UNITED STATES

SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, DC 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 June 30, 2004
| | --------------------------------------------

or

| | [
] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from ______________ to _____________
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

Commission file number
001-14681

---

# PENN TREATY AMERICAN
CORPORATION

# 3440 Lehigh Street,
Allentown, PA 18103

# (610) 965-2222

|                             |  |                       
|---------------------------- |  | ----------------------
|Incorporated in Pennsylvania |  | I.R.S. Employer ID No.
|                             |  | 23-1664166            

---

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

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

The number of shares outstanding of
the Registrants common stock, par value $.10 per share, as of August 12, 2004 was
40,706,019.



---

# PART I FINANCIAL
INFORMATION

Item 1. Financial
Statements

Penn
Treaty American Corporation is one of the leading providers of long-term nursing home and
home health care insurance. Our unaudited Consolidated Balance Sheets, Statements of
Income and Comprehensive Income and Statements of Cash Flows and Notes thereto required
under this item are contained on pages 3 through 14 of this report. Our financial
statements represent the consolidation of our operations and those of our subsidiaries:
Penn Treaty Network America Insurance Company, American Network Insurance Company,
American Independent Network Insurance Company of New York, Penn Treaty (Bermuda) Ltd.
(dissolved in 2003), United Insurance Group Agency, Inc., Network Insurance Senior Health
Division and Senior Financial Consultants Company, which are underwriters and marketers of
long-term care insurance, Medicare supplement and other senior-market products.

---



|PENN TREATY AMERICAN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands, except per share data)
|---------------------------------------------------------------------------------------------------------------------------
|
|
|Investments:                                                                                                               
|Bonds, available for sale at market (cost of $50,069 and $42,933, respectively) (1)                                        
|Policy loans                                                                                                               
|                                                                                                                           
|Total investments                                                                                                          
|Cash and cash equivalents (1)                                                                                              
|Property and equipment, at cost, less accumulated depreciation of                                                          
|$10,053 and $9,635, respectively                                                                                           
|Unamortized deferred policy acquisition costs                                                                              
|Receivables from agents, less allowance for                                                                                
|uncollectible amounts of $480 and $404, respectively                                                                       
|Accrued investment income                                                                                                  
|Goodwill                                                                                                                   
|Receivable from reinsurers                                                                                                 
|Corporate owned life insurance                                                                                             
|Experience account due from reinsurer                                                                                      
|Other assets                                                                                                               
|                                                                                                                           
|Total assets                                                                                                               
|                                                                                                                           
|LIABILITIES                                                                                                                
|Policy reserves:                                                                                                           
|Accident and health                                                                                                        
|Life                                                                                                                       
|Claim reserves                                                                                                             
|Accounts payable and other liabilities                                                                                     
|Long-term debt, less discount of $1,530 and $1,625, respectively                                                           
|Preferred interest on early conversion                                                                                     
|Deferred income taxes                                                                                                      
|                                                                                                                           
|Total liabilities                                                                                                          
|                                                                                                                           
|Commitments and contingencies                                                                                              
|SHAREHOLDERS' EQUITY                                                                                                       
|Common stock, par value $.10; 150,000 shares authorized;                                                                   
|40,948 and 25,645 shares issued, respectively                                                                              
|Preferred stock, par value $1.00; 5,000 shares authorized, none outstanding                                                
|Additional paid-in capital                                                                                                 
|Accumulated other comprehensive (loss) income                                                                              
|Retained earnings                                                                                                          
|Less 915 common shares held in treasury, at cost                                                                           
|                                                                                                                           
|                                                                                                                           
|                                                                                                                           
|Total liabilities and shareholders' equity                                                                                 
|                                                                                                                           

| | (1)
Cash and investments of $30,013 and $28,490, respectively, are restricted as to use (see
Note 5).
| | -----------------------------------------------------------------------------------------------------

| | See
accompanying notes to consolidated financial statements.
| | ------------------------------------------------------------



---

|PENN TREATY AMERICAN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
(amounts in thousands, except per share data)
|----------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|Premium revenue                                                                                                                                           
|Net investment income                                                                                                                                     
|Net realized capital (loss) gain                                                                                                                          
|Market (loss) gain on notional experience account                                                                                                         
|Change in preferred interest on early conversion liability                                                                                                
|Other income                                                                                                                                              
|                                                                                                                                                          
|                                                                                                                                                          
|                                                                                                                                                          
|Benefits and expenses:                                                                                                                                    
|Benefits to policyholders                                                                                                                                 
|Commissions                                                                                                                                               
|Net policy acquisition costs amortized                                                                                                                    
|General and administrative expense                                                                                                                        
|Expense and risk charges on reinsurance                                                                                                                   
|Excise tax expense                                                                                                                                        
|Interest expense                                                                                                                                          
|                                                                                                                                                          
|                                                                                                                                                          
|                                                                                                                                                          
|(Loss) income  before federal income taxes                                                                                                                
|Federal income tax benefit (provision)                                                                                                                    
|                                                                                                                                                          
|Net (loss) income                                                                                                                                         
|                                                                                                                                                          
|Other comprehensive (loss) income:                                                                                                                        
|Unrealized holding (loss) gain arising during period                                                                                                      
|Income tax benefit (provision) from unrealized holdings                                                                                                   
|Reclassification of losses (gains) included in net income                                                                                                 
|Income tax (provision) benefit from reclassification adjustment                                                                                           
|                                                                                                                                                          
|Comprehensive (loss) income                                                                                                                               
|                                                                                                                                                          
|Basic earnings per share from net (loss) income                                                                                                           
|Diluted earnings per share from net (loss) income                                                                                                         
|Weighted average number of shares outstanding                                                                                                             
|Weighted average number of shares and share equivalents                                                                                                   

| | See
accompanying notes to consolidated financial statements.
| | ------------------------------------------------------------



---

|PENN TREATY AMERICAN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(amounts in thousands)
|--------------------------------------------------------------------------------------------------------------------------
|
|
|Cash flow from operating activities:                                                                                      
|Net income                                                                                                                
|Adjustments to reconcile net income to cash                                                                               
|provided by operations:                                                                                                   
|Depreciation and amortization                                                                                             
|Change in preferred interest on early conversion liability                                                                
|Net realized capital gains                                                                                                
|Notional experience account due from reinsurer                                                                            
|Investment credit on corporate owned life insurance                                                                       
|Equity issued for interest expense from long-term debt conversions                                                        
|Increase (decrease) due to change in:                                                                                     
|Receivables from agents                                                                                                   
|Receivable from reinsurers                                                                                                
|Deferred acquisition costs                                                                                                
|Deferred income taxes                                                                                                     
|Claim reserves                                                                                                            
|Policy reserves                                                                                                           
|Accounts payable and other liabilities                                                                                    
|Accrued investment income                                                                                                 
|Other, net                                                                                                                
|                                                                                                                          
|Cash provided by operations                                                                                               
|                                                                                                                          
|Cash flow from investing activities:                                                                                      
|Proceeds from sales of bonds                                                                                              
|Proceeds from maturities of bonds                                                                                         
|Purchase of bonds                                                                                                         
|Change in policy loans                                                                                                    
|Death benefits received from corporate owned life insurance                                                               
|Deposits to notional experience account due from reinsurer                                                                
|Acquisition of property and equipment                                                                                     
|                                                                                                                          
|Cash used in investing                                                                                                    
|                                                                                                                          
|Cash flow from financing activities:                                                                                      
|Repayment of long-term debt                                                                                               
|Issuance of long-term debt                                                                                                
|                                                                                                                          
|Cash provided by financing                                                                                                
|                                                                                                                          
|Decrease in cash and cash equivalents                                                                                     
|Cash balances:                                                                                                            
|Beginning of period                                                                                                       
|                                                                                                                          
|End of period                                                                                                             
|                                                                                                                          

| | See
accompanying notes to consolidated financial
statements.
| | ------------------------------------------------------------

---

PENN TREATY AMERICAN CORPORATION 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 



June 30, 2004 
(unaudited)
(amounts in thousands,except per share data)

The
Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial
 Statements included in the Annual Report on Form 10-K for
the year ended December 31, 2003 of Penn Treaty American Corporation (the
Company). Certain amounts in the June 30, 2003 financial statements have been
reclassified to conform to the presentation in the June 30, 2004 financial statements.

In
the opinion of management, the summarized financial information reflects all adjustments
(consisting only of normal recurring adjustments) that are necessary for a fair
presentation of the financial position and results of operations, comprehensive income and
cash flows for the interim periods.

1. Stock Based Employee
Compensation:

The
following table reflects net income, basic and diluted earnings per share as reported and
pro-forma as if the Company had adopted the fair value based method of accounting for its
stock-based employee compensation awards:

|                                            | Three Months Ended June 30, | Six Months Ended June 30,
|------------------------------------------- | --------------------------- | -------------------------
|
|Net (loss) income, as reported              |                             |                          
|Total stock-based employee                  |                             |                          
|compensation expense determined under       |                             |                          
|fair value based method for all awards, net |                             |                          
|of related tax effects                      |                             |                          
|                                            |                             |                          
|Pro forma net (loss) income                 |                             |                          
|                                            |                             |                          
|Earnings per share:                         |                             |                          
|Basic - as reported                         |                             |                          
|Basic - pro forma                           |                             |                          
|Diluted - as reported                       |                             |                          
|Diluted - pro forma                         |                             |                          

2. Regulatory
Developments:

Pennsylvania
Corrective Action Plan

The
Companys primary insurance subsidiary, Penn Treaty Network America Insurance Company
(PTNA), which represented approximately 91% of the Companys direct
premium revenue during the six months ended June 30, 2004, is subject to a Corrective
Action Plan (the Plan), as approved by the Pennsylvania Insurance Department
(the Department). American Network Insurance Company (ANIC), which
is wholly owned by PTNA, is also subject to the provisions of the Plan.



---

The
Plan principally:

| | a) | required the Company to enter into a reinsurance agreement with Centre Solutions
               (Bermuda) Limited (the 2001 Centre Agreement) for substantially all
               of its existing business at December 31, 2001;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | limits new investments to those rated by the National Association of Insurance
               Commissioners (NAIC) as 1 or 2;
| | -- | -------------------------------------------------------------------------------------------------------------------------------

| | c) | limits and requires Department approval for certain affiliated transactions; and
| | -- | --------------------------------------------------------------------------------

| | d) | requires a $125,000 increase in statutory reserves over a three-year period, of
               which an $11,000increase remains to be made by the December 31, 2004.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
2001 Centre Agreement is accounted for as reinsurance for statutory accounting purposes,
but does not qualify as reinsurance under generally accepted accounting principles
(GAAP). As the agreement is treated as reinsurance for statutory accounting
purposes, it results in the ceding (or removal) of substantially all of PTNAs and
ANICs policy reserve and claim reserve liabilities for statutory accounting
purposes. Furthermore, subject to certain limitations, any adverse development of the 2001
and prior policy and claim reserves, including the $125,000 of reserve increases mentioned
above, is ceded to the reinsurer and is not reflected on PTNAs or ANICs
statutory financial statements.

