UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q/A

[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the quarterly period ended March 31, 2001

                                       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 0-13972
                ------------------------------------------------

                        PENN TREATY AMERICAN CORPORATION
                     3440 Lehigh Street, Allentown, PA 18103
                                 (610) 965-2222

       Incorporated in Pennsylvania             I.R.S. Employer ID No.
                                                     023-1664166
                -------------------------------------------------

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 [ ]

The number of shares outstanding of the Registrant's common stock, par value
$.10 per share, as of May 14, 2001 was 7,820,634.


                                       1
<PAGE>

                          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 Operations and Comprehensive Income and Statements of Cash
Flows and Notes thereto required under this item are contained on pages 3
through 10 of this report, respectively. Our financial statements represent the
consolidation of our operations and those of our subsidiaries, Penn Treaty
Network America Insurance Company ("PTNA"), American Network Insurance Company
("American Network"), American Independent Network Insurance Company of New York
("American Independent") and Penn Treaty (Bermuda) Ltd. ("Penn Treaty
(Bermuda))" (collectively the "Insurers") and United Insurance Group Agency,
Inc. ("UIG"), Network Insurance Senior Health Division ("NISHD") and Senior
Financial Consultants (collectively the "Agencies"), which are underwriters and
marketers of long-term care insurance, disability and other senior market
products. Penn Treaty Network is also an underwriter of life insurance products.





                                       2
<PAGE>
<TABLE>
<CAPTION>
                        PENN TREATY AMERICAN CORPORATION
                                AND SUBSIDIARIES
                            Condensed Balance Sheets
                             (amounts in thousands)
                                                                                        March 31     December 31,
                                                                                          2001          2000
                                                                                          ----          ----
                                                                                       (unaudited)
                                                     ASSETS
<S>                                                                                     <C>          <C>
Investments:
  Bonds, available for sale at market (cost of $397,069 and $349,877, respectively)     $ 405,999    $ 349,488
  Bonds, classified as trading                                                             17,835           --
  Equity securities at market value (cost of $16,329 and $17,112, respectively)            14,822       16,496
  Policy loans                                                                                148          142
                                                                                        ---------    ---------
Total investments                                                                         438,804      366,126
Cash and cash equivalents                                                                  80,741      116,596
Property and equipment, at cost, less accumulated depreciation of
  $5,533 and $5,162, respectively                                                          12,513       12,467
Unamortized deferred policy acquisition costs                                             257,109      251,711
Receivables from agents, less allowance for
  uncollectable amounts of $199 and $199, respectively                                      3,168        3,333
Accrued investment income                                                                   6,343        6,214
Federal income tax recoverable                                                              4,556        3,671
Cost in excess of fair value of net assets acquired, less
  accumulated amortization of $3,637 and $3,314, respectively                              26,741       27,064
Present value of future profits acquired                                                    2,248        2,352
Receivable from reinsurers                                                                 15,982       16,131
Other assets                                                                               49,974       50,466
                                                                                        ---------    ---------
    Total assets                                                                        $ 898,179    $ 856,131
                                                                                        =========    =========
                                  LIABILITIES
Policy reserves:
  Accident and health                                                                   $ 370,011    $ 348,344
  Life                                                                                     13,192       13,065
Policy and contract claims                                                                178,986      164,565
Accounts payable and other liabilities                                                     17,428       14,706
Long-term debt                                                                             79,250       81,968
Deferred income taxes                                                                      48,070       45,421
                                                                                        ---------    ---------
    Total liabilities                                                                     706,937      668,069
                                                                                        ---------   ----------
                              SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00; 5,000 shares authorized, none outstanding                    --           --
Common stock, par value $.10; 25,000 shares authorized, 8,201 and 8,202 shares issued         820          820
Additional paid-in capital                                                                 53,908       53,879
Accumulated other comprehensive income                                                      4,825         (662)
Retained earnings                                                                         138,394      140,730
                                                                                        ---------    ---------
                                                                                          197,947      194,767
Less 915 and 915, respectively, common shares held in treasury, at cost                    (6,705)      (6,705)
                                                                                        ---------    ---------
                                                                                          191,242      188,062
                                                                                        ---------    ---------
    Total liabilities and shareholders' equity                                          $ 898,179    $ 856,131
                                                                                        =========    =========

          See accompanying notes to consolidated financial statements

</TABLE>


                                       3
<PAGE>
<TABLE>
<CAPTION>

                   PENN TREATY AMERICAN CORPORATION
                           AND SUBSIDIARIES
    Consolidated Statements of Operations and Comprehensive Income
                             (unaudited)
            (amounts in thousands, except per share data)

                                                                     Three Months Ended March 31,
                                                                     ---------------------------
                                                                          2001       2000
                                                                          ----       ----
<S>                                                                     <C>        <C>
Revenue:
   Premiums                                                             $ 96,019   $ 86,038
   Net investment income                                                   6,725      6,161
   Net realized capital gains                                             (1,566)     2,155
   Trading account unrealized income (loss)                               (1,723)        --
   Other income                                                            2,400      2,138
                                                                        --------   --------
                                                                         101,855     96,492
 Benefits and expenses:
   Benefits to policyholders                                              72,137     59,911
   Commissions                                                            24,988     25,286
   Net policy acquisition costs deferred                                  (5,397)   (10,890)
   General and administrative expense                                     12,634     11,073
   Reserve for claim litigation                                             (250)     1,500
   Interest expense                                                        1,282      1,281
                                                                        --------   --------
                                                                         105,394     88,161
                                                                        --------   --------

 (Loss) income before federal income taxes                                (3,539)     8,331
 Provision for federal income taxes                                       (1,203)     2,840
                                                                        --------   --------
     Net (loss) income                                                    (2,336)     5,491
                                                                        --------   --------

  Other comprehensive income:
     Unrealized holding gain arising during period                         5,139      1,959
     Income tax expense from unrealized holdings                          (1,747)      (666)
     Reclassification adjustment for (gain) loss included in net income    3,289     (2,155)
     Income (tax) benefit from reclassification adjustment                (1,118)       733
                                                                        --------   --------

     Comprehensive income                                                  3,227      5,362
                                                                        ========   ========


 Basic earnings per share                                                $ (0.32)    $ 0.75
 Diluted earnings per share                                              $ (0.32)    $ 0.64


 Weighted average number of shares outstanding                             7,288      7,277
 Weighted average number of shares outstanding (diluted)                   7,375      9,948

     See accompanying notes to consolidated financial statements.

