UNITED STATES 


SECURITIES AND EXCHANGE
COMMISSION 


WASHINGTON, DC 20549

# FORM 10-Q/A

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

| | For
the quarterly period ended March 31, 2004
| | ---------------------------------------------

or

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

Commission file number
001-14681

---

# PENN TREATY AMERICAN
CORPORATION 


3440 Lehigh Street,
Allentown, PA 18103 


(610) 965-2222

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

---

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

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

| | The
number of shares outstanding of the Registrants common stock, par value $.10 per
share, as of May 13, 2004 was 39,612,946.
| | -------------------------------------------------------------------------------------------------------------------------------



---

# EXPLANATORY NOTE

This Quarterly Report on Form 10-Q/A
amends Penn Treaty American Corporations Quarterly Report on Form 10-Q for the
period ended March 31, 2004, as filed on May 17, 2004, to restate its previously issued
financial statements as described herein. This Form 10-Q/A further amends Penn Treaty
American Corporations previously filed Form 10-Q to include in Part I, Item 4,
Controls and Procedures, the revised conclusion of the principal executive
officer and principal financial officer regarding the effectiveness of Penn Treaty
American Corporations disclosure controls and procedures as of March 31, 2004. No
other disclosures have been updated or modified and no other changes have been made in
this Form 10-Q/A, except to comply with changes in the SECs requirements for
Quarterly Reports on Form 10-Q.

# PART I FINANCIAL
INFORMATION

Item 1.   Financial
Statements

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



---

|PENN TREATY AMERICAN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands, except per share data)
|---------------------------------------------------------------------------------------------------------------------------
|
|
|Investments:                                                                                                               
|Bonds, available for sale at market (cost of $45,341 and $42,933, respectively)  (2)                                       
|Policy loans                                                                                                               
|                                                                                                                           
|Total investments                                                                                                          
|Cash and cash equivalents (2)                                                                                              
|Property and equipment, at cost, less accumulated depreciation of                                                          
|$10,014 and $9,635, respectively                                                                                           
|Unamortized deferred policy acquisition costs                                                                              
|Receivables from agents, less allowance for                                                                                
|uncollectible amounts of $445 and $404, respectively                                                                       
|Accrued investment income                                                                                                  
|Goodwill                                                                                                                   
|Receivable from reinsurers                                                                                                 
|Corporate owned life insurance                                                                                             
|Experience account due from reinsurer                                                                                      
|Other assets                                                                                                               
|                                                                                                                           
|Total assets                                                                                                               
|                                                                                                                           
|LIABILITIES                                                                                                                
|Policy reserves:                                                                                                           
|Accident and health                                                                                                        
|Life                                                                                                                       
|Claim reserves                                                                                                             
|Accounts payable and other liabilities                                                                                     
|Long-term debt, less discount of $1,729 and $1,625, respectively                                                           
|Preferred interest on early conversion                                                                                     
|Deferred income taxes                                                                                                      
|                                                                                                                           
|Total liabilities                                                                                                          
|                                                                                                                           
|Commitments and contingencies                                                                                              
|SHAREHOLDERS' EQUITY                                                                                                       
|Preferred stock, par value $1.00; 5,000 shares authorized, none outstanding                                                
|Common stock, par value $.10; 150,000 shares authorized;                                                                   
|36,453 and 25,645 shares issued, respectively                                                                              
|Additional paid-in capital                                                                                                 
|Accumulated other comprehensive income                                                                                     
|Retained earnings                                                                                                          
|                                                                                                                           
|                                                                                                                           
|Less 915 common shares held in treasury, at cost                                                                           
|                                                                                                                           
|Total shareholders' equity                                                                                                 
|                                                                                                                           
|Total liabilities and shareholders' equity                                                                                 
|                                                                                                                           

| | (1)
See Note 1 to consolidated financial statements
| | ---------------------------------------------------

| | (2)
 Cash and investments of $29,011 and $27,045, respectively, are restricted as to use (see
Note 6).
| | ------------------------------------------------------------------------------------------------------

See accompanying notes
to consolidated financial statements.



---

|PENN TREATY AMERICAN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
(amounts in thousands, except per share data)
|----------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|Premium revenue                                                                                                                                           
|Net investment income                                                                                                                                     
|Net realized capital 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                                                                                                                        
|Expense and risk charges on reinsurance                                                                                                                   
|Excise tax expense                                                                                                                                        
|Interest expense                                                                                                                                          
|                                                                                                                                                          
|                                                                                                                                                          
|                                                                                                                                                          
|Income  before federal income taxes                                                                                                                       
|Federal income tax provision                                                                                                                              
|                                                                                                                                                          
|Net income                                                                                                                                                
|                                                                                                                                                          
|Other comprehensive income:                                                                                                                               
|Unrealized holding gain arising during period                                                                                                             
|Income tax provision from unrealized holdings                                                                                                             
|Reclassification of gains included in net income                                                                                                          
|Income tax provision from reclassification adjustment                                                                                                     
|                                                                                                                                                          
|Comprehensive income                                                                                                                                      
|                                                                                                                                                          
|                                                                                                                                                          
|Basic earnings per share from net income                                                                                                                  
|Diluted earnings per share from net income                                                                                                                
|                                                                                                                                                          
|Weighted average number of shares outstanding                                                                                                             
|Weighted average number of shares and share equivalents                                                                                                   

