----------------|---------|-----------|--|--------|------------|--------|--|--------|---------|---------|--|--|
|                            |  | December31, 2005 |            | December 31,2004 |
| Country ofDomicile              |  | NotionalAmount   |            | Fair Value       |  | NotionalAmount |         | FairValue |
| **Credit SwapsSold-SingleName** |  |             |       |             |  |           |    |      |  |   |       |   |  |   |    |    |
| ByReferenceEntity:              |  |             |       |             |  |           |    |      |  |   |       |   |  |   |    |    |
| NorthAmerica                    |  | $                | 8,243,123  |             |  | $              | 12,268  |      |  | $      | 5,798,363  |   |  | $      | 28,926  |    |
| Europe                          |  |             | 4,561,908  |             |  |           | 7,412   |      |  |   | 4,367,365  |   |  |   | 17,733  |    |
| Pacific                         |  |             | 445,000    |             |  |           | 992     |      |  |   | 305,000    |   |  |   | 1,421   |    |
| Others                          |  |             | 124,000    |             |  |           | 464     |      |  |   | 74,000     |   |  |   | 380     |    |
| Total                           |  | $                | 13,374,031 |             |  | $              | 21,136  |      |  | $      | 10,544,728 |   |  | $      | 48,460  |    |
| ByCounterparty:                 |  |             |       |             |  |           |    |      |  |   |       |   |  |   |    |    |
| NorthAmerica                    |  | $                | 6,878,892  |             |  | $              | 8,754   |      |  | $      | 5,596,849  |   |  | $      | 23,146  |    |
| Europe                          |  |             | 6,388,139  |             |  |           | 12,359  |      |  |   | 4,885,879  |   |  |   | 25,110  |    |
| Pacific                         |  |             | 65,000     |             |  |           | (37     | )    |  |   | —    |   |  |   | — |    |
| Others                          |  |             | 42,000     |             |  |           | 60      |      |  |   | 62,000     |   |  |   | 204     |    |
| Total                           |  | $                | 13,374,031 |             |  | $              | 21,136  |      |  | $      | 10,544,728 |   |  | $      | 48,460  |    |
| **CreditSwapsSold-Tranche**     |  |             |       |             |  |           |    |      |  |   |       |   |  |   |    |    |
| ByCounterparty:                 |  |             |       |             |  |           |    |      |  |   |       |   |  |   |    |    |
| U.S.                            |  | $                | 50,000     |             |  | $              | 685     |      |  | $      | —    |   |  | $      | — |    |
| Total                           |  | $                | 50,000     |             |  | $              | 685     |      |  | $      | —    |   |  | $      | — |    |
| **CreditSwapsPurchased**        |  |             |       |             |  |           |    |      |  |   |       |   |  |   |    |    |
| ByReferenceEntity:              |  |             |       |             |  |           |    |      |  |   |       |   |  |   |    |    |
| NorthAmerica                    |  | $                | —    |             |  | $              | — |      |  | $      | 265,000    |   |  | $      | (1,282  | )  |
| Europe                          |  |             | —    |             |  |           | — |      |  |   | 203,175    |   |  |   | (920    | )  |
| Total                           |  | $                | —    |             |  | $              | — |      |  | $      | 468,175    |   |  | $      | (2,202  | )  |
| ByCounterparty:                 |  |             |       |             |  |           |    |      |  |   |       |   |  |   |    |    |
| NorthAmerica                    |  | $                | —    |             |  | $              | — |      |  | $      | 215,635    |   |  | $      | (935    | )  |
| Europe                          |  |             | —    |             |  |           | — |      |  |   | 232,540    |   |  |   | (1,110  | )  |
| Others                          |  |             | —    |             |  |           | — |      |  |   | 20,000     |   |  |   | (157    | )  |
| Total                           |  | $                | —    |             |  | $              | — |      |  | $      | 468,175    |   |  | $      | (2,202  | )  |
|                                 |

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31, 2005

The table below shows the distribution ofPrimus Guaranty’s credit swap portfolio by year of maturity forDecember  31,  2005 and 2004 (in thousands):

|                                 |  |                  |            |                              |  |                 |         |                             |  |        |            |        |  |        |         |         |  |  |
|---------------------------------|--|------------------|------------|------------------------------|--|-----------------|---------|-----------------------------|--|--------|------------|--------|--|--------|---------|---------|--|--|
|                            |  | December31, 2005 |            | December 31,2004             |
|                            |  | NotionalAmount   |            | Net Fair ValueofTransactions |  | Notional Amount |         | Net FairValueofTransactions |
| **CreditSwaps Sold-SingleName** |  |             |       |                         |  |            |    |                        |  |   |       |   |  |   |    |    |
| YearofMaturity                  |  |             |       |                         |  |            |    |                        |  |   |       |   |  |   |    |    |
| 2005                            |  | $                | —    |                         |  | $               | — |                        |  | $      | 2,841,441  |   |  | $      | 3,859   |    |
| 2006                            |  |             | 939,657    |                         |  |            | 588     |                        |  |   | 1,014,554  |   |  |   | 1,340   |    |
| 2007                            |  |             | 2,469,188  |                         |  |            | 12,637  |                        |  |   | 2,583,503  |   |  |   | 20,442  |    |
| 2008                            |  |             | 1,129,811  |                         |  |            | 7,948   |                        |  |   | 1,184,157  |   |  |   | 11,427  |    |
| 2009                            |  |             | 2,684,704  |                         |  |            | 5,980   |                        |  |   | 2,901,073  |   |  |   | 11,423  |    |
| 2010                            |  |             | 6,122,897  |                         |  |            | (5,963  | )                      |  |   | 20,000     |   |  |   | (31     | )  |
| 2011                            |  |             | 27,774     |                         |  |            | (54     | )                      |  |   | —    |   |  |   | — |    |
| Total                           |  | $                | 13,374,031 |                         |  | $               | 21,136  |                        |  | $      | 10,544,728 |   |  | $      | 48,460  |    |
| **CreditSwapsSold-Tranche**     |  |             |       |                         |  |            |    |                        |  |   |       |   |  |   |    |    |
| YearofMaturity                  |  |             |       |                         |  |            |    |                        |  |   |       |   |  |   |    |    |
| 2010                            |  | $                | 50,000     |                         |  | $               | 685     |                        |  | $      | —    |   |  | $      | — |    |
| Total                           |  | $                | 50,000     |                         |  | $               | 685     |                        |  | $      | —    |   |  | $      | — |    |
| **CreditSwapsPurchased**        |  |             |       |                         |  |            |    |                        |  |   |       |   |  |   |    |    |
| YearofMaturity                  |  |             |       |                         |  |            |    |                        |  |   |       |   |  |   |    |    |
| 2007                            |  | $                | —    |                         |  | $               | — |                        |  | $      | 10,000     |   |  | $      | (43     | )  |
| 2008                            |  |             | —    |                         |  |            | — |                        |  |   | 15,000     |   |  |   | (21     | )  |
| 2009                            |  |             | —    |                         |  |            | — |                        |  |   | 443,175    |   |  |   | (2,138  | )  |
| 2010                            |  |             | —    |                         |  |            | — |                        |  |   | —    |   |  |   | — |    |
| Total                           |  | $                | —    |                         |  | $               | — |                        |  | $      | 468,175    |   |  | $      | (2,202  | )  |
|                                 |

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

8. Fixed Assets

Fixed assets include computer hardware, telephone equipment,furniture and fixtures, and office equipment, which are depreciatedusing a straight-line method over the estimated useful lives of fiveyears, and leasehold improvements which are amortized using thestraight-line method over the shorter of the lease term or estimateduseful life of ten years. At December  31,  2005 and 2004,fixed assets consist of the following (in thousands):

|                                              |  |            |        |        |  |        |        |        |  |  |
|----------------------------------------------|--|------------|--------|--------|--|--------|--------|--------|--|--|
|                                         |  | December31 |
|                                         |  | 2005       |        | 2004   |
| Assetcategory                                |  |       |   |   |  |   |   |   |
| Furniture andfixtures                        |  | $          | 487    |   |  |   | 487    |   |
| Computers                                    |  |       | 209    |   |  |   | 132    |   |
| Officeequipment                              |  |       | 116    |   |  |   | 50     |   |
| Telephones                                   |  |       | 114    |   |  |   | 114    |   |
| Leaseholdimprovements                        |  |       | 1,521  |   |  |   | 1,510  |   |
|                                         |  |       | 2,447  |   |  |   | 2,293  |   |
| Lessaccumulated depreciation andamortization |  |       | 765    |   |  |   | 493    |   |
| Totalfixedassets                             |  | $          | 1,682  |   |  | $      | 1,800  |   |
|                                              |

TheCompany recorded depreciation expense of $272  thousand and$234  thousand for the years ended December  31,2005 and 2004, respectively.

