SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

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

     For the Quarterly Period Ended September 30, 2001

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

     Commission File Number: 1-10777

                           Ambac Financial Group, Inc.
             (Exact name of Registrant as specified in its charter)

         Delaware                                        13-3621676
 (State of incorporation)                   (I.R.S. employer identification no.)


          One State Street Plaza
            New York, New York                              10004
 (Address of principal executive offices)                 (Zip code)


                                 (212) 668-0340
              (Registrant's telephone number, including area code)

     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

     As of October 31 2001, 105,533,118 shares of Common Stock, par value $0.01
per share, (net of 487,419 treasury shares) of the Registrant were outstanding.








                  Ambac Financial Group, Inc. and Subsidiaries

                                      INDEX
                                      -----



                                                                                                    PAGE
                                                                                                    ----
                                                                                                 
PART I  FINANCIAL INFORMATION

Item 1. Financial Statements of Ambac Financial Group, Inc. and Subsidiaries

        Consolidated Balance Sheets - September 30, 2001
        And December 31, 2000 .....................................................................    3

        Consolidated Statements of Operations - three months and nine months
        Ended September 30, 2001 and 2000 .........................................................    4

        Consolidated  Statements of Stockholders' Equity - nine months ended September 30, 2001 and
        2000 ......................................................................................    5

        Consolidated Statements of Cash Flows - nine months ended
        September 30, 2001 and 2000 ...............................................................    6

        Notes to Consolidated Unaudited Financial Statements ......................................    7

Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations .......................................................   11

Item 3. Quantitative and Qualitative Disclosures About
        Market Risk ...............................................................................   22

PART II OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K ..........................................................   24

SIGNATURES ........................................................................................   25

INDEX TO EXHIBITS..................................................................................   26






PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements of Ambac Financial Group, Inc. and Subsidiaries


                  Ambac Financial Group, Inc. and Subsidiaries

                           Consolidated Balance Sheets

                    September 30, 2001 and December 31, 2000

                             (Dollars in Thousands)



                                                                                September 30, 2001         December 31, 2000
                                                                                ------------------         -----------------
                                                                                   (unaudited)
Assets
- ------
                                                                                                                
Investments:
        Fixed income securities, at fair value
               (amortized cost of $7,643,798 in 2001 and $6,743,450 in 2000)               $7,866,192                 $6,825,152
        Fixed income  securities pledged as collateral, at fair value
               (amortized cost of $1,067,256 in 2001 and $1,238,401 in 2000)                1,083,593                  1,239,349
        Short-term investments, at cost (approximates fair value)                             184,809                    253,519
        Other                                                                                   1,933                      5,852
                                                                                ----------------------     ----------------------
               Total investments                                                            9,136,527                  8,323,872

Cash                                                                                           99,585                     20,493
Cash pledged as collateral                                                                     11,842                     24,935
Securities purchased under agreements to resell                                               361,100                    255,786
Receivable for investment agreements                                                           67,518                      6,663
Receivable for securities sold                                                                  5,381                      1,926
Investment income due and accrued                                                             119,456                    130,692
Reinsurance recoverable                                                                         1,919                      1,091
Prepaid reinsurance                                                                           265,811                    242,604
Deferred acquisition costs                                                                    160,765                    153,424
Loans                                                                                         720,327                    695,251
Other assets                                                                                  460,272                    263,563
                                                                                ----------------------     ----------------------
               Total assets                                                               $11,410,503                $10,120,300
                                                                                ======================     ======================

Liabilities and Stockholders' Equity

Liabilities:
        Unearned premiums                                                                  $1,719,890                 $1,546,290
        Losses and loss adjustment expense reserve                                            146,613                    132,445
        Ceded reinsurance balances payable                                                     20,159                     10,892
        Obligations under investment and payment agreements                                 3,653,081                  3,509,049
        Obligations under investment repurchase agreements                                  1,527,055                  1,383,882
        Deferred income taxes                                                                 167,183                    106,035
        Current income taxes                                                                   60,206                     25,628
        Debentures                                                                            416,633                    424,061
        Accrued interest payable                                                               75,280                     90,575
        Other liabilities                                                                     500,138                    291,394
        Payable for securities purchased                                                      160,323                      3,935
                                                                                ----------------------     ----------------------
               Total liabilities                                                            8,446,561                  7,524,186
                                                                                ----------------------     ----------------------

Stockholders' equity:
        Preferred stock                                                                             -                          -
        Common stock                                                                            1,060                      1,060
        Additional paid-in capital                                                            544,519                    533,558
        Accumulated other comprehensive income                                                136,651                     45,154
        Retained earnings                                                                   2,303,313                  2,035,209
        Common stock held in treasury at cost                                                 (21,601)                   (18,867)
                                                                                ----------------------     ----------------------
               Total stockholders' equity                                                   2,963,942                  2,596,114
                                                                                ----------------------     ----------------------
               Total liabilities and stockholders' equity                                 $11,410,503                $10,120,300
                                                                                ======================     ======================




      See accompanying Notes to Consolidated Unaudited Financial Statements


                                       3



                  Ambac Financial Group, Inc. and Subsidiaries

                      Consolidated Statements of Operations
                                   (Unaudited)

                For the Periods Ended September 30, 2001 and 2000
                    (Dollars in Thousands Except Share Data)




                                                           Three Months Ended                       Nine Months Ended
                                                             September 30,                            September 30,
                                                  -------------------------------------   --------------------------------------
                                                        2001                2000                2001                 2000
                                                  -------------------------------------   --------------------------------------
Revenues:
  Financial Guarantee:
                                                                                                           
     Gross premiums written                               $152,918            $147,949             $499,253            $338,956
     Ceded premiums written                                (35,874)            (20,077)             (72,342)            (62,451)
                                                  -----------------   -----------------   ------------------   -----------------
       Net premiums written                               $117,044            $127,872             $426,911            $276,505
                                                  =================   =================   ==================   =================

     Net premiums earned                                   $98,019             $78,695             $276,547            $230,774
     Net fees and other premiums earned                      3,323               5,645               16,423              10,693
     Net investment income                                  67,318              61,090              196,852             177,623
     Net realized gains (losses)                             6,633              (2,535)               3,009              (2,103)

  Financial Services:
     Revenue                                                10,231              10,856               36,457              46,425
     Net realized losses                                    (3,589)               (600)              (2,524)             (7,871)

  Other:
     Revenue                                                   786                 517                3,093               1,522
     Net realized losses                                    (1,383)                  -               (1,383)                  -
                                                  -----------------   -----------------   ------------------   -----------------
       Total revenues                                      181,338             153,668              528,474             457,063
                                                  -----------------   -----------------   ------------------   -----------------

Expenses:
  Financial Guarantee:
     Losses and loss adjustment expenses                     5,100               3,908               14,500              10,757
     Underwriting and operating expenses                    16,602              13,208               50,671              40,562
  Financial Services                                         5,023               5,808               16,627              18,563
  Interest                                                   9,370               9,394               28,338              28,153
  Other                                                        921               2,010                4,372               5,424
                                                  -----------------   -----------------   ------------------   -----------------

       Total expenses                                       37,016              34,328              114,508             103,459
                                                  -----------------   -----------------   ------------------   -----------------

Income before income taxes                                 144,322             119,340              413,966             353,604
Provision for income taxes                                  33,314              28,432               97,398              84,418
                                                  -----------------   -----------------   ------------------   -----------------
Income before accounting change                            111,008              90,908              316,568             269,186
Cumulative effect of accounting change
 (net of income taxes of $219)                                   -                   -                 (408)                  -
                                                  -----------------   -----------------   ------------------   -----------------
       Net income                                         $111,008             $90,908             $316,160            $269,186
                                                  =================   =================   ==================   =================

Net income per share:
       Basic                                                 $1.05               $0.86                $2.99               $2.57
                                                  =================   =================   ==================   =================
       Diluted                                               $1.02               $0.84                $2.90               $2.51
                                                  =================   =================   ==================   =================

Weighted average number of common
  shares outstanding:

       Basic                                           105,781,745         105,111,708          105,753,654         104,882,927
                                                  =================   =================   ==================   =================
       Diluted                                         109,077,058         107,732,178          108,980,936         107,051,811
                                                  =================   =================   ==================   =================



