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# SECURITIES AND
EXCHANGE COMMISSION

# Washington, D.C. 20549

# FORM 10-Q

( X )     QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

# For the quarterly
period ended June 30, 2003

OR

(  ) TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition
period from __________ to __________

Commission File Number
0-50087

# VETERINARY PET
SERVICES, INC.

|                                | 
|------------------------------- | 
|California                      | 
|(State or other jurisdiction of | 
|incorporation or organization)  | 

|                                        | 
|--------------------------------------- | 
|3060 Saturn Street, Brea, California    | 
|(Address of Principal Executive Office) | 

Registrants
telephone number, including area code (714) 989-0555

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|

As
of July 31, 2003, the registrant had 5,627,200 shares outstanding of its Common Stock.

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# VETERINARY PET
SERVICES, INC. AND SUBSIDIARIES

# TABLE OF CONTENTS

|                                                                                                                                                         | Page
|-------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|Part I-- FINANCIAL INFORMATION                                                                                                                           |     
|Item 1. Consolidated Financial Statements:                                                                                                              
|Consolidated Balance Sheets as of June 30, 2003 (unaudited)
      and December 31, 2002                                                                  | 1   
|Consolidated Statements of Income (unaudited) for the     six months ended June 30, 2003 and 2002 and     
the three months ended June 30, 2003 and 2002 | 2   
|Consolidated Statements of Cash Flows (unaudited)     for the six months ended June 20, 2003 and 2002                                                    | 3   
|Notes to Unaudited Consolidated Financial Statements                                                                                                     | 4   
|Item 2. Management's Discussion and Analysis of      Financial Condition and Results of Operations                                                       | 6   
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                                                       | 11  
|Item 4. Controls and Procedures                                                                                                                          | 11  
|Part II-- OTHER INFORMATION                                                                                                                              | 11  
|SIGNATURES                                                                                                                                               | 14  

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# VETERINARY PET
SERVICES, INC. AND SUBSIDIARIES

# PART I. FINANCIAL
INFORMATION

# ITEM 1. CONSOLIDATED
FINANCIAL STATEMENTS

# CONSOLIDATED BALANCE
SHEETS

# (AMOUNTS IN THOUSANDS
 EXCEPT SHARE AMOUNTS)

|                                                                          | Jun 30,2003 | Dec 31, 2002
|------------------------------------------------------------------------- | ----------- | ------------
|
|ASSETS                                                                    |             |             
|Investments                                                               |             |             
|Available for sale:                                                       |             |             
|Fixed maturities, at market value (amortized cost:                        |             |             
|June 30, 2003 $19,384; December 31, 2002 $13,761)                         |             |             
|Equity securities, at market value (cost: June 30, 2003 $207;             |             |             
|December 31, 2002 $207)                                                   |             |             
|                                                                          |             |             
|TOTAL INVESTMENTS                                                         |             |             
|Cash and cash equivalents                                                 |             |             
|Premiums receivable                                                       |             |             
|Deferred acquisition costs                                                |             |             
|Accrued investment income                                                 |             |             
|Furniture and equipment, net                                              |             |             
|Deferred tax asset, net                                                   |             |             
|Prepaid expenses and other assets                                         |             |             
|                                                                          |             |             
|TOTAL ASSETS                                                              |             |             
|                                                                          |             |             
|LIABILITIES AND SHAREHOLDERS EQUITY                                      |             |             
|Unpaid losses and loss adjustment expenses                                |             |             
|Unearned premiums                                                         |             |             
|Payable to affiliated insurance company                                   |             |             
|Accounts payable and accrued expenses                                     |             |             
|Income taxes payable                                                      |             |             
|Deferred revenue                                                          |             |             
|                                                                          |             |             
|TOTAL LIABILITIES                                                         |             |             
|                                                                          |             |             
|Shareholders equity:                                                     |             |             
|Convertible preferred stock, Series A, no par value.  Authorized 500,000  |             |             
|shares; issued and outstanding 403,226 shares at December 31, 2002        |             |             
|Convertible preferred stock, Series B, no par value.  Authorized 500,000  |             |             
|shares; issued and outstanding 250,596 shares at December 31, 2002        |             |             
|Common stock, no par value. Authorized 50,000,000 shares; issued and      |             |             
|outstanding 5,626,700 at June 30, 2003 and 1,699,075 at December 31, 2002 |             |             
|Accumulated other comprehensive income                                    |             |             
|Accumulated deficit                                                       |             |             
|                                                                          |             |             
|TOTAL SHAREHOLDERS EQUITY                                                |             |             
|Commitments                                                               |             |             
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                |             |             
|                                                                          |             |             

