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, 2001
[ ] 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. J

The  aggregate  market  value of the voting stock held by  nonaffiliates  of the
registrant  as of February 1, 2002,  computed by reference to the last  reported
price at which the stock was sold on such date, was $285,662,790.

The number of shares of the registrant's common stock, par value $.01 per share,
outstanding as of February 1, 2002, was 13,727,823.

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

   TRIAD GUARANTY INC.
   Proxy Statement for 2002 Annual Meeting               Part III
   of Stockholders
<PAGE>
                                     PART I

ITEM 1.       BUSINESS.
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     Triad Guaranty Inc. is a holding  company which,  through its  wholly-owned
subsidiary,  Triad Guaranty Insurance  Corporation  ("Triad"),  provides private
mortgage insurance ("MI") coverage in the United States to residential  mortgage
lenders and investors. Triad Guaranty Inc. and its subsidiaries are collectively
referred to as the  "Company."  The  "Company"  when used  within this  document
refers  to the  holding  company  and/or  one or  more of its  subsidiaries,  as
appropriate.

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

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

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

     The Company was  incorporated  by CIC in Delaware in August  1993,  for the
purpose of  holding  all the  outstanding  stock of Triad and to  undertake  the
initial public  offering of the Company's  Common Stock,  which was completed in
November 1993.  CIC currently  owns 19.6% and CML owns 18.8% 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.

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TYPES OF MORTGAGE INSURANCE PRODUCTS

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

PRIMARY INSURANCE

     Primary insurance  provides mortgage default protection on individual loans
and covers unpaid loan  principal,  delinquent  interest,  and certain  expenses
associated with the default and subsequent foreclosure (collectively, the "claim
amount").  The claim amount,  to which the  appropriate  coverage  percentage is
applied,  generally ranges from 110% to 115% of the unpaid principal  balance of
the loan. The Company's  obligation to an insured lender with respect to a claim
is  determined  by applying the  appropriate  coverage  percentage  to the claim
amount. Under its master policy, the Company has the option of paying the entire
claim amount and taking title to the  mortgaged  property or paying the coverage
percentage in full satisfaction of its obligations under the insurance  written.
Primary  insurance can be placed on many types of loan instruments and generally
applies to loans secured by mortgages on owner occupied homes.

     The Company offers primary  coverage  generally from 6% to 45% of the claim
amount, with most coverage from 12% to 35% as of December 31, 2001. The coverage
percentage provided by the Company is selected by the insured lender, subject to
the Company's  underwriting  approval,  usually in order to comply with investor
requirements to reduce investor loss exposure on loans they purchase.

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

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

     With respect to its traditional flow mortgage  insurance,  the premiums are
paid by either the borrower  (borrower-paid) or the lender (lender-paid).  Under
the Company's  borrower-paid  plan,  mortgage insurance premiums are paid by the

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mortgage  borrower to the mortgage lender or servicer,  which in turn remits the
premiums  to  the  Company.  Under  the  Company's  lender-paid  plan,  mortgage
insurance  premiums are charged to the mortgage  lender or loan servicer,  which
pays the  premium to the  Company.  The lender  builds  the  mortgage  insurance
premium into the borrower's interest rate. During 2001, approximately 82% of the
Company's  traditional flow insurance was written under its  borrower-paid  plan
and 18% was written under its lender-paid plan.

     Premiums may be remitted to the Company monthly, annually, or in one single
payment.  The monthly  premium  payment plan  involves the payment of one or two
months' premium at the mortgage loan closing.  Thereafter level monthly premiums
are  collected by the loan servicer for monthly  remittance to the Company.  The
Company  also offers a plan under  which the first  monthly  mortgage  insurance
payment is deferred  until the first loan  payment is  remitted to the  Company.
This deferred monthly premium product decreases the amount of cash required from
the  borrower  at closing,  therefore  making home  ownership  more  affordable.
Monthly premium plans represented approximately 93% of insurance written (88% of
traditional flow insurance written) in 2001.

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

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

POOL INSURANCE

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

     The Company  participates  on a limited  basis in modified  pool  insurance
programs on loans  purchased by Freddie Mac.  Modified pool  insurance  provides
coverage for a specified  percentage  of the claim amount for each loan insured,
subject to an overall stop-loss provision applicable to the entire pool of loans
insured. At December 31, 2001, modified pool insurance programs represented less
than 1% of the Company's insurance in force.

STRUCTURED BULK TRANSACTIONS

     The Company  participates in structured bulk transactions.  Structured bulk
transactions  involve  insuring a group of loans  where the  insured  loans have
individual  loan level  coverage and frequently  include an aggregate  stop-loss

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limit  applied  to the  entire  group of  insured  loans.  Insurance  issued  in
structured  bulk  transactions  is generally  either  primary or, where the loan
already has primary coverage, supplemental.

     Structured bulk transactions are generally  initiated by secondary mortgage
market  participants where mortgage  insurance is used as a credit  enhancement.
The Company is provided loan-level  information on the group of loans and, based
on the risk characteristics of the entire group of loans and the requirements of
the secondary mortgage market  participant,  the Company will submit a price for
insuring the entire group of loans.  The Company competes against other mortgage
insurers in this process. During 2001, structured bulk transactions  represented
approximately 36% of the Company's  insurance written for the year. Although the
Company expects to continue to be competitive in the structured bulk transaction
market,  it is difficult to predict the Company's volume of business during 2002
due to the relatively  small number of  transactions  that encompass this market
(as opposed to the  traditional  flow  market),  the  competitive  nature of the
market, and the unknown loan composition of the market.

     The bulk market can be divided into three broad segments: the prime segment
(fully  underwritten  loans, high credit scores, low LTV's), the Alternative - A
segment  (generally high credit score, low LTV loans that have been underwritten
with reduced  documentation),  and the sub-prime segment (higher risk loans with
lower credit  scores).  During 2001,  approximately  80% of the  Company's  bulk
insurance  written  was in the prime  segment and  approximately  20% was in the
Alternative  - A segment.  The Company  does not  participate  in the  sub-prime
segment of the bulk market.

RISK SHARING PRODUCTS

     The Company offers mortgage insurance programs designed to allow lenders to
share in the  risks of  mortgage  insurance.  One such  program  is the  captive
reinsurance  program.  Under the  captive  reinsurance  program,  a  reinsurance
company,  generally an  affiliate  of the lender,  assumes a portion of the risk
associated  with  the  lender's  insured  book of  business  in  exchange  for a
percentage of the premium.  Typically,  the reinsurance  program is an excess of
loss arrangement with a maximum  exposure for the captive  reinsurance  company.
These  captive  reinsurance  programs  may also be in the form of a quota  share
arrangement.  In addition,  the Company has  insurance  in force under  programs
which  increases  a  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.
Approximately  35% of the Company's  insurance in force at December 31, 2001 was
subject to risk sharing programs.

     Regulatory and industry  issues exist  regarding the future of risk-sharing
programs  currently  being  marketed  within the  mortgage  insurance  industry.
Management  is unable to predict  the impact of the  regulatory  issues on these
products.

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<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.  Pursuant
to the Homeowners  Protection Act, most loans made on or after July 29, 1999 are
required to have their private  mortgage  insurance  canceled  automatically  by
lenders  when  the  outstanding  loan  amount  is 78% or less of the  property's
original  purchase  price and certain other  conditions  are met. A borrower may
request that a loan servicer  cancel  insurance on a mortgage loan when the loan
balance is less than 80% of the property's current value, but loan servicers are
generally restricted in their ability to grant such requests by secondary market
requirements as well as by certain other regulatory restrictions.

     Mortgage  insurance  coverage can also be cancelled when an insured loan is
refinanced.  If the Company provides insurance on the refinanced  mortgage,  the
policy  on the  refinanced  home  loan  is  considered  new  insurance  written.
Therefore,  continuation  of the Company's  coverage from a refinanced loan to a
new loan results in both a cancellation of insurance and new insurance  written.
The percentage of insurance written from refinanced loans was 35.8%,  13.2%, and
25.0% in 2001, 2000, and 1999, 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. The
percentage of the  Company's  insurance in force at the end of the previous year
that was  canceled  during 2001,  2000,  and 1999 was 32.4%,  17.4%,  and 22.9%,
respectively.  The high  cancellation  rate in 2001 was a result of low mortgage
rates available  throughout the year. The cancellations  have not had a material
impact on the geographic dispersion of the Company's risk in force.

CUSTOMERS

     Residential  mortgage lenders such as mortgage  bankers,  mortgage brokers,
commercial  banks  and  savings  institutions  are the  principal  customers  of
traditional  flow  insurance  written by the  Company.  At  December  31,  2001,
approximately  67% of the  Company's  traditional  flow risk in force  came from
mortgage bankers,  16% from commercial banks, 13% from mortgage brokers,  and 3%
from  savings  institutions.  At December  31,  2000,  approximately  62% of the
Company's  traditional flow risk in force came from mortgage  bankers,  18% from
mortgage brokers, 16% from commercial banks, and 4% from savings institutions.

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<PAGE>

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

     The master  policy  sets forth the terms and  conditions  of the  Company's
mortgage  insurance  policy.  The master  policy does not obligate the lender to
obtain  insurance  from the  Company,  nor does it obligate the Company to issue
insurance on a particular  loan. The master policy provides that the lender must
submit  individual  loans for insurance to the Company and the loan,  subject to
certain  underwriting  criteria,  must be  approved  by the  Company  to  effect
coverage  (except in the case of delegated  underwriting and when the originator
has the authority to approve  coverage within certain  guidelines).  The Company
had 7,337  master  policyholders  at  December  31,  2001,  compared to 7,190 at
December 31, 2000.

     The Company's ten largest customers were responsible for 42.3%,  30.0%, and
31.0% of  traditional  flow risk in force at December 31, 2001,  2000, and 1999,
respectively.  No  single  customer  of  the  Company  (including  branches  and
affiliates of that  customer)  accounted for revenues  greater than 10% of total
revenues for 2001.  The largest  single  customer of the Company  accounted  for
13.7%,  6.6%, and 9.2% of  traditional  flow risk in force at December 31, 2001,
2000, and 1999, respectively.

     The mortgage lending industry  continues to experience  consolidation and a
greater  percentage  of  origination  volume  is being  generated  by the  large
lenders.  The top 30  lenders  in the  United  States,  as  ranked  by  mortgage
origination  volume,  accounted for  approximately  73% of  originated  mortgage
volume  in  2001  compared  to  66% in  2000.  As a  result  of  this  continued
consolidation,  the number of lenders  making  decisions as to which  insurer to
select for mortgage  insurance is being reduced.  The Company could be adversely
affected if one of its large customers is consolidated  with a lender with which
the  Company  is not  approved  to do  business  or if one of its large  lenders
terminates  its  relationship  with the Company for any  reason.  Currently  the
Company is approved to do business with 19 of the top 30 lenders and  production
from these lenders accounted for approximately 66% of the Company's  traditional
flow insurance written in 2001 compared to 33% in 2000.

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

SALES AND MARKETING

     The Company currently markets its insurance products through a sales force,
including sales  management,  of approximately 45 professionals and an exclusive
commissioned general agency serving a specific geographic market. The Company is
licensed  to do  business  in 46 states and the  District  of  Columbia  and has

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license  applications  pending in three  states.  The Company  will  continue to
evaluate geographic  expansion  opportunities as well as the need for additional
sales representation.

     During 2001, the Company's sales force was divided into five sales regions,
each  with  its own  manager.  These  regional  managers  reported  to a  senior
executive who oversaw all sales  activities for the Company,  including those of
the national account market  representatives.  This reporting  structure allowed
the senior  executive in charge of all sales  activities to focus time on large,
national  accounts  while  remaining  in control of all other sales  activities.
Effective  January 1, 2002, the number of sales regions was reduced from five to
two.

     The  success of the  Company is  dependent  upon the  services of its sales
force and its general  agency.  For 2001,  the  Company's  commissioned  general
agency produced  approximately  9% of the Company's  traditional  flow insurance
written  while  the  salaried  account   executives  and  the  national  account
representatives produced the remainder.

     The marketing  department's mission is to develop and implement programs in
support  of the  Company's  sales  objectives.  A  variety  of tools are used to
achieve this goal including direct mail, public relations,  marketing materials,
internal/external publications,  convention trade shows, and the World Wide Web.
A national advertising and public relations campaign designed to raise corporate
visibility to lenders and investors is also being utilized to achieve this goal.

CONTRACT UNDERWRITING

     The Company provides fee-based contract  underwriting  services that enable
customers to improve the efficiency of their  operations by  outsourcing  all or
part  of  their  mortgage  loan  underwriting.  Contract  underwriting  involves
examining a prospective  borrower's information contained in a lender's mortgage
application file and making a determination whether the borrower is approved for
a mortgage loan subject to the lender's underwriting guidelines. This service is
provided for loans that require mortgage  insurance as well as loans that do not
require mortgage insurance.

     Contract  underwriting  services  have  become  increasingly  important  to
lenders as they seek to reduce fixed costs.  Accordingly,  contract underwriting
significantly  contributes to the Company's mortgage insurance  production.  The
Company  provides  contract  underwriting  services through its own employees as
well as independent  contractors.  If the Company becomes unable to maintain and
provide a sufficient number of qualified underwriters,  the Company's operations
could be materially adversely affected.

COMPETITION AND MARKET SHARE

     The Company and other  private  mortgage  insurers  compete  directly  with
federal and state governmental and quasi-governmental agencies,  principally the
Federal Housing Administration ("FHA"). These agencies sponsor government-backed

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mortgage  insurance  programs which accounted for  approximately 37% of high LTV
loans in 2001 and 41% in 2000. In addition to competition from federal agencies,
the  Company  and  other  private   mortgage   insurers  face  competition  from
state-supported  mortgage  insurance funds, some of which are either independent
agencies or affiliated with state housing agencies. Indirectly, the Company also
competes with certain mortgage  lenders which forego private mortgage  insurance
and  self-insure  against the risk of loss from  defaults on all or a portion of
their low down payment mortgage loans.

     Fannie Mae and Freddie Mac have the ability to modify the required level of
mortgage  insurance  coverage which should be maintained by lenders on loans for
resale to the secondary  market. If Fannie Mae or Freddie Mac reduced the amount
of private  mortgage  insurance  coverage  required or adopted private  mortgage
insurance  substitutes,  there  could  be an  adverse  affect  on the  Company's
financial condition and results of operations.

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

     The private mortgage  insurance  industry consists of eight active mortgage
insurance  companies including Triad,  Mortgage Guaranty Insurance  Corporation,
General Electric Mortgage Insurance Corporation, PMI Mortgage Insurance Co., CMG
Mortgage Insurance Co., United Guaranty Residential Insurance Company,  Republic
Mortgage  Insurance  Company,  and Radian  Guaranty  Inc.  Triad is the  seventh
largest private  mortgage  insurer based on 2001 market share and,  according to
industry  data,  had a 3.6% share of net new primary  insurance  written in 2001
compared to 2.7% in 2000.  The Company's  market share for 2001 included net new
primary insurance written related to bulk transactions. The Company wrote no new
insurance in 2000 attributable to bulk transactions.

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

UNDERWRITING PRACTICES

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

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<PAGE>

UNDERWRITING PERSONNEL

     The  Company's  Senior Vice  President of Risk  Management  and Senior Vice
President of  Underwriting  have been in their positions since shortly after the
Company  was  founded and report  directly  to the  President.  In addition to a
centralized  underwriting  department  in  the  home  office,  the  Senior  Vice
President of Underwriting is responsible for the Company's  regional  offices in
Arizona, California, Colorado, Georgia, Illinois, Ohio, Pennsylvania, and Texas.
The Senior Vice President of Risk  Management is  responsible  for assessing the
risk  factors  used by the Company in its  underwriting  procedures  and for the
quality control function.

     The Company employed an underwriting  staff of 44 at December 31, 2001. The
Company's  field  underwriters  and  underwriting  managers are limited in their
authority to approve  programs for certain  mortgage loans. The authority levels
are  tied  to  underwriting  position,  knowledge,  and  experience  and  relate
primarily to loan amounts and property  type.  All loans  insured by the Company
are subject to quality control reviews.