     See accompanying Notes to Consolidated Unaudited Financial Statements


                                       4




                  Ambac Financial Group, Inc. and Subsidiaries
                 Consolidated Statements of Stockholders' Equity

                                   (Unaudited)
                For The Periods Ended September 30, 2001 and 2000

                             (Dollars in Thousands)



                                                                              2001                              2000
                                                                -------------------------------   --------------------------------
Retained Earnings:
                                                                                                             
       Balance at January 1                                         $2,035,209                         $1,713,446
       Net income                                                      316,160        $316,160            269,186        $269,186
                                                                               ----------------                   ----------------
       Dividends declared - common stock                               (26,439)                           (23,775)
       Exercise of stock options                                       (21,617)                           (10,035)
                                                                ---------------                   ----------------
       Balance at September 30                                      $2,303,313                         $1,948,822
                                                                ---------------                   ----------------

Accumulated Other Comprehensive Income (Loss):
       Balance at January 1                                            $45,154                          ($187,540)
       Unrealized gains on securities, $148,148 and
         $168,221, pre-tax in 2001 and 2000, respectively(1)                            93,021                            103,552
       Cumulative effect of accounting change                                             (880)                                 -
       Loss on derivative transactions                                                    (377)                                 -
       Foreign currency translation loss                                                  (267)                            (1,881)
                                                                               ----------------                   ----------------
       Other comprehensive income                                       91,497          91,497            101,671         101,671
                                                                -------------------------------   --------------------------------
       Comprehensive income                                                           $407,657                           $370,857
                                                                               ================                   ================
       Balance at September 30                                        $136,651                           ($85,869)
                                                                ---------------                   ----------------

Preferred Stock:
       Balance at January 1 and September 30                                $-                                 $-
                                                                ---------------                   ----------------

Common Stock:
       Balance at January 1 and September 30                            $1,060                               $707
                                                                ---------------                   ----------------

Additional Paid-in Capital:
       Balance at January 1                                           $533,558                           $525,012
       Exercise of stock options tax benefit                            10,961                              7,741
                                                                ---------------                   ----------------
       Balance at September 30                                        $544,519                           $532,753
                                                                ---------------                   ----------------

Common Stock Held in Treasury at Cost:
       Balance at January 1                                           ($18,867)                          ($33,175)
       Cost of shares acquired                                         (35,855)                           (15,037)
       Shares issued under equity plans                                 33,121                             24,343
                                                                ---------------                   ----------------
       Balance at September 30                                        ($21,601)                          ($23,869)
                                                                ---------------                   ----------------


Total Stockholders' Equity at September 30                          $2,963,942                         $2,372,544
                                                                ===============                   ================
(1) Disclosure of reclassification amount:
Unrealized holding gains arising during period                         $94,505                            $97,069
Less: reclassification adjustment for net gains (losses)
    included in net income                                               1,484                             (6,483)
                                                                ---------------                   ----------------
Net unrealized gains on securities                                     $93,021                           $103,552
                                                                ===============                   ================




     See accompanying Notes to Consolidated Unaudited Financial Statements.


                                       5



                  Ambac Financial Group, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
                                   (Unaudited)
                For The Periods Ended September 30, 2001 and 2000
                             (Dollars in Thousands)



                                                                                               Nine Months Ended
                                                                                                  September 30,
                                                                                      -------------------------------------
                                                                                           2001                  2000
                                                                                      ----------------      ---------------

Cash flows from operating activities:
                                                                                                            
     Net income                                                                              $316,160             $269,186
     Adjustments to reconcile net income to net cash
            provided by operating activities:
     Depreciation and amortization                                                              2,630                2,708
     Amortization of bond premium and discount                                                (14,065)              (8,812)
     Current income taxes                                                                      34,578               (3,955)
     Deferred income taxes                                                                      6,859               15,255
     Deferred acquisition costs                                                                (7,341)             (12,089)
     Unearned premiums, net                                                                   150,393               45,161
     Losses and loss adjustment expenses                                                       13,340                6,716
     Ceded reinsurance balances payable                                                         9,267               (1,421)
     Investment income due and accrued                                                         11,236               10,620
     Accrued interest payable                                                                 (15,295)              (5,714)
     Net realized losses                                                                          898                9,974
     Other, net                                                                                (1,168)              (1,499)
                                                                                      ----------------      ---------------
            Net cash provided by operating activities                                         507,492              326,130
                                                                                      ----------------      ---------------

Cash flows from investing activities:
     Proceeds from sales of bonds                                                             985,901              899,561
     Proceeds from matured bonds                                                            1,874,727            1,340,538
     Purchases of bonds                                                                    (3,418,853)          (1,643,518)
     Change in short-term investments                                                          68,710               70,682
     Securities purchased under agreements to resell                                         (105,314)             (83,009)
     Loans                                                                                    (25,076)             (11,302)
     Other, net                                                                               (11,264)              (4,441)
                                                                                      ----------------      ---------------
            Net cash (used in) provided by investing activities                              (631,169)             568,511
                                                                                      ----------------      ---------------

Cash flows from financing activities:
     Dividends paid                                                                           (26,439)             (23,775)
     Proceeds from issuance of investment agreements                                        2,045,119            1,314,928
     Payments for investment agreement draws                                               (1,820,596)          (2,205,135)
     Payment agreements                                                                         1,826               11,302
     Payment for buyback of debentures                                                         (7,500)                   -
     Proceeds from sale of treasury stock                                                      33,121               24,343
     Purchases of treasury stock                                                              (35,855)             (15,037)
                                                                                      ----------------      ---------------
            Net cash provided by (used in) financing activities                               189,676             (893,374)
                                                                                      ----------------      ---------------
Net cash flow                                                                                  65,999                1,267
Cash and cash pledged as collateral at January 1                                               45,428               13,588
                                                                                      ----------------      ---------------
     Cash and cash pledged as collateral at September 30                                     $111,427              $14,855
                                                                                      ================      ===============

Supplemental disclosures of cash flow information: Cash paid during the period
     for:
            Income taxes                                                                      $45,000              $65,400
                                                                                      ================      ===============
            Interest expense on debt                                                          $30,575              $30,481
                                                                                      ================      ===============
            Interest expense on investment agreements                                        $170,601             $217,823
                                                                                      ================      ===============



      See accompanying Notes to Consolidated Unaudited Financial Statements



                                       6




Ambac Financial Group, Inc. and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
(Dollars in thousands)

(1)  Basis of Presentation

     Ambac Financial Group, Inc., headquartered in New York City, is a holding
company whose affiliates provide financial guarantees and financial services to
clients in both the public and private sectors around the world. Ambac's
principal operating subsidiary, Ambac Assurance Corporation, a leading provider
of financial guarantees for municipal and structured finance obligations, has
earned triple-A ratings, the highest ratings available from Moody's Investors
Service, Inc., Standard & Poor's Ratings Services, Fitch, Inc., and Rating and
Investment Information, Inc. Ambac's Financial Services segment provides
financial and investment products including investment agreements, interest rate
swaps, funding conduits, investment advisory and cash management services,
principally to its financial guarantee clients which include municipalities and
their authorities, school districts, healthcare organizations and asset-backed
issuers.

     Ambac's consolidated unaudited interim financial statements have been
prepared on the basis of accounting principles generally accepted in the United
States of America ("GAAP") and, in the opinion of management, reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of Ambac's financial condition, results of operations and cash
flows for the periods presented. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported revenues and expenses during the reporting period. Actual results
could differ from those estimates. The results of operations for the three and
nine months ended September 30, 2001 may not be indicative of the results that
may be expected for the full year ending December 31, 2001. These consolidated
financial statements and notes should be read in conjunction with the financial
statements and notes included in the audited consolidated financial statements
of Ambac Financial Group, Inc. and its subsidiaries contained in (i) Ambac's
Annual Report on Form 10-K for the year ended December 31, 2000, which was filed
with the Securities and Exchange Commission on March 28, 2001, (ii) Ambac's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001,
which was filed with the SEC on May 15, 2001, and (iii) Ambac's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 2001, which was filed with
the SEC on August 10, 2001.

     The consolidated financial statements include the accounts of Ambac and
each of its subsidiaries. All significant intercompany balances have been
eliminated.

     Certain reclassifications have been made to prior period's amounts to
conform to the current period's presentation.