</TABLE>


                                       4
<PAGE>

                        PENN TREATY AMERICAN CORPORATION
                                AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                      for the Three Months Ended March 31,
                                   (unaudited)
                             (amounts in thousands)
                                                          2001             2000
                                                          ----             ----
Net cash flow from operating activities:
  Net income                                           $  (2,336)     $   5,491
  Adjustments to reconcile net income to cash
    provided by operations:
    Amortization of intangible assets                        517            502
    Policy acquisition costs, net                         (5,397)       (10,890)
    Deferred income taxes                                   (178)           758
    Depreciation expense                                     371            220
    Net realized capital losses (gains)                    1,566         (2,155)
    Trading account unrealized loss                        1,723             --
    Net proceeds from purchase and sales
       of trading account                                 (2,553)            --
  Increase (decrease) due to change in:
    Receivables from agents                                  165            446
    Receivable from reinsurers                               149             42
    Policy and contract claims                            14,421          4,522
    Policy reserves                                       21,794         23,080
    Accounts payable and other liabilities                 2,722          1,314
    Federal income taxes recoverable                        (885)           583
    Accrued investment income                               (129)          (591)
    Other, net                                               306            (69)
                                                       ---------      ---------
      Cash provided by operations                         32,256         23,253
Cash flow used in investing activities:
  Net cash purchase of subsidiary                             --         (6,000)
  Proceeds from sales of bonds                            24,349         18,501
  Proceeds from sales of equity securities                 3,190          7,535
  Maturities of investments                                2,239          4,207
  Purchase of bonds                                      (91,237)       (38,521)
  Purchase of equity securities                           (3,529)        (8,130)
  Acquisition of property and equipment                     (417)          (684)
                                                       ---------      ---------
      Cash used in investing                             (65,405)       (23,092)
Cash flow used in financing activities:
  Proceeds from exercise of stock options                     12             --
  Repayments of long-term debt                            (2,718)          (837)
                                                       ---------      ---------
      Cash used in financing                              (2,706)          (837)
                                                       ---------      ---------
Decrease in cash and cash equivalents                    (35,855)          (676)
Cash balances:
  Beginning of period                                    116,596         17,347
                                                       ---------      ---------
  End of period                                        $  80,741      $  16,671
                                                       =========      =========

          See accompanying notes to consolidated financial statements.


                                       5
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(unaudited)
(amounts in thousands, except per share data)

The Consolidated Financial Statements should be read in conjunction with these
notes and with the Notes to Consolidated Financial Statements included in the
Annual Report on Form 10-K for the year ended December 31, 2000 of Penn Treaty
American Corporation (the "Company").

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 for
the interim periods. Certain prior period amounts have been reclassified to
conform to current period presentation.

1.       Recent Developments:


         In the Company's Annual Report on Form 10-K for the year ended December
31, 2000, it reported that it had received a going concern qualification from
its independent accountant.  The going concern qualification addressed the
Company's parent liquidity and the statutory capital and surplus position of
PTNA.


         At December 31, 2000, PTNA's statutory surplus had decreased so that
for regulatory purposes, it was at the Regulatory Action Level, below which a
company must file a Corrective Action Plan that details the insurer's plan to
raise additional statutory capital over the next four years. As a result, PTNA
is required to submit the Corrective Action Plan to the Pennsylvania Insurance
Department for approval. Individual states in which the Company's insurance
subsidiaries are licensed to conduct business may also suspend the Company's
certificate of authority if they believe that the Company's capital and surplus
levels are deficient.

         The Pennsylvania Insurance Department has requested that the Company
seek its approval prior to taking certain actions. These include payment of
dividends, transactions with affiliates, new investments, incurral of debt,
pledging of assets, and new reinsurance agreements. The Department is also
requiring monthly reports related to financial condition.

         During the second quarter, 2001, the Company has voluntarily consented
to discontinue the issuance of new policies in certain states in which it is
licensed to conduct operations. New sales in these states accounted for
approximately 29% and 28% of the Company's new business in 2000 and the first
quarter, 2001, respectively. For the period ended March 31, 2001, the Company
reported further declines in its subsidiaries' statutory capital and surplus.
The statutory surplus of PTNA declined to $11,093 from $14,969 at December 31,
2000. The Company expects that if it is unsuccessful in its efforts to raise
additional capital by May 31, 2001, it will voluntarily consent to discontinue
issuing new policies in all states.

         The Company engaged a leading, nationally respected independent
actuarial consultant. The consulting actuary evaluated the Company's reserves
for current claims as of December 31, 2000 and determined that its reserves were
sufficient to meet anticipated obligations for current claims.

                                       6
<PAGE>

         In its statutory filing for March 31, 2001, the Company adopted a
reserving methodology for its statutory active life reserves, which differed
from its previous seriatim method. The Company's primary insurance subsidiary
has negative statutory capital and surplus of approximately $2,000 if the new
methodology had not been employed. The Company is required to obtain approval
from the Pennsylvania Insurance Department to change its reserving methodology.
It has not yet received this approval. If the Pennsylvania Insurance Department
does not approve this change, PTNA's capital and surplus would be reduced. The
Company reported capital and surplus of $11,093. The new methodology was based
upon a preliminary gross premium valuation. The preliminary gross premium
valuation report was completed in order to assist the Company in assessing the
adequacy of its reserves and to enable the Company to ultimately generate
seriatim factors for the future determination of its statutory active life
reserves. The preliminary gross premium valuation enables the Company to
determine minimum required reserve levels, incorporating future expectations
such as planned rate increase and morbidity assumptions. The Company assumed no
rate increases and a future morbidity decrease of 1.5% annually in its statutory
reserve determination. Although the Company believes that its reserve
assumptions are correct, this methodology produces statutory reserves that are
materially lower than if the Company's original factors were employed. The
Company believes that the former factors, which would increase reserves by 40%
annually and would have produced statutory reserve levels approximately $20,000
higher than currently reported, are inconsistent with its estimates for future
policy benefit requirements. Pennsylvania statutory regulation requires
factor-based reserves to be used in the determination of minimum reserve levels.
The Company intends to utilize the preliminary gross premium valuation to
develop new factors to be used in the ongoing development of reserves that are
in compliance with Pennsylvania regulations.

         As a result of its insurance subsidiaries reduced statutory surplus at
December 31, 2000, the Company's subsidiary ratings from A.M. Best and Standard
and Poor's were reduced in April 2001 to B- and CCC+, respectively, citing
deficient statutory surplus levels.