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

RISK MANAGEMENT APPROACH

     The Company evaluates risk based on historical  performance of risk factors
and utilizes  automated  underwriting  systems in the risk selection  process to
assist  the  underwriter  with  decision  making.  This  process  evaluates  the
following categories of risk:

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

     o    PURPOSE  AND  TYPE  OF  LOAN.   The  Company   analyzes  five  general
          characteristics  of a loan to  evaluate  its  level of  risk:  (i) LTV
          ratio;  (ii) purpose of the loan; (iii) type of loan instrument;  (iv)
          level of  documentation;  and,  (v) type of property.  Generally,  the
          Company  seeks loan  types  with  proven  track  records  for which an
          assessment  of risk  can be  readily  made  and the  premium  received
          sufficiently  offsets that risk.  Loan types that do not have a proven
          track  record are charged a higher  premium,  as are other loans which
          have  been  shown to  carry  higher  risks,  such as  adjustable  rate
          mortgages  ("ARMs")  and  loans  having  higher  LTV  ratios.  Certain
          categories  of loans are not actively  pursued by the Company  because
          such  loans  are  deemed  to have a  disproportionate  amount of risk,
          including scheduled negatively amortizing ARMs, investment properties,
          and subprime loans.

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

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

UNDERWRITING PROCESS FOR TRADITIONAL FLOW BUSINESS

     The Company accepts  applications for insurance under three basic programs:
a  traditional   fully-documented   program,   a  credit-score   driven  reduced
documentation  program,  and a delegated  underwriting  program  which  allows a
lender's underwriters to commit insurance to a loan based on strict, agreed upon
underwriting guidelines.  The Company also accepts loans approved through Feddie
Mac's or Fannie Mae's automated underwriting systems.

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

                                       11
<PAGE>

     Subject to the Company's  underwriting  guidelines  and exception  approval
procedures,  the Company  expects its  internal  and  contract  underwriters  to
utilize their  experience and business  judgement in evaluating each loan on its
own merits.  Accordingly,  the Company's  underwriting  staff has  discretionary
authority  to insure  loans which  deviate in certain  minor  respects  from the
Company's  underwriting  guidelines.  More significant exceptions are subject to
management approval. In all such cases, compensating factors must be identified.
The  predominant  reason  for  such  deviations  involves  instances  where  the
borrower's  debt-to-income ratio exceeds the Company's guidelines. To compensate
for exceptions,  the Company's underwriters give favorable consideration to such
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 1.8% at December 31, 2001 and 2.4% at December 31,
2000.

     The  Company's  Stick With Triad  program  featuring  the Slam Dunk Loan SM
approval  process allows lenders to submit insurance  applications  with reduced
documentation. Under this program, Triad issues a certificate of insurance based
on the  borrower's  FICO credit score or the approval of the loan through Fannie
Mae's or Freddie  Mac's  automated  underwriting  system.  The Company  issues a
certificate of insurance  without the standard  underwriting  process if certain
program parameters are met and the borrower has a credit score above established
thresholds. Documentation submission requirements for non-automated underwritten
loans  vary  depending  on the  borrower's  credit  score.  The Stick With Triad
program  represented   approximately  45%  of  the  Company's  traditional  flow
commitments  in 2001 and 65% in 2000.  The  decline  is  primarily  a result  of
increased  participation in the Company's delegated  underwriting  program.  The
Company  randomly and through adverse  selection  audits lenders' files on loans
submitted under the Stick With Triad program.

     The Company's delegated  underwriting program, in addition to the Company's
risk  management  strategies,   utilizes  extensive  quality  control  practices
including reunderwriting, reappraisal, and similar procedures following issuance
of the policy.  Standards for type of loan, property type, and credit history of
the borrower are established  consistent  with the Company's risk strategy.  The
program  has  allowed  the  Company  to serve a greater  number  of the  larger,
well-established  mortgage  originators.  The Company's  delegated  underwriting
program  accounted  for 49% of  traditional  flow  commitments  received in 2001
compared  to 23% in 2000 and 17% in 1999.  Many  lenders who are not part of the
delegated  underwriting program participate in the Stick With Triad underwriting
program.  The  performance  of loans insured  under the  delegated  underwriting
program has been comparable to the Company's non-delegated business.

                                       12
<PAGE>

     The Company utilizes its underwriting  staff as well as contract  personnel
to  provide  contract  underwriting  services  to  customers.  For a fee,  Triad
underwrites applications for secondary market compliance, while at the same time
assessing the application for mortgage  insurance,  if applicable.  In addition,
the   Company   offers   Fannie   Mae's   Desktop   Originator(R)   and  Desktop
Underwriter(R), 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(R). These products, which are designed to streamline and reduce costs
in the mortgage  origination  process,  supply the Company's customers with fast
and accurate service regarding loan compliance and Fannie Mae's or Freddie Mac's
decision for loan purchase or securitization.

UNDERWRITING STRUCTURED BULK TRANSACTIONS

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

OTHER RISK MANAGEMENT

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

TECHNOLOGY

     Triad's  TAXI  -  Transactions  Across  the  Internet  -  allows  qualified
customers to view,  update,  and process  certain  data within their  borrowers'

                                       13
<PAGE>

private mortgage insurance records. TAXI is an internet-based service.  Business
areas  that  can  be  addressed  through  TAXI  include  applying  for  mortgage
insurance,  contract underwriting through eU Xpress, loan servicing,  claims and
default processing, and risk-sharing performance.

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

FINANCIAL STRENGTH RATING

     Credit ratings  generally are considered an important element in a mortgage
insurer's ability to compete for new business,  indicating the insurer's present
financial strength and capacity to pay future claims.  Certain national mortgage
lenders and a large  segment of the mortgage  securitization  market,  including
Fannie Mae and Freddie Mac,  generally  will not purchase  high LTV mortgages or
mortgage-backed securities unless the insurer issuing private mortgage insurance
coverage has a financial  strength rating of at least "AA-" by either Standard &
Poor's  Ratings  Services  ("S&P") or Fitch Ratings  ("Fitch") or a rating of at
least "Aa3" from Moody's Investors Service  ("Moody's").  Fannie Mae and Freddie
Mac require  mortgage  guaranty  insurers  to  maintain  two ratings of "AA-" or
better. Triad is rated "AA" by both S&P and Fitch and "Aa3" by Moody's.  Private
mortgage insurers are not rated by any other  independent  nationally-recognized
insurance  industry  rating  organization  or  agency  (such  as the  A.M.  Best
Company).

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

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

                                       14
<PAGE>

     Rating  agencies issue  financial  strength  ratings based, in part, upon a
company's performance  sensitivity to various economic depression scenarios.  In
determining  capital levels required to maintain a company's rating,  the rating
agencies  allow  the use of  different  forms  of  capital  including  statutory
capital,  reinsurance  and debt.  In January 1998,  the Company  completed a $35
million  private  offering of notes due January 15, 2028.  The notes,  which are
rated "A" by S&P and "A+" by Fitch,  were issued to provide  additional  capital
considered in the rating agency's depression models.

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

REINSURANCE

     The use of reinsurance as a source of capital and as a risk management tool
is well established within the mortgage insurance industry. Reinsurance does not
legally  discharge an insurer from its primary  liability for the full amount of
the risk it insures,  although it does make the reinsurer  liable to the primary
insurer. There can be no assurance that the Company's reinsurers will be able to
meet their obligations under the reinsurance agreements.

RISK-SHARING ARRANGEMENTS

     Triad's product  offerings  include captive mortgage  reinsurance  programs
whereby an  affiliate  of a lender  reinsures a portion of the  insured  risk on
loans  originated  or  purchased  by  the  lender.  Triad  entered  the  captive
reinsurance   market  in  1999  with  the  LEAPSM   (Lower   Entry-   Additional
Profitability)  program.  The  LEAP  program  is  an  excess  of  loss  mortgage
reinsurance  program that provides  lenders an  opportunity to share in the risk
and return of mortgage  insurance  on loans the lender  originates  or services.
Under  LEAP,  the lender  may elect a risk band with a  flexible  entry and exit
point.  LEAP  also  permits  cessions  greater  than the 25%  industry  standard
arrangements  that existed  prior to this  program.  Ceded premium under captive
reinsurance  agreements  represented  6.6% of direct  written  premiums  in 2001
compared to 2.1% in 2000.

     In November 1999, Triad formed Triad Re Insurance  Corporation ("Triad Re")
as a wholly-owned  sponsored captive  reinsurance  company domiciled in Vermont.
Triad Re was  formed to allow  small and  mid-sized  lenders to  participate  in
captive reinsurance arrangements with reduced up-front capital costs and without
co-mingling its risk with other lenders.  Triad Re was initially  capitalized in
February 2000, with regulatory capital of $1.0 million. As of December 31, 2001,
approximately  $8 million of Triad's  risk in force had been ceded to  sponsored
captive reinsurer cells under participating agreements with Triad Re.

                                       15
<PAGE>

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

     The Company also has in place  reinsurance  agreements with  non-affiliated
reinsurers in association with certain of the Company's non-captive risk sharing
programs.  The reinsurance  agreements are excess of loss contracts  whereby the
reinsurer  will  indemnify the Company with respect to losses covered as defined
by the reinsurance  agreements.  In 2001,  2.1% of the Company's  direct written
premium was ceded to  reinsurers  under these  agreements as compared to 1.9% in
2000.

     At the end of 2001,  34.6% of Triad's  insurance  in force had been insured
under some type of  risk-sharing  arrangement as compared to 24.8% at the end of
2000.  Risk-sharing   arrangements  represented  57.9%  of  Triad's  traditional
insurance written in 2001 as compared to 42.9% in 2000.

OTHER REINSURANCE

     Certain  premiums and losses are assumed  from and ceded to  non-affiliated
insurance companies under various quota share reinsurance agreements. The ceding
agreement  principally  provides  the Company with  increased  capacity to write
business and achieve a more favorable  geographic  dispersion of risk. Less than
0.1% of Triad's risk in force at December 31, 2001, and direct premiums  written
in 2001 were ceded in quota share  arrangements  to  non-affiliated  reinsurance
companies.

     Pursuant to deeper coverage  requirements imposed by Fannie Mae and Freddie
Mac, certain loans eligible for sale to such agencies with a loan-to-value ratio
over 90% require  insurance with a coverage  percentage of 30% or more.  Certain
states  limit the amount of risk a mortgage  insurer may retain with  respect to
coverage of an insured loan to 25% of the claim  amount,  and, as a result,  the
deeper  coverage  portion  of such  insurance  must be  reinsured.  To  minimize
reliance  on  third-party  reinsurers  and to permit  the  Company to retain the
premiums and related risk on deeper  coverage  business,  Triad  reinsures  this
deeper  coverage  business  with its  wholly-owned  subsidiary,  Triad  Guaranty
Assurance  Corporation  ("TGAC").  As of  December  31,  2001,  TGAC had assumed
approximately $67.4 million in risk from Triad.

     The Company  continues to maintain excess of loss reinsurance  arrangements
designed to protect the Company in the event of a catastrophic  level of losses.
In the first  quarter of 2001,  the Company  voluntarily  cancelled an excess of
loss reinsurance  contract maintained with a non-affiliated  reinsurer.  Also in

                                       16
<PAGE>

the first  quarter of 2001,  the Company  entered  into a new  agreement  with a
third-party reinsurer to provide excess of loss reinsurance coverage under terms
similar to the cancelled agreement. The Company currently maintains $125 million
of  excess  of loss  reinsurance  through  non-affiliated  reinsurers  that have
financial strength ratings of "AA" or better from Standard & Poor's.

DEFAULTS AND CLAIMS

DEFAULTS

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

     The following  table shows default  statistics as of December 31, 2001, and
the preceding four year ends:

<TABLE>
<CAPTION>
                               DEFAULT STATISTICS
                                                                             December 31
                                                                             -----------
                                                            2001       2000       1999       1998       1997
                                                            ----       ----       ----       ----       ----
<S>                                                      <C>        <C>        <C>         <C>        <C>
Number of insured loans in force........................ 159,400    123,046    108,623     97,222     82,682
Number of loans in default..............................   1,420        740        690        518        388
Percentage of loans in default (default rate)...........   0.89%      0.60%      0.64%      0.53%      0.47%
Dollar amount of insured loans in default (000's).......$164,283    $77,423    $67,802    $50,882    $37,828
Dollar amount of direct risk (gross of reinsurance)
with respect to insured loans in default (000's)........ $43,678    $20,743    $18,108    $13,216     $9,249
Reserve per delinquent loan............................. $12,669    $20,253    $21,378    $23,442    $23,094
</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

                                       17
<PAGE>

temporary  financial  setbacks.  The likelihood  that a claim will result from a
default,  and the amount of such  claim,  principally  depend on the  borrower's
equity at the time of default and the  borrower's  (or the lender's)  ability to
sell the home for an amount  sufficient  to satisfy  all  amounts  due under the
mortgage,  as well as the effectiveness of loss mitigation efforts.  The ability
to mitigate a claim is affected by the local  housing  market,  interest  rates,
employment  growth,  the  housing  supply,  and the  borrower's  desire to avoid
foreclosure.  During the default  period,  the Company works with the insured as
well as the  borrower  in an  effort to  either  reinstate  the loan or sell the
property for an amount which results in a reduced claim prior to foreclosure.

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

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

     Under the terms of the  master  policy,  the lender is  required  to file a
claim with the  Company no later  than 60 days  after it has  acquired  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.  Depending on the applicable state foreclosure law, an average of about
12 months  elapses  from  date of  default  to  payment  of claim on an  uncured
default.  The Company's  experience  indicates that the claim amount on a policy
generally  ranges  from  110%  to  115%  of the  unpaid  principal  amount  of a
foreclosed loan.

     Within 60 days after the claim has been  filed,  the Company has the option
of either (i) paying the coverage  percentage  specified on the  certificate  of
insurance (usually 12% to 35% of the claim), with the insured retaining title to

                                       18
<PAGE>

the underlying property and receiving all proceeds from the eventual sale of the
property,  or (ii) paying 100% of the claim  amount in exchange for the lender's
conveyance of good and marketable title to the property to the Company, with the
Company selling the property for its own account.  The Company chooses the claim
settlement  option believed to cost the least.  In general,  the Company settles
claims by paying the coverage  percentage of the claim  amount.  At December 31,
2001,  the Company held two properties  with a combined net realizable  value of
$162,331 which were acquired by electing to pay 100% of the claim amount.

LOSS MITIGATION

     Once a default  notice is  received,  the Company  attempts to mitigate its
loss.  Through proactive  intervention  with insured lenders and borrowers,  the
Company has been  successful  in reducing  the number and severity of its claims
for loss. Loss mitigation  techniques include  pre-foreclosure  sales,  property
sales  after  foreclosure,  advances  to assist  distressed  borrowers  who have
suffered a  temporary  economic  setback,  and the use of  repayment  schedules,
refinances,  loan modifications,  forbearance  agreements,  and deeds-in-lieu of
foreclosure.  Such  mitigation  efforts  typically  result in a  savings  to the
Company over the percentage  coverage  amount  payable under the  certificate of
insurance.  Through loss mitigation efforts,  the Company paid out approximately
58% of its potential  exposure on claims in 2001 compared to 68% in 2000 and 66%
in 1999.

LOSS RESERVES

     The Company  establishes  reserves to provide  for the  estimated  costs of
settling  claims on loans  reported in default and estimates of loans in default
which have not been reported. Consistent with industry accounting practices, the
Company does not  establish  loss  reserves for future  claims on insured  loans
currently not in default.  Although the Company  believes  that overall  reserve
levels at December 31, 2001, are adequate to meet future obligations, due to the
inherent  uncertainty  of the reserving  process there can be no assurance  that
reserves will prove to be adequate to cover ultimate loss developments.

     In  determining  the  liability for unpaid  losses  related to  outstanding
defaults,  the Company  establishes loss reserves on a case-by-case  basis using
estimated  claim rates  (frequency)  and claim  amounts  (severity)  to estimate
ultimate losses.  The Company relies on historical  experience in the estimation
of claim rates and claim amounts.  The Company also establishes reserves for the
estimated costs of settling claims ("loss adjustment  expenses" or "LAE"), which
include,   but  are  not  limited  to,  legal  fees  and  general   expenses  of
administering the claims settlement process,  and for losses and loss adjustment
expenses  incurred  from  defaults  which  have  occurred  but have not yet been
reported to the insurer ("Incurred But Not Reported" or "IBNR").

     Management  periodically  reviews  the  loss  reserve  process  in order to
improve  its  estimate  of ultimate  losses.  During the third  quarter of 2001,
management  refined its  methodology  for setting loss reserves for  outstanding

                                       19
<PAGE>

defaults and for IBNR defaults.  The enhancements  made to the reserving process
incorporate  a more  multi-dimensional  analytical  form,  which gives effect to
current economic conditions and profiles delinquencies by such factors as policy
year,  geography,  and  chronic  late  payment  characteristics  in  addition to
profiling them by age.