(2)  Segment Information

     Ambac has two reportable segments, as follows: (1) financial guarantee,
which provides financial guarantees (including structured credit derivatives)
for municipal and structured finance obligations; and (2) financial services,
which provides investment agreements, interest rate swaps, funding conduits, and
investment advisory and cash management services.


                                       7



Notes to Consolidated Unaudited Financial Statements (Continued)
(Dollars in thousands)


     Ambac's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different marketing strategies, personnel skill sets and
technology.

     Pursuant to insurance and indemnity agreements, Ambac Assurance guarantees
the swap and investment agreement obligations of those financial services
subsidiaries. Intersegment revenues include the premiums earned under those
agreements, but which are eliminated in the consolidated financial statements.
Such premiums are accounted for as if they were premiums to third parties, that
is, at current market prices.

     Information provided below for "Corporate and Other" relates to Ambac
Financial Group, Inc. corporate activities. Corporate and other revenue from
unaffiliated customers consists primarily of interest income and realized gains
or losses from investment securities. Intersegment revenues consist of dividends
received.

     The following tables summarize the financial information by reportable
segment as of and for the three and nine-month periods ended September 30, 2001
and 2000:



                                          Financial       Financial      Corporate       Intersegment
Three months ended September 30,          Guarantee        Services       And Other      Eliminations     Consolidated
                                        --------------  ---------------  -------------  ---------------- ----------------
2001:
    Revenues:
                                                                                                 
        Unaffiliated customers .......       $175,293         $6,642            ($597)              $-          $181,338
        Intersegment .................          1,031           (972)          17,000          (17,059)                -
                                        --------------  ---------------  -------------  ---------------- ----------------
    Total revenues....................       $176,324         $5,670          $16,403         ($17,059)         $181,338
                                        --------------  ---------------  -------------  ---------------- ----------------
    Income before income taxes:
        Unaffiliated customers .......       $153,591         $1,619         ($10,888)              $-          $144,322
        Intersegment .................          1,087           (958)          16,653          (16,782)                -
                                        --------------  ---------------  -------------  ---------------- ----------------
    Total income before income taxes..       $154,678           $661           $5,765         ($16,782)         $144,322
                                        --------------  ---------------  -------------  ---------------- ----------------
    Identifiable assets...............     $5,581,637     $5,775,782          $53,084               $-       $11,410,503
                                        --------------  ---------------  -------------  ---------------- ----------------
2000:
    Revenues:
        Unaffiliated customers .......       $142,895        $10,256             $517               $-          $153,668
        Intersegment .................            909           (815)          15,958          (16,052)                -
                                        --------------  ---------------  -------------  ---------------- ----------------
    Total revenues....................       $143,804         $9,441          $16,475         ($16,052)         $153,668
                                        --------------  ---------------  -------------  ---------------- ----------------
    Income before income taxes:
        Unaffiliated customers .......       $125,779         $4,448         ($10,887)              $-          $119,340
        Intersegment .................            909           (809)          15,957          (16,057)                -
                                        --------------  ---------------  -------------  ---------------- ----------------
    Total income before income taxes..       $126,688         $3,639           $5,070         ($16,057)         $119,340
                                        --------------  ---------------  -------------  ---------------- ----------------
    Identifiable assets...............     $4,591,374     $5,474,619          $48,731               $-       $10,114,724
                                        --------------  ---------------  -------------  ---------------- ----------------



                                       8



Notes to Consolidated Unaudited Financial Statements (Continued)
(Dollars in thousands)




                                          Financial       Financial      Corporate       Intersegment
Nine months ended September 30,           Guarantee        Services       And Other      Eliminations     Consolidated
                                        --------------  ---------------  -------------  ---------------- ----------------
2001:
    Revenues:
                                                                                                 
        Unaffiliated customers .......       $492,831        $33,933           $1,710               $-          $528,474
        Intersegment .................          3,422         (2,916)          52,000          (52,506)                -
                                        --------------  ---------------  -------------  ---------------- ----------------
    Total revenues....................       $496,253        $31,017          $53,710         ($52,506)         $528,474
                                        --------------  ---------------  -------------  ---------------- ----------------
    Income before income taxes:
        Unaffiliated customers .......       $427,660        $17,306         ($31,000)              $-          $413,966
        Intersegment .................          3,742         (2,775)          50,959          (51,926)                -
                                        --------------  ---------------  -------------  ---------------- ----------------
    Total income before income taxes..       $431,402        $14,531          $19,959         ($51,926)         $413,966
                                        --------------  ---------------  -------------  ---------------- ----------------
    Identifiable assets...............     $5,581,637     $5,775,782          $53,084               $-       $11,410,503
                                        --------------  ---------------  -------------  ---------------- ----------------
2000:
    Revenues:
        Unaffiliated customers .......       $416,987        $38,554           $1,522               $-          $457,063
        Intersegment .................          2,679         (2,463)          47,886          (48,102)                -
                                        --------------  ---------------  -------------  ---------------- ----------------
    Total revenues....................       $419,666        $36,091          $49,408         ($48,102)         $457,063
                                        --------------  ---------------  -------------  ---------------- ----------------
    Income before income taxes:

        Unaffiliated customers .......       $365,668        $19,991         ($32,055)              $-          $353,604
        Intersegment .................          2,679         (2,412)          47,885          (48,152)                -
                                        --------------  ---------------  -------------  ---------------- ----------------
    Total income before income taxes..       $368,347        $17,579          $15,830         ($48,152)         $353,604
                                        --------------  ---------------  -------------  ---------------- ----------------
    Identifiable assets...............     $4,591,374     $5,474,619          $48,731               $-       $10,114,724
                                        --------------  ---------------  -------------  ---------------- ----------------



     The following table summarizes unaffiliated gross premiums written and net
premiums earned included in the financial guarantee segment by location of risk
for the three and nine-month periods ended September 30, 2001 and 2000.



                                                        Three Months                         Nine Months
                                             ----------------------------------   ----------------------------------
                                              Gross Premiums     Net Premiums       Gross Premiums    Net Premiums
 2001:                                            Written           Earned             Written           Earned
                                             -----------------  ---------------   ------------------ ---------------
                                                                                               
     United States ......................            $128,544          $81,340             $382,997        $232,002
     United Kingdom .....................               7,307            2,922               34,732           6,958
     Japan...............................               3,298            2,332                8,808           6,486
     Mexico..............................               4,061            1,885               12,087           5,568
     Australia...........................               2,107              994                7,158           2,787
     France..............................                  95              274                  531             822
     Internationally diversified (1).....               4,247            4,481               24,993          11,801
     Other international.................               3,259            3,791               27,947          10,123
                                             -----------------  ---------------   ------------------ ---------------
         Total...........................            $152,918          $98,019             $499,253        $276,547
                                             -----------------  ---------------   ------------------ ---------------
 2000:
     United States ......................            $124,160          $65,262             $256,963        $196,399
     United Kingdom .....................               1,930            2,130               15,429           4,554
     Japan...............................               1,903            1,737                5,374           4,943
     Mexico..............................               3,960            1,942               12,106           5,555
     Australia...........................               9,163              942               26,589           2,386
     France .............................                 129              268                  650             861
     Internationally diversified (1).....               3,709            4,299                9,656           9,727
     Other international.................               2,995            2,115               12,189           6,349
                                             -----------------  ---------------   ------------------ ---------------
         Total...........................            $147,949          $78,695             $338,956        $230,774
                                             -----------------  ---------------   ------------------ ---------------



1) Internationally diversified includes guarantees with multiple locations of
risk and includes components of domestic exposure.


                                       9



Notes to Consolidated Unaudited Financial Statements (Continued)
(Dollars in thousands)

(3)  Cumulative Effect of Accounting Change

     In June 1998, the Financial Accounting Standards Board issued FAS Statement
133, "Accounting for Derivative Instruments and Hedging Activities". FAS 133, as
amended by FAS 138 and related guidance, established accounting and reporting
standards for derivative instruments and hedging activities. Ambac adopted FAS
133 and its related guidance on January 1, 2001, that resulted in transition
adjustment losses of $0.9 million (net of related income tax) in Accumulated
Other Comprehensive Income and $0.4 million (net of related income tax) in net
income.

