SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-K/A


                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934


[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

 For the fiscal year ended _____December 31, 2001_______________________________

[ ]  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 ___022316_____

____________PENN-AMERICA GROUP, INC.____________________________________________
         (Exact Name of Registrant as Specified in Its Charter)

____________Pennsylvania_________________________________________23-2731409_____
         (State or Other Jurisdiction of                  (I.R.S. Employer
           Incorporation or Organization)                  Identification No.)

____________420 S. York Road, Hatboro, PA____________     ______19040___________
         (Address of Principal Executive Offices)             (Zip Code)

Registrant's telephone number, including area code ______(215) 443-3600_________

Securities registered pursuant to Section 12(b) of the Act:

      Title of Each Class                   Name of Each Exchange on
                                               Which Registered

_Common stock, par value, per share______________New York_______________________

Securities registered pursuant to Section 12(g) of the Act:

____None________________________________________________________________________
                                (Title of class)

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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.

As of March 22, 2002, the aggregate market value of the outstanding Common Stock
held by non-affiliates of the Registrant was approximately $69,149,535. As of
March 22, 2002, there were 11,546,204 shares of the Common Stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's definitive Proxy Statement with respect to the
Registrant's 2002 Annual Meeting of Shareholders, to be filed not later than 120
days after the close of the Registrant's fiscal year, are incorporated by
reference in Part III of this report.


<PAGE>

                            PENN-AMERICA GROUP, INC.
                          ANNUAL REPORT ON FORM 10-K/A
                                DECEMBER 31, 2001

                                                                            Page
                                     PART I
ITEM  1.  BUSINESS...........................................................3

ITEM  2.  PROPERTIES........................................................19

ITEM  3.  LEGAL PROCEEDINGS.................................................19

ITEM  4.  SUBMISSION OF MATTERS TO A VOTE OF
          SECURITY-HOLDERS..................................................19


                                     PART II

ITEM  5.  MARKET FOR REGISTRANT'S COMMON STOCK
          AND RELATED STOCKHOLDER MATTERS...................................20

ITEM  6.  SELECTED FINANCIAL DATA...........................................21

ITEM  7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................22

ITEM  7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
          MARKET RISK.......................................................35

ITEM  8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................38

ITEM  9.  CHANGES IN AND DISAGREEMENTS WITH
          ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
          DISCLOSURE........................................................61

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE
          REGISTRANT........................................................62

ITEM 11.  EXECUTIVE COMPENSATION............................................62

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
          OWNERS AND MANAGEMENT.............................................62

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................62

ITEM 14.  CONTROLS AND PROCEDURES...........................................63

                                     PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
          REPORTS ON FORM 8-K...............................................64



                                     Page 2
<PAGE>

                                     PART I

Explanatory Note
Penn-America Group, Inc. ("PAGI" or the "Company") has recently resolved various
accounting and disclosure comments from the Securities and Exchange Commission
("SEC"), in conjunction with the Company's registration statement filing
relating to the issuance of additional shares of common stock. One of the
comments addressed the timing of recording other-than-temporary ("OTT") declines
in the market value of certain equity securities. In order to resolve the
comments, the Company agreed to amend its accounting policy and record OTT
write-downs on these securities for the periods ending December 31, 2001, 2000
and 1999. This restatement affects net income for each of these periods but has
no affect on stockholders' equity since the unrealized loss on these securities
was already recorded in Accumulated Other Income (Loss) in the Consolidated
Balance Sheets and Statements of Stockholders' Equity. The Company has restated
its financial statements for the affected periods and has filed such
restatements on this amended Form 10-K for the year ended December 31, 2001. For
further information, see Note 1 of the Notes to Consolidated Financial
Statements.

In addition, the SEC staff requested that PAGI add certain disclosures or not
report certain items. Business, Selected Financial Data, the Consolidated
Financial Statements and Managements' Discussion and Analysis of Financial
Condition and Results of Operations, included herein, have been amended as
appropriate to respond to these requests.

The filing of this amended Form 10-K shall not be deemed an admission that the
original filing, when made, included any untrue statement of a material fact or
omitted to state a material fact necessary to make a statement not misleading.

ITEM 1. BUSINESS
General

Penn-America Group, Inc. ("PAGI") is a specialty property and casualty insurance
holding company which, through its subsidiary, Penn-America Insurance Company
("Penn-America") and its subsidiary, Penn-Star Insurance Company ("Penn-Star")
(collectively the "Company"), markets and underwrites commercial property,
general liability and multi-peril insurance for small businesses located
primarily in small towns and suburban and rural areas. Penn-America writes
business in all fifty states and the District of Columbia. The Company writes
business on both an admitted and non-admitted (excess and surplus lines) basis
in thirty-six states, on only an admitted basis in two states and on only a
non-admitted basis in twelve states and the District of Columbia. The Company
chooses in each state whether to write business on an admitted or non-admitted
basis based upon the Company's analysis of competition in each state. Writing
business on an admitted basis is highly regulated. The regulations, which vary
by state, generally govern licensing, underwriting rules, rates and policy
forms, and require insurance companies to pay premium taxes and guaranty fund
assessments. Writing business on a non-admitted basis is significantly less
regulated and provides much more freedom in setting rules, rates and policy
forms and removes insurance companies from premium taxes and guaranty fund
assessment liabilities. Coverage written on a non-admitted basis is less
comprehensive than coverage issued on an admitted basis. If the Company chooses
non-admitted status, the Company could be at a competitive disadvantage to
carriers writing on an admitted basis if those competitors choose to offer
coverages which are more comprehensive and attractive to an insured. Further,
surplus lines agents are prohibited from writing nonadmitted business in states
in which they are not resident. Thus, if the Company does not have resident
surplus lines agents in every state (currently, we do not in 7 states), the
Company is precluded from writing business on a non-admitted basis in those
states.



                                     Page 3
<PAGE>

Penn-America Insurance Company was formed in 1975 by Irvin Saltzman, Chairman of
the Board of Directors, who began working in the insurance industry in 1947 when
he founded a general agency. The Company completed an initial public offering
("IPO") on October 28, 1993, at a price of $4.00 per share, which was then
followed by a secondary offering in July of 1997 where 4,537,500 shares were
sold by the Company for net proceeds of approximately $9.67 per share.
Currently, the Saltzman family, substantially through their ownership of Penn
Independent Corporation ("Penn-Independent"), owns approximately 40% of the
Company's Common Stock. Jon S. Saltzman, Irvin Saltzman's son, is a Director,
President and Chief Executive Officer of the Company and has been employed by
the Company since 1986. Prior to 1986, Jon Saltzman was employed by Penn
Independent from 1976 to 1986.

Marketing and Distribution

Penn-America's commercial insureds consist primarily of small, "Main Street"
businesses including restaurants, mercantiles and non-residential service
contractors. In addition, the Company has developed customized products and
coverages for other small commercial insureds such as daycare facilities,
fitness centers and special events. The Company believes it has benefited from a
general migration of small businesses out of urban centers and into suburban and
rural areas. Industry consolidation, corporate downsizing and the increased use
of communications technology and personal computers, among other factors, have
contributed to the high growth in the number of small businesses in these areas.
The Company selects only insurance lines of business and industry segments for
which it reasonably can estimate future loss costs and the resulting price
levels needed to produce a satisfactory return to the Company. Therefore, the
Company avoids high-hazard risks and high-hazard lines of business such as
medical malpractice and environmental liability.

Penn-America markets its products through fifty-seven (57) general agents, who
in turn produce business through more than 25,000 retail insurance brokers
located throughout the United States. The Company focuses on serving the
insurance needs of small businesses in small towns and rural areas that are
serviced by retail insurance brokers with limited access to larger, standard
lines insurers. The Company believes that larger, standard lines insurers, which
often limit their underwriting to larger policies and to certain risk classes,
generally underserve these markets. Penn-America believes that its distribution
network enables it to effectively access these numerous small markets at a
relatively low fixed-cost through the marketing, underwriting and administrative
support of its general agents. This access also is enabled by the local market
knowledge and expertise of these general agents and their retail insurance
brokers.

Penn-America's distribution strategy is to maintain strong relationships with a
select group of high-quality general agents. The Company carefully selects a
limited number of general agents based on their experience and reputation and
strives to preserve each agent's franchise value within its marketing territory.
The Company seeks to grow with these general agents and develop strong,
long-standing relationships by providing a high level of service and support.
The success of the Company's strategy is demonstrated by its strong and
consistent growth. From 1992 to 2001, commercial gross written premiums grew at
an 18% compound annual rate from $22.6 million to $98.4 million while the number
of general agents rose from 38 to 57.

Core Commercial Business

The Company underwrites its core commercial business (excluding the Company's
exited commercial automobile business - see Exited Lines, below) on a Binding
Authority, Submit and Specialty Lines basis, which are defined as follows:

o        Binding authority business represents risks that may be quoted and
         bound by the Company's general agents prior to the Company's
         underwriting review.




                                     Page 4
<PAGE>

o        Submit business represents risks that must be submitted by the
         Company's general agents to the Company prior to quoting or binding the
         account.

o        Specialty lines business represents risks that meet specific,
         pre-determined industry-segment and territorial parameters and may be
         quoted or bound by the Company's general agents prior to the Company's
         underwriting review.

Binding Authority business accounted for approximately 88% of the Company's core
commercial gross written premiums in 2001. Of this amount, approximately 85% is
bound by general agents in accordance with the Company's underwriting manual.
New and renewal Binding Authority business issued by the general agents is
reviewed on a continuous basis to ensure that the Company's underwriting
guidelines are followed. The Company provides its general agents with a
comprehensive, regularly updated underwriting manual, which also is available
online through a private intranet site called PennLink. This manual clearly
outlines the Company's risk eligibility, pricing, underwriting guidelines and
policy issuance instructions. Penn-America closely monitors the underwriting
quality of its business through online system edits and in-force account
reviews. The Company also periodically audits each agent's office to determine
if the Company's underwriting guidelines are followed in all aspects of risk
selection, underwriting compliance, policy issuance and pricing. In addition to
standard commissions, the Company provides strong incentives to its general
agents to produce profitable business through a contingent profit commission
structure that is tied directly to underwriting profitability. Payments of these
contingent profit commissions have been through the issuance of shares of PAGI
common stock and cash. Since 1996, the Company has awarded agents approximately
276,000 shares of PAGI common stock through its contingent profit commission
structure.

The Company began writing business on a Submit basis in 1999 in response to
general agents who had risks similar to the Company's risk profile but were
outside of their underwriting authority. This provides a market to the Company's
general agents for approximately fifty classes of business. One hundred percent
of the business is quoted and bound by Penn-America underwriters; general agents
have no binding authority. This business accounted for approximately 5% of core
commercial gross written premiums in 2001.

Specialty Lines business, which accounted for 7% of the Company's core
commercial gross written premiums in 2001, represents specialized underwriting
and marketing programs for individual general agents based upon specific
territorial needs and opportunities. An individual general agent typically is
given exclusive marketing authority for a special program subject to territorial
limitations. The Company believes it can achieve superior underwriting results
and expense savings on these programs. The Company continuously is developing
specialized programs for certain industry segments to meet the needs of insureds
in these segments. For example, Penn-America has developed programs for cargo
and Alaskan dwellings. Collectively, these programs are a significant benefit to
Penn-America's marketing efforts.

Exited Lines

The Company offered commercial automobile coverage from 1998 through the first
quarter of 2001. In late 2000, the Company announced that it was exiting this
line of business due to unsatisfactory underwriting results. No new policies
have been written since the first quarter of 2001 and all policies are being
non-renewed. Gross written premiums for commercial automobile business decreased
to $1.1 million in 2001 from $11.5 million in 2000 and $7.0 million in 1999.

The Company exited the non-standard personal automobile business in 1999 and, as
a result, gross written premiums declined to $2,000 in 2001 from $2.8 million in
2000 and $11.5 million in 1999.






                                     Page 5
<PAGE>

Financial Information About Business Segments

The Company has two reportable segments: personal lines and commercial lines.
The Company exited the non-standard personal automobile business in 1999 and
announced that it would run-off its remaining portfolio of such business. The
Company will continue to report on this segment separately until the amounts
relating to the non-standard personal automobile business become immaterial to
the financial statements presented. These segments were managed separately
because they have different customers, pricing and expense structures. The
Company does not allocate assets between segments because assets are reviewed in
total by management for decision-making purposes.

