================================================================================

                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549


                                   ----------

(Mark One)

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

               For the quarterly period ended September 30, 1998.

                                       OR

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



                         Commission File Number 333-7944


                                 CGA GROUP, LTD.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)


                BERMUDA                                          98-0173536
     -------------------------------                         -------------------
     (State or other jurisdiction of                          (I.R.S. Employer
      incorporation or organization)                         Identification No.)


             Craig Appin House
              8 Wesley Street                        
          Hamilton HM11 Bermuda                                Not Applicable
----------------------------------------                       --------------
(Address of principal executive offices)                         (Zip Code)


                                 (441) 296-3165
              ----------------------------------------------------
              (Registrant's telephone number, including area code)


                                 Not Applicable
              -----------------------------------------------------
              (Former name, former address, and former fiscal year,
                          if changed since last report)


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  
                                   ---      ---


Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:


                                   9,100,000
                           --------------------------
                           (As of September 30, 1998)

================================================================================

<PAGE>

                                CGA GROUP, LTD.

                               TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION                                              PAGE

Item 1. Financial Statements

          Consolidated Balance Sheets -
          September 30, 1998 and December 31, 1997.............................1

          Consolidated Statements of Operations -
          Three Months and Nine Months Ended September 30, 1998 and
          Three Months and Six Months Ended September 30, 1997.................2

          Consolidated Statements of Mezzanine Equity -
          Nine Months Ended September 30, 1998 and Nine Months
          Ended December 31, 1997..............................................3

          Consolidated Statements of Shareholders' Equity -
          Nine Months Ended September 30, 1998 and Nine Months
          Ended December 31, 1997..............................................4

          Consolidated Statements of Cash Flows -
          Nine Months Ended September 30, 1998 and Six Months Ended 1997.......5

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

Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations.............................................12

Item 3. Quantitative and Qualitative Disclosures About Market Risk............15


PART II - OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds.............................16

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

Signatures....................................................................18

<PAGE>
                                         CGA GROUP, LTD.
                                  CONSOLIDATED BALANCE SHEETS
                                  (Expressed in U.S. Dollars)
                                         (Unaudited)
<TABLE>
<CAPTION>
                                                                  September 30     December 31
                                                                      1998            1997
                                                                 -------------    -------------
<S>                                                              <C>              <C>          
ASSETS
 Fixed maturities available for sale, ( at fair value)
    (Amortized cost: $125,313,994 and $121,664,671)              $ 129,938,047    $ 123,302,763
 Cash and short-term investments                                     3,294,251        7,199,106
 Note receivable                                                          --            250,000
 Premiums receivable                                                 2,972,829          447,172
 Accrued interest receivable                                         3,361,870        4,080,600
 Deferred acquisition costs                                          3,116,901        1,001,883
 Other assets                                                        3,501,573        2,018,309
 Organization costs                                                       --          4,421,353
                                                                 -------------    -------------

 Total assets                                                    $ 146,185,471    $ 142,721,186
                                                                 =============    =============

LIABILITIES
 Unearned premiums                                               $     962,791    $     270,576
 Provision for losses and loss adjustment expenses                   1,355,000           55,000
 Reinsurance balances payable                                          280,847             --
 Accrued costs and expenses                                          4,726,420        3,591,033
                                                                 -------------    -------------
 
 Total liabilities                                                   7,325,058        3,916,609
                                                                 -------------    -------------
MEZZANINE EQUITY
 Preferred stock, $.01 par value, 20,000,000 shares authorized:
 Series A                                                           72,474,645       65,532,499
 Series B                                                           37,250,849       37,075,371
 Dividends accrued on Series B                                      11,443,966        4,439,231
                                                                 -------------    -------------
 
 Total mezzanine equity                                            121,169,460      107,047,101
                                                                 -------------    -------------
SHAREHOLDERS' EQUITY
 Common stock, $.01 par value, 20,000,000 shares authorized,            
 9,100,000 issued and outstanding                                       91,000           91,000
 Additional paid-in-capital                                         42,684,159       42,086,353
 Accumulated other comprehensive income                              4,624,055        1,638,092
 Retained deficit                                                  (29,708,261)     (12,057,969)
                                                                 -------------    -------------
 
 Total shareholders' equity                                         17,690,953       31,757,476
                                                                 -------------    -------------
 
 Total liabilities and shareholders' equity                      $ 146,185,471    $ 142,721,186
                                                                 =============    =============

           The accompanying notes are an integral part of these financial statements.
</TABLE>

                                               1
<PAGE>
                                                 CGA GROUP, LTD.
                                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                           (Expressed in U.S. Dollars)
                                                   (Unaudited)
<TABLE>
<CAPTION>
                                                  Three Months Ended       Nine Months Ended   Six Months Ended
                                                       Sept 30                 Sept 30             Sept 30
                                            ----------------------------   ------------------  ----------------
                                                   1998          1997              1998             1997
<S>                                         <C>             <C>               <C>                <C>      
REVENUES                                                                                        
     Gross  premiums written                $  3,163,321    $     55,823      $  6,893,540       $     55,823
     Ceded premiums                             (280,847)           --            (453,314)              --
                                            ------------    ------------      ------------       ------------
     Net premiums written                      2,882,474          55,823         6,440,226             55,823
     Change in unearned premiums                 145,062            --            (692,214)              --
                                            ------------    ------------      ------------       ------------
                                                                                                
     Net premiums earned                       3,027,536          55,823         5,748,012             55,823
                                                                                                
     Net investment income                     1,746,653       2,923,079         5,959,548          3,065,666
     Net realized gains                          239,175            --             791,556               --
                                            
     Management fees                           1,472,589            --           2,154,584               --
                                            ------------    ------------      ------------       ------------
                                                                                                
Total Revenues                                 6,485,953       2,978,902        14,653,700          3,121,489
                                            ------------    ------------      ------------       ------------
                                                                                                