9. Long Term Debt ofSubsidiary

On December  19,  2005, Primus Financialissued in aggregate $125.0  million of subordinated deferrableinterest notes, consisting of $ 75.0  million of Series A and$50.0  million of Series B notes, which mature in June2021. The notes are subordinated in right of payment to the priorpayment in full of all existing and future senior indebtedness of theCompany, including counterparty claims and the notes issued inJuly  2004. The notes are redeemable at the option of PrimusFinancial, in whole or in part, on any auction date, at a redemptionprice equal to 100% of the principal amount of the notes to beredeemed, plus any accrued and unpaid interest thereon to theredemption date.

The interest rate on the Series A notes wasfixed on the issue date at a rate of 4.57% for 25 days and thensubsequently, the rate will be set every 28 days through a monthlyauction process. The first interest payment is due on January13,  2006 and subsequently will be due every 28 days.

Theinterest rate on the Series B notes was fixed on the issue date at arate of 5.60% for one year and then subsequently, the rate willbe set every 28 days through a monthly auction process. Interestpayments for the first year are due quarterly and subsequently will bedue every 28 days.

In connection with the above issuance of thesubordinated deferrable notes, the Company incurred approximately$2.0  million in debt issuance costs, which will be amortizedover the life of the debt. Amortization of debt issuance costs isincluded in interest expense in the consolidated statements ofoperations.

On July  23,  2004, Primus Financialissued $75.0  million of subordinated deferrable interest notesthat mature in July  2034. The notes are subordinated in right ofpayment to the prior payment in full of all existing and future seniorindebtedness of the company, including counterparty claims. The rate onthe notes is set through a monthly auction process, although theCompany has the option to fix the rate at the prevailing market ratefor longer periods of time. The notes are redeemable at the option ofPrimus Financial, in whole or in part, on any auction date, at aredemption price equal to 100% of the principal amount of thenotes to be redeemed, plus any accrued and unpaid interest thereon to

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

the redemption date. The interest rate on thenotes was fixed on the issue date at a rate of 2.57% for aperiod of one year, expiring in July  2005, from which point therate is set every 28 days through a monthly auction process. Costsassociated with the issuance of this debt were $1.1  million andare included in the Company’s consolidated statement offinancial condition as debt issuance costs, and amortized over the lifeof the debt. Amortization of debt issuance costs is included ininterest expense in the consolidated statements ofoperations.

The Company recorded interest expense related to theabove debt of approximately $2.6  million and $0.9  millionfor the years ended December  31,  2005 and 2004. AtDecember  31,  2005 and 2004, the carrying value of thesubordinated notes approximates fair value.

10.    Incometaxes

Primus Guaranty is a Bermuda company. Primus Guarantybelieves that it is not involved in the active conduct of a trade orbusiness in the U.S. For U.S. tax purposes, Primus Guaranty will betreated either as a controlled foreign corporation or as a passiveforeign investment company by its U.S. shareholders. As such, PrimusGuaranty has not provided for any federal or state and local incometaxes in its separate financial statements. However, on a consolidatedbasis, it has provided for income taxes for certain of itssubsidiaries, which are described below. Primus Guaranty wasincorporated in Bermuda to domicile itself in a jurisdiction that isinternationally recognized as a base for financial companies and in ajurisdiction that has an efficient and predictable corporate taxregime. Primus Guaranty does not have any full time employees in, nordoes the Company lease or own any real property in Bermuda.

ForU.S. tax purposes, Primus Bermuda, originally Primus (Barbados) Ltd.,will be treated either as a controlled foreign corporation or as apassive foreign investment company by its U.S. shareholders. PrimusBermuda was interposed between Primus Guaranty and Primus GroupHoldings because Barbados had a tax treaty with the United States andBermuda has no relevant tax treaty. The Barbados tax treaty, however,was amended. Therefore, as of December  31,  2004, theCompany re-domiciled Primus (Barbados), Ltd. as Primus (Bermuda), Ltd.,or Primus Bermuda, in Bermuda.

From July  16,  1999through May  21,  2002, Primus Financial’spredecessor, Primus Financial Products, Inc. (the‘‘Corporation’’), was a corporation forU.S. tax purposes. As of May  22,  2002, the Corporationwas converted to Primus Financial, a limited liability companyorganized under Delaware law, and its parent was also converted to alimited liability company organized under Delaware law, with all of theinterests in its parent being held by Primus Bermuda, a non-UScorporation. As a result, from May  22,  2002 throughDecember  17,  2002, Primus Financial was treated as a‘‘disregarded entity’’ for U.S. taxpurposes, and the results of its operations were treated as theoperations of a branch of its foreign parent corporation, PrimusBermuda. As a disregarded entity, Primus Financial was not itselfsubject to U.S. net income taxation. In addition, because PrimusFinancial’s activities in the U.S. were confined to holdinginvestments in debt instruments and credit swaps for its own account,Primus Financial believes that its activities fall within theprovisions of Internal Revenue Code(‘‘IRC’’) Section 864(b) and therefore doesnot believe that Primus Bermuda, a non-U.S. corporation, should besubject to taxation in the U.S. on a net income basis as a result ofits interest in Primus Financial. Accordingly, Primus Financial did notprovide for any income taxes in its financial statements for thisperiod.

If the activities of Primus Financial, and thus PrimusBermuda, were found to fall outside the provisions of IRC Section864(b), and Primus Financial, and thus Primus Bermuda, were found to besubject to U.S. federal, state and local corporate income tax, it isdifficult to predict the exact treatment that would apply to PrimusBermuda and, therefore, to estimate the resulting income tax expense.However, were Primus Bermuda to be subject to income tax, at a combinedU.S. federal, New York State and New York City corporate income taxrate of 46%, on its GAAP income, then its 

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

income tax expense (excluding interest andpenalties) would have been approximately $3.7  million for 2005,$13.1  million for 2004 and $37.0  million for 2003. Thesefigures assume that Primus Financial is not deemed to be makingdistributions to Primus Bermuda; such distributions would subjectPrimus Bermuda to an additional U.S. federal branch profits tax.

As of December  19,  2002, Primus Financial issued asecond class of equity interests (the Preferred Stock issuancediscussed in Note 11), and as a result Primus Financial was treated asa partnership for U.S. income tax purposes for the period fromDecember  19,  2002 onward. All of PrimusFinancial’s items of taxable income and expense flow through toits interest-holders for U.S. federal income tax purposes and any taxesthat may be attributable to such items are the responsibility of theinterest-holders. Based on the application of the provisions of IRCSection 864(b) and the investment nature of its operations, PrimusFinancial continues to believe that Primus Bermuda, a non-U.S.corporation, will not be subject to U.S. net income taxes with respectto its interest in Primus Financial.

Primus Asset Management hasentered into a Services Agreement with Primus Financial and otheraffiliates, whereby Primus Asset Management provides services to PrimusFinancial including management, consulting and information technology.Since Primus Asset Management is a U.S. domiciled corporation it issubject to U.S. income taxes and income taxes of other taxingjurisdictions on fees received from Primus Financial.

Thesignificant components of the consolidated (provision)/ benefit forincome taxes for the years ended December  31, 2005, 2004 and2003 were as follows:

|                                          |  |            |         |         |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------|--|------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                     |  | December31 |
| (inthousands)                            |  | 2005       |         | 2004    |  | 2003   |
| Current:                                 |  |       |    |    |  |   |    |    |  |   |    |    |
| Federal                                  |  | $          | — |    |  | $      | — |    |  | $      | 252     |    |
| State/City                               |  |       | (46     | )  |  |   | (46     | )  |  |   | (80     | )  |
| Totalcurrent                             |  |       | (46     | )  |  |   | (46     | )  |  |   | 172     |    |
| Deferred:                                |  |       |    |    |  |   |    |    |  |   |    |    |
| Federal                                  |  |       | — |    |  |   | — |    |  |   | — |    |
| State/City                               |  |       | — |    |  |   | — |    |  |   | — |    |
| Totaldeferred                            |  |       | — |    |  |   | — |    |  |   | — |    |
| Total(provision)/benefit for incometaxes |  | $          | (46     | )  |  | $      | (46     | )  |  | $      | 172     |    |
|                                          |

TheCompany’s effective tax rate differs from the Bermudian federalstatutory rate of zero percent mainly due to taxation of its U.S.subsidiary, Primus Asset Management, which is subject to U.S. federalincome tax at a rate of 35 percent, as well as U.S. state and localtaxes. The Bermuda Minister of Finance has given the Company a taxexemption certificate effective through 2016 that prevents the Companyfrom being subject to tax in the event that any legislation is enactedthat would impose tax computed on profits or income, or computed on anycapital asset, gain or appreciation, or any tax in the nature of estateduty or inheritance tax.