The
agreement is subject to certain coverage limitations, including an aggregate limit of
liability that is a function of certain factors and that may be reduced in the event that
the premium rate increases that the reinsurance agreement may require are not obtained.
The Company is required to perform annual comparisons of its actual to expected claims
experience. If the Company has reason to believe, whether from this analysis or other
available information, that at least a 5% premium rate increase is necessary, the Company
is obligated to file and obtain such premium rate increases in order to comply with the
requirements of the agreement. If the Company does not file and obtain such premium rate
increases, the aggregate limit of liability would be reduced by 50% of the premium amount
that would have otherwise been received. The Company is currently in compliance with the
agreement.

In
the event the statutory policy and claim reserves for the reinsured policies ultimately
exceed the limit of liability established in the reinsurance agreement, either as a result
of additions to reserves or reductions in the amount of the reinsurers limit of
liability, PTNA or ANIC would have to retain any reserve liabilities in excess of the
limit of liability, which could have a materially adverse impact upon their statutory
surplus.

The
estimation of policy reserves for statutory accounting purposes differs from that utilized
in GAAP. For statutory accounting purposes, the assumptions utilized and the methodology
applied may be at the discretion of the Department in its interpretation of its
regulations. As noted above, as part of the Plan, the Department has provided the Company
with guidelines for establishing its statutory policy reserves. Because PTNA and ANIC have
limited statutory capital and the 2001 Centre Agreement has a limit of liability, any
changes in the Departments interpretation or view of how the Companys
insurance subsidiaries determine their statutory policy reserves could have a material
adverse impact on PTNA or ANIC, possibly resulting in regulatory control or liquidation.

New
Policy Sales



---

The
Company is licensed and receives renewal premium revenue from policyholders in all states,
but is currently prohibited from issuing new policies in 10 states. In February 2004, the
Company received approval for the recommencement of sales in California, subject to
certain continuing conditions and pending approval of certain of its policy forms.
California represented approximately 15% of the Companys direct premium revenue for
the six months ended June 30, 2004. The Company is approved for sales in Florida and
Pennsylvania (subject to Corrective Action Plans), which accounted for approximately 17%
and 11% respectively, of the Companys direct premium revenue for the six months
ended June 30, 2004. No other states sales accounted for more than 10% of the
Companys direct premium revenue for the period ended June 30, 2004.

3. 2001 Centre Agreement:

As
a primary component of the Plan, effective December 31, 2001, the Company entered the 2001
Centre Agreement to reinsure, on a quota share basis, substantially all of its long-term
care insurance policies then in-force.

This
agreement does not qualify for reinsurance treatment in accordance with GAAP because it
does not result in the reasonable possibility that the reinsurer may realize a significant
loss. This is due to a number of factors related to the agreement, including experience
refund provisions, expense and risk charges due to the reinsurer and an aggregate limit of
liability. Accordingly, the contract is being accounted for in accordance with deposit
accounting for reinsurance contracts. However, this agreement meets the requirements to
qualify for reinsurance treatment under statutory accounting rules.

The
initial premium and future cash flows from the reinsured policies, less claims payments,
ceding commissions and risk charges, are credited to a notional experience account, which
is held for the Companys benefit in the event of commutation and recapture on or
after December 31, 2007. The notional experience account balance receives an investment
credit based upon the total return from a series of benchmark indices and derivative
hedges that are intended to match the duration of the Companys reserve liability.

The
notional experience account represents a hybrid instrument, containing both a fixed debt
host contract and an embedded derivative. The economic characteristics and risks of the
embedded derivative instrument are not clearly and closely related to the economic
characteristics and risks of the fixed debt host contract. The Company is accounting for
the investment credit received on the notional experience account as follows:

| | a) | The fixed debt host yields a fixed return based on the yield to maturity of the
               underlying benchmark indices. The return on the fixed debt host is reported as
               investment income in the Statements of Income and Comprehensive Income.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | The change in fair value of the embedded derivative represents the percentage
               change in the underlying indices applied to the notional experience account,
               similar to that of an unrealized gain/loss on a bond. The change in the fair
               value of the embedded derivative is reported as market gain (loss) on notional
               experience account in the Statements of Income and Comprehensive Income.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
benchmark indices are comprised of US treasury strips, agencies and investment grade
corporate bonds, with weightings of approximately 25%, 15% and 60%, respectively, and have
a duration of approximately 11 years. The hybrid instrument subjects the Companys
financial results to significant volatility as the estimated value of the embedded
derivative is highly sensitive to changes in prevailing market interest rates



---

For
the periods ended June 30, 2004 and 2003, respectively, the notional experience account
activity was as follows:

|                              | Three Months Ended June 30, | Six Months Ended June 30,
|----------------------------- | --------------------------- | -------------------------
|
|Beginning balance             |                             |                          
|Premiums, net of claims and   |                             |                          
|ceding allowance              |                             |                          
|Investment credit:            |                             |                          
|Investment income             |                             |                          
|Market (loss) gain            |                             |                          
|Expense and risk charges      |                             |                          
|Broker/custodian/trustee fees |                             |                          
|                              |                             |                          
|Ending balance                |                             |                          
|                              |                             |                          

The
reinsurance agreement contains commutation provisions and allows the Company to recapture
the reserve liabilities and the current notional experience account balance as of December
31, 2007, or on December 31 of any year thereafter. The Company intends, but is not
required, to commute the agreement on December 31, 2007. In the event the Company does not
commute the agreement on December 31, 2007, the expense and risk charges applied to the
notional experience account will increase significantly. Additionally, the reinsurance
provisions contain covenants and conditions that, if breached, may result in the immediate
commutation of the agreement and the payment of $2,500 per quarter from the period of the
breach through December 31, 2007.

The
Companys current modeling and actuarial projections, which were completed as of December 31, 2003
 suggest that it is likely to be
able to commute the agreement, as planned, on December 31, 2007. In order to commute the
agreement, PTNAs and ANICs statutory surplus following commutation must be
sufficient to support the reacquired business in compliance with all statutory
requirements. Upon commutation, the Company will receive cash or other liquid assets
equaling the value of the notional experience account from the reinsurer. The Company
would also record the necessary reserves for the business in PTNAs and ANICs
statutory financial statements. Accordingly, the Companys ability to commute the
agreement is highly dependent upon the value of the notional experience account exceeding
the level of required statutory reserves to be established. As of June 30, 2004, the
statutory basis reserve liabilities of $998,325 exceeded the combination of the notional
experience account value and funds held due to the reinsurer of $840,262. Management
expects the value of the notional experience account to exceed the reserve liabilities at
December 31, 2007. In addition to the performance of the reinsured policies from now
through 2007, the notional experience account value is susceptible to market interest rate
changes. Currently, a market interest rate increase of 100 basis points could reduce the
value of the current notional experience account by approximately $79,000 and jeopardize
the Companys ability to commute as planned. As the intended commutation date
approaches, the sensitivity of the notional experience account to market interest rate
movement will decline as the duration of the benchmark indices becomes shorter. However,
the amount of assets susceptible to such interest sensitivity will continue to grow as
additional net cash flows are credited to the notional experience account balance prior to
commutation.

In
the event the Company determines that commutation of the reinsurance agreement is unlikely
on December 31, 2007, but likely at some future date, it will include additional annual
reinsurer expense and risk charges in its DAC recoverability analysis. As a result, it
could impair the value of its DAC asset and record the impairment in its financial
statements at that time. However, the Company currently believes that PTNA and ANIC will
have sufficient statutory capital and surplus to commute the agreement on December 31,
2007 or that sufficient alternatives, such as additional capital issuance or new
reinsurance opportunities, will be available to enable it to commute the agreement on
December 31, 2007.



---

4. 2002 Centre Agreement:

The
2001 Centre Agreement granted the reinsurer an option to participate in reinsuring new
business sales on a quota share basis. In August 2002, the reinsurer exercised its option
to reinsure up to 50% of future sales, subject to a limitation of the reinsurers
risk. The reinsurer had the option to continue this level of participation on the first
$100 million in new policy premium issued after January 1, 2002. The final agreement,
which was entered into in December 2002, further provided the reinsurer the option to
reinsure a portion of the next $1 billion in newly issued long-term care annual insurance
premium, subject to maximum quota share amounts of up to 40% as additional policies were
written.

This
agreement does not qualify for reinsurance treatment in accordance with GAAP because the
agreement does not result in the reasonable possibility that the reinsurer may realize a
significant loss. This is due to an aggregate limit of liability that reduces the
likelihood of the reinsurer realizing a significant loss on the agreement. The agreement
meets the requirements to qualify for reinsurance treatment under statutory accounting
rules.

In
March 2004, the reinsurer notified the Company that it would discontinue the 2002 Centre
Agreement for any new long-term care insurance policies issued after July 31, 2004.
Policies issued prior to this date and policies covered by the 2001 Centre Agreement are
unaffected.  If we unable to replace this agreement, our statutory surplus could be negatively
impacted as a result of the surplus strain caused by new premium growth.

5. Contingencies:

The
Companys subsidiaries are parties to various lawsuits generally arising in the
normal course of their business. The Company does not believe that the eventual outcome of
any of these suits to which it is party will have a material adverse effect on its
financial condition or results of operations. However, the outcome of any single event
could have a material impact upon the quarterly or annual financial results of the period
in which it occurs.

The
Company and its subsidiary, PTNA, are defendants in an action in the Fifth Judicial
Circuit of the State of Florida in and for Marion County, Civil Division.  Plaintiffs
filed this matter on January 10, 2003 in Florida State Court, on behalf of themselves
and a class of similarly situated Florida long-term care policyholders. The Company
removed this case to United States District Court, Middle District of Florida, Ocala
Division for a second time in November 2003. Plaintiffs motion to remand the case to
Florida State Court was granted in April 2004.  Plaintiffs claim wrongdoing in
connection with the sale of long-term care insurance policies to the Plaintiffs and the
class. Plaintiffs allege claims for reformation, breach of fiduciary duty, breach of the
implied duty of good faith and fair dealing, negligent misrepresentation, fraudulent
misrepresentation, and restitution and pray for relief in the form of compensatory damages
and restitution, an order of reformation of the polices, and attorney fees and court
costs. The Company has filed motions to dismiss for failure to state a claim, lack of
personal jurisdiction against the Company, and to strike certain allegations of the
complaint as irrelevant and improper.  While the Company cannot predict the outcome
of this case, it could have a material adverse impact upon its financial condition and
results of operations in the event of an unfavorable outcome. The Company believes that
the complaint is without merit and intends to continue to defend the matter vigorously.



---

The
Company and its subsidiary, PTNA, are defendants in an action in the Orange County
Superior Court in the state of California. Plaintiffs filed this matter in November 2003
on behalf of themselves, all other persons similarly situated and the general public.
Plaintiffs claim wrongdoing in violation of the California Business & Professions Code
in connection with the sale of long term care insurance policies. Plaintiffs allege
unlawful business acts, claims for reformation, breach of fiduciary duty, breach of the
implied duty of good faith and fair dealing, and negligent misrepresentation and pray for
relief in the form of compensatory damages and restitution, punitive damages, an order of
reformation of the policies, and attorney fees and court costs. After review of the
Companys motions related to the plaintiffs complaint, the court dismissed
plaintiffs claim for breach of fiduciary duty, and the Company recently filed an
answer to the plaintiffs other claims in the complaint.  While the Company
cannot predict the outcome of this case, it could have a material adverse impact upon its
financial condition and results of operations in the event of an unfavorable outcome. The
Company believes that the complaint is without merit and intends to continue to defend the
matter vigorously.