EXPENSES                                                                                        
     Operating expenses                        4,043,755       2,420,176        11,481,293          2,526,023
     Acquisition costs                           129,944          16,293           275,531             16,293
     Commitment fees                             151,233         149,589           448,767            172,603
     Excess of loss facility                      50,000            --             150,000               --
     Losses and Loss adjustment expenses         700,000            --           1,300,000               --
                                            ------------    ------------      ------------       ------------
                                                                                                
     Total expenses                            5,074,931       2,586,058        13,655,590          2,714,919
                                            ------------    ------------      ------------       ------------
                                                                                                
Income before cumulative effect of                                                              
  change in accounting principle               1,411,022         392,844           998,110            406,570
                                                                                                
Cumulative effect of change in                                                                  
   accounting principle                       (3,928,238)           --          (3,928,238)              --
                                                                                                
NET INCOME (LOSS)                             (2,517,216)        392,844        (2,930,128)           406,570
                                                                                                
Other comprehensive income                     2,711,047         218,341         2,985,963             53,647
                                            ------------    ------------      ------------       ------------
                                                                                                
COMPREHENSIVE INCOME                        $    193,831    $    611,185      $     55,835       $    460,217
                                            ============    ============      ============       ============
                                                                                            
Net loss available to common shareholders   $ (7,991,082)                     $(18,399,788)
                                                                                           
                                                                                           
Basic and diluted loss per common share     $      (0.88)                     $      (2.02)
                                            ============                      ============ 
                                                                                           
Weighted average shares outstanding            9,100,000                         9,100,000 
                                            ============                      ============ 
                                                                              
                    The accompanying notes are an integral part of these financial statements.
</TABLE>

                                                         2
<PAGE>
                                        CGA GROUP, LTD.
                          CONSOLIDATED STATEMENTS OF MEZZANINE EQUITY
                                  (Expressed in U.S. Dollars)
                                          (Unaudited)

<TABLE>
<CAPTION>
                                               Nine Months Ended         Nine Months Ended
                                               September 30, 1998        December 31, 1997
                                               ------------------        -----------------
<S>                                               <C>                      <C>        
MEZZANINE EQUITY

SERIES A PREFERRED STOCK
Balance - beginning of period                     $      27,965            $        --
Stock issued                                               --                     26,000
Pay-in-kind dividends paid                                3,086                    1,965
                                                  -------------            -------------
Balance - end of period                                  31,051                   27,965
                                                  -------------            -------------

ADDITIONAL PAID-IN-CAPITAL - SERIES A PREFERRED
Balance - beginning of period                        65,504,534                     --
Stock issued                                               --                 64,974,000
Issuance costs                                             --                 (4,571,319)
Fair value of warrants                               (1,347,300)                    --
Pay-in-kind dividends paid                            7,712,344                4,911,381
Accretion to redemption value                           399,990                  190,472
Accretion on warrants                                   174,027                     --
                                                  -------------            -------------
Balance - end of period                              72,443,594               65,504,534
                                                  -------------            -------------

Total Series A Preferred Stock                    $  72,474,645            $  65,532,499
                                                  =============            =============

SERIES B PREFERRED STOCK
Balance - beginning of period                     $      16,000            $        --
Stock issued                                               --                     16,000
                                                  -------------            -------------
Balance - end of period                                  16,000                   16,000
                                                  -------------            -------------

ADDITIONAL PAID-IN-CAPITAL - SERIES B PREFERRED
Balance - beginning of period                        37,059,371                     --
Stock issued                                               --                 39,984,000
Issuance costs                                             --                 (3,008,190)
Accretion to redemption value                           175,478                   83,561
                                                  -------------            -------------
Balance - end of period                              37,234,849               37,059,371
                                                  -------------            -------------
Total Series B Preferred stock                    $  37,250,849            $  37,075,371
                                                  =============            =============

PAY-IN-KIND DIVIDENDS ACCRUED-SERIES B
Balance - beginning of period                     $   4,439,231            $        --
Dividends accrued                                     7,004,735                4,439,231
                                                  -------------            -------------
Balance - end of period                           $  11,443,966            $   4,439,231
                                                  =============            =============

TOTAL MEZZANINE EQUITY                            $ 121,169,460            $ 107,047,101
                                                  =============            =============

        The accompanying notes are an integral part of these financial statements.
</TABLE>

                                            3
<PAGE>
                                              CGA GROUP, LTD.
                              CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                        (Expressed in U.S. Dollars)
                                             (Unaudited)
<TABLE>
<CAPTION>
                                                                 Nine Months Ended      Nine Months Ended
                                                                 September 30, 1998     December 31, 1997
                                                                 ------------------     -----------------
<S>                                                                  <C>                  <C>          
SHAREHOLDERS' EQUITY

COMMON STOCK
Balance - beginning of period                                        $     91,000         $     12,000
Stock redeemed (12,000 shares)                                               --                (12,000)
Stock issued (9,100,000 shares)                                              --                 91,000
                                                                     ------------         ------------ 
                                                                                        
Balance - end of period                                                    91,000               91,000
                                                                     ------------         ------------
                                                                                        
ADDITIONAL PAID-IN-CAPITAL - COMMON STOCK                                               
Balance - beginning of period                                          42,086,353                 --
Stock issued                                                                 --             45,409,000
Issuance costs                                                               --             (3,048,614)
Fair value of warrants                                                  1,347,300                 --
Accretion of Series A Preferred Stock to redemption value                (399,990)            (190,472)
Accretion of Series B Preferred Stock to redemption value                (175,478)             (83,561)
Accretion on warrants                                                    (174,027)                --
                                                                     ------------         ------------ 
                                                                                        
Balance - end of period                                                42,684,159           42,086,353
                                                                     ------------         ------------ 
                                                                                        
ACCUMULATED OTHER COMPREHENSIVE INCOME                                                  
Balance - beginning of period                                           1,638,092                 --
Increase during the period                                              2,985,963            1,638,092
                                                                     ------------         ------------ 
                                                                                        
Balance - end of period                                                 4,624,055            1,638,092
                                                                     ------------         ------------- 
                                                                                        
