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, 1996

                                       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)

                                 (910) 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 1,
1996: 6,645,361 shares.


<PAGE>





                               TRIAD GUARANTY INC.

                                      INDEX
                                                                          Page
                                                                         Number
Part I. Financial Information:

     Item 1. Financial Statements:

     Consolidated Balance Sheets as of September 30, 1996 (Unaudited)
              and December 31, 1995..........................................3

     Consolidated  Statements  of Income  for the Three and Nine  Month  Periods
              Ended September 30, 1996 and 1995 (Unaudited)..................4

     Consolidated Statements of Cash Flows for the Nine Month
              Periods Ended September 30, 1996 and 1995 (Unaudited)..........5

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

     Item 2. Management's Discussion and Analysis of Financial Condition
              and Results of Operations......................................9

Part II. Other Information:

     Item 6. Exhibits and Reports on Form 8-K...............................16

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


                                        2

<PAGE>

                               TRIAD GUARANTY INC.
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                    September 30,    December 31,
                                                                          1996           1995
                                                                    -------------    ------------
                                                                     (Unaudited)
<S>                                                                 <C>              <C>
Assets
Invested assets:
  Securities available-for-sale, at fair value:
    Fixed maturities .............................................   $ 84,253,890    $ 76,093,199
    Equity securities ............................................      6,977,203       5,659,026
  Short-term investments .........................................      2,414,502       4,226,207
                                                                     ------------    ------------
                                                                       93,645,595      85,978,432

Cash .............................................................        377,564         199,241
Real estate acquired in settlement of claims .....................        134,401               0
Accrued investment income ........................................      1,186,357         895,657
Deferred policy acquisition costs ................................      9,728,297       7,576,684
Property and equipment ...........................................      1,623,526       1,340,052
Prepaid reinsurance premium ......................................        345,188       2,039,240
Reinsurance recoverable ..........................................         75,248         271,106
Other assets .....................................................        464,090         716,837
                                                                     -------------   ------------
Total assets .....................................................   $107,580,266    $ 99,017,249
                                                                     ============    ============


Liabilities and stockholders' equity Liabilities:
    Losses and loss adjustment expenses ..........................   $  5,753,940    $  4,589,103
    Unearned premiums ............................................      8,588,811       9,086,274
    Amounts payable to reinsurer .................................              0          71,437
    Current taxes payable ........................................          1,600          39,931
    Deferred income taxes ........................................      3,762,161       2,708,572
    Unearned ceding commission ...................................         93,713         620,115
    Accrued expenses and other liabilities .......................      1,714,880       1,460,475
                                                                     ------------    ------------
Total liabilities ................................................     19,915,105      18,575,907
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
     10,000,000 shares; 6,645,361 issued and outstanding shares
     at September 30, 1996 and 4,418,939 at December 31, 1995 ....         66,453          44,189
   Additional paid-in capital ....................................     59,346,832      59,141,808
   Unrealized gain on available-for-sale securities, net of
     income tax liability of $343,383 at September 30, 1996 and
     $889,387 at December  31, 1995 .............................        661,297       1,732,209
    Retained earnings ............................................     27,590,579      19,523,136
                                                                     ------------    ------------
Total stockholders' equity .......................................     87,665,161      80,441,342
                                                                     ------------    ------------
Total liabilities and stockholders' equity .......................   $107,580,266    $ 99,017,249
                                                                     ============    ============
</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
                                                     ----------------------------   -----------------------------
                                                         1996           1995             1996          1995
                                                         ----           ----             ----          ----