See Notes to Unaudited
Consolidated Financial Statements

1

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# VETERINARY PET
SERVICES, INC. AND SUBSIDIARIES

# CONSOLIDATED STATEMENTS
OF INCOME

# (Unaudited)

# (AMOUNTS IN THOUSANDS
 EXCEPT SHARE AND PER SHARE DATA)

|                                    | Three Months EndedJune 30, | Six Months EndedJune 30,
|----------------------------------- | -------------------------- | ------------------------
|
|Revenues                            |                            |                         
|Earned Premiums                     |                            |                         
|Service Fees                        |                            |                         
|Investment and other income         |                            |                         
|                                    |                            |                         
|Expenses                            |                            |                         
|Losses and loss adjustment expenses |                            |                         
|Policy acquisition costs            |                            |                         
|General and administrative expenses |                            |                         
|                                    |                            |                         
|                                   
|Net income (loss)                   |                            |                         
|                                   
|Basic earnings (loss) per share     |                            |                         
|                                   
|Diluted earnings (loss) per share   |                            |                         
|                                   

See Notes to Unaudited
Consolidated Financial Statements

2

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# VETERINARY PET
SERVICES, INC. AND SUBSIDIARIES

# CONSOLIDATED
STATEMENTS OF CASH FLOWS

# (Unaudited)

# (AMOUNTS IN THOUSANDS)

|                                                          | Six Months EndedJune 30,
|--------------------------------------------------------- | ------------------------
|
|OPERATING ACTIVITIES                                      |                         
|Net income                                                |                         
|Adjustments to reconcile net income to net cash           |                         
|provided by operating activities:                         |                         
|Depreciation                                              |                         
|Accretion of discount on debt securities                  |                         
|Changes in:                                               |                         
|Premiums receivable                                       |                         
|Deferred acquisition costs                                |                         
|Accrued investment income                                 |                         
|Deferred tax asset, net                                   |                         
|Other assets                                              |                         
|Unpaid losses and loss adjustment expenses                |                         
|Unearned premiums                                         |                         
|Payable to insurer                                        |                         
|Accounts payable and accrued expenses                     |                         
|Income taxes payable                                      |                         
|Deferred revenue                                          |                         
|                                                          |                         
|NET CASH PROVIDED BY OPERATING ACTIVITIES                 |                         
|INVESTING ACTIVITIES                                      |                         
|Capital expenditures                                      |                         
|Purchase of available for sale securities                 |                         
|Proceeds from maturities of available for sale securities |                         
|                                                          |                         
|                                                          |                         
|NET CASH USED IN INVESTING ACTIVITIES                     |                         
|FINANCING ACTIVITIES                                      |                         
|Payments of bank loan                                     |                         
|Exercise of incentive stock options                       |                         
|Common stock issued, net of offering costs                |                         
|                                                          |                         
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES       |                         
|                                                          |                         
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS      |                         
|Cash and cash equivalents at beginning of period          |                         
|                                                          |                         
|Cash and cash equivalents at end of period                |                         
|                                                          |                         
|Supplemental disclosures of cash flow information:        |                         
|Cash paid for interest                                    |                         
|                                                          |                         
|Income taxes paid                                         |                         
|                                                          |                         

See Notes to Unaudited
Consolidated Financial Statements

3

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# VETERINARY PET
SERVICES, INC. AND SUBSIDIARIES

# NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS

# Six Months Ended June
30, 2003

# 1. Basis of Presentation

The
financial information included in this report includes the accounts of Veterinary Pet
Services, Inc. (VPSI) and its subsidiaries (collectively referred to as the
Company), Veterinary Pet Insurance Company (VPI) and V.P.I.
Services, Inc. (VPIS), and VPIs subsidiary, DVM Insurance Agency
(DVM), and has been prepared in accordance with accounting principles
generally accepted in the United States of America and the instructions to Form 10-Q and
Article 10 of Regulation S-X. All adjustments, consisting of normal recurring accruals
considered necessary for a fair presentation, have been included. The statements do not
include all disclosures required by accounting principles generally accepted in the United
States of America for annual financial statements and should be read in conjunction with
the Companys Annual Report on Form 10-K for the year ended December 31, 2002. The
results of operations for the six months ended June 30, 2003 are not necessarily
indicative of the results to be expected for the year ending December 31, 2003.