RETAINED EARNINGS (DEFICIT)                                                             
Balance - beginning of period                                         (12,057,969)          (2,706,182)
Net income (loss)                                                      (2,930,128)           (1,318,730)
Series A pay-in-kind dividends paid                                    (7,715,430)          (4,913,346)
Series B pay-in-kind dividends accrued                                 (7,004,734)          (4,439,231)
                                                                     ------------         ------------ 
                                                                                        
Balance - end of period                                               (29,708,261)         (12,057,969)
                                                                     ------------         ------------ 
                                                                                        
TOTAL SHAREHOLDERS' EQUITY                                           $ 17,690,953         $ 31,757,476
                                                                     ============         ============ 

                The accompanying notes are an integral part of these financial statements.
</TABLE>
                                                    4
<PAGE>
                                          CGA GROUP, LTD.
                               CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    (Expressed in U.S. Dollars)
                                            (Unaudited)
<TABLE>
<CAPTION>
                                                           Nine Months Ended      Six Months Ended
                                                             September 30           September 30
                                                                 1998                   1997
                                                           -----------------      ----------------
<S>                                                          <C>                    <C>          
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income                                            $  (2,930,128)         $     406,570
Changes in non-cash items

       Amortization of investments                                 112,386                   --
       Depreciation expense                                        259,470                296,433
       Realized gain on sale of investments                       (791,556)                  --
       Realized loss on sale of fixed assets                        26,282                   --
       Premiums receivable                                      (2,525,657)               (55,823)
       Accrued interest                                            718,730             (2,974,012)
       Deferred acquisition costs                               (2,115,018)            (1,019,463)
       Organization costs                                        4,421,353             (4,738,515)
       Other assets                                             (1,114,608)              (921,461)
       Unearned premiums                                           692,215                   --
       Loss adjustment expenses                                  1,300,000                   --
       Reinsurance balances payable                                280,847                   --
       Accrued costs and expenses                                1,135,387              2,753,272
                                                             -------------          -------------

Net cash used in operating activities                             (530,297)            (6,252,999)
                                                             -------------          -------------

CASH FLOWS FROM INVESTING ACTIVITIES
Net purchases and sales of investments                          (3,000,371)          (122,055,573)
Net purchases of fixed assets                                     (624,187)              (547,243)
Note receivable                                                    250,000             (1,250,000)
                                                             -------------          -------------

Net cash used in investing activites                            (3,374,558)          (123,852,816)
                                                             -------------          -------------

CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of Common Stock                                            --                  (12,000)
Issuance of series A preferred stock                                  --                   27,179
Issuance of series B preferred stock                                  --                   16,000
Issuance of common stock                                              --                   91,000
Paid-in-capital                                                       --              152,955,762
Issuance costs of series A preferred stock                            --               (4,571,318)
Issuance costs of series B preferred stock                            --               (3,008,190)
Issuance costs of common stock                                        --               (3,043,310)
Series A pay-in-kind dividends paid                                   --               (2,589,941)
Loan repaid                                                           --                 (121,000)
                                                             -------------          -------------

Net cash provided by financing activities                             --              139,744,182
                                                             -------------          -------------

NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS      (3,904,855)             9,638,367

CASH AND SHORT-TERM INVESTMENTS - BEGINNING OF PERIOD            7,199,106                121,742
                                                             -------------          -------------

CASH AND SHORT-TERM INVESTMENTS - END OF PERIOD              $   3,294,251          $   9,760,109
                                                             =============          =============

             The accompanying notes are an integral part of these financial statements.
</TABLE>
                                                 5
<PAGE>



CGA GROUP, LTD.
Notes to Consolidated Financial Statements
For the Nine Months ended September 30, 1998
(Expressed in U.S. Dollars)

1.   BUSINESS AND ORGANIZATION
     CGA Group, Ltd. (the "Company") is a holding company, which was
     incorporated in Bermuda on June 21, 1996. The Company has two wholly owned
     subsidiaries. Commercial Guaranty Assurance, Ltd. ("CGA") was incorporated
     in Bermuda on October 22, 1996. CGA is licensed as a class 3 insurer under
     the laws of Bermuda with a AAA claims paying ability rating from Duff &
     Phelps Credit Rating Company ("DCR"). CGA provides financial guaranty
     insurance of structured securities, including commercial real estate,
     asset-backed and other securities. The Company, CGA and all of their
     employees are based in Hamilton, Bermuda. CGA Investment Management, Inc.
     ("CGAIM") was incorporated in Delaware, U.S.A. in July 1996 by the founders
     of the Company and was acquired at nominal cost to the Company on June 9,
     1997. The purchase method of accounting for the CGAIM acquisition was used.
     There was no goodwill acquired and no contingent payments, options, or
     commitments exist. CGAIM had not commenced operations prior to its
     acquisition by the Company. CGAIM is an investment advisor and provides
     financial advisory services to a variety of clients. CGAIM and its
     employees are based in New York City, New York.

     The Company's first fiscal year end was March 31, 1997. The Company
     subsequently changed its fiscal year end to December 31. Therefore, the
     comparative periods in the consolidated financial statements are not
     consistent.

     Operations commenced following the completion of the Company's private
     placement offering which occurred on June 17, 1997 (the
     "Recapitalization"). The initial capitalization of the Company consisted of
     12,000 common shares with a par value of $1.00 per share. All 12,000 shares
     were redeemed on June 17, 1997 at which time the Company completed its
     Recapitalization.

     The Company issued 2.6 million shares of Series A Preferred Stock, par
     value $.01 per share, at a price of $25 per share, with a 13.75% quarterly
     compounding dividend paid in additional shares of Series A Preferred Stock.
     The holders of Series A Preferred Stock also received warrants, which are
     transferable separately from the Series A Preferred Stock, which represent
     the right to purchase on or prior to June 17, 2007, at an exercise price of
     $.01 per share, a total of 270,000 shares of Common Stock. The warrants are
     valued at $4.99 per share and are accounted for as additional
     paid-in-capital to the Common Stock.