         During the first quarter of 2001, PTNA paid an obligation of
approximately $3,000 on behalf of the Company, which is not in accordance with
Pennsylvania insurance regulations. This could subject PTNA to penalties or
sanctions by the Insurance Department. Subsequent to March 31, 2001, the Company
entered a tax sharing agreement with PTNA that requires PTNA to determine its
stand alone tax liability and make payment to the Company for the timely
submission of tax deposits as needed. The agreement formalized procedures that
had generally been followed in the past, but have not yet been filed and
approved with the Pennsylvania Insurance Department. As discussed with the
Department for statutory reporting purposes, the payment by PTNA is being
applied against amounts due under the tax allocation agreement with any excess
funds not required by the Company for tax payments to the Internal Revenue
Services remitted back to PTNA on a timely basis.


         On April 27, 2001, the Company, with the assistance of its financial
advisors, distributed rights to its shareholders and holders of its 6 1/4%
convertible subordinated notes due 2003 for the purpose of raising new equity
capital. Pursuant to the rights offering, holders of the Company's common stock
and holders of its convertible subordinated notes received rights to purchase
approximately 12,000 newly issued shares of common stock at a set price of $2.40
per share. The rights offering may generate net proceeds up to $27,000 in
additional equity capital. The rights offering is expected to expire on or
before May 25, 2001. In addition, the Company has offered to certain of its
largest agency producers the opportunity to participate as standby purchasers in
the rights offering for the same price of $2.40 per share.

         On April 17, 2001, the Company signed a letter of intent to sell its
New York subsidiary, American Independent, and certain of its non-core product
lines, including life, medicare supplement and disability coverages. The Company
anticipates that it will exclude its life business from the original anticipated
sale, and that the total purchase amount of the sale will be approximately
$10,700. The sale remains subject to customary due diligence, execution of
definitive agreements and regulatory approvals.

2.       Contingencies:

         The Company received notice on April 17, 2001, that it and certain of
its key executive officers have been named as defendants in class action
lawsuits filed in United States District Court for the Eastern District of
Pennsylvania as a result of the Company's recent stock performance. The
complaints in each case allege that the Company and its executives made
misleading statements about the Company's statutory surplus, statutory reserves
and financial health. The Company cannot predict the outcome of these class
action lawsuits, however it contends that the lawsuits are baseless and
completely without merit, and intends to defend itself vigorously.


                                       7
<PAGE>

3.       Codification:

         In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles guidance, which replaces the current Accounting Practices and
Procedures manual as the NAIC's primary guidance on statutory accounting as of
January 1, 2001. The Codification provides guidance for areas where statutory
accounting has been silent and changes current statutory accounting in some
areas.

         The Pennsylvania and New York Insurance Departments have adopted the
Codification guidance, effective January 1, 2001. The Company has adopted the
Codification guidance, including certain limitations on the recognition of
goodwill and EDP equipment, and the recognition of other than temporary declines
in investments, which served to reduce the statutory surplus of the Company's
insurance subsidiaries at March 31, 2001, by approximately $3,050.

4.       Investments:

         Management has categorized the majority of its investment securities as
available for sale since they may be sold in response to changes in interest
rates, prepayments, and similar factors. Investments in this classification 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 March 31,
2001, shareholders' equity was increased by $4,825 due to unrealized gains of
$7,423 in the investment portfolio. As of December 31, 2000, shareholders'
equity was decreased by $662 due to unrealized losses of $1,005 in the
investment portfolio.

         The amortized cost and estimated market value of the Company's
available for sale investment portfolio as of March 31, 2001 and December 31,
2000 are as follows:

<TABLE>
<CAPTION>

                                           March 31, 2001                       December 31, 2000
                                           --------------                       -----------------
                                      Amortized     Estimated                Amortized     Estimated
                                        Cost       Market Value                Cost      Market Value
                                      --------     ------------              ---------   ------------
<S>                                   <C>            <C>                  <C>            <C>
U.S. Treasury securities
  and obligations of U.S
  Government authorities
  and agencies                        $ 148,600      $ 156,047            $ 120,691      $ 125,981

Obligations of states and
  political sub-divisions                   572            603                  572            600

Mortgage backed securities               32,116         32,520               26,529         26,720

Debt securities issued by
 foreign governments                     10,472         10,368               15,817         15,549

Corporate securities                    205,309        206,461              186,268        180,638

Equities                                 16,329         14,822               17,112         16,496
                                      ---------      ---------            ---------      ---------

Total Investments                     $ 413,398      $ 420,821            $ 366,989      $ 365,984
                                      =========      =========            =========      =========

Net unrealized gain (loss)                7,423        (1,005)
                                      ---------      ---------

                                      $ 420,821      $ 365,984
                                      =========      =========
</TABLE>

         Effective January 1, 2001, in accordance with Statement of Financial
Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133), the Company transferred its convertible bond
portfolio, which contained embedded derivatives, from the available for sale
category of investments to the trading category. Changes in unrealized gains and
losses for the trading portfolio are recorded in current operations. The
unrealized loss at the time of the transfer was $1,064. The unrealized loss on
the trading portfolio recorded for the period ended March 31, 2001 is $1,723.


                                       8
<PAGE>

         During the period ended March 31, 2001, the Company recognized
impairment losses of $744 on equity securities, which it deemed to be other than
temporary.

5.       New Accounting Principle:

         Effective January 1, 2001, the Company adopted SFAS No. 133 as amended
by SFAS No. 137 "Deferral of the Effective Date of FAS 133", which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
"derivatives") and for hedging activities. SFAS No. 133 requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.

         In accordance with SFAS No. 133, the Company transferred its
convertible bond portfolio from the available for sale category to the trading
category. The unrealized loss at the time of the transfer was $1,064, which has
been included in current operations.

         The Company has purchased life insurance policies covering
substantially all of its employees. The Financial Accounting Standards Board
(FASB) is currently reconsidering its tentative conclusion that certain types of
variable corporate-owned life insurance policies contain embedded derivatives
that should be accounted for separately by the purchaser of the life insurance.
The Company is currently accounting for the life insurance at cash surrender
value in accordance with FASB Technical Bulletin 85-4 "Accounting for Purchases
of Life Insurance." The Company believes this represents the fair value of the
life insurance.

         The Company has entered into an interest rate swap agreement, which
serves to convert its mortgage loan from a variable rate to a fixed rate
instrument. The Company has determined that the swap qualifies as a cash-flow
hedge. The notional amount of the swap is approximately $1,600. The effects have
been determined to be immaterial to the financial statements.

         The Company's involvement with derivative instruments and transactions
is primarily to offer protection to others or to mitigate its own risk and is
not considered speculative in nature.


                                       9
<PAGE>

6.       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 stockholders 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.