(1) See Note 1 to consolidated
financial statements

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:                                                                                                   
|Amortization of intangible assets                                                                                         
|Amortization of gain on assumption of reinsurance                                                                         
|Amortization of discount on long-term debt                                                                                
|Amortization on bonds                                                                                                     
|Change in preferred interest on early conversion liability                                                                
|Depreciation expense                                                                                                      
|Net realized capital gains                                                                                                
|Notional experience account due from reinsurer                                                                            
|Investment credit on corporate owned life insurance                                                                       
|Equity issued for interest expense from long-term debt conversions                                                        
|Increase (decrease) due to change in:                                                                                     
|Receivables from agents                                                                                                   
|Receivable from reinsurers                                                                                                
|Policy acquisition costs, net                                                                                             
|Deferred income taxes                                                                                                     
|Claim reserves                                                                                                            
|Policy reserves                                                                                                           
|Accounts payable and other liabilities                                                                                    
|Accrued investment income                                                                                                 
|Other, net                                                                                                                
|                                                                                                                          
|Cash provided by operations                                                                                               
|                                                                                                                          
|Cash flow from investing activities:                                                                                      
|Proceeds from sales of bonds                                                                                              
|Proceeds from maturities of bonds                                                                                         
|Purchase of bonds                                                                                                         
|Change in policy loans                                                                                                    
|Death benefits received from corporate owned life insurance                                                               
|Deposits to notional experience account due from reinsurer                                                                
|Acquisition of property and equipment                                                                                     
|                                                                                                                          
|Cash used in investing                                                                                                    
|                                                                                                                          
|Cash flow from financing activities:                                                                                      
|Issuance of long-term debt                                                                                                
|                                                                                                                          
|Cash provided by financing                                                                                                
|                                                                                                                          
|Increase in cash and cash equivalents                                                                                     
|Cash balances:                                                                                                            
|Beginning of period                                                                                                       
|                                                                                                                          
|End of period                                                                                                             
|                                                                                                                          

(1) See Note 1 to consolidated
financial statements

See accompanying notes
to consolidated financial statements.



---

PENN TREATY AMERICAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004(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, 2003 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.  Restatement:

In March
2005, in conjunction with the preparation of the financial statements for the year ended
December 31, 2004, management discovered that certain policy riders were not properly
reserved for in prior years. The policy riders are options chosen by the policyholders and
the previously unreserved policy riders include inflation, restoration of benefit and
return of premium benefit. A significant majority of these policy riders were inflation
riders. The premiums associated with the policies were properly billed and any claims
incurred on these policies were properly paid. However, the policy riders were not
properly identified in the data utilized to calculate policy reserves. As a result the Company
has restated its previously issued financial statements for the
years ended December 31, 2003 and 2002 to reflect the inclusion of the policy riders. In
addition, the Company is restating its previously issued financial statements for the
quarters ended March 31, June 30, and September 30, 2004.

The
total cumulative impact of the restatement that affected shareholders equity as of
December 31, 2003 was a decrease in shareholders equity of $6,655, which includes a
decrease in beginning shareholders equity as of January 1, 2003 of $6,838. The
overall financial decrease in shareholders equity as a result of the restatement as
of December 31, 2002 and 2003 and March 31, 2003 and 2004 was as follows:

|                      | 
|--------------------- | 
|December 31, 2002 (1) | 
|December 31, 2003 (2) | 
|March 31, 2003 (2)    | 
|March 31, 2004 (2)    | 

| | (1)
The adjustment represents an opening retained earnings adjustment
on January 1, 2003.
| | -----------------------------------------------------------------------------------------

| | (2)
 The adjustment represents the retained earnings impact of the restatement to net income
in the respective period.
| | ----------------------------------------------------------------------------------------------------------------------

The
consolidated financial statements reflect the effects of the restatement on (i) net policy
acquisition costs amortized and unamortized deferred policy acquisition
costs, (ii) benefits to policyholders expense and policy reserves, (iii)
the Federal income tax benefit and deferred income taxes and (iv) basic
and diluted earnings per share. A summary of the effects of the restatement on reported
amounts as of March 31, 2004 and December 31, 2003 is presented below.



---

|                                              | Consolidated Balance Sheets
|--------------------------------------------- | ---------------------------
|
|
|Unamortized deferred policy acquisition costs |                            
|Policy reserves (accident and health)         |                            
|Deferred income tax liability                 |                            
|Total shareholders' equity                    |                            

A
summary of the effects of the restatement on reported amounts for the three months ended
March 31, 2004 and March 31, 2003 is presented below.

|                                           | Consolidated Statements of Income and Comprehensive Income for the Three Months Ended
|------------------------------------------ | -------------------------------------------------------------------------------------
|
|
|Benefits to policyholders                  |                                                                                      
|Net policy acquisition costs amortized     |                                                                                      
|Federal income tax provision               |                                                                                      
|Net income                                 |                                                                                      
|Basic earnings per share from net income   |                                                                                      
|Diluted earnings per share from net income |                                                                                      

The
restatement did not have any impact on total cash flows from operations, investing or
financing activities.

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 March 31,
|------------------------------------------- | ----------------------------
|
|Net income, as reported                     |                             
|Add:  Stock-based employee compensation     |                             
|income included in reported net income,     |                             
|net of related tax effects                  |                             
|Deduct:  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                         |                             

(1) See Note 1 to
consolidated financial statements



---

3.  Regulatory
Developments:

Pennsylvania
Corrective Action Plan

The
Companys primary insurance subsidiary, Penn Treaty Network America Insurance Company
(PTNA), which represented approximately 91% of the Companys direct
premium revenue during the three months ended March 31, 2004, is subject to a Corrective
Action Plan (the Plan), as approved by the Pennsylvania Insurance Department
(the Department). American Network Insurance Company (ANIC), which
is wholly owned by PTNA, is also subject to the provisions of the Plan.

The
Plan principally:

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

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

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

| | d) | requires
a $125,000 increase in                statutory reserves over a three-year period, of
which a $17,000 increase remains                to be made by the end of 2004.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

The
2001 Centre Agreement is subject to certain coverage limitations, including an aggregate
limit of liability that is a function of certain factors and that may be reduced in the
event that the premium rate increases that the reinsurance agreement may require are not
obtained. The Company is required to perform annual comparisons of its actual to expected
claims experience. If the Company has reason to believe, whether from this analysis or
other available information, that at least a 5% premium rate increase is necessary, the
Company is obligated to file and obtain such premium rate increases in order to comply
with the requirements of the agreement. If the Company does not file and obtain such
premium rate increases, the aggregate limit of liability would be reduced by 50% of the
premium amount that would have otherwise been received. The Company is currently in
compliance with the agreement.

