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 September 30, 2005

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

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# 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]
| | -----------------------------------------------------------------------------------------------------------------------------------------

| | Indicate
by checkmark whether the registrant is a shell company (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 November 11, 2005 was 23,268,685.
| | ------------------------------------------------------------------------------------------------------------------------------------



---

# 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, 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)
|---------------------------------------------------------------------------------------------------------------------------
|
|ASSETS                                                                                                                     
|Investments:                                                                                                               
|Bonds, available for sale at market (cost of $1,016,317 and $58,945 respectively) (1)                                      
|Policy loans                                                                                                               
|                                                                                                                           
|Total investments                                                                                                          
|Cash and cash equivalents (1)                                                                                              
|Property and equipment, at cost, less accumulated depreciation of                                                          
|$12,028 and $10,727, respectively                                                                                          
|Unamortized deferred policy acquisition costs                                                                              
|Receivables from agents, less allowance for                                                                                
|uncollectible amounts of $372 and $474, respectively                                                                       
|Accrued investment income                                                                                                  
|Goodwill                                                                                                                   
|Receivable from reinsurers                                                                                                 
|Corporate owned life insurance                                                                                             
|Notional experience account due from reinsurer                                                                             
|Other assets                                                                                                               
|                                                                                                                           
|Total assets                                                                                                               
|                                                                                                                           
|LIABILITIES                                                                                                                
|Policy reserves:                                                                                                           
|Accident and health                                                                                                        
|Life                                                                                                                       
|Claim reserves                                                                                                             
|Federal income tax payable                                                                                                 
|Accounts payable and other liabilities                                                                                     
|Long-term debt, less discount of $696 and $1,426, respectively                                                             
|Preferred interest on early conversion                                                                                     
|Deferred income taxes                                                                                                      
|                                                                                                                           
|Total liabilities                                                                                                          
|                                                                                                                           
|Commitments and contingencies (see note 6)                                                                                 
|                                                                                                                           
|SHAREHOLDERS' EQUITY                                                                                                       
|                                                                                                                           
|Common stock, par value $.10; 37,500 shares authorized;                                                                    
|15,895 and 11,023 shares issued, respectively (2)                                                                          
|Preferred stock, par value $1.00; 1,250 shares authorized, none outstanding (2)                                            
|Additional paid-in capital (2)                                                                                             
|Accumulated other comprehensive (loss) income                                                                              
|Retained earnings                                                                                                          
|Less 229 common shares held in treasury, at cost (2)                                                                       
|                                                                                                                           
|Total shareholders' equity                                                                                                 
|                                                                                                                           
|Total liabilities and shareholders' equity                                                                                 
|                                                                                                                           

(1) Cash
and investments of $960,323 and $31,497, respectively, are restricted as to use (see Note
7).  



(2) Adjusted to reflect impact of reverse stock split (see Note 1).

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)
|----------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|Revenues:                                                                                                                                                 
|Premium revenue                                                                                                                                           
|Net investment income                                                                                                                                     
|Net realized capital (loss) gain                                                                                                                          
|Market 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                                                                                                                        
|Litigation accrual expense                                                                                                                                
|Commutation expense                                                                                                                                       
|Reinsurance warrant expense                                                                                                                               
|Expense and risk charges on reinsurance                                                                                                                   
|Excise tax expense                                                                                                                                        
|Interest expense                                                                                                                                          
|                                                                                                                                                          
|                                                                                                                                                          
|                                                                                                                                                          
|Income before federal income taxes                                                                                                                        
|Federal income tax provision                                                                                                                              
|                                                                                                                                                          
|Net 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 (benefit) provision from reclassification adjustment                                                                                           
|                                                                                                                                                          
|                                                                                                                                                          
|Comprehensive (loss) income                                                                                                                               
|                                                                                                                                                          
|                                                                                                                                                          
|Basic earnings per share from net income (1)                                                                                                              
|Diluted earnings per share from net income (1)                                                                                                            
|                                                                                                                                                          
|Weighted average number of shares outstanding (1)                                                                                                         
|Weighted average number of shares and share equivalents (1)                                                                                               

(1) Adjusted to reflect
impact of reverse stock split (see Note 1).

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                                                                                             
|Warrant amortization                                                                                                      
|Change in preferred interest on early conversion liability                                                                
|Net realized capital losses (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                                                                                                
|Policy acquisition costs, net                                                                                             
|Federal income tax payable                                                                                                
|Deferred income taxes                                                                                                     
|Claim reserves                                                                                                            
|Policy reserves                                                                                                           
|Accounts payable and other liabilities                                                                                    
|Accrued investment income                                                                                                 
|Other, net                                                                                                                
|                                                                                                                          
|Cash (used in) provided by operations                                                                                     
|                                                                                                                          
|Cash flow from investing activities:                                                                                      
|Proceeds from sales of bonds                                                                                              
|Proceeds from commutation                                                                                                 
|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                                                                
|Proceeds from sale of property and equipment                                                                              
|Acquisition of property and equipment                                                                                     
|                                                                                                                          
|Cash provided by (used in) investing                                                                                      
|                                                                                                                          
|Cash flow from financing activities:                                                                                      
|Issuance of long-term debt                                                                                                
|Proceeds from exercise of stock options                                                                                   
|Sale leaseback payments                                                                                                   
|                                                                                                                          
|Cash (used in) provided by financing                                                                                      
|                                                                                                                          
|Increase (decrease) in cash and cash equivalents                                                                          
|Cash balances:                                                                                                            
|Beginning of period                                                                                                       
|                                                                                                                          
|End of period                                                                                                             
|                                                                                                                          
|                                                                                                                          
|Supplemental disclosures of cash flow information:                                                                        
|Cash paid during the year for interest                                                                                    
|Cash paid during the year for federal income taxes                                                                        

See accompanying notes
to consolidated financial statements.



---

PENN TREATY AMERICAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2005(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, 2004 of Penn Treaty American Corporation (the
Company).

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.   
Reverse Stock Split:

A
one-for-four reverse stock split for current holders of the Companys common stock
became effective July 11, 2005. The financial statements and notes related to the three
and nine months ended September 30, 2004 have been restated to reflect the impact of the
reverse stock split.

2.    
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 September 30, | Nine Months Ended September 30,
|------------------------------------------------ | -------------------------------- | -------------------------------
|
|Net 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 income                             |                                  |                                
|                                                 |                                  |                                
|Earnings per share:                              |                                  |                                
|Basic - as reported                              |                                  |                                
|Basic - pro-forma                                |                                  |                                
|Diluted - as reported                            |                                  |                                
|Diluted - pro-forma                              |                                  |                                

3.    Regulatory
Developments:

The
Company is licensed and receives renewal premiums from policyholders in all states, but is
currently restricted from issuing new policies in seven states. The Company is approved
for sales in Florida, California and Pennsylvania (subject to corrective orders in all
three states), which accounted for approximately 16%, 14% and 11%, respectively, of the
Companys direct premium revenue for the nine months ended September 30, 2005. No
other state accounted for more than 10% of the Companys direct premium revenue for
the nine months ended September 30, 2005.



---

4.    Commutation of
Reinsurance Agreements with Centre:

2001
Centre Agreement

Effective
December 31, 2001, the Company entered into 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 did not qualify for reinsurance treatment in accordance with generally accepted
accounting pringicples (GAAP)
because it did not result in the reasonable possibility that the reinsurer would realize a
significant loss. Therefore, the agreement was accounted for in accordance with deposit
accounting for reinsurance contracts.

The
2001 Centre Agreement was commuted effective May 24, 2005. The Company recorded a
termination fee paid to Centre of $18,300 related to the early commutation of this
agreement.

As
part of the 2001 Centre Agreement, the reinsurer was granted four tranches of warrants to
purchase shares of non-voting convertible preferred stock. The warrants were forfeited as
part of the early commutation. The value of the warrants was recorded as a deferred
reinsurance premium and was being expensed over the life of the reinsurance agreement. The
remaining value of $7,267 was recorded as an expense in the nine months ended September
30, 2005.