The Company and two of its subsidiaries, PTNA and Senior Financial Consultants Company,
are defendants in an action instituted on June 5, 2002 in the United States District
Court for the Eastern District of Pennsylvania by National Healthcare Services, Inc. The
complaint seeks compensatory damages in excess of $150 and punitive damages in excess of
$5,000 for an alleged breach of contract and misappropriation.  On December 18, 2003,
the Plaintiffs voluntarily dismissed their claim for misappropriation and the attendant
punitive damages claim. The claims arise out of a joint venture related to the AllRisk
Healthcare program, which was marketed first by PTNA and then later by Senior Financial
Consultants Company. Depositions of fact witnesses were completed on October 30,
2003.  Motions for summary judgment were filed by both parties in December 2003, and
in February 2004 the court granted the Companys motion for summary judgment with
respect to one claim, and denied the remaining motions. Pursuant to court order, a
settlement conference is scheduled to be held on August 25, 2004. While the Company cannot
predict the outcome of this case, it could have a material adverse impact upon its
financial condition and results of operations in the event of an unfavorable outcome. The
Company believes that the complaint is without merit and intends to continue to defend the
matter vigorously.

The
Companys subsidiary, PTNA, is a defendant in an action in the Los Angeles County
Superior Court in the state of California.  Plaintiff filed this matter on May 28,
2004 on behalf of herself and all other persons similarly situated and the general
public.  The plaintiff alleges wrongdoing in connection with the payment of long-term
care insurance claims. The Plaintiff alleges violations of the California Consumer Legal
Remedies Act, the California Business and Professions Code, breach of the implied duty of
good faith and fair dealing, financial elder abuse and prays for relief in the form of
compensatory damages and restitution, punitive damages, an accounting, attorney fees and
court costs.  The Company has filed a demurrer to all counts of the Plaintiffs
complaint, and a motion to strike allegations of the complaint, including Plaintiffs
class allegations.  While the Company cannot predict the outcome of this case, it
could have a material adverse impact upon its financial condition and results of
operations. However, the Company believes that the complaint is without merit and intends
to continue to defend the matter vigorously.

PTNA
is a party to a reinsurance agreement to cede the risk of certain home health care claims
that extend beyond 36 months. The reinsurance recoverable related to this treaty was
$10,744 and $10,614 at March 31, 2004 and December 31, 2003, respectively. The reinsurer
has notified PTNA that it believes that the Company is in breach of its current agreement
as a result of entering into the 2001 Centre Agreement without the prior written approval
of the reinsurer. PTNA has contested this assertion of breach based upon its verbal and
written notification to the reinsurer prior to entering into the 2001 Centre
Agreement.   PTNA further believes that the 2001 Centre Agreement substantially
improved PTNAs financial strength and further protected the reinsurer. The ultimate
resolution of this dispute cannot be determined at this time.



---

6. Investments:

Management
has categorized all of its investment securities as available for sale because they may be
sold in response to changes in interest rates, prepayments and similar factors.
Investments in this category are reported at their current market value, with net
unrealized gains and losses, net of the applicable deferred income tax effect, being added
to or deducted from the Companys total shareholders equity on the balance
sheet. As of June 30, 2004, there is accumulated other comprehensive loss of $124 in shareholders' equity due to
unrealized losses of $191 in the investment portfolio. As of December 31, 2003,
there was accumulated other comprehensive income of $598 in shareholders' equity due to unrealized gains of $920 in the
investment portfolio.

The
amortized cost and estimated market value of the Companys available for sale
investment portfolio as of June 30, 2004 and December 31, 2003 are as follows:

|                           | June 30, 2004 | December 31, 2003
|-------------------------- | ------------- | -----------------
|
|U.S. Treasury securities   |               |                  
|and obligations of U.S.    |               |                  
|Government authorities     |               |                  
|and agencies               |               |                  
|Mortgage backed securities |               |                  
|Debt securities issued by  |               |                  
|foreign governments        |               |                  
|Corporate securities       |               |                  
|Policy loans               |               |                  
|                           |               |                  
|Total investments          |               |                  
|                           |               |                  
|Net unrealized (loss) gain |               |                  
|                           |               |                  

Pursuant
to certain statutory licensing requirements, as of June 30, 2004 and December 31, 2003,
the Company had on deposit bonds with an estimated market value aggregating $12,382 and
$12,585, respectively, in Insurance Department special deposit accounts. The Company is
not permitted to remove the bonds from these accounts without approval of the regulatory
authority.

The
Company maintains assets in a trust account under a reinsurance agreement with an
unaffiliated insurer. The Company is required to hold assets equal to 102% of the reserves
for the policies assumed under this agreement. At June 30, 2004 and December 31, 2003,
the  value of the assets required to be held in the trust was $17,631 and $15,905, respectively.

7. Reconciliation of
Earnings Per Share:

A
reconciliation of the numerator and denominator of the basic earnings per share
computation to the numerator and denominator of the diluted earnings per share computation
follows. Basic earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential dilution that
could occur if securities or other contracts to issue common stock were exercised or
converted into common stock. Anti-dilutive effects are not included.



---

|                                                           | Three Months Ended June 30, | Six Months Ended June 30,
|---------------------------------------------------------- | --------------------------- | -------------------------
|
|Net (loss) income                                          |                             |                          
|Weighted average common shares outstanding                 |                             |                          
|                                                           |                             |                          
|Basic earnings per share from net (loss) income            |                             |                          
|                                                           |                             |                          
|Adjustments net of tax:                                    |                             |                          
|Change in preferred interest on early conversion liability |                             |                          
|Interest expense on convertible debt                       |                             |                          
|Amortization of debt offering costs                        |                             |                          
|                                                           |                             |                          
|Diluted net (loss) income                                  |                             |                          
|                                                           |                             |                          
|Weighted average common shares outstanding                 |                             |                          
|Common stock equivalents due to dilutive effect of stock   |                             |                          
|options/warrants                                           |                             |                          
|Shares converted from convertible debt                     |                             |                          
|                                                           |                             |                          
|                                                           |                             |                          
|                                                           |                             |                          
|                                                           |                             |                          
|Total outstanding shares for diluted earnings per share    |                             |                          
|computation                                                |                             |                          
|                                                           |                             |                          
|Diluted earnings per share from net (loss) income          |                             |                          
|                                                           |                             |                          

The
weighted average of securities that could potentially dilute basic earnings per share in
the future that were not included in the computation of diluted earnings per share were
95,778 and 41,540 for the three months ended June 30, 2004 and 2003, respectively, and
97,158 and 36,183 for the six months ended June 30, 2004 and 2003, respectively, because
to do so would have been anti-dilutive. These securities include options, warrants and
convertible debt securities that have exercise prices above the current period market
price or the inclusion of which would result in a lower net loss per share.

8.    
          Long-Term Debt:

Principal
repayment of the Companys long-term debt outstanding at June 30, 2004 is as follows:

|      | 
|----- | 
|
|2004  | 
|2005  | 
|2006  | 
|2007  | 
|2008  | 
|      | 
|Total | 
|      | 

During
the first quarter of 2004, the Company issued an additional $16,000 in 6.25% convertible
subordinated notes due 2008 (the 2008 Notes). All of the 2008 Notes, of which
$81,787 are outstanding, have a conversion price of $1.75 per share and are mandatorily
convertible if, at any time after October 15, 2005, the 15-day average closing price of
the Companys common stock exceeds 110% of the conversion price. The 2008 Notes also
provide that, upon conversion prior to October 15, 2005, the Company will pay the holder
additional interest (referred to as preferred interest on early conversion)
equal to the amount, on a discounted basis, that would otherwise have been paid from the
date of conversion until October 15, 2005. The interest amount, which is discounted from
October 15, 2005 to the date of early conversion, is payable at the Companys
discretion in cash or in shares of common stock. If the interest is paid in common stock,
the number of shares issued will be determined based on a per share value equal to 90% of
the current market price of the Companys common stock.



---

During
the six months ended June 30, 2004 and 2003, $24,305 and $51 of the Companys 2008
Notes were converted into 13,889 and 29 shares of common stock, respectively. The Company
issued 1,316 and 4 shares of common stock as payment for preferred interest on early
conversion for the six months ended June 30, 2004 and 2003, respectively. In connection
with these conversions, the Company recognized additional interest expense of $671 and
$2,475 for the three and six month ended June 30, 2004, respectively, and $7 of additional
interest expense for the three and six months ended June 30, 2003.

As
noted above, holders of the 2008 Notes are entitled to convert their notes into shares of
common stock before October 2005 and receive a discounted amount of interest that they
would have otherwise received until that date. This feature is an embedded derivative as
defined in Statement of Financial Accounting Standards No. 133 Accounting for
Derivative Instruments and Hedging Activities. This embedded derivative is not
clearly and closely related to the host contract, the convertible subordinated notes,
because it could at least double the investors initial rate of return on the host
contract and could also result in a rate of return that is at least twice what otherwise
would be the market return for a contract that has the same terms as the host contract and
that involves a debtor with a similar credit quality.

The
Company has valued and bifurcated the embedded derivative from the host contract. At each
balance sheet date, the embedded derivative is recorded at fair value, with any change in
fair value recognized in current operations.

As
of June 30, 2004 and December 31, 2003, the fair value of the embedded derivative was
$3,542 and $3,018, respectively. In determining the fair value of the embedded derivative,
the Company makes certain assumptions, including with respect to the future volatility and
liquidity of the Companys common stock, as well as recent trends in the number of
holders converting.



---

Item
2.Managements Discussion and Analysis of Financial Condition and Results of
Operations. (amounts in thousands, except per share data)

Overview

Our
principal products are individual, defined benefit accident and health insurance policies
that consist of nursing home care, home health care and Medicare supplement.

Our
insurance subsidiaries are subject to the insurance laws and regulations of the states in
which they are licensed to write insurance. These laws and regulations govern matters such
as payment of dividends, settlement of claims and loss ratios. State regulatory
authorities must approve premiums charged for insurance products. In addition, our
insurance subsidiaries are required to establish and maintain reserves with respect to
reported and incurred but not reported claims, as well as estimated future benefits
payable under our insurance policies. These reserves must, at a minimum, comply with
mandated standards. Our reserves are certified annually by our consulting actuary as to
standards required by the insurance departments for our domiciliary states and for the
other states in which we conduct business. We believe we maintained adequate reserves as
mandated by each state in which we are currently writing business at June 30, 2004.

