SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   -----------

                                    FORM 10-K

[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934For the fiscal year ended December 31, 1998
[ ] 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 or other jurisdiction of          (I.R.S. Employer Identification No.)
   incorporation or organization)        

   101 South Stratford Road, Suite 500
      Winston-Salem, North Carolina                         27104
 (Address of principal executive offices)                (Zip Code)

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

               Securities registered pursuant to Section 12(b) of
                                    the Act:

                                      None

               Securities registered pursuant to Section 12(g) of
                                    the Act:

                               Title of each class
                     Common Stock, par value $.01 per share

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 by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /

The  aggregate  market  value of the voting stock held by  nonaffiliates  of the
registrant  as of February 16, 1999,  computed by reference to the last reported
price at which the stock was sold on such date, was $122,850,797.

The number of shares of the registrant's common stock, par value $.01 per share,
outstanding as of February 16, 1999 was 13,346,869.

Portions of the following documents            Part of this Form 10-K into which
are incorporated by reference                  the document is incorporated by
into this Form 10-K:                           reference:
   TRIAD GUARANTY INC.
   Proxy Statement for 1999 Annual Meeting                 PART III
   of Stockholders


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                                     PART I

ITEM 1.       BUSINESS.

     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 residential
mortgage lenders, including mortgage bankers, mortgage brokers, commercial banks
and savings institutions.

     Private mortgage insurance,  also known as mortgage guaranty insurance,  is
issued  in  most  home  purchases  and   refinancings   involving   conventional
residential  first  mortgage loans to borrowers with equity of less than 20%. If
the  homeowner  defaults,  private  mortgage  insurance  reduces,  and  in  some
instances eliminates, the loss to the insured lender. Private mortgage insurance
also  facilitates  the sale of low down payment  mortgage loans in the secondary
mortgage  market,  principally  to the Federal  Home Loan  Mortgage  Corporation
("Freddie Mac") and the Federal National  Mortgage  Association  ("Fannie Mae").
Under risk-based capital regulations applicable to savings institutions, private
mortgage  insurance  also  reduces the capital  requirement  for such lenders on
residential mortgage loans with equity of less than 20%.

     Triad  was  formed  in  1987  as a  wholly-owned  subsidiary  of  Primerica
Corporation and began writing private  mortgage  insurance in 1988. In September
1989,  Triad was  acquired by  Collateral  Mortgage,  Ltd.  ("CML"),  a mortgage
banking and real estate  lending firm located in Birmingham,  Alabama.  In 1990,
CML  contributed  the  outstanding  stock of Triad to its affiliate,  Collateral
Investment Corp. ("CIC"), an insurance holding company.

     The  Company  was  incorporated  by CIC in  Delaware in August 1993 for the
purpose of  holding  all the  outstanding  stock of Triad and to  undertake  the
initial public  offering of the Company's  Common Stock,  which was completed in
November 1993.  CIC currently  owns 20.0% and CML owns 19.2% of the  outstanding
Common Stock of the Company.

     The  principal  executive  offices of the  Company are located at 101 South
Stratford Road,  Suite 500,  Winston-Salem,  North Carolina 27104. Its telephone
number is (336) 723-1282.

TYPES OF MORTGAGE INSURANCE PRODUCTS

     There are two  principal  types of  private  mortgage  insurance  coverage:
"primary" and "pool." The Company offers only primary insurance.


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PRIMARY INSURANCE

     Primary insurance  provides mortgage default protection on individual loans
and covers  unpaid loan  principal,  delinquent  interest  and certain  expenses
associated with the default and subsequent foreclosure (collectively, the "claim
amount").  The  claim  amount,  to which  the  appropriate  coverage  percentage
(typically 15% to 30% as of December 31, 1998) is applied, generally ranges from
110% to  115%  of the  unpaid  principal  balance  of the  loan.  The  Company's
obligation  to an  insured  lender  with  respect  to a claim is  determined  by
applying the  appropriate  coverage  percentage to the claim  amount.  Under its
master policy,  the Company has the option of paying the entire claim amount and
taking title to the mortgaged property or paying the coverage percentage in full
satisfaction of its obligations under the insurance  written.  Primary insurance
can be placed on many types of loan  instruments and generally  applies to loans
secured by mortgages on owner occupied homes.  The Company  underwrites  primary
insurance on a loan-by-loan basis and on a "delegated  underwriting"  basis to a
select group of lenders.  Mortgage  originators who participate in the Company's
delegated  program are allowed to issue a certificate  of insurance on the loans
it underwrites if certain strict qualifications are met.

     The Company offers primary coverage generally ranging from 6% to 35% of the
claim amount with most coverage in the 15% to 30% range as of December 31, 1998.
The  coverage  percentage  provided  by the  Company is  selected by the insured
lender,  subject to the  Company's  underwriting  approval,  usually in order to
comply with  existing  Freddie Mac and Fannie Mae  requirements  to reduce their
loss exposure on loans they purchase to 75% or less of the  property's  value at
the time the loan is originated.  In January 1999,  Fannie Mae announced that it
would accept lower coverage percentages from lenders on certain loans for resale
to the secondary  market than it previously  required.  In conjunction  with the
announcement,  Fannie Mae  reduced  the  coverage  requirement  so that its loss
exposure on loans processed by its automated underwriting system will be limited
to 80% or less of the  property's  value  at the time of  origination.  In March
1999, Freddie Mac introduced a similar program.

     The Company's  premium rates vary  depending upon the  loan-to-value  (LTV)
ratio, loan type,  mortgage term, coverage amount and type, which all affect the
perceived risk of a claim on the insured mortgage loan. Generally, premium rates
cannot be changed after the issuance of coverage.  The Company,  consistent with
industry practice, generally utilizes a nationally based, rather than a regional
or local, premium rate structure.

     Mortgage  insurance  premiums are usually paid by the mortgage  borrower to
the  mortgage  lender or  servicer,  which in turn  remits the  premiums  to the
mortgage  insurer.  The Company has three basic types of borrower  paid  premium
plans.  The first is a monthly  premium plan under which only one or two months'
premium is paid at the mortgage loan closing.  Thereafter level monthly premiums
are  collected by the loan servicer for monthly  remittance to the Company.  The
Company  also offers a plan under  which the first  monthly  mortgage  insurance

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payment is deferred  until the first loan  payment is  remitted to the  Company.
This deferred monthly premium product decreases the amount of cash required from
the  borrower  at closing,  therefore  making home  ownership  more  affordable.
Monthly premium plans represented 97% of new insurance written in 1998. Based on
the  positive  response  from  mortgage  borrowers  to the monthly  premium plan
product,  the Company  expects that the  percentage  of new business  written on
monthly premium plans will remain near the current level.

     The second type of premium  payment plan is an annual premium plan in which
a  first-year  premium is paid at the mortgage  loan closing and annual  renewal
payments,  which  are  generally  less  than the first  year  premium,  are paid
thereafter. Renewal payments are collected monthly from the borrower and held in
escrow by the mortgage  lender or servicer for annual  remittance  in advance of
each renewal year.

     The third type of premium  payment plan  requires a single  payment paid at
the loan closing.  The single premium payment can be financed by the borrower by
adding  it to the  principal  amount of the  mortgage  or can be paid in cash at
closing by the borrower.

     In addition to the borrower paid plans,  the Company has a lender-paid plan
whereby mortgage  insurance  premiums are charged to the mortgage lender or loan
servicer,  which pays the premium to the Company. The lender builds the mortgage
insurance premium into the borrower's  interest rate. The Company's  lender-paid
plan allows the lender to offer  borrowers  lower cost mortgages by reducing the
necessary  closing costs compared to certain  borrower paid plans. The Company's
lender-paid plan has been approved for use by Fannie Mae and Freddie Mac.

POOL INSURANCE

     Pool insurance has generally been offered by private  mortgage  insurers to
lenders  as an  additional  "credit  enhancement"  for  certain  mortgage-backed
securities  and  provides  coverage  for the full amount of the net loss on each
individual loan included in the pool,  subject to a provision limiting aggregate
losses to a specified  percentage of the total original balances of all loans in
the pool.  Modified pool insurance provides coverage for a specified  percentage
of the claim  amount for each loan  insured,  subject  to an  overall  stop-loss
provision  applicable to the entire pool of loans insured.  The Company does not
offer pool insurance.

RISK SHARING PRODUCTS

     In 1997, the Company  introduced a mortgage insurance program to enable the
Company to better meet the needs and  requirements of larger  national  lenders.
The program  increases the lender's share of the risk of loss on an insured book
of business  and  provides  for a fee to the lender for this  increased  risk. A
significant  portion of Triad's  1998  production  resulted  from  Triad's  risk

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sharing  programs.  In addition,  in 1999, the Company began  marketing  certain
captive  reinsurance  programs  that allow a reinsurance  company,  generally an
affiliate of the lender,  to assume  mortgage  insurance  default losses up to a
maximum  exposure.  Regulatory and industry issues exist regarding the future of
certain risk  sharing  programs  currently  being  marketed  within the mortgage
insurance  industry.  The resolution of the  regulatory  and industry  questions
regarding risk sharing  programs makes the continued  viability of such programs
uncertain.  Management is unable to predict the impact of the regulatory  issues
on these products.

CANCELLATION OF INSURANCE

     Mortgage  insurance  coverage  cannot be canceled by the Company except for
nonpayment of premium or certain material  violations of the master policy,  and
remains  renewable  at the option of the  insured  lender.  Generally,  mortgage
insurance  is  renewable  at a rate  fixed  when the  insurance  on the loan was
initially issued.

     Insured  lenders  may  cancel  insurance  at any  time at their  option.  A
borrower may request  that an insured  servicer  cancel  insurance on a mortgage
loan when its loan balance is less than 80% of the property's current value, but
loan servicers are generally  restricted in their ability to grant such requests
by  secondary  market  requirements  as  well  as by  certain  other  regulatory
restrictions.  Pursuant to recently enacted federal legislation, most loans made
on or after July 29, 1999, are required to have their private mortgage insurance
canceled automatically by the lenders when the outstanding loan amount is 78% or
less of the original property purchase price.

     When a borrower  refinances a Triad-insured  mortgage loan by paying it off
in full with the proceeds of a new  mortgage,  the  insurance  on that  existing
mortgage is canceled,  and insurance on the new mortgage is considered to be new
insurance written. Therefore, continuation of Triad's coverage from a refinanced
loan to a new loan results in both a cancellation of insurance and new insurance
written. The percentage of new insurance written represented by refinanced loans
was 31.7%, 14.0%, and 16.9% in 1998, 1997, and 1996, respectively.

     To the extent canceled insurance  coverage in areas  experiencing  economic
growth is not replaced by new  insurance in such areas,  the  percentage  of the
Company's  book of business in  economically  weaker  areas may  increase.  This
development may occur during periods of heavy mortgage  refinancing.  Refinanced
loans in regions experiencing economic growth are less likely to require private
mortgage  insurance,  while borrowers in economically  distressed areas are less
likely to qualify for  refinancing  because of  depreciated  real estate values.
Throughout the 1990's,  high refinancing  activity has occurred because of lower
mortgage  interest rates.  The percentage of the Company's  policies in force at
the end of the previous  year that were canceled  during the following  year was
26.6%, 15.6%, and 14.7% in 1998, 1997, and 1996, respectively. The cancellations

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which have occurred since 1988 have not had a material  impact on the geographic
dispersion of the Company's risk in force.

CUSTOMERS

     Residential  mortgage lenders such as mortgage  bankers,  mortgage brokers,
commercial  banks and savings  institutions  are the principal  customers of the
Company. At December 31, 1998,  approximately 55% of the Company's risk in force
came from mortgage bankers, 20% from mortgage brokers, 18% from commercial banks
and 7% from savings institutions. At December 31, 1997, approximately 53% of the
Company's risk in force came from mortgage  bankers,  22% from mortgage brokers,
16% from commercial banks and 9% from savings  institutions.  Although  mortgage
lenders are the Company's  principal  customers,  individual  mortgage borrowers
generally bear the cost of primary insurance coverage.

     To obtain primary insurance from the Company,  a mortgage lender must first
apply for and receive a master policy from the Company.  The Company's  approval
of a lender as a master  policyholder  is based,  among other  factors,  upon an
evaluation of the lender's financial position and its management's  demonstrated
adherence to sound loan origination practices.

     The master  policy  sets forth the terms and  conditions  of the  Company's
mortgage  insurance  policy.  The master  policy does not obligate the lender to
obtain  insurance  from the  Company,  nor does it obligate the Company to issue
insurance on a particular  loan. The master policy provides that the lender must
submit  individual  loans for insurance to the Company and the loan,  subject to
certain stringent  criteria,  must be approved by the Company to effect coverage
(except in the case of delegated  underwriting  and when the  originator has the
authority to approve coverage within certain guidelines).  The Company had 6,214
master  policy  holders at December 31, 1998,  compared to 6,096 at December 31,
1997.

     The Company's ten largest customers were responsible for 31.7%,  32.2%, and
23.4%  of  direct  risk  in  force  at  December  31,  1998,   1997,  and  1996,
respectively.  No  single  customer  of  the  Company  (including  branches  and
affiliates of that  customer)  accounted for revenues  greater than 10% of total
revenues for 1998. The largest single customer of the Company,  measured by risk
in force,  accounted for 9.5%,  10.2%,  and 3.3% at December 31, 1998, 1997, and
1996, respectively.

SALES AND MARKETING

     The Company currently markets its insurance  products through a field sales
force of thirty-one salaried account executives,  three regional sales managers,
six national  accounts  representatives  and an exclusive  commissioned  general
agency  serving a specific  geographic  market.  The  Company is  licensed to do
business in 44 states and the District of Columbia  and has licenses  pending in
two states.  The Company is actively serving  mortgage  originators in 38 states
and the District of Columbia.

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     In  1998,   the  Company  added  to  its  existing  sales  force  with  new
representation   in  Wisconsin   and  Southern   Florida,   and  added  one  new
representative  to  service  the  national  account  market of  larger  mortgage
lenders.  The Company also bought out one of the exclusive general agencies with
which it had a  relationship  in order to better  service  the state of Florida.
Currently, the Company is approved to do business with 24 of the top 30 lenders,
up from 21 at year end 1997.  The Company will  continue to evaluate  geographic
expansion   opportunities,   as  well  as  the   need   for   additional   sales
representation.

     The success of the Company is  dependent  upon the  services of its account
executives  and general  agents.  For 1998, the Company's  commissioned  general
agencies  produced  approximately  20% of the  Company's  new  direct  insurance
written  while  the  salaried  account   executives  and  the  national  account
representatives  produced the remainder.  The loss of the services of any of its
key account  executives  or the  general  agency  could have a material  adverse
effect on the Company's operations.

     The Company provides, for a fee, contract underwriting services that enable
customers to improve the efficiency of their  operations by  outsourcing  all or
part of their mortgage loan underwriting.  Contract  underwriting  services have
become  increasingly  important  to  lenders  as  they  seek  to  reduce  costs.
Accordingly,  contract underwriting  significantly  contributes to the Company's
mortgage  insurance  production.  The  Company  provides  contract  underwriting
services  through its own  employees  as well as  independent  contractors.  The
Company's  inability to maintain  and provide a  sufficient  number of qualified
underwriters could have a material adverse effect on the Company's operations.

COMPETITION AND MARKET SHARE

     Triad and other private mortgage insurers compete directly with federal and
state  governmental  and  quasi-governmental  agencies,  principally the Federal
Housing  Administration   ("FHA").  These  agencies  sponsor   government-backed
mortgage  insurance  programs which accounted for  approximately 44% of high LTV
loans in 1998 and 46% in 1997. In addition to competition from federal agencies,
Triad and other private mortgage insurers face competition from  state-supported
mortgage  insurance  funds.  Several of these states  (among  them,  California,
Connecticut,  Massachusetts,  New York and Vermont) have state housing insurance
funds which are either  independent  agencies or  affiliated  with state housing
agencies.  Indirectly,  the Company also competes with certain  mortgage lenders
which forego private mortgage insurance and self-insure against the risk of loss
from defaults on all or a portion of their low down payment mortgage loans.

     Fannie Mae and Freddie Mac announced in the first quarter of 1999 that they
would accept lower coverage percentages from lenders on certain loans for resale
to the secondary market than had been previously required.  The reduction in the
amount of private  mortgage  insurance  coverage  required  or the  adoption  of

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private  mortgage  insurance  substitutes  by Fannie  Mae or  Freddie  Mac could
adversely affect the Company's financial condition and results of operations.

     Various  proposals  are being  discussed  by Congress  and certain  federal
agencies to reform or modify the FHA.  Management is unable to predict the scope
and content of such  proposals,  or whether any such  proposals  will be enacted
into law, and if enacted, the effect on the Company.

     The private mortgage  insurance  industry  consists of nine active mortgage
insurance  companies including Triad,  Mortgage Guaranty Insurance  Corporation,
General Electric Mortgage Insurance Corporation, PMI Mortgage Insurance Co., CMG
Mortgage Insurance Co., United Guaranty Residential Insurance Company,  Republic
Mortgage Insurance Company,  and Commonwealth  Mortgage Assurance Company (which
contracted to purchase  Amerin  Corporation  during  1998).  Triad is the eighth
largest private  mortgage  insurer based on 1998 market share and,  according to
industry  data,  had a 2.6% share of net new mortgage  insurance  written during
1998, up from 2.4% in 1997.

     Management  believes  the  Company  competes  with other  private  mortgage
insurers  principally on the basis of personalized and professional  service,  a
strong management and sales team, and innovative products.

UNDERWRITING PRACTICES

     The  Company  considers  effective  risk  management  to be critical to its
long-term financial stability. Market analysis, prudent underwriting, the use of
automated  risk  evaluation  models,  auditing  and  customer  service  are  all
important elements of the Company's risk management process.

UNDERWRITING PERSONNEL

     The Company's Vice  Presidents of Risk Management and  Underwriting  report
directly to the  President of the Company and the  Executive  Vice  President of
Sales and  Marketing,  respectively.  In addition to a centralized  underwriting
department in the home office, the Vice President of Underwriting is responsible
for the  Company's  regional  offices  in  Georgia,  Texas,  Illinois,  Arizona,
Pennsylvania,  Colorado and California. The Vice President of Risk Management is
responsible  for  assessing the risk factors for the Company and for the quality
control function.

     The Company  employed an  underwriting  staff of forty-five at December 31,
1998. The Company's field underwriters and underwriting  managers are limited in
their authority to approve  programs for certain  mortgage loans.  The authority
levels are tied to  underwriting  position,  knowledge and experience and relate

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primarily to loan amounts and property  type.  All loans  insured by the Company
are subject to quality control reviews.

RISK MANAGEMENT APPROACH

     From  its  inception  in 1988,  Triad  has  adhered  to  conservative  risk
management strategies that were developed,  in part, as a result of management's
assessment of the private mortgage  insurance  industry's loss experience in the
late 1980s.  The Company's risk management  objective is to build a portfolio of
insurance in force with a claims  incidence less than the expected  claims rates
on  which  its  premium  rates  are  based.  The  Company  underwrites  based on
historical  performance  of risk  factors and  utilizes  automated  underwriting
systems  in  the  risk  selection   process  to  assist  the  underwriter   with
decision-making. This process evaluates the following categories of risk:

     o    MORTGAGE   LENDER.   The  Company  reviews  each  lender's   financial
          statements and management  experience  before issuing a master policy.
          The  Company  also  tracks  the  historical  risk  performance  of all
          customers that hold a master policy. This information is factored into
          the  determination  of the loan programs that the company will approve
          for  various  lenders.  The  Company  assigns  delegated  underwriting
          authority  only to lenders with  substantial  financial  resources and
          established records of originating good quality loans.

     o    PURPOSE  AND  TYPE  OF  LOAN.   The  Company   analyzes  four  general
          characteristics  of a loan to  evaluate  its  level of  risk:  (i) LTV
          ratio;  (ii) purpose of the loan; (iii) type of loan  instrument;  and
          (iv) type of  property.  The  Company  seeks  only the most basic loan
          types with proven track records for which an assessment of risk can be
          readily made and the premium received  sufficiently offsets that risk.
          Loans having  higher LTV ratios are charged a higher  premium,  as are
          other  loans  which have been  shown to carry  higher  risks,  such as
          adjustable rate mortgages  ("ARMs").  Certain  categories of loans are
          generally not insured by the Company  because such loans are deemed to
          have an unacceptable level of risk, including negatively and potential
          negatively amortizing ARMs, ARMs with maximum annual and lifetime caps
          greater than two and six percentage  points,  respectively,  and loans
          for investor properties.

     o    INDIVIDUAL LOAN AND BORROWER.  Except to the extent that the Company's
          delegated  underwriting  program  and Freddie  Mac's and Fannie  Mae's
          automated  underwriting  services  are  being  utilized,  the  Company
          evaluates  insurance   applications  based  on  its  analysis  of  the
          borrower's  ability and willingness to repay the mortgage loan and the
          characteristics and value of the mortgaged  property.  The analysis of
          the borrower includes  reviewing the borrower's housing and total debt
          ratios as well as the borrower's  Fair,  Isaac and Co., Inc.  ("FICO")
          credit  score,  as reported by credit  rating  agencies.  Loans may be
          submitted  under the Stick With Triad program  provided the loans meet
          the program requirements.  Further description of the Stick with Triad
          program is located in the Underwriting  Process  section.  Within this
          program,   the  degree  to  which  the  borrower   must  meet  certain
          underwriting standards, as well as the amount of documentation that is

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          required,  is a function of the credit score. In the case of delegated
          underwriting,  compliance  with  program  parameters  is  monitored by
          periodic audits of delegated business. With the automated underwriting
          services  provided by Freddie Mac and Fannie Mae,  lenders are able to
          obtain approval for mortgage guaranty insurance with any participating
          mortgage insurer. Triad works with both agencies in offering insurance
          services  through their systems,  while monitoring the risk quality of
          loans insured through such systems.

     o    GEOGRAPHIC  SELECTION OF RISK. The Company places significant emphasis
          on the condition of the regional  housing  markets in determining  its
          marketing and underwriting policies.  Using both internal and external
          data, the Company's risk management  department  continually  monitors
          the economic conditions in the Company's active and potential markets.