The
initial premium and future cash flows from the reinsured policies, less claims payments,
ceding commissions and risk charges, were credited to a notional experience account, which
was held for the Companys benefit in the event of commutation and recapture. The
notional experience account balance received an investment credit based upon the total
return from a series of benchmark indices and derivative hedges that were intended to
closely match the duration of the Companys reserve liability. The Company accounted
for the investment credit received on the notional experience account as follows:

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

| | b) | The change in fair value of the embedded derivative represented 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 was reported as market gain (loss) on notional
               experience account in the Statements of Income and Comprehensive Income.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
notional experience account activity for the three and nine months ended September 30,
2005 and 2004 was as follows:



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|                                              | Three Months Ended September 30, | Nine Months Ended September 30,
|--------------------------------------------- | -------------------------------- | -------------------------------
|
|Beginning balance                             |                                  |                                
|Premiums, net of claims and                   |                                  |                                
|ceding allowance                              |                                  |                                
|Investment credit:                            |                                  |                                
|Investment income                             |                                  |                                
|Market gain                                   |                                  |                                
|Expense and risk charges                      |                                  |                                
|Broker/custodian/trustee fees                 |                                  |                                
|Cash and Securities received upon commutation |                                  |                                
|                                              |                                  |                                
|Ending balance                                |                                  |                                
|                                              |                                  |                                

5.   Reinsurance
Agreement with Imagine:

Effective
June 30, 2005, the Company entered into an agreement to reinsure, on a 100% quota share
basis, substantially all of its long-term care insurance policies in-force as of December
31, 2001 with Imagine International Reinsurance Limited (The 2005 Imagine
Agreement). 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 an experience refund provision, expense and risk charges due to the reinsurer
that escalate over the life of the agreement and an aggregate limit of liability.
Therefore, the agreement is being accounted for in accordance with deposit accounting for
reinsurance contracts. However, the agreement meets the requirements to qualify for
reinsurance treatment under statutory accounting rules.

The
2005 Imagine Agreement allows the Company to withhold all funds due to the reinsurer as a
funds withheld liability, which is only recorded for statutory accounting purposes. In
addition, the agreement allows the Company to recapture the reinsured policies on any
January 1 commencing January 1, 2008. In the event the Company elects to commute the
agreement and recapture the reinsured policies, it will be entitled to an experience
refund equal to the funds withheld liability (except as further described below). For
deposit accounting purposes, the experience refund and the funds withheld liability are
offset as a net deposit amount.

The
funds withheld liability and the corresponding experience refund are comprised of (1) an
initial premium of $1,039,476 equal to the statutory reserves for the reinsured policies
at the effective date, plus (2) future investment income, plus (3) future premiums, less
(4) future losses paid, less (5) an initial ceding commission of $60,000, less (6) future
expense allowances less (7) future expense and risk charges.

The
Company recorded an expense and risk charge of $2,980 for the three months ended September
30, 2005.

As
noted above, the 2005 Imagine Agreement contains commutation provisions and allows the
Company to recapture the reinsured policies as of January 1, 2008, or on January 1 of any
year thereafter. If the agreement is commuted on January 1, 2008, the Company will be
obligated to pay an early termination fee equal to two quarters of expense and risk
charges. The Company intends, but is not required, to commute the agreement on January 1,
2009, but may, if its statutory capital is sufficient, commute the agreement on January 1,
2008. Additionally, the agreement contains certain covenants and conditions that, if
breached, may result in the immediate commutation of the agreement and the payment of all
expense and risk charges from the period of the breach through January 1, 2008.  The Company was
not in violation of these covenants as of and for this period ended September 30, 2005 and as of the date
of this filing.



---

In
the event the Company does not commute the 2005 Imagine Agreement on or before January 1,
2009, the expense and risk charge paid to the reinsurer will increase by 50 percent. In
the event the Company does not commute the agreement on or before January 1, 2011, but
does commute at a later date, the experience refund will not exceed the statutory reserves
as of the date of commutation, resulting in the Companys forfeiture of any
accumulated statutory profits.

The
Companys current modeling and actuarial projections suggest that it is probable that
it will be able to commute the 2005 Imagine Agreement, as planned, on or before January 1,
2009. In order to commute the agreement, Penn Treaty Network America Insurance Company (PTNA)and
American Network Insurance Companys(ANIC) statutory surplus following commutation must be
sufficient to support the reacquired business in compliance with all statutory
requirements. Upon commutation, the Company will record the necessary reserves for the
business and remove its funds withheld liability 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 accumulated funds withheld liability exceeding the
level of required statutory reserves to be established. As of September 30, 2005, the
statutory basis reserve liabilities of $1,040,667 exceeded the funds withheld liability of
$988,503.

In
the event the Company determines that commutation of the 2005 Imagine Agreement is
unlikely on or before January 1, 2009, but likely at some future date, it will include
additional annual expense and risk charges in its unamortized deferred acquisition cost
(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 or before January 1, 2009 or that other alternatives,
such as new reinsurance opportunities or additional capital issuances will be available to
enable it to commute the agreement as planned.

6.   Contingencies:

The
Company and its subsidiaries are parties to various lawsuits generally arising in the
normal course of their business. While the outcome of any single lawsuit could have a
material impact upon the Companys financial results for the period in which it
occurs, the Company does not believe that the eventual outcome of the majority of these
lawsuits is likely to have a material adverse effect on its overall financial condition or
results of operations. However, the matters specifically described below are currently
viewed by management as potentially material and, in the event of an unfavorable outcome,
any one of these matters could have a material adverse effect on the Companys
financial condition and results of operations.

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 (Forest, et al.
v. Penn Treaty Network America Insurance Company).  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. In their complaint,
plaintiffs claim wrongdoing in connection with the sale of long-term care insurance
policies to the plaintiffs and the class, and 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.  No amounts were specified for compensatory
damages and restitution.  On August 23, 2005, the court preliminarily approved a
settlement negotiated between the parties and certified, for settlement purposes only, a
proposed national class.  A final hearing will be held before the court on December
14, 2005 to consider the fairness, reasonableness and adequacy of the proposed settlement,
as well as the application for awards to class representatives, for attorneys fees,
and for expense reimbursement. The Company has accrued a total of $3,738 related to the
proposed settlement of this matter and the related matter described below.



---

The
Company and PTNA are defendants in an action in the Orange County Superior Court in the
state of California (Bartolini, et al. v. Penn Treaty Network America Insurance
Company).  Plaintiffs filed this matter in November 2003 on behalf of themselves, all
other persons similarly situated and the general public.  In their complaint,
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.  No amounts were
specified for compensatory damages and restitution.  On August 23, 2005, the court in
the Florida matter described above preliminarily approved a settlement negotiated between
the parties and certified, for settlement purposes only, a proposed national class which,
if approved, would also resolve this matter pursuant to the agreement between the parties.
 A final hearing will be held in the Florida matter before the Court on December 14,
2005 to consider the fairness, reasonableness and adequacy of the proposed settlement, as
well as the application for awards to class representatives, for attorneys fees, and
for expense reimbursement.  As stated above, the Company has accrued a total of
$3,738 related to the proposed settlement of this matter and the related matter described
above.

PTNA
was a defendant in an action in the Los Angeles County Superior Court in the state of
California (Westfall, et al. v. Penn Treaty Network America Insurance Company). 
Plaintiffs filed this matter on May 28, 2004 on behalf of themselves, all other persons
similarly situated and the general public.  Plaintiffs alleged wrongdoing in
connection with the payment of long-term care insurance claims.  Plaintiffs alleged
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 and financial
elder abuse and prayed for relief in the form of compensatory damages and restitution,
punitive damages, an accounting, attorney fees and court costs.  No amounts were
specified for compensatory damages and restitution or punitive damages.  PTNA removed
this case to United States District Court for the Central District of California in March
2005. The Company believes that the complaint was without merit, however, in order to
resolve the matter and to reduce further litigation expense and the burdens and
uncertainties of protracted litigation, the parties have settled this matter for $300.

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 agreement was
$11,468 and $11,236 at September 30, 2005 and December 31, 2004, respectively. The
reinsurer has notified PTNA that it believes that PTNA 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.   In addition, PTNA believes that the 2001 Centre Agreement
substantially improved PTNAs financial strength and actually benefited the
reinsurer. In May 2005, PTNA notified the reinsurer that PTNA was initiating arbitration
proceedings. The ultimate resolution of this dispute cannot be determined at this time.

