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 1934
For the fiscal year ended December 31, 2002
[ ] 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
 incorporation or organization)                           Identification No.)

                            101 SOUTH STRATFORD ROAD
                       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 RegulationS-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.

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2). Yes /X/ No / /.

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant, computed by reference to the price at which
the common  equity was last sold,  or the  average  bid and asked  price of such
common  equity,  as of the last business day of the  registrant's  most recently
completed second fiscal quarter:  $353,805,876 as of June 28, 2002, which amount
excludes  the value of all shares  beneficially  owned (as defined in Rule 13d-3
under the  Securities  Exchange  Act of 1934) by officers  and  directors of the
registrant  (however this does not constitute a representation or acknowledgment
that any such individual is an affiliate of the registrant).

The number of shares of the registrant's common stock, par value $.01 per share,
outstanding as of February 15, 2003, was 14,218,674.

Portions of the following documents are               Part of this Form 10-K
incorporated by reference into this                  into which the document is
Form 10-K:                                           incorporated by reference

     Triad Guaranty Inc.                                     Part III
     Proxy Statement for 2003 Annual Meeting
     of Stockholders
<PAGE>
                                     PART I

ITEM 1.  BUSINESS.

     Triad Guaranty Inc. is a holding  company which,  through its  wholly-owned
subsidiary,  Triad Guaranty Insurance  Corporation  ("Triad"),  provides private
mortgage insurance ("MI") coverage in the United States to residential  mortgage
lenders and investors. Triad Guaranty Inc. and its subsidiaries are collectively
referred to as the  "Company".  The  "Company"  when used  within this  document
refers  to the  holding  company  and/or  one or  more of its  subsidiaries,  as
appropriate.

     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  National  Mortgage  Association
("Fannie Mae") and the Federal Home Loan Mortgage  Corporation  ("Freddie Mac").
Under risk-based capital regulations applicable to most financial  institutions,
private mortgage insurance also reduces the capital requirement for such lenders
on  residential  mortgage  loans  with  equity of less than  20%.  In  addition,
mortgage  insurance is purchased  by investors  and lenders who seek  additional
default protection or capital relief on loans with equity of greater than 20%.

     Private  mortgage  insurance has  traditionally  involved  underwriting and
insuring  an  individual  loan.  This  type of  mortgage  insurance  is known as
"traditional flow" mortgage insurance and will be referred to as such throughout
this  document.  In 2001,  the Company began  participating  in structured  bulk
transactions which involve underwriting and insuring a group of loans. This type
of mortgage  insurance is known as "structured bulk" mortgage insurance and will
be referred to as such throughout this document.

     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 18.9% and CML owns 18.2% of the  outstanding
Common Stock of the Company.

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

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<PAGE>

TYPES OF MORTGAGE INSURANCE PRODUCTS

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 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 offers primary  coverage  generally from 6% to 45% of the claim
amount, with most coverage from 12% to 40% as of December 31, 2002. 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 investor
requirements to reduce investor loss exposure on loans they purchase.

     Fannie  Mae  and  Freddie  Mac  are  the  ultimate  purchasers  of a  large
percentage  of the  loans  insured  by the  Company.  Generally  they  require a
coverage  percentage that will reduce their loss exposure on loans they purchase
to 75% or less of the property's value at the time the loan is originated. Since
1999,  Fannie Mae and Freddie Mac have accepted lower coverage  percentages  for
certain  categories  of mortgages  when the loan is approved by their  automated
underwriting  services.  The reduced coverage percentages limit loss exposure to
80% or less of the property's value at the time the loan is originated.

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

     With respect to its traditional flow mortgage  insurance,  the premiums are
paid by either the borrower  (borrower-paid) or the lender (lender-paid).  Under
the Company's borrower-paid plan, mortgage insurance premiums are charged to the
mortgage lender or servicer which collects the premium from the borrower and, in
turn, remits the premiums to the Company.  Under the Company's lender-paid plan,
mortgage insurance premiums are charged to the mortgage lender or loan servicer,
which pays the premium to the Company.  The lender typically builds the mortgage
insurance premium into the borrower's  interest rate.  Approximately 72% and 82%
of the Company's  traditional flow insurance was written under its borrower-paid
plan during 2002 and 2001,  respectively.  The  remainder  was written under its
lender-paid  plan (28% and 18% of  traditional  flow  insurance  during 2002 and
2001,  respectively).  The Company's  lender-paid  volume is concentrated  among

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<PAGE>

larger mortgage lender  customers.  The premium rate structures  associated with
the lender-paid plan are lower than standard borrower-paid rates. The Company is
able to have lower premium rate structures with  lender-paid  plans due to lower
acquisition  costs,  higher expected  persistency,  and expected  favorable loss
development associated with lender-paid plans.

     Premiums may be remitted to the Company monthly, annually, or in one single
payment.  The monthly  premium  payment plan  involves the payment of one or two
months' premium 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
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  approximately 80% and 88% of traditional flow
insurance written in 2002 and 2001, respectively.

     The annual  premium  payment  plan  requires a  first-year  premium paid at
mortgage  loan  closing  with  annual  renewal  payments.  With  respect  to the
Company's  borrower-paid  plan,  renewal payments are collected monthly from the
borrower  and held in  escrow by the  mortgage  lender or  servicer  for  annual
remittance to the Company in advance of each renewal year.  Annual premium plans
represented  approximately  20% and 11% of traditional flow insurance written in
2002 and 2001, respectively.  The increase in the percentage of traditional flow
insurance  written  under the  Company's  annual  premium plan is primarily  the
result of a large mortgage lender customer choosing the Company's annual premium
plan for its lender-paid volume in 2002.

     The single  premium  payment  plan  requires a single  payment paid at 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.  Single premium plans  represented  less than 1% of  traditional  flow
insurance written in 2002 and 2001.

POOL INSURANCE

     Pool insurance  generally has 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. The Company does not offer this traditional form of pool insurance.

     In the second quarter of 2000, the Company began to participate in modified
pool  insurance  programs  on loans  purchased  by Freddie  Mac.  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.  At December 31, 2002,  Freddie Mac modified pool

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<PAGE>

insurance programs represented less than 1% of the Company's insurance in force.
The Company  ceased  participation  in the Freddie Mac modified  pool  insurance
programs  in  September  of 2002 and has not  entered  into any new  Freddie Mac
programs subsequent to that date.

STRUCTURED BULK TRANSACTIONS

     The Company  participates in structured bulk transactions.  Structured bulk
transactions  involve  insuring a group of loans  where the  insured  loans have
individual  loan  level  coverage.  These  transactions  frequently  include  an
aggregate  stop-loss  limit  applied  to the  entire  group  of  insured  loans.
Insurance  issued in structured bulk  transactions is generally  either primary,
supplemental  if the policy  already has primary  coverage,  or a combination of
both.  Individual  loan  level  coverage  is  determined  in order to reduce the
insured's  exposure on a given loan down to a percentage  of the loan's  balance
("down to" coverage).  Through December 31, 2002,  insurance written through the
structured bulk channel has not been subject to captive mortgage  reinsurance or
other risk-sharing arrangements.

     Structured bulk transactions are generally  initiated by secondary mortgage
market  participants,  including  underwriters  of  mortgage-backed  securities,
mortgage  lenders,  and mortgage  investors  such as Fannie Mae and Freddie Mac,
where  mortgage  insurance  is used as a  credit  enhancement.  The  Company  is
provided  loan-level  information  on the group of loans and,  based on the risk
characteristics  of the  entire  group  of  loans  and the  requirements  of the
secondary  mortgage  market  participant,  the  Company  will submit a price for
insuring the entire group of loans.  The Company competes against other mortgage
insurers  as well as other  forms of credit  enhancements  provided  by  capital
markets for these transactions.

     The structured  bulk market can be divided into three broad  segments:  the
Prime segment  (predominantly fully underwritten loans, high credit scores, high
percentage of low LTV's),  the  Alternative - A segment  (generally  high credit
score,  low to  moderate  LTV loans  that have been  underwritten  with  reduced
documentation),  and the Sub-prime segment  (generally fully  underwritten loans
with credit impaired borrowers). Although the Company has evaluated transactions
in all segments of the structured bulk market, all of the Company's insurance in
force from  structured  bulk  transactions at December 31, 2002 was in the Prime
segment and the  Alternative  - A segment.  During  2002,  all of the  Company's
structured  bulk  insurance  written was in the  Alternative  - A segment of the
structured  bulk  market.  During  2001,  approximately  80%  of  the  Company's
structured  bulk  insurance  written was in the Prime segment of the  structured
bulk  market and  approximately  20% was in the  Alternative  - A  segment.  The
Company  anticipates bidding on and insuring loans across all market segments in
2003.

     During 2002, structured bulk transactions  represented  approximately 9% of
the Company's  insurance  written for the year.  Insurance  written  during 2001
attributed to structured bulk transactions represented  approximately 36% of the
Company's  total  insurance  written.  The  Company  expects to  continue  to be

                                       5
<PAGE>

competitive in the structured bulk transaction market.  However, it is difficult
to predict the Company's  volume of business  during 2003 due to the  relatively
small  number of  transactions  that  encompass  this  market (as opposed to the
traditional  flow market),  competitiveness  with other mortgage  insurers,  the
attractiveness  in the marketplace of mortgage  insurance  versus other forms of
credit enhancements, and the changing loan composition of the market.

RISK-SHARING PRODUCTS

     The Company offers mortgage insurance programs designed to allow lenders to
share in the risks of  mortgage  insurance  in  exchange  for a  portion  of the
insurance premium.  One such program is the captive reinsurance  program.  Under
the captive reinsurance program, a reinsurance  company,  generally an affiliate
of the  lender,  assumes  a portion  of the risk  associated  with the  lender's
insured book of business in exchange for a percentage of the premium. Typically,
the reinsurance  program is an excess of loss arrangement with defined entry and
exit points and a maximum  exposure limit for the captive  reinsurance  company.
These  captive  reinsurance  programs  may also be in the form of a quota  share
arrangement, although the Company had no quota share arrangements in force as of
December 31, 2002. Under excess-of-loss  programs,  with respect to a given book
year of business,  Triad  retains a first loss  position on a defined  aggregate
layer of risk and reinsures a second defined aggregate layer with the reinsurer.
Triad generally  retains the remaining risk above the layer  reinsured.  Because
claims incidence is generally  highest in the third through six years after loan
origination,  Triad is  likely  to  retain  all  losses  in the  earlier  years,
particularly  in the  first  two years  after  loans  for a given  book year are
originated, and the reinsurer will assume the losses in subsequent years subject
to the  defined  layer of risk and up to their  aggregate  limit.  The  ultimate
impact on the  Company's  financial  performance  of an  excess-of-loss  captive
structure is dependent on the operating  environment,  primarily the total level
of losses  and the  persistency  rates,  during the life of a given book year of
business.  The Company  believes  that its  excess-of-loss  captive  reinsurance
programs provide valuable reinsurance protection by limiting the aggregate level
of losses,  and under  normal  operating  environments  potentially  reduces the
degree of  volatility in the Company's  earnings  from the  development  of such
losses over a period of years.

     The Company believes that its excess-of-loss  captive reinsurance  programs
provide  valuable  reinsurance  protection  and  potentially  reduce the risk of
volatility in the Company's earnings.

     In addition to captive reinsurance  programs,  the Company has insurance in
force under  programs,  which are in run-off,  that increase a lender's share of
the risk of loss on an insured  book of business and provide a fee to the lender
for the increased risk.  Approximately 46% and 35% of the Company's insurance in
force at December 31, 2002 and December 31, 2001,  respectively,  was subject to
risk-sharing   programs.   This  increase  in  insurance  in  force  subject  to

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<PAGE>

risk-sharing  arrangements is due primarily to the increased market  penetration
of the  Company's  risk-sharing  arrangements  and the high  level of  refinance
activity  during the past twelve  months,  as policies that were  previously not
subject to  risk-sharing  arrangements  refinanced and new policies  issued were
subject to  risk-sharing  arrangements.  One of the  Company's  competitors  has
announced  that as of March 31, 2003 it will not  participate  in excess of loss
risk-sharing  arrangements  where the net premium  cede rate is greater than 25%
("deep  ceded").   The  Company   currently   participates  in  excess  of  loss
risk-sharing  arrangements  where the net premium cede rate is greater than 25%.
As of December 31, 2002, the Company had "deep ceded" captive  arrangements with
15% of the lenders  participating in risk-sharing  programs.  Insurance in force
subject   to   risk-sharing   arrangements   from  these   lenders   represented
approximately  69%  of  the  Company's  total  insurance  in  force  subject  to
risk-sharing arrangements at December 31, 2002. The Company believes that, based
upon historical data and actuarial studies,  its deep ceded captive arrangements
will produce  acceptable  returns on capital.  It is uncertain at this time what
impact, if any, the competitor's decision to exit this business will have on the
Company.

     Regulatory  issues  exist  regarding  the future of  risk-sharing  programs
currently being marketed within the mortgage insurance  industry.  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.  Pursuant
to the  Homeowners  Protection  Act,  most  loans  with  borrower-paid  mortgage
insurance  made on or after July 29,  1999 are  required  to have their  private
mortgage insurance  canceled  automatically by lenders when the outstanding loan
amount is 78% or less of the  property's  original  purchase  price and  certain
other  conditions  are met. A borrower may request that a loan  servicer  cancel
borrower-paid  mortgage  insurance  on a mortgage  loan when the 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 and by certain other regulatory restrictions.

     Mortgage  insurance  coverage can also be cancelled when an insured loan is
refinanced.  If the Company provides insurance on the refinanced  mortgage,  the
policy  on the  refinanced  home  loan  is  considered  new  insurance  written.
Therefore,  continuation  of the Company's  coverage from a refinanced loan to a
new loan results in both a cancellation of insurance and new insurance  written.
The percentage of insurance written from refinanced loans was 40.1%,  35.8%, and
13.2% in 2002, 2001, and 2000, 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

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<PAGE>

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. The
percentage of the  Company's  insurance in force at the end of the previous year
that was  canceled  during 2002,  2001,  and 2000 was 39.1%,  32.4%,  and 17.4%,
respectively.  The high  cancellation  levels  in 2002  were due to  significant
refinance  activity as mortgage  rates  remained low  throughout  the year.  The
cancellations 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
traditional  flow  insurance  written by the  Company.  At  December  31,  2002,
approximately  73% of the  Company's  traditional  flow risk in force  came from
mortgage bankers,  15% from commercial banks, 9% from mortgage brokers,  and the
remainder from savings  institutions  and credit  unions.  At December 31, 2001,
approximately  67% of the  Company's  traditional  flow risk in force  came from
mortgage bankers,  16% from commercial banks, 13% from mortgage brokers, and the
remainder from savings institutions and credit unions.

     To obtain primary  insurance from the Company written on a traditional flow
basis,  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 evaluation of the lender's financial position
and 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  underwriting  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 7,809  master  policyholders  at  December  31,  2002,  compared to 7,337 at
December 31, 2001.

     The Company's ten largest  customers  generated 73.0%,  64.3%, and 47.1% of
traditional flow insurance  written during 2002,  2001, and 2000,  respectively.
The  Company's  two  largest  customers  generated  53.4%,  42.0%,  and 24.8% of
traditional flow insurance written during 2002, 2001, and 2000, respectively.

     The Company's ten largest customers were responsible for 58.9%,  42.3%, and
30.0% of  traditional  flow risk in force at December 31, 2002,  2001, and 2000,
respectively.  The two largest  customers  of the Company  accounted  for 39.7%,
24.8%,  and 11.5% of traditional  flow risk in force at December 31, 2002, 2001,
and 2000, respectively.

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<PAGE>

     Premium  revenue for the Company is  comprised of premium from current year
originated  business plus renewal  premiums from  insurance  originated in prior
years.  There was no single  customer whose revenue from current year originated
business  accounted  for 10% or more of the  Company's  consolidated  revenue in
2002, 2001, or 2000.  However,  approximately 11% of the Company's  consolidated
revenue in 2002 was from current year and prior years  originated  business from
Countrywide Credit  Industries,  Inc. There was no single customer whose revenue
from current and prior years  originated  business  accounted for 10% or more of
the Company's consolidated revenue in 2001 or 2000.

     The mortgage lending industry  continues to experience  consolidation and a
greater  percentage  of  origination  volume  is being  generated  by the  large
lenders.  The top 30  lenders  in the  United  States,  as  ranked  by  mortgage
origination  volume,  accounted for  approximately  82% of  originated  mortgage
volume  in  2002  compared  to  73% in  2001.  As a  result  of  this  continued
consolidation,  the number of lenders  making  decisions as to which  insurer to
select for mortgage  insurance is being reduced.  The Company could be adversely
affected if one of its large customers is consolidated  with a lender with which
the  Company  is not  approved  to do  business  or if one of its large  lenders
terminates  its  relationship  with the Company for any  reason.  Currently  the
Company is approved to do business with 21 of the top 30 lenders and  production
from these lenders accounted for approximately 60% of the Company's  traditional
flow insurance written in 2002 compared to 51% in 2001.

     Structured bulk transactions are generally  initiated by secondary mortgage
market participants such as underwriters of mortgage-backed securities.

SALES AND MARKETING

     The Company  currently  markets its insurance  products through a dedicated
sales force,  including sales management,  of approximately 41 professionals and
an exclusive  commissioned  general agency serving a specific geographic market.
The Company is licensed to do business in 46 states and the District of Columbia
and has license  applications  pending in four states. The Company will continue
to  evaluate  geographic  expansion  opportunities  as  well  as  the  need  for
additional sales representation.

     The Company's field sales force is divided into two sales  divisions,  each
with its own manager,  regional  account  representatives,  and national account
executives.  The division managers report to a senior executive who oversees all
sales and marketing  activities for the Company. The national account executives
are primarily  responsible  for managing the Company's  sales efforts toward the
larger national  mortgage  originators.  The division  managers and the regional
account  executives serve key regional accounts and provide support for national
account sales efforts.  This reporting  structure allows the senior executive in

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<PAGE>

charge of all sales activities to focus time on large,  national  accounts while
maintaining responsibility of all other sales activities.  This senior executive
reports directly to the President of the Company.

     The  success of the  Company is  dependent  upon the  services of its sales
force and its general  agency.  For 2002,  the  Company's  commissioned  general
agency produced  approximately  4% of the Company's  traditional  flow insurance
written  while  the  salaried  account   executives  and  the  national  account
representatives produced the remainder.

     The marketing  department's mission is to develop and implement programs in
support of the Company's sales  objectives and to promote the Company's image. A
variety of tools are used to achieve  these goals  including  public  relations,
marketing materials, internal/external publications, convention trade shows, and
the Internet.  A national  advertising and public relations campaign designed to
raise  corporate  visibility  to  lenders  and  investors  is  also  part of the
Company's integrated marketing approach.

CONTRACT UNDERWRITING

     The Company provides fee-based 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  involves
examining a prospective  borrower's information contained in a lender's mortgage
application file and making a determination whether the borrower is approved for
a mortgage loan subject to the lender's underwriting guidelines. This service is
provided for loans that require mortgage  insurance as well as loans that do not
require mortgage insurance. In the event that Triad fails to properly underwrite
a loan subject to the lender's underwriting guidelines, Triad may be required to
provide monetary or other remedies to the lender customer.

     Contract  underwriting  services  have  become  increasingly  important  to
lenders as they seek to reduce fixed 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.  If the Company becomes unable to maintain and
provide a sufficient number of qualified underwriters,  the Company's operations
could be materially adversely affected.

COMPETITION AND MARKET SHARE

     The Company 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 36% of high LTV
loans in 2002 and 37% in 2001. In addition to competition from federal agencies,
the  Company  and  other  private   mortgage   insurers  face  competition  from
state-supported  mortgage  insurance funds, some of which are either independent
agencies or affiliated with state housing agencies. Indirectly, the Company also

                                       10

<PAGE>

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 have the ability to modify the required level of
mortgage  insurance  coverage which should be maintained by lenders on loans for
resale to the  secondary  market.  Both Fannie Mae and Freddie Mac have programs
that reduce the amount of private  mortgage  insurance  they require in exchange
for the lender  providing  an upfront  delivery  fee.  The  Company's  financial
condition and results of operations  could be adversely  affected as a result of
these  programs  or if Fannie  Mae and/or  Freddie  Mac adopt  private  mortgage
insurance substitutes.