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

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



---

New
Policy Sales

The
Company is licensed in all states and receives renewal premiums from policyholders, but is
currently restricted from issuing new policies in 10 states. The Company has agreed upon
terms for the recommencement of sales in California, subject to certain continuing
conditions and the approval of filed product and rate forms. California renewal premium
from policies issued prior to the cessation of sales in California accounted for
approximately 15% of the Companys direct premium revenue for the three months ended
March 31, 2004. The Company is approved for sales in Florida and Pennsylvania (subject to
the Corrective Action Plan and the Florida Consent Order), which accounted for
approximately 18% and 11%, respectively, of the Companys direct premium revenue for
the three months ended March 31, 2004. No other states sales accounted for more than
10% of the Companys direct premium revenue for the three months ended March 31,
2004.

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

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

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

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

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

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



---

The
notional experience account activity for the three months ended March 31, 2004 and 2003
was as follows:

|                              | 2004 | 2003
|----------------------------- | ---- | ----
|Beginning balance             |      |     
|Premiums, net of claims and   |      |     
|ceding allowance              |      |     
|Investment credit:            |      |     
|Investment income             |      |     
|Market gain                   |      |     
|Expense and risk charges      |      |     
|Broker/custodian/trustee fees |      |     
|                              |      |     
|Ending balance                |      |     
|                              |      |     

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

The
Companys current modeling and actuarial projections suggest that it is likely to be
able to commute the agreement, as planned, on December 31, 2007. In order to commute the
agreement, PTNAs and ANICs statutory surplus following commutation must be
sufficient to support the reacquired business in compliance with all statutory
requirements. Upon commutation, the Company will receive cash or other liquid assets
equaling the value of the notional experience account from the reinsurer. The Company
would also record the necessary reserves for the business in PTNAs and ANICs
statutory financial statements. Accordingly, the Companys ability to commute the
agreement is highly dependent upon the value of the notional experience account exceeding
the level of required statutory reserves to be established. As of March 31, 2004, the
statutory basis reserve liabilities of $981,189 exceeded the combination of the notional
experience account value and funds held due to the reinsurer of $888,209. Management
expects the value of the notional experience account to exceed the reserve liabilities at
December 31, 2007. In addition to the performance of the reinsured policies from now
through 2007, the notional experience account value is susceptible to market interest rate
changes. A market interest rate increase of 100 basis points could reduce the value of the
current notional experience account by approximately $84,000 and jeopardize the
Companys ability to commute as planned. As the intended commutation date approaches,
the sensitivity of the notional experience account to market interest rate movement will
decline as the duration of the benchmark indices becomes shorter. However, the amount of
assets susceptible to such interest sensitivity will continue to grow as additional net
cash flows are credited to the notional experience account balance prior to commutation.

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



---

5.  Contingencies:

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

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

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

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



---

PTNA
is a party to a reinsurance agreement to cede the risk of certain home health care claims
that extend beyond 36 months. The reinsurance recoverable related to this treaty was
$10,850 and $10,614 at March 31, 2004 and December 31, 2003, respectively. The reinsurer
has notified PTNA that it believes that the Company is in breach of its current agreement
as a result of entering into the 2001 Centre Agreement without the prior written approval
of the reinsurer. PTNA has contested this assertion of breach based upon its verbal and
written notification to the reinsurer prior to entering into the 2001 Centre
Agreement.   PTNA further believes that the 2001 Centre Agreement substantially
improved PTNAs financial strength and further protected the reinsurer. The ultimate
resolution of this dispute cannot be determined at this time.

6.  Investments:

Management
has categorized all of its investment securities as available for sale because they may be
sold in response to changes in interest rates, prepayments and similar factors.
Investments in this category are reported at their current market value, with net
unrealized gains and losses, net of the applicable deferred income tax effect, added to or
deducted from the Companys total shareholders equity on the balance sheet. As
of March 31, 2004, shareholders equity was increased by $935 due to unrealized gains
of $1,438 in the investment portfolio. As of December 31, 2003, shareholders equity
was increased by $598 due to unrealized gains of $920 in the investment portfolio. The
amortized cost and estimated market value of the Companys available for sale
investment portfolio as of March 31, 2004 and December 31, 2003 were as follows:

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

Pursuant
to certain statutory licensing requirements, as of March 31, 2004 and December 31, 2003
the Company had on deposit bonds with an estimated market value aggregating $12,659 and
$12,585 in insurance department special deposit accounts. The Company is not permitted to
remove the bonds from these accounts without approval of the regulatory authority.

The
Company maintains assets in a trust account under a reinsurance agreement with an
unaffiliated insurer. The Company is required to hold assets equal to 102% of the reserves
for the policies assumed under this agreement. At March 31, 2004 and December 31, 2003,
the market value of the assets in the trust was $16,352 and $14,460, respectively.



---

7.  Reconciliation of
Earnings Per Share:

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

|                                                           | Three Months Ended March 31,
|---------------------------------------------------------- | ----------------------------
|
|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 equivalents due to dilutive effect of stock   |                             
|options/warrants                                           |                             
|Shares converted from convertible debt                     |                             
|                                                           |                             
|Total outstanding shares for diluted earnings per share    |                             
|computation                                                |                             
|                                                           |                             
|Diluted earnings per share from net income                 |                             
|                                                           |                             

| | (1) | See
Note 1 to consolidated financial statements
| | --- | -----------------------------------------------

Shares of common stock 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 45,085 and 30,765 at March 31, 2004 and March 31, 2003, respectively. These
securities include shares issuable upon exercise of options and warrants.



---

8.  Long-Term Debt:

Principal
repayment of the Companys long-term debt outstanding at March 31, 2004 is as
follows:

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

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

During
the three months ended March 31, 2004, $17,180 of the Companys 2008 Notes were
converted into 9,817 shares of the Companys common stock and 992 shares were issued
as payment for preferred interest on early conversion. In connection with these
conversions, the Company recognized additional interest expense of $1,805 for the three
months ended March 31, 2004. There were no conversions in the three months ended March 31,
2003.