UNDERWRITING PROCESS

     The Company accepts  applications for insurance under three basic programs:
the  traditional  fully  documented  program,  a  credit  score  driven  reduced
documentation  program,  and a delegated  underwriting  program,  which allows a
lender's  underwriters to commit insurance to a loan based on strict agreed upon
underwriting guidelines.

     The Company  utilizes  nationwide  underwriting  guidelines to evaluate the
potential  risk of default on mortgage loans  submitted for insurance  coverage.
These  guidelines  have  evolved  over  time  and  take  into  account  the loss
experience of the entire  private  mortgage  insurance  industry.  They are also
largely  influenced by Freddie Mac and Fannie Mae underwriting  guidelines.  The
Company  believes its  guidelines  are generally  consistent  with those used by
other  private  mortgage  insurers  with  respect to the types of loans that the
Company will insure.  As a result of the Company's review of regional  economies
and housing patterns,  specific  underwriting  guidelines  applicable to a given
local,  state or regional  market  will be modified to address  concerns in that
market.

     Subject to the Company's  underwriting  guidelines  and exception  approval
procedures,  the Company  expects its  internal  and  contract  underwriters  to
utilize their  experience and business  judgement in evaluating each loan on its
own merits.  Accordingly,  the Company's  underwriting  staff has  discretionary
authority  to insure  loans which  deviate in certain  minor  respects  from the
Company's  underwriting  guidelines.  More significant exceptions are subject to
management approval. In all such cases, compensating factors must be identified.
The  predominant  reason  for  such  deviations  involves  instances  where  the
borrower's  debt-to-income ratio exceeds the Company's guidelines. To compensate
for exceptions,  the Company's underwriters give favorable consideration to such

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factors as excellent  borrower credit history,  the availability of satisfactory
cash reserves after closing and employment stability.

     In addition to the  borrower's  willingness  and ability to repay the loan,
the Company  believes  that  mortgage  default  risk is affected by a variety of
other factors,  including the borrower's  employment  status.  Insured  mortgage
loans made to  self-employed  borrowers  are  perceived  by the  Company to have
higher risk of claim,  all other  factors  being equal,  than loans to borrowers
employed by third parties.  The Company's  percentage of risk in force involving
self-employed  borrowers  was 2.4%  and  3.7% at  December  31,  1998 and  1997,
respectively.

     The  Company's  Stick With Triad  program  featuring  the Slam Dunk Loan SM
approval process allows selected lenders to submit insurance  applications  that
do not include all standard  documentation.  Under this program,  Triad issues a
certificate  of  insurance  based on the  borrower's  FICO  credit  score or the
approval  of  the  loan  through   Fannie  Mae's  or  Freddie  Mac's   automated
underwriting  systems. The Company issues a certificate of insurance without the
standard  underwriting  process if certain  program  parameters  are met and the
borrower has a  predetermined  minimum  credit score.  Documentation  submission
requirements  for  non-  automated  underwritten  loans  vary  depending  on the
borrower's  credit score. In 1998, the Stick With Triad program  represented 59%
of the  Company's  commitment  volume,  compared  to 60% in  1997.  The  Company
randomly and through adverse  selection audits lenders' files on loans submitted
under this program.

     The Company's delegated  underwriting program, in addition to the Company's
conservative risk management  strategies,  utilizes  extensive "quality control"
practices including reunderwriting, reappraisal and similar procedures following
issuance of the policy.  Standards  for type of loan,  property  type and credit
history of the borrower  are  established  consistent  with the  Company's  risk
strategy.  The program has allowed the Company to serve a greater  number of the
larger,  well  established   mortgage   originators.   The  Company's  delegated
underwriting  program accounted for 16% of commitments received in 1998 compared
to 18% in  1997  and  38% in  1996.  The  decline  in the  volume  of  delegated
commitments is a result of the lenders'  acceptance of the Company's  Stick With
Triad program as well as the increased  use of  contract-underwriting  services.
The  performance of loans insured under the delegated  underwriting  program has
been comparable to the Company's non-delegated business.

     The  Company  utilizes  its  underwriting  skills  to  provide  a  contract
underwriting  service  to its  customers.  For a fee,  Triad  underwrites  fully
documented underwriting files for secondary market compliance, while at the same
time  assessing the file for mortgage  insurance,  if  applicable.  In 1996, the
Company began offering Fannie Mae's Desktop Originator and Desktop  Underwriter,
as well as the personnel to conduct the underwriting  tasks, as a service to its
contract   underwriting   customers.   The  Company  also  offers  its  contract
underwriting  customers  direct access to Freddie Mac's Loan  Prospector.  These
products,  which are  designed to  streamline  and reduce  costs in the mortgage

                                       11

<PAGE>



origination  process,  supply the  Company's  customers  with fast and  accurate
service regarding loan compliance and Fannie Mae's or Freddie Mac's decision for
loan purchase or securitization.

OTHER RISK MANAGEMENT

     Another  important  aspect of the Company's risk management is the tracking
of risk exposure in condominium projects. The Company's risk management computer
system  tracks the  exposure  in each  project and alerts the  underwriter  once
predetermined  limits are reached. The Company's computer system also identifies
certain exceptions in loan files that deserve special underwriter attention.

     The Company uses a comprehensive  audit plan designed to determine  whether
the  underwriting  decisions  being  made  are  consistent  with  the  policies,
procedures and expectations for quality as set forth by management. All areas of
business  activity  which involve an  underwriting  decision are included,  with
emphasis on new products,  procedures and new master policyholders.  The process
used to  identify  categories  of loans  selected  for an audit  begins with the
identification  and evaluation of certain  defined and verifiable risk elements.
Each loan is then tested  against these elements to identify loans which fail to
meet prescribed policies or an identified norm. The procedure allows the Company
management  to identify  concerns not only at the loan level but also  portfolio
concerns which may exist within a given category of business.

CLAIMS-PAYING ABILITY RATINGS

     Certain  national  mortgage  lenders  and a large  segment of the  mortgage
securitization market,  including Fannie Mae and Freddie Mac, generally will not
purchase high LTV  mortgages or  mortgage-backed  securities  unless the private
mortgage  insurance coverage on the mortgages has been issued by an insurer with
a  claims-paying  ability rating of at least "AA-" from Standard & Poor's Rating
Services,  a division of the McGraw-Hill  Companies,  Inc.  ("S&P"),  Fitch IBCA
("Fitch") or Duff & Phelps  Credit  Rating Co.  ("Duff & Phelps") or a financial
strength  rating from Moody's  Investor  Service  ("Moody's") of at least "Aa3."
Fannie Mae and Freddie Mac require  mortgage  guaranty  insurers to maintain two
ratings of "AA-" or better. Private mortgage insurers are not rated by any other
independent  nationally-recognized  insurance  industry  rating  organization or
agency (such as the A.M. Best Company).

     Triad has its claims-paying  ability rated by S&P, Fitch and Duff & Phelps.
These  ratings  are an  indication  to a  mortgage  insurer's  customers  of the
insurer's  present  financial  strength and its  capacity to pay future  claims.
Ratings are generally  considered an important  element in a mortgage  insurer's
ability to compete for new business.  Triad is rated "AA" by S&P, Fitch and Duff
& Phelps.  These  ratings  allow  Triad to compete  on  similar  risk-to-capital
guidelines  as its  competitors.  Triad has not  sought  and does not  presently
intend to seek a financial strength rating from Moody's.


                                       12

<PAGE>



     S&P defines insurers rated "AA" as offering  excellent  financial  security
and having the capacity to meet policyholder  obligations that is strong under a
variety  of  economic  and  underwriting  conditions.  Fitch  defines  insurance
companies  rated "AA" as having a very  strong  claims-paying  ability and to be
only slightly more  susceptible  than  companies  rated "AAA" to exhibiting  any
weakening   of  financial   strength  due  to  adverse   business  and  economic
developments.  Duff & Phelps  defines  insurers rated "AA" as having a very high
claims-paying  ability with only modest risk which may vary  slightly  over time
due to economic and/or underwriting conditions. Ratings from S&P, Fitch and Duff
& Phelps are modified  with a "+" or "-" sign to indicate the relative  position
of a company within its category.

     When assigning a  claims-paying  ability  rating,  S&P,  Fitch,  and Duff &
Phelps generally  consider:  (i) the specific risks associated with the mortgage
insurance  industry,  such as  regulatory  climate,  market  demand,  growth and
competition;  (ii) management  depth,  corporate  strategy and  effectiveness of
operations;  (iii) historical  operating results and expectations of current and
future performance;  and (iv) long-term capital structure,  the ratio of debt to
equity, the ratio of risk to capital,  near-term liquidity and cash flow levels,
as well as any reinsurance  relationships and the claims-paying  ability ratings
of such reinsurers. Claims- paying ability ratings are based on factors relevant
to policyholders,  agents,  insurance brokers, and intermediaries.  Such ratings
are  not  directed  to the  protection  of  investors  and do not  apply  to any
securities issued by the Company.

     Rating agencies issue claims-paying  ability ratings based, in part, upon a
company's performance  sensitivity to various economic depression scenarios.  In
determining  capital  levels  required  to  maintain a  company's  claims-paying
ability rating,  the rating agencies allow the use of different forms of capital
including  statutory capital,  reinsurance and debt. In January 1998 the Company
completed a $35 million  private  offering  of notes due January 15,  2028.  The
notes  are  rated  "A" by S&P and "A+" by Fitch.  The  Company  contributed  $25
million of the net proceeds  from the sale of the notes to Triad.  The effect of
the Company's contribution of $25 million to the capital of Triad was to improve
its risk-to- capital ratio and to provide  additional  capital considered in the
rating agency's depression models.

     S&P,  Fitch and Duff & Phelps  periodically  review  Triad's  claims-paying
ability, as they do with all rated insurers. Ratings can be withdrawn or changed
at any time by a rating agency.

REINSURANCE

     The use of reinsurance as a source of capital and as a risk management tool
is well established within the mortgage insurance industry. Reinsurance does not
legally  discharge an insurer from its primary  liability for the full amount of

                                       13

<PAGE>



the risk it insures,  although it does make the reinsurer  liable to the primary
insurer. There can be no assurance that the Company's reinsurers will be able to
meet their obligations under the reinsurance agreements.

     Certain  premiums and losses are assumed from and ceded to other  insurance
companies under various quota share reinsurance agreements. The ceding agreement
principally  provides the Company with increased  capacity to write business and
achieve a more favorable  geographic  dispersion of risk. In addition,  in early
1999, Triad agreed to reinsure  portions of the risk written on loans originated
by certain  lenders  with captive  reinsurance  companies  affiliated  with such
lenders.

     In January  1996 the  Company  eliminated  quota share  reinsurance  on new
business  and  recaptured  substantial  portions  of its  coverages  on  renewal
business. In October 1997 the Company recaptured most of its remaining coverages
on renewal business. The restructured  reinsurance program reduced the Company's
quota share cede rate to 0.1% of direct premium written in 1998 compared to 1.7%
in 1997 and 5.3% in 1996. The recapture of business previously ceded resulted in
increased  premium revenues for the Company.  The Company  continues to maintain
$25 million in excess of loss reinsurance designed to protect the Company in the
event of catastrophic levels of losses.

     Pursuant to deeper coverage  requirements imposed by Fannie Mae and Freddie
Mac, loans eligible for sale to such agencies with a loan-to-value ratio of over
90% require insurance with a coverage  percentage of 30%, in contrast to the 25%
coverage previously required. Certain states limit the amount of risk a mortgage
insurer  may retain with  respect to  coverage of an insured  loan to 25% of the
claim amount,  and, as a result,  the deeper coverage  portion of such insurance
must be  reinsured.  Although  recent  changes by Fannie Mae and Freddie Mac are
expected to reduce how many loans are insured over 25%, the need for reinsurance
channels  is not  expected to change for Triad.  To  minimize  reliance on third
party  reinsurers  and to permit the Company to retain the  premiums and related
risk on deeper coverage business,  Triad reinsures this deeper coverage business
with its wholly-owned  subsidiary Triad Guaranty Assurance Corporation ("TGAC").
As of December 31, 1998,  TGAC had assumed  approximately  $72.0 million in risk
from Triad.

DEFAULTS AND CLAIMS

DEFAULTS

     The claim process on private  mortgage  insurance begins with the insurer's
receipt  of  notification  from the lender of a default  on an  insured's  loan.
Default is defined in the primary  master  policy as the failure by the borrower
to pay,  when due, an amount at least equal to the  scheduled  monthly  mortgage
payment under the terms of the mortgage.  The master policy requires  lenders to
notify the Company of default on a mortgage payment within 10 days of either (i)

                                       14

<PAGE>



the date on which the  borrower  becomes four months in default or (ii) the date
on which  any  legal  proceeding  which  affects  the  loan has been  commenced,
whichever  occurs first.  Notification is required within 45 days of the default
if it occurs when the first payment is due. The incidence of default is affected
by a variety of  factors,  including  change in borrower  income,  unemployment,
divorce,   illness,   the  level  of  interest   rates  and   general   borrower
creditworthiness.  Defaults that are not cured result in a claim to the Company.
Borrowers may cure defaults by making all delinquent loan payments or by selling
the property and satisfying all amounts due under the mortgage.

     The  following  table shows the number of loans  insured,  related loans in
default,  percentage  of  loans  in  default  (default  rate  as  of  the  dates
indicated),  dollar amount of insured loans in default,  dollar amount of direct
risk  (gross of  reinsurance)  with  respect to insured  loans in  default,  and
reserves per delinquent loan. Consistent with industry standards,  for 1998, the
number of reported  loans in default no longer  includes  defaults of 45 days or
less delinquent.

                               Default Statistics

<TABLE>
<CAPTION>
                                                                        December 31
                                                                        -----------
                                                      1998      1997       1996      1995      1994
                                                      ----      ----       ----      ----      ----
<S>                                                  <C>       <C>        <C>       <C>       <C>   
Number of insured loans in force...................  97,222    82,682     62,334    49,791    41,358
Number of loans in default.........................     518       388        273       206       156
Percentage of loans in default (default rate)......    0.53%     0.47%      0.44%     0.41%     0.38%
Dollar amount of insured loans in default (000's).. $50,882   $37,828    $25,253   $19,907   $14,356
Dollar amount of direct risk with respect to
insured loans in default (000's)................... $13,216    $9,249     $5,770    $4,071    $2,827
Reserve per delinquent loan........................ $23,442   $23,094    $23,097   $22,277   $20,281
</TABLE>


CLAIMS

     Claims  result from  defaults  that are not cured.  The frequency of claims
does not  directly  correlate  to the  frequency  of defaults due in part to the
Company's  loss  mitigation  efforts  and the  borrower's  ability  to  overcome
temporary  financial  setbacks.  The likelihood  that a claim will result from a
default,  and the amount of such  claim,  principally  depend on the  borrower's
equity at the time of default and the  borrower's  (or the lender's)  ability to
sell the home for an amount  sufficient  to satisfy  all  amounts  due under the
mortgage,  as well as the effectiveness of loss mitigation  efforts.  Claims are
also affected by local housing prices, interest rates,  unemployment levels, the
housing  supply  and the  borrower's  desire to avoid  foreclosure.  During  the
default  period,  the Company works with the insured for possible early disposal
of underlying  properties  when the chance of the loan  reinstating  is minimal.
Such dispositions typically result in a reduced claim amount to the Company.

                                       15

<PAGE>




     Claim activity is not evenly spread through the coverage period. Relatively
few  claims  are  received  during  the first two years  following  issuance  of
insurance.  A  period  of  rising  claims  follows,  which,  based  on  industry
experience,  has  historically  reached its highest  level in the third  through
sixth  years  after  the loan  origination.  Thereafter,  the  number  of claims
received  has  historically  declined at a gradual  rate,  although  the rate of
decline  can be  affected  by  economic  and other  conditions.  There can be no
assurance that the historical pattern of claims will continue in the future.

     Generally,  the  Company  does not pay a claim for loss  under  the  master
policy  if the  application  for  insurance  for the loan in  question  contains
fraudulent information,  material omissions or misrepresentations which increase
the risk  characteristics of the loan. The Company's master policy also excludes
any cost or  expense  related  to the  repair or remedy of any  physical  damage
(other than "normal wear and tear") to the property  collateralizing  an insured
mortgage  loan.  Such  physical  damage  may  be  caused  by  accident,  natural
occurrence or otherwise.

     Under the terms of the  master  policy,  the lender is  required  to file a
claim with the  Company no later  than 60 days  after it has  acquired  good and
marketable  title to the  underlying  property  through  foreclosure.  A primary
insurance claim amount includes (i) the amount of unpaid principal due under the
loan;  (ii)  the  amount  of  accumulated  delinquent  interest  due on the loan
(excluding late charges) to the date of claim filing; (iii) expenses advanced by
the  insured  under the terms of the  master  policy,  such as hazard  insurance
premiums,  property maintenance expenses and property taxes to the date of claim
filing;  and (iv) certain  foreclosure and other expenses,  including  attorneys
fees.  Such claim  amount is subject to review and  possible  adjustment  by the
Company.  An  average of about 12 months  elapses  from the date of default to a
payment of claim on an uncured default.  The Company's experience indicates that
the claim  amount on a policy  generally  ranges from 110% to 115% of the unpaid
principal amount of a foreclosed loan.

     Within 60 days after the claim has been  filed,  the Company has the option
of either (i) paying the coverage  percentage  specified on the  certificate  of
insurance (usually 15% to 30% of the claim), with the insured retaining title to
the underlying property and receiving all proceeds from the eventual sale of the
property or (ii) paying 100% of the claim  amount in exchange  for the  lender's
conveyance of good and marketable title to the property to the Company, with the
Company selling the property for its own account. The Company attempts to choose
the claim  settlement  option  which costs the least.  In  general,  the Company
settles claims by paying the coverage  percentage of the claim amount.  In 1998,
the Company did not  exercise the option to acquire any property and did not own
any real estate  acquired  through claim  settlements  at December 31, 1998. The
Company  did own  $141,999  of real  estate  valued  at the lower of cost or net
realizable value as of December 31, 1997.


                                       16

<PAGE>



LOSS MITIGATION

     Once a default  notice is  received,  the Company  attempts to mitigate its
loss.  Through proactive  intervention  with insured lenders and borrowers,  the
Company has been  successful  in reducing  the number and severity of its claims
for loss. Loss mitigation techniques include  pre-foreclosure sales, advances to
assist distressed  borrowers who have suffered a temporary economic setback, and
the use of new repayment schedules, refinances, loan modifications,  forbearance
agreements and deeds-in-lieu of foreclosure.  Such mitigation  efforts typically
result in a savings to the Company over the percentage  coverage  amount payable
under the certificate of insurance. Through loss mitigation efforts, the Company
has paid out only 67% of its potential  exposure on claims paid through December
31, 1998.

LOSS RESERVES

     The Company  establishes  reserves to provide  for the  estimated  costs of
settling claims with respect to loans reported to be in default and estimates of
loans in  default  which  have  not  been  reported.  Consistent  with  industry
accounting  practices,  the Company does not establish  loss reserves for future
claims on insured loans which are not currently in default. Although the Company
believes that its overall  reserve  levels at December 31, 1998, are adequate to
meet its future  obligations,  due to the inherent  uncertainty of the reserving
process there can be no assurance that its reserves will prove to be adequate to
cover ultimate loss developments.

     In  determining  the  liability for unpaid  losses  related to  outstanding
defaults,  the Company  establishes loss reserves on a case-by-case  basis using
historical experience and by making various assumptions and judgements about the
ultimate  amount to be paid on loans in  default.  The amount  reserved  for any
particular  loan is  dependent  upon the status of the loan as  reported  by the
servicer of the insured loan. As the default  progresses  closer to foreclosure,
the  amount of loss  reserve  for that  particular  loan will be  increased,  in
stages,  to  approximately  120%  of  the  Company's  exposure,  which  includes
claims-related  expenses.  The  Company  periodically  reviews  and  adjusts its
reserve  estimates  to  address  changes  in  economic  conditions  as  well  as
developments in its loss experience.

     The Company also establishes reserves to provide for the estimated costs of
settling  claims,  including  legal and other  fees,  and  general  expenses  of
administering  the claims  settlement  process  ("loss  adjustment  expenses" or
"LAE")  and for  losses  and loss  adjustment  expenses  incurred  arising  from
defaults  which  have  occurred,  but which  have not yet been  reported  to the
insurer ("Incurred But Not Reported" or "IBNR").

