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 March 31, 2002

                                       or

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

                         Commission file number 0-13972
                ------------------------------------------------

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

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

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

The number of shares outstanding of the Registrant's common stock, par value
$.10 per share, as of May 8, 2002 was 19,367,737.

<PAGE>

                          PART I FINANCIAL INFORMATION

Item 1.  Financial Statements

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



                                       2
<PAGE>

<TABLE>
<CAPTION>

                PENN TREATY AMERICAN CORPORATION AND SUBSIDIARIES
                           Consolidated Balance Sheets
                             (amounts in thousands)
                                                                                               March 31,      December 31,
                                                                                                  2002           2001
                                                                                                  ----           ----
                                                                                               (unaudited)
                                   ASSETS
<S>                                                                                              <C>          <C>
Investments:
  Bonds, available for sale at market (cost of $21,004 and $463,618, respectively)               $  21,879    $ 478,608
  Equity securities at market value (cost of $0 and $8,760, respectively)                             --          9,802
  Policy loans                                                                                         196          181
                                                                                                 ---------    ---------
Total investments                                                                                   22,075      488,591
Cash and cash equivalents                                                                           26,911      114,600
Property and equipment, at cost, less accumulated depreciation of
  $6,992 and $6,594, respectively                                                                   12,715       12,783
Unamortized deferred policy acquisition costs                                                      183,378      180,052
Receivables from agents, less allowance for
  uncollectable amounts of $199                                                                      1,557        2,190
Accrued investment income                                                                              386        7,907
Federal income tax recoverable                                                                       4,406        4,406
Goodwill                                                                                            25,771       25,771
Present value of future profits acquired                                                             1,833        1,937
Receivable from reinsurers                                                                          28,597       25,594
Corporate owned life insurance                                                                      55,340       54,478
Experience account due from reinsurer                                                              552,967         --
Other assets                                                                                        24,016       22,058
                                                                                                 ---------    ---------
    Total assets                                                                                 $ 939,952    $ 940,367
                                                                                                 =========    =========
                                LIABILITIES
Policy reserves:
  Accident and health                                                                            $ 407,576    $ 382,660
  Life                                                                                              13,059       13,386
Policy and contract claims                                                                         229,135      214,466
Accounts payable and other liabilities                                                              15,829       19,422
Long-term debt                                                                                      76,310       79,190
Deferred income taxes                                                                               26,680       38,447
                                                                                                 ---------    ---------
    Total liabilities                                                                              768,589      747,571
                                                                                                 ---------    ---------
Commitments and contingencies                                                                         --           --
                            SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00; 5,000 shares authorized, none outstanding                           --           --
Common stock, par value $.10; 40,000 shares authorized,  20,261 and 19,749 shares issued             2,026        1,975
Additional paid-in capital                                                                          96,963       94,802
Accumulated other comprehensive income                                                                 564       10,583
Retained earnings                                                                                   78,515       92,141
                                                                                                   178,068      199,501
                                                                                                 ---------    ---------
Less 915 common shares held in treasury, at cost                                                    (6,705)      (6,705)
                                                                                                 ---------    ---------
                                                                                                   171,363      192,796
                                                                                                 ---------    ---------
    Total liabilities and shareholders' equity                                                   $ 939,952    $ 940,367
                                                                                                 =========    =========

           See accompanying notes to consolidated financial statements

</TABLE>

                                       3
<PAGE>

<TABLE>
<CAPTION>

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

                                                                              Three Months Ended March 31,
                                                                              ----------------------------
                                                                                    2002          2001
                                                                                    ----          ----
<S>                                                                               <C>          <C>
Revenues:
   Premium revenue                                                                $  84,236    $  96,019
   Net investment income                                                                692        6,725
   Net realized capital gains (losses)                                               14,523       (1,566)
   Trading account loss                                                                --         (1,723)
   Investment credit on experience account                                          (17,110)        --
   Other income                                                                       2,770        2,400
                                                                                  ---------    ---------
                                                                                     85,111      101,855
                                                                                  ---------    ---------
 Benefits and expenses:
   Benefits to policyholders                                                         80,187       72,137
   Commissions                                                                       12,830       24,988
   Net policy acquisition costs deferred                                             (3,326)      (5,397)
   General and administrative expense                                                10,712       12,634
   Expense and risk charges on reinsurance                                            3,577         --
   Reserve for claim litigation                                                        --           (250)
   Excise tax expense                                                                   581         --
   Interest expense                                                                   1,196        1,282
                                                                                  ---------    ---------
                                                                                    105,757      105,394
                                                                                  ---------    ---------

Loss before federal income taxes                                                    (20,646)      (3,539)
Benefit for federal income taxes                                                     (7,020)      (1,203)
                                                                                  ---------    ---------
     Net loss                                                                       (13,626)      (2,336)
                                                                                  ---------    ---------

  Other comprehensive income:
     Unrealized holding (loss) gain arising during period                              (634)       5,139
     Income tax benefit (provision) from unrealized holdings                            216       (1,747)
     Reclassification of (gain) loss included in net loss                           (14,523)       3,289
     Income tax benefit (provision) from reclassification adjustment                  4,938       (1,118)
                                                                                  ---------    ---------
     Comprehensive (loss) income                                                  $ (23,629)   $   3,227
                                                                                  =========    =========


 Basic earnings per share                                                         $   (0.72)   $   (0.32)
 Diluted earnings per share                                                       $   (0.72)   $   (0.32)


 Weighted average number of shares outstanding                                       18,853        7,288
 Weighted average number of shares outstanding (diluted)                             18,853        7,288

           See accompanying notes to consolidated financial statements

</TABLE>

                                       4
<PAGE>
<TABLE>
<CAPTION>


                PENN TREATY AMERICAN CORPORATION AND SUBSIDIARIES
   Consolidated Statements of Cash Flows for the Three Months Ended March 31,
                                   (unaudited)
                             (amounts in thousands)
                                                                             2002                2001
                                                                             ----                ----
<S>                                                                       <C>                  <C>
Cash flow from operating activities:
  Net loss                                                                $ (13,626)           $ (2,336)
  Adjustments to reconcile net income (loss) to cash
    provided by operations:
    Amortization of intangible assets                                           194                 517
    Amortization of deferred reinsurance premium                                660                   -
    Policy acquisition costs, net                                            (3,326)             (5,397)
    Deferred income taxes                                                    (6,605)               (178)
    Depreciation expense                                                        398                 371
    Net realized capital (losses) gains                                     (14,523)              1,566
    Trading account loss                                                          -               1,723
    Net proceeds from purchase and sales of trading securities                    -              (2,553)
  Increase (decrease) due to change in:
    Receivables from agents                                                     633                 165
    Receivable from reinsurers                                               (3,003)                149
    Experience account due from reinsurer                                    10,562                   -
    Policy and contract claims                                               14,669              14,421
    Policy reserves                                                          24,589              21,794
    Accounts payable and other liabilities                                   (3,593)              2,722
    Federal income taxes recoverable                                              -                (885)
    Accrued investment income                                                 7,521                (129)
    Other, net                                                                 (753)                306
                                                                          ---------           ---------
      Cash provided by operations                                            13,797              32,256