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

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

As
of March 31, 2004 and December 31, 2003, the fair value of the embedded derivative was
$4,324 and $3,018, respectively. In determining the fair value of the embedded derivative,
the Company makes certain assumptions, including with respect to the future volatility and
liquidity of the Companys common stock, as well as recent trends in the number of
holders converting.



---

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


(amounts in thousands,
except per share data)

Restatement

In March
2005, in conjunction with the preparation of the financial statements for the year ended
December 31, 2004, we discovered that certain policy riders were not reserved for in
prior years. The policy riders are options chosen by the policyholders and the previously
unidentified policy riders include inflation, restoration of benefit and return of premium
benefit. A significant majority of these policy riders were inflation riders. The premiums
associated with the policies were properly billed and any claims incurred on these
policies were properly paid. However, the policy riders were not identified in the data
utilized to calculate policy reserves. As a result we have restated
our previously issued financial statements for the years ended December 31, 2003 and 2002
to reflect the inclusion of the policy riders. In addition, we are restating our
previously issued financial statements for the quarters ended March 31, June 30, and
September 30, 2004.

The
total cumulative impact of the restatement that affected shareholders equity as of
December 31, 2003 was a decrease in shareholders equity of $6,655, which includes a
decrease in beginning shareholders equity as of January 1, 2003 of $6,838. The
overall financial decrease in shareholders equity as a result of the restatement as
of December 31, 2002 and 2003 and March 31, 2003 and 2004 was as follows:

|                      | 
|--------------------- | 
|December 31, 2002 (1) | 
|December 31, 2003 (2) | 
|March 31, 2003 (2)    | 
|March 31, 2004 (2)    | 

| | (1)
The adjustment represents an opening retained earnings adjustment
on January 1, 2003.
| | -----------------------------------------------------------------------------------------

| | (2)
 The adjustment represents the retained earning impact of the restatement to net income
in the respective period.
| | ---------------------------------------------------------------------------------------------------------------------

The
consolidated financial statements reflect the effects of the restatement on (i) net policy
acquisition costs amortized and unamortized deferred policy acquisition
costs, (ii) benefits to policyholders expense and policy reserves, (iii)
the Federal income tax benefit and deferred income taxes and (iv) basic
and diluted earnings per share. A summary of the effects of the restatement on reported
amounts as of March 31, 2004 and December 31, 2003 is presented below.

|                                              | Consolidated Balance Sheets
|--------------------------------------------- | ---------------------------
|
|
|Unamortized deferred policy acquisition costs |                            
|Policy reserves (accident and health)         |                            
|Deferred income tax liability                 |                            
|Total shareholders' equity                    |                            



---

A
summary of the effects of the restatement on reported amounts for the three months ended
March 31, 2004 and March 31, 2003 is presented below.

|                                           | Consolidated Statements of Income and Comprehensive Income for the Three Months Ended
|------------------------------------------ | -------------------------------------------------------------------------------------
|
|
|Benefits to policyholders                  |                                                                                      
|Net policy acquisition costs amortized     |                                                                                      
|Federal income tax provision               |                                                                                      
|Net income                                 |                                                                                      
|Basic earnings per share from net income   |                                                                                      
|Diluted earnings per share from net income |                                                                                      

The
restatement did not have any impact on total cash flows from operations, investing or
financing activities. We have restated all pertinent historical information in
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 and Medicare supplement.

Our
insurance subsidiaries are subject to the insurance laws and regulations of the states in
which they are licensed to write insurance. These laws and regulations govern matters such
as payment of dividends, settlement of claims and loss ratios. State regulatory
authorities must approve premiums charged for insurance products. In addition, our
insurance subsidiaries are required to establish and maintain reserves with respect to
reported and incurred but not reported claims, as well as estimated future benefits
payable under our insurance policies. These reserves must, at a minimum, comply with
mandated standards. Our reserves are certified annually by our consulting actuary as to
standards required by the insurance departments for our domiciliary states and for the
other states in which we conduct business. We believe we maintained adequate reserves as
mandated by each state in which we are currently writing business at March 31, 2004.

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

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



---

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

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

Our
current modeling and actuarial projections suggest that we are likely to be able to
commute the agreement, as planned, on December 31, 2007. In order to commute the
agreement, our statutory capital following commutation must be sufficient to support the
reacquired business in compliance with all statutory requirements. Upon commutation, PTNA
and ANIC would receive cash or other liquid assets equaling the market value of our
notional experience account from the reinsurer. We would also record the necessary
reserves for the business in PTNAs and ANICs statutory financial statements.
Our ability to commute the agreement is highly dependent upon the market value of the
notional experience account exceeding the level of required reserves to be established. As
of March 31, 2004, the statutory basis reserve liabilities of $981,189 exceeded the
combination of the notional experience account value and funds held due to the reinsurer
of $888,209. We expect the value of the notional experience account to exceed the reserve
liabilities at December 31, 2007. In addition to the performance of the reinsured policies
from now until 2007, the notional experience account value is susceptible to market
interest rate changes. A market interest rate increase of 100 basis points could reduce
the market value of the current notional experience account by approximately $84,000 and
jeopardize our ability to commute as planned. As we approach the intended commutation
date, the sensitivity of our notional experience account to market interest rate movement
will decline as the duration of the benchmark indices becomes shorter, however the amount
of assets susceptible to such interest sensitivity will continue to grow as additional net
cash flows are added to the notional experience account balance prior to commutation. We
intend to give notice to the reinsurer of our intention to commute on December 31, 2007 at
such time as we are highly confident of our ability to support the reacquired policies.
The reinsurer has agreed to invest the underlying assets of the notional experience
account in a manner that we request in order to minimize short term volatility at that
time.