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

A reconciliation of the difference betweenthe (provision) benefit for income taxes and the expected tax provisionat the applicable zero percent domestic rate for the years endedDecember  31, 2005, 2004, and 2003, is provided below:

|                                                                                                   |  |        |         |         |  |        |         |         |  |        |     |         |  |  |
|---------------------------------------------------------------------------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|-----|---------|--|--|
| (inthousands)                                                                                     |  | 2005   |         | 2004    |  | 2003   |
| U.S.federal income tax (provision)/benefit on Primus AssetManagement’s taxableincome/(loss) |  | $      | — |    |  | $      | — |    |  | $      | 252 |    |
| U.S.state and local tax(provision)                                                                |  |   | (46     | )  |  |   | (46     | )  |  |   | (80 | )  |
| Totalincome tax(provision)/benefit                                                                |  | $      | (46     | )  |  | $      | (46     | )  |  | $      | 172 |    |
|                                                                                                   |

TheCompany has a net U.S. deferred tax asset of $4.8  million,$9.3  million and $5.9  million as of December31,  2005, 2004 and 2003, respectively. The net deferred taxasset is primarily comprised of stock compensation expense andcapitalized costs and pre-operating formation costs, which are beingamortized for tax purposes. In addition, included within the grossdeferred tax assets are tax effected net operating losses related toPrimus Asset Management of $3.3  million related to the netoperating losses during years 2002 through 2005.

The taxconsequences of various restructurings that took place in 2002,included certain limitations and uncertainties, including issues withrespect to the application of Internal Revenue Code Section 382, whichcould limit the utilization of certain amortized costs as an offsetagainst Primus Asset Management’s taxable income. However, theCompany believes it is more likely than not that these costs will beallowable tax deductions.

The Company had previously estimated a2004 net operating loss estimate of $1.8  million. However, thecompletion of the 2004 tax return in 2005 showed an actual netoperating income of $117  thousand, in part due to a change inthe Service Agreement between Primus Asset Management and itsaffiliates, which necessitated a reduction in 2005 to the grossdeferred tax asset of $1.9  million. Net operating losses willbegin to expire in the year 2022 if not utilized.

The Companyhas recorded a 100 percent valuation allowance against its deferred taxasset because management has determined that it is more likely than notthat the deferred tax asset will not be realized due to Primus AssetManagement’s history of net operating losses and inability togenerate future taxable income sufficient to utilize such deferred taxasset. A rollforward of the valuation allowance against Primus AssetManagement’s deferred tax asset is provided below.

Thecomponents of the net deferred tax asset at December  31,2005, 2004 and 2003, are as follows:

|                                                |  |            |         |         |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------------|--|------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
| (inthousands)                                  |  |       |         |    |  |   |
|                                           |  | December31 |
|                                           |  | 2005       |         | 2004    |  | 2003   |
| Deferredtax assets                             |  |       |    |    |  |   |    |    |  |   |    |    |
| Capitalized and pre-operatingformationcosts    |  | $          | 700     |    |  | $      | 2,641   |    |  | $      | 5,408   |    |
| Stockcompensation                              |  |       | 1,483   |    |  |   | 3,270   |    |  |   | 397     |    |
| Netoperatinglosses                             |  |       | 3,345   |    |  |   | 3,873   |    |  |   | 426     |    |
| Grossdeferred taxasset                         |  |       | 5,528   |    |  |   | 9,784   |    |  |   | 6,231   |    |
| Deferredtaxliability                           |  |       |    |    |  |   |    |    |  |   |    |    |
| Other                                          |  |       | (20     | )  |  |   | — |    |  |   | — |    |
| Depreciation                                   |  |       | (745    | )  |  |   | (477    | )  |  |   | (317    | )  |
| Grossdeferred taxliability                     |  |       | (765    | )  |  |   | (477    | )  |  |   | (317    | )  |
| Netdeferred taxasset                           |  |       | 4,763   |    |  |   | 9,307   |    |  |   | 5,914   |    |
| Valuationallowance                             |  |       | (4,763  | )  |  |   | (9,307  | )  |  |   | (5,914  | )  |
| Netdeferred tax asset after valuationallowance |  | $          | — |    |  | $      | — |    |  | $      | — |    |
|                                                |

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

The changes in the valuation allowance forthe deferred tax asset for the years ended December  31, 2005,2004 and 2003, are as follows:

|                                    |  |            |        |         |  |        |        |         |  |        |       |         |  |  |
|------------------------------------|--|------------|--------|---------|--|--------|--------|---------|--|--------|-------|---------|--|--|
|                               |  | December31 |
| (inthousands)                      |  | 2005       |        | 2004    |  | 2003   |
| Balanceat beginning ofperiod       |  | $          | 9,307  |    |  | $      | 5,914  |    |  | $      | 4,539 |    |
| Capitalizedand pre-operating costs |  |       | (1,941 | )  |  |   | (2,767 | )  |  |   | 980   |    |
| Stockcompensation                  |  |       | (1,787 | )  |  |   | 2,873  |    |  |   | 515   |    |
| Taxdepreciation/Other              |  |       | (288   | )  |  |   | (160   | )  |  |   | (265  | )  |
| Netoperating loss                  |  |       | (528   | )  |  |   | 3,447  |    |  |   | 145   |    |
| Balanceat end ofperiod             |  | $          | 4,763  |    |  | $      | 9,307  |    |  | $      | 5,914 |    |
|                                    |

11. PreferredSecurities of Subsidiary

On December  19,  2002,Primus Financial issued $110  million of perpetual Floating RateCumulative Preferred Securities (‘‘PreferredSecurities’’) in two series, Series I and Series II to aTrust. The securities are held by Deutsche Bank Trust Company Americas,as custodian and auction agent. Pursuant to AICPA SOP 98-5, specificincremental costs directly attributable to the offering of the Trustpreferred securities have been charged against these grossproceeds.

In conjunction with the receipt of the Securities, theTrust issued $100  million of Money Market Preferred SecuritiesCustodial Receipts (‘‘MMP’’) in two series,Series A and Series B, with a liquidation preference of $1,000 pershare, to various institutional investors in a private placement. TheTrust also issued $10  million of Variable Inverse PreferredSecurities Custodial Receipts (‘‘VIP’’),which were retained by Primus Financial.

In 2003, the Companyadopted FIN 46R and deconsolidated the Trust effective December19,  2002. The preferred securities referred to in the financialstatements are Primus Financial’s Preferred Securities, whichare shown net of the $10  million of VIP issued by the Trust thatare held by Primus Financial.

Distributions to the Trust on thePreferred Securities are adjusted through the VIP to equal thedistributions required on the MMP. The Series A MMP pays distributionsevery 28 days based upon an auction rate set on the prior business day.The Series B MMP makes dividend payments quarterly. The distributionrate was reset for a one year period at an auction rate of 4.0%on January  19,  2005. On January  19,  2006,the distribution rate was reset at 5.8% for another one-yearperiod. After December  19,  2012, the Company may redeemthe Preferred Securities, in whole or in part, on any distribution dateat $1,000 per share plus accumulated and unpaid dividends.

12. Stockholders’ Equity

ConvertiblePreferred Stock

On March  14,  2002, the Companyissued 6,212,000 shares of Series A Convertible Voting Preferred Shares(‘‘Series A Preferred Stock’’), par valueof $0.01 per share, at a price of $25 per share. Each share wasconvertible at any time into 38.61 shares (4.8262548 shares afteradjusting for the reverse split) of the Company’s common stock(‘‘Common Stock’’).

In connectionwith the Company’s IPO on September  30,  2004, theSeries A Preferred Stock was automatically converted into 29,980,691shares of Common Stock.

