FORM 10-Q
                           ---------------------------

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

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities  Exchange
Act of 1934

                For the quarterly period ended September 30, 1998

                                       or

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
                  For the transition period from _____ to _____



                         Commission File Number 0-22342

                               TRIAD GUARANTY INC.
             (Exact name of registrant as specified in its charter)

       DELAWARE                                         56-1838519
(State of Incorporation)                 (I.R.S. Employer Identification Number)

                       101 SOUTH STRATFORD ROAD, SUITE 500
                       WINSTON-SALEM, NORTH CAROLINA 27104
                    (Address of principal executive offices)

                                 (336) 723-1282
              (Registrant's telephone number, including area code)
                          -----------------------------

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

Number of shares of Common Stock, $.01 par value,  outstanding as of November 3,
1998: 13,377,536 shares.

<PAGE>

                              TRIAD GUARANTY INC.

                                      INDEX
                                                                           Page
                                                                          Number
Part I. Financial Information:

    Item 1. Financial Statements:

    Consolidated Balance Sheets as of September 30, 1998 (Unaudited)
    and December 31, 1997.....................................................3

    Consolidated Statements of Income for the Three and Nine Month
    Periods Ended September 30, 1998 and 1997 (Unaudited).....................4

    Consolidated Statements of Cash Flow for the Nine Month
    Periods Ended September 30, 1998 and 1997 (Unaudited).....................5

    Notes to Consolidated Financial Statements................................6

    Item 2. Management's Discussion and Analysis of Financial Condition and
         Results of Operations...............................................10

Part II. Other Information:

    Item 6. Exhibits and Reports on Form 8-K.................................17

    Signatures...............................................................17














                                       2
<PAGE>
                               TRIAD GUARANTY INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                    September 30,   December 31,
                                                        1998            1997
                                                    -----------    ------------
                                                     (Unaudited)
<S>                                                 <C>            <C>  
Assets                                              
Invested assets:
  Securities available-for-sale, at fair value:
    Fixed maturities .............................. $153,662,429   $ 99,725,487
    Equity securities .............................   11,427,910     11,466,028
  Short-term investments ..........................    4,744,018      8,685,842
                                                    ------------   ------------
                                                    $169,834,357   $119,877,357


Cash ..............................................      170,824          8,557
Accrued investment income .........................    2,332,144      1,460,168
Deferred policy acquisition costs .................   14,659,504     12,587,355
Property and equipment ............................    3,105,208      2,524,228
Prepaid reinsurance premium .......................       16,368         23,263
Reinsurance recoverable ...........................       30,217         49,447
Other assets ......................................    4,109,781      2,448,685
                                                    ------------   ------------
Total assets ...................................... $194,258,403   $138,979,060
                                                    ============   ============

Liabilities and stockholders' equity
Liabilities:
    Losses and loss adjustment expenses ........... $ 10,536,147   $  8,960,411
    Unearned premiums .............................    6,975,250      7,988,342
    Current taxes payable .........................        3,322          3,318
    Deferred income taxes .........................    8,132,759      7,521,874
    Long term debt ................................   34,480,782           --
    Accrued interest on debt ......................      583,722           --
    Accrued expenses and other liabilities ........    3,187,253      2,724,324
                                                    ------------   ------------
Total liabilities .................................   63,899,235     27,198,269
Commitments and contingent liabilities - Note 4
Stockholders' equity:
   Preferred stock, par value $.01 per share
      authorized 1,000,000 shares; no shares 
      issued and outstanding.......................      ---              ---
   Common  stock,  par value  $.01 per share
      authorized 32,000,000 shares; 13,392,536
      shares issued and outstanding at 
      September 30, 1998 and 13,293,721 at 
      December 31, 1997 ...........................      133,925        132,937
   Additional paid-in capital .....................   60,417,014     59,369,223
   Accumulated other comprehensive income, 
      net of income tax liability of $2,174,213
      at September 30, 1998 and $2,368,998
      at December 31, 1997 ........................    4,043,571      4,405,315
   Retained earnings ..............................   65,764,658     47,873,316
                                                    ------------   ------------
Total stockholders' equity ........................  130,359,168    111,780,791
                                                    ------------   ------------
Total liabilities and stockholders' equity ........ $194,258,403   $138,979,060
                                                    ============   ============
</TABLE>

                             See accompanying notes

                                       3
<PAGE>

                               TRIAD GUARANTY INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                           Three Months Ended            Nine Months Ended
                                                              September 30                 September 30
                                                      --------------------------   -----------------------------
                                                         1998           1997            1998            1997
                                                         ----           ----            ----            ----
<S>                                                 <C>             <C>             <C>             <C>         
Revenue:
Premiums written:

   Direct ..........................................$ 13,681,365    $ 11,088,559    $ 38,017,064    $ 28,635,704
   Assumed .........................................       1,335           7,150          10,262          23,204
   Ceded ...........................................    (310,979)       (485,041)       (788,451)     (1,541,755)
                                                    ------------    ------------    ------------    ------------
Net premiums written ...............................  13,371,721      10,610,668      37,238,875      27,117,153
Change in unearned premiums ........................     284,247        (232,442)      1,006,197          94,691
                                                    ------------    ------------    ------------    ------------
Earned premiums ....................................  13,655,968      10,378,226      38,245,072      27,211,844
Net investment income ..............................   2,424,083       1,729,886       6,788,337       4,703,465
Realized investment gains ..........................     307,812          71,616         582,076          77,466
Other income .......................................       8,609           1,686           9,648           7,716
                                                    ------------    ------------    ------------    ------------
                                                      16,396,472      12,181,414      45,625,133      32,000,491
Losses and expenses:
Losses and loss adjustment expenses ................   1,714,629       1,554,580       4,297,145       3,938,719
Reinsurance recoveries .............................       1,508         (34,927)          2,991        (133,320)
                                                    ------------    ------------    ------------    ------------
Net losses and loss adjustment expenses ............   1,716,137       1,519,653       4,300,136       3,805,399
Interest expense on debt ...........................     692,388            --         1,861,578            --
Amortization of deferred policy acquisition costs ..   1,553,379       1,049,639       4,188,705       3,007,082
Other operating expenses (net) .....................   3,177,927       2,704,303       9,515,458       7,371,666
                                                    ------------    ------------    ------------    ------------
                                                       7,139,831       5,273,595      19,865,877      14,184,147
                                                    ------------    ------------    ------------    ------------
Income before income taxes .........................   9,256,641       6,907,819      25,759,256      17,816,344
Income taxes:
   Current .........................................        --               223             426           2,391
   Deferred ........................................   2,793,250       2,169,410       7,867,488       5,595,680
                                                    ------------    ------------    ------------    ------------
                                                       2,793,250       2,169,633       7,867,914       5,598,071
                                                    ------------    ------------    ------------    ------------
Net income .........................................$  6,463,391    $  4,738,186    $ 17,891,342    $ 12,218,273
                                                    ============    ============    ============    ============

Earnings per common and
   common equivalent share:
   Basic ...........................................$    .48        $    .36        $   1.34        $    .92
                                                    ============    ============    ============    ============
   Diluted .........................................$    .47        $    .34        $   1.29        $    .89
                                                    ============    ============    ============    ============
Shares used in computing earnings per
   common and common equivalent share:
   Basic ...........................................  13,358,409      13,291,244      13,325,656      13,290,885
                                                    ============    ============    ============    ============
   Diluted .........................................  13,854,330      13,762,476      13,864,865      13,681,225
                                                    ============    ============    ============    ============
</TABLE>
                             See accompanying notes.

                                       4
<PAGE>

                               TRIAD GUARANTY INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                               Nine Months Ended
                                                                  September 30
                                                         ----------------------------
                                                              1998            1997
<S>                                                      <C>             <C>         
Operating activities
Net income ...........................................   $ 17,891,342    $ 12,218,273
Adjustments to reconcile net income to net
 cash provided by operatingactivities:
   Loss and unearned premium reserves ................        562,644       1,846,535
   Accrued expenses and other liabilities ............        440,186         326,267
   Current taxes payable .............................              4           1,722
   Accrued investment income .........................       (871,976)       (525,512)
   Policy acquisition costs deferred .................     (6,260,854)     (4,264,541)
   Amortization of policy acquisition costs ..........      4,188,705       3,007,082
   Net realized investment gains .....................       (582,076)        (77,466)
   Provision for depreciation ........................        560,815         434,894
   Amortization of intangible assets .................         34,795            --
   Accretion of discount on investments ..............       (739,867)       (463,182)
   Deferred income taxes .............................        805,670       1,289,680
   Accrued interest on debt ..........................        583,722            --
   Real estate acquired in claim settlement ..........        141,999            --
   Other assets ......................................     (1,464,865)     (1,095,670)
                                                         ------------    ------------
Net cash provided by operating activities ............     15,290,244      12,698,082
Investing activities
Securities available-for-sale:
    Purchases - fixed maturities .....................    (63,482,701)    (20,254,380)
    Sales - fixed maturities .........................     10,760,774      10,582,547
    Purchases - equities .............................     (5,119,678)     (3,150,355)
    Sales - equities .................................      4,677,949       1,469,121
  Purchase of property and equipment .................     (1,134,700)     (1,043,244)
                                                         ------------    ------------
Net cash used in investing activities ................    (54,298,356)    (12,396,311)
Financing activities
Proceeds from issuance of long term debt .............     34,477,899            --
Proceeds from exercise of stock options ..............        750,656           8,920
                                                         ------------    ------------
Net cash provided by financing activities ............     35,228,555           8,920
                                                         ------------    ------------
Net change in cash and short-term investments ........     (3,779,557)        310,691
Cash and short-term investments at beginning
   of period .........................................      8,694,399       3,662,711
                                                         ------------    ------------
Cash and short-term investments at end of period .....   $  4,914,842    $  3,973,402
                                                         ============    ============
Supplemental  schedule  of cash flow  information
  Cash paid during theperiod for:
   Income taxes and United States Mortgage Guaranty
      Tax and Loss Bonds .............................   $  6,979,726    $  4,306,900
   Interest ..........................................   $  1,274,972    $       --
Non-cash investing and finance activities:
   Exchange of restricted common stock for
      intangible asset ...............................   $    298,125    $       --
</TABLE>