     The  Company's  reserving  process is based upon the  assumption  that past
experience,  adjusted for the anticipated effect of current economic  conditions
and projected future economic trends, provides a reasonable basis for estimating
future events.  However,  estimation of loss reserves is a difficult and inexact
process. In addition,  economic conditions that have affected the development of

                                       17

<PAGE>



the loss reserves in the past may not necessarily affect development patterns in
the future in either a similar manner or degree. 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
developments  on loans in default,  currently  or in the future.  The  Company's
profitability and financial  condition could be adversely affected to the extent
that the Company's  estimated reserves are insufficient to cover losses on loans
in default.

     The following table represents a reconciliation of the beginning and ending
loss reserves (net of reinsurance) for the periods indicated.

<TABLE>
<CAPTION>
                                    Reconciliation of Losses and Loss Adjustment Expense Reserves

                                                                                Year Ended December 31
                                                                                    (in thousands)
                                                                      1998      1997       1996      1995      1994
                                                                      ----      ----       ----      ----      ----
<S>                                                                 <C>        <C>        <C>       <C>       <C>
Reserve for losses and LAE, net of related reinsurance
recoverables, at beginning of year...............................   $ 8,909    $5,974     $3,703    $2,466    $1,805

Add losses and LAE incurred in respect of defaults occurring in:
     Current year (1)............................................     7,953     6,023      4,673     3,191     2,053
     Prior years (1) (2).........................................      (944)     (846)    (1,394)     (974)     (791)
                                                                    -------    ------     ------    ------    ------
Total incurred losses and LAE....................................     7,009     5,177      3,279     2,217     1,262

Deduct losses and LAE paid in respect of defaults occurring in:
     Current year................................................       267       210        167       216        86
     Prior years.................................................     3,535     2,032        841       764       515
                                                                    -------    ------     ------    ------    ------
Total payments...................................................     3,802     2,242      1,008       980       601

Reserve for losses and LAE, net of the related reinsurance
recoverables, at end of year ....................................    12,116     8,909      5,974     3,703     2,466

Reinsurance recoverables on unpaid losses and LAE, at the end
of year .........................................................        27        51        331       886       698
                                                                    -------    ------     ------    ------    ------

Reserve for unpaid losses and LAE, before deduction of
reinsurance recoverables on unpaid losses, at end of year........   $12,143    $8,960     $6,305    $4,589    $3,164
                                                                    =======    ======     ======    ======    ======
</TABLE>

(1)  Includes  loss and LAE reserves  relating to loans which are in default but
     for which default notices have not been received.

(2)  Indicates a cumulative redundancy in loss reserves at the beginning of each
     period. Redundancies result from overestimating ultimate claim amounts.

     The top  section of the above  table shows  losses  incurred  on  insurance
policies  with  respect to  defaults  which  occurred  in the  current and prior
periods.  The amount of losses  incurred  relating to defaults  occurring in the
current period represents the estimated amount to be ultimately paid on defaults

                                       18

<PAGE>



occurring in that  period.  The amount of losses  incurred  relating to defaults
occurring in prior periods  represents an adjustment  made in the current period
for  defaults  which were  included in the loss  reserve at the end of the prior
period.

     The middle  section  of the above  table  shows  claims  paid on  insurance
policies with respect to defaults  which  occurred in the current  period and in
prior periods,  respectively.  Since it takes, on average, about 12 months for a
default which is not cured to eventually  develop into a paid claim, most losses
paid relate to defaults occurring in prior periods.

ANALYSIS OF DIRECT RISK IN FORCE

     A  foundation  of  the  Company's   business  strategy  is  proactive  risk
selection.  The Company  analyzes its  portfolio in a number of ways to identify
any  concentrations  of  risk or  imbalances  in risk  dispersion.  The  Company
believes that the quality of its insurance  portfolio is affected  predominantly
by (i) the quality of loan originations  (including the strength of the borrower
and the  marketability  of the  property);  (ii) the attributes of loans insured
(including LTV ratio,  purpose of the loan,  type of loan instrument and type of
underlying  property  securing  the  loan);  (iii)  the  seasoning  of the loans
insured;  (iv) the geographic dispersion of the underlying properties subject to
mortgage insurance;  and (v) the quality and integrity of lenders from which the
Company receives loans to insure.



                                       19

<PAGE>



LENDER AND PRODUCT CHARACTERISTICS

     The following  table  reflects the percentage of direct gross risk in force
(as  determined  on the basis of  information  available on the date of mortgage
origination) by the categories indicated on December 31, 1998 and 1997:

                              Direct Risk in Force

                                                           December 31
                                                           -----------
Product Type:                                            1998       1997
                                                         ----       ----
Primary...............................................  100.0%     100.0%
Pool..................................................   0.0%        0.0%
                                                        -----      ------
Total.................................................  100.0%     100.0%
                                                        ======     ======



                          Direct Primary Risk in Force

                                                              December 31
                                                         1998       1997
                                                         ----       ----
Direct Risk in Force (dollars in millions)............  $2,777     $2,231
Lender Concentration:
Top 10 lenders (by original applicant)................   31.7%      32.2%
LTV:
90.01% to 95.00% (1)..................................   51.4%      52.0%
90.00 and below.......................................   48.6%      48.0%
                                                        ------     ------
Total.................................................  100.0%     100.0%
                                                        ======     ======
Loan Type:
Fixed.................................................   92.4%      88.2%
ARM (positive amortization) (2).......................    7.6%      11.8%
ARM (potential negative amortization) (3).............    0.0%       0.0%
ARM (scheduled negative amortization) (3).............    0.0%       0.0%
Other.................................................    0.0%       0.0%
                                                        -----      ------
Total.................................................  100.0%     100.0%
                                                        ======     ======
Mortgage Term:
15 years and under....................................    7.0%       4.3%
Over 15 years.........................................   93.0%      95.7%
                                                        ------     ------
Total.................................................  100.0%     100.0%
                                                        ======     ======
Property Type:
Noncondominium (principally single-family detached)...   95.5%      94.9%
Condominium...........................................    4.5%       5.1%
                                                        ------     ------
Total.................................................  100.0%     100.0%
                                                        ======     ======
Occupancy Status:
Primary residence.....................................  100.0%     100.0%
Second home...........................................    0.0%       0.0%
Nonowner occupied.....................................    0.0%       0.0%
                                                        ------     ------
Total.................................................  100.0%     100.0%
                                                        ======     ======
Mortgage Amount:
$200,000 or less......................................   93.9%      95.3%
Over $200,000.........................................    6.1%       4.7%
                                                        ------     ------
Total.................................................  100.0%     100.0%
                                                        ======     ======

(1)  Includes 97s,  representing  approximately  1% of risk in force at December
     31, 1998.

(2)  Refers to loans where payment adjustments are the same as mortgage interest
     rate adjustments.

(3)  Scheduled  negative  amortization is defined by the Company as the increase
     in loan balance that will occur if interest rates do not change. Loans with
     potential negative amortization will not have increasing principal balances
     unless interest rates increase.


                                       20

<PAGE>



     One of the most important  determinants  of claim incidence is the relative
amount of the borrower's equity in the home (which at the time of origination is
the down payment).  For the industry as a whole,  historical  evidence indicates
that  claim  incidence  on loans  having a LTV ratio in excess of 90% is greater
than the claim incidence on loans with LTV ratios equal to or less than 90%. The
Company  believes  that the  higher  premium  rates it charges on these high LTV
loans adequately reflects the additional risk.

     Approximately 1% of the company's risk in force is comprised of the 97% LTV
product ("97s"), which is offered primarily to low and moderate income borrowers
under  certain  pilot  programs.  The Company  believes  that these  "affordable
housing"  loans have higher risks than its other insured  business and has often
attracted  borrowers with weak credit histories,  generally  resulting in higher
loss ratios.  In keeping  with the  Company's  established  risk  strategy,  the
Company has not aggressively solicited this segment of the industry. The Company
does not routinely delegate the underwriting of its 97% LTV product.

     The Company generally insures only positively  amortizing ARMs with maximum
annual  and  lifetime  caps  of two  and six  percentage  points,  respectively.
Payments on these loans adjust fully with  interest rate  adjustments.  To date,
the  performance of the Company's ARM loans has been consistent with that of the
fixed rate portfolio. However, since historical claim frequency data on ARMs has
not yet been tested during a prolonged period of economic  stress,  there can be
no  assurance  that  claim  frequency  on ARMs  may not  eventually  be  higher,
particularly  during a period of rising  interest rates combined with decreasing
housing  prices.  In its normal course of  operations,  the  Company's  existing
underwriting  policy  does not  permit  coverage  of ARMs  with  "scheduled"  or
"potential" negative amortization.

     Historical  evidence  indicates  that higher priced  properties  experience
wider   fluctuations  in  value  than  moderately   priced   residences.   These
fluctuations  exist primarily  because there is a much smaller pool of qualified
buyers for higher  priced  homes  which,  in turn,  reduces  the  likelihood  of
achieving a quick sale at fair market value when necessary to avoid a default.

     The Company believes that 15-year  mortgages  present a lower level of risk
than 30-year mortgages, primarily as a result of the faster amortization and the
more rapid  accumulation  of borrower equity in the property.  Accordingly,  the
Company  charges lower  premium rates on these loans than on comparable  30-year
mortgages.

     The Company believes that the risk of claim is also affected by the type of
property  securing  the  insured  loan.  In  management's   opinion,   loans  on
single-family  detached housing are subject to less risk of claim incidence than
loans on other types of properties.  The Company  believes that attached housing
types, particularly condominiums and cooperatives,  are a higher risk because in
most areas condominiums and cooperatives tend to be more susceptible to downward
fluctuations in value than single family detached  dwellings in the same market.
The term "single-family"  applies to all one-to-four unit dwellings and includes
detached and attached  townhouse units with fee simple  ownership,  condominiums
and cooperatives.

                                       21

<PAGE>



     Loans on primary  residences  that were owner  occupied at the time of loan
origination  constituted  almost all of the Company's  risk in force at December
31, 1998. Because management believes that loans on nonowner occupied properties
represent  a  substantially  higher risk of claim  incidence  and are subject to
greater value  declines than loans on primary homes,  the Company  insures these
types of loans only on a case-by-case basis and only after stringent  management
review.

     The  Company's  book of  business  is less  mature than that of the private
mortgage  insurance industry as a whole, with the Company's direct risk in force
having a weighted  average life of 2.4 years at December 31, 1998, and 2.3 years
at December 31, 1997,  compared to an estimated industry average of 3.4 years at
December 31, 1998.

     The  following  table  shows the  percentage  of direct risk in force as of
December 31, 1998,  for policies  written from 1988 through 1998 by the Company,
as well as the  cumulative  loss ratio  (calculated  as losses  paid  divided by
premiums  written,  in each case for a  particular  certificate  year) which has
developed,  through December 31, 1998, for the policies written during the years
indicated and excludes the effects of reinsurance:




     Certificate                          Percent   Cumulative Ratio of Losses
         Year     Direct Risk in Force   of Total   Paid to Premiums Written(1)
         ----     --------------------   --------   ---------------------------
                      (in millions)
         1988         $     1.2              0.0%               14.5%
         1989               1.7              0.1                24.2
         1990               3.2              0.1                17.4
         1991              12.5              0.5                10.6
         1992              53.5              1.9                 8.0
         1993             135.8              4.9                 4.9
         1994             127.8              4.6                 6.7
         1995             215.9              7.8                 6.2
         1996             348.0             12.5                 3.6
         1997             732.9             26.4                 1.4
         1998           1,144.9             41.2                 0.0
                      ---------            -----
        Total         $ 2,777.4            100.0%
                      =========            =====


(1)  Claim activity is not spread evenly  throughout the coverage  period of the
     book of business.  Based on the  Company's  and the  industry's  historical
     experience,  claims  incidence is highest in the third  through sixth years
     after loan origination, and relatively few claims are paid during the first
     two years after loan  origination.  Thus, the cumulative loss experience of
     recent certificate years is not indicative of ultimate losses.

                                       22

<PAGE>



GEOGRAPHIC DISPERSION

     The following tables reflect the percentage of direct risk in force, net of
reinsurance, on the Company's book of business (by location of property) for the
top ten states and the top ten  metropolitan  statistical  areas  ("MSAs") as of
December  31,  1998.  The  Company  continues  to  diversify  its  risk in force
geographically.  The percentage of the Company's direct risk in force by top ten
states declined to 70.6% for 1998 compared to 73.9% and 77.5% for 1997 and 1996,
respectively.  The  percentage of the Company's  direct risk in force by top ten
MSAs  declined to 33.0% for 1998  compared to 36.8% and 41.9% for 1997 and 1996,
respectively.


                 Top Ten States                                 Top Ten MSAs
                 --------------                                 ------------
                  December 31                                    December 31
                     1998                                            1998
                    ------                                           ----
Illinois             12.4%        Chicago, IL                        11.7%
Georgia              10.5         Atlanta, GA                         4.8
California           10.1        Los Angeles, CA                      3.8
Florida               8.3         San Francisco/Oakland, CA           2.4
Texas                 6.4         Houston/Galveston, TX               2.0
North Carolina        5.8         Phoenix, AZ                         1.7
Virginia              5.6         Denver, CO                          1.7
Pennsylvania          4.3         Charlotte-Gastonia, NC              1.7
Colorado              4.1         Dallas/Forth Worth, TX              1.6
Maryland              3.1         Minneapolis-St. Paul, MN            1.6
                     -----                                           -----
Total                70.6%       Total                               33.0%
                     =====                                           =====

     While the Company continues to diversify its risk in force  geographically,
a prolonged regional  recession,  particularly in its high concentration  areas,
such as the Southeastern, Western, Middle Atlantic and upper Mid-Western states,
or a prolonged national economic recession,  could  significantly  increase loss
development.

INVESTMENT PORTFOLIO

     Income  from  its  investment  portfolio  is one of the  Company's  primary
sources of cash flow to support its operations and claims payments. Triad has an
investment advisory agreement with CML for management of its portfolio.

     The Company  follows an investment  policy which  requires:  (i) 80% of its
investment portfolio (together with cash assets) to consist of cash,  short-term
investments and debt securities  (including  redeemable preferred stocks) which,
at the date of purchase,  were rated investment grade by a nationally recognized
rating  agency  (e.g.,"BBB-"  or  better  by S&P) and  (ii) at least  50% of its

                                       23

<PAGE>



investment  portfolio  (together  with cash  assets) to  consist  of cash,  cash
equivalents and securities which, at the date of purchase, were rated one of the
two highest  investment  grades by a nationally  recognized  rating  agency.  At
December 31, 1998, the Company's  total  investment  portfolio had a fair market
value of $177.3 million and did not include any real estate or mortgage loans.

     Liquidity  is  sought  through  cash  equivalent  investments  and  through
diversification  and  investment  in  publicly  traded  securities.  The Company
attempts  to  maintain a level of  liquidity  and a duration  in its  investment
portfolio  consistent  with  its  business  outlook  and  the  expected  timing,
direction and degree of changes in interest  rates.  As of December 31, 1998, no
investment  in  the  securities  of any  single  issuer  (other  than  the  U.S.
government and its agencies) exceeded 2% of the Company's investment portfolio.

     The  Company's  investment  policies and  strategies  are subject to change
depending upon  regulatory,  economic and market  conditions and the existing or
anticipated  financial condition and operating  requirements,  including the tax
position, of the Company.

     The following table shows the results of the Company's investment portfolio
for the periods indicated: Investment Portfolio Results

<TABLE>
<CAPTION>

                                             1998            1997           1996           1995           1994
                                             ----            ----           ----           ----           ----
<S>                                      <C>             <C>             <C>            <C>            <C>        
Average investments (1)................. $151,711,923    $103,804,750    $89,577,031    $79,253,289    $73,774,699
Pre-tax net investment income...........   $9,289,026      $6,234,142     $5,446,672     $4,836,461     $4,180,876
Effective pre-tax yield (1).............         6.1%            6.0%           6.1%           6.1%           5.7%
Tax-equivalent yield (2)................         7.9%            8.0%           7.7%           7.5%           7.2%
Pre-tax realized gain (loss) on sale of 
 investments............................     $880,502         $34,330     $(162,385)       $172,992     $(162,723)
</TABLE>


(1)  Based on historical cost adjusted for amortization and accretion of premium
     and discount.
(2)  Based on book value and the Company's marginal tax rate.

                                       24

<PAGE>



     The diversification of the Company's  investment  portfolio at December 31,
1998, is shown in the table below: 

                      Investment Portfolio Diversification

                                                   December 31, 1998
                                         ---------------------------------------
                                         Amortized Cost  Fair Value   Percent(1)
                                         --------------  ----------   ----------
Available-for-sale securities:
 Fixed maturity securities:
   U. S. government obligations.......... $  8,587,562   $  8,928,171       5.1%
   Mortgage-backed bonds.................    1,359,163      1,411,931        0.8
   State and municipal bonds.............  107,535,039    111,753,839       63.0
   Industrial & miscellaneous............   36,386,473     35,297,888       19.9
                                          ------------   ------------
     Total fixed maturities..............  153,868,237    157,391,829

 Equity securities.......................   11,550,510     14,024,012        7.9
                                          ------------   ------------
     Total available-for-sale securities.  165,418,747    171,415,841

 Short-term investments..................    5,885,192      5,885,192        3.3
                                          ------------   ------------     ------
                                          $171,303,939   $177,301,033     100.0%
                                          ============   ============     ======

(1) Percentage of fair value.

     The following table shows the scheduled maturities at December 31, 1998, of
the fixed maturity securities held in the Company's investment portfolio:

                     Investment Portfolio Scheduled Maturity

                                                   December 31, 1998
                                              --------------------------
                                               Fair Value        Percent
                                               ----------        -------
One year or less............................  $  6,661,101         4.2%
After one year through five years...........    22,877,328         14.5
After five years through ten years..........    28,895,494         18.4
After ten years though twenty years.........    79,896,775         50.8
After twenty years..........................    17,649,200         11.2
Mortgage-backed securities (1)..............     1,411,931          0.9
                                              ------------        ------
    Total...................................  $157,391,829        100.0%
                                              ============        ======

(1)Substantially  all of these  securities  are  guaranteed  by U.S.  Government
     Agencies.

                                       25

<PAGE>



     The following table shows the ratings of the Company's investment portfolio
as of December 31, 1998:

                       Investment Portfolio by S&P Rating



                                                    December 31, 1998
Rating(1)                                          Fair Value         Percent

Fixed maturities:
         U.S. Treasury and U.S. agency bonds...  $  10,340,102         6.6%
         AAA...................................     54,639,903         34.7
         AA....................................     25,904,056         16.5
         A.....................................     23,703,029         15.1
         BBB...................................     22,493,752         14.3
         BB....................................      7,441,892          4.7
         B.....................................      5,141,999          3.3
         C.....................................        336,375          0.2
         D.....................................         78,000          0.0
         NR....................................      7,312,721          4.6
                                                 -------------        ------

              Total fixed maturities...........  $ 157,391,829        100.0%
                                                 =============        ======

Equities:
         AAA...................................  $     890,688          6.4%
         AA....................................        924,750          6.6
         A.....................................     10,143,710         72.3
         BBB...................................        375,938          2.6
         BB....................................        251,250          1.8
         B.....................................      1,437,676         10.3
                                                 -------------        ------
             Total equities....................  $  14,024,012        100.0%
                                                 =============        ======
Total Portfolio................................  $ 171,415,841
                                                 =============

(1)  Current ratings assigned by S&P.


                                       26

<PAGE>


REGULATION

DIRECT REGULATION

     The Company's insurance subsidiaries are subject to comprehensive, detailed
regulation,  principally for the protection of policyholders rather than for the
benefit of investors,  by the  insurance  departments  of the various  states in
which each insurer is licensed to transact business. Although their scope varies
by state,  state  insurance  laws in general  grant broad powers to  supervisory
agencies or  officials  to examine  companies  and to enforce  rules or exercise
discretion  touching almost every significant aspect of the insurance  business.
These include the licensing of companies to transact  business,  claims handling
practices,  reinsurance  requirements,  varying  degrees of control over premium
rates,  the forms and  policies  offered  to  customers,  financial  statements,
periodic financial reporting, permissible investments and adherence to financial
standards  relating  to  statutory  surplus,  dividends  and other  criteria  of
solvency intended to assure the satisfaction of obligations to policyholders.

     All states have enacted legislation that requires each insurance company in
a holding company system to register with the insurance  regulatory authority of
its  state  of  domicile  and  furnish  to the  regulator  financial  and  other
information  concerning the operations of companies  within the holding  company
system  that may  materially  affect the  operations,  management  or  financial
condition of the insurers within the system.  Generally, all transactions within
a holding  company system between an insurer and its affiliates must be fair and
reasonable  and the insurer's  statutory  policyholders'  surplus  following any
transaction  with an  affiliate  must  be both  reasonable  in  relation  to its
outstanding  liabilities  and adequate for its needs.  Most states also regulate
transactions  between insurance  companies and their parents and/or  affiliates.
There can be no assurance  that state  regulatory  requirements  will not become
more stringent in the future and have an adverse effect on the Company.