7.    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 September 30, 2005, there is an accumulated other comprehensive loss of
$12,983 in shareholders equity due to unrealized losses of $19,974 in the investment
portfolio. As of December 31, 2004, there was an accumulated other comprehensive gain of
$147 in shareholders equity due to unrealized gains of $226 in the investment
portfolio. The amortized cost and estimated market value of the Companys available
for sale investment portfolio as of September 30, 2005 and December 31, 2004 were as
follows:



---

|                                              | September 30, 2005 | December 31, 2004
|--------------------------------------------- | ------------------ | -----------------
|
|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                    |                    |                  
|                                              |                    |                  

Upon
the commutation of the 2001 Centre Agreement effective May 24, 2005, the Company received
investments with a market value of $941,472.

Effective
June 30, 2005, the Company entered into a reinsurance agreement with an unaffiliated
reinsurer for policies issued prior to January 1, 2002 on a funds withheld basis (See Note
5).  As a condition precedent to withholding the funds due to the reinsurer, the
Company has agreed to hold assets in trust for the benefit of the reinsurer.  The
amount required to be held in trust was $921,882 at September 30, 2005.

Pursuant
to certain statutory licensing requirements, as of September 30, 2005 and December 31,
2004, the Company had on deposit bonds with an estimated market value aggregating $12,054
and $12,264, 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 another reinsurance agreement with an
unaffiliated insurer. The Company is required to hold assets equal to 102% of the
statutory reserves for the policies assumed under this agreement. At September 30, 2005
and December 31, 2004, the Company was required to hold $22,887 and $18,869, respectively,
in the trust account.

The
Company maintains assets in a certificate of deposit for the benefit of the lessor under
its sale leaseback agreement entered into in the first quarter of 2005. As of September
30, 2005, the amount of the certificate of deposit was $3,500.

8.   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 were exercised or
converted into common stock. Anti-dilutive effects are not included.



---

|                                                                    | Three Months Ended September 30, | Nine Months Ended September 30,
|------------------------------------------------------------------- | -------------------------------- | -------------------------------
|
|Net income                                                          |                                  |                                
|Weighted average common shares outstanding                          |                                  |                                
|                                                                    |                                  |                                
|Basic earnings per share from net 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 income                                                  |                                  |                                
|                                                                    |                                  |                                
|Weighted average common shares outstanding                          |                                  |                                
|Common stock issuable upon exercise of options/warrants             |                                  |                                
|Shares issuable upon conversion of convertible debt                 |                                  |                                
|                                                                    |                                  |                                
|Total outstanding shares for diluted earnings per share computation |                                  |                                
|                                                                    |                                  |                                
|Diluted earnings per share from net 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 because
to do so would have been anti-dilutive were 159 and 11,885 for the three months ended
September 30, 2005 and 2004, respectively, and 159 and 20,747 for the nine months ended
September 30, 2005 and 2004, respectively. At September 30, 2005 these securities only
included options that had exercise prices above the current period average market price.
At September 30, 2004, these securities included options and warrants that had exercise
prices above the current period average market price.

9.    
          Long-Term Debt:

Principal
repayment of the Companys long-term debt outstanding at September 30, 2005 is as
follows:

|     | Debt
|---- | ----
|2005 |     
|2006 |     
|2007 |     
|2008 |     
|2009 |     
|     |     
|     |     
|     |     

Holders
of the Companys 6 1/4% Convertible Subordinated Notes due 2008 (the 2008
Notes) were entitled to convert their 2008 Notes into shares of common stock before
October 15, 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.

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 September 30, 2005 and December 31, 2004, the fair value of the embedded derivative was
$3 and $1,403, 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.



---

During
the nine months ended September 30, 2005, $33,380 of the 2008 Notes were
converted into 4,769 shares of the Companys common stock and 69 shares were issued
as payment for preferred interest on early conversion. In connection with these
conversions, the Company recognized additional interest expense of $655.

During
the three months ended September 30, 2005, $20,903 of the Companys 2008 Notes were
converted into 2,986 shares of the Companys common stock and 19 shares were issued
as payment for preferred interest on early conversion. In connection with these
conversions, the Company recognized additional interest expense of $199.

The
2008 Notes automatically converted to shares of the Companys common stock on
November 4, 2005 (See Note 11).

10.   Sale Leaseback:

During
the first quarter of 2005, the Company entered into a sale leaseback agreement under which
it sold property and equipment, consisting entirely of software, with a value of $3,000 to
a third party and agreed to lease back the same equipment.  The term of the lease is
two years and the lease is accounted for as a capital lease.

During
the second quarter and third quarter of 2005, the Company entered into an additional sale
leaseback agreement, under the same master lease agreement, under which it sold property
and equipment, consisting entirely of software with a value of $1,506 and $52,
respectively, to the same third party and agreed to lease back the same equipment. 
The term of the lease is two years and the lease is accounted for as a capital lease.

The
Company recorded $123 and $209 in interest expense related to the lease in the three and
nine months ended September 30, 2005, respectively.

Minimum
annual rentals for the term of the lease are as follows:

|Year                                                                | Capital Lease
|------------------------------------------------------------------- | -------------
|2005                                                                |              
|2006                                                                |              
|2007                                                                |              
|                                                                    |              
|                                                                    |              
|Less executory costs                                                |              
|                                                                    |              
|Net minimum lease payments under capital lease                      |              
|Less amount representing interest                                   |              
|                                                                    |              
|Present value of the net minimum lease payments under capital lease |              
|                                                                    |              

11.   Subsequent Event:

The
2008 Notes automatically converted to shares of the Companys common stock on
November 4, 2005. The conversion occurred under the terms of the Notes because the average
closing price of the Companys common stock on the fifteen trading days following
October 15, 2005 was greater than 110% of the conversion price of $7.00. There was $46,544
of 2008 Notes outstanding on November 4, 2005. Immediately after the conversion on
November 7, 2005, there were 23,269 shares of common stock issued and outstanding.



---

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



(amounts in thousands)

Overview

Our
principal products are individual, defined benefit accident and health insurance policies
that cover care received in a nursing home facility or assisted living facility and home
health care.

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 September 30, 2005
and the date of this filing.

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). This agreement was
commuted effective May 24, 2005 and we entered into a new reinsurance agreement with
Imagine International Reinsurance Limited, effective June 30, 2005 (the 2005 Imagine
Agreement).

The
2005 Imagine Agreement reinsures, on a 100% quota share basis, substantially all of our
long-term care insurance policies in-force as of December 31, 2001. 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 an experience refund provision, expense and risk
charges due to the reinsurer that escalate over the life of the agreement and an aggregate
limit of liability. Therefore, the agreement is being accounted for in accordance with
deposit accounting for reinsurance contracts. The agreement meets the requirements to
qualify for reinsurance treatment under statutory accounting rules.



---

The
2005 Imagine Agreement allows us to withhold all funds due to the reinsurer as a funds
withheld liability, which is only recorded for statutory accounting purposes. In addition,
the agreement allows us to recapture the reinsured policies on any January 1 commencing
with January 1, 2008. In the event we elect to commute the agreement and recapture the
reinsured policies, we will be entitled to an experience refund equal to the funds
withheld liability (except as further described below). For deposit accounting purposes,
the experience refund and the funds withheld liability are offset as a net deposit amount.

The
funds withheld liability and the corresponding experience refund are comprised of (1) an
initial premium of $1,039,476 equal to the statutory reserves for the reinsured policies
at the effective date, plus (2) future investment income, plus (3) future premiums, less
(4) future losses paid, less (5) an initial ceding commission of $60,000, less (6) future
expense allowances less (7) future expense and risk charges.

The
expense allowance from the reinsurer, limited to a maximum of 25% of premiums collected,
is equal to:

|1. | Renewal
commissions paid to our agents, not to exceed 10.5% of premiums           collected; plus
|-- | -------------------------------------------------------------------------------------------------

|2. | 9.2%
of premiums collected; plus
|-- | --------------------------------

|3. | 4.0%
of paid claims.
|-- | --------------------

The
expense and risk charge is equal to the sum of (1) 0.25% of total ceded statutory reserves
at the end of a quarter; and (2) 0.50% of the value of the combination of any letters of
credit or funds deposited in trust by the reinsurer as of the beginning of the quarter. In
addition, we paid the reinsurer an initial expense and risk charge of $2,920, which is
being amortized to expense over 42 months, the estimated life of the agreement.