     Various  proposals  are  periodically  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 eight active mortgage
insurance  companies including Triad,  Mortgage Guaranty Insurance  Corporation,
PMI Mortgage  Insurance Co.,  United  Guaranty  Residential  Insurance  Company,
Radian Guaranty Inc, General Electric Mortgage Insurance  Corporation,  Republic
Mortgage Insurance Company,  and CMG Mortgage Insurance Co. Triad is the seventh
largest private  mortgage  insurer based on 2002 market share and,  according to
industry  data,  had a 3.7% share of net new primary  insurance  written in 2002
compared to 3.6% in 2001. Net new primary insurance  written includes  insurance
written on a  traditional  flow basis as well as that  attributed  to structured
bulk  transactions.  Triad's national market share of net new primary  insurance
written on a traditional flow basis was 4.3% for 2002 compared to 3.4% for 2001.

     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,  responsive  and versatile  technology,  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  Senior Vice  President of Audit and Senior Vice President of
Underwriting  have been in their  positions  since shortly after the Company was
formed. The Company's Senior Vice President of Risk Management has been with the

                                       11

<PAGE>

Company  since  2001 and has  more  than 20 years  of  industry  experience.  In
addition to a centralized underwriting department in the home office, the Senior
Vice President of Underwriting is responsible for the Company's regional offices
in Arizona, California, Colorado, Georgia, Illinois, Ohio, Pennsylvania,  Texas,
and  Washington.  The Senior  Vice  President  of Audit is  responsible  for the
quality  control  function.  The Senior Vice  President  of Risk  Management  is
responsible  for  assessing  the  risk  factors  used  by  the  Company  in  its
underwriting procedures

     The Company employed an underwriting  staff of 46 at December 31, 2002. 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
primarily to loan amounts and property  type.  All loans  insured by the Company
are subject to quality control reviews.

     The Company also  utilizes  various  non-employee  underwriters  to perform
contract underwriting services.  The number can vary substantially  depending on
the need for this service.

RISK MANAGEMENT APPROACH

     The Company evaluates risk 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,  including
          loan level risk  characteristics,  of all customers that hold a master
          policy.  This  information  is  factored  into  determining  the  loan
          programs the Company approves 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  five  general
          characteristics  of a loan to  evaluate  its  level of  risk:  (i) LTV
          ratio;  (ii) purpose of the loan; (iii) type of loan instrument;  (iv)
          level of  documentation;  and,  (v) type of property.  Generally,  the
          Company  seeks loan  types  with  proven  track  records  for which an
          assessment  of risk  can be  readily  made  and the  premium  received
          sufficiently  offsets that risk.  Loan types that do not have a proven
          track  record are charged a higher  premium,  as are other loans which
          have  been  shown to  carry  higher  risks,  such as  adjustable  rate
          mortgages  ("ARMs")  and  loans  having  higher  LTV  ratios.  Certain
          categories  of loans are not actively  pursued by the Company  because
          such loans have a disproportionate amount of risk, including scheduled
          negatively amortizing ARMs and investment 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 analysis of the borrower's

                                       12
<PAGE>

          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. Within this program, the degree to which the
          borrower  must meet  certain  underwriting  standards,  as well as the
          amount of documentation  required,  is a function of the credit score.
          (For a  further  description  of the Stick  With  Triad  program,  see
          Underwriting  Process  below.) 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 Fannie Mae and Freddie Mac, 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
          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 FOR TRADITIONAL FLOW BUSINESS

     The Company accepts  applications for insurance under three basic programs:
a  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 also accepts loans approved through Feddie
Mac's or Fannie Mae's automated underwriting systems.

     The  Company  generally  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 also are
largely  influenced by Fannie Mae and Freddie Mac underwriting  guidelines.  The
Company  believes its  guidelines  generally are  consistent  with those used by
other  private  mortgage  insurers  with  respect to the types of loans that the
Company will insure.  Specific  underwriting  guidelines  applicable  to a given
local, state, or regional market are modified to address concerns resulting from
the Company's review of regional economies and housing patterns.

     Subject to the Company's  underwriting  guidelines  and exception  approval
procedures,   the  Company  expects  its  internal   underwriters  and  contract
underwriters  to utilize their  experience  and business  judgment 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  factors  as  excellent  borrower  credit  history,  the
availability  of  satisfactory  cash  reserves  after  closing,  and  employment
stability.

                                       13
<PAGE>

     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 2.6% at December 31, 2002 and 1.8% at December 31,
2001.

     The  Company's  Stick With Triad  program  featuring  the Slam Dunk Loan SM
approval  process allows lenders to submit insurance  applications  with reduced
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  system.  The Company  issues a
certificate of insurance  without the standard  underwriting  process if certain
program parameters are met and the borrower has a credit score above established
thresholds. Documentation submission requirements for non-automated underwritten
loans  vary  depending  on the  borrower's  credit  score.  The Stick With Triad
program  represented   approximately  33%  of  the  Company's  traditional  flow
applications  in 2002 and 36% in 2001. The Company  randomly and through adverse
selection  audits  lenders' files on loans  submitted under the Stick With Triad
program.

     The Company's delegated  underwriting program, in addition to the Company's
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 44% of  traditional  flow  applications  received in 2002
compared  to 40% in  2001.  Many  lenders  who  are not  part  of the  delegated
underwriting  program participate in the Stick With Triad underwriting  program.
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  staff as well as contract  personnel
to  provide  contract  underwriting  services  to  customers.  For a fee,  Triad
underwrites applications for secondary market compliance, while at the same time
assessing the application for mortgage  insurance,  if applicable.  In addition,
the Company offers Fannie Mae's Desktop Originator(R) and Desktop Underwriter(R)
and Freddie  Mac's Loan  Prospector(R),  as well as the personnel to conduct the
underwriting tasks, as a service to its contract underwriting  customers.  These
products,  which are  designed to  streamline  and reduce  costs in the mortgage
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.

UNDERWRITING STRUCTURED BULK TRANSACTIONS

     The Company employs a risk review process in  underwriting  structured bulk
transactions that is designed to identify the loans which pose the greatest risk
of  nonperformance.  High risk  loans are  identified  based on an  analysis  of

                                       14
<PAGE>


multiple   risk  factors   including,   but  not  limited  to,   credit   score,
loan-to-value,  documentation type, loan purpose, and loan amount. The pertinent
risk  characteristics  of each loan are evaluated to determine the impact on the
transaction's  frequency and severity of loss and  persistency.  The Company may
utilize an outside due  diligence  firm in this process as well as mortgage risk
analysis  systems such as Standard & Poor's  Levels.  The Company's  pricing for
structured bulk transactions is commensurate with a transaction's  risk profile.
The Company  also employs an audit  procedure to test the  integrity of the loan
level data provided to Triad.  The risk review and audit procedure may result in
a request by the Company to remove certain loans from the transaction.

OTHER RISK MANAGEMENT

     A comprehensive audit plan determines whether underwriting  decisions being
made are consistent with the policies,  procedures, and expectations for quality
set forth by  management.  All  areas of  business  activity  which  involve  an
underwriting  decision  are  examined,   with  emphasis  on  new  products,  new
procedures,  contract  underwritten loans,  delegated loans, new employees,  new
master policyholders,  and new branches of an existing master policyholder.  The
process  used to identify  categories  of loans  selected  for audit begins with
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's management to identify concerns,  not only at the loan level, but also
portfolio concerns which may exist within a given category of business.

TECHNOLOGY

     Triad's  TAXI  -  Transactions  Across  the  Internet  -  allows  qualified
customers to view,  update,  and process  certain  data within their  borrowers'
private mortgage insurance records. TAXI is an internet-based service.  Business
areas  that  can  be  addressed  through  TAXI  include  applying  for  mortgage
insurance,  contract underwriting through eU Xpress, loan servicing,  claims and
default processing, and risk-sharing performance.

     eU  Xpress  is  an  internet-based  service  that  automates  the  contract
underwriting and mortgage insurance  commitment process.  The Company introduced
eU Xpress in 2002. eU Xpress is accessed  through TAXI and provides an interface
with automated underwriting systems.

FINANCIAL STRENGTH RATING

     Credit ratings  generally are considered an important element in a mortgage
insurer's ability to compete for new business,  indicating the insurer's present
financial strength and capacity to pay future claims.  Certain national mortgage

                                       15

<PAGE>


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 insurer issuing private mortgage insurance
coverage has a financial  strength rating of at least "AA-" by either Standard &
Poor's  Ratings  Services  ("S&P") or Fitch Ratings  ("Fitch") or a rating of at
least "Aa3" from Moody's Investors Service  ("Moody's").  Fannie Mae and Freddie
Mac require  mortgage  guaranty  insurers  to maintain  two ratings of "AA- " or
better. Triad is rated "AA" by both S&P and Fitch and "Aa3" by Moody's.  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).

     S&P defines  insurers rated "AA" as having very strong  financial  security
characteristics,  differing only slightly from those rated higher. Fitch defines
insurance  companies  rated "AA" as  possessing  very  strong  capacity  to meet
policyholder  and contract  obligations,  risk factors that are modest,  and the
impact of any  adverse  business  and  economic  factors is  expected to be very
small.  Moody's defines  insurers rated "Aa" as offering  exceptional  financial
security but appearing to have somewhat  larger  long-term  risks than companies
rated "Aaa".  Ratings from S&P and Fitch are modified  with a "+" or "-" sign to
indicate the relative  position of a company  within its category.  Moody's uses
numeric  modifiers  to refer to the ranking  within a group - with "1" being the
highest and "3" being the lowest.

     When  assigning  a  financial  strength  rating,  S&P,  Fitch,  and Moody's
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 financial  strength ratings of
such reinsurers. 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  financial  strength  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 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,  which are
rated "A" by S&P and "A+" by Fitch,  were issued to provide  additional  capital
considered in the rating agency's depression models.

     S&P, Fitch, and Moody's will periodically review Triad's rating, as they do
with all rated  insurers.  Ratings can be  withdrawn or changed at any time by a
rating agency.  A reduction in the Company's  rating by S&P,  Fitch,  or Moody's
could materially impact the ability of the Company to write new business.

     In January of 2003,  Fitch revised its rating outlook for the U.S.  private
mortgage  insurance  industry to "Negative" from "Stable".  As it relates to the
mortgage  insurance  industry,  Fitch defines a negative industry outlook as the

                                       16
<PAGE>


expectation  that insurers'  ratings or ratings  outlook  downgrades will exceed
upgrades  during a 12-18 month time frame and that the number of downgrades  are
expected  to be material to the rated  universe.  As of the end of 2002,  Fitch,
S&P, and Moody's all report a "Stable" ratings outlook for Triad. A reduction in
the Company's  rating outlook by Fitch,  S&P, or Moody's could adversely  impact
the Company's operations.

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
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.

RISK-SHARING ARRANGEMENTS

     Triad's product  offerings  include captive mortgage  reinsurance  programs
whereby an  affiliate  of a lender  reinsures a portion of the  insured  risk on
loans  originated  or  purchased  by  the  lender.  Triad  entered  the  captive
reinsurance   market  in  1999  with  the  LEAPSM   (Lower   Entry-   Additional
Profitability)  program.  The  LEAP  program  is  an  excess  of  loss  mortgage
reinsurance  program that provides  lenders an  opportunity to share in the risk
and return of mortgage  insurance  on loans the lender  originates  or services.
Under  LEAP,  the lender  may elect a risk band with a  flexible  entry and exit
point.  LEAP  also  permits  cessions  greater  than the 25%  industry  standard
arrangements  that existed  prior to this  program.  Ceded premium under captive
reinsurance  agreements  represented  12.7% of direct  written  premiums in 2002
compared to 6.6% in 2001.

     In November 1999, Triad formed Triad Re Insurance  Corporation ("Triad Re")
as a wholly-owned  sponsored captive  reinsurance  company domiciled in Vermont.
Triad Re was  formed to allow  small and  mid-sized  lenders to  participate  in
captive reinsurance arrangements with reduced up-front capital costs and without
co-mingling its risk with other lenders.  Triad Re was initially  capitalized in
February 2000, with regulatory capital of $1.0 million. As of December 31, 2002,
approximately  $5 million of Triad's  risk in force had been ceded to  sponsored
captive reinsurer cells under participating agreements with Triad Re.

     Triad's  captive  reinsurance  agreements  provide  for trust  arrangements
whereby  the  captive  reinsurer  is the  grantor  of the trust and Triad is the
beneficiary  of the trust.  Trusts are  established  to support the  reinsurers'
obligations  under the  reinsurance  agreements.  The trust  agreement  includes
covenants  regarding  minimum and  ongoing  capitalization,  required  reserves,
authorized investments,  and withdrawal of assets and is funded by ceded premium
and investment earnings on trust assets as well as capital  contributions by the
reinsurer.

     The Company also has in place an agreement with a non-affiliated  reinsurer
in association with certain of the Company's  non-captive risk sharing programs,
which will  indemnify  the Company with respect to losses  covered as defined by

                                       17
<PAGE>

the agreement.  In 2002,  less than one percent of the Company's  direct written
premium was ceded under this agreement as compared to 2.1% in 2001.

     At the end of 2002,  45.7% of Triad's  insurance  in force had been insured
under some type of  risk-sharing  arrangement as compared to 34.6% at the end of
2001.  Risk-sharing  arrangements  represented 50.5% of Triad's traditional flow
insurance written in 2002 as compared to 57.9% in 2001.

OTHER REINSURANCE

     Certain  premiums and losses are assumed  from and ceded to  non-affiliated
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. Less than
0.1% of Triad's risk in force at December 31, 2002 and direct  premiums  written
in 2002 were ceded in quota share  arrangements  to  non-affiliated  reinsurance
companies.

     Pursuant to deeper coverage  requirements imposed by Fannie Mae and Freddie
Mac, certain loans eligible for sale to such agencies with a loan-to-value ratio
over 90% require  insurance with a coverage  percentage of 30% or more.  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.  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,  2002,  TGAC had assumed
approximately $59.4 million in risk from Triad.

     The Company  continues to maintain excess of loss reinsurance  arrangements
designed to protect the Company in the event of a catastrophic  level of losses.
The  Company  currently  maintains  $125  million of excess of loss  reinsurance
through  non-affiliated  reinsurers that have financial strength ratings of "AA"
or better from Standard & Poor's.

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)
the date on which the  borrower  becomes four months in default or (ii) the date

                                       18
<PAGE>

on which any legal  proceeding  affecting the loan commences,  whichever  occurs
first.  Notification is required within 45 days of default if it occurs when the
first  payment is due.  The  incidence  of default is  affected  by a variety of
factors including, but not limited to, changes in borrower income, unemployment,
divorce,   illness,   the  level  of  interest  rates,   and  general   borrower
creditworthiness. Defaults that are not cured generally 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 default  statistics as of December 31, 2002, and
the preceding four year ends:

                               Default Statistics
<TABLE>
<CAPTION>

                                                                                  December 31
                                                                                  -----------
                                                                2002        2001       2000       1999       1998
                                                                ----        ----       ----       ----       ----
<S>                                                          <C>         <C>        <C>        <C>         <C>
Number of insured loans in force..........................   190,480     159,400    123,046    108,623     97,222
Number of loans in default................................     2,379       1,420        740        690        518
Percentage of loans in default (default rate).............     1.25%       0.89%      0.60%      0.64%      0.53%
Number of insured loans in force excluding bulk loans.....   171,723     141,220          -          -          -
Number of loans in default excluding bulk loans...........     2,120       1,420          -          -          -
Percentage of loans in default excluding bulk loans.......     1.23%       1.01%          -          -          -
Number of bulk loans in force.............................    18,757      18,180          -          -          -
Number of bulk loans in default...........................       259           0          -          -          -
Percentage of bulk loans in default.......................     1.38%       0.00%          -          -          -

</TABLE>

     The number of loans in default includes all reported delinquencies that are
three or more  payments  in  arrears  at the  reporting  date  and all  reported
delinquencies  that were  previously  three or more payments in arrears and have
not made payments to the current date.

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.  The ability
to mitigate a claim is affected by the local  housing  market,  interest  rates,
employment  growth,  the  housing  supply,  and the  borrower's  desire to avoid
foreclosure.  During the default  period,  the Company works with the insured as
well as the  borrower  in an  effort to  either  reinstate  the loan or sell the
property for an amount which results in a reduced claim prior to foreclosure.

     The payment of claims is not evenly  spread  through the  coverage  period.
Relatively few claims are paid during the first two years following  issuance of

                                       19
<PAGE>

insurance.  A period of rising claim payments 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 claim payments
made has historically  declined at a gradual rate,  although the rate of decline
can be affected by local economic 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  borrower's
title to the  underlying  property  through  foreclosure  or a  deed-in-lieu  of
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
prorated 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.   Depending  on  the  applicable  state
foreclosure  law, an average of about 12 months  elapses from date of default to
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 12% to 40% 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 chooses the claim
settlement option believed to cost the least. In most cases, the Company settles
claims by paying the coverage  percentage of the claim  amount.  At December 31,
2002, the Company held properties  with a combined net realizable  value of $1.6
million which were acquired by electing to pay 100% of the claim amount.

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,  property

                                       20
<PAGE>


sales  after  foreclosure,  advances  to assist  distressed  borrowers  who have
suffered a  temporary  economic  setback,  and the use of  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 paid out approximately
65% of its  potential  exposure  on claims  in 2002 and 69% of its  ever-to-date
exposure.

LOSS RESERVES

     The Company  establishes  reserves to provide  for the  estimated  costs of
settling  claims on loans  reported 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
currently not in default.  Although the Company  believes  that overall  reserve
levels at December 31, 2002, are adequate to meet future obligations, due to the
inherent  uncertainty  of the reserving  process there can be no assurance  that
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 using  estimated  claim rates
(frequency)  and claim  amounts  (severity)  to estimate  ultimate  losses.  The
Company  relies on historical  experience  in the  estimation of claim rates and
claim amounts.  The Company also establishes reserves for the estimated costs of
settling claims ("loss adjustment  expenses" or "LAE"),  which include,  but are
not limited  to,  legal fees and general  expenses of  administering  the claims
settlement  process,  and for losses and loss adjustment  expenses incurred from
defaults  which have  occurred  but have not yet been  reported  to the  insurer
("Incurred But Not Reported" or "IBNR").

     Management  periodically  reviews  the  loss  reserve  process  in order to
improve  its  estimate  of  ultimate  losses.  In 2001,  management  refined its
methodology  for setting  loss  reserves for  outstanding  defaults and for IBNR
defaults.  The  enhancements  made to the reserving  process  incorporate a more
multi-dimensional  analytical  form,  which  gives  effect to  current  economic
conditions  and  profiles  delinquencies  by such  factors as age,  policy year,
geography, and chronic late payment characteristics.

     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. Economic conditions that have affected the development of 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
reserves  will 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.

                                       21
<PAGE>


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

          Reconciliation of Losses and Loss Adjustment Expense Reserves
<TABLE>
<CAPTION>
                                                                                  Year Ended December 31
                                                                                  ----------------------
                                                                                      (in thousands)
                                                                 2002         2001        2000        1999         1998
                                                                 ----         ----        ----        ----         ----
<S>                                                             <C>         <C>         <C>          <C>         <C>
Reserve for losses and LAE, net of related reinsurance
recoverables, at beginning of year...........................   $17,981     $14,976     $14,723      $12,116     $ 8,909

Add losses and LAE incurred in respect of defaults
 occurring in:
     Current year (1)........................................    14,798      14,219      11,229        9,322       7,953
     Prior years (1) (2).....................................      (735)     (5,200)     (3,642)      (2,211)       (944)
                                                                -------     -------     -------      -------     -------
Total incurred losses and LAE................................    14,063       9,019       7,587        7,111       7,009

Deduct losses and LAE paid in respect of defaults
 occurring in:
     Current year............................................       508         286         574          236         267
     Prior years.............................................    10,181       5,728       6,760        4,268       3,535
                                                                -------     -------     -------      -------     -------
Total payments...............................................    10,689       6,014       7,334        4,504       3,802
Reserve for losses and LAE, net of related reinsurance
recoverables, at end of year ................................    21,355      17,981      14,976       14,723      12,116

Reinsurance recoverables on unpaid losses and LAE, at
the end of year .............................................         5          10          11           28          27
                                                                -------     -------     -------      -------     -------
Reserve for unpaid losses and LAE, before deduction
of reinsurance recoverables on unpaid losses, at
end of year..................................................   $21,360     $17,991     $14,987      $14,751     $12,143
                                                                =======     =======     =======      =======     =======
---------------------------
<FN>
(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.
</FN>
</TABLE>

     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

                                       22
<PAGE>

current period represents the estimated amount to be ultimately paid on defaults
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.