(4)  Goodwill and Other Intangible Assets

     In July 2001, the FASB issued FAS Statement 142, "Goodwill and Other
Intangible Assets". FAS 142 addresses the initial recognition and measurement of
intangible assets either singly or within a group of assets, as well as the
measurement of goodwill and other intangible assets subsequent to their initial
acquisition. FAS 142 changes the accounting for goodwill and intangible assets
that have indefinite useful lives from an amortization approach to an
impairment-only approach that requires that those assets be tested at least
annually for impairment. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives, but without an arbitrary
ceiling on their useful lives. FAS 142 is required to be applied starting with
fiscal years beginning after December 15, 2001 and is required to be applied at
the beginning of an entity's fiscal year. The statement is to be applied to all
goodwill and other intangible assets recognized in an entity's financial
statements at that date. Impairment losses for goodwill and indefinite lived
intangible assets that arise due to the initial application of FAS 142
(resulting from an impairment test) are to be reported as a change in accounting
principle. Retroactive application is not permitted. Ambac has not yet
determined the impact that FAS 142 will have on its consolidated financial
statements.


                                       10




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

     The following paragraphs describe the consolidated results of operations of
Ambac and its subsidiaries for the three and nine-month periods ended September
30, 2001 and 2000, and its financial condition as of September 30, 2001 and
December 31, 2000. These results are presented for Ambac's two reportable
segments: Financial Guarantee and Financial Services.

     Materials in this Form 10-Q may contain information that includes or is
based upon forward-looking statements within the meaning of the Securities
Litigation Reform Act of 1995. Forward-looking statements give Ambac's
expectations or forecasts of future events. You can identify these statements by
the fact that they do not relate strictly to historical or current facts and
relate to future operating or financial performance.

     Any or all of Ambac's forward-looking statements here or in other
publications may turn out to be wrong and are based on current expectations and
the current economic environment. Ambac's actual results may vary materially,
and there are no guarantees about the performance of our securities. Among
factors that could cause actual results to differ materially are: (1) changes in
the economic, credit or interest rate environment in the United States and
abroad; (2) the level of activity within the national and worldwide debt
markets; (3) competitive conditions and pricing levels; (4) legislative and
regulatory developments; (5) changes in tax laws, (6) the policies and actions
of the United States and other governments and (7) other risks and uncertainties
that have not been identified at this time. Ambac is not obligated to publicly
correct or update any forward-looking statement if we later become aware that it
is not likely to be achieved, except as required by law. You are advised,
however, to consult any further disclosures we make on related subjects in
Ambac's reports to the SEC.

Results of Operations

     Consolidated Net Income

     Ambac's net income for the three months ended September 30, 2001 was $111.0
million or $1.02 per diluted share. This represents a 22% increase from the
three months ended September 30, 2000 in net income of $90.9 million and a 21%
increase in net income per diluted share from $0.84 in the three months ended
September 30, 2000. The increase in net income was primarily attributable to
higher Financial Guarantee operating earnings driven by a $32.4 million, or 23%,
increase in revenues, partially offset by lower financial services revenues.
Ambac's net income for the nine months ended September 30, 2001 was $316.2
million, or $2.90 per diluted share. This represents an increase of 17% from the
comparable prior period net income of $269.2 million, and a 16% increase in net
income per diluted share from $2.51 per diluted share for the nine months ended
September 30, 2000.

     Financial Guarantee

     Ambac provides financial guarantees for municipal and structured finance
obligations through its principal operating subsidiary, Ambac Assurance. Ambac
Assurance serves clients in international markets through its wholly owned
subsidiary, Ambac Assurance UK Limited.

     Ambac Credit Products, L.L.C., a wholly owned subsidiary of Ambac
Assurance, also provides credit protection in the global markets in the form of
structured credit derivatives.


                                       11




Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations (Continued)

     Gross Par Written. Ambac Assurance guaranteed $15.9 billion in par value
     -----------------
bonds during the three months ended September 30, 2001, a 4% decrease from $16.5
billion in par during the comparable prior year period. Par value written for
the third quarter of 2001 was comprised of $8.8 billion from municipal bond
obligations, $3.9 billion from structured finance obligations and $3.2 billion
from international obligations, compared to $7.7 billion, $5.5 billion and $3.3
billion, respectively, in the third quarter of 2000. During the nine months
ended September 30, 2001, Ambac Assurance guaranteed $60.5 billion in par value
bonds, a 14% increase from $53.1 billion in par during the first nine months of
2000. Par value written for the nine months ended September 30, 2001 was
comprised of $26.2 billion from municipal bond obligations, $19.7 billion from
structured finance obligations and $14.6 billion from international obligations,
compared to $14.2 billion, $22.0 billion, and $16.9 billion, respectively, for
the nine months ended September 30, 2000. Municipal obligations issued for the
three and nine-month periods ended September 30, 2001 saw increases of 18% and
39% respectively, versus comparable prior year periods. The increase in total
issuance was largely the result of the lower interest rate environment. Although
Ambac's new issue market share dropped from 29% in the third quarter of 2000 to
24% during the third quarter of 2001, there were increases in insured market
penetration during the periods, contributing to the increase in Ambac's insured
municipal obligations. Despite the decline in the third quarter of 2001, Ambac's
new issue municipal market share increased from 21% for the first nine months of
2000 to 25% for the first nine months of 2001. Declines in structured finance
guarantees resulted from lower mortgage-backed guarantees offset by greater
penetration into other consumer asset-backed types (auto rental, credit card and
lease securitizations). Changes to international guarantees primarily relate to
guarantees of structured credit derivatives. Structured credit derivative par
guarantees were $1.3 billion and $8.8 billion for the three and nine months
ended September 30, 2001, an increase of 117% from $0.6 billion in par in the
three months ended September 30, 2000 and a decrease of 12% from $10.0 billion
in par during the nine months ended September 30, 2000.

     Gross Premiums Written. Gross premiums written for the three and nine-month
     ----------------------
periods ended September 30, 2001 were $152.9 million and $499.3 million,
respectively, an increase of 3% over $147.9 million in the three-month period
ended September 30, 2000 and an increase of 47% from $339.0 million in the nine
months ended September 30, 2000. Installment premiums written for the three and
nine months ended September 30, 2001 were $62.3 million and $176.4 million,
respectively, an increase of 29% from $48.3 million in the three months ended
September 30, 2000 and an increase of 33% over $132.7 million in the nine months
ended September 30, 2000. The growth in installment premiums is due to the
growing book of business in all segments. Structured finance premiums collected
up-front decreased from $6.9 million to $0.5 million as a result of a decline in
leveraged lease utility transactions. On the municipal side, Ambac saw an
increase in writings for the three and nine months ended September 30, 2001. As
mentioned above under "Gross Par Written", this was a result of increases in
municipal market volume partially offset by a decline in market share for the
third quarter of 2001. The following tables set forth the amounts of gross
premiums written and the related gross par written by type:



                                       12



Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations (Continued)




                                                                      Three Months Ended September 30,
                                                             ----------------------------------------------------
(Dollars in Millions)                                                  2001                       2000
                                                             -------------------------  -------------------------
                                                                Gross        Gross         Gross        Gross
                                                              Premiums        Par        Premiums        Par
                                                               Written      Written       Written      Written
                                                             ------------  -----------  ------------  -----------
Municipal finance:
    Up-front:
                                                                                              
      New issue.........................................           $81.1       $7,811         $80.9       $6,720
      Secondary market..................................             2.2          192           2.2          246
                                                             ------------  -----------  ------------  -----------
        Sub-total up-front .............................            83.3        8,003          83.1        6,966
    Installment.........................................             9.5          771           4.2          685
                                                             ------------  -----------  ------------  -----------
           Total municipal finance......................            92.8        8,774          87.3        7,651
                                                             ------------  -----------  ------------  -----------
Structured finance:
      Up-front..........................................             0.5          206           6.9          316
      Installment.......................................            35.2        3,702          29.9        5,187
                                                             ------------  -----------  ------------  -----------
            Total structured finance....................            35.7        3,908          36.8        5,503
                                                             ------------  -----------  ------------  -----------
International(1):

         Up-front.......................................             6.8          898           9.6          696
         Installment....................................            17.6        2,304          14.2        2,614
                                                             ------------  -----------  ------------  -----------
              Total  international......................            24.4        3,202          23.8        3,310
                                                             ------------  -----------  ------------  -----------
              Total.....................................          $152.9      $15,884        $147.9      $16,464
                                                             ============  ===========  ============  ===========