                                                  Three Months Ended March 31,
                                                  ---------------------------
                                                       2001         2000
                                                       ----         ----
Net income                                           $ (2,336)    $  5,491
Weighted average common shares outstanding              7,288        7,277
Basic earnings per share                             $  (0.32)    $   0.75
                                                     ========     ========

Net income                                           $ (2,336)    $  5,491
Adjustments net of tax:
     Interest expense on convertible debt                  --          770
     Amortization of debt offering costs                   --           60
                                                     --------     --------
Diluted net income                                   $ (2,336)    $  6,321
                                                     ========     ========

Weighted average common shares outstanding              7,288        7,277
Common stock equivalents due to dilutive
     effect of stock options                               87           43
Shares converted from convertible debt                     --        2,628
                                                     --------     --------
Total outstanding shares for diluted earnings
     per share computation                              7,375        9,948
Diluted earnings per share                           $  (0.32)    $   0.64
                                                     ========     ========


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

Overview

         As a result of our insurance subsidiary surplus needs and parent
company liquidity requirements, the report of our independent accountant for our
fiscal 2000 financial statements contained a going concern qualification. See "-
Liquidity and Capital Resources."

         Our principal products are individual, defined benefit accident and
health insurance policies that consist of nursing home care, home health care,
Medicare supplement and long-term disability insurance. Our underwriting
practices rely upon the base of experience which we have developed in over 29
years of providing nursing home care insurance, as well as upon available
industry and actuarial information. As the home health care market has
developed, we have encouraged our customers to purchase both nursing home and
home health care coverage, thus providing our insureds with enhanced protection
and broadening our policy base.

                                       10
<PAGE>

         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 losses, as well as estimated future benefits payable
under our insurance policies. These reserves must, at a minimum, comply with
mandated standards.  For a description of current regulatory matters affecting
our insurance subsidiary, see "-Liquidity and Capital Resources - Subsidiary
Operations."

         Our results of operations are affected significantly by the following
other factors:

         Level of required reserves for policies in-force. The amount of
reserves relating to reported and unreported claims incurred is determined by
periodically evaluating historical claims experience and statistical information
with respect to the probable number and nature of such claims. Claim reserves
reflect actual experience through the most recent time period. We compare actual
experience with estimates and adjust our reserves on the basis of such
comparisons. Revisions to reserves are reflected in our current results of
operations through benefits to policyholders' expense.

         We also maintain reserves for policies that are not currently in claim
based upon actuarial expectations that a policy may go on claim in the future.
These reserves are calculated based on factors that include estimates for
mortality, morbidity, interest rates and persistency. Factor components
generally include assumptions that are consistent with both our experience and
industry practices.

         Policy premium levels. We attempt to set premium levels to maximize
profitability. Premium levels on new products, as well as rate increases on
existing products, are subject to government review and regulation.

         Deferred 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 of 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 deferred acquisition costs is determined
using the same projected actuarial assumptions used in computing policy
reserves. Deferred acquisition costs can be affected by unanticipated
terminations of policies because, upon such terminations, we are required to
expense fully the deferred acquisition costs associated with the terminated
policies.

         The number of years a policy has been in effect. Claims costs tend to
be higher on policies that have been in-force for a longer period of time. As
the policy ages, it is more likely that the insured will need services covered
by the policy. However, the longer the policy is in effect, the more premium we
receive.

         Investment income. Our investment portfolio 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 5.0 years), investment interest
income does not immediately reflect changes in market interest rates. However,
we are susceptible to changes in market rates when cash flows from maturing
investments are reinvested at prevailing market rates. As of March 31, 2001,
approximately 3.4% of our invested assets were committed to common stocks and
small capitalization preferred stocks.

                                       11
<PAGE>

         Lapsation and persistency. Factors that affect our results of
operations include 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 premiums renewed, which we
calculate by dividing the total annual premiums at the end of each year (less
first year premiums for that year) by the total annual premiums in-force for the
prior year. For purposes of this calculation, a decrease in total annual
premiums in-force at the end of any year would be the result of non-renewal of
policies, including policies that have terminated by reason of death, lapsed due
to nonpayment of premiums and/or been converted to other policies offered by us.
First year premiums are premiums covering the first twelve months a policy is
in-force. Renewal premiums are premiums covering all subsequent periods.

         Policies renew or lapse for a variety of reasons, both internal and
external. We believe that our efforts to address policyholder concerns or
questions in an expedient fashion help to ensure policy renewals. We also
believe that we enjoy a favorable reputation among policyholders for providing
desirable policy benefits and efficient claims processing. We work closely with
our licensed agents, who play an integral role in policy conservation and
policyholder communication.

         External factors also contribute to policy renewal or lapsation.
Economic cycles can influence a policyholder's ability to continue the payment
of insurance premiums when due. We believe that tax relief for certain long-term
care insurance premiums and other governmental initiatives, which have raised
public awareness of the escalating costs of long-term care, increase new sales
and renewal payments. The ratings assigned to our insurance subsidiaries by
independent rating agencies also influences consumer decisions.

         Lapsation and persistency can both positively and adversely impact
future earnings. Improved lapsation and persistency generally result in higher
renewal premiums and lower amortization of deferred acquisition costs, but may
lead to increased claims in future periods. Lapsation and persistency problems
can result in reduced premium collection and a greater percentage of higher-risk
policyholders and lapsation requires us to fully expense deferred acquisition
costs relating to lapsed policies in the period in which policies lapse.

Three Months Ended March 31, 2001 and 2000
(amounts in thousands, except per share data)

Premiums. Total premium revenue earned in the three month period ended March 31,
2001 (the "2001 quarter"), including long-term care, disability, life and
Medicare supplement, increased 11.6% to $96,019, compared to $86,038 in the same
period in 2000 (the "2000 quarter").

         First year long-term care premiums earned in the 2001 quarter decreased
22.1% to $19,225, compared to $24,671 in the 2000 quarter. We believe that the
reduction in premium during the 2001 quarter is the result of higher premiums
charged on certain of our products in many states. Although the higher premiums
generate additional long-term profitability, we believe that many agents have
experienced difficulty or are unwilling to sell higher premium products that are
underwritten by a smaller company with lower credit agency ratings than some of
our larger competitors.

         Subsequent to March 31, 2001, we experienced significant reductions in
new premium sales as a result of financial concerns regarding our insurance
subsidiaries' statutory surplus and from the voluntary cessation of new business
generation in certain states that have generally accounted for approximately 29%
and 28% of our new business sales during 2000 and the 2001 quarter,
respectively. As a result of our current statutory surplus limitations, we
expect that if we are unsuccessful in our efforts to raise additional capital by
May 31, 2001, we will voluntarily consent to discontinue issuing new policies in
all states.  See "--Liquidity and Capital Resources."