Cash flow from investing activities:
  Proceeds from sales of bonds                                              466,677              24,349
  Proceeds from sales of equity securities                                    9,547               3,190
  Proceeds from maturities of bonds                                           2,571               2,239
  Purchase of bonds                                                         (12,888)            (91,237)
  Purchase of equity securities                                                 (20)             (3,529)
  Increase in corporate owned life insurance                                   (862)                  -
  Initial premium for experience account                                   (563,529)                  -
  Acquisition of property and equipment                                        (330)               (417)
                                                                          ---------           ---------
      Cash used in investing                                                (98,834)            (65,405)

Cash flow from financing activities:
  Net cash from stock offering                                                  228                   -
  Proceeds from exercise of stock options                                         -                  12
  Repayments of long-term debt                                               (2,880)             (2,718)
                                                                          ---------           ---------
      Cash used in financing                                                 (2,652)             (2,706)
                                                                          ---------           ---------
Decrease in cash and cash equivalents                                       (87,689)            (35,855)
Cash balances:
  Beginning of period                                                       114,600             116,596
                                                                          ---------           ---------
  End of period                                                           $  26,911           $  80,741
                                                                          =========           =========

          See accompanying notes to consolidated financial statements.

</TABLE>

                                       5
<PAGE>

PENN TREATY AMERICAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(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, 2001 of Penn
Treaty American Corporation (the "Company").

     In the opinion of management, the summarized financial information reflects
all adjustments (consisting only of normal recurring adjustments) that are
necessary for a fair presentation of the financial position and results of
operations, comprehensive income and cash flows for the interim periods. Certain
prior period amounts have been reclassified to conform to the current period
presentation.

1.   Recent Developments:

     The Company's subsidiaries are required to hold statutory surplus that is,
at a minimum, above a calculated authorized control level at which the
Pennsylvania Insurance Department (the "Department") may place its subsidiary
under regulatory control, leading to rehabilitation or liquidation. Insurers are
obligated to hold additional statutory surplus above the authorized control
level. At December 31, 2000, the Company's primary insurance subsidiary,
representing 94% of our direct premium, had Total Adjusted Capital at the
Regulatory Action level. As a result, it was required to file a Corrective
Action Plan (the "Plan") with the insurance commissioner.

     On February 12, 2002, the Department approved the Plan. It requires the
Company's subsidiary to comply with certain agreements at the direction of the
Department, including, but not limited to:

o    The entrance into the reinsurance agreement for substantially all of its
     existing business at December 31, 2001. (See Note 2)

o    New investments are limited to those rated by the National Association of
     Insurance Commissioners ("NAIC") as 1 or 2.

o    Affiliated transactions are limited and require Department approval.

o    An agreement to increase statutory reserves; the reinsurance agreement has
     provided the capacity to accommodate this increase and will provide an
     additional $80,000 throughout 2002-2004, such that the Insurers' policy
     reserves will be based on new, current claims assumptions and will not
     include any rate increases. These claim assumptions are applied to all
     policies, regardless of issue year and are assumed to have been present
     since the policy was first issued.

                                       6
<PAGE>

2.   Reinsurance Agreement:

     As a primary component of the Plan, effective December 31, 2001, the
Company entered a reinsurance transaction to reinsure, on a quota share basis,
substantially all of its respective long-term care insurance policies then
in-force. The agreement was entered with Centre Solutions (Bermuda) Limited,
which is rated A- by A.M. Best. The agreement is subject to certain coverage
limitations, including an aggregate limit of liability that is a function of
certain factors and that may be reduced in the event that rate increases are not
obtained. The agreement meets the requirements to qualify as reinsurance for
statutory accounting, but not for generally accepted accounting principles.

     The initial premium of the reinsurance treaty resulted in the transfer of
approximately $563,000 in cash and marketable securities during February 2002,
and $56,000 as funds held due to the reinsurer. The initial premium and future
cash flows of the reinsured policies, less claims payments, ceding commissions
and risk charges, is credited to a notional experience account, which is held
for the Company's benefit in the event of commutation and recapture following
December 31, 2007. The notional experience account balance receives an
investment credit based upon the total return of a series of benchmark indices
and derivative hedges, which are designed to closely match the duration of
reserve liabilities. Periodic changes in the market values of the benchmark
indices and derivative hedges are recorded in the Company's financial statements
as investment gains or losses in the period in which they occur. As a result,
the Company's financial statements are subject to significant volatility. During
the period ending March 31, 2002, the Company recorded a net loss of $17,110
resulting from the total return of the benchmark portfolio during the period.

     The reinsurance agreement contains commutation provisions and allows the
Company to recapture the reserve liabilities and the current experience account
balance as of December 31, 2007, or on December 31 of any year thereafter. The
Company intends to commute the treaty on December 31, 2007; therefore, it is
accounting for the reinsurance agreements in anticipation of this commutation.
In the event the Company does not commute the agreements on December 31, 2007,
it will be subject to escalating expenses. Additionally, the reinsurance
provisions contain covenants and conditions that, if breached, may result in the
immediate commutation of the agreement and the payment of $2,500 per quarter
from the period of the breach through December 31, 2007. These covenants
include, but are not limited to, no material breach and insolvency.

         As part of the agreement, the reinsurer was granted four tranches of
warrants to purchase non-voting shares of convertible preferred stock. The first
three tranches of convertible preferred stock are exercisable through December
31, 2007 at common stock equivalent prices ranging from $4.00 to $12.00 per
share, if converted. The reinsurer, at its sole discretion, may execute a cash
exercise or a cashless exercise. If exercised for cash, at the reinsurer's
option, the warrants could yield additional capital and liquidity of
approximately $20,000 and, if converted, would represent ownership of
approximately 15% of the outstanding shares of our common stock. If the
agreement is not commuted following December 31, 2007, the reinsurer may
exercise the fourth tranche of warrants for common stock equivalent prices of
$2.00 per share, if converted, potentially generating additional capital of
$12,000 and representing an additional 20% of the then outstanding common stock.
The reinsurer is under no obligation to exercise any of the warrants.

         The warrants are part of the consideration for the reinsurance contract
and are recognized as premium expense over the anticipated life of the contract.
The warrants were valued at the issuance date using a Black-Scholes model with
the following assumptions: 6.0 years expected life, volatility of 70.9% and a
risk free rate of 4.74%. The $15,855 value of the warrants was recorded as a
deferred premium as of December 31, 2001. $660 of the deferred premium was
amortized to expense during the three months ended March 31, 2002.