                             See accompanying notes.

                                       5
<PAGE>
                              TRIAD GUARANTY INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 1998
                                   (Unaudited)


NOTE 1 -- THE COMPANY

     Triad Guaranty Inc. (the "Company") is a holding company which, through its
wholly-owned   subsidiary,   Triad  Guaranty  Insurance  Corporation  ("Triad"),
provides  private mortgage  insurance  coverage in the United States to mortgage
lenders to protect the lender  against  loss from  defaults on low down  payment
residential mortgage loans.


NOTE 2 -- BASIS OF PRESENTATION

     The  accompanying  unaudited  consolidated  financial  statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-Q and Article 10 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. In the opinion of management,  all adjustments (consisting
of normal recurring accruals)  considered necessary for a fair presentation have
been  included.  Operating  results for the three and nine month  periods  ended
September  30, 1998 are not  necessarily  indicative  of the results that may be
expected for the year ending December 31, 1998. For further  information,  refer
to the consolidated  financial  statements and footnotes thereto included in the
Triad  Guaranty Inc.  annual report on form 10-K for the year ended December 31,
1997.


NOTE 3 -- CONSOLIDATION

     The consolidated financial statements include the amounts of Triad Guaranty
Inc. and its wholly-owned subsidiaries, Triad Guaranty Insurance Corporation and
Triad  Guaranty  Assurance  Corporation,  a  wholly-owned  subsidiary  of  Triad
Guaranty  Insurance  Corporation.  All  significant  intercompany  accounts  and
transactions have been eliminated.

NOTE 4 -- COMMITMENTS AND CONTINGENT LIABILITIES

     REINSURANCE  - The Company  assumes and cedes  certain  premiums and losses
from/to reinsurers under various reinsurance  agreements.  Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of the
reinsurer  to honor its  obligation  could  result  in  losses  to the  Company;
consequently, allowances are established for amounts when deemed uncollectible.

                                       6
<PAGE>

                               TRIAD GUARANTY INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
                               September 30, 1998
                                   (Unaudited)

     INSURANCE  IN  FORCE,  DIVIDEND  RESTRICTIONS,   AND  STATUTORY  RESULTS  -
Insurance  regulations  limit the writing of mortgage  guaranty  insurance to an
aggregate amount of insured risk no greater than twenty-five  times the total of
statutory capital and surplus and the statutory  contingency reserve. The amount
of net risk for  insurance in force at September 30, 1998 and December 31, 1997,
as presented below, was computed by applying the various  percentage  settlement
options to the insurance in force amounts based on the original  insured  amount
of the loan. Triad's ratio is as follows:


                                            September 30,        December 31,
                                                1998                1997

Net risk ...........................      $ 2,599,455,489      $2,231,572,130
                                          ===============      ==============
Statutory capital and surplus ......      $    89,163,345      $   60,929,830
Statutory contingency reserve ......           74,379,618          54,766,669
                                          ---------------      --------------
Total ..............................      $   163,542,963      $  115,696,499
                                          ===============      ==============
Risk-to-capital ratio ..............            15.9-to-1           19.3-to-1
                                          ===============      ==============


     Triad is  required  under  the  Illinois  Insurance  Code (the  "Code")  to
maintain minimum statutory capital and surplus of $5,000,000. In addition, Triad
Guaranty  Assurance  Corporation is required under the Code to maintain  minimum
capital and surplus of  $5,000,000.  The Code permits  dividends to be paid only
out of  earned  surplus  and  also  requires  prior  approval  of  extraordinary
dividends.  An extraordinary dividend is any dividend or distribution of cash or
other property the fair value of which, together with that of other dividends or
distributions  made within a period of twelve  consecutive  months,  exceeds the
greater  of  (a)  ten   percent  of   Triad's   statutory   surplus  as  regards
policyholders,  or (b)  Triad's  statutory  net  income  for the  calendar  year
preceding the date of the dividend.