The accounting policies of the segments are the same as those more fully
described in the summary of significant accounting policies in Note 1 to the
consolidated financial statements, included herein . The Company evaluates
segment profit based on profit or loss from operating activities. Segment profit
or loss from operations is pre-tax and does not include unallocated expenses but
does include investment income attributable to insurance transactions. Segment
profit or loss therefore excludes income taxes, unallocated expenses and
investment income attributable to equity. The aforementioned segment information
is presented in Note 8 to the consolidated financial statements included herein.


The following table sets forth the geographic distribution of the Company's
gross written premiums for the periods indicated:




<TABLE>
<CAPTION>
                                                                Years ended December 31,
                          -----------------------------------------------------------------------------------------------------
                                       2001                               2000                               1999
                          -------------------------------    -------------------------------    -------------------------------
(Dollars in Thousands)       Amount            Percent           Amount           Percent           Amount           Percent
<S>                           <C>                 <C>            <C>                 <C>             <C>                <C>
Pacific                       $ 15,613            15.9%          $ 19,961            18.2%           $21,404            22.3%
Midwest                         17,338            17.6             21,768            19.8             17,516            18.2
South                           17,021            17.3             16,539            15.1             13,812            14.4
Southwest                       12,306            12.5             15,532            14.1             13,971            14.6
Mid-Atlantic                    17,633            17.9             17,253            15.7             12,496            13.0
Mountain/Northwest               8,088             8.2             10,457             9.5             10,849            11.3
New England                     10,413            10.6              8,281             7.6              5,935             6.2
                          --------------     ------------    ---------------    ------------    ---------------    ------------
                              $ 98,412           100.0%          $109,791           100.0%           $95,983           100.0%
                          ==============     ============    ===============    ============    ===============    ============
</TABLE>








                                     Page 6
<PAGE>




Lines of Business

The following table sets forth an analysis of gross written premiums by specific
product lines during the periods indicated:
<TABLE>
<CAPTION>
                                                                    Years ended December 31,
                                   ------------------------------------------------------------------------------------------------
                                           2001                                   2000                             1999
                                   -----------------------------     -------------------------------   ----------------------------
(Dollars in thousands)                 Amount         Percent            Amount          Percent           Amount         Percent
Core commercial lines
<S>                                   <C>               <C>                  <C>              <C>             <C>            <C>
Special property                      $10,118           10.3%                $5,930           5.4%            $ 5,374        5.6%

CMP - property                         36,381           37.0                 32,677          29.8              25,418       26.5

CMP - liability                        27,348           27.8                 27,660          25.2              21,649       22.6

Other & product liability              23,483           23.8                 29,268          26.6              24,966       26.0
                                   -----------      ------------     ---------------  --------------   --------------- ------------
          Total core commercial                         98.9                                                                80.7
                                       97,330                                95,535          87.0              77,407
Exited lines

Commercial auto liability                 874            0.9                  8,779           8.0               5,477        5.7

Commercial auto physical damage           206            0.2                  2,690           2.5               1,569        1.6

Personal lines                              2            -                    2,787           2.5              11,530       12.0
                                   -----------      ------------     ---------------  --------------   --------------- ------------

          Total exited lines            1,082            1.1                 14,256          13.0              18,576       19.3
                                   -----------      ------------     ---------------  --------------   --------------- ------------
Total gross written premiums         $ 98,412          100.0%              $109,791         100.0%            $95,983      100.0%
                                   ===========      ============     ===============  ==============   =============== ============
</TABLE>


o    The Company's Commercial General Liability insurance is written on an
     occurrence policy form, which generally provides coverage for bodily injury
     or property damage that arises during the policy period, even though a
     claim is made after the policy expires, as opposed to a claims-made policy
     form, which generally provides coverage for claims made against an insured
     during the policy period, irrespective of when the bodily injury or
     property damage occurred. The Company's insurance coverage provides limits
     generally ranging from $25,000 to $3 million per occurrence, with the
     majority of such policies having limits between $500,000 and $1 million.
     The Company's general liability policies provide for defense and related
     expenses in addition to per occurrence and aggregate policy limits.

o    The Company's Commercial Property lines provide limits usually no higher
     than $2 million per risk, with almost all of the policies being written at
     limits of $1 million per risk or less.

o    The Company writes Commercial Multi-Peril policies that provide the same
     commercial property and general liability coverages bundled together as a
     "package" for its insureds. The limits on these policies are the same as if
     written on a monoline basis.

o    The Company also offers Commercial Umbrella policies to enhance its
     commercial multi-peril and commercial general liability writings.
     Commercial umbrella insurance is written for limits up to $5 million per
     occurrence. For commercial umbrella coverage, Penn-America usually writes
     the primary $1 million liability limit.

o    Commercial Automobile policies were written with liability limits up to $1
     million per occurrence.

o    Non-Standard Personal Automobile policies were written with liability
     limits up to $100,000 per person and $300,000 per occurrence.




                                     Page 7
<PAGE>


Pricing

In the commercial property and casualty market, the rates and terms of coverage
provided by property and casualty insurance carriers are frequently based on
benchmarks and forms promulgated by the Insurance Services Office ("ISO"). ISO
makes available to its members advisory rating, statistical and actuarial
services, policy language and other related services. ISO currently provides
such services to more than 1,500 property and casualty insurance companies in
the U.S. One of the services that ISO provides is an actuarial-based estimate of
the expected loss cost for risks in each of approximately 1,000 risk
classifications. These benchmark loss costs reflect an analysis of the loss and
allocated loss adjustment expenses on claims reported to ISO. ISO statistics,
however, include only claims and policy information reported to ISO, and
therefore do not reflect all of the loss experience for each class. Also, the
historical results for a particular class may not be sufficient to provide
actuarially meaningful results.

The Company primarily uses ISO statistics as a benchmark for risk selection and
pricing. Other carriers may or may not rely as heavily on this information, and
several of the larger standard carriers have developed their own actuarial
databases. As a general rule, most standard lines insurers set rates lower than
ISO benchmarks. However, the Company, because of its strategy of providing
insurance to underserved markets, typically charges 100% or more of prescribed
ISO benchmarks. Generally, the Company establishes a pricing strategy on a
countrywide basis that is designed to support its loss costs and operating
expenses plus a targeted return on equity. This pricing strategy is regionalized
to incorporate variables such as historical loss experience, the types and lines
of business written and state regulatory considerations. The Company provides
its general agents with pricing flexibility on a per-policy basis, with the
objective that in the aggregate, the weighted average premium of all new and
renewal commercial policies written by a general agent are at approximately
110-150% of ISO benchmarks.

Claims Management and Administration

Commercial Claims:
The Company's approach to commercial claims management is designed to
investigate reported incidents at the earliest juncture, to select, manage and
supervise all legal and adjustment aspects thereof and to provide a high level
of service and support to general agents, retail insurance brokers and insureds
throughout the claims process. The Company's commercial general agents have no
authority to settle commercial claims or otherwise exercise control over the
claims process. All commercial lines claims are supervised and processed
centrally by the Company's claims management staff. Senior claims management
reviews all claims greater than $25,000.

Discontinued Personal Automobile Claims:
All claims for the personal automobile business are handled by the Company's
internal claims unit. Prior to February 1, 2000, if an automobile claim was in
the States of California or Washington, they were handled by outside third-party
claims management companies.

Insurance Loss Reserves

The Company is directly liable for losses and loss adjustment expenses under the
terms of the insurance policies that it writes. In many cases, several years may
lapse between the occurrence of an insured loss, the reporting of the loss to
the Company and the Company's payment of that loss. The Company reflects its
liability for the ultimate payment of all incurred losses and loss adjustment
expenses by establishing loss and loss adjustment expense reserves as balance
sheet liabilities for both reported and unreported claims.





                                     Page 8
<PAGE>

When a claim involving a probable loss is reported, the Company establishes a
case reserve for the estimated amount of the Company's ultimate loss. The
estimate of the amount of the ultimate loss is based upon such factors as the
type of loss, jurisdiction of the occurrence, knowledge of the circumstances
surrounding the claim, severity of injury or damage, potential for ultimate
exposure and policy provisions relating to the claim. Loss adjustment expenses
are determined via a formula method that estimates loss adjustment expenses as a
percentage of expected indemnity losses based on historical patterns adjusted to
current experience.

In addition to case reserves, management establishes reserves on an aggregate
basis to provide for incurred but not reported losses and loss adjustment
expenses ("IBNR"). The establishment of reserves for IBNR requires an estimate
of the ultimate liability based primarily on past experience. The Company
applies a variety of traditional actuarial techniques to determine its estimate
of ultimate liability. The techniques recognize, among other factors, the
Company's and the industry's experience, historical trends in reserving patterns
and loss payments, the impact of claim inflation, the pending level of unpaid
claims, the cost of claim settlements, the line of business mix and the economic
environment in which property and casualty insurance companies operate.
Estimates continually are reviewed and, based on new developments and new
information, adjustments of the probable ultimate liability are included in
operating results for the periods in which the adjustments are made. In general,
reserves are established initially based upon the actuarial and underwriting
data utilized to set pricing levels and are reviewed as additional information,
including claims experience, becomes available. The establishment of loss and
loss adjustment expense reserves makes no provision for the broadening of
coverage by legislative action or judicial interpretation or for the
extraordinary future emergence of new types of losses not sufficiently
represented in the Company's historical experience, or which cannot yet be
quantified. The Company regularly analyzes its reserves and reviews its pricing
and reserving methodologies so that future adjustments to prior year reserves
can be minimized. However, given the complexity of this process, reserves will
require continual updates and the ultimate liability may be higher or lower than
previously indicated. The Company does not discount its loss reserves.

Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:

                                          Year ended December 31,
                                ----------------------------------------------
                                   2001             2000             1999
                                -------------    ------------    -------------
                                               (in thousands)

Balance, beginning of year       $115,314           $93,719        $88,937
Less reinsurance recoverable       24,093            18,086         16,502
                                -------------    ------------    -------------
Net balance, beginning of year     91,221            75,633         72,435
Incurred related to:
     Current year                  60,885            66,214         54,768
     Prior years                       36             9,164          8,419
                                -------------    ------------    -------------
Total incurred                     60,921            75,378         63,187

Paid related to:
     Current year                  19,913            26,273         23,540
     Prior years                   38,183            33,517         36,449
                                -------------    ------------    -------------
Total paid                         58,096            59,790         59,989

Net balance, end of year           94,046            91,221         75,633
Plus reinsurance recoverable       25,552            24,093         18,086
                                -------------    ------------    -------------
Balance, end of year             $119,598          $115,314        $93,719
                                =============    ============    =============


In 2001, the Company increased incurred losses and loss adjustment expenses
attributable to insured events of prior years by $36,000. This increase related
entirely to the commercial automobile line of business. During 2001, the Company
increased its estimate for the commercial multi-peril liability line of business
by $1.8 million due to the development of outstanding claim reserves on claims
occurring primarily in 1998 and 1999.



                                     Page 9
<PAGE>


This increase was almost entirely offset by a reduction in the Company's
estimate for the non-standard personal automobile line of business due to
favorable settlements on closed claims.

In 2000, the Company increased incurred losses and loss adjustment expenses
attributable to insured events of prior years by $9,164,000. The increase is
primarily attributable to changes in the Company's estimates for losses and loss
adjustment expense reserves of $1,400,000 for commercial automobile, $3,900,000
for commercial multi-peril liability and $3,400,000 for other liability lines of
business.

The Company began writing commercial automobile coverage for vehicles and light
trucks in 1998. The initial estimates for 1998 and 1999 were based on a
relatively low level of claims reported to the Company. In 2000, the Company
received a significant number of claims relating to accidents incurred in 1998
and 1999. In the fourth quarter of 2000, the Company exited the commercial
automobile line of business due to unsatisfactory underwriting results.

The change in estimates in 2000 for the commercial multi-peril liability line of
business resulted principally from increased exposure to liquor liability losses
for policies primarily written in 1998 and 1999. In 2000, the Company revised
its underwriting approach significantly to reduce its exposure to liquor
liability.

