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, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ___________ to ___________
Commission file number 0-22342
                                   ---------
                               TRIAD GUARANTY INC.
             (Exact name of registrant as specified in its charter)

            DELAWARE                                      56-1838519
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
    incorporation or organization)

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

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

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

                                      None

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes /X/ No / /.

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

The  aggregate  market  value of the voting stock held by  nonaffiliates  of the
registrant  as of February 17, 1998,  computed by reference to the last reported
price at which the stock was sold on such date, was $287,675,048.

The number of shares of the registrant's common stock, par value $.01 per share,
outstanding as of February 17, 1998 was 13,302,721.

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

  Triad Guaranty Inc.                                      Part III
  Proxy Statement for 1998 Annual Meeting
  of Stockholders

<PAGE>

                                     PART I

ITEM 1.  BUSINESS.

     Triad Guaranty Inc. (the" Company") is a holding company which, through its
wholly-owned   subsidiary,   Triad  Guaranty  Insurance  Corporation  ("Triad"),
provides private mortgage insurance coverage in the United States to residential
mortgage lenders, including mortgage bankers, mortgage brokers, commercial banks
and savings institutions.

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

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

     The  Company  was  incorporated  by CIC in  Delaware in August 1993 for the
purpose of  holding  all the  outstanding  stock of Triad and to  undertake  the
initial public  offering of the Company's  Common Stock,  which was completed in
November 1993.  CIC currently  owns 20.1% and CML owns 19.3% of the  outstanding
Common Stock of the Company.

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

TYPES OF MORTGAGE INSURANCE

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



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PRIMARY INSURANCE

     Primary insurance  provides mortgage default protection on individual loans
and covers  unpaid loan  principal,  delinquent  interest  and certain  expenses
associated with the default and subsequent foreclosure (collectively, the "claim
amount").  The  claim  amount,  to which  the  appropriate  coverage  percentage
(typically 15% to 30% as of December 31, 1997) is applied, generally ranges from
110% to  115%  of the  unpaid  principal  balance  of the  loan.  The  Company's
obligation  to an  insured  lender  with  respect  to a claim is  determined  by
applying the  appropriate  coverage  percentage to the claim  amount.  Under its
master policy,  the Company has the option of paying the entire claim amount and
taking title to the mortgaged property or paying the coverage percentage in full
satisfaction of its obligations under the insurance  written.  Primary insurance
can be placed on many types of loan  instruments and generally  applies to loans
secured by mortgages on owner occupied homes.  The Company  underwrites  primary
insurance on a loan-by-loan basis and on a "delegated  underwriting"  basis to a
select group of lenders.  Mortgage  originators who participate in the Company's
delegated  program are allowed to issue a certificate  of insurance on the loans
it underwrites if certain strict qualifications are met.

     The Company offers primary coverage generally ranging from 6% to 35% of the
claim amount with most coverage in the 15% to 30% range as of December 31, 1997.
The  coverage  percentage  provided  by the  Company is  selected by the insured
lender,  subject to the  Company's  underwriting  approval,  usually in order to
comply with  existing  Freddie Mac and Fannie Mae  requirements  to reduce their
loss exposure on loans they purchase to 75% or less of the  property's  value at
the time the loan is originated.

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

     Mortgage  insurance  premiums are usually paid by the mortgage  borrower to
the  mortgage  lender or  servicer,  which in turn  remits the  premiums  to the
mortgage  insurer.  The Company has three basic types of borrower  paid  premium
plans.  The first is a monthly  premium plan under which only one or two months'
premium is paid at the  mortgage  loan closing and in some cases no premiums are
paid at closing.  Thereafter  level  monthly  premiums are collected by the loan
servicer for monthly remittance to the Company.  In 1996, the Company introduced
a  variation  of the  monthly  premium  plan under  which the  initial  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 94% of new insurance  written in

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<PAGE>



1997.  Based on the positive  response  from  mortgage  borrowers to the monthly
premium plan product,  the Company  expects that the  percentage of new business
written on monthly premium plans will remain at least at the current level.

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

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

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

     In 1997, the Company  introduced a mortgage insurance program to enable the
Company to better meet the needs and  requirements of larger  national  lenders.
The program  increases the lender's share of the risk of loss on an insured book
of  business  and  provides  for a fee to the  lender for this  increased  risk.
Regulatory  and  industry  issues  exist  regarding  the future of certain  risk
sharing programs,  such as captive reinsurance,  currently being marketed within
the  mortgage  insurance  industry.   A  significant  portion  of  Triad's  1997
production,  which does not include captive  reinsurance,  resulted from Triad's
new risk  sharing  programs.  However,  the  resolution  of the  regulatory  and
industry questions regarding risk sharing programs makes the continued viability
of such programs uncertain.

POOL INSURANCE

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

                                        4

<PAGE>



CANCELLATION OF INSURANCE

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

     Insured  lenders  may  cancel  insurance  at any  time at their  option.  A
borrower may request  that an insured  servicer  cancel  insurance on a mortgage
loan when its loan balance is less than 80% of the property's current value, but
loan servicers are generally  restricted in their ability to grant such requests
by  secondary  market  requirements  as  well  as by  certain  other  regulatory
restrictions.  Legislation  currently is being discussed,  however,  which could
affect the  cancellation  of  private  mortgage  insurance.  See  "Regulation  -
Indirect Regulation".

     When a borrower  refinances a Triad-insured  mortgage loan by paying it off
in full with the proceeds of a new  mortgage,  the  insurance  on that  existing
mortgage is canceled,  and insurance on the new mortgage is considered to be new
insurance written. Therefore, continuation of Triad's coverage from a refinanced
loan to a new loan results in both a cancellation of insurance and new insurance
written. The percentage of new insurance written represented by refinanced loans
was 14.0%, 16.9%, and 9.3% in 1997, 1996, and 1995, respectively.

     To the extent canceled insurance  coverage in areas  experiencing  economic
growth is not replaced by new  insurance in such areas,  the  percentage  of the
Company's  book of business in  economically  weaker  areas may  increase.  This
development may occur during periods of heavy mortgage  refinancing.  Refinanced
loans in regions experiencing economic growth are less likely to require private
mortgage  insurance,  while borrowers in economically  distressed areas are less
likely to qualify for  refinancing  because of  depreciated  real estate values.
Throughout  the  1990's  high  refinancing  activity  occurred  because of lower
mortgage  interest rates.  The percentage of the Company's  policies in force at
the end of the year that were  canceled  during  the  following  year was 15.6%,
14.7%, and 13.6% in 1997, 1996, and 1995, respectively.  The cancellations which
have  occurred  since  1988 have not had a  material  impact  on the  geographic
dispersion of the Company's risk in force.

CUSTOMERS

     Residential  mortgage lenders such as mortgage  bankers,  mortgage brokers,
commercial  banks and savings  institutions  are the principal  customers of the
Company. At December 31, 1997,  approximately 53% of the Company's risk in force
came from mortgage bankers, 22% from mortgage brokers, 16% from commercial banks
and 9% from savings  institutions.  At December 31, 1996,  47% of the  Company's
risk in force came from mortgage bankers,  24% from mortgage  brokers,  17% from

                                        5

<PAGE>



commercial banks and 12% from savings  institutions.  Although  mortgage lenders
are the Company's principal  customers,  individual mortgage borrowers generally
bear the cost of primary insurance coverage.

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

     The master  policy  sets forth the terms and  conditions  of the  Company's
mortgage  insurance  policy.  The master  policy does not obligate the lender to
obtain  insurance  from the  Company,  nor does it obligate the Company to issue
insurance on a particular  loan. The master policy provides that the lender must
submit  individual  loans for insurance to the Company and the loan,  subject to
certain stringent  criteria,  must be approved by the Company to effect coverage
(except in the case of delegated  underwriting  and when the  originator has the
authority  to approve  coverage  within  certain  guidelines).  The  Company had
approximately  6,096 master  policy  holders at December  31, 1997,  compared to
5,750 at December 31, 1996.

     The Company's ten largest customers were responsible for 32.2%,  23.4%, and
23.7%  of  direct  risk  in  force  at  December  31,  1997,   1996,  and  1995,
respectively. The largest single customer of the Company (including branches and
affiliates of that  customer),  measured by risk in force,  accounted for 10.2%,
3.3%, and 3.4% at December 31, 1997, 1996, and 1995, respectively.

SALES AND MARKETING

     The Company currently markets its insurance  products through a field sales
force of twenty-five salaried account executives, three regional sales managers,
four national accounts  representatives and two exclusive  commissioned  general
agencies each serving a specific  geographic  market. The Company is licensed to
do business in 43 states and the District of Columbia  and has licenses  pending
in three states.  The Company is actively  serving  mortgage  originators  in 34
states and the District of Columbia.

     In  1997,   the  Company  added  to  its  existing  sales  force  with  new
representation  in the  Pacific  Northwest,  the  Upper  Midwest,  and  two  new
representatives  to  service  the  national  account  market of larger  mortgage
lenders. Currently, the Company is approved to do business with 21 of the top 30
lenders.   The  Company   will   continue  to  evaluate   geographic   expansion
opportunities, as well as the need for additional sales representation.

     The success of the Company is  dependent  upon the  services of its account
executives   and  general   agents.   For  1997,  the  Company's  two  exclusive
commissioned  general agencies  produced  approximately 18% of the Company's new

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<PAGE>



direct insurance written while the salaried account  executives and the national
account representatives  produced the remainder. The loss of the services of any
of its key account  executives or general agencies could have a material adverse
effect on the Company's operations.

COMPETITION AND MARKET SHARE

     Triad and other private mortgage insurers compete directly with federal and
state  governmental  and  quasi-governmental  agencies,  principally the Federal
Housing  Administration  ("  FHA").  These  agencies  sponsor  government-backed
mortgage  insurance  programs which accounted for  approximately 46% of high LTV
loans in 1997 and 45% in 1996. In addition to competition from federal agencies,
Triad and other private mortgage insurers face competition from  state-supported
mortgage  insurance  funds.  Several of these states  (among  them,  California,
Connecticut,  Massachusetts,  New York and Vermont) have state housing insurance
funds which are either  independent  agencies or  affiliated  with state housing
agencies.  Indirectly,  the Company also competes with certain  mortgage lenders
which forego private mortgage insurance and self-insure against the risk of loss
from defaults on all or a portion of their low down payment mortgage loans.

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

     The private mortgage  insurance  industry  consists of nine active mortgage
insurance  companies including Triad,  Mortgage Guaranty Insurance  Corporation,
General Electric Mortgage Insurance Corporation, PMI Mortgage Insurance Co., CMG
Mortgage Insurance Co., United Guaranty Residential Insurance Company,  Republic
Mortgage Insurance Company,  Commonwealth  Mortgage Assurance Company and Amerin
Guaranty Corporation. Triad is the eighth largest private mortgage insurer based
on 1997 market share and,  according to industry  data,  had a 2.4% share of net
new mortgage insurance written during 1997, up from 1.7% in 1996.

     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, an  experience-based  pricing  structure and
innovative  products.  Triad was the first in the industry to provide  preferred
rates to approved  lenders that  maintain  lower loss ratios on loans which they
insure with Triad.



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<PAGE>



UNDERWRITING PRACTICES

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

UNDERWRITING PERSONNEL

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

     The Company employed an underwriting  staff of twenty at December 31, 1997.
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.

RISK MANAGEMENT APPROACH

     From  its  inception  in 1988,  Triad  has  adhered  to  conservative  risk
management strategies that were developed,  in part, as a result of management's
assessment of the private mortgage  insurance  industry's loss experience in the
late 1980s.  The Company's risk management  objective is to build a portfolio of
insurance in force with a claims  incidence less than the expected  claims rates
on which its  premium  rates are  based.  In order to meet  this  objective  the
Company focuses its risk management efforts on five key elements:

     o    MORTGAGE   LENDER.   The  Company  reviews  each  lender's   financial
          statements and management  experience  before issuing a master policy.
          This  analysis  permits  the  Company to  determine  if that lender is
          predisposed to maintaining a loss ratio on loans which it insures with
          the  Company  that  will  allow  the  continued  use of the  Company's
          preferred  premium  schedule  after the three year grace  period.  The
          Company assigns delegated  underwriting authority only to lenders with
          substantial financial resources and established records of originating
          good quality loans.

     o    PURPOSE  AND  TYPE  OF  LOAN.   The  Company   analyzes  four  general
          characteristics  of a loan to  evaluate  its  level of  risk:  (i) LTV
          ratio;  (ii) purpose of the loan;  (iii) type of loan  instrument; and


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

     o    INDIVIDUAL LOAN AND BORROWER.  Except to the extent that the Company's
          delegated  underwriting  program  and Freddie  Mac's and Fannie  Mae's
          automated  underwriting  services  are  being  utilized,  the  Company
          evaluates  insurance   applications  based  on  its  analysis  of  the
          borrower's  ability and willingness to repay the mortgage loan and the
          characteristics and value of the mortgaged  property.  The analysis of
          the borrower includes  reviewing the borrower's housing and total debt
          ratios as well as the borrower's  Fair,  Isaac and Co., Inc.  ("FICO")
          credit  score,  as reported by credit  rating  agencies.  Loans may be
          submitted  under the Stick With Triad program  provided the loans meet
          the program requirements.  Further description of the Stick with Triad
          program is located in the Underwriting  Process  section.  Within this
          program,   the  degree  to  which  the  borrower   must  meet  certain
          underwriting standards, as well as the amount of documentation that is
          required,  is a function of the credit score. In the case of delegated
          underwriting,  compliance  with  program  parameters  is  monitored by
          periodic audits of delegated business. With the automated underwriting
          services  provided by Freddie Mac and Fannie Mae,  lenders are able to
          obtain approval for mortgage guaranty insurance with any participating
          mortgage insurer. Triad works with both agencies in offering insurance
          services  through their systems,  while monitoring the risk quality of
          loans insured through such systems.