                                       12
<PAGE>

         Renewal premiums earned in the 2001 quarter increased 25.5% to $76,108,
compared to $60,659 in the 2000 quarter. Renewal long-term care premiums earned
in the 2001 quarter increased 26.3% to $72,176, compared to $57,155 in the 2000
quarter. This increase reflects renewals of a larger base of in-force policies.
We may experience reduced renewal premiums if policies lapse as a result of our
current statutory surplus condition.

Net Investment Income. Net investment income earned for the 2001 quarter
increased 9.2% to $6,725, from $6,161 for the 2000 quarter. Management
attributes this growth to more invested assets as a result of higher established
reserves. Our average yield on invested assets at cost, including cash and cash
equivalents, was 5.4% in the 2001 quarter, compared to 6.0% in the 2000 quarter.
The average yield is lower due to reduced market rates for reinvesting of
maturing investments and due to higher cash balances held during the 2001
quarter.

         Net Realized Capital Gains and Trading Account Activity. During the
2001 quarter, we recognized capital losses of $1,566, compared to gains of
$2,155 in the 2000 quarter. The results in both periods were recorded as a
result of our normal investment management operations. In the 2001 quarter, we
recognized impairment losses of $744 on equity securities, which we deemed to be
other than temporary. We are retaining ownership of the equites secirities
because we believe that the current market price is artificially low for their
value, and believe that we will recognize a higher return by retaining
ownership.

         During the 2001 quarter, we determined to classify our convertible bond
portfolio as a result of the adoption of SFAS No. 133 as trading account
investments. Changes in trading account investment market values are recorded in
our statement of operations during the period in which the change occurs, rather
than as an unrealized gain or loss recorded directly through equity. As a
result, we have recorded a trading account loss in the 2001 quarter of $1,723,
which reflects the total unrealized loss of our convertible portfolio at March
31, 2001.

Other Income. We recorded $2,400 in other income during the 2001 quarter, up
from $2,138 in the 2000 quarter. The increase is attributable to an increase of
commissions earned by United Insurance Group on sales of insurance products
underwritten by unaffiliated insurers and to income generated from corporate
owned life insurance policies.

Benefits to Policyholders. Total benefits to policyholders in the 2001 quarter
increased 20.4% to $72,137, compared to $59,911 in the 2000 quarter. Our loss
ratio, or policyholder benefits to premiums, was 75.1% in the 2001 quarter,
compared to 69.6% in the 2000 quarter.

         In the 2001 quarter, as a result of our reserve review by our newly
appointed consulting actuary, we determined to increase our reserves for the
future adjudication of claims, or loss adjustment expense reserve ("LAE"), from
1.4% to 2.8% of total claim reserves, due to our assessment of recent Company
and industry trends. This adjustment increased benefits expense by approximately
$2,500. We expect to maintain the LAE reserve at 2.8% in future periods, and
although it is expected to increase in proportion to claim reserve levels, we do
not expect to have to increase the LAE reserve ratio further. Excluding the
impact of our LAE adjustment, our loss ratio would have been 72.5% for the 2001
quarter.

         Our loss ratio is expected to grow as the percentage of new business
premium to total premium decreases. As discussed under "Premiums," new premium
in the 2001 quarter grew less as a percentage of the total portfolio than in
prior periods.
                                       13
<PAGE>

         In the 2001 quarter, we engaged a new independent actuarial consultant.
Our consulting actuary evaluated our reserves for current claims as of December
31, 2000 and determined that our reserves were sufficient to meet anticipated
obligations for current claims. Subsequent to the 2001 quarter, our consulting
actuary performed a retrospective analysis upon the December 31, 2000 claim
reserves and reaffirmed the appropriateness of our claim reserve levels.

         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. We have been generally
successful in the past in obtaining state insurance department approvals for
increases.

Commissions. Commissions to agents decreased 1.2% to $24,988 in the 2001
quarter, compared to $25,286 in the 2000 quarter.

         First year commissions on accident and health business in the 2001
quarter decreased 19.8% to $12,889, compared to $16,061 in the 2000 quarter, due
to the decrease in first year accident and health premiums. The ratio of first
year accident and health commissions to first year accident and health premiums
was 65.6% in the 2001 quarter and 64.8% in the 2000 quarter. We believe that the
increase in the first year commission ratio is primarily attributable to the
sale of younger issue age policies. We generally pay a higher first year
commission percentage on younger issue ages policies due to the expectation that
premiums will be collected over a longer period of time.

         Renewal commissions on accident and health business in the 2001 quarter
increased 35.7% to $12,515, compared to $9,221 in the 2000 quarter, due to the
increase in renewal premiums discussed above. The ratio of renewal accident and
health commissions to renewal accident and health premiums was 16.9% in the 2001
quarter and 15.7% in the 2000 quarter. Although the ratio of commission expense
can be affected by adjustments in any particular quarter, we believe that the
increase in the 2001 quarter is indicative of the renewal of policies written by
managing general agents, who receive higher commissions for new and renewal
business written. Managing general agents generally receive higher commissions
to compensate them for providing additional services in the recruitment,
training and retention of producing agents.

         Commission expense during the 2001 quarter was reduced by $992 from
United Insurance Group and NISHD override commissions paid to those companies by
affiliated insurers. During the 2000 quarter, commissions were reduced by $869.

Net Policy Acquisition Costs Deferred. The net deferred policy acquisition costs
in the 2001 quarter decreased 50.4% to $5,397, compared to $10,890 in the 2000
quarter.

         Deferred costs are typically all costs that are directly related to,
and vary with, the acquisition of new premiums. These costs include the variable
portion of commissions, which are defined as the first year commission rate less
ultimate renewal commission rates, and variable general and administrative
expenses related to policy underwriting. Deferred costs are amortized over the
life of the policy based upon 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.

                                       14
<PAGE>

         Policy acquisition cost deferrals are reduced in the 2001 quarter (as
are related commission expenses) due to the generation of less new premium.
Also, $11,552 of gross deferred acquisition costs were amortized during the 2001
quarter, compared to $9,090 during the 2000 quarter. We believe that as new
premium growth declines, the amortization of deferred acquisition costs could
exceed gross expense deferrals.

General and Administrative Expenses. General and administrative expenses in the
2001 quarter increased 14.1% to $12,634, compared to $11,073 in the 2000
quarter. The 2001 and 2000 quarters include $1,657 and $2,154, respectively of
general and administrative expenses related to United Insurance Group expense.