<S>                                                  <C>             <C>            <C>              <C>
Revenue:
Premiums written:
   Direct ........................................   $  7,217,239    $  5,011,362    $ 19,008,390    $ 13,562,164
   Assumed .......................................          4,559           8,273          20,306          26,695
   Ceded .........................................       (537,661)     (1,023,085)     (1,712,620)     (2,907,543)
                                                     ------------    ------------    ------------    ------------
Net premiums written .............................      6,684,137       3,996,550      17,316,076      10,681,316
Change in unearned premiums ......................       (171,273)        (25,164)        438,941         377,092
                                                     ------------    ------------    ------------    ------------
Earned premiums ..................................      6,512,864       3,971,386      17,755,017      11,058,408
Net investment income ............................      1,368,002       1,224,345       4,011,300       3,564,780
Realized investment gains ........................        (12,334)         10,284        (153,906)        173,256
Other income .....................................              0             256               0             360
                                                     ------------    ------------    ------------    ------------
                                                       7,868,532       5,206,271      21,612,411      14,796,804
Losses and expenses:
Losses and loss adjustment expenses ..............      1,048,633         684,473       2,381,510       1,744,512
Reinsurance recoveries ...........................        (35,826)       (123,864)       (101,085)       (337,421)
                                                     ------------    ------------    ------------    ------------
Net losses and loss adjustment expenses ..........      1,012,807         560,609       2,280,425       1,407,091
Amortization of deferred policy acquisition costs.        816,832         573,182       2,418,039       1,708,574
Other operating expenses (net) ...................      1,840,693       1,144,168       5,216,808       3,440,990
                                                     ------------    ------------    ------------    ------------
                                                        3,670,332       2,277,959       9,915,272       6,556,655
                                                     ------------    ------------    ------------    ------------
Income before income taxes .......................      4,198,200       2,928,312      11,697,139       8,240,149
Income taxes:
   Current .......................................            223           4,000         (37,518)          5,000
   Deferred ......................................      1,309,466         918,418       3,645,061       2,562,107
                                                     ------------    ------------    ------------    ------------
                                                        1,309,689         922,418       3,607,543       2,567,107
                                                     ------------    ------------    ------------    ------------
Net income .......................................   $  2,888,511    $  2,005,894    $  8,089,596    $  5,673,042
                                                     ============    ============    ============    ============

Earnings per common and common equivalent share:
    Primary .....................................        $.42            $.30            $1.22            $.86
                                                     ============    ============    ============    ============
    Fully diluted ................................       $.42            $.30            $1.18            $.84
                                                     ============    ============    ============    ============

Shares used in computing earnings per common and common equivalent share:
    Primary .....................................      6,868,787       6,628,409       6,636,757       6,628,409
                                                    ============    ============    ============    ============
    Fully diluted ...............................      6,881,204       6,745,133       6,872,600       6,745,133
                                                    ============    ============    ============    ============
</TABLE>
                             See accompanying notes

                                        4

<PAGE>

                               TRIAD GUARANTY INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                          Nine Months Ended
                                                                                            September 30
                                                                                --------------------------------
                                                                                         1996            1995
                                                                                         ----            ----

<S>                                                                                 <C>             <C>
Operating activities
Net income ......................................................................   $  8,089,596    $  5,673,042
Adjustments to reconcile net income to net cash provided by operating activities:
   Loss and unearned premium reserves ...........................................        667,374         277,769
   Accrued expenses and other liabilities .......................................        246,133         136,647
   Current taxes payable ........................................................        (38,331)            103
   Amounts due to/from reinsurers ...............................................      1,818,475          73,274
   Accrued investment income ....................................................       (290,700)        (88,803)
   Policy acquisition costs deferred ............................................     (4,569,653)     (2,933,818)
   Amortization of policy acquisition costs .....................................      2,418,039       1,708,574
   Net realized investment gains ................................................        153,906        (173,256)
   Provision for depreciation ...................................................        276,541         210,364
   Accretion of discount on investments .........................................       (444,646)       (429,880)
   Amortization of deferred compensation ........................................              0         112,155
   Deferred income taxes ........................................................      1,539,794         131,758
   Unearned ceding commission ...................................................       (526,402)        (61,773)
   Real estate acquired in claim settlement .....................................       (134,401)              0
   Other assets .................................................................        240,047        (190,065)
                                                                                    ------------    ------------
Net cash provided by operating activities .......................................      9,445,772       4,446,091