     Net income as determined in accordance with statutory  accounting practices
was $24,094,862 for the nine months ended September 30, 1998 and $22,916,215 for
the year ended December 31, 1997.

     At September 30, 1998 and December 31, 1997,  the amount of Triad's  equity
that  could  be  paid  out in  dividends  to  stockholders  was  $5,447,417  and
$2,512,027,  respectively,  which was the earned surplus of Triad on a statutory
basis on those dates.

                                       7
<PAGE>
                              TRIAD GUARANTY INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
                               September 30, 1998
                                   (Unaudited)


     LOSS  RESERVES - The Company  establishes  loss reserves to provide for the
estimated  costs of  settling  claims  with  respect to loans  reported to be in
default and loans in default which have not been reported to the Company. Due to
the inherent  uncertainty in estimating  reserves for losses and loss adjustment
expenses,  there can be no assurance that the reserves will prove to be adequate
to cover ultimate loss development.


NOTE 5 - - EARNINGS PER SHARE

     Basic and  diluted  earnings  per share are based on the  weighted  average
daily  number of  shares  outstanding.  For  diluted  earnings  per  share,  the
denominator   includes   the   dilutive   effect   of  stock   options   on  the
weighted-average  shares  outstanding.  There  are no  other  reconciling  items
between the  denominator  used in basic earnings per share and diluted  earnings
per  share,  and the  numerator  used in basic  earnings  per share and  diluted
earnings per share is the same for all periods presented.


NOTE 6 - - COMPREHENSIVE INCOME

     On January 1, 1998, the Company adopted  Statement of Financial  Accounting
Standards No. 130, Reporting Comprehensive Income. Statement No. 130 establishes
standards for reporting and display of the components of comprehensive income in
financial statements.  Comprehensive income is divided into net income and other
comprehensive income. For the Company, other comprehensive income is composed of
unrealized gains or losses on available-for-sale  securities, net of income tax.
Prior to adoption of this statement,  these amounts were reported as a component
to  stockholders'  equity.  The adoption of this  statement had no impact on the
Company's net income or stockholders' equity.

     For the  three  month  periods  ended  September  30,  1998 and  1997,  the
Company's comprehensive income was $6.2 million and $6.3 million,  respectively.
For the nine month  periods  ended  September  30, 1998 and 1997,  the Company's
comprehensive  income was $17.5 million and $14.3 million,  respectively.  Prior
period   financial   statements  have  been   reclassified  to  conform  to  the
requirements of Statement No. 130.

                                       8
<PAGE>

                              TRIAD GUARANTY INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
                               September 30, 1998
                                   (Unaudited)

NOTE 7 - - LONG TERM DEBT

     On January 29, 1998, the Company  completed a $35 million private  offering
of notes due January 15, 2028. The notes, which represent unsecured  obligations
of the Company,  bear interest at a rate of 7.9% per annum and are non-callable.
The notes are rated "A" by  Standard  and Poor's  Corporation  and "A+" by Fitch
Investors Service.  The Company contributed $25 million of the net proceeds from
the sale of the notes to Triad in exchange for a surplus debenture.  The Company
will be dependent upon payments under the surplus  debenture issued by Triad and
upon  possible  future  dividends  from  Triad,  all of which will be subject to
significant payment restrictions under Illinois insurance laws, to provide funds
for the  payment  of the  Company's  obligations  under the notes.  The  Company
retained the balance of the net  proceeds of the  offering,  approximately  $9.4
million,  which will be available  for general  corporate  purposes,  including,
without limitation,  investment, payments of principal and interest on the notes
and possible future contributions to the capital of Triad.













                                       9
<PAGE>

ITEM 2.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATION.

RESULTS OF OPERATIONS

     Net  income  for the first  nine  months of 1998  increased  46.4% to $17.9
million  compared to $12.2 million in the first nine months of 1997.  Net income
for the third quarter of 1998 increased  36.4% to $6.5 million  compared to $4.7
million for the third quarter of 1997.  This  improvement is  attributable  to a
40.5% (31.6% in the third quarter)  increase in earned premiums,  a 44.3% (40.1%
in the third quarter) increase in net investment income and an improved combined
loss and expense ratio.