Our
insurance subsidiaries are regulated by various state insurance departments. The National
Association of Insurance Commissioners (NAIC) has Risk-Based Capital
(RBC) requirements for insurance companies to evaluate the adequacy of
statutory capital and surplus in relation to investment and insurance risks, such as asset
quality, mortality and morbidity, asset and liability matching, benefit and loss reserve
adequacy, and other business factors. The RBC formula is used by state insurance
regulators as an early warning tool to identify, for the purpose of initiating regulatory
action, insurance companies that potentially are inadequately capitalized. In addition,
the formula defines minimum capital standards that an insurer must maintain. Regulatory
compliance is determined by a ratio of the enterprises regulatory Total Adjusted
Capital to its Authorized Control Level RBC, as defined by the NAIC. Companies below
specific trigger points or ratios are classified within certain levels, each of which may
require specific corrective action depending upon the insurers state of domicile.

At
December 31, 2000, Penn Treaty Network America Insurance Company (PTNA) had Total
Adjusted Capital at the Regulatory Action level, which required it to file a Corrective
Action Plan (the Plan) with the Pennsylvania Insurance Department (the
Department). In addition, American Network Insurance Company
(ANIC), which is wholly owned by PTNA, is also subject to the provisions of
the Plan. On February 12, 2002, the Department approved the Plan. As a primary component
of the Plan, effective December 31, 2001, PTNA and ANIC entered a reinsurance transaction
to reinsure, on a quota share basis, substantially all of their long-term care insurance
policies then in-force (the 2001 Centre Agreement). The agreement is subject
to certain coverage limitations, including an aggregate limit of liability that is a
function of certain factors and that may be reduced in the event that the premium rate
increases that the reinsurance agreement may require are not obtained. We are required to
perform annual comparisons of our actual to expected claims experience. If we have reason
to believe, whether from this analysis or other available information, that at least a 5%
premium rate increase is necessary, we are obligated to file and obtain such premium rate
increases in order to comply with the requirements of the agreement. If we do not file and
obtain such premium rate increases, our aggregate limit of liability would be reduced by
50% of the premium amount that would have otherwise been received. We are currently in
compliance with the agreement.



---

As
part of this agreement, annual risk charges of approximately $11,000 are credited against
our notional experience account by the reinsurer. The annual amount increases if we do not
commute on December 31, 2007. This agreement does not qualify for reinsurance treatment in
accordance with generally accepted accounting principles (GAAP) because it
does not result in the reasonable possibility that the reinsurer may realize a significant
loss. This is due to a number of factors related to the agreement, including experience
refund provisions, the expense and risk charges credited to the notional experience
account by the reinsurer and the aggregate limit of liability. However, this agreement
meets the requirements to qualify for reinsurance treatment under statutory accounting
rules.

The
initial premium and future cash flows from the reinsured policies, less claims payments,
ceding commissions and risk charges, are credited to a notional experience account, which
is held for our benefit in the event of commutation and recapture on or after December 31,
2007. The notional experience account balance receives an investment credit based upon the
total return from a series of benchmark indices and derivative hedges that are intended to
closely match the duration of our reserve liability.

Our
current modeling and actuarial projections, which were completed as of December 31, 2003
 suggest that we are likely to be able to
commute the agreement, as planned, on December 31, 2007. In order to commute the
agreement, our statutory capital following commutation must be sufficient to support the
reacquired business in compliance with all statutory requirements. Upon commutation, PTNA
and ANIC would receive cash or other liquid assets equaling the market value of our
notional experience account from the reinsurer. We would also record the necessary
reserves for the business in PTNAs and ANICs statutory financial statements.
Our ability to commute the agreement is highly dependent upon the market value of the
notional experience account exceeding the level of required reserves to be established. As
of June 30, 2004, the statutory basis reserve liabilities of $998,325 exceeded the
combination of the notional experience account value and funds held due to the reinsurer
of $840,262. We expect the value of the notional experience account to exceed the reserve
liabilities at December 31, 2007. In addition to the performance of the reinsured policies
from now until 2007, the notional experience account value is susceptible to market
interest rate changes. A current market interest rate increase of 100 basis points could
reduce the market value of the notional experience account by approximately $79,000 and
jeopardize our ability to commute as planned. As we approach the intended commutation
date, the sensitivity of our notional experience account to market interest rate movement
will decline as the duration of the benchmark indices becomes shorter, however the amount
of assets susceptible to such interest sensitivity will continue to grow as additional net
cash flows are added to the notional experience account balance prior to commutation. We
intend to give notice to the reinsurer of our intention to commute on December 31, 2007 at
such time as we are highly confident of our ability to support the reacquired policies. In
that instance, the reinsurer has agreed to invest the underlying assets of the notional
experience account in a manner that we request in order to minimize short term volatility
at that time.

In
the event we determine that commutation of the reinsurance agreement is unlikely on
December 31, 2007, but likely at some future date, we will include additional annual
expense and risk charge credits against our notional experience account in our deferred policy acquisition costs ("DAC")
recoverability analysis. As a result, we could impair the value of our DAC asset and
record the impairment in our financial statements. However, we currently believe that we
will have sufficient statutory capital and surplus to commute the reinsurance agreement on
December 31, 2007 or that sufficient alternatives, such as proceeds from additional
capital issuance or new reinsurance opportunities, will be available to enable us to
commute the agreement as planned.

In
addition to the requirement to enter into the 2001 Centre Agreement, the Plan principally:

| | a) | limits new investments to those rated by the NAIC as 1 or 2;
| | -- | ------------------------------------------------------------

| | b) | limits and requires Department approval for certain affiliated transactions; and
| | -- | --------------------------------------------------------------------------------



---

| | c) | requires a $125,000 increase in statutory reserves over a three-year period, of
          which an $11,000 increase remains to be made by the end of 2004.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

Upon
the Departments approval of the Plan in February 2002, we recommenced new policy
sales in 23 states, including Pennsylvania. We have now recommenced new policy sales in 17
additional states. These 40 states represented approximately 89% of our direct premium
revenue in the three months ended June 30, 2004. We are actively working with the
remaining states to recommence new policy sales in all jurisdictions.

The
2001 Centre Agreement also granted the reinsurer an option to participate in reinsuring
new business sales on a quota share basis. In August 2002, the reinsurer exercised its
option to reinsure up to 50% of future sales, subject to a limitation of the
reinsurers risk.  This agreement does not qualify for reinsurance treatment in
accordance with GAAP because the agreement does not result in the reasonable possibility
that the reinsurer may realize a significant loss. This is due to an aggregate limit of
liability that reduces the likelihood of the reinsurer realizing a significant loss on the
agreement. However, this agreement meets the requirements to qualify for reinsurance
treatment under statutory accounting rules.

In March
2004, the reinsurer notified us that, for reasons unrelated to us, it would discontinue
its quota share reinsurance of new long-term care insurance policies issued after July 31,
2004.  Policies issued and reinsured prior to this date and policies covered by the
2001 Centre Agreement are unaffected by the reinsurers notification to
us.  We are pursuing a new quota share reinsurance relationship with several
reinsurers and anticipate that, if successfully completed, a new treaty could
retroactively include policies issued on or after August 1, 2004.  If we are unable to replace this agreement,
our statutory surplus could be negatively impacted as a result of the surplus strain caused by new premium growth.

Our
financial condition and results of operations are affected significantly by the following
factors:

Level
of required reserves for policies in-force. Our insurance policies are accounted for
as long duration contracts. As a result, there are two components of policyholder
liabilities. The first is a policy reserve liability for future policyholder benefits,
represented by the present value of future benefits less a portion of future premium
collection. These reserves are calculated based on assumptions that include estimates for
mortality, morbidity, interest rates, premium rate increases and policy persistency. The
assumptions are based on our past experience, industry experience and current trends.

The
second is a reserve for incurred, either reported or not yet reported, policy claims. The
amount of reserves relating to reported and unreported claims incurred is determined by
periodically evaluating statistical information with respect to the number and nature of
historical claims. We compare actual experience with estimates and adjust our reserves in
the current period on the basis of such comparisons to the extent that our analysis
suggests that the estimates utilized differ from actual experience.

Additions
to, or reductions in, reserves are recognized in our current Consolidated Statements of
Income and Comprehensive Income as expense or income, respectively, through benefits to
policyholders and are a material component of our net income or loss. A portion of premium
collected in each period is set aside to establish reserves for future policy benefits.
Reserves are established based upon current assumptions and we cannot assure you that
actual experience will not differ materially from the assumptions used in the
establishment of our reserves. Any variance from these assumptions could affect our
profitability in future periods.

Deferred
policy acquisition costs. In connection with the sale of our insurance policies, we
defer and amortize a portion of the policy acquisition costs over the related premium
paying periods for the life of the policy. These costs include all expenses that are
directly related to, and vary with, the acquisition of the policy, including commissions,
underwriting and other policy issue expenses. The amortization of DAC is determined using
the same projected actuarial
assumptions used in computing policy reserves. DAC can be affected by unanticipated
terminations of policies because, upon such terminations, we are required to expense fully
the DAC associated with the terminated policies. In addition, the assumptions underlying
DAC and our policy benefit reserves are periodically reviewed and updated to reflect
current assumptions, including planned premium rate increases. In the event planned
premium rate increases are not achieved, we could recognize an impairment of our DAC in
the future. Whenever we determine that our DAC is not fully recoverable, we impair the
carrying value of our DAC through an expense to our Consolidated Statements of Income and
Comprehensive Income.

Policy
premium levels. We attempt to set premium levels to maintain planned profit margins.
Premium levels on new products, as well as rate increases on existing products, are
subject to government review and regulation. We may be limited in our ability to gain
approval for premium rate increases such that future profit margins could be reduced or
prior losses may not be recouped.



---

Investment
income and notional experience account. Our investment portfolio, excluding our
notional experience account, consists primarily of investment grade fixed income
securities. Income generated from this portfolio is largely dependent upon prevailing
levels of interest rates. Due to the duration of our investments (approximately 3.3
years), investment income does not immediately reflect changes in market interest rates.

In
connection with the 2001 Centre Agreement, we transferred substantially our entire
investment portfolio to the reinsurer as the initial premium payment. The initial and
future premium for the reinsured policies, less claims payments, ceding commissions and
risk charges, is credited to a notional experience account, the balance of which also
receives an investment credit based upon the total market return of a series of benchmark
indices and derivative hedges. The notional experience account balance represents an
amount to be paid to us in the event of commutation of the agreement. We believe that the
notional experience account represents a hybrid instrument, containing both a fixed debt
host contract and an embedded derivative. The economic characteristics and risks of the
embedded derivative instrument are not clearly and closely related to the economic
characteristics and risks of the fixed debt host contract. We are accounting for the
investment credit received on the notional experience account as follows:

| | a) | The fixed debt host yields a fixed return based upon the yield to maturity of
               the underlying benchmark indices. The return on the fixed debt host is reported
               as investment income in the Statements of Income and Comprehensive Income.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | The change in fair value of the embedded derivative represents the percentage
               change in the underlying indices applied to the notional experience account,
               similar to that of an unrealized gain/loss on a bond. The change in the fair
               value of the embedded derivative is reported as market gain (loss) on notional
               experience account in the Statements of Income and Comprehensive Income.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
a result, our results of operations are subject to significant volatility. Recorded market
value gains or losses, although recognized in current earnings, are expected to be
partially offset in future periods from the receipt of the most recent market interest
rates for all subsequent periods. The benchmark indices are comprised of U.S. Treasury
strips, agencies and investment grade corporate bonds, with weightings of approximately
25%, 15% and 60%, respectively, and have a duration of approximately 11 years.