                                       7
<PAGE>

3.   Contingencies:

     The Company and certain of its key executive officers are defendants in
consolidated actions that were instituted on April 17, 2001 in the United States
District Court for the Eastern District of Pennsylvania by shareholders of the
Company, on their own behalf and on behalf of a putative class of similarly
situated shareholders who purchased shares of the Company's common stock between
July 23, 2000 through and including March 29, 2001. The consolidated amended
class action complaint seeks damages in an unspecified amount for losses
allegedly incurred as a result of misstatements and omissions allegedly
contained in the Company's periodic reports filed with the SEC, certain press
releases issued by the Company, and in other statements made by its officials.
The alleged misstatements and omissions relate, among other matters, to the
statutory capital and surplus position of the Company's largest subsidiary,
PTNA. On December 7, 2001, the defendants filed a motion to dismiss the
complaint, which is currently pending. The Company believes that the complaint
is without merit, and it and its executives will continue to vigorously defend
the matter.

4.   Investments:

     Management has categorized all of its investment securities as available
for sale since they may be sold in response to changes in interest rates,
prepayments and similar factors. Investments in this 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 March 31, 2002,
shareholders' equity was increased by $578 due to unrealized gains of $875 in
the investment portfolio. As of December 31, 2001, shareholders' equity was
increased by $10,581 due to unrealized gains of $16,032 in the investment
portfolio.

                                       8
<PAGE>


     The amortized cost and estimated market value of the Company's available
for sale investment portfolio as of March 31, 2002 and December 31, 2001 are as
follows:

<TABLE>
<CAPTION>
                                                 March 31, 2002                      December 31, 2001
                                                 --------------                      -----------------
                                           Amortized         Estimated          Amortized          Estimated
                                             Cost          Market Value           Cost           Market Value
                                             ----          ------------           ----           ------------
<S>                                         <C>               <C>                <C>               <C>
   U.S. Treasury securities
     and obligations of U.S.
     Government authorities
     and agencies                           $ 12,284          $ 13,006           $ 164,712         $ 172,063

   Obligations of states and
     political sub-divisions                       -                 -                 572               612

   Mortgage backed securities                  2,025             2,029              42,587            43,331

   Debt securities issued by
    foreign governments                          206               207              11,954            12,089

   Corporate securities                        6,489             6,637             243,793           250,513

   Equities                                        -                 -               8,760             9,802

   Policy Loans                                  196               196                 181               181
                                            --------          --------           ---------         ---------
   Total Investments                        $ 21,200          $ 22,075           $ 472,559         $ 488,591
                                            ========          ========           =========         =========
   Net unrealized gain                           875                                16,032
                                            --------                             ---------
                                            $ 22,075                             $ 488,591
                                            ========                             =========
</TABLE>


     The majority of the Company's investment portfolio was transferred to the
reinsurer as part of the initial premium paid for the Company's December 31,
2001 reinsurance transaction.

     Pursuant to certain statutory licensing requirements, as of March 31, 2002,
the Company had on deposit bonds aggregating $8,447 in Insurance Department
special deposit accounts. The Company is not permitted to remove the bonds from
these accounts without approval of the regulatory authority.

5.   New Accounting Principles:

     In June 2001, the Financial Accounting Standards Board ("FASB") issued two
Statements of Financial Accounting Standards ("SFAS"). SFAS No. 141, "Business
Combinations," requires usage of the purchase method for all business
combinations initiated after June 30, 2001, and prohibits the usage of the
pooling of interests method of accounting for business combinations. The
provisions of SFAS No. 141 relating to the application of the purchase method
are generally effective for business combinations completed after July 1, 2001.
Such provisions include guidance on the identification of the acquiring entity,
the recognition of intangible assets other than goodwill acquired in a business
combination and the accounting for negative goodwill. The transition provisions
of SFAS No. 141 require an analysis of goodwill acquired in purchase business
combinations prior to July 1, 2001 to identify and reclassify separately
identifiable intangible assets currently recorded as goodwill.

     SFAS No. 142, "Goodwill and Other Intangible Assets," primarily addresses
the accounting for goodwill and intangible assets subsequent to their
acquisition. The Company adopted SFAS No. 142 on January 1, 2002 and ceased
amortizing goodwill at that time. All goodwill recognized in the Company's
consolidated balance sheet at January 1, 2002 has been assigned to one or more
reporting units. Goodwill in each reporting unit will be tested for impairment
by June 30, 2002. An impairment loss recognized as a result of a transitional
impairment test of goodwill, if necessary, will be reported as the cumulative
effect of a change in accounting principle. Management has completed an
assessment of other intangible assets and as determined to continue to amortize
these assets so as to closely match the future profit emergence from these
assets.

                                       9
<PAGE>

     The Company's book value is currently in excess of its market value, which
will require an analysis of the goodwill at the reporting unit level. Management
has not yet completed this analysis to determine the extent of impairment, if
any. No goodwill was amortized for the three months ended March 31, 2002. For
the three months ended March 31, 2001, the Company amortized $323 of goodwill.

6.   Reconciliation of Earnings Per Share:

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

                                                   Three Months Ended March 31,
                                                   ---------------------------
                                                      2002           2001
                                                      ----           ----
Net income                                         $ (13,626)      $ (2,336)
Weighted average common shares outstanding            18,853          7,288
                                                   ---------       --------
Basic earnings per share                           $   (0.72)      $  (0.32)
                                                   =========       ========

Net income                                         $ (13,626)      $ (2,336)
Adjustments net of tax:
     Interest expense on convertible debt                 -              -
     Amortization of debt offering costs                  -              -
                                                   ---------       --------
Diluted net income                                 $ (13,626)      $ (2,336)
                                                   ---------       --------

Weighted average common shares outstanding            18,853          7,288
Common stock equivalents due to dilutive
     effect of stock options                              -              -
Shares converted from convertible debt                    -              -
                                                   ---------       --------
Total outstanding shares for diluted earnings
     per share computation                            18,853          7,288
                                                   ---------       --------
Diluted earnings per share                         $   (0.72)      $  (0.32)
                                                   =========       ========

7.   Equity Placement:

     In March 2002, the Company completed a private placement of 510 shares of
common stock for net proceeds of approximately $2,372. The common stock was sold
to several current and new institutional investors, at $4.65 per share. The
offering price was a 10 percent discount to the 30-day average price of our
common stock prior to the issuance of the new shares. Our common stock is listed
on the New York Stock Exchange. The Company intends to file a registration
statement with the Securities and Exchange Commission on or before June 5, 2002.
The proceeds of the private placement provided additional liquidity to the
parent company to meet its current year debt service obligations. The proceeds,
together with currently available cash sources, are not sufficient to meet the
December 2003 final interest requirement of the debt or to retire the debt upon
maturity.

