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 March 31, 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 May 6, 1998:
13,304,722 shares.


<PAGE>

                               TRIAD GUARANTY INC.

                                      INDEX
                                                                           Page
                                                                          Number
Part I. Financial Information:

    Item 1. Financial Statements:

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

    Consolidated Income Statement for the Three Month
         Periods Ended March 31, 1998 and 1997 (Unaudited)....................4

    Consolidated Statements of Cash Flows for the Three Month
         Periods Ended March 31, 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.................................16

    Signatures...............................................................16






                                        2

<PAGE>

                               TRIAD GUARANTY INC.
                           CONSOLIDATED BALANCE SHEETS


                                                       March 31,    December 31,
                                                         1998           1997
                                                     ------------  -------------
Assets                                               (Unaudited)
Invested assets:
  Securities available-for-sale, at fair value:
    Fixed maturities ............................... $133,434,540   $ 99,725,487
    Equity securities...............................   12,677,081     11,466,028
    Short-term investments..........................   13,347,249      8,685,842
                                                     ------------  -------------
                                                      159,458,870    119,877,357

Cash................................................       41,000          8,557
Accrued investment income...........................    1,989,304      1,460,168
Deferred policy acquisition costs...................   13,218,093     12,587,355
Property and equipment..............................    2,681,067      2,524,228
Prepaid reinsurance premium.........................       20,237         23,263
Reinsurance recoverable.............................       55,128         49,447
Other assets........................................    2,661,348      2,448,685
                                                     ------------  -------------
Total assets........................................ $180,125,047   $138,979,060
                                                     ============  =============

Liabilities and stockholders' equity
Liabilities:
    Losses and loss adjustment expenses.............  $ 9,629,555  $   8,960,411
    Unearned premiums...............................    7,390,114      7,988,342
    Current taxes payable...........................        3,322          3,318
    Deferred income taxes...........................    8,901,364      7,521,874
    Long term debt..................................   34,500,923            - -
    Accrued interest on debt........................      476,194            - -
    Accrued expenses and other liabilities..........    2,089,100      2,724,324
                                                     ------------  -------------
Total liabilities...................................   62,990,572     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 20,000,000 shares; 13,302,721
      issued and outstanding shares at March 31,
      1998 and 13,293,721 at December 31, 1997......      133,027        132,937
    Additional paid-in capital......................   59,410,383     59,369,223
    Accumulated other comprehensive income, 
     net of income tax liability of $2,330,895
     at March 31, 1998 and $2,368,998 
     at December  31, 1997...........................   4,334,553      4,405,315
    Retained earnings................................  53,256,512     47,873,316
                                                     ------------  -------------
Total stockholders' equity..........................  117,134,475    111,780,791
                                                     ------------  -------------
Total liabilities and stockholders' equity.......... $180,125,047   $138,979,060
                                                     ============  =============

                             See accompanying notes.

                                        3

<PAGE>

                               TRIAD GUARANTY INC.
                         CONSOLIDATED INCOME STATEMENTS
                                   (Unaudited)


                                                         Three Months Ended
                                                              March 31
                                                     1998             1997
Revenue:
Premiums written:
   Direct.......................................... $11,569,733    $7,894,068
   Assumed.........................................       5,821         6,039
   Ceded...........................................   (240,499)     (521,604)
                                                   ------------   -----------
Net premiums written...............................  11,335,055     7,378,503
Change in unearned premiums........................     595,201       470,380
                                                   ------------   -----------
Earned premiums....................................  11,930,256     7,848,883
Net investment income..............................   2,038,569     1,471,915
Realized investment gains (losses).................     115,513         (881)
Other income.......................................         470         2,664
                                                   ------------   -----------
                                                     14,084,808     9,322,581
Losses and expenses:
Losses and loss adjustment expenses................   1,479,704     1,241,546
Reinsurance recoveries.............................     (2,472)      (45,696)
                                                   ------------   -----------
Net losses and loss adjustment expenses............   1,477,232     1,195,850
Interest expense on debt...........................     476,888           - -
Amortization of deferred policy acquisition costs..   1,272,708       973,055
Other operating expenses (net).....................   3,091,460     2,121,764
                                                   ------------   -----------
                                                      6,318,288     4,290,669
                                                   ------------   -----------
Income before income taxes.........................   7,766,520     5,031,912
Income taxes:
   Current.........................................         213           458
   Deferred........................................   2,383,111     1,584,566
                                                   ------------   -----------
                                                      2,383,324     1,585,024
                                                   ------------   -----------
Net income......................................... $ 5,383,196    $3,446,888
                                                   ============   ===========

Earnings per common and
   common equivalent share:
   Basic...........................................     $.40          $.26
                                                   ============   ===========
   Diluted.........................................     $.39          $.25
                                                   ============   ===========

Shares used in computing earnings
   per common and common equivalent share:
   Basic...........................................  13,301,554    13,290,722
                                                   ============   ===========
   Diluted.........................................  13,870,538    13,621,034
                                                   ============   ===========

                             See accompanying notes.