# 2. Earnings (Loss) Per Share

The
Company presents basic earnings (loss) per share, representing net earnings (loss) divided
by the weighted average shares outstanding (excluding all Common Stock equivalents), and
diluted earnings (loss) per share, representing the dilutive effect of all Common
Stock equivalents. The following table illustrates the computation of basic and diluted
earnings (loss) per share.

|                                                       | Three Months EndedJune 30, | Six Months EndedJune 30,
|------------------------------------------------------ | -------------------------- | ------------------------
|
|
|Net income (loss)                                      |                            |                         
|                                                       |                            |                         
|Weighted average shares outstanding during the period  |                            |                         
|Plus:  Common Stock equivalent shares assumed from     |                            |                         
|exercise of options and warrants and conversion of     |                            |                         
|Preferred Stock                                        |                            |                         
|                                                       |                            |                         
|Weighted average shares outstanding during the period, |                            |                         
|diluted                                                |                            |                         
|                                                       |                            |                         
|Basic earnings (loss) per share                        |                            |                         
|                                                       |                            |                         
|Diluted earnings (loss) per share                      |                            |                         
|                                                       |                            |                         

Had
the Company recognized net income in the three months ended June 30, 2003, incremental
shares attributable to the assumed exercise of outstanding options and warrants would
have increased diluted shares outstanding by 737,000 shares.

# 3. Comprehensive Income
(Loss)

Comprehensive
income (loss) includes net income as well as certain items that are reported directly
within a separate component of shareholders equity that bypass net income. Other
comprehensive income (loss) is comprised of net unrealized gains (losses) on
available-for-sale securities. The related before and after federal income tax amounts are
as follows:

4

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|                                               | Three Months EndedJune 30, | Six Months EndedJune 30,
|---------------------------------------------- | -------------------------- | ------------------------
|
|
|Net income (loss)                              |                            |                         
|Other comprehensive income, before tax:        |                            |                         
|Unrealized gains on securities:                |                            |                         
|Unrealized holding gains arising during period |                            |                         
|Other comprehensive income before tax          |                            |                         
|Income tax expense related to unrealized       |                            |                         
|holding gains arising during period            |                            |                         
|Comprehensive income (loss), net of tax        |                            |                         

# 4. Stock Based
Compensation

The
Company accounts for its stock options in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and
Related Interpretations. Compensation expense is recorded on the date of grant only
if the current market price of the underlying stock exceeds the exercise price. SFAS No.
123, Accounting for Stock-Based Compensation, permits entities to recognize the fair value
of all stock-based awards on the date of grant as expense over the vesting period.
Alternatively, SFAS No. 123 allows the Company to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income disclosures for employee stock options
grants made in 1995 and future years as if the fair-value-based method defined in SFAS No.
123 had been applied. All options granted had an exercise price equal to the market value
of the underlying common stock on the date of grant; therefore, no stock-based
compensation cost is reflected in net earnings. The following table illustrates the effect
on net earnings and earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation:

|                                                         | Three Months EndedJune 30, 2003 | Six Months EndedJune 30, 2003
|-------------------------------------------------------- | ------------------------------- | -----------------------------
|
|Net income (loss), as reported                           |                                 |                              
|Deduct:Total stock-based compensation expense determined |                                 |                              
|under fair value based methods for all awards, net of    |                                 |                              
|related tax effects                                      |                                 |                              
|                                                         |                                 |                              
|Pro forma net income (loss)                              |                                 |                              
|                                                         |                                 |                              
|Earnings (Loss) Per Share:                               |                                 |                              
|Basic - as reported                                      |                                 |                              
|Basic - pro forma                                        |                                 |                              
|Diluted - as reported                                    |                                 |                              
|Diluted - pro forma                                      |                                 |                              

5

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The
effects of applying SFAS No. 123 to the Companys option and warrant grants would
result in an immaterial effect on the Companys results of operations for the three
months and six months ended June 30, 2002.

# 5. Equity Transactions

On
April 14, 2003, the Company sold 750,000 shares of its Common Stock to Scottsdale
Insurance Company (SIC) at a purchase price of $12.00 per share for gross
proceeds of $9.0 million, of which $5.0 million was contributed to the statutory capital
and surplus of VPI. On April 15, 2003, the Company sold 500,000 shares of its Common Stock
to The Iams Company (Iams), a subsidiary of The Procter & Gamble Company,
at a purchase price of $12.00 per share for gross proceeds of $6.0 million, all of which
was contributed to the statutory capital and surplus of VPI. As a condition to the sale of
the shares to Iams, all of the Companys shares of Series A Preferred Stock and
Series B Preferred Stock were converted on April 15, 2003 to 2,615,288 shares of Common
Stock, of which SIC received 2,580,648 shares. The conversion of the Companys
403,226 shares of Series A Preferred Stock and 250,596 shares of Series B Preferred Stock
to 2,615,288 shares of Common Stock was an $8.1 million non-cash financing transaction.