                                       10
<PAGE>

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

Overview

     Our principal products are individual, defined benefit accident and health
insurance policies that consist of nursing home care, home health care, Medicare
supplement and long-term disability insurance. We experienced significant
reductions in new premium sales during 2001 due to the cessation of new business
generation in all states and as a result of market concerns regarding our
insurance subsidiaries' statutory surplus. Under our Corrective Action Plan,
which was approved by the Pennsylvania Insurance Department (the "Department")
in February 2002, we recommenced sales in certain states, but intend to limit
new business growth to levels that will allow us to maintain sufficient
statutory surplus. Our underwriting practices rely upon the base of experience
that we have developed in over 29 years of providing nursing home care
insurance, as well as upon available industry and actuarial information. As the
home health care market has developed, we have encouraged our customers to
purchase both nursing home and home health care coverage, thus providing our
policyholders with enhanced protection and broadening our policy base.

     Our insurance subsidiaries are subject to the insurance laws and
regulations of the states in which they are licensed to write insurance. These
laws and regulations govern matters such as payment of dividends, settlement of
claims and loss ratios. State regulatory authorities must approve premiums
charged for insurance products. In addition, our insurance subsidiaries are
required to establish and maintain reserves with respect to reported and
incurred but not reported losses, as well as estimated future benefits payable
under our insurance policies. These reserves must, at a minimum, comply with
mandated standards. For a description of current regulatory matters affecting
our insurance subsidiaries, see "Liquidity and Capital Resources" and
"Subsidiary Operations."

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

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

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

                                       11
<PAGE>

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

     Deferred 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 deferred policy acquisition costs ("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.

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

     Investment income. Our investment portfolio consists primarily of
investment grade fixed income securities. Income generated from this portfolio
is largely dependent upon prevailing levels of interest rates. Due to the
duration of our investments (approximately 5.0 years), investment income does
not immediately reflect changes in market interest rates.

     Experience account. In February, 2002, and in connection with our December
31, 2001 reinsurance agreement, we transferred substantially all of our
investment portfolio to our reinsurer. The reinsurer will maintain a notional
experience account for our benefit that includes the initial premium paid, all
future cash flows from the reinsured business and accumulated investment
earnings. The notional experience account balance will receive an investment
credit based upon the total return of a series of benchmark indices and
derivative hedges, which are designed to closely match the duration of our
reserve liabilities. Periodic changes in the market values of the benchmark
indices and derivative hedges are recorded in our financial statements as
investment gains or losses in the period in which they occur. As a result, our
future financial statements are subject to significant volatility.

     Lapsation and persistency. Factors that affect our results of operations
include lapsation and persistency, both of which relate to the renewal of
insurance policies. Lapsation is the termination of a policy by non-renewal.
Lapsation is automatic if and when premiums become more than 31 days overdue
although, in some cases, a lapsed policy may be reinstated within six months.
Persistency represents the percentage of premiums renewed, which we calculate by
dividing the total annual premiums at the end of each year (less first year
premiums for that year) by the total annual premiums in-force for the prior
year. For purposes of this calculation, a decrease in total annual premiums
in-force at the end of any year would be the result of non-renewal of policies,
including policies that have terminated by reason of death, lapsed due to
nonpayment of premiums and/or been converted to other policies we offered. First
year premiums are premiums covering the first twelve months a policy is
in-force. Renewal premiums are premiums covering all subsequent periods.

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

                                       12
<PAGE>

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

     Lapsation and persistency can both positively and adversely impact future
earnings. Reduced lapses and higher persistency generally result in higher
renewal premiums and lower amortization of deferred acquisition costs, 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 deferred acquisition costs. However, higher
lapsation may lead to decreased claims in future periods.

Results of Operations

Three Months Ended March 31, 2002 and 2001
(amounts in thousands, except per share data)

Premiums. Total premium revenue earned in the three month period ended March 31,
2002 (the "2002 quarter"), including long-term care, disability, life and
Medicare supplement, decreased 12.3% to $84,236, compared to $96,019 in the same
period in 2001 (the "2001 quarter").

     Total first year premium earned in the 2002 quarter decreased 88.6% to
$2,275, compared to $19,910 in the 2001 quarter. First year long-term care
premiums earned in the 2002 quarter decreased 89.4% to $2,037, compared to
$19,225 in the 2001 quarter. We experienced significant reductions in new
premium sales due to the cessation of new business generation in all states and
as a result of market concerns regarding our insurance subsidiaries' statutory
surplus. As a result, expect to experience similar declines in future quarters
compared to comparable prior periods. Under our Corrective Action Plan (the
"Plan"), which was approved by the Pennsylvania Insurance Department (the
"Department") in the 2002 quarter, we recommenced sales in certain states, but
intend to limit new business growth to levels that will allow us to maintain
sufficient statutory surplus. See "Liquidity and Capital Resources."

     Effective September 10, 2001, we determined to discontinue the sale
nationally of all new long-term care insurance policies until the Plan was
completed and approved by the Department. This decision resulted from our
concern about further depletion of statutory surplus from new sales prior to the
completion and approval of the Plan and from increasing concern with respect to
the status of the Plan expressed by many states in which the Company is licensed
to conduct business. Upon the approval by the Department of the Plan in February
2002, we recommenced new sales in 23 states. We have since recommenced sales in
3 additional states. We are actively working with all states in order to
recommence sales in all remaining jurisdictions.

     Total renewal premiums earned in the 2002 quarter increased 7.7% to
$81,961, compared to $76,108 in the 2001 quarter. Renewal long-term care
premiums earned in the 2002 quarter increased 9.8% to $79,276, compared to
$72,176 in the 2001 quarter. This increase reflects renewals of a larger base of
in-force policies. We may experience reduced renewal premiums in the future if
policies lapse, especially given our recent premium rate increases that are
anticipated to cause additional policy lapses. Current declines in first year
premiums, as discussed above, will negatively impact future renewal premium
growth.

                                       13
<PAGE>

Net Investment Income. Net investment income earned for the 2002 quarter
decreased 89.7% to $692, from $6,725 for the 2001 quarter. This decline resulted
from the transfer of substantially all of our invested assets to our reinsurer
as initial premium ceded for our reinsurance agreement, which was effective
December 31, 2001. See "Liquidity and Capital Resources." Our average yield on
invested assets at cost, including cash and cash equivalents, was 6.51% and
5.40%, respectively, in the 2002 and 2001 quarters. The higher yield in the 2002
period resulted from having investments only in higher yielding bonds, rather
than in common stocks as were present in the 2001 quarter.

Net Realized Capital Gains and Trading Account Activity. During the 2002
quarter, we recognized capital gains of $14,523, compared to capital losses of
$1,566 in the 2001 quarter. The gains recognized in the 2002 quarter resulted
from the transfer of substantially all of our invested assets to our reinsurer.
The results in the 2001 quarter were recorded as a result of our normal
investment management operations.

     During the 2001 quarter, we classified our convertible bond portfolio as
trading account investments. Changes in trading account investment market values
were recorded in our statement of operations during the period in which the
change occurred, rather than as an unrealized gain or loss recorded directly
through equity. As a result, we recorded a trading account loss in the 2001
quarter of $1,723, which reflected the unrealized and realized loss of our
convertible portfolio that arose during that quarter. No investments were
classified as trading during the 2002 quarter.