         As described above, our ratio of renewal commissions to renewal
premiums has increased as a result of policy sales made by agencies with a
higher commission schedule. These agencies are paid higher rates in order to
compensate them for incurring additional costs related to policy generation,
such as sales lead generation, agent training and certain marketing material
expense. As a result, our general and administrative expenses should be reduced.
As new premium sales have declined, we have recognized that our new policy
generation expenses have not declined at a comparable rate. Therefore,
subsequent to March 31, 2001, the Company reduced its staff related to new
business production by approximately 50 employees in order to eliminate costs
associated with declining new business production. We believe that if we are
unsuccessful in our attempt to write new business in states where we have
currently ceased new production or if further new business declines are
experienced, we will need to decrease production expenses further.

         General and administrative expenses also increased during the 2001
quarter as a result of supplemental accounting and actuarial fees, legal fees
and depreciation expenses.

Reserve for Claim Litigation. In April 2000, a jury awarded compensatory damages
of $24 and punitive damages of $2,000 in favor of the plaintiff in a disputed
claim case against one of our subsidiaries. Subsequent to the 2001 quarter, we
agreed to settle the claim for $750 and reduced our $1,000 reserve by $250.

Provision for Federal Income Taxes. Our provision for federal income taxes for
the 2001 quarter declined 142.4% to a benefit of $1,203, compared to a tax of
$2,840 for the 2000 quarter. The effective tax rates of 34.0% and 34.1% in the
2001 and 2000 quarters, respectively, are at or below the normal federal
corporate rate as a result of credits from our investments in tax-exempt bonds
and corporate owned life insurance and dividends we receive that are partially
exempt from taxation and are partially offset by non-deductible goodwill
amortization and other non-deductible expenses.

Comprehensive Income. During the 2001 quarter, our investment portfolio
generated pre-tax unrealized gains of $5,139, compared to 2000 quarter
unrealized gains of $1,959. After accounting for deferred taxes from these
gains, shareholders' equity increased by $3,227 from comprehensive income during
the 2001 quarter, compared to comprehensive income of $5,362 in the 2000
quarter.

Liquidity and Capital Resources

         In our Annual Report on Form 10-K for the year ended December 31, 2000,
we reported that we had received a going concern qualification from our
independent accountant. The going concern qualification addressed parent
liquidity and the statutory capital and surplus position of our primary
insurance subsidiary.
                                       15
<PAGE>

         Our consolidated liquidity requirements have historically been created
and met from the operations of our insurance subsidiaries. Our primary sources
of cash are premiums, investment income and maturities of investments. We have
obtained, and may continue to obtain, cash through public offerings of our
common stock, capital markets activities or debt instruments. The primary uses
of cash are policy acquisition costs (principally commissions), payments to
policyholders, investment purchases and general and administrative expenses.

         In the 2001 quarter, our cash flows were attributable to cash provided
by operations, cash used in investing and cash used in financing. Our cash
decreased $35,855 in the 2001 quarter primarily due to the purchase of $94,766
in bonds and equity securities. Cash was provided primarily from the maturity
and sale of $29,778 in bonds and equity securities. These sources of funds were
supplemented by $32,256 from operations. The major provider of cash from
operations was premium revenue used to fund reserve additions of $36,215.

         Our cash decreased $676 in the 2000 quarter primarily due to the
acquisition of $46,651 in bonds and equity securities. The use of these funds
offset $23,253 from operations and $30,243 provided from the sale and maturity
of bonds and equity securities. The major provider of cash from operations was
premium revenue used to fund reserve increases of $27,602. We also used $6,000
for the purchase of Network Insurance Senior Health Division, an insurance
agency.

         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. At March 31, 2001, the market value of our bond portfolio represented
102.2% of our cost, with a current unrealized gain of $8,930. Our equity
portfolio market value was below cost by $1,507 at March 31, 2001. Our equity
portfolio was below cost by $616 at December 31, 2000 and the market value of
our bond portfolio was below our cost by $389.

          As of March 31, 2001, shareholders' equity was increased by $4,825 due
to unrealized gains of $7,423 in the investment portfolio. As of December 31,
2000, shareholders' equity was decreased by $662 due to unrealized losses of
$1,005 in the investment portfolio.

Subsidiary Operations

         At December 31, 2000, our primary insurance subsidiary's statutory
surplus was $14,969 and had decreased so that, for regulatory purposes, it was
at the Regulatory Action Level, below which a company must file a Corrective
Action Plan that details the insurer's plan to raise additional statutory
capital over the next four years. As a result, our subsidiary is required to
submit the Corrective Action Plan to the Pennsylvania Insurance Department for
approval. Individual states in which our insurance subsidiaries are licensed to
conduct business may also suspend our certificate of authority if they believe
that the Company's capital and surplus levels are deficient.

         At March 31, 2001, capital and surplus had declined further to $11,093.
Although this subsidiary's capital and surplus remains at the Regulatory Action
Level, we believe that further declines would cause the Pennsylvania Insurance
Department to require further corrective action, including, but not limited to
the involuntary cessation of new business generation, placing the subsidiary
under Departmental supervision, or involuntary receivership, which could result
in the liquidation of all subsidiary assets.

                                       16
<PAGE>

         In its statutory filing for March 31, 2001, our primary insurance
subsidiary adopted a reserving methodology for its statutory active life
reserves, which differed from its previous seriatim method. Our primary
insurance subsidiary has negative statutory capital and surplus of approximately
$2,000 if the new methodology had not been employed. We are required to obtain
approval from the Pennsylvania Insurance Department to change our reserving
methodology. We have not yet received this approval. If the Pennsylvania
Insurance Department does not approve this change, our primary insurance
subsidiary's capital and surplus would be reduced. We reported capital and
surplus of $11,093. The new methodology was based upon a preliminary gross
premium valuation. The preliminary gross premium valuation report was completed
in order to assist us in assessing the adequacy of our reserves and to enable us
to ultimately generate seriatim factors for the future determination of our
active life reserves. The gross premium valuation enables us to determine
minimum required reserve levels, incorporating future expectations such as
planned rate increase and morbidity assumptions. We assumed no rate increases
and a future morbidity decrease of 1.5% annually in our statutory reserve
determination. Although we believe that our reserve assumptions are correct,
this methodology produces statutory reserves that are materially lower than if
our subsidiary's original factors were employed. We believe that the former
factors, which would increase reserves by 40% annually and would have produced
statutory reserve levels approximately $20,000 higher than currently reported,
are inconsistent with our estimates for future policy benefit requirements.
Pennsylvania statutory regulation requires factor-based reserves to be used in
the determination of minimum reserve levels. We intend to utilize the
preliminary gross premium valuation to develop new factors to be used in the
ongoing development of reserves that are in compliance with Pennsylvania
regulations.