Investing activities Securities available-for-sale:
    Purchases - fixed maturities ................................................    (16,999,911)     (7,464,668)
    Sales - fixed maturities ....................................................      7,047,623       3,133,921
    Purchases - equities ........................................................     (2,595,723)     (1,248,913)
    Sales - equities ............................................................      1,824,431       1,097,235
  Purchase of property and equipment ............................................       (560,598)       (353,954)
                                                                                    ------------    ------------
Net cash used in investing activities ...........................................    (11,284,178)     (4,836,379)
Financing activities
Proceeds from exercise of stock options .........................................        205,536            --
Retirement of common stock (at cost) ............................................           (512)           --
                                                                                    ------------    ------------
Net cash provided by financing activities .......................................        205,024               0
                                                                                    ------------    ------------
Net change in cash and short-term investments ...................................     (1,633,382)       (390,288)
Cash and short-term investments at beginning of period ..........................      4,425,448       2,433,518
                                                                                    ------------    ------------
Cash and short-term investments at end of period ................................   $  2,792,066    $  2,043,230
                                                                                    ============    ============
Supplemental  schedule of cash flow  information Cash paid during the period for
income taxes and United States
   Mortgage Guaranty Tax and Loss Bonds .........................................   $  1,948,782    $  2,430,349
                                                                                    ============    ============
</TABLE>


                             See accompanying notes.

                                       5
<PAGE>

                               TRIAD GUARANTY INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 1996
                                   (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, 1996 are not  necessarily  indicative  of the results that may be
expected for the year ending December 31, 1996. 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,
1995.


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.  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  obligationcould  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, 1996
                                   (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, 1996 and  December 31, 1995,  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
                                                  1996               1995

Net risk.................................... $1,346,473,056      $869,650,148
                                            ===============     =============
Statutory capital and surplus...............    $56,313,474       $55,951,158
Statutory contingency reserve...............     31,585,727        22,297,737
Total.......................................    $87,899,201       $78,248,895
                                            ===============     =============
Risk-to-capital ratio.......................   15.3-to-1           11.1-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  to
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 $9,301,518  for the nine months ended  September 30, 1996 and $9,337,430 for
the year ended December 31, 1995.


                                        7

<PAGE>


                               TRIAD GUARANTY INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
                               September 30, 1996
                                   (Unaudited)


     None of Triad's equity could be paid out to the parent company in dividends
because  the earned  surplus of Triad,  on a statutory  basis,  was a deficit of
$2,104,329  and  $2,466,645  at  September  30,  1996  and  December  31,  1995,
respectively.

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 -- STOCKHOLDERS' EQUITY

     On May 23, 1996, the Company's Board of Directors  approved a three-for-two
stock split of the Company's Common Stock in the form of a 50% stock dividend on
June 28, 1996. All references to average  number of shares  outstanding  and per
share  amounts  prior to June 28, 1996  included  herein  have been  restated to
reflect a three-for-two stock split on that date.


NOTE 6 -- EARNINGS PER SHARE

     Primary  earnings per common and common  equivalent  share were computed by
dividing net income by the weighted average number of shares of common stock and
common  stock  equivalents  outstanding  during the  period.  For the purpose of
computing  primary earnings per share, the number of common shares was increased
by the number of shares  issuable  on the  exercise  of stock  options  when the
market  price of the common stock  exceeded  the exercise  price of the options.
This increase in the number of common shares was reduced by the number of common
shares  that are  assumed  to have been  purchased  with the  proceeds  from the
exercise of the options;  these  purchases were assumed to have been made at the
average price of the common stock during the period.  Fully diluted earnings per
share was  determined  in the same  manner as  primary  earnings  per common and
common equivalent share except that the greater of the period-end stock price or
average stock price for the period was used.

                                        8

<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 1996  increased  42.6% to $8.1
million  compared to $5.7  million in the first nine months of 1995.  Net income
for the third quarter of 1996 increased  44.0% to $2.9 million  compared to $2.0
million in the third quarter of 1995.  This  improvement  is  attributable  to a
60.6%  (64.0% in the third  quarter)  increase in earned  premiums,  an improved
expense ratio,  a 12.5% (11.7% in the third quarter)  increase in net investment
income and a continuing low loss ratio.

     Net income per share on a fully diluted basis  increased 40.0% to $1.18 for
the first  nine  months of 1996  compared  to $0.84 per share for the first nine
months of 1995. Net income per share for the third quarter of 1996 was $0.42 per
share on a fully diluted  basis  compared to $0.30 per share for the same period
of 1995.  Operating  earnings per share on a fully  diluted basis were $1.19 for
the first nine months of 1996 compared to $0.82 per share for the same period in
1995.  Operating  earnings exclude realized  investment  losses of approximately
$154,000  in the first  nine  months of 1996 and  realized  investment  gains of
approximately  $173,000 in the same period of 1995. Realized investment gains or
losses were  nominal in the third  quarter of 1996 and 1995 and had no effect on
operating earnings for the quarters.