The change in estimates in 2000 for the other liability line resulted
principally from construction defect claims, which were new types of claims that
were not anticipated when the Company wrote these policies between 1991 and
1996. These claims predominantly related to residential contractors and
sub-contractors in California. In 2000, the Company completed its withdrawal
from the residential contractors and sub-contractors industry segment.

In 1999, the Company increased incurred losses and loss adjustment expenses
attributable to insured events of prior years by $8,419,000. The increase is
primarily attributable to changes in estimates for losses and loss adjustment
expense reserves for non-standard personal automobile line of business. In 1999,
the Company received a significant number of claims relating to accidents
incurred prior to 1999, resulting in an increase in loss estimates. In 1999, the
Company exited the non-standard personal automobile lines.

Incurred losses and loss adjustment expenses include estimates, recorded as loss
and loss adjustment expense reserves on the balance sheet, for the ultimate
payment on both reported and unreported claims. The Company changes its
estimates for loss and loss adjustment expenses reserves as new events occur, as
more loss experience is acquired or as additional information is received.
Estimates for loss and loss adjustment expense reserves result from a continuous
review process and the change in these estimates, as required by Financial
Accounting Standards Board No. 60, Accounting and Reporting by Insurance
Enterprises, paragraph 18, is recorded in the period that the change in these
estimates is made.

The Company believes that its loss and loss adjustment expense reserves are
fairly stated as of December 31, 2001 due to the exiting of non-standard
personal and commercial automobile lines of business and the reduction in
exposure to construction defect and liquor liability losses. In addition, the
Company implemented improvements in the loss reserving process, including the
development of monthly and quarterly loss and loss adjustment expense reserve
analyses and the creation of a reserve committee that meets quarterly.

The following table presents the Company's accident year loss and loss
adjustment expense ratios (the sum of losses and loss adjustment expenses
divided by premiums earned) for the ten most recent accident years (the year in
which the loss occurred), as recorded as of December 31, 1999, 2000 and 2001
after giving effect to the increase in loss and loss adjustment expenses
relating to changes in estimates of insured events of prior years. These
"accident year" loss ratios differ from the loss ratios included in the
Company's financial statements set forth elsewhere in this report in that the




                                    Page 10
<PAGE>

latter loss ratios are based upon the year in which losses are recognized for
accounting purposes, regardless of when the loss actually occurred or was
reported. See the notes to the consolidated financial statements included
herein.

                                As of December 31,
                   ------------------------------------------------
Accident Year        1999              2000               2001
                   ------------    --------------      ------------

1992                 69.6             72.1                 72.5
1993                 70.9             70.2                 71.3
1994                 69.1             72.0                 71.8
1995                 63.9             65.4                 65.1
1996                 68.1             68.3                 69.4
1997                 62.4             62.0                 62.1
1998                 63.6             65.8                 65.0
1999                 63.8             68.2                 70.0
2000                                  72.4                 70.2
2001                                                       68.5


The following table represents the development of unpaid loss and loss
adjustment expense reserves during the ten years ended December 31, 2001. The
top of the table reflects the ten-year development of the Company's reserves,
net of reinsurance. The bottom of the table reconciles 1992 through 2001 ending
reserves to the gross reserves in the Company's consolidated financial
statements. Prior to 1992, the Company developed its reserves on a net of
reinsurance basis and restatement for those prior years is not presented. The
top line of the table shows the estimated reserve for unpaid loss and loss
adjustment expenses at the balance sheet date for each of the indicated years.
These figures represent the estimated amount of unpaid loss and loss adjustment
expenses for claims arising in all prior years that were unpaid at the balance
sheet date, including losses that had been incurred but not yet reported. The
table also shows the re-estimated amount of the previously recorded reserve
based on experience as of the end of each succeeding year. The estimate changes
as more information becomes available about the frequency and severity of
claims. The cumulative redundancy or deficiency represents the aggregate change
in the reserve estimates over all prior years.




                                    Page 11
<PAGE>
<TABLE>
<CAPTION>

                     1991      1992      1993       1994      1995      1996       1997        1998      1999       2000       2001
                    ---------------------------------------------------------------------------------------------------------------
<S>                <C>       <C>        <C>        <C>       <C>        <C>        <C>        <C>        <C>       <C>      <C>
Reserves for unpaid
 losses and loss
 adjustment        $25,681   $26,110    $26,830    $35,307   $46,512    $55,656    $68,863    $72,435    $75,633   $91,221  $94,046
 Expenses,
 as stated
 (In thousands)

a. Net cumulative
   paid as of
   1 year later     $6,605    $7,381     $6,852    $12,383   $17,208    $23,660    $30,236    $36,449    $34,626    38,183
   2 years later    10,988    11,127     13,127     20,617    29,612     38,819     51,141     55,718     57,415
   3 years later    13,325    15,546     18,656     27,266    38,091     50,982     63,470     70,370
   4 years later    16,417    19,253     22,254     32,119    44,016     57,613     72,651
   5 years later    19,283    21,503     24,303     34,883    48,236     62,724
   6 years later    20,872    22,796     25,642     37,687    51,485
   7 years later    21,881    23,714     27,121     39,863
   8 years later    22,452    24,959     28,449
   9 years later    23,303    25,979
   10 years later   24,006

b. Reserves
   re-estimated as
   of end of year
   1 year later    $23,228   $24,478    $23,897    $33,601   $45,708    $55,997    $68,946    $80,855    $84,797   $91,257
   2 years later    22,383    21,945     23,489     34,281    47,225     57,913     76,217     86,351     86,863
   3 years later    20,471    22,032     24,558     36,453    47,378     63,575     79,881     86,899
   4 years later    20,819    22,767     26,335     36,359    50,704     67,310     81,226
   5 years later    21,726    23,935     26,380     38,768    54,245     68,567
   6 years later    22,550    24,143     27,532     41,425    54,740
   7 years later    22,761    24,776     29,050     42,095
   8 years later    23,117    26,485     29,804
   9 years later    24,280    26,948
   10 years later   24,644

Net cumulative
 redundancy
 (deficiency)       $1,037     ($839)   ($2,974)   ($6,788)  ($8,228)  ($12,911)  ($12,363)  ($14,463)  ($11,230)     ($36)

Gross liability
 for unpaid
 losses and
 loss adjustment
 expenses,
 as stated                   $31,703    $33,314    $44,796   $60,139    $70,728    $84,566    $88,937    $93,719  $115,314  $119,598
Reinsurance recoverable        5,593      6,484      9,489    13,627     15,072     15,703     16,502     18,086    24,093    25,552
Net liability for unpaid
 losses and loss adjustment
 expenses, as stated          26,110     26,830     35,307    46,512     55,656     68,863     72,435     75,633    91,221    94,046
                             -------- --------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------

Gross liability
 re-estimated
 - 1 year later               30,609     32,796     48,173    63,884     71,644     85,640     98,395    101,597   115,350
Reinsurance
 recoverable
 re-estimated                  6,131      8,899     14,572    18,176     15,647     16,694     17,540     16,800    24,093
Net liability
 re-estimated -
 1 year later                 24,478     23,897     33,601    45,708  55,997        68,946     80,855     84,797    91,257
                             -------- --------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------
Gross liability
 re-estimated -
 2 years later                30,390     36,243     53,009    66,405     74,312     92,832    104,664    104,137
Reinsurance
 recoverable
 re-estimated                  8,445     12,754     18,728    19,180     16,399     16,615     18,313     17,274
Net liability
 re-estimated -
 2 years later                21,945     23,669     34,281    47,225     57,913     76,217     86,351     86,863
                             -------- --------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------
Gross liability
 re-estimated -
 3 years later                33,992     41,600     56,042    66,891     80,574     97,786    105,248
Reinsurance
 recoverable
 re-estimated                 11,960     17,042     19,589    19,513     16,999     17,905     18,349
Net liability
 re-estimated
 - 3 years later              22,032     24,558     36,453    47,378     63,575     79,881     86,899
                             -------- --------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------
Gross liability
 re-estimated
 - 4 years later              38,165     43,824     56,167    68,927     84,831     98,244
Reinsurance
 recoverable
 re-estimated                 15,398     17,489     19,808    18,223     17,521     17,018
Net liability
 re-estimated
 - 4 years later              22,767     26,335     36,359    50,704     67,310     81,226
                             -------- --------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------
Gross liability
 re-estimated -
 5 years later                39,956     44,466     58,272    73,042     85,221
Reinsurance
 recoverable
 re-estimated                 16,021     18,086     19,504    18,797     16,654

Net liability
 re-estimated
 - 5 years later              23,935     26,380     38,768    54,245     68,567
                             -------- --------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------
Gross liability
 re-estimated
 - 6 years later              40,670     45,595     61,814    72,978
Reinsurance
 recoverable
 re-estimated                 16,527     18,063     20,389    18,238

Net liability
 re-estimated
 - 6 years later              24,143     27,532     41,425    54,740
                             -------- --------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------
Gross liability
 re-estimated
 - 7 years later              41,679       47,955   61,766
Reinsurance
 recoverable
 re-estimated                 16,903     18,905     19,671
Net liability
 re-estimated
 - 7 years later              24,776     29,050     42,095
                             -------- --------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------
Gross liability
 re-estimated
 - 8 years later              43,958     48,032
Reinsurance
 recoverable
 re-estimated                 17,473     18,228
Net liability
 re-estimated
- 8 years later               26,485     29,804
                             -------- --------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------
Gross liability
 re-estimated
 - 9 years later              44,248
Reinsurance
 recoverable
 re-estimated                 17,300
Net liability
 re-estimated
 - 9 years later              26,948
Gross cumulative
 deficiency                 ($12,545)  ($14,718)  ($16,970) ($12,838)  ($14,493)  ($13,678)  ($16,311)  ($10,418)     ($36)
</TABLE>




                                    Page 12
<PAGE>

The table below illustrates the sensitivity to a hypothetical change in the
Company's net loss and loss adjustment expense reserves as of December 31, 2001.
The selected scenarios are not predictions of future events, but rather
illustrative of the effect that such events may have on stockholders' equity.

<TABLE>
<CAPTION>
                                                                                                                Hypothetical
                                                                                                                 Percentage
                                                                    Balance of Net         Change in Net          Increase
                                                                    Loss and Loss          Loss and Loss       (Decrease) in
Hypothetical Change in Net Loss and Loss Adjustment                   Adjustment             Adjustment        Stockholders'
Expense Reserve                                                    Expense Reserves       Expense Reserve          Equity
                                                                 -------------------      -----------------    ---------------
<S>                                                                   <C>                      <C>                   <C>
3% increase                                                           $96,867                  $2,821                (2.3)%
2% increase                                                            95,927                   1,881                (1.5)
1% increase                                                            94,986                     940                (0.8)
No change                                                              94,046                     ---                  ---
1% decrease                                                            93,106                    (940)                0.8
2% decrease                                                            92,165                  (1,881)                1.5
3% decrease                                                            91,225                  (2,821)                2.3
</TABLE>


The following table sets forth ratios for the Company and the industry prepared
in accordance with statutory accounting practices ("SAP") prescribed or
permitted by state insurance authorities. The statutory combined ratio, which
reflects underwriting results but not investment income, is a traditional
measure of the underwriting performance of a property and casualty insurer. This
ratio is the sum of (i) the ratio of incurred losses and loss adjustment
expenses to net earned premium ("loss ratio"); and (ii) the ratio of expenses
incurred for commissions, premium taxes, administrative and other underwriting
expenses to net written premium ("expense ratio").

<TABLE>
<CAPTION>
                                                                           Years ended December 31,
                                                                    ---------------------------------------
                                                                       2001          2000         1999
                                                                    ------------  -----------  ------------
<S>                                                                 <C>              <C>          <C>
The Company:
SAP Basis (3)
Loss and loss adjustment expense ratio                                   68.5          82.4         73.8
Expense ratio                                                            33.6          33.2         34.9
                                                                    ------------  -----------  ------------
Combined ratio                                                          102.1         115.6        108.7
                                                                    ============  ===========  ============


                                                                           Years ended December 31,
                                                                    ---------------------------------------
                                                                     2001 (1)      2000 (2)     1999 (2)
                                                                    ------------  -----------  ------------
Property and casualty insurance industry :
SAP Basis (3)
Loss and loss adjustment expense ratio                                   88.0          81.5         78.8
Expense ratio                                                            25.9          27.5         27.8
Dividend ratio                                                             .5           1.4          1.3
                                                                    ------------  -----------  ------------
Combined ratio                                                          114.4         110.4        107.9
                                                                    ============  ===========  ============
</TABLE>

(1) Source: Industry Estimate for 2001, BestWeek, December 17, 2001 edition.
(2) Source: Best's Aggregates & Averages, Property/Casualty United States 2001
Edition
(3) While the SAP loss ratio is the same ratio as the loss ratio prepared in
accordance with generally accepted accounting principles ("GAAP"), the expense
ratio differs in two aspects. First, the numerator on a SAP basis represents
acquisition and other underwriting expenses relating to net written premiums
recorded during the calendar year, while, on a GAAP basis, the numerator
represents amortization of deferred policy acquisition costs and other
underwriting expenses. Second, the denominator on a SAP basis is net written
premiums, versus net earned premium on a GAAP basis.