     The Company also issued 1.6 million shares of Series B Cumulative Voting
     Preference Shares, par value $.01 per share, at a price of $25 per share,
     with a 20% quarterly compounding dividend paid in additional shares of
     Series B Cumulative Voting Preference Shares. The Series B Cumulative
     Voting Preference Shares were sold to investors in the form of Investment
     Units which included commitments to purchase an additional $60 million of
     Series B Preferred Stock upon the occurrence of certain funding events, in
     order to maintain CGA's AAA rating from DCR. The Company pays a $600,000
     annual fee to the Unit Investors for their commitments. The Investment
     Units also included 7,827,957 shares of Common Stock out of a total of
     9,100,000 million shares of Common Stock issued, par value $.01 per share,
     at a price of $5 per share.

     The remaining 1,272,043 shares of Common Stock were sold to the sponsoring
     investors and certain members of management who also received 847,729
     warrants, which each represent the right to purchase one share of Common
     Stock on or prior to June 17, 2007 at an exercise price of $5 per share. An
     additional 1,494,771 warrants have been authorized to certain employees
     which each represent the right to purchase one share of Common Stock on or
     prior to June 17, 2007 at an exercise price of $5 per share.

2.   SIGNIFICANT ACCOUNTING POLICIES
     The consolidated financial statements have been prepared on the basis of
     accounting principles generally accepted in the United States of America
     ("GAAP") and include the accounts of the Company, CGA, and CGAIM. All
     significant intercompany accounts and transactions have been eliminated in
     consolidation. The preparation of financial statements in conformity with
     GAAP requires management to make estimates and assumptions that affect the
     reported amounts of assets and liabilities and the disclosure of contingent


                                       6
<PAGE>


     assets and liabilities at the date of the consolidated financial statements
     and the reported amounts of revenues and expenses during the reporting
     period. Actual results could differ from those estimates.

a)   PREMIUMS
     CGA's insurance contracts are classified as long-duration contracts for
     accounting purposes as the contracts are expected to remain in force for an
     extended period. The contracts generally are not subject to unilateral
     changes in their provisions and require insurance protection for extended
     periods. Premium rates generally are level throughout the period of
     coverage. Premiums are recognized as written upon inception of multi-year
     policies. Up-front premiums are earned pro-rata over the period of risk.
     Installment premiums are earned over each installment period.

b)   DEFERRED ACQUISITION COSTS
     Deferred acquisition costs are expenses that vary with and are primarily
     related to the production of business. These costs include compensation and
     related costs of underwriting and marketing, certain rating agency fees,
     and administrative expenses. Policy acquisition costs are amortized on a
     straight-line basis over the estimated term of the related insured risks.

c)   REINSURANCE
     In the ordinary course of business, the company cedes exposures under
     various reinsurance contracts designed to limit losses from certain risks
     and to protect capital and surplus. The reinsurance of risk does not
     relieve the company of its original liability to its policyholders. In the
     event that a reinsurer was unable to meet its obligations under the
     existing reinsurance contracts, the Company would be liable for such
     defaulted amounts.

d)   PROVISION FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
     A case basis reserve for unpaid losses and loss adjustment expenses may be
     recorded at the present value of the estimate loss when, in management's
     opinion, the likelihood of a future loss is probable and determinable at
     the balance sheet date. A general reserve is calculated by applying a loss
     factor to the total net par amount outstanding of CGA's insured obligations
     over the expected term of such insured obligations.

     Management believes that the current level of the provision is adequate to
     cover the ultimate net cost of claims. The provision is necessarily an
     estimate and there can be no assurance that the ultimate liability will not
     differ from such estimates. The Company will monitor the provision on an
     ongoing basis and may periodically adjust the provision based on actual
     loss experience, the future mix of business and economic conditions. See
     footnote number four regarding subsequent events.

e)   ORGANIZATION EXPENSES
     Organization costs consisted of expenses incurred to form the Company and
     were amortized over a five-year period starting from the date of
     commencement of operations using the straight-line method. The Accounting
     Standards Executive issued Statement of Position 98-5, "Reporting on Costs
     of Start-Up Activities", effective for fiscal years beginning after
     December 15, 1998. This statement requires the Company to expense
     organization costs as incurred. On July 1, 1998, the Company expensed the
     remaining unamortized organization costs which is reflected in the
     financial statements as a change in accounting principle.

f)   INVESTMENTS
     In accordance with the provisions of Statement of Financial Accounting
     Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
     Equity Securities," investments in debt securities designated as
     available-for-sale are recorded at fair value. Any resulting unrealized
     gains or losses are reflected as a separate component of shareholders'
     equity until realized. The periodic unrealized gains or losses are
     reflected as other comprehensive income on the statement of income.

     Bond discounts and premiums are accreted or amortized on the effective
     interest method over the term of the related securities. Short-term
     investments, which are those investments with a maturity of less than one
     year at time of purchase, are carried at cost, which approximates fair
     value. Realized gains or losses on 


                                       7
<PAGE>


     sale of investments are determined on the basis of specific identification.
     Investment income is recognized when earned. The Company previously used
     foreign currency forward contracts for the purpose of managing certain
     investment portfolio exposures. As of June 30, 1998 the investment in
     non-U.S. dollar denominated securities was discontinued, eliminating the
     need to utilize foreign currency forward contracts.

g)   STATEMENT OF CASH FLOWS
     For purposes of the statements of cash flows, short-term deposits are
     composed of deposits with original maturities which are less than three
     months.

h)   LOSS PER COMMON SHARE
     The Company computed loss per share in accordance with SFAS No. 128,
     "Earnings Per Share." Loss per common share is calculated using the loss
     for the period adjusted for preference dividends, accretion of preference
     stock to redemption value, and accretion on warrants divided by the
     weighted average number of common shares outstanding and, if dilutive,
     shares issuable under outstanding warrants.

     The following is a reconciliation of the numerators and denominators of the
     basic and diluted loss per share.