During
April 2003, in connection with the sale of shares to SIC and Iams and the contribution of
$11.0 million to VPIs statutory capital and surplus, VPI applied for approval from
the California Department of Insurance (the DOI) for an addendum to the
Reinsurance Agreement with SIC to return to the 80% (VPI): 20% (SIC) quota share
reinsurance percentage, retroactive to January 1, 2003. The DOI has not yet completed its
review of VPIs application.

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

General

For
convenience in this Form 10-Q, references to the Company, we,
us, and our refer to Veterinary Pet Services, Inc.
(VPSI), its wholly-owned subsidiaries, Veterinary Pet Insurance Company
(VPI) and V.P.I. Services, Inc. (VPI), and VPIs wholly-owned
subsidiary, DVM Insurance Agency (DVM).

The
Company markets, underwrites, insures, and reinsures pet accident and health insurance for
dogs and cats, and to a lesser extent birds and other pets, through our subsidiaries, VPI,
a California insurer, and DVM, a licensed, non-resident insurance agency in all states
outside California. VPI writes coverage in California, and DVM places all insurance
written outside California with National Casualty Company (NCC). NCC, in turn,
reinsures 100% of this business with Scottsdale Insurance Company (SIC), which
then reinsures a portion of that business (currently 50% since January 1, 2001) with
VPI. Both NCC and SIC are subsidiaries of Nationwide Mutual Insurance Company, and SIC
owns 60.8% of the Common Stock of VPSI. For the six months ended June 30, 2003,
approximately 59% of the Companys total earned premiums were derived from the
reinsurance agreement with SIC (the SIC Reinsurance Agreement). We also
operate a nationwide pet registry service for our policyholders through VPIS. The Company
operates in only one business segment.

Since
1997, our premiums have grown at an average annual rate of over 55% per year, due to
increased marketing and sales efforts to promote product awareness through veterinarians,
animal hospitals, print advertising, joint marketing efforts with other pet service and
product providers, and, most recently, through the Internet. Over the past six years, we
have been building and updating our infrastructure to accommodate the planned premium
growth, and those expenses led to net operating losses through 2000. Such losses abated at
year-end 2001, due to consistent premium growth, a stable loss ratio, and operational
efficiencies. Management expects annual premium volume to continue to increase, although
at a slower rate than in the past five years, due to the higher expected revenue base and
the resulting lower percentage that additional revenue represents as a percentage of the
prior years revenue. We do not believe that a slower rate of premium growth will be
material to our financial condition or our future results of operations. We anticipate
that our investment in our operating infrastructure over the last six years will support
premium growth and contribute to higher profit margins in the future.

6

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Results of Operations

Six Months Ended June 30, 2003
compared to Six Months Ended June 30, 2002 and the Three Months Ended June 30, 2003
compared to the Three Months Ended June 30, 2002

The
following table presents information regarding the components of total revenues:

|                             | Three Months EndedJune 30, | Six Months EndedJune 30,
|---------------------------- | -------------------------- | ------------------------
|
|
|Gross premiums produced      |                            |                         
|Service fees                 |                            |                         
|Investment and other income  |                            |                         
|                             |                            |                         
|Gross revenue                |                            |                         
|Premiums retained by SIC     |                            |                         
|Changes in unearned premiums |                            |                         
|                             |                            |                         
|Total revenues               |                            |                         
|                             |                            |                         

Gross
revenue, representing gross premiums produced before the application of the quota share
reinsurance agreement, service fees and investment and other income, was $42.9 million for the six
months ended June 30, 2003, an increase of 33.6% over the comparable six months for 2002
of $32.1 million. For the three months ended June 30, 2003, the gross revenue total was
$22.2 million, an increase of 31.4% compared to the gross revenue for the comparable three
months of 2002 of $16.9 million. Gross premiums produced include sales of pet insurance
policies in California by VPI, and sales of pet insurance policies outside of California
through DVM that are underwritten by National Casualty Company.