                                    Page 13
<PAGE>

Reinsurance

The Company purchases reinsurance through contracts called "treaties" to reduce
its exposure to liability on individual risks and to protect against
catastrophic losses. Reinsurance involves an insurance company transferring or
"ceding" a portion of its exposure on a risk to another insurer (the
"reinsurer"). The reinsurer assumes the exposure in return for a portion of the
premium. The ceding of liability to a reinsurer does not legally discharge the
primary insurer from its liability for the full amount of the policies on which
it obtains reinsurance. The primary insurer will be required to pay the entire
loss if the reinsurer fails to meet its obligations under the reinsurance
agreement.

In formulating its reinsurance programs, the Company is selective in its choice
of reinsurers and considers numerous factors, the most important of which are
the financial stability of the reinsurer, its history of responding to claims
and its overall reputation. In an effort to minimize its exposure to the
insolvency of its reinsurers, the Company evaluates the acceptability and
reviews the financial condition of each reinsurer annually. The Company's policy
is to use only reinsurers that have an A.M. Best rating of "A- (Excellent)" or
better and that have at least $500 million in policyholders' surplus. A.M. Best
assigns ratings to each insurance company transacting business in the United
States. "A-" is the fourth highest of sixteen rating categories, and is
considered "excellent" by A.M. Best Co. These ratings are based upon factors of
concern to policyholders and are not directed toward the protection of
investors.

Since September 2001, the Company's multiple-line excess of loss treaty
reinsurance is with American Re, part of the Munich Re Group. American Re is
rated "A++" (Superior) by A.M. Best. For the three years prior to September 1,
2001, General Reinsurance Corporation, rated "A++" (Superior) by A.M. Best, was
the Company's reinsurer on their multiple-line excess of loss treaty. The
following is a summary of the Company's multiple-line excess of loss reinsurance
treaty:

<TABLE>
<CAPTION>
Line of Business                  Company Policy Limit                Reinsurance Coverage / Company Retention
--------------------------------- ---------------------------------- ------------------------------------------------------------

<S>                             <C>                                     <C>
Property                          $2.0 million per risk              $1.7 million per risk in excess of $300,000 per risk
Commercial Automobile             $1.0 million per occurrence        $750,000 per occurrence in excess of $250,000 per
                                                                     occurrence
General Liability                 $3.0 million per occurrence        $2.5 million per occurrence in excess of $500,000 per
                                                                     occurrence
</TABLE>

The combined Company retention for any one loss resulting from a common
occurrence involving both the property and general liability coverage on a
single risk is $500,000. The Company also maintains casualty contingent excess
coverage with American Re, which covers exposures such as punitive damages and
other extra-contractual obligations, losses in excess of policy limits (such as
bad faith and errors and omissions) and liability actions brought by two or more
of the Company's insureds against each other resulting from the same occurrence.

The Company offers umbrella liability policies up to $5.0 million per
occurrence. These policies are reinsured with American Re for 90% of policy
limits up to $1.0 million per occurrence and 100% of policy limits to $4.0
million in excess of $1.0 million per occurrence.

The Company maintains a catastrophic loss reinsurance program, the terms of
which provide for 100% retention of the first $1.0 million per occurrence,




                                    Page 14
<PAGE>

reinsurance of 90.0% of $1.0 million per occurrence in excess of $1.0 million
per occurrence and reinsurance of 100% of $23.0 million per occurrence in excess
of $2.0 million per occurrence.

As of January 1, 2002, the Company's catastrophic loss reinsurance program
includes: American Agricultural Insurance Company, Converium (North America),
Converium (UK), Everest Reinsurance Company, Hannover Ruckversicherungs, PXRE
Reinsurance Company, Shelter Reinsurance Company, Sirius International Insurance
Corporation and XL Re Ltd. All of these reinsurers are rated A- (Excellent) or
higher by A.M. Best and have policyholders' surplus greater than $500 million.

The Company may write individual policies with limits of liability greater than
the aforementioned Company policy limits. These limits of liability are 100%
reinsured on a facultative reinsurance basis.

Information regarding the amount of premiums written and ceded under reinsurance
treaties is included in Note 5 to the Consolidated Financial Statements included
herein.

Investments

The Company's investment policy seeks to maximize investment income consistent
with the overriding objective of maintaining liquidity and minimizing risk.
Approximately 93% of the Company's fixed-income securities as of December 31,
2001 were rated "A" or better by Standard & Poor's. Standard & Poor's rates
publicly traded securities in twenty categories ranging from AAA to CC.
Securities with ratings from AAA to BBB- (the top ten categories) are commonly
referred to as having an investment grade rating. As of December 31, 2001, the
Company's fixed-income investments had an effective average duration of
approximately 3.5 years. Publicly traded equity securities, the majority of
which consisted of preferred stocks, represented 16% of the Company's investment
portfolio as of December 31, 2001.

As of December 31, 2001, the Company's investment portfolio contained $48.8
million of mortgage-backed and asset-backed and collateral mortgage obligations.
All of these securities were rated "AA-" or better by Standard & Poor's or
Moody's and 75% were "AAA" or better by Standard & Poor's or Moody's, are
publicly traded, and have market values obtained from an external pricing
service. Changes in estimated cash flows due to changes in prepayment
assumptions from the original purchase assumptions are revised based on current
interest rates and the economic environment. Although the Company is permitted
to invest in other derivative financial instruments, real estate mortgages and
real estate, the Company does not invest in these financial instruments and does
not have any such investments in its investment portfolio.

The Company's investment portfolio is under the direction of its Investment
Committee, which is comprised of selected members of the Company's Board of
Directors and officers of the Company. The Investment Committee establishes and
monitors the Company's investment policies, which are intended to maximize
after-tax income while maintaining a high level of quality and liquidity in its
portfolio for insurance operations. All investment transactions are approved by
the Investment Committee.

The Investment Committee has retained General Re-New England Asset Management,
Inc, a wholly owned subsidiary of General Re Corporation, to manage its
investment portfolio in accordance with the investment strategy adopted by the
Investment Committee.


                                    Page 15
<PAGE>



The following table shows the classifications of the Company's investments at
December 31, 2001:

<TABLE>
<CAPTION>
                                                                         Amount
                                                                       reflected
                                                    Fair               on balance          Percent of
                                                   value                 sheet               total
                                              -----------------     -----------------    ---------------
                                                                     (In thousands)
<S>                                                     <C>              <C>                <C>
Fixed maturities:
   Available for sale:
      U.S. Treasury securities and obligations
          of U.S. government agencies                   $  4,195          $  4,195              2.4%

      Corporate securities                                52,021            52,021             29.6

      Mortgage-backed securities                          27,316            27,316             15.6

      Other structured securities                         21,462            21,462             12.2

      Municipal securities                                21,004            21,004             12.0

      Public utilities                                     9,255             9,255              5.3
                                                        --------          --------          -------
         Total available for sale
                                                         135,253           135,253             77.1
                                                        --------          --------          -------

   Held to maturity
      U.S. Treasury securities and
obligations

          of U.S. government agencies                     14,025            13,812              7.9

      Corporate securities                                   290               276              0.1

      Public utilities                                     1,002               996              0.6
                                                        --------          --------          -------
         Total held to maturity
                                                          15,317            15,084              8.6
                                                        --------          --------          -------


         Total fixed-maturity securities                 150,570           150,337             85.7
                                                        --------          --------          -------
   Equity securities:
      Common stock                                         7,977             7,977              4.5
      Preferred stock                                     17,172            17,172              9.8
                                                        --------          --------          -------


         Total equity securities                          25,149            25,149             14.3
                                                        --------          --------          -------


   Total investments                                    $175,719          $175,486            100.0%
                                                        ========          ========          =======
</TABLE>

The composition of the Company's portfolio of fixed-income investments were
rated by Standard & Poor's or Moody's at December 31, 2001, as follows:


          "AAA"                                  50%
          "AA"                                   18%
          "A"                                    25%
          "BBB"                                   6%
          Below "BBB"                             1%
                                               ------
                                                100%
                                               ======

The market risk of the Company's investment portfolio is descibed in
Quantitative and Qualitative Disclosures About Market Risk included herein.

Note 4 to the consolidated financial statements included herein sets forth the
net investment income results of the Company for 2001, 2000 and 1999.



                                    Page 16
<PAGE>


Competition

The property and casualty insurance industry is highly competitive and includes
several thousand insurers, ranging from large companies offering a wide variety
of products worldwide to smaller, specialized companies in a single state or
region and offering in some cases only a single product. The Company competes
with a significant number of these insurers in attracting quality general agents
and in selling insurance products. Many of the Company's existing or potential
competitors are larger excess and surplus lines and specialty admitted insurers
which have considerably greater financial and other resources, have greater
experience in the insurance industry and offer a broader line of insurance
products than the Company. The Company believes that in order to be successful
in its market, it must be aware of pricing cycles, must be able to minimize the
impact of such cycles through tight expense control and superior customer
service. Another competitive factor is the rating assigned by independent rating
organizations such as A.M. Best Company. Penn-America and Penn-Star currently
have a pooled rating from A.M. Best of "A-"(Excellent). "A-" is the fourth
highest of sixteen rating categories, and if considered "excellent" by A.M. Best
Co. These ratings are based upon factors of concern to policyholders and are not
directed toward the protection of investors.

The Company believes that its distribution strategy, which is based on building
and maintaining strong relationships with a small number of high quality general
agents that are enabled with the latest technological innovation, provides a
competitive advantage in the markets it targets. The "Marketing and
Distribution" section included herein more fully describes the elements of the
strategies which the Company believes provide this competitive advantage.

Regulation

General. The Company is subject to regulation under the insurance statutes and
regulations, including insurance holding company statutes, of the various states
in which it does business. These statutes are generally designed to protect the
interests of insurance policyholders, as opposed to the interests of
stockholders, and they relate to such matters as the standards of solvency which
must be met and maintained; the licensing of insurers and their agents; the
nature and limitations of investments; deposits of securities for the benefit of
policyholders; approval of policy forms and premium rates; periodic examination
of the affairs of insurance companies; annual and other reports required to be
filed on the financial condition of insurers or for other purposes;
establishment and maintenance of reserves for unearned premiums and losses; and
requirements regarding numerous other matters. All insurance companies must file
annual statements with certain state regulatory agencies and are subject to
regular and special financial examinations by those agencies. The last
regulatory financial examination of Penn-America was completed by the
Pennsylvania Insurance Department in 1999, covering the five-year period ended
December 31, 1998, and for Penn-Star, covering a two year period ended December
31, 1998, since its initial licensing in 1997.

Insurance Holding Company Laws. Pennsylvania, the Companies' state of domicile,
has laws governing insurers and insurance holding companies. The Pennsylvania
statutes generally require insurers and insurance holding companies to register
and file reports concerning their capital structure, ownership, financial
condition and general business operations. Under the statutes, a person must
generally obtain the Pennsylvania Insurance Department's approval to acquire,
directly or indirectly, 10% or more of the outstanding voting securities of the
company or any of its insurance company subsidiaries. The insurance department's
determination of whether to approve any such acquisition is based on a variety
of factors, including an evaluation of the acquirer's financial condition, the
competence of its management and whether competition would be reduced. All
transactions within a holding company's group affecting an insurer must be fair
and reasonable and the insurer's policyholders' surplus following any such
transaction must be both reasonable in relation to its outstanding liabilities




                                    Page 17
<PAGE>

and adequate for its needs. Notice to applicable regulators is required prior to
the consummation of certain transactions affecting insurance subsidiaries of the
holding company group.