---

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

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

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

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

| | c) | requires
a $125,000 increase in statutory reserves over a three-year period, of
               which a $17,000 increase remains to be made by the end of 2004.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

Upon
the Departments approval of the Plan in February 2002, we recommenced new policy
sales in 23 states, including Pennsylvania. We have now recommenced new policy sales in 17
additional states. These 40 states represented approximately 89% of our direct premium
revenue in the three months ended March 31, 2004. We are actively working with the
remaining states to recommence new policy sales in all jurisdictions.

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 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. In addition, the assumptions underlying
DAC and our policy benefit reserves are periodically reviewed and updated to reflect
current assumptions, including planned premium rate increases. In the event planned
premium rate increases are not achieved, we could recognize an impairment of our DAC in
the future. Whenever we determine that our DAC is not fully recoverable, we impair the
carrying value of our DAC through an expense to our Consolidated Statements of Income and
Comprehensive Income. DAC is fully recoverable at March 31, 2004.



---

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 and notional experience account. Our investment portfolio, excluding our
notional experience account, consists primarily of investment grade fixed income
securities. Income generated from this portfolio is largely dependent upon prevailing
levels of interest rates. Due to the duration of our investments (approximately 3.4
years), investment income does not immediately reflect changes in market interest rates.

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

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

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

As
a result, our results of operations are subject to significant volatility. A market
interest rate increase of 100 basis points could reduce the market value of the current
notional experience account by approximately $84,000 and jeopardize our ability to commute
as planned. As we approach the intended commutation date, the sensitivity of our notional
experience account to market interest rate movement will decline as the duration of the
benchmark indices becomes shorter, however the amount of assets susceptible to such
interest sensitivity will continue to grow as additional net cash flows are added to the
notional experience account balance prior to commutation. We intend to give notice to the
reinsurer of our intention to commute on December 31, 2007 at such time as we are highly
confident of our ability to support the reacquired policies. The reinsurer has agreed to
fix the market value of the notional experience account at that time, and to then invest
the assets in a manner that we request in order to minimize short term volatility. The
benchmark indices are comprised of U.S. Treasury strips, agencies and investment grade
corporate bonds, with weightings of approximately 25%, 15% and 60%, respectively, and have
a duration of approximately 11 years.



---

Lapsation
and persistency. Both lapsation and persistency 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.

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

Economic
cycles can influence a policyholders ability to continue the payment of insurance
premiums when due. We believe that publicity regarding Federal and state tax legislation
allowing medical deductions for certain long-term care insurance premiums has raised
public awareness of the escalating costs of long-term care and the value provided to the
consumer 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 March
31, 2004 and 2003

Premiums.
        Total
premium revenue earned in the three month period ended March 31, 2004 (the
          2004 quarter), including long-term care, disability, life and
          Medicare supplement, decreased 1.5% to $82,288, compared to $83,578 in the same
          period in 2003 (the 2003 quarter).

Total
first year premium revenue in the 2004 quarter increased 75.2% to $2,702, compared to
$1,542 in the 2003 quarter. First year long-term care premium revenue in the 2004 quarter
increased 84.3% to $2,455, compared to $1,332 in the 2003 quarter. We anticipate that
first year premium revenue will continue to increase as independent agents who sold our
policies prior to the cessation of sales are re-engaged and independent agents who had not
previously sold our policies are recruited. We also anticipate that we will recommence
sales in additional states in which we are currently not writing new business. In
addition, we are preparing to file a new Medicare supplement policy in certain states,
which we anticipate will be available for sale in the third quarter of 2004.

Total
renewal premium revenue in the 2004 quarter decreased 3.0% to $79,587 compared to $82,036
in the 2003 quarter. Renewal long-term care premium revenue in the 2004 quarter decreased
3.1% to $76,441, compared to $78,907 in the 2003 quarter. The decrease in renewal premium
revenue is due to the lapsation of existing policies and a reduced level of new premium
revenue compared to periods prior to the cessation of sales in 200l. 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 84.2% for the 2004 and 2003 quarters, respectively.



---

Net
investment income. Net investment income earned for the 2004 quarter increased 6.2% to
$10,987, from $10,347 for the 2003 quarter.

Our
average yield on invested assets at cost, including the notional experience account and
cash equivalents, was 5.02% and 5.22% in the 2004 and 2003 quarters, respectively. The
investment income component of our notional experience account investment credit generated
$10,911 and $9,882 in the 2004 and 2003 quarters, respectively. The yield on our notional
experience account was 5.13% and 5.68% in the 2004 and 2003 quarters, respectively. The
decrease in our average yield is due to a decline in market interest rates which has the
greatest impact on our notional experience account. The notional experience account yields
a fixed return based upon the yield to maturity of the underlying benchmark indices, which
are comprised of U.S. Treasury strips, agencies and investment grade corporate bonds, with
weightings of approximately 25%, 15% and 60%, respectively, and has a duration of
approximately 11 years.

Market
gain (loss) on notional experience account. We recorded a market gain on our notional
experience account balance of $35,648 and $4,302 in the 2004 and 2003 quarters,
respectively.

During
both the 2004 and 2003 quarters, interest rates decreased, leading to a market gain on the
notional experience account. The yield on the notional experience account was 5.62% in the
fourth quarter of 2003 compared to 5.13% in the first quarter of 2004 and was 5.93% in the
fourth quarter of 2002 compared to 5.68% in the first quarter of 2003. Subsequent to March
31, 2004, there has been an increase in market rates, which, if sustained, will generate a
market loss on the notional experience account.

Change
in preferred interest on early conversion. The fair value of the embedded derivative
was $4,324 and $2,099 as of March 31, 2004 and 2003, respectively. We recorded $818 and
$61 in the 2004 and 2003 quarters, respectively, to reflect the change in value of the
preferred interest on early conversion. We believe that the value of the embedded
derivative is significantly affected by the ability of the investor to liquidate their
shares in the market. We further believe that the number of shares of our common stock
outstanding and the average daily trading volume of our common stock provide an indication
of the ability of the market to bear additional sales of stock without a material
degradation of the current market value of those shares. Throughout 2003 and the first
quarter of 2004, the liquidity of our common stock rose significantly, as did the average
daily trading volume, which indicated to us that the market could absorb additional shares
without significant degradation of the market price. As a result, we increased our
estimates of the value of the embedded derivative based on an assumption that conversions
were more likely to occur without stock price deflation. If we assumed that all holders
converted on March 31, 2004, without giving any consideration to the relationship of the
current share price to the conversion price or to the impact of this level of conversions
on the stock price, the value of the embedded derivative would be $7,814. If actual
experience deviates from current assumptions, our financial results may be significantly
impacted in future periods.