The
2005 Imagine Agreement contains an aggregate limit of liability, which limits the ultimate
liability for paid claims of the reinsurer. The aggregate limit of liability is equal to:

|1. | $100,000,
plus
|-- | --------------

|2. | The
initial premium, less
|-- | -------------------------

|3. | the
initial ceding allowance,           plus
|-- | --------------------------------------------

|4. | the
cumulative premiums collected after the effective date, less
|-- | ----------------------------------------------------------------

|5. | the
cumulative expense allowances reimbursed after the effective date, plus
|-- | ---------------------------------------------------------------------------

|6. | the
cumulative investment income after the effective date
|-- | ---------------------------------------------------------

The
2005 Imagine Agreement contains commutation provisions and allows us to recapture the
reinsured policies as of January 1, 2008, or on January 1 of any year thereafter. If the
agreement is commuted on January 1, 2008, we will be obligated to pay an early termination
fee of two quarters of expense and risk charges. We intend, but are not required, to
commute the agreement on January 1, 2009, but may, if our statutory capital is sufficient,
commute the agreement on January 1, 2008. Additionally, the agreement contains certain
covenants and conditions that, if breached, may result in the immediate commutation of the
agreement and the payment of all expense and risk charges from the period of the breach
through January 1, 2008.  The Company was not in violation of these convenants as of and for the period
ended September 30, 2005 and as of the date of this filing.

In
the event we do not commute the agreement on or before January 1, 2009, the expense and
risk charge paid to the reinsurer will increase by 50 percent. In the event we do not
commute the agreement on or before January 1, 2011, but commute at a later date, the
experience refund will not exceed the statutory reserves as of the date of commutation,
resulting in our forfeiture of any accumulated statutory profits.



---

The
agreement further requires that we maintain our financial position in good standing,
including covenants regarding our financial strength ratings and risk-based capital
ratios. The agreement provides for the reinsurer to require the immediate repayment of the
funds withheld liability in the event of a deterioration of our financial strength. As a
result of such deterioration, our expense and risk charges could be increased by 25
percent, although any additional expense and risk charges would be refunded, with
interest, upon commutation of the agreement if on or before January 1, 2010.

Our
current modeling and actuarial projections suggest that it is probable that we will be
able to commute the agreement, as planned, on or before January 1, 2009. 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, we will record the necessary reserves for the business and
remove the funds withheld liability in PTNAs and ANICs statutory financial
statements. Accordingly, our ability to commute the agreement is highly dependent upon the
value of the accumulated funds withheld liability exceeding the level of required
statutory reserves to be established. As of September 30, 2005, the statutory basis
reserve liabilities of $1,040,667 exceeded the funds withheld liability of $988,503.

In
the event we determine that commutation of the 2005 Imagine Agreement is unlikely on or
before January 1, 2009, but likely at some future date, we will include additional annual
expense and risk charges in our unamortized deferred acquisition cost (DAC)
recoverability analysis. As a result, we could impair the value of our DAC asset and
record the impairment in our financial statements at that time. However, we currently
believe that PTNA and ANIC will have sufficient statutory capital and surplus to commute
the agreement on or before January 1, 2009 or that other alternatives, such as new
reinsurance opportunities or additional capital issuance will be available to enable it 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; and
|-- | ----------------------------------------------------------------

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

Upon
the Departments approval of the Plan in February 2002, we recommenced new policy
sales in twenty three states, including Pennsylvania. We have now recommenced new policy
sales in twenty additional states. These forty three states represented approximately 94%
of our direct premium revenue in the nine months ended September 30, 2005. We are working
with the remaining states to recommence new policy sales in all jurisdictions.

In
October 2005, Imagine International Reinsurance Limited (Imagine) completed
its due diligence and its Underwriting Committee approved a 75% quota share reinsurance
agreement for new long-term care insurance policies issued by the Company on and after
October 1, 2005. Agreed upon terms are currently undisclosed pending completion of final
legal and regulatory review and the negotiation and execution of definitive documentation.

Our
financial condition and results of operations are affected significantly by the following
other 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.
Establishing reserves is based upon current assumptions and we can provide no assurance
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 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 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. 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. DAC was fully recoverable at
September 30, 2005.

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.

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 at the time a security is purchased. Due to the duration of our
investments (approximately 10 years), investment income does not immediately reflect
changes in market interest rates.

Lapsation
and persistency. Both lapsation and persistency relate to the renewal of insurance
policies. Lapsation is the termination of a policy by non-renewal. Generally, 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.

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 encourage 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 of 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
September 30, 2005 and 2004

Premiums.
 Total premium revenue in the three month period ended September 30, 2005 (the
          2005 quarter), including long-term care, disability, life and
          Medicare supplement, decreased 5.3% to $76,066, compared to $80,309 in the same
          period in 2004 (the 2004 quarter).

Total
first year premium revenue in the 2005 quarter increased 8.2% to $3,130, compared to
$2,892 in the 2004 quarter. First year long-term care premium revenue in the 2005 quarter
increased 14.3% to $3,090, compared to $2,704 in the 2004 quarter. We believe that the
increase in first year premiums is due to (1) the recommencement of sales in additional
states during 2004 and 2005, (2) the engagement of additional independent agents that had
not previously sold our policies, and (3) the introduction of our new long-term care
products, which have higher annual premiums than our previously sold long-term care
products. We anticipate that first year long-term care 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 first year long-term care premium will continue to
increase as sales levels increase in states in which we have recently begun to write new
business and as we recommence sales in additional states in which we are currently not
writing new business.

Total
renewal premium revenue in the 2005 quarter decreased 5.8% to $72,936 compared to $77,421
in the 2004 quarter. Renewal long-term care premium revenue in the 2005 quarter decreased
5.6% to $70,004, compared to $74,117 in the 2004 quarter. The decrease in renewal premium
revenue is due to the lapsation of existing policies. In addition, renewal long-term care
premium revenue decreased due to the cancellation of a group policy on June 30, 2005 that
had an annual premium due July 1, 2005. The annual premium was approximately $2,900 in the
2004 quarter. We anticipate that we will continue to experience reduced levels of renewal
premium revenue until the level of new premium revenue is sufficient to offset the
lapsation of existing policies. Our persistency was 92.3% and 89.6% in the 2005 and 2004
quarters, respectively.

Net
investment income. Net investment income earned for the 2005 quarter increased 4.4% to
$12,580, from $12,055 for the 2004 quarter.

Our
average yield on invested assets at cost was 4.96% and 5.36% in the 2005 and 2004
quarters, respectively. The yield for the 2004 quarter includes the return earned on our
notional experience account, which did not exist in the 2005 quarter due to the
commutation of the 2001 Centre Agreement on May 24, 2005. While the yield on the invested
assets declined in the 2005 quarter compared to the 2004 quarter, investment income
increased due to an increase in total invested assets.



---

During
the 2005 quarter, we sold approximately $125,000 in U.S. Treasury obligations and
reinvested the proceeds in mortgage backed securities. As a result, our future yield on
invested assets increased approximately ten basis points.

Market
gain on notional experience account. The notional experience account no longer exists
due to the commutation of the 2001 Centre Agreement and therefore, there is no gain or loss
on the notional experience account in the 2005 quarter. We recorded a market gain on our
notional experience account of $54,438 in the 2004 quarter. During the 2004 quarter,
interest rates decreased, leading to a market gain on the notional experience account.

Change
in preferred interest on early conversion. The fair value of the embedded derivative
was $3 and $1,291 as of September 30, 2005 and 2004, respectively. We recorded income of
$331 and $2,251 in the 2005 and 2004 quarters, respectively, to reflect the change in
value of the preferred interest on early conversion. The value of the embedded derivative
decreased in the 2005 quarter as a result of $20,903 of conversions and the decrease in
the value of the interest we would pay upon the conversion due to the shortening of the
time period between the date of conversion and October 15, 2005. The value of the embedded
derivative decreased during the 2004 quarter due to $1,101 of conversions and the
shortening of the time period between the date of conversion and October 15, 2005.

Other
income. We recorded $3,123 in other income during the 2005 quarter, an increase from
$1,180 in the 2004 quarter. The increase is attributable primarily to the recognition of a
deferred gain from the 2001 sale of our disability business. The sale was done as a 100%
quota share agreement, in contemplation of a subsequent assumption of the business, where
actual ownership of the policies would change. For the 2005 quarter, the process to
complete the remaining policyholder assumptions was substantially completed and we
recorded $1,714 as other income.