     New  insurance  written was $1.6  billion for the first nine months of 1996
compared to $1.1  billion in the first nine months of 1995,  an increase of 45%.
New insurance written in the third quarter of 1996 totaled $576 million compared
to $493  million a year  ago.  This  increase  is the  result  of the  continued
penetration  of Triad's  products in the  marketplace  coupled  with a favorable
interest rate  environment for much of 1996, which has caused both refinance and
home  buying  activities  to  remain  strong  for the year.  Refinance  activity
accounted  for 18.8% of new  insurance  written in the first nine months of 1996
compared to 7.8% of new insurance written in the same period of 1995.  Refinance
activity  declined  slightly in the third  quarter of 1996 to 10.1%  compared to
11.8% in the third quarter of 1995.

     Total direct premiums  written were $19.0 million for the first nine months
of 1996,  an  increase  of 40.2%  compared  to $13.6  million for the first nine
months of 1995. Contributing to this growth were the strong mortgage market, the
requirements  of the  secondary  mortgage  market  for deeper  coverage  and the
Company's expansion into new territories. Offsetting the growth somewhat was the
decrease in the  annualized  persistency  rate to 84.3% for the third quarter of
1996 compared to 89.3% for the third quarter of 1995 and 86.4% for all of 1995.

     Sales under the Company's  monthly premium plan represented 92.7% (93.5% in
the third  quarter)  of new  insurance  written in the first nine months of 1996
compared to  80.1% (86.0% in the third quarter) in the  same period of 1995. The

                                       9

<PAGE>


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


monthly  product  spreads  the  collection  of  premiums  over 12 equal  monthly
payments,  rather  than one  payment  received  in advance as on annual  premium
plans.  However,  renewal premiums on monthly premium plans are greater than the
renewal  premiums on a comparable  annual premium plan.  While in the short term
monthly premium plans decrease the level of written premium,  management expects
the ultimate  level of written  premium on monthly  premium  plans to exceed the
level of written premium produced by comparable annual premium plans. Management
believes that the percentage of new insurance  written under the monthly premium
plan will remain at or slightly above the current level.

     Net premiums written  increased by 62.1% to $17.3 million in the first nine
months of 1996  compared  to $10.7  million  for the same  period  in 1995.  Net
premiums  written for the third  quarter of 1996 were $6.7  million  compared to
$4.0 million in 1995, an increase of 67.2%.  Earned premiums  increased 60.6% to
$17.8  million for the first nine months of 1996 and by 64.0% to $6.5 million in
the 1996  third  quarter.  This  increase  in  written  and  earned  premium  is
attributable  to the  increase  in new  insurance  written and the change in the
Company's reinsurance program.

     Effective  January  1,  1996,  the  Company   eliminated  its  quota  share
reinsurance on new business,  recaptured substantial portions of its quota share
coverage on renewal  business and secured excess of loss  reinsurance to protect
against  catastrophic  losses.  These changes have reduced the  Company's  quota
share cede rate to 5.8% of direct  premiums  written in the first nine months of
1996  compared  to 21.4% in the same  period of 1995.  Premiums  ceded under the
Company's quota share  reinsurance  agreements for the first nine months of 1996
totaled $1.1 million compared to $2.9 million in the first nine months of 1995.

     Total direct  insurance in force reached $6.2 billion at September 30, 1996
compared to $4.9 billion at September 30, 1995, an increase of 27.1%.

     In keeping with the Company's  established  risk strategy,  the Company has
not  aggressively  solicited  mortgage  insurance under lender  guidelines which
allow relaxed credit standards,  reduced  borrower-paid  down payment (e.g., 97%
LTV loans) and expanded underwriting ratios. These products have been especially
popular with  borrowers  with weak credit  histories.  Management  believes that
successful  long term home  ownership is not being  promoted by the evolution of
many of these  programs and that  substantially  higher loss ratios will result.
The  Company  does not  delegate  the  underwriting  of its 97% LTV  product and
continues to maintain underwriting  standards which promote successful long-term
home ownership.