Dividend Restrictions. PAGI is a holding company, the principal asset of which
is the common stock of Penn-America. The principal source of cash to meet the
Company's short-term liquidity needs, including the payment of dividends to
PAGI's stockholders and PAGI's operating expenses is dividends from
Penn-America. The Company has no long-term debt obligations or planned capital
expenditures that could impact its long-term liquidity needs. Penn-America's
principal sources of funds are underwriting operations, investment income and
proceeds from sales and redemptions of investments. Funds are used by
Penn-America and Penn-Star principally to pay claims and operating expenses, to
purchase investments and to make dividend payments to PAGI. The Company's future
liquidity is dependent on the ability of Penn-America to pay dividends to PAGI.

The National Association of Insurance Commissioners has adopted a system to test
the adequacy of statutory capital, known as "risk-based capital", which applies
to Penn-America Insurance Company and Penn-Star Insurance Company, Penn-America
Insurance Company's wholly-owned subsidiary. This system establishes the minimum
amount of risk-based capital necessary for a company to support its overall
business operations. It identifies property and casualty insurers that may be
inadequately capitalized by looking at certain inherent risks of each insurer's
assets and liabilities and its mix of net written premiums. Insurers falling
below a calculated threshold may be subject to varying degrees of regulatory
action, including supervision or control. Penn-America is also subject to
regulations under which payment of dividends from statutory surplus may require
prior approval from the Pennsylvania Insurance Department. Penn-America may pay
dividends to PAGI without advance regulatory approval only from unassigned
surplus and only to the extent that all dividends in the past twelve months do
not exceed the greater of 10% of total statutory surplus or statutory net income
for the prior year. Using these criteria, the available ordinary dividend for
2002 is $6,473,325. Ordinary dividends paid by Penn-America to PAGI in 2001 were
$1.6 million. No ordinary dividends were paid to PAGI in 2000. Rather,
Penn-America paid a $6.4 million return of capital to PAGI in 2000, after
receiving approval from the Pennsylvania Insurance Department, which PAGI used
to repurchase stock and pay dividends and PAGI operating expenses.
Penn-America's ability to pay future dividends to us without advance regulatory
approval is dependent upon maintaining a positive level of unassigned and
policyholders' surplus, which in turn, is dependent upon Penn-America Insurance
Company and Penn-Star Insurance Company generating net income in excess of
dividends to the Company. As of December 31, 2001, Penn-America Insurance
Company's unassigned surplus was $64,733,251 million and Penn-Star Insurance
Company's policyholders' surplus was $33,389,965 million.

Insurance Guaranty Funds. Under insolvency or guarantee laws in states in which
Penn-America is licensed as an admitted insurer (and in New Jersey),
organizations have been established (often referred to as guaranty funds) with
the authority to assess admitted insurers up to prescribed limits for the claims
of policyholders insured by insolvent, admitted insurance companies. Surplus
lines insurance companies are generally not subject to such assessments except
in New Jersey and their policyholders are not eligible to file claims against
the guaranty funds.

Additional Legislation or Regulations. New regulations and legislation are
proposed from time to time to limit damage awards, to bring the industry under
regulation by the federal government, to control premiums, policy terminations
and other policy terms, and to impose new taxes and assessments. Difficulties
with insurance availability and affordability have increased legislative
activity at both the federal and state levels. Some state legislatures and
regulatory agencies have enacted measures, particularly in personal lines, to




                                    Page 18
<PAGE>

limit midterm cancellations by insurers and require advance notice of renewal
intentions. In addition, Congress is investigating possible avenues for federal
regulation of the insurance industry.

Employees

The Company has approximately 100 employees. The Company is not a party to any
collective bargaining agreements and believes that its employee relations are
good.

Item 2. Properties

The Company leases approximately 23,000 square feet in an office building
located in Hatboro, Pennsylvania. The office building also houses Penn
Independent and certain of its subsidiaries. The Company leases the space from
Mr. Irvin Saltzman, Chairman of the Board of Directors of the Company, pursuant
to a lease agreement renewed June 30, 2000 that expires on June 30, 2005, and
provides for an annual rental payment of $357,247. This amount is considered by
the Company to be at fair market value.

ITEM 3. Legal Proceedings

The Company's insurance subsidiaries are subject to routine legal proceedings in
connection with their property and casualty business. Penn-America has been
named as a defendant in litigation commenced in the Superior Court of
California, County of Los Angeles, on November 6, 2000 and in an identical suit
on December 18, 2000 in the County of Orange relating to the Company's exited
non-standard personal automobile business. Management believes that its position
is defensible as to such litigation, but, the Company is pursuing settlement
discussions at this time. Irrespective of Management's current activity,
Management does not believe at this time that any settlement or judgment will
have a material effect on the Company's financial statements. The Company is
involved in no other pending or threatened legal or administrative proceedings
which management believes might have a material adverse effect on the Company's
financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted during 2001 to a vote of holders of PAGI's common stock.





                                    Page 19
<PAGE>


                                     PART II

ITEM 5. Market for the Registrant's Common Stock and Related
        Stockholder Matters

Market and Common Stock Information
The Company's common stock trades on the New York Stock Exchange under the
symbol "PNG". As of February 1, 2002 there were 190 registered holders of record
and approximately 1,000 beneficial holders of record of the company's common
stock. The high and low sale prices of the common stock were as follows:

                                             Market Price (1)
                                       --------------------------------
                                          High                Low
                                       --------------    --------------
Year Ended December 31, 2001
     First Quarter                        $ 6.97             $4.79
     Second Quarter                         7.00              6.67
     Third Quarter                          6.80              6.40
     Fourth Quarter                         7.03              6.00

Year Ended December 31, 2000
     First Quarter                        $ 6.00             $4.42
     Second Quarter                         6.50              4.75
     Third Quarter                          5.25              4.59
     Fourth Quarter                         6.29              4.59

(1) Market prices are adjusted to reflect a three-for-two split of the Company's
common stock effected on May 9, 2002.














                                    Page 20
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

Selected Financial Data

As described in Part I, the Company has restated its previously issued financial
statements for the years ended December 31, 2001, 2000, and 1999. See Note 1 to
consolidated financial statements for further information regarding the
restatement.

<TABLE>
<CAPTION>
                                                                          Year ended December 31,
                                           --------------------------------------------------------------------------------------
                                               2001               2000              1999             1998               1997
                                           --------------     --------------    -------------    --------------     -------------
                                            (Restated)         (Restated)        (Restated)
                                                                    (dollars in thousand, except per share data)

Operating Data:
<S>                                       <C>                <C>                 <C>                 <C>                 <C>
Premiums earned                           $  88,934          $  91,449           $  85,677           $  89,493           $  91,649
Net investment income                        11,339             10,454               9,537              10,763               9,218
Net realized investment gain (loss)              18              1,314              (1,178)             (2,808)               (110)

Total revenues                               99,095             99,095              95,104             100,274             102,853

Net income (loss)                             4,940             (4,831)              1,410               8,881               9,645
Comprehensive income (loss)                   7,254               (343)             (5,000)              9,946              10,301
Diluted net income (loss) per share (1)        0.43              (0.42)               0.11                0.60                0.78


Cash dividends per share (1)              $    0.14          $    0.14           $  0.1383           $  0.1333           $  0.1067
Cash flow provided (used) by
operations (2)                                8,423             14,991               8,602              10,644              24,988

Insurance Performance Data
Gross written premiums (3)                $  98,412          $ 109,791           $  95,983           $  95,097           $ 104,694
Net written premiums (4)                     87,123             97,250              87,036              87,829              96,561
GAAP basis:
     Loss ratio (5)                            68.5               82.4                73.8                62.3                63.0
     Expense ratio (6)                         34.6               34.0                34.5                33.9                33.2
                                          ---------          ---------           ---------           ---------           ---------
     Combined ratio (7)                       103.1              116.4               108.3                96.2                96.2


Balance Sheet Data (at the end of the
period):
Cash and investments                      $ 188,615          $ 178,675           $ 166,227           $ 182,866           $ 177,819
Total assets                                248,115            239,486             217,782             230,504             225,157
Total stockholders' equity                   80,391             74,051              80,618             100,630              97,307
Total stockholders' equity per share (1)       7.00               6.52                6.67                7.14                6.56

__________
<FN>
(1)  Adjusted to reflect a three-for-two split of the Company's common stock effected on May 9, 2002.

(2)  Cash flow provided (used) by operations differs from net income (loss), due to the fact that net income (loss) includes
     accruals for non-cash items as required by GAAP and net realized investment gain (loss).

(3)  The amount received or to be received for insurance policies written by us during a specific period of time without reduction
     for acquisitions costs, reinsurance costs or other deductions.

(4)  The total of gross written premiums less the portion of such premiums ceded to (reinsured by) other insurers during a specific
     period of time.

(5)  The ratio of losses and loss adjustment expenses to premiums earned.

(6)  The ratio of amortization of deferred policy acquisition costs and other underwriting expenses to premiums earned.

(7)  The addition of the loss ratio and expense ratio.
</FN>
</TABLE>






                                                              Page 21
<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition
and Results of Operations

Penn-America Group, Inc. ("PAGI" or the "Company") has recently resolved various
accounting and disclosure comments from the Securities and Exchange Commission
("SEC"), in conjunction with the Company's registration statement filing
relating to the issuance of additional shares of common stock. One of the
comments addressed the timing of recording other than temporary ("OTT") declines
in the market value of certain equity securities. In order to resolve the
comments, the Company agreed to amend its accounting policy and record OTT
write-downs on these securities for the periods ending December 31, 2001, 2000
and 1999. This restatement affects net income for each of these periods but has
no affect on stockholders' equity since the unrealized loss on these securities
was already recorded in Accumulated Other Income (Loss) in the Consolidated
Balance Sheets and Statements of Stockholders' Equity. The Company has restated
its financial statements for the affected periods and has filed such
restatements on this amended Form 10-K for the year ended December 31, 2001. For
further information, see Note 1 of the Notes to Consolidated Financial
Statements.

The affect of the restatement on total revenues, net income (loss), and basic
and diluted net income (loss) per share are as follows:

<TABLE>
<CAPTION>
                                                                     For the years ended
                            -------------------------------------------------------------------------------------------------------
                                   December 31, 2001                   December 31, 2000                  December 31, 1999
                            --------------------------------     -------------------------------    -------------------------------

                            As Reported       As Restated        As Reported      As Restated       As Reported      As Restated
                            --------------    --------------     -------------    --------------    --------------   --------------

<S>                              <C>              <C>          <C>                  <C>                <C>               <C>
Total revenues                   $99,718          $99,095        $100,572           $99,095            $96,055           $95,104

Net income (loss)                  5,351            4,940          (3,856)           (4,831)             2,038             1,410
Net income (loss) per share
     Basic                          0.47             0.43           (0.33)            (0.42)              0.16              0.11
     Diluted                        0.47             0.43           (0.33)            (0.42)              0.16              0.11
</TABLE>

The OTT write-downs are non-cash items, and have no affect on stockholders'
equity as the declines in market value on preferred and common stocks were
previously recorded in stockholders' equity as net unrealized losses in
accumulated other income (loss).

In addition, the SEC requested the Company add certain disclosures or not
disclose certain information. This Management's Discussion and Analysis of
Financial Condition and Results of Operations has been amended to respond to
those requests.

The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements of the Company and Notes to the Consolidated
Financial Statements.