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











                                       20
<PAGE>
     The following table represents a reconciliation of the beginning and ending
loss reserves (net of reinsurance) for the periods indicated:
<TABLE>
<CAPTION>
          Reconciliation of Losses and Loss Adjustment Expense Reserves
                                                                                  Year Ended December 31
                                                                                  ----------------------
                                                                                      (in thousands)
                                                                   2001        2000         1999        1998        1997
                                                                   ----        ----         ----        ----        ----
<S>                                                              <C>         <C>          <C>         <C>          <C>
Reserve for losses and LAE, net of related reinsurance
recoverables, at beginning of year...........................    $14,976     $14,723      $12,116     $ 8,909     $ 5,974

Add losses and LAE incurred in respect of defaults occurring in:

     Current year (1)........................................     14,219      11,229        9,322       7,953       6,023
     Prior years (1) (2).....................................     (5,200)     (3,642)      (2,211)       (944)       (846)
                                                                 -------     -------      -------     -------      ------
Total incurred losses and LAE................................      9,019       7,587        7,111       7,009       5,177

Deduct losses and LAE paid in respect of defaults occurring in:

     Current year............................................        286         574          236         267         210
     Prior years.............................................      5,727       6,760        4,268       3,535       2,032
                                                                 -------     -------      -------     -------      ------
Total payments...............................................      6,013       7,334        4,504       3,802       2,242
Reserve for losses and LAE, net of related reinsurance
recoverables, at end of year ................................     17,982      14,976       14,723      12,116       8,909

Reinsurance recoverables on unpaid losses and LAE, at
the end of year .............................................          9          11           28          27          51
                                                                 -------     -------      -------     -------      ------
Reserve for unpaid losses and LAE, before deduction
of reinsurance recoverables on unpaid losses, at
end of year..................................................    $17,991     $14,987      $14,751     $12,143      $8,960
                                                                 =======     =======      =======     =======      ======
---------------------
<FN>

(1) Includes  loss and LAE  reserves  relating to loans which are in default but
for which  default  notices have not been  received.
(2) Indicates a cumulative  redundancy in loss reserves at the beginning of each
period. Redundancies result from overestimating ultimate claim amounts.
</FN>
</TABLE>

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

                                       21
<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.









                                       22
<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, 2001 and 2000:

                              Direct Risk in Force

                                                               December 31
                                                               -----------

Product Type:                                             2001            2000
                                                          ----            ----

Primary................................................  100.0%          100.0%
Pool...................................................    0.0%            0.0%

Total..................................................  100.0%          100.0%
                                                         ======          ======

 Direct Primary Risk in Force

                                                               December 31
                                                               -----------
                                                           2001           2000
                                                           ----           ----
Direct Risk in Force (dollars in millions).............  $4,582          $3,760
Lender Concentration (excludes bulk):
Top 10 lenders (by original applicant).................   42.3%           30.0%
LTV:
95.01% and above.......................................    2.3%            2.5%
90.01% to 95.00%.......................................   41.4%           50.7%
90.00% and below.......................................   56.3%           46.8%
                                                         ------          ------
Total..................................................  100.0%          100.0%
                                                         ======          ======
Loan Type:
Fixed..................................................   86.2%           94.9%
ARM (positive amortization) (1)........................   13.8%            5.1%
ARM (potential negative amortization) (2)..............    0.0%            0.0%
ARM (scheduled negative amortization) (2)..............    0.0%            0.0%
Other..................................................    0.0%            0.0%
                                                         ------          ------
Total..................................................  100.0%          100.0%
                                                         ======          ======
Mortgage Term:
15 years and under.....................................    3.8%            3.2%
Over 15 years..........................................   96.2%           96.8%
                                                         ------          ------
Total..................................................  100.0%          100.0%
                                                         ======          ======
Property Type:
Noncondominium (principally single-family detached)....   95.2%           96.2%
Condominium............................................    4.8%            3.8%
                                                         ------          ------
Total..................................................  100.0%          100.0%
                                                         ======          ======
Occupancy Status:
Primary residence......................................   95.9%           98.1%
Second home............................................    1.7%            1.2%
Nonowner occupied......................................    2.4%            0.7%
                                                         ------          ------
Total..................................................  100.0%          100.0%
                                                         ======          ======
Mortgage Amount:
$200,000 or less.......................................   70.8%           82.3%
Over $200,000..........................................   29.2%           17.7%
                                                         ------          ------
Total..................................................  100.0%          100.0%
                                                         ======          ======
------------------
(1) Refers to loans where payment  adjustments are the same as mortgage interest
rate adjustments.
(2) Scheduled negative amortization is defined by the Company as the increase in
loan  balance  that will  occur if  interest  rates do not  change.  Loans  with
potential  negative  amortization  will not have increasing  principal  balances
unless interest rates increase.

                                       23
<PAGE>

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

     Approximately  2.3% of the  Company's  risk in force is  comprised of loans
with an LTV greater than 95%. These high LTV loans are offered  primarily to low
and moderate  income  borrowers.  The Company  believes  that these  "affordable
housing"  loans have higher risks than its other insured  business and has often
attracted  borrowers with weak credit histories,  generally  resulting in higher
loss ratios.  In keeping  with the  Company's  established  risk  strategy,  the
Company has not aggressively solicited this segment of the industry. The Company
does not routinely delegate the underwriting of high LTV loans.

     In  2000  the  State  of  Illinois  Insurance  Department,  as  well as the
insurance departments of several other states, began to permit mortgage insurers
to  write  coverage  on  loans  in  excess  of 97% up to 100%  and,  in  certain
instances,  up  to  103%.  This  determination  was  made  in  response  to  the
development by certain entities in the mortgage securitization market, including
Fannie Mae and Freddie  Mac, of programs  that  allowed  LTV's in excess of 97%.
These programs are designed to accommodate the credit-worthy  borrower who lacks
the ability or interest to provide a down payment on a home. The Company accepts
loans with LTV's greater than 97% on a limited basis.

     The Company actively pursues only positively  amortizing ARMs with industry
standard  caps.  Payments  on  these  loans  adjust  fully  with  interest  rate
adjustments.  To date,  the  performance  of the  Company's  ARM  loans has been
consistent  with that of its fixed rate  portfolio.  However,  since  historical
claim  frequency data on ARMs has not yet been tested during a prolonged  period
of economic  stress,  there can be no assurance that claim frequency on ARMs may
not eventually be higher,  particularly during a period of rising interest rates
combined with decreasing housing prices. In its normal course of operations, the
Company's  existing  underwriting  policy does not permit  coverage of ARMs with
"scheduled" negative  amortization.  ARMs with "potential" negative amortization
characteristics  due to possible  interest rate  increases and borrower  payment
option changes are accepted under limited conditions for approved lenders.

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

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

                                     24
<PAGE>

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

     Loans on primary  residences  that were owner  occupied at the time of loan
origination  constituted  approximately  96% of the  Company's  risk in force at
December 31, 2001. Because management  believes that loans on non-owner occupied
properties  represent a  substantially  higher risk of claim  incidence  and are
subject to greater value declines than loans on primary homes,  the Company does
not actively pursue these loans.

     The  Company's  book of  business  is less  mature than that of the private
mortgage  insurance industry as a whole, with the Company's direct risk in force
having a weighted  average  life of 2.6 years at December 31, 2001 and 2.8 years
at December 31, 2000,  compared to an estimated industry average of 3.1 years at
December 31, 2001.










                                       25
<PAGE>


     The  following  table  shows the  percentage  of direct risk in force as of
December 31, 2001,  for policies  written from 1988 through 2001, 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, 2001,  for the policies  written  during the years  indicated  and
excludes    the    effects   of    reinsurance:

  Certificate                            Percent    Cumulative Ratio of Losses
     Year        Direct Risk in Force   of Total    Paid to Premiums Written(1)
  -----------    --------------------   --------    ---------------------------
                   (in millions)
     1988             $ 0.5               0.0%                 15.3%

     1989               0.6               0.0                  24.0

     1990               1.3               0.0                  18.7

     1991               5.4               0.1                  11.9

     1992              16.7               0.4                   8.5

     1993              53.3               1.2                   5.2

     1994              49.0               1.1                   9.8

     1995              83.9               1.8                  11.7

     1996             134.5               2.9                  11.7

     1997             272.6               5.9                   7.2

     1998             666.9              14.6                   3.3

     1999             621.6              13.6                   2.4

     2000             649.2              14.2                   2.5

     2001           2,026.0              44.2                   0.0
                  ---------             -----

     Total        $ 4,581.5             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.

                                       26
<PAGE>

GEOGRAPHIC DISPERSION

     The following  tables reflect the percentage of direct risk in force on the
Company's  book of business (by location of property) for the top ten states and
the top ten metropolitan statistical areas ("MSAs") as of December 31, 2001:



                 Top Ten States                       Top Ten MSAs
         -----------------------------   --------------------------------------
                           December 31                              December 31
                              2001                                      2001
                           -----------                              -----------

         California           14.9%      Chicago, IL                     6.1%

         Florida               7.5       Los Angeles/Long Beach, CA      3.3

         Texas                 7.3       Atlanta, GA                     3.2

         Illinois              6.7       Phoenix/Mesa, AZ                2.4

         Georgia               6.2       Houston, TX                     1.9

         North Carolina        5.7       Riverside/San Bernardino, CA    1.5

         Pennsylvania          4.0       Philadelphia, PA                1.5

         Colorado              3.6       Denver, CO                      1.4

         Arizona               3.4       Dallas, TX                      1.4

         Virginia              3.3       Oakland, CA                     1.4
                              ----                                      ----
         Total               62.6%       Total                          24.1%
                             =====                                      =====


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

INVESTMENT PORTFOLIO

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

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

                                       27
<PAGE>
investment  portfolio  (together  with cash  assets) to  consist  of cash,  cash
equivalents,  and securities  which, at the date of purchase,  were rated one of
the two highest investment grades by a nationally recognized rating agency.

     At December 31, 2001, the Company's total  investment  portfolio had a fair
market  value of $277.2  million and did not include any real estate or mortgage
loans. The investment portfolio was composed of approximately 89% fixed maturity
securities, 4% equities, and 7% short-term investments.

     Liquidity  is  sought  through  cash  equivalent  investments  and  through
diversification  and  investment  in  publicly  traded  securities.  The Company
attempts  to  maintain a level of  liquidity  and a duration  in its  investment
portfolio  consistent  with  its  business  outlook  and  the  expected  timing,
direction,  and degree of changes in interest rates. As of December 31, 2001, no
investment  in  the  securities  of any  single  issuer  (other  than  the  U.S.
government and its agencies) exceeded 2% of the Company's investment portfolio.

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

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

<TABLE>
<CAPTION>

                          Investment Portfolio Results

                                                    2001            2000           1999             1998           1997
                                                    ----            ----           ----             ----           ----
<S>                 <C>                     <C>             <C>            <C>              <C>            <C>
Average investments (1)................     $252,508,660    $212,029,383   $183,987,661     $151,711,923   $103,804,750

Pre-tax net investment income..........     $ 14,764,536    $ 12,645,321   $ 10,545,663     $  9,289,026   $  6,234,142

Effective pre-tax yield (1)............             5.8%            6.0%           5.7%             6.1%           6.0%

Tax-equivalent yield (2)...............             8.0%            8.2%           7.7%             7.9%           8.0%

Pre-tax realized gain on sale of
         investments...................     $    296,974    $    285,849   $  1,153,191     $    880,502   $     34,330
---------------------
<FN>
(1)  Based on historical cost adjusted for amortization and accretion of premium and discount.
(2)  Based on book value and the Company's marginal tax rate.
</FN>
</TABLE>

                                       28

<PAGE>
     The diversification of the Company's  investment  portfolio at December 31,
2001,  is  shown  in  the  table  below:
<TABLE>
<CAPTION>

                      Investment Portfolio Diversification

                                                                     December 31, 2001
                                                       -----------------------------------------------

                                                       Amortized Cost        Fair Value    Percent (1)
                                                       --------------        ----------    -------
<S>                                                      <C>               <C>              <C>
 Available-for-sale securities:
    Fixed maturity securities:

       U. S. government obligations.................     $ 12,164,542      $ 12,645,657       4.6%

       Mortgage-backed bonds........................          253,277           277,834       0.1

       State and municipal bonds....................      177,780,714       178,047,417      64.2

       Corporate bonds..............................       55,463,919        55,014,611      19.8
                                                         ------------      ------------
           Total fixed maturities...................      245,662,452       245,985,519

     Equity securities..............................       11,308,230        12,476,030       4.5
                                                         ------------      ------------
           Total available-for-sale securities......      256,970,682       258,461,549

     Short-term investments.........................       18,738,590        18,738,590       6.8
                                                         ------------      ------------     -----
                                                         $275,709,272      $277,200,139     100.0%
                                                         ============      ============     =====
---------------------
<FN>
(1)  Percentage of fair value.
</FN>
</TABLE>

     The following table shows the scheduled maturities at December 31, 2001, of
the fixed maturity securities held in the Company's investment portfolio:

                     Investment Portfolio Scheduled Maturity

                                                       December 31, 2001
                                                   --------------------------
                                                    Fair Value        Percent
                                                    ----------        -------

 One year or less................................   $1,968,163          0.8%

 After one year through five years...............   23,344,601          9.5

 After five years through ten years..............   38,171,721         15.5

 After ten years though twenty years.............  120,818,081         49.1

 After twenty years..............................   61,405,119         25.0

 Mortgage-backed securities (1)..................      277,834          0.1
                                                  ------------        -----
           Total................................. $245,985,519        100.0%
                                                  ============        =====
  ---------------------
(1)Substantially  all of these  securities  are  guaranteed  by U.S.  Government
Agencies.

                                       29
<PAGE>
     The following table shows the ratings of the Company's investment portfolio
as of December 31, 2001 and December 31, 2000:
<TABLE>
<CAPTION>
                         Investment Portfolio by Rating

                                                            December 31,  2001              December 31, 2000
                                                         ------------------------      --------------------------
 Rating(1)                                               Fair Value       Percent       Fair Value        Percent
                                                         ----------       -------       ----------        -------
<S>                                                     <C>               <C>          <C>                <C>
 Fixed maturities:
          U.S. Treasury and U.S. agency bonds.....      $ 12,923,491        5.3%       $  5,217,023         2.6%

          AAA.....................................       119,417,729       48.5          79,443,654         39.0

          AA......................................        28,573,877       11.6          27,253,100         13.4

          A.......................................        42,723,692       17.4          51,479,757         25.1

          BBB.....................................        26,086,166       10.6          23,359,844         11.5

          BB......................................         9,348,004        3.8           8,000,251          3.9

          B.......................................         4,420,279        1.8           5,418,940          2.7

          C.......................................           215,060        0.1              57,000          0.0

          D.......................................           120,250        0.0             168,983          0.1

          NR......................................         2,156,971        0.9           3,526,100          1.7
                                                       -------------      -----       -------------        -----
               Total fixed maturities.............     $ 245,985,519      100.0%      $ 203,924,652        100.0%
                                                       =============      =====       =============        =====
 Equities:

          AAA.....................................     $     358,556        2.9%      $     483,125          4.3%

          AA......................................         2,301,250       18.4                   0          0.0

          A.......................................         4,860,365       39.0           7,038,892         63.5

          BBB.....................................         1,403,732       11.2             970,568          8.8

          BB......................................           631,515        5.1                   0          0.0

          B.......................................         2,920,612       23.4           2,595,940         23.4
                                                       -------------      -----       -------------        -----
                 Total equities....................    $  12,476,030      100.0%      $  11,088,525        100.0%
                                                       -------------      =====       -------------        =====
 Total portfolio..................................     $ 258,461,549                  $ 215,013,177
                                                       =============                  =============
---------------------
<FN>
(1) Current ratings as assigned by the NRSRO (Nationally  Recognized Statistical
Rating  Organization).  The NRSRO includes the following  nationally  recognized
rating agencies: S&P, Moody's, and Fitch.
</FN>
</TABLE>
                                       30
<PAGE>

REGULATION

DIRECT REGULATION

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

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

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

                                       31
<PAGE>

     Triad is required by Illinois  insurance  laws to provide for a contingency
reserve in an amount equal to at least 50% of earned  premiums in its  statutory
financial statements.  Such reserves must be maintained for a period of 10 years
except  in  circumstances   where  high  levels  of  losses  exceed   regulatory
thresholds.  The contingency reserve,  designed to provide a cushion against the
effect of adverse economic cycles,  has the effect of reducing statutory surplus
and  restricting  dividends and other  distributions  by Triad.  At December 31,
2001,  Triad  had  statutory  policyholders'  surplus  of $105.3  million  and a
statutory contingency reserve of $193.7 million. At December 31, 2000, Triad had
statutory  policyholders'  surplus of $101.0 million and a statutory contingency
reserve of $150.8 million. Triad's statutory earned surplus was $21.6 million at
year-end 2001 and $17.3 million at year-end 2000, reflecting growth in statutory
net income greater than the increase in the statutory contingency reserve.