Lapsation
and persistency. Our financial condition and results of operations may be affected by
lapsation and persistency, both of which relate to the renewal of insurance policies.
Lapsation is the termination of a policy by non-renewal. Lapsation is automatic if and
when premiums become more than 31 days overdue, although, in some cases, a lapsed policy
may be reinstated within six months. Persistency represents the percentage of policies
renewed.

Policies
renew or lapse for a variety of reasons, both internal and external. We believe that our
efforts to address policyholder concerns or questions help to ensure policy renewals. We
work closely with our licensed agents, who play an integral role in policy persistency and
policyholder communication.

Economic
cycles can influence a policyholders ability to continue the payment of insurance
premiums when due. We believe that publicity regarding Federal and state tax legislation
allowing medical deductions for certain long-term care insurance premiums has raised
public awareness of the escalating costs of long-term care and the value provided to the
consumer by long-term care insurance. The ratings assigned to our insurance subsidiaries
by independent rating agencies also influence consumer decisions.



---

Lapsation
and persistency can both positively and adversely affect future earnings. Reduced
lapsation and higher persistency generally result in higher renewal premiums and lower
amortization of DAC, but may lead to increased claims in future periods. Higher lapsation
can result in reduced premium collection, a greater percentage of higher-risk
policyholders, and accelerated expensing of DAC. However, higher lapsation may also lead
to decreased claims in future periods.

Results of Operations

# Three Months Ended June
30, 2004 and 2003

Premiums.           Total
premium revenue earned in the three month period ended June 30, 2004 (the           2004
quarter), including long-term care, disability, life and           Medicare
supplement, increased 0.6% to $79,197, compared to $78,707 in the same           period
in 2003 (the 2003 quarter).

Total
first year premium revenue in the 2004 quarter increased 61.0% to $2,726, compared to
$1,693 in the 2003 quarter. First year long-term care premium revenue in the 2004 quarter
increased 72.0% to $2,530, compared to $1,471 in the 2003 quarter. We anticipate that
first year premium revenue will continue to increase as independent agents that sold our
policies prior to the cessation of sales are reengaged and independent agents that had not
previously sold our policies are recruited. In addition, we anticipate that we will
recommence sales in additional states in which we are currently not writing new business.

Total
renewal premium revenue in the 2004 quarter decreased 0.7% to $76,471 compared to $77,014
in the 2003 quarter. Renewal long-term care premium revenue in the 2004 quarter decreased
1.1% to $73,388, compared to $74,218 in the 2003 quarter. We may continue to experience
reduced renewal premium revenue in the future, primarily driven by the reduced level of
new premium revenue in recent prior periods as discussed above and the lapsation of
existing policies.

Net
investment income. Net investment income earned for the 2004 quarter increased 9.2% to
$11,542, from $10,572 for the 2003 quarter.

Our
average yield on invested assets at cost, including the notional experience account and
cash equivalents, was 5.20% and 5.02% in the 2004 and 2003 quarters, respectively. The
investment income component of our notional experience account investment credit generated
$11,497 and $10,123 in the 2004 and 2003 quarters, respectively. The yield on our notional
experience account was 5.69% and 5.53% in the 2004 and 2003 quarters, respectively. The
increase in our average yield is due to an increase in market interest rates, which has the
greatest impact on our notional experience account. The notional experience account return
is based upon the yield to maturity of the underlying benchmark indices, which are
comprised of U.S. Treasury strips, agencies and investment grade corporate bonds, with
weightings of approximately 25%, 15% and 60%, respectively, and has a duration of
approximately 11 years.

Market
(loss) gain on notional experience account. We recorded a market loss on our notional
experience account balance of $63,697 in the 2004 quarter compared to a market gain of
$38,964 in the 2003 quarter.



---

During
the 2004 quarter, interest rates increased, leading to a market loss on the notional
experience account. The yield on the notional experience account was 5.13% in the first
quarter of 2004 compared to 5.69% in the second quarter of 2004. During the 2003 quarter,
interest rates decreased, leading to a market gain on the notional experience account. The
yield on the notional experience account was 5.68% in the first quarter of 2003 compared
to 5.53% in the second quarter of 2003.

Change
in preferred interest on early conversion. The fair value of the embedded derivative
was $3,542 and $1,950 as of June 30, 2004 and 2003, respectively. We recorded $782 and
$148 in the 2004 and 2003 quarters, respectively, to reflect the change in value of the
preferred interest on early conversion. We believe that the value of the embedded
derivative is significantly affected by the ability of investors to liquidate their shares
in the market. We further believe that the number of shares of our common stock
outstanding and the average daily trading volume of our common stock provide an indication
of the ability of the market to bear additional sales of stock without a material
degradation of the current market value of those shares. Throughout 2003 and the first two
quarters of 2004, the liquidity of our common stock rose significantly, as did the average
daily trading volume, which indicated to us that the market could absorb additional shares
without significant degradation of the market price. As a result, we increased our
estimates of the value of the embedded derivative based on an assumption that conversions
were more likely to occur without stock price deflation. If we assumed that all holders
converted on June 30, 2004, without giving any consideration to the relationship of the
current share price to the conversion price or to the impact of this level of conversions
on the stock price, the value of the embedded derivative would be $7,011. If actual
experience deviates from current assumptions, our financial results may be significantly
impacted in future periods.

Other
income. We recorded $1,421 in other income during the 2004 quarter, down from $2,181
in the 2003 quarter. The net commission income earned by our agency subsidiaries was $465
less in the 2004 quarter than in the 2003 quarter due to reduced production levels.

In addition there was a decrease of
$350 in the income generated from our ownership of corporate owned life insurance policies
due to reduced outstanding balances and a decrease in market interest rates.

Benefits
to policyholders. Total benefits to policyholders in the 2004 quarter decreased 5.4%
to $57,596, compared to $60,873 in the 2003 quarter. Our loss ratio, or policyholder
benefits to premium revenue, was 72.7% in the 2004 quarter, compared to 77.3% in the 2003
quarter. The loss ratio has decreased due to premium rate increases and certain claims
processing improvements.

Claims
experience can differ from our expectations due to numerous factors, including mortality
rates, duration of care and type of care utilized. When we experience deviation from our
estimates, we typically seek premium rate increases that are sufficient to offset future
deviation. In 2001 and 2002, we filed for premium rate increases on the majority of our
policies in-force. These rate increases were necessary because we expected higher loss
ratios as a result of higher claims expectations than existed at the time of the original
premium rate filings. We have filed additional premium rate increases on many policies
in-force as result of new claim assumptions we established in the third quarter of 2002.
We have been generally successful in the past in obtaining state insurance department
approvals for increases. If we are unsuccessful in obtaining the recently filed or future
rate increases when deemed necessary, or if we do not pursue rate increases when actual
claims experience exceeds our expectations, we would suffer a financial loss.

Historically,
we have observed variations throughout the year in the payment or incurrals of new claims.
Management employs seasonal assumptions throughout the year, based upon observed
historical trends, in the establishment of its claim reserves so that it can more
consistently monitor loss ratio variances from its expectations based upon other
significant factors such as claims duration and incidence. We reduced our claims reserves
by approximately $2,726 and $4,650 as of June 30, 2004 and 2003, respectively, to reflect
this seasonal variation.



---

Our
policy reserves, which are held for policyholders not currently on claim, are highly
dependent upon several factors, including policyholder persistency and the mix of policies
with varying benefit amounts or types. We project the growth of our policy reserves based
upon the current and projected mix of policies in-force. Variances from our expectations
result from future changes in this mix that differ from our assumptions.

Commissions.           Commissions
to agents decreased 4.4% to $9,806 in the 2004 quarter, compared to           $10,260 in
the 2003 quarter.

First
year commissions on accident and health business in the 2004 quarter increased 78.2% to
$1,616, compared to $907 in the 2003 quarter, due to the increase in first year accident
and health premium revenue. The ratio of first year accident and health commissions to
first year accident and health premium revenue was 59.3% in the 2004 quarter and 53.6% in
the 2003 quarter. The first year commission ratio for both the 2004 and 2003 quarters is
lower than the first year commission ratio prior to the cessation of sales in 2001 due to
the increased portion of premium revenue attributable to the sale of our Secured Risk,
Medicare Supplement and franchise group policies. All of these policies pay a lower
commission as a percentage of premium revenue to agents than our individual long-term care
policies. Individual long-term care policy sales have declined as a result of our lower
financial ratings with A.M. Best and Standard and Poors rating services and
continued consumer and agent concerns regarding our financial strength. We believe that
this ratio will continue to increase as the sale of our individual long-term care policies
increase as a percentage of total sales.

Renewal
commissions on accident and health business in the 2004 quarter decreased 10.5% to $8,863,
compared to $9,903 in the 2003 quarter, due to the decrease in renewal accident and health
premium revenue. The ratio of renewal accident and health commissions to renewal accident
and health premiums was 11.7% in the 2004 quarter and 13.0% in the 2003 quarter. We have
implemented premium rate increases on a majority of policies written prior to December 31,
2001. We do not pay commissions on the additional premium collected as a result of a rate
increase, which reduces the ratio of renewal commissions to renewal premium revenue.

Net
policy acquisition costs amortized. The net policy acquisition costs amortized in the
2004 quarter increased to $4,425, compared to $2,140 in the 2003 quarter.

Deferred
costs are typically all costs that are directly related to, and vary with, the acquisition
of new premiums. The deferred costs include the variable portion of commissions, which are
defined as the first year commissions less ultimate renewal commissions, and variable
general and administrative expenses related to policy sales, underwriting and issuance.
Deferred costs are amortized over the life of the policy based on actuarial assumptions,
including persistency of policies in-force. In the event a policy lapses prematurely due
to death or termination of coverage, the remaining unamortized portion of the deferred
amount is immediately recognized as expense in the current period.

The
net amortization of deferred policy acquisition costs is affected by new business
generation, imputed interest on prior reserves and policy persistency. The amortization of
deferred costs is generally offset largely by the deferral of costs associated with new
premium generation. However, lower new premium revenue throughout 2003 and continuing
through the 2004 quarter produced significantly less expense deferral to offset amortized
costs.

General
and administrative expenses. General and administrative expenses in the 2004 quarter
decreased 23.4% to $13,297, compared to $17,364 in the 2003 quarter. The ratio of total
general and administrative expenses to premium revenues was 16.8% in the 2004 quarter,
compared to 22.1% in the 2003 quarter.



---

During
the 2003 quarter, we recorded expense of approximately $2,500 related to the initial
recognition of future retirement benefits payable to our former chairman and severance
related expenses for certain managers whose positions were eliminated during the third
quarter of 2003. Due to these changes and additional eliminations of positions, salaries
and benefits were approximately $600 less in the 2004 quarter than the 2003 quarter. In
addition legal, actuarial and consulting expenses were approximately $900 less in the 2004
quarter than the 2003 quarter. Legal fees decreased as a result of a reduction in activity
related to our litigation. Actuarial and consulting fees decreased as a result of
additional staffing in key positions which served to reduce the reliance on outside
parties.