     Net income per share on a diluted  basis,  which  reflects the  two-for-one
stock split  effective  on October 28,  1997,  increased  44.5% to $1.29 for the
first nine months of 1998  compared to $0.89 per share for the first nine months
of 1997.  Net  income  per share for the  third  quarter  of 1998 was $0.47 on a
diluted basis compared to $0.34 per share for the same period of 1997. Operating
earnings  per share  were $1.26 for the first nine  months of 1998  compared  to
$0.89 for the first nine months of 1997. Operating earnings exclude net realized
gains  of  approximately  $582,000  in the  first  nine  months  of 1998  and of
approximately $77,000 in the same period of 1997.

     Net new  insurance  written  was $3.3  billion for the first nine months of
1998 as compared to $2.1 billion for the first nine months of 1997,  an increase
of 52.5%. For the third quarter,  net new insurance written totaled $1.2 billion
in  1998   compared  to  $817  million  in  1997.   The  Company  also  produced
approximately  $186 million of new  insurance  written on seasoned  loans in the
first nine months of 1998  compared to $951  million in the same period of 1997.
The  increase  in new  insurance  written  was the  result of a strong  economy,
continued  geographic  expansion,  the  penetration  of Triad's  products in the
marketplace  to both new and  existing  customers  and the  introduction  of new
products.  According to industry data,  Triad's national market share of net new
insurance  written  increased to 2.5% for the first nine months of 1998 compared
to 2.4% reported for all of 1997.

     The growth in new insurance  written also  reflects the favorable  interest
rate  environment  in the first nine months of 1998 which caused home buying and
refinance  activities  to remain  strong.  Refinance  activity  was 30.6% of new
insurance  written in the first  nine  months of 1998  compared  to 13.0% in the
first nine months of 1997. Total direct insurance in force reached $10.5 billion
at September  30,  1998,  compared to $8.8  billion at  September  30, 1997,  an
increase of 20.1%.

     Total direct premiums  written were $38.0 million for the first nine months
of 1998,  an  increase  of 32.8%  compared  to $28.6  million for the first nine
months of 1997. Net premiums written  increased by 37.3% to $37.2 million in the
first nine months of 1998 compared to $27.1 million for the same period in 1997.
Earned  premiums  increased  40.5% to $38.2 million for the first nine months of
1998 from  $27.2  million  for the first  nine  months of 1997.  This  growth in

                                       10
<PAGE>


ITEM 2.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED

written and earned premium resulted from the increase in new insurance  written,
offset  by  a  decline  in  the  Company's   persistency   rate.  The  Company's
persistency,  or the number of policies  remaining in force from one year prior,
was 73.8% at  September  30, 1998,  compared to 84.2% at December 31, 1997.  The
decline in  persistency  experienced  thus far in 1998 will cause future renewal
premiums  to be less than  would have been  expected  under  higher  persistency
conditions.  Sales under the Company's monthly premium plan represented 97.5% of
new insurance  written in the first three  quarters of 1998 compared to 93.5% in
the same period of 1997.

     Net investment income for the first nine months of 1998 was $6.8 million, a
44.3%  increase  over  $4.7  million  in the  first  nine  months  of 1997.  Net
investment  income  for the  third  quarter  of 1998 was $2.4  million,  a 40.1%
increase over the third quarter of 1997.  This increase in investment  income is
the  result of growth in the  average  book  value of  invested  assets by $45.3
million  to $146.8  million  at  September  30,  1998,  from  $101.5  million at
September 30, 1997. The growth in invested  assets is  attributable  to both the
investment  of the  proceeds  of  the  Company's  $35.0  million  debt  offering
completed in late January 1998 and the increase in invested assets due to normal
operating cash flow. The yield on average  invested  assets  remained  stable at
6.2% for the first  nine  months of 1997 and 1998,  compared  to 6.0% for all of
1997. The portfolio's tax-equivalent yield was 7.9% for the first nine months of
1998 and 1997 versus 8.0% for all of 1997.  Approximately  69% or $102.7 million
of the Company's fixed maturity portfolio at September 30, 1998, was composed of
state and municipal tax-preferred securities as compared to 67% at September 30,
1997.