     Because  the  Company  is an  insurance  holding  company  and  Triad is an
Illinois  domiciled  insurance  company,  the Illinois  insurance laws regulate,
among other  things,  certain  transactions  in the  Company's  Common Stock and
certain transactions between Triad and the Company or affiliates.  Specifically,
no person may,  directly or indirectly,  offer to acquire or acquire  beneficial
ownership of more than 10% of any class of outstanding securities of the Company
or its  subsidiaries  unless such person files a statement  and other  documents
with the  Illinois  Director  and  obtains the  Director's  prior  approval.  In
addition,  material transactions between Triad and the Company or affiliates are
subject to certain  conditions,  including  that they be "fair and  reasonable."
These  restrictions  generally apply to all persons  controlling or under common
control with the insurance  companies.  "Control" is presumed to exist if 10% or
more  of  Triad's  voting  securities  is  owned  or  controlled,   directly  or
indirectly,  by a person, although the Illinois Director may find that "control"
in fact does or does not exist where a person  owns or controls  either a lesser
or greater  amount of  securities.  Other  states in addition  to  Illinois  may
regulate  affiliated  transactions and the acquisition of control of the Company
or its insurance subsidiaries.

                                       27

<PAGE>



     Triad is required by Illinois  insurance  laws to provide for a contingency
reserve in an amount  equal to at least 50% of earned  premiums.  Such  reserves
must be maintained for a period of 10 years except in  circumstances  where high
levels of losses exceed regulatory thresholds. The contingency reserve, designed
to provide a cushion  against  the effect of adverse  economic  cycles,  has the
effect  of  reducing  statutory  surplus  and  restricting  dividends  and other
distributions by Triad. At December 31, 1998, Triad had statutory policyholders'
surplus of $89.5 million and statutory  contingency reserve of $81.6 million. At
December 31, 1997, Triad had statutory  policyholders'  surplus of $60.9 million
and a statutory  contingency reserve of $54.8 million.  Triad's statutory earned
surplus was $5.8  million at year end 1998 versus $2.5 million at year end 1997,
reflecting  growth in  statutory  net income  greater  than the  increase in the
statutory contingency reserve.

     The insurance  laws of Illinois  provide that Triad may pay dividends  only
out of statutory earned surplus as of the end of the preceding calendar year and
further establish  standards  limiting the maximum amount of dividends which may
be paid without prior approval by the Illinois  Director.  Under such standards,
Triad may pay dividends  during any 12-month  period equal to the greater of (i)
10% of the  preceding  year-end  statutory  policyholders'  surplus  or (ii) the
preceding year's net income. In addition,  insurance regulatory authorities have
broad discretion to limit the payment of dividends by insurance companies.  As a
mortgage  guaranty  insurer,  Triad is required by  Illinois  insurance  laws to
provide  a  contingency  reserve.  The  contingency  reserve  has the  effect of
reducing statutory surplus and restricting  dividends and other distributions by
Triad.

     Although  not  subject  to a rating  law in  Illinois,  premium  rates  for
mortgage  insurance  are  subject  to  regulation  in  most  states  to  protect
policyholders  against the adverse effects of excessive,  inadequate or unfairly
discriminatory rates and to encourage competition in the insurance  marketplace.
Any increase in premium rates must be  justified,  generally on the basis of the
insurer's  loss  experience,  expenses  and future trend  analysis.  The general
mortgage default experience may also be considered.

     TGAC was organized as a subsidiary of Triad under the insurance laws of the
state of Illinois in December,  1994 and as an Illinois  domiciled  insurer,  is
subject to all Illinois insurance regulatory requirements applicable to Triad.

     Triad and TGAC are subject to  examination  of its affairs by the insurance
departments of each of the states in which it is licensed to transact  business.
The Illinois Director periodically conducts a financial examination of insurance
companies domiciled in Illinois. The most recent examination of Triad was issued
by the Illinois  Insurance  Department  on  September  6, 1995,  and covered the
period January 1, 1991,  through December 31, 1994. No material  recommendations
were made as a result of this  examination.  The Illinois  Insurance  Department
began its examination of Triad and TGAC for the period January 1, 1995,  through
December 31, 1998, in March, 1999.


                                       28

<PAGE>



     A number of states  generally  limit the amount of insurance risk which may
be written by a private  mortgage  insurer to  twenty-five  times the  insurer's
total  policyholders'  surplus.  This  restriction  is  commonly  known  as  the
"risk-to-capital" requirement.

     Mortgage  insurers are  generally  restricted by state  insurance  laws and
regulations to writing  residential  mortgage guaranty  insurance business only.
This restriction  generally  prohibits Triad from using its capital resources in
support of other types of insurance  and restricts  its  noninsurance  business.
However,  noninsurance  businesses of the Company would not generally be subject
to regulation under state insurance laws.

     Regulation of reinsurance varies by state. Except for Illinois,  Wisconsin,
New York,  Ohio and  California,  most  states have no special  restrictions  on
reinsurance  that would apply to private  mortgage  insurers other than standard
reinsurance   requirements   applicable  to  property  and  casualty   insurance
companies.  Certain restrictions,  including reinsurance trust fund or letter of
credit  requirements,  apply under Illinois law to domestic  companies and under
the laws of several  other states to any  licensed  company  ceding  business to
unlicensed  reinsurers.  If a reinsurer is not admitted or approved, the company
doing business with the reinsurer cannot take credit in its statutory  financial
statements  for the risk  ceded to such  reinsurer  absent  compliance  with the
reinsurance security requirements.  In addition, some states in which Triad does
business have limited  private  mortgage  insurers to a maximum policy  coverage
limit of 25% of the  insured's  claim amount and require  coverages in excess of
25% to be reinsured through another licensed mortgage insurer.

     The National  Association  of Insurance  Commissioners  ("NAIC")  adopted a
risk-based  capital  ("RBC")  formula  designed  to  help  regulators   identify
property/casualty  insurers  in  need of  additional  capital.  The RBC  formula
establishes  minimum  capital  needs based upon risks  applicable  to individual
insurers, including asset risks, off balance sheet risks (such as guarantees for
affiliates  and contingent  liabilities),  and credit risks (such as reinsurance
ceded  and  receivables).  The NAIC and the  Illinois  Department  of  Insurance
currently  do not require  mortgage  guaranty  insurers to file RBC  analysis in
their annual statements.

     As the dominant  purchasers and sellers of conventional  mortgage loans and
beneficiaries of private mortgage guaranty insurance, Freddie Mac and Fannie Mae
impose  requirements on private mortgage  insurers in order for such insurers to
be  eligible  to insure  loans  sold to such  agencies.  Freddie  Mac's  current
eligibility  requirements  impose  limitations  on the  type  of  risk  insured,
standards for the geographic and customer  diversification  of risk,  procedures
for  claims   handling,   acceptable   underwriting   practices   and  financial
requirements  which generally  mirror state insurance  regulatory  requirements.
These  requirements are subject to change from time to time. Fannie Mae also has
eligibility requirements, although such requirements are not published. Triad is
an approved  mortgage  insurer for both Freddie Mac and Fannie Mae and meets all
eligibility  requirements.  There  can  be  no  assurance,  however,  that  such
requirements  will  not  change  or  that  Triad  will  continue  to  meet  such
requirements.

                                       29

<PAGE>



     Certain  national  mortgage  lenders  and a large  segment of the  mortgage
securitization market,  including Fannie Mae and Freddie Mac, generally will not
purchase  mortgages or  mortgage-backed  securities  unless the private mortgage
insurance on the  mortgages  has been issued by an insurer with a  claims-paying
ability  rating  of at least  "AA-"  from  S&P,  Fitch,  or Duff &  Phelps  or a
financial strength rating of at least "Aa3" from Moody's. Fannie Mae and Freddie
Mac require  mortgage  guaranty  insurers  to  maintain  two ratings of "AA-" or
better.  Triad has a claims-paying  ability rating of "AA" from S&P, Fitch,  and
Duff & Phelps. These ratings meet the eligibility requirements of Fannie Mae and
Freddie Mac. S&P, Fitch, and Duff & Phelps include TGAC operations and financial
position with those of Triad in rating Triad's claims-paying  ability. There can
be no assurance that Triad's  claims-paying  ability rating, the method by which
this rating is  determined  or the  eligibility  requirements  of Fannie Mae and
Freddie Mac will not change.

     The Real Estate  Settlement and Procedures Act of 1974 ("RESPA") applies to
most residential  mortgages  insured by Triad, and related  regulations  provide
that mortgage insurance is a "settlement  service" for purposes of loans subject
to RESPA. Subject to limited exceptions,  RESPA prohibits persons from accepting
anything of value for referring real estate settlement  services to any provider
of such services.  Although many states prohibit  mortgage  insurers from giving
rebates,  RESPA has been interpreted to cover many non-fee services as well. The
recently  renewed  interest of the  Department of Housing and Urban  Development
("HUD") in  investigating  transactions  for compliance with RESPA has increased
awareness  of  both  mortgage  insurers  and  their  customers  of the  possible
implications of this law.

     Most  originators of mortgage loans are required to collect and report data
relating to a mortgage  loan  applicant's  race,  nationality,  gender,  marital
status and census tract to HUD or the Federal  Reserve  under the Home  Mortgage
Disclosure  Act of 1975  ("HMDA").  The  purpose  of HMDA is to detect  possible
discrimination  in home lending and,  through  disclosure,  to  discourage  such
discrimination.  Mortgage  insurers  are  not  required  pursuant  to any law or
regulation  to  report  HMDA data  although  under  the laws of  several  states
mortgage insurers are currently  prohibited from  discriminating on the basis of
certain  classifications.  The active  mortgage  insurers,  through  their trade
association,  the Mortgage Insurance Companies of America ("MICA"), have entered
into an agreement with the Federal Financial  Institutions  Examinations Council
("FFIEC")  to  report  the same  data on loans  submitted  for  insurance  as is
required for most mortgage lenders under HMDA.

INDIRECT REGULATION

     The  Company,  Triad  and  TGAC  are also  indirectly,  but  significantly,
impacted by regulations  affecting purchasers of mortgage loans, such as Freddie
Mac and Fannie Mae, and regulations affecting  governmental insurers such as the
FHA as well as lenders.  Private mortgage insurers,  including Triad, are highly
dependent upon federal housing  legislation and other laws and regulations which
affect  the  demand  for  private  mortgage  insurance  and the  housing  market
generally.  For example,  housing legislation enacted in 1992 permits up to 100%

                                       30

<PAGE>



of borrower  closing cost to be financed by loans  insured by FHA, a significant
increase  from the  previous  57% limit.  Also,  in April 1994,  HUD reduced the
initial  premium  (payable at loan  origination)  for FHA insurance from 3.0% to
2.25%.  Effective January 1999, the maximum  individual loan amount that the FHA
could insure  increased from $170,362 to $208,800.  The maximum  individual loan
amount the VA can insure  presently is  $203,000.  The maximum loan amounts that
the FHA and VA can insure are  subject to  adjustment  and may  increase  in the
future. Any future legislation that increases the number of persons eligible for
FHA or VA mortgages  could have an adverse  effect on the  Company's  ability to
compete with the FHA or VA.

     Pursuant to the Financial  Institutions Reform,  Recovery,  and Enforcement
Act of  1989  ("FIRREA"),  the  Office  of  Thrift  Supervision  ("OTS")  issued
risk-based capital rules for savings institutions. These rules establish a lower
capital  requirement  for a low down  payment  loan that is insured with private
mortgage  insurance,  as  opposed  to  remaining  uninsured.   Furthermore,  the
guidelines for real estate lending policies  applicable to savings  institutions
and commercial banks provide that such institutions  should require  appropriate
credit  enhancement  in  the  form  of  either  mortgage  insurance  or  readily
marketable  collateral  for  any  high  LTV  mortgage.  To the  extent  FIRREA's
risk-based  capital rules or the  guidelines  for real estate  lending  policies
applicable  to savings  institutions  and  commercial  banks are  changed in the
future,  some of the anticipated  benefits of FIRREA and the guidelines for real
estate lending policies to the mortgage insurance industry, including Triad, may
be curtailed or eliminated.

     In 1995,  Fannie Mae and Freddie Mac each  introduced  their own  automated
underwriting  system to be used by mortgage  originators  selling  mortgages  to
them.  These systems,  which are provided by Triad as a service to the Company's
contract  underwriting  customers,  streamline  the mortgage  process and reduce
costs. As a result of the increased acceptance of these products, the process by
which mortgage  originators sell loans to Fannie Mae and Freddie Mac is becoming
increasingly  automated,  a trend which is expected  to  continue.  As a result,
Fannie Mae and Freddie Mac could  develop the  capability to become the decision
maker regarding  selection of a private mortgage insurer for loans sold to them,
a decision traditionally made by the mortgage originator.  The Company, however,
is not aware of any plans to do so. The  concentration  of purchasing power that
would be attained if such  development in fact occurred could adversely  affect,
from the Company's perspective, the terms on which mortgage insurance is written
on loans sold to Fannie Mae and Freddie Mac.

     Additionally, proposals have been advanced which would allow Fannie Mae and
Freddie  Mac  additional  flexibility  in  determining  the amount and nature of
alternative recourse  arrangements or other credit enhancements which they could
utilize as  substitutes  for private  mortgage  insurance.  The  Company  cannot
predict  if or  when  any of the  foregoing  legislation  or  proposals  will be
adopted,  but if adopted and  depending  upon the nature and extent of revisions
made, demand for private mortgage insurance may be adversely affected. There can
be no assurance that other federal laws affecting such institutions and entities
will not change, or that new legislation or regulation will not be adopted.

                                       31

<PAGE>



     Upon request by an insured,  Triad must cancel the mortgage insurance for a
mortgage  loan.  Fannie  Mae and  Freddie  Mac  guidelines,  as well as  several
existing and proposed state  statutes,  contain  various  provisions  which give
borrowers the right to request cancellation of mortgage insurance when specified
conditions  are met. A bill was  enacted by  Congress  on July 29,  1998,  to be
effective on July 29,1999,  which will require  mortgage lenders to periodically
update borrowers about their private mortgage insurance.  Under the legislation,
lenders must inform borrowers that: 1) they have private mortgage insurance; and
2) they may request  cancellation  when their home equity  (loan-to-value or LTV
ratio) has  reached 80 percent and other  conditions  are met.  The  legislation
further requires lenders to automatically cancel private mortgage insurance when
home  equity  reaches 78 percent if certain  conditions  are met.  Because  most
mortgage  borrowers  who obtain  private  mortgage  insurance do not achieve 20%
equity in their homes before the homes are sold or the mortgages refinanced, the
Company does not expect to lose a  significant  amount of its insurance in force
due to the enactment of this bill.

     In 1996,  the Office of the  Comptroller  of the Currency  ("OCC")  granted
permission  to national  banks to have a reinsurance  company as a  wholly-owned
operating subsidiary for the purpose of reinsuring mortgage insurance written on
loans originated or purchased by such banks. Several subsequent  applications by
banks to offer  reinsurance have been approved by the OCC including at least one
request to engage in quota share  reinsurance.  The OTS, which regulates thrifts
and  savings  institutions,   has  recently  announced  that  it  would  approve
applications for such captive arrangements as well. The reinsurance subsidiaries
of national banks or savings  institutions could become significant  competitors
of the Company in the future.

EMPLOYEES

     As of December 31, 1998,  the Company  employed 168 persons.  Employees are
not covered by any collective  bargaining  agreement.  The Company considers its
employee relations to be satisfactory.



                                       32

<PAGE>



EXECUTIVE OFFICERS

The executive officers of the Company are as follows:

Name                           Position                              Age
----                           --------                              ---

William T. Ratliff, III        Chairman of the Board of               45
                               the Company and Triad

Darryl W. Thompson             President, Chief Executive             58
                               Officer and Director of the
                               Company and Triad

David W. Whitehurst            Executive Vice President,              49
                               Chief Financial Officer,
                               Treasurer and Director of the
                               Company; Vice President
                               and Director of Triad

John H. Williams               Executive Vice President and           51
                               Director of Triad

Ron D. Kessinger               Executive Vice President of            44
                               Triad

Henry B. Freeman               Senior Vice President of Triad         49

Earl F. Wall                   Vice President, Secretary and          41
                               General Counsel of the
                               Company and Triad

Michael R. Oswalt              Vice President, Controller             37
                               and Principal Accounting Officer
                               of the Company and Triad



                                       33

<PAGE>



     WILLIAM T.  RATLIFF,  III has been the Chairman of the Board of the Company
since 1993. Mr. Ratliff has also been Chairman of the Board of Triad since 1989,
President of CIC since 1990 and was  President  and General  Partner of CML from
1987 to 1995.  Mr.  Ratliff has been Chairman of New South Federal  Savings Bank
("New South")  since 1986 and  President  and Director of New South  Bancshares,
Inc., New South's  parent  company,  since 1995.  From March 1994 until December
1996, Mr. Ratliff  served as President of Southwide  Life  Insurance  Corp.,  of
which he had been Executive Vice President since 1993. Mr. Ratliff joined CML in
1981 after completing his doctoral degree with a study of planning  processes in
an  insurance  company.  Previously,  he  trained  and  worked  as an  educator,
counselor and organizational consultant.

     DARRYL W. THOMPSON has been the President,  Chief  Executive  Officer and a
Director of the Company since 1993. Mr. Thompson has also been President,  Chief
Executive Officer and a Director of Triad since its inception in 1987. From 1986
to 1989, Mr.  Thompson also served as President and Chief  Executive  Officer of
Triad Life Insurance Company, which sold mortgage insurance products.  From 1976
to 1985, Mr. Thompson served as Senior Vice President/Southeast Division Manager
of MGIC. Mr. Thompson joined MGIC in 1972.

     DAVID W.  WHITEHURST  has been Executive Vice  President,  Chief  Financial
Officer,  Treasurer  and a Director  of the Company  since  1993,  and served as
Secretary of the Company from 1993 until 1996.  Mr.  Whitehurst  has also been a
Vice President and Director of Triad since 1989, Executive Vice President of CIC
since 1995 (Vice President from 1990 to 1995),  was Chief  Financial  Officer of
CIC from 1990 through  1995,  was  Executive  Vice  President of Southwide  Life
Insurance  Corp. from 1992 until 1996 and has been a director of New South since
1989. Since January 1997, Mr. Whitehurst has been the President, Treasurer and a
Director  of  Southland  National  Insurance  Corp.  and its  subsidiaries.  Mr.
Whitehurst  joined  CML in 1989  and  served  as Vice  President  of CML and its
affiliates  until 1992,  when he began  devoting  all of his time to CIC and its
affiliates. Mr. Whitehurst is a certified public accountant.

     JOHN H. WILLIAMS has been  Executive Vice President and a Director of Triad
since its  inception in 1987.  From 1986 to 1987,  Mr.  Williams was employed by
Triad Life Insurance  Company to develop and organize Triad.  From 1978 to 1985,
Mr.  Williams was employed by MGIC,  most recently  serving as Vice President of
Secondary Market Trading.

     RON D. KESSINGER has been Executive Vice President of Insurance  Operations
of Triad since June 1996 and was Vice President of Claims and  Administration of
Triad from  January  1991 to June 1996.  From 1985 to 1991,  Mr.  Kessinger  was
employed by Integon  Mortgage  Guaranty  Insurance  Corporation,  most  recently
serving as Vice  President  of  Operations.  Prior to joining  Integon  Mortgage
Guaranty Insurance Corporation, Mr. Kessinger was employed by the parent company
of Integon Mortgage Guaranty Insurance Corporation.



                                       34

<PAGE>



     HENRY B. FREEMAN has been Senior Vice President of Risk Management of Triad
since January, 1999 and was Vice President of Risk Management of Triad since its
inception in 1987.  From 1981 to 1987, Mr. Freeman was employed by Home Guaranty
Insurance  Corporation,  where he performed  underwriting and claims  management
services.

     EARL F. WALL has been Vice  President  and  General  Counsel of Triad since
January 1996 and Secretary  since June 1996.  Mr. Wall has been Vice  President,
Secretary and General  Counsel of the Company since September 1996. From 1982 to
1995, Mr. Wall was employed by Integon in a number of capacities  including Vice
President,  Associate  General  Counsel and Director of Integon  Life  Insurance
Corporation and Georgia International Life Insurance Corporation, Vice President
and General Counsel of Integon Mortgage Guaranty Insurance Corporation, and Vice
President, General Counsel and Director of Marketing One, Inc.

     MICHAEL R. OSWALT has been Vice  President  and  Controller  of the Company
since March 1994, Vice President of Triad since December 1994, and Controller of
Triad  since June 1996.  Mr.  Oswalt  previously  served as Vice  President  and
Controller of CIC and Southwide  Life Insurance  Corp.  from February 1994 until
June 1996.  From  January  1993 to February  1994,  Mr.  Oswalt was  employed by
Complete Health Services,  Inc. where he performed internal audit services. From
1991 to 1993, Mr. Oswalt was employed by Arthur  Andersen & Co. Prior to joining
Arthur Andersen & Co., Mr. Oswalt was employed by Deloitte & Touche from 1988 to
1991. Mr. Oswalt is a certified public accountant.

Officers of the Company serve at the discretion of the Board of Directors of the
Company.

ITEM 2.   PROPERTIES.