     0    EXPERIENCE-BASED  PREMIUM STRUCTURE.  To increase  profitability,  the
          Company  targets lower risk business  through the Company's  preferred
          premium rate  schedules.  The Company was the first in the industry to
          provide  preferred rates to lenders  maintaining  lower loss ratios on
          loans which they insure with the Company. These rates, which are lower
          than those generally available throughout the industry, are offered to
          lenders for the first three years under a master policy so that a loss
          ratio on loans which a lender  insures  with the Company can be fairly
          determined.  After that point,  approved  lenders  maintaining  a loss
          ratio of 40% or less will continue to operate under the preferred rate
          schedule.  Those  with loss  ratios  greater  than 40% will be charged
          higher premiums on new business (as well as higher premiums on renewal
          business if a variable  renewal  program  was  chosen)  until the loss
          ratio is  reduced.  These  higher  premiums  are  comparable  to those
          premiums  typically  charged  by  the  Company's   competitors.   This
          experience-based  structure  encourages  lenders to maintain  low loss
          ratios on loans which they insure with the Company.

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

UNDERWRITING PROCESS

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

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

     Subject to the Company's  underwriting  guidelines  and exception  approval
procedures,  the Company allows its underwriters to utilize their experience and
business judgement in evaluating each loan on its own merits.  Accordingly,  the
Company underwriters have 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.

     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 3.7%  and  3.8% at  December  31,  1997 and  1996,
respectively.

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     In 1996, the Company  introduced the Stick With Triad program featuring the
Slam Dunk  Loan(SM) approval  process  whereby  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  programs.  Under
this program, the Company issues a certificate of insurance without the standard
underwriting  process if certain program parameters are met and the borrower has
a predetermined minimum credit score.  Documentation submission requirements for
non-automated  underwritten loans vary depending on the borrower's credit score.
In  1997,  the  Stick  With  Triad  program  represented  60% of  the  Company's
commitment volume.

     The Company's delegated  underwriting program, in addition to the Company's
conservative risk management  strategies,  utilizes  extensive "quality control"
practices including reunderwriting, reappraisal and similar procedures following
issuance of the policy.  Standards  for type of loan,  property  type and credit
history of the borrower  are  established  consistent  with the  Company's  risk
strategy.  The program has allowed the Company to serve a greater  number of the
larger,  well  established   mortgage   originators.   The  Company's  delegated
underwriting  program accounted for 18% of commitments received in 1997 compared
to 38% in  1996  and  25% in  1995.  The  decline  in the  volume  of  delegated
commitments is a result of the lenders'  acceptance of the Company's  Stick With
Triad 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  skills  to  provide  a  contract
underwriting  service  to its  customers.  For a fee,  Triad  underwrites  fully
documented underwriting files for secondary market compliance, while at the same
time  assessing the file for mortgage  insurance,  if  applicable.  In 1996, the
Company began offering Fannie Mae's Desktop Originator and Desktop  Underwriter,
as well as the personnel to conduct the underwriting  tasks, as a service to its
contract   underwriting   customers.   The  Company  also  offers  its  contract
underwriting  customers  direct access to Freddie Mac's Loan  Prospector.  These
products,  which are  designed to  streamline  and reduce  costs in the mortgage
origination  process,  supply the  Company's  customers  with fast and  accurate
service regarding loan compliance and Fannie Mae's or Freddie Mac's decision for
loan purchase or securitization.

OTHER RISK MANAGEMENT

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

     The Company uses a comprehensive  audit plan designed to determine  whether
the  underwriting  decisions  being  made  are  consistent  with  the  policies,
procedures and expectations for quality as set forth by management. All areas of

                                       11

<PAGE>



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

CLAIMS-PAYING ABILITY RATINGS

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

     Triad has its claims-paying  ability rated by S&P, Fitch and Duff & Phelps.
These  ratings  are an  indication  to a  mortgage  insurer's  customers  of the
insurer's  present  financial  strength and its  capacity to pay future  claims.
Ratings are generally  considered an important  element in a mortgage  insurer's
ability to compete for new business. Triad's claims-paying ability rating by S&P
was  upgraded  to "AA" from  "AA-" in  January  1997,  and the "AA"  rating  was
reaffirmed  in  January  1998.  Triad's  improved  rating  from S&P allows it to
compete on similar risk-to-capital guidelines as its competitors.  Triad is also
rated  "AA" by Fitch  and  Duff &  Phelps.  Triad  has not  sought  and does not
presently intend to seek a financial strength rating from Moody's.

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


                                       12

<PAGE>



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

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

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

REINSURANCE

     In January  1996 the  Company  eliminated  quota share  reinsurance  on new
business  and  recaptured  substantial  portions  of its  coverages  on  renewal
business. In October 1997 the Company recaptured most of its remaining coverages
on renewal business. The restructured  reinsurance program reduced the Company's
quota share cede rate to 1.7% of direct premium written in 1997 compared to 5.3%
in 1996 and 20.8% in 1995. The recapture of business  previously  ceded resulted
in increased premium revenues for the Company. The Company continues to maintain
$25 million in excess of loss reinsurance designed to protect the Company in the
event of catastrophic levels of losses.

     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.

                                       13

<PAGE>



     Pursuant to deeper coverage  requirements imposed by Fannie Mae and Freddie
Mac, loans eligible for sale to such agencies with a loan-to-value ratio of over
90% require insurance with a coverage  percentage of 30%, in contrast to the 25%
coverage previously required. Certain states limit the amount of risk a mortgage
insurer  may retain with  respect to  coverage of an insured  loan to 25% of the
claim amount,  and, as a result,  the deeper coverage  portion of such insurance
must be reinsured.  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, 1997, TGAC had
assumed approximately $81.5 million in risk from Triad.

DEFAULTS AND CLAIMS

DEFAULTS

     The claim process on private  mortgage  insurance begins with the insurer's
receipt  of  notification  from the lender of a default  on an  insured's  loan.
Default is defined in the primary  master  policy as the failure by the borrower
to pay,  when due, an amount at least equal to the  scheduled  monthly  mortgage
payment under the terms of the mortgage.  The master policy requires  lenders to
notify the Company of default on a mortgage payment within 10 days of either (i)
the date on which the  borrower  becomes four months in default or (ii) the date
on which  any  legal  proceeding  which  affects  the  loan has been  commenced,
whichever  occurs first.  Notification is required within 45 days of the default
if it occurs when the first payment is due. The incidence of default is affected
by a variety of  factors,  including  change in borrower  income,  unemployment,
divorce,   illness,   the  level  of  interest   rates  and   general   borrower
creditworthiness.  Defaults that are not cured result in a claim to the Company.
Borrowers may cure defaults by making all delinquent loan payments or by selling
the property and satisfying all amounts due under the mortgage.

     The  following  table shows the number of loans  insured,  related loans in
default,  percentage  of  loans  in  default  (default  rate  as  of  the  dates
indicated),  dollar amount of insured loans in default,  dollar amount of direct
risk  (gross of  reinsurance)  with  respect to insured  loans in  default,  and
reserves per delinquent loan:





                                       14

<PAGE>



                               Default Statistics

<TABLE>
<CAPTION>
                                                                           December 31
                                                        1997       1996        1995       1994       1993
                                                        ----       ----        ----       ----       ----
<S>                                                   <C>        <C>         <C>        <C>        <C>   
Number of insured loans in force....................  82,682     62,334      49,791     41,358     30,497
Number of loans in default..........................     388        273         206        156        102
Percentage of loans in default (default rate).......   0.47%      0.44%       0.41%      0.38%      0.33%
Dollar amount of insured loans in default (000's)... $37,828    $25,253     $19,907    $14,356     $9,177
Dollar amount of direct risk with respect to
insured loans in default (000's)....................  $9,249     $5,770      $4,071     $2,827     $1,810
Reserve per delinquent loan......................... $23,094    $23,097     $22,277    $20,281    $22,111
</TABLE>


CLAIMS

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

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

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

                                       15

<PAGE>



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

     Within 60 days after the claim has been  filed,  the Company has the option
of either (i) paying the coverage  percentage  specified on the  certificate  of
insurance (usually 15% to 30% of the claim), with the insured retaining title to
the underlying property and receiving all proceeds from the eventual sale of the
property or (ii) paying 100% of the claim  amount in exchange  for the  lender's
conveyance of good and marketable title to the property to the Company, with the
Company selling the property for its own account. The Company attempts to choose
the claim  settlement  option  which costs the least.  In  general,  the Company
settles claims by paying the coverage  percentage of the claim amount.  In 1997,
the Company  exercised the option to acquire the property on less than 1% of the
primary  claims  processed for payment.  At December 31, 1997, the Company owned
$141,999 of real estate acquired through claim  settlements  valued at the lower
of cost or net  realizable  value and owned no real  estate as of  December  31,
1996.

LOSS MITIGATION

     Once a default  notice is  received,  the Company  attempts to mitigate its
loss.  Through proactive  intervention  with insured lenders and borrowers,  the
Company has been  successful  in reducing  the number and severity of its claims
for loss. Loss mitigation techniques include  pre-foreclosure sales, advances to
assist distressed  borrowers who have suffered a temporary economic setback, and
the use of new repayment schedules, refinances, loan modifications,  forbearance
agreements and deeds-in-lieu of foreclosure.  Such mitigation  efforts typically
result in a savings to the Company over the percentage  coverage  amount payable
under the certificate of insurance. Through loss mitigation efforts, the Company
has paid out only 65% of its potential  exposure on claims paid through December
31, 1997.


LOSS RESERVES

     The Company  establishes  reserves to provide  for the  estimated  costs of
settling claims with respect to loans reported to be in default and estimates of
loans in  default  which  have  not  been  reported.  Consistent  with  industry

                                       16

<PAGE>


accounting  practices,  the Company does not establish  loss reserves for future
claims on insured loans which are not currently in default. Although the Company
believes that its overall  reserve  levels at December 31, 1997, are adequate to
meet its future  obligations,  due to the inherent  uncertainty of the reserving
process there can be no assurance that its reserves will prove to be adequate to
cover ultimate loss developments.

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

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

     The  Company's  reserving  process is based upon the  assumption  that past
experience,  adjusted for the anticipated effect of current economic  conditions
and projected future economic trends, provides a reasonable basis for estimating
future events.  However,  estimation of loss reserves is a difficult and inexact
process,  especially in light of the rapidly changing  economic  conditions over
the past few  years in  certain  regions  of the  United  States.  In  addition,
economic  conditions  that have affected the development of the loss reserves in
the past may not necessarily affect development patterns in the future in either
a similar  manner or  degree.  Due to the  inherent  uncertainty  in  estimating
reserves for losses and loss adjustment expenses, there can be no assurance that
the reserves will prove to be adequate to cover  ultimate loss  developments  on
loans in default,  currently or in the future.  The Company's  profitability and
financial condition could be adversely affected to the extent that the Company's
estimated reserves are insufficient to cover losses on loans in default.



                                       17

<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

                                              Year Ended December 31
                                                  (in thousands)
                                        1997     1996    1995     1994    1993
                                        ----     ----    ----     ----    ----
Reserve for losses and LAE, net
 of related reinsurance 
 recoverables, at beginning of year..  $5,974  $3,703   $2,466   $1,805  $1,073

Add losses and LAE incurred in 
 respect of defaults occurring in:
     Current year (1)................   6,023   4,673    3,191    2,053   1,489
     Prior years (1) (2).............    (846) (1,394)    (974)    (791)   (205)
                                       -------  ------- -------  ------- ------
Total incurred losses and LAE........   5,177   3,279    2,217    1,262   1,284

Deduct losses and LAE paid in 
 respect of defaults occurring in:
     Current year.....................    210     167      216       86      95
     Prior years......................  2,032     841      764      515     457
                                       -------  ------- -------  ------- ------
Total payments........................  2,242   1,008      980      601     552

Reserve for losses and LAE, net
 of the related reinsurance 
 recoverables, at end of year.........  8,909   5,974    3,703    2,466   1,805

Reinsurance recoverables on unpaid
 losses and LAE, at the end
 of year .............................     51     331      886      698     450
                                       -------  ------- -------  ------- ------
Reserve for unpaid losses and LAE,
 before deduction of reinsurance 
 recoverables on unpaid losses, at
 end of year.......................... $8,960  $6,305   $4,589   $3,164  $2,255
                                       ======  ======   ======   ======  ======
--------------
(1) Includes  loss and LAE  reserves  relating to loans which are in default but
for which  default  notices have not been  received.
(2) Indicates a cumulative  redundancy in loss reserves at the beginning of each
period. Redundancies result from overestimating ultimate claim amounts.

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

                                       18

<PAGE>



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


ANALYSIS OF DIRECT RISK IN FORCE

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

























                                       19

<PAGE>

LENDER AND PRODUCT CHARACTERISTICS

     The following  table  reflects the percentage of direct gross risk in force
(as  determined  on the basis of  information  available on the date of mortgage
origination) by the categories indicated on December 31, 1997 and 1996:

                              Direct Risk in Force

                                                              December 31
                                                          1997          1996
                                                          ----           ----
Product Type:
Primary...............................................   100.0%         100.0%
Pool..................................................     0.0%           0.0%
                                                         ------         ------
Total.................................................   100.0%         100.0%
                                                         ======         ======

                          Direct Primary Risk in Force

                                                              December 31
                                                          1997           1996
                                                          ----           ----
Direct Risk in Force (dollars in millions)............   $2,231         $1,515
Lender Concentration:
Top 10 lenders (by original applicant)................    32.2%          23.4%
LTV:
90.01% to 95.00% (1)..................................    52.0%          49.4%
90.00 and below.......................................    48.0%          50.6%
                                                         ------         ------
Total.................................................   100.0%         100.0%
                                                         ======         ======
Loan Type:
Fixed.................................................    88.2%          85.6%
ARM (positive amortization) (2).......................    11.8%          14.4%
ARM (potential negative amortization) (3).............     0.0%           0.0%
ARM (scheduled negative amortization) (3).............     0.0%           0.0%
Other.................................................     0.0%           0.0%
                                                         ------         ------
Total.................................................   100.0%         100.0%
                                                         ======         ======
Mortgage Term:
15 years and under....................................     4.3%           5.6%
Over 15 years.........................................    95.7%          94.4%
                                                         ------         ------
Total.................................................   100.0%         100.0%
                                                         ======         ======
Property Type:
Noncondominium (principally single-family detached)...    94.9%          94.3%
Condominium...........................................     5.1%           5.7%
                                                         ------         ------
Total.................................................   100.0%         100.0%
                                                         ======         ======
Occupancy Status:
Primary residence.....................................   100.0%         100.0%
Second home...........................................     0.0%           0.0%
Nonowner occupied.....................................     0.0%           0.0%
                                                         ------         ------
Total.................................................   100.0%         100.0%
                                                         ======         ======
Mortgage Amount:
$200,000 or less......................................    95.3%          92.1%
Over $200,000.........................................     4.7%           7.9%
                                                         ------         ------
Total.................................................   100.0%         100.0%
                                                         ======         ======

(1)  Includes  97s,  representing  less than 1% of risk in force at December 31,
1997.