Benefits
to policyholders. Total benefits to policyholders in the 2005 quarter increased 5.5%
to $59,325, compared to $56,256 in the 2004 quarter. Our loss ratio, or policyholder
benefits to premium revenue, was 78% in the 2005 quarter, compared to 70% in the 2004
quarter. The loss ratio increased due to lower premium revenue in the 2005 quarter
compared to the 2004 quarter (see Premiums). In addition, persistency was
higher in the 2005 quarter compared to the 2004 quarter resulting in the retention of more
policy reserves.

Beginning
in 2003, we undertook a series of claims adjudication process changes, which we believe
enable us to more accurately fulfill our contractual policy obligations.  Until these
process changes are completed and their ultimate benefit evaluated, we employ our best
assumptions related to these changes in the establishment of our claim reserves.  The
assumptions are based upon test samplings and experience of prior completed process
changes.  We have developed a schedule for completion of these changes, including their
impact upon current claims, and intend to continuously modify the assumptions based upon
our adherence to the schedule and future assessment of results.  During 2005 additional
changes to our processes were made which include face-to-face eligibility assessments for
a majority of our nursing home and assistant living facility claimants, changes to our
internal claims auditing processes and the development of a national preferred provider
network which will offer discounted rates to our policyholders with both national and
regional nursing home and assisted living facilities.  As a result of these ongoing
modifications, which reduce our expected future payments on currently open claims, we reduced our
claim reserves by approximately $9,000 in the 2005 quarter. However, we increased our claim reserves by approximately
$6,500 as a result of changes in our assumptions related to incurred but not reported claims and
closed but expected to re-open claims.  The net decrease to claim reserves for the 2005 quarter as a result of
these assumption changes was $2,500.

Historically,
more new claims are reported during the first quarter than in later quarters. This
seasonality generates higher incurred claim ratios in the first quarter than in subsequent
quarters. Management employs these seasonal assumptions throughout the year 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. Management estimates that seasonality would have otherwise
resulted in approximately $2,070 and $3,129 in higher incurred claims in the 2005 and 2004
quarters, respectively, and as a result established lower claim reserves during both
quarters to reflect this seasonal variation.

Commissions.           Commissions
to agents decreased 1.9% to $9,383 in the 2005 quarter, compared to           $9,564 in
the 2004 quarter.



---

First
year commissions on accident and health business in the 2005 quarter increased 14.4% to
$1,964, compared to $1,717 in the 2004 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 62.7% in the 2005 quarter and 59.4% in
the 2004 quarter. The increase in the first year commission ratio for the 2005 quarter
compared to the 2004 quarter is due to the decreased portion of premium revenue
attributable to the sale of our Secured Risk and Medicare Supplement policies in the 2005
quarter. These policies pay a lower commission as a percentage of premium revenue to
agents than our individual long-term care policies. We believe that this ratio will
continue to increase as sales of our individual long-term care policies increase as a
percentage of total sales.

Renewal
commissions on accident and health business in the 2005 quarter decreased 7% to $7,951
compared to $8,550 in the 2004 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 11.0% in the 2005 quarter and 11.1% in the 2004 quarter.

Net
policy acquisition costs amortized. The net policy acquisition costs amortized in the
2005 quarter decreased to $227, compared to $1,246 in the 2004 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. The decrease in net policy acquisition costs amortized is partially
due to the increase in new business sales in the 2005 quarter compared to the 2004
quarter.

General
and administrative expenses. General and administrative expenses in the 2005 quarter
increased 5% to $13,310, compared to $12,672 in the 2004 quarter. The ratio of total
general and administrative expenses to premium revenues was 17.5% in the 2005 quarter,
compared to 15.8% in the 2004 quarter.

The
increase in the 2005 quarter compared to the 2004 quarter was primarily due to an increase
in the accounting fees related to our compliance efforts with respect to Section 404 of
the Sarbanes-Oxley Act and the review of the 2005 Imagine Agreement. In addition, the
amortization of deferred offering costs increased in connection with the increased
activity in conversions during the third quarter of 2005 compared to the third quarter of
2004 and legal costs associated with the settling of our litigation were higher in the
third quarter of 2005 than the third quarter of 2004. These increases were partially
offset by a decrease in amortization of our warrants related to the 2001 Centre Agreement
as a result of the commutation of the agreement effective May 24, 2005.

Expense
and risk charges on reinsurance. In the 2005 and 2004 quarters, we incurred expense
and risk charges of $2,980 and $2,807, respectively. Our 2005 Imagine Agreement provides
the reinsurer an expense and risk charge equal to the sum of (1) 0.25% of total ceded
statutory reserves at the end of a quarter; and (2) 0.50% of the value of the combination
of any letters of credit or funds deposited in trust by the reinsurer as of the beginning
of the quarter. In addition, we paid the reinsurer an initial expense and risk charge as
of June 30, 2005, the effective date of the agreement, of $2,920, which is being amortized
to expense over 42 months, the estimated life of the agreement. Our 2001 Centre Agreement
provided the reinsurer with expense and risk charges. The annual charge consisted of a
fixed cost and a variable component based upon reserve and capital levels needed to
support the reinsured business.



---

Excise
tax expense. We were subject to an excise tax for premium payments made to a foreign
reinsurer under the 2001 Centre Agreement, equal to one percent of the net premium revenue
ceded to the foreign reinsurer. We recorded $730 for excise tax expenses in the 2004
quarter. We do not pay any excise tax under the 2005 Imagine Agreement.

Interest
expense. Interest expense in the 2005 quarter decreased 3.8% to $1,780, compared to
$1,851 in the 2004 quarter. The interest expense in both the 2005 and 2004 quarters is
primarily related to our convertible subordinated notes, which bore interest at an annual
rate of 6.25%. We incurred additional interest expense related to the conversion of our
convertible subordinated notes prior to October 15, 2005.  Holders of our
convertible subordinated notes were entitled to convert their notes into shares of our
common stock before October 15, 2005 and receive a discounted amount of interest that they
would have otherwise received through October 15, 2005 had they not converted the notes.
We incurred $199 of interest expense from the conversion of $20,903 in convertible
subordinated notes during the 2005 quarter. We incurred $88 of interest expense from the
conversion of $1,101 in convertible subordinated notes during the 2004 quarter. In
addition, interest expense decreased due to a reduction in outstanding notes as a result
of the conversions.

The
2008 Notes automatically converted to shares of the Companys common stock on
November 4, 2005. The conversion occurred under the terms of the Notes because the average
closing price of the Companys common stock on the fifteen trading days following
October 15, 2005 was greater than 110% of the conversion price of $7.00. There was $46,544
of 2008 Notes outstanding on November 4, 2005. Immediately after the conversion on
November 7, 2005, there were 23,269 shares of common stock issued and outstanding.

Federal
income tax provision. Our provision for Federal income taxes was $1,616 in the 2005
quarter, compared to a provision of $23,336 in the 2004 quarter. The effective tax rate of
35% and 36% in the 2005 and 2004 quarters, respectively, is based on permanent differences
between GAAP and tax accounting.

# Nine Months Ended
September 30, 2005 and 2004

Premiums. Total
premium revenue in the nine month period ended September 30, 2005 (the           2005
period), including long-term care, disability, life and           Medicare
supplement, decreased 3.1% to $234,360, compared to $241,795 in the           same period
in 2004 (the 2004 period).

Total
first year premium revenue in the 2005 period increased 9.4% to $9,102, compared to $8,319
in the 2004 period. First year long-term care premium revenue in the 2005 period increased
15.4% to $8,870, compared to $7,689 in the 2004 period. We believe that the increase in
first year premiums is due to (1) the recommencement of sales in additional states during
2004 and 2005, (2) the engagement of additional independent agents that had not previously
sold our policies, and (3) the introduction of our new long-term care products, which have
higher annual premiums than our previously sold long-term care products. 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 first year
premium will continue to increase as sales levels increase in states in which we have
recently begun to write new business and as we recommence sales in additional states in
which we are currently not writing new business.



---

Total
renewal premium revenue in the 2005 period decreased 3.5% to $225,258 compared to $233,479
in the 2004 period. Renewal long-term care premium revenue in the 2005 period decreased
3.7% to $215,673, compared to $223,946 in the 2004 period. The decrease in renewal premium
revenue is due to the lapsation of existing policies. In addition, renewal long-term care
premium revenue decreased due to the cancellation of a group policy during the 2005
period. The annual premium was approximately $2,900 in the 2004 period. We anticipate that
we will continue to experience reduced levels of renewal premium revenue until the level
of new premium revenue is sufficient to offset the lapsation of existing policies. Our
persistency was 88.0% and 88.3% in the 2005 and 2004 periods, respectively.