     As  of  December  31,  1998,   the  Company  leases  office  space  in  its
Winston-Salem  headquarters and its nine underwriting offices located throughout
the country  comprising  approximately  38,475 square feet under leases expiring
between 1999 and 2002 and which  require  annual  lease  payments of $586,348 in
1999.  With respect to all  facilities,  the Company has, or believes it will be
able to obtain,  lease renewals on satisfactory  terms. The Company believes its
existing  properties  are well  utilized  and are  suitable and adequate for its
present circumstances.

     The  Company  maintains  mid-range  and  micro-computer  systems  from  its
corporate data center located in its  headquarters  building to support its data
processing requirements for accounting,  claims,  marketing, risk management and
underwriting.  The  Company  has in place  back-up  procedures  in the  event of
emergency situations.

ITEM 3.   LEGAL PROCEEDINGS.

     The Company and its  subsidiaries,  in common with other  private  mortgage
insurers,  are subject to litigation  in the normal course of their  businesses.
There is no material  litigation  currently  pending  against the Company or its
subsidiaries.

                                       35

<PAGE>



ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

          None.

                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY
          AND RELATED STOCKHOLDER MATTERS.

     The Company's Common Stock trades on the Nasdaq National Market tier of the
Nasdaq Stock MarketSM under the symbol "TGIC." At December 31, 1998,  13,408,869
shares were issued and  outstanding.  The following table sets forth the highest
and lowest closing  prices of the Company's  Common Stock,  $0.01 par value,  as
reported  by Nasdaq  during the  periods  indicated  (closing  prices  have been
restated to reflect the two-for-one stock split on October 28, 1997).


                             1998                       1997
                             ----                       ----
                        High       Low           High         Low
First Quarter........ 42 1/8      30            15 7/8       14
Second Quarter....... 40 3/4      29 3/4        22 11/16     14 3/4
Third Quarter........ 35 7/8      22 3/4        28 1/4       20 1/2
Fourth Quarter ...... 25 3/8      13 1/2        31           26 1/4


     As of March 12,  1999,  the  number of  stockholders  of record of  Company
Common Stock was approximately  159. In addition,  there were an estimated 3,300
beneficial owners of shares held by brokers and fiduciaries.

     Payments of future  dividends are subject to  declaration  by the Company's
Board of Directors  and the amount of such  dividend is dependent on the ability
of Triad to pay  dividends to the  Company.  Because of Triad's need to maintain
capital levels required by rating agencies, the Company has no present intention
to pay dividends.


                                       36

<PAGE>
ITEM 6.   SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
                                                                           Year Ended December 31
                                                  ------------------------------------------------------------------------
                                                        1998          1997          1996           1995           1994
                                                        ----          ----          ----           ----           ----
Income  Statement  Data (for period  ended):                     (Dollars in thousands, except per share amounts)
<S>                                                 <C>           <C>           <C>           <C>            <C>          
 Premiums written:
     Direct.......................................  $     52,974  $     40,083  $     26,152  $      18,890  $      16,172
     Assumed......................................            13            20            26             34             38
     Ceded........................................        (1,090)       (1,772)       (2,217)        (3,924)        (4,034
                                                     -----------   -----------   -----------   ------------   ------------
                                                    $     51,897  $     38,331  $     23,961  $      15,000  $      12,176
                                                     ===========   ===========   ===========   ============   ============
Earned premiums...................................  $     52,822  $     38,522  $     24,727  $      15,478  $      10,999
Net investment income.............................         9,289         6,234         5,447          4,836          4,181
Realized investments gains (losses)...............           880            34          (162)           173           (163)
Other income......................................            14             8            --              1              5
                                                     -----------   -----------   -----------   ------------   ------------
     Total revenues...............................        63,005        44,798        30,012         20,488         15,022

Net losses and loss adjustment expenses...........         7,009         5,177         3,279          2,217          1,262
Interest expense on debt..........................         2,554            --            --             --             --
Amortization of deferred policy acquisition cost..         5,955         4,120         3,235          2,289          1,726
Other operating expenses (net of acquisition                                                                               
        cost deferred)............................        12,435        10,257         7,259          4,753          3,658
                                                     -----------   -----------   -----------   ------------   ------------
Income before income taxes........................        35,052        25,244        16,239         11,229          8,376
Income taxes......................................        10,678         8,002         5,042          3,470          2,594
                                                     -----------   -----------   -----------   ------------   ------------
Net income........................................  $     24,374  $     17,242  $     11,197  $       7,759  $       5,782
                                                     ===========   ===========   ===========   ============   ============
     Basic earnings per share (1).................  $       1.83  $       1.30  $       0.84  $        0.59  $        0.44
     Diluted earnings per share (1)...............  $       1.76  $       1.26  $       0.83  $        0.58  $        0.43
                                                     -----------   -----------   -----------   ------------   ------------
Weighted average common and common share
     equivalents outstanding (1)
         Basic ...................................    13,342,749    13,291,160    13,277,853     13,196,067     13,181,459
         Diluted..................................    13,843,382    13,713,538    13,541,551     13,333,014     13,305,786

Balance Sheet Data (at year end):
     Total assets.................................  $    205,256  $    138,979  $    112,403  $      99,017  $      86,664
     Total invested assets........................  $    177,301  $    119,877  $     98,027  $      85,978  $      75,364
     Losses and loss adjustment expenses..........  $     12,143  $      8,960  $      6,305  $       4,589  $       3,164
     Unearned premiums............................  $      7,055  $      7,988  $      8,216  $       9,086  $       9,893
     Long-term debt ..............................  $     34,457  $         --  $         --  $          --  $          --
     Stockholders' equity.........................  $    137,531  $    111,781  $     91,680  $      80,441  $      70,108
Statutory Ratios (2):
     Loss ratio...................................         13.3%         14.2%         16.0%          14.3%          11.5%
     Expense ratio................................         42.3%         42.5%         49.6%          59.1%          61.8%
                                                     -----------   -----------   -----------   ------------   ------------
     Combined ratio...............................         55.6%         56.7%         65.6%          73.4%          73.3%
                                                     ===========   ===========   ===========   ============   ============
GAAP Ratios:
     Loss ratio...................................         13.3%         13.4%         13.3%          14.3%          11.5%
     Expense ratio................................         35.4%         37.5%         43.8%          46.9%          44.2%
                                                     -----------   -----------   -----------   ------------   ------------
     Combined ratio...............................         48.7%         50.9%         57.1%          61.2%          55.7%
                                                     ===========   ===========   ===========   ============   ============
Other Statutory Data (dollars in millions) (2):
     Direct insurance in force....................  $   11,256.6  $    9,176.7  $    6,556.3  $     5,080.3  $     4,111.4
     Direct risk in force (gross).................  $    2,777.4  $    2,231.4  $    1,515.4  $     1,090.6  $       814.1
     Risk-to-capital..............................        16.2:1        19.3:1        15.8:1         11.1:1          8.9:1
</TABLE>

(1)  Periods have been restated to reflect the three-for-two stock split on June
     28, 1996, and the two-for-one stock split on October 28, 1997.

(2)  Based on  statutory  accounting  practices  and derived  from  consolidated
     statutory financial statements of Triad.

                                       37

<PAGE>
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATION.


RESULTS OF OPERATIONS

1998 COMPARED TO 1997

     Net  income  for  1998  increased  41.4%  to  $24.4  million   compared  to
$17.2million  in 1997.  This  improvement is attributable to a 37.1% increase in
earned  premiums,  a 49.0%  increase in net investment  income,  and an improved
combined loss and expense ratio.

     Net income per share on a diluted basis  increased  40.0% to $1.76 for 1998
compared to $1.26 per share for 1997.  Operating  earnings  per share were $1.72
for 1998  compared to $1.26 for 1997.  Operating  earnings  exclude net realized
gains of approximately $881,000 and $34,000 in 1998 and 1997, respectively.

     Net new  insurance  written  was $4.8  billion for 1998 as compared to $2.9
billion for 1997, an increase of 66.2%.  For the fourth  quarter  1998,  net new
insurance  written  increased 106.2% to $1.5 billion compared to $740 million in
the fourth quarter 1997. The Company also produced approximately $225 million of
new  insurance  written on seasoned  loans in 1998  compared to $950  million in
1997. The increase in new insurance  written was the result of a strong economy,
continued  geographic  expansion,  the  penetration  of Triad's  products in the
marketplace  to both new and existing  customers,  and the  introduction  of new
products.  According to industry data,  Triad's national market share of net new
insurance  written  increased to 2.6% for all of 1998 and to 2.8% for the fourth
quarter as compared to 2.4% reported for all of 1997.

     The growth in new insurance  written also  reflects the favorable  interest
rate  environment  in 1998 which caused home buying and refinance  activities to
remain  strong.  Refinance  activity was 31.7% of new insurance  written in 1998
compared to 14.0% in 1997. Total direct insurance in force reached $11.3 billion
at December 31, 1998, compared to $9.2 billion at December 31, 1997, an increase
of 22.7%.

     Total direct  premiums  written were $53.0 million for 1998, an increase of
32.2%  compared to $40.1  million for 1997.  Net premiums  written  increased by
35.4% to $51.9  million  in 1998  compared  to $38.3  million  for 1997.  Earned
premiums  increased 37.1% to $52.8 million for 1998 from $38.5 million for 1997.
This  growth in written and earned  premium  resulted  from the  increase in new
insurance  written  offset by a decline in the Company's  persistency  rate. The
Company's persistency, or the percentage of policies remaining in force from one
year prior,  was 73.4% at December 31,  1998,  compared to 84.2% at December 31,
1997.  The decline in  persistency  experienced  can be expected to cause future
renewal  premiums to be lower than would have been  expected,  which  would,  in

                                       38

<PAGE>


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED


turn,  have an adverse  effect on earnings.  Sales under the  Company's  monthly
premium plan  represented  97.3% of new  insurance  written in 1998  compared to
94.3% in 1997.

     Net investment income for 1998 was $9.3 million, a 49.0% increase over $6.2
million in 1997.  This increase in investment  income is the result of growth in
the average book value of invested  assets by $47.9 million to $151.7 million at
December 31,  1998,  from $103.8  million at December  31,  1997.  The growth in
invested  assets  is  attributable  to the  investment  of the  proceeds  of the
Company's  $35.0 million debt offering,  completed in late January 1998, as well
as the increase in invested assets due to normal  operating cash flow. The yield
on average  invested  assets was 6.1% for 1998  compared  to 6.0% for 1997.  The
portfolio's  tax-equivalent  yield  was  7.9%  for 1998  versus  8.0% for  1997.
Approximately  70%, or $107.5 million of the Company's fixed maturity  portfolio
at  December  31,  1998,  was  composed  of state  and  municipal  tax-preferred
securities as compared to 72%, or $68.7 million, at December 31, 1997.

     The Company's loss ratio (the ratio of incurred losses to earned  premiums)
was 13.3% for 1998 compared to 13.4% for 1997.  The loss ratio was 18.6% for the
fourth  quarter of 1998  compared to 12.1% for the fourth  quarter of 1997.  The
Company's favorable loss ratio reflects the low level of delinquencies  compared
to the  number  of  insured  loans and the fact  that  approximately  78% of the
Company's  insurance in force was  originated in the last 36 months.  Management
believes, based upon its experience and industry data, that claims incidence for
it and other private mortgage insurers is generally highest in the third through
sixth  years  after loan  origination.  Although  the claims  experience  on new
insurance  written in  previous  years has been  quite  favorable,  the  Company
expects its incurred  losses to increase as a greater amount of its insurance in
force reaches its anticipated highest claim frequency years. The increase in the
loss ratio in the fourth  quarter of 1998  reflects an  increase  in  delinquent
loans reported in the latter half of 1998 as well as reduced earned premiums due
to lower persistency.  Due to the inherent uncertainty of future premium levels,
losses,  economic  conditions,  and other  factors that impact  earnings,  it is
impossible  to predict  with any degree of  certainty  the impact of such higher
claims frequencies on future earnings.

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

     Net losses and loss  adjustment  expenses (net of  reinsurance  recoveries)
increased  by 35.4% in 1998 to $7.0  million  compared to $5.2  million in 1997.
This increase  reflects the growing  amount of the Company's  insurance in force
and the resulting recognition of a greater amount of insurance in force reaching
its higher claim frequency years.



                                       39

<PAGE>


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED

     Amortization  of deferred  policy  acquisition  costs increased by 44.5% to
$6.0  million  in 1998  compared  to $4.1  million  for 1997.  The  increase  in
amortization  reflects an increasing  deferred policy acquisition costs asset to
amortize  as the  Company  builds  its  total  insurance  in force  and a higher
cancellation rate during 1998.

     In January 1998, the Company  completed a $35.0 million private offering of
notes due January  15,  2028,  which bear  interest at a rate of 7.9% per annum.
Interest expense relating to this debt was $2.6 million for 1998.

     Standard & Poor's  Corporation in February 1999 affirmed the "AA" Financial
Strength and  counterparty  credit rating of Triad. In addition,  the "A" issuer
credit rating and senior debt rating of the Company were also affirmed.

     Other operating expenses increased 21.2% to $12.4 million for 1998 compared
to $10.3 million for 1997.  This increase in expenses is primarily  attributable
to  advertising,  personnel,  and  facilities  and equipment  costs  required to
support the Company's product development,  technology enhancements,  geographic
expansion, and increased production.

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

     The effective tax rate for 1998 was 30.5% compared to 31.7% for 1997.  This
decrease is primarily  the result of the increase in investment in tax preferred
securities.  Management expects the Company's effective tax rate to remain about
the same as long as yields from new funds invested in  tax-preferred  securities
remain favorable in relation to fully taxable securities.

1997 COMPARED TO 1996

     Net income for 1997  increased  54.0% to $17.2  million  compared  to $11.2
million in 1996. This improvement was primarily attributable to a 55.8% increase
in earned premiums,  a 14.5% increase in net investment  income, and an improved
combined loss and expense ratio.

     Net income per share on a diluted basis  increased  52.1% to $1.26 for 1997
compared to $0.83 per share for 1996.  Operating  earnings  per share were $1.26
for 1997  compared to $0.84 for 1996, an increase of 50.3%.  Operating  earnings
exclude net realized  investment gains of approximately  $34,000 in 1997 and net
realized investment losses of approximately $162,000 in 1996.



                                       40

<PAGE>


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED

     Net new  insurance  written  was $2.9  billion for 1997 as compared to $2.2
billion in 1996, an increase of 30.9%. For the fourth quarter, net new insurance
written  increased  32.9% to $740  million in 1997  compared to $557  million in
1996.  The Company also  produced  approximately  $950 million of new  insurance
written on seasoned  loans in 1997.  This increase in new insurance  written was
the  result of  continued  geographic  expansion,  the  penetration  of  Triad's
products in the marketplace,  and the introduction of new products. According to
industry data,  Triad's national market share of new insurance written increased
to 2.4% for 1997 compared to 1.7% for 1996.

     The growth in new insurance  written also reflected the favorable  interest
rate  environment in 1997 which caused home buying  activities to remain strong.
Refinance  activity was 14.0% of new insurance written in 1997 compared to 16.9%
of  insurance  written in 1996.  Total direct  insurance  in force  reached $9.2
billion at December 31, 1997,  compared to $6.6 billion at December 31, 1996, an
increase of 40.0%.

     Total direct  premiums  written were $40.1 million for 1997, an increase of
53.3% compared to $26.2 million in 1996. Net premiums written increased by 60.0%
to $38.3  million in 1997  compared to $24.0  million in 1996.  Earned  premiums
increased  55.8% to $38.5  million  for 1997 from $24.7  million  in 1996.  This
growth in written and earned premium resulted from the increase in new insurance
written offset slightly by the decline in the Company's  persistency rate. Sales
under the  Company's  monthly  premium plan  represented  94.3% of new insurance
written in 1997 compared to 93.0% in 1996.  The Company's  persistency  rate was
84.2% for 1997 compared to 85.3% for 1996.

     Net investment income for 1997 was $6.2 million, a 14.5% increase over $5.4
million in 1996.  This  increase  resulted  from the growth in the average  book
value of invested  assets to $103.8  million at December  31,  1997,  from $89.6
million at December 31, 1996. The yield on average  invested assets was 6.0% for
1997 compared to 6.1% for 1996.  This slight  decrease was  attributable  to the
Company's  continued  investment  in  lower  yielding  municipal   tax-preferred
securities.  The portfolio's tax-equivalent yield was 8.0% for 1997 up from 7.7%
for 1996.  Approximately 72%, or $68.7 million,  of the Company's fixed maturity
portfolio  at  December  31,   1997,   was  composed  of  state  and   municipal
tax-preferred  securities  as compared to 53% at December 31,  1996,  and 37% at
December 31, 1995.

     The Company's loss ratio was 13.4% for 1997 compared to 13.3% for 1996. The
Company's favorable loss ratio reflected the low level of delinquencies compared
to the  number  of  insured  loans and the fact  that  approximately  73% of the
Company's insurance in force was originated in the previous 36 months.



                                       41

<PAGE>


ITEM 7.   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 57.9% in 1997 to $5.2  million  compared to $3.3  million in 1996.
This increase reflected 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.

     Amortization  of deferred  policy  acquisition  costs increased by 27.4% to
$4.1  million  in 1997  compared  to $3.2  million  for 1996.  The  increase  in
amortization reflected a growing balance of deferred policy acquisition costs to
amortize as the Company continued to build its total insurance in force.

     Other operating expenses increased 41.3% to $10.3 million for 1997 compared
to $7.3 million for 1996.  This increase in expenses was primarily  attributable
to  advertising,  personnel,  and  facilities  and equipment  costs  required to
support the Company's product development,  technology enhancements,  geographic
expansion, and increased production.

     The  expense  ratio  for  1997  was  37.5%  compared  to  43.8%  for  1996.
Contributing  to this  improvement  was the  higher  level of  written  premiums
partially offset by the increase in expenses.

     The effective tax rate for 1997 was 31.7%  compared to 31.0% in 1996.  This
increase was primarily the result of the phase-in of the 35.0% federal statutory
income tax rate  applicable to companies  with annual taxable income above $10.0
million.

LIQUIDITY AND CAPITAL RESOURCES

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

     The Company generated positive cash flow from operating activities for 1998
of $23.3  million  compared to $17.9  million for 1997.  The increase in Triad's
operating  cash flow  reflects  the growth in  renewal  premiums  and  insurance
written that has more than offset the  increases in claims paid,  interest,  and
other expenses.

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





                                       42

<PAGE>


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED

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

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

     In December  1998,  the Company  announced  that its Board of Directors had
authorized  the  purchase  of up to $3.0  million of the  Company's  outstanding
Common Stock.  The parent company will fund the purchase of these shares through
either the sale of parent  company  invested  assets or through  dividends  from
Triad.  Through  February 1999, the Company had purchased  131,000 shares of its
common stock for approximately $2.4 million.

     Consolidated  invested  assets were $177.3  million at December  31,  1998,
compared to $119.9 million at December 31, 1997.  This increase is  attributable
to the  investment  of proceeds of the $35.0 million debt offering and operating
cash  flow.  Through  investment  of a portion of the net  proceeds  of the note
offering,   the  Company  has  increased  its  investments  in  higher  yielding
non-investment   grade  securities  to  approximately  8%  of  its  consolidated
investment  portfolio,  up from  approximately  3% at  December  31,  1997.  Net
unrealized  investment  gains were $2.5  million on equity  securities  and $3.5
million on fixed  maturity  securities  at December  31,  1998.  Fixed  maturity
securities and equity  securities,  all of which are classified as available for
sale,  totaled $171.4 million at December 31, 1998.  Based upon book value,  the
fixed maturity  portfolio at December 31, 1998,  consisted of approximately  70%
municipal securities,  24% corporate securities, 5% U.S. government obligations,
and 1% mortgage-backed bonds.


                                       43

<PAGE>


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED

     Fixed  maturity  securities  represent  approximately  89% of the Company's
invested  assets at December  31,  1998,  and the fair value of these fixed rate
securities  generally  bears an inverse  relationship  to changes in  prevailing
market  interest rates.  The Company's  long-term debt bears interest at a fixed
rate of 7.9%  per  annum,  and as a  result,  the  fair  value  of this  debt is
sensitive to changes in prevailing  interest  rates. A 10% relative  increase or
decrease  in  market   interest  rates  that  affect  the  Company's   financial
instruments  would not have a material impact on earnings during the next fiscal
year, and would not materially affect the fair value of the Company's  financial
instruments.

     The  Company's  loss  reserves  increased to $12.1  million at December 31,
1998,  compared to $9.0 million at December 31, 1997.  This growth is the result
of the increases in new insurance written and the maturing of the Company's risk
in force.  Consistent  with industry  practices,  the Company does not establish
loss  reserves  for future  claims on insured  loans which are not  currently in
default. The Company's reserves per delinquent loan were $23,400 at December 31,
1998, compared to $23,100 at December 31, 1997. The Company's delinquency ratio,
the ratio of reported delinquent insured loans to total insured loans, was 0.53%
at December 31, 1998,  compared to 0.47% at December  31, 1997.  Beginning  with
year end 1998, the Company began reporting only  delinquencies  that are greater
than 45 days delinquent to conform with the industry standard.  Previously,  the
Company  reported all  delinquencies,  including those 45 days or less past due.
The change had no material impact on the Company's loss reserves.