Gross
premiums of $39.9 million produced for the six months ended June 30, 2003 increased 32.6%
from $30.1 million in the corresponding six months in 2002. Premiums earned in the amount
of $19.5 million for the six months ended June 30, 2003 increased 27.5% from $15.3 million
the corresponding six months in 2002. Premiums earned in the amount of $9.7 million in the
quarter ended June 30, 2003 increased 19.8% from $8.1 million in the corresponding quarter
in 2002. Gross premiums of $20.7 million produced in the quarter ended June 30, 2003
increased 29.4% from $16.0 million in the corresponding quarter in 2002. This is due to a
21.8% increase in the number of new pet insurance policies sold and a 34.0% increase in
the number of renewed pet insurance policies for the six-month period ending June 30, 2003
compared to June 30, 2002. The average premium per policy increased 7.1% from a $254
average premium per policy for the six-month period in 2002 to $272 for the six-month
period in 2003.

Total
revenues include premiums earned, service fees, policy fees, lost and found registry fees,
installment fees, and investment income. Total revenues of $22.5 million for the six
months ended June 30, 2003 increased 30.8% as compared to $17.2 million for the six months
ended June 30, 2002. Total revenues of $11.2 million for the quarter ended June 30, 2003
increased by 25.8% as compared to $8.9 million for the quarter ended June 30, 2002.

7

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Losses
and loss adjustment expenses (LAE) are charged to income as incurred. Unpaid
losses and LAE represent the accumulation of estimates for reported losses and include a
provision based on past experience, for losses incurred but not reported, using actuarial
techniques.

Losses
and LAE of $12.5 million increased by 25.0% for the six months ended June 30, 2003 as
compared to $10.0 million for the six months ended June 30, 2002. Losses and LAE of $6.2
million increased by 14.8% for the quarter ended June 30, 2003 as compared to $5.4 million
for the quarter ended June 30, 2002. Losses and LAE generally increase as a result of
growth in premiums earned, the percentage of reinsurance assumed, and other factors
affecting insured pets such as accidents and injuries, illnesses, and the mix of business
between dogs and cats and specific breeds therein. The loss and LAE ratio for the six
months (loss and loss adjustment expenses related to premiums earned) was 63.8% in 2003
and 65.3% in 2002. The 1.5 percentage point improvement is due to a lower loss ratio of
58.4% for the six months ended June 30, 2003 compared to 59.9% for the comparable period
in 2002.

The
loss and LAE ratio for the three months ended June 30, 2003 was 63.7% compared to 67.1% in
the comparable three months period in 2002. The 3.4 percentage point improvement is due to
a lower loss ratio of 58.8% for the three months ended June 30, 2003 compared to 61.7% for
the comparable period in 2002. The remaining 0.5 percentage point improvement as a
percentage of premiums earned is due to lower claims administration expenses.

Policy
acquisition costs consist of commissions incurred, marketing and sales expenses, and
premium taxes, reduced by commissions received by DVM from NCC for producing and servicing
policies outside of California. Policy acquisition costs that are directly related to and
vary with the amount of new and renewal premiums are deferred and amortized over the
related policy terms. All other acquisition costs are expensed in the period incurred.

Policy
acquisition costs as a percentage of premiums earned decreased from 11.1% to 10.5% for the
first six months in 2002 compared to the first six months in 2003. Policy acquisition
costs as a percentage of premiums earned increased from 9.3% to 10.0% from the second
quarter 2002 to the second quarter 2003. These variances are primarily due to the 36.1%
and 32.8% increases in the volume of premiums produced outside of California for the
six-month period and quarter ending June 30, 2003 as compared to June 30, 2002, and the
related commission income associated with the production of non-California pet insurance
policies.

General
and administrative (G&A) expenses as a percentage of premiums earned were
30.6% for the first six months in 2002 and 38.9% for the first six months in 2003. G&A
expenses as a percentage of premiums earned were 28.8% for the second quarter 2002 and
43.6% for second quarter 2003. The increase in G&A expenses in the three and six
months period ended June 30, 2003 as a percentage of premiums earned is due to a
combination of higher salary and employee benefit costs incurred, which will allow VPI to
continue to support and service its current and future premium volume; additional
consulting and temporary employment expenses related to the cost of the Companys
software system conversion; higher depreciation and amortization costs associated with the
implementation of the software system conversion; increased debit and credit card
processing fees as a result of our increased volume in business; and, the costs associated
with the start of the Iams joint marketing agreement.