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

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

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

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

     Triad,  TGAC, and Triad Re are each subject to examination of their affairs
by the  insurance  departments  of every  state in which  they are  licensed  to
transact  business.  The  Illinois  Insurance  Director  and  Vermont  Insurance
Commissioner  periodically conduct financial examinations of insurance companies
domiciled in their states.  The most recent  examinations of Triad and TGAC were
issued by the Illinois Insurance Department on February 3, 2000, and covered the
period January 1, 1995,  through December 31, 1998. No material  recommendations
were made as a result of these examinations.

                                       32
<PAGE>

     A number of states  generally  limit the amount of insurance risk which may
be  written  by a  private  mortgage  insurer  to 25 times the  insurer's  total
policyholders'   surplus.   This   restriction   is   commonly   known   as  the
risk-to-capital requirement.

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

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

     The National  Association  of Insurance  Commissioners  ("NAIC")  adopted a
risk-based  capital  ("RBC")  formula  designed  to  help  regulators   identify
property/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  types  of risk  insured,
standards for geographic and customer  diversification  of risk,  procedures for
claims handling,  acceptable underwriting practices,  and financial requirements
which  generally   mirror  state  insurance   regulatory   requirements.   These
requirements are subject to change from time to time.  Freddie Mac most recently
modified its  eligibility  guidelines in June 2000. The new  guidelines  include
financial  requirements  for  captive  reinsurance  transactions  in general and
additional  financial  requirements for captive arrangements that permit premium
cessions  greater  than  25%.  Fannie  Mae  also has  eligibility  requirements,
although such  requirements  are not  published.  Triad is an approved  mortgage

                                       33
<PAGE>

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

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

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

     The Real Estate  Settlement and Procedures Act of 1974 ("RESPA") applies to
most residential  mortgages  insured by Triad, and related  regulations  provide
that the  provision of services  involving  mortgage  insurance is a "settlement

                                       34

<PAGE>

service" for purposes of loans subject to RESPA.  Subject to limited exceptions,
RESPA  prohibits  persons from  accepting  anything of value for referring  real
estate  settlement  services to any  provider of such  services.  Although  many
states  prohibit  mortgage   insurers  from  giving  rebates,   RESPA  has  been
interpreted to cover many non-fee services as well.

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

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

     Upon request by an insured,  Triad must cancel the mortgage insurance for a
mortgage  loan.  Fannie  Mae and  Freddie  Mac  guidelines,  as well as  several
existing and proposed state  statutes,  contain  various  provisions  which give
borrowers the right to request cancellation of borrower-paid  mortgage insurance
when specified conditions are met.

     The Homeowners  Protection Act of 1998,  effective July 29, 1999,  provides
for certain termination and cancellation requirements for borrower-paid mortgage
insurance and requires  mortgage lenders to periodically  update borrowers about
their private mortgage insurance. Under the legislation, borrowers may generally

                                       35

<PAGE>

request  termination of mortgage  insurance  once the LTV reaches 80%,  provided
that certain  conditions are met. The legislation  further  requires  lenders to
automatically cancel  borrower-paid  private mortgage insurance when home equity
reaches 78% if certain conditions are met. The legislation also requires lenders
to notify  borrowers  that they have  private  mortgage  insurance  and requires
certain  disclosures  to borrowers  of their rights under the law.  Because most
mortgage  borrowers  who obtain  private  mortgage  insurance do not achieve 20%
equity in their homes before the homes are sold or the mortgages refinanced, the
Company  has not lost and does not  expect to lose a  significant  amount of its
insurance in force due to the enactment of this legislation.

INDIRECT REGULATION

     The Company,  Triad,  and Triad's  subsidiaries  are also  indirectly,  but
significantly,  impacted by regulations  affecting purchasers of mortgage loans,
such as Freddie  Mac and Fannie  Mae,  and  regulations  affecting  governmental
insurers, such as the FHA and the Department of Veterans Affairs ("VA"), as well
as lenders.  Private  mortgage  insurers,  including Triad, are highly dependent
upon federal housing legislation and other laws and regulations which affect the
demand for private  mortgage  insurance and the housing  market  generally.  For
example,  housing  legislation  enacted in 1992  permits up to 100% of  borrower
closing  costs to be financed by loans  insured by FHA, a  significant  increase
from the  previous  57% limit.  Also,  in April  1994,  HUD  reduced the initial
premium (payable at loan  origination) for FHA insurance from 3.0% to 2.25%. FHA
loan limits are  adjusted in response to changes in the Freddie  Mac/Fannie  Mae
conforming loan limits.  Currently,  the maximum individual loan amount that the
FHA can insure is $261,609. 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 Triad's ability to compete with the FHA or VA.

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

     In July 2001, the Office of Federal Housing  Enterprise  Oversight  (OFHEO)
released its initial  risk-based  capital  rules for Fannie Mae and Freddie Mac.
The regulation provided a more preferential  capital credit for insurance from a
"AAA"  rated  private  mortgage  insurer  than for  insurance  from a "AA" rated
private mortgage insurer.  In December 2001, OFHEO announced  proposed revisions

                                       36
<PAGE>

to the  risk-based  capital  rules for Fannie  Mae and  Freddie  Mac.  Among the
proposed  revisions,  the new rule reduced,  but did not eliminate,  the capital
charge  differential  between  insurance  from a "AAA"  rated  private  mortgage
insurer and insurance from a "AA" rated private mortgage  insurer.  In addition,
the proposed phase-in period was extended from five years to ten years. The rule
was  finalized in February  2002 and became  effective in March.  The  continued
presence of a capital charge differential could adversely affect Triad. Triad is
evaluating  various  business  approaches  and options  available to address the
capital differential  contained in the rule. What response,  if any, Triad makes
and the ultimate impact of the regulation on Triad is unknown at this time.

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

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

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

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

                                       37

<PAGE>

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













                                       38
<PAGE>



EMPLOYEES

     As of December 31, 2001,  the Company  employed 209 persons.  Employees are
not covered by any collective  bargaining  agreement.  The Company considers its
employee relations to be satisfactory.

EXECUTIVE OFFICERS

The executive officers of the Company are as follows:

Name                          Position                                     Age
----                          --------                                     ---
William T. Ratliff, III       Chairman of the Board of                     48
                              the Company and Triad

Darryl W. Thompson            President, Chief Executive                   61
                              Officer, and Director of the
                              Company and Triad

Ron D. Kessinger              Executive Vice President and                 47
                              Chief Financial Officer of the
                              Company and Triad

Henry B. Freeman              Senior Vice President of Triad               52

Earl F. Wall                  Senior Vice President, Secretary,            44
                              and General Counsel of the
                              Company and Triad

Michael R. Oswalt             Senior Vice President, Treasurer,            40
                              and Principal Accounting Officer
                              of the Company and Triad


                                       39
<PAGE>



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

     RON D.  KESSINGER has been  Executive  Vice  President and Chief  Financial
Officer  of the  Company  since  December  1999.  Mr.  Kessinger  has been Chief
Financial  Officer of Triad since  November 1999 and Executive Vice President of
Insurance  Operations of Triad since June 1996. Mr. Kessinger was Vice President
of Claims and  Administration of Triad from January 1991 to June 1996. From 1985
to 1991,  Mr.  Kessinger  was employed by Integon  Mortgage  Guaranty  Insurance
Corporation,  most recently  serving as 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.

     HENRY B. FREEMAN has been Senior Vice President of Risk Management of Triad
since January 1999, and was a Vice  President from 1987 till 1999.  From 1981 to
1987, Mr. Freeman was employed by Home Guaranty Insurance Corporation,  where he
was  Vice  President  of  Underwriting  and  Claims  from  1982 to 1985 and Vice
President of Risk Management from 1985 to 1987.

                                       40
<PAGE>


     EARL F. WALL has been Senior Vice  President of Triad since  November 1999,
General  Counsel of Triad since January 1996, and Secretary since June 1996. Mr.
Wall was Vice  President of Triad from 1996 till 1999.  Mr. Wall has been Senior
Vice  President of the Company since  December  1999,  and Secretary and General
Counsel of the Company since  September 1996. Mr. Wall was Vice President of the
Company from 1996 to 1999.  From 1982 to 1995,  Mr. Wall was employed by Integon
in a number of capacities  including Vice President,  Associate General Counsel,
and Director of Integon Life  Insurance  Corporation  and Georgia  International
Life  Insurance  Corporation,  Vice  President,  and General  Counsel of Integon
Mortgage Guaranty Insurance  Corporation,  and Vice President,  General Counsel,
and Director of Marketing One, Inc.

     MICHAEL R. OSWALt has been  Senior  Vice  President  and  Treasurer  of the
Company since  December  1999.  Mr. Oswalt has been a Senior Vice  President and
Treasurer of Triad since November 1999. Mr. Oswalt was Controller of the Company
from March 1994 to October 2001 and he was Controller of Triad from June 1996 to
October  2001.  Mr.  Oswalt was Vice  President  of the  Company  and Triad from
December 1994 to December 1999. Mr. Oswalt  previously  served as Vice President
and  Controller of CIC and Southwide Life  Insurance  Corp.  from February 1994,
until June 1996. From January 1993, to February 1994, Mr. Oswalt was employed by
Complete Health Services,  Inc. where he performed internal audit services. From
1991 to 1993, Mr. Oswalt was employed by Arthur  Andersen & Co. Prior to joining
Arthur Andersen & Co., Mr. Oswalt was employed by Deloitte & Touche from 1988 to
1991. Mr. Oswalt is a certified public accountant.

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

ITEM 2.       PROPERTIES.
-------       -----------

     As  of  December  31,  2001,   the  Company  leases  office  space  in  its
Winston-Salem   headquarters  and  its  eleven   underwriting   offices  located
throughout the country comprising  approximately 56,000 square feet under leases
expiring  between  2002 and 2008 and which  require  annual  lease  payments  of
approximately $1.2 million in 2002. 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.

                                       41
<PAGE>

ITEM 3.       LEGAL PROCEEDINGS.
-------       ------------------

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

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

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

         None.












                                       42
<PAGE>



                                     PART II

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

     The Company's  Common Stock trades on The Nasdaq Stock  Market(R) under the
symbol  "TGIC."  At  December  31,  2001,  13,691,672  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.


                                      2001                      2000
                                      ----                      ----
                                High       Low            High        Low
                                ----       ---            ----        ---

       First Quarter......... $35.438    $26.688        $22.625     $14.875

       Second Quarter........ $40.000    $30.125        $23.438     $18.250

       Third Quarter......... $39.750    $29.650        $29.750     $21.500

       Fourth Quarter ....... $36.530    $30.400        $34.250     $26.250


     As of March 12,  2002,  the  number of  stockholders  of record of  Company
Common Stock was approximately  400. In addition,  there were an estimated 3,400
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.





                                       43
<PAGE>

ITEM 6.       SELECTED FINANCIAL DATA.
-------       ------------------------
<TABLE>
<CAPTION>

                                                                           Year Ended December 31
                                                    ---------------------------------------------------------------
                                                         2001         2000         1999        1998          1997
                                                         ----         ----         ----        ----          ----
Income Statement Data (for period ended):                    (Dollars in thousands, except per share amounts)
<S>                                                 <C>          <C>          <C>          <C>          <C>
Premiums written:
     Direct..................................       $    95,551  $    76,867  $    65,381  $    52,974  $    40,083
     Assumed.....................................             4            8           11           13           20
     Ceded.......................................       (10,557)      (4,993)      (1,665)      (1,090)      (1,772)
                                                    -----------  -----------  -----------  -----------  -----------
                                                    $    84,998  $    71,882  $    63,727  $    51,897  $    38,331
                                                    ===========  ===========  ===========  ===========  ===========
Earned premiums..................................   $    84,356  $    71,843  $    63,970  $    52,822  $    38,522
Net investment income............................        14,765       12,645       10,546        9,289        6,234
Realized investments gains ......................           297          286        1,153          880           34
Other income.....................................         1,892           37           13           14            8
                                                    -----------  -----------  -----------  -----------  -----------
     Total revenues..............................       101,310       84,811       75,682       63,005       44,798

Net losses and loss adjustment expenses..........         9,019        7,587        7,111        7,009        5,177
Interest expense on debt.........................         2,771        2,770        2,780        2,554           --
Amortization of deferred policy acquisition cost.        11,712        8,211        6,955        5,955        4,120
Other operating expenses (net of acquisition
        cost deferred)...........................        18,136       16,008       15,061       12,435       10,257
                                                    -----------  -----------  -----------  -----------  -----------
Income before income taxes.......................        59,672       50,235       43,775       35,052       25,244
Income taxes.....................................        18,413       15,237       13,365       10,678        8,002
                                                    -----------  -----------  -----------  -----------  -----------
Net income.......................................   $    41,259  $    34,998  $    30,410  $    24,374  $    17,242
                                                    ===========  ===========  ===========  ===========  ===========
     Basic earnings per share ...................   $      3.05  $      2.63  $      2.28  $      1.83  $      1.30
     Diluted earnings per share .................   $      2.95  $      2.55  $      2.23  $      1.76  $      1.26
                                                    -----------  -----------  -----------  -----------  -----------
Weighted average common and common share
     equivalents outstanding
         Basic ..................................    13,545,725   13,321,901   13,312,104   13,342,749   13,291,160
         Diluted.................................    13,977,435   13,726,088   13,640,716   13,843,382   13,713,538

Balance Sheet Data (at year end):
     Total assets (1)............................   $   396,455  $   328,377  $   263,141  $   230,512  $   155,272
     Total invested assets.......................   $   277,200  $   232,025  $   191,564  $   177,301  $   119,877
     Losses and loss adjustment expenses.........   $    17,991  $    14,987  $    14,751  $    12,143  $     8,960
     Unearned premiums...........................   $     7,650  $     6,933  $     6,831  $     7,055  $     7,988
     Long-term debt .............................   $    34,473  $    34,467  $    34,462  $    34,457  $        --
     Stockholders' equity........................   $   246,070  $   199,831  $   157,072  $   137,531  $   111,781

Statutory Ratios (2):
     Loss ratio..................................         10.7%        10.6%        11.1%        13.3%        14.2%
     Expense ratio...............................         39.9%        37.4%        40.5%        42.3%        42.5%
                                                    -----------  -----------  -----------  -----------  -----------
     Combined ratio..............................         50.6%        48.0%        51.6%        55.6%        56.7%
                                                    ===========  ===========  ===========  ===========  ===========
GAAP Ratios:
     Loss ratio..................................         10.7%        10.6%        11.1%        13.3%        13.4%
     Expense ratio...............................         35.1%        33.7%        34.5%        35.4%        37.5%
                                                    -----------  -----------  -----------  -----------  -----------
     Combined ratio..............................         45.8%        44.3%        45.6%        48.7%        50.9%
                                                    ===========  ===========  ===========  ===========  ===========
Other Statutory Data (dollars in millions) (2):
     Direct insurance in force...................   $  21,726.0  $  15,123.5  $  13,038.0  $  11,256.6  $   9,176.7
     Direct risk in force (gross)................   $   4,581.5  $   3,760.0  $   3,222.5  $   2,777.4  $   2,231.4
     Risk-to-capital.............................        15.0:1       14.8:1       15.4:1       16.2:1       19.3:1
----------------
<FN>
(1) Periods prior to 1999 have been restated to reflect reclassification of Tax and Loss bonds.
(2) Based on statutory accounting practices and derived from consolidated statutory financial statements of Triad.
</FN>
</TABLE>
                                       44
<PAGE>

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

RESULTS OF OPERATIONS

2001 COMPARED TO 2000

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

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

     Insurance  written for 2001 was $13.3  billion  compared to $4.4 billion in
2000,  an increase  of 199%.  Insurance  written for the fourth  quarter of 2001
increased  254% to $4.8 billion from $1.3 billion in the fourth quarter of 2000.
Traditional flow production was $8.5 billion in 2001 compared to $4.4 billion in
2000, an increase of 92.6%. For the fourth quarter,  traditional flow production
in 2001  increased  115% to $2.9 billion from $1.3 billion in 2000. The increase
in insurance  written from  traditional  flow production was driven primarily by
new and  expanding  relationships  with  national  lenders,  strong  demand  for
risk-sharing arrangements, and a lower interest rate environment which increased
refinance activity and overall mortgage origination activity.