Warrants

In connection with theSeries A Preferred Stock issuance, XL Insurance (Bermuda) Ltd., asubsidiary of XL Capital Ltd., the lead investor in the Series APreferred Stock, and Radian Group 

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

Inc., also an investor, were issued warrantson the closing date to purchase 1,414,746 and 1,061,059 common shares,respectively. Both warrants are exercisable at a price per common shareof $5.18 until March  14,  2007.

On May15,  2004, Radian Group, Inc. exercised its warrants that wereconvertible into 1,061,059 common shares at the exercise price of $5.18per share, yielding proceeds to the Company of $5.5  million.

13.    Earnings per share

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:

|                                             |  |             |         |        |  |        |        |        |  |        |         |           |  |  |
|---------------------------------------------|--|-------------|---------|--------|--|--------|--------|--------|--|--------|---------|-----------|--|--|
|                                        |  | December31, |
| (amounts in thousands, except persharedata) |  |        | 2005    |   |  |   | 2004   |   |  |   | 2003    |      |
| Netearnings available to commonstockholders |  | $           | 4,083   |   |  | $      | 23,685 |   |  | $      | 78,471  |      |
| Weighted-averagebasic sharesoutstanding     |  |        | 43,150  |   |  |   | 16,486 |   |  |   | 2,517   |      |
| Effectof dilutiveinstruments:               |  |        |    |   |  |   |   |   |  |   |    |      |
| Series APreferredStock                      |  |        | — |   |  |   | 22,381 |   |  |   | 29,981  |      |
| Employeestockoptions                        |  |        | 188     |   |  |   | 85     |   |  |   | — | (a)  |
| Restrictedshareunits                        |  |        | 467     |   |  |   | 361    |   |  |   | 300     |      |
| Warrants                                    |  |        | 840     |   |  |   | 943    |   |  |   | 939     |      |
| Dilutivepotentialshares                     |  |        | 1,495   |   |  |   | 23,770 |   |  |   | 31,220  |      |
| Weightedaverage diluted sharesoutstanding   |  |        | 44,645  |   |  |   | 40,256 |   |  |   | 33,737  |      |
| BasicEPS                                    |  | $           | 0.09    |   |  | $      | 1.44   |   |  | $      | 31.18   |      |
| DilutedEPS                                  |  | $           | 0.09    |   |  | $      | 0.59   |   |  | $      | 2.33    |      |
|                                             |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                                                                               |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (a) | Securities(including those issuable pursuant to contingent stock agreements) thatcould potentially dilute basic EPS were not included in the computationof diluted EPS because to do so would have been anti-dilutive for theperiod presented. In 2005, employee stock options of 245,469 wereexcluded. In 2003, employee stock options totaling 209,375 shares wereexcluded. |

14.    Commitments andContingencies

Leases

Primus Financial has leased itspremises at 360 Madison Avenue, New York, New York from Madison 45 LLCat a fixed yearly rental (subject to certain escalations specified inthe lease) until August  1,  2012. There are no materialrestrictions imposed by the lease agreement. The lease is categorizedas an operating lease and future payments as of December31,  2005 under the lease are as follows (in thousands):

|                   |  |        |       |        |  |  |
|-------------------|--|--------|-------|--------|--|--|
| 2006              |  |   | 756   |   |
| 2007              |  |   | 756   |   |
| 2008              |  |   | 756   |   |
| 2009              |  |   | 774   |   |
| 2010              |  |   | 792   |   |
| 2011andthereafter |  |   | 1,188 |   |
| Total             |  | $      | 5,022 |   |
|                   |

Pursuantto the terms of the lease, Primus Financial was not required to makeany rent payments until March  2003. Primus Financial recognizesrent expense from July  25,  2002 (the lease 

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

commencement date) based on a straight-lineamortization of the total lease obligation. Primus Financial hasrecorded deferred rent payable in the statement of financial condition,which represents the amortized cost that will be payable in the future.In 2006, we amended the lease to extend its term to 2015 and addapproximately 5,500 square feet of additional space.

PrimusFinancial has an outstanding letter of credit as of December31,  2005 for $756  thousand from Harris Trust and SavingsBank (‘‘Harris Bank’’) related to thislease.

Statutory Requirements

Primus Re is an insurancecompany subject to Bermuda insurance regulations. Primus Re’sability to pay dividends and make capital distributions is subject torestrictions based principally on the amount of Primus Re’s netpremiums written and net loss reserves, subject to an overall minimumstatutory capital and surplus of $1.0  million. In addition,Primus Re is required to maintain a minimum statutory liquidity ratio.At December  31,  2005, Primus Re’s statutorycapital and surplus was $1.07  million and the minimum amountrequired to be maintained was $1.0  million. At December31,  2004, Primus Re’s statutory capital and surplus was$1.01  million and the minimum amount required to be maintainedwas $1.0  million.

15.    LiquidityFacility

Primus Financial has obtained a Liquidity Facility fromHarris Bank for $37.5  million. The Liquidity Facility is subjectto a commitment fee of 0.25% per annum. At December31,  2005, the Liquidity Facility had a termination date ofMarch  9,  2006, and may be extended for successiveone-year periods upon the request of Primus Financial and agreement ofHarris Bank. Primus Financial has applied to the rating agencies forpermission to terminate this facility. The Liquidity Facility may onlybe drawn upon in the event that (a) there is a credit event (as definedin each credit swap) on a credit swap sold by Primus Financial, (b)such credit swap requires Physical Delivery (as defined in each creditswap), (c) Primus Financial cannot otherwise make its requiredsettlement as called for by the terms of the credit swap, and (d)Primus Financial has investment securities that are available to bepledged as collateral to secure any advances under the LiquidityFacility. As of December  31,  2005 and 2004 there havebeen no drawings under the Liquidity Facility.

16.    Employee Compensation Plans

Primus Guaranty hasestablished three incentive compensation plans for the benefit of itsemployees.

Initial Staffing Award Pool

During 2001, anaward pool of common stock of Primus Guaranty totaling 1,500,000 shareswas established (the ‘‘Initial Staffing AwardPool’’). A total of 912,500 of these shares were awardedto selected members of Primus Asset Management (‘‘InitialAwards’’). These awards vested immediately. The Companyestimated that the fair value of the common stock at the time theInitial Awards were granted was $0.08 per share.

BetweenMarch  14,  2002 and December  31,  2002,additional awards totaling 405,000 shares were made to certainadditional employees from the Initial Staffing Award Pool(‘‘Post-Funding Awards’’). These awardsvest ratably over a three-year period. Vesting is subject to certainterms, including the continued employment of the award recipient byPrimus Asset Management. Upon the IPO by the Company, 50% of thethen unvested shares vested. The Company estimated the fair value ofthe common stock at the time the Post-Funding Awards were granted at$2.56 per share. These awards represent non-cash financingtransactions.

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

During 2003, the Company awarded 183,000shares from the Initial Staffing Award Pool, net of the repurchase ofcertain vested shares from employees that left the employment of theCompany. Upon the IPO by the Company, 50% of the then unvestedshares vested. The Company estimated the fair value of the common stockduring 2003 to be $6.93 per share. Stock compensation expense of$259  thousand related to these awards and $310  thousandrelated to the 2002 awards was recorded in the 2003 consolidatedstatements of operations.

During 2004, stock compensationexpense of $1.1  million was recorded for Initial Staffing AwardPool grants outstanding, including $443  thousand for theaccelerated vesting of stock in connection with the Company’sIPO. There were no grants made during 2004.

During 2005, stockcompensation expense of $278  thousand was recorded for InitialStaffing Award Pool grants outstanding. There were no grants madeduring 2005.

Annual Performance Bonus Plan

The AnnualPerformance Bonus Plan (‘‘Bonus Plan’’) wascreated in 2002 and provides for the awards of cash to employees ofPrimus Asset Management and Restricted Share Units, or RSUs convertibleat the option of the holder into common stock of Primus Guaranty. Thetotal value of awards under the Bonus Plan is determined by theCompensation Committee of Primus Guaranty based on quantitative andnon-quantitative measures of the performance of Primus Guaranty.Individual awards are then determined by the Chief Executive Officer ofPrimus Guaranty, and are subject to the approval of the CompensationCommittee. The Compensation Committee also determines the awards to theexecutive officers. Under the terms of the plan individual awards willbe made 75% in cash and 25% in RSUs (70% in cashand 30% in RSUs for certain members of management), with thenumber of RSUs determined on the basis of the value of the common stockon the date the award is authorized. The RSUs vest ratably over a threeyear period on the anniversary dates of each award, with vestingsubject to certain terms including the continued employment of theaward recipient by Primus Asset Management. The Bonus Plan includesprovision for the award of up to 1,393,652 RSUs and options (discussedbelow) over a five year period beginning in February  2003.