General

Penn-America Group, Inc. ("PAGI") is a specialty property and casualty insurance
holding company which, through its subsidiary, Penn-America Insurance Company
and its subsidiary Penn-Star Insurance Company (collectively "Penn-America" or
the "Company") markets and underwrites commercial property, general liability
and multi-peril insurance for small businesses located primarily in small towns
and suburban and rural areas. Penn-America can write business in all fifty
states and the District of Columbia. The Company writes business on both an




                                     Page 22
<PAGE>

admitted and non-admitted (excess and surplus lines) basis in thirty-six states,
on only an admitted basis in two states and on only a non-admitted basis in
twelve states and the District of Columbia. The Company chooses in each state
whether to write business on an admitted or non-admitted basis based upon the
Company's analysis of competition in each state. Writing business on an admitted
basis is highly regulated. The regulations, which vary by state, generally
govern licensing, underwriting rules, rates and policy forms, and require
insurance companies to pay premium taxes and guaranty fund assessments. Writing
business on a non-admitted basis is significantly less regulated and provides
much more freedom in setting rules, rates and policy forms and removes insurance
companies from premium taxes and guaranty fund assessment liabilities. Coverage
written on a non-admitted basis is less comprehensive than coverage issued on an
admitted basis. If the Company chooses non-admitted status, the Company could be
at a competitive disadvantage to carriers writing on an admitted basis if those
competitors choose to offer coverages which are more comprehensive and
attractive to an insured. Further, surplus lines agents are prohibited from
writing non-admitted business in states in which they are not resident. Thus, if
the Company does not have resident surplus lines agents in every state
(currently, we do not in 7 states), the Company is precluded from writing
business on a non-admitted basis in those states.

Penn-America's commercial insureds consist primarily of small, "Main Street"
businesses including restaurants, mercantiles and non-residential service
contractors. In addition, the Company has developed customized products and
coverages for other small commercial insureds such as day-care facilities,
fitness centers and special events. The Company believes it has benefited from a
general migration of small businesses out of urban centers and into suburban and
rural areas. Industry consolidation, corporate downsizing and the increased use
of communications technology and personal computers, among other factors, have
contributed to the high growth in the number of small businesses in these areas.
The Company selects only insurance lines of business and industry segments for
which it can reasonably evaluate the probability of future loss exposure.
Therefore, the Company avoids high-hazard risks and high-hazard lines of
business such as medical malpractice and environmental liability.

Penn-America markets its products through fifty-seven high-quality general
agents, who in turn produce business through more than 25,000 retail insurance
brokers located throughout the United States. The Company focuses on serving the
insurance needs of small businesses in small towns and rural areas that are
serviced by retail insurance brokers with limited access to larger, standard
lines insurers. The Company believes that larger, standard lines insurers, which
often limit their underwriting to larger policies and to certain risk classes,
generally underserve these markets. Penn-America believes that its distribution
network enables it to effectively access these numerous small markets at a
relatively low fixed-cost through the marketing, underwriting and administrative
support of its general agents. This access also is enabled by the local market
knowledge and expertise of its general agents and their retail insurance
brokers.

Penn-America's distribution strategy is to maintain strong relationships with a
select group of high-quality general agents. The Company carefully selects a
limited number of general agents based on their experience and reputation and
strives to preserve each agent's franchise value within its marketing territory.
The Company seeks to grow with these general agents and to develop strong,
long-standing relationships by providing a high level of service and support.
The success of the Company's strategy is demonstrated by its strong and
consistent growth. From 1992 to 2001, commercial gross written premiums grew at
an 18% compound annual rate from $22.6 million to $98.4 million while the number
of general agents rose from 38 to 57.







                                    Page 23
<PAGE>



Commercial Gross Written Premium
Per General Agent
(Same Store Sales)
<TABLE>
<CAPTION>
                                                                     Compound
                                                                      Annual
(Dollars in millions)            1992               2001             Growth %
--------------------------------------------------------------------------------
<S>                            <C>                    <C>                 <C>
Commercial gross
    written premiums           $  22.6                $98.4               18%
Number of general
    agents                         38                    57                5%
Commercial gross
    written premiums
    per general agent          $   0.6                $ 1.7               13%
--------------------------------------------------------------------------------
</TABLE>


Core Commercial Business

The Company underwrites its core commercial business (excluding the Company's
exited commercial automobile business - see Exited Lines, below) through three
underwriting units: the Binding Authority Unit, the Submit Unit and the
Specialty Lines Unit, which are defined as follows:

o    Binding authority business represents risks that may be quoted and bound by
     the Company's general agents prior to the Company's underwriting review.

o    Submit business represents risks that must be submitted by the Company's
     general agents to the Company prior to quoting or binding the account.

o    Specialty lines business represents risks that meet specific,
     pre-determined industry-segment and territorial parameters and may be
     quoted or bound by the Company's general agents prior to the Company's
     underwriting review.

The Binding Authority Unit accounted for approximately 88% of the Company's core
commercial gross written premiums in 2001. Of this amount, approximately 85% is
bound by general agents in accordance with the Company's underwriting manual.
The Binding Authority Unit reviews, on a continuous basis, the new and renewal
policies issued by the general agents to ensure that the Company's underwriting
guidelines are followed. The Company provides its general agents with a
comprehensive, regularly updated underwriting manual, which also is available
online through a private intranet site called PennLINK. This manual clearly
outlines the Company's risk eligibility, pricing, underwriting guidelines and
policy issuance instructions. Penn-America closely monitors the underwriting
quality of its business through on-line system edits and in-force account
reviews. The Company also periodically audits each agent's office to determine
if the Company's underwriting guidelines are followed in all aspects of risk
selection, underwriting compliance, policy issuance and pricing. In addition to
standard commissions, the Company provides strong incentives to its general
agents to produce profitable business through a contingent profit commission
structure that is tied directly to underwriting profitability. Payments of these
contingent profit commissions have been through the issuance of shares of PAGI
common stock and cash. Since 1996, the Company has awarded agents approximately
276,000 shares of PAGI common stock through its contingent profit commission
structure.



                                    Page 24
<PAGE>


The Submit Unit was formed in 1999 in response to general agents who had risks
similar to the Company's risk profile but were outside of their underwriting
authority. The unit provides a market to the Company's general agents for
approximately fifty classes of business. One hundred percent of the business is
quoted and bound by Penn-America underwriters; general agents have no binding
authority. This unit accounted for approximately 5% of core commercial gross
written premiums in 2001.

The Specialty Lines Unit, which accounted for 7% of the Company's core
commercial gross written premiums in 2001, creates specialized underwriting and
marketing programs for individual general agents based upon specific territorial
needs and opportunities. The individual general agent typically is given
exclusive marketing authority for the program subject to territorial
limitations. The Company believes it can achieve superior underwriting results
and expense savings on these programs. The Company continuously is developing
specialized programs for certain industry segments to meet the needs of these
insureds. For example, Penn-America has developed programs for cargo and Alaska
dwellings. Collectively, these programs are a significant benefit to the
Penn-America's marketing efforts.

Exited Lines

The Company offered commercial automobile coverage from 1998 through the first
quarter of 2001. In late 2000, the Company announced that it was exiting this
line of business due to unsatisfactory underwriting results. No new policies
have been written since the first quarter of 2001 and all policies are being
non-renewed. Gross written premiums for commercial automobile business decreased
to $1.1 million in 2001 from $11.5 million in 2000 and $7.0 million in 1999.

The Company exited non-standard personal automobile business in 1999 and, as a
result, gross written premiums declined to $2,000 in 2001 from $2.8 million in
2000 and $11.5 million in 1999.

Competition

The property and casualty insurance industry is highly competitive. Penn-America
competes with domestic and international insurers, some of which have greater
financial, marketing and management resources and experience than the Company.
The Company also may compete with new market entrants in the future. Competition
is based on many factors including the perceived market strength of the insurer,
pricing and other terms and conditions, services provided, the speed of claims
payment, the reputation and experience of the insurer and ratings assigned by
independent rating organizations such as A.M. Best Company. Penn-America
Insurance Company and Penn-Star Insurance Company currently have a pooled rating
from A.M. Best of "A-" (Excellent). "A-" is the fourth highest of sixteen rating
categories, and is considered "excellent" by A.M. Best Co. These ratings are
based upon factors of concern to policyholders and are not directed toward the
protection of investors.

Reinsurance

The Company purchases reinsurance in order to lower its retention for individual
risks, enable it to underwrite policies with higher limits of liability and to
protect against catastrophic losses. Reinsurance does not discharge the Company
from its primary liability for the full amount of insured claims. The Company
carefully examines the financial condition of its reinsurers and places its
coverage only with financially sound companies.



                                    Page 25
<PAGE>



The Company has a multiple-line excess-of-loss reinsurance treaty currently in
place that provides the following reinsurance coverage:

<TABLE>
<CAPTION>
Line of Business            Company Policy Limit             Reinsurance Coverage / Company Retention
<S>                        <C>                               <C>
Property                    $2.0 million per risk            $1.7 million per risk in excess of $300,000 per risk
Commercial Automobile       $1.0 million per occurrence      $750,000 per occurrence in excess of $250,000 per
                                                             occurrence
General Liability           $3.0 million per occurrence      $2.5 million per occurrence in excess of $500,000 per
                                                             occurrence
</TABLE>

Umbrella liability coverages are provided up to $5.0 million per occurrence and
are reinsured for 90% of policy limits up to $1.0 million per occurrence and
100% of policy limits to $4.0 million in excess of $1.0 million per occurrence.

The Company may write individual policies with limits of liability greater than
the aforementioned Company policy limits. These limits of liability are 100%
reinsured on a facultative reinsurance basis.

The Company maintains a catastrophic loss reinsurance program the terms of which
provide for 100% retention of the first $1.0 million per occurrence, reinsurance
of 90.0% of $1.0 million per occurrence in excess of $1.0 million per occurrence
and reinsurance of 100% of $23.0 million per occurrence in excess of $2.0
million per occurrence.

Results of Operations

Year ended December 31, 2001 compared with year ended December 31, 2000

Gross written premiums decreased 10.4% to $98.4 million for the year ended
December 31, 2001 from $109.8 million for the year ended December 31, 2000. The
decrease was due to the decline of $13.2 million in gross written premiums for
the exited commercial and non-standard personal automobile lines. Core
commercial gross written premiums increased 1.9% in 2001 to $97.3 million from
$95.5 million in the prior year. This increase was attributable mainly to rate
increases implemented during the year as well as growth in new business, which
were offset partially by a decline in the renewal ratio due to the Company's
decision to exit the residential contractors industry segment.

Ceded written premiums, the portion of gross premiums reinsured by other
unaffiliated insurers, decreased to $11.3 million for the year ended December
31, 2001 compared to $12.5 million for the year ended December 31, 2000. The
decline is ceded written premiums is primarily due to the decline in gross
written premiums.

Net written premiums, which are gross written premiums less ceded written
premiums, decreased 10.4% to $87.1 million for the year ended December 31, 2001
from $97.3 million for the year ended December 31, 2000. This decline is
consistent with the drop in gross written premiums. Premiums earned decreased
2.8% to $88.9 million for the year ended December 31, 2001 from $91.5 million
for the year ended December 31, 2000.

Net investment income increased 8.5% to $11.3 million for the year ended
December 31, 2001 from $10.5 million for the year ended December 31, 2000. The
increase resulted principally from an increase in the investment yield of the
fixed-income investment portfolio and the growth in invested assets, partially
offset by a decline in interest rates on overnight cash balances.

Net realized investment loss for the year ended December 31, 2001 was $1.2
million for the year ended December 31, 2001 as compared with $2.8 million for
the year ended December 31, 2000. Net realized investment loss for the years




                                    Page 26
<PAGE>

ended December 31, 2001 and 2000 included other-than-temporary impairment
write-downs on certain of the Company's preferred and common stock investments
of $1.2 million and $1.7 million, respectively.

For the year ended December 31, 2001, the other-than-temporary impairment
write-down was primarily due to declines in the market value of two common stock
exchange-traded funds, S & P 500 Depositary Receipts and Biotech Holders Trust,
totaling $1.0 million. For the year ended December 31, 2000, the
other-than-temporary impairment write-downs were due to declines in the market
value of twelve preferred stock securities totaling $1.3 million and one common
stock, AMEX Technology Fund, totaling $0.4 million.

Losses and loss adjustment expenses decreased 19.2% to $60.9 million in 2001 as
compared with $75.4 million in 2000. The 2000 operating results included
strengthening of prior year loss reserves of $9.2 million. This prior year
reserve increase related principally to the commercial automobile liability,
commercial multi-peril liability and other liability lines of business.

The September 11, 2001 tragedies in New York, Washington D.C. and Pennsylvania
resulted in no property or casualty losses to the Company.

Amortization of deferred acquisition costs (ADAC) decreased 9.9% to $22.7
million for the year ended December 31, 2001 from $25.2 million for the year
ended December 31, 2000. The decrease is due to lower commission rates to
general agents that were implemented in the third quarter of 2000 and lower
premium taxes as a result of the Company writing a larger portion of its
business on a non-admitted basis. Also contributing to the decrease were lower
commissions related to the exited lines of business. Non-standard personal
automobile commission rates were higher than commercial rates.