Net
investment income. Net investment income earned for the 2005 period increased 8.9% to
$37,673, from $34,584 for the 2004 period.

Our
average yield on invested assets at cost, including the notional experience account, cash
and cash equivalents, was 5.03% and 5.17% in the 2005 and 2004 periods, respectively. The
investment income component of our notional experience account investment credit generated
$18,849 and $34,271 in the 2005 and 2004 periods, respectively. The yield on our notional
experience account was 5.26% and 5.64% in the 2005 and 2004 periods, respectively. The
notional experience account no longer exists, effective May 24, 2005, due to the
commutation of the 2001 Centre Agreement. While the yield on invested assets declined in
the 2005 period as compared to the 2004 period, investment income increased due to an
increase in invested assets.

During
the 2005 period, we sold approximately $125,000 in U.S. Treasury obligations and
reinvested the proceeds in mortgage backed securities. As a result, our future yield on
invested assets increased approximately ten basis points.

Market
gain on notional experience account. The notional experience account no longer exists
due to the commutation of the 2001 Centre Agreement, effective May 24, 2005, and therefore
the gain on the notional experience account reflects activity through that date. We
recorded a market gain on our notional experience account balance of $48,799 and $26,388
in the 2005 and 2004 periods respectively. The gains were due to decreasing interest rates
during both periods.

Change
in preferred interest on early conversion. The fair value of the embedded derivative
was $3 and $1,291 as of September 30, 2005 and 2004, respectively. We recorded income of
$1,400 and $2,215 in the 2005 and 2004 periods, respectively, to reflect the change in
value of the preferred interest on early conversion. The value of the embedded derivative
decreased in the 2005 period as a result of $33,380 in conversions and the decrease in the
value of the interest we would pay upon the conversion due to the shortening of the time
period between the date of conversion and October 15, 2005. The value of the embedded
derivative decreased during the 2004 period due to $25,406 of conversions and the
shortening of the time period between the date of conversion and October 15, 2005.

Other
income. We recorded $6,625 in other income during the 2005 period, an increase from
$4,222 in the 2004 period. The increase is attributable primarily to the recognition of a
deferred gain from the 2001 sale of our disability business. The sale was done as a 100%
quota share agreement, in contemplation of a subsequent assumption of the business, where
actual ownership of the policies would change. For the 2005 period, the process to
complete the remaining policyholder assumptions was substantially completed and we
recorded $1,714 as other income. In addition we recorded a gain of $816 as a result of the
recapture of the 2002 Centre Agreement.



---

Benefits
to policyholders. Total benefits to policyholders in the 2005 period increased 7.7% to
$185,710, compared to $172,412 in the 2004 period. Our loss ratio, or policyholder
benefits to premium revenue, was 79.2% in the 2005 period, compared to 71.3% in the 2004
period. The loss ratio increased due to an increase in claim reserves of approximately
$5,000 as a result of the utilization of a lower discount rate due to the lower earnings
rate of our investment portfolio after commutation. In addition, premium revenue was lower
in the 2005 period compared to the 2004 period (see Premiums).

Beginning
in 2003, we undertook a series of claims adjudication process changes, which we believe
enable us to more accurately fulfill our contractual policy obligations.  Until these
process changes are completed and their ultimate benefit evaluated, we employ our best
assumptions related to these changes in the establishment of our claim reserves.  The
assumptions are based upon test samplings and experience of prior completed process
changes.  We have developed a schedule for completion of these changes, including their
impact upon current claims, and intend to continuously modify the assumptions based upon
our adherence to the schedule and future assessment of results.  During 2005 additional
changes to our processes were made which include face-to-face eligibility assessments for
a majority of our nursing home and assistant living facility claimants, changes to our
internal claims auditing processes and the development of a national preferred provider
network which will offer discounted rates to our policyholders with both national and
regional nursing home and assisted living facilities.  As a result of these ongoing
modifications, which reduce our expected future payments on currently open claims, we reduced our
claim reserves by approximately $21,000 in the 2005 period.  However, we increased our claim reserves
by approximately $12,500 as a result of changes in our assumptions related to incurred but not
reported claims and closed but expected to re-open claims.  The net decrease to claim reserves for
the 2005 period as a result of these assumption changes was $8,500.

Historically,
more new claims are reported during the first quarter than in later quarters. This
seasonality generates higher incurred claim ratios in the first quarter than in subsequent
quarters. Management employs these seasonal assumptions throughout the year 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. Management estimates that seasonality would have otherwise
resulted in approximately $2,070 and $3,129 in higher incurred claims in the 2005 and 2004
periods, respectively, and as a result established lower claim reserves during both
periods to reflect this seasonal variation.

Commissions. Commissions
to agents decreased 3.6% to $28,725 in the 2005 period, compared to           $29,792 in
the 2004 period.

First
year commissions on accident and health business in the 2005 period increased 15.5% to
$5,621, compared to $4,868 in the 2004 period, primarily 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 61.8% in the 2005 period
and 58.5% in the 2004 period. The increase in the first year commission ratio for the 2005
period compared to the 2004 period is due to the decreased portion of premium revenue
attributable to the sale of our Secured Risk and Medicare supplement policies in the 2005
period. These policies pay a lower commission as a percentage of premium revenue to agents
than our individual long-term care policies. We believe that this ratio will continue to
increase as sales of our individual long-term care policies increase as a percentage of
total sales.

Renewal
commissions on accident and health business in the 2005 period decreased 7.4% to $24,873,
compared to $26,856 in the 2004 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 11.1% in the 2005 period and 11.6% in the 2004 period.

Net
policy acquisition costs amortized. The net policy acquisition costs amortized in the
2005 period decreased to $4,206, compared to $9,649 in the 2004 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. The decrease in net policy acquisition costs amortized is partially
due to the increase in new business sales in the 2005 period compared to the 2004 period.

General
and administrative expenses. General and administrative expenses in the 2005 period
increased 1.7% to $40,117, compared to $39,446 in the 2004 period. The ratio of total
general and administrative expenses to premium revenues was 17.1% in the 2005 period,
compared to 16.3% in the 2004 period.



---

The
increase in the 2005 period compared to the 2004 period was primarily due to an increase
in accounting fees related to the restatement of our Form 10-K for the year ended December
31, 2004 and our Form 10-Q for the quarters ended March 31, 2004, June 30, 2004 and
September 30, 2004, as well as an increase in the accounting fees related to our
compliance efforts with respect to Section 404 of the Sarbanes-Oxley Act and the review of
the 2005 Imagine Agreement. In addition, the legal costs associated with the settling of
our litigation were higher in the 2005 period compared to the 2004 period. These increases
were partially offset by a decrease in amortization of our warrants related to the 2001
Centre Agreement as a result of the commutation of the agreement effective May 24, 2005.

Litigation
accrual expense.While there can be no assurance, we believe that we will reach a
settlement with plaintiffs in a class action lawsuit that has been filed against us, for
which we accrued an expense amount that we believe represents our most probable outcome.
During the 2005 period, we increased this accrued amount by $737 based upon our most
recent best estimate. The total accrued as of September 30, 2005 is $3,738. In addition,
$300 was recorded for a settlement of a separate lawsuit during the 2005 period.

Commutation
expense. The 2001 Centre Agreement was commuted effective May 24, 2005. We recorded a
termination fee $18,300 in the 2005 period related to the early commutation of this
agreement.

Reinsurance
warrants expense. As part of the 2001 Centre Agreement, the reinsurer was granted four
tranches of warrants to purchase shares of non-voting convertible preferred stock. The
warrants were forfeited as part of the early commutation of the agreement. The remaining
value of $7,267 was recorded as an expense in the 2005 period.

Expense
and risk charges on reinsurance. In the 2005 and 2004 periods, we incurred expense and
risk charges of $8,648 and $8,422, respectively. Our 2005 Imagine Agreement provides the
reinsurer an expense and risk charge equal to the sum of (1) 0.25% of total ceded
statutory reserves at the end of a quarter; and (2) 0.50% of the value of the combination
of any letters of credit or funds deposited in trust by the reinsurer as of the beginning
of the quarter. In addition, we paid the reinsurer an initial expense and risk charge as
of June 30, 2005, the effective date of the agreement, of $2,920, which is being amortized
to expense over 42 months, the estimated life of the agreement. Our 2001 Centre Agreement
provided the reinsurer with expense and risk charges. The annual charge consisted of a
fixed cost and a variable component based upon reserve and capital levels needed to
support the reinsured business.