In February  2003, the Company made awards under the BonusPlan totaling $5.0  million for the period ended December31,  2002, of which $3.75  million was awarded in cash andincluded as compensation expense, and $1.25  million was awardedin the form of RSUs for 181,000 shares of common stock (based upon theestimated fair value of common stock of $6.93 per share on the date ofthe awards). The value of the RSUs is being expensed as the RSUs areearned, beginning in 2003. The Company recognized $164  thousand,$533  thousand and $387  thousand of expense for the yearsended December  31,  2005, 2004 and 2003, respectively,related to these awards, including $231  thousand for the yearended December  31,  2004 for the accelerated vesting ofstock in connection with the Company’s IPO.

InJanuary  2004, the Company approved awards under the Bonus Plantotaling $7.77  million for the period ended December31,  2003, of which $4.75  million was awarded in cash andincluded as compensation expense, and $3.02  million was awardedin the form of RSUs for 191,000 shares of common stock (based upon theestimated fair value of common stock of $15.84 per share on the date ofthe awards, as adjusted in connection with the Company’s IPO).The value of the RSUs is expensed ratably over the vesting period. TheCompany recognized $495  thousand and $1.8  million ofstock compensation expense for those RSU grants issued under the BonusPlan for the year ended December  31,  2005 and 2004,respectively, including $1.1  million for the year endedDecember  31,  2004 for the accelerating vesting of stockin connection with the Company’s IPO.

In February2005, the Company approved awards of $7.5  million under theBonus Plan for the period ended December  31,  2004, ofwhich $5.4  million was awarded in cash and included as

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

compensation expense and $2.1  millionwas awarded in the form of Restricted Stock Units for 129,025 shares ofcommon stock (based upon the fair value of common stock of $16.05 pershare on the date of the awards). The value of the RSU’s isexpensed ratably over the vesting period. For the year endedDecember  31,  2005, stock compensation expense was$552  thousand, related to these awards.

Stock IncentivePlan

The Stock Incentive Plan (‘‘IncentivePlan’’) was created in 2002 and provides for the award ofoptions on common stock of Primus Guaranty to selected employees ofPrimus Asset Management. Individual awards are determined by the ChiefExecutive Officer of the Company, and are subject to the approval ofthe Compensation Committee. The Compensation Committee also determinesthe awards to the executive officers. The options become exercisableratably over a four year period on the anniversary date of each award,subject to certain terms including the continued employment of eachrecipient by the Primus Asset Management. The options expire ten yearsfrom the date of grant and do not qualify for Incentive Stock OptionTreatment under the Economic Recovery Tax Act of 1981 (ISO Treatment).Upon the IPO by the Company, 50% of the then unvested optionsvested. The total number of equity incentive awards authorized forissuance under the Incentive Plan is 12% of total authorizedshares.

In January  2003, the Company approved awardsunder the Incentive Plan for 240,625 options with an exercise price of$6.93 and which began to vest in February  2004. AtDecember  31,  2005 and 2004, 60,545 and 1,562 options,respectively have been exercised. The Company recognized $93thousand, $412  thousand and $190  thousand of stockcompensation expense for the years ended December  31,2005, 2004 and 2003, respectively, for these options, including$236  thousand for the year ended December  31,  2004for the accelerated vesting of options in connection with theCompany’s IPO.

In January  2004, the Companyapproved awards under the Incentive Plan for 322,500 options with anexercise price of $9.76 and which began to vest in February2005. The Company recognized $415  thousand and $2.0million of stock compensation expense during 2005 and 2004 for theseoptions, including $1.3  million in 2004 for the acceleratedvesting of options in connection with the Company’s IPO. Therewere no grants made under the Stock Incentive Plan in 2005.

2004Share Incentive Plan

In connection with the Company’sIPO, its board of directors adopted a new incentive plan and authorizedthe grant of options and performance shares (the ‘‘IPOawards’’) in the aggregate amount of up to 2.4% oftotal authorized shares. The board of directors delegated to thecompensation committee decisions regarding the terms and conditions ofsuch awards, including the apportionment between options andperformance shares, the employees to whom such awards are to be grantedand the performance factors required to earn such shares. Theperformance factors are (i) the return on economic equity and (ii) thecompound annual growth rate of the economic results over a specifiedthree year period. The performance shares vest only at the end of therespective performance period.

The IPO awards of 259,063performance stock and 259,063 options with an exercise price of $13.50were granted in October  2004. The cost of the IPO awards isrecognized over the vesting period for the awards in accordance withFAS 123. The cost of the performance stock is recognized ratably fromthe date of the IPO to December  31,  2006, the end of thethree year performance period. The cost of options is recognizedratably over four years from the consummation of the IPO. The expenseassociated with the performance shares will be adjusted over thevesting period to reflect the projected actual award, which is basedupon the aggregate performance of the company in the years 2004, 2005and 2006. The Company recognized $819  thousand and $461thousand of expense for the year ended December  31,  2005and 2004, respectively, related to these awards.

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

During 2005, the Company granted 146,537performance stock awards, and in October  2005, granted 30,000options at an exercise price of $10.50. The cost of the performancestock awards and options is recognized over the vesting period. Theexpense associated with the performance shares will be adjusted overthe vesting period to reflect the projected actual award, which isbased upon the aggregate performance of the company in the years 2005,2006 and 2007. We also issued 35,423 shares of common stock to ourdirectors. The Company recognized $873  thousand of stockcompensation for the year ended December  31,  2005 relatedto these awards.

In connection with the IPO, as discussed above,the Company recognized $3.3  million of expense for theaccelerated vesting of stock and options under the Company’sInitial Staffing Award Pool, Bonus Plan, Stock Incentive Plan and 2004Share Incentive Plan.

The fair value of each option grant isestimated on the date of grant using the Black-Scholes option-pricingmodel using the following assumptions for the periodindicated:

|                        |  |                 |  |              |  |              |  |               |  |  |  |  |  |  |  |  |  |  |
|------------------------|--|-----------------|--|--------------|--|--------------|--|---------------|--|--|--|--|--|--|--|--|--|--|
|                   |  | OptionGrantDate |
|                   |  | October2005     |  | October 2004 |  | February2004 |  | February 2003 |
| Risk free interestrate |  | 4.90%           |  | 3.08%        |  | 4.04%        |  | 3.95%         |
| Volatility             |  | 31.8%           |  | 28.3%        |  | 27.9%        |  | 39.2%         |
| Expecteddividendyield  |  | 0.00%           |  | 0.00%        |  | 0.00%        |  | 0.00%         |
| Expectedoption life    |  | 7 years         |  | 7 years      |  | 10 years     |  | 10years       |
| Fair value ofoption    |  | $2.78           |  | $3.61        |  | $10.00       |  | $3.92         |
|                        |

Thefollowing table is a summary of the information concerning outstandingand exercisable options for the years ended December  31, 2005,2004 and 2003: 

|                                |  |                |         |                              |  |                |       |                              |  |                |         |                              |  |   |         |        |  |        |         |         |  |   |         |        |  |  |
|--------------------------------|--|----------------|---------|------------------------------|--|----------------|-------|------------------------------|--|----------------|---------|------------------------------|--|---|---------|--------|--|--------|---------|---------|--|---|---------|--------|--|--|
|                           |  | 2005           |         | 2004                         |  | 2003           |
|                           |  | Numberofshares |         | Weightedaverageexerciseprice |  | Numberofshares |       | Weightedaverageexerciseprice |  | Numberofshares |         | Weightedaverageexerciseprice |
| Outstandingat beginning ofyear |  |           | 776,094 |                         |  | $              | 10.28 |                         |  |           | 200,781 |                         |  | $ | 6.93    |   |  |   | — |    |  | $ | — |   |
| Granted                        |  |           | 30,000  |                         |  | $              | 10.50 |                         |  |           | 581,563 |                         |  | $ | 11.43   |   |  |   | 240,625 |    |  | $ | 6.93    |   |
| Exercised                      |  |           | (58,983 | )                       |  | $              | 8.35  |                         |  |           | — |                         |  | $ | — |   |  |   | (1,562  | )  |  | $ | 6.93    |   |
| Forfeited                      |  |           | (36,251 | )                       |  | $              | 10.61 |                         |  |           | (6,250  | )                       |  | $ | 9.76    |   |  |   | (38,282 | )  |  | $ | 6.93    |   |
| Outstandingat end ofyear       |  |           | 710,860 |                         |  | $              | 10.43 |                         |  |           | 776,094 |                         |  | $ | 10.28   |   |  |   | 200,781 |    |  | $ | 6.93    |   |
| Exercisableat end ofyear       |  |           | 280,077 |                         |  | $              | 9.54  |                         |  |           | 158,123 |                         |  | $ | 9.76    |   |  |   | 123,044 |    |  | $ | 6.93    |   |
|                                |