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

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

                                       20

<PAGE>


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

     In 1995,  the  mortgage  insurance  industry  introduced  a 97% LTV product
("97s")  which was offered to low and moderate  income  borrowers  under certain
pilot programs.  The Company believes that these "affordable housing" loans have
higher risks than its other insured  business and has often attracted  borrowers
with weak  credit  histories,  generally  resulting  in higher loss  ratios.  In
keeping  with the  Company's  established  risk  strategy,  the  Company has not
aggressively  solicited  this segment of the  industry,  and, as of December 31,
1997, 97s constituted less than 1% of direct risk in force. The Company does not
routinely delegate the underwriting of its 97% LTV product.

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

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

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

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

                                       21

<PAGE>


     detached  and  attached   townhouse   units  with  fee  simple   ownership,
condominiums and cooperatives.

     Loans on primary  residences  that were owner  occupied at the time of loan
origination  constituted  almost all of the Company's  risk in force at December
31, 1997. Because management believes that loans on nonowner occupied properties
represent  a  substantially  higher risk of claim  incidence  and are subject to
greater value  declines than loans on primary homes,  the Company  insures these
types of loans only on a case-by-case basis and only after stringent  management
review.

     The  Company's  book of  business  is less  mature than that of the private
mortgage  insurance industry as a whole, with the Company's direct risk in force
having a weighted  average life of 2.3 years at December 31, 1997, and 2.4 years
at December 31, 1996,  compared to an estimated industry average of 3.3 years at
December 31, 1997.

     The  following  table  shows the  percentage  of direct risk in force as of
December 31, 1997,  for policies  written from 1988 through 1997 by the Company,
as well as the  cumulative  loss ratio  (calculated  as losses  paid  divided by
premiums  written,  in each case for a  particular  certificate  year) which has
developed,  through December 31, 1997, for the policies written during the years
indicated and excludes the effects of reinsurance:




 Certificate                             Percent    Cumulative Ratio of Losses
    Year        Direct Risk in Force     of Total    Paid to Premiums Written(1)
    ----        --------------------     --------    ---------------------------
                    (in millions)
    1988                $ 1.9                0.1%                14.6
    1989                  2.6                0.1                 23.8
    1990                  4.8                0.2                 16.1
    1991                 18.9                0.8                 10.6
    1992                 83.0                3.7                  7.1
    1993                184.9                8.3                  4.2
    1994                196.6                8.9                  4.7
    1995                319.9               14.3                  3.1
    1996                505.6               22.7                  1.0
    1997                913.2               40.9                  0.0
                      --------             ------
   Total              $2,231.4             100.0%
                      ========             ======
-------------------------
(1) Claim activity is not spread evenly  throughout  the coverage  period of the
book  of  business.  Based  on  the  Company's  and  the  industry's  historical
experience,  claims  incidence is highest in the third through sixth years after
loan origination,  and relatively few claims are paid during the first two years
after  loan  origination.   Thus,  the  cumulative  loss  experience  of  recent
certificate years is not indicative of ultimate losses.

                                       22

<PAGE>


GEOGRAPHIC DISPERSION

         The following  tables  reflect the  percentage of direct risk in force,
net of reinsurance,  on the Company's book of business (by location of property)
for the top ten states and the top ten metropolitan  statistical  areas ("MSAs")
as of December 31, 1997.  The Company  continues to diversify  its risk in force
geographically.  The percentage of the Company's direct risk in force by top ten
states declined to 73.9% for 1997 compared to 77.5% and 78.6% for 1996 and 1995,
respectively.  The  percentage of the Company's  direct risk in force by top ten
MSAs  declined to 36.8% for 1997  compared to 41.9% and 42.9% for 1996 and 1995,
respectively.



           Ten States                                   Top Ten MSAs
           ----------                                   ------------

                      December 31                                    December 31
                         1997                                            1997
                         ----                                            ----
Georgia                  13.2%         Chicago, IL                       12.3%
Illinois                 12.9          Atlanta, GA                        7.0
Florida                   9.5          Washington D.C.                    3.6
Virginia                  7.2          San Francisco/Oakland, CA          2.2
California                7.1          Houston/Galveston, TX              2.0
Texas                     5.8          Baltimore, MD                      2.0
North Carolina            5.3          Minneapolis-St. Paul, MN           2.0
Pennsylvania              5.1          Richmond, VA                       2.0
Colorado                  3.9          Charlotte-Gastonia, NC             2.0
Maryland                  3.9          Denver, CO                         1.7
                         -----                                           -----
Total                    73.9%         Total                             36.8%
                         =====                                           =====

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

INVESTMENT PORTFOLIO

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

     The Company  follows an investment  policy which  requires:  (i) 75% 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

                                       23

<PAGE>



two highest  investment  grades by a nationally  recognized  rating  agency.  At
December 31, 1997, the Company's  total  investment  portfolio had a fair market
value of $119.9 million and did not include any real estate or mortgage loans.

     Liquidity  is  sought  through  cash  equivalent  investments  and  through
diversification  and  investment  in  publicly  traded  securities.  The Company
attempts  to  maintain a level of  liquidity  and a duration  in its  investment
portfolio  consistent  with  its  business  outlook  and  the  expected  timing,
direction and degree of changes in interest  rates.  As of December 31, 1997, 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  intends  to  invest  the  proceeds  of the note  offering  in
accordance with its investment  policy. To date, the Company's  investments have
emphasized  tax-preferred  securities.  Because of  restrictions  imposed  under
federal  income tax laws,  investment  by the  Company of  proceeds  of the note
offering must be made principally in taxable securities. Through investment of a
portion of the net proceeds of the note offering,  the Company plans to increase
its  investments  in  higher  yielding   non-investment   grade   securities  to
approximately  10% of its consolidated  portfolio,  up from  approximately 3% at
December 31, 1997.

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

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

                          Investment Portfolio Results
<TABLE>
<CAPTION>
                                              1997             1996           1995          1994            1993
                                              ----             ----           ----          ----            ----
<S>                                        <C>             <C>            <C>            <C>             <C>        
Average investments (1) (2).............   $103,804,750    $89,577,031    $79,253,289    $73,774,699     $31,211,740

Pre-tax net investment income...........     $6,234,142     $5,446,672     $4,836,461     $4,180,876      $1,896,639

Effective pre-tax yield (2).............           6.0%           6.1%           6.1%           5.7%            6.1%
Tax-equivalent yield (3)................           8.0%           7.7%           7.5%           7.2%            6.2%

Pre-tax realized gain (loss) on sale of  
 investments............................        $34,330      $(162,385)      $172,992      $(162,723)       $(15,852)
</TABLE>

(1) Excludes the Company's  investment in Southwide Life Insurance Corp. for all
periods during which it was held.
(2) Based on historical cost adjusted for  amortization and accretion of premium
and discount.
(3) Based on book value and the Company's marginal tax rate.

                                       24

<PAGE>



     The diversification of the Company's  investment  portfolio at December 31,
1997, is shown in the table below:

                      Investment Portfolio Diversification

                                                     December 31, 1997
                                                     -----------------
                                            Amortized         Fair
                                               Cost          Value    Percent(1)
                                               ----          -----    ----------
Available-for-sale securities:
  Fixed maturity securities:
    U. S. government obligations.......... $  9,823,960  $  10,197,431      8.5%
    Mortgage-backed bonds.................    4,679,115      4,801,355      4.0
    State and municipal bonds.............   68,789,100     71,819,355     59.9
    Industrial & miscellaneous............   12,463,961     12,907,346     10.7
                                           ------------  -------------
     Total fixed maturities...............   95,756,136     99,725,487

  Equity securities.......................    8,666,815     11,466,028      9.6
                                           ------------  -------------
     Total available-for-sale securities..  104,422,951    111,191,515
  Short-term investments..................    8,685,842      8,685,842      7.3
                                           ------------  -------------    ------
_________________                          $113,108,793   $119,877,357    100.0%
                                           ============   ============    ======
(1)  Percentage of fair  value.


     The following table shows the scheduled maturities at December 31, 1997, of
the fixed maturity securities held in the Company's investment portfolio:

                     Investment Portfolio Scheduled Maturity


                                                       December 31, 1997
                                                       -----------------
                                                Fair Value         Percent
                                                ----------         -------
One year or less............................  $   1,181,270           1.2%
After one year through five years...........     23,101,381          23.2
After five years through ten years..........     19,592,870          19.6
After ten years though twenty years.........     45,984,210          46.1
After twenty years..........................      5,064,401           5.1
Mortgage-backed securities (1)..............      4,801,355           4.8
                                                -----------         ------
         Total..............................  $  99,725,487         100.0%
                                                ===========         ======
------------
(1)  Substantially  all of these  securities are  guaranteed by U.S.  Government
Agencies.

                                       25

<PAGE>



     The following table shows the ratings of the Company's investment portfolio
as of December 31, 1997:

                       Investment Portfolio by S&P Rating



                                                          December 31, 1997
                                                          -----------------
Rating(1)                                              Fair Value        Percent
                                                       ----------        -------

Fixed maturities:
         U.S. Treasury and U.S. agency bonds.....    $   4,801,355          4.8%
         AAA.....................................       43,965,748         44.1
         AA......................................       20,539,938         20.6
         A.......................................       14,979,834         15.0
         BBB.....................................       11,960,617         12.0
         BB......................................          287,798          0.3
         B.......................................          282,000          0.3
         NR......................................        2,908,197          2.9
                                                     -------------        ------
              Total fixed maturities.............    $  99,725,487        100.0%
                                                     =============        ======

Equities:
         AAA.....................................    $     508,750          4.4%
         AA......................................        1,208,441         10.5
         A.......................................        8,974,909         78.3
         B.......................................          773,928           6.8
                                                    --------------        ------
              Total equities.....................    $  11,466,028        100.0%
                                                    ==============        ======
Total Portfolio..................................    $ 111,191,515
                                                    ==============
--------------
(1) Current ratings assigned by S&P.


                                       26

<PAGE>



REGULATION

DIRECT REGULATION

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

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

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


                                       27

<PAGE>



     Triad is required by Illinois  insurance  laws to provide for a contingency
reserve in an amount  equal to at least 50% of earned  premiums.  Such  reserves
must be maintained for a period of 10 years except in  circumstances  where high
levels of losses exceed regulatory thresholds. The contingency reserve, designed
to provide a cushion  against  the effect of adverse  economic  cycles,  has the
effect  of  reducing  statutory  surplus  and  restricting  dividends  and other
distributions by Triad. At December 31, 1997, Triad had statutory policyholders'
surplus of $60.9 million and statutory  contingency reserve of $54.8 million. At
December 31, 1996, Triad had statutory  policyholders'  surplus of $57.1 million
and a statutory  contingency reserve of $35.1 million.  Triad's statutory earned
surplus was $2.5  million at year end 1997  versus a deficit of $1.3  million at
year end 1996,  reflecting  growth in  statutory  net  income  greater  than the
increase in the statutory contingency reserve.

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

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

     Triad is subject to examination of its affairs by the insurance departments
of each of the states in which it is licensed to transact business. The Illinois
Director  periodically  conducts a financial  examination of insurance companies
domiciled in Illinois.  The most recent  examination  of Triad was issued by the
Illinois  Insurance  Department  on  September  6, 1995,  and covered the period
January 1, 1991,  through  December 31, 1994. No material  recommendations  were
made  as a  result  of this  examination.  The  next  examination  has not  been
scheduled.

     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
described above. To date the Illinois Director has not conducted or scheduled an
examination of TGAC.

                                       28

<PAGE>



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

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

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

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

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


                                       29

<PAGE>



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

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

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

INDIRECT REGULATION

     The  Company,  Triad  and  TGAC  are also  indirectly,  but  significantly,
impacted by regulations  affecting purchasers of mortgage loans, such as Freddie
Mac and Fannie Mae, and regulations affecting  governmental insurers such as the
FHA as well as lenders.  Private mortgage insurers,  including Triad, are highly
dependent upon federal housing  legislation and other laws and regulations which
affect  the  demand  for  private  mortgage  insurance  and the  housing  market
generally.  For example,  housing legislation enacted in 1992 permits up to 100%
of borrower  closing cost to be financed by loans  insured by FHA, a significant
increase  from the  previous  57% limit.  Also,  in April 1994,  HUD reduced the

                                       30

<PAGE>



initial  premium  (payable at loan  origination)  for FHA insurance from 3.0% to
2.25%.  Effective  January 1, 1998, the maximum  individual loan amount that the
FHA could insure was increased from $160,950 to $170,362. The maximum individual
loan amount the VA can insure  presently is  $203,000.  The maximum loan amounts
that the FHA and VA can insure are subject to adjustment and may increase in the
future. Any future legislation that increases the number of persons eligible for
FHA or VA mortgages  could have an adverse  effect on the  Company's  ability to
compete with the FHA or VA.

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

     In 1995,  Fannie Mae and Freddie Mac each  introduced  their own  automated
underwriting  system to be used by mortgage  originators  selling  mortgages  to
them. These systems,  which are provided as a service to the Company's  contract
underwriting  customers,  streamline the mortgage process and reduce costs. As a
result  of the  increased  acceptance  of these  products  in 1997 and for other
reasons,  the process by which mortgage originators sell loans to Fannie Mae and
Freddie Mac is  becoming  increasingly  automated,  a trend which is expected to
continue.  As a result,  Fannie Mae and Freddie Mac could develop the capability
to become the decision maker regarding  selection of a private  mortgage insurer
for  loans  sold  to  them,  a  decision  traditionally  made  by  the  mortgage
originator.  The  Company,  however,  is not  aware of any  plans to do so.  The
concentration  of purchasing power that would be attained if such development in
fact occurred could adversely affect, from the Company's perspective,  the terms
on which  mortgage  insurance is written on loans sold to Fannie Mae and Freddie
Mac.