Excise
tax expense. We were subject to an excise tax for premium payments made to a foreign
reinsurer under the 2001 Centre Agreement equal to one percent of the net premium revenue
ceded to the foreign reinsurer. We recorded $749 and $2,259 for excise tax expenses in the
2005 and 2004 periods, respectively. The amount decreased in the 2005 period due to the
commutation of the 2001 Centre Agreement effective May 24, 2005 and due to a refund filed
for the return of a portion of the excise taxes paid during the last three years.

Interest
expense. Interest expense in the 2005 period decreased 32.9% to $5,262, compared to
$7,838 in the 2004 period. The interest expense in both the 2005 and 2004 periods is
primarily related to our convertible subordinated notes, which bore interest at an annual
rate of 6.25%. We incurred additional interest expense related to the conversion of our
convertible subordinated notes prior to October 15, 2005.  Holders of our
convertible subordinated notes were entitled to convert their notes into shares of our
common stock before October 15, 2005 and receive a discounted amount of interest that they
would have otherwise received through October 15, 2005 had they not converted the notes.
We incurred $655 of interest expense from the conversion of $33,380 in convertible
subordinated notes during the 2005 period. We incurred $2,563 of interest expense from the
conversion of $25,406 in convertible subordinated notes during the 2004 period. In
addition, interest expense decreased due to a reduction in outstanding notes as a result
of the conversions.



---

The
2008 Notes automatically converted to shares of the Companys common stock on
November 4, 2005. The conversion occurred under the terms of the Notes because the average
closing price of the Companys common stock on the fifteen trading days following
October 15, 2005 was greater than 110% of the conversion price of $7.00. There was $46,544
of 2008 Notes outstanding on November 4, 2005. Immediately after the conversion on
November 7, 2005, there were 23,269 shares of common stock issued and outstanding.

Federal
income tax provision. Our provision for Federal income taxes was $9,944 in the 2005
period, compared to a provision of $14,657 in the 2004 period. The effective tax rate of
35% and 37% in the 2005 and 2004 periods, respectively, is based on permanent differences
between GAAP and tax accounting.

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 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 2005 period, our cash flows were attributable to cash used in operations, cash
provided by investing and cash used in financing.  Our cash increased $2,869 in the
2005 period primarily due to the receipt of $972,656 as a result of the commutation of the
2001 Centre Agreement and the sale of $180,417 in bonds. Our cash decreased during the
period primarily due to the purchase of $1,137,587 in bonds and deposits of $11,923 to the notional
experience account.  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 commissions paid to agents.

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 $9,955 in the 2004
period primarily due to payments made to our reinsurer of $40,190 and the purchase of
$41,236 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 $26,718 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 commissions paid to agents.

At
September 30, 2005, our total principal payment and lease obligations through 2009 were as
follows:



---

|     | Debt | Lease
Obligations | Total
|---- | ---- | ----------------- | -----
|2005 |      |                   | $    
|2006 |      |                   |      
|2007 |      |                   |      
|2008 |      |                   |      
|2009 |      |                   |      
|     |      |                   |      
|     |      |                   | $    
|     |      |                   |      

Parent
company operations

The
cash flow needs of the parent company primarily include interest payments on outstanding
debt and operating expenses. Historically, the funding had been primarily derived from the
issuance of debt securities, the operating cash flow of our agency subsidiaries and
dividends from the insurance subsidiaries. However, the dividend capabilities of the
insurance subsidiaries are limited and we may need to rely upon our ability to raise
additional capital and the operating cash flow of our agency subsidiaries to meet future
liquidity needs. Our 6 1/4% Convertible Subordinated Notes automatically converted to
shares of the Companys common stock on November 4, 2005. The conversion occurred
under the terms of the 2008 Notes because the average closing price of our common stock on
the fifteen trading days following October 15, 2005 was greater than 110% of the
conversion price of $7.00.

Our
parent company anticipated cash needs for the remainder of 2005 are as follows:

|                       | 
|---------------------- | 
|Debt interest payments | 
|Litigation settlements | 
|Parent expenses        | 
|                       | 
|Cash requirements      | 
|                       | 

Our anticipated
parent company sources to meet our 2005 obligations are:

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

Subsidiary
operations

The
majority of our insurance subsidiaries cash flow results from our existing long-term
care policies, which had been ceded to the reinsurer under the 2001 Centre Agreement and
are currently ceded to our new reinsurer under the 2005 Imagine 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, obtain reinsurance
for those policies and 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 or the New York Insurance 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 the Department or its statutory net income as shown on that annual
statement. Statutory earnings are generally lower than earnings reported in accordance
with GAAP 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 four 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 2005.

Forward Looking Statements

Certain
statements made by us in this report 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, whether our Corrective Action Plan will be accepted and approved by all states,
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, the cost associated with recommencing new
business sales, liquidity needs, the adequacy of our loss reserves and the recoverability
of our DAC asset, our ability to sell insurance products in certain states, our ability to
enter into a reinsurance agreement for policies sold after July 31, 2004, our ability to
resume generating new business in all states, our ability to commute our reinsurance
agreement and to recapture our reinsured policies, 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 or to settle such matters, implementation of approved and pending
premium rate increases, policyholder persistency 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 fixed rate long-term and medium-term
instruments and, to a lesser extent, short-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.

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
89.2% of total liabilities. Long-term debt, although not carried at fair value, is
included in the hypothetical effect calculation. In addition, we evaluate the effect of
our long-term debt based upon its contractual maturity of October 15, 2008. Subsequent to
September 30, 2005, all of our outstanding long-term debt converted to equity under the
terms of the debt.

The
hypothetical effects of changes in market rates or prices on the fair values of our
financial instruments as of September 30, 2005, 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 September 30, 2005, there would have
been a decrease of approximately $95,461 in the net fair value of our investment portfolio
less our long-term debt. A 200 basis point increase in market rates at September 30, 2005
would have resulted in a decrease of approximately $181,282 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 $106,303 and $224,812 respectively, in the net fair value of our
total investments and debt.

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 September 30,
2005, 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 reasonably likely to materially affect,
our internal controls over financial reporting.



---

# PART II OTHER INFORMATION

Item 1.  Legal Proceedings
(amounts in thousands)

The
Company and its subsidiaries are parties to various lawsuits generally arising in the
normal course of their business. While the outcome of any single lawsuit could have a
material impact upon the Companys financial results for the period in which it
occurs, the Company does not believe that the eventual outcome of the majority of these
lawsuits is likely to have a material adverse effect on its overall financial condition or
results of operations. However, the matters specifically described below are currently
viewed by management as potentially material and, in the event of an unfavorable outcome,
any one of these matters could have a material adverse effect on the Companys
financial condition and results of operations.

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 (Forest, et al.
v. Penn Treaty Network America Insurance Company).  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. In their complaint,
plaintiffs claim wrongdoing in connection with the sale of long-term care insurance
policies to the plaintiffs and the class, and 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.  No amounts were specified for compensatory
damages and restitution.  On August 23, 2005, the court preliminarily approved a
settlement negotiated between the parties and certified, for settlement purposes only, a
proposed national class.  A final hearing will be held before the court on December
14, 2005 to consider the fairness, reasonableness and adequacy of the proposed settlement,
as well as the application for awards to class representatives, for attorneys fees,
and for expense reimbursement. We have accrued a total of $3,738 related to the proposed
settlement of this matter and the related matter described below.

The
Company and PTNA are defendants in an action in the Orange County Superior Court in the
state of California (Bartolini, et al. v. Penn Treaty Network America Insurance
Company).  Plaintiffs filed this matter in November 2003 on behalf of themselves, all
other persons similarly situated and the general public.  In their complaint,
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.  No amounts were
specified for compensatory damages and restitution.  On August 23, 2005, the court in
the Florida matter described above preliminarily approved a settlement negotiated between
the parties and certified, for settlement purposes only, a proposed national class which,
if finally approved, would also resolve this matter pursuant to the agreement between the
parties.  A final hearing will be held in the Florida matter before the Court on
December 14, 2005 to consider the fairness, reasonableness and adequacy of the proposed
settlement, as well as the application for awards to class representatives, for
attorneys fees, and for expense reimbursement.  As stated above, we have
accrued a total of $3,738 related to the proposed settlement of this matter and the
related matter described above.