--------------------------------------------------------------------------------
                                         Three Months Ended    Nine Months Ended
                                         September 30, 1998   September 30, 1998
--------------------------------------------------------------------------------

Basic Loss Per Share ("EPS")

Numerator:
  Net income (loss)                          $ (2,517,216)       $ (2,930,128)
  Series A - Pay-in-kind dividends paid        (2,826,050)         (7,715,430)
  Series A - Accretion to redemption value       (114,283)           (399,990)
  Series A - Accretion on warrants                (33,683)           (174,027)
  Series B - Pay-in-kind dividends accrued     (2,449,713)         (7,004,735)
  Series B - Accretion to redemption value        (50,137)           (175,478)
                                             ------------        ------------

Net Loss Available to Common Shareholders      (7,991,082)        (18,399,788)
                                             ------------        ------------

Denominator:
  Weighted Average  Shares Outstanding          9,100,000           9,100,000
                                             ------------        ------------

Basic EPS                                    $      (0.87)       $      (2.02)
                                             ============        ============

Diluted Loss Per Share

Numerator                                    $ (7,991,082)       $(18,399,788)
                                              ------------        ------------

Denominator                                     9,100,000           9,100,000
                                             ------------        ------------

Diluted EPS                                  $      (0.87)       $      (2.02)
                                             ============        ============

--------------------------------------------------------------------------------

     The Company has outstanding warrants which were not included in the
     computation of the diluted loss per share as the effect of these warrants
     is antidilutive for the periods presented above.

     On June 17, 1997 the Company issued warrants to purchase 270,000 shares of
     common stock in connection with the issuance of 2.6 million shares of
     Series A Preferred Stock. All of the warrants are outstanding as 


                                       8
<PAGE>


     of June 30, 1998. These warrants are excerciseable at any time on or prior
     to June 17, 2007 at an exercise price of $.01.

     The Company also issued 847,729 warrants to certain investors and members
     of management in connection with the issuance of 1.6 million investment
     units. Each warrant represents the right to purchase one share of common
     stock on or prior to June 17, 2007. The warrants have an exercise price of
     $5 per share and were outstanding at September 30, 1998. In addition, the
     Company has authorized 1,494,771 warrants for certain employees which each
     represent the right to purchase one share of common stock on or prior to
     June 17, 2007 at an exercise price of $5 per share. The employee rights
     will vest ratably over a four-year period and expire if not excercised
     within thirty days of the employee's termination of employment. As at
     September 30, 1998, there are 1,428,129 warrants outstanding of which
     357,032 warrants were exercisable.

i)   TAXATION
     The Company and CGA, which are domiciled in Bermuda, have received from the
     Minister of Finance of Bermuda an assurance under the Exempted Undertakings
     Tax Protection Act, 1966 of Bermuda, that generally protects them from
     incurring taxation by Bermuda tax authorities until March 28, 2016. Since
     the Company and CGA are not engaged in a trade or business in the U.S.
     there should be no U.S. income taxes due, however, CGA intends to file
     protective U.S. income tax returns. CGAIM will be subject to U.S. taxation
     at regular corporate tax rates, but has tax losses carried forward of
     approximately $3.9 million as of December 31, 1997, for which no benefit
     has been recorded in the financial statements. These tax loss
     carry-forwards expire in the year 2012.

j)   ACCOUNTING STANDARDS
     The Financial Accounting Standards Board ("FASB") issued Statement of
     Financial Accounting Standard No. 130 ("SFAS 130"), "Reporting
     Comprehensive Income", effective for fiscal years beginning after December
     15, 1997. This statement requires the Company to report in the financial
     statements, in addition to net income, comprehensive income and its
     components. The Company has adopted SFAS 130 in these consolidated
     financial statements.

     The FASB issued Statement of Financial Accounting Standard No. 131 ("SFAS
     131"), "Disclosures about Segments of an Enterprise and Related
     Information", which the company will be required to adopt for fiscal year
     1998. This statement established standards for reporting information about
     operating segments in annual financial statements and requires selected
     information about operating segments in interim financial reports issued to
     shareholders. It also established standards for related disclosures about
     products and services, geographic areas and major customers. Under SFAS
     131, operating segments are to be determined consistent with the way that
     management organizes and evaluates financial information internally for
     making operating decisions and assessing performance. The Company has
     chosen to adopt SFAS 131 effective December 31, 1998. Segment information
     will be reported separately for the Company's investment management and
     insurance operations.

     The Accounting Standards Executive issued Statement of Position 98-5,
     "Reporting on Costs of Start-Up Activities", effective for fiscal years
     beginning after December 15, 1998. This statement requires the Company to
     expense organization costs as incurred. On July 1, 1998, the Company
     expensed the remaining unamortized organization costs which is reflected in
     the financial statements as a change in accounting principle.

     On June 15, 1998, the FASB issued Statement of Financial Accounting
     Standard No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
     Hedging Activities" effective for fiscal years beginning after June 15,
     1999, but earlier application is permitted as of the beginning of any
     fiscal quarter subsequent to June 15, 1998. SFAS 133 requires all
     derivatives to be recognized in the statement of financial position as
     either assets or liabilities and measured at fair value. The Company does
     not believe the application of SFAS 133 will have a material effect on its
     consolidated financial statements.

3.   MEZZANINE EQUITY
     The Company's Series A Preferred Stock is subject to mandatory redemption
     including all accrued and unpaid dividends thereon, on June 17, 2007. The
     Series A Preferred Stock is also redeemable at the election of the Company
     at any time after June 17, 2002, subject to the payment of early redemption
     premiums starting at 11% initially, declining to 8% after June 17, 2003 and
     declining by 2% annually 


                                       9
<PAGE>


     through June 16, 2007. The Series B Preferred Stock is subject to mandatory
     redemption including all accrued and unpaid dividends thereon, on June 17,
     2012.