     The  Company's  unearned  premium  reserve of $7.1  million at December 31,
1998,  decreased  from $8.0  million  at  December  31,  1997.  This  decline is
primarily  attributable  to the  continued  production  of the  monthly  premium
product,  which produces little unearned  premium  compared to annual and single
premium products.  Cancellation  activity also can contribute to the decrease in
unearned  premiums,  whereby  older  annual  premium  policies  are  canceled or
replaced by monthly premium policies.

     Total  stockholders'  equity  increased  to $137.5  million at December 31,
1998, from $111.8 million at December 31, 1997. This increase resulted primarily
from net  income of $24.4  million  for 1998,  the tax  benefit  and  additional
paid-in  capital of $1.9  million  relating to the  exercise  of employee  stock
options,  and the issuance of restricted  stock in connection with the buyout of
one of the Company's exclusive  commissioned  general agencies.  These increases
were offset  somewhat by a decline in net  unrealized  gains on  investments  of
$497,000  and the  retirement  of 15,000  shares of the  Company's  Common Stock
purchased during October 1998 for $297,000.

     Triad's total statutory  policyholders'  surplus increased to $89.5 million
at December 31, 1998,  from $60.9  million at December 31, 1997.  This  increase
resulted  from the  Company's  contribution  to Triad of $25.0  million  of note
proceeds through a surplus  debenture and statutory net income of $31.3 million,
offset primarily by a decrease in unrealized investment gains of $925,000 and an

                                       44

<PAGE>


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED


increase  in  the  statutory  contingency  reserve  of  $26.8  million.  Triad's
statutory earned surplus was $5.8 million at December 31, 1998, compared to $2.5
million at December 31, 1997,  reflecting growth in statutory net income greater
than the  increase in the  statutory  contingency  reserve.  Approximately  $1.9
million  and $2.8  million of the  statutory  earned  surplus for 1998 and 1997,
respectively, was attributable to unrealized gains. The balance in the statutory
contingency  reserve was $81.6  million at December 31, 1998,  compared to $54.8
million at December 31, 1997.

     The  Company is  undertaking  modifications  and  upgrades  to enhance  its
computer  systems  and  technological  capabilities.  The Company  expects  that
aggregate costs of  approximately  $2.8 million will be expended for this system
conversion and upgrade  (approximately  $1.8 million in  capitalized  costs have
been  incurred for the project thus far through  December 31, 1998) and that the
project will be funded through cash flow from operations.

     Substantially  all of the  Company's  existing  computer  systems which are
integral to its business were originally  developed to be year 2000 compliant or
are being  reprogrammed.  The Company plans to reprogram  its existing  computer
systems, as necessary,  and complete testing of the Company's existing system by
March 31,  1999.  As of December  31,  1998,  the Company is  approximately  90%
complete in the review and  testing of its  existing  computer  systems for year
2000 compliance.  Year 2000 compliance costs incurred  relating to the Company's
existing  computer  systems are being expensed and are  immaterial.  Some of the
Company's  computer  systems  integral to its business  interface  with computer
systems of third parties.  Virtually all  transactions  with systems operated by
third   parties   involve    nationally    recognized    service   bureaus   and
government-sponsored entities such as Freddie Mac and Fannie Mae. The Company is
working with these third  parties to coordinate  any  necessary  testing of year
2000 related  system  interfaces.  As a result,  the Company does not anticipate
that year 2000  compliance  issues  arising  from  interfaces  with  third-party
systems will have a material impact on its operations.

     Triad's  ability  to write  insurance  depends  on the  maintenance  of its
claims-paying  ability  ratings  and the  adequacy of its capital in relation to
risk in force. A significant  reduction of capital or a significant  increase in
risk may impair  Triad's  ability  to write  additional  insurance.  A number of
states also  generally  limit Triad's  risk-to-capital  ratio to 25-to-1.  As of
December 31, 1998,  Triad's  risk-to-capital  ratio was 16.2-to-1 as compared to
19.3-to-1  at December 31, 1997,  and  17.8-to-1  for the industry as a whole at
December 31, 1997, the latest industry data available.

                                       45
<PAGE>


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATION -- CONTINUED


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

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

                                       46

<PAGE>




ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The Financial Statements and Supplementary Data are presented in a separate
section of this report.


ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH
          ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

          None.



                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     Information  regarding  directors and nominees for directors of the Company
is included in the  Company's  Proxy  Statement  for the 1999 Annual  Meeting of
Stockholders, and is hereby incorporated by reference.

     For information regarding the executive officers of the Company,  reference
is made to the section entitled  "Executive  Officers of the Company" in Part I,
Item 1 of this Report.

ITEM 11.  EXECUTIVE COMPENSATION.

     This  information is included in the Company's Proxy Statement for the 1999
Annual Meeting of Stockholders, and is hereby incorporated by reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     This  information is included in the Company's Proxy Statement for the 1999
Annual Meeting of Stockholders, and is hereby incorporated by reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     This  information is included in the Company's Proxy Statement for the 1999
Annual Meeting of Stockholders, and is hereby incorporated by reference.


                                       47

<PAGE>



                                     PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT
          SCHEDULES, AND REPORTS ON FORM 8-K.

     (a)  (1) and (2) The  response to this portion of Item 14 is submitted as a
          separate section of this report.

     (a)  (3) Listing of  Exhibits--  The response to this portion of Item 14 is
          submitted as a separate section of this report.

     (b)  Reports on Form 8-K.

          No reports on form 8-K were filed during  the quarter ended  December
          31, 1998.

     (c)  Exhibits--  The  response to this portion of Item 14 is submitted as a
          separate section of this report.

     (d)  Financial  Statement  Schedules-- The response to this portion of Item
          14 is submitted as a separated section of this report.





















                                       48

<PAGE>



                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) 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  on the 18th day of
March, 1999.

                                       By /s/ Darryl W. Thompson
                                       -----------------------------
                                       Darryl W. Thompson
                                       President and Chief Executive Officer

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been  signed  below on the 18th day of March,  1999 by the  following
persons on behalf of the Registrant in the capacities indicated.


       SIGNATURE                                TITLE

/s/ William T. Ratliff, III           Chairman of the Board
---------------------------
William T. Ratliff, III


/s/ Darryl W. Thompson                President, Chief Executive Officer and 
---------------------------           Director
Darryl W. Thompson


/s/ David W. Whitehurst               Executive Vice President, Chief Financial
---------------------------           Officer, Treasurer and Director
David W. Whitehurst        


/s/ Michael R. Oswalt                 Vice President and Controller, Principal
---------------------------           Accounting Officer
Michael R. Oswalt          


/s/ Robert T. David                   Director
---------------------------
Robert T. David


/s/ Raymond H. Elliott                Director
---------------------------
Raymond H. Elliott




                                       49

<PAGE>



                           ANNUAL REPORT ON FORM 10-K

                 ITEM 8, ITEM 14(a)(1) and (2), (3), (c) and (d)

            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

                                INDEX TO EXHIBITS

                              FINANCIAL STATEMENTS

                          FINANCIAL STATEMENT SCHEDULES

                                CERTAIN EXHIBITS

                          YEAR ENDED DECEMBER 31, 1998

                               TRIAD GUARANTY INC.

                          WINSTON-SALEM, NORTH CAROLINA


                                       50

<PAGE>



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULES

                              (Item 14(a) 1 and 2)



CONSOLIDATED FINANCIAL STATEMENTS                                          Page
---------------------------------                                          ----
Report of Independent Auditors.........................................    54
Consolidated Balance Sheets at December 31, 1998 and 1997..............  55 - 56
Consolidated Statements of Income for each of the three years
   in the period ended December 31, 1998...............................    57
Consolidated Statements of Changes in Stockholders' Equity for 
   each of the three years in the period ended December 31, 1998.......    58
Consolidated Statements of Cash Flows for each of the three years
   in the period ended December 31, 1998...............................    59
Notes to Consolidated Financial Statements.............................  60 - 77

FINANCIAL STATEMENT SCHEDULES
-----------------------------
Schedules at and for each of the three years in the period ended December 31,
1998
   Schedule I - Summary of investments - other than investments
      in related parties...............................................    78
   Schedule II - Condensed financial information of Registrant.........  79 - 83
   Schedule IV - Reinsurance...........................................    84


All other schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedules,  or
because the  information  required is  included  in the  consolidated  financial
statements and notes thereto.


                                       51

<PAGE>



                                INDEX TO EXHIBITS
                                 (ITEM 14(A) 3)




EXHIBIT
NUMBER    DESCRIPTION OF EXHIBIT
------    ----------------------
  3.1     Certificate of Incorporation of the Registrant, as amended (7)(Exhibit
          3.1)

  3.2     By-Laws of the Registrant (1) (Exhibit 3(b))

  4.1     Form of Common Stock certificate (1)(Exhibit 4(a))

  4.2     Indenture Between Triad Guaranty Inc. and Banker's Trust Co.(8)
          (Exhibit 4.2)

 10.1     1993 Long-Term Stock Incentive Plan (1)(3) (Exhibit 10(a)  

 10.2     Proportional Reinsurance Agreement between Triad Guaranty Insurance
          Corporation and PMI Mortgage Insurance Co. (1) (Exhibit 10(b))

 10.3     Agreement for Administrative Services among Triad Guaranty Insurance
          Corporation and Collateral Investment Corp. and Collateral Mortgage,
          Ltd. (1)(Exhibit 10(c))

 10.4     Investment Advisory Agreement between Triad Guaranty Insurance
          Corporation and Collateral Mortgage, Ltd. (1) (Exhibit 10(d))

 10.6     Registration Agreement among the Registrant, Collateral Investment
          Corp. and Collateral Mortgage, Ltd. (2) (Exhibit 10.6)

 10.7     Employment Agreement between the Registrant and Darryl W. Thompson
          (2)(3) (Exhibit 10.7)

 10.8     Employment Agreement between the Registrant and John H.Williams (2)(3)
          (Exhibit 10.8)

 10.10    Employment Agreement between the Registrant and Henry B.Freeman (2)(3)
          (Exhibit 10.10)

 10.11    Employment Agreement between the Registrant and Ron D.Kessinger (2)(3)
          (Exhibit 10.11)

 10.13    Proportional Reinsurance Agreement between Triad Guaranty Insurance
          Corporation and PMI Mortgage Insurance Co. (4) (Exhibit 10.13)

 10.15    Excess of Loss Reinsurance  Agreement  between Triad Guaranty
          Insurance  Corporation  and  National  Union  Fire  Insurance
          Company of Pittsburgh, PA.(5) (Exhibit 10.15)

 10.16    Economic Value Added Incentive Bonus Program (Senior Management)
          (6) (Exhibit 10.16)


                                       52

<PAGE>



 10.17    Amendment to Employment Agreement between the Registrant and Darryl W.
          Thompson (3)(6) (Exhibit 10.17)

 10.18    Amendment to Employment Agreement between the Registrant and John H.
          Williams (3)(6) (Exhibit 10.18)

 10.19    Amendment to Employment Agreement between the Registrant and Henry B.
          Freeman (3)(6) (Exhibit 10.19)

 10.20    Amendment to Employment Agreement between the Registrant and Ron D.
          Kessinger (3)(6) (Exhibit 10.20)

 21.1     Subsidiaries of the Registrant (6) (Exhibit 21.1)

*23.1     Consent of Ernst & Young LLP (Exhibit 23.1)

*27.1     Financial Data Schedule (Exhibit 27.1)


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

*    Filed Herewith.

(1)  Incorporated by reference to the exhibit  identified in parentheses,  filed
     as an exhibit in the Registrant's  Registration Statement on Form S-1 filed
     October 22, 1993 and amendments thereto.

(2)  Incorporated by reference to the exhibit  identified in parentheses,  filed
     as an exhibit in the 1993 Form 10-K.

(3)  Denotes management contract or compensatory plan of arrangement required to
     be filed as an exhibit to this report  pursuant  to Item 601 of  Regulation
     S-K.

(4)  Incorporated by reference to the exhibit  identified in parentheses,  filed
     as an exhibit in the 1994 Form 10-K.

(5)  Incorporated by reference to the exhibit  identified in parentheses,  filed
     as an exhibit in the 1995 Form 10-K.

(6)  Incorporated by reference to the exhibit  identified in parentheses,  filed
     as an exhibit in the 1996 Form 10-K.

(7)  Incorporated by reference to the exhibit  identified in parentheses,  filed
     as an exhibit in the June 30, 1997 Form 10-Q.

(8)  Incorporated by reference to the exhibit  identified in parentheses,  filed
     as an exhibit in the 1997 Form 10-K.

                                       53

<PAGE>





                         REPORT OF INDEPENDENT AUDITORS


Board of Directors
Triad Guaranty Inc.


We have audited the accompanying  consolidated  balance sheets of Triad Guaranty
Inc.  and  subsidiaries  as of  December  31,  1998 and  1997,  and the  related
consolidated  statements of income,  changes in stockholders'  equity,  and cash
flows for each of the three years in the period ended  December 31, 1998.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial  position of Triad Guaranty
Inc.  and  subsidiaries  at  December  31, 1998 and 1997,  and the  consolidated
results of their  operations and their cash flows for each of the three years in
the period  ended  December  31,  1998 in  conformity  with  generally  accepted
accounting principles.

                                             Ernst & Young LLP

January 20, 1999


                                       54
<PAGE>



                               Triad Guaranty Inc.

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>

                                                                 December 31
                                                          1998                1997
                                                     -----------------------------------
Assets
<S>                                                   <C>                <C>         
Invested assets:
   Securities  available-for-sale,  at fair value: 
      Fixed maturities  (amortized cost:
         1998-$153,868,237; 1997-$95,756,136)         $157,391,829       $ 99,725,487
      Equity securities (cost: 1998-$11,550,510;
        1997-$8,666,815)                                14,024,012         11,466,028
   Short-term investments                                5,885,192          8,685,842
                                                     -----------------------------------
                                                       177,301,033        119,877,357

Cash                                                       444,200              8,557
Accrued investment income                                2,258,878          1,460,168
Deferred policy acquisition costs                       16,015,559         12,587,355
Property and equipment, at cost less 
   accumulated depreciation
  (1998-$2,292,770; 1997-$1,563,289)                     3,446,656          2,524,228
Reinsurance recoverable                                    610,817             49,447
Other assets                                             5,178,627          2,471,948










                                                     -----------------------------------
Total assets                                          $205,255,770       $138,979,060
                                                     ===================================
</TABLE>



                                       55
<PAGE>







<TABLE>
<CAPTION>

                                                                December 31
                                                          1998               1997
                                                      --------------------------------
Liabilities and stockholders' equity
<S>                                                   <C>                <C>         
Liabilities:
   Losses and loss adjustment expenses                $ 12,142,990       $  8,960,411
   Unearned premiums                                     7,054,737          7,988,342
   Current taxes payable                                    45,787              3,318
   Deferred income taxes                                 7,930,878          7,521,874
   Unearned ceding commission                              621,161                  -
   Long-term debt                                       34,457,080                  -
   Accrued interest on debt                              1,274,972                  -
   Accrued expenses and other liabilities                4,196,825          2,724,324
                                                      --------------------------------
Total liabilities                                       67,724,430         27,198,269

Commitments and contingencies (Note 5 and 7)

Stockholders' equity:
   Preferred stock, par value $.01 per share -
     authorized 1,000,000 shares, no shares
     issued and outstanding                                   -                  -
   Common stock, par value $.01 per share - 
     authorized 32,000,000  shares,  13,408,869
     at  December  31, 1998 and  13,293,721  at
     December 31, 1997 issued and outstanding shares       134,089            132,937
   Additional paid-in capital                           61,538,613         59,369,223
   Accumulated other comprehensive income, net
     of income tax liability of $2,101,170 at
     December 31, 1998 and $2,368,998 at
     December 31, 1997                                   3,907,920          4,405,315
   Retained earnings                                    71,950,718         47,873,316
                                                      --------------------------------
Total stockholders' equity                             137,531,340        111,780,791
                                                      --------------------------------
Total liabilities and stockholders' equity            $205,255,770       $138,979,060
                                                      ================================

</TABLE>

See accompanying notes.

                                       56
<PAGE>


<TABLE>
<CAPTION>

                               Triad Guaranty Inc.

                        Consolidated Statements of Income


                                                      Year ended December 31
                                             1998              1997             1996
                                         -------------------------------------------------
<S>                                       <C>               <C>              <C>        
Revenue:
   Premiums written:
     Direct                               $52,973,589       $40,082,507      $26,151,650
     Assumed                                   13,052            20,061           26,222
     Ceded                                 (1,089,955)       (1,772,039)      (2,216,417)
                                         -------------------------------------------------
   Net premiums written                    51,896,686        38,330,529       23,961,455
   Change in unearned premiums                925,045           191,163          766,286
                                         ------------------------------------------------
Earned premiums                            52,821,731        38,521,692       24,727,741

Net investment income                       9,289,026         6,234,142        5,446,672
Net realized investment gains (losses)        880,502            34,330         (162,385)
Other income                                   13,652             7,716                -
                                         ------------------------------------------------
                                           63,004,911        44,797,880       30,012,028

Losses and expenses:
   Losses and loss adjustment expenses      7,005,420         5,317,812        3,444,354
   Reinsurance recoveries                       3,198          (140,734)        (165,224)
                                         ------------------------------------------------
Net losses and loss adjustment expenses     7,008,618         5,177,078        3,279,130

Interest expense on debt                    2,554,126                 -                -
Amortization of deferred policy
   acquisition costs                        5,954,915         4,120,469        3,234,876
Other operating expenses (net of 
   acquisition costs deferred)             12,434,890        10,256,815        7,259,271
                                         ------------------------------------------------
                                           27,952,549        19,554,362       13,773,277
                                         ------------------------------------------------
Income before income taxes                 35,052,362        25,243,518       16,238,751

Income taxes:
   Current                                     38,928             2,613          (37,292)
   Deferred                                10,639,361         7,999,081        5,079,077
                                         ------------------------------------------------
                                           10,678,289         8,001,694        5,041,785
                                         ------------------------------------------------
Net income                                $24,374,073       $17,241,824      $11,196,966
                                         ================================================

Earnings per common and common
  equivalent share:
     Basic                                      $1.83             $1.30             $.84
     Diluted                                     1.76              1.26              .83
                                         ================================================
Shares used in computing earnings per
  common and common equivalent share:
     Basic                                 13,342,749        13,291,160       13,277,853
     Diluted                               13,843,382        13,713,538       13,541,551
                                         ================================================
</TABLE>

See accompanying notes.

                                       57
<PAGE>


<TABLE>
<CAPTION>

                                                        Triad Guaranty Inc.

                                      Consolidated Statements of Changes in Stockholders' Equity

                                                                            Accumulated Other
                                                                Additional    Comprehensive
                                                   Common        Paid-In          Income          Retained
                                                    Stock        Capital                          Earnings         Total
                                               --------------------------------------------------------------------------------
<S>                                              <C>             <C>              <C>            <C>             <C>         
 Balance at December 31, 1995                    $ 44,189        $59,141,808      $1,732,209     $19,523,136     $ 80,441,342
   Net income                                           -                  -               -      11,196,966       11,196,966
   Other comprehensive income - net of tax:
     Change in unrealized gain                          -                  -        (163,409)              -         (163,409)
                                                                                                              -----------------
   Comprehensive income                                 -                  -               -               -       11,033,557
   Issuance of 11,316 shares of common stock
     under stock option plans                         113            205,536               -               -          205,649
   Three-for-two stock split effected in
     the form of a 50% stock dividend              22,151                  -               -         (22,151)               -
 Retirement of common stock                             -               (512)              -               -             (512)
                                               --------------------------------------------------------------------------------
 Balance at December 31, 1996                      66,453         59,346,832       1,568,800      30,697,951       91,680,036
   Net income                                           -                  -               -      17,241,824       17,241,824
   Other comprehensive income - net of tax:
     Change in unrealized gain                          -                  -       2,836,515               -        2,836,515
                                                                                                              -----------------
   Comprehensive income                                 -                  -               -               -       20,078,339
   Issuance of 2,499 shares of common stock
     under stock option plans                          25             22,391               -               -           22,416
   Two-for-one stock split effected in the
     form of a 100% stock dividend                 66,459                  -               -         (66,459)               -
                                               --------------------------------------------------------------------------------
 Balance at December 31, 1997                     132,937         59,369,223       4,405,315      47,873,316      111,780,791
   Net income                                           -                  -               -      24,374,073       24,374,073
   Other comprehensive income - net of tax:
     Change in unrealized gain                          -                  -        (497,395)              -         (497,395)
                                                                                                              -----------------
   Comprehensive income                                 -                  -               -               -       23,876,678
   Issuance of 122,648 shares of common stock
     under stock option plans                       1,227            954,629               -               -          955,856
   Tax effect of exercise of non-qualified
     stock options                                      -            916,711               -               -          916,711
   Purchase and subsequent retirement of
     15,000 shares of common stock                   (150)                 -               -        (296,671)        (296,821)
   Issuance of 7,500 shares of restricted              75            298,050               -               -          298,125
     stock
                                               ================================================================================
 Balance at December 31, 1998                    $134,089        $61,538,613      $3,907,920     $71,950,718     $137,531,340
                                               ================================================================================
</TABLE>


See accompanying notes.

                                       58
<PAGE>
<TABLE>
<CAPTION>
                                               Triad Guaranty Inc.