8

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In December 2002, we entered into a joint marketing agreement with Iams to
jointly advertise and market our pet insurance policies and Iams pet nutritional products.
Through this agreement, we intend to increase awareness of our pet heath insurance and
Iams nutritional products, increase veterinarian recommendations of Iams products and VPI
insurance policies, and help consumers find the channels for contacting us concerning pet
insurance. We have cross-linked our websites, are distributing marketing materials of both
companies to dog and cat breeders, veterinarian clinics, and retail customer outlets, and
are including our promotional materials in Iams and Eukanuba puppy and kitten starter
kits. Iams has agreed to pay on behalf of the policyholder the first two months of
12-month pet insurance policies sold through our joint marketing activities. We pay for
sales, marketing, and promotional expenses of the joint activities. Our estimated expenses
under the Iams agreement have been approximately $78,000 through June 30, 2003. We derive
no revenues under the Iams agreement other than through the sale of additional pet
insurance policies. The agreement also provides that we will not enter into any marketing
or advertising arrangements with another pet nutritional product company and that Iams
will not enter into any marketing or advertising arrangements with another pet insurance
provider during the term of the agreement. The term of the Iams agreement continues as
long as Iams is a shareholder of the Company and the parties are conducting joint
marketing activities together, or it can be terminated on 30-days written notice in
the event of a breach of the terms of the agreement.

Liquidity and Capital
Resources

VPI
is required by the California Department of Insurance (the DOI) to maintain a
minimum level of statutory capital and surplus at the greater of $2.0 million or the
amount necessary to maintain our net written premiums to surplus ratio at a level not to
exceed 8:1. At June 30, 2003 and December 31, 2002, statutory capital and surplus were
$15.3 million and $5.0 million, respectively, and the net written premiums to surplus
ratios were 3.1:1 and 8.1:1, respectively.

On
April 14, 2003 we sold 750,000 shares of our Common Stock to SIC at a purchase price of
$12.00 per share for gross proceeds of $9.0 million, of which $5.0 million was contributed
to the statutory capital and surplus of VPI. On April 15, 2003, we sold 500,000 shares of
our Common Stock to Iams at a purchase price of $12.00 per share for gross proceeds of
$6.0 million, all of which was contributed to the statutory capital and surplus of VPI.

During
April 2003, in connection with the sale of shares to SIC and Iams and the contribution of
$11.0 million to VPIs statutory capital and surplus, we applied for approval from
the DOI for an addendum to the SIC Reinsurance Agreement to return to the 80% (VPI): 20%
(SIC) quota share reinsurance percentage, retroactive to January 1, 2003. The DOI has not
yet responded to our application.

We
utilize cash from operations and maturing investments to meet our insurance obligations to
policyholders and for operating costs. Primary sources of cash from operations include
premium collections, commissions and fees, and investment income. The principal uses of
cash from operations are for premium payments to SIC, payments of claims, and operating
expenses such as salaries, communications, and general overhead. Net cash provided from
operating activities during the first six months of 2003 was $245,000.

VPI
currently invests in United States government or agency bonds, bills and notes, high
quality corporate bonds, municipal bonds, and preferred stocks. At June 30, 2003, $13.9
million or 67% of the portfolios market value was held in U.S. Treasury securities
and obligations of U.S. agencies. The remaining 33% of the portfolio was held in corporate
bonds, municipal bonds, and preferred stocks.

Funds
used in investing activities was $6.8 million, and funds provided from financing
activities was $14.9 million. Fixed-maturity investments, at amortized cost, increased by
$5.6 million during the six-month period ended June 30, 2003. Equity investments remained
the same during the first six months of 2003 as they were at December 31, 2002. The
amortized cost of fixed maturities available for sale that were sold or matured during the
period was $6.0 million. The Company continued its investment in its operating systems
through June 30, 2003 related to its software system conversion. Capital expenditures of
$1.2 million during the six months ended June 30, 2003 primarily includes amounts paid for
the development of the software in the amount of $670,000 and $530,000 for the corporate
office build out for tenant improvements and furniture and fixtures to support the growth
of our business.

9

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The
market value of all investments (fixed maturities and equities) held at market as
Available for Sale exceeded amortized cost of $19.6 million at June 30, 2003
by $1.2 million. The unrealized gain, reflected as accumulated other income, net of
applicable tax effects, was $833,000 at June 30, 2003 compared with an unrealized gain of
$702,000 at December 31, 2002. The increase in unrealized gains was due to the increased
market value of our bonds as a result of lower interest rates.

The
Companys cash and cash equivalents totaled $9.1 million at June 30, 2003. This
increase is a result of $10.0 million invested in money market accounts as a result of the
sale of Common Stock to SIC and Iams in April 2003.