Total up-front..........................................           $90.6       $9,107         $99.6       $7,978
Total installment.......................................            62.3        6,777          48.3        8,486
                                                             ------------  -----------  ------------  -----------
              Total.....................................          $152.9      $15,884        $147.9      $16,464
                                                             ============  ===========  ============  ===========


                                                                       Nine Months Ended September 30,
                                                             ----------------------------------------------------
(Dollars in Millions)                                                  2001                       2000
                                                             -------------------------  -------------------------
                                                                Gross        Gross         Gross        Gross
                                                              Premiums        Par        Premiums        Par
                                                               Written      Written       Written      Written
                                                             ------------  -----------  ------------  -----------
Municipal finance:
    Up-front:
      New issue.........................................          $233.3      $22,177        $129.9      $11,898
      Secondary market..................................            17.7        1,416           8.6          842
                                                             ------------  -----------  ------------  -----------
        Sub-total up-front .............................           251.0       23,593         138.5       12,740
    Installment.........................................            23.4        2,642          14.5        1,500
                                                             ------------  -----------  ------------  -----------
           Total municipal finance......................           274.4       26,235         153.0       14,240
                                                             ------------  -----------  ------------  -----------
Structured finance:
      Up-front..........................................             7.4          940          25.5        2,176
      Installment.......................................           101.2       18,699          78.5       19,776
                                                             ------------  -----------  ------------  -----------
            Total structured finance....................           108.6       19,639         104.0       21,952
                                                             ------------  -----------  ------------  -----------
International(1):

         Up-front.......................................            64.5        2,690          42.2        2,435
         Installment....................................            51.8       11,944          39.8       14,469
                                                             ------------  -----------  ------------  -----------
              Total  international......................           116.3       14,634          82.0       16,904
                                                             ------------  -----------  ------------  -----------
              Total.....................................          $499.3      $60,508        $339.0      $53,096
                                                             ============  ===========  ============  ===========

Total up-front..........................................          $322.9      $27,223        $206.3      $17,351
Total installment.......................................           176.4       33,285         132.7       35,745
                                                             ------------  -----------  ------------  -----------
              Total.....................................          $499.3      $60,508        $339.0      $53,096
                                                             ============  ===========  ============  ===========



(1) International par written includes structured credit derivatives of $1,337
million and $646 million for the three months ended September 30, 2001 and 2000,
respectively, and $8,848 million and $9,975 million for the nine months ended
September 30, 2001 and 2000, respectively. Previously, gross par written was net
of par related to international deals that were ceded to MBIA Insurance
Corporation pursuant to a joint venture agreement that ceased during 2000. Prior
period amounts have been restated.


                                       13



Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations (Continued)


     Ceded Premiums Written. Ceded premiums written for the three and nine
     ----------------------
months ended September 30, 2001 were $35.9 million and $72.3 million,
respectively, an increase of 79% from $20.1 million in the three months ended
September 30, 2000 and an increase of 16% from $62.5 million in the nine months
ended September 30, 2000. Ceded premiums written were 23.5% and 14.5% of gross
premiums written for the three and nine months ended September 30, 2001,
respectively, compared with 13.6% and 18.4% for the three and nine months ended
September 30, 2000, respectively. The increase in ceded premiums written for the
third quarter of 2001 was largely due to higher cessions of municipal premiums
pursuant to a reinsurance treaty that Ambac Assurance put into place earlier
this year. This treaty is designed to limit single risk exposure. The increase
in ceded premiums written for the nine months ended September 30, 2001 was
primarily from higher cessions of municipal premiums, partly offset by lower
cessions on international policies.

     Net Premiums Written. Net premiums written for the three and nine months
     --------------------
ended September 30, 2001 were $117.0 million and $426.9 million, respectively.
The 9% decrease from $127.9 million in the three months ended September 30, 2000
reflects the higher level of municipal cessions during the third quarter of
2001, partially offset by slightly higher gross premiums written. The increase
of 54% from $276.5 million in the nine months ended September 30, 2000 reflects
the higher level of gross premiums written, partially offset by higher premiums
ceded to reinsurers in the nine months ended September 30, 2001.

     Net Premiums Earned. Net premiums earned during the three and nine months
     -------------------
ended September 30, 2001 were $98.0 million and $276.5 million, respectively, an
increase of 25% from $78.7 million in the three months ended September 30, 2000,
and an increase of 20% from $230.8 million in the nine months ended September
30, 2000. These increases were primarily the result of the larger financial
guarantee book of business during the periods. Normal net premiums earned
(defined as net premiums earned excluding the effects of refundings, calls and
other accelerations of previously insured obligations, collectively referred to
as "refundings") increased 16% from $75.4 million in the third quarter of 2000
to $87.5 million in the third quarter of 2001. Normal net premiums earned for
the nine months ended September 30, 2001 were $249.3 million, an increase of 17%
from $212.6 million in the nine months ended September 30, 2000. The increases
in normal net premiums earned resulted primarily from strong business written
from prior periods in all areas.

     Net premiums earned include accelerated premiums that result from
refundings. When a guaranteed issue is called by the issuer or is in substance
paid in advance through a refunding, the remaining unearned premium is
recognized at that time. Refunding levels vary depending upon a number of
conditions, primarily the relationship between current interest rates and
interest rates on outstanding debt. Net premiums earned for the three and nine
months ended September 30, 2001 included $10.5 million (which had a net income
per diluted share effect of $0.05) and $27.2 million (which had a net income per
diluted share effect of $0.14) from refundings. Net premiums earned for the
three and nine months ended September 30, 2000 included $3.3 million (which had
a net income per diluted share effect of $0.02) and $18.2 million (which had a
net income per diluted share effect of $0.10) from refundings.

     Net Investment Income. Net investment income for the three and nine months
     ---------------------
ended September 30, 2001 was $67.3 million and $196.9 million, respectively, an
increase of 10% from $61.1 million in the three months ended September 30, 2000
and an increase of 11% from $177.6 million in the nine months ended September
30, 2000. The increases were



                                       14



Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations (Continued)


primarily attributable to the growth of the investment portfolio from ongoing
operations, partially offset by a lower reinvestment rate due to the current
interest rate environment. The average pre-tax yield-to-maturity on the
investment portfolio was 5.82% and 6.15% as of September 30, 2001 and 2000,
respectively. Ambac Assurance's investments in tax-exempt securities amounted to
68% of the total fair value of its portfolio as of September 30, 2001, versus
75% at September 30, 2000.

     Net Realized Gains (Losses). Net realized gains for the three and nine
     ---------------------------
months ended September 30, 2001 were $6.6 million and $3.0 million,
respectively. This compares to net realized losses of $2.5 million and $2.1
million for the three and nine months ended September 30, 2000. Included in net
realized gains for the three and nine months ended September 30, 2001 are
foreign exchange gains of $2.6 million and losses of $1.5 million, respectively,
related to Ambac Assurance's foreign denominated short-term investments. Foreign
exchange losses related to Ambac Assurance's foreign denominated short-term
investments for the three and nine months ended September 30, 2000 were $2.3
million and $5.0 million, respectively.

     Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
     -----------------------------------
for the three and nine months ended September 30, 2001 were $5.1 million and
$14.5 million, respectively, compared to $3.9 million and $10.8 million for the
three and nine months ended September 30, 2000, respectively. Losses and loss
adjustment expenses are based upon estimates of the ultimate aggregate losses
inherent in the financial guarantee portfolio. The liability for losses and loss
adjustment expenses consists of the active credit reserve, which represents an
estimate of the expected annual levels of debt service defaults resulting from
credit failures on currently guaranteed issues that are not presently or
imminently in default, and case basis loss reserves for obligations in monetary
default, or, in the judgement of management, for which default is imminent. The
following table summarizes Ambac's loss reserves split between case basis loss
reserves and active credit reserves at September 30, 2001 and December 31, 2000.



         (Dollars in millions)                                    September 30,          December 31,
                                                                      2001                   2000
         ------------------------------------------------------ ------------------     ------------------
         Net loss and loss adjustment expense reserves:
                                                                                       
             Case basis reserves *                                    $31.9                  $31.0
             Active credit reserves                                   112.8                  100.3
                                                                ------------------     ------------------
         Total                                                       $144.7                 $131.3
                                                                ------------------     ------------------



(*)  After netting reinsurance recoverable amounting to $1.9 million and $1.1
     million at September 30, 2001 and December 31, 2000, respectively.