                                       Consolidated Statements of Cash Flows


                                                                    Year ended December 31
                                                             1998              1997              1996
                                                      ---------------------------------------------------- 
Operating activities
<S>                                                       <C>               <C>               <C>        
Net income                                                $24,374,073       $17,241,824       $11,196,966
Adjustments to reconcile net income to net
  cash provided by operating activities:
     Loss and unearned premium reserves                     2,248,974         2,426,878           846,498
     Accrued expenses and other liabilities                 1,450,310           901,991           362,459
     Current taxes payable                                     42,469             1,722           (38,335)
     Amounts due to/from reinsurer                           (547,469)          378,771         1,787,428
     Accrued investment income                               (798,710)         (333,526)         (230,985)
     Accrued interest on debt                               1,274,972                 -                 -
     Policy acquisition costs deferred                     (9,383,119)       (6,509,427)       (5,856,589)
     Amortization of policy acquisition costs               5,954,915         4,120,469         3,234,876
     Net realized investment (gains) losses                  (880,502)          (34,330)          162,385
     Provision for depreciation                               750,097           621,050           394,282
     Accretion of bond discounts                           (1,013,820)         (620,762)         (591,336)
     Deferred income taxes                                  1,593,543         1,700,081         1,573,810
     Unearned ceding commission                               621,161           (80,573)         (539,542)
     Other assets                                          (2,559,112)       (1,914,971)          171,949
     Other operating activities                               192,489                 -                 -
                                                      ----------------------------------------------------
Net cash provided by operating activities                  23,320,271        17,899,197        12,473,866

Investing activities
Securities available-for-sale:
      Purchases - fixed maturities                        (74,664,883)      (25,487,708)      (19,823,655)
      Sales  - fixed maturities                            17,449,277        16,186,544         8,036,070
      Purchases - equities                                 (7,507,782)       (3,835,769)       (2,732,179)
      Sales - equities                                      5,591,607         1,678,286         1,838,226
Purchases of property and equipment                        (1,665,430)       (1,431,278)         (760,202)
                                                      ----------------------------------------------------
Net cash used in investing activities                     (60,797,211)      (12,889,925)      (13,441,740)

Financing activities
Proceeds from issuance of long-term debt                   34,452,898                 -              (512)
Retirement of common stock                                   (296,821)                -                 -
Proceeds from exercise of stock options                       955,856            22,416           205,649
                                                      ----------------------------------------------------
Net change by financing activities                         35,111,933            22,416           205,137
Net change in cash and short-term investments              (2,365,007)        5,031,688          (762,737)
Cash and short-term investments at beginning of year        8,694,399         3,662,711         4,425,448
                                                      ----------------------------------------------------
Cash and short-term investments at end of year            $ 6,329,392       $ 8,694,399       $ 3,662,711
                                                      ====================================================

Supplemental schedule of cash flow information
Cash paid during the period for:
  Income taxes and United States Mortgage Guaranty
    Tax and Loss Bonds                                    $ 8,963,726       $ 6,299,891       $ 3,348,000
  Interest                                                $ 1,274,972
Non-cash investing and finance activities:
  Exchange of restricted common stock for 
    intangible assets                                     $   298,125                 -                 -
</TABLE>

See accompanying notes.

                                       59
<PAGE>

                               TRIAD GUARANTY INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


1. ACCOUNTING POLICIES

NATURE OF BUSINESS

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.

BASIS OF PRESENTATION

The  accompanying  financial  statements  have been prepared in conformity  with
generally  accepted  accounting  principles,  which vary in some  respects  from
statutory  accounting practices which are prescribed or permitted by the various
insurance departments.

CONSOLIDATION

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

USE OF ESTIMATES

The  preparation of the  consolidated  financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions that affect the amounts  reported in the consolidated  financial
statements  and  accompanying  notes.  Actual  results  could  differ from those
estimates.

INVESTMENTS

Securities  classified as  "available-for-sale"  are carried at fair value,  and
unrealized  gains and  losses on such  securities  are  reported  as a  separate
component of accumulated other  comprehensive  income. The Company does not have
any securities classified as "held-to-maturity" or "trading".

                                       60
<PAGE>
                               TRIAD GUARANTY INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



1. ACCOUNTING POLICIES (CONTINUED)

Fair value generally represents quoted market value prices for securities traded
in the  public  market or prices  analytically  determined  using bid or closing
prices for securities not traded in the public marketplace.  Realized investment
gains or  losses  are  determined  on a  specific  identification  basis and are
included in net income. Short-term investments are defined as short-term, highly
liquid investments both readily  convertible to known amounts of cash and having
maturities of three months or less upon acquisition by the Company.

DEFERRED POLICY ACQUISITION COSTS

The costs of acquiring new business,  principally commissions and certain policy
underwriting  and issue  costs,  which  generally  vary  with and are  primarily
related to the production of new business,  are deferred.  Amortization  of such
policy  acquisition costs is charged to expense in proportion to premium revenue
recognized  over the estimated  policy life. The Company reviews the persistency
of  policies  in force and  makes  appropriate  adjustments  to  reflect  policy
cancellations.

PROPERTY AND EQUIPMENT

Property and  equipment is recorded at cost and is  amortized  principally  on a
straight-line  basis over the  estimated  useful  lives of  depreciable  assets.
Property  and  equipment  primarily  consists of  furniture  and  equipment  and
computer hardware and software.

LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

Reserves are provided for the estimated  costs of settling  claims in respect of
loans reported to be in default and estimates of loans in default which have not
been reported to the Company. Consistent with industry accounting practices, the
Company does not  establish  loss  reserves for future  claims on insured  loans
which are not currently in default.  Loss reserves are established by management
using  historical  experience  and by making various  assumptions  and judgments
about the  ultimate  amount to be paid on loans in default.  The  estimates  are
continually  reviewed and, as adjustments to these liabilities become necessary,
such adjustments are reflected in current operations.

                                       61
<PAGE>
                               TRIAD GUARANTY INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)




1. ACCOUNTING POLICIES (CONTINUED)

REINSURANCE

Certain  premiums  and  losses  are  assumed  from and ceded to other  insurance
companies under various  reinsurance  agreements.  Reinsurance  premiums,  claim
reimbursement and reserves related to reinsurance  business are accounted for on
a basis  consistent  with those used in  accounting  for the  original  policies
issued and the terms of the reinsurance contracts. The Company receives a ceding
commission in connection with ceded reinsurance. The ceding commission is earned
on a monthly pro rata basis in the same manner as the premium and is recorded as
a reduction of other operating  expenses.  The reinsurance  treaties provide for
profit  commissions on ceded reinsurance based on the loss ratio associated with
the business ceded.

INCOME TAXES

The Company uses the asset and liability  method of accounting for income taxes.
Under the asset and liability method,  deferred tax assets, net of any valuation
allowance,  and  deferred  tax  liabilities  are  recognized  for the future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases.  Deferred tax assets and liabilities are measured using enacted tax rates
expected  to apply to  taxable  income  in the  years in which  those  temporary
differences are expected to be recovered or settled,  and the effect on deferred
tax assets and  liabilities  of a change in tax rates is recognized in income in
the period that includes the enactment date.

INCOME RECOGNITION

The Company  writes  policies  that are  guaranteed  renewable  contracts at the
borrower's option on single premium,  annual premium, and monthly premium bases.
For annual payment policies, the first year premium exceeds the renewal premium.
The Company does not have the option to reunderwrite  these contracts.  Premiums
written  on annual  policies  are  earned on a monthly  pro rata  basis.  Single
premium  policies  covering more than one year are amortized  over the estimated
policy life in accordance  with the  expiration of risk.  Premiums  written on a
monthly basis are generally earned in the month that coverage is provided.

STOCK OPTIONS

The Company  grants stock options for a fixed number of shares to employees with
an exercise  price equal to or greater  than the fair value of the shares at the
date of grant.  The Company  accounts for stock option grants in accordance with
APB Opinion No. 25, Accounting for Stock Issued to Employees,  and, accordingly,
recognizes no compensation expense for the stock option grants.

                                       62
<PAGE>
                               TRIAD GUARANTY INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



1. ACCOUNTING POLICIES (CONTINUED)

EARNINGS PER SHARE

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

STOCK SPLITS

The Company had a  three-for-two  stock split in 1996 in the form of a 50% stock
dividend.  The Company also had a two-for-one stock split in 1997 in the form of
a 100%  stock  dividend.  All  earnings  per  share  amounts  and  stock  option
information  prior to the stock  splits  were  restated  to  reflect  post-split
amounts.

COMPREHENSIVE INCOME

In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting  Comprehensive  Income.  The Statement  establishes  standards for the
reporting and display of  comprehensive  income and its  components in financial
statements. The Company adopted the provisions of Statement No. 130 in the first
quarter of 1998 and  reclassified  the financial  statements for earlier periods
provided for comparative purposes as required by the Statement.  The application
of the new rules had no impact on the Company's financial position or results of
operations.

Currently,  the only element of other  comprehensive  income  applicable  to the
Company is changes in unrealized  gains and losses on  securities  classified as
available-for-sale,  which are  displayed  in the  following  table,  along with
related tax effects.

                                         1998          1997           1996
                                      ------------------------------------------
Unrealized gains (losses) arising
   during the period, before taxes       $ 115,278     $4,398,198     $(413,783)
   Income taxes                            (40,347)    (1,539,369)      144,824
                                      ------------------------------------------
Unrealized gains (losses) arising 
   during the period, net of taxes          74,931      2,858,829      (268,959)
                                      ------------------------------------------
Less: Reclassification adjustment
   Gains (losses) realized in net
   income                                  880,502         34,330      (162,385)
   Income taxes                           (308,176)       (12,016)       56,835
                                      ------------------------------------------
Reclassification adjustment for gains 
   (losses) realized in net income         572,326         22,314      (105,550)
                                      ------------------------------------------
Other comprehensive income - change
   in unrealized gains                   $(497,395)    $2,836,515     $(163,409)
                                      ==========================================

                                       63
<PAGE>
                          TRIAD GUARANTY INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2. INVESTMENTS

The amortized cost and the fair value of investments are as follows:

<TABLE>
<CAPTION>

                                                       Gross           Gross
                                    Amortized       Unrealized       Unrealized         Fair
                                       Cost            Gains           Losses           Value
                                   --------------------------------------------------------------
<S>                                  <C>             <C>             <C>            <C>         
At December 31, 1998
 Available-for-sale securities:
   Fixed maturity securities:
     Corporate                      $ 36,386,473     $  599,664      $1,688,249     $ 35,297,888
     U.S. Government                   8,587,562        340,609               -        8,928,171
     Mortgage-backed                   1,359,163         52,768               -        1,411,931
     State and municipal             107,535,039      4,317,425          98,625      111,753,839
                                   --------------------------------------------------------------
Total                                153,868,237      5,310,466       1,786,874      157,391,829
   Equity securities                  11,550,510      3,027,626         554,124       14,024,012
                                   --------------------------------------------------------------
Total                               $165,418,747     $8,338,092      $2,340,998     $171,415,841
                                   ==============================================================

At December 31, 1997
 Available-for-sale securities:
   Fixed maturity securities:
     Corporate                      $ 12,260,852     $  475,211      $   38,842     $ 12,697,221
     U.S. Government                   9,823,960        374,877           1,406       10,197,431
     Mortgage-backed                   4,679,115        127,190           4,950        4,801,355
     State and municipal              68,789,100      3,039,784           9,529       71,819,355
     Public utilities                    203,109          7,016               -          210,125
                                  ---------------------------------------------------------------
 Total                                 95,756,136     4,024,078          54,727       99,725,487
   Equity securities                   8,666,815      2,810,028          10,815       11,466,028
                                  ---------------------------------------------------------------
 Total                               $104,422,951    $6,834,106      $   65,542     $111,191,515
                                  ===============================================================

</TABLE>

The amortized  cost and estimated  fair value of  investments  in fixed maturity
securities, at December 31, 1998, are summarized by stated maturity as follows:

                                                Available-for-Sale
                                         -----------------------------------
                                              Amortized          Fair
                                                 Cost            Value
                                         -----------------------------------
Maturity:
   One year or less                        $    6,583,097   $    6,661,101
   After one year through five years           22,091,536       22,877,328
   After five years through ten years          28,707,282       28,895,494
   After ten years                             95,127,159       97,545,975
   Mortgage-backed securities                   1,359,163        1,411,931
                                         ===================================
Total                                        $153,868,237     $157,391,829
                                         ===================================


                                       64
<PAGE>
                               TRIAD GUARANTY INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



2. INVESTMENTS (CONTINUED)

Realized gains and losses on sales of investments are as follows:

                                                 Year ended December 31
                                           1998            1997           1996
                                      ------------------------------------------
     Securities available-for-sale:
        Fixed maturity securities:
          Gross realized gains         $307,255     $   35,274       $  28,425
          Gross realized losses         (73,329)      (270,818)        (48,112)
        Equity securities:
          Gross realized gains          707,695        360,066          86,607
          Gross realized losses         (91,425)      (117,810)       (106,244)
        Other investments:
          Gross realized gains           30,306         42,520          30,509
          Gross realized losses               -        (14,902)       (153,570)
                                      ------------------------------------------
     Net realized gains (losses)       $880,502     $   34,330       $(162,385)
                                      ==========================================

Net unrealized appreciation  (depreciation) on fixed maturity securities changed
by  $(445,759)   $2,809,249,   and   $(1,228,326),   in  1998,  1997  and  1996,
respectively;  the corresponding  amounts for equity securities were $(325,711),
$1,571,472 and $961,475.

Major  categories  of the  Company's  net  investment  income are  summarized as
follows:

                                                 Year ended December 31
                                           1998            1997         1996
                                      ------------------------------------------
   Income:
      Fixed maturities                  $8,625,387     $5,849,084    $5,260,073
      Preferred stocks                     280,032        114,610        37,858
      Common stocks                        256,918        279,640       236,715
      Cash and short-term investments      494,565        212,033       122,461
                                      ------------------------------------------
                                         9,656,902      6,455,367     5,657,107
   Expenses                                367,876        221,225       210,435
                                      ------------------------------------------
   Net investment income                $9,289,026     $6,234,142    $5,446,672
                                      ==========================================

At December 31, 1998 and 1997,  investments with an amortized cost of $6,314,934
and $6,404,051,  respectively,  were on deposit with state insurance departments
to satisfy regulatory requirements.

                                       65
<PAGE>
                               TRIAD GUARANTY INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



3. DEFERRED POLICY ACQUISITION COSTS

An analysis of deferred policy acquisition costs is as follows:

                                                 Year ended December 31
                                        1998            1997          1996
                                      ------------------------------------------

  Balance at beginning of year         $12,587,355    $10,198,397    $ 7,576,684
  Acquisition costs deferred:
     Sales compensation                  6,353,311      4,265,208      3,330,059
     Underwriting and issue expenses     3,029,808      2,244,219      2,526,530
                                      ------------------------------------------
                                         9,383,119      6,509,427      5,856,589

  Amortization of acquisition expenses   5,954,915      4,120,469      3,234,876
                                      ------------------------------------------
  Net increase                           3,428,204      2,388,958      2,621,713
                                      ------------------------------------------
  Balance at end of year               $16,015,559    $12,587,355    $10,198,397
                                      ==========================================


                                       66
<PAGE>
                               TRIAD GUARANTY INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



4. RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

Activity  for the reserve for unpaid  losses and loss  adjustment  expenses  for
1998, 1997 and 1996 are summarized as follows:

                                           1998          1997           1996
                                        ----------------------------------------
Reserve for losses and loss 
  adjustment expenses at January 1,
  net of reinsurance recoverables        $8,909,121    $5,974,664   $ 3,703,251
Incurred  losses and loss  adjustment 
  expenses net of reinsurance 
  recoveries (principally in respect 
  of default notices occurring in):
     Current year                         7,953,412     6,022,700     4,673,130
     Redundancy on prior years             (944,794)     (845,622)   (1,394,000)
                                        ----------------------------------------
Total incurred losses and loss
  adjustment expenses                     7,008,618     5,177,078     3,279,130

Loss and loss adjustment expense
  payments net of reinsurance
  recoveries (principally in respect
  of default  notices occurring in):
     Current year                           266,983       210,493       166,717
     Prior years                          3,534,822     2,032,128       841,000
                                        ----------------------------------------
Total loss and loss adjustment 
  expense payments                        3,801,805     2,242,621     1,007,717
                                        ----------------------------------------

Reserve for losses and loss 
  adjustment expenses at December 31,
  net of  reinsurance  recoverables
  of $27,056, $51,290 and $330,733 
  in 1998, 1997 and 1996, respectively  $12,115,934    $8,909,121   $ 5,974,664
                                        ========================================

The foregoing reconciliation shows a redundancy in reserves has emerged for each
of the years presented.  These redundancies  resulted  principally from settling
case-basis  reserves for amounts less than expected or reducing incurred but not
reported reserves on default notices occurring in prior years.


                                       67
<PAGE>
                               TRIAD GUARANTY INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



5. COMMITMENTS

The Company  leases  certain office  facilities  and equipment  under  operating
leases.  Rental  expense for all leases was $902,866,  $835,596 and $609,215 for
1998, 1997, and 1996, respectively. Future minimum payments under noncancellable
operating leases at December 31, 1998 are as follows:

                 1999        $  904,525
                 2000           813,412
                 2001           715,827
                 2002           294,286
                 2003            43,456
                            -----------
                             $2,771,506
                            ===========

6. FEDERAL INCOME TAXES

Triad purchases  ten-year  non-interest  bearing United States Mortgage Guaranty
Tax and Loss Bonds in lieu of paying federal income taxes.  At December 31, 1998
and 1997, Triad was obligated to purchase  approximately  $154,000 and $425,000,
respectively, of United States Mortgage Guaranty Tax and Loss Bonds.

Income tax expense  differed  from the amounts  computed by applying the Federal
statutory income tax rate to income before taxes as follows:

                                     1998           1997         1996
                                ------------------------------------------

     Income tax computed at
       statutory rate            $12,268,326    $ 8,835,231   $5,683,563
     Increase (decrease) in
       taxes resulting from:
        Tax-exempt interest       (1,559,067)    (1,002,062)    (751,407)
        Other                        (30,970)       168,525      109,629
                                ------------------------------------------
      Income tax expense         $10,678,289    $ 8,001,694   $5,041,785
                                ==========================================


                                       68
<PAGE>
                               TRIAD GUARANTY INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



6. FEDERAL INCOME TAXES  (CONTINUED)

The tax effects of temporary  differences that give rise to significant portions
of deferred  tax assets and deferred  tax  liabilities  at December 31, 1998 and
1997 are presented below.

                                                  1998              1997
                                             --------------------------------
    DEFERRED TAX LIABILITIES
    Statutory contingency reserve              $25,605,001      $17,370,996
    Deferred policy acquisition costs            5,605,446        4,405,574
    Unrealized investment gain                   2,101,170        2,368,998
    Other                                          861,296          686,937
                                             --------------------------------
    Total deferred tax liabilities              34,172,913       24,832,505

    DEFERRED TAX ASSETS
    United States Mortgage Guaranty Tax and
      Loss Bonds                                25,256,666       16,293,366
    Unearned premiums                              536,397          611,467
    Losses and loss adjustment expenses            341,449          250,599
    Other                                          107,523          155,199
                                             --------------------------------
    Total deferred tax assets                   26,242,035       17,310,631
                                             --------------------------------
    Net deferred tax liability                 $ 7,930,878      $ 7,521,874
                                             ================================


                                       69
<PAGE>
                               TRIAD GUARANTY INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



7. INSURANCE IN FORCE, DIVIDEND RESTRICTION, AND STATUTORY RESULTS

Approximately  60% of Triad's net risk in force is  concentrated in seven states
including 12% in Illinois, 11% in Georgia, 10% in California,  8% in Florida, 7%
in Texas,  6% in Virginia,  and 6% in North  Carolina.  While Triad continues to
diversify its risk in force  geographically,  a prolonged  recession in its high
concentration  areas could result in higher  incurred losses and loss adjustment
expenses for Triad.

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 December 31, 1998 and 1997,  as presented
below, was computed by applying the various percentage settlement options to the
insurance in force  amounts  based on the original  insured  amount of the loan.
Triad's ratio is as follows:

                                             1998                 1997
                                     ---------------------------------------

     Net risk                           $2,776,205,499       $2,231,572,130
                                     =======================================

     Statutory capital and surplus      $   89,539,785       $   60,929,830
     Contingency reserve                    81,614,277           54,766,669
                                     ---------------------------------------
     Total                              $  171,154,062       $  115,696,499
                                     =======================================

     Risk-to-capital ratio                  16.2 to 1            19.3 to 1
                                     =======================================

Triad and TGAC are each required under the Illinois  Insurance Code (the "Code")
to  maintain  minimum  statutory  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  market  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 statutory
surplus as regards  policyholders,  or (b) statutory net income for the calendar
year preceding the date of the dividend.  Net income as determined in accordance
with  statutory   accounting   practices  was  $31,252,891,   $22,916,215,   and
$13,369,769 for the years ended December 31, 1998, 1997 and 1996,  respectively.
At December 31, 1998, the amount of the Company's equity that can be paid out in
dividends to the  stockholders  is  $5,823,857,  which is the earned  surplus of
Triad on a statutory basis.