     The dividends on the Series A Preferred Stock are declared quarterly by the
     Board of Directors and paid in additional shares of Series A Preferred
     Stock. The Company was obligated to pay an additional pay-in-kind dividend
     of .5% on the Series A Preferred Stock from December 15, 1997 to the
     effective date of the registration statement. The Company registered the
     Series A Preferred Stock with the Securities and Exchange Commission
     effective August 6, 1998 at which time the accrual of the additional .5%
     dividend on the Series A Preferred Stock ceased. The payment of the
     additional dividend was paid on September 30, 1998. The dividend
     on the Series B Preferred Stock is not declared quarterly, however, the
     mandatory redemption provision requires that at redemption the Company is
     obligated to pay 100% of the stated value of the shares plus accrued and
     unpaid dividends thereon. Accordingly, the liability for dividends payable
     on the Series B Cumulative Voting Preference Shares is accrued and the
     charge against retained earnings is recorded.

4.   SUBSEQUENT EVENTS
     In October, the credit ratings on asset-backed securities issued by
     Commercial Financial Services Inc. ("CFS"), a credit-card debt collection
     company, were withdrawn by the three credit rating companies that rate the
     most recently issued CFS securities. The withdrawal of the ratings was in
     response to allegations of accounting irregularities at CFS. The rating
     agencies, investors and insurors have commenced an investigation into the
     allegations. Clients of CGAIM own approximately $157 million par of the CFS
     securities and CGA has insured the credit facilities used to finance their
     purchase. CGA had previously reinsured approximately $140 million par of
     this exposure. In addition, CGA has exposure of approximately $47 million
     par to CFS securities through a financial guaranty policy issued to a
     client that purchased the securities for their own account. CGA previously
     reinsured approximately $16 million par of this exposure. In summary, CGA
     has exposure to a total of $204 million par of CFS issued securities, of
     which $156 million par has been reinsured, leaving a net exposure of
     approximately $48 million par. No estimate of potential losses, if any, can
     be made until additional information becomes available.

     Also during October, CGA took steps to mitigate risks related to its
     exposure in connection with guarantees of client credit facilities used to
     purchase asset-backed and real estate securities. As a result of recent
     turmoil in certain areas of the capital markets, the spreads over
     treasuries at which investors are willing to purchase certain securities
     widened considerably. This spread widening caused a decrease in the fair
     value of many of the securities used as collateral for the insured credit
     facilities. The estimated market value of these securities had declined
     significantly during the month. Certain of the credit facilities have
     requirements that lender's operating ratios, ( the portfolio market value
     divided by the loan outstanding ) be maintained above certain levels. In
     the event that an operating ratio falls below the required level and is not
     brought into compliance within the cure period, the lender may liquidate
     the collateral and require CGA to pay any remaining balance outstanding
     under the credit facility.


                                       10
<PAGE>

     During October, two of CGAIM's clients worked with CGA to provide a
     solution to reduce the impact of any future spread widening on the
     operating ratios. CGA provided credit support on approximately $382 million
     of securities within the two insured portfolios, which was further
     supported by a "AAA" rated reinsurer, using documentation that would permit
     the insured party to proceed directly against the reinsurer. The effect of
     the described credit support arrangements was to substantially increase the
     market value of the subject securities. CGA received a premium of $38.95
     million from its clients in connection with these credit support
     arrangements, and ceded $38.7 million to the aforementioned reinsurer. The
     reinsurer is a shareholder of the Company who has contracted with two other
     shareholders of the Company to participate in the above-described credit
     arrangements. CGA purchased a $30 million note from St. George Holdings,
     Ltd. (the parent of the referred-to clients) in order to enable St. George
     Holdings, Ltd. to provide its subsidiaries (the referred-to clients) with
     sufficient funds to pay to CGA the described premium, while leaving these
     entities with sufficient liquidity to manage any future market value
     declines. This outflow of $30 million from CGA reduced the claims-paying
     resources of CGA by 14% from approximately $210 million to approximately
     $180 million.
     
     During November, the credit facility for St. George Investments I, Ltd.
     ("SGI"), was not renewed. This facility is insured by CGA and has an
     outstanding balance of approximately $425 million. The terms of the
     facility require repayment over four years with four equal principal
     installments due at the end of each year with the first installment being
     due in November, 1999. It is expected that the facility will be refinanced
     with another lender, however, there is no certainty that SGI will be able
     to obtain such refinancing.

     The #30 million reduction in CGA's claims paying resources will require
     that CGA modify its business plan until such time that the funds are repaid
     by St. George Holdings, Ltd. or new capital is raised. Likely modifications
     will result in not adding exposure to any non-investment grade securities,
     and a reduction of new business volume.

                                       11
<PAGE>


ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS

The following discussion should be read in conjunction with, and is qualified in
its entirety by, the consolidated financial statements of the Company and the
related notes thereto included elsewhere in this report.

GENERAL

CGA Group, Ltd. (the "Company"), a holding company, was incorporated in Bermuda
on June 21, 1996. The Company has two wholly owned subsidiaries. Commercial
Guaranty Assurance, Ltd. ("CGA"), was incorporated in Bermuda on October 22,
1996. CGA is licensed as a class 3 insurer under the Insurance Act 1978 of
Bermuda (the "Act") which authorizes it to carry on insurance business of all
classes in or from within Bermuda subject to its compliance with the solvency
margin, liquidity ratio and other requirements imposed on it by the Act. CGA has
an AAA "claims paying ability" rating from Duff & Phelps Credit Rating Company
("DCR). CGA provides financial guaranty insurance of structured securities,
including commercial real estate, asset-backed, and other securities. CGA
Investment Management, Inc. ("CGAIM") was incorporated in Delaware, U.S.A. in
July 1996 by the founders of the Company and was acquired at nominal cost to the
Company on June 9, 1997. CGAIM did not commence operations until after its
acquisition by the Company. CGAIM acts as an investment advisor and provides
financial advisory services to a variety of clients. The Company and its
subsidiaries were inactive until June 17, 1997, on which date the Company's
private placement offering was completed and the Company was recapitalized with
(i) two classes of preferred stock totaling $105 million, (ii) common stock
totaling $45.5 million and (iii) commitments to purchase $60 million of
additional preferred stock upon the occurrence of certain events.