     Management continually reviews and monitors the guaranteed book of business
for potential problem credits. Net additions were made to the case reserves of
$5.9 million and $5.1 million for the nine months ended September 30, 2001 and
2000, respectively. Losses paid and recoveries of previously paid losses were
$2.2 million and $1.1 million for the nine months ended September 30, 2001,
respectively, and $4.0 million and zero for the nine months ended September 30,
2000, respectively. The entire case reserves, losses paid and recoveries relate
to the municipal finance book of business for all periods presented.

     Underwriting and Operating Expenses. Underwriting and operating expenses
     -----------------------------------
for the three and nine months ended September 30, 2001 were $16.6 million and
$50.7 million, respectively, an increase of 26% from $13.2 million in the three
months ended September 30, 2000 and an increase of 25% from $40.6 million in the
nine months ended September 30, 2000. Underwriting and operating expenses
consist of gross underwriting and operating



                                       15



Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations (Continued)

expenses, less the deferral to future periods of expenses and reinsurance
commissions related to the acquisition of new insurance contracts, plus the
amortization of previously deferred expenses and reinsurance commissions. During
the three and nine month periods ended September 30, 2001, gross underwriting
and operating expenses were $21.5 million and $72.8 million, respectively, a
decrease of 4% from $22.5 million in the three months ended September 30, 2000
and an increase of 15% from $63.5 million in the nine months ended September 30,
2000. The decrease in the three months ended September 30, 2001 is a result of
lower premium taxes as a result of a refund, partially offset by increased
compensation related to new hires. The increase in expenses for the nine months
ended September 20, 2001 reflects the overall increased business activity during
the period due to increased compensation costs related to new hires.
Underwriting and operating expenses deferred for the three and nine months ended
September 30, 2001 were $12.2 million and $43.5 million, respectively, and $14.7
million and $39.7 million for the three and nine months ended September 30,
2000, respectively. The amortization of previously deferred expenses and
reinsurance commissions for the three and nine months ended September 30, 2001
were $7.3 million and $21.4 million, respectively, and $5.6 million and $16.9
million for the three and nine months ended September 30, 2000, respectively.

     Financial Services

     Through its financial services subsidiaries, Ambac provides financial and
investment products including investment agreements, interest rate swaps,
funding conduits, investment advisory and cash management services, principally
to its financial guarantee clients which include municipalities and their
authorities, school districts, health care organizations and asset-backed
issuers.

     Revenues. Revenues, excluding realized gains and losses, for the three and
     --------
nine months ended September 30, 2001 were $10.2 million and $36.5 million,
respectively, a decrease of 6% from $10.9 million in revenues for the third
quarter of 2000 and a decrease of 21% from $46.4 million for the nine months
ended September 30, 2000. Investment agreements declined 24%, from $4.6 million
in revenues in the third quarter of 2000 to $3.5 million in the third quarter of
2001, due to lower interest rate spreads. An increase in municipal swap revenues
of 27%, to $3.3 million in the third quarter of 2001 from $2.6 million in the
third quarter of 2000, was due to higher post inception revenue during the third
quarter of 2001. Investment advisory and cash management revenues decreased 6%
to $3.5 million in the third quarter of 2001 compared to $3.7 million in the
third quarter of 2000. Investment agreement revenues for the nine months ended
September 30, 2001 were $9.8 million, down 36% from $15.4 million in the nine
months ended September 30, 2000. Interest rate swap revenues for the nine months
ended September 30, 2001 were $16.4 million, down 23% from $21.4 million in the
nine months ended September 30, 2000. Investment advisory and cash management
revenues for the nine months ended September 30, 2001 were $10.1 million, up 5%
from $9.6 million in the nine months ended September 30, 2000.

     Expenses. Expenses for the three and nine months ended September 30, 2001
     --------
were $5.0 million and $16.6 million, respectively, down 14% from $5.8 million in
the three months ended September 30, 2000 and down 11% from $18.6 million in the
nine months ended September 30, 2000.



                                       16



Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations (Continued)

     Corporate Items

     Income Taxes. Income taxes for the three and nine months ended September
     ------------
30, 2001 were at an effective rate of 23.1% and 23.5%, respectively, versus
23.8% and 23.9% for the three and nine months ended September 30, 2000.

     Supplemental Analytical Financial Data

     Management, equity analysts and investors consider the following three
measures important in analyzing the financial results of Ambac: core earnings;
operating earnings; and adjusted gross premiums written. However, none of these
measures are promulgated in accordance with GAAP and should not be considered as
substitutes for net income and gross premiums written. The definitions of core
earnings, operating earnings, and adjusted gross premiums written described
below may differ from the definitions used by other public holding companies of
financial guarantee insurers.

     Core Earnings. Ambac defines core earnings as consolidated net income, less
     -------------
the effect of net realized gains and losses, unrealized mark-to-market gains and
losses in the Company's structured credit derivatives business, net insurance
premiums earned from refundings and calls and certain non-recurring items. Core
earnings for the three and nine months ended September 30, 2001 were $105.9
million and $303.6 million, respectively, an increase of 16% from $91.5 million
for the three months ended September 30, 2000 and an increase of 14% from $266.5
million for the nine months ended September 30, 2000. These increases were
primarily the result of higher normal net premiums earned from the growth in the
financial guarantee book of business, higher net investment income and higher
structured credit derivative revenue (excluding unrealized mark-to-market
losses), all from financial guarantee operations. These increases were partially
offset by higher expenses in the financial guarantee segment and lower revenues
from the investment agreement business in the financial services segment.

     Operating Earnings. Ambac defines operating earnings as consolidated net
     ------------------
income, less the effect of net realized gains and losses, unrealized
mark-to-market gains and losses in the Company's structured credit derivatives
business and certain non-recurring items. Operating earnings for the three and
nine months ended September 30, 2001 were $111.9 million and $319.1 million,
respectively, an increase of 20% from $93.4 million in the three months ended
September 30, 2000 and an increase of 15% from $276.9 million for the nine
months ended September 30, 2000.


                                       17



Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations (Continued)

     The following table reconciles net income computed in accordance with GAAP
to operating earnings and core earnings for the three and nine months ended
September 30, 2001 and 2000:



                                                              Three Months Ended                 Nine Months Ended
                                                                 September 30,                     September 30,
                                                        ------------------------------- -- -----------------------------
(Dollars in Millions)                                         2001                 2000          2001            2000
                                                        --------------    -------------    -------------    ------------

                                                                                                     
Net Income............................................       $111.0             $90.9           $316.2           $269.2

Net realized (gains) losses, after tax................         (1.1)              2.0              0.6              6.5

Unrealized mark-to-market losses, after tax...........          2.0               0.5              1.9              1.2

Non-recurring item, after tax.........................            -                 -              0.4                -
                                                        --------------    -------------    -------------    ------------

         Operating earnings...........................        111.9              93.4            319.1            276.9

Premiums earned from refundings, calls and other
accelerations, after tax..............................         (6.0)             (1.9)           (15.5)           (10.4)
                                                        --------------    -------------    -------------    ------------
         Core earnings................................       $105.9             $91.5           $303.6           $266.5
                                                        ==============    =============    =============    ============



Adjusted Gross Premiums Written. Ambac defines adjusted gross premiums written
- -------------------------------
as gross (direct and assumed) up-front premiums written plus the present value
of estimated installment premiums written on insurance policies and structured
credit derivatives issued in the period. Previously, adjusted gross premiums was
net of premiums related to international deals that were ceded to MBIA Insurance
Corporation pursuant to a joint venture that ceased during 2000. Prior period
amounts have been restated. Adjusted gross premiums for the three and nine
months ended September 30, 2001 were $180.6 million and $646.1 million,
respectively, up 1% from $179.3 million in the three months ended September 30,
2000 and up 26% from $514.0 million in the nine months ended September 30, 2000.
The increases in 2001 were primarily due to increased activity in municipal
finance and international, partially offset by a decline in structured finance.
On the municipal side, Ambac benefited from increased municipal volume resulting
from the lower interest rate environment and insured penetration, partially
offset by lower market share in the third quarter of 2001. The structured
business was negatively impacted by the tragic events of September 11, with
several large transactions postponed. Adjusted gross premiums for the five
largest structured transactions decreased from $28.9 million (three transactions
greater than $6 million) in the third quarter of 2000 to $14.9 million (no
transactions greater than $6 million) in the third quarter of 2001.
International premiums written in the third quarter of 2001 was dominated by a
large health care securitization in the United Kingdom.