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

                                       31

<PAGE>



     Upon request by an insured,  Triad must cancel the mortgage insurance for a
mortgage  loan.  Fannie  Mae and  Freddie  Mac  guidelines,  as well as  several
existing and proposed state  statutes,  contain  various  provisions  which give
borrowers the right to request cancellation of mortgage insurance when specified
conditions are met. In addition,  legislation  currently is being  considered in
the Senate and House banking  committees  regarding the  cancellation of private
mortgage insurance.  Such legislation would require mortgage servicers to inform
consumers of their right to cancel their  private  mortgage  insurance  once the
home owners have  achieved 20% equity in their home.  Among other  options being
proposed   regarding  the  cancellation  of  mortgage  insurance  are  automatic
cancellation of private mortgage  insurance once the prescribed  equity level of
20% has been achieved and automatic  cancellation of private mortgage  insurance
half-way  through the term of the loan.  Because  most  mortgage  borrowers  who
obtain  private  mortgage  insurance  do not  achieve  20% equity in their homes
before the homes are sold or the  mortgages  refinanced,  the  Company  does not
expect to lose a significant  amount of its insurance in force if such proposals
are  adopted.  The  Company  cannot  predict,   however,  the  financial  burden
associated  with borrower  notification  or automatic  termination if any of the
related costs are delegated to mortgage insurers.

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

EMPLOYEES

         As of December 31, 1997,  the Company  employed 119 persons.  Employees
are not covered by any collective  bargaining  agreement.  The Company considers
its employee relations to be satisfactory.



                                       32

<PAGE>



EXECUTIVE OFFICERS

The executive officers of the Company are as follows:

Name                                 Position                              Age
----                                 --------                              ---
William T. Ratliff, III              Chairman of the Board of              44
                                     the Company and Triad

Darryl W. Thompson                   President, Chief Executive            57
                                     Officer and Director of the
                                     Company and Triad

David W. Whitehurst                  Executive Vice President,             48
                                     Chief Financial Officer,
                                     Treasurer and Director of the
                                     Company; Vice President
                                     and Director of Triad

John H. Williams                     Executive Vice President and          50
                                     Director of Triad

Ron D. Kessinger                     Executive Vice President of           43
                                     Triad

Earl F. Wall                         Vice President, Secretary and         40
                                     General Counsel of the
                                     Company and Triad

Henry B. Freeman                     Vice President of Triad               48

Michael R. Oswalt                     Vice President, Controller           36
                                      and Principal Accounting Officer
                                      of the Company and Triad



                                       33

<PAGE>



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

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

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

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

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



                                       34

<PAGE>



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

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

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

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

ITEM 2.      PROPERTIES.

     The Company leases office space in its  Winston-Salem  headquarters and its
six underwriting offices located throughout the country comprising approximately
31,582 square feet under leases expiring between 1998 and 2002 and which require
annual lease payments of $531,613 in 1998. With respect to all  facilities,  the
Company  has,  or  believes  it  will  be  able to  obtain,  lease  renewals  on
satisfactory  terms.  The Company  believes  its  existing  properties  are well
utilized and are suitable and adequate for its present circumstances.

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

ITEM 3.      LEGAL PROCEEDINGS.

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

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

         None.

                                       35

<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 tier of the
Nasdaq Stock MarketSM under the symbol "TGIC". At December 31, 1997,  13,293,721
shares were issued and  outstanding.  The following table sets forth the highest
and lowest closing  prices of the Company's  Common Stock,  $0.01 par value,  as
reported  by Nasdaq  during the  periods  indicated  (closing  prices  have been
restated to reflect the  three-for-two  stock  split on June 28,  1996,  and the
two-for-one stock split on October 28, 1997).


                                 1997                          1996
                                 ----                          ----
                          High           Low            High           Low
First Quarter.......... 15 7/8          14            10 21/32        8 27/32
Second Quarter......... 22 11/16        14 3/4        12 1/4         10
Third Quarter.......... 28 1/2          20 1/2        14 3/4         11 5/8
Fourth Quarter ........ 31              26 1/4        16 3/4         13 5/8


     As of March 4, 1998, the number of stockholders of record of Company Common
Stock  was  approximately  176.  In  addition,  there  were an  estimated  2,744
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.


                                       36
<PAGE>
ITEM 6.      SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
                                                                                  Year Ended December 31
                                                     -------------------------------------------------------------------------------
                                                         1997             1996             1995              1994          1993
                                                         ----             ----             ----              ----          ----
INCOME  STATEMENT  DATA (for period  ended):                     (Dollars in thousands, except per share amounts)
<S>                                                  <C>              <C>              <C>              <C>             <C>        
Premiums written:
     Direct ......................................   $     40,083     $     26,152     $     18,890     $     16,172    $    13,522
     Assumed .....................................             20               26               34               38            222
     Ceded .......................................         (1,772)          (2,217)          (3,924)          (4,034)        (3,926)
                                                     ------------     ------------     ------------     ------------    -----------
                                                     $     38,331     $     23,961     $     15,000     $     12,176    $     9,818
                                                     ============     ============     ============     ============    ===========
Earned premiums ..................................   $     38,522     $     24,727     $     15,478     $     10,999    $     7,911
Net investment income ............................          6,234            5,447            4,836            4,181          1,897
Realized investments gains (losses) ..............             34             (162)             173             (163)           (16)
Other income .....................................              8                0                1                5             14
                                                     ------------     ------------     ------------     ------------    -----------
     Total revenues ..............................         44,798           30,012           20,488           15,022          9,806

Net losses and loss adjustment expenses ..........          5,177            3,279            2,217            1,262          1,284
Amortization of deferred policy acquisition cost .          4,120            3,235            2,289            1,726          1,533
Other operating expenses (net of acquisition
        cost deferred) ...........................         10,257            7,259            4,753            3,658          2,371
                                                     ------------     ------------     ------------     ------------    -----------
Income before income taxes .......................         25,244           16,239           11,229            8,376          4,618
Income taxes .....................................          8,002            5,042            3,470            2,594          1,251
                                                     ------------     ------------     ------------     ------------    -----------
Net income .......................................   $     17,242     $     11,197     $      7,759     $      5,782    $     3,367
                                                     ============     ============     ============     ============    ===========
     Basic earnings per share (1) ................   $       1.30     $       0.84     $       0.59     $       0.44    $      0.51
     Diluted earnings per share (1) ..............   $       1.26     $       0.83     $       0.58     $       0.43    $      0.51
                                                     ------------     ------------     ------------     ------------    -----------
Weighted average common and common share
     equivalents outstanding (1)
         Basic ...................................     13,291,160       13,277,853       13,196,067       13,181,459      6,586,365
         Diluted .................................     13,713,538       13,541,551       13,333,014       13,305,786      6,587,716

Balance Sheet Data (at year end):
     Total assets ................................   $    138,979     $    112,403     $     99,017     $     86,664    $    78,634
     Total invested assets .......................   $    119,877     $     98,027     $     85,978     $     75,364    $    70,800
     Losses and loss adjustment expenses .........   $      8,960     $      6,305     $      4,589     $      3,164    $     2,255
     Unearned premiums ...........................   $      7,988     $      8,216     $      9,086     $      9,893    $     8,774
     Stockholders' equity ........................   $    111,781     $     91,680     $     80,441     $     70,108    $    64,726
Statutory Ratios (2):
     Loss ratio ..................................           14.2%            16.0%            14.3%            11.5%          16.2%
     Expense ratio ...............................           42.5%            49.6%            59.1%            61.8%          49.1%
                                                     ------------     ------------     ------------     ------------    -----------
     Combined ratio ..............................           56.7%            65.6%            73.4%            73.3%          65.3%
                                                     ============     ============     ============     ============    ===========
GAAP Ratios:
     Loss ratio ..................................           13.4%            13.3%            14.3%            11.5%          16.2%
     Expense ratio ...............................           37.5%            43.8%            46.9%            44.2%          39.8%
                                                     ------------     ------------     ------------     ------------    -----------
     Combined ratio ..............................           50.9%            57.1%            61.2%            55.7%          56.0%
                                                     ============     ============     ============     ============    ===========
Other Statutory Data (dollars in millions) (2):
     Direct insurance in force ...................   $    9,176.7     $    6,556.3     $    5,080.3     $    4,111.4    $   2,967.8
     Direct risk in force (gross) ................   $    2,231.4     $    1,515.4     $    1,090.6     $      814.1    $     569.8
     Risk-to-capital .............................         19.3:1           15.8:1           11.1:1            8.9:1          6.5:1
</TABLE>
(1) Periods have been restated to reflect the three-for-two  stock split on June
28, 1996,  and the  two-for-one  stock split on October 28,  1997.
(2) Based on  statutory  accounting  practices  and  derived  from  consolidated
statutory financial statements of Triad.

                                       37
<PAGE>
 Item 7.          Management's Discussion and Analysis of
                  Financial Condition and Results of Operation.


RESULTS OF OPERATIONS

1997 COMPARED TO 1996

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

     Net income per share on a diluted  basis,  which  reflects the  two-for-one
stock split  effective  on October 28, 1997,  increased  52.1% to $1.26 for 1997
compared to $0.83 per share for 1996.  Operating  earnings  per share were $1.26
for 1997  compared to $0.84 for 1996, an increase of 50.3%.  Operating  earnings
exclude net realized  investment gains of approximately  $34,000 in 1997 and net
realized investment losses of approximately $162,000 in 1996.

     New insurance written,  which includes insurance on new and seasoned loans,
was $3.8  billion for 1997 as compared to $2.2  billion in 1996,  an increase of
74.0%.  For the fourth quarter,  new insurance  written  increased 32.9% to $740
million in 1997  compared to $557  million in 1996.  This  increase in gross new
insurance  written  was the result of  continued  geographic  expansion  and the
penetration of Triad's  products in the marketplace  including  Triad's new risk
sharing programs.  Approximately 25% of 1997 new insurance written resulted from
Triad's risk sharing programs.  Uncertainty  exists regarding the future of risk
sharing  programs  in  the  mortgage  insurance  industry.   The  resolution  of
regulatory  and industry  questions  regarding  risk sharing  programs makes the
continued viability of such programs uncertain. Of the $3.8 billion in total new
insurance  production,  approximately  $950 million was attributable to seasoned
loans.  The  Company  does not  expect to  produce a  significant  amount of new
business attributable to seasoned loans in 1998.

     The growth in new insurance  written also  reflects the favorable  interest
rate  environment in 1997 which caused home buying  activities to remain strong.
Refinance  activity was 14.0% (18.3% in fourth quarter) of new insurance written
in 1997  compared to 16.9%  (11.2% in fourth  quarter) of  insurance  written in
1996.  Total direct insurance in force reached $9.2 billion at December 31, 1997
compared to $6.6 billion at December 31, 1997, an increase of 40.0%.

         The Company  also  benefited  from the January  1997 upgrade of Triad's
     claims-paying ability rating from "AA-" to "AA" by Standard & Poor's
Corporation.  In January 1998,  Standard & Poor's  Corporation  affirmed Triad's
"AA" claims-paying ability rating.


                                       38

<PAGE>


Item 7.          Management's Discussion and Analysis of
                 Financial Condition and Results of Operation -- Continued


     Net new insurance  written,  which includes coverage on new loans only, was
$2.9 billion for 1997  compared to $2.2 billion for 1996,  an increase of 30.9%.
According to industry data,  Triad's national market share,  which is calculated
based on net new insurance  written,  increased by approximately 39% to 2.4% for
1997 (2.2% in the fourth quarter) compared to 1.7% for all of 1996.

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

     In late 1996, Triad  introduced its Stick With Triad program  featuring the
Slam Dunk  Loan SM  approval  process  whereby  Triad  issues a  certificate  of
insurance  based on the borrower's  credit score.  In 1997, the Stick With Triad
products  accounted for 60.1% of new  commitments.  The  popularity,  to a large
extent,   of  this  product  has  reduced  customer  use  of  Triad's  delegated
underwriting  program in 1997.  Commitments  processed through Triad's delegated
underwriting  program  accounted  for 18.2% of  commitments  received  for 1997,
compared to 38.0% for 1996.

     Net investment income for 1997 was $6.2 million, a 14.5% increase over $5.4
million in 1996.  This  increase  resulted  from the growth in the average  book
value of  invested  assets to $103.8  million at  December  31,  1997 from $89.6
million at December 31, 1996. The yield on average  invested assets was 6.0% for
1997  compared to 6.1% for 1996.  This slight  decrease is  attributable  to the
Company's  continued  investment  in  lower  yielding  municipal   tax-preferred
securities.  The portfolio's tax-equivalent yield was 8.0% for 1997 up from 7.7%
for 1996.  Approximately  71.8% or $68.7 million of the Company's fixed maturity
portfolio at December 31, 1997 was composed of state and municipal tax-preferred
securities as compared to 53% at December 31, 1996 and 37% at December 31, 1995.

     The Company's loss ratio (the ratio of incurred losses to earned  premiums)
was 13.4% for 1997 compared to 13.3% for 1996.  The loss ratio was 12.1% for the
fourth  quarter  of 1997  compared  to 14.3% for the same  period  of 1996.  The
Company's favorable loss ratio reflects the low level of delinquencies  compared
to the  number  of  insured  loans and the fact  that  approximately  73% of the
Company's  insurance in force was  originated in the 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

                                       39

<PAGE>


Item 7.          Management's Discussion and Analysis of
                 Financial Condition and Results of Operation -- Continued


sixth  years  after loan  origination.  Although  the claims  experience  on new
insurance  written in  previous  years has been  quite  favorable,  the  Company
expects its incurred  losses to increase as a greater amount of its insurance in
force reaches its anticipated highest claim frequency years. Due to the inherent
uncertainty  of future premium  levels,  losses,  economic  conditions and other
factors that impact  earnings,  it is  impossible  to predict with any degree of
certainty the impact of such higher claims frequencies on future earnings.

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

     Net losses and loss  adjustment  expenses (net of  reinsurance  recoveries)
increased by 57.9% in 1997 to $5.2 million compared to $3.3 million in 1996.This
increase  reflects  the  increase in the  Company's  insurance  in force and the
resulting  recognition  of a  greater  amount  of  insurance  in force  reaching
itshigher claim frequency years.