Investment credit on experience account. In connection with our December 31,
2001 reinsurance agreement, we recorded an investment loss of $17,110 on the
experience account maintained by the reinsurer. The notional experience account
balance will receive an investment credit based upon the total return of a
series of benchmark indices and derivative hedges, which are designed to closely
match the duration of our reserve liabilities. Periodic changes in the market
values of the benchmark indices and derivative hedges are recorded in our
financial statements as investment gains or losses in the period in which they
occur. As a result, our future financial statements are subject to significant
volatility.

Other Income. We recorded $2,770 in other income during the 2002 quarter, up
from $2,400 in the 2001 quarter. The increase is attributable primarily to an
increase in commissions earned by United Insurance Group on sales of insurance
products underwritten by unaffiliated insurers and to income generated from our
ownership of corporate owned life insurance policies.

Benefits to policyholders. Total benefits to policyholders in the 2002 quarter
increased 11.2% to $80,187, compared to $72,137 in the 2001 quarter. Our loss
ratio, or policyholder benefits to premiums, was 95.2% in the 2002 quarter,
compared to 75.1% in the 2001 quarter.

     During the 2002 quarter, we increased our policy reserves by approximately
$16,500 above the levels that we would have normally anticipated. This increase
in reserves resulted from the following:

                                       14
<PAGE>


     (1) We establish reserves utilizing expectations for future events,
including anticipated lapses. We generally assume that those policies expected
to lapse are representative of the total in-force policy base and that we will
thereby maintain a similar composition of in-force policies in future periods.
During the 2002 quarter, we experienced shifts in the general composition of our
policyholder base that caused us to hold an additional $11,000 in policy
reserves at March 31, 2002, compared to our expectations. We have determined
that the composition of policyholders at March 31, 2002 differed from the mix at
December 31, 2001. This shift resulted in a higher than expected number of
policies with features that require additional reserves to be held for future
benefits, including more policies with inflation protection, more skilled
facility care policies and reduced elimination periods. This change in the
composition of our policies occurred as a result of higher lapses of policies
without these features rather than as a result of new sales.

     (2) Also, policy persistency, or the retention of renewing policies, also
increased by 0.3% during the 2002 quarter, which generated additional policy
reserves of approximately $5,500. This increase was only partially offset by
higher premium revenue and lower amortization of deferred policy acquisition
costs.

     Historically, more new claims are reported during the first quarter than in
later quarters. We refer to this as seasonality. As a result, this seasonality
generates higher incurred claim ratios in the first quarter than in subsequent
quarters. In the 2002 quarter, management estimates that approximately $5,000 in
higher incurred claims resulted from this seasonality of reported claims. While
the number of newly reported claims exceeded our "non-seasonally" adjusted
expectations in the 2002 quarter, our paid loss ratio of 48% was as we expected.

     Claims experience can differ from our expectations due to numerous factors,
including mortality rates, duration of care and type of care utilized. When we
experience deviation from our estimates, we typically seek premium rate
increases that are sufficient to offset future deviation. During the third
quarter 2001, we filed for premium rate increases on the majority of our policy
forms. These rate increases were sought as a result of higher claims
expectations and policyholder persistency than existed at the time of the
original form filings. The assumptions used in requesting and supporting the
premium rate increase filings are consistent with those incorporated in our
newest policy form offerings. We have currently received approval for
approximately 85% of the rate increases requested. We have been generally
successful in the past in obtaining state insurance department approvals for
increases. If we are unsuccessful in obtaining rate increases when deemed
necessary, or if we do not pursue rate increases when actual claims experience
exceeds our expectations, we would suffer a financial loss.

Commissions. Commissions to agents decreased 48.7% to $12,830 in the 2002
quarter, compared to $24,988 in the 2001 quarter.

     First year commissions on accident and health business in the 2002 quarter
decreased 88.7% to $1,456, compared to $12,889 in the 2001 quarter, due to the
decrease in first year accident and health premiums. The ratio of first year
accident and health commissions to first year accident and health premiums was
64.0% in the 2002 quarter and 65.6% in the 2001 quarter. We believe that the
decrease in the first year commission ratio is primarily attributable to the
increased sale of our Secured Risk policy, which pays a lower, limited
commission. Our Secured Risk policy provides limited benefits to higher risk
policyholders at a substantially increased premium rate. We believe that we are
likely to experience an increase in the sale of these policies while we reenter
sales in many states as a result of our lower financial ratings.

                                       15
<PAGE>

     Renewal commissions on accident and health business in the 2002 quarter
decreased 2.1% to $12,248, compared to $12,515 in the 2001 quarter, due to the
decrease in renewal premiums discussed above. The ratio of renewal accident and
health commissions to renewal accident and health premiums was 15.1% in the 2002
quarter and 16.9% in the 2001 quarter. This ratio reflects the sale of more
Secured Risk and Medicare Supplement policies in the 2001 quarter, which pay no
or reduced renewal commissions.

     During the 2002 quarter, we reduced commission expense by netting $780 from
override commissions affiliated insurers paid to our agency subsidiaries. During
the 2001 quarter, we reduced commissions by $992.

Net policy acquisition costs deferred. The net deferred policy acquisition costs
in the 2002 quarter decreased to $3,326, compared to $5,397 in the 2001 quarter.

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

     The net amortization of deferred policy acquisition costs is effected by
new business generation, imputed interest on prior reserves and policy
persistency. During the 2002 quarter, higher policy persistency (as noted under
"Premiums") than was anticipated at December 31, 2001, resulted in reduced
amortization of deferred policy acquisition costs. The deferral of costs and the
imputed interest exceeded the amortization of deferred policy acquisition costs
for the period, resulting in a net increase in deferred policy acquisition
costs, and a related income statement benefit of approximately $3,000.

     The amortization of deferred costs is generally offset largely by the
deferral of costs associated with new premium generation. Lower new premium
sales during the 2001 quarter produced significantly less expense deferral to
offset amortized costs.

General and administrative expenses. General and administrative expenses in the
2002 quarter decreased 15.2% to $10,712, compared to $12,634 in the 2001
quarter. The 2002 and 2001 quarters include $1,657 and $1,626, respectively of
general and administrative expenses related to United Insurance Group expense.
The ratio of total general and administrative expenses to premium revenues,
excluding United Insurance Group, was 11.0% in the 2002 quarter, compared to
11.5% in the 2001 quarter.

     Expenses have declined as a result of reduced new premium sales and
management initiatives to reduce operating expenses. However, we believe that if
we remain unable to write new business in certain states where we have ceased
new production, or if we are unable to utilize our existing staff and
infrastructure capacity to generate additional premiums, we will need to
decrease production expenses further.