Thefollowing table summarizes the status of the Company’s stockoptions as of December  31,  2005 (shares inthousands):

|                         |  |                          |     |                                         |  |                              |        |                  |  |                              |        |        |  |        |     |        |  |        |        |        |  |  |
|-------------------------|--|--------------------------|-----|-----------------------------------------|--|------------------------------|--------|------------------|--|------------------------------|--------|--------|--|--------|-----|--------|--|--------|--------|--------|--|--|
|                    |  | StockOptions Outstanding |     | Stock OptionsExercisable                |
| Range ofExercise Prices |  | Number of Shares         |     | AverageRemainingContractual Life(Years) |  | WeightedAverageExercisePrice |        | Number of Shares |  | WeightedAverageExercisePrice |
| $0.00-$6.94             |  |                     | 164 |                                    |  |                         | 7.0    |             |  | $                            | 6.94   |   |  |   | 98  |   |  | $      | 6.94   |   |
| $6.95-$9.76             |  |                     | 271 |                                    |  |                         | 8.0    |             |  | $                            | 9.76   |   |  |   | 125 |   |  | $      | 9.76   |   |
| $9.77-$13.50            |  |                     | 275 |                                    |  |                         | 5.9    |             |  | $                            | 13.17  |   |  |   | 57  |   |  | $      | 13.50  |   |
| Total                   |  |                     | 710 |                                    |  |                         |   |             |  |                         |   |   |  |   | 280 |   |  |   |   |   |
|                         |

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2005

17.    DividendRestrictions

Primus Financial’s operating guidelinesrestrict the payment of dividends to once per year. The payment ofdividends by Primus Financial is contingent upon a dividend payment notresulting in a capital shortfall under its operating guidelines and thedividend not exceeding 25% of Primus Financial’s netincome (excluding mark-to-market unrealized gains or losses on creditswaps). Primus Financial is further restricted from paying dividendsunder the terms of its Preferred Securities, unless all of thecumulative distributions on the Preferred Securities have beenpreviously made or set aside. Primus Financial’s $37.5million liquidity facility also restricts payment of dividends byPrimus Financial except as permitted by its operating guidelines. TheCompany’s insurance subsidiary, Primus Re, is also subject tosignificant regulatory restrictions limiting its ability to declare andpay dividends.

Further, the Company is subject to Bermuda law andregulatory constraints that will affect its ability to pay dividends onits common shares and make other payments. Under the Bermuda CompaniesAct, each of Primus Guaranty, Primus Bermuda and Primus Re may notdeclare or pay a dividend out of distributable reserves if there arereasonable grounds for believing that each of us is, or would after thepayment be, unable to pay the respective liabilities as they becomedue; or if the realizable value of our respective assets would therebybe less than the aggregate of our respective liabilities and issuedshare capital and share premiumaccounts.

81

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember  31,2005

|           |                                        |
|-----------|----------------------------------------|
| 18.  | QuarterlyOperating Results (unaudited) |

(inthousands)

|                                  |  |              |         |               |  |              |        |               |  |        |        |        |  |        |        |        |  |  |
|----------------------------------|--|--------------|---------|---------------|--|--------------|--------|---------------|--|--------|--------|--------|--|--------|--------|--------|--|--|
| 2005:                            |  | FirstQuarter |         | SecondQuarter |  | ThirdQuarter |        | FourthQuarter |
| Total revenues                   |  | $            | (4,928  | )        |  | $            | (1,569 | )        |  | $      | 32,134 |   |  | $      | 12,565 |   |
| Operatingincome(loss)            |  |         | (13,818 | )        |  |         | (9,171 | )        |  |   | 24,072 |   |  |   | 3,046  |   |
| Netincome (loss)                 |  |         | (13,854 | )        |  |         | (9,180 | )        |  |   | 24,009 |   |  |   | 3,108  |   |
| Basicearnings (loss) per share   |  | $            | (0.32   | )        |  | $            | (0.21  | )        |  | $      | 0.56   |   |  | $      | 0.07   |   |
| Dilutedearnings (loss) per share |  | $            | (0.32   | )        |  | $            | (0.21  | )        |  | $      | 0.54   |   |  | $      | 0.07   |   |
|                                  |

(inthousands)

|                                  |  |              |        |               |  |              |       |               |  |        |        |        |  |        |        |        |  |  |
|----------------------------------|--|--------------|--------|---------------|--|--------------|-------|---------------|--|--------|--------|--------|--|--------|--------|--------|--|--|
| 2004:                            |  | FirstQuarter |        | SecondQuarter |  | ThirdQuarter |       | FourthQuarter |
| Total revenues                   |  | $            | (2,325 | )        |  | $            | 6,658 |          |  | $      | 24,665 |   |  | $      | 24,756 |   |
| Operatingincome(loss)            |  |         | (8,190 | )        |  |         | 219   |          |  |   | 18,004 |   |  |   | 13,698 |   |
| Netincome (loss)                 |  |         | (8,262 | )        |  |         | 174   |          |  |   | 18,026 |   |  |   | 13,747 |   |
| Basicearnings (loss) per share   |  | $            | (3.21  | )        |  | $            | 0.05  |          |  | $      | 4.23   |   |  | $      | 0.32   |   |
| Dilutedearnings (loss) per share |  | $            | (3.21  | )        |  | $            | 0.01  |          |  | $      | 0.51   |   |  | $      | 0.31   |   |
|                                  |

82

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember  31,2005

|            |                                                     |
|------------|-----------------------------------------------------|
| 19.   | Primus Guaranty,Ltd Standalone Financial Statements |

Primus Guaranty,Ltd.Statement of FinancialCondition

|                                                |  |                |         |          |  |        |         |        |  |  |
|------------------------------------------------|--|----------------|---------|----------|--|--------|---------|--------|--|--|
| (inthousands)                                  |  | **December31** |
|                                           |  | **2005**       |         | **2004** |
| Assets                                         |  |           |    |     |  |   |    |   |
| Cashand cashequivalents                        |  | $              | 53,568  |     |  | $      | 54,088  |   |
| Intercompanyreceivable                         |  |           | — |     |  |   | 6,951   |   |
| Investmentin subsidiaries, atequity            |  |           | 315,429 |     |  |   | 299,907 |   |
| Otherreceivable                                |  |           | 44      |     |  |   | 44      |   |
| Prepaidassets                                  |  |           | — |     |  |   | 7       |   |
| Totalassets                                    |  |           | 369,041 |     |  |   | 360,997 |   |
| Liabilitiesand stockholders’equity       |  |           |    |     |  |   |    |   |
| Intercompanypayable                            |  |           | 7,190   |     |  |   | — |   |
| Totalliabilities                               |  |           | 7,190   |     |  |   | — |   |
| Commonstock                                    |  |           | 3,572   |     |  |   | 3,535   |   |
| Additionalpaid-in-capital                      |  |           | 265,848 |     |  |   | 264,860 |   |
| Accumulatedother comprehensiveloss             |  |           | (4,254  | )   |  |   | — |   |
| Warrants                                       |  |           | 612     |     |  |   | 612     |   |
| Retainedearnings                               |  |           | 96,073  |     |  |   | 91,990  |   |
| Totalstockholders’equity                 |  |           | 361,851 |     |  |   | 360,997 |   |
| Totalliabilities and stockholders’equity |  | $              | 369,041 |     |  | $      | 360,997 |   |
|                                                |