RESULTS OF OPERATIONS

Total revenues for the three months ended September 30, 1998 were $6.5 million,
of which $3.0 million was derived from financial guaranty insurance premiums,
$1.4 million was derived from management fees and $2.0 million was derived from
investments. Net premiums earned were derived from $3.2 million of gross
premiums written, of which $.3 million were ceded under reinsurance agreements,
and a decrease of $.1 million in unearned premiums. Revenues for the three
months ended September 30, 1997 were $3.0 million, of which $.1 million was from
insurance premiums and $2.9 million was from investments. Further revenue
comparisons between the quarters ended September 30, 1998 and 1997 are not
meaningful due to the Company's limited operating history.

The following table shows the net par outstanding of insured obligations at
September 30, 1998 by asset type:
                                                        (in thousands)
        REIT Debt......................................   $  528,479       29%
        Consumer asset-backed securities...............      445,657       24%
        Corporate asset-backed securities..............      414,149       23%
        Commercial mortgage-backed securities..........      258,500       14%
        Sovereign credit derivatives...................      120,000        6%
        REIT Preferred stock...........................       70,000        4%

        Total .........................................   $1,836,785      100%

Based on net par outstanding, the credit ratings of the above assets were 3%
"AAA", 3% "AA", 14% "A", 70% "BBB" and 10% "BB".


                                       12
<PAGE>


Total revenues for the nine months ended September 30, 1998 were $14.7 million,
of which $5.7 million was derived from financial guaranty insurance premiums,
$2.1 million was from management fees and $6.8 million was from investments. Net
premiums earned were derived from $6.9 million of gross premiums written, of
which $.5 million were ceded under reinsurance agreements. CGA intends to build
upon the current book of business as its underwriting volume and risk in force
grow, thereby layering new business on top of a base of prior business that
creates an increasing annuity-like stream of revenue.

CGA monitors its exposure on a routine basis and stays in close contact with DCR
to ensure that its AAA rating is maintained. GCA has a $20 million excess of
loss reinsurance facility agreement and can also arrange reinsurance on an as
needed basis to manage its exposure. The Company also has commitments which
expire June 17, 2002, from certain institutional shareholders to purchase an
aggregate of $60 million of additional Series B Preferred Stock. Should those
commitments be called upon, the proceeds would likely be used to increase the
capital of CGA. The commitments must be funded in the event that DCR notifies
the Company at least 45 days prior to June 17, 2002 that CGA's rating will
otherwise be downgraded below a AAA rating.

Net investment income for the three and nine month periods ending September 30,
1998 was comprised of $1.7 and $6.0 million respectively, of interest earned on
debt securities and short-term investments, and $.2 and $.8 million of net
realized gains. Net investment income is presented after deducting the cost of
external investment management fees which totaled $.1 million for the quarter
and $.3 million for the nine month period. The total market value of the fixed
maturity portfolio at September 30, 1998, including accrued interest receivable,
was $133.3 million. Unrealized gains on the investment portfolio as of September
30, 1998 were $4.6 million. The average yield on the investment portfolio was
6%.

Operating expenses for the three months ended September 30, 1998 were $4.0
million compared to $2.7 million for the same period last year as a result of
increased staffing. These costs consist primarily of personnel costs and legal
and financing costs incurred to set up investment programs for CGAIM's clients.
Total operating expenses for the nine month period ended September 30, 1998 were
$11.5 million.

In response to the Accounting Standards Executive issued Statement of Position
98-5, "Reporting on Costs of Start-Up Activities", effective for fiscal years
beginning after December 15, 1998, which requires the Company to expense
organization costs as incurred, the Company expensed the remaining unamortized
organization costs totaling $3.9 million which is reflected in the financial
statements as a change in accounting principle.

LIQUIDITY AND CAPITAL RESOURCES

The Company capitalized CGA with $125 million. Alliance Capital Management
Corporation currently manages CGA's entire investment portfolio. These funds are
invested in foreign corporate and government debt securities which are rated AA
or higher and denominated in U.S. dollars. The portfolio maintains a weighted
average duration of two to five years. CGAIM was initially capitalized with $3
million. It will require additional funding during 1998 and 1999 from the
Company to cover its operations while it builds its assets under management to
generate sufficient fee income. On a consolidated basis, the Company used $.5
million of cash from operating activities for the nine month period ended
September 30, 1998.

The Company does not expect to pay cash dividends to its shareholders. CGA's
Board of Directors has passed a resolution that CGA will not declare or pay cash
dividends during the first five years of operations. After such five-year
period, CGA intends to comply with dividend restrictions, if any, imposed by DCR
subject to covenants contained in the subscription agreements for the various
classes of the Company's stock. In addition, CGA's dividend payments are subject
to certain limitations under Bermudian insurance regulations that require
minimum solvency margins and liquidity ratios.


                                       13
<PAGE>


SUBSEQUENT EVENTS

In October, the credit ratings on asset-backed securities issued by Commercial
Financial Services Inc. ("CFS"), a credit-card debt collection company, were
withdrawn by the three credit rating companies that rate the most recently
issued CFS securities. The withdrawal of the ratings was in response to
allegations of accounting irregularities at CFS. The rating agencies, investors
and insurors have commenced an investigation into the allegations. Clients of
CGAIM own approximately $157 million par of the CFS securities and CGA has
insured the credit facilities used to finance their purchase. CGA had previously
reinsured approximately $140 million par of this exposure. In addition, CGA has
exposure of approximately $47 million par to CFS securities through a financial
guaranty policy issued to a client that purchased the securities for their own
account. CGA previously reinsured approximately $16 million par of this
exposure. In summary, CGA has exposure to a total of $204 million par of CFS
issued securities, of which $156 million par has been reinsured, leaving a net
exposure of approximately $48 million par. No estimate of potential losses, if
any, can be made until additional information becomes available.