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

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

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

     The effective tax rate for 1997 was 31.7%  compared to 31.0% in 1996.  This
increase is primarily  the result of the  phase-in of the 35% federal  statutory
income tax rate  applicable to companies  with annual  taxable  income above $10
million.  Management  expects  the  Company's  effective  tax  rate to  increase
slightly  as new funds from the debt  offering in January  1998 are  invested in
taxable  securities  and the Company's  taxable income grows faster than its tax
preferred investment income.


                                       40

<PAGE>


Item 7.          Management's Discussion and Analysis of
                 Financial Condition and Results of Operation -- Continued


1996 COMPARED TO 1995

     Net income  for 1996  increased  44.3% to $11.2  million  compared  to $7.8
million in 1995. This improvement was attributable to a 59.8% increase in earned
premiums,  a 12.6% increase in net investment  income, an improved expense ratio
and a continuing low loss ratio.

     Net income per share on a diluted basis, reflecting stock splits, increased
42.1% to $0.83 for 1996 compared to $0.58 per share in 1995.  Operating earnings
per share were  $0.84 for 1996  compared  to $0.57 per share in 1995.  Operating
earnings exclude realized  investment  losses of approximately  $162,000 in 1996
and realized investment gains of approximately $173,000 in 1995.

     New insurance  written was $2.2 billion in 1996 compared to $1.6 billion in
1995, an increase of 36.4%. New insurance written was $557 million in the fourth
quarter  of 1996  compared  to $479  million  in the same  period  of 1995.  The
increase  in new  insurance  written  in 1996 was the  result  of the  continued
penetration  of Triad's  products in the  marketplace  coupled  with a favorable
interest rate environment for much of 1996, which caused both refinance and home
buying activities to remain strong for the year.  Refinance  activity  accounted
for 16.9% of new  insurance  written in 1996  compared  to 9.3% for 1995.  Total
direct  insurance in force reached $6.6 billion at December 31, 1996 compared to
$5.1 billion the previous year, an increase of 29.1%.

     According to industry data,  Triad's share of total new mortgage  insurance
written  increased  to 1.7% for  1996  compared  to 1.5%  for all of 1995.  This
increase was primarily the result of the Company's geographic expansion into new
territories  and the success of a marketing focus on larger,  national  mortgage
lenders.

     Total direct  premiums  written were $26.2 million for 1996, an increase of
38.4% compared to $18.9 million in 1995. Net premiums written increased by 59.7%
to $24.0 million for 1996 compared to $15.0  million for 1995.  Earned  premiums
increased   59.8%  to  $24.7  million  in  1996  from  $15.5  million  in  1995.
Contributing  to this  growth were the strong  mortgage  market,  the  Company's
continued  expansion  into  new  territories,   the  secondary  mortgage  market
requirements  for deeper  coverages  and  increased  renewal  premium due to the
growth of our monthly premium product. Sales under the Company's monthly premium
plan  represented  93.0% of new  insurance  written in 1996 compared to 82.6% in
1995.  Offsetting  the  premium  growth  somewhat  was the  decrease  in Triad's
persistency  rate,   reflecting  the  1996  increase  in  refinancing  activity.
Annualized persistency was 85.3% in 1996 compared to 86.4% in 1995.

     In January 1996, the Company  eliminated its quota share reinsurance on new
business, recaptured substantial portions of its quota share coverage on renewal
business and secured excess of loss reinsurance to protect against  catastrophic
losses.  These changes  reduced the  Company's  quota share cede rate to 5.3% of

                                       41

<PAGE>


Item 7.          Management's Discussion and Analysis of
                 Financial Condition and Results of Operation -- Continued


direct premium  written in 1996 compared to 20.8% in 1995.  Premiums ceded under
the Company's quota share  reinsurance  agreements for 1996 totaled $1.4 million
compared  to $3.9  million in 1995.  Had the  Company  retained  its quota share
reinsurance in 1996 and maintained a cede rate comparable to 1995, the Company's
net written  premium would have  increased  approximately  38.0% rather than the
59.7% noted above.

     Net investment income for 1996 was $5.4 million, a 12.6% increase over $4.8
million in 1995.  This  increase  resulted  from the growth in average  invested
assets of $10.3  million to $89.6  million at December  31,  1996.  The yield on
average  invested  assets was 6.1% for both 1996 and 1995. The  portfolio's  tax
equivalent  yield was 7.7% in 1996 and 7.5% in 1995.  This yield  reflected  the
Company's investment strategy to emphasize tax-preferred  securities which yield
lower pre-tax rates than similar fully-taxable securities.

     The Company's loss ratio was 13.3% for 1996 compared to 14.3% for 1995. The
favorable  loss ratio  reflects the low level of  delinquencies  compared to the
number of  insured  loans and the fact  that 71% of the  insurance  in force was
originated in the prior 36 months.

     Net losses and loss  adjustment  expenses (net of  reinsurance  recoveries)
increased  by 47.9% in 1996 to $3.3  million  compared to $2.2  million in 1995,
reflecting  the increase in the  Company's  insurance in force and the resulting
recognition  of a greater amount of insurance in force reaching its higher claim
frequency  years.  A decrease in  reinsurance  recoveries,  attributable  to the
Company's restructuring of its reinsurance program for 1996, also contributed to
the increase in net losses and loss adjustment expenses.

     Amortization  of deferred  policy  acquisition  costs increased by 41.3% to
$3.2  million  in 1996  compared  to $2.3  million  for 1995.  The  increase  in
amortization  reflects a growing balance of deferred policy acquisition costs to
amortize as the Company builds its total insurance in force.

     Other  operating  expenses  increased to $7.3 million for 1996  compared to
$4.8 million for 1995.  This increase in expenses was primarily  attributable to
personnel, facilities and equipment costs required to support Triad's geographic
expansion  and  increased   production   coupled  with  a  reduction  in  ceding
commissions  earned following changes in the Company's  reinsurance  program for
1996.  Ceding  commissions  paid to the Company are  reported as a reduction  in
other  operating  expenses and  decreased  to $572,000 in 1996  compared to $1.5
million in 1995.

     The Company's  expense ratio for 1996 was 43.8% compared to 46.9% for 1995.
Contributing to this  improvement  was the higher level of written  premiums for
1996 offset somewhat by the increase in expenses.


                                       42

<PAGE>


Item 7.          Management's Discussion and Analysis of
                 Financial Condition and Results of Operation -- Continued


     The  effective  tax rate for all of 1996 was  31.0%  compared  to 30.9% for
1995. In 1996, the Company began a phase-in of the 35% Federal  statutory income
tax rate applicable to companies with annual taxable income above $10 million.

LIQUIDITY AND CAPITAL RESOURCES

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

     For  1997,  the  Company  generated   positive  cash  flow  from  operating
activities of $17.9 million  compared to $12.5 million for 1996. The increase in
Triad's  operating  cash flow  reflects  the  growth  in  renewal  premiums  and
insurance  written  that has more than offset the  increases  in claims paid and
other expenses.

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

     The parent  company's cash flow is dependent on cash dividends and revenues
from  management  fees from Triad.  The insurance  laws of the State of Illinois
impose certain  restrictions on dividends from Triad. These restrictions,  based
on statutory  accounting  practices,  include requirements that dividends may be
paid only out of statutory  earned surplus as of the end of the preceding fiscal
year and limit the amount of dividends  that may be paid without prior  approval
of the  Illinois  Insurance  Department.  Triad  had an earned  surplus  of $2.5
million at December 31, 1997 and a deficit of $1.3 million at December 31, 1996.
The Illinois  Insurance  Department permits expenses of the parent company to be
paid by Triad in the form of management fees.

     In January  1998 the Company  completed a $35 million  private  offering of
senior  notes due  January  15,  2028.  The  notes,  which  represent  unsecured
obligations  of the Company,  bear  interest at a rate of 7.9% per annum and are
non-callable.  The notes are rated "A" by Standard  and Poor's  Corporation  and
"A+" by Fitch Investors Service.  The Company contributed $25 million of the net
proceeds  from  the  sale of the  notes  to  Triad  in  exchange  for a  surplus
debenture.  The  Company  will be  dependent  upon  payments  under the  surplus
debenture  issued by Triad and upon possible future dividends from Triad, all of
which  will be  subject  to  significant  payment  restrictions  under  Illinois
insurance  laws, to provide  funds for the payment of the Company's  obligations
under the notes.  The Company  retained  the balance of the net  proceeds of the
offering,  approximately  $9.4  million,  which will be  available  for  general

                                       43

<PAGE>


Item 7.          Management's Discussion and Analysis of
                 Financial Condition and Results of Operation -- Continued


corporate  purposes,  including,  without  limitation,  investment,  payments of
principal  and interest on the notes and possible  future  contributions  to the
capital of Triad.

     The  Company  intends  to  invest  the  proceeds  of the note  offering  in
accordance with its investment  policy. To date, the Company's  investments have
emphasized  tax-preferred  securities.  Because of  restrictions  imposed  under
federal  income tax laws,  investment  by the  Company of  proceeds  of the note
offering must be made principally in taxable securities. Through investment of a
portion of the net proceeds of the note offering,  the Company plans to increase
its  investments  in  higher  yielding   non-investment   grade   securities  to
approximately  10% of its consolidated  portfolio,  up from  approximately 3% at
December 31, 1997.

     Consolidated  invested  assets were $119.9  million at December  31,  1997,
including  a total of $111.2  million in fixed  maturity  securities  and equity
securities  classified as  available-for-sale.  Net unrealized  investment gains
were $2.8  million  on equity  securities  and $4.0  million  on fixed  maturity
securities at December 31, 1997.

     Approximately  4.8%  or  $4.8  million  of  the  Company's  fixed  maturity
portfolio  at December  31, 1997 was  composed  of  mortgage-backed  securities,
substantially all of which are guaranteed by U.S. Government  Agencies.  Certain
mortgage-backed securities are subject to significant prepayment risk due to the
fact that, in periods of declining interest rates,  mortgages may be repaid more
rapidly  than  scheduled as borrowers  refinance  higher rate  mortgages to take
advantage of lower rates. As a result, holders of mortgage-backed securities may
receive large  prepayments on their investments which must be reinvested at then
current rates.

     The Company's loss reserves  increased to $9.0 million at December 31, 1997
compared to $6.3 million at December 31, 1996.  This growth is the result of the
increases in new  insurance  written and the maturing of the  Company's  risk in
force.  Consistent with industry practices,  the Company does not establish loss
reserves for future  claims on insured loans which are not currently in default.
The  Company's  reserves per  delinquent  loan were $23,100 at both December 31,
1997 and December 31, 1996. The Company's  ratio of delinquent  insured loans to
total insured loans was 0.47% at December 31, 1997 compared to 0.44% at December
31, 1996.

     The Company's unearned premium reserve of $8.0 million at December 31, 1997
decreased from $8.2 million at December 31, 1996.  This decline is  attributable
primarily to the continued  production  of the monthly  premium  product,  which
produces little unearned premium compared to annual and single premium products.
Cancellation  activity also can contribute to the decrease in unearned premiums,
whereby  older  annual  premium  policies  are  canceled  or replaced by monthly
premium policies.

                                       44

<PAGE>


Item 7.          Management's Discussion and Analysis of
                 Financial Condition and Results of Operation -- Continued


     Total stockholders' equity increased to $111.8 million at December 31, 1997
from $91.7 million at December 31, 1996. This increase  resulted  primarily from
net income of $17.2 million for 1997 and an increase in net unrealized  gains on
invested assets classified as  available-for-sale of $2.8 million (net of income
tax).

     Triad's total statutory  policyholders'  surplus increased to $60.9 million
at December  31, 1997 from $57.1  million at December 31,  1996.  This  increase
resulted  from  statutory net income of $22.9  million and  unrealized  gains on
equity  securities  of $1.6  million  offset  primarily  by an  increase  in the
statutory contingency reserve of $19.7 million. Triad's statutory earned surplus
was $2.5 million at December  31, 1997  compared to a deficit of $1.3 million at
December 31, 1996,  reflecting  growth in statutory net income  greater than the
increase in the  statutory  contingency  reserve.  The balance in the  statutory
contingency  reserve was $54.8  million at December  31, 1997  compared to $35.1
million at December 31, 1996.

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

     Triad's ability to write insurance depends on the adequacy of its statutory
capital in relation to risk in force.  A  significant  reduction of capital or a
significant  increase  in risk may impair  Triad's  ability to write  additional
insurance. A number of states limit Triad's risk-to-capital ratio to 25-to-1. As
of December  31, 1997 Triad's  risk-to-capital  ratio was  19.3-to-1,  and as of
December 31, 1996 was 15.8-to-1,  as compared to 19.4-to-1 for the industry as a
whole at December 31, 1996, the latest industry data available.

     Rating   agencies  also  require   capital  levels  based  on  a  company's
performance  sensitivity to various depression scenarios. In determining capital
levels,  the  rating  agencies  allow  the use of  different  forms  of  capital
including  statutory capital,  reinsurance and debt. The effect of the Company's
contribution  of $25  million of its $35  million  senior  note  offering to the
capital of Triad in January  1998 will be to improve its  risk-to-capital  ratio
and to provide additional  capital considered in the rating agency's  depression
models.   Had  the  contribution  been  made  as  of  year  end  1997,   Triad's
risk-to-capital ratio would have been approximately  15.9-to-1.  There can be no
assurance that the Company will continue to meet such capital requirements.


                                       45

<PAGE>


Item 7.          Management's Discussion and Analysis of
                 Financial Condition and Results of Operation -- Continued


NEW ACCOUNTING STANDARDS

     In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share.  Statement No. 128 replaced the  calculation  of primary and
fully  diluted  earnings  per share with basic and diluted  earnings  per share.
Unlike  primary  earnings  per share,  basic  earnings  per share  excludes  any
dilutive  effects of  options,  warrants  and  convertible  securities.  Diluted
earnings  per share is very similar to the  previously  reported  fully  diluted
earnings per share.  All  earnings  per share  amounts for all periods have been
presented, and where appropriate, restated to conform to Statement 128.

     In June 1997, the Financial Accounting Standards Board issued Statement No.
130,  Reporting  Comprehensive  Income,  which is  effective  for  fiscal  years
beginning after December 31, 1997. The Statement  establishes  standards for the
reporting and display of  comprehensive  income and its  components in financial
statements.  The Company expects to adopt the provisions of Statement No. 130 in
the first quarter of 1998 and will present the financial  statements for earlier
periods  provided for  comparative  purposes as required by the  Statement.  The
application of the new rules will not have an impact on the Company's  financial
position or results of operations.