We
believe that we currently have capacity for premium growth at our current staff levels,
print inventories and other expense categories. We also believe that our current expense
levels represent the minimum requirements necessary to reengage new sales territories,
design competitive product lines and properly underwrite new policy applications. However,
we believe that if we remain unable to write new business in certain states where we have
ceased new production, or if we are unable to use our existing staff and infrastructure
capacity to generate additional premium revenue, we will need to decrease production
expenses, which could result in decisions to reduce our staff or other operating
functions. During August 2004, 35 additional positions were eliminated through termination
or the decision not to fill current position vacancies. These eliminations will result in
annual savings of approximately $2,000.

Expense
and risk charges on reinsurance and excise tax expense. Our 2001 Centre Agreement
provides the reinsurer with annual expense and risk charges, which are credited against
our notional experience account in the event of future commutation of the agreement. The
annual charge consists of a fixed cost and a variable component based upon reserve and
capital levels needed to support the reinsured business. In the 2004 and 2003 quarters, we
incurred charges of $2,807 and $2,769, respectively, for this item. In addition, we are
subject to an excise tax for premium payments made to a foreign reinsurer equal to one
percent of the net premium revenue ceded to the foreign reinsurer. We recorded $746 and
$386 for excise tax expenses in the 2004 and 2003 quarters, respectively.

Interest
expense. Interest expense in the 2004 quarter increased 12.7% to $2,171, compared to
$1,926 in the 2003 quarter. The interest expense in both the 2004 and 2003 quarters is
primarily related to our convertible subordinated notes, which pay interest at an annual
percentage rate of 6.25%. We incur additional interest expense related to the conversion
of our convertible subordinated notes.  Holders of our convertible subordinated
notes are entitled to convert their notes into shares of our common stock before October
2005 and receive a discounted amount of interest that they would have otherwise received
through October 2005 had they not converted the notes. We incurred $671 of interest
expense from the conversion of $7,125 in convertible subordinated notes during the 2004
quarter. During the 2003 quarter, we incurred $7 of interest expense from the conversion
of $51 in convertible subordinated notes. This increase in interest expense was partially
offset by the decrease in outstanding notes due to the conversions.

Federal
income tax benefit (provision). Our benefit for Federal income taxes was $20,959 in
the 2004 quarter, compared to a provision of $11,908 in the 2003 quarter. The effective
tax rate of 34% in the 2004 and 2003 quarters is based on permanent differences between
GAAP and tax accounting related to the investment in our corporate owned life insurance
and the interest we pay in shares for the early conversion of our convertible subordinated
notes.

# Six Months Ended June
30, 2004 and 2003

Premiums.           Total
premium revenue earned in the six month period ended June 30, 2004 (the           2004
period), including long-term care, disability, life and           Medicare
supplement, decreased 0.5% to $161,485, compared to $162,285 in the           same period
in 2003 (the 2003 period).



---

Total
first year premium revenue in the 2004 period increased 67.8% to $5,427, compared to
$3,235 in the 2003 period. First year long-term care premium revenue in the 2004 period
increased 77.7% to $4,985, compared to $2,803 in the 2003 period. We anticipate that first
year premium revenue will continue to increase as independent agents that sold our
policies prior to the cessation of sales are reengaged and independent agents that had not
previously sold our policies are recruited. In addition to this increase in states in
which we have recommenced sales, we anticipate that we will recommence sales in additional
states in which we are currently not writing new business.

Total
renewal premium revenue in the 2004 period decreased 1.9% to $156,058 compared to $159,050
in the 2003 period. Renewal long-term care premium revenue in the 2004 period decreased
2.2% to $149,829, compared to $153,125 in the 2003 period. We may continue to experience
reduced renewal premium revenue in the future, primarily driven by the reduced level of
new premium revenue in recent prior periods as discussed above and the lapsation of
existing policies.

Net
investment income. Net investment income earned for the 2004 period increased 7.7% to
$22,529, from $20,919 for the 2003 period.

Our
average yield on invested assets at cost, including cash and cash equivalents, was 5.10%
and 5.11% in the 2004 and 2003 periods, respectively. The investment income component of
our notional experience account investment credit generated $22,408 and $20,005 in the
2004 and 2003 periods, respectively. The yield on our notional experience account was
5.56% and 5.65% in the 2004 and 2003 periods, respectively. The notional experience
account yields a fixed return based upon the yield to maturity of the underlying benchmark
indices, which are comprised of U.S. Treasury strips, agencies and investment grade
corporate bonds with weightings of approximately 25%, 15% and 60%, respectively, and have
a duration of approximately 11 years.

Market
(loss) gain on notional experience account. We recorded a market loss on our notional
experience account balance of $28,049 in the 2004 period compared to a market gain of
$43,266 in the 2003 period. The notional experience account is susceptible to market
interest rate changes. As a result, our future financial results are subject to
significant volatility. During the 2004 period, market rates increased, leading to a
market loss on the notional experience as compared to the 2003 period in which market
rates decreased.

Change
in preferred interest on early conversion. The fair value of the embedded derivative
was $3,542 and $1,950 as of June 30, 2004 and 2003, respectively. We recorded an expense
of $36 and a gain of $87 in the 2004 and 2003 periods, respectively, to reflect the change
in value of the preferred interest on early conversion. We believe that the value of the
embedded derivative is significantly affected by the ability of investors to liquidate
their shares in the market. We further believe that the number of shares of our common
stock outstanding and the average daily trading volume of our common stock provide an
indication of the ability of the market to bear additional sales of stock without a
material degradation of the current market value of those shares. Throughout 2003 and the
2004 period, the liquidity of our common stock rose significantly, as did the average
daily trading volume, which indicated to us that the market could absorb additional shares
without significant degradation of the market price. As a result, we increased our
estimates of the value of the embedded derivative based on an assumption that conversions
were more likely to occur without stock price deflation. If we assumed that all holders
converted on June 30, 2004, without giving any consideration to the relationship of the
current share price to the conversion price or to the impact of this level of conversions
on the stock price, the value of the embedded derivative would be $6,109. If actual
experience deviates from current assumptions, our financial results may be significantly
impacted in future periods.



---

Other
income. We recorded $3,042 in other income during the 2004 period, down from $4,444 in
the 2003 period. The decrease is attributable primarily to a decrease of approximately
$765 in the income generated from our ownership of corporate owned life insurance policies
due to reduced outstanding balances and a decrease in market interest rates. In addition,
net commission payments earned by our agency subsidiaries were $766 less in the 2004
period than in the 2003 period, primarily as a result of decreased production.

Benefits
to policyholders. Total benefits to policyholders in the 2004 period decreased 6.6% to
$116,755, compared to $125,040 in the 2003 period. Our loss ratio, or policyholder
benefits to premium revenue, was 72.3% in the 2004 period, compared to 77.05% in the 2003
period. The loss ratio has decreased due to premium rate increases and certain claims
processing procedures.

Historically,
we have observed variations throughout the year in the payment or incurrals of new claims.
Management employs seasonal assumptions throughout the year, based upon observed
historical trends, in the establishment of its claim reserves so that it can more
consistently monitor loss ratio variances from its expectations based upon other
significant factors such as claims duration and incidence. We reduced our claims reserves
by approximately $2,726 and $4,650 as of June 30, 2004 and 2003, respectively, to reflect
this seasonal variation.

Commissions. 
          Commissions
to agents decreased 3.5% to $20,227 in the 2004 period, compared to           $20,964 in
the 2003 period.

First
year commissions on accident and health business in the 2004 period decreased 86.8% to
$3,151, compared to $1,687 in the 2003 period, primarily due to the decrease in first year
accident and health premium revenue. The ratio of first year accident and health
commissions to first year accident and health premium revenue was 58.1% in the 2004 period
and 52.1% in the 2003 period. The first year commission ratio for both the 2004 and 2003
periods is lower than the first year commission ratio prior to the cessation of sales in
2001 due to the increased sale of our Secured Risk, Medicare Supplement and franchise
group policies as a percentage of new sales. All of these policies pay a lower commission
as a percentage of premium revenue to agents than our individual long-term care policies.
Individual long-term care policy sales have declined as a result of our lower financial
ratings with A.M. Best and Standard and Poors rating services and continued consumer
and agent concerns regarding our financial strength. We believe that this ratio will
continue to increase as the sale of our individual long-term care policies increase as a
percentage of total sales.

Renewal
commissions on accident and health business in the 2004 period decreased 10.1% to $18,306,
compared to $20,372 in the 2003 period, due to the decrease in renewal accident and health
premium revenue. The ratio of renewal accident and health commissions to renewal accident
and health premiums was 11.8% in the 2004 period and 12.9% in the 2003 period. We have
implemented premium rate increases on a majority of policies written prior to December 31,
2001. We do not pay commissions on the additional premium collected as a result of a rate
increase, which reduces the ratio of renewal commissions to renewal premium revenue.

Net
policy acquisition costs amortized. The net policy acquisition costs amortized in the
2004 period increased to $8,380, compared to $5,194 in the 2003 period.

Deferred
costs are typically all costs that are directly related to, and vary with, the acquisition
of new premiums. The deferred costs include the variable portion of commissions, which are
defined as the first year commissions less ultimate renewal commissions, and variable
general and administrative expenses related to policy sales, underwriting and issuance.
Deferred costs are amortized over the life of the policy based on actuarial assumptions,
including persistency of policies in-force. In the event a policy lapses prematurely due
to death or termination of coverage, the remaining unamortized portion of the deferred
amount is immediately recognized as expense in the current period.



---

The
net amortization of deferred policy acquisition costs is affected by new business
generation, imputed interest on prior reserves and policy persistency. The amortization of
deferred costs is generally offset largely by the deferral of costs associated with new
premium generation. However, lower new premium revenue throughout 2003 and continuing
through the 2004 period produced significantly less expense deferral to offset amortized
costs.

General
and administrative expenses. General and administrative expenses in the 2004 period
decreased 11.1% to $26,773, compared to $30,104 in the 2003 period. The ratio of total
general and administrative expenses to premium revenues was 16.6% in the 2004 period,
compared to 18.6% in the 2003 period.

During
the 2003 period, we recorded expense of approximately $2,500 related to the initial
recognition of future retirement benefits payable to our former chairman and severance
related expenses for certain managers whose positions will be eliminated during the third
quarter of 2003.

We
believe that we currently have capacity for premium growth at our current staff levels,
print inventories and other expense categories. We also believe that our current expense
levels represent the minimum requirements necessary to reengage new sales territories,
design competitive product lines and properly underwrite new policy applications. However,
we believe that if we remain unable to write new business in certain states where we have
ceased new production, or if we are unable to use our existing staff and infrastructure
capacity to generate additional premium revenue, we will need to decrease production
expenses, which could result in decisions to reduce our staff or other operating
functions. During August of 2004, 35 additional positions were eliminated through
termination or the decision not to fill current position vacancies. These eliminations
will result in annual savings of approximately $2,000.