     The  Company's  delegated  underwriting  program  accounted  for  38.1%  of
commitments received for the first nine months of 1996. This program has allowed
Triad to serve a greater number of the country's  larger  mortgage  originators.
Mortgage  originators  who  participate in the Company's  delegated  program are
allowed to issue a certificate of insurance on the loans it underwrites but must

                                       10

<PAGE>


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


follow strict criteria regarding property type and minimum credit standards. The
Company  also  performs  extensive  post-issuance  quality  control  reviews  of
certificates issued through each approved mortgage originator under the program.
Management expects the percentage of commitments processed through the Company's
delegated underwriting program to increase.

     Net investment income for the first nine months of 1996 was $4.0 million, a
12.5% increase over the first nine months of 1995. Net investment income for the
third quarter of 1996 was $1.4 million, an 11.7% increase over the third quarter
of 1995.  This increase  resulted from the growth in average  invested assets of
$9.8  million  to $88.1  million at  September  30,  1996 from $78.3  million at
September 30, 1995. The yield on average  invested assets was 6.1% for the first
nine months of 1996,  compared  to 6.1% for the same period of 1995.  This yield
reflects the Company's investment strategy to emphasize tax-preferred securities
which  yield  lower  pre-tax  rates  than  similar   fully-taxable   securities.
Approximately 51% or $42.7 million of the Company's fixed maturity  portfolio at
September  30,  1996  was   comprised  of  state  and  municipal   tax-preferred
securities.

     In the first nine months of 1996, the Company reported realized  investment
losses of $154,000  ($12,000 in the third  quarter).  This  compares to $173,000
($10,000 in the third quarter) of realized  investment  gains for the first nine
months  of 1995.  The  reported  losses  for the nine  months  of 1996  resulted
primarily  from  the  sale of  equity  securities  sold in  connection  with the
Company's  program  of  selling  short-term  covered  calls and from the sale of
approximately $5 million in mortgage backed securities.

     The Company's loss ratio (the ratio of incurred losses to earned  premiums)
was 12.8%  for the first  nine  months  of 1996  compared  to 12.7% for the same
period of 1995 and 14.3% for all of 1995. The loss ratio was 15.6% for the third
quarter of 1996  compared  to 14.1% for the same period of 1995.  The  favorable
ratio reflects the low level of delinquencies  compared to the number of insured
loans  and the fact  that  approximately  75.0% of the  insurance  in force  was
originated in the last 36 months.  While the Company  experienced an increase in
its loss ratio,  paid  losses  continue to remain low at 6.7% and 6.2% of earned
premium for the nine month periods  ending  September 30, 1996 and September 30,
1995, respectively.  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


     Net losses and loss  adjustment  expenses (net of  reinsurance  recoveries)
increased by 62.1% in the first nine months of 1996 to $2.3 million  compared to
$1.4 million in the same period of 1995. Losses and loss adjustment expenses for
the third  quarter of 1996 were $1.0  million  compared to  $561,000  during the
third  quarter of 1995.  This  increase  reflects the increase in the  Company's
insurance  in  force  and the  resulting  recognition  of a  greater  amount  of
insurance  in force  reaching its higher claim  frequency  years.  A decrease in
reinsurance  recoveries  attributable  to  the  Company's  restructuring  of its
reinsurance  program  also  contributed  to the  increase in net losses and loss
adjustment expenses.

     Amortization  of deferred  policy  acquisition  costs increased by 41.5% to
$2.4  million in the first nine months of 1996  compared to $1.7 million for the
first nine months of 1995.  These costs were  $817,000 for the third  quarter of
1996  compared to $573,000 for the third  quarter of 1995, an increase of 42.5%.
The  increase in  amortization  reflects a growing  balance of  deferred  policy
acquisition  costs to  amortize  as the Company  builds its total  insurance  in
force.

     Other  operating  expenses  increased  to $5.2  million  for the first nine
months of 1996  compared to $3.4  million  for the same period in 1995.  For the
third quarter of 1996, other operating  expenses  increased to $1.8 million from
$1.1  million  in the third  quarter  of 1995.  This  increase  in  expenses  is
primarily attributable to personnel,  facilities and equipment costs required to
support Triad's  geographic  expansion and increased  production  coupled with a
reduction in ceding  commissions earned following changes in the Company's quota
share reinsurance  program.  Ceding commissions paid to the Company are reported
as a reduction  in other  operating  expenses  and  decreased to $461,000 in the
first nine months of 1996  compared to $1.2  million in the first nine months of
1995. For the third quarter of 1996 ceding commissions were $128,000 compared to
$374,000 in the third quarter of 1995.