     Insurance written for 2001 also included  approximately  $4.7 billion ($1.9
billion in the fourth quarter) attributable to structured bulk transactions. For
the comparable  periods of 2000, there was no insurance written  attributable to
these  transactions.  Structured bulk  transactions  involve insuring a group of
loans where the insured loans have individual loan level coverage and frequently
include an  aggregate  stop-loss  limit  applied to the entire  group of insured
loans.  The bulk  market can be divided  into three  broad  segments:  the Prime
segment  (fully   underwritten   loans,  high  credit  scores,  low  LTVs),  the
Alternative - A segment  (generally  high credit score,  low LTV loans that have
been underwritten with reduced documentation), and the Sub-prime segment (higher
risk loans with lower credit  scores).  The Company does not  participate in the
Sub-prime segment of the market.

     Consolidation   within  the  mortgage   origination  industry  and  Triad's
continued  focus on national  lenders has  resulted in a greater  percentage  of
production volume being  concentrated among a smaller customer base. The loss of
one or more of these  significant  customers  could have a  significant  adverse
effect on the Company's  business.  However, to date, the Company's market share

                                       45
<PAGE>

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


has continued to increase.  According to industry data,  Triad's national market
share of net new primary  insurance  written  increased  to 3.6% for all of 2001
(4.0%  for the  fourth  quarter)  from  2.7%  for all of 2000.  Net new  primary
insurance written excludes insurance placed upon loans more than 12 months after
loan  origination,  insurance  placed  upon  loans  already  covered  by primary
mortgage  insurance,  and insurance  placed upon loans where lender  exposure is
effectively  reduced below defined  minimums.  This treatment is consistent with
the new definitions adopted by the Company and the industry in the third quarter
of 2001  regarding the  computation  of new  insurance  written for market share
purposes.  The Company's market share reported for 2000 did not include any bulk
transactions,  as the Company  wrote no new  insurance in 2000  attributable  to
these  transactions.  Total direct  insurance in force  reached $21.7 billion at
December 31, 2001,  compared to $15.1  billion at December 31, 2000, an increase
of 43.7%.

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

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

     Refinance  activity  was 35.8%  (43.3% in the fourth  quarter) of insurance
written  in 2001  compared  to 13.2%  (15.2%  in the  fourth  quarter)  in 2000.
Persistency,  or the amount of insurance in force remaining from one-year prior,
was 67.6% at December  31, 2001,  compared to 82.6% at December  31,  2000.  The
increase in refinance activity and the decrease in persistency are reflective of
the current low interest rate environment.

     Net  investment  income for 2001 was $14.8  million,  a 16.8% increase over
$12.6  million in 2000.  This  increase  is the result of growth in the  average
balance of invested assets by $40.5 million to $252.5 million for the year ended
December 31, 2001,  from $212.0 million for 2000. The growth in invested  assets

                                       46

<PAGE>

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

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

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

     Net losses and loss  adjustment  expenses (net of  reinsurance  recoveries)
increased by 18.9% in 2001 to $9.0 million from $7.6 million in 2000.  This rise
reflects  increased  levels of insurance in force. The Company's loss ratio (the
ratio of net incurred losses to earned  premiums) was 10.7% for 2001 compared to
10.6% for 2000. The loss ratio was 13.2% for the fourth quarter of 2001 compared
to 10.6% for the fourth quarter of 2000. As of December 31, 2001,  there were no
incurred losses related to the Company's bulk business.

     As of December 31, 2001,  approximately  76% of the Company's  insurance in
force was originated in the last 36 months.  Management believes, based upon its
experience  and industry  data,  that claims  incidence for it and other private
mortgage  insurers is generally  highest in the third  through sixth years after
loan  origination.  Although  the  claims  experience  on  insurance  written in
previous years has been quite  favorable,  management  does not expect losses to
remain at the low levels  currently  reported.  The Company expects its incurred
losses to increase as a greater  amount of its  insurance  in force  reaches its
anticipated highest claim frequency years. Furthermore,  changes in the economic
environment  could  accelerate  paid and incurred loss  development.  Due to the
inherent uncertainty of future premium levels, losses, economic conditions,  and
other factors that affect earnings,  it is impossible to predict with any degree
of certainty the impact of such higher claim frequencies on future earnings.

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

                                       47
<PAGE>

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

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

     The  effective tax rate for 2001 was 30.9%  compared to 30.3% in 2000.  The
increase  in the  effective  tax rate was due to a lower  percentage  of pre-tax
income being generated from tax-preferred securities as well as the recognition,
on a taxable  basis,  of  previously  deferred  income.  Management  expects the
Company's  effective tax rate to remain at about the same annual rate as long as
yields from new funds invested in tax-preferred  securities  remain favorable in
relation to fully taxable securities.

2000 COMPARED TO 1999

     Net income for 2000 increased  15.1% to $35.0 million from $30.4 million in
1999. This improvement was attributable  primarily to a 12.3% increase in earned
premiums,  a 19.9% increase in net investment  income,  and an improved combined
loss and expense ratio for all of 2000.

     Net income per share on a diluted basis  increased  14.4% to $2.55 for 2000
from $2.23 per share for 1999.  Included in 2000 earnings per share is $0.01 per
share of net  realized  investment  gains  compared  to $0.06 per share in 1999.
Operating earnings per share, which exclude net realized  investment gains, were
$2.54 for 2000 compared to $2.17 for 1999, an increase of 16.6%.

     Insurance  written was $4.4  billion for 2000,  an increase of less than 1%
from 1999 levels.  For the fourth quarter,  insurance written increased 50.8% to
$1.3 billion in 2000 from $892 million in 1999. For 2000,  insurance written was
driven by expanded  relationships  with  national  lenders as well as innovative
product offerings.  According to industry data, Triad's national market share of
net new primary insurance  written,  which excluded  insurance placed upon loans
more than 12 months  after loan  origination,  increased to 2.7% for all of 2000
(3.1% in the fourth quarter) from 2.3% for all of 1999.  Total direct  insurance
in force reached  $15.1 billion at December 31, 2000,  compared to $13.0 billion
at December 31, 1999, an increase of 16.0%.

     Total direct  premiums  written were $76.9 million for 2000, an increase of
17.6%  compared to $65.4  million for 1999.  Net premiums  written  increased by
12.8% to $71.9  million in 2000 from $63.7  million  for 1999.  Earned  premiums
increased  12.3% to $71.8  million for 2000 from $64.0  million  for 1999.  This

                                       48
<PAGE>

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

growth in written and earned premium resulted from both new insurance production
in 2000 and an  improvement in the Company's  persistency.  The growth in direct
premiums written was offset somewhat by the increase in ceded premiums  written.
Driven  primarily by increases in risk-sharing  arrangements  and excess of loss
reinsurance, ceded premiums written for 2000 increased 200% to $5.0 million from
$1.7  million  in 1999.  Approximately  42.9% of  insurance  written in 2000 was
subject to captive  mortgage  reinsurance and similar  arrangements  compared to
22.9% in 1999.

     Refinance  activity  was 13.2%  (15.2% in the fourth  quarter) of insurance
written  in 2000  compared  to 25.0%  (11.5%  in the  fourth  quarter)  in 1999,
reflecting  the continued rise in interest rates through the first six months of
the year.  Persistency,  or the  amount of  insurance  in force  remaining  from
one-year  prior,  was 82.6% at December 31, 2000,  compared to 77.1% at December
31, 1999.

     Net  investment  income for 2000 was $12.6  million,  a 19.9% increase over
$10.5  million in 1999.  This  increase in  investment  income was the result of
growth in the average book value of invested  assets by $28.0  million to $212.0
million for the year ended December 31, 2000,  from $184.0 million for 1999. The
growth in invested assets was  attributable  to normal  operating cash flow. The
pre-tax yield on average  invested assets increased to 6.0% for 2000 as compared
to 5.7% for all of 1999. The portfolio's  tax-equivalent yield was 8.2% for 2000
versus 7.7% for 1999. Approximately 69% or $139.9 million of the Company's fixed
maturity  portfolio at December 31,  2000,  was composed of state and  municipal
tax-preferred  securities as compared to approximately  71% or $124.4 million at
December 31, 1999.

     The Company realized net investment gains of approximately  $286,000 during
2000  compared  to $1.2  million in 1999.  For the fourth  quarter of 2000,  the
Company realized net investment losses of approximately $1.4 million, which were
primarily attributable to a repositioning of the fixed maturity portfolio.

     Net losses and loss  adjustment  expenses (net of  reinsurance  recoveries)
increased  by 6.7% in 2000 to $7.6  million  from  $7.1  million  in 1999.  This
increase  reflected the growing  amount of the Company's  insurance in force and
the resulting recognition of a greater amount of insurance in force reaching its
highest claim frequency years.

     The Company's loss ratio was 10.6% for 2000 compared to 11.1% for 1999. The
loss ratio was 10.6% for the fourth  quarter  of 2000  compared  to 7.8% for the
fourth  quarter of 1999. The Company's  favorable  loss ratio  reflected the low
level of delinquencies compared to the number of insured loans and the fact that
approximately 75% (79% at year-end 1999) of the Company's insurance in force was
originated in the prior 36 months.

     Amortization  of deferred  policy  acquisition  costs increased by 18.1% to
$8.2  million in 2000 from $7.0 million for 1999.  The increase in  amortization

                                       49
<PAGE>

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

reflected a growing balance of deferred policy  acquisition costs to amortize as
the Company continued to build its total insurance in force.

     Other  operating  expenses  increased  6.3% to $16.0  million for 2000 from
$15.1  million  for the same  period in 1999.  This  increase  in  expenses  was
primarily attributable to advertising,  personnel,  and facilities and equipment
costs  required  to  support  the  Company's  product  development,   technology
enhancements,   geographic  expansion,  and  production.   Amortization  of  the
Company's policy  administration  system began in December of 2000 and accounted
for approximately $129,000 of other operating expenses.

     The  expense  ratio  for  2000  was  33.7%  compared  to  34.5%  for  1999.
Contributing  to this  improvement  was the higher level of written  premiums in
2000 partially offset by the increase in expenses.

     The  effective tax rate for 2000 was 30.3%  compared to 30.5% in 1999.  For
the fourth quarter of 2000,  the effective tax rate was 29.6%.  The lower fourth
quarter rate was primarily the result of a higher  percentage of pre-tax  income
being generated from tax-preferred securities.

LIQUIDITY AND CAPITAL RESOURCES

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

     The Company generated positive cash flow from operating activities for 2001
of $43.8  million  compared to $32.7  million for 2000.  The increase in Triad's
operating  cash flow  reflects  the growth in premiums  and  investment  income,
nonrecurring   income  related  to  the  cancellation  of  the  excess  of  loss
reinsurance  contract,  the effects of tax benefits  resulting from stock option
exercises,  and a decrease in paid losses  partially  offset by the  increase in
underwriting expenses.

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

     The parent Company's cash flow is dependent on interest income and payments
from Triad  including cash  dividends,  management  fees, and interest  payments
under surplus notes.  The insurance laws of the State of Illinois impose certain
restrictions  on dividends from Triad.  These  restrictions,  based on statutory

                                       50

<PAGE>

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

accounting  practices,  include requirements that dividends may be paid only out
of statutory  earned  surplus and limit the amount of dividends that may be paid
without  prior  approval of the  Illinois  Insurance  Department.  The  Illinois
Insurance  Department permits expenses of the parent company to be reimbursed by
Triad in the form of management fees.

     Consolidated  invested  assets were $277.2  million at December  31,  2001,
compared to $232.0 million at December 31, 2000.  Fixed maturity  securities and
equity securities classified as available-for-sale totaled $258.5 million at the
end of 2001.  Net  unrealized  investment  gains  were  $1.2  million  on equity
securities and $323,000 on fixed maturity securities at December 31, 2001. Based
on fair value,  the fixed  maturity  portfolio  consisted of  approximately  72%
municipal  securities,   23%  corporate  securities,   and  5%  U.S.  government
obligations at December 31, 2001.

     Fixed maturity  securities  represented  approximately 89% of the Company's
invested  assets at December  31,  2001,  and the fair value of these fixed rate
securities  generally  bears an inverse  relationship  to changes in  prevailing
market  interest rates.  The Company's  long-term debt bears interest at a fixed
rate of 7.9%  per  annum,  and as a  result,  the  fair  value  of this  debt is
sensitive to changes in prevailing  interest  rates. A 10% relative  increase or
decrease  in  market   interest  rates  that  affect  the  Company's   financial
instruments  would not have a material impact on earnings during the next fiscal
year, and would not materially affect the fair value of the Company's  financial
instruments.

     The  Company's  loss  reserves  increased to $18.0  million at December 31,
2001,  compared to $15.0 million at December 31, 2000.  Reserves are established
for reported insurance losses and loss adjustment expenses based on when notices
of default on insured mortgage loans are received. Reserves are also established
for  estimated  losses  incurred on notices of default  not yet  reported by the
lender.  Consistent with industry practices, the Company does not establish loss
reserves for future claims on insured loans which are not currently in default.

     Reserves  are  established  by  management   using  estimated  claim  rates
(frequency) and claim amounts  (severity) to estimate  ultimate losses.  Because
the estimate for loss reserves is sensitive to our estimates of claims frequency
and severity,  we perform sensitivity analyses to test the reasonableness of the
best  estimate  generated  by  our  loss  reserve  estimation   process.   These
sensitivity  analyses allow us to use alternative  assumptions related to claims
frequency  and claims  severity to develop a range of  reasonably  possible loss
reserve  outcomes  that we can use to  challenge  our  best  estimate.  Our loss
reserve   estimation   process  and  our   sensitivity   analyses   support  the
reasonableness  of our best estimate of loss reserves recorded as a liability in
our financial statements.

     Management  periodically  reviews  the  loss  reserve  process  in order to
improve  its  estimate  of  ultimate  losses  on  loans  currently  in  default.
Adjustments  to reserve  estimates are reflected in the financial  statements in

                                       51

<PAGE>

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

the periods in which the adjustments are made. During the third quarter of 2001,
management  refined its methodology for setting loss reserves.  The enhancements
made to the reserving process  incorporate a more  multi-dimensional  analytical
form that gives effect to current economic conditions and profiles delinquencies
by  such   factors  as  policy  year,   geography,   and  chronic  late  payment
characteristics  in  addition  to  profiling  them by age.  The  growth  in loss
reserves is the result of the increase in reported  defaults and the maturing of
the Company's risk in force  mitigated by favorable  trends in the frequency and
severity of paid losses.  The Company  expects loss  reserves  will  continue to
grow,  reflecting  changing economic  conditions and the growth and aging of its
insurance in force.  The Company's  delinquency  ratio,  the ratio of delinquent
insured loans to total insured loans,  was 0.89% at December 31, 2001,  compared
to 0.60% at December 31, 2000. Net paid losses and loss adjustment  expenses for
2001 were $6.0 million compared to $7.3 million for 2000, a decline of 18.0%. As
of  December  31,  2001,  there were no  reported  delinquencies  or claims paid
related to the Company's bulk business.

     Total  stockholders'  equity  increased  to $246.1  million at December 31,
2001, from $199.8 million at December 31, 2000. This increase resulted primarily
from net income of $41.3  million and from  additional  paid-in  capital of $6.3
million  resulting  from the exercise of employee  stock options and the related
tax benefit,  offset  somewhat by a decline in net unrealized  gains on invested
assets classified as available-for-sale of $1.4 million (net of income tax).

     Triad's total statutory  policyholders' surplus increased to $105.5 million
at December 31, 2001,  from $101.0  million at December 31, 2000.  This increase
resulted  primarily  from  statutory  net  income  of $55.4  million,  offset by
increases in the  statutory  contingency  reserve of $43.0  million and the $2.6
million effect of adopting new statutory  accounting  principles  that went into
effect on January 1, 2001. Triad's statutory earned surplus was $21.8 million at
December 31, 2001,  compared to $17.3 million at December 31, 2000,  reflecting,
primarily,  growth in  statutory  net income  greater  than the  increase in the
statutory  contingency  reserve and the impact of the new  statutory  accounting
principles.  The balance in the statutory contingency reserve was $193.7 million
at December 31, 2001, compared to $150.8 million at December 31, 2000.

     Triad's  ability  to write  insurance  depends  on the  maintenance  of its
financial  strength  ratings and the adequacy of its capital in relation to risk
in force. A significant  reduction of capital or a significant  increase in risk
may impair Triad's  ability to write  additional  insurance.  A number of states
also generally limit Triad's  risk-to-capital  ratio to 25-to-1.  As of December
31, 2001, Triad's  risk-to-capital ratio was 15.0 -to-1 as compared to 14.8-to-1
at December 31, 2000,  and 11.2-to-1 for the industry as a whole at December 31,
2000, the latest industry data available.