Other
income. We recorded $1,621 in other income during the 2004 quarter, down from $2,263
in the 2003 quarter. The decrease is attributable primarily to a decrease of approximately
$375 in the income generated from our ownership of corporate owned life insurance
policies, which was caused by a decrease in market interest rates. In addition, net
commission income earned by one of our agency subsidiaries was $270 less in the 2004
quarter than in the 2003 quarter due to reduced production levels.

Benefits
to policyholders. (Restated to reflect the impact of previously unreserved policy
riders.) Total benefits to policyholders in the 2004 quarter decreased 7.6% to $59,386,
compared to $64,283 in the 2003 quarter. Our loss ratio, or policyholder benefits to
premium revenue, was 72.2% in the 2004 quarter, compared to 76.9% in the 2003 quarter. The
decrease in the loss ratio was due to the implementation of premium rate increases,
improved claims adjudication procedures and improved underwriting protocols previously
implemented.



---

As
discussed in Overview above, we establish claim reserves based upon
current and historical experience of our policyholder benefits, including an expectation
of claims incidence and duration, as well as the establishment of a reserve for claims
that have been incurred but are not yet reported. We continuously monitor our experience
to determine the best estimate of reserves to be held for future payments of these claims.
As a result, we periodically refine our process to incorporate the most recent known
information in establishing these reserves.

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 $3,800 and $4,500 in higher incurred claims in the 2004 and 2003
quarters, respectively, and as a result established lower claim reserves during both
quarters to reflect this seasonal variation.

Commissions.
          Commissions to agents decreased 2.6%
to $10,421 in the 2004 quarter, compared to           $10,704 in the 2003 quarter.

First
year commissions on accident and health business in the 2004 quarter increased 96.8% to
$1,535, compared to $780 in the 2003 quarter, due to the increase in first year accident
and health premium revenue. The ratio of first year accident and health commissions to
first year accident and health premium revenue was 56.8% in the 2004 quarter and 50.6% in
the 2003 quarter. The first year commission ratio for both the 2004 and 2003 quarters is
lower than the first year commission ratio prior to the cessation of sales in 2001, due to
the increased sale of our Secured Risk, Medicare Supplement and franchise group policies
as a percentage of total new sales. All of these policies pay a lower commission as a
percentage of premium revenue to agents than our individual long-term care policies. We
believe that sales of these policies as a percentage of new sales are likely to remain at
this level as we recommence sales in many states. We believe that the sale of long-term
care policies has declined as a percentage of sales as a result of our lower ratings with
A.M. Best and Standard and Poors rating services and continued consumer and agent
concerns regarding our financial strength.

Renewal
commissions on accident and health business in the 2004 quarter decreased 9.8% to $9,443,
compared to $10,469 in the 2003 quarter. The ratio of renewal accident and health
commissions to renewal accident and health premiums was 12.0% in the 2004 quarter and
12.9% in the 2003 quarter. We have implemented premium rate increases on a majority of
policies written prior to December 31, 2001. We do not pay commissions on the additional
premium collected as a result of rate increases, which reduces the ratio of renewal
commissions to renewal premium revenue. We anticipate that this ratio will continue to
decline until these premium rate increases are fully implemented, which we anticipate will
occur prior to the end of 2004.

Net
policy acquisition costs amortized. (Restated to reflect the impact of previously
unreserved policy riders.) The net policy acquisition costs amortized in the 2004 quarter
increased to $3,955, compared to $2,698 in the 2003 quarter.

Deferred
costs are typically all costs that are directly related to, and vary with, the acquisition
of new premiums. The deferred costs include the variable portion of commissions, which is
defined as the first year commissions less ultimate renewal commissions, and variable
general and administrative expenses related to policy underwriting. 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 historically had been offset by the deferral of costs associated with new
premium generation. However, lower new premium revenue throughout the 2004 and 2003
quarters, as compared to premium revenue prior to the cessation of sales in 2001, produced
significantly less expense deferral to offset amortized costs.

General
and administrative expenses. General and administrative expenses in the 2004 quarter
increased 5.8% to $13,477, compared to $12,740 in the 2003 quarter. The ratio of total
general and administrative expenses to premium revenues was 16.4% in the 2004 quarter,
compared to 15.2% in the 2003 quarter.

During
the 2004 quarter, increases in variable expenses related to the increased level of new
policy sales, along with severance payments for the elimination of certain positions and
an increase in legal fees related to litigation were substantially offset by reduced
expenses for accounting fees, actuarial fees and consulting expenses.

Expense
and risk charges on reinsurance and excise tax expense. Our 2001 Centre Agreement
provides the reinsurer with annual expense and risk charges, which are credited against
our notional experience account in the event of future commutation of the agreement. The
annual charge consists of a fixed cost and a variable component based upon reserve and
capital levels needed to support the reinsured business. In the 2004 and 2003 quarters, we
incurred charges of $2,807 and $2,768, respectively, for this item. In addition, we are
subject to an excise tax for premium payments made to a foreign reinsurer equal to one
percent of the net premium revenue ceded to the foreign reinsurer. We recorded $783 and
$789 for excise tax expenses in the 2004 and 2003 quarters, respectively.

Interest
expense. Interest expense in the 2004 quarter increased 130.5% to $3,817, compared to
$1,656 in the 2003 quarter. The interest expense in both the 2004 and 2003 quarters is
primarily related to our convertible subordinated notes, which pay interest at an annual
percentage rate of 6.25%. We incur additional interest expense related to the conversion
of our convertible subordinated notes.  Holders of our convertible subordinated
notes are entitled to convert their notes into shares of our common stock before October
2005 and receive a discounted amount of interest that they would have otherwise received
through October 2005 had they not converted the notes. We incurred $1,805 of interest
expense from the conversion of $17,180 in convertible subordinated notes during the 2004
quarter. There were no conversions during the 2003 quarter.