                                       23
<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, 2002 and 2001:

                              Direct Risk in Force
                                                              December 31
                                                              -----------
PRODUCT TYPE:                                            2002              2001
                                                         ----              ----
Primary.............................................    100.0%            100.0%
Pool................................................      0.0%              0.0%
                                                        ------            ------
Total...............................................    100.0%            100.0%
                                                        ======            ======
                          Direct Primary Risk in Force
                                                              December 31
                                                              -----------
                                                         2002              2001
                                                         ----              ----
DIRECT PRIMARY RISK IN FORCE (dollars in millions)..    $5,791            $4,582
Lender Concentration (excludes bulk):
Top 10 lenders (by original applicant)..............     58.9%             42.3%
LTV:
95.01% and above....................................      5.1%              2.3%
90.01% to 95.00%....................................     42.0%             41.4%
90.00% and below....................................     52.9%             56.3%
                                                        ------            ------
Total...............................................    100.0%            100.0%
                                                        ======            ======
Loan Type:
Fixed...............................................     87.3%             86.2%
ARM (positive amortization) (1).....................     12.7%             13.8%
ARM (potential negative amortization) (2)...........      0.0%              0.0%
ARM (scheduled negative amortization) (2)...........      0.0%              0.0%
Other...............................................      0.0%              0.0%
                                                        ------            ------
Total...............................................    100.0%            100.0%
                                                        ======            ======
Mortgage Term:
15 years and under..................................      5.2%              3.8%
Over 15 years.......................................     94.8%             96.2%
                                                        ------            ------
Total...............................................    100.0%            100.0%
                                                        ======            ======
Property Type:
Noncondominium (principally single-family detached).     94.6%             95.2%
Condominium.........................................      5.4%              4.8%
                                                        ------            ------
Total...............................................    100.0%            100.0%
                                                        ======            ======
Occupancy Status:
Primary residence...................................     94.4%             95.9%
Second home.........................................      2.1%              1.7%
Nonowner occupied...................................      3.5%              2.4%
                                                        ------            ------
Total...............................................    100.0%            100.0%
                                                        ======            ======
Mortgage Amount:
$200,000 or less....................................     72.2%             70.8%
Over $200,000.......................................     27.8%             29.2%
                                                        ------            ------
Total...............................................    100.0%            100.0%
                                                        ======            ======
---------------
(1)  Refers to loans where payment adjustments are the same as mortgage interest
     rate adjustments.
(2)  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.

                                       24
<PAGE>

     An important  determinant  of claim  incidence  is the  relative  amount of
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 claim
incidence  on loans  with LTV  ratios  equal to or less  than 90%.  The  Company
believes the higher premium rates charged on high LTV loans adequately  reflects
the additional risk.

     Approximately  5.1% of the  Company's  risk in force is  comprised of loans
with an LTV greater than 95%. These high LTV loans are offered  primarily to low
and moderate income borrowers. The Company believes that these 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 high LTV loans.

     In  2000  the  State  of  Illinois  Insurance  Department,  as  well as the
insurance departments of several other states, began to permit mortgage insurers
to write  coverage  on loans  with  LTV's in excess  of 97% up to 100%  and,  in
certain  instances,  up to 103%. This  determination was made in response to the
development by certain entities in the mortgage securitization market, including
Fannie Mae and Freddie  Mac, of programs  that  allowed  LTV's in excess of 97%.
These programs are designed to accommodate the credit-worthy  borrower who lacks
the ability or otherwise  chooses not to provide a down  payment on a home.  The
Company accepts loans with LTV's greater than 97% on a limited basis.

     The Company actively pursues only positively  amortizing ARMs with industry
standard  caps.  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 its 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" negative  amortization.  ARMs with "potential" negative amortization
characteristics  due to possible  interest rate  increases and borrower  payment
option changes are accepted under limited conditions for approved lenders.

     Historical  evidence  indicates that  higher-priced  properties  experience
wider   fluctuations  in  value  than  moderately   priced   residences.   These
fluctuations exist primarily because there is a 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.

                                       25
<PAGE>

     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.

     Loans on primary  residences  that were owner  occupied at the time of loan
origination  constituted  approximately  94% of the  Company's  risk in force at
December 31, 2002. Because management  believes that loans on non-owner occupied
properties  represent a  substantially  higher risk of claim  incidence  and are
subject to greater value declines than loans on primary homes,  the Company does
not actively pursue these loans.

     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 2.3 years at December 31, 2002 and 2.6 years
at December 31, 2001,  compared to an estimated industry average of 2.8 years at
December 31, 2002.














                                       26
<PAGE>

     The  following  table  shows the  percentage  of direct risk in force as of
December 31, 2002,  for policies  written from 1988 through 2002, as well as the
cumulative  loss  ratio  (calculated  as direct  losses  paid  divided by direct
premiums  written,  in each case for a  particular  certificate  year) which has
developed  through  December 31, 2002, 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                  $ 0.4             0.0%               15.3%

      1989                    0.4             0.0                24.0

      1990                    0.9             0.0                18.7

      1991                    3.7             0.1                11.9

      1992                    9.4             0.2                 8.5

      1993                   34.2             0.6                 5.2

      1994                   30.0             0.5                10.1

      1995                   50.1             0.9                12.4

      1996                   79.9             1.4                13.1

      1997                  148.8             2.5                 8.4

      1998                  403.0             7.0                 4.6

      1999                  346.4             6.0                 3.7

      2000                  314.4             5.4                11.2

      2001                1,730.8            29.9                 1.4

      2002                2,638.5            45.5                 0.0
                        ---------           -----
      Total             $ 5,790.9           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.

     The above table  reflects a relatively  higher  cumulative  ratio of losses
paid to premium  written for the 2000 policy year at this stage of  development.
This is due, in part, to the high level of refinancing  for this policy year and
the resulting lower aggregate level of premium written.

                                       27
<PAGE>

GEOGRAPHIC DISPERSION

     The following  tables reflect the percentage of direct risk in force 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, 2002:

          Top Ten States                  Top Ten MSAs
          --------------                  ------------
                       December 31                                   December 31
                          2002                                          2002
                          ----                                          ----
    California            11.9%       Chicago, IL                       4.6%

    Florida                7.8        Atlanta, GA                       3.1

    Texas                  7.7        Los Angeles/Long Beach, CA        2.8

    North Carolina         5.6        Phoenix/Mesa, AZ                  2.7

    Georgia                5.5        Houston, TX                       2.1

    Illinois               5.1        Riverside/San Bernardino, CA      1.7

    Pennsylvania           3.9        Dallas, TX                        1.5

    Arizona                3.7        New York, NY                      1.5

    Colorado               3.4        Denver, CO                        1.4

    New Jersey             3.3        Philadelphia, PA                  1.3
                          -----                                        -----
    Total                 57.9%       Total                            22.7%
                          =====                                        =====

     While the Company continues to diversify its risk in force  geographically,
a prolonged regional recession, particularly in its high concentration areas, 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.  The Company
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
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.

                                       28
<PAGE>

     At December 31, 2002, the Company's total  investment  portfolio had a fair
market  value of $344.6  million.  The  investment  portfolio  was  composed  of
approximately  87% fixed maturity  securities,  3% equities,  and 10% short-term
investments.

     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, 2002, 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 actively  monitors  investment  securities  considered to be at
risk for impairment.  When the Company determines that a decline in the value of
a security below its amortized cost is other-than-temporary,  an impairment loss
has occurred. In the event of impairment, the Company writes down the cost basis
of the security to its fair value and  recognizes a realized loss for the amount
of the writedown.  During 2002, the Company realized  approximately $2.0 million
of impairment writedowns on securities held in its 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
                          (dollar amounts in thousands)
<TABLE>
<CAPTION>

                                               2002        2001       2000        1999        1998
                                               ----        ----       ----        ----        ----
<S>                                        <C>         <C>        <C>         <C>         <C>
Average investments (1)................    $301,434    $252,509   $212,029    $183,988    $151,712
Pre-tax net investment income..........    $ 16,099    $ 14,765   $ 12,645    $ 10,546    $  9,289
Effective pre-tax yield (1)............        5.3%        5.8%       6.0%        5.7%        6.1%
Tax-equivalent yield-to-maturity (2)...        7.9%        8.0%       8.2%        7.7%        7.9%
Pre-tax realized investment (loss) gain    $(2,519)    $    297   $    286    $  1,153    $    881

-----------------
<FN>
(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.
</FN>
</TABLE>


                                       29
<PAGE>

     The diversification of the Company's  investment  portfolio at December 31,
2002, is shown in the table below:

                      Investment Portfolio Diversification
                          (dollar amounts in thousands)
<TABLE>
<CAPTION>
                                                                    December 31, 2002
                                                                    -----------------
                                                  Amortized Cost        Fair Value       Percent(1)
                                                  --------------        ----------       -------
Available-for-sale securities:
    <S>                                                 <C>               <C>             <C>
   Fixed maturity securities:
      U. S. government obligations...............       $ 10,189          $ 10,596          3.1%

      Mortgage-backed bonds......................            167               186          0.1

      State and municipal bonds..................        231,210           242,336         70.3

      Corporate bonds............................         43,171            45,352         13.2
                                                        --------          --------
          Total fixed maturities.................        284,737           298,470

    Equity securities............................         11,266            10,808          3.1
                                                        --------          --------
          Total available-for-sale securities....        296,003           309,278

    Short-term investments.......................         35,303            35,303         10.2
                                                        --------          --------        ------
                                                        $331,306          $344,581        100.0%
                                                        ========          ========        ======
---------------------
<FN>
(1) Percentage of fair value.
</FN>
</TABLE>

     The following table shows the scheduled maturities at December 31, 2002, of
the fixed maturity securities held in the Company's investment portfolio:

                     Investment Portfolio Scheduled Maturity
                          (dollar amounts in thousands)

                                                  December 31, 2002
                                                  -----------------
                                                Fair Value        Percent
                                                ----------        -------
 One year or less.........................        $  4,115           1.4%

 After one year through five years........          17,000           5.7

 After five years through ten years.......          35,366          11.8

 After ten years though twenty years......         165,662          55.5

 After twenty years.......................          76,141          25.5

 Mortgage-backed securities (1)...........             186           0.1
                                                  --------         ------
           Total..........................        $298,470         100.0%
                                                  ========         ======
  ---------------------
(1)Substantially  all of these  securities  are  guaranteed  by U.S.  Government
   Agencies.

                                       30
<PAGE>



     The following table shows the ratings of the Company's investment portfolio
as of December 31, 2002 and December 31, 2001:

                         Investment Portfolio by Rating
                          (dollar amounts in thousands)
<TABLE>
<CAPTION>

                                                             December 31, 2002                December 31, 2001
                                                             ------------------               -----------------
 Rating(1)                                                 Fair Value       Percent        Fair Value        Percent
 --------                                                  ----------       -------        ----------        -------
<S>                                                         <C>             <C>             <C>               <C>
 Fixed maturities:
          U.S. Treasury and U.S. agency bonds.....          $  9,040          3.0%          $ 12,923            5.3%
          AAA.....................................           185,346         62.1            119,418           48.5
          AA......................................            32,114         10.8             28,574           11.6
          A.......................................            42,433         14.2             42,724           17.4
          BBB.....................................            14,784          5.0             26,086           10.6
          BB......................................             8,534          2.9              9,348            3.8
          B.......................................             2,437          0.8              4,420            1.8
          C.......................................               361          0.1                215            0.1
          D.......................................                38          0.0                120            0.0
          NR......................................             3,383          1.1              2,157            0.9
                                                            --------        ------          --------          ------
               Total fixed maturities.............          $298,470        100.0%          $245,985          100.0%
                                                            ========        ======          ========          ======
 Equities:
          AAA.....................................          $    361          3.3%          $    359            2.9%
          AA......................................             1,432         13.2              2,301           18.4
          A.......................................             4,622         42.8              4,860           39.0
          BBB.....................................             2,132         19.7              1,404           11.2
          BB......................................               180          1.7                632            5.1
          B.......................................             2,081         19.3              2,920           23.4
                                                            --------        ------          --------          ------
                Total equities....................          $ 10,808        100.0%          $ 12,476          100.0%
                                                            ========        ======          ========          ======
 Total portfolio..................................          $309,278                        $258,461
                                                            ========                        ========
-------------------------------
<FN>
(1)  Current ratings as assigned by the NRSRO (Nationally Recognized Statistical
     Rating   Organization).   The  NRSRO  includes  the  following   nationally
     recognized rating agencies: S&P, Moody's, and Fitch.
</FN>
</TABLE>

                                       31

<PAGE>

REGULATION

DIRECT REGULATION

     The Company's insurance subsidiaries are subject to comprehensive, detailed
regulation,  principally for the protection of policyholders and their borrowers
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,  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,  and
varying  degrees  of  control  over  claims  handling   practices,   reinsurance
requirements,  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  of  Insurance  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.

                                       32
<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 in its  statutory
financial statements.  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,
2002,  Triad  had  statutory  policyholders'  surplus  of $112.9  million  and a
statutory contingency reserve of $245.0 million. At December 31, 2001, Triad had
statutory  policyholders' surplus of `$105.3 million and a statutory contingency
reserve of $193.7 million. Triad's statutory earned surplus was $29.2 million at
December 31, 2002 and $21.6 million at December 31, 2001,  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 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.

     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 also may 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 Re was organized as a subsidiary of Triad under the insurance laws of
the state of Vermont in November 1999, and as a Vermont  domiciled  insurer,  is
subject to Vermont insurance regulatory requirements.

     Triad,  TGAC, and Triad Re are each subject to examination of their affairs
by the  insurance  departments  of every  state in which  they are  licensed  to
transact  business.  The  Illinois  Insurance  Director  and  Vermont  Insurance
Commissioner  periodically conduct financial examinations of insurance companies
domiciled in their states.  The most recent  examinations of Triad and TGAC were
issued by the Illinois Insurance Department on February 3, 2000, and covered the

                                       33
<PAGE>

period January 1, 1995,  through December 31, 1998. No material  recommendations
were made as a result of these examinations.

     A number of states  generally  limit the amount of insurance risk which may
be  written  by a  private  mortgage  insurer  to 25 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
and 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,  Government  Sponsored
Enterprises  (GSEs)  Fannie Mae and Freddie Mac 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 types of risk insured,  standards for 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.  Freddie Mac most recently  modified its  eligibility  guidelines in March
2002.

     Fannie Mae is in the  process of revising  its  approval  requirements  for
mortgage  insurers.  The new  requirements,  which have not yet been  finalized,

                                       34
<PAGE>

would require prior  approval by Fannie Mae for many of Triad's  activities  and
new products,  allow for other  approved  types of mortgage  insurers rated less
than  "AA," and give  Fannie  Mae  increased  rights to revise  the  eligibility
standards of mortgage insurers.  The form the eligibility  guidelines ultimately
will take is unknown at this time, but new guidelines,  if issued, could have an
adverse effect on the Company.

     Triad is an approved  mortgage  insurer for both Fannie Mae and Freddie Mac
and meets all  existing  eligibility  requirements.  There can be no  assurance,
however,  that such requirements or the  interpretation of the requirements will
not change or that Triad will continue to meet such  requirements.  In addition,
to the extent  Fannie Mae or Freddie  Mac assumes  default  risk for itself that
would otherwise be insured,  changes current guarantee fee arrangements,  allows
alternative credit enhancements,  alters or liberalizes  underwriting guidelines
on low down payment  mortgages it purchases,  or otherwise  changes its business
practices or processes with respect to such mortgages, private mortgage insurers
may be affected.  Triad could be particularly  adversely  affected if changes in
eligibility  requirements  regarding  captive  arrangements  that permit premium
cessions  greater than 25% were to impede Triad's  ability to offer this form of
captive reinsurance.

     Fannie Mae and Freddie Mac both accept reduced mortgage  insurance coverage
from lenders that deliver  loans  approved by the their  automated  underwriting
services,  Desktop  Underwriter and Loan  Prospector,  respectively.  Generally,
Fannie Mae's and Freddie  Mac's  reduced  mortgage  insurance  coverage  options
provide for: (i) across-the-board  reductions in required MI coverage on 30-year
fixed-rate  loans  recommended for approval by the their automated  underwriting
services to the levels in effect in 1994; (ii) reduction in required MI coverage
for  loans  with  only a 5% down  payment  (a 95%  LTV)  from  30% to 25% of the
mortgage  loan covered by MI; and,  (iii)  reduction in required MI coverage for
loans with a 10% down  payment (a 90% LTV loan) from 25% to 17% of the  mortgage
loan  covered by MI. In  addition,  Fannie Mae and Freddie Mac have  implemented
other programs that further reduce MI coverage upon the payment of an additional
fee by the lender.  Under this  option,  a 95% LTV loan will  require 18% of the
mortgage loan to have mortgage  insurance  coverage.  Similarly,  a 90% LTV loan
will require 12% of the mortgage loan to have mortgage  insurance.  In order for
the homebuyer to have MI at these levels,  such loans would require a payment at
closing or a higher note rate.

     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  financial
strength  rating  of at least  "AA-"  from S&P or Fitch or a 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  financial
strength  rating of "AA" from S&P and Fitch and a rating of "Aa3" from  Moody's.
S&P, Fitch, and Moody's consider Triad's  consolidated  operations and financial

                                       35
<PAGE>

position in  determining  the rating.  There can be no  assurance  that  Triad's
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 the  provision of services  involving  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.

     Various lawsuits filed in US district court in Augusta,  Georgia as well as
other  jurisdictions  against each of the national mortgage insurers,  including
the  Company,  assert that  defendant  mortgage  insurers  have  violated  RESPA
guidelines   by  offering  pool   insurance,   captive   reinsurance,   contract
underwriting,  and other  services at  preferential  below  market  prices as an
illegal  inducement  to  persuade  lenders to use those  mortgage  insurers  for
primary insurance coverage. The lawsuits seek class action status. Four mortgage
insurers have entered into  settlements of the lawsuits.  In August 2000,  Triad
filed a motion for  summary  judgment  in the case which was granted on February
13, 2001.  The summary  judgment  was  overturned  by the 11th Circuit  Court of
Appeals in January 2002. In overturning  the judgment,  the court  addressed the
applicability  of the  McCarron-Ferguson  Act (regarding  federal  preemption of
state  law) to the case;  it did not  address  the  merits  of the  case.  Triad
subsequently  filed a motion  opposing  class  certification  which was granted.
Plaintiffs  have appealed this  decision.  Triad  believes that its products and
services comply with RESPA as well as all other applicable laws and regulations.
While the ultimate outcome of the RESPA litigation is uncertain,  the litigation
is not expected to have a material  adverse affect on the financial  position of
the Company.

     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.

     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 borrower-paid  mortgage insurance
when specified conditions are met.

     The Homeowners  Protection Act of 1998 provides for certain termination and
cancellation  requirements  for  borrower-paid  mortgage  insurance and requires
mortgage  lenders to periodically  update borrowers about their private mortgage

                                       36
<PAGE>

insurance. Under the legislation, borrowers may generally request termination of
mortgage  insurance once the LTV reaches 80%,  provided that certain  conditions
are met.  The  legislation  further  requires  lenders to  automatically  cancel
borrower-paid private mortgage insurance when home equity reaches 78% if certain
conditions are met. The legislation  also requires  lenders to notify  borrowers
that they have private mortgage  insurance and requires  certain  disclosures to
borrowers of their rights under the law.  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 has not lost
and does not expect to lose a  significant  amount of its insurance in force due
to the enactment of this legislation.