                                       52

<PAGE>

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

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

     In July 2001, the Office of Federal Housing  Enterprise  Oversight  (OFHEO)
released its initial  risk-based  capital  rules for Fannie Mae and Freddie Mac.
The regulation provided a more preferential  capital credit for insurance from a
"AAA"  rated  private  mortgage  insurer  than for  insurance  from a "AA" rated
private mortgage insurer.  In December 2001, OFHEO announced  proposed revisions
to the  risk-based  capital  rules for Fannie  Mae and  Freddie  Mac.  Among the
proposed  revisions,  the new rule reduced,  but did not eliminate,  the capital
charge  differential  between  insurance  from a "AAA"  rated  private  mortgage
insurer and insurance from a "AA" rated private mortgage  insurer.  In addition,
the proposed phase-in period was extended from five years to ten years. The rule
was finalized in February 2002 and became effective in March 2002. The continued
presence of a capital charge differential could adversely affect Triad. Triad is
evaluating  various  business  approaches  and options  available to address the
capital differential  contained in the rule. What response,  if any, Triad makes
and the ultimate impact of the regulation on Triad is unknown at this time.

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 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;  the  Company's  financial  condition  and  competitive  position  could be
affected by legislation  impacting the mortgage guaranty  industry  specifically
and the  financial  services  industry in general;  rating  agencies  may revise
methodologies for determining the Company's  financial  strength ratings and may
revise or withdraw the assigned  ratings at any time;  decreases in persistency,
which are affected by loan  refinancings in periods of low interest  rates,  may
have an adverse  effect on  earnings;  the amount of  insurance  written and the
growth of insurance in force or risk in force as well as the  performance of the
Company may be adversely impacted by the competitive  environment in the private
mortgage  insurance  industry,  including  the type,  structure,  and pricing of
products  and  services  offered  by  the  Company  and  its  competitors;  with
consolidation  occurring among mortgage lenders and the Company's  concentration
of insurance in force generated through  relationships  with significant  lender
customers,  the loss of a  significant  customer  may have an adverse  effect on
earnings;   the  Company's  performance  may  be  impacted  by  changes  in  the
performance of the financial markets and general economic  conditions.  Economic

                                       53
<PAGE>

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

downturns  in  regions  where  Triad's  risk is more  concentrated  could have a
particularly adverse effect on Triad's financial condition and loss development.
The United  States is in an economic  downturn  that could  decrease  demand for
mortgage insurance and cause loss experience to suffer.

         New OFHEO risk-based capital rules for Fannie Mae and Freddie Mac could
severely limit the ability of Triad to compete with "AAA" rated private mortgage
insurers. The ultimate effect of the new rules on Triad and the mortgage
insurance industry in general is not known at this time and will not be known
until Fannie Mae and Freddie Mac determine their requirements under the rules.

         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.












                                       54
<PAGE>


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

The  response  to this item is  submitted  on page 51 of this  report  under the
section titled "Management's  Discussion and Analysis of Financial Condition and
Results of Operations."

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------       --------------------------------------------

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


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

         None.


                                    PART III

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------      ---------------------------------------------------

     Information  regarding  directors and nominees for directors of the Company
is included in the  Company's  Proxy  Statement  for the 2002 Annual  Meeting of
Stockholders, and is hereby incorporated by reference.

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

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

     This  information is included in the Company's Proxy Statement for the 2002
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 2002
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 2002
Annual Meeting of Stockholders, and is hereby incorporated by reference.

                                       55
<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, 2001.

     (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 separate section of this report.




















                                       56
<PAGE>


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto  duly  authorized  on the 21st day of
March, 2002.

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

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been  signed  below on the 21st day of March,  2002 by the  following
persons on behalf of the Registrant in the capacities indicated.


           SIGNATURE                                   TITLE

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


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


 /s/ Ron D. Kessinger                        Executive Vice President and Chief
 -----------------------------------         Financial Officer
 Ron D. Kessinger


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


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


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


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



                                       57
<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


                        CONSOLIDATED FINANCIAL STATEMENTS

                          FINANCIAL STATEMENT SCHEDULES

                                CERTAIN EXHIBITS

                          YEAR ENDED DECEMBER 31, 2001

                               TRIAD GUARANTY INC.

                          WINSTON-SALEM, NORTH CAROLINA










                                       58
<PAGE>



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULES

                              (Item 14(a) 1 and 2)



 CONSOLIDATED FINANCIAL STATEMENTS                                        Page
 ---------------------------------                                        ----
  Report of Independent Auditors...................................        62

  Consolidated Balance Sheets at December 31, 2001 and 2000........     63 - 64

  Consolidated Statements of Income for each of the three
      years in the period ended December 31, 2001..................        65

  Consolidated Statements of Changes in Stockholders' Equity
     for each of the three years in the period ended
     December 31, 2001.............................................        66

  Consolidated Statements of Cash Flows for each of the three
     years in the period ended December 31, 2001...................        67

  Notes to Consolidated Financial Statements.......................     68 - 86


 FINANCIAL STATEMENT SCHEDULES
 -----------------------------
  Schedules at and for each of the three years in the period
       ended December 31, 2001

     Schedule I - Summary of Investments - Other Than Investments
       in Related Parties..........................................        87

     Schedule II - Condensed Financial Information of Registrant...     88 - 92

     Schedule IV - Reinsurance.....................................        93


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.




                                       59
<PAGE>

                               Index To Exhibits
                                 (Item 14(a) 3)

EXHIBIT
NUMBER      DESCRIPTION OF EXHIBIT
------      ----------------------
    3.1     Certificate of Incorporation of the Registrant, as amended (5)
               (Exhibit 3.1)

    3.2     By-Laws of the Registrant (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.(6)
            (Exhibit 4.2)

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

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

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

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

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

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

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

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

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

                                       60
<PAGE>

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

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

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

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

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

  23.1      Consent of Ernst & Young LLP (Exhibit 23.1)

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

*        Filed Herewith.

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

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

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

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

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

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

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

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










                                       61
<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,  2001 and  2000,  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, 2001.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial  position of Triad Guaranty
Inc.  and  subsidiaries  at  December  31, 2001 and 2000,  and the  consolidated
results of their  operations and their cash flows for each of the three years in
the period ended  December 31, 2001, in conformity  with  accounting  principles
generally accepted in the United States.

                                              /s/ERNST & YOUNG LLP

Greensboro, North Carolina
January 17, 2002



                                       62
<PAGE>

<TABLE>
<CAPTION>

                               Triad Guaranty Inc.

                           Consolidated Balance Sheets


                                                                    December 31
                                                               2001               2000
                                                         ---------------------------------
<S>                                                      <C>                <C>
Assets
Invested assets:
   Securities available-for-sale, at fair value:
     Fixed maturities (amortized cost:
         2001-$245,662,452; 2000-$201,780,191)           $ 245,985,519      $ 203,924,652
     Equity securities (cost: 2001-$11,308,230;
         2000-$9,630,441)                                   12,476,030         11,088,525
   Short-term investments                                   18,738,590         17,012,080
                                                         ---------------------------------
                                                           277,200,139        232,025,257

Cash                                                           853,341          1,512,578
Real estate                                                    162,331             99,482
Accrued investment income                                    3,196,203          2,896,977
Deferred policy acquisition costs                           25,943,676         22,815,422
Property and equipment, at cost less accumulated
  depreciation (2001-$6,120,403; 2000-$3,867,336)           11,169,443          9,234,757
Prepaid federal income tax                                  62,619,166         49,374,666
Reinsurance recoverable                                          5,233              5,587
Other assets                                                15,305,627         10,411,877










                                                         ---------------------------------
Total assets                                             $ 396,455,159      $ 328,376,603
                                                         =================================
</TABLE>

                                       63
<PAGE>

<TABLE>
<CAPTION>
                                                                     December 31
                                                               2001               2000
                                                         ---------------------------------
<S>                                                      <C>                <C>
Liabilities and stockholders' equity
Liabilities:
   Losses and loss adjustment expenses                   $  17,990,583       $ 14,986,988
   Unearned premiums                                         7,649,994          6,933,259
   Amounts payable to reinsurer                              2,445,222          1,288,712
   Current taxes payable                                        40,114             85,062
   Deferred income taxes                                    74,773,407         60,651,647
   Unearned ceding commission                                2,323,922          1,481,691
   Long-term debt                                           34,473,035         34,467,285
   Accrued interest on debt                                  1,274,972          1,274,972
   Accrued expenses and other liabilities                    9,414,354          7,375,503
                                                         ---------------------------------
Total liabilities                                          150,385,603        128,545,119

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

Stockholders' equity:
   Preferred stock, par value $.01 per share -
     authorized 1,000,000 shares, no shares
     issued and outstanding                                        -                  -
   Common stock, par value $.01 per share -
     authorized 32,000,000 shares, issued
     and outstanding 13,691,672 shares at
     December 31, 2001, and 13,351,694 at
     December 31, 2000                                         136,917            133,517
   Additional paid-in capital                               69,057,458         62,723,667
   Accumulated other comprehensive income,
     net of income tax liability of $521,803
     at December 31, 2001, and $1,262,863 at
     December 31, 2000                                         974,811          2,351,065
   Deferred compensation                                      (117,167)          (135,041)
   Retained earnings                                       176,017,537        134,758,276
                                                         ---------------------------------
Total stockholders' equity                                 246,069,556        199,831,484
                                                         ---------------------------------
Total liabilities and stockholders' equity               $ 396,455,159      $ 328,376,603
                                                         =================================
</TABLE>


See accompanying notes.

                                       64
<PAGE>

<TABLE>
<CAPTION>

                               Triad Guaranty Inc.

                        Consolidated Statements of Income

                                                                             Year ended December 31
                                                                      2001             2000             1999
                                                                  ------------------------------------------------
<S>                                                               <C>               <C>              <C>
Revenue:
   Premiums written:
     Direct                                                       $ 95,550,936      $ 76,867,728     $ 65,380,631
     Assumed                                                             4,011             7,776           11,377
     Ceded                                                         (10,556,497)       (4,993,059)      (1,665,179)
                                                                  ------------------------------------------------
   Net premiums written                                             84,998,450        71,882,445       63,726,829
   Change in unearned premiums                                        (642,199)          (39,355)         242,971
                                                                  ------------------------------------------------
Earned premiums                                                     84,356,251        71,843,090       63,969,800
Net investment income                                               14,764,536        12,645,321       10,545,663
Net realized investment gains                                          296,974           285,849        1,153,191
Other income                                                         1,892,142            36,785           13,039
                                                                  ------------------------------------------------
                                                                   101,309,903        84,811,045       75,681,693
Losses and expenses:
   Losses and loss adjustment expenses                               9,019,907         7,562,228        7,121,002
   Reinsurance recoveries                                                 (596)           25,009           (9,686)
                                                                  ------------------------------------------------
Net losses and loss adjustment expenses                              9,019,311         7,587,237        7,111,316
Interest expense on debt                                             2,770,750         2,770,307        2,779,915
Amortization of deferred policy acquisition costs                   11,711,737         8,210,776        6,955,273
Other operating expenses (net of acquisition costs
   deferred)                                                        18,136,351        16,008,210       15,060,376
                                                                  ------------------------------------------------
                                                                    41,638,149        34,576,530       31,906,880
                                                                  ------------------------------------------------
Income before income taxes                                          59,671,754        50,234,515       43,774,813
Income taxes:
   Current                                                             186,790            14,996           24,166
   Deferred                                                         18,225,703        15,221,544       13,340,340
                                                                  ------------------------------------------------
                                                                    18,412,493        15,236,540       13,364,506
                                                                  ------------------------------------------------
Net income                                                        $ 41,259,261      $ 34,997,975     $ 30,410,307
                                                                  ================================================
Earnings per common and common equivalent share:
     Basic                                                        $       3.05      $       2.63     $       2.28
     Diluted                                                      $       2.95      $       2.55     $       2.23
                                                                  ================================================
Shares used in computing earnings per common and
   common equivalent share:
     Basic                                                          13,545,725        13,321,901       13,312,104
     Diluted                                                        13,977,435        13,726,088       13,640,716
                                                                  ================================================
</TABLE>

See accompanying notes.

                                       65
<PAGE>

<TABLE>
<CAPTION>

                               Triad Guaranty Inc.

           Consolidated Statements of Changes in Stockholders' Equity

                                                                    Accumulated
                                                      Additional       Other
                                           Common      Paid-In     Comprehensive     Deferred       Retained
                                            Stock      Capital         Income      Compensation     Earnings          Total
                                         --------------------------------------------------------------------------------------
<S>                                      <C>        <C>             <C>            <C>           <C>              <C>
 Balance at December 31, 1998            $ 134,089  $ 61,538,613    $ 3,907,920    $             $  71,950,718    $ 137,531,340
   Net income                                    -             -              -             -       30,410,307       30,410,307
   Other comprehensive income - net of
     tax:
     Change in unrealized gain (loss)            -             -     (8,631,695)            -                -       (8,631,695)
                                                                                                                   ------------
   Comprehensive income                                                                                              21,778,612
   Issuance of 34,500 shares of common
     stock under stock option plans            345       199,928              -             -                -          200,273
   Tax effect of exercise of
     non-qualified stock options                 -       129,706              -             -                -          129,706
   Purchase and subsequent retirement of
     146,000 shares of common stock         (1,460)            -              -             -       (2,600,724)      (2,602,184)
   Issuance of 5,825 shares of
     restricted stock                           58       104,065              -      (104,123)               -                -
   Amortization of deferred
     compensation                                -             -              -        34,709                -           34,709
                                         ---------------------------------------------------------------------------------------
 Balance at December 31, 1999              133,032    61,972,312     (4,723,775)      (69,414)      99,760,301      157,072,456
   Net income                                    -             -              -             -       34,997,975       34,997,975
   Other comprehensive income - net of
     tax:
     Change in unrealized gain (loss)            -             -      7,074,840             -                -        7,074,840
                                                                                                                  -------------
   Comprehensive income                                                                                              42,072,815
   Issuance of 41,500 shares of common
     stock under stock option plans            415       471,157              -             -                -          471,572
   Tax effect of exercise of
     non-qualified stock options                 -       129,768              -             -                -          129,768
   Issuance of 7,000 shares of
     restricted stock                           70       150,430              -      (150,500)               -                -
   Amortization of deferred
     compensation                                -             -              -        84,873                -           84,873
                                         --------------------------------------------------------------------------------------
 Balance at December 31, 2000              133,517    62,723,667      2,351,065      (135,041)     134,758,276      199,831,484
   Net income                                                                                       41,259,261       41,259,261
   Other comprehensive income - net of
     tax:
     Change in unrealized gain                   -             -     (1,376,254)            -                -       (1,376,254)
                                                                                                                  -------------
   Comprehensive income                                                                                              39,883,007
   Issuance of 336,628 shares of common
     stock under stock option plans          3,366     2,870,441              -             -                -        2,873,807
   Tax effect of exercise of
     non-qualified stock options                 -     3,362,883              -             -                -        3,362,883
   Issuance of 3,350 shares of
     restricted stock                           34       100,467              -      (100,501)               -                -
   Amortization of deferred
     compensation                                -             -              -       118,375                -          118,375
                                         --------------------------------------------------------------------------------------
 Balance at December 31, 2001            $ 136,917  $ 69,057,458    $   974,811    $ (117,167)   $ 176,017,537    $ 246,069,556
                                         ======================================================================================
</TABLE>
              See accompanying notes.

                                       66
<PAGE>

<TABLE>
<CAPTION>

                               Triad Guaranty Inc.