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

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

                                       46

<PAGE>

ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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


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

         None.



                                    PART III

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     Information  regarding  directors and nominees for directors of the Company
is included in the  Company's  Proxy  Statement  for the 1998 Annual  Meeting of
Stockholders, and is hereby incorporated by reference.

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

ITEM 11.     EXECUTIVE COMPENSATION.

     This  information is included in the Company's Proxy Statement for the 1998
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 1998
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 1998
Annual Meeting of Stockholders, and is hereby incorporated by reference.


                                       47

<PAGE>


                                     PART IV


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

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

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

         (b) Reports on Form 8-K.

               No reports on form 8-K were filed  during  the  quarter  ended
                  December 31, 1997.

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

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





















                                       48

<PAGE>



                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto  duly  authorized  on the 26th day of
March, 1998.

                                       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  26th  day of  March,  1998 by the
following persons on behalf of the Registrant in the capacities indicated.


       SIGNATURE                           TITLE

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

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

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

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

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

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




                                       49

<PAGE>



                           ANNUAL REPORT ON FORM 10-K

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

            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

                                INDEX TO EXHIBITS

                              FINANCIAL STATEMENTS

                          FINANCIAL STATEMENT SCHEDULES

                                CERTAIN EXHIBITS

                          YEAR ENDED DECEMBER 31, 1997

                               TRIAD GUARANTY INC.

                          WINSTON-SALEM, NORTH CAROLINA


                                       50

                                     <PAGE>



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULES

                              (Item 14(a) 1 and 2)



CONSOLIDATED FINANCIAL STATEMENTS                                         PAGE
---------------------------------                                         ----
Report of Independent Auditors................ .......................     54
Consolidated Balance Sheets at December 31, 1997 and 1996.............   55 - 56
Consolidated Statements of Income for each of the three
    years in the period ended December 31, 1997.......................     57
Consolidated Statements of Changes in Stockholders' Equity
    for each of the three years in the period ended December 31, 1997..    58
Consolidated Statements of Cash Flows for each of the three years
    in the period ended December 31, 1997..............................    59
Notes to Consolidated Financial Statements.............................  60 - 76

FINANCIAL STATEMENT SCHEDULES
Schedules at and for each of the three years in the
   period ended December 31, 1997
      Schedule I - Summary of investments - other than
                   investments in related parties......................    77
      Schedule II - Condensed financial information of Registrant......  78 - 81
      Schedule IV - Reinsurance........................................    82


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


                                       51

<PAGE>



                                INDEX TO EXHIBITS
                                 (ITEM 14(A) 3)


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       52

<PAGE>





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

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

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

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

  *11.1     Statement Re Computation of Net Income per share (Exhibit 11.1)

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

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

  *27.1     Financial Data Schedule (Exhibit 27.1)

  *27.2     Financial Data Schedule (Exhibit 27.2)

  *27.3     Financial Data Schedule (Exhibit 27.3)
-----------------

*  Filed Herewith.

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

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

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

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

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

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

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



                                       53

<PAGE>


                         Report of Independent Auditors


Board of Directors
Triad Guaranty Inc.


We have audited the accompanying  consolidated  balance sheets of Triad Guaranty
Inc.  and  subsidiaries  as of  December  31,  1997 and  1996,  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, 1997.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the  consolidated  financsent  fairly,  in all material
respects,  the  consolidated  financial  position  of Triad  Guaranty  Inc.  and
subsidiaries  at December  31, 1997 and 1996,  and the  consolidated  results of
their  operations and their cash flows for each of the three years in the period
ended  December  31,  1997 in  conformity  with  generally  accepted  accounting
principles.

                                             Ernst & Young LLP

January 22, 1998

                                       54

<PAGE>


                               Triad Guaranty Inc.

                           Consolidated Balance Sheets


                                                             December 31
                                                         1997           1996
                                                         ----           ----

Assets
Invested assets:
 Securities available-for-sale, at fair value:
   Fixed maturities (amortized cost:
     1997-$95,756,136;1996-$86,069,753)............  $ 99,725,487   $ 87,229,855
   Equity securities (cost: 1997-$8,666,815;
     1996-$6,267,076)..............................    11,466,028      7,494,817
   Short-term investments .........................     8,685,842      3,302,125
                                                     ------------   ------------
                                                      119,877,357     98,026,797

Cash ..............................................         8,557        360,586
Accrued investment income .........................     1,460,168      1,126,642
Deferred policy acquisition costs .................    12,587,355     10,198,397
Property and equipment, at cost less accumulated
   depreciation (1997-$1,563,289; 1996-$956,538) ..     2,524,228      1,705,389
Prepaid reinsurance premiums ......................        23,263        300,200
Reinsurance recoverable ...........................        49,447        153,274
Other assets ......................................     2,448,685        531,238

                                                     ------------   ------------
Total assets .....................................   $138,979,060   $112,402,523
                                                     ============   ============







                                       55
<PAGE>


                                                               December 31
                                                           1997          1996
                                                           ----          ----

Liabilities and stockholders' equity Liabilities:
   Losses and loss adjustment expenses ..........      $ 8,960,411   $ 6,305,397
   Unearned premiums ............................        7,988,342     8,216,478
   Amounts payable to reinsurer .................             --           1,993
   Current taxes payable ........................            3,318         1,596
   Deferred income taxes ........................        7,521,874     4,276,081
   Unearned ceding commission ...................             --          80,573
   Accrued expenses and other liabilities .......        2,724,324     1,840,369
                                                       -----------  ------------
Total liabilities ...............................       27,198,269    20,722,487


Commitments and contingencies (Notes 5 and 7)

Stockholders' equity:
   Preferred stock, par value $.01 per share- 
     authorized 1,000,000 shares, no shares
     issued and outstanding......................             -            -
   Common stock, par value $.01 per share -
     authorized 20,000,000 shares,13,293,721
     at December 31, 1997 and 6,645,361 at
     December 31, 1996 issued and
     outstanding shares.........................           132,937        66,453
   Additional paid-in capital...................        59,369,223    59,346,832
   Unrealized gain on available-for-sale
     securities, net of income tax liability 
     of $2,368,998 at December 31, 1997 and 
     $823,287 at December 31, 1996..............         4,405,315     1,568,800
   Retained earnings............................        47,873,316    30,697,951
                                                      ------------  ------------
Total stockholders' equity......................       111,780,791    91,680,03
                                                      ------------  ------------
Total liabilities and stockholders' equity......      $138,979,060  $112,402,523
                                                      ============  ============


See accompanying notes.

                                       57
<PAGE>


                               Triad Guaranty Inc.

                        Consolidated Statements of Income
<TABLE>
<CAPTION>

                                                         Year ended December 31
                                                       1997            1996            1995
                                                       ----            ----            ----
<S>                                               <C>             <C>             <C>         
Revenue:
Premiums written:
   Direct ....................................... $ 40,082,507    $ 26,151,650    $ 18,889,933
   Assumed ......................................       20,061          26,222          33,891
   Ceded ........................................   (1,772,039)     (2,216,417)     (3,923,625)
                                                  ------------    ------------    ------------
Net premiums written ............................   38,330,529      23,961,455      15,000,199
Change in unearned premiums .....................      191,163         766,286         477,841
                                                  ------------    ------------    ------------
Earned premiums .................................   38,521,692      24,727,741      15,478,040

Net investment income ...........................    6,234,142       5,446,672       4,836,461
Net realized investment gains (losses) ..........       34,330        (162,385)        172,992
Other income ....................................        7,716            --               261
                                                   ------------    ------------    ------------
                                                    44,797,880      30,012,028      20,487,754
Losses and expenses:
   Losses and loss adjustment expenses ..........    5,317,812       3,444,354       2,691,608
   Reinsurance recoveries .......................     (140,734)       (165,224)       (474,822)
                                                  ------------    ------------    ------------
Net losses and loss adjustment expenses .........    5,177,078       3,279,130       2,216,786

Amortization of deferred policy
 acquisition costs ..............................    4,120,469       3,234,876       2,289,121
Other operating expenses (net
  of acquisition costs deferred) ................   10,256,815       7,259,271       4,752,934
                                                  ------------    ------------    ------------
                                                    19,554,362      13,773,277       9,258,841
                                                  ------------    ------------    ------------
Income before income taxes ......................   25,243,518      16,238,751      11,228,913

Income taxes:
   Current ......................................        2,613         (37,292)         38,717
   Deferred .....................................    7,999,081       5,079,077       3,431,304
                                                  ------------    ------------    ------------
                                                     8,001,694       5,041,785       3,470,021
                                                  ------------    ------------    ------------
Net income ...................................... $ 17,241,824    $ 11,196,966    $  7,758,892
                                                  ============    ============    ============

Earnings per common and
   common equivalent share:
     Basic ......................................     $1.30            $.84            $.59
     Diluted ....................................      1.26             .83             .58
                                                   ============    ============    ============
Shares used in computing earnings
  per common and common equivalent share:
     Basic ......................................   13,291,160      13,277,853      13,196,067
     Diluted ....................................   13,713,538      13,541,551      13,333,014
                                                   ============    ============    ============
</TABLE>


See accompanying notes.

                                       57
<PAGE>
                               Triad Guaranty Inc.

           Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>

                                                         Unrealized
                                                         Gain (Loss)
                              Additional                on Available-
                                Common       Paid-In       for-Sale       Retained       Deferred
                                Stock        Capital      Securities      Earnings     Compensation      Total
                               --------      -------    -------------     --------     ------------      ------

<S>                            <C>        <C>             <C>           <C>             <C>          <C>         
Balance at December 31, 1994.. $ 44,189   $ 59,082,010    $ (632,877)   $ 11,764,244    $ (149,539)  $ 70,108,027
  Net income .................                  --             --          7,758,892          --        7,758,892
  Amortization of deferred
   compensation...............     --           --             --              --          149,539        149,539
  Tax benefit on       
   restricted stock...........     --           59,798         --              --             --           59,798
  Change in unrealized
   (loss) gain................     --           --         2,365,086           --             --        2,365,086
                               --------   ------------    ----------    ------------     ----------   -----------
Balance at December 31, 1995..   44,189     59,141,808     1,732,209      19,523,136          --       80,441,342
  Net income .................     --           --             --         11,196,966          --       11,196,966
  Issuance of 11,316 shares
    of common stock under
    stock option plans........      113        205,536         --              --             --          205,649
  Three-for-two stock split
    effected in the form of
    a 50% stock dividend......   22,151         --             --            (22,151)         --             --  
    stock dividend
   Retirement of common
     stock....................     --             (512)        --              --              --            (512)
   Change in unrealized
     gain.....................     --           --          (163,409           --              --        (163,409)
                               --------   ------------    ----------    ------------     ----------   -----------
Balance at December 31, 1996..   66,453     59,346,832     1,568,800      30,697,951           --      91,680,036
   Net income ................     --           --             --         17,241,824           --      17,241,824
   Issuance of 2,499 shares
     of common stock under
     stock option plans.......       25         22,391         --              --              --          22,416
   Two-for-one stock split
     effected in the form of
     a 100% stock dividend....   66,459         --             --            (66,459)          --            --
   Change in unrealized 
     gain.....................     --           --         2,836,515           --              --       2,836,515
                               --------   ------------    ----------    ------------     ----------   -----------
Balance at December 31, 1997.. $132,937   $ 59,369,223    $4,405,315    $ 47,873,316    $      --    $ 11,780,791
                               ========   ============    ==========    ============     ==========   ===========
</TABLE>


See accompanying notes.

                                       58
<PAGE>
                               Triad Guaranty Inc.

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                    Year ended December 31
                                                           1997             1996            1995
                                                           ----             ----            ----
<S>                                                    <C>             <C>             <C>         
Operating activities
Net income .........................................   $ 17,241,824    $ 11,196,966    $  7,758,892
Adjustments to reconcile net income to net
   cash provided by operating activities:
     Loss and unearned premium reserves ............      2,426,878         846,498         618,079
     Accrued expenses and other liabilities ........        901,991         362,459         229,364
     Current taxes payable .........................          1,722         (38,335)         26,118
     Amounts due to/from reinsurer .................        378,771       1,787,428         125,574
     Accrued investment income .....................       (333,526)       (230,985)       (104,490)
     Policy acquisition costs deferred .............     (6,509,427)     (5,856,589)     (3,994,830)
     Amortization of policy acquisition costs ......      4,120,469       3,234,876       2,289,121
     Net realized investment (gains) losses ........        (34,330)        162,385        (172,992)
     Provision for depreciation ....................        621,050         394,282         329,758
     Amortization of bond discount .................       (620,762)       (591,336)       (555,771)
     Amortization of deferred compensation .........           --              --           149,539
     Deferred income taxes .........................      1,700,081       1,573,810         170,955
     Unearned ceding commission ....................        (80,573)       (539,542)        (86,623)
     Other assets ..................................     (1,914,971)        171,949        (291,593)
                                                        ------------    -----------      ----------
Net cash provided by operating activities ..........     17,899,197      12,473,866       6,491,101

Investing activities
Securities available-for-sale:
   Purchases - fixed maturities ....................    (25,487,708)    (19,823,655)    (16,552,078)
   Sales  - fixed maturities .......................     16,186,544       8,036,070      12,960,894
   Purchases - equities ............................     (3,835,769)     (2,732,179)     (2,222,254)
   Sales - equities ................................      1,678,286       1,838,226       1,781,793
Purchases of property and equipment ................     (1,431,278)       (760,202)       (467,526)
                                                        ------------    -----------      ----------
Net cash used in investing activities ..............    (12,889,925)    (13,441,740)     (4,499,171)

Financing activities
Proceeds from exercise of stock options ............         22,416         205,649           --
Retirement of common stock .........................           --              (512)          --
                                                        ------------    -----------      ----------
Net cash provided by financing activities ..........         22,416         205,137           --
                                                        ------------    -----------      ----------
Net change in cash and short-term investments ......      5,031,688        (762,737)      1,991,930
Cash and short-term investments at beginning of year      3,662,711       4,425,448       2,433,518
                                                        ------------    -----------      ----------
Cash and short-term investments at end of year .....   $  8,694,399    $  3,662,711    $  4,425,448
                                                       ============    ============    ============

Supplemental schedule of cash flow information
Cash paid during the period for income taxes
   and United States Mortgage Guaranty Tax and
   Loss Bonds.......................................    $  6,299,891    $  3,348,000    $  3,260,349
                                                        ============    ============    ============
</TABLE>

See accompanying notes.