     The Company's loss ratio (the ratio of incurred losses to earned  premiums)
was 11.2%  for the first  nine  months  of 1998  compared  to 14.0% for the same
period of 1997 and 13.4% for all of 1997. The loss ratio was 12.6% for the third
quarter of 1998 compared to 14.6% for the third  quarter of 1997.  The Company's
favorable  loss ratio  reflects the low level of  delinquencies  compared to the
number of insured  loans and the fact that  approximately  77% of the  Company's
insurance in force was  originated in the last 36 months.  Management  believes,
based upon its experience and industry  data,  that claims  incidence for it and
other private mortgage  insurers is generally highest in the third through sixth
years after loan  origination.  Although the claims  experience on new insurance
written in previous  years has been quite  favorable,  the  Company  expects its
incurred  losses to  increase  as a greater  amount  of its  insurance  in force
reaches its  anticipated  highest  claim  frequency  years.  Due to the inherent
uncertainty  of future premium  levels,  losses,  economic  conditions and other
factors that impact  earnings,  it is  impossible  to predict with any degree of
certainty the impact of such higher claims frequencies on future earnings.

                                       11
<PAGE>

ITEM 2.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED

     During periods of  significant  refinancing  activity,  it is possible that
policies on stronger  loans may be  canceled  and on weaker  loans may remain in
force, thus potentially increasing the loss ratio on older business. Substantial
increases  in  production  of new business  during these  periods can offset the
increased loss ratio on the older business.

     Net losses and loss  adjustment  expenses (net of  reinsurance  recoveries)
increased by 13.0% in the first nine months of 1998 to $4.3 million  compared to
$3.8  million in the first nine months of 1997.  Net losses and loss  adjustment
expenses for the third quarter of 1998 was $1.7 million  versus $1.5 million for
the same quarter in 1997. The year to date increase  reflects the growing amount
of the Company's  insurance in force and the resulting  recognition of a greater
amount of insurance in force reaching its higher claim frequency years.

     Amortization  of deferred  policy  acquisition  costs increased by 39.3% to
$4.2  million in the first nine months of 1998  compared to $3.0 million for the
first nine months of 1997.  These costs were $1.6 million for the third  quarter
of 1998  compared to $1.0 million for the third  quarter of 1997, an increase of
48.0%. The increase in amortization  reflects both a growing balance of deferred
policy  acquisition  costs to amortize as the Company builds its total insurance
in force and a higher cancellation rate during the first nine months of 1998.

     Other operating expenses increased 29.1% to $9.5 million for the first nine
months of 1998  compared to $7.4  million  for the same period in 1997.  For the
third quarter of 1998, other operating  expenses  increased to $3.2 million from
$2.7  million  in the third  quarter  of 1997.  This  increase  in  expenses  is
primarily attributable to advertising, personnel, facilities and equipment costs
required to support the Company's product development,  technology enhancements,
geographic expansion and increased production.

     The expense ratio (ratio of underwriting  expenses to net premiums written)
for the first nine months of 1998 was 36.8% compared to 38.3% for the first nine
months  of 1997 and  37.5%  for all of 1997.  The  expense  ratio  for the third
quarter  of  1998  and  1997  was  35.4%.   Contributing  to  this  year-to-date
improvement is the higher level of written  premiums in 1998 partially offset by
the increase in expenses.

     The effective tax rate for the first nine months of 1998 was 30.5% compared
to 31.4% in the first nine  months of 1997.  This  decrease is the result of the
increase in  investment in tax preferred  securities  and the  completion of the
phase-in during 1997 of the 35% federal  statutory income tax rate applicable to
companies with annual taxable income above $10 million.  Management  expects the
Company's effective tax rate to remain about the same as long as yields from new
funds invested in tax-preferred securities remain favorable in relation to fully
taxable securities.

                                       12
<PAGE>

ITEM 2.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED

LIQUIDITY AND CAPITAL RESOURCES

     The  Company's  sources of operating  funds  consist  primarily of premiums
written and investment  income.  Operating cash flow is applied primarily to the
payment of claims and expenses.

     The Company generated positive cash flow from operating  activities for the
first nine months of 1998 of $15.3  million  compared  to $12.7  million for the
first nine months of 1997. The increase in Triad's  operating cash flow reflects
the growth in renewal  premiums and insurance  written that has more than offset
the increases in claims paid and other expenses.

     The  Company's  business  does not routinely  require  significant  capital
expenditures. Positive cash flows are invested pending future payments of claims
and expenses.  Cash flow  shortfalls,  if any,  could be funded through sales of
short-term investments and other investment portfolio securities.