PrimusGuaranty, Ltd.Statement ofOperations

|                                                       |  |                       |         |         |  |        |         |        |  |        |         |        |  |  |
|-------------------------------------------------------|--|-----------------------|---------|---------|--|--------|---------|--------|--|--------|---------|--------|--|--|
| (inthousands)                                         |  | Year ended December31 |
|                                                  |  | 2005                  |         | 2004    |  | 2003   |
| Revenues                                              |  |                  |    |    |  |   |    |   |  |   |    |   |
| Interestincome                                        |  | $                     | 1,526   |    |  | $      | 266     |   |  | $      | 24      |   |
| Foreigncurrency revaluation income(loss)              |  |                  | (1,281  | )  |  |   | 115     |   |  |   | — |   |
| Totalrevenues                                         |  |                  | 245     |    |  |   | 381     |   |  |   | 24      |   |
| Expenses                                              |  |                  |    |    |  |   |    |   |  |   |    |   |
| Intercompanyexpenses*                                 |  |                  | 6,787   |    |  |   | — |   |  |   | — |   |
| Stockcompensation                                     |  |                  | 423     |    |  |   | — |   |  |   | — |   |
| Exchangefees                                          |  |                  | 35      |    |  |   | 194     |   |  |   | — |   |
| Professionaland legalfees                             |  |                  | 20      |    |  |   | 19      |   |  |   | 8       |   |
| Other                                                 |  |                  | 8       |    |  |   | — |   |  |   | — |   |
| Bankfees                                              |  |                  | — |    |  |   | 1       |   |  |   | — |   |
| Totalexpenses                                         |  |                  | 7,273   |    |  |   | 214     |   |  |   | 8       |   |
| Income(loss) before equity in earnings ofsubsidiaries |  |                  | (7,028  | )  |  |   | 167     |   |  |   | 16      |   |
| Equityin earnings of subsidiaries, net oftax          |  |                  | 11,111  |    |  |   | 23,518  |   |  |   | 78,455  |   |
| NetIncome                                             |  | $                     | 4,083   |    |  | $      | 23,685  |   |  | $      | 78,471  |   |
|                                                       |

|  |
|--|
|  |  |  |
|  |

|  |         |                                                                                            |
|--|---------|--------------------------------------------------------------------------------------------|
|  | *  | Chargesfor services provided by subsidiaries under modified intercompanyservice agreement. |

83

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember  31,2005

Primus Guaranty, Ltd.Statement ofCashFlows

|                                                                                           |  |                       |         |         |  |        |         |         |  |        |         |         |  |  |
|-------------------------------------------------------------------------------------------|--|-----------------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
| (inthousands)                                                                             |  | Year ended December31 |
|                                                                                      |  | 2005                  |         | 2004    |  | 2003   |
| Cashflows from operatingactivities:                                                       |  |                  |    |    |  |   |    |    |  |   |    |    |
| Netincome                                                                                 |  | $                     | 4,083   |    |  | $      | 23,685  |    |  | $      | 78,471  |    |
| Adjustmentsto reconcile net income to net cash provided by (used in) operatingactivities: |  |                  |    |    |  |   |    |    |  |   |    |    |
| Non-cashitems included in netincome:                                                      |  |                  |    |    |  |   |    |    |  |   |    |    |
| Stockcompensation                                                                         |  |                  | 423     |    |  |   | — |    |  |   | — |    |
| Equityin subsidiaries’ earnings, net oftax                                          |  |                  | (11,111 | )  |  |   | (23,518 | )  |  |   | (78,455 | )  |
| Increase(decrease) in cash resulting from changesin:                                      |  |                  |    |    |  |   |    |    |  |   |    |    |
| Intercompanyreceivable/payable                                                            |  |                  | 14,141  |    |  |   | (5,517  | )  |  |   | — |    |
| Otherreceivable                                                                           |  |                  | — |    |  |   | (44     | )  |  |   | — |    |
| Prepaidexpenses                                                                           |  |                  | 7       |    |  |   | (7      | )  |  |   | — |    |
| Netcash provided by (used in) operatingactivities                                         |  |                  | 7,543   |    |  |   | (5,401  | )  |  |   | 16      |    |
| Cashflows from investingactivities                                                        |  |                  |    |    |  |   |    |    |  |   |    |    |
| Investmentinsubsidiaries                                                                  |  |                  | (5,402  | )  |  |   | (65,500 | )  |  |   | — |    |
| Netcash used in investingactivities                                                       |  |                  | (5,402  | )  |  |   | (65,500 | )  |  |   | — |    |
| Cashflows from financingactivities                                                        |  |                  |    |    |  |   |    |    |  |   |    |    |
| Proceedsfrom issuance of commonshares                                                     |  |                  | — |    |  |   | 116,974 |    |  |   | — |    |
| Repurchaseand retirement of commonshares                                                  |  |                  | (3,154  | )  |  |   | — |    |  |   | — |    |
| Proceedsfrom exercise ofwarrants                                                          |  |                  | — |    |  |   | 5,500   |    |  |   | — |    |
| Proceedsfrom exercise of stockoptions                                                     |  |                  | 493     |    |  |   | — |    |  |   | — |    |
| Netcash provided by (used in) financingactivities                                         |  |                  | (2,661  | )  |  |   | 122,474 |    |  |   | — |    |
| Netincrease (decrease) incash                                                             |  |                  | (520    | )  |  |   | 51,573  |    |  |   | 16      |    |
| Cashand cash equivalents at beginning ofyear                                              |  |                  | 54,088  |    |  |   | 2,515   |    |  |   | 2,499   |    |
| Cashand cash equivalents at end ofyear                                                    |  | $                     | 53,568  |    |  | $      | 54,088  |    |  | $      | 2,515   |    |
|                                                                                           |

84

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Item 9.    Changes in and Disagreementswith Accountants on Accounting and FinancialDisclosures 

None.

Item 9A.    Controls andProcedures

The company has carried out an evaluation, under thesupervision and with the participation of the company’smanagement, including the Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of disclosure controls and procedures, asdefined in Rules 13a-15(e) and 15d-15(e) under the Securities andExchange Act of 1934, as amended, as of the end of the period coveredby this report. Based on that evaluation, the Chief Executive Officerand the Chief Financial Officer concluded that the disclosure controlsand procedures are effective to provide reasonable assurance that allmaterial information relating to the company required to be filed inthis report have been made known to them in a timely fashion. Therehave been no changes in internal control over financial reporting thatoccurred during the most recent fiscal quarter that have materiallyaffected, or are reasonably likely to affect, internal control overfinancial reporting.

The company’s management, includingthe Chief Executive Officer and the Chief Financial Officer, does notexpect that the company’s disclosure controls or its internalcontrols will prevent all errors and all fraud. Further, the design ofa control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relativeto their costs. As a result 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.

See Management’s Reporton Internal Control over Financial Reporting in Item 8 of this annualreport on Form 10-K, which is incorporated by referenceherein.

Item 9B.    Other information

None.

All items requiring disclosure in a report on Form 8-K duringthe fourth quarter of the year ended December  31,  2005,have been so reported.

Part III.

Item 10.    Directorsand Executive Officers of the Registrant

Information regardingdirectors is set forth under ‘‘Election ofDirectors’’ in the company’s Proxy Statement to befiled on or before April  30,  2006 ( the‘‘Proxy Statement’’), which is incorporatedin this Item 10 by reference.

Information regarding executiveofficers is set forth under ‘‘ExecutiveOfficers,’’ in the Proxy Statement, which is incorporatedin this Item 10 by reference.

Information regarding Section 16(a)is set forth under ‘‘Section 16(a) Beneficial OwnershipReporting Compliance’’ in the Proxy Statement, which isincorporated in this Item 10 by reference.

The company hasadopted a code of business conduct and ethics for all employees,including its Chief Executive Officer and Chief Financial Officer. Acopy of such code of ethics can be found on the Company’swebsite, at www.primusguaranty.com, free of charge. The Company wouldintend to satisfy the disclosure requirements regarding an amendmentto, or waiver from, a provision of its code of ethics and that relatesto a substantive amendment or material departure from a provision ofthe code by posting such information on its website atwww.primusguaranty.com.

85

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Item 11.    ExecutiveCompensation

Information regarding compensation of thecompany’s executive officers is set forth under‘‘Executive Officer Compensation’’ in thecompensation tables in the Proxy Statement, which is incorporated inthis Item 11 by reference.

|                 |                                                                                                   |
|-----------------|---------------------------------------------------------------------------------------------------|
| Item 12.   | SecurityOwnership of Certain Beneficial Owners and Management and RelatedStockholder Matters |

Information regarding securitiesauthorized for issuance under equity compensation plans, is set forthin the Proxy Statement, which is incorporated in this Item 12 byreference.

Information regarding security ownership of certainbeneficial owners and management is set forth under‘‘Security Ownership of Certain Beneficial Owners andManagement’’ in the Proxy Statement, which isincorporated in this Item 12 by reference.

Item 13.    CertainRelationships and Related Transactions

Information regardingrelationships and related transactions is set forth under‘‘Certain Relationships and RelatedTransactions’’ in the Proxy Statement, which isincorporated in this Item 13 by reference.