Expense and risk charges on reinsurance and excise tax expense. Our reinsurance
agreement provides the reinsurer with annual expense and risk charges, which are
charged against our experience account in the event of future commutation of the
agreement. The annual charge consists of a fixed cost and a variable component
based upon reserve and capital levels needed to support the reinsured business.
In the 2002 quarter, we accrued $3,577 for this charge. In addition, we are
subject to an excise tax for premium payments made to a foreign reinsurer. We
recorded $581 for excise tax expenses in the 2002 quarter.

                                       16
<PAGE>

Provision for federal income taxes. Our benefit for federal income taxes for the
2002 quarter increased 683.5% to $7,020, compared to an income tax benefit of
$1,203 for the 2001 quarter. The effective tax rate of 34% in the 2002 and 2001
quarters is below the normal federal corporate rate as a result of anticipated
credits from our investments in corporate owned life insurance that are
partially offset by non-deductible goodwill amortization and other
non-deductible expenses.

Comprehensive income. During the 2002 quarter, our investment portfolio
generated pre-tax unrealized losses of $634, compared to unrealized gains of
$5,139 in the 2001 quarter. After accounting for deferred taxes from these
losses and gains, shareholders' equity decreased by $23,629 from comprehensive
losses during the 2002 quarter, compared to comprehensive income of $3,227 in
the 2001 quarter.

Liquidity and Capital Resources

     Our consolidated liquidity requirements have historically been created and
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 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, other
capital markets activities or 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 2002 period, our cash flows were attributable to cash provided by
operations, cash used in investing and cash provided by financing. Our cash
decreased $87,689 in the 2002 period primarily due to payments made to our
reinsurer and from the purchase of $12,908 in bonds and equity securities. Cash
was provided primarily from the maturity and sale of $478,795 in bonds and
equity securities. These sources of funds were supplemented by $13,797 from
operations. The major provider of cash from operations was premium and
investment income received.

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

     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. As of March 31, 2002, shareholders' equity was increased by $578 due to
unrealized gains of $875 in the investment portfolio. As of December 31, 2001,
shareholders' equity was increased by $10,581 due to unrealized gains of $16,032
in the investment portfolio.

                                       17
<PAGE>

Subsidiary Operations

     Our insurance subsidiaries are regulated by various state insurance
departments. In its ongoing effort to improve solvency regulation, the National
Association of Insurance Commissioners ("NAIC") has adopted 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.

     Our subsidiaries are required to hold statutory surplus that is, at a
minimum, above a calculated mandatory control level at which the Pennsylvania
Insurance Department (the "Department") would be required to place our
subsidiaries under regulatory control, leading to rehabilitation or liquidation.
Insurers are obligated to hold additional statutory surplus above the mandatory
control level. At December 31, 2000, our primary insurance subsidiary,
representing 94% of our direct premium, had Total Adjusted Capital at the
Regulatory Action level. As a result, it was required to file a Corrective
Action Plan (the "Plan") with the insurance commissioner.

     On February 12, 2002, the Department approved the Plan. As a primary
component of the Plan, effective December 31, 2001, we entered a reinsurance
transaction to reinsure, on a quota share basis, substantially all of our
respective long-term care insurance policies then in-force. The agreement is
subject to certain coverage limitations, including an aggregate limit of
liability that is a function of certain factors and that may be reduced in the
event that the rate increases that the reinsurance agreement may require are not
obtained. The agreement meets the requirements to qualify as reinsurance for
statutory accounting, but not for generally accepted accounting principles.

     The initial premium of the treaties was approximately $619,000, comprised
of $563,000 of cash and qualified securities transferred in February 2002, and
$56,000 as funds held due to the reinsurer. The initial premium and future cash
flows from the reinsured policies, less claims payments, ceding commissions and
risk charges, is credited to a notional experience account, which is held for
our benefit in the event of commutation and recapture on or after December 31,
2007. The notional experience account balance receives an investment credit
based upon the total return from a series of benchmark indices and derivative
hedges that are intended to match the duration of our reserve liability.

     The agreement contains commutation provisions and allows us to recapture
the reserve liabilities and the current experience account balance as of
December 31, 2007 or on December 31 of any year thereafter. If we choose not to
or are unable to commute the agreement as planned, our financial results would
likely suffer a materially adverse impact due to an escalation of the charges
paid to the reinsurer. Additionally, our reinsurance provisions contain
significant covenants and conditions that, if breached, could result in a
significant loss, requiring a payment of $2.5 million per quarter from the
period of the breach through December 31, 2007. Any breach of the reinsurance
agreement may also result in the immediate recapture of the reinsured business,
which would have a negative on our subsidiaries' statutory surplus. Management
has completed an assessment of its ability to avoid any breach through 2002 and
believes that the insurance subsidiaries will remain compliant. In addition, the
reinsurer has been granted warrants to acquire convertible preferred stock in
the event we do not commute the agreements that, if converted, would represent
an additional 20 percent of the common stock then outstanding.

                                       18
<PAGE>

     The Plan requires our subsidiary to comply with certain other agreements at
the direction of the Department, including, but not limited to:

o    New investments are limited to NAIC 1 or 2 rated securities.

o    Affiliated transactions are limited and require Department approval.

o    An agreement to increase statutory reserves; the reinsurance agreement has
     provided the capacity to accommodate this increase and will provide an
     additional $80,000 throughout 2002-2004, such that the our insurance
     subsidaries' policy reserves will be based on new, current claims
     assumptions and will not include any rate increases. These claim
     assumptions are applied to all policies, regardless of issue year and are
     assumed to have been present since the policy was first issued.

     Effective September 10, 2001, we determined to discontinue the sale
nationally of all new long-term care insurance policies until the Plan was
approved by the Department. The decision resulted from our concern about further
depletion of statutory surplus from new sales prior to the completion and
approval of the Plan and from increasing concern regarding our status by many
states in which we are licensed to conduct business. The form of our cessation
varied by state, ranging from no action to certificate suspensions.

     Upon the approval by the Department of the Plan in February 2002, we
recommenced new sales in 23 states. We have since recommenced sales in 3
additional states. We are actively working with all states in order to
recommence sales in all remaining jurisdictions.

     The majority of our insurance subsidiaries' cash flow results from our
existing long-term care policies, which will be ceded to the reinsurer under
this agreement. Our subsidiaries' ability to meet additional liquidity needs and
fixed expenses in the future is highly dependent upon our ability to issue new
policies and to control expense growth.

     Our future growth 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 our ability to fund our marketing and expansion while
maintaining minimum statutory levels of capital and surplus required to support
such growth.

     We are unlikely in the foreseeable future to be able to make dividend
payments from our two largest insurance subsidiaries. Additionally, the Plan
requires the Department to approve all dividend requests, regardless of
statutory allowances. However, our New York subsidiary is not subject to the
Plan and was permitted by New York statute to make a dividend payment following
December 31, 2001. During the 2002 quarter, we received a dividend from our New
York subsidiary of $651.