     In January 1998, the Company  completed a $35.0 million private offering of
notes due January 15, 2028. The notes, which represent unsecured  obligations of
the Company, bear interest at a rate of 7.9% per annum and are non-callable. The
notes  are  rated  "A" by  Standard  and  Poor's  Corporation  and "A+" by Fitch
Investors  Service.  The parent  company  contributed  $25.0  million of the net
proceeds to Triad in exchange  for a surplus  debenture.  The parent  company is
dependent  upon payments  under the surplus  debenture  issued by Triad and upon
possible  future  dividends  from  Triad,  all  of  which  will  be  subject  to
significant payment restrictions under Illinois insurance laws, to provide funds
for the payment of the Company's obligations under the notes. The parent company
retained the balance of the net  proceeds of the  offering,  approximately  $9.4
million,  and these  proceeds  are  available  for general  corporate  purposes,
including, without limitation, investment, payments of principal and interest on
the notes and possible future contributions to its subsidiaries.

     The parent  company's  cash flow is  dependent  on  interest  income,  cash
dividends, revenues from management fees and interest payments under the surplus
debenture from Triad. The insurance laws of the State of Illinois impose certain
restrictions  on dividends from Triad.  These  restrictions,  based on statutory
accounting  practices,  include requirements that dividends may be paid only out
of statutory earned surplus as of the end of the preceding fiscal year and limit
the amount of dividends  that may be paid without prior approval of the Illinois
Insurance Department.  The Illinois Insurance Department permits expenses of the
parent company to be paid by Triad in the form of management fees.

     Consolidated  invested  assets were $169.8  million at September  30, 1998,
compared to $119.9 million at December 31, 1997.  This increase is  attributable
to the  investment  of proceeds of the $35.0 million debt offering and operating
cash  flow.  Through  investment  of a portion of the net  proceeds  of the note
offering,   the  Company  has  increased  its  investments  in  higher  yielding
non-investment   grade  securities  to  approximately  9%  of  its  consolidated
investment  portfolio,  up from  approximately  3% at  December  31,  1997.  Net
unrealized  investment  gains were $1.8  million on equity  securities  and $4.4

                                       13
<PAGE>


ITEM 2.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED

million on fixed  maturity  securities  at September  30, 1998.  Fixed  maturity
securities and equity securities classified as available for sale totaled $165.1
million at  September  30,  1998.  Based  upon book  value,  the fixed  maturity
portfolio  consisted of approximately  69% municipal  securities,  23% corporate
securities,  6% U.S.  government  obligations  and 2%  mortgage-backed  bonds at
September 30, 1998.

     The  Company's  loss  reserves  increased to $10.5 million at September 30,
1998,  compared to $9.0 million at December 31, 1997.  This growth is the result
of the increases in new insurance written and the maturing of the Company's risk
in force.  Consistent  with industry  practices,  the Company does not establish
loss  reserves  for future  claims on insured  loans which are not  currently in
default.  The Company's  reserves per delinquent  loan were $21,500 at September
30, 1998,  compared to $23,100 at December 31, 1997.  The Company's  delinquency
ratio,  the ratio of delinquent  insured loans to total insured loans, was 0.53%
at September 30, 1998, compared to 0.47% at December 31, 1997.

     The  Company's  unearned  premium  reserve of $7.0 million at September 30,
1998,  decreased  from $8.0  million  at  December  31,  1997.  This  decline is
attributable  primarily  to the  continued  production  of the  monthly  premium
product,  which produces little unearned  premium  compared to annual and single
premium products.  Cancellation  activity also can contribute to the decrease in
unearned  premiums,  whereby  older  annual  premium  policies  are  canceled or
replaced by monthly premium policies.

     Total  stockholders'  equity  increased to $130.4  million at September 30,
1998, from $111.8 million at December 31, 1997. This increase  resulted from net
income of $17.9  million for the first nine  months of 1998 and from  additional
paid-in  capital of $1.0 million  resulting  from the exercise of employee stock
options and the issuance of restricted  stock in  connection  with the buyout of
one of the Company's exclusive  commissioned  general agencies.  These increases
were offset  somewhat by a decline in net  unrealized  gains on  investments  of
about $362,000.

     Triad's total statutory  policyholders'  surplus increased to $89.2 million
at September 30, 1998,  from $60.9  million at December 31, 1997.  This increase
resulted  from the  Company's  contribution  to Triad of $25.0  million  of note
proceeds through a surplus  debenture and statutory net income of $24.1 million,
offset primarily by a decrease in unrealized gains on equity  securities of $1.7
million and an increase in the statutory  contingency  reserve of $19.6 million.
Triad's  statutory  earned  surplus  was $5.4  million at  September  30,  1998,
compared to $2.5 million at December 31,  1997,  reflecting  growth in statutory
net income greater than the increase in the statutory  contingency  reserve. The
balance in the statutory  contingency reserve was $74.4 million at September 30,
1998, compared to $54.8 million at December 31, 1997.