     The Company provides  contract  underwriting as a service to lenders and to
provide a means of generating new mortgage insurance business. Expenses relating
to providing  contract  underwriting  services  are reported in other  operating
expenses.  The Company began reporting revenue related to contract  underwriting
as other income in the first half of 1996. Management views,  however,  contract
underwriting  revenue  to be an offset to the costs  incurred  to  provide  this
service to  lenders.  Accordingly,  the  Company  began  reporting  the  revenue
associated with contract underwriting services as a reduction in expense, rather
than income, in the 1996 third quarter.

     The Company's expense ratio (ratio of underwriting expenses to net premiums
written)  for the first nine months of 1996 was 44.1%  compared to 48.2% for the
first nine  months of 1995 and 46.9% for all of 1995.  For the third  quarter of
1996 the expense ratio was 39.8%  compared to 43.0% for the same period of 1995.
Contributing to this  improvement is the higher level of written premiums offset
somewhat by the increase in expenses.


                                       12

<PAGE>


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

     The effective tax rate for the first nine months of 1996 was 30.8% compared
to 31.2% in the first  nine  months of 1995.  This  reduction  is the  result of
increased  investments  in  tax-preferred  securities  offset  somewhat  by  the
phase-in 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 or increase only slightly as long as
yields from new funds invested in tax-preferred  securities  remain favorable in
relation to fully taxable securities.

LIQUIDITY AND CAPITAL RESOURCES

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

     Triad generated positive cash flow from operating  activities for the first
nine months of 1996 of $9.4 million  compared to $4.4 million for the first nine
months of 1995. The increase in Triad's  operating cash flow is  attributable to
growth in  production  and the  impact  of the  Company's  restructuring  of its
reinsurance  agreements  which resulted in the recapture of premiums  previously
ceded.

     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.

     The parent  company's cash flow is dependent on cash dividends and revenues
from  management  fees 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 and limit the amount of dividends that
may be paid without prior approval of the Illinois Insurance Department. Because
of Triad's rapid growth in written  premiums and the  requirement to add amounts
to the statutory  contingency  reserve equal to at least 50% of earned  premiums
(which reduces statutory earned surplus),  Triad reported a deficit in statutory
earned  surplus  of $2.1  million  at  September  30,  1996 and $2.5  million at
December 31, 1995.  Accordingly,  Triad may not presently pay cash  dividends to
the parent company.  The Illinois  Insurance  Department permits expenses of the
parent company to be charged to Triad in the form of management fees.

     Consolidated  invested  assets were $93.6  million at  September  30, 1996,
including $91.2 million in fixed maturity and equity securities all of which are
classified  as  available-for-sale.  Net  unrealized  investment  gains on fixed
maturity  securities  were $166,000 and  unrealized  investment  gains on equity
securities totaled $833,000 at September 30, 1996.


                                       13

<PAGE>


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

     Approximately  19%  or  $16.4  million  of  the  Company's  fixed  maturity
portfolio at  September  30, 1996 was  composed of  mortgage-backed  securities,
substantially all of which are guaranteed by U.S. Government  Agencies.  Certain
mortgage-backed securities are subject to significant prepayment risk due to the
fact that, in periods of declining interest rates,  mortgages may be repaid more
rapidly  than  scheduled as borrowers  refinance  higher rate  mortgages to take
advantage of lower rates. As a result, holders of mortgage-backed securities may
receive large  prepayments on their investments which must be reinvested at then
current rates.