Other underwriting and corporate expenses increased 29.2% to $8.6 million for
the year ended December 31, 2001 from $6.6 million for the year ended December
31, 2000. This increase was due to the recording of additional expenses related
to guarantee fund assessments and an increase in the allowance for doubtful
accounts. Costs related to audits of assureds' records and salary expenses also
were higher in 2001 than in the prior year.

The GAAP combined ratio, which is the sum of the loss and expense ratios,
decreased to 103.1 for the year ended December 31, 2001 compared with 116.4 for
the year ended December 31, 2000. The loss ratio, which is calculated by
dividing losses and loss adjustment expenses by premiums earned, decreased to
68.5 for the year ended December 31, 2001 from 82.4 for the year ended December
31, 2000. As noted above, 2000 operating results included the strengthening of
prior year loss reserves by $9.2 million. This strengthening added approximately
10.0 points to the 2000 loss and combined ratios. The GAAP expense ratio, which
is calculated by dividing the sum of ADAC and other underwriting expenses by
premiums earned, for the year ended December 31, 2001, increased slightly to
34.6 from 34.0 for the year ended December 31, 2000. The GAAP combined ratio is
a standard measure of underwriting profitability used throughout the property
and casualty insurance industry. A ratio below 100.0 generally indicates
profitable underwriting results.

As a result of the factors described above, net income for the year ended
December 31, 2001 was $4.9 million or $0.43 per share (basic and diluted) as
compared with a net loss of $4.8 million or $0.42 per share (basic and diluted)
for the year ended December 31, 2000.


                                    Page 27
<PAGE>

Year ended December 31, 2000, compared with year ended December 31, 1999

Gross written premiums increased 14.4% to $109.8 million for the year ended
December 31, 2000 from $96.0 million for the year ended December 31, 1999. This
increase resulted from a 26.7% increase in commercial lines gross written
premiums to $107.0 million, partially offset by a 75.8% decline in gross written
premiums for the non-standard personal automobile lines of business to $2.8
million. The Company exited the non-standard personal automobile lines of
business in 1999.

Net written premiums increased 11.7% to $97.3 million for the year ended
December 31, 2000 from $87.0 million for the year ended December 31, 1999.
During the same period, net premiums earned increased 6.7% to $91.5 million from
$85.7 million. The increase in net premiums earned corresponds to the increase
in gross and net written premiums.

Net investment income increased 9.6% to $10.5 million for the year ended
December 31, 2000 from $9.5 million for the year ended December 31, 1999. The
increase resulted principally from an increase in yields on fixed-income
investments and an increase in cash flows from operations due principally to the
growth in written premiums and a reduction in paid losses.

Net realized investment loss for the year ended December 31, 2000 was $2.8
million as compared with $0.1 million for the year ended December 31, 1999.
Realized investment losses were generated in 2000 due to our decision to sell
selected securities and reinvest the proceeds into higher-yielding securities,
along with other-than-temporary impairment write-downs due to declines in the
market value of eleven preferred stock securities totaling $1.3 million and one
common stock, AMEX Technology Fund, totaling $0.4 million.

Losses and loss adjustment expenses increased 19.3% to $75.4 million in 2000 as
compared with $63.2 million in 1999. The 2000 operating results included
strengthening of prior year loss reserves of $9.2 million relating principally
to our commercial automobile liability, commercial multi-peril liability and
other liability lines of business. Operating results in 1999 included adverse
loss development of $8.4 million in our discontinued non-standard personal
automobile, other liability and property lines of business. Property results in
1999 also were affected by losses related to Hurricanes Floyd and Irene and
other windstorm damage.

Amortization of deferred acquisition costs (ADAC) increased 1.7% to $25.2
million for the year ended December 31, 2000 from $24.8 million for the year
ended December 31, 1999. The increase was attributable primarily to the growth
in premiums earned.

Other underwriting and corporate expenses increased 10.0% to $6.6 million for
the year ended December 31, 2000 from $6.0 million for the year ended December
31, 1999. This increase was mainly attributable to increases in salary and
benefit expenses.

The GAAP combined ratio increased to 116.4 for the year ended December 31, 2000
compared with 108.3 for the year ended December 31, 1999. The loss ratio
increased to 82.4 for the year ended December 31, 2000 from 73.8 for the year
ended December 31, 1999. The GAAP expense ratio decreased to 34.0 for the year
ended December 31, 2000 from 34.5 for the year ended December 31, 1999.


                                    Page 28
<PAGE>

As a result of the factors described above, net loss for the year ended December
31, 2000 was $4.8 million or $0.42 per share (basic and diluted) as compared
with net income of $1.4 million or $0.11 per share (basic and diluted) for the
year ended December 31, 1999.

Critical Accounting Estimates and Policies

The Company is directly liable for losses and loss adjustment expenses under the
terms of the insurance policies it writes. In many cases, several years may
lapse between the occurrence of an insured loss, the reporting of the loss and
the payment of that loss. The Company reflects its liability for the ultimate
payment of all incurred losses and loss adjustment expenses by establishing loss
and loss adjustment expense reserves as balance sheet liabilities for both
reported and unreported claims.

When a claim involving a probable loss is reported, the Company establishes a
case reserve for the estimated amount of its ultimate loss. The estimate of the
amount of the ultimate loss is based upon factors such as:

         o the type of loss,
         o the jurisdiction of the occurrence,
         o the Company's knowledge of the circumstances surrounding the claim,
         o the severity of injury or damage,
         o the potential for ultimate exposure, and
         o policy provisions relating to the claim.

The Company determines loss adjustment expenses via a formula method that
estimates loss adjustment expenses as a percentage of expected indemnity losses
based on historical patterns adjusted to current experience.

In addition to case reserves, the Company establishes reserves on an aggregate
basis to provide for incurred but not reported losses and loss adjustment
expenses, commonly referred to as "IBNR". To establish reserves for IBNR, the
Company must estimate the ultimate liability based primarily on past experience.
The Company applies a variety of traditional actuarial techniques to estimate
its ultimate liability. The techniques recognize, among other factors:

         o the Company's and the industry's experience,
         o historical trends in reserving patterns and loss payments,
         o the impact of claim inflation,
         o the pending level of unpaid claims,
         o the cost of claim settlements, o the line of business mix, and
         o the economic environment in which property and casualty insurance
           companies operate.

The Company continually reviews these estimates and, based on new developments
and information, the Company includes adjustments of the probable ultimate
liability in the operating results for the periods in which the adjustments are
made. In general, initial reserves are based upon the actuarial and underwriting
data utilized to set pricing levels and are reviewed as additional information,
including claims experience, becomes available. The establishment of loss and
loss adjustment expense reserves makes no provision for the broadening of
coverage by legislative action or judicial interpretation or for the
extraordinary future emergence of new types of losses not sufficiently
represented in our historical experience, or which cannot yet be quantified. The
Company regularly analyzes its reserves and reviews pricing and reserving





                                    Page 29
<PAGE>

methodologies so that future adjustments to prior year reserves can be
minimized. However, given the complexity of this process, reserves will require
continual updates and the ultimate liability may be higher or lower than
previously indicated. The Company does not discount its loss reserves.

The table below illustrates the sensitivity to a hypothetical change in the
estimated net loss and loss adjustment expense reserves as of December 31, 2001.
The selected scenarios are not predictions of future events, but rather
illustrative of the effect that such events may have ultimate stockholders'
equity.


<TABLE>
<CAPTION>
(Dollars in thousands)                                                         Balance of          Change in       Hypothetical
Hypothetical change in net loss and loss adjustment expense reserve           Net Loss and         Net Loss         Percentage
                                                                                  Loss             and Loss          Increase
                                                                               Adjustment         Adjustment        (Decrease)
                                                                                 Expense            Expense             in
                                                                                Reserves            Reserve        Stockholders'
                                                                                                                      Equity
-----------------------------------------------------------------------       --------------      ------------     --------------
<S>                                                                              <C>                <C>                   <C>
3% adjustment - increase                                                         $96,867            $2,821                (2.3)%
2% adjustment - increase                                                          95,927             1,881                (1.5)
1% adjustment - increase                                                          94,986               940                (0.8)
No change                                                                         94,046                 -                 -
1% adjustment - decrease                                                          93,106              (940)                0.8
2% adjustment - decrease                                                          92,165            (1,881)                1.5
3% adjustment - decrease                                                          91,225            (2,821)                2.3
</TABLE>



      Activity in the liability for unpaid losses and loss adjustment expenses
is summarized as follows:

                                               Year ended December 31,
                                  ----------------------------------------------
                                      2001           2000               1999
                                  ----------------------------------------------
                                                 (in thousands)
Balance, beginning of year         $115,314           $93,719         $88,937
Less reinsurance recoverable         24,093            18,086          16,502
                                  ----------      -------------     ------------
Net balance, beginning of year       91,221            75,633          72,435
Incurred related to:
     Current years                   60,885            66,214          54,768
     Prior years                         36             9,164           8,419
                                  ----------      -------------     ------------
Total incurred                       60,921            75,378          63,187
Paid related to:
     Current year                    19,913            26,273          23,540
     Prior year                      38,183            33,517          36,449
                                  ----------      -------------     ------------
Total paid                           58,096            59,790          59,989
Net balance, end of year             94,046            91,221          75,633
Plus reinsurance recoverable         25,552            24,093          18,086
                                  ----------      -------------     ------------
Balance, end of year               $119,598          $115,314         $93,719
                                  ==========      =============     ============

In 2001, the Company increased incurred losses and loss adjustment expenses
attributable to insured events of prior years by $36,000. This increase related
entirely to the commercial automobile line of business. During 2001, the Company
increased its estimate for the commercial multi-peril liability line of business
by $1.8 million due to the development of outstanding claim reserves on claims
occurring primarily in 1998 and 1999. This increase was almost entirely offset
by a reduction in the Company's estimate for the non-standard personal
automobile line of business due to favorable settlements on closed claims.

In 2000, the Company increased incurred losses and loss adjustment expenses
attributable to insured events of prior years by $9,164,000. The increase is
primarily attributable to changes in the Company's estimates for losses and loss




                                    Page 30
<PAGE>

adjustment expense reserves of $1,400,000 for commercial automobile, $3,900,000
for commercial multi-peril liability and $3,400,000 for other liability lines of
business.

The Company began writing commercial automobile coverage for vehicles and light
trucks in 1998. The initial estimates for 1998 and 1999 were based on a
relatively low level of claims reported to us. In 2000, the Company received a
significant number of claims relating to accidents incurred in 1998 and 1999. In
the fourth quarter of 2000, the Company exited the commercial automobile line of
business due to unsatisfactory underwriting results.

The change in estimates in 2000 for the commercial multi-peril liability line of
business resulted principally from increased exposure to liquor liability losses
for policies primarily written in 1998 and 1999. In 2000, the Company revised
its underwriting approach significantly to reduce its exposure to liquor
liability.

The change in estimates in 2000 for the other liability line resulted
principally from construction defect claims, which were new types of claims that
were not anticipated when the Company wrote these policies between 1991 and
1996. These claims predominantly related to residential contractors and
sub-contractors in California. In 2000, the Company completed its withdrawal
from the residential contractors and sub-contractors industry segment.

In 1999, the Company increased incurred losses and loss adjustment expenses
attributable to insured events of prior years by $8,419,000. The increase is
primarily attributable to changes in estimates for losses and loss adjustment
expense reserves for non-standard personal automobile line of business. In 1999,
the Company received a significant number of claims relating to accidents
incurred prior to 1999, resulting in an increase in loss estimates. In 1999, the
Company exited the non-standard personal automobile lines.

Incurred losses and loss adjustment expenses include estimates, recorded as loss
and loss adjustment expense reserves on the balance sheet, for the ultimate
payment on both reported and unreported claims. The Company changes its
estimates for loss and loss adjustment expenses reserves as new events occur, as
more loss experience is acquired or as additional information is received.
Estimates for loss and loss adjustment expense reserves result from a continuous
review process and the change in these estimates, as required by Financial
Accounting Standards Board No. 60, Accounting and Reporting by Insurance
Enterprises, paragraph 18, is recorded in the period that the change in these
estimates is made.