                                        4

<PAGE>



                               TRIAD GUARANTY INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                   (Unaudited)


                                                        Three Months Ended
                                                              March 31
                                                    ---------------------------
                                                         1998           1997
                                                         ----           ----
Operating activities
Net income.......................................... $ 5,383,196    $ 3,446,888
Adjustments to reconcile net income to net
      cash provided by operating activities:
   Loss and unearned premium reserves...............      70,916        247,413
   Accrued expenses and other liabilities...........    (634,126)      (675,371)
   Current taxes payable............................           4            235
   Accrued investment income........................    (529,136)      (182,738)
   Policy acquisition costs deferred................  (1,903,445)    (1,351,765)
   Amortization of policy acquisition costs.........   1,272,708        973,055
   Net realized investment (gains) losses ..........    (115,513)           881
   Provision for depreciation.......................     206,811        128,379
   Accretion of discount on investments.............    (197,715)      (149,142)
   Deferred income taxes............................   1,417,594      1,369,566
   Real estate acquired in claim settlement.........     141,999         --
   Accrued interest on debt.........................     476,194         --
   Other assets.....................................    (354,661)      (635,658)
                                                    ------------   ------------
Net cash provided by operating activities...........   5,234,826      3,171,743
Investing activities
Securities available-for-sale:
    Purchases - fixed maturities.................... (38,143,846)   (10,278,355)
    Sales - fixed maturities........................   3,814,529      9,064,083
    Purchases - equities............................  (3,160,977)      (385,641)
    Sales - equities................................   2,763,701        726,551
  Purchase of property and equipment................    (356,555)      (285,283)
                                                    ------------   ------------
Net cash used in investing activities............... (35,083,148)    (1,158,645)
Financing activities
Proceeds from issuance of long term debt............  34,500,923         --
Proceeds from exercise of stock options.............      41,250         --
                                                    ------------   ------------
Net cash provided by financing activities...........  34,542,173         --
                                                    ------------   ------------
Net change in cash and short-term investments.......   4,693,851      2,013,098
Cash and short-term investments at beginning
    of period.......................................   8,694,398      3,662,711
                                                    ------------   ------------
Cash and short-term investments at end of period.... $13,388,249    $ 5,675,809
                                                    ============   ============

Supplemental schedule of cash flow information
Cash paid during the period for income taxes 
    and United States Mortgage 
    Guaranty Tax and Loss Bonds..................... $   883,213    $   215,458
                                                    ============   ============


                             See accompanying notes.

                                       5
<PAGE>

                               TRIAD GUARANTY INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 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 month period ended March 31, 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
                                 March 31, 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 March  31,  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:



                                      March 31           December 31
                                        1998               1997
                                        ----               ----

Net risk.........................   $2,313,504,845     $2,231,572,130
                                 =================    ===============
Statutory capital and surplus....   $   87,727,230     $   60,929,830
Statutory contingency reserve....       60,963,401         54,766,669
                                 -----------------    ---------------
Total............................   $  148,690,631     $  115,696,499
                                 =================    ===============
Risk-to-capital ratio............      15.6-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 $7,513,864 for the three months ended March 31, 1998 and $22,916,215 for the
year ended December 31, 1997.

     At March 31, 1998 and December 31, 1997,  the amount of Triad's equity that
could be paid out in dividends to  stockholders  was $4,309,427 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
                                 March 31, 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.
For the three month periods ended March 31, 1998 and 1997, Triad's comprehensive
income was $5.3 million and $2.5 million, respectively. Comprehensive income for
those  periods  consists of net income from  operations of $5.4 million and $3.4
million less unrealized losses on available-for-sale  securities,  net of income
tax  effect,  of  $70,000  and  $961,000,  respectively.  The  adoption  of this
statement had no impact on the Company's net income or stockholders' equity.


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

                                        8

<PAGE>


                               TRIAD GUARANTY INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
                                 March 31, 1998
                                   (Unaudited)

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  three  months of 1998  increased  56.2% to $5.4
million  compared  to $3.4  million  in the first  three  months  of 1997.  This
improvement was primarily attributable to a 52.0% increase in earned premiums, a
38.5% increase in net investment income and an improved 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  53.4% to $0.39 for the
first  three  months of 1998  compared  to $0.25  per share for the first  three
months of 1997.  Operating  earnings  per share were  $0.38 for the first  three
months of 1998 compared to $0.25 for the first three months of 1997, an increase
of  51.1%.   Operating  earnings  exclude  net  realized   investment  gains  of
approximately  $116,000  in the  first  three  months  of 1998 and net  realized
investment losses of approximately $1,000 in the first three months of 1997.