Also during October, CGA took steps to mitigate risks related to its exposure in
connection with guarantees of client credit facilities used to purchase
asset-backed and real estate securities. As a result of recent turmoil in
certain areas of the capital markets, the spreads over treasuries at which
investors are willing to purchase certain securities widened considerably. This
spread widening caused a decrease in the market value of many of the securities
used as collateral for the insured credit facilities. The estimated fair value
of these securities had declined significantly during the month. Certain of the
credit facilities have requirements that lender's operating ratios, ( the
portfolio market value divided by the loan outstanding ) be maintained above
certain levels. In the event that an operating ratio falls below the required
level and is not brought into compliance within the cure period, the lender may
liquidate the collateral and require CGA to pay any remaining balance
outstanding under the credit facility.

During October, two of CGAIM's clients worked with CGA to provide a solution to
reduce the impact of any future spread widening on the operating ratios. CGA
provided credit support on approximately $382 million of securities within the
two insured portfolios, which was further supported by a "AAA" rated reinsurer,
using documentation that would permit the insured party to proceed directly
against the reinsurer. The effect of the described credit support arrangements
was to substantially increase the market value of the subject securities. CGA
received a premium of $38.95 million from its clients in connection with these
credit support arrangements, and ceded $38.7 million to the aforementioned
reinsurer. The reinsurer is a shareholder of the Company who has contracted with
two other shareholders of the Company to participate in the above-described
credit arrangements. CGA purchased a $30 million note from St. George Holdings,
Ltd. (the parent of the referred-to clients) in order to enable St. George
Holdings, Ltd. to provide its subsidiaries (the referred-to clients) with
sufficient funds to pay to CGA the described premium, while leaving these
entities with sufficient liquidity to manage any future market value declines.
This outflow of $30 million from CGA reduced the claims-paying resources of CGA
by 14% from approximately $210 million to approximately $180 million.
     
During November, the credit facility for St. George Investments I, Ltd. ("SGI"),
was not renewed. This facility is insured by CGA and has an outstanding balance
of approximately $425 million. The terms of the facility require repayment over
four years with four equal principal installments due at the end of each year,
with the first installment being due in November, 1999. It is expected that the
facility will be refinanced with another lender, however, there is no certainty
that SGI will be able to obtain such refinancing.

The #30 million reduction in CGA's claims paying resources will require that CGA
modify its business plan until such time that the funds are repaid by St. George
Holdings, Ltd. or new capital is raised. Likely modifications will result in not
adding exposure to any non-investment grade securities, and a reduction of new
business volume.

RECENT ACCOUNTING PRONOUNCEMENTS

On June 15, 1998, the FASB issued Statement of Financial Accounting Standard No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities"
effective for fiscal years beginning after June 15, 1999, but earlier
application is permitted as of the beginning of any fiscal quarter subsequent to
June 15, 1998. SFAS 133 requires all derivatives to be recognized in the
statement of financial position as either assets or liabilities and measured at
fair value. The Company does not believe the application of SFAS 133 will have a
material effect on its consolidated financial statements.


                                       14
<PAGE>


YEAR 2000

The Company's primary uses of software systems are for corporate and investment
portfolio accounting, as well as investment underwriting and analysis. The
Company's current systems have recently been purchased or leased as the Company
commenced operations in June, 1997, and are believed to be Year 2000 compliant
Therefore, the Company believes that the risk of Year 2000 compliance is not
significant as it relates to its computer software systems. The Company has
incurred no material costs to date and expects to incur no material costs in the
future to make its systems Year 2000 compliant.

The Company is also in the process of reviewing its exposure to Year 2000 issues
resulting from its vendors' computer systems. The Company has contacted vendors
regarding the state of their remediation activities for material Year 2000
issues. The Company does not expect that there will be material disruptions to
its business or material costs associated with any Year 2000 disruption by its
vendors. However, the cost and timing of third party Year 2000 compliance is not
within the Company's control and no assurances can be given with respect to the
cost or timing of such efforts or the potential efffects of any failure to
comply. Formal contingency plans will not be formulated until the Company has
identified specific areas where there is a substantial risk of Year 2000
problems occurring, and no such areas are identified as of this date.

FORWARD LOOKING INFORMATION

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward looking statements. This Form 10-Q or any other written or oral
statements made by or on behalf of the Company may include forward looking
statements which reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain uncertainties and other factors that could cause actual results to
differ materially from such statements. The words "believe", "anticipate",
"project", "plan", "expect", "intend", "will likely result" or "will continue"
and similar expressions, identify forward-looking statements. Readers are
cautioned not to place undue emphasis on these forward-looking statements, which
speak only as of their dates. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by Item 305 of Regulation S-K is included in Item 2
hereof, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."


                                       15



<PAGE>


                          PART II -- OTHER INFORMATION


ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

(d) On August 6, 1998, the Company's Registration Statement on Form S-1
(Commission file number 333-7944) (the "S-1 Registration Statement") with
respect to the Series A Preferred Stock was declared effective by the
Securities and Exchange Commission. The S-1 Registration Statement is intended
to satisfy certain obligations of the Company under the Series A Subscription
Agreement dated as of June 9, 1997 among the Company and the Selling
Stockholders (the "Series A Preferred Stock Subscription Agreement"). The
Company will not receive any proceeds from sales of Series A Preferred Stock, if
any, effected pursuant to the S-1 Registration Statement and the prospectus
included therein, and has agreed to pay the expenses of the performance of its
obligations under the Series A Preferred Stock Subscription Agreement with
respect to the S-1 Registration Statement.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

     (a) Exhibits.

EXHIBIT NUMBER                        DESCRIPTION
--------------                        -----------
27.1                                  Financial Data Schedules.

----------

     (b) Reports on Form 8-K.

             The Company has not filed any reports on Form 8-K.

















                                       16
<PAGE>



                                   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.


                                          CGA GROUP, LTD.
                                          ---------------
                                          Registrant


Date:  November 16, 1998                  /s/ JAMES R. REINHART
                                          --------------------------------------
                                              James R. Reinhart
                                              Chief Financial Officer
                                              (principal financial officer)






                                       17