INDIRECT REGULATION

     The Company,  Triad,  and Triad's  subsidiaries  are also  indirectly,  but
significantly,  impacted by regulations  affecting purchasers of mortgage loans,
such as Fannie Mae and  Freddie  Mac,  and  regulations  affecting  governmental
insurers, such as the FHA and the Department of Veterans Affairs ("VA"), 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% of  borrower
closing  costs to be financed by loans  insured by FHA, a  significant  increase
from the  previous 57% limit.  Also,  in 1994,  HUD reduced the initial  premium
(payable at loan  origination)  for FHA insurance  from 3.0% to 2.25%.  FHA loan
limits  are  adjusted  in  response  to changes in the  Freddie  Mac/Fannie  Mae
conforming loan limits.  Currently,  the maximum individual loan amount that the
FHA can insure is $280,749. The maximum FHA loan amount is subject to adjustment
and may  increase  in the  future.  While  there is no maximum  VA loan  amount,
lenders  will  generally  limit VA loans to $240,000  according  to the VA. This
implied  maximum VA loan  amount may also  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 Triad'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  benefits  of FIRREA  and the  guidelines  for real  estate
lending  policies to the mortgage  insurance  industry,  including Triad, may be
curtailed or eliminated.

     In the first  quarter of 2002,  the Office of  Federal  Housing  Enterprise
Oversight  (OFHEO)  released  its  risk-based  capital  rules for Fannie Mae and
Freddie Mac.  The  regulation  provides  capital  guidelines  for Fannie Mae and
Freddie Mac in connection  with their use of various types of credit  protection

                                       37
<PAGE>


counterparties including a more preferential capital credit for insurance from a
"AAA"  rated  private  mortgage  insurer  than for  insurance  from a "AA" rated
private mortgage insurer. The phase-in period for the new rule is ten years. The
Company  does not believe the new rules had an adverse  impact on it in 2002 nor
that the new rules will have a significant  adverse impact on the Company in the
future.  However,  if the new capital guidelines result in future changes to the
preferences  of Fannie Mae and  Freddie Mac  regarding  their use of the various
types of credit enhancements or their choice of mortgage insurers based on their
credit rating, the Company's financial condition could be significantly harmed.

     Fannie Mae and Freddie Mac each provide  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. The
increased  acceptance of these products is driving the automation of the process
by which mortgage  originators sell loans to Fannie Mae and Freddie Mac, 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.

     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,  purchased,  or serviced 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 approved 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.

     In November 1999, the  Gramm-Leach-Bliley  Act, also known as the Financial
Services  Modernization  Act  of  1999,  became  effective  and  allows  holding
companies of banks also to own a company that underwrites insurance. As a result

                                       38
<PAGE>


of this Act,  banking  organizations  that  previously  were not  allowed  to be
affiliated with insurance  companies may now do so.  Management does not know to
what extent this expanded  opportunity for banks will be utilized or how it will
affect the mortgage insurance  industry.  However,  the evolution of federal law
making it easier for banks to engage in the mortgage  guaranty  business through
affiliates may subject mortgage  guaranty  insurers to more intense  competition
and risk-sharing with bank lender customers.

WEB SITE ACCESS TO COMPANY REPORTS

     The Company  makes  available,  free of charge,  through its Web site,  its
Annual Report on Form 10-K,  quarterly reports on Form 10-Q, and current reports
on Form 8-K, and  amendments to those reports as soon as reasonably  practicable
after this material is electronically  filed with or furnished to the Securities
and  Exchange  Commission.  This  material  may  be  accessed  by  visiting  the
Investors/Financial  Information/SEC Filing Information section of the Company's
Web site at www.triadguaranty.com.










                                       39
<PAGE>

EMPLOYEES

     As of December 31, 2002,  the Company  employed 209 persons.  Employees are
not covered by any collective  bargaining  agreement.  The Company considers its
employee relations to be satisfactory.

EXECUTIVE OFFICERS

The executive officers of the Company are as follows:

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

William T. Ratliff, III       Chairman of the Board of                 49
                              the Company and Triad

Darryl W. Thompson            President, Chief Executive               62
                              Officer, and Director of the
                              Company and Triad

Ron D. Kessinger              Executive Vice President and             48
                              Chief Financial Officer of the
                              Company and Triad

Kenneth N. Lard               Executive Vice President of the          44
                              Company and Executive Vice
                              President, Sales and Marketing
                              of Triad

Earl F. Wall                  Senior Vice President, Secretary,        45
                              and General Counsel of the
                              Company and Triad

Michael R. Oswalt             Senior Vice President, Treasurer,        41
                              and Principal Accounting Officer
                              of the Company and Triad

Kenneth C. Foster            Senior Vice President of Triad            54


                                       40
<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.  Since 1995,  he has served as  President of Collat,  Inc.,  CML's
corporate  general  partner.  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 1994. 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  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.

     RON D.  KESSINGER has been  Executive  Vice  President and Chief  Financial
Officer  of the  Company  since  December  1999.  Mr.  Kessinger  has been Chief
Financial  Officer of Triad since  November 1999 and Executive Vice President of
Insurance  Operations of Triad since June 1996. Mr. Kessinger 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 Senior 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.

     KENNETH  N. LARD has been  Executive  Vice  President  of the  Company  and
Executive Vice President,  Sales and Marketing of Triad since February 2003. Mr.
Lard was Senior Vice  President,  Sales and Marketing of Triad from June 2002 to
January  2003.  From  November  1997 to May  2002,  Mr.  Lard  was  Senior  Vice
President,  National  Sales  Director of Triad.  From November 1995 to September
1996 Mr. Lard was Vice President,  National Accounts of Triad.  Prior to joining
Triad,  Mr.  Lard was  employed  by  Signet  Bank  from  1987 to  1995,  as Vice
President,  Capitol  Markets  Division  and  most  recently  as Vice  President,
Secondary  Marketing.  Mr.  Lard has been with Triad for 7 years and has over 20
years experience in the mortgage industry.


                                       41
<PAGE>


     EARL F. WALL has been Senior Vice  President of Triad since  November 1999,
General  Counsel of Triad since January 1996, and Secretary since June 1996. Mr.
Wall was Vice  President of Triad from 1996 till 1999.  Mr. Wall has been Senior
Vice  President of the Company since  December  1999,  and Secretary and General
Counsel of the Company since  September 1996. Mr. Wall was Vice President of the
Company from 1996 to 1999.  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  Senior  Vice  President  and  Treasurer  of the
Company since  December  1999.  Mr. Oswalt has been a Senior Vice  President and
Treasurer of Triad since November 1999. Mr. Oswalt was Controller of the Company
from March 1994 to October 2001 and he was Controller of Triad from June 1996 to
October  2001.  Mr.  Oswalt was Vice  President  of the  Company  and Triad from
December 1994 to December 1999. 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.

     KENNETH C. FOSTER has been Senior Vice President,  Risk Management of Triad
since  April  2002.  From June 2001 to April 2002 Mr.  Foster  was  Senior  Vice
President,  Product Development of Triad. Prior to joining Triad, Mr. Foster was
Principal of Applied Mortgage Solutions from 1994 to 2001. Previously Mr. Foster
was  employed  by MGIC from 1980 to 1994,  most  recently as Vice  President  of
Business/Information  Development. Mr. Foster has been associated with Triad for
8 years and in the insurance/mortgage industry for over 30 years.

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

ITEM 2.  PROPERTIES.

     As  of  December  31,  2002,   the  Company  leases  office  space  in  its
Winston-Salem   headquarters  and  its  twelve   underwriting   offices  located
throughout the country comprising  approximately 77,000 square feet under leases
expiring  between  2003 and 2012 and which  require  annual  lease  payments  of
approximately $1.3 million in 2003. With respect to all facilities,  the Company
either has renewal  options 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.

                                       42
<PAGE>

     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 is involved in litigation  in the ordinary  course of business.
No pending  litigation  is  expected  to have a material  adverse  affect on the
financial position of the Company.

     Triad is a defendant in Patton v. Triad.  This action was commenced on June
30,  2000 with the  filing of a  complaint  in  Federal  District  Court for the
Southern  District  of  Georgia  seeking  class  action  status  on  behalf of a
nationwide class of home mortgage  borrowers.  The complaint  alleges that Triad
violated the Real Estate  Settlement  Procedures  Act ("RESPA") by entering into
transactions with lenders (including  captive mortgage  reinsurance and contract
underwriting)  that were not  properly  priced,  in return for the  referral  of
mortgage  insurance.  In August 2000, Triad filed a motion for summary judgement
in the case which was granted on February 13, 2001.  The summary  judgement  was
overturned by the 11th Circuit Court of Appeals in January 2002. In  overturning
the judgement,  the court addressed the  applicability of the  McCarron-Ferguson
Act (regarding  federal preemption of state law) to the case; it did not address
the  merits  of the  case.  Triad  subsequently  filed a motion  opposing  class
certification which was granted.  Plaintiffs have appealed this decision.  While
the ultimate outcome of the RESPA litigation is uncertain, the litigation is not
expected  to have a material  adverse  affect on the  financial  position of the
Company.

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

         None.




                                       43
<PAGE>



                                     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(R) under
the symbol  "TGIC." At  December  31,  2002,  14,159,601  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.


                                     2002                         2001
                                     ----                         ----
                              High          Low            High           Low
                              ----          ---            ----           ---
    First Quarter.......... $43.470       $34.740        $35.438        $26.688

    Second Quarter......... $48.470       $40.270        $40.000        $30.125

    Third Quarter.......... $46.000       $32.400        $39.750        $29.650

    Fourth Quarter ........ $41.610       $31.002        $36.530        $30.400


     As of March 12,  2003,  the  number of  stockholders  of record of  Company
Common Stock was approximately  200. In addition,  there were an estimated 3,600
beneficial owners of shares held by brokers and fiduciaries.

     Payments of future  dividends are subject to  declaration  by the Company's
Board of  Directors.  The dividend  policy is  dependent  also on the ability of
Triad  to  pay  dividends  to  the  Company.   Because  of  regulatory  dividend
restrictions  by the  Illinois  Department  of  Insurance  and  Triad's  need to
maintain capital levels required by rating agencies,  the Company has no present
intention to pay dividends.















                                       44
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
                                                                           Year Ended December 31
                                                                           ----------------------
                                                          2002          2001          2000           1999           1998
                                                          ----          ----          ----           ----           ----
Income Statement Data (for period ended):                     (Dollars in thousands, except per share amounts)
<S>                                                  <C>           <C>           <C>           <C>            <C>
Premiums written:
     Direct..................................        $   124,214   $    95,551   $    76,867   $     65,381   $     52,974
     Assumed.....................................              3             4             8             11             13
     Ceded.......................................       (18,348)      (10,557)       (4,993)        (1,665)        (1,090)
                                                     -----------   -----------   -----------   ------------   ------------
                                                     $   105,869   $    84,998   $    71,882   $     63,727   $     51,897
                                                     ===========   ===========   ===========   ============   ============
Earned premiums..................................    $   105,067   $    84,356   $    71,843   $     63,970   $     52,822
Net investment income............................         16,099        14,765        12,645         10,546          9,289
Net realized investment (losses) gains ..........        (2,519)           297           286          1,153            880
Other income.....................................             72         1,892            37             13             14
                                                     -----------   -----------   -----------   ------------   ------------
     Total revenues..........................            118,719       101,310        84,811         75,682         63,005

Net losses and loss adjustment expenses..........         14,063         9,019         7,587          7,111          7,009
Interest expense on debt.........................          2,771         2,771         2,770          2,780          2,554
Amortization of deferred policy acquisition cost.         13,742        11,712         8,211          6,955          5,955
Other operating expenses (net of acquisition
     cost deferred).............................          22,900        18,136        16,008         15,061         12,435
                                                     -----------   -----------   -----------   ------------   ------------
Income before income taxes.......................         65,243        59,672        50,235         43,775         35,052
Income taxes.....................................         20,140        18,413        15,237         13,365         10,678
                                                     -----------   -----------   -----------   ------------   ------------
Net income.......................................    $    45,103   $    41,259   $    34,998   $     30,410   $     24,374
                                                     ===========   ===========   ===========   ============   ============
     Basic earnings per share ...................    $      3.21   $      3.05   $      2.63   $       2.28   $       1.83
     Diluted earnings per share .................    $      3.15   $      2.95   $      2.55   $       2.23   $       1.76
                                                     -----------   -----------   -----------   ------------   ------------
Weighted average common and common share
     equivalents outstanding
         Basic ..................................     14,060,420    13,545,725    13,321,901     13,312,104     13,342,749
         Diluted.................................     14,331,581    13,977,435    13,726,088     13,640,716     13,843,382

Balance Sheet Data (at year end):
     Total assets (1)............................    $   482,886   $   396,455   $   328,377   $    263,141   $    230,512
     Total invested assets.......................    $   344,581   $   277,200   $   232,025   $    191,564   $    177,301
     Losses and loss adjustment expenses.........    $    21,360   $    17,991   $    14,987   $     14,751   $     12,143
     Unearned premiums...........................    $     8,539   $     7,650   $     6,933   $      6,831   $      7,055
     Long-term debt .............................    $    34,479   $    34,473   $    34,467   $     34,462   $     34,457
     Stockholders' equity........................    $   309,407   $   246,070   $   199,831   $    157,072   $    137,531
Statutory Ratios (2):
     Loss ratio..................................          13.4%         10.7%         10.6%          11.1%          13.3%
     Expense ratio...............................          38.0%         39.9%         37.4%          40.5%          42.3%
                                                     -----------   -----------   -----------   ------------   ------------
     Combined ratio..............................          51.4%         50.6%         48.0%          51.6%          55.6%
                                                     ===========   ===========   ===========   ============   ============
GAAP Ratios:
     Loss ratio..................................          13.4%         10.7%         10.6%          11.1%          13.3%
     Expense ratio...............................          34.6%         35.1%         33.7%          34.5%          35.4%
                                                     -----------   -----------   -----------   ------------   ------------
     Combined ratio..............................          48.0%         45.8%         44.3%          45.6%          48.7%
                                                     ===========   ===========   ===========   ============   ============
Other Statutory Data (dollars in millions) (2):
     Direct insurance in force...................    $  25,379.1   $  21,726.0   $  15,123.5   $   13,038.0   $   11,256.6
     Direct risk in force (gross)................    $   5,790.9   $   4,581.5   $   3,760.0   $    3,222.5   $    2,777.4
     Risk-to-capital.............................         15.5:1        15.0:1        14.8:1         15.4:1         16.2:1
<FN>
(1)  Periods prior to 1999 have been restated to reflect reclassification of Tax
     and Loss bonds.
(2)  Based on  statutory  accounting  practices  and derived  from  consolidated
     statutory financial statements of Triad.
</FN>
</TABLE>

                                       45
<PAGE>

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

RESULTS OF OPERATIONS

2002 COMPARED TO 2001

     Net income for 2002  increased  9.3% to $45.1 million from $41.3 million in
2001.  Net income per share on a diluted basis  increased 6.6% to $3.15 for 2002
from $2.95 per share for 2001. This improvement in net income was led by a 24.6%
increase in earned  premiums and a 9.0% increase in net investment  income.  Net
income for 2002  includes net realized  investment  losses of $2.5  million,  or
$0.11 per  diluted  share,  while net  income  for 2001  included  net  realized
investment gains of $297,000,  or $0.01 per diluted share.  Also included in net
income  for  2001  was  the  receipt  of a  nonrecurring  incentive  payment  of
approximately  $1.9  million,  or  $0.09  per  diluted  share,  relating  to the
voluntary  cancellation  of one of the  Company's  excess  of  loss  reinsurance
contracts.  The payment was  reported  as other  income in the first  quarter of
2001.

     Operating earnings,  which exclude realized investment gains and losses net
of related  taxes,  increased  13.8% to $46.7  million in 2002 compared to $41.1
million in 2001.  Operating  earnings per share were $3.26 for 2002  compared to
$2.94 for 2001, an increase of 11.0%. Management believes operating earnings and
operating earnings per share are relevant and useful  information,  and they are
primary measurements used by management in assessing the Company's  performance.
Management  does not believe that net realized  investment  gains and losses are
strong  indicators  of trends in  operations.  Operating  earnings and operating
earnings  per share  results,  as  described  above,  may not be  comparable  to
similarly titled measures reported by other companies.  Excluding the effects of
the nonrecurring  incentive payment from operating  results,  operating earnings
increased   17.3%,   and  operating   earnings  per  diluted   share   increased
approximately 14.4% for 2002 compared to 2001.

     Total insurance written in 2002 was $13.4 billion compared to $13.3 billion
in 2001, an increase of 1.3%. Total insurance written includes insurance written
from  traditional  flow  production  and  insurance   written   attributable  to
structured  bulk  transactions.  Total direct  insurance in force  reached $25.4
billion at December 31, 2002, compared to $21.7 billion at December 31, 2001, an
increase of 16.8%.  Significant refinance activity in 2002 drove a high level of
policy  cancellations  that  partially  offset the impact that the high level of
insurance written had on in force growth.

     Traditional  flow  insurance  written  for  2002  increased  42.8% to $12.2
billion  from $8.5  billion in 2001.  The  increase in  insurance  written  from
traditional flow production was primarily the result of expanding  relationships
with national lenders, strong demand for risk-sharing arrangements,  and a lower
interest rate environment.  Insurance written in 2002 attributable to structured
bulk  transactions  totaled  $1.2  billion  compared  to $4.7  billion  in 2001.
Structured  bulk  transactions  are  generally  initiated by secondary  mortgage
market  participants who wish to use mortgage insurance as a credit enhancement.
The Company competes  against other mortgage  insurers as well as other forms of
credit  enhancements   provided  by  capital  markets  for  these  transactions.

                                       46

<PAGE>

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

Insurance  written  attributed to structured bulk transactions is likely to vary
significantly  from  period  to period  due to the  relatively  small  number of
transactions  that  encompass  this market (as opposed to the  traditional  flow
market), competitiveness with other mortgage insurers, the attractiveness in the
marketplace of mortgage insurance versus other forms of credit enhancements, and
the changing  loan  composition  of the market.  The Company has  evaluated  all
segments of the bulk market - Prime  (predominantly  fully  underwritten  loans,
high credit scores, high percentage of low LTVs),  Alternative-A (generally high
credit score, low to moderate LTV loans that have been underwritten with reduced
documentation),  and Sub-prime  (generally fully  underwritten loans with credit
impaired borrowers).  All insurance written through the bulk channel in 2002 and
2001 was in the Prime segment and the Alternative-A segment of the bulk market.

     Consolidation   within  the  mortgage   origination  industry  and  Triad's
continued  focus on national  lenders has  resulted in a greater  percentage  of
production  volume  being  concentrated  among  a  smaller  customer  base.  The
Company's ten largest customers were responsible for 58.9%,  42.3%, and 30.0% of
traditional   flow  risk  in  force  at  December  31,  2002,  2001,  and  2000,
respectively.  The loss of one or more of these significant customers could have
a significant  adverse effect on the Company's  business.  According to industry
data, Triad's national market share of net new primary insurance written,  which
includes  insurance  written  on a  traditional  flow  basis  as  well  as  that
attributed  to  structured  bulk  transactions,  was 3.7% for 2002 (3.9% for the
fourth quarter) compared to 3.6% for 2001 (4.0% for the fourth quarter). Triad's
national market share of net new primary insurance written on a traditional flow
basis was 4.3% for 2002 (4.7% for the fourth quarter)  compared to 3.4% for 2001
(4.1%  in the  fourth  quarter).  Net new  primary  insurance  written  excludes
insurance placed on loans more than 12 months after loan origination,  insurance
placed on loans already  covered by primary  mortgage  insurance,  and insurance
placed on loans where  lender  exposure is  effectively  reduced  below  defined
minimums.  This  treatment is  consistent  with the  definitions  adopted by the
Company and the industry in the third quarter of 2001 regarding the  computation
of new insurance written for market share purposes.

     Total direct premiums  written were $124.2 million for 2002, an increase of
30.0%  compared to $95.6  million for 2001.  Net premiums  written  increased by
24.6% to $105.9  million in 2002 from $85.0  million for 2001.  Earned  premiums
increased  24.6% to $105.1  million for 2002 from $84.4  million for 2001.  This
growth in written and earned  premium  resulted  from record levels of insurance
written offset by the impact of a declining persistency rate due to a high level
of refinance activity.