Federal
income tax provision. (Restated to reflect the impact of previously unreserved policy
riders.) Our provision for Federal income taxes was $12,001 and $1,658, for the 2004 and
2003 quarters, respectively. The effective tax rate of 34.0% in the 2004 and 2003 quarters
is below the normal Federal corporate income tax rate as a result of anticipated credits
from our investments in corporate owned life insurance.



---

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 sales and maturities of investments. We have obtained, and may in the future
obtain, cash through public and private offerings of our debt instruments, common stock,
the exercise of stock options and warrants and other capital markets activities. Our
primary uses of cash are policy acquisition costs (principally commissions), claim
payments to policyholders, investment purchases, deposits to our notional experience
account, debt service and general and administrative expenses.

In
the 2004 quarter, our cash flows were attributable to cash provided by operations, cash
used in investing and cash provided by financing. Our cash increased $8,971 in the 2004
quarter primarily due to $16,000 in additional funds generated from the issuance of
convertible subordinated debt. This was supplemented by $11,159 from operations. The major
source of cash from operations was premium revenue and investment income received. Our
major uses of cash during the 2003 quarter were payments made to our reinsurer of $21,277
and the purchase of $17,976 in bonds.

In
the 2003 quarter, our cash flows were attributable to cash provided by operations, cash
used in investing and cash provided by financing. Our cash increased $6,364 in the 2003
quarter primarily due to $32,397 in additional funds generated from the issuance of
convertible subordinated debt. This was supplemented by $14,577 from operations. The major
source of cash from operations was premium revenue and investment income received. Our
major uses of cash during the 2003 quarter were payments made to our reinsurer of $14,324
and the purchase of $29,094 in bonds.

Parent company operations

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

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

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

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

| | 4) | During
the first quarter of 2004, holders of $17,180 of our 2008 Notes elected                to
convert their 2008 Notes for 10,809 shares of our common stock, which
               includes 992 shares issued for interest paid for conversion prior to
October 15,                2005.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

At
March 31, 2004, our total principal repayment and lease obligations through 2008 were as
follows:

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

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 subsidiary operations
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 dividend capabilities of our agency subsidiaries to meet
current liquidity needs. We believe that our current cash on hand and the dividend
capabilities of our agency subsidiaries will be sufficient to service our debt obligations
through at least April 15, 2005 and potentially through October 15, 2005, depending on our
parent company expenses and our insurance subsidiaries surplus needs. If we are unable to
generate sufficient funds through operations or raise additional capital to meet our debt
service obligations on or after October 15, 2005, or if our assumptions about our ability
to service our debt prior to 2005 are not correct, we may default on our debt obligations.
We will need to raise additional capital to satisfy any parent company liquidity needs,
including debt service payments, beyond October 2005, particularly if the price of our
common stock on or after October 15, 2005 is insufficient to cause mandatory conversion of
our 2008 Notes.

Our
anticipated cash needs for 2004 are as follows:

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

Our anticipated
sources to meet our 2004 obligations are:

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

| | Subsidiary
operations
| | ---------------------

The
majority of our insurance subsidiaries cash flow results from our existing long-term
care policies, which have been ceded to the reinsurer under the 2001 Centre Agreement. Our
subsidiaries ability to meet additional liquidity needs and cover fixed expenses in
the future is highly dependent upon our ability to issue new policies and to control
expense growth. Our future growth and new policy issuance is dependent upon our ability to
continue to expand our historical markets, retain and expand our network of agents and
effectively market our products and fund our marketing and expansion while maintaining
minimum statutory levels of capital and surplus required to support such growth.



---

Under
the insurance laws of Pennsylvania and New York, where our insurance subsidiaries are
domiciled, insurance companies can pay ordinary dividends only out of earned surplus. In
addition, under Pennsylvania and New York law, insurance subsidiaries must give the
Department and the New York Insurance Department at least 30 days advance notice of
any proposed extraordinary dividend and cannot pay such a dividend if the
Department 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 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 three years and
are unlikely in the foreseeable future to be able to make dividend payments due to
insufficient statutory surplus and anticipated earnings. We do not anticipate that
American Independent Network Insurance Company of New York will make a dividend payment to
the parent company in 2004.

Forward Looking Statements

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



---

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

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

Our
financial instruments are held for purposes other than trading. Our portfolio does not
contain any significant concentrations in single issuers (other than U.S. treasury and
agency obligations), industry segments or geographic regions. However, our notional
experience account balance, which represents approximately 92% of our investable assets at
March 31, 2004, is with one reinsurer. Although sufficient assets to support our statutory
reserve liabilities and our notional experience account are secured by trust accounts and
irrevocable letters of credit with major United States financial institutions, the
accumulated profits of our reinsured business are susceptible to significant credit risk
of the reinsurer.

We
urge caution in evaluating overall market risk from the information below. Actual results
could differ materially because the information was developed using estimates and
assumptions as described below, and because insurance liabilities and reinsurance
receivables are excluded in the hypothetical effects (insurance liabilities represent 86%
of total liabilities). Long-term debt, although not carried at fair value, is included in
the hypothetical effect calculation.

The
hypothetical effects of changes in market rates or prices on the fair values of our
financial instruments as of March 31, 2004, excluding insurance liabilities and
reinsurance receivables on unpaid losses because such insurance related assets and
liabilities are not carried at fair value, would have been as follows:

If
interest rates had increased by 100 basis points at March 31, 2004, there would have been
a decrease of approximately $90,000 in the net fair value of our investment portfolio less
our long-term debt. A 200 basis point increase in market rates at March 31, 2004 would
have resulted in a decrease of approximately $171,000 in the net fair value. If interest
rates had decreased by 100 and 200 basis points, there would have been a net increase of
approximately $101,000 and $213,000, respectively, in the net fair value of our total
investments and debt.