Investment
balances of $14.0 million at June 30, 2003 are restricted as collateral against a letter
of credit provided by VPI for the unearned premiums assumed from SIC. Restricted
investment balances represent 47% of our total cash, cash equivalents, and investments at
June 30, 2003. We pay an annual commitment fee equal to 80 basis points of the total
letter of credit, and there is no expiration date stated in the letter of credit; however,
the letter of credit is subject to annual renewal.

There
have been no material changes in our critical accounting policies described in our Annual
Report on Form 10-K for the year ended December 31, 2002.

Recent Accounting
Pronouncements

In
December 2002, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based
CompensationTransition and Disclosurean amendment of SFAS No. 123
(SFAS No. 148). This statement provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based employee
compensation. This statement also amends the disclosure requirements of SFAS No. 123 and
APB Opinion No. 28, Interim Financial Reporting, to require prominent
disclosures in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on reported
results. We have not yet determined whether we will voluntarily change to the fair value
based method of accounting for stock-based employee compensation.

Information Concerning
Forward-Looking Statements and Factors That May Affect Future Results

Certain
information contained in this report is forward-looking and is based on various
assumptions. Such forward-looking statements involve assumptions, known and unknown risks,
uncertainties and other factors which may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. Examples of the
uncertainties and contingencies that might affect our business include, among other
important factors, those affecting the insurance industry generally such as economic
conditions, the risk of higher inflation and the effect it may have on claims costs and
loss ratios, interest rates, legislative and regulatory developments and our ability to
raise capital when needed. Additional factors relate to the pet insurance industry
specifically, such as market pricing, competitive trends in the pet insurance industry,
our insurance premiums and related fee income, our claims experience, our reinsurance
arrangements and the performance of our investment portfolio. In such instances, actual
results could differ materially as a result of a variety of factors, including the risks
associated with the effect of changing economic conditions and other risk factors detailed
Part I, Item 1 of the Companys Annual Report on Form 10-K for the year ended
December 31, 2002 under the heading entitled Risk Factors.

10

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# Item 3. Quantitative and
Qualitative Disclosures About Market Risk

There
have been no material changes in the Companys investment strategies, types of
financial instruments held or the risks associated with such instruments which would
materially alter the market risk disclosures made in the Companys Annual Statement
on Form 10-K for the year ended December 31, 2002. Please refer to the 2002 Annual Report
on Form 10-K for a complete discussion of the Companys exposures to market risk.

# Item 4. Controls and
Procedures

Within
90 days prior to the date of this report, we carried out an evaluation, under the
supervision and with the participation of our Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and the operation of our disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) of the Securities
Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and our
Chief Financial Officer concluded that our disclosure controls and procedures are
effective in alerting them on a timely basis to material information required to be
disclosed in our periodic reports to the Securities and Exchange Commission. There have
been no significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to such evaluation.

# PART II  OTHER
INFORMATION

# Item 1. Legal Proceedings

# Item 2. Changes in
Securities and Use of Proceeds

# Issuance of Common Stock

On
April 14, 2003, the Company sold 750,000 shares of its Common Stock to Scottsdale
Insurance Company (SIC) at a purchase price of $12.00 per share for gross
proceeds of $9.0 million, of which $5.0 million was contributed to the statutory capital
and surplus of Veterinary Pet Insurance Company (VPI). On April 15, 2003, the
Company sold 500,000 shares of its Common Stock to The Iams Company (Iams), a
subsidiary of The Procter & Gamble Company, at a purchase price of $12.00 per share
for gross proceeds of $6.0 million, all of which was contributed to the statutory capital
and surplus of VPI. The shares of Common Stock issued to SIC and Iams were not registered
under the Securities Act of 1933 (the Act). These securities were purchased by
SIC and Iams, both of which are accredited investors, in private placements as provided
under Rule 506 to Regulation D of the Act. No underwriter was used in connection
with the sale of the shares to SIC and Iams. In addition, the shares to SIC and Iams are
entitled to registration rights under certain circumstances.

On
April 29, 2003, the Company issued 500 shares of Common Stock to George Beidler upon
exercise of incentive stock options at an exercise price of $4.00 per share. On May 30,
2003, the Company issued 4,500 shares of Common Stock to Mark Burke upon exercise of
incentive stock options at an exercise price of $4.00 per share. The proceeds for the sale
of these shares were used for general working capital purposes. These shares were issued
pursuant to an exemption from the registration requirements of the Act afforded by Section
4(2) of the Act.