                                       18



Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations (Continued)

     The following table sets forth the amounts of adjusted gross premiums by
type and percent of total for the three and nine months ended September 30, 2001
and 2000:




                                                Three Months Ended September 30,         Nine Months Ended September 30,
                                            --------------------------------------  ---------------------------------------
(Dollars in Millions)                         2001        %       2000       %        2001       %        2000        %
                                            ---------- -------- --------- --------  ---------  -------  ---------  --------
Municipal Finance:
    Up-front:
                                                                                               
      New issue...........................      $81.1       45%    $80.9       45%    $233.3       36%    $130.0        25%
      Secondary market....................        2.2        1       2.2        1       17.7        3        8.6         2
                                            ---------- -------- --------- --------  ---------  -------  ---------  --------
        Sub-total up-front ...............       83.3       46      83.1       46      251.0       39      138.6        27
    Installment...........................       15.5        9       6.5        4       41.2        6       20.4         4
                                            ---------- -------- --------- --------  ---------  -------  ---------  --------
           Total Municipal Finance........       98.8       55      89.6       50      292.2       45      159.0        31
                                            ---------- -------- --------- --------  ---------  -------  ---------  --------
Structured Finance:
      Up-front............................        0.5        -       7.0        4        7.4        1       25.5         5
      Installment.........................       27.1       15      46.6       26      153.5       24      150.8        29
                                            ---------- -------- --------- --------  ---------  -------  ---------  --------
         Total Structured Finance.........       27.6       15      53.6       30      160.9       25      176.3        34
                                            ---------- -------- --------- --------  ---------  -------  ---------  --------
International (1):
         Up-front.........................        6.8        4       9.6        5       64.5       10       42.2         8
         Installment......................       47.4       26      26.5       15      128.5       20      136.5        27
                                            ---------- -------- --------- --------  ---------  -------  ---------  --------
         Total  International.............       54.2       30      36.1       20      193.0       30      178.7        35
                                            ---------- -------- --------- --------  ---------  -------  ---------  --------
Total adjusted gross premiums.............     $180.6      100%   $179.3      100%    $646.1      100%    $514.0       100%
                                            ========== ======== ========= ========  =========  =======  =========  ========

Total up-front............................      $90.6       50%    $99.7       56%    $322.9       50%    $206.3        40%
Total installment.........................       90.0       50      79.6       44      323.2       50      307.7        60
                                            ---------- -------- --------- --------  ---------  -------  ---------  --------
Total  adjusted gross premiums............     $180.6      100%  $179.38      100%    $646.1      100%    $514.0       100%
                                            ========== ======== ========= ========  =========  =======  =========  ========



(1) Adjusted gross premiums written include reinsurance assumed of $7.0 million
and $48.6 million in the third quarter and nine months of 2001. Adjusted gross
premiums written also include structured credit derivatives of $7.4 million and
$22.1 million for the three and nine months ended September 30,2001,
respectively, and $2.0 million and $29.4 million for the three and nine months
ended September 30, 2000, respectively.

     Liquidity and Capital Resources

     Ambac Financial Group, Inc. Liquidity. Ambac's liquidity, both on a
     -------------------------------------
short-term basis (for the next twelve months) and a long-term basis (beyond the
next twelve months), is largely dependent upon (i) Ambac Assurance's and other
subsidiaries' ability to pay dividends or make payments to Ambac; and (ii)
external financings. Pursuant to Wisconsin insurance laws, Ambac Assurance may
declare dividends, provided that, after giving effect to the distribution, it
would not violate certain statutory equity, solvency and asset tests. During the
nine months ended September 30, 2001, Ambac Assurance paid dividends of $51.0
million on its common stock to Ambac. Also during the nine months ended
September 30, 2001, Ambac Capital Corporation, a financial services wholly-owned
subsidiary paid dividends of $1.0 million on its common stock to Ambac.

     Ambac's principal uses of liquidity are for the payment of its operating
expenses, interest on its debt, dividends on its shares of common stock,
purchases of its common stock in the open market and capital investments in its
subsidiaries. Based on the amount of dividends that it expects to receive from
Ambac Assurance and other subsidiaries during the next twelve months and the
income it expects to receive from its investment portfolio, management believes
that Ambac will have sufficient liquidity to satisfy its liquidity needs over
the next twelve months, including the ability to pay dividends on its common
stock in accordance with its dividend policy. Beyond the next twelve months,
Ambac Assurance's ability to declare and pay dividends to Ambac may be
influenced by a variety of factors, including adverse market changes, insurance
regulatory changes and changes in general economic conditions. Consequently,
although management believes that Ambac will continue to have



                                       19




Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations (Continued)


sufficient liquidity to meet its debt service and other obligations over the
long term, no guarantee can be given that Ambac Assurance will be permitted to
dividend amounts sufficient to pay all of Ambac's operating expenses, debt
service obligations and dividends on its common stock.

     On October 17, 2001, Ambac issued $200.0 million in principal amount of
7.0% debentures due on October 17, 2051. Ambac may not redeem the debentures
prior to October 17, 2006. On or after October 17, 2006, Ambac may redeem the
debentures at 100% of their principal amount, plus accrued interest to the date
of redemption. Use of the net proceeds received from the sale of the debentures
will be for general corporate purposes, which include additions to working
capital of subsidiaries, acquisitions and repurchases of common stock. These
debentures will be listed on the New York Stock Exchange.

     Ambac Assurance Liquidity. The principal uses of Ambac Assurance's
     -------------------------
liquidity are the payment of operating expenses, reinsurance premiums, income
taxes, dividends to Ambac and capital investments in its subsidiaries.
Management believes that Ambac Assurance's operating liquidity needs can be
funded exclusively from its operating cash flow. The principal sources of Ambac
Assurance's liquidity are gross premiums written, scheduled investment
maturities, net investment income and receipts from structured credit
derivatives.

     Financial Services Liquidity. The principal uses of liquidity by financial
     ----------------------------
services subsidiaries are payment of investment agreement obligations pursuant
to defined terms, net obligations under interest rate swaps and related hedges,
operating expenses, income taxes and dividends to Ambac. Management believes
that its financial services liquidity needs can be funded primarily from its
operating cash flow and the maturity of its invested assets. The principal
sources of this segment's liquidity are proceeds from issuance of investment
agreements, net investment income, maturities of securities from its investment
portfolio (which are invested with the objective of matching the maturity
schedule of its obligations under the investment agreements), net receipts from
interest rate swaps and related hedges, and fees for investment management
services. Additionally, from time to time, liquidity needs of the financial
services subsidiaries are satisfied by short-term inter-company loans from
Ambac. The investment objectives with respect to investment agreements are to
achieve the highest after-tax total return, subject to a minimum average credit
quality rating of Aa/AA on invested assets, and to maintain cash flow matching
of invested assets to funded liabilities to minimize interest rate and liquidity
exposure. Financial services maintain a portion of their assets in short-term
investments and repurchase agreements in order to meet unexpected liquidity
needs.

     Credit Facilities. Ambac and Ambac Assurance have a revolving credit
     -----------------
facility with four major international banks for $200 million, which expires in
August 2002 and provides a two-year term loan provision. The facility is
available for general corporate purposes, including the payment of claims. As of
September 30, 2001 and December 31, 2000, no amounts were outstanding under this
credit facility.

     Ambac Assurance maintains third party capital support in the form of
seven-year irrevocable limited recourse credit facilities from a group of highly
rated banks for $800 million. These credit facilities provide liquidity to Ambac
Assurance in the event claims from municipal or certain structured obligations
in its covered portfolios exceed specified levels. Repayments of amounts drawn
under the credit facilities are limited primarily to the amount of any
recoveries of losses related to policy obligations in the covered portfolios.
The line expires in




                                       20



Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations (Continued)

June 2008. As of September 30, 2001 and December 31, 2000, no amounts were
outstanding under these facilities.