                                       14
<PAGE>


ITEM 2.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED

     Substantially  all of the  Company's  existing  computer  systems which are
integral to its business were originally  developed to be year 2000 compliant or
will be  reprogrammed.  The Company  plans to reprogram  its  existing  computer
systems, as necessary,  and complete testing of the Company's existing system by
December 31, 1998. As of September 30, 1998,  the Company is  approximately  80%
complete in the review and testing of its existing computer systems for the Year
2000 compliance.  Year 2000 compliance costs incurred  relating to the Company's
existing  computer  systems are being expensed and are  immaterial.  Some of the
Company's  computer  systems  integral to its business  interface  with computer
systems of third parties.  Virtually all  transactions  with systems operated by
third parties  involve  nationally  recognized  service  bureaus and  government
sponsored  entities  such as Freddie Mac and Fannie Mae.  The Company is working
with  these  third  parties to  coordinate  any  necessary  testing of year 2000
related system  interfaces.  As a result,  the Company does not anticipate  that
year 2000 compliance  issues arising from interfaces  with  third-party  systems
will have a material impact on its operations.

     The Company also is undertaking  modifications  and upgrades to enhance its
computer  systems  and  technological  capabilities.  The Company  expects  that
aggregate costs of  approximately  $2.8 million will be expended for this system
conversion and upgrade (approximately $1.4 million in capitalized costs has been
incurred  for the project  thus far  through  September  30,  1998) and that the
project  will be funded  through  cash flow from  operations.  As a part of this
systems  enhancement  effort,  which should be completed in the first quarter of
1999,  management  has  initiated a program to insure that these new systems and
applications are year 2000 compliant. Internal staff costs, consulting and other
expenses  necessary to insure that the new systems are year 2000  compliant will
be made as  part  of the  Company's  capital  upgrade  to its  computer  systems
throughout the remainder of 1998 and 1999.

     Triad's  ability  to write  insurance  depends  on the  maintenance  of its
claims-paying  ability  ratings  and the  adequacy of its capital in relation to
risk in force. A significant  reduction of capital or a significant  increase in
risk may impair  Triad's  ability  to write  additional  insurance.  A number of
states also  generally  limit Triad's  risk-to-capital  ratio to 25-to-1.  As of
September 30, 1998, Triad's  risk-to-capital ratio was 15.9-to-1, as compared to
19.3-to-1  at December 31, 1997,  and  17.8-to-1  for the industry as a whole at
December 31, 1997, the latest industry data available.

                                       15
<PAGE>

ITEM 2.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATION - - CONTINUED

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

     Management's  Discussion  and  Analysis  and this  Report  contain  forward
looking statements relating to future plans,  expectations and performance which
involve  various  risks and  uncertainties,  including  but not  limited  to the
following:  interest  rates may  increase  from their  current  levels;  housing
transactions  and mortgage  issuance  may  decrease  for many reasons  including
changes in interest rates or economic conditions; the Company's market share may
change as a result of changes in underwriting  criteria or competitive  products
or rates;  the amount of new  insurance  written could be affected by changes in
federal  housing   legislation,   including   changes  in  the  Federal  Housing
Administration  loan limits and coverage  requirements of Freddie Mac and Fannie
Mae;  rating  agencies may revise  methodologies  for  determining the Company's
claims-paying ability ratings and may revise or withdraw the assigned ratings at
any  time;  the  Company's  performance  may  be  impacted  by  changes  in  the
performance of the financial markets and general economic  conditions.  Economic
downturns  in  regions  where  Triad's  risk is more  concentrated  could have a
particularly adverse affect on Triad's financial condition and loss development.
Accordingly,  actual  results  may differ  from  those set forth in the  forward
looking  statements.  Attention is also directed to other risk factors set forth
in documents filed by the Company with the Securities and Exchange Commission.













                                       16
<PAGE>

PART II

         ITEM 1.  LEGAL PROCEEDINGS - NONE

         ITEM 2.  CHANGES IN SECURITIES - NONE

         ITEM 3.  DEFAULTS UPON SENIOR SECURITIES - NONE

         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE

         ITEM 5.  OTHER INFORMATION - NONE

         ITEM 6.    A.  EXHIBITS

                       Exhibit No.                  Description
                       -----------                  -----------
                           27                Financial Data Schedule



                                   SIGNATURES
Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                               TRIAD GUARANTY INC.


Date: November 12, 1998
                                               /s/ Michael R. Oswalt 
                                               ----------------------
                                               Michael R. Oswalt
                                               Vice President and Controller,
                                               Principal Accounting Officer



                                       17