                                       59
<PAGE>

                               Triad Guaranty Inc.

                   Notes to Consolidated Financial Statements

                                December 31, 1997



1. ACCOUNTING POLICIES

NATURE OF BUSINESS

Triad  Guaranty Inc. (the  "Company") is a holding  company  which,  through its
wholly-owned   subsidiary,   Triad  Guaranty  Insurance  Corporation  ("Triad"),
provides  private mortgage  insurance  coverage in the United States to mortgage
lenders to protect the lender  against  loss from  defaults on low down  payment
residential mortgage loans.

BASIS OF PRESENTATION

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

CONSOLIDATION

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

USE OF ESTIMATES

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

INVESTMENTS

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


                                       60
<PAGE>
                             Triad Guaranty Inc.

              Notes to Consolidated Financial Statements(continued)



1. ACCOUNTING POLICIES (CONTINUED)

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

DEFERRED POLICY ACQUISITION COSTS

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

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

LOSSES AND LOSS ADJUSTMENT EXPENSE RESERVES

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

                                       61
<PAGE>

                               Triad Guaranty Inc.

              Notes to Consolidated Financial Statements(continued)



1. ACCOUNTING POLICIES (CONTINUED)

REINSURANCE

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

INCOME TAXES

The Company uses the asset and liability  method of accounting for income taxes.
Under the asset and liability  method,  deferred tax assets,  net of 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,  and the effect on deferred
tax assets and  liabilities  of a change in tax rates is recognized in income in
the period that includes the enactment date.

INCOME RECOGNITION

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


                                       62
<PAGE>
                               Triad Guaranty Inc.

              Notes to Consolidated Financial Statements(continued)



1. ACCOUNTING POLICIES (CONTINUED)

STOCK OPTIONS

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

EARNINGS PER SHARE

In 1997,  the Financial  Accounting  Standards  Board issued  Statement No. 128,
Earnings per Share.  Statement 128 replaced the calculation of primary and fully
diluted  earnings per share with basic and diluted  earnings  per share.  Unlike
primary  earnings  per share,  basic  earnings  per share  excludes any dilutive
effects of options. Diluted earnings per share is very similar to the previously
reported  fully diluted  earnings per share.  All earnings per share amounts for
all periods have been presented,  and where appropriate,  restated to conform to
the Statement 128 requirements.

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

STOCK SPLITS

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

                                       63
<PAGE>
                               Triad Guaranty Inc.

              Notes to Consolidated Financial Statements(continued)



1. ACCOUNTING POLICIES (CONTINUED)

NEW ACCOUNTING PRONOUNCEMENT

In June 1997, the Financial Accounting Standards board issued Statement No. 130,
"Reporting  Comprehensive Income", which is effective for fiscal years beginning
after December 31, 1997. The Statement  establishes  standards for the reporting
and display of comprehensive income and its components in financial  statements.
The  Company  expects  to adopt the  provisions  of  Statement  130 in the first
quarter of 1998 and will reclassify the financial statements for earlier periods
provided for comparative purposes as required by the Statement.  The application
of the new rules will not have an impact on the Company's  financial position or
results of operations.

2. INVESTMENTS

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

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

At December 31, 1996
Available-for-sale securities:
 Fixed maturity securities:
  Corporate ...............  $ 14,620,814   $  427,065   $200,114   $ 14,847,765
  U.S. Government .........     9,311,329      360,899     16,484      9,655,744
  Mortgage-backed .........    16,545,818       84,823    381,003     16,249,638
  State and municipal .....    45,087,458    1,005,494    132,936     45,960,016
  Public utilities ........       504,334       12,358       --          516,692
                             ------------   ----------   --------   ------------
Total .....................    86,069,753    1,890,639    730,537     87,229,855
  Equity securities .......     6,267,076    1,294,831     67,090      7,494,817
                             ------------   ----------   --------   ------------
Total .....................  $ 92,336,829   $3,185,470   $797,627   $ 94,724,672
                             ============   ==========   ========   ============

                                       64
<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, 1997 are summarized by stated maturity as follows:

                                                  Available-for-Sale
                                                  ------------------
                                                Amortized        Fair
                                                   Cost         Value
                                                   ----         -----
       Maturity:
          One year or less .................   $ 1,171,591   $ 1,181,270
          After one year through five years     22,306,492    23,101,381
          After five years through ten years    18,617,950    19,592,870
          After ten years ..................    48,980,988    51,048,611
          Mortgage-backed securities .......     4,679,115     4,801,355
                                               -----------   -----------
       Total ...............................   $95,756,136   $99,725,487
                                               ===========   ===========

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

                                              Year ended December 31
                                          1997         1996         1995
                                          ----         ----         ----
       Securities available-for-sale:
         Fixed maturity securities:
           Gross realized gains.....   $  35,274    $  28,425    $ 131,968
           Gross realized losses ...    (270,818)     (48,112)    (202,123)
         Equity securities:
           Gross realized gains.....     360,066       86,607      208,061
           Gross realized losses ...    (117,810)    (106,244)      (7,372)
         Other investments:
           Gross realized gains.....      42,520       30,509       96,056
           Gross realized losses ...     (14,902)    (153,570)     (53,598)
                                       ---------    ---------    --------- 
      Net realized gains (losses) ..   $  34,330    $(162,385)   $ 172,992
                                       =========    =========    =========

Net unrealized appreciation  (depreciation) on fixed maturity securities changed
by  $2,809,249,   $(1,228,326),   and   $6,689,443  in  1997,   1996  and  1995,
respectively;  the corresponding  amounts for equity securities were $1,571,472,
$961,475 and $495,328.


                                       65
<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:
                                               Year ended December 31
                                           1997         1996         1995
                                           ----         ----         ----
   Income:
      Fixed maturities ..............   $5,849,084   $5,260,073   $4,677,448
      Preferred stocks ..............      114,610       37,858       11,417
      Common stocks .................      279,640      236,715      234,249
      Cash and short-term investments      212,033      122,461      153,087
                                        ----------   ----------   ----------
                                         6,455,367    5,657,107    5,076,201
   Expenses .........................      221,225      210,435      239,740
                                        ----------   ----------   ----------
   Net investment income ............   $6,234,142   $5,446,672   $4,836,461
                                        ==========   ==========   ==========

At December 31, 1997 and 1996,  investments with an amortized cost of $6,404,051
and $6,214,410,  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:

                                                Year ended December 31
                                            1997         1996          1995
                                            ----         ----          ----
 Balance at beginning of year .......   $10,198,397   $ 7,576,684   $5,870,975
 Acquisition costs deferred:
    Sales compensation ..............     4,039,086     2,766,809    1,995,312
    Underwriting and issue expenses .     2,470,341     3,089,780    1,999,518
                                        -----------   -----------   ----------
                                          6,509,427     5,856,589    3,994,830

 Amortization of acquisition expenses     4,120,469     3,234,876    2,289,121
                                        -----------   -----------   ----------
 Net increase .......................     2,388,958     2,621,713    1,705,709
                                        -----------   -----------   ----------
 Balance at end of year .............   $12,587,355   $10,198,397   $7,576,684
                                        ===========   ===========   ==========


                                       66
<PAGE>
                               Triad Guaranty Inc.

              Notes to Consolidated Financial Statements(continued)



4. RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

Activity  for the reserve for unpaid  losses and loss  adjustment  expenses  for
1997, 1996 and 1995 are summarized as follows:

                                            1997           1996         1995
                                            ----           ----         ----
Reserve for losses and loss
 adjustment expenses at January 1,
 net of reinsurance recoverables
 of $330,733,  $885,852 and 
 $697,393 in 1997,  1996,  and 
 1995,respectively...................    $5,974,664    $ 3,703,251   $2,466,461
Incurred  losses and loss adjustment
 expenses net of reinsurance recoveries
 (principally in respect of default 
 notices occurring in):
     Current year....................     6,022,700      4,673,130    3,190,786
     Redundancy on prior years.......      (845,622)    (1,394,000)    (974,000)
                                         ----------    -----------    ---------
 Total incurred losses and
     loss adjustment expenses........     5,177,078      3,279,130     2,216,786

Loss and loss adjustment expense
 payments net of reinsurance 
 recoveries (principally in respect 
 of default notices occurring in):
     Current year....................       210,493        166,717      215,996
     Prior years.....................     2,032,128        841,000      764,000
                                         ----------    -----------    ---------
Total loss and loss adjustment
  expense payments...................     2,242,621      1,007,717      979,996
                                         ----------    -----------    ---------
Reserve for losses and loss
  adjustment expenses at
  December 31, net of reinsurance
  recoverables of $51,290, $330,733,
  and $885,852 in 1997, 1996 and
  1995, respectively.................    $8,909,121     $ 5,974,664   3,703,251
                                         ==========     ===========   =========

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


                                       67
<PAGE>
                               Triad Guaranty Inc.

              Notes to Consolidated Financial Statements(continued)

5. COMMITMENTS

The Company  leases  certain office  facilities  and equipment  under  operating
leases. Rental expense for all leases was $835,596,  $609,215,  and $512,692 for
1997, 1996 and 1995, respectively.  Future minimum payments under noncancellable
operating leases at December 31, 1997 are as follows:

                    1998.............   $  531,613
                    1999.............      456,945
                    2000.............      346,211
                    2001.............      280,674
                    2002.............      127,192
                                        ----------
                                        $1,742,635
                                        ==========

6. FEDERAL INCOME TAXES

Triad purchases  ten-year  non-interest  bearing United States Mortgage Guaranty
Tax and Loss Bonds in lieu of paying federal income taxes.  At December 31, 1997
and 1996, Triad was obligated to purchase  approximately  $425,000 and $215,000,
respectively, of United States Mortgage Guaranty Tax and Loss Bonds.

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

                                             1997          1996         1995
                                             ----          ----         ----
Income tax computed at statutory rate .. $ 8,835,231   $ 5,683,563  $ 3,817,830
Increase (decrease) in taxes
  resulting from:
   Tax-exempt interest .................  (1,002,062)     (751,407)    (352,486)
   Other ...............................     168,525       109,629        4,677
                                         -----------   -----------  -----------
     Income tax expense ................ $ 8,001,694   $ 5,041,785  $ 3,470,021
                                         ===========   ===========  ===========


                                       68
<PAGE>
                               Triad Guaranty Inc.

              Notes to Consolidated Financial Statements(continued)



6. FEDERAL INCOME TAXES  (CONTINUED)

The tax effects of temporary  differences that give rise to significant portions
of deferred  tax assets and deferred  tax  liabilities  at December 31, 1997 and
1996 are presented below:

                                                    1997          1996
                                                    ----          ----
        Deferred tax liabilities
        Statutory contingency reserve .......   $17,370,996   $10,708,063
        Deferred policy acquisition costs ...     4,405,574     3,518,447
        Prepaid reinsurance premiums ........        53,911       159,792
        Amounts payable to reinsurer ........        11,367       169,947
        Fixed maturities ....................       202,884       168,895
        Unrealized investment gain ..........     2,368,998       823,287
        Other ...............................       418,775       223,621
                                                -----------   -----------
        Total deferred tax liabilities ......    24,832,505    15,772,052

        Deferred tax assets
        United States Mortgage Guaranty
          Tax and Loss Bonds ................    16,293,366     9,994,366
        Unearned premiums ...................       611,467       706,015
        Unearned ceding commission ..........          --          27,798
        Losses and loss adjustment expenses..       250,599       602,109
        Other ...............................       155,199       165,683
                                                -----------   -----------
        Total deferred tax assets ...........    17,310,631    11,495,971
                                                -----------   -----------
        Net deferred tax liability ..........   $ 7,521,874   $ 4,276,081
                                                ===========   ===========


                                       69
<PAGE>
                               Triad Guaranty Inc.

              Notes to Consolidated Financial Statements(continued)



7. INSURANCE IN FORCE, DIVIDEND RESTRICTION AND STATUTORY RESULTS

Approximately  57% of Triad's  net risk in force is  concentrated  in six states
including 14% in Georgia, 13% in Illinois, 10% in Florida, 7% in Virginia, 7% in
California,  and 6% in Texas.  While Triad  continues to  diversify  its risk in
force  geographically,  a prolonged  recession in its high  concentration  areas
could result in higher incurred losses and loss adjustment expenses for Triad.

Insurance  regulations  limit the writing of mortgage  guaranty  insurance to an
aggregate amount of insured risk no greater than twenty-five  times the total of
statutory capital and surplus and the statutory  contingency reserve. The amount
of net risk for  insurance in force at December 31, 1997 and 1996,  as presented
below, was computed by applying the various percentage settlement options to the
insurance in force amounts based on the original insured amount of the loan.
Triad's ratio is as follows:

                                                1997                 1996
                                                ----                 ----
     Net risk...........................  $2,231,572,130       $1,452,824,414
                                          ==============       ==============

     Statutory capital and surplus......  $   60,929,830       $   57,070,475
     Contingency reserve................      54,766,669           35,072,109
                                          --------------       --------------
     Total..............................  $  115,696,499       $   92,142,584
                                          ==============       ==============
     Risk-to-capital ratio..............     19.3 to 1            15.8 to 1
                                          ==============       ==============

Triad and TGAC are each required under the Illinois  Insurance Code (the "Code")
to  maintain  minimum  statutory  capital and  surplus of  $5,000,000.  The Code
permits dividends to be paid only out of earned surplus, and also requires prior
approval of extraordinary  dividends.  An extraordinary dividend is any dividend
or  distribution  of cash or other  property,  the fair  market  value of which,
together with that of other dividends or  distributions  made within a period of
twelve consecutive  months,  exceeds the greater of (a) ten percent of statutory
surplus as regards  policyholders,  or (b) statutory net income for the calendar
year preceding the date of the dividend.  Net income as determined in accordance
with statutory accounting practices was $22,916,215, $13,369,769, and $9,337,430
for the years ended December 31, 1997, 1996 and 1995, respectively.  At December
31, 1997,  the amount of the Company's  equity that can be paid out in dividends
to the  stockholders  is  $2,512,027,  which is the earned surplus of Triad on a
statutory basis.