         On March 31, 2001, we contributed the common stock ownership of one of
our insurance subsidiaries to our largest insurance subsidiary as a capital
infusion. This resulted in an increase of statutory surplus for that insurer of
$4,875.

         The Pennsylvania Insurance Department has requested that we seek its
approval prior to taking certain actions. These include payment of dividends,
transactions with affiliates, new investments, incurral of debt, pledging of
assets, and new reinsurance agreements. The Department is also requiring monthly
reports related to our financial condition.

         We have voluntarily consented to discontinue the issuance of new
policies in certain states in which we are licensed to conduct operations. In
our statutory filing for the period ending March 31, 2001, we reported further
declines in our subsidiaries' statutory capital and surplus, which we believe
will place us in non-compliance with statutory regulations in many states. We
expect that if we are unsuccessful in our efforts to raise additional capital by
May 31, 2001, we will voluntarily consent to discontinue issuing new policies in
all states.

         If our statutory surplus continues to decline, and if we are
unsuccessful in raising additional capital for infusion to our subsidiary, our
subsidiary insurer would be subject to mandatory control and receivership by the
Pennsylvania Insurance Department. In this event, our shareholders would
likely receive little if any value from the sale or liquidation of the
subsidiary.

         The Pennsylvania Insurance Department is concluding an examination of
our subsidiary insurers. We are aware that the Pennsylvania Insurance Department
has required other long-term care companies with similar actuarial assumptions
to post higher reserves as a result of their examination. While the Pennsylvania
Insurance Department has not finalized its exam or quantified any of its
findings, it has expressed concerns regarding our reserve levels. Any increases
in statutory reserves arising as a result of the Pennsylvania Insurance
Department's audit will further reduce our already strained statutory surplus
and require additional statutory capital. We intend to vigorously contest any
requested changes to our statutory reserve levels based upon the conclusions
drawn from our preliminary gross premium valuation analysis.

                                       17
<PAGE>


         During the first quarter of 2001, PTNA paid an obligation of
approximately $3,000 on our behalf, which is not in accordance with Pennsylvania
insurance regulations. This could subject PTNA to penalties or sanctions by the
Insurance Department. Subsequent to March 31, 2001, we entered a tax sharing
agreement with PTNA that requires PTNA to determine its stand alone tax
liability and make payment to us for the timely submission of tax deposits as
needed. The agreement formalized procedures that had generally been followed in
the past, but have not yet been filed and approved with the Pennsylvania
Insurance Department. As discussed with the Department for statutory reporting
purposes, the payment by PTNA is being applied against amounts due under the tax
allocation agreement with any excess funds not required by us for tax payments
to the Internal Revenue Services remitted back to PTNA on a timely basis.


        As a result of its insurance subsidiaries reduced statutory surplus at
December 31, 2000, the Company's subsidiary ratings from A.M. Best and Standard
and Poor's were reduced in April 2001 to B- and CCC+, respectively, citing
deficient statutory surplus levels.

         Our subsidiaries' debt currently consists primarily of a mortgage note
in the amount of approximately $1,600 that was issued by a former subsidiary and
assumed by us when that subsidiary was sold. The mortgage note is currently
amortized over 15 years, and has a balloon payment due on the remaining
outstanding balance in December 2003. Although the note carries a variable
interest rate, we have entered into an amortizing swap agreement with the same
bank with a nominal amount equal to the outstanding debt, which has the effect
of converting the note to a fixed rate of interest of 6.85%.

Parent Company Operations

         Our parent company is a non-insurer that directly controls 100% of the
voting stock of our insurance company subsidiaries. If we are unable to meet our
financial obligations, become insolvent or discontinue operations, the financial
condition and results of operations of our insurance company subsidiaries could
be materially affected.

         Parent company debt currently consists of $74,750 of 6.25% Convertible
Subordinated Notes due 2003, as well as an installment note in the amount of
$2,858 issued in connection with the purchase of United Insurance Group. The
convertible subordinated notes, issued in November 1996, are convertible into
common stock at $28.44 per share until maturity in November 2003. At maturity,
to the extent that the convertible subordinated notes have not been converted
into common stock, we will have to repay their entire principal amount in cash.
The convertible subordinated notes carry a fixed interest coupon of 6.25%,
payable semi-annually. We expect that we will need to refinance our convertible
subordinate notes upon their maturity in 2003, unless those notes are converted
into common stock.

         The indenture under which our convertible subordinated notes were
issued contains covenants including the timely payment of interest and principal
and requires us to protect the interests of our insurance subsidiaries. If we
are not successful in our efforts to raise additional capital, and the
Pennsylvania Insurance Department places our insurance subsidiary into
receivership, we may be in default of the terms of our convertible debt.

          On January 1, 1999, we purchased all of the common stock of United
Insurance Group, a Michigan based consortium of long-term care insurance
agencies, for $18,192. As part of the purchase, we issued a note payable for
$8,078, which was in the form of a three-year zero-coupon installment note. The
installment note, after discounting for imputed interest, was recorded as a note
payable of $7,167, and had an outstanding balance of $2,858 at March 31, 2001.
The remainder of the purchase was for cash.

         In December 1999, we contributed $1,000 to initially capitalize another
subsidiary, which concurrently lent us $750 in exchange for a demand note.

         At March 31, 2000, we had a $3,000 line of credit from a bank, which
was unused. The bank did not renew the line of credit at December 31, 2000.

                                       18
<PAGE>

         Cash flow needs of the parent company primarily include interest
payments on outstanding debt and limited operating expenses. The funding is
primarily derived from the operating cash flow of our agency operations, tax
sharing arrangements with our subsidiaries and dividends, if allowed under
insurance department regulations, from the insurance subsidiaries. However, as
noted above, the dividend capabilities of the insurance subsidiaries are
limited. The available cash sources to the parent company may not be sufficient
to meet its obligations for 2001, resulting in an immediate need to raise
additional capital in order to meet its outstanding debt obligations in order to
avoid defaulting on our debt servicing obligations. We have engaged financial
advisors to assist us in raising additional capital to satisfy our near-term
parent company liquidity and statutory surplus needs. We have an effective
registration statement, covering $75,000 of marketable securities.