                                       19
<PAGE>

     Our subsidiaries' debt currently consists primarily of a mortgage note in
the amount of approximately $1,560 that was issued by a former subsidiary and
assumed by us when that subsidiary was sold. The mortgage note is currently
amortized over 15 years, and has a balloon payment due on the remaining
outstanding balance in December 2003. Although the note carries a variable
interest rate, we have entered into an amortizing swap agreement with the same
bank with a nominal amount equal to the outstanding debt, which has the effect
of converting the note to a fixed rate of interest of 6.85%.

Parent Company Operations

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

     On April 27, 2001, we distributed rights to our shareholders and holders of
our 6.25% convertible subordinated notes due 2003 ("Rights Offering") for the
purpose of raising new equity capital. Pursuant to the Rights Offering, holders
of our common stock and holders of our convertible subordinated notes received
rights to purchase 11,547 newly issued shares of common stock at a set price of
$2.40 per share. The Rights Offering was completed on May 25, 2001 and generated
net proceeds of $25,726 in additional equity capital. We contributed $18,000 of
the net proceeds to the statutory capital of our subsidiaries.

     Parent company debt currently consists of $74,750 of 6.25% Convertible
Subordinated Notes due 2003. The convertible subordinated notes, issued in
November 1996, are convertible into common stock at $28.44 per share until
maturity in December 2003. At maturity, to the extent that the convertible
subordinated notes have not been converted into common stock, we will have to
repay their entire principal amount in cash. The convertible subordinated notes
carry a fixed interest coupon of 6.25%, payable semi-annually. Because we do not
have sufficient cash flow to retire the debt upon maturity, and the conversion
price of $28.44 per share is not likely to be met, we expect that we will need
to refinance our 6.25% Convertible Subordinate Notes on or before maturity in
2003. The terms of any such refinancing are not yet known, or if refinancing is
achievable. We cannot give assurance that these terms will not be materially
adverse to our existing shareholders' interests.

     On January 1, 1999, we purchased all of the common stock of United
Insurance Group, a Michigan based consortium of long-term care insurance
agencies, for $18,192. As part of the purchase, we issued a note payable for
$8,078, which was in the form of a three-year zero-coupon installment note. The
installment note, after discounting for imputed interest, was recorded as a note
payable of $7,167, and had an outstanding balance of $2,858 at December 31,
2001. The remainder of the purchase was paid in cash. The total outstanding
balance of the note was repaid in January 2002.

                                       20
<PAGE>

     At March 31, 2002, our total debt and financing obligations through 2006
are as follows:
                                                                    Lease
                             Debt             Commitments           Total
                             ----             -----------           -----
2002                      $     -              $    325           $    325
2003                         76,212                 344             76,556
2004                            -                   252                252
2005                            -                    18                 18
2006                            -                    18                 18
                          ---------            --------           --------
   Total                  $ 76,212             $    957           $ 77,169
                          =========            ========           ========

     Amounts subsequent to 2006 are immaterial.

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

     As part of our reinsurance agreement, effective December 31, 2001, the
reinsurer was granted four tranches of warrants to purchase non-voting shares of
convertible preferred stock. The first three tranches of convertible preferred
stock are exercisable through December 31, 2007 at common stock equivalent
prices ranging from $4.00 to $12.00 per share if converted. If exercised for
cash, at the reinsurer's option, the warrants could yield additional capital and
liquidity of approximately $20,000 and would represent, if converted,
approximately 15% of the outstanding shares of our common stock. If the
agreement is not commuted on or after December 31, 2007, the reinsurer may
exercise the fourth tranche of warrants for common stock equivalent prices of
$2.00 per share if converted, potentially generating additional capital of
$12,000 and representing an additional 20% of the then outstanding common stock.
No assurance can be given that the reinsurer will exercise any or all of the
warrants granted or that it will pay cash in connection with their exercise.

     Cash flow needs of the parent company primarily include interest payments
on outstanding debt and limited operating expenses. The funding is primarily
derived from the operating cash flow of our agency subsidiary operations and
dividends from the insurance subsidiaries. However, as noted above, the dividend
capabilities of the insurance subsidiaries are limited and the only insurance
company that can pay dividends is American Independent Network Insurance Company
of New York. While we intend to sell this insurance subsidiary in order to
generate additional parent company liquidity, we cannot assure that this will be
accomplished during 2002. In the event the sale is not completed, we may need to
rely upon the dividend capabilities of our agency subsidiaries to meet current
liquidity needs. These sources of funds, however, are expected to be
insufficient to meet our future needs beyond June 30, 2003, including the
repayment of $74,750 million of long-term debt in December 2003.

     In March 2002, we completed a private placement of 510 shares of common
stock for net proceeds of approximately $2,400. The common stock was sold to
several current and new institutional investors, at $4.65 per share. The
offering price was a 10 percent discount to the 30-day average price of our
common stock prior to the issuance of the new shares. Our common stock is listed
on the New York Stock Exchange. We have agreed to file a registration statement
with the Securities and Exchange Commission on or before June 5, 2002 to
register these shares for resale. The proceeds of the private placement provided
sufficient additional liquidity to the parent company to meet our debt
obligations prior to the maturity of the convertible debt in 2003. The proceeds,
together with currently available cash sources, are not sufficient to meet the
December 2003 final interest requirement of the debt or to retire the debt upon
maturity.

                                       21
<PAGE>

     Our liquidity projections, while based upon our best estimates and
containing excess margin for our estimated needs, may not be sufficient to meet
our obligations throughout 2003. We cannot assure that we will not need
additional funding in the event that our liquidity projections are insufficient
to meet our future cash needs.

New Accounting Principles

     In June 2001, the Financial Accounting Standards Board ("FASB") issued two
Statements of Financial Accounting Standards ("SFAS"). SFAS No. 141, "Business
Combinations," requires usage of the purchase method for all business
combinations initiated after June 30, 2001, and prohibits the usage of the
pooling of interests method of accounting for business combinations. The
provisions of SFAS No. 141 relating to the application of the purchase method
are generally effective for business combinations completed after July 1, 2001.
Such provisions include guidance on the identification of the acquiring entity,
the recognition of intangible assets other than goodwill acquired in a business
combination and the accounting for negative goodwill. The transition provisions
of SFAS No. 141 require an analysis of goodwill acquired in purchase business
combinations prior to July 1, 2001 to identify and reclassify separately
identifiable intangible assets currently recorded as goodwill.

     SFAS No. 142, "Goodwill and Other Intangible Assets," primarily addresses
the accounting for goodwill and intangible assets subsequent to their
acquisition. We adopted SFAS No. 142 on January 1, 2002 and ceased amortizing
goodwill at that time. All goodwill recognized in our consolidated balance sheet
at January 1, 2002 has been assigned to one or more reporting units. Goodwill in
each reporting unit will be tested for impairment by June 30, 2002. An
impairment loss recognized as a result of a transitional impairment test of
goodwill, if necessary, will be reported as the cumulative effect of a change in
accounting principle.