     Growth in direct  premiums  written was partially  offset by an increase in
ceded  premiums   written.   Driven   primarily  by  increases  in  risk-sharing
arrangements  and also by excess of loss  reinsurance,  ceded  premiums  written
increased  73.8% to $18.3  million  in 2002  from  $10.6  million  in 2001.  The
Company's  premium  cede rate (the  ratio of ceded  premiums  written  to direct
premiums  written) was 14.8% for 2002 compared to 11.0% for 2001.  The Company's
premium cede rate for captive  reinsurance  was 12.7% for 2002  compared to 6.6%
for 2001.  Approximately  51% of flow insurance  written (46% of total insurance

                                       47
<PAGE>

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

written  including  structured  bulk  transactions)  during  2002 is  subject to
captive mortgage reinsurance and other risk-sharing arrangements compared to 58%
of flow insurance written (37% of total insurance  written including  structured
bulk  transactions)  in 2001.  The decline in the  percentage of flow  insurance
written  subject to risk-sharing  arrangements  from 2001 to 2002 is primarily a
result of increased  production in the Company's  lender-paid mortgage insurance
program which is generally  not subject to  risk-sharing  arrangements.  Through
December  31,  2002,   insurance   written   attributable   to  structured  bulk
transactions  has not been  subject to  captive  mortgage  reinsurance  or other
risk-sharing  arrangements.  Approximately 45.7% of direct insurance in force is
subject to risk-sharing  arrangements at December 31, 2002, compared to 34.6% at
December 31, 2001.  This increase in insurance in force subject to  risk-sharing
arrangements  is  due  primarily  to the  increased  market  penetration  of the
Company's  risk-sharing  arrangements  and the high level of refinance  activity
during the past twelve months,  as policies that were  previously not subject to
risk-sharing  arrangements  refinanced  and new policies  issued were subject to
risk-sharing  arrangements.  Management  anticipates  that ceded  premiums  will
continue to increase as a result of the expected  increase in insurance  written
and growth in the Company's risk-sharing programs.

     The  Company   currently   participates  in  excess  of  loss  risk-sharing
arrangements  with  various  entrance  and exit  attachment  points.  One of the
Company's  competitors  has  announced  that as of March 31,  2003,  it will not
participate in excess of loss  risk-sharing  arrangements  where the net premium
cede rate is  greater  than 25%.  The  Company  believes  that its  risk-sharing
arrangements provide valuable reinsurance  protection and potentially reduce the
risk of volatility in the Company's  earnings.  The Company plans to continue to
participate in its excess of loss risk-sharing arrangements.  It is uncertain at
this time what impact,  if any, the competitor's  decision to exit this business
will have on the Company's  direct  insurance in force  subject to  risk-sharing
arrangements and its market share.

     Refinance  activity  was 40.1% of  insurance  written  (47.0% in the fourth
quarter)  in 2002  compared  to 35.8%  (43.3% in the  fourth  quarter)  in 2001.
Excluding  structured  bulk  transactions,   refinance  activity  was  40.1%  of
insurance  written  (47.0% in the fourth  quarter) in 2002  compared to 37.5% of
insurance  written (44.4% in the fourth  quarter) in 2001.  Persistency,  or the
percentage  of insurance in force  remaining  from one year prior,  was 60.9% at
December  31, 2002,  compared to 67.6% at December  31, 2001.  The high level of
refinance  activity and the resulting  decrease in  persistency is reflective of
the low interest rate  environment  that has been in place during the past year.
Low  persistency  results in an  acceleration  of the  amortization  of deferred
policy  acquisition  costs and a reduction in renewal  premiums.  The annualized
quarterly persistency run rate for the fourth quarter of 2002 was 32.1% compared
to 40.8% for the fourth quarter of 2001.

     The Company  defines  persistency  as the  percentage of insurance in force
remaining  from 12 months  prior.  Run off,  defined as cancelled or  terminated
policies,  of production  originated during the past 12 months is not considered
in the Company's calculation of persistency.  The Company calculates persistency

                                       48
<PAGE>

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

by determining  the run off over the prior 12 months of each  individual  policy
year  (exclusive  of  current  year  production).  This  method  of  calculating
persistency may vary from that of other mortgage insurers.  The Company believes
that its calculation presents an accurate measure of the percentage of insurance
in force  remaining  from 12  months  prior.  The  Company's  current  method of
calculating  persistency is consistent with the methodology  used by the Company
in prior years.

     Net  investment  income for 2002 was $16.1  million,  a 9.0%  increase over
$14.8  million in 2001.  This  increase  is the result of growth in the  average
balance of invested assets by $48.9 million to $301.4 million for the year ended
December 31, 2002,  from $252.5 million for 2001. The growth in invested  assets
is  attributable  to normal  operating  cash flow.  The pre-tax yield on average
invested assets decreased to 5.3% for 2002 compared to 5.8% for 2001, reflecting
the current low interest  rate  environment  for new money  investments  and the
disposal  of a number of higher  yielding  corporate  bonds  with  lower  credit
quality  during the past twelve  months to enhance  the  overall  quality of the
portfolio. The portfolio's tax-equivalent yield-to-maturity was 7.9% at December
31, 2002,  versus 8.0% at December 31, 2001. Based on fair value,  approximately
81% and 72% of the Company's  fixed maturity  portfolio at December 31, 2002 and
2001,   respectively,   was  composed  of  state  and  municipal   tax-preferred
securities. At December 31, 2002, based on fair value,  approximately 95% of the
Company's fixed maturity  portfolio was either a U.S.  government or U.S. agency
obligation or was rated investment  grade by at least one nationally  recognized
securities  rating  organization  compared to approximately 93% of the Company's
fixed maturity portfolio at December 31, 2001.

     The Company actively  monitors  investment  securities  considered to be at
risk for impairment.  When the Company determines that a decline in the value of
a security below its amortized cost is other-than-temporary,  an impairment loss
has occurred. In the event of impairment, the Company writes down the cost basis
of the security to its fair value and  recognizes a realized loss for the amount
of the  writedown.  Net  realized  losses of $2.5 million  during 2002  included
impairment  writedowns of  approximately  $2.0 million on securities held in the
Company's portfolio. The net realized gain of $154,000 during the fourth quarter
of 2002 included approximately $403,000 of impairment writedowns. The writedowns
primarily involved securities in the  telecommunications  and technology sectors
and, to a lesser degree,  the airline,  energy,  electronic  manufacturing,  and
textile manufacturing industries.

     Net losses and loss  adjustment  expenses (net of  reinsurance  recoveries)
increased by 55.9% in 2002 to $14.1 million from $9.0 million in 2001.  The rise
reflects  an  increase  in paid  losses and  delinquent  loans as the  Company's
insurance in force grows and the condition of the economy remains weak. Net paid
losses and loss adjustment  expenses increased to $10.7 million during 2002 from
$6.0 million during 2001.  Reported  delinquent  loans totaled 2,379 at December
31,  2002,  compared to 1,420 at December 31,  2001,  an increase of 67.5%.  The
delinquency  inventory count includes all reported  delinquencies that are three
or more payments in arrears at the reporting date and all reported delinquencies

                                       49
<PAGE>

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

that  were  previously  three  or more  payments  in  arrears  and have not made
payments to the current due date. Reserves are established for all insured loans
reported as delinquent to the Company by the loan  servicer.  The Company's loss
ratio (the ratio of net incurred  losses to net earned  premiums)  was 13.4% for
2002 compared to 10.7% for 2001. The loss ratio was 15.4% for the fourth quarter
of 2002 and 13.2% for the fourth quarter of 2001.

     As of December 31, 2002,  approximately  83% 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  insurance  written in
previous years has been quite  favorable,  management  does not expect losses to
remain at the low levels  currently  reported.  The Company expects its incurred
losses to increase as a greater  amount of its  insurance  in force  reaches its
anticipated highest claim frequency years. Furthermore,  changes in the economic
environment  could  accelerate  paid and incurred loss  development.  Due to the
inherent uncertainty of future premium levels, losses, economic conditions,  and
other factors that affect  earnings,  it is difficult to predict with any degree
of certainty the impact of such higher claim frequencies on future earnings.

     Amortization  of deferred  policy  acquisition  costs increased by 17.3% to
$13.7 million in 2002 from $11.7 million for 2001. The increase in  amortization
reflects  growth in deferred policy  acquisition  costs related to the growth of
the  Company's  insurance in force and  accelerated  amortization  due to higher
cancellations  from refinance  activity in 2002. The Company's model  calculates
the amortization of deferred policy  acquisition  costs separately for each book
year. The model  accelerates the  amortization  of deferred  policy  acquisition
costs through a dynamic  adjustment  when  persistency  for a book year is lower
than a historical baseline level in order to match the amortization expense with
the  life of the  policies  on  which  the  acquisition  costs  were  originally
deferred.  Low  persistency  levels  during  the  past  two  years  resulted  in
additional  amortization  of deferred policy  acquisition  costs through dynamic
adjustments totaling $2.6 million in 2002 and $2.1 million in 2001.

     Other  operating  expenses  increased  26.3% to $22.9 million for 2002 from
$18.1 million for 2001.  This increase in expenses is primarily  attributable to
personnel, technology amortization, and equipment and software costs required to
support the  Company's  increased  levels of  production,  product  development,
system enhancements,  and geographic expansion.  The expense ratio (ratio of the
amortization of deferred policy  acquisition costs and other operating  expenses
to net premiums written) for 2002 was 34.6% compared to 35.1% for 2001.

     The effective tax rate was 30.9% for both 2002 and 2001. Management expects
the Company's effective tax rate to remain at about the same annual rate as long
as yields from new funds invested in tax-preferred  securities  remain favorable
in relation to fully taxable securities.

                                       50
<PAGE>

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

2001 COMPARED TO 2000

     Net income for 2001 increased  17.9% to $41.3 million from $35.0 million in
2000.  This  improvement  was led by a 17.4%  increase in earned  premiums and a
16.8% increase in net investment  income.  Net income for 2001 also included the
receipt of a nonrecurring  payment of approximately  $1.9 million related to the
voluntary  cancellation of an excess of loss reinsurance  contract.  The payment
was reported as "other income" in the first quarter of 2001.

     Net income per share on a diluted basis  increased  15.8% to $2.95 for 2001
from $2.55 per share for 2000.  Operating earnings per share were $2.94 for 2001
compared to $2.54 for 2000, an increase of 15.8%.  Operating  earnings per share
exclude  approximately  $297,000 of net  realized  investment  gains in 2001 and
$286,000 in 2000.  Operating  earnings in 2001 include  approximately  $0.09 per
share related to the nonrecurring payment.

     Insurance  written for 2001 was $13.3  billion  compared to $4.4 billion in
2000, an increase of 199%.  Traditional flow production was $8.5 billion in 2001
compared  to $4.4  billion  in 2000,  an  increase  of 92.6%.  The  increase  in
insurance  written from  traditional flow production was driven primarily by new
and  expanding   relationships   with  national   lenders,   strong  demand  for
risk-sharing arrangements, and a lower interest rate environment which increased
refinance activity and overall mortgage origination activity.  Insurance written
for 2001 also included  approximately  $4.7 billion  attributable  to structured
bulk  transactions.  For the comparable  period of 2000,  there was no insurance
written attributable to these transactions.  According to industry data, Triad's
national market share of net new primary insurance written increased to 3.6% for
all of 2001 from 2.7% for all of 2000.  Total direct  insurance in force reached
$21.7  billion at December 31, 2001,  compared to $15.1  billion at December 31,
2000, an increase of 43.7%.

     Total direct  premiums  written were $95.6 million for 2001, an increase of
24.3%  compared to $76.9  million for 2000.  Net premiums  written  increased by
18.2% to $85.0  million in 2001 from $71.9  million  for 2000.  Earned  premiums
increased  17.4% to $84.4  million for 2001 from $71.8  million  for 2000.  This
growth in written and earned  premium  resulted  from record levels of insurance
written offset by the impact of a declining persistency rate due to a high level
of mortgage refinancings.

     Growth in direct premiums  written was partially  offset by the increase in
ceded  premiums   written.   Driven   primarily  by  increases  in  risk-sharing
arrangements  and also by excess of loss  reinsurance,  ceded  premiums  written
increased 111% to $10.6 million from $5.0 million in 2000. The Company's premium
cede rate (the ratio of ceded premiums  written to direct premiums  written) was
11.0% for 2001  compared  to 6.5% for  2000.  Approximately  37.3% of  insurance
written (57.9% excluding bulk  transactions)  during 2001 was subject to captive
mortgage  reinsurance and other risk-sharing  arrangements  compared to 42.9% of
insurance written in 2000.

     Refinance activity was 35.8% of insurance written in 2001 compared to 13.2%
in 2000.  Persistency,  or the amount of insurance in force  remaining  from one
year prior,  was 67.6% at December 31,  2001,  compared to 82.6% at December 31,
2000. The increase in refinance  activity and the decrease in  persistency  were
reflective of the low interest rate environment during 2001.

     Net  investment  income for 2001 was $14.8  million,  a 16.8% increase over
$12.6  million in 2000.  This  increase  was the result of growth in the average
balance of invested  assets by $40.5  million to $252.5  million for 2001,  from

                                       51
<PAGE>

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

$212.0  million for 2000.  The growth in  invested  assets was  attributable  to
normal  operating  cash  flow.  The  pre-tax  yield on average  invested  assets
decreased to 5.8% for 2001 as compared to 6.0% for all of 2000,  reflecting  the
low interest  rate  environment  during  2001.  The  portfolio's  tax-equivalent
yield-to-maturity  was 8.0% at December  31,  2001,  versus 8.2% at December 31,
2000.  Based on fair value,  approximately  72% of the Company's  fixed maturity
portfolio  at  December  31,   2001,   was  composed  of  state  and   municipal
tax-preferred  securities as compared to approximately 70% at December 31, 2000.
At December 31, 2001,  based on fair value,  approximately  93% of the Company's
fixed maturity portfolio was either a U.S.  government or U.S. agency obligation
or was rated investment grade by at least one nationally  recognized  securities
rating  organization  compared  to  approximately  92%  of the  Company's  fixed
maturity portfolio at December 31, 2000.

     In the  first  quarter  of 2001,  the  Company  recognized  a  nonrecurring
incentive   payment  of   approximately   $1.9  million   related  to  voluntary
cancellation of an excess of loss reinsurance contract maintained by the Company
with a  non-affiliated  reinsurer.  This  payment  was  accounted  for as "other
income".  The  Company  also  established  excess of loss  reinsurance  coverage
through a  separate  third-party  reinsurer  in the first  quarter of 2001 under
terms similar to the cancelled agreement.

     Net losses and loss  adjustment  expenses (net of  reinsurance  recoveries)
increased by 18.9% in 2001 to $9.0 million from $7.6 million in 2000.  This rise
reflected  increased  levels of insurance in force. The Company's loss ratio was
10.7% for 2001 compared to 10.6% for 2000.  As of December 31, 2001,  there were
no incurred losses related to the Company's bulk business.

     Approximately 76% of the Company's insurance in force at December 31, 2001,
was originated in the prior 36 months.

     Amortization  of deferred  policy  acquisition  costs increased by 42.6% to
$11.7 million in 2001 from $8.2 million for 2000.  The increase in  amortization
reflected growth in deferred policy  acquisition  costs related to the expansion
of the Company's  insurance in force and accelerated  amortization due to higher
cancellations from refinance activity in 2001.

     Other  operating  expenses  increased  13.3% to $18.1 million for 2001 from
$16.0 million for 2000. This increase in expenses was primarily  attributable to
personnel,  technology amortization, and equipment costs required to support the
Company's product development, system enhancements, and expanded production. The
expense ratio for 2001 was 35.1% compared to 33.7% for 2000.

     The  effective tax rate for 2001 was 30.9%  compared to 30.3% in 2000.  The
increase  in the  effective  tax rate was due to a lower  percentage  of pre-tax
income being generated from tax-preferred securities as well as the recognition,
on a taxable basis, of previously deferred income.


                                       52
<PAGE>

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

LIQUIDITY AND CAPITAL RESOURCES

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

     The Company generated positive cash flow from operating activities for 2002
of $47.0 million  compared to $43.8 million for 2001 and $32.7 million for 2000.
The increase in cash flow from operating  activities in 2002 reflects the growth
in premium and investment income and the effects of tax benefits  resulting from
the exercise of stock options offset  partially by the increase in  underwriting
expenses and losses paid.  The Company's  business  does not  routinely  require
significant  capital  expenditures  other than for  enhancements to its computer
systems and technological capabilities. Positive cash flows are invested pending
future payments of claims and expenses.  Cash flow shortfalls,  if any, could be
funded through sales of short-term  investments and other  investment  portfolio
securities.

     The parent company's cash flow is dependent on interest income and payments
from Triad including  management fees and interest payments under surplus notes.
The Illinois  Insurance  Department permits expenses of the parent company to be
reimbursed by Triad in the form of management fees. Payment of dividends is also
permitted, although none have been paid to date.

     The insurance laws of the State of Illinois impose certain  restrictions on
dividends that Triad can pay the parent company.  These  restrictions,  based on
statutory accounting practices,  include requirements that dividends may be paid
only out of statutory earned surplus and that limit the amount of dividends that
may be paid without prior approval of the Illinois Insurance Department.

     Consolidated  invested  assets were $344.6  million at December  31,  2002,
compared to $277.2 million at December 31, 2001.  Fixed maturity  securities and
equity  securities  classified as  available-for-sale  totaled $309.3 million at
December 31, 2002. Net unrealized  investment  gains were $13.7 million on fixed
maturity securities and net unrealized investment losses were $458,000 on equity
securities  at  December  31,  2002.  Based on fair  value,  the fixed  maturity
portfolio  consisted of approximately  81% municipal  securities,  15% corporate
securities, and 4% U.S. government obligations at December 31, 2002. At December
31, 2001, the fixed maturity portfolio  consisted of approximately 72% municipal
securities,  23% corporate securities,  and 5% U.S. government obligations.  The
weighted-average  duration to maturity of the Company's fixed maturity portfolio
was 12.1 years at December  31,  2002,  compared  to 11.2 years at December  31,
2001.  This  increase  in  duration  was due to  shifts  in the  portfolio  from
corporate  securities  to municipal  securities,  where the yield curve was more
attractive on longer duration investments.

                                       53
<PAGE>

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

     Fixed maturity  securities  represented  approximately 87% of the Company's
invested  assets at December  31,  2002,  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 and loss adjustment  expense reserves increased to $21.4
million at December  31, 2002,  compared to $18.0  million at December 31, 2001.
Loss and loss  adjustment  expense  reserves  are  established  when  notices of
default on insured  mortgage loans are received.  Reserves also are  established
for  estimated  losses  incurred on notices of default  not yet  reported by the
lender.  Consistent with industry practices, the Company does not establish loss
reserves for future  claims on insured  loans that are not currently in default.
The growth in loss  reserves is the result of the increase in reported  defaults
and the  maturing  of the  Company's  risk in force.  The Company  expects  loss
reserves to continue to grow,  reflecting  the growth and aging of its insurance
in force.  Including bulk loans, the Company's  delinquency  ratio (the ratio of
delinquent insured loans to total insured loans) was 1.25% at December 31, 2002,
compared to 0.89% at December 31, 2001.  The  Company's  delinquency  ratios for
traditional flow and bulk loans were 1.23% and 1.38%, respectively,  at December
31, 2002.  There were no reported  delinquencies  for bulk loans at December 31,
2001.

     Reserves  are  established  by  management   using  estimated  claim  rates
(frequency)  and claim  amounts  (severity)  to estimate  ultimate  losses.  The
reserving process  incorporates  numerous factors in a formula that gives effect
to current  economic  conditions and profiles  delinquencies  by such factors as
policy year, geography, chronic late payment characteristics,  and the number of
months the policy has been in default. Because the estimate for loss reserves is
sensitive to the estimates of claims frequency and severity, management performs
sensitivity  analyses to test the  reasonableness of the best estimate generated
by the loss reserve process.  These sensitivity analyses allow management to use
alternative  assumptions  related to claims  frequency  and claims  severity  to
develop a range of reasonably possible loss reserve outcomes that can be used to
challenge  the  best  estimate.  The loss  reserve  estimation  process  and the
sensitivity  analyses  support the  reasonableness  of the best estimate of loss
reserves  recorded  as a  liability  in  the  financial  statements.  Management
periodically  reviews the loss reserve  process in order to improve its estimate
of  ultimate  losses on loans  currently  in  default.  Adjustments  to  reserve
estimates are reflected in the financial  statements in the periods in which the
adjustments are made.

     Triad  cedes  business  to  captive  reinsurance  subsidiaries  of  certain
mortgage  lenders  ("captives")  primarily  under  excess  of  loss  reinsurance
agreements.  Generally,  reinsurance  recoverables on loss reserves and unearned
premiums ceded to these captives are backed by trust funds or letters of credit.