Item14.    Principal Accounting Fees and Services

Informationconcerning principal accountant fees and services will be set forthunder ‘‘Audit Committee Report-Fees of the IndependentRegistered Public Accounting Firm’’ in the ProxyStatement, which is incorporated in this Item 14 by reference.

Part IV.

Item. 15    Exhibits and Financial StatementSchedules

(a) Financial Statements

The financialstatements are set forth under Item 8 of this Annual Report on Form10-K.

(b) Financial Statement Schedules

Thefollowing information is filed as part of this Annual Report on Form10-K and should be read in conjunction with the financial statementscontained in Item 8:

Reports of IndependentRegistered Public Accounting Firm

All other schedules have beenomitted because they were not applicable or because the requiredinformation has been included in the financial statements or notesthereto.

(c) Exhibits

86

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Index toExhibits

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                    |  |  |  |  |
|--------|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| Number |  | Exhibit                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1    |  | Memorandumof Association (Incorporated by reference to Exhibit 3.1 to the S-1dated July  23,2004)                                                                                                                                                                                                                                                                                                                  |
| 3.2    |  | Bye-laws (Incorporated byreference to Exhibit 3.2 to the S-1/A dated June  10,2004)                                                                                                                                                                                                                                                                                                                                |
| 4.1    |  | Specimen Common Share Certificate(Incorporated by reference to Exhibit 4.1 to the S-1/A datedJuly  23,  2004)                                                                                                                                                                                                                                                                                                      |
| 4.2    |  | Warrant topurchase 11,317,972 common shares, par value $.01 per share, datedMarch  14,  2002, issued by the Registrant to XL Insurance(Bermuda) Ltd. (Incorporated by reference to Exhibit 4.2 to the S-1dated April  26,2004)                                                                                                                                                                                     |
| 4.3    |  | Warrant to purchase 8,488,479common shares, par value $.01 per share, dated March  14,2002, issued by the Registrant to Radian Group Inc. (Incorporated byreference to Exhibit 4.3 to the S-1 dated April  26,2004)                                                                                                                                                                                                |
| 10.1   |  | Employment Agreement with ThomasW. Jasper, dated August  16,  2004 (Incorporated byreference to Exhibit 10.1 to the S-1 dated August  17,2004)                                                                                                                                                                                                                                                                     |
| 10.2   |  | Employment Letter with ZacharySnow, dated April  26,  2002 (Incorporated by reference toExhibit 10.2 to the S-1/A dated June  10,2004)                                                                                                                                                                                                                                                                             |
| 10.3   |  | Employment Letter with RichardClaiden, dated October  20,  2003 (Incorporated byreference to Exhibit 10.3 to the S-1/A dated June  10,2004)                                                                                                                                                                                                                                                                        |
| 10.4   |  | Form of Registration RightsAgreement by and among the Registrant and the signatories thereto(Incorporated by reference to Exhibit 10.4 to the S-1/A datedJune  10,  2004)                                                                                                                                                                                                                                          |
| 10.5   |  | PrimusGuaranty, Ltd. Stock Incentive Plan (Incorporated by reference toExhibit 10.5 to the S-1 dated April  26,2004)                                                                                                                                                                                                                                                                                               |
| 10.6   |  | Primus Guaranty, Ltd. 2004 ShareIncentive Plan (Incorporated by reference to Exhibit 10.6 to the S-1/Adated July  23,2004)                                                                                                                                                                                                                                                                                         |
| 10.7   |  | Primus Guaranty, Ltd. AnnualPerformance Bonus Plan (Incorporated by reference to Exhibit 10.7 tothe S-1 dated April  26,2004)                                                                                                                                                                                                                                                                                      |
| 10.8   |  | Primus Guaranty, Ltd. SeverancePlan (Incorporated by reference to Exhibit 10.8 to the S-1/A datedJune  10,  2004)                                                                                                                                                                                                                                                                                                  |
| 10.9   |  | OfficeLease Agreement, dated July  25,  2002, between Madison 45LLC and Primus Financial Products, LLC (Incorporated by reference toExhibit 10.9 to the S-1 dated April  26,2004)                                                                                                                                                                                                                                  |
| 10.10  |  | Credit Agreement, dated as ofMarch  14,  2002, between Primus Financial Products, Inc.and Harris Trust and Savings Bank, as amended as of May31,  2002, as further amended as of December  19,2002, as further amended as of March  13,  2003, as furtheramended as of January  19,  2004 and as further amended asof March  12,  2004 (Incorporated by reference to Exhibit10.10 to the S-1 dated April  26,2004) |
| 10.11  |  | Form of IndemnificationAgreement between the Registrant and each of its directors and officers(Incorporated by reference to Exhibit 10.11 to the S-1/A datedJune  10,2004)                                                                                                                                                                                                                                         |
| 10.12  |  | Indemnification Agreement, datedSeptember  22,  2004, between Primus Guaranty, Ltd. and XLCapital Ltd. (Incorporated by reference to Exhibit 10.12 to the S-1/Adated September  24,  2004)                                                                                                                                                                                                                         |
|        |

87

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|        |  |                                                                                                                                                                   |  |  |  |  |
|--------|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| Number |  | Exhibit                                                                                                                                                           |
| 21     |  | Subsidiaries of PrimusGuaranty, Ltd.                                                                                                                              |
| 23.3   |  | Consent of Ernst &Young LLP, Independent Registered Public AccountingFirm                                                                                     |
| 31.1   |  | Certification of Chief ExecutiveOfficer pursuant to Section 302 of the Sarbanes-Oxley Act of2002                                                                  |
| 31.2   |  | Certification of Chief FinancialOfficer pursuant to Section 302 of the Sarbanes-Oxley Act of2002                                                                  |
| 32     |  | Certification of Chief ExecutiveOfficer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350,as adopted by Section 906 of the Sarbanes-Oxley Act of2002 |
|        |

88

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SIGNATURES

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report to be signed onits behalf by the undersigned, thereunto duly authorized.

|        |  |                                                                                                                                                                                                                                                      |  |  |  |  |
|--------|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
|   |  | PRIMUSGUARANTY, LTD.(Registrant)                                                                                                                                                                                                                     |
|   |  | By:  /s/ ThomasW. Jasper                            Thomas W.JasperChief ExecutiveOfficer |
|        |

Dated: March 15,2006

Pursuant to the requirements of the Securities Exchange Actof 1934, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the datesindicated.

|                                                       |  |                                                                     |  |                |
|-------------------------------------------------------|--|---------------------------------------------------------------------|--|----------------|
| Signature                                             |  | Title                                                               |  | Date           |
|                                                       |
| /s/Thomas W. Jasper                                   |  | ChiefExecutive Officer and Director (Principal ExecutiveOfficer)    |  | March 15, 2006 |
|                                                       |
| Thomas W. Jasper                                      |
|                                                       |
| /s/RichardClaiden       |  | Chief Financial Officer (PrincipalFinancial and Accounting Officer) |  | March 15,2006  |
|                                                       |
| RichardClaiden                                        |
|                                                       |
| /s/ Michael P. Esposito,Jr.                           |  | Directorand Chairman of the Board                                   |  | March 15,2006  |
|                                                       |
| Michael P. Esposito, Jr.                              |
|                                                       |
| /s/ Frank P. Filipps                                  |  | Director                                                            |  | March 15,2006  |
|                                                       |
| FrankP. Filipps                                       |
|                                                       |
| /s/ DuncanGoldie-Morrison                             |  | Director                                                            |  | March 15,2006  |
|                                                       |
| Duncan Goldie-Morrison                                |
|                                                       |
| /s/ Paul S. Giordano                                  |  | Director                                                            |  | March 15,2006  |
|                                                       |
| PaulS. Giordano                                       |
|                                                       |
| /s/ Thomas J.Hartlage                                 |  | Director                                                            |  | March 15,2006  |
|                                                       |
| Thomas J. Hartlage                                    |
|                                                       |
| /s/ James K. Hunt                                     |  | Director                                                            |  | March 15,2006  |
|                                                       |
| James K.Hunt                                          |
|                                                       |
| /s/ Robert R.Lusardi                                  |  | Director                                                            |  | March 15,2006  |
|                                                       |
| Robert R. Lusardi                                     |
|                                                       |
| /s/ John Ward, III                                    |  | Director                                                            |  | March 15,2006  |
|                                                       |
| JohnWard, III                                         |
|                                                       |

89

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