                                       70
<PAGE>
                               Triad Guaranty Inc.

              Notes to Consolidated Financial Statements(continued)



8. RELATED PARTY TRANSACTIONS

The Company and Triad pay affiliated companies for management,  investment,  and
other services. The total expense incurred for such items was $284,660, $303,555
and $438,200 in 1997, 1996 and 1995, respectively.  Management believes that the
expenses incurred for suchtively. Management believes that the expenses incurred
for such  services  approximate  costs that the Company  would have  incurred if
those services had been provided by unaffiliated third parties.

9. EMPLOYEE BENEFIT PLAN

Substantially  all employees  participate in the Company's 401(k) Profit Sharing
Plan.  Under the plan,  employees elect to defer a portion of their wages,  with
the  Company  matching  deferrals  at the  rate  of 50% of the  first  8% of the
employee's salary deferred.  The Company  contributed  $151,134,  $123,699,  and
$81,675 for the years ended December 31, 1997, 1996 and 1995,  respectively,  to
the plan.

10. REINSURANCE

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

Effective  January 1, 1996,  Triad  eliminated  quota share reof its coverage on
renewal business.  Triad received  approximately  $1,100,000 and  re-established
reserves,  unearned premiums,  and deferred acquisition costs for the previously
ceded business with no effect on income.  Also, effective January 1, 1996, Triad
obtained  $25  million  in  excess  of  loss  reinsurance  designed  to  provide
reinsurance protection in case of catastrophic levels of losses.

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


                                       71
<PAGE>
                               Triad Guaranty Inc.

              Notes to Consolidated Financial Statements(continued)



10. REINSURANCE (CONTINUED)

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

                                               1997        1996
                                               ----        ----

               Earned premiums ceded ...   $1,809,012   $2,319,927
               Losses ceded ............      140,734      165,224
               Earned premiums assumed..       19,804       29,012
               Losses assumed ..........       67,903       99,910

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

11. LONG-TERM STOCK INCENTIVE PLAN

In August 1993 the Company  adopted the 1993 Long-Term Stock Incentive Plan (the
"Plan").  Under the Plan,  certain  directors,  officers and key  employees  are
eligible  to be  granted  various  stock-based  awards.  The number of shares of
common  stock  which  may be  issued  or  sold or for  which  options  or  stock
appreciation  rights  may be granted  under the Plan is  2,100,000  shares.  All
information relating to the number of shares and option price have been adjusted
to reflect the three-for-two stock split in 1996 and the two-for-one stock split
in 1997.


                                       72
<PAGE>
                               Triad Guaranty Inc.

              Notes to Consolidated Financial Statements(continued)



11. LONG-TERM STOCK INCENTIVE PLAN (CONTINUED)

Information concerning the stock option plan is summarized below:

                                                                        Weighted
                                                                         Average
                                           Number of      Option        Exercise
                                            Shares         Price          Price
                                            ------         -----          -----
 1995
   Outstanding, beginning of year ..       570,000      5.33 - 6.93         6.22
   Granted .........................       227,850      4.58 - 8.92         5.84
   Exercised .......................          --         --                  --
   Canceled ........................          --         --                  --
   Outstanding, end of year ........       797,850      4.58 - 8.92         6.13
   Exercisable, end of year ........       638,950      4.58 - 8.92         6.17

1996
   Granted .........................       239,254      8.84 - 15.13       11.47
   Exercised .......................        33,948      5.34 - 6.94         6.06
   Canceled ........................         9,462      5.96 - 11.49        9.56
   Outstanding, end of year ........       993,694      4.58 - 15.13        7.38
   Exercisable, end of year ........       738,229      4.58 - 11.49        6.54

1997
   Granted .........................       184,550      14.81 - 38.27      20.13
   Exercised .......................         2,999      4.58 - 8.92         7.47
   Canceled ........................          --         --                  --
   Outstanding, end of year ........     1,175,245      4.58 - 38.27        9.39
   Exercisable, end of year ........       887,462      4.58 - 15.13        6.91

At December  31,  1997,  1,941,553  shares of the  Company's  common  stock were
reserved and 766,308  shares were  available  for issuance  under the Plan.  The
weighted-average  remaining  contractual  life  of the  options  outstanding  at
December 31, 1997, is 7.1 years.

The options issued under the Plan in 1995,  1996 and 1997 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.


                                       73
<PAGE>
                               Triad Guaranty Inc.

              Notes to Consolidated Financial Statements(continued)



11. LONG-TERM STOCK INCENTIVE PLAN (CONTINUED)

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  1995,  1996,  and 1997 was
estimated at the date of the grant using a  Black-Scholes  option  pricing model
with the following  weighted-average input assumptions:  risk-free interest rate
of 6.4% for 1995,  6.2% for 1996,  and 5.7% for  1997;  dividend  yield of 0.0%;
expected  volatility  of .20 for  1995,  .20 for 1996,  and .29 for 1997;  and a
weighted-average expected life of the option of 7 years.

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

The following table  summarizes the fair value of options granted in 1995, 1996,
and 1997:

                                   Weighted-Average          Weighted-Average
                                    Exercise Price               Fair Value
Type of Option                   1997    1996    1995      1997    1996    1995
------------------------------  ------  ------   -----     -----   -----   -----
Stock Price equals
      Exercise Price........... $18.65  $11.44   $5.65     $5.73   $3.16   $1.59
Stock Price less than
      Exercise Price..........  $20.78  $11.48   $5.96     $3.88   $1.70   $0.90












                                       74
<PAGE>
                               Triad Guaranty Inc.

              Notes to Consolidated Financial Statements(continued)



11. LONG-TERM STOCK INCENTIVE PLAN (CONTINUED)

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):

                                               1997         1996        1995
                                               ----         ----        ----
Net Income - as reported ..............    $  17,242    $  11,197    $  7,759

Net Income - pro forma ................    $  16,937    $  11,054    $  7,713

Earnings per share - as reported
     Basic ............................    $   1.30     $   0.84     $  0.59
     Diluted ..........................    $   1.26     $   0.83     $  0.58

Earnings per share - pro forma
     Basic ............................    $   1.28     $   0.83     $  0.59
     Diluted ..........................    $   1.24     $   0.82     $  0.58

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







                                       75
<PAGE>
                               Triad Guaranty Inc.

              Notes to Consolidated Financial Statements(continued)



12. UNAUDITED QUARTERLY FINANCIAL DATA

The following is a summary of the unaudited  quarterly results of operations for
the years ended December 31, 1997 and 1996 (in thousands except per share data):

                                                  1997 Quarter
                                    First  Second    Third     Fourth      Year
                                    -----  ------    -----     ------      ----
Net premiums written ...........   $7,379   $9,128   $10,611   $11,213   $38,331
Earned premiums ................    7,849    8,985    10,378    11,310    38,522
Net investment income ..........    1,472    1,502     1,730     1,530     6,234
Net losses incurred ............    1,196    1,090     1,520     1,371     5,177
Underwriting and other expenses     3,095    3,530     3,754     3,998    14,377
Net income .....................    3,447    4,033     4,738     5,024    17,242
Basic EPS ......................     .26      .30       .36       .38      1.30
Diluted EPS ....................     .25      .30       .34       .36      1.26

                                                    1996 Quarter
                                    First  Second    Third     Fourth      Year
                                    -----  ------    -----     ------      ----
Net premiums written ...........   $5,073   $5,559   $ 6,684   $ 6,645   $23,961
Earned premiums ................    5,479    5,763     6,513     6,973    24,728
Net investment income ..........    1,279    1,364     1,368     1,435     5,446
Net losses incurred ............      653      614     1,013       999     3,279
Underwriting and other expenses     2,387    2,590     2,658     2,859    10,494
Net income .....................    2,549    2,652     2,889     3,107    11,197
Basic EPS ......................     .19      .20       .22       .23       .84
Diluted EPS ....................     .19      .20       .21       .23       .83

13. SUBSEQUENT EVENT

On January 22, 1998,  the Company  completed a $35 million  private  offering of
notes due January 15, 2028. The notes, which represent unsecured  obligations of
the Company, bear int


                                       76
<PAGE>


                                   Schedule I
       Summary of Investments - Other Than Investments In Related Parties
                               Triad Guaranty Inc.
                                December 31, 1997

                                                               Amount at
                                                              Which Shown
                                        Amortized     Fair    in Balance
Type of Investment                         Cost      Value       Sheet
                                        ---------------------------------
                                              (dollars in thousands)
Fixed maturity securities,
  available-for-sale:
   Bonds:
     U.S. Government obligations .....   $  9,824   $ 10,198   $ 10,198
     Mortgage-backed securities ......      4,679      4,801      4,801
     State and municipal bonds .......     68,789     71,819     71,819
     Corporate bonds .................     12,261     12,697     12,697
     Public utilities ................        203        210        210
                                          -------   --------    -------
   Total .............................     95,756     99,725     99,725
                                          --------   --------   -------

Equity securities, available-for-sale:
   Common stocks:
       Public utilities ..............        627        885        885
       Industrial & miscellaneous ....      5,140      7,597      7,597
   Preferred Stock ...................      2,900      2,984      2,984
                                          -------   --------    -------
    Total ............................      8,667     11,466     11,466
                                          -------   --------    -------
Short-term investments ...............      8,686      8,686      8,686
                                          -------   --------    -------

Total investments other than 
   investments in related parties ....   $113,109   $119,877   $119,877
                                         ========   ========   ========












                                       77

<PAGE>



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


                                                                 December 31
                                                              1997        1996
                                                              ----        ----
                                                          (dollars in thousands)

Assets:
   Investment in subsidiaries .........................     $111,200     $91,136
   Cash and short-term investments ....................          562         534
   Other assets .......................................           56          16
                                                            --------     -------
   Total assets .......................................     $111,818     $91,686
                                                            ========     =======

Liabilities and stockholders' equity:
Liabilities:
   Current taxes payable ..............................     $      3     $     1
   Accrued expenses and other liabilities .............           35           5
                                                            --------     -------
   Total liabilities ..................................           38           6


Stockholders' equity:
   Common stock .......................................          133          66
   Additional paid-in capital .........................       59,369      59,347
   Unrealized gain on invested assets (all from
    subsidiaries) .....................................       4,405        1,569
   Retained earnings ..................................       47,873      30,698
                                                            --------     -------
Total stockholders' equity ............................      111,780      91,680
                                                            --------     -------
Total liabilities and stockholders' equity ............     $111,818     $91,686
                                                            ========     =======





                  See notes to condensed financial statements.


                                       78

<PAGE>




           Schedule Ii - Condensed Financial Information Of Registrant
                         Condensed Statements Of Income
                               Triad Guaranty Inc.
                                (Parent Company)rant



                                                      Year Ended December 31
                                                    1997       1996      1995
                                                    ----       ----      ----
                                                       (dollars in thousands)
Revenues:
   Net investment income .......................  $    22   $     17    $    14
                                                  -------   --------    -------
                                                       22         17         14
                                                  -------   --------    -------
Expenses:
   Operating expenses ..........................        6          6        152
                                                  -------   --------    -------
                                                        6          6        152
                                                  -------   --------    -------
Income (loss) before federal income taxes and
equity in undistributed income of subsidiaries         16         11       (138)

Federal income tax expense .....................        2        151         22
                                                  -------   --------    -------
Income (loss) before equity in undistributed
 income of subsidiaries ........................       14       (140)      (160)
Equity in undistributed income of subsidiaries..   17,228     11,337      7,919
                                                  -------   --------    -------

Net income .....................................  $17,242   $ 11,197    $ 7,759
                                                  =======   ========    =======









                  See notes to condensed financial statements.


                                       79

<PAGE>



           Schedule II - Condensed Financial Information of Registrant
                       Condensed Statements of Cash Flows
                               Triad Guaranty Inc.
                                (Parent Company)

                                                       Year Ended December 31
                                                      1997      1996      1995
                                                      ----      ----      ----
                                                        (dollars in thousands)
Operating Activities
   Net income ..................................... $ 17,242  $ 11,197  $ 7,759

Adjustments to reconcile net income to net cash
 provided by (used in) operating activities:
   Equity in undistributed income of subsidiaries..  (17,228)  (11,337)  (7,919)
   Amortization of deferred compensation ..........      --       --        149
   (Increase) decrease in other assets ............      (40)       20      (14)
   Decrease in deferred income taxes ..............      --        151       21
   Increase (decrease) in current tax payable .....        2      --         (3)
   Increase (decrease) in accrued expenses and
      other liabilities ...........................       30       (15)     (18)
                                                    --------  --------   -------
   Net cash provided by (used in) 
      operating activities.........................        6        16      (25)

Financing Activities
   Proceeds from exercise of stock options...... ..       22       206      --
                                                    --------  --------   -------
Net cash provided by financing activities .........       22       206      --
                                                    --------  --------   -------
Increase (decrease) in cash and 
   short-term investments..........................       28       222      (25)
Cash and short-term investments at
   beginning of year ..............................      534       312       337
                                                    --------   -------   -------
Cash and short-term investments at end of year .... $    562   $   534   $   312
                                                    ========   =======   =======






                  See notes to condensed financial statements.


                                       80

<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

     In January  1998 the Company  completed a $35 million  private  offering of
notes due January 15, 2028. The notes, which represent unsecured  obligations of
the Company, bear interest at a rate of 7.9% per annum and are non-callable.


                                       81

<PAGE>


                            Schedule IV - Reinsurance

                               Triad Guaranty Inc.
                        Mortgage Insurance Premium Earned
                  Years Ended December 31, 1997, 1996 and 1995



                                                                  Percentage of
                               Ceded To      Assumed                  Amount
                      Gross       Other    From Other     Net        Assumed
                     Amount   Companies     Companies    Amount       to Net
                     ------   ---------     ---------    ------       ------
(dollars in thousands)
 
1997............    $40,311      $1,809        $20      $38,522        0.1%
                    =======      ======        ===      =======
1996............    $27,019      $2,320        $29      $24,728        0.1%
                    =======      ======        ===      =======
1995............    $19,699      $4,253        $32      $15,478        0.2%
                    =======      ======        ===      =======





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