     Included in the  Company's  fixed  maturity  portfolio  of mortgage  backed
securities  at  September  30,  1996  was  $5.3  million   invested  in  planned
amortization class ("PAC")  collateralized  mortgage obligations ("CMOs").  PACs
are  tranches of CMOs  specifically  designed to amortize in a more  predictable
manner and to protect against  prepayments as interest rates decline. In periods
of  declining  interest  rates,  prepayments  are first  applied to the  non-PAC
tranches of the CMO, creating improved call protection for the PAC tranche. Only
after all non-PAC tranches have been paid off are prepayments applied to the PAC
tranche. In periods of increasing interest rates,  prepayments are first applied
to the PAC tranche,  thus reducing  extension  risk for PACs. As a result,  PACs
have a more stable cash flow than most other  mortgage  securities  because they
have better call  protection  and less extension  risk.  All principal  balances
invested  in CMOs  by the  Company  are  U.S.  Government  agency  sponsored  or
guaranteed.

     The Company's  reinsurance  recoverable of $75,000 and prepaid  reinsurance
premium of $345,000 at  September  30, 1996  decreased  from  $271,000  and $2.0
million,  respectively,  at December 31, 1995. These decreases primarily reflect
the  recapture of previously  ceded losses and unearned  premiums as part of the
Company's restructuring of its reinsurance program.

     The Company's loss reserves increased to $5.8 million at September 30, 1996
compared to $4.6 million at December 31, 1995.  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  delinquency ratio, the ratio of delinquent insured loans to total
insured loans, was 0.42% at September 30, 1996 compared to 0.41% at December 31,
1995.

     The  Company's  unearned  premium  reserve of $8.6 million at September 30,
1996  decreased  from $9.1  million  at  December  31,  1995.  This  decline  is
attributable  primarily to the continued high  production of the monthly premium
product,  which produces little unearned  premium  compared to annual and single
premium products.  Also, the Company has experienced a higher level of refinance
activity in the first nine months of 1996 whereby older annual premium  policies
are replaced by monthly premium policies  resulting in a decline in the unearned
premium reserve.


                                       14

<PAGE>


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

     Total stockholders' equity increased to $87.7 million at September 30, 1996
from $80.4 million at December 31, 1995. This increase  resulted from net income
of $8.1  million for the first nine months of 1996 and from  additional  paid-in
capital of $205,000  resulting  from the exercise of employee  stock options and
the issuance of common stock under the Company's  stock incentive plan. This was
partially  offset by a  decrease  in net  unrealized  gains on  invested  assets
classified as available-for-sale of $1.1 million (net of income tax).

     Triad's total statutory  policyholders'  surplus increased to $56.3 million
at September 30, 1996 from $56.0 million at December 31, 1995.  This increase is
primarily  related to statutory  net income for the first nine months of 1996 of
$9.3 million and an unrealized investment gain of $691,000 offset by an increase
in the contingency reserve of $9.3 million.  Triad's deficit in statutory earned
surplus was $2.1  million at  September  30, 1996  reduced  from $2.5 million at
December 31, 1995. The balance in the  contingency  reserve was $31.6 million at
September 30, 1996 compared to $22.3 million at December 31, 1995.

     The Company has no current plans for any significant capital expenditures.

     The  Company's  ability to write  insurance  depends on the adequacy of its
capital in relation to its risk in force. A significant reduction of capital may
impair the Company's  ability to write new insurance.  In spite of higher limits
permitted by the secondary mortgage market and state insurance laws,  management
believes its risk to capital  ratio can increase up to the  approximate  current
industry level of 20-to-1 without an adverse effect on its claims-paying ability
ratings. As of September 30, 1996, Triad's  risk-to-capital  ratio was 15.3-to-1
compared to 11.1-to-1 at December 31, 1995.

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

     Management's  Discussion  and  Analysis  and this  Report  contain  forward
looking statements which involve various risks and uncertainties,  including but
not limited to the following: interest rates may increase or decrease 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;  the Company's performance may be impacted by
changes  in the  performance  of the  financial  markets  and  general  economic
conditions.  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.




                                       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

Item 6.    a.  Exhibits

                   Exhibit No.                   Description
                   -----------                   -----------
                       11              Statement Re Computation of Net Income
                                          per share
                       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: November 13, 1996
                                        /s/ Michael R. Oswalt
                                        ---------------------
                                        Michael R. Oswalt
                                        Vice President and Controller,
                                        Principal Accounting Officer




                                       16

<PAGE>



                                  EXHIBIT INDEX




          Exhibit
          Number                                        Description
          ------                                        -----------
            11              Statement Re. Computation of Net Income per Share
            27              Financial Data Schedule






                                       17