                                       54
<PAGE>

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

     Total  stockholders'  equity  increased  to $309.4  million at December 31,
2002, from $246.1 million at December 31, 2001. This increase resulted primarily
from net  income  of $45.1  million,  an  increase  in net  unrealized  gains on
invested assets classified as  available-for-sale of $7.7 million (net of income
tax),  and  additional  paid-in-capital  of  $10.2  million  resulting  from the
exercise of employee stock options and the related tax benefit.

     Triad's total statutory  policyholders' surplus increased to $112.9 million
at  December  31,  2002,  from  $105.3  million at December  31,  2001.  Triad's
statutory  earned surplus  increased to $29.2 million at December 31, 2002, from
$21.6  million  at  December  31,  2001.  The  increase  in  Triad's   statutory
policyholders'  surplus and statutory earned surplus resulted,  primarily,  from
statutory  net income of $61.8  million  which  exceeded the net increase in the
statutory contingency reserve of $51.2 million and the increase in the statutory
deferred tax liability of $3.0 million. The balance in the statutory contingency
reserve was $245.0  million at December 31, 2002,  compared to $193.7 million at
December 31, 2001.

     Triad's  ability  to write  insurance  depends  on the  maintenance  of its
financial  strength  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, 2002, Triad's  risk-to-capital  ratio was 15.5-to-1 as compared to 15.0-to-1
at December 31, 2001,  and 11.1-to-1 for the industry as a whole at December 31,
2001, the latest industry data available.

     Triad is rated "AA" by both  Standard & Poor's  Ratings  Services and Fitch
Ratings and "Aa3" by Moody's Investors Service.

     Fannie Mae is in the  process of revising  its  approval  requirements  for
mortgage  insurers.  The new  requirements,  which have not yet been  finalized,
would require prior  approval by Fannie Mae for many of Triad's  activities  and
new products,  allow for other  approved  types of mortgage  insurers rated less
than  "AA," and give  Fannie  Mae  increased  rights to revise  the  eligibility
standards of mortgage insurers.  The final form the eligibility  guidelines will
take is unknown  at this  time,  but new  guidelines,  if issued,  could have an
adverse effect on the Company.

     The Office of  Federal  Housing  Enterprise  Oversight  (OFHEO)  issued its
risk-based  capital rules for Fannie Mae and Freddie Mac in the first quarter of
2002. The regulation  provides capital guidelines for Fannie Mae and Freddie Mac
in   connection   with  their  use  of  various   types  of  credit   protection
counterparties including a more preferential capital credit for insurance from a
"AAA"  rated  private  mortgage  insurer  than for  insurance  from a "AA" rated
private  mortgage  insurer.  The phase-in period for the new rules is ten years.
The Company  does not  believe  the new rules had an adverse  impact in 2002 nor

                                       55
<PAGE>

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

that the new rules will have a significant  adverse impact on the Company in the
future.  However,  if the new capital guidelines result in future changes to the
preferences  of Fannie Mae and  Freddie Mac  regarding  their use of the various
types of credit enhancements or their choice of mortgage insurers based on their
credit rating, the Company's financial condition could be significantly harmed.

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 or decrease  from their
current levels;  housing  transactions  and mortgage  insurance 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 insurance written could
be  adversely  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; the Company's  financial  condition
and competitive position could be affected by legislation impacting the mortgage
guaranty industry  specifically and the financial  services industry in general;
rating agencies may revise methodologies for determining the Company's financial
strength  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 amount of
insurance  written and the growth in insurance in force or risk in force as well
as the  performance of the Company may be adversely  impacted by the competitive
environment  in the private  mortgage  insurance  industry,  including the type,
structure,  and pricing of products and services  offered by the Company and its
competitors;  if the Company fails to properly  underwrite  mortgage loans under
contract underwriting service agreements,  the Company may be required to assume
the costs of  repurchasing  those  loans;  with  consolidation  occurring  among
mortgage lenders and the Company's concentration of insurance in force generated
through  relationships  with  significant  lender  customers,   the  loss  of  a
significant  customer  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;  new OFHEO risk-based capital
rules could  severely  limit the Company's  ability to compete  against  various
types  of  credit  protection  counterparties,  including  "AAA"  rated  private
mortgage  insurers;  changes  in the  eligibility  guidelines  of Fannie  Mae or
Freddie Mac could have an adverse effect on the Company.

     Accordingly,  actual  results  may  differ  from  those  set  forth  in the
forward-looking statements. Attention also is directed to other risk factors set
forth  in  documents  filed by the  Company  with the  Securities  and  Exchange
Commission.

                                       56

<PAGE>


ITEM 7 (A).    QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS.
-----------    ------------------------------------------------------------

The  response  to this item is  submitted  on page 54 of this  report  under the
section titled "Management's  Discussion and Analysis of Financial Condition and
Results of Operations."

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 2003 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" in Part I, Item 1 of this
Report.

ITEM 11.      EXECUTIVE COMPENSATION.
-------       ----------------------

     This  information is included in the Company's Proxy Statement for the 2003
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 2003
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 2003
Annual Meeting of Stockholders, and is hereby incorporated by reference.

                                       57
<PAGE>


ITEM 14.      CONTROLS AND PROCEDURES
--------      -----------------------

     Within  the 90 days  prior to the filing  date of this  report the  Company
evaluated  the  effectiveness  of the design  and  operation  of its  disclosure
controls and procedures  pursuant to the Exchange Act of 1934, Rule 13a-15.  The
evaluation was conducted  under the supervision  and with the  participation  of
management,  including the Chief  Executive  Officer  (CEO) and Chief  Financial
Officer (CFO). Based on that evaluation,  management, including the CEO and CFO,
concluded that the Company's  disclosure controls and procedures were effective.
Disclosure  controls  and  procedures  are  designed to ensure that  information
required to be disclosed in the Company's  reports filed or submitted  under the
Exchange Act is recorded,  processed,  summarized  and reported  within the time
periods specified in the Securities and Exchange Commission's rules and forms.

     There have been no significant  changes in the Company's  internal controls
or in other  factors  that could  significantly  affect the  Company's  internal
controls subsequent to the date management carried out its evaluation.














                                       58
<PAGE>

                                     PART IV


ITEM 15.      EXHIBITS, FINANCIAL STATEMENT
-------       SCHEDULES, AND REPORTS ON FORM 8-K.
              -----------------------------------

          (a)(1) and (2) The response to this portion of Item 15 is submitted as
               a separate section of this report.

          (a)(3) Listing of Exhibits - The  response to this  portion of Item 15
               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, 2002.

          (c)  Exhibits - The  response to this  portion of Item 15 is submitted
               as a separate section of this report.

          (d)  Financial  Statement  Schedules - The response to this portion of
               Item 15 is submitted as a separate section of this report.




















                                       59
<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 21st day of
March, 2003.

                                       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 21st day of March,  2003 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/ Ron D. Kessinger              Executive Vice President and Chief Financial
 ---------------------------       Officer
 Ron D. Kessinger


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


 /s/ David W. Whitehurst           Director
 ---------------------------
 David W. Whitehurst


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


 /s/ Michael A. F. Roberts         Director
 ---------------------------
 Michael A. F. Roberts



                                       60
<PAGE>
Form 10-K

                                 CERTIFICATIONS

I, Darryl W. Thompson, certify that:

     1.   I have  reviewed  this  annual  report on Form 10-K of Triad  Guaranty
          Inc.;

     2.   Based on my knowledge,  this annual report does not contain any untrue
          statement  of a  material  fact  or  omit to  state  a  material  fact
          necessary to make the statements  made, in light of the  circumstances
          under which such  statements were made, not misleading with respect to
          the period covered by this annual report;

     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this  annual  report,  fairly  present in all
          material respects the financial  condition,  results of operations and
          cash flows of the registrant as of, and for, the periods  presented in
          this annual report;

     4.   The registrant's  other  certifying  officer and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and have:

          a)   designed such  disclosure  controls and procedures to ensure that
               material  information  relating to the registrant,  including its
               consolidated  subsidiaries,  is made known to us by others within
               those  entities,  particularly  during  the  period in which this
               annual report is being prepared;

          b)   evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this annual report (the "Evaluation Date"); and

          c)   presented  in  this  annual  report  our  conclusions  about  the
               effectiveness of the disclosure  controls and procedures based on
               our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officer and I have disclosed,  based
          on our most recent  evaluation,  to the registrant's  auditors and the
          audit committee of registrant's board of directors:

          a)   all  significant  deficiencies  in the  design  or  operation  of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors any material
               weaknesses in internal controls; and

          b)   any fraud,  whether or not material,  that involves management or
               other employees who have a significant  role in the  registrant's
               internal controls; and


                                       61
<PAGE>


     6.   The registrant's other certifying officer and I have indicated in this
          annual  report  whether  there were  significant  changes in  internal
          controls or in other factors that could significantly  affect internal
          controls  subsequent  to the  date  of  our  most  recent  evaluation,
          including   any   corrective   actions  with  regard  to   significant
          deficiencies and material weaknesses.



         March 27, 2003
                                             /s/Darryl W. Thompson
                                             ---------------------------
                                             Darryl W. Thompson
                                             President, Chief Executive Officer

















                                       62
<PAGE>

Form 10-K
                                 CERTIFICATIONS


I, Ron D. Kessinger, certify that:

     1.   I have  reviewed  this  annual  report on Form 10-K of Triad  Guaranty
          Inc.;

     2.   Based on my knowledge,  this annual report does not contain any untrue
          statement  of a  material  fact  or  omit to  state  a  material  fact
          necessary to make the statements  made, in light of the  circumstances
          under which such  statements were made, not misleading with respect to
          the period covered by this annual report;

     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this  annual  report,  fairly  present in all
          material respects the financial  condition,  results of operations and
          cash flows of the registrant as of, and for, the periods  presented in
          this annual report;

     4.   The registrant's  other  certifying  officer and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and have:

          a)   designed such  disclosure  controls and procedures to ensure that
               material  information  relating to the registrant,  including its
               consolidated  subsidiaries,  is made known to us by others within
               those  entities,  particularly  during  the  period in which this
               annual report is being prepared;

          b)   evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this annual report (the "Evaluation Date"); and

          c)   presented  in  this  annual  report  our  conclusions  about  the
               effectiveness of the disclosure  controls and procedures based on
               our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officer and I have disclosed,  based
          on our most recent  evaluation,  to the registrant's  auditors and the
          audit committee of registrant's board of directors:

          a)   all  significant  deficiencies  in the  design  or  operation  of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors any material
               weaknesses in internal controls; and

          b)   any fraud,  whether or not material,  that involves management or
               other employees who have a significant  role in the  registrant's
               internal controls; and

                                       63
<PAGE>

     6.   The registrant's other certifying officer and I have indicated in this
          annual  report  whether  there were  significant  changes in  internal
          controls or in other factors that could significantly  affect internal
          controls  subsequent  to the  date  of  our  most  recent  evaluation,
          including   any   corrective   actions  with  regard  to   significant
          deficiencies and material weaknesses.



         March 27, 2003
                                             /s/Ron D. Kessinger
                                             -----------------------
                                             Ron D. Kessinger
                                             Executive Vice President and
                                               Chief Financial Officer
























                                       64
<PAGE>


                               Triad Guaranty Inc.


                   Certification of Periodic Financial Report
                       Pursuant to 18 U.S.C. Section 1350

     Pursuant to 18 U.S.C.  Section 1350, as adopted  pursuant to Section 906 of
the  Sarbanes-Oxley  Act of  2002,  each of the  undersigned  officers  of Triad
Guaranty Inc. (the  "Company")  certifies  that,  to his  knowledge,  the Annual
Report on Form 10-K of the  Company for the year ended  December  31, 2002 fully
complies  with the  requirements  of  Section  13(a) or 15(d) of the  Securities
Exchange  Act of 1934  and  information  contained  in  that  Form  10-K  fairly
presents,  in all material  respects,  the  financial  condition  and results of
operations of the Company.



Dated: March 27, 2003                /s/Darryl W. Thompson
                                     ----------------------
                                     Darryl W. Thompson
                                     President, Chief Executive Officer



Dated: March 27, 2003               /s/Ron D. Kessinger
                                    -----------------------
                                    Ron D. Kessinger
                                    Executive Vice-President and
                                      Chief Financial Officer



     This certification is made solely for the purpose of 18 U.S.C. Section 1350
and not for any other purpose.
















                                       65
<PAGE>



                           ANNUAL REPORT ON FORM 10-K

                ITEM 8, ITEM 15(a)(1) and (2), (3), (c), and (d)

            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

                                INDEX TO EXHIBITS


                        CONSOLIDATED FINANCIAL STATEMENTS

                          FINANCIAL STATEMENT SCHEDULES

                                CERTAIN EXHIBITS

                          YEAR ENDED DECEMBER 31, 2002

                               TRIAD GUARANTY INC.

                          WINSTON-SALEM, NORTH CAROLINA






                                       66
<PAGE>
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULES

                              (Item 15(a) 1 and 2)



 CONSOLIDATED FINANCIAL STATEMENTS                                        Page
 ---------------------------------                                        ----
 Report of Independent Auditors.....................................       70

 Consolidated Balance Sheets at December 31, 2002 and 2001..........    71 - 72

 Consolidated Statements of Income for each of the three
   years in the period ended December 31, 2002......................       73

 Consolidated Statements of Changes in Stockholders'
   Equity for each of the three years in
   the period ended December 31, 2002...............................       74

 Consolidated Statements of Cash Flows for each of
   the three years in the period ended December 31, 2002............       75

 Notes to Consolidated Financial Statements.........................     76 - 95


 FINANCIAL STATEMENT SCHEDULES
 -----------------------------

 Schedules at and for each of the three years in the period ended
    December 31, 2002

    Schedule I - Summary of Investments - Other Than
                 Investments in Related Parties.....................       96

    Schedule II - Condensed Financial Information of Registrant.....    97 - 101

    Schedule IV - Reinsurance.......................................      102



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.






                                       67
<PAGE>
                                Index To Exhibits
                                 (Item 15(a) 3)

  EXHIBIT
   NUMBER   DESCRIPTION OF EXHIBIT
   ------   ----------------------

     3.1   Certificate  of  Incorporation  of  the Registrant,  as  amended  (5)
           (Exhibit 3.1)

    *3.2   By-Laws of the Registrant as amended March 21, 2003 (Exhibit 3.2(c))

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

     4.2   Indenture  Between  Triad  Guaranty  Inc. and  Banker's  Trust Co.(6)
           (Exhibit 4.2)

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

     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)

     10.10 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)

     10.16 Economic Value Added Incentive Bonus Program (Senior  Management) (4)
           (Exhibit 10.16)

     10.17 Amendment to Employment  Agreement  between the Registrant and Darryl
           W. Thompson (3)(4) (Exhibit 10.17)

     10.19 Amendment to Employment Agreement between the Registrant and Henry B.
           Freeman (3)(4) (Exhibit 10.19)

     10.20 Amendment to Employment Agreement  between the  Registrant and Ron D.
           Kessinger (3)(4) (Exhibit 10.20)

     10.21 Excess of Loss Reinsurance Agreement between Triad Guaranty Insurance
           Corporation,  Capital  Mortgage   Reinsurance  Company,  and  Federal
           Insurance Company. (7) (Exhibit 10.21)


                                       68
<PAGE>

     10.22 Excess of Loss Reinsurance Agreement between Triad Guaranty Insurance
           Corporation and Ace Capital Mortgage Reinsurance Company. (8)(Exhibit
           10.22)

     10.23 Employment  Agreement between the  Registrant and Earl F. Wall (3)(9)
           (Exhibit 10.23)

     10.24 Employment  Agreement  between the  Registrant  and Michael R. Oswalt
           (3)(9) (Exhibit 10.24)

    *10.25 Employment  Agreement between the Registrant and Kenneth N. Lard (3)
           (Exhibit 10.25)

    *10.26 Employment  Agreement  between the  Registrant and Kenneth C. Foster
           (3) (Exhibit 10.26)

     21.1  Subsidiaries of the Registrant (7) (Exhibit 21.1)

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


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

*    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 1996 Form 10-K.

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

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

(7)  Incorporated by reference to the exhibit  identified in parentheses,  filed
     as an exhibit in the 1999 Form 10-K.

(8)  Incorporated by reference to the exhibit  identified in parentheses,  filed
     as an exhibit in the 2000 Form 10-K.

(9)  Incorporated by reference to the exhibit  identified in parentheses,  filed
     as an exhibit in the June 30, 2002 Form 10-Q.



                                       69
<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,  2002 and  2001,  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, 2002.  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 auditing standards generally accepted
in the United States. 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, 2002 and 2001,  and the  consolidated
results of their  operations and their cash flows for each of the three years in
the period ended  December 31, 2002, in conformity  with  accounting  principles
generally accepted in the United States.

                                                  /s/ERNST & YOUNG LLP
Greensboro, North Carolina
January 22, 2003


                                       70
<PAGE>
                               Triad Guaranty Inc.

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>

                                                                       December 31
                                                                2002                2001
                                                            ---------------------------------
                                                            (In thousands, except share data)
<S>                                                          <C>               <C>
Assets
Invested assets:
   Securities available-for-sale, at fair value:
      Fixed maturities (amortized cost:
      2002 - $284,737; 2001 - $245,662)                      $    298,470      $    245,985
      Equity securities (cost:
      2002 - $11,266; 2001 - $11,308)                              10,808            12,476
   Short-term investments                                          35,303            18,739
                                                             ---------------------------------
                                                                  344,581           277,200

Cash                                                                  233               853
Real estate                                                         1,561               162
Accrued investment income                                           3,088             3,196
Deferred policy acquisition costs                                  28,997            25,944
Property and equipment, at cost less accumulated
  depreciation (2002 - $8,146; 2001 - $6,120)                       9,533            11,170
Prepaid federal income tax                                         77,786            62,619
Reinsurance recoverable                                               396                 5
Other assets                                                       16,711            15,306












                                                            ---------------------------------
Total assets                                                 $    482,886      $    396,455
                                                            =================================
</TABLE>

See accompanying notes.

                                       71

<PAGE>
                               Triad Guaranty Inc.

                           Consolidated Balance Sheets
<TABLE>
<CAPTION>

                                                                        December 31
                                                                  2002                2001
                                                           -----------------------------------
                                                             (In thousands, except share data)
<S>                                                         <C>                <C>
Liabilities and stockholders' equity
Liabilities:
   Losses and loss adjustment expenses                      $     21,360       $      17,991
   Unearned premiums                                               8,539               7,650
   Amounts payable to reinsurer                                    3,415               2,445
   Current taxes payable                                             598                  40
   Deferred income taxes                                          94,241              74,773
   Unearned ceding commission                                      1,386               2,324
   Long-term debt                                                 34,479              34,473
   Accrued interest on debt                                        1,275               1,275
   Accrued expenses and other liabilities                          8,186               9,414
                                                           ----------------------------------
Total liabilities                                                173,479             150,385

Commitments and contingencies (Notes 5, 7, and 14)

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, issued and
     outstanding 14,159,601 shares at December 31,
     2002, and 13,691,672 at December 31, 2001
                                                                     142                 137
   Additional paid-in capital                                     80,169              69,058
   Accumulated other comprehensive income, net of
     income tax liability of $4,646 at
     December 31, 2002, and $521 at December 31, 2001              8,634                 975
   Deferred compensation                                            (658)               (117)
   Retained earnings                                             221,120             176,017
                                                           ----------------------------------
Total stockholders' equity                                       309,407             246,070
                                                           ----------------------------------
Total liabilities and stockholders' equity                  $    482,886       $     396,455
                                                           ==================================
</TABLE>

                                       72
<PAGE>
                               Triad Guaranty Inc.