                      Consolidated Statements of Cash Flows
                                                                            Year ended December 31
                                                                   2001             2000              1999
                                                              -------------------------------------------------
<S>                                                            <C>             <C>              <C>
Operating activities
Net income                                                     $ 41,259,261    $  34,997,975    $  30,410,307
Adjustments to reconcile net income to net cash provided by
   operating activities:
     Loss and unearned premium reserves                           3,720,330          337,609        2,384,911
     Accrued expenses and other liabilities                       1,359,326        1,167,424        2,033,465
     Current taxes payable                                          (44,948)          14,790           24,485
     Amounts due to/from reinsurer                                1,082,328          931,198          875,266
     Accrued investment income                                     (299,226)        (305,365)        (332,734)
     Policy acquisition costs deferred                          (14,839,991)     (11,119,321)     (10,846,591)
     Amortization of policy acquisition costs                    11,711,737        8,210,776        6,955,273
     Net realized investment gains                                 (296,974)        (285,849)      (1,153,191)
     Provision for depreciation                                   2,246,404          859,879          720,456
     Accretion of discount on investments                        (3,127,733)      (1,577,713)      (1,046,470)
     Deferred income taxes                                       18,225,703       15,221,544       13,340,340
     Prepaid federal income taxes                               (13,244,500)     (13,959,000)     (10,159,000)
     Unearned ceding commission                                     842,231        1,081,170         (220,640)
     Other assets                                                (4,819,214)      (2,992,907)      (2,158,206)
     Other operating activities                                      55,639          136,214          (50,215)
                                                              -------------------------------------------------
Net cash provided by operating activities                        43,830,373       32,718,424       30,777,456

Investing activities
Securities available-for-sale:
      Purchases - fixed maturities                              (76,932,533)     (51,835,382)     (45,489,517)
      Sales  - fixed maturities                                  36,575,935       23,279,996       26,280,714
      Purchases - equities                                       (4,998,592)      (1,663,169)      (3,216,099)
      Sales - equities                                            3,899,373        5,608,372        5,035,504
Purchases of property and equipment                              (4,181,090)      (4,179,374)      (3,191,320)
                                                              -------------------------------------------------
Net cash used in investing activities                           (45,636,907)     (28,789,557)     (20,580,718)

Financing activities
Retirement of common stock                                                -                -       (2,602,184)
Proceeds from exercise of stock options                           2,873,807          471,572          200,273
                                                              -------------------------------------------------
Net cash provided by (used in) financing activities               2,873,807          471,572       (2,401,911)
Net change in cash and short-term investments                     1,067,273        4,400,439        7,794,827
Cash and short-term investments at beginning of year             18,524,658       14,124,219        6,329,392
                                                              -------------------------------------------------
Cash and short-term investments at end of year                $  19,591,931    $  18,524,658    $  14,124,219
                                                              =================================================

Supplemental schedule of cash flow information
   Cash paid during the period for:
      Income taxes and United States Mortgage
      Guaranty Tax and Loss Bonds                             $  13,269,557    $  13,959,208    $  10,158,677
   Interest                                                       2,765,000        2,765,000        2,775,017
</TABLE>

See accompanying notes.

                                       67
<PAGE>

                                        1
                               Triad Guaranty Inc.

                   Notes to Consolidated Financial Statements

                                December 31, 2001


1. ACCOUNTING POLICIES

NATURE OF BUSINESS

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

BASIS OF PRESENTATION

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

CONSOLIDATION

The consolidated financial statements include the amounts of Triad Guaranty Inc.
and its wholly-owned subsidiary,  Triad Guaranty Insurance Corporation ("Triad")
and Triad's  wholly-owned  subsidiaries,  Triad Guaranty  Assurance  Corporation
("TGAC") and Triad Re Insurance  Corporation ("Triad Re"). Triad Re, a sponsored
captive  reinsurance  company,  is domiciled in Vermont and began  operations in
2000.  All  significant   intercompany   accounts  and  transactions  have  been
eliminated.

USE OF ESTIMATES

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

INVESTMENTS

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

                                       68
<PAGE>

                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


1. ACCOUNTING POLICIES (CONTINUED)

Fair value generally represents quoted market value prices for securities traded
in the  public  market or prices  analytically  determined  using bid or closing
prices for securities not traded in the public marketplace.  Realized investment
gains or losses are determined on a specific  identification  basis.  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.

The Company writes covered call options on certain equity  securities it owns as
a yield enhancement vehicle.  Call options convey to the option holder the right
to buy (call) a certain  stock at or before a  specified  date for a  contracted
price  (strike  price) from the Company.  The contract can expire  without being
exercised  in the  event  that the  price of the  underlying  stock is below the
strike  price.  In this  case,  the fee  received  for  granting  the  option is
recognized as a realized  gain.  The Company has no credit risk related to these
covered call options.  The Company's  financial risk in this activity is limited
to the  increase of the market price of the security in excess of the sum of the
option's  strike  price and the fee  received  for the  option.  The options are
carried  at fair value as other  liabilities  on the  accompanying  Consolidated
Balance  Sheets,  with  changes in the fair value of these  options  reported as
realized gains or losses.  The liability recorded for these options was $145,500
and $5,938 at December 31, 2001 and 2000, respectively.

DEFERRED POLICY ACQUISITION COSTS

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

PROPERTY AND EQUIPMENT

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

                                       69
<PAGE>

                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)




1. ACCOUNTING POLICIES (CONTINUED)

LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

Reserves are provided for the estimated  costs of settling  claims in respect of
loans reported to be in default and estimates of loans in default which have not
been reported to the Company. Consistent with industry accounting practices, the
Company does not establish loss reserves for future claims on insured loans that
are not currently in default.  Loss reserves are established by management using
historical  experience and by making  various  assumptions  and judgments  about
claim rates (frequency) and claim amounts (severity) to estimate ultimate losses
to be paid on loans in default. The Company's reserving methodology gives effect
to current  economic  conditions and profiles  delinquencies  by such factors as
age,  policy year,  geography,  and chronic late  payment  characteristics.  The
estimates are  continually  reviewed and, as  adjustments  to these  liabilities
become necessary, such adjustments are reflected in current operations.

REINSURANCE

Certain  premiums  and  losses  are  assumed  from and ceded to other  insurance
companies  under various  reinsurance  agreements.  Reinsurance  premiums,  loss
reimbursement, and reserves related to reinsurance business are accounted for on
a basis consistent with that used in accounting for the original policies issued
and the terms of the  reinsurance  contracts.  The  Company may receive a ceding
commission in connection with ceded reinsurance. If so, the ceding commission is
earned on a monthly  pro rata  basis in the same  manner as the  premium  and is
recorded as a reduction of other operating expenses.

INCOME TAXES

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

Triad purchases  ten-year  non-interest  bearing United States Mortgage Guaranty
Tax and Loss  Bonds  ("Tax and Loss  Bonds")  in lieu of paying  federal  income
taxes.  Purchases  of these Tax and Loss Bonds are  treated  as prepaid  federal

                                       70
<PAGE>

                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


1. ACCOUNTING POLICIES (CONTINUED)


income  taxes  because  the  payment  for Tax and Loss  Bonds is  essentially  a
prepayment  of federal  income  taxes that will become due in ten years when the
Tax and Loss Bonds mature.  Current  income tax expense is primarily  associated
with the maturing of a portion of Triad's Tax and Loss Bonds.

INCOME RECOGNITION

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

STOCK OPTIONS

The Company  grants stock  options to employees and directors for a fixed number
of shares with an exercise  price equal to or greater than the fair value of the
shares at the date of grant.  The Company  accounts for stock  option  grants 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

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

                                       71
<PAGE>

                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


1. ACCOUNTING POLICIES (CONTINUED)

COMPREHENSIVE INCOME

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

                                          2001          2000             1999
                                     -------------------------------------------
Unrealized (losses) gains arising
 during the period,
   before taxes                      ($1,820,340)  $ 11,170,218    ($12,126,338)
   Income taxes                          637,119     (3,909,576)      4,244,218
                                     -------------------------------------------
Unrealized (losses) gains arising
 during the period, net of taxes      (1,183,221)     7,260,642      (7,882,120)
                                     -------------------------------------------
Less reclassification adjustment:
   Gains realized in net income          296,974        285,849       1,153,191
   Income taxes                         (103,941)      (100,047)       (403,616)
                                     -------------------------------------------
Reclassification adjustment for
   gains realized in net income          193,033        185,802         749,575
                                     -------------------------------------------
Other comprehensive income           ($1,376,254)   $ 7,074,840    ($ 8,631,695)
                                     ===========================================

                                       72
<PAGE>

                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)

2. INVESTMENTS

The amortized cost and the fair value of investments are as follows:
<TABLE>
<CAPTION>
                                                          Gross            Gross
                                      Amortized        Unrealized        Unrealized           Fair
                                        Cost              Gains            Losses            Value
                                     -----------------------------------------------------------------
<S>                                  <C>                 <C>               <C>            <C>
At December 31, 2001
 Available-for-sale securities:
   Fixed maturity securities:
     Corporate                       $ 55,463,919        $1,879,711        $2,329,019     $ 55,014,611
     U.S. Government                   12,164,542           545,823            64,708       12,645,657
     Mortgage-backed                      253,277            24,557                 -          277,834
     State and municipal              177,780,714         3,483,169         3,216,466      178,047,417
                                     -----------------------------------------------------------------
Total                                 245,662,452         5,933,260         5,610,193      245,985,519
   Equity securities                   11,308,230         1,448,566           280,766       12,476,030
                                     -----------------------------------------------------------------
Total                                $256,970,682        $7,381,826        $5,890,959     $258,461,549
                                     =================================================================

At December 31, 2000
  Available-for-sale securities:
   Fixed maturity securities:
     Corporate                       $ 47,986,616        $  949,415        $2,952,735     $ 45,983,296
     U.S. Government                   12,933,975           332,841            28,503       13,238,313
     Mortgage-backed                      933,215            48,030                 -          981,245
     State and municipal              139,926,385         4,880,661         1,085,248      143,721,798
                                     -----------------------------------------------------------------
Total                                 201,780,191         6,210,947         4,066,486      203,924,652
   Equity securities                    9,630,441         2,022,360           564,276       11,088,525
                                     -----------------------------------------------------------------
Total                                $211,410,632        $8,233,307        $4,630,762     $215,013,177
                                     =================================================================
</TABLE>

                                       73
<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, 2001, are summarized by stated maturity as follows:

                                                     Available-for-Sale
                                              -------------------------------
                                                                      Fair
                                               Amortized Cost        Value
                                              -------------------------------
Maturity:
   One year or less                           $   1,936,681     $   1,968,163
   After one year through five years             22,896,460        23,344,601
   After five years through ten years            38,385,623        38,171,721
   After ten years                              182,190,411       182,223,200
   Mortgage-backed securities                       253,277           277,834
                                              -------------------------------
Total                                         $ 245,662,452     $ 245,985,519
                                              ===============================

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

                                              Year ended December 31
                                        2001           2000           1999
                                   -----------------------------------------
Securities available-for-sale:
   Fixed maturity securities:
     Gross realized gains          $ 1,203,327     $   225,989   $   468,368
     Gross realized losses          (1,484,922)     (2,255,251)     (613,015)
   Equity securities:
     Gross realized gains              940,170       2,560,569     1,430,241
     Gross realized losses            (417,397)       (401,663)     (208,956)
Covered call options:
   Gross realized gains                113,360         162,849       129,864
   Gross realized losses               (57,564)         (6,644)      (53,311)
                                   -----------------------------------------
Net realized gains                 $   296,974     $   285,849   $ 1,153,191
                                   =========================================

Net unrealized appreciation  (depreciation) on fixed maturity securities changed
by  $(1,821,394),  $11,543,909,  and  $(12,923,040),  in 2001,  2000,  and 1999,
respectively;  the corresponding  amounts for equity securities were $(290,284),
$(665,174), and $(350,244).

                                       74
<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
                                      2001           2000              1999
                                    -----------------------------------------
Income:
   Fixed maturities                 $14,188,304     $11,754,951   $ 9,863,671
   Preferred stocks                     467,702         490,002       392,297
   Common stocks                        156,388         230,446       268,091
   Cash and short-term investments      495,375         635,272       465,544
                                    -----------------------------------------
                                     15,307,769      13,110,671    10,989,603
Expenses                                543,233         465,350       443,940
                                    -----------------------------------------
Net investment income               $14,764,536     $12,645,321   $10,545,663
                                    =========================================

At December 31, 2001 and 2000,  investments with an amortized cost of $6,645,745
and $6,537,653,  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
                                            2001           2000          1999
                                       -----------------------------------------
Balance at beginning of year           $ 22,815,422   $ 19,906,877  $ 16,015,559
Acquisition costs deferred:
   Sales compensation                     5,928,610      5,218,844     5,361,233
   Underwriting and issue expenses        8,911,381      5,900,477     5,485,358
                                       -----------------------------------------
                                         14,839,991     11,119,321    10,846,591

Amortization of acquisition expenses     11,711,737      8,210,776     6,955,273
                                       -----------------------------------------
Net increase                              3,128,254      2,908,545     3,891,318
                                       -----------------------------------------
Balance at end of year                 $ 25,943,676   $ 22,815,422  $ 19,906,877
                                       =========================================

                                       75
<PAGE>

                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


4. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

Activity for the reserve for losses and loss adjustment expenses for 2001, 2000,
and 1999 is summarized as follows:

                                            2001          2000          1999
                                        ---------------------------------------
Reserve for losses and loss
  adjustment expense at January 1,
  net of reinsurance recoverables       $14,976,180   $14,723,192   $12,115,934

Incurred losses and loss adjustment
  expenses net of reinsurance
  recoveries(principally in respect
  of default notices occurring in):
     Current year                        14,218,882    11,229,124     9,322,142
     Redundancy on prior years           (5,199,571)   (3,641,887)   (2,210,826)
                                        ----------------------------------------
Total incurred losses and loss
  adjustment expenses                     9,019,311     7,587,237     7,111,316

Loss and loss adjustment expense
  payments net of reinsurance
  recoveries (principally in
  respect of default notices
  occurring in):
     Current year                           285,876       573,874       236,250
     Prior years                          5,727,800     6,760,375     4,267,808
                                        ---------------------------------------
Total loss and loss adjustment
  expense payments                        6,013,676     7,334,249     4,504,058
                                        ---------------------------------------

Reserve for losses and loss adjustment
  expenses at December 31, net of
  reinsurance recoverables of
  $8,768, $10,808, and $28,156
  in 2001, 2000, and 1999,
  respectively                          $17,981,815   $14,976,180   $14,723,192
                                        =======================================

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

                                       76
<PAGE>

                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)



5. COMMITMENTS

The Company  leases  certain office  facilities  and equipment  under  operating
leases. Rental expense for all leases was $1,656,706, $1,398,586, and $1,154,671
for  2001,  2000,  and  1999,   respectively.   Future  minimum  payments  under
noncancellable operating leases at December 31, 2001, are as follows:

     2002                  $1,439,763
     2003                   1,204,502
     2004                   1,013,700
     2005                     814,005
     2006                     769,063
     Thereafter               965,180
                           ----------
                           $6,206,213
                           ==========

6. FEDERAL INCOME TAXES

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

                                      2001          2000          1999
                                  ---------------------------------------

Income tax computed at
   statutory rate                 $20,885,114   $17,582,080   $15,321,185
Increase (decrease) in
   taxes resulting from:
     Tax-exempt interest           (3,104,966)   (2,640,938)   (2,095,576)
     Other                            632,345       295,398       138,897
                                  ---------------------------------------
Income tax expense                $18,412,493   $15,236,540   $13,364,506
                                  =======================================



                                       77

<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, 2001 and
2000, are presented below:

                                           2001            2000
                                      -----------------------------
Deferred tax liabilities
Statutory contingency reserve         $ 67,534,711     $ 51,025,055
Deferred policy acquisition costs        9,080,287        7,985,398
Unrealized investment gain                 521,803        1,262,863
Other                                    3,352,700        2,859,749
                                      -----------------------------
Total deferred tax liabilities          80,489,501       63,133,065

Deferred tax assets
Exercise of employee stock options       4,539,069        1,176,185
Unearned premiums                          603,570          535,471
Capital loss carryforward                        -          280,356
Losses and loss adjustment expenses        437,182          368,630
Other                                      136,273          120,776
                                      -----------------------------
Total deferred tax assets                5,716,094        2,481,418
                                      -----------------------------
Net deferred tax liability            $ 74,773,407     $ 60,651,647
                                      =============================

At December 31, 2001 and 2000,  Triad was  obligated  to purchase  approximately
$1,228,000 and $537,000, respectively, of Tax and Loss Bonds.

                                       78
<PAGE>

                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


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

At  December  31,  2001,  approximately  56% of  Triad's  net risk in force  was
concentrated  in eight  states,  with  15% in  California,  7% each in  Florida,
Illinois,  and Texas,  6% each in  Georgia  and North  Carolina,  and 4% each in
Colorado and Pennsylvania.  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.

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, 2001 and 2000,  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:

                                         2001                 2000
                                   -----------------------------------
Net risk                           $4,471,704,928       $3,738,596,850
                                   ===================================

Statutory capital and surplus      $  105,306,174       $  101,045,355
Contingency reserve                   193,746,529          150,762,722
                                   -----------------------------------
Total                              $  299,052,703       $  251,808,077
                                   ===================================
Risk-to-capital ratio                   15.0 to 1            14.8 to 1
                                   ===================================

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

The Code  permits  dividends  to be paid  only out of  earned  surplus  and also
requires prior approval of extraordinary dividends. An extraordinary dividend is
any dividend or distribution of cash or other property, the fair market value of
which,  together  with that of other  dividends or  distributions  made within a
period of twelve consecutive  months,  exceeds the greater of (a) ten percent of
statutory surplus as regards policyholders,  or (b) statutory net income for the
calendar year  preceding the date of the  dividend.  Consolidated  net income as
determined in accordance with statutory  accounting  practices was  $55,448,185,
$47,830,174,  and $40,019,488  for the years ended December 31, 2001,  2000, and
1999, respectively. At December 31, 2001, the amount of the

                                       79
<PAGE>

                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)



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

Company's  equity  that  can be paid out in  dividends  to the  stockholders  is
$21,590,246, which is the earned surplus of Triad on a statutory basis.