Expense
and risk charges on reinsurance and excise tax expense. Our 2001 Centre Agreement
provides the reinsurer with annual expense and risk charges, which are credited against
our notional experience account in the event of future commutation of the agreement. The
annual charge consists of a fixed cost and a variable component based upon reserve and
capital levels needed to support the reinsured business. In the 2004 and 2003 periods, we
incurred charges of $5,615 and $5,537, respectively, for this item. In addition, we are
subject to an excise tax for premium payments made to a foreign reinsurer equal to one
percent of the net premium revenue ceded to the foreign reinsurer. We recorded $1,529 and
$1,175 for excise tax expenses in the 2004 and 2003 periods, respectively.

Interest
expense. Interest expense in the 2004 period increased 67.2% to $5,988, compared to
$3,582 in the 2003 period. The interest expense in both the 2004 and 2003 periods is
primarily related to our convertible subordinated notes, which pay interest at an annual
percentage rate of 6.25%. We incur additional interest expense related to the conversion
of our convertible subordinated notes.  Holders of our convertible subordinated
notes are entitled to convert their notes into shares of our common stock before October
2005 and receive a discounted amount of interest that they would have otherwise received
through October 2005 had they not converted the notes. We incurred $2,475 of interest
expense from the conversion of $24,305 in convertible subordinated notes during the 2004
period. During the 2003 quarter, we incurred $7 of interest expense from the conversion of
$51 in convertible subordinated notes. This increase in interest expense was partially
offset by the decrease in outstanding notes due to the conversions.



---

Federal
income tax benefit (provision). Our benefit for Federal income taxes was $8,880 in the
2004 quarter, compared to a provision of $13,482 in the 2003 quarter. The effective tax
rate of 34% in the 2004 and 2003 quarters is based on permanent differences between GAAP
and tax accounting related to the investment in our corporate owned life insurance and the
interest we pay in shares for the early conversion of our convertible subordinated notes.

Liquidity and Capital
Resources

Our
consolidated liquidity requirements have historically been met from the operations of our
insurance subsidiaries, from our agency subsidiaries and from funds raised in the capital
markets. Our primary sources of cash from normal operations are premiums, investment
income and maturities of investments. We have obtained, and may in the future obtain, cash
through public and private offerings of our common stock, the exercise of stock options
and warrants and other capital markets activities including the sale or exchange of debt
instruments. Our primary uses of cash are policy acquisition costs (principally
commissions), payments to policyholders, investment purchases and general and
administrative expenses.

In
the 2004 period, our cash flows were attributable to cash provided by operations, cash
used in investing and cash provided by financing. Our cash decreased $1,521 in the 2004
period primarily due to payments made to our reinsurer of $30,617 and the purchase of
$28,910 in bonds. Our cash was increased during the period primarily due to $16,000 in
additional funds generated from the issuance of convertible subordinated debt. This was
supplemented by $15,075 from operations. The major source of cash from operations was
premium revenue and investment income received and the major use of cash was for claims
paid to policyholders and commission paid to agents.

In
the 2003 period, our cash flows were attributable to cash provided by operations, cash
used in investing and cash provided by financing. Our cash decreased $19,175 in the 2003
period primarily due to payments made to our reinsurer of $28,057 and the purchase of
$46,419 in bonds. In the 2003 period, our cash was also decreased as a result of the
repayment of approximately $9,000 of convertible subordinated notes due 2003. Our cash was
increased during the period due primarily to $32,421 in additional funds generated from
the issuance of convertible subordinated debt. This was supplemented by $22,691 from
operations. The major source of cash from operations was premium revenue and investment
income received and the major use of cash was for claims paid to policyholders and
commission paid to agents.

Parent
company operations

We
have engaged in financing activities, including issuance of debt securities, over the past
two years to fund our liquidity and subsidiary capital needs. These activities have
included:

| | 1. | In the first quarter of 2003, we completed the sale of 2008 Notes and received
          proceeds of $32,421. We used $16,000 of the proceeds to satisfy the premium to
          surplus requirements of our voluntary consent order with the Florida Insurance
          Department. We used the remaining proceeds to supplement parent liquidity,
          retire our remaining 2003 Notes, and for general working capital purposes.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In the first quarter of 2004, we issued an additional $16,000 in 2008 Notes. We
          intend to use the proceeds to supplement parent liquidity, for general working
          capital purposes and to further supplement our subsidiaries statutory
          surplus.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | During 2003, holders of $8,122 of our 2008 Notes elected to convert their 2008
          Notes for 5,184 shares of our common stock, which includes 543 shares issued for
          interest paid for conversion prior to October 15, 2005.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

| | 4. | During 2004, holders of $24,305 of our 2008 Notes elected to convert their 2008
          Notes for 15,205 shares of our common stock, which includes 1,316 shares issued
          for interest paid for conversion prior to October 15, 2005.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

At
June 30, 2004, our total principal payment and lease obligations through 2008 were as
follows:

|      | Debt | Lease
Obligations | Total
|----- | ---- | ----------------- | -----
|2004  |      |                   | $    
|2005  |      |                   |      
|2006  |      |                   |      
|2007  |      |                   |      
|2008  |      |                   |      
|      |      |                   |      
|Total |      |                   | $    
|      |      |                   |      

The
parent companys cash needs primarily include interest payments on outstanding debt, capital contributions to our
insurance subsidiaries
and operating expenses. The funding has been primarily derived from the operating cash flow of
our agency subsidiary operations and the issuance of debt and equity securities. We believe that
 our current cash on hand and the dividend capabilities of our agency subsidiaries are expected to be sufficient
to meet our liquidity needs through  April 15, 2005, but may be insufficient to
meet our interest payments thereafter. If we are
unable to generate sufficient funds through operations or raise additional capital to meet
our debt service obligations on or after April 15, 2005, or if our assumptions about our
ability to service our debt prior to 2005 are not correct, we may default on our debt
obligations. We will need to raise additional capital to satisfy any parent company
liquidity needs, beyond October 2005, particularly if the
price of our common stock on or after October 15, 2005 is insufficient to cause mandatory
conversion of our 2008 Notes.

Our
anticipated cash needs for the remainder of 2004 are as follows:

|                             | 
|---------------------------- | 
|Debt interest payments       | 
|Capital contribution to PTNA | 
|Parent expenses              | 
|                             | 
|Cash requirements            | 
|                             | 

Our anticipated
sources to meet our 2004 obligations are:

|                             | 
|---------------------------- | 
|Cash and investments on hand | 
|Subsidiary sources           | 
|                             | 
|Cash sources                 | 
|                             | 

| | There
can be no assurance that we will be able to access the capital markets to raise funds
necessary to meet our future obligations.
| | -------------------------------------------------------------------------------------------------------------------------------------



---

Subsidiary
operations

The
majority of our insurance subsidiaries cash flow results from our existing long-term
care policies, which have been ceded to the reinsurer under this agreement. Our
subsidiaries ability to meet additional liquidity needs and cover fixed expenses in
the future is highly dependent upon our ability to issue new policies and to control
expense growth. Our future growth and new policy issuance is dependent upon our ability to
continue to expand our historical markets, retain and expand our network of agents and
effectively market our products and fund our marketing and expansion while maintaining
minimum statutory levels of capital and surplus required to support such growth.

Under
the insurance laws of Pennsylvania and New York, where our insurance subsidiaries are
domiciled, insurance companies can pay ordinary dividends only out of earned surplus. In
addition, under Pennsylvania and New York law, insurance subsidiaries must give the
Department and the New York Insurance Department at least 30 days advance notice of
any proposed extraordinary dividend and cannot pay such a dividend if the
Department disapproves the payment during that 30-day period. For purposes of Pennsylvania
law, an extraordinary dividend is a dividend that, together with all other dividends paid
during the preceding twelve months, exceeds the greater of 10% of the insurance
companys surplus as shown on the companys last annual statement filed with
Department or its statutory net income as shown on that annual statement. Statutory
earnings are generally lower than earnings reported in accordance with generally accepted
accounting principles due to the immediate or accelerated recognition of all costs
associated with premium growth and benefit reserves. For purposes of New York law,
approval must be obtained for any dividend that, together with all other dividends paid
during the preceding twelve months, exceeds the lesser of 10% of the insurance
companys surplus as of the preceding December 31 or its adjusted net investment
income for the year ended the preceding December 31. Additionally, the Plan requires the
Department to approve all dividends made by PTNA, regardless of normal statutory
requirements for allowable dividends. We believe that the Department is unlikely to
approve any dividend in the foreseeable future as a result of PTNAs current
statutory surplus position. Although not stipulated in the Plan, this requirement is
likely to continue until such time as PTNA meets normal statutory allowances, including
reported net income and positive cumulative earned surplus. We do not expect that this
will occur in the foreseeable future.

PTNA
and ANIC have not paid any dividends to the parent company for the past three years and
are unlikely in the foreseeable future to be able to make dividend payments due to
insufficient statutory surplus and anticipated earnings. We do not anticipate that
American Independent Network Insurance Company of New York will make a dividend payment to
the parent company in 2004.

Forward
Looking Statements



---

Certain
statements made by us may be considered forward looking within the meaning of the Private
Securities Litigation Reform Act of 1995. Although we believe that our expectations are
based upon reasonable assumptions within the bounds of our knowledge of our business and
operations, there can be no assurance that actual results of our operations will not
differ materially from our expectations. An investment in our securities includes certain
risks, which may be specific to us or to the long-term care insurance industry. Factors
which could cause actual results to differ from expectations include, among others, our
ability to comply with the Corrective Action Plan, the Florida Consent Order, the orders
or directives of other states in which we do business or any special provisions imposed by
states in connection with the resumption of writing new business, our ability to commute
our reinsurance agreement and to recapture our reinsured policies and accumulated notional
experience account balance, our ability to meet our future risk-based capital goals, the
adverse financial impact of suspending new business sales, our ability to raise adequate
capital to meet regulatory requirements and to support anticipated growth, our ability to
refinance, convert or repay our outstanding debt and associated interest requirements, the
volatility of market interest rates and the resultant impact upon our notional experience
account, the cost associated with recommencing new business sales, liquidity needs and
debt obligations, the adequacy of our loss reserves and the recoverability of our DAC
asset, our ability to sell insurance products in certain states, including California, our
ability to resume generating new business in all states, our ability to comply with
government regulations and the requirements which may be imposed by state regulators as a
result of our capital and surplus levels, the ability of senior citizens to purchase our
products in light of the increasing costs of health care, our ability to defend ourselves
against adverse litigation, and our ability to recapture, expand and retain our network of
productive independent agents, especially in light of the suspension of new business.

Item 3.Quantitative and
Qualitative Disclosures About Market Risk(amounts in thousands)

We
invest in securities and other investments authorized by applicable state laws and
regulations and follow an investment policy designed to maximize yield to the extent
consistent with liquidity requirements and preservation of assets. A significant portion
of assets and liabilities are financial instruments, which are subject to the market risk
of potential losses from adverse changes in market rates and prices. Our primary market
risk exposures relate to interest rate risk on our notional experience account and fixed
rate domestic medium-term instruments and, to a lesser extent, domestic short-term and
long-term instruments. We have established strategies, asset quality standards, asset
allocations and other relevant criteria for our portfolio to manage our exposure to market
risk.