     Management has completed an assessment of other intangible assets and as
determined to continue to amortize these assets so as to closely match the
future profit emergence from these assets.

     Our book value is currently in excess of our market value, which will
require an analysis of the goodwill at the reporting unit level. We have not yet
completed this analysis to determine the extent of impairment, if any.

Forward Looking Statements

     Certain statements made by the Company may be considered forward-looking
within the meaning of the Private Securities Litigation Reform Act of 1995.
Although the Company believes that its expectations are based upon reasonable
assumptions within the bounds of its knowledge of its business and operations,
there can be no assurance that actual results of the Company's operations will
not differ materially from its expectations. Factors which could cause actual
results to differ from expectations include, among others, the Company's new
reinsurance agreement is subject to certain coverage limitations including an
aggregate limit of liability, which is a function of certain factors and which
may be reduced as a result of our inability to obtain certain rate increases,
the ability to file and make effective a registration statement for its newly
issued, privately placed shares, whether its Corrective Action Plan will be



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<PAGE>

accepted and approved by state insurance regulators in addition to the
Pennsylvania Department of Insurance, the Company's ability to meet its future
risk-based capital goals, the adverse financial impact of suspending new
business sales, the Company's ability to raise adequate capital to meet the
requirements of anticipated growth and the cost associated with recommencing new
business sales, liquidity needs and debt obligations, the possible sale of
certain product lines and its New York subsidiary, the adequacy of the Company's
loss reserves and the recoverability of its unamortized deferred policy
acquisition cost asset, the Company's ability to sell insurance products in
certain states, to resume generating new business in all states and to succeed
in obtaining necessary rate increases, the Company's ability to comply with
government regulations and the requirements which may be imposed by state
regulators as a result of the Company's capital and surplus levels, the ability
of senior citizens to purchase the Company's products in light of the increasing
costs of health care, the ability of the Company to retain its current
policyholder base, the ability of the Company to defend itself against adverse
litigation, and the Company's ability to recapture, expand and retain its
network of productive independent agents, For additional information, please
refer to the Company's reports filed with the Securities and Exchange
Commission.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     We invest in securities and other investments authorized by applicable
state laws and regulations and follow an investment policy designed to maximize
yield to the extent consistent with liquidity requirements and preservation of
assets.

     A significant portion of assets and liabilities are financial instruments,
which are subject to the market risk of potential losses from adverse changes in
market rates and prices. Our primary market risk exposures relate to interest
rate risk on fixed rate domestic medium-term instruments and, to a lesser
extent, domestic short-term and long-term instruments. We have established
strategies, asset quality standards, asset allocations and other relevant
criteria for our portfolio to manage our exposure to market risk.

     As part of our reinsurance transaction, our reinsurer will maintain a
notional experience account for our benefit that includes the initial premium
paid, all future cash flows from the reinsured business and accumulated
investment earnings. The notional experience account balance will receive an
investment credit based upon the total return of a series of benchmark indices
and derivative hedges, which are designed to closely match the duration of our
reserve liabilities. Periodic changes in the market values of the benchmark
indices and derivative hedges are recorded in our financial statements as
investment gains or losses in the period in which they occur. As a result, our
future financial statements are subject to significant volatility.

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

     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.

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<PAGE>

     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 84.5% of total liabilities
and reinsurance receivables on unpaid losses represent 3.0% of total assets).
Long-term debt, although not carried at fair value, is included in the
hypothetical effect calculation.

     The hypothetical effects of changes in market rates or prices on the fair
values of financial instruments as of March 31, 2002, including the value of our
experience account, but excluding insurance liabilities and other reinsurance
receivables on unpaid losses because such insurance related assets and
liabilities are not carried at fair value, would have been as follows:

     If interest rates had increased by 100 basis points, there would have been
an approximate $31,981,000 decrease in the net fair value of our financial
instruments. The change in fair values was determined by estimating the present
value of future cash flows using models that measure the change in net present
values arising from selected hypothetical changes in market interest rate. A 200
basis point increase in market rates at March 31, 2002 would have resulted in an
approximate $60,471,000 decrease in the net fair value. If interest rates had
decreased by 100 and 200 basis points, there would have been an approximate
$35,932,000 and $76,339,000 net increase, respectively, in the net fair value of
our financial instruments.

     We hold certain mortgage and asset backed securities as part of our
investment portfolio. The fair value of these instruments may react in a convex
or non-linear fashion when subjected to interest rate increases or decreases.
The anticipated cash flows of these instruments may differ from expectations in
changing interest rate environments, resulting in duration drift or a varying
nature of predicted time-weighted present values of cash flows. The result of
unpredicted cash flows from these investments could cause the above hypothetical
estimates to change. However, we believe that the minimal amount we have
invested in these instruments and their broadly defined payment parameters
sufficiently outweigh the cost of computer models necessary to accurately
predict their possible impact to our investment income from the hypothetical
effects of changes in market rates or prices on the fair values of financial
instruments as of March 31, 2002.


                            PART II OTHER INFORMATION

Item 1.  Legal Proceedings

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

     The Company and certain of our key executive officers are defendants in
consolidated actions that were instituted on April 17, 2001 in the United States
District Court for the Eastern District of Pennsylvania by shareholders of the
Company, on their own behalf and on behalf of a putative class of similarly
situated shareholders who purchased shares of the Company's common stock between
July 23, 2000 through and including March 29, 2001. The consolidated amended
class action complaint seeks damages in an unspecified amount for losses
allegedly incurred as a result of misstatements and omissions allegedly
contained in our periodic reports filed with the SEC, certain press releases
issued by us, and in other statements made by our officials. The alleged
misstatements and omissions relate, among other matters, to the statutory
capital and surplus position of our largest subsidiary, Penn Treaty Network
America Insurance Company. On December 7, 2001, the defendants filed a motion to
dismiss the complaint, which is currently pending. We believe that the complaint
is without merit, and we will continue to vigorously defend the matter.

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<PAGE>

Item 2.  Changes in Securities

          Not Applicable

Item 3.  Defaults Upon Senior Securities

          Not Applicable

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

          Not Applicable

Item 5.  Other Information

          Not Applicable

Item 6.  Exhibits and Reports on Form 8-K

          Reports on Form 8-K:

          February 21, 2002 - Reinsurance Agreement with Centre Solutions
          (Bermuda) Limited.




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                                   SIGNATURES

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

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


Date:   May 15, 2002                        /s/ Irving Levit
        ------------                        ------------------------------------
                                                Irving Levit
                                                Chairman of the Board, President
                                                and Chief Executive Officer

Date:   May 15, 2002                        /s/ Cameron B. Waite
        ------------                        ------------------------------------
                                                Cameron B. Waite
                                                Chief Financial Officer


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