---

PTNA
was a defendant in an action in the Los Angeles County Superior Court in the state of
California (Westfall, et al. v. Penn Treaty Network America Insurance Company). 
Plaintiffs filed this matter on May 28, 2004 on behalf of themselves, all other persons
similarly situated and the general public.  Plaintiffs alleged wrongdoing in
connection with the payment of long-term care insurance claims.  Plaintiffs alleged
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 and financial
elder abuse and prayed for relief in the form of compensatory damages and restitution,
punitive damages, an accounting, attorney fees and court costs.  No amounts were
specified for compensatory damages and restitution or punitive damages.  PTNA removed
this case to United States District Court for the Central District of California in March
2005.  We believe that the complaint was without merit, however, in order to resolve
the matter and to reduce further litigation expense and the burdens and uncertainties of
protracted litigation, the parties have settled this matter for $300.

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 agreement was
$11,468 and $11,236 at September 30, 2005 and December 31, 2004, respectively. The
reinsurer has notified PTNA that it believes that PTNA 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.   In addition, PTNA believes that the 2001 Centre Agreement
substantially improved PTNAs financial strength and actually benefited the
reinsurer. In May 2005, PTNA notified the reinsurer that PTNA was initiating arbitration
proceedings. The ultimate resolution of this dispute cannot be determined at this time.

Item 2.  Unregistered
Sales of Equity Securities and Use of Proceeds

On
June 30, July 31, August 31, and September 30, 2005, we issued 962, 1,447, 1,025, and
1,050 shares, respectively, of common stock as compensation to LTC Exchange Ltd., in
private placements exempt from registration pursuant to section 4(2) of the Securities Act
of 1933, as amended.

Item 3.  Defaults Upon
Senior Securities

Not
Applicable

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

None

Item 5.  Other Information

None

Item 6.   Exhibits

|Exhibit Number |  | Description
|-------------- |  | -----------

|3.1 |  | Restated
and Amended Articles of Incorporation, as amended effective July 8, 2005.
|--- |  | ----------------------------------------------------------------------------------

|10.1 |  | Coinsurance
Agreement dated as of July 28, 2005 among Penn Treaty Network America Insurance Company,
American Network Insurance Company and Imagine International Reinsurance Limited
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K (File No. 001-14681) filed on August 3, 2005).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 |  | Funds
Withheld Trust Agreement dated as of July 28, 2005 among Penn Treaty Network America
Insurance Company as Grantor, Imagine International Reinsurance Limited as Beneficiary
and The Bank of New York as Trustee (incorporated by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K (File No. 001-14681) filed on August 3, 2005).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

|10.3 |  | Funds
Withheld Trust Agreement dated as of July 28, 2005 among American Network Insurance
Company as Grantor, Imagine International Reinsurance Limited as Beneficiary and The Bank
of New York as Trustee (incorporated by reference to Exhibit 10.3 to the Companys
Current Report on Form 8-K (File No. 001-14681) filed on August 3, 2005).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4 |  | Reinsurer
Trust Agreement dated as of July 28, 2005 among Imagine International Reinsurance Limited
as Grantor, Penn Treaty Network America Insurance Company as Beneficiary and The Bank of
New York as Trustee (incorporated by reference to Exhibit 10.4 to the Companys
Current Report on Form 8-K (File No. 001-14681) filed on August 3, 2005).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5 |  | Reinsurer
Trust Agreement dated as of July 28, 2005 among Imagine International Reinsurance Limited
as Grantor, American Network Insurance Company as Beneficiary and The Bank of New York as
Trustee (incorporated by reference to Exhibit 10.5 to the Companys Current Report
on Form 8-K (File No. 001-14681) filed on August 3, 2005).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.6 |  | Investment
Management Agreement dated as of July 28, 2005 between Perspective (Barbados) Limited,
formerly Brascan Strategic Asset Management Limited (Barbados), and Penn Treaty Network
America Insurance Company and American Network Insurance Company (incorporated by
reference to Exhibit 10.6 to the Companys Current Report on Form 8-K (File No.
001-14681) filed on August 3, 2005).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.7 |  | Commutation
and Settlement Agreement dated as of July 28, 2005 by and between Centre Solutions
(Bermuda) Limited and Penn Treaty American Corporation, Penn Treaty Network America
Insurance Company and American Network Insurance Company (incorporated by reference to
Exhibit 10.7 to the Companys Current Report on Form 8-K (File No. 001-14681) filed
on August 3, 2005).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|31.1 |  | Rule
13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
|---- |  | ------------------------------------------------------------------

|31.2 |  | Rule
13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
|---- |  | ------------------------------------------------------------------

|32.1 |  | Section
1350 Certification of Chief Executive Officer.
|---- |  | ------------------------------------------------------

|32.2 |  | Section
1350 Certification of Chief Financial Officer.
|---- |  | ------------------------------------------------------



---

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:   November 14, 2005 | /s/ William W. Hunt                                    
|                          | William W. Hunt
 President and
 Chief Executive Officer

|                          |                                                                
|------------------------- | ---------------------------------------------------------------
|Date:   November 14, 2005 | /s/ Mark Cloutier                                              
|                          | Mark Cloutier
Senior Vice President and
Chief Financial Officer



---

EXHIBIT INDEX

|Exhibit Number |  | Description
|-------------- |  | -----------

|3.1 |  | Restated
and Amended Articles of Incorporation, as amended effective July 8, 2005.
|--- |  | ----------------------------------------------------------------------------------

|10.1 |  | Coinsurance
Agreement dated as of July 28, 2005 among Penn Treaty Network America Insurance Company,
American Network Insurance Company and Imagine International Reinsurance Limited
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K (File No. 001-14681) filed on August 3, 2005).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 |  | Funds
Withheld Trust Agreement dated as of July 28, 2005 among Penn Treaty Network America
Insurance Company as Grantor, Imagine International Reinsurance Limited as Beneficiary
and The Bank of New York as Trustee (incorporated by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K (File No. 001-14681) filed on August 3, 2005).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3 |  | Funds
Withheld Trust Agreement dated as of July 28, 2005 among American Network Insurance
Company as Grantor, Imagine International Reinsurance Limited as Beneficiary and The Bank
of New York as Trustee (incorporated by reference to Exhibit 10.3 to the Companys
Current Report on Form 8-K (File No. 001-14681) filed on August 3, 2005).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4 |  | Reinsurer
Trust Agreement dated as of July 28, 2005 among Imagine International Reinsurance Limited
as Grantor, Penn Treaty Network America Insurance Company as Beneficiary and The Bank of
New York as Trustee (incorporated by reference to Exhibit 10.4 to the Companys
Current Report on Form 8-K (File No. 001-14681) filed on August 3, 2005).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5 |  | Reinsurer
Trust Agreement dated as of July 28, 2005 among Imagine International Reinsurance Limited
as Grantor, American Network Insurance Company as Beneficiary and The Bank of New York as
Trustee (incorporated by reference to Exhibit 10.5 to the Companys Current Report
on Form 8-K (File No. 001-14681) filed on August 3, 2005).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.6 |  | Investment
Management Agreement dated as of July 28, 2005 between Perspective (Barbados) Limited,
formerly Brascan Strategic Asset Management Limited (Barbados), and Penn Treaty Network
America Insurance Company and American Network Insurance Company (incorporated by
reference to Exhibit 10.6 to the Companys Current Report on Form 8-K (File No.
001-14681) filed on August 3, 2005).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

|10.7 |  | Commutation
and Settlement Agreement dated as of July 28, 2005 by and between Centre Solutions
(Bermuda) Limited and Penn Treaty American Corporation, Penn Treaty Network America
Insurance Company and American Network Insurance Company (incorporated by reference to
Exhibit 10.7 to the Companys Current Report on Form 8-K (File No. 001-14681) filed
on August 3, 2005).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|31.1 |  | Rule
13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
|---- |  | ------------------------------------------------------------------

|31.2 |  | Rule
13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
|---- |  | ------------------------------------------------------------------

|32.1 |  | Section
1350 Certification of Chief Executive Officer.
|---- |  | ------------------------------------------------------

|32.2 |  | Section
1350 Certification of Chief Financial Officer.
|---- |  | ------------------------------------------------------