                        Consolidated Statements of Income
<TABLE>
<CAPTION>

                                                                    Year ended December 31
                                                                2002             2001             2000
                                                      --------------------------------------------------
                                                               (In thousands, except share data)
<S>                                                    <C>               <C>              <C>
Revenue:
   Premiums written:
     Direct                                            $      124,214    $       95,551   $       76,867
     Assumed                                                        3                 4                8
     Ceded                                                    (18,348)          (10,557)          (4,993)
                                                      --------------------------------------------------
   Net premiums written                                       105,869            84,998           71,882
   Change in unearned premiums                                   (802)             (642)             (39)
                                                      --------------------------------------------------
Earned premiums                                               105,067            84,356           71,843

Net investment income                                          16,099            14,765           12,645
Net realized investment (losses) gains                         (2,519)              297              286
Other income                                                       72             1,892               37
                                                      --------------------------------------------------
                                                              118,719           101,310           84,811
Losses and expenses:
   Losses and loss adjustment expenses                         14,064             9,020            7,562
   Reinsurance recoveries                                          (1)               (1)              25
                                                      --------------------------------------------------
Net losses and loss adjustment expenses                        14,063             9,019            7,587

Interest expense on debt                                        2,771             2,771            2,770
Amortization of deferred policy acquisition costs              13,742            11,712            8,211
Other operating expenses (net of acquisition costs
   deferred)                                                   22,900            18,136           16,008
                                                      --------------------------------------------------
                                                               53,476            41,638           34,576
                                                      --------------------------------------------------
Income before income taxes                                     65,243            59,672           50,235
Income taxes:
   Current                                                        667               187               15
   Deferred                                                    19,473            18,226           15,222
                                                      --------------------------------------------------
                                                               20,140            18,413           15,237
                                                      --------------------------------------------------
Net income                                             $       45,103    $       41,259   $       34,998
                                                      ==================================================

Earnings per common and common equivalent share:
     Basic                                             $         3.21    $         3.05 $          2.63
                                                      ==================================================
     Diluted                                           $         3.15    $         2.95 $          2.55
                                                      ==================================================
Shares used in computing earnings per common
 and common equivalent share:
     Basic                                                 14,060,420        13,545,725       13,321,901
                                                      ==================================================
     Diluted                                               14,331,581        13,977,435       13,726,088
                                                      ==================================================
</TABLE>

See accompanying notes.

                                       73
<PAGE>
                               Triad Guaranty Inc.

           Consolidated Statements of Changes in Stockholders' Equity
                        (In thousands, except share data)
<TABLE>
<CAPTION>
                                                                 Accumulated
                                                     Additional     Other
                                           Common     Paid-In    Comprehensive     Deferred      Retained
                                            Stock     Capital       Income       Compensation    Earnings       Total
                                        ----------------------------------------------------------------------------------
<S>                                         <C>      <C>           <C>             <C>          <C>           <C>
 Balance at December 31, 1999               $ 133    $  61,972     $ (4,724)       $  (69)      $   99,760    $  157,072
   Net income                                   -            -            -             -           34,998        34,998
   Other comprehensive income - net of
     tax:
     Change in unrealized (loss) gain           -            -        7,075             -                -         7,075
                                                                                                           ---------------
   Comprehensive income                                                                                           42,073
   Issuance of 41,500 shares of common
     stock under stock option plans             1          471            -             -                -           472
   Tax effect of exercise of
     non-qualified stock options                -          130            -             -                -           130
   Issuance of 7,000 shares of
     restricted stock                           -          151            -          (151)               -             -
   Amortization of deferred
     compensation                               -            -            -            85                -            85
                                         ---------------------------------------------------------------------------------
 Balance at December 31, 2000                 134       62,724        2,351          (135)         134,758       199,832
   Net income                                   -            -            -             -           41,259        41,259
   Other comprehensive income - net of
     tax:
     Change in unrealized gain                  -            -       (1,376)            -                -        (1,376)
                                                                                                           ---------------
   Comprehensive income                                                                                           39,883
   Issuance of 336,628 shares of
     common stock under stock option
     plans                                      3        2,871            -             -                -         2,874
   Tax effect of exercise of
     non-qualified stock options                -        3,363            -             -                -         3,363
   Issuance of 3,350 shares of
     restricted stock                           -          100            -          (100)               -             -
   Amortization of deferred
     compensation                               -            -            -           118                -           118
                                         ---------------------------------------------------------------------------------
 Balance at December 31, 2001                 137       69,058          975          (117)         176,017       246,070
   Net income                                   -            -            -             -           45,103        45,103
   Other comprehensive income - net of
     tax:
     Change in unrealized gain                  -            -        7,659             -                -         7,659
                                                                                                           ---------------
   Comprehensive income                                                                                           52,762
   Issuance of 444,349 shares of
     common stock under stock option
     plans                                      5        5,684            -             -                -         5,689
   Tax effect of exercise of
     non-qualified stock options                -        4,494            -             -                -         4,494
   Issuance of 23,580 shares of
     restricted stock                           -          933            -          (933)               -             -
   Amortization of deferred
     compensation                               -            -            -           392                -           392
                                         ---------------------------------------------------------------------------------
Balance at December 31, 2002                $ 142    $  80,169     $  8,634        $ (658)      $  221,120    $  309,407
                                         =================================================================================
</TABLE>

See accompanying notes.

                                       74
<PAGE>
                               Triad Guaranty Inc.

                      Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                       Year ended December 31
                                                                2002              2001              2000
                                                           ------------------------------------------------
                                                                           (In thousands)
<S>                                                          <C>              <C>                <C>
Operating activities
Net income                                                   $  45,103        $  41,259          $  34,998
Adjustments to reconcile net income to net cash
  provided by operating activities:
    Loss and unearned premium reserves                           4,258            3,720                338
    Accrued expenses and other liabilities                      (2,624)           1,359              1,167
    Current taxes payable                                          558              (45)                15
    Amounts due to/from reinsurer                                  492            1,082                931
    Accrued investment income                                      108             (299)              (305)
    Policy acquisition costs deferred                          (16,795)         (14,840)           (11,119)
    Amortization of policy acquisition costs                    13,742           11,712              8,211
    Net realized investment losses (gains)                       2,519             (297)              (286)
    Provision for depreciation                                   2,778            2,246                859
    Accretion of discount on investments                        (4,601)          (3,128)            (1,578)
    Deferred income taxes                                       19,473           18,226             15,222
    Prepaid federal income taxes                               (15,167)         (13,244)           (13,959)
    Unearned ceding commission                                    (938)             842              1,081
    Other assets                                                (1,318)          (4,819)            (2,993)
    Other operating activities                                    (636)              56                136
                                                           ------------------------------------------------
Net cash provided by operating activities                       46,952           43,830             32,718

Investing activities
 Securities available-for-sale:
  Purchases - fixed maturities                                 (94,889)         (76,932)           (51,835)
  Sales - fixed maturities                                      59,696           36,576             23,280
  Purchases - equities                                          (2,160)          (4,999)            (1,663)
  Sales - equities                                               1,797            3,899              5,608
Net change in short-term investments                           (16,564)          (1,727)            (3,104)
Purchases of property and equipment                             (1,141)          (4,181)            (4,179)
                                                           ------------------------------------------------
Net cash used in investing activities                          (53,261)         (47,364)           (31,893)

Financing activities
Proceeds from exercise of stock options                          5,689            2,874                472
                                                           -----------------------------------------------
Net cash provided by financing activities                        5,689            2,874                472
Net change in cash                                                (620)            (660)             1,297
Cash at beginning of year                                          853            1,513                216
                                                           -----------------------------------------------
Cash at end of year                                          $     233        $     853          $   1,513
                                                           ===============================================

Supplemental schedule of cash flow information
 Cash paid during the period for:
  Income taxes and United States Mortgage
    Guaranty Tax and Loss Bonds                              $  16,024       $   13,270          $  13,959
  Interest                                                       2,765            2,765              2,765
</TABLE>

See accompanying notes.

                                       75
<PAGE>
                               Triad Guaranty Inc.

                   Notes to Consolidated Financial Statements

                                December 31, 2002


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  or  investors  to  protect  the lender or  investor  against  loss from
defaults on low down payment residential mortgage loans.

BASIS OF PRESENTATION

The  accompanying  consolidated  financial  statements  have  been  prepared  in
conformity with accounting  principles  generally accepted in the United States,
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 subsidiary,  Triad Guaranty Insurance Corporation ("Triad")
and Triad's  wholly-owned  subsidiaries,  Triad Guaranty  Assurance  Corporation
("TGAC")  and Triad Re  Insurance  Corporation  ("Triad  Re").  All  significant
intercompany accounts and transactions have been eliminated.

USE OF ESTIMATES

The  preparation of the  consolidated  financial  statements in conformity  with
accounting   principles   generally  accepted  in  the  United  States  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,  net of tax, 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."

                                       76
<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. The Company
evaluates its investments  regularly to determine  whether there are declines in
value that are other-than-temporary. When the Company determines that a security
has  experienced an  other-than-temporary  impairment,  the  impairment  loss is
recognized as a realized investment loss. Short-term  investments are defined as
short-term,  highly liquid investments both readily convertible to known amounts
of cash and having  maturities of twelve months or less upon  acquisition by the
Company.

The Company writes covered call options on certain equity  securities it owns as
a yield enhancement vehicle.  Call options convey to the option holder the right
to buy (call) a certain  stock at or before a  specified  date for a  contracted
price  (strike  price) from the Company.  The contract can expire  without being
exercised  in the  event  that the  price of the  underlying  stock is below the
strike  price.  In this  case,  the fee  received  for  granting  the  option is
recognized as a realized  gain.  The Company has no credit risk related to these
covered call options.  The Company's  financial risk in this activity is limited
to the  increase of the market price of the security in excess of the sum of the
option's  strike  price and the fee  received  for the  option.  The options are
carried  at fair value as other  liabilities  on the  accompanying  Consolidated
Balance  Sheets,  with  changes in the fair value of these  options  reported as
realized gains or losses.  The liability  recorded for these options was $10,800
and $145,500 at December 31, 2002 and 2001, respectively.

DEFERRED POLICY ACQUISITION COSTS

The costs of acquiring new business,  principally commissions and certain policy
underwriting and issue costs,  which 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.

                                       77

<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


1. ACCOUNTING POLICIES (CONTINUED)

PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost and is  depreciated  principally on a
straight-line  basis over the estimated  useful lives,  generally  three to five
years, of the depreciable  assets.  Property and equipment primarily consists of
computer hardware and software and furniture and equipment.

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 that
are not currently in default.  Loss reserves are established by management using
historical  experience and by making  various  assumptions  and judgments  about
claim rates (frequency) and claim amounts (severity) to estimate ultimate losses
to be paid on loans in default. The Company's reserving methodology gives effect
to current  economic  conditions and profiles  delinquencies  by such factors as
age,  policy year,  geography,  and chronic late  payment  characteristics.  The
estimates are  continually  reviewed and, as  adjustments  to these  liabilities
become necessary, such adjustments are reflected in current operations.

REINSURANCE

Certain  premiums  and  losses  are  assumed  from and ceded to other  insurance
companies  under various  reinsurance  agreements.  Reinsurance  premiums,  loss
reimbursement, and reserves related to reinsurance business are accounted for on
a basis consistent with that used in accounting for the original policies issued
and the terms of the  reinsurance  contracts.  The  Company may receive a ceding
commission in connection with ceded reinsurance. If so, 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.

                                       78

<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)




1. ACCOUNTING POLICIES (CONTINUED)

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 a 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.  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.

Triad purchases  ten-year  non-interest  bearing United States Mortgage Guaranty
Tax and Loss  Bonds  ("Tax and Loss  Bonds")  in lieu of paying  federal  income
taxes.  Purchases  of these Tax and Loss Bonds are  treated  as prepaid  federal
income  taxes  because  the  payment  for Tax and Loss  Bonds is  essentially  a
prepayment  of federal  income  taxes that will become due in ten years when the
Tax and Loss Bonds mature.  Current  income tax expense is primarily  associated
with the maturing of a portion of Triad's Tax and Loss Bonds.

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.
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 generally are earned when received.

SIGNIFICANT CUSTOMERS

Approximately  11  percent  of the  Company's  revenue in 2002 was from a single
customer.  No single customer  accounted for 10 percent or more of the Company's
revenue in 2001 or 2000.

                                       79
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


1. ACCOUNTING POLICIES (CONTINUED)

STOCK OPTIONS

The Company  grants stock  options to employees and directors for a fixed number
of shares 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 using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees",  and accordingly,  recognizes no
compensation expense for the stock option grants.

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):

                                            2002           2001          2000
                                         -------------------------------------

Net income - as reported                 $ 45,103       $ 41,259      $ 34,998

Net income - pro forma                   $ 44,261       $ 40,375      $ 34,107

Earnings per share - as reported:
   Basic                                 $  3.21        $  3.05       $  2.63
   Diluted                               $  3.15        $  2.95       $  2.55

Earnings per share - pro forma:
   Basic                                 $  3.15        $  2.98       $  2.56
   Diluted                               $  3.09        $  2.89       $  2.48

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.  The numerator
used in basic earnings per share and diluted  earnings per share is the same for
all periods presented.

                                       80
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


1. ACCOUNTING POLICIES (CONTINUED)

COMPREHENSIVE INCOME

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 is  displayed  in the  following  table,  along  with
related tax effects (in thousands):

                                               2002         2001          2000
                                         ---------------------------------------
Unrealized gains (losses) arising
  during the period, before taxes        $    9,265    $   (1,820)  $    11,170
Income taxes                                 (3,243)          637        (3,909)
                                         ---------------------------------------
Unrealized gains (losses) arising
  during the period,net of taxes              6,022        (1,183)        7,261
                                         ---------------------------------------
Less reclassification adjustment:
  (Losses) gains realized in net income      (2,519)          297           286
  Income taxes                                  882          (104)         (100)
                                         ---------------------------------------
Reclassification adjustment for
  (losses) gains realized in net income      (1,637)          193           186
                                         ---------------------------------------
Other comprehensive income               $    7,659    $   (1,376)  $     7,075
                                         =======================================

RECLASSIFICATION

Certain amounts in the 2001 and 2000 Consolidated  Statements of Cash Flows have
been reclassified to conform to the 2002 presentation.  These  reclassifications
have no effect on previously reported  stockholders'  equity, net income, or net
cash provided by operating activities.

                                       81
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


2. INVESTMENTS

The amortized cost and the fair value of investments are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                               Gross            Gross
                                           Amortized        Unrealized        Unrealized           Fair
                                             Cost              Gains            Losses            Value
                                         -----------------------------------------------------------------

<S>                                      <C>               <C>               <C>              <C>
At December 31, 2002
Available-for-sale securities:
   Fixed maturity securities:
     Corporate                           $     43,171      $    3,131        $     950        $    45,352
     U.S. Government                           10,189             439               32             10,596
     Mortgage-backed                              167              19                -                186
     State and municipal                      231,210          11,610              484            242,336
                                         -----------------------------------------------------------------
Total                                         284,737          15,199            1,466            298,470
   Equity securities                           11,266             733            1,191             10,808
                                         -----------------------------------------------------------------
Total                                    $    296,003      $   15,932        $   2,657        $   309,278
                                         =================================================================

At December 31, 2001
Available-for-sale securities:
   Fixed maturity securities:
     Corporate                           $     55,464      $    1,879        $   2,329        $    55,014
     U.S. Government                           12,164             546               65             12,645
     Mortgage-backed                              253              25                -                278
     State and municipal                      177,781           3,483            3,216            178,048
                                         -----------------------------------------------------------------
Total                                         245,662           5,933            5,610            245,985
   Equity securities                           11,308           1,449              281             12,476
                                         -----------------------------------------------------------------
Total                                    $    256,970      $    7,382        $   5,891        $   258,461
                                         =================================================================
</TABLE>

                                       82
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


2. INVESTMENTS (CONTINUED)

The amortized  cost and estimated  fair value of  investments  in fixed maturity
securities,  at December 31, 2002, are summarized by stated  maturity as follows
(in thousands):

                                                   Available-for-Sale
                                             -------------------------------
                                                                      Fair
                                             Amortized Cost           Value

Maturity:
   One year or less                           $      3,997      $      4,115
   After one year through five years                16,158            17,000
   After five years through ten years               33,800            35,366
   After ten years                                 230,615           241,803
   Mortgage-backed securities                          167               186
                                             --------------------------------
Total                                         $    284,737      $    298,470
                                             ================================

Realized gains and losses on sales of investments are as follows (in thousands):

                                              Year ended December 31
                                         2002          2001          2000
                                  ---------------------------------------
Securities available-for-sale:
   Fixed maturity securities:
     Gross realized gains          $    1,833    $    1,203    $      226
     Gross realized losses             (3,948)       (1,485)       (2,255)
   Equity securities:
     Gross realized gains                  15           940         2,561
     Gross realized losses               (576)         (417)         (402)
Covered call options:
   Gross realized gains                   189           113           163
   Gross realized losses                  (32)          (57)           (7)
                                  ---------------------------------------
Net realized (losses) gains        $   (2,519)   $      297    $      286
                                  =======================================

Net unrealized appreciation  (depreciation) on fixed maturity securities changed
by  $13,409,656,   $(1,821,394),  and  $11,543,909  in  2002,  2001,  and  2000,
respectively; the corresponding amounts for equity securities were $(1,625,907),
$(290,284), and $(665,174).

                                       83
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


2. INVESTMENTS (CONTINUED)

Major  categories  of the  Company's  net  investment  income are  summarized as
follows (in thousands):

Year ended December 31
                                          2002           2001           2000
                                    -----------------------------------------
Income:
   Fixed maturities                  $   15,809     $   14,188    $   11,755
   Preferred stocks                         438            468           490
   Common stocks                            179            157           230
   Cash and short-term investments          270            495           635
                                    -----------------------------------------
                                         16,696         15,308        13,110
Expenses                                    597            543           465
                                    -----------------------------------------
Net investment income                $   16,099     $   14,765    $   12,645
                                    =========================================

At December 31, 2002 and 2001,  investments with an amortized cost of $6,634,066
and $6,645,745,  respectively,  were on deposit with state insurance departments
to satisfy regulatory requirements.

3. DEFERRED POLICY ACQUISITION COSTS

An analysis of deferred policy acquisition costs is as follows (in thousands):

                                               Year ended December 31
                                             2002           2001          2000
                                      ----------------------------------------

Balance at beginning of year          $    25,944    $    22,816   $    19,908
Acquisition costs deferred:
   Sales compensation                       6,291          5,929         5,219
   Underwriting and issue expenses         10,504          8,911         5,900
                                      ----------------------------------------
                                           16,795         14,840        11,119

Amortization of acquisition expenses       13,742         11,712         8,211
                                      ----------------------------------------
Net increase                                3,053          3,128         2,908
                                      ----------------------------------------
Balance at end of year                $    28,997    $    25,944   $    22,816
                                      ========================================


                                       84
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


4. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

Activity for the reserve for losses and loss adjustment expenses for 2002, 2001,
and 2000 is summarized as follows (in thousands):

                                                2002        2001         2000
                                            ----------------------------------
Reserve for losses and loss
   adjustment expenses at January 1,
   net of reinsurance recoverables          $  17,981   $  14,976   $  14,723
Incurred losses and loss adjustment
   expenses net of reinsurance recoveries
   (principally in respect of default
   notices occurring in):
     Current year                              14,798      14,219      11,229
     Redundancy on prior years                   (735)     (5,200)     (3,642)
                                            ----------------------------------
Total incurred losses and loss
   adjustment expenses                         14,063       9,019       7,587

Loss and loss adjustment expense
   payments net of reinsurance recoveries
   (principally in respect of default
   notices occurring in):
     Current year                                 508         286         574
     Prior years                               10,181       5,728       6,760
                                            ----------------------------------
Total loss and loss adjustment
   expense payments                            10,689       6,014       7,334
                                            ----------------------------------
Reserve for losses and loss
   adjustment expenses at December 31,
   net of reinsurance recoverables of
   $5, $10, and $11 in 2002, 2001,
   and 2000, respectively                   $  21,355   $  17,981   $  14,976
                                            ==================================

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 on default notices occurring in prior years for amounts less
than expected or reducing incurred but not reported reserves.

                                       85
<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 $1,792,237, $1,656,706, and $1,398,586
for  2002,  2001,  and  2000,   respectively.   Future  minimum  payments  under
noncancellable  operating  leases at  December  31,  2002,  are as  follows  (in
thousands):

             2003            $     1,814
             2004                  1,663
             2005                  1,405
             2006                  1,159
             2007                  1,131
             Thereafter            5,630
                             -----------
                             $    12,802
                             ===========

The Company  entered into a new ten-year lease on its corporate  headquarters in
2002. The Company has options to renew this lease for up to ten additional years
at the fair market rental rate at the time of the renewal.