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

8. RELATED PARTY TRANSACTIONS

The Company pays unconsolidated affiliated companies for management, investment,
and other  services.  The total  expense  incurred for such items was  $433,167,
$398,872, and $353,432 in 2001, 2000, and 1999,  respectively.  In addition, the
Company  provides  certain  investment  accounting,  reporting,  and maintenance
functions  for  an  affiliate.  Income  earned  during  2001,  2000,  and  1999,
respectively,  for such services was $23,487,  $21,780, and $17,444.  Management
believes  that the income and expenses  incurred for such  services  approximate
costs that the Company and affiliates  would have incurred if those services had
been provided by unaffiliated third parties.

9. EMPLOYEE BENEFIT PLAN

Substantially  all employees  participate in the Company's 401(k) Profit Sharing
Plan.  Under the plan,  employees elect to defer a portion of their wages,  with
the  Company  matching  deferrals  at the  rate  of 50% of the  first  8% of the
employee's salary deferred.  The Company  contributed  $353,004,  $301,281,  and
$281,728 to the plan for the years ended  December  31,  2001,  2000,  and 1999,
respectively.

10. REINSURANCE

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

                                       80
<PAGE>

                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


10. REINSURANCE (CONTINUED)

Reinsurance  activity for the years ended  December 31,  2001,  2000,  and 1999,
respectively, is as follows:

                                   2001             2000              1999
                               ----------------------------------------------

Earned premiums ceded          $10,481,961        $4,930,445       $1,645,655
Losses ceded                           596           (25,009)           9,686
Earned premiums assumed              5,485             9,106           13,866
Losses assumed                       1,056             8,514           30,057


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

The Company also maintains  excess of loss  reinsurance  agreements  designed to
protect the Company in the event of a catastrophic  level of losses.  Throughout
2001, the Company maintained $125 million of excess of loss reinsurance  through
non-affiliated reinsurers.

In 2001, the Company  recognized a nonrecurring  incentive payment of $1,863,000
related to  voluntary  cancellation  of an excess of loss  reinsurance  contract
maintained  by the Company  with a  non-affiliated  reinsurer.  This  payment is
included as other income in the  accompanying  Consolidated  Statement of Income
for 2001.  The Company  also  established  excess of loss  reinsurance  coverage
through a separate  third-party  reinsurer  in 2001 under  terms  similar to the
cancelled agreement.

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

                                       81
<PAGE>

                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


11. LONG-TERM STOCK INCENTIVE PLAN (CONTINUED)


common  stock  which  may be  issued  or  sold or for  which  options  or  stock
appreciation rights may be granted under the Plan is 2,600,000 shares.

Information concerning the stock option plan is summarized below:

                                                                      Weighted-
                                       Number of        Option        Average
                                        Shares           Price    Exercise Price
                                     -------------------------------------------
1999
   Outstanding, beginning of year     1,178,607    $ 4.58 - 49.08       $13.11
   Granted                              204,840     17.00 - 23.24        22.05
   Exercised                             34,500      4.58 - 10.17         5.81
   Canceled                              14,500     17.88 - 38.27        30.86
   Outstanding, end of year           1,334,447      4.58 - 49.08        14.48
   Exercisable, end of year           1,069,218      4.58 - 49.08        11.72

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

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


                                       82
<PAGE>


                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


11. LONG-TERM STOCK INCENTIVE PLAN (CONTINUED)

Information concerning stock options outstanding and exercisable at December 31,
2001 is summarized below:

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

   355,600   $ 4.58 -  8.92   $ 6.19        2.35        355,600       $ 6.19
   229,398    10.17 - 18.56    13.15        4.87        212,754        12.79
   500,401    20.07 - 34.80    25.22        7.31        376,284        23.76
   164,100    37.75 - 39.75    39.02        8.06         93,300        39.04
    59,275    41.94 - 49.08    48.26        6.08         59,275        48.26
 ---------                                            ---------
 1,308,774                                            1,097,213
 =========                                            =========

At December  31,  2001,  1,890,102  shares of the  Company's  common  stock were
reserved and 581,328 shares were available for issuance under the Plan.

The options issued under the Plan in 2001, 2000, and 1999 vest over three years.
Certain of the options will immediately vest in the event of a change in control
of the Company.  Options granted under the Plan terminate no later than 10 years
following the date of grant.

Pro forma information required by Financial Accounting Standards Board Statement
No. 123, Accounting for Stock-Based  Compensation,  has been estimated as if the
Company had accounted for stock-based awards under the fair value method of that
Statement.  The fair  value of  options  granted  in  2001,  2000,  and 1999 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 4.86% for 2001,  5.3% for 2000,  and 6.5% for 1999;  dividend  yield of 0.0%;
expected  volatility  of .40 for  2001,  .42 for 2000,  and .42 for 1999;  and a
weighted-average expected life of the option of seven years.

                                       83
<PAGE>

                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)



11. LONG-TERM STOCK INCENTIVE PLAN (CONTINUED)

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

The following table  summarizes the fair value of options granted in 2001, 2000,
and 1999:

                                   Weighted-Average           Weighted-Average
                                    Exercise Price               Fair Value
           Type of Option        2001    2000    1999       2001    2000    1999
--------------------------------------------------------------------------------

Stock Price = Exercise Price    $31.89  $22.38  $17.49     $11.14   $8.17  $6.74
Stock Price < Exercise Price    $39.00  $27.95  $23.24     $ 8.81   $6.70  $5.96

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):

                                       2001          2000          1999
                                    -------------------------------------

Net income - as reported             $41,259        $34,998       $30,410

Net income - pro forma               $40,375        $34,107       $29,675

Earnings per share - as reported:
   Basic                             $  3.05        $  2.63       $  2.28
   Diluted                           $  2.95        $  2.55       $  2.23

Earnings per share - pro forma:
   Basic                             $  2.98        $  2.56       $  2.23
   Diluted                           $  2.89        $  2.48       $  2.18

                                       84
<PAGE>

                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)


12. LONG-TERM DEBT

In January of 1998,  the Company  completed a $35  million  private  offering of
notes due January 15, 2028. Proceeds from the offering,  net of debt issue costs
of  $547,102,   totaled  $34,452,898.   The  notes,  which  represent  unsecured
obligations  of the Company,  bear  interest at a rate of 7.9% per annum and are
non-callable.

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values and fair values of financial  instruments as of December 31,
2001 and 2000 are summarized below:

                                      2001                        2000
                           -------------------------   -------------------------
                             Carrying      Fair         Carrying       Fair
                              Value        Value          Value        Value
                           -------------------------   -------------------------
Financial Assets
Fixed maturity securities
   available-for-sale      $245,985,519 $245,985,519   $203,924,652 $203,924,652
Equity securities
   available-for-sale        12,476,030   12,476,030     11,088,525   11,088,525

Financial Liabilities
Long-term debt               34,473,035   36,673,000     34,467,285   36,778,000

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

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

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

14. CONTINGENCIES

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

                                       85
<PAGE>

                               Triad Guaranty Inc.

             Notes to Consolidated Financial Statements (continued)



15. UNAUDITED QUARTERLY FINANCIAL DATA

The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 2001 and 2000 (in thousands except per share data):

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

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

                                             2000 Quarter
                                --------------------------------------
                                 First     Second    Third    Fourth     Year
                                ----------------------------------------------

Net premiums written            $17,063   $17,718   $18,293  $18,808   $71,882
Earned premiums                  17,144    17,836    18,071   18,792    71,843
Net investment income             2,926     3,067     3,156    3,496    12,645
Net losses incurred               1,596     2,060     1,932    1,999     7,587
Underwriting and other expenses   6,804     6,723     6,482    6,980    26,989
Net income                        8,652     8,486     9,484    8,376    34,998
Basic earnings per share            .65       .64       .71      .63      2.63
Diluted earnings per share          .63       .62       .69      .61      2.55






                                       86
<PAGE>



                                   Schedule I
       Summary of Investments - Other Than Investments in Related Parties
                               Triad Guaranty Inc.
                                December 31, 2001


                                                                      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............ $ 12,164      $ 12,646     $ 12,646

     Mortgage-backed securities.............      253           278          278

     State and municipal bonds..............  177,781       178,048      178,048

     Corporate bonds........................   53,613        53,202       53,202

     Public utilities.......................    1,851         1,812        1,812
                                             --------      --------     --------
    Total                                     245,662       245,986      245,986
                                             --------      --------     --------
Equity securities, available-for-sale:
   Common stocks:
       Bank, Trust, and Insurance...........      511           641          641

       Industrial & miscellaneous...........    3,915         4,841        4,841

   Preferred stock .........................    6,882         6,994        6,994
                                             --------      --------     --------
    Total...................................   11,308        12,476       12,476
                                             --------      --------     --------
Short-term investments......................   18,739        18,739       18,739
                                             --------      --------     --------
Total investments other than investments
 in related parties......................... $275,709      $277,201     $277,201
                                             ========      ========     ========








                                       87
<PAGE>



           Schedule II - Condensed Financial Information of Registrant
                            Condensed Balance Sheets
                               Triad Guaranty Inc.
                                (Parent Company)
                                                                December 31
                                                             2001         2000
                                                             ----         ----
                                                               (dollars in
                                                                thousands)
 Assets:
    Fixed maturities, available-for-sale.............     $  9,071     $  6,563

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

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

    Investment in subsidiaries.......................      244,464      200,952

    Cash and short-term investments..................        1,371        1,302

    Accrued investment income........................        1,261        1,221

    Deferred income taxes............................           99          389

    Other assets.....................................          120          216
                                                          --------     --------
    Total assets.....................................     $281,887     $235,643
                                                          ========     ========

 Liabilities and stockholders' equity:
 Liabilities:

    Current taxes payable............................     $     70     $     70

    Long-term debt...................................       34,473       34,467

    Accrued interest on long-term debt...............        1,275        1,275
                                                          --------     --------
    Total liabilities................................       35,818       35,812

 Stockholders' equity:

    Common stock.....................................          137          134

    Additional paid-in capital.......................       69,057       62,723

    Accumulated other comprehensive income...........          975        2,351

    Deferred compensation............................         (117)        (135)

    Retained earnings................................      176,017      134,758
                                                          --------     --------
 Total stockholders' equity..........................      246,069      199,831
                                                          --------     --------
 Total liabilities and stockholders' equity..........     $281,887     $235,643
                                                          ========     ========

                  See notes to condensed financial statements.

                                       88
<PAGE>


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


                                                   Year Ended December 31
                                               ------------------------------
                                               2001         2000         1999
                                               ----         ----         ----
                                                  (dollars in thousands)
  Revenues:
    Net investment income..................  $3,000       $2,908       $2,875

    Realized investment gains (losses)....     (266)        (373)        (124)
                                            -------      -------      -------
                                              2,734        2,535        2,751

 Expenses:
    Interest on long-term debt............    2,771        2,770        2,780

    Operating expenses....................      396           90           35
                                            -------      -------      -------

 Income (loss) before federal income
   taxes and equity in undistributed
   income of subsidiaries.................     (433)        (325)         (64)

 Income taxes:

    Current...............................     (121)           -           24

    Deferred..............................      172         (129)         (46)
                                            -------      -------      -------
                                                 51         (129)         (22)
                                            -------      -------      -------
Income (loss) before equity in
  undistributed income of subsidiaries....     (484)        (196)         (42)

 Equity in undistributed income
  of subsidiaries.........................   41,743       35,194       30,452
                                            -------      -------      -------
 Net income...............................  $41,259      $34,998      $30,410
                                            =======      =======      =======

                  See notes to condensed financial statements.

                                       89
<PAGE>

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

                                                        Year Ended December 31
                                                     --------------------------
                                                        2001     2000    1999
                                                        ----     ----    ----
Operating Activities                                    (dollars in thousands)

Net income...........................................$41,259   $34,998  $30,410
Adjustments to reconcile net income to
     net cash provided by (used in)
     operating activities:
      Equity in undistributed income of
       subsidiaries..................................(41,743)  (35,194) (30,452)
      Accrued investment income......................    (40)      (15)      19
      Other assets...................................     96      (216)       -
      Deferred income taxes..........................    172      (129)     (46)
      Current tax payable............................      -         -       25
      Accretion of discount on investments...........    (52)      (60)     (86)
      Amortization of deferred compensation..........    118        85       34
      Amortization of debt issue costs...............      6         5        5
      Realized investment gain on securities.........    266       373      124
      Accrued expenses and other liabilities.........      -         -      (25)
                                                      ------    ------   ------
   Net cash provided by (used in) operating
      activities.....................................     82      (153)       8

 Investing Activities
   Securities available-for-sale:
     Fixed maturities:
           Purchases................................. (5,756)   (2,951)  (3,682)
           Sales.....................................  3,369     2,501    6,282
     Equity securities:
           Purchases.................................   (500)        -        -
           Sales.....................................      -         -      284
                                                      ------    ------   ------
   Net cash (used in) provided
      by investing activities........................ (2,887)     (450)   2,884

 Financing Activities
    Proceeds from exercise of stock options..........  2,874       472      200
    Retirement of common stock.......................      -         -   (2,602)
                                                      ------    ------   ------
   Net cash provided by (used in) financing
      activities.....................................  2,874       472   (2,402)

   Increase in cash and short-term investments.......     69      (131)     490
   Cash and short-term investments at
      beginning of year..............................  1,302     1,433      943
                                                      ------    ------   ------
   Cash and short-term investments at end
     of year......................................... $1,371    $1,302   $1,433
                                                      ======    ======   ======
                  See notes to condensed financial statements.

                                       90
<PAGE>



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

NOTE 1

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

NOTE 2

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

NOTE 3

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

                                                Gross       Gross
                                  Amortized   Unrealized   Unrealized     Fair
At December 31, 2001                Cost        Gains       Losses       Value
                                  --------------------------------------------
Available-for-sale securities:
   Fixed maturity securities:
      Corporate                   $8,795         $159         $553      $8,401
      Municipal                      669            1            -         670
                                  ------       ------       ------      ------
   Total                           9,464          160          553       9,071

      Equity Securities              500            1            -         501
                                  ------       ------       ------      ------
   Total                          $9,964         $161         $553      $9,572
                                  ======       ======       ======      ======


                                                Gross       Gross
                                  Amortized   Unrealized   Unrealized     Fair
At December 31, 2000                Cost        Gains       Losses       Value
                                  --------------------------------------------
Available-for-sale securities:
   Fixed maturity securities:
      Corporate                   $7,292          $93         $822      $6,563
                                  ------       ------       ------      ------
   Total                           7,292           93          822       6,563
      Equity Securities                -            -            -           -
                                  ------       ------       ------      ------
   Total                          $7,292          $93         $822      $6,563
                                  ======       ======       ======      ======

                                       91
<PAGE>



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


NOTE 3 (CONTINUED)

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


                                              Year ended December 31
                                         2001          2000        1999
                                         ------------------------------
Income:
   Fixed maturities                    $  770        $  664      $  645
   Equity securities                       19             -          18
   Cash and short-term investments         45            55          42
   Note receivable from subsidiary      2,225         2,225       2,225
                                       --------------------------------
                                        3,059         2,944       2,930
Expenses                                   59            36          55
                                       --------------------------------
Net investment income                  $3,000        $2,908      $2,875
                                       ================================


NOTE 4

     In January of 1998, the Company completed a $35 million private offering of
notes due January 15, 2028. Proceeds from the offering,  net of debt issue costs
of  $547,102,   totaled  $34,452,898.   The  notes,  which  represent  unsecured
obligations  of the Company,  bear  interest at a rate of 7.9% per annum and are
non-callable.





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<PAGE>



                            Schedule IV - Reinsurance

                               Triad Guaranty Inc.
                        Mortgage Insurance Premium Earned
                  Years Ended December 31, 2001, 2000 and 1999




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

 2001....... $94,833      $10,482          $ 5       $84,356           0.0%
             =======      =======          ===       =======

 2000....... $76,764      $ 4,930          $ 9       $71,843           0.0%
             =======      =======          ===       =======

 1999....... $65,602      $ 1,646          $14       $63,970           0.0%
             =======      =======          ===       =======









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