     Net new  insurance  written was $860  million for the first three months of
1998 as compared to $596 million for the first three months of 1997, an increase
of 44.3%. The Company also produced  approximately  $41 million of new insurance
written on seasoned  loans in the first  quarter of 1998 compared to $54 million
in the same period of 1997. The increase in new insurance written was the result
of continued geographic expansion and the penetration of Triad's products in the
marketplace  to both new and existing  customers.  According  to industry  data,
Triad's  national market share,  which is calculated  based on net new insurance
written,  increased to 2.5% for the first three 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 three months of 1998 which caused home buying and
refinance  activities  to remain  strong.  Refinance  activity  was 34.3% of new
insurance  written in the first  three  months of 1998  compared to 18.4% in the
first three months of 1997. Total direct insurance in force reached $9.5 billion
at March 31, 1998,  compared to $7.0  billion at March 31, 1997,  an increase of
35.7%.

     Total direct premiums written were $11.6 million for the first three months
of 1998,  an  increase  of 46.6%  compared  to $7.9  million for the first three
months of 1997. Net premiums written increased by 53.6% to $11.6 million for the
first three months of 1998 compared to $7.4 million for the same period in 1997.
Earned  premiums  increased 52.0% to $11.9 million for the first three months of
1998 from $7.8 million for the first quarter of 1997. This growth in written and
earned  premium  resulted  from the increase in new  insurance  written,  offset
somewhat  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 81.8% compared to 84.2% for all of 1997.  Sales under the Company's  monthly
premium plan represented  97.5% of new insurance written in the first quarter of
1998 compared to 93.5% in the first quarter of 1997.

     Triad's "Stick With Triad" program featuring the Slam Dunk Loan SM approval
process, whereby Triad issues a certificate of insurance based on the borrower's
credit score,  accounted for 56.2% of new  commitments in the first three months

                                       10

<PAGE>


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

of 1998  compared  to 34.7% for the same period of 1997.  Commitments  processed
through  Triad's   delegated   underwriting   program  accounted  for  14.8%  of
commitments  received for the first three months of 1998,  compared to 11.4% for
the first three months of 1997.

     Net  investment  income for the first quarter of 1998 was $2.0  million,  a
38.5%  increase over $1.5 million for the same period in 1997.  This increase in
investment  income is the result of growth in the average book value of invested
assets by $35.7 million to $133.0 million at March 31, 1998,  from $97.3 million
at March 31, 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 was 6.1% for
both  the  first  three  months  of 1998 and for the same  period  of 1997.  The
portfolio's  tax-equivalent  yield was 7.8% for the first  three  months of both
1998  and  1997.  Approximately  67% or $87.6  million  of the  Company's  fixed
maturity  portfolio  at March  31,  1998 was  composed  of state  and  municipal
tax-preferred securities as compared to 63% at March 31, 1997.

     The Company's loss ratio (the ratio of incurred losses to earned  premiums)
was 12.4% for the 1998 first quarter as compared to 15.2% for the same period of
1997 and 13.4% for all 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 74% 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.

     During periods of  significant  refinancing  activity,  it is possible that
policies on stronger  loans may lapse and that 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 23.5% in the first three months of 1998 to $1.5 million compared to
$1.2  million in the first three  months of 1997.  This  increase  reflects  the
growth 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 30.8% to
$1.3 million in the first three months of 1998  compared to $1.0 million for the
first three months of 1997. The increase in amortization reflects both a growing

                                       11

<PAGE>


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


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
quarter of 1998.

     Other  operating  expenses  increased  45.7% to $3.1  million for the first
three  months of 1998 as compared  to $2.1  million for the same period in 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 quarter of 1998 was 38.5%  compared to 41.9% for the first quarter
of 1997 and 37.5%  for all of 1997.  The  primary  factor  contributing  to this
improvement  between  the  quarterly  periods  is the  higher  level of  written
premiums in the first quarter of 1998.

     The effective tax rate for the first quarter of 1998 was 30.7%  compared to
31.5% in the first quarter of 1997. This decrease is the result of completion of
the  phase-in  of the 35%  federal  statutory  income  tax  rate  applicable  to
companies  with annual  taxable  income  above $10  million and the  increase in
investment  in  tax  preferred  securities.  Management  expects  the  Company's
effective  tax rate to increase  slightly  during 1998 as the funds from the $35
million  debt  offering,  completed  in January  1998,  are  invested in taxable
securities.  However,  any increase in the effective  rate is largely  dependent
upon  the  Company's  taxable  income  growing  faster  than  its tax  preferred
investment income.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's  sources of operating cash flow 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 three  months of 1998 of $5.2  million  compared  to $3.2  million for the
first three 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 Company contributed $25.0 million of the net proceeds to
Triad in  exchange  for a surplus  debenture.  The  Company  is  dependent  upon
payments under the surplus  debenture  issued by Triad and upon possible  future

                                       12

<PAGE>


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

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, 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 the capital of Triad.