Our
financial instruments are held for purposes other than trading. Our portfolio does not
contain any significant concentrations in single issuers (other than U.S. treasury and
agency obligations), industry segments or geographic regions. However, our notional
experience account balance, which represents approximately 93% of our investable assets at
June 30, 2004, is with one reinsurer. Although sufficient assets to support our statutory
reserve liabilities are secured by trust accounts and irrevocable letters of credit with
major United States financial institutions, the accumulated profits of our reinsured
business are susceptible to significant credit risk of the reinsurer.

We
urge caution in evaluating overall market risk from the information below. Actual results
could differ materially because the information was developed using estimates and
assumptions as described below, and because insurance liabilities and reinsurance
receivables are excluded in the hypothetical effects (insurance liabilities represent
88.7% of total liabilities). Long-term debt, although not carried at fair value, is
included in the hypothetical effect calculation.

The
hypothetical effects of changes in market rates or prices on the fair values of our
financial instruments (including our notional experience account balance, as discussed
below) as of June 30, 2004, excluding insurance liabilities and reinsurance receivables on
unpaid losses because such insurance related assets and liabilities are not carried at
fair value, would have been as follows:

If
interest rates had increased by 100 basis points at June 30, 2004, there would have been a
decrease of approximately $84,000 in the net fair value of our investment portfolio less
our long-term debt and the related swap agreement. A 200 basis point increase in market
rates at June 30, 2004 would have resulted in a decrease of approximately $159,000 in the
net fair value. If interest rates had decreased by 100 and 200 basis points, there would
have been a net increase of approximately $94,000 and $199,000, respectively, in the net
fair value of our total investments and debt.



---

We
hold certain mortgage and asset backed securities as part of our investment portfolio. The
fair value of these instruments may react in a convex or non-linear fashion when subjected
to interest rate increases or decreases. The anticipated cash flows of these instruments
may differ from expectations in changing interest rate environments, resulting in duration
drift or a varying nature of predicted time-weighted present values of cash flows. The
result of unpredicted cash flows from these investments could cause the above hypothetical
estimates to change. However, we believe that the minimal amount we have invested in these
instruments and their broadly defined payment parameters sufficiently outweigh the cost of
computer models necessary to accurately predict the possible impact on our investment
income of hypothetical effects of changes in market rates or prices on the fair values of
financial instruments as of June 30, 2004.

Item 4. Controls and
Procedures

Our
management, under the supervision and with the participation of the principal executive
officer and principal financial officer, has evaluated the effectiveness of our controls
and procedures related to our reporting and disclosure obligations as of June 30, 2004,
which is the end of the period covered by this Quarterly Report on Form 10-Q. Based on
that evaluation, the principal executive officer and principal financial officer have
concluded that these disclosure controls and procedures are sufficient to provide that (a)
material information relating to us, including our consolidated subsidiaries, is made
known to these officers by other employees of us and our consolidated subsidiaries,
particularly material information related to the period for which this periodic report is
being prepared; and (b) this information is recorded, processed, summarized, evaluated and
reported, as applicable, within the time periods specified in the rules and forms of the
Securities and Exchange Commission.

There
were no changes that occurred during the fiscal quarter covered by this Quarterly Report
on Form 10-Q that have materially affected, or are reasonable likely to materially affect,
our internal controls over financial reporting.



---

# PART II      OTHER INFORMATION

Item 1.Legal Proceedings(amounts in thousands)

Our
subsidiaries are parties to various lawsuits generally arising in the normal course of
their business. We do not believe that the eventual outcome of any of these suits to which
we are party will have a material adverse effect on our financial condition or results of
operations. However, the outcome of any single event could have a material impact upon the
quarterly or annual financial results of the period in which it occurs.

The
Company and its subsidiary, Penn Treaty Network America Insurance Company
(PTNA), are defendants in an action in the Fifth Judicial Circuit of the State
of Florida in and for Marion County, Civil Division.  Plaintiffs filed this matter on
January 10, 2003 in Florida State Court, on behalf of themselves and a class of
similarly situated Florida long-term care policyholders. We removed this case to United
States District Court, Middle District of Florida, Ocala Division for a second time in
November 2003. Plaintiffs motion to remand the case to Florida State Court was
granted in April 2004.  Plaintiffs claim wrongdoing in connection with the sale of
long-term care insurance policies to the Plaintiffs and the class. Plaintiffs allege
claims for reformation, breach of fiduciary duty, breach of the implied duty of good faith
and fair dealing, negligent misrepresentation, fraudulent misrepresentation, and
restitution and pray for relief in the form of compensatory damages and restitution, an
order of reformation of the policies, and attorney fees and court costs. We have filed
motions to dismiss for failure to state a claim, lack of personal jurisdiction against us,
and to strike certain allegations of the complaint as irrelevant and improper.  While
we cannot predict the outcome of this case, it could have a material adverse impact upon
our financial condition and results of operations in the event of an unfavorable outcome.
We believe that the complaint is without merit and intend to continue to defend the matter
vigorously.

The
Company and its subsidiary, PTNA, are defendants in an action in the Orange County
Superior Court in the state of California. Plaintiffs filed this matter in November 2003
on behalf of themselves, all other persons similarly situated and the general public.
Plaintiffs claim wrongdoing in violation of the California Business & Professions Code
in connection with the sale of long term care insurance policies. Plaintiffs allege
unlawful business acts, claims for reformation, breach of fiduciary duty, breach of the
implied duty of good faith and fair dealing, and negligent misrepresentation and pray for
relief in the form of compensatory damages and restitution, punitive damages, an order of
reformation of the policies, and attorney fees and court costs. After review of our
motions related to plaintiffs complaint, the court dismissed plaintiffs claim
for breach of fiduciary duty, and we recently filed an answer to the plaintiffs
other claims in the complaint.  While we cannot predict the outcome of this case, it
could have a material adverse impact upon our financial condition and results of
operations in the event of an unfavorable outcome. We believe that the complaint is
without merit and intend to continue to defend the matter vigorously.

The
Company and two of its subsidiaries, PTNA and Senior Financial Consultants Company
(SFCC), are defendants in an action instituted on June 5, 2002 in the
United States District Court for the Eastern District of Pennsylvania by National
Healthcare Services, Inc. The complaint seeks compensatory damages in excess of $150,000
and punitive damages in excess of $5,000,000 for an alleged breach of contract and
misappropriation.  On December 18, 2003, the Plaintiffs voluntarily dismissed their
claim for misappropriation and the attendant punitive damages claim. The claims arise out
of a joint venture related to the AllRisk Healthcare program, which was marketed first by
PTNA and then later by SFCC. Depositions of fact witnesses were completed on
October 30, 2003.  Motions for summary judgment were filed by both parties in
December 2003, and in February 2004 the court granted our motion for summary judgment with
respect to one claim, and denied the remaining motions. Pursuant to court order, a
settlement conference is scheduled to be held on August 25, 2004. While we cannot predict
the outcome of this case, it could have a material adverse impact upon our financial
condition and results of operations in the event of an unfavorable outcome. We believe
that the complaint is without merit and intend to continue to defend the matter
vigorously.



---

The
Companys subsidiary, PTNA, is a defendant in an action in the Los Angeles County
Superior Court in the state of California.  Plaintiff filed this matter on May 28,
2004 on behalf of herself and all other persons similarly situated and the general
public.  The Plaintiff alleges wrongdoing in connection with the payment of long-term
care insurance claims. The Plaintiff alleges violations of the California Consumer Legal
Remedies Act, the California Business and Professions Code, breach of the implied duty of
good faith and fair dealing, financial elder abuse and prays for relief in the form of
compensatory damages and restitution, punitive damages, an accounting, attorney fees and
court costs.  We have filed a demurrer to all counts of the Plaintiffs
complaint, and a motion to strike allegations of the complaint, including Plaintiffs
class allegations.  While the Company cannot predict the outcome of this case, it
could have a material adverse impact upon its financial condition and results of
operations. However, we believe that the complaint is without merit and intend
to continue to defend the matter vigorously.

Item 2.Changes in Securities,
Use of Proceeds and Issuer Purchases of Equity Securities

On
May 28, 2004, we issued 100,000 shares of common stock as compensation to individuals affiliated with Philadelphia
Brokerage Corporation, our financial advisor, in a private placement exempt from registration pursuant to section 4(2) of the
Securities Act of 1933, as amended.

Item 3. Defaults Upon
Senior Securities

Not
Applicable

The
Companys Annual Meeting of Shareholders was held on May 28, 2004. At this meeting,
the following matters were voted upon by the shareholders, receiving the number of
affirmative, negative and withheld votes, as well as abstentions and broker non-votes, set
forth below each matter.

| | 1. | To elect three persons to the Companys Board of Directors as Class II
               Directors to serve until the 2007 Annual Meeting of Shareholders and until their
               successors are elected and have been qualified.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                       | For        | Against   | Abstentions | Broker
Non-Votes
|---------------------- | ---------- | --------- | ----------- | ----------------
|a) Alexander M. Clark  | 28,812,249 | 2,262,417 | 0           | 0               
|b) Patrick E. Falconio | 30,777,989 | 296,677   | 0           | 0               
|c) Matthew W. Kaplan   | 30,799,497 | 275,169   | 0           | 0               

| | 2. | To ratify the selection of PricewaterhouseCoopers LLP as the independent public
               accountants for the Company and its subsidiaries for the year ending December
               31, 2004.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|For        | Against | Abstentions | Broker Non-Votes
|---------- | ------- | ----------- | ----------------
|30,870,267 | 45,922  | 158,477     | 0               



---

| | 3. | To transact other business that properly comes before the Annual Meeting, or any
               adjournments or postponements.
| | -- | ------------------------------------------------------------------------------------------------------------------------------

|For        | Against   | Abstentions | Broker Non-Votes
|---------- | --------- | ----------- | ----------------
|27,938,814 | 2,906,578 | 229,274     | 0               

Item 5. Other Information

None

Item 6.Exhibits and Reports
on Form 8-K

(a)
Exhibits

| | 31.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------

| | 31.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------

| | 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------

| | 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------

(b)    
          Reports on Form 8-K.

During the three month period ended
June 30, 2004, the Company filed one Current Report on Form 8-K pursuant to Item 7
(Financial Statement and Exhibits) and Item 12 (Results of Operations and Financial
Condition). The report was dated May 14, 2004, and furnished financial results for the
first quarter 2004.



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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.

| | PENN TREATY AMERICAN CORPORATION
| | --------------------------------
| | Registrant                      

|                        |  |                        
|----------------------- |  | -----------------------
|Date:   August 13, 2004 |  | /s/ William W. Hunt    
|                        |  | William W. Hunt        
|                        |  | President and          
|                        |  | Chief Executive Officer

|                        |  |                          
|----------------------- |  | -------------------------
|Date:   August 13, 2004 |  | /s/ Mark Cloutier        
|                        |  | Mark Cloutier            
|                        |  | Senior Vice President and
|                        |  | Chief Financial Officer