We
hold certain mortgage and asset backed securities as part of our investment portfolio. The
fair value of these instruments may react in a convex or non-linear fashion when subjected
to interest rate increases or decreases. The anticipated cash flows of these instruments
may differ from expectations in changing interest rate environments, resulting in duration
drift or a varying nature of predicted time-weighted present values of cash flows. The
result of unpredicted cash flows from these investments could cause the above hypothetical
estimates to change. However, we believe that the minimal amount we have invested in these
instruments and their broadly defined payment parameters sufficiently outweigh the cost of
computer models necessary to accurately predict the possible impact on our investment
income of hypothetical effects of changes in market rates or prices on the fair values of
financial instruments as of March 31, 2004.



---

Item 4. Controls and
Procedures

The
Company carried out an evaluation, under the supervision and with the participation of
the Companys management, including the Companys Chief Executive Officer and the Companys
Chief Financial Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of March 31,
2004. Based upon that evaluation, the Chief Executive Officer and the Chief Financial
Officer have concluded that the Companys disclosure controls and procedures were not
effective as of March 31, 2004 because in March 2005, in conjunction with the preparation
of the financial statements for the year ended December 31, 2004, the Company discovered that
certain policy riders were not reserved for in prior years.  This conclusion with respect
to the effectiveness of the Companys disclosure controls and procedures as of March 31,
2004 is different from the conclusion disclosed in the Companys previously filed
Quarterly Report on Form 10-Q.  The premiums associated with the policies were properly
billed and any claims incurred on these policies were properly paid.  However, the policy
riders were not properly identified in the data utilized to calculate policy reserves.
 Therefore, the Company has determined that it did not properly account for benefits
expense and policy reserves.  As a result, the Company restated its previously issued
financial statements for the years ended December 31, 2003 and 2002 and is restating its previously
issued financial statements for the quarters ended March 31, 2004, June 30, 2004 and
September 30, 2004 to reflect the inclusion of the policy riders.  In determining whether
this control deficiency constitutes a material weakness, the Company referred to PCAOB
Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed
in Conjunction with an Audit of Financial Statements, noting that a material weakness is
defined as a significant deficiency that, by itself, or in a combination with other
significant deficiencies, results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented or
detected.  The Company has concluded that the omission of the policy riders from benefits
expense and policy reserves is a material weakness.  In light of the material weakness
described above, the Company performed additional procedures to ensure that its
consolidated financial statements were prepared in accordance with generally accepted
accounting principles.  Accordingly, management believes that the financial statements
included in this report fairly present in all material respects the Companys financial
condition, results of operations and cash flows for the periods presented.

There
were no significant changes in the Companys internal controls that occurred during the
quarter ended March 31, 2004. However, during the first fiscal quarter of 2005, the
Company implemented a control related to the control deficiency noted above.  A system
report is run that identifies all policies issued with an inflation rider.  This report
is cross-referenced to the data utilized to calculate policy reserves to ensure that the
policy rider is properly identified.



---

# 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 these suits to which
we are party will have a material adverse effect on our financial condition or results of
operations. However, the outcome of any single event could have a material impact upon the
quarterly or annual financial results of the period in which it occurs.

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

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

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



---

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

On
February 2 and February 19, 2004, the Company sold $14,000,000 and $2,000,000,
respectively, in aggregate principal amount of 6 1/4% Convertible Subordinated Notes due
2008 (the 2008 Notes) to accredited investors in two separate private
placements exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended, and pursuant to Rule 506 of Regulation D promulgated there under. The 2008 Notes
have a conversion price of $1.75 per share and are convertible at any time after May 31,
2004. The 2008 Notes are also mandatorily convertible if, at any time after October 2005,
the 15-day average closing price of the Companys common stock exceeds 110% of the
conversion price. The 2008 Notes also provide that, upon conversion prior to October 15,
2005, the Company will pay the holder additional interest equal to the amount that would
otherwise have been paid from the date of conversion until October 15, 2005. The interest
amount, which is discounted from October 15, 2005 to the date of early conversion, is
payable at the Companys discretion in cash or in shares of common stock. If the
interest is paid in common stock, the number of shares issued will be determined based on
a per share value equal to 90% of the current market prices of the Companys common
stock. Commissions paid to brokers in connection with the private placements totaled
$560,000.

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

A
Special Meeting of Shareholders was held on February 12, 2004. At this meeting, the
following matters were voted upon by the shareholders, receiving the number of
affirmative, negative and withheld votes, as well as abstentions and broker non-votes, set
forth below for each matter.

| | 1. | To
ratify and approve issuance of $16,000,000 of 6-1/4% Convertible Subordinated
          Notes due 2008 (the Notes) and the related shares of Common Stock.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|           |         |             |                 
|---------- | ------- | ----------- | ----------------
|For        | Against | Abstentions | Broker Non-Votes
|14,573,956 | 722,753 | 245,890     | 0               

| | 2. | To
transact other business that properly comes before the Special Meeting and           any
and all adjournments and postponements.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------

|           |           |             |                 
|---------- | --------- | ----------- | ----------------
|For        | Against   | Abstentions | Broker Non-Votes
|12,663,220 | 2,560,449 | 318,930     | 0               



---

Item 6.   Exhibits

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

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

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

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

|32.2 |  | Section
1350 Certification of Senior Vice President and 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:  June 15, 2005 |  | /s/ William W. Hunt                                  
|                     |  | William W. Hunt
President and
Chief Executive Officer

|                     |  |                                                                   
|-------------------- |  | ------------------------------------------------------------------
|Date:  June 15, 2005 |  | /s/ Mark D. Cloutier                                              
|                     |  | Mark D. Cloutier
Senior Vice President and
Chief Financial Officer



---

# Exhibit Index

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

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

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

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

|32.2 |  | Section
1350 Certification of Senior Vice President and Chief Financial Officer.
|---- |  | --------------------------------------------------------------------------------