# Conversion of Preferred
Stock

As
a condition to the sale of the shares to Iams, all of the Companys shares of Series
A Preferred Stock and Series B Preferred Stock were converted on April 15, 2003 to
2,615,288 shares of Common Stock, of which SIC received 2,580,648 shares and Richard
Johnson, D.V.M., another accredited investor, received 34,640 shares. These shares were
issued pursuant to an exemption from the registration requirements of the Act afforded by
Section 4(2) of the Act.

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The
shareholders of the Company approved an amendment to the Companys Articles of
Incorporation on June 6, 2003 to eliminate the authority of the Company to issue preferred
stock.

# Item 3. Defaults Upon
Senior Securities

None.

# Item 4. Submission of Matters
to a Vote of Securities Holders

The
Annual Meeting of the Shareholders of Company was held on June 6, 2003 at the
Companys principal executive offices in Brea, California. Our proxy statement filed
pursuant to Section 14 of the Securities Exchange Act of 1934 contains a detailed
discussion of the proposals the shareholders were asked to vote upon as summarized below.

Approval
of Amendment to Articles of Incorporation. The Companys shareholders approved an
amendment of our Restated Articles of Incorporation to eliminate the authority to issue
preferred shares. The following table presents the voting results:

|                      | For       | Against | Abstained | Broker'sNon-Votes
|--------------------- | --------- | ------- | --------- | -----------------
|Amendment of Articles | 4,701,244 | 8,534   | 22,713    | -0-              

Election
of Directors. The Companys shareholders elected five members to serve on the
Board of Directors until the next annual meeting of the shareholders. The following table
presents the voting results:

|                  | For       | Against | Abstained | Broker'sNon-Votes
|----------------- | --------- | ------- | --------- | -----------------
|Jack L. Stephens  | 4,730,062 | 10,070  | 1,423     | -0-              
|David J. Lancer   | 4,720,659 | 19,473  | 1,423     | -0-              
|Michael D. Miller | 4,728,694 | 11,438  | 1,423     | -0-              
|R. Max Williamson | 4,728,944 | 11,188  | 1,423     | -0-              
|Gary L. Tiepelman | 4,728,569 | 11,563  | 1,423     | -0-              

Ratification
of 2003 Stock Option Plan. The Companys shareholders ratified the adoption by
the Board of Directors of the 2003 Omnibus Stock Option and Incentive Plan. The following
table presents the voting results:

|                                       | For       | Against | Abstained | Broker'sNon-Votes
|-------------------------------------- | --------- | ------- | --------- | -----------------
|Ratification of 2003 Stock Option Plan | 4,705,819 | 26,086  | 2,750     | -0-              

Ratification
of Independent Auditors. The Companys shareholders ratified the selection of
KPMG LLP as the Companys auditors for the year ending December 31, 2003. The
following table presents the voting results:

|                                     | For       | Against | Abstained | Broker'sNon-Votes
|------------------------------------ | --------- | ------- | --------- | -----------------
|Ratification of Independent Auditors | 4,725,629 | 2,413   | 5,240     | -0-              

# Item 5. Other Information

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# Item 6. Exhibits and
Reports on Form 8-K

|(a) | Exhibits
|--- | --------

| | 3. | Restated Articles of Incorporation.
| | -- | -----------------------------------

| | 31.1 | Certification Pursuant to Rules 13a-14(a) and 15d-14(a) of Jack L. Stephens as Chief Executive Officer.
| | ---- | -------------------------------------------------------------------------------------------------------

| | 31.2 | Certification Pursuant to Rules 13a-14(a) and 15d-14(a) of Paul W. Souza as Chief Financial Officer.
| | ---- | ----------------------------------------------------------------------------------------------------

| | 32.1 | Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of Jack L. Stephens as Chief Executive Officer.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | 32.3 | Certification
Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of Paul W. Souza as Chief Financial Officer.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Reports
on Form 8-K
|--- | -------------------

| | None
| | ----

13

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# SIGNATURES

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

|Dated: August 14, 2003 | /s/ JACK L. STEPHENS
________________________________
Jack L. Stephens
President, Chief Executive  
Officer (Principal Executiver Officer)
|---------------------- | ------------------------------------------------------------------------------------------------------------------------------------------

|Dated: August 14, 2003 | /s/ PAUL W. SOUZA
________________________________
Paul W. Souza
Executive Vice President, 
Chief Financial Officer
(Principal Financial and Accounting Officer)
|---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

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