6. FEDERAL INCOME TAXES

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

                                            2002         2001        2000
                                       ------------------------------------

Income tax computed at statutory rate  $   22,835   $   20,885  $   17,582
(Decrease) increase in taxes
 resulting from:
    Tax-exempt interest                    (3,933)      (3,105)     (2,641)
    Other                                   1,238          633         296
                                       ------------------------------------
Income tax expense                     $   20,140   $   18,413  $   15,237
                                       ====================================

                                       86
<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, 2002 and
2001, are presented below (in thousands):

                                            2002              2001
                                      ------------------------------
Deferred tax liabilities
Statutory contingency reserve         $    78,420      $     62,996
Deferred policy acquisition costs          10,149             9,080
Unrealized investment gain                  4,646               521
Other                                       3,083             3,353
                                      ------------------------------
Total deferred tax liabilities             96,298            75,950

Deferred tax assets
Unearned premiums                             685               604
Losses and loss adjustment expenses           516               437
Other                                         856               136
                                      ------------------------------
Total deferred tax assets                   2,057             1,177
                                      ------------------------------
Net deferred tax liability            $    94,241      $     74,773
                                      ==============================

At December 31, 2002 and 2001, Triad was obligated to purchase approximately
$1,017,000 and $1,228,000, respectively, of Tax and Loss Bonds.

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

At December 31, 2002,  approximately  52 percent of Triad's direct risk in force
was concentrated in eight states, with 12 percent in California,  8 percent each
in Florida and Texas, 6 percent in North Carolina, 5 percent each in Georgia and
Illinois,  and 4 percent each in Pennsylvania and Arizona. 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.

                                       87
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


7. INSURANCE IN FORCE, DIVIDEND RESTRICTION, AND STATUTORY RESULTS (CONTINUED)

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, 2002 and 2001,  as presented
below, was computed by applying the various percentage settlement options to the
insurance in force amounts,  adjusted by risk ceded under reinsurance agreements
and by any applicable  aggregate  stop-loss limits.  Triad's ratio is as follows
(dollars in thousands):

                                        2002               2001
                                  ----------------------------------
Net risk                           $  5,534,420       $  4,471,705
                                  ==================================

Statutory capital and surplus      $    112,874       $    105,306
Contingency reserve                     245,006            193,747
                                  ----------------------------------
Total                              $    357,880       $    299,053
                                  ==================================

Risk-to-capital ratio                 15.5 to 1         15.0 to 1
                                  ==================================

Triad and its  wholly-owned  subsidiaries,  TGAC and Triad Re, are each required
under their respective  domiciliary states' insurance code to maintain a minimum
level of statutory capital and surplus. Triad, an Illinois domiciled insurer, is
required  under the Illinois  Insurance  Code (the  "Code") to maintain  minimum
capital and surplus of $5,000,000.

The Code  permits  dividends  to be paid  only out of  earned  surplus  and also
requires prior approval of extraordinary dividends. An extraordinary dividend is
any dividend or distribution of cash or other property, the fair 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.  Consolidated  net income as
determined in accordance with statutory  accounting  practices was  $61,787,339,
$55,448,185,  and $47,830,174  for the years ended December 31, 2002,  2001, and
2000,  respectively.  At December 31, 2002,  the amount of the Company's  equity
that can be paid out in dividends to the  stockholders is $29,158,197,  which is
the earned surplus of Triad on a statutory basis.

                                       88
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


7. INSURANCE IN FORCE, DIVIDEND RESTRICTION, AND STATUTORY RESULTS (CONTINUED)

The NAIC revised the  Accounting  Practices and  Procedures  Manual in a process
referred to as Codification.  The revised manual was effective  January 1, 2001.
The domiciliary  states of Triad and its subsidiaries  adopted the provisions of
the revised  manual.  The revised  manual  changed,  to some extent,  prescribed
statutory  accounting  practices  and  resulted  in  changes  to the  accounting
practices that Triad and its subsidiaries  use to prepare their  statutory-basis
financial  statements.  Triad recorded a $2,561,388  reduction in surplus in its
statutory-basis  financial  statements  during 2001 as the cumulative  effect of
changes in accounting principles from the adoption of Codification.

8. RELATED PARTY TRANSACTIONS

The Company pays unconsolidated affiliated companies for management, investment,
and other  services.  The total  expense  incurred for such items was  $500,731,
$433,167, and $398,872 in 2002, 2001, and 2000,  respectively.  In addition, the
Company  provides  certain  investment  accounting,  reporting  and  maintenance
functions  for  an  affiliate.  Income  earned  during  2002,  2001,  and  2000,
respectively,  for such services was $48,628,  $23,487, and $21,780.  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 percent of the first 8 percent
of the employee's  salary deferred.  The Company's  expense  associated with the
plan totaled $373,877,  $353,004,  and $301,281 for the years ended December 31,
2002, 2001, and 2000, respectively.

10. REINSURANCE

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

                                       89
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


10. REINSURANCE (CONTINUED)

Reinsurance  activity for the years ended  December 31,  2002,  2001,  and 2000,
respectively, is as follows (in thousands):

                                     2002              2001             2000
                               ------------------------------------------------
Earned premiums ceded           $   18,260        $   10,482      $     4,930
Losses ceded                             1                 1              (25)
Earned premiums assumed                  4                 5                9
Losses assumed                          (1)                1                9

The  Company  cedes  business  to captive  reinsurance  subsidiaries  of certain
mortgage  lenders  ("captives")  primarily  under  excess  of  loss  reinsurance
agreements.  Generally,  reinsurance  recoverables on loss reserves and unearned
premiums ceded to these captives are backed by trust funds or letters of credit.

The  Company  maintains  $125  million  of  excess of loss  reinsurance  through
non-affiliated  reinsurers.  The  excess  of  loss  reinsurance  agreements  are
designed to protect the Company in the event of a catastrophic level of losses.

In 2001, the Company  recognized a nonrecurring  incentive payment of $1,863,000
related to  voluntary  cancellation  of an excess of loss  reinsurance  contract
maintained  by the Company  with a  non-affiliated  reinsurer.  This  payment is
included as other income in the  accompanying  Consolidated  Statement of Income
for 2001.

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.

                                       90
<PAGE>
                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


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 2,600,000 shares.

Information concerning the stock option plan is summarized below:

                                                                     Weighted-
                                     Number of       Option           Average
                                      Shares          Price       Exercise Price
                                    --------------------------------------------
2000
   Outstanding, beginning of year     1,334,447    $4.58 - 49.08       $14.48
   Granted                              193,875    18.56 - 28.00        26.91
   Exercised                             41,500     4.58 - 27.88        11.36
   Canceled                               2,100    17.00 - 41.94        23.19
   Outstanding, end of year           1,484,722     4.58 - 49.08        16.17
   Exercisable, end of year           1,257,142     4.58 - 49.08        14.41

2001
   Outstanding, beginning of year     1,484,722     4.58 - 49.08        16.17
   Granted                              169,950    29.65 - 39.00        36.33
   Exercised                            336,628     4.58 - 27.88         8.54
   Canceled                               9,270     8.92 - 41.94        23.06
   Outstanding, end of year           1,308,774     4.58 - 49.08        20.71
   Exercisable, end of year           1,097,213     4.58 - 49.08        18.56

2002
   Outstanding, beginning of year     1,308,774     4.58 - 49.08        20.71
   Granted                               88,640    32.96 - 47.60        40.48
   Exercised                            444,349     4.58 - 41.94        12.80
   Canceled                               2,760    29.65 - 39.49        35.92
   Outstanding, end of year             950,305     4.58 - 49.08        25.94
   Exercisable, end of year             804,652     4.58 - 49.08        23.91


                                       91
<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,
2002, 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
------------------------------------------------      --------------------------

 157,900   $ 4.58 -  8.83      $ 6.45       1.77      157,900        $ 6.45
 102,495    10.17 - 18.56       13.03       3.82       99,495         12.86
 400,546    20.07 - 34.80       25.82       6.56      356,046         25.10
 218,589    37.75 - 39.75       39.13       7.60      134,936         39.05
  70,775    41.40 - 49.08       48.04       5.94       56,275         48.60
--------                                            ---------
 950,305                                              804,652
========                                            =========

At December  31,  2002,  1,422,453  shares of the  Company's  common  stock were
reserved and 472,148 shares were available for issuance under the Plan.

The options issued under the Plan in 2002, 2001, and 2000 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  2002,  2001,  and 2000 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 3.63  percent for 2002,  4.86  percent for 2001,  and 5.30  percent for 2000;
dividend  yield of 0.0 percent;  expected  volatility  of .39 for 2002,  .40 for
2001,  and .42 for 2000; and a  weighted-average  expected life of the option of
seven years.

                                       92
<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  that 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 2002, 2001,
and 2000:

                                    Weighted-Average        Weighted-Average
                                     Exercise Price            Fair Value
        Type of Option           2002    2001    2000     2002    2001     2000
--------------------------------------------------------------------------------

Stock Price = Exercise Price    $40.48  $31.89  $22.38   $13.21  $11.14   $8.17
Stock Price < Exercise Price    $    -  $39.00  $27.95   $    -  $ 8.81   $6.70


12. LONG-TERM DEBT

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  $34,452,898.   The  notes,  which  represent  unsecured
obligations of the Company, bear interest at a rate of 7.9 percent per annum and
are non-callable.

                                       93
<PAGE>
                              Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


13. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values and fair values of financial  instruments as of December 31,
2002 and 2001 are summarized below (in thousands):

                                         2002                      2001
                              ------------------------ ------------------------
                                Carrying      Fair        Carrying       Fair
                                 Value        Value        Value        Value
                              ------------------------ ------------------------
Financial Assets
Fixed maturity securities
   available-for-sale         $ 298,470    $ 298,470    $ 245,985    $ 245,985
Equity securities
   available-for-sale            10,808       10,808       12,476       12,476

Financial Liabilities
Long-term debt                   34,479       38,430       34,473       36,673


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.

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.

14. CONTINGENCIES

A lawsuit  has been filed  against  the  Company in the  ordinary  course of the
Company's  business.  In the opinion of management,  the ultimate  resolution of
this pending litigation will not have a material adverse effect on the financial
position or results of operations of the Company.

                                       94
<PAGE>
                              Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


15. UNAUDITED QUARTERLY FINANCIAL DATA

The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 2002 and 2001 (in thousands except per share data):

                                              2002 Quarter
                                 -----------------------------------
                                   First    Second    Third   Fourth      Year
                                 ----------------------------------------------

Net premiums written              $24,492   $25,291  $28,281  $27,805  $105,869
Earned premiums                    24,535    25,499   27,351   27,682   105,067
Net investment income               3,764     3,953    4,156    4,226    16,099
Net losses incurred                 2,516     2,879    4,392    4,276    14,063
Underwriting and other expenses     9,748     9,516    9,657   10,492    39,413
Net income                         10,038    11,290   11,765   12,010    45,103
Basic earnings per share             .73       .80      .83       .85      3.21
Diluted earnings per share           .71       .78      .82       .84      3.15

                                              2001 Quarter
                                 -----------------------------------
                                   First    Second    Third   Fourth      Year
                                 ----------------------------------------------

Net premiums written              $19,812   $19,777  $20,822  $24,587  $ 84,998
Earned premiums                    19,683    20,143   20,517   24,013    84,356
Net investment income               3,477     3,657    3,804    3,827    14,765
Net losses incurred                 2,203     2,134    1,519    3,163     9,019
Underwriting and other expenses     7,378     7,660    8,051    9,530    32,619
Net income                         10,920     9,830   10,338   10,171    41,259
Basic earnings per share             .82       .73      .76       .74      3.05
Diluted earnings per share           .79       .71      .73       .72      2.95




                                       95
<PAGE>
                                   Schedule I
       Summary of Investments - Other Than Investments in Related Parties
                               Triad Guaranty Inc.
                                December 31, 2002


                                                               Amount at Which
                                        Amortized      Fair    Shown in Balance
Type of Investment                         Cost        Value        Sheet
                                       -----------------------------------------
                                               (dollars in thousands)
Fixed maturity securities,
 available-for-sale:

 Bonds:

     U.S. Government obligations........ $ 10,189     $ 10,596    $ 10,596

     Mortgage-backed securities.........      167          186         186

     State and municipal bonds..........  231,210      242,336     242,336

     Corporate bonds....................   42,533       44,724      44,724

     Public utilities...................      638          628         628
                                         --------      -------    --------
    Total                                 284,737      298,470     298,470
                                         --------      -------    --------
Equity securities, available-for-sale:

   Common stocks:

       Bank, trust, and insurance.......      511          586         586

       Industrial and miscellaneous.....    4,573        3,867       3,867

   Preferred stock .....................    6,182        6,355       6,355
                                         --------      -------    --------
    Total...............................   11,266       10,808      10,808
                                         --------      -------    --------
Short-term investments..................   35,303       35,303      35,303
                                         --------      -------    --------
Total investments other than
investments in related parties.......... $331,306     $344,581    $344,581
                                         ========     ========    ========









                                       96
<PAGE>
           Schedule II - Condensed Financial Information of Registrant
                            Condensed Balance Sheets
                               Triad Guaranty Inc.
                                (Parent Company)

                                                            December 31
                                                       2002                2001
                                                       ----                ----
                                                             (dollars in
                                                              thousands)
 Assets:
    Fixed maturities, available-for-sale.......... $ 13,315             $ 9,071

    Equity securities, available-for-sale.........      760                 501

    Notes receivable from subsidiary..............   25,000              25,000

    Investment in subsidiary......................  302,559             244,464

    Short-term investments........................    1,995               1,219

    Cash..........................................      196                 152

    Accrued investment income.....................    1,294               1,261

    Deferred income taxes.........................        -                  99

    Other assets..................................      350                 120
                                                   --------            ---------
    Total assets.................................. $345,469            $281,887
                                                   ========            =========

 Liabilities and stockholders' equity:

 Liabilities:
    Current taxes payable.........................    $  52               $  70

    Long-term debt................................   34,479              34,473

    Deferred income taxes.........................      256                   -

    Accrued interest on long-term debt............    1,275               1,275
                                                   --------            ---------
    Total liabilities.............................   36,062              35,818

 Stockholders' equity:
    Common stock..................................      142                 137

    Additional paid-in capital....................   80,169              69,057

    Accumulated other comprehensive income........    8,634                 975

      Deferred compensation.........................   (658)              (117)

      Retained earnings.............................221,120             176,017
                                                   --------            ---------
Total stockholders' equity.......................   309,407             246,069
                                                   --------            ---------
Total liabilities and stockholders' equity.......  $345,469            $281,887
                                                   ========            =========

                  See notes to condensed financial statements.

                                       97
<PAGE>
           Schedule II - Condensed Financial Information of Registrant
                         Condensed Statements of Income
                               Triad Guaranty Inc.
                                (Parent Company)


                                                 Year Ended December 31
                                                 ----------------------
                                            2002         2001           2000
                                            ----         ----           ----
                                                (dollars in thousands)
 Revenues:
    Net investment income............... $ 3,170       $ 3,000        $ 2,908

    Realized investment losses..........  (1,168)         (266)          (373)
                                         -------       -------        -------
                                           2,002         2,734          2,535

 Expenses:
    Interest on long-term debt..........   2,771         2,771          2,770

    Operating expenses..................     885           396             90
                                         -------       -------        -------
                                           3,656         3,167          2,860
                                         -------       -------        -------
 Loss before federal income taxes
   and equity in undistributed
   income of subsidiary.................  (1,654)         (433)          (325)

 Income taxes:
    Current.............................       -          (121)              -

    Deferred............................    (176)          172           (129)
                                         -------       -------        -------
                                            (176)           51           (129)
 Loss before equity in undistributed
   income of subsidiary.................  (1,478)         (484)          (196)

 Equity in undistributed income
   of subsidiary........................  46,581        41,743         35,194
                                         -------       -------        -------
 Net income............................. $45,103       $41,259        $34,998
                                         =======       =======        =======

                  See notes to condensed financial statements.

                                       98
<PAGE>
           Schedule II - Condensed Financial Information of Registrant
                       Condensed Statements of Cash Flows
                               Triad Guaranty Inc.
                                (Parent Company)
                                                         Year Ended December 31
                                                    2002        2001      2000
                                                    ----        ----      ----
                                                       (dollars in thousands)
 Operating Activities
   Net income...................................  $45,103     $41,259   $34,998
   Adjustments to reconcile net income
      to net cash (used in) provided
      by operating activities:
    Equity in undistributed income of
      subsidiary................................  (46,581)    (41,743)  (35,194)
    Accrued investment income...................      (33)        (40)      (15)
    Other assets................................     (230)         96      (216)
    Deferred income taxes.......................     (176)        172      (129)
    Current tax payable.........................      (18)          -         -
    Accretion of discount on investments........      (98)        (52)      (60)
    Amortization of deferred compensation.......      392         118        85
    Amortization of debt issue costs............        6           6         5
    Realized investment gain on securities......    1,168         266       373
    Other operating activities..................      188           -         -
                                                  -------     -------   -------
   Net cash (used in) provided by
     operating activities.......................     (279)         82      (153)

 Investing Activities
   Securities available-for-sale:
      Fixed maturities:
            Purchases...........................   (8,600)     (5,756)   (2,951)
            Sales...............................    4,258       3,369     2,501

      Equity securities:
            Purchases...........................     (250)       (500)        -
            Sales...............................        2             -       -
      Change in short-term investments..........     (776)        (87)       (4)
                                                  -------     -------   -------
   Net cash used in investing activities........   (5,366)     (2,974)     (454)

 Financing Activities
     Proceeds from exercise of stock options....    5,689       2,874       472
                                                  -------     -------   -------
   Net cash provided by financing activities....    5,689       2,874       472
                                                  -------     -------   -------
   Increase (decrease)in cash...................       44         (18)     (135)
   Cash at beginning of year....................      152         170       305
                                                  -------     -------   -------
   Cash at end of year..........................  $   196     $   152   $   170
                                                  =======     =======   =======

                  See notes to condensed financial statements.

                                       99
<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     Fair
At December 31, 2002                  Cost       Gains        Losses       Value
                                   ---------------------------------------------
Available-for-sale securities:
   Fixed maturity securities:
      Corporate                      $7,959       $389         $120       $8,228

      Municipal                       4,775        312            -        5,087
                                   ---------------------------------------------
   Total                             12,734        701          120       13,315

      Equity securities                 750         17            7          760
                                   ---------------------------------------------
   Total                            $13,484       $718         $127      $14,075
                                   =============================================

                                                 Gross        Gross
                                   Amortized   Unrealized   Unrealized     Fair
At December 31, 2001                  Cost       Gains        Losses       Value
                                   ---------------------------------------------
Available-for-sale securities:
   Fixed maturity securities:
      Corporate                      $8,795       $159         $553       $8,401

      Municipal                         669          1            -          670
                                   ---------------------------------------------
   Total                              9,464        160          553        9,071
      Equity securities                 500          1            -          501
                                   ---------------------------------------------
   Total                             $9,964       $161         $553       $9,572
                                   =============================================

                                       100
<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
                                         2002            2001         2000
Income:                               ------------------------------------
   Fixed maturities                    $  918         $  770        $  664

   Equity securities                       51             19             -

   Cash and short-term investments         28             45            55

   Note receivable from subsidiary      2,225          2,225         2,225
                                      ------------------------------------
                                        3,222          3,059         2,944
Expenses                                   52             59            36
                                     -------------------------------------
Net investment income                  $3,170         $3,000        $2,908
                                     =====================================

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  $34,452,898.   The  notes,  which  represent  unsecured
obligations  of the Company,  bear  interest at a rate of 7.9% per annum and are
non-callable.

                                       101
<PAGE>



                            Schedule IV - Reinsurance

                               Triad Guaranty Inc.
                        Mortgage Insurance Premium Earned
                  Years Ended December 31, 2002, 2001 and 2000




                          Ceded To       Assumed                  Percentage of
               Gross       Other        From Other       Net      Amount Assumed
              Amount     Companies      Companies      Amount         to Net
             -------------------------------------------------------------------
                                  (dollars in thousands)
 2002....... $123,323      $18,260          $4        $105,067         0.0%
             ========      =======          ==        ========
 2001....... $ 94,833      $10,482          $5        $ 84,356         0.0%
             ========      =======          ==        ========
 2000....... $ 76,764      $ 4,930          $9        $ 71,843         0.0%
             ========      =======          ==        ========




















                                       102