         On April 27, 2001, we distributed rights to our shareholders and
holders of our 6 1/4% convertible subordinated notes due 2003 for the purpose of
raising new equity capital. Pursuant to the rights offering, holders of our
common stock and holders of our convertible subordinated notes received rights
to purchase approximately 12,000 newly issued shares of common stock at a set
price of $2.40 per share. The rights offering is anticipated to generate net
proceeds up to $27,000 in additional equity capital. The rights offering is
expected to close on or before May 31, 2001. In addition, we offered to certain
of our largest agency producers the opportunity to participate as standby
purchasers in the rights offering for the same price of $2.40 per share.

         We are in the process of preparing a Corrective Action Plan for our
ongoing capital needs. The plan calls for raising additional capital, which will
be contributed to the statutory capital and surplus of our insurance
subsidiaries and will be used to meet our liquidity needs. The rights offering
described above, which could raise net proceeds of up to $27,000 is one
component of this plan. We are continuing to assess all financial alternatives,
including venture capital, partnerships, acquisitions, and reinsurance
transactions.  There are no assurances that we will be successful.

         On April 17, 2001, we signed a letter of intent to sell our New York
subsidiary and certain of our non-core product lines, including life, medicare
supplement and disability coverages. The sale, originally estimated at
approximately $13,000, is now expected to exclude life and is anticipated to be
approximately $10,700 and remains subject to final due diligence, execution of
definitive agreements and regulatory approvals.

New Accounting Principle

         Effective January 1, 2001, we adopted SFAS No. 133 as amended by SFAS
No. 137 "Deferral of the Effective Date of FAS 133", which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
"derivatives") and for hedging activities. SFAS No. 133 requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.

         In accordance with SFAS No. 133, we transferred our convertible bond
portfolio from the available for sale category to the trading category. The
unrealized loss at the time of the transfer was $1,064, which has been included
in current operations.

                                       19
<PAGE>

         We have purchased life insurance policies covering substantially all of
our employees. The Financial Accounting Standards Board (FASB) is currently
reconsidering its tentative conclusion that certain types of variable
corporate-owned life insurance policies contain embedded derivatives that should
be accounted for separately by the purchaser of the life insurance. We are
currently accounting for the life insurance at cash surrender value in
accordance with FASB Technical Bulletin 85-4 "Accounting for Purchases of Life
Insurance." We believe this represents the fair value of the life insurance.

         We have entered into an interest rate swap agreement, which serves to
convert our mortgage loan from a variable rate to a fixed rate instrument. We
have determined that the swap qualifies as a cash-flow hedge. The notional
amount of the swap is approximately $1,600. The effects have been determined to
be immaterial to the financial statements.

         Our involvement with derivative instruments and transactions is
primarily to offer protection to others or to mitigate our own risk and is not
considered speculative in nature.

Forward Looking Statements

         Certain statements made by us in this filing 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 operations will not differ
materially from our expectations. Factors which could cause actual results to
differ from expectations include, among others, our ability to raise adequate
capital to meet the requirements of current business, anticipated growth and
liquidity needs, the success of the rights offering, the ability to write
business,the completion of the proposed acquisition of certain product lines and
our New York subsidiary, the adequacy of loss reserves, our ability to qualify
new insurance products for sale in certain states, to resume business in states
in which we have ceased new sales and to succeed in obtaining necessary rate
increases, our ability to comply with government regulations and the
requirements which may be imposed by state regulators as a result of our surplus
levels, the ability of senior citizens to purchase our products in light of the
increasing costs of health care, the modality of premium revenue, our ability to
defend against adverse litigation, and our ability to expand our network of
productive independent agents. For additional information, please refer to our
Annual Report on Form 10-K, our prospectus and supplements filed with the
Securities and Exchange Commission.


Item 3.  Quantitative and Qualitative Disclosures About Market Risk

         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 our 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 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.

         We currently have an interest rate swap on our mortgage with the same
bank, which is used as a hedge to convert the mortgage to a fixed interest rate.
We believe that since the notional amount of the swap is amortized at the same
rate as the underlying mortgage, and that both financial instruments are with
the same bank, no credit or financial risk is carried with the swap.


                                       20
<PAGE>

         Our financial instruments are held for purposes other than trading,
except for our convertible bond portfolio. Our portfolio does not contain any
significant concentrations in single issuers (other than U.S. treasury and
agency obligations), industry segments or geographic regions.

         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 79.5% of total liabilities
and reinsurance receivables on unpaid losses represent 1.8% of total assets).
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 financial instruments as of March 31, 2001, 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, there would have
been an approximate $15,847,000 decrease in the net fair value of our investment
portfolio less our long-term debt and the related swap agreement. The change in
fair values was determined by estimating the present value of future cash flows
using models that measure the change in net present values arising from selected
hypothetical changes in market interest rate. A 200 basis point increase in
market rates at March 31, 2001 would have resulted in an approximate $30,356,000
decrease in the net fair value. If interest rates had decreased by 100 and 200
basis points, there would have been an approximate $17,329,000 and $36,302,000
net increase, 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 our minimal invested amount in
these instruments and their broadly defined payment parameters sufficiently
outweigh the cost of computer models necessary to accurately predict their
possible impact to our investment income from the hypothetical effects of
changes in market rates or prices on the fair values of financial instruments as
of March 31, 2001.

                            PART II OTHER INFORMATION

Item 1.  Legal Proceedings

         Our subsidiaries are parties to various lawsuits generally arising in
the normal course of their business.

         In April 2000, a jury awarded compensatory damages of $24,000 and
punitive damages of $2 million in favor of the plaintiff in a disputed claim
case against one of our subsidiaries. Subsequent to March 31, 2001, we agreed to
settle this suit for $750,000.

                                       21
<PAGE>

         On April 17, 2001, we received notice that the company and certain of
our key executive officers were named in class action lawsuits filed in United
States District Court for the Eastern District of Pennsylvania as a result of
our recent stock performance. The complaints in each case allege that the
company and its executives made misleading statements about the company's
statutory surplus, statutory reserves and financial health. We contend that the
lawsuits are baseless and completely without merit, and intend to defend
ourselves vigorously.

Item 2.  Changes in Securities

         Not Applicable

Item 3.  Defaults Upon Senior Securities

         Not Applicable

Item 4.  Submission of Matters to a Vote of Security Holders

         Not Applicable

Item 5.  Other Information

         Not Applicable

Item 6.  Exhibits and Reports on Form 8-K

         Reports on Form 8-K:

         Not Applicable



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                                   SIGNATURES

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

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


Date:   May 21, 2001                    /s/ Irving Levit
        ------------                    ------------------------------------
                                            Irving Levit
                                            Chairman of the Board, President
                                            and Chief Executive Officer

Date:   May 21, 2001                    /s/ Cameron B. Waite
        ------------                    ------------------------------------
                                            Cameron B. Waite
                                            Chief Financial Officer








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