     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.  Triad had an earned surplus of $4.3 million at March 31,
1998, and $2.5 million at December 31, 1997. 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  $159.5  million  at March  31,  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 normal
operating  cash  flow.  To  date,  the  Company's  investments  have  emphasized
tax-preferred  securities.  Because of restrictions imposed under federal income
tax laws,  investment  by the Company of proceeds of the note  offering  must be
made in taxable securities.  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 $3.5  million on equity  securities  and $3.1
million  on  fixed  maturity  securities  at  March  31,  1998.  Fixed  maturity
securities and equity securities classified as available for sale totaled $146.1
million  at  March  31,  1998.  The  fixed  maturity   portfolio   consisted  of
approximately  67%  municipal  securities,  22%  corporate  securities,  8% U.S.
government obligations and 3% mortgage-backed bonds at March 31, 1998.

     The Company's  loss  reserves  increased to $9.6 million at March 31, 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  $25,200 at March 31,  1998
compared to $23,100 at December  31, 1997.  The  Company's  ratio of  delinquent
insured loans to total  insured  loans was 0.45% at March 31, 1998,  compared to
0.47% at December 31, 1997.

     The Company's  unearned  premium reserve of $7.4 million at March 31, 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.

                                       13

<PAGE>


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

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 $117.1 million at March 31, 1998,
from $111.8 million at December 31, 1997. This increase resulted  primarily from
net income of $5.4 million for the first three months of 1998 offset slightly by
a  decrease  in  net  unrealized   gains  on  invested   assets   classified  as
available-for-sale of $71,000 (net of income tax).

     Triad's total statutory  policyholders'  surplus increased to $87.7 million
at March 31,  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,  statutory net income of $7.5 million, and
unrealized  gains on  equity  securities  of  $712,000  offset  primarily  by an
increase in the statutory contingency reserve of $6.2 million. Triad's statutory
earned  surplus was $4.3  million at March 31, 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 $61.0  million at March 31,  1998,  compared  to $54.8
million at December 31, 1997.

     The  Company is  undertaking  modifications  and  upgrades  to enhance  its
computer  systems  and  technological  capabilities.  The Company  expects  that
approximately  $1.6  million  will be expended  in 1998 to complete  this system
upgrade and that the project will be funded  through cash flow from  operations.
As a part of this  effort,  management  has  initiated  a program to prepare the
Company's  computer  systems and  applications  to be year 2000  compliant.  The
Company  expects to incur  internal  staff costs as well as consulting and other
expenses  related to  infrastructure  and  facilities  enhancement  necessary to
prepare the systems for the year 2000. Most of the modifications will be made as
part of the Company's capital upgrade to its computer systems throughout 1998.

     Triad's ability to write insurance depends on the adequacy of its statutory
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 limit Triad's risk-to-capital ratio to 25-to-1. As
of March 31, 1998, Triad's  risk-to-capital ratio was 15.6-to-1,  as compared to
19.3-to-1  at December 31, 1997,  and  19.4-to-1  for the industry as a whole at
December 31, 1996, the latest industry data available.

     Rating   agencies  also  require   capital  levels  based  on  a  company's
performance  sensitivity to various depression scenarios. In determining capital
levels,  the  rating  agencies  allow  the use of  different  forms  of  capital
including  statutory capital,  reinsurance and debt. The effect of the Company's
contribution  of $25.0  million  of the  proceeds  of its note  offering  to the
capital of Triad in January 1998 was to improve its risk-to-capital ratio and to
provide additional capital considered in the rating agencies' depression models.


                                       14

<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  other  documents  filed by the  Company  with the  Securities  and  Exchange
Commission.





                                       15

<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


                        a.  Exhibits
ITEM 6.
                                Exhibit               Description
                                -------               -----------

                                   27          Financial Data Schedule

                        b.  Reports on Form 8-K - None






     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: May 13, 1998
                                              /s/ Michael R. Oswalt
                                              -----------------------------
                                              Michael R. Oswalt
                                              Vice President and Controller,
                                              Principal Accounting Officer







                                       16

<PAGE>



                                  EXHIBIT INDEX



         Exhibit
         Number                       Description
         ------                       -----------

            27                  Financial Data Schedule

















                                       17