                                       70
<PAGE>
                               TRIAD GUARANTY INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)




8. RELATED PARTY TRANSACTIONS

The Company and Triad pay affiliated companies for management,  investment,  and
other services. The total expense incurred for such items was $336,143, $284,660
and $303,555 in 1998, 1997 and 1996,  respectively.  In addition, in 1998, Triad
began  providing  certain  investment  accounting,  reporting,  and  maintenance
functions  for an  affiliate.  Income  earned  during 1998 for such services was
$12,309.  Management  believes  that the income and  expenses  incurred for such
services  approximate  costs that the Company and affiliates would have incurred
if those services had been provided by unaffiliated third parties.

9. EMPLOYEE BENEFIT PLAN

Substantially  all employees  participate in the Company's 401(k) Profit Sharing
Plan.  Under the plan,  employees elect to defer a portion of their wages,  with
the  Company  matching  deferrals  at the  rate  of 50% of the  first  8% of the
employee's salary deferred.  The Company  contributed  $225,797,  $151,134,  and
$123,699 for the years ended December 31, 1998, 1997 and 1996, respectively,  to
the plan.

10. REINSURANCE

Certain  premiums  and  losses  are  assumed  from and ceded to other  insurance
companies under various reinsurance agreements. The ceding agreement principally
provides  Triad with  increased  capacity to write  business  and achieve a more
favorable geographic dispersion of risk.

Effective  January 1, 1996,  Triad  eliminated  quota share  reinsurance  on new
business  and  recaptured  substantial  portions  of  its  coverage  on  renewal
business.  Triad received approximately  $1,100,000 and re-established reserves,
unearned  premiums,  and deferred  acquisition  costs for the  previously  ceded
business  with no effect on income.  Also,  effective  January  1,  1996,  Triad
obtained  $25.0  million  in  excess of loss  reinsurance  designed  to  provide
reinsurance protection in case of catastrophic levels of losses.


                                       71
<PAGE>
                          TRIAD GUARANTY INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



10. REINSURANCE (CONTINUED)

Effective  October 1, 1997, Triad  recaptured most of the remaining  coverage on
renewal  business.  Triad  received  approximately  $168,000 and  re-established
reserves,  unearned premiums,  and deferred acquisition costs for the previously
ceded business with no effect on income.

Reinsurance activity for the years ended December 31, 1998, 1997, and 1996 is as
follows:

                                      1998            1997          1996
                                  -----------------------------------------

       Earned premiums ceded       $1,098,515     $1,809,012     $2,319,927
       Losses ceded                    (3,198)       140,734        165,224
       Earned premiums assumed         15,500         19,804         29,012
       Losses assumed                  50,241         67,903         99,910

Reinsurance   contracts   do  not  relieve   Triad  from  its   obligations   to
policyholders.  Failure of the reinsurer to honor its obligation could result in
losses to Triad;  consequently,  allowances are  established  for amounts deemed
uncollectible.  Triad  evaluates the financial  condition of its  reinsurers and
monitors credit risk arising from similar  geographic  regions,  activities,  or
economic   characteristics  of  its  reinsurers  to  minimize  its  exposure  to
significant losses from reinsurer insolvency.

11. LONG-TERM STOCK INCENTIVE PLAN

In August 1993, the Company adopted the 1993 Long-Term Stock Incentive Plan (the
"Plan").  Under the Plan,  certain  directors,  officers,  and key employees are
eligible  to be  granted  various  stock-based  awards.  The number of shares of
common  stock  which  may be  issued  or  sold or for  which  options  or  stock
appreciation rights may be granted under the Plan is 2,100,000 shares.






                                       72
<PAGE>
                               TRIAD GUARANTY INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)




11. LONG-TERM STOCK INCENTIVE PLAN (CONTINUED)

Information concerning the stock option plan is summarized below.

                                                                    Weighted
                                     Number of          Option       Average
                                      Shares             Price    Exercise Price
                                   ---------------------------------------------

1996
   Outstanding, beginning of year       797,850    $  4.58 -  8.92    $  6.13
   Granted                              239,256       8.84 - 15.13      11.47
   Exercised                             33,948       5.34 -  6.94       6.06
   Canceled                               9,462       5.96 - 11.49       9.56
   Outstanding, end of year             993,696       4.58 - 15.13       7.38
   Exercisable, end of year             738,229       4.58 - 11.49       6.54

1997
   Outstanding, beginning of year       993,696       4.58 - 15.13       7.38
   Granted                              184,550      14.81 - 38.27      20.13
   Exercised                              2,999       4.58 -  8.92       7.47
   Outstanding, end of year           1,175,247       4.58 - 38.27       9.39
   Exercisable, end of year             887,462       4.58 - 15.13       6.91

1998
   Outstanding, beginning of year     1,175,247       4.58 - 38.27       9.39
   Granted                              126,675      22.50 - 49.08      42.52
   Exercised                            122,648       4.58 - 20.07       7.79
   Canceled                                 667      14.81              14.81
   Outstanding, end of year           1,178,607       4.58 - 49.08      13.11
   Exercisable, end of year             934,027       4.58 - 49.08       9.05



                                       73
<PAGE>
                               TRIAD GUARANTY INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



11. LONG-TERM STOCK INCENTIVE PLAN (CONTINUED)

Information concerning stock options outstanding and exercisable at December 31,
1998 is summarized below.


                       Outstanding                           Exercisable
----------------------------------------------------  --------------------------

                              Weighted    Weighted                    Weighted
                              Average     Average                      Average
  Number of                   Exercise    Remaining    Number of     Exercisable
    Shares     Option Price    Price        Life         Shares         Price
----------------------------------------------------  --------------------------

   675,150    $4.58 - $8.92     $6.17        5.2        675,150         $6.17
   240,698    10.17 - 17.00     12.28        7.3        194,329         12.06
   138,084    20.07 - 29.44     21.09        8.2         39,414         21.07
    63,900    37.75 - 39.75     38.98        9.2          7,630         37.86
    60,775    41.94 - 49.08     48.11        9.1         17,504         49.08
============                                          ---------
 1,178,607                                              934,027
============                                          =========


At December  31,  1998,  1,818,905  shares of the  Company's  common  stock were
reserved, and 640,298 shares were available for issuance under the Plan.

The options issued under the Plan in 1998, 1997, and 1996 vest over three years.
Certain of the options will immediately vest in the event of a change in control
of the Company.  Options granted under the Plan terminate no later than 10 years
following the date of grant.

Pro forma information required by Financial Accounting Standards Board Statement
No. 123, "Accounting for Stock-Based Compensation", has been estimated as if the
Company had accounted for stock-based awards under the fair value method of that
Statement.  The fair  value of  options  granted  in  1996,  1997,  and 1998 was
estimated at the date of the grant using a  Black-Scholes  option  pricing model
with the following  weighted-average input assumptions:  risk-free interest rate
of 6.2% for 1996,  5.7% for 1997,  and 5.1% for  1998;  dividend  yield of 0.0%;
expected  volatility  of .20 for  1996,  .29 for 1997,  and .40 for 1998;  and a
weighted-average expected life of the option of seven years.


                                       74
<PAGE>
                               TRIAD GUARANTY INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



11. LONG-TERM STOCK INCENTIVE PLAN (CONTINUED)

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the Company's stock options have  characteristics  significantly  different from
those of traded options and because changes in the subjective input  assumptions
can materially  affect the fair value  estimate,  in management's  opinion,  the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.

The following table  summarizes the fair value of options granted in 1998, 1997,
and 1996.

                                   Weighted-Average        Weighted-Average
                                    Exercise Price             Fair Value
       Type of Option           1998     1997     1996    1998    1997     1996
-----------------------------  ------------------------  -----------------------
Stock Price = Exercise Price   $37.87   $18.65   $11.44   $13.42   $5.73   $3.16
Stock Price < Exercise Price   $49.08   $20.78   $11.48   $11.29   $3.88   $1.70

For purposes of pro forma  disclosures,  the estimated fair value of the options
is  amortized  to expense over the options'  vesting  period.  Had  compensation
expense for stock  options  been  recognized  using the fair value method on the
grant date,  net income and  earnings  per share on a pro forma basis would have
been (in thousands except for earnings per share information):

                                         1998           1997           1996
                                   --------------------------------------------
Net Income - as reported                 $24,374         $17,242       $11,197

Net Income - pro forma                   $23,779         $16,937       $11,054

Earnings per share - as reported:
   Basic                              $    1.83       $    1.30     $    0.84
   Diluted                            $    1.76       $    1.26     $    0.83

Earnings per share - pro forma:
   Basic                              $    1.78       $    1.28     $    0.83
   Diluted                            $    1.72       $    1.24     $    0.82

The preceding effects of applying  Statement 123 are not likely to be indicative
of the effects on net income and  earnings  per share in future years due to the
vesting period of awards granted in these years.

                                       75
<PAGE>
                               TRIAD GUARANTY INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



12. LONG-TERM DEBT

In January of 1998, the Company  completed a $35.0 million  private  offering of
notes due January 15, 2028. Proceeds from the offering,  net of debt issue costs
of  $547,102,   totaled  $34,542,898.   The  notes,  which  represent  unsecured
obligations  of the Company,  bear  interest at a rate of 7.9% per annum and are
non-callable.

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values and fair values of financial  instruments as of December 31,
1998 and 1997 are summarized below.

<TABLE>
<CAPTION>
                                          1998                              1997
                              -----------------------------  ---------------------------------
                                Carrying        Fair             Carrying           Fair
                                  Value         Value              Value            Value
                              -----------------------------  ---------------------------------
<S>                            <C>           <C>                 <C>             <C>        
Financial Assets
Fixed maturities available-
   for-sale                    $157,391,829  $157,391,829        $99,725,487     $99,725,487
Equity securities
   available-for-sale            14,024,012    14,024,012         11,466,028      11,466,028

Financial Liabilities
Long-term debt                   34,457,080    38,468,000               -               -

</TABLE>

The fair values of cash and short-term  investments  approximate  their carrying
values due to their short-term maturity or availability.

The fair values of fixed  maturity  securities and equity  securities  have been
determined using quoted market prices for securities traded in the public market
or prices using bid or closing  prices for  securities  not traded in the public
marketplace. These fair values are disclosed in Note 2.

The fair value of the Company's  long-term  debt is estimated  using  discounted
cash flow analysis,  based on the Company's current incremental  borrowing rates
for similar types of borrowing arrangements.

                                       76
<PAGE>



14. UNAUDITED QUARTERLY FINANCIAL DATA

The following is a summary of the unaudited  quarterly results of operations for
the years ended December 31, 1998 and 1997 (in thousands except per share data):

                                                 1998 Quarter
                                -----------------------------------------------
                                  First     Second    Third    Fourth    Year
                                -----------------------------------------------

Net premiums written             $11,335   $12,532   $13,372  $14,658  $51,897
Earned premiums                   11,930    12,659    13,656   14,577   52,822
Net investment income              2,039     2,326     2,424    2,501    9,290
Net losses incurred                1,477     1,107     1,716    2,709    7,009
Underwriting and other expenses
                                   4,841     5,301     5,423    5,379   20,944
Net income                         5,383     6,045     6,463    6,483   24,374
Basic earnings per share            .40       .45       .48       .48     1.83
Diluted earnings per share          .39       .44       .47       .47     1.76

                                              1997 Quarter
                                -----------------------------------------------
                                  First     Second    Third    Fourth    Year
                                -----------------------------------------------

Net premiums written              $7,379    $9,128   $10,611  $11,213  $38,331
Earned premiums                    7,849     8,985    10,378   11,310   38,522
Net investment income              1,472     1,502     1,730    1,530    6,234
Net losses incurred                1,196     1,090     1,520    1,371    5,177
Underwriting and other expenses
                                   3,095     3,530     3,754    3,998   14,377
Net income                         3,447     4,033     4,738    5,024   17,242
Basic earnings per share            .26       .30       .36       .38     1.30
Diluted earnings per share          .25       .30       .34       .36     1.26


                                       77
<PAGE>



                                   SCHEDULE I
       SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
                               TRIAD GUARANTY INC.
                                DECEMBER 31, 1998

                                                                       Amount at
                                                                     Which Shown
                                              Amortized      Fair     in Balance
Type of Investment                               Cost        Value       Sheet
                                              ----------------------------------
                                                     (dollars in thousands)
Fixed maturity securities, available-for-sale:
  Bonds:
     U.S. Government obligations................ $  8,588    $  8,928  $  8,928
     Mortgage-backed securities.................    1,359       1,412     1,412
     State and municipal bonds..................  107,535     111,754   111,754
     Corporate bonds............................   36,135      35,043    35,043
     Public utilities...........................      251         255       255
                                                 --------    --------  --------
   Total........................................  153,868     157,392   157,392
                                                 --------    --------  --------

Equity securities, available-for-sale:
   Common stocks:
       Public utilities.........................      857       1,395     1,395
       Bank, Trust, and Insurance...............      793       1,347     1,347
       Industrial & miscellaneous...............    5,257       6,540     6,540
   Preferred Stock .............................    4,644       4,742     4,742
                                                 --------    --------  --------
    Total.......................................   11,551      14,024    14,024
                                                 --------    --------  --------
Short-term investments..........................    5,885       5,885     5,885
                                                 --------    --------  --------

Total investments other than investments in
related parties................................. $171,304    $177,301  $177,301
                                                 ========    ========  ========










                                       78

<PAGE>



           Schedule II - Condensed Financial Information of Registrant
                            Condensed Balance Sheets
                               Triad Guaranty Inc.
                                (Parent Company)


                                                              December 31
                                                           1998         1997
                                                           ----         ----
                                                         (dollars in thousands)
Assets:
   Fixed maturities- available-for-sale..............    $  9,439     $   ---
   Equity securities- available-for-sale.............         271         ---
   Notes receivable from subsidiary..................      25,000         ---
   Investment in subsidiaries........................     136,369      111,200
   Cash and short-term investments...................         943          562
   Accrued investment income.........................       1,225         ---
   Deferred income taxes.............................          86         ---
   Other assets......................................        ---            56
                                                         --------     --------
   Total assets......................................    $173,333     $111,818
                                                         ========     ========

Liabilities and stockholders' equity:
Liabilities:
   Current taxes payable.............................    $     45     $      3
   Long-term debt....................................      34,457         ---
   Accrued interest on long-term debt................       1,275         ---
   Accrued expenses and other liabilities............          25           35
                                                         --------     --------
   Total liabilities.................................      35,802           38


Stockholders' equity:
   Common stock......................................         134          133
   Additional paid-in capital........................      61,538       59,369
   Accumulated other comprehensive income............       3,908        4,405
   Retained earnings.................................      71,951       47,873
                                                         --------     --------
Total stockholders' equity...........................     137,531      111,780
                                                         --------     --------
Total liabilities and stockholders' equity...........    $173,333     $111,818
                                                         ========     ========

See notes to condensed financial statements.


                                       79

<PAGE>



           SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                         CONDENSED STATEMENTS OF INCOME
                               TRIAD GUARANTY INC.
                                (PARENT COMPANY)



                                                       Year Ended December 31
                                                       ----------------------
                                                    1998        1997      1996
                                                    ----        ----      ----
                                                       (dollars in thousands)
Revenues:
   Net investment income........................   $ 2,787    $    22   $    17
   Realized investment gains....................        14       ---       ---
                                                   -------    --------  -------
                                                     2,801         22        17
                                                   -------    -------   -------
Expenses:
   Interest on long-term debt...................     2,554       ---       ---
   Operating expenses...........................         5          6         6
                                                   -------    -------   -------
                                                     2,559          6         6
                                                   -------    -------   -------
Income before federal income taxes
   and equity in undistributed income 
   of subsidiaries..............................       242         16        11

Federal income tax expense......................        80          2       151
                                                   -------    -------   -------
Income (loss) before equity in
   undistributed income of subsidiaries.........       162         14      (140)
Equity in undistributed income of
   subsidiaries.................................    24,213     17,228    11,337
                                                   -------    -------   -------

Net income......................................   $24,375    $17,242   $11,197
                                                   =======    =======   =======


See notes to condensed financial statements.


                                       80

<PAGE>



           SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                       CONDENSED STATEMENTS OF CASH FLOWS
                               TRIAD GUARANTY INC.
                                (PARENT COMPANY)

                                                          Year Ended December 31
                                                          ----------------------
                                                        1998     1997     1996
                                                        ----     ----     ----
Operating Activities                                    (dollars in thousands)
  Net income........................................ $ 24,375  $17,242  $11,197
  Adjustments to reconcile net income to net cash
     provided by operating activities:
     Equity in undistributed income of subsidiaries.  (24,213) (17,228) (11,337)
     Accrued investment income......................   (1,225)    ---      ---
     Other assets...................................       56      (40)      20
     Deferred income taxes..........................       42     ---       151
     Current tax payable............................       42        2     ---
     Accrued interest on long-term debt.............    1,275     ---      ---
     Accretion of discount on investments...........     (130)    ---      ---
     Amortization of debt issue costs...............        4     ---      ---
     Realized investment gain on securities.........      (14)    ---      ---
     Accrued expenses and other liabilities.........      (10)      30      (15)
                                                     --------  -------  -------
  Net cash provided by operating activities.........      202        6      16
Investing Activities
  Securities available-for-sale:                          
     Fixed Maturities:                                
        Purchases...................................  (13,909)    ---      ---
        Sales.......................................    4,276     ---      ---
     Equities                                         
        Purchases...................................     (300)    ---      ---
     Issuance of Surplus Note to subsidiary.........  (25,000)    ---      ---
                                                     --------  -------  -------
  Net cash used in investing activities               (34,933)    ---      ---
Financing Activities
     Proceeds from issuance of long term debt.......   34,453     ---      ---
     Proceeds from exercise of stock options........      956       22      206
     Retirement of common stock.....................     (297)    ---      ---
                                                     --------  -------  -------
  Net cash provided by financing activities.........   35,112       22      206
                                                     --------  -------   ------
  Increase in cash and short-term investments.......      381       28      222
  Cash and short-term investments at beginning
      of year.......................................      562      534      312
                                                     --------  -------  -------
  Cash and short-term investments at end of year.... $    943  $   562  $   534
                                                     ========  =======  =======

See notes to condensed financial statements.


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<PAGE>



           SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                               TRIAD GUARANTY INC.
                                (PARENT COMPANY)
                               SUPPLEMENTARY NOTES


NOTE 1

     In the parent company financial statements, the Company's investment in its
subsidiaries  is stated at cost plus  equity in  undistributed  earnings  of the
subsidiaries.  The Company's share of net income of its subsidiaries is included
in income using the equity method.  The  accompanying  Parent Company  financial
statements  should  be read  in  conjunction  with  the  Consolidated  Financial
Statements and Notes to Consolidated  Financial  Statements  included as part of
this Form 10-K.

NOTE 2

     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 3

     The  amortized  cost and the fair value of  investments  held by the parent
company are as follows (dollars in thousands):

                                               Gross       Gross
                                  Amortized  Unrealized  Unrealized
                                    Cost       Gains       Losses     Fair Value
AT DECEMBER 31, 1998                                   
Available-for-sale Securities:
   Fixed Maturity Securities:
     Corporate...................  $ 9,777      $113        $451        $9,439
                                    ------      ----        ----        ------
        Total....................    9,777       113         451         9,439
   Equity Securities.............      300       --           29           271
                                    ------      ----        ----        ------
        Total....................  $10,077      $113        $480        $9,710
                                   =======      ====        ====        ======










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<PAGE>



           SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                               TRIAD GUARANTY INC.
                                (PARENT COMPANY)
                               SUPPLEMENTARY NOTES


NOTE 3 (CONTINUED)

     Major categories of the parent company's  investment  income are summarized
as follows (dollars in thousands):


                                              Year Ended December 31
                                              ----------------------
                                           1998        1997     1996
                                            ----        ----     ----
Income:
   Fixed Maturities..................      $  679        $--     $--
   Equity Securities.................          17         --      --
   Cash and short-term investments...          71         22      417
   Note receivable from subsidiary...       2,052         --      --
                                           ------        ---     ----
   Total.............................       2,819
Expenses.............................          32         --      --
                                           ------        ---     ----
Net investment income................      $2,787        $22     $ 17
                                           ======        ===     ====


NOTE 4

     In January of 1998, the Company completed a $35 million private offering of
notes due January 15, 2028. Proceeds from the offering,  net of debt issue costs
of  $547,102,   totaled  $34,542,898.   The  notes,  which  represent  unsecured
obligations  of the Company,  bear  interest at a rate of 7.9% per annum and are
non-callable.


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<PAGE>


                            SCHEDULE IV - REINSURANCE

                               TRIAD GUARANTY INC.
                        MORTGAGE INSURANCE PREMIUM EARNED
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996



                                                                     Percentage
                                 Ceded To      Assumed                of Amount
                         Gross     Other     From Other     Net        Assumed
                        Amount   Companies    Companies    Amount       to Net
                       --------------------------------------------------------
                                   (dollars in thousands)

1998................   $53,905     $1,099       $16       $52,822        0.0%
                       =======     ======       ===       =======
1997................   $40,311     $1,809       $20       $38,522        0.1%
                       =======     ======       ===       =======
1996................   $27,019     $2,320       $29       $24,728        0.1%
                       =======     ======       ===       =======





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