     Ambac Credit Products, L.L.C. has a revolving credit facility with one
major international bank for $50 million that expires in June 2002 and provides
a three-year term loan provision. The facility is available to Ambac Credit
Products for general corporate purposes, including payments in regard to its
structured credit derivative activities. As of September 30, 2001 and December
31, 2000, no amounts were outstanding under this facility.

     Stock Repurchase Program. The Board of Directors of Ambac has authorized
     ------------------------
the establishment of a stock repurchase program that permits the repurchase of
up to 12,000,000 shares of Ambac's Common Stock. During the nine months ended
September 30, 2001, Ambac acquired approximately 680,000 shares for an aggregate
amount of $35.9 million. Since inception of the Stock Repurchase Program, Ambac
has acquired approximately 8,170,000 shares for an aggregate amount of $219.8
million.

     Balance Sheet. Total assets as of September 30, 2001 were $11.41 billion,
     -------------
an increase of 13% from $10.12 billion at December 31, 2000. This increase was
primarily due to an increase in the fair value of Ambac's investment portfolio.
As of September 30, 2001, stockholders' equity was $2.96 billion, a 14% increase
from year-end 2000 stockholders' equity of $2.60 billion. The increase stemmed
primarily from net income during the period and an increase in the value of the
investment portfolio due to a decline in interest rates.

     Cash Flows. Net cash provided by operating activities was $507.5 million
     ----------
and $326.1 million during the nine months ended September 30, 2001 and 2000,
respectively. These cash flows were primarily provided by financial guarantee
operations.

     Net cash provided by financing activities was $189.7 million during the
nine months ended September 30, 2001, of which $224.5 million was provided by
investment agreements issued (net of draws paid). For the nine months ended
September 30, 2000, $893.4 million was used in financing activities, of which
$890.2 million was used by investment agreements draws paid (net of investment
agreements issued).

     Net cash used in investing activities was $631.2 million during the nine
months ended September 30, 2001, of which $3,418.9 million was used to purchase
bonds, partially offset by the proceeds from sales and maturities of bonds of
$2,860.6 million. For the nine months ended September 30, 2000, $568.5 million
was provided by investing activities, of which $2,240.1 million was provided by
sales and maturities of bonds, partially offset by purchases of bonds totaling
$1,643.5 million.

     Material Commitments. Ambac has made no commitments for material capital
     --------------------
expenditures within the next twelve months.



                                       21



Item 3. Quantitative and Qualitative Disclosures About Market Risk

     In the ordinary course of business, Ambac, through its affiliates, manages
a variety of risks, principally market, credit, liquidity, operational, and
legal. These risks are identified, measured and monitored through a variety of
control mechanisms that are in place at different levels throughout the
organization.

     Market risk represents the potential for losses that may result from
changes in the value of a financial instrument as a result of changes in market
conditions. The primary market risks that would impact the value of Ambac's
financial instruments are interest rate risk, basis risk (taxable interest rates
relative to tax-exempt interest rates, discussed below) and credit spread risk.
Senior managers in Ambac's Risk Management Group are responsible for monitoring
risk limits and applying risk measurement methodologies. The estimation of
potential losses arising from adverse changes in market conditions is a key
element in managing market risk. Ambac utilizes various systems, models and
stress test scenarios to monitor and manage market risk. This process includes
frequent analyses of parallel and non-parallel shifts in the yield curve,
"Value-at-Risk" and changes in credit spreads. These models include estimates,
made by management, which utilize current and historical market information. The
valuation results from these models could differ materially from amounts that
would actually be realized in the market.

     Financial instruments that may be adversely affected by changes in interest
rates consist primarily of investment securities, investment agreement
liabilities, debentures, certain derivative contracts (primarily interest rate
swaps) used for hedging purposes.

     Financial instruments that may be adversely affected by changes in basis
include Ambac's municipal interest rate swap portfolio. Ambac, through its
affiliate Ambac Financial Services, L.P., is a provider of interest rate swaps
to states, municipalities and their authorities and other entities in connection
with their financings. Ambac Financial Services manages its business with the
goal of being market neutral to changes in overall interest rates, while seeking
to profit from retaining some basis risk. If actual or projected tax-exempt
interest rates change in relation to taxable interest rates, Ambac will
experience a mark-to-market gain or loss. Since late 1995, most municipal
interest rate swaps transacted by Ambac Financial Services contain provisions
that are designed to protect Ambac against certain forms of tax reform, thus
mitigating its basis risk. The estimation of potential losses arising from
adverse changes in market relationships, known as VaR, is a key element in
management's monitoring of basis risk for the municipal interest rate swap
portfolio. Ambac has developed a VaR methodology to estimate potential losses
over a specified holding period and based on certain probabilistic assessments.
Ambac's methodology estimates VaR using a 300-day historical "look back" period.
This means that changes in market values are simulated using market inputs from
the past 300 days. Since no single measure can capture all dimensions of market
risk, Ambac supplements its VaR methodology by performing analyses of parallel
and non-parallel shifts in yield curves and stress test scenarios which measure
the potential impact of normal market conditions, which might cause abnormal
volatility swings or disruptions of market relationships.



                                       22



Item 3. Quantitative and Qualitative Disclosures About Market Risk (Continued)


     Financial instruments that may be adversely affected by changes in credit
spreads include Ambac's outstanding structured credit derivative contracts.
Ambac, through its affiliate, Ambac Credit Products, enters into structured
credit derivative contracts. These contracts require Ambac Credit Products to
make payments upon the occurrence of certain defined credit events relating to
underlying obligations (generally fixed income obligations). If credit spreads
of the underlying obligations change, the market value of the related structured
credit derivative changes. As such, Ambac Credit Products could experience
mark-to-market gains or losses. Market liquidity could also impact valuations.
Changes in credit spreads are generally caused by changes in the market's
perception of the credit quality of the underlying obligations. The majority of
Ambac Credit Product's contracts are partially hedged with various financial
institutions or structured with first loss protection. Such structuring
mitigates Ambac Credit Product's risk of loss and reduces the price volatility
of these financial instruments. Personnel in Ambac's credit surveillance group
monitor credit spread risk. Additionally, management models the potential impact
of credit spread changes on the value of its contracts.




                                       23



PART II - OTHER INFORMATION

     Items 1, 2, 3, 4 and 5 are omitted either because they are inapplicable or
because the answer to such question is negative.

Item 6 - Exhibits and Reports on Form 8-K

(a)      The following are annexed as exhibits:



Exhibit
Number         Description
- ---------      ----------------------------------------------------------------
            
4.08           Form of 7.00% Debenture due October 17,2051. (Filed as Exhibit 1
               to the company's Registration Statement on Form 8-A dated October
               26, 2001 and incorporated herein by reference.)

4.09           Indenture dated as of August 24, 2001 between the Company and The
               Chase Manhattan Bank as trustee. (Filed as Exhibit 4.1 to the
               Company's Registration Statement on Form S-3 (Reg. No. 333-57206)
               and incorporated herein by reference.)

99.07          Ambac Assurance Corporation and Subsidiaries Consolidated
               Unaudited Financial Statements as of September 30, 2001 and
               December 31, 2000 and for the periods ended September 30, 2001
               and 2000.



(b)  Reports on Form 8-K:

     On September 17, 2001, Ambac filed a Current Report on Form 8-K with its
September 13, 2001 press release announcing that Ambac does not expect any
material claims as a result of the World Trade Center tragedy.

     On September 19, 2001, Ambac filed a Current Report on Form 8-K with its
September 18, 2001 press release providing additional information related to the
World Trade Center tragedy.

     On October 22, 2001, Ambac filed a Current Report on Form 8-K with its
October 17, 2001 press release containing unaudited interim financial
information and accompanying discussion for the three and nine months ended
September 30, 2001.


                                       24



                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                           Ambac Financial Group, Inc.
                                           (Registrant)

Dated:    November 14, 2001                By: /s/ Frank J. Bivona
                                               ----------------------------
                                               Frank J. Bivona
                                               Vice Chairman and Chief
                                               Financial Officer  (Principal
                                               Financial and Accounting Officer
                                               and Duly Authorized Officer)




                                       25




                                INDEX TO EXHIBITS

Exhibit
Number         Description
- ---------      ----------------------------------------------------------------
99.07          Ambac Assurance Corporation and Subsidiaries Consolidated
               Unaudited Financial Statements as of September 30, 2001 and
               December 31, 2000 and for the periods ended September 30, 2001
               and 2000.


                                       26