The Company believes that its loss and loss adjustment expense reserves are
fairly stated as of December 31, 2001 due to the exiting of non-standard
personal and commercial automobile lines of business and the reduction in
exposure to construction defect and liquor liability losses. In addition, the
Company implemented improvements in the loss reserving process, including the
development of monthly and quarterly loss and loss adjustment expense reserve
analyses and the creation of a reserve committee that meets quarterly.

The following table presents accident year loss and loss adjustment expense
ratios (the sum of losses and loss adjustment expenses divided by premiums
earned) for the ten most recent accident years (the year in which the loss
occurred), as recorded as of December 31, 1999, 2000 and 2001 after giving
effect to the increase in loss and loss adjustment expenses relating to changes
in estimates of insured events of prior years. These "accident year" loss ratios
differ from the loss ratios included in the Company's financial statements in




                                    Page 31
<PAGE>

that the latter loss ratios are based upon the year in which we recognize the
loss for accounting purposes, regardless of when the loss actually occurred or
was reported to the Company. See notes to consolidated financial statements in
this report.

                                       As of December 31,

Accident Year                 1999           2000             2001
                           -----------     ----------      -----------

1992                           69.6            72.1            72.5
1993                           70.9            70.2            71.3
1994                           69.1            72.0            71.8
1995                           63.9            65.4            65.1
1996                           68.1            68.3            69.4
1997                           62.4            62.0            62.1
1998                           63.6            65.8            65.0
1999                           63.8            68.2            70.0
2000                                           72.4            70.2
2001                                                           68.5

Liquidity and Capital Resources

PAGI is a holding company, the principal asset of which is the common stock of
Penn-America Insurance Company. The principal source of cash to meet short-term
liquidity needs, including the payment of PAGI dividends to stockholders and
corporate expenses, is dividends from Penn-America Insurance Company. PAGI has
no long-term debt obligations or planned capital expenditures that could impact
PAGI's long-term liquidity needs. Penn-America Insurance Company's principal
sources of funds are underwriting operations, investment income and proceeds
from sales and redemptions of investments. Funds are used by Penn-America
Insurance Company and Penn-Star Insurance Company principally to pay claims and
operating expenses, to purchase investments and to make dividend payments to
PAGI. PAGI's future liquidity is dependent on the ability of Penn-America
Insurance Company to pay dividends to PAGI.

The Company's insurance subsidiaries are restricted by statute as to the amount
of dividends that they may pay without the prior approval of regulatory
authorities. Penn-America Insurance Company may pay dividends to PAGI without
advance regulatory approval only from unassigned surplus and only to the extent
that all dividends in the past twelve months do not exceed the greater of 10% of
total statutory policyholders' surplus, or statutory net income for the prior
year. Using these criteria, the available ordinary dividend payable by
Penn-America Insurance Company to PAGI for 2002 is $6,473,325. No ordinary
dividends have been paid to PAGI in 2002. Ordinary dividends paid by
Penn-America Insurance Company to PAGI in 2001 were $1.6 million. No ordinary
dividends were paid to PAGI in 2000. Rather, after receiving approval from the
Pennsylvania Insurance Department, Penn-America Insurance Company paid a $6.4
million return of capital to PAGI in 2000, which PAGI used to repurchase common
stock and to pay common stock dividends and PAGI operating expenses.
Penn-America Insurance Company's ability to pay future dividends to PAGI without
advance regulatory approval is dependent upon maintaining a positive level of
unassigned and policyholders' surplus, which in turn, is dependent upon
Penn-America Insurance Company and Penn-Star Insurance Company generating net
income in excess of dividends to PAGI.

Penn-America Insurance Company and Penn-Star Insurance Company are required by
law to maintain a certain minimum level of policyholders' surplus on a statutory
basis. Policyholders' surplus is calculated by subtracting total liabilities
from total assets. The National Association of Insurance Commissioners adopted
risk based capital standards designed to identify property and casualty insurers
that may be inadequately capitalized based on inherent risks of each insurer's
assets and liabilities and its mix of net written premiums. Insurers falling
below a calculated threshold may be subject to varying degrees of regulatory
action. As of December 31, 2001, the policyholders' surplus of Penn-America
Insurance Company and Penn-Star Insurance Company was in excess of the
prescribed risk-based capital requirements. Penn-America Insurance Company's





                                    Page 32
<PAGE>

policyholders' surplus at December 31, 2001 was $64,733,251 and its regulatory
action level was $17,124,648. Penn-Star Insurance Company's policyholders'
surplus at December 31, 2001 was $33,389,965 and its regulatory action level was
$5,675,459.

Net cash provided by operating activities decreased to $8.4 million for the year
ended December 31, 2001 from $15.0 million for the year ended December 31, 2000.
The decrease in net cash provided by operations resulted principally from the
decrease in net written premiums during 2001, partially offset by a decrease in
paid losses. Net cash used by investing activities was $5.5 million for the year
ended December 31, 2001, compared with $9.1 million for the year ended December
31, 2000.

Net cash used by financing activities was $1.2 million for the year ended
December 31, 2001 as compared with $6.5 million for the same period in 2000. In
2000, $4.7 million was used by us to repurchase 858,638 shares of our common
stock through a stock buy-back program, which was discontinued in the third
quarter of 2000.

Investment Portfolio

The Company seeks to maintain sufficient liquidity from operations, investing
and financing activities to meet its anticipated insurance obligations and
operating and capital expenditure needs. The Company's investment strategy
emphasizes quality, liquidity and diversification, as well as total return. With
respect to liquidity, the Company considers liability durations, specifically
related to loss reserves, when determining desired investment maturities. In
addition, maturities have been staggered to produce cash flows for loss payments
and reinvestment opportunities. At December 31, 2001, the Company held a total
of $188.6 million in cash and investments. Of this amount, cash represented
$13.1 million, equity securities represented $25.1 million, and fixed-income
securities represented $150.4 million.

The Company's cash and investments portfolio mix as December 31, 2001, was as
follows:

Fixed income:
    U.S. Treasury securities and obligations of U.S. government agencies   10%
    Corporate securities                                                   33%
    Mortgage-backed securities                                             8%
    Other structured securities                                            18%
    Municipal securities                                                   11%
                                                                         ------
Total fixed income                                                         80%
Cash and short-term                                                         7%
Preferred stock                                                             9%
Common stock                                                                4%
                                                                         ------
                                                                          100%
                                                                         ======

The Company's fixed-income portfolio of $150.4 million was 80% of the total cash
and investments as of December 31, 2001. Approximately 93% of these securities
were rated "A" or better by Standard & Poor's. Standard & Poor's rates publicly
traded securities in twenty categories ranging from AAA to CC. Securities with
ratings from AAA to BBB- (the top ten categories) are commonly referred to as
having an investment grade rating. Equity securities, the majority of which
consist of preferred stocks and common stocks (comprised exclusively of
exchange-traded funds), were $25.1 million or 13% of total cash and investments
as of December 31, 2001.




                                    Page 33
<PAGE>

As of December 31, 2001, the Company's investment portfolio contained corporate
fixed-income and preferred stock securities with a market value of $79.7
million. A summary of these securities by industry segment is as follows:



          Financial institutions                                            48%
          Communications                                                    11%
          Utilities                                                         11%
          Industrial                                                         8%
          Consumer, cyclical                                                 6%
          Basic materials                                                    6%
          Energy                                                             4%
          Technology                                                         3%
          Consumer, non-cyclical                                             3%
                                                                          ------
                                                                           100%
                                                                          ======

As of December 31, 2001, the Company's investment portfolio contained $48.8
million of mortgage-backed, asset-backed and collateralized mortgage
obligations. All of these securities were rated "AA-" or better and 75% were
rated "AAA" by Standard & Poor's. These securities are publicly traded, and had
market values obtained from an independent pricing service. Changes in estimated
cash flows due to changes in prepayment assumptions from the original purchase
assumptions are revised based on current interest rates and the economic
environment. The Company had no derivative financial instruments, real estate or
mortgages in the investment portfolio as of December 31, 2001. The quality of
the fixed-income portfolio as of December 31, 2001, was as follows:


          "AAA"                                                             50%
          "AA"                                                              18%
          "A"                                                               25%
          "BBB"                                                              6%
          Below "BBB"                                                        1%
                                                                          ------
                                                                           100%
                                                                          ======

The Company regularly evaluates its investment portfolio to identify
other-than-temporary impairments of individual securities. We consider many
factors in determining if any other-than-temporary impairment exists, including
the length of time and extent to which the market value of the security has been
less than cost, the financial condition and near-term prospects of the issuer of
the security and our ability and willingness to hold the security until the
market value is expected to recover. The following table contains an analysis of
the Company's securities with gross unrealized losses, categorized by the period
that the securities were in a continuous unrealized loss position as of December
31, 2001:


         Investment Securities with Gross Unrealized Losses, Categorized by
Period of Continuous Unrealized Loss Position

<TABLE>
<CAPTION>
                                                                                                         Over
                                                                                                         Six
                                Number                                      Gross          Six          Months         Over
                                  of            Fair         Book        Unrealized       Months        to One         One
(in thousands)                 Securities      Value         Value         Losses        or Less         Year          Year
                               ----------     ---------    ----------    ------------    ---------    -----------    ---------

<S>                                 <C>        <C>          <C>             <C>              <C>        <C>           <C>
Fixed income securities             13         $16,502      $16,802         $300             $46        $183          $ 71
Preferred stock                      1           1,005        1,053           48                                        48
Common stock                         3           1,888        2,018          130               9          80            41
                                                                         ------------    ---------    -----------    ---------
                                                                            $478           $55          $263          $160
                                                                         ============    =========    ===========    =========
</TABLE>




                                    Page 34
<PAGE>

As of December 31, 2001, the Company's fixed-income investment portfolio had
thirteen securities with $300,000 of gross unrealized losses. No single issuer
had an unrealized loss position greater than $109,000. The over one year gross
unrealized losses for fixed income securities of $71,000 represents 3 issuers
rated A-, A- and BBB+ by Standard & Poor's, and the unrealized loss position was
2.3% of the securities' original cost. The over six months to one year gross
unrealized losses for fixed income securities of $183,000 primarily represents
two public utility securities with maturity dates in 2004, were upgraded to B-
and BB by Standard & Poor's in February 2002 and the unrealized loss position
was 6% of the securities' original cost.


As of December 31, 2001, the Company's preferred stock portfolio had one
security with a gross unrealized loss of $48,000. This security is an investment
grade security (Standard and Poor's rating "AA-") and the unrealized loss was
4.5% of its original cost.

As of December 31, 2001, the Company's common stock portfolio had three
securities, all of which were exchange-traded funds, with $130,000 of gross
unrealized losses. No single issuer had an unrealized loss position of greater
than $80,000 or 11% of its book value.

Three-for-Two Stock Split

On April 11, 2002, the Company announced a three-for-two stock split to be
effected in the form of a 50% stock dividend payable to stockholders of record
as of April 25, 2002. The distribution date was May 9, 2002.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Market risk is the potential economic loss principally arising from adverse
changes in the market value of financial instruments. The major components of
market risk affecting us are interest rate risk and equity price risk.

Interest Rate Risk

The Company had fixed-income and preferred stock investments with a market value
of $167.7 million at December 31, 2001 that are subject to interest rate risk.
The Company manages its exposure to interest rate risk through a disciplined
asset/liability matching and capital management process. In the management of
this risk, the characteristics of duration, credit and variability of cash flows
are critical elements. These risks constantly are assessed and balanced within
the context of the Company's liability and capital position.

The table below summarizes the Company's interest rate risk. The table
illustrates the sensitivity of the market value of fixed-income and preferred
stock investments to selected hypothetical changes in interest rates as of
December 31, 2001. The selected scenarios are not predictions of future events,
but rather illustrative of the effect that such events may have on the market
value of the fixed-income and preferred stock portfolio and stockholders'
equity.




                                    Page 35
<PAGE>




<TABLE>
<CAPTION>
                                                    Estimated Market
(dollars in thousands)                               Value of Fixed                                Hypothetical Percentage
                                                       Income and           Estimated              Increase (Decrease) in
                                                                                             ------------------------------------
                                                     Preferred Stock        Change in                             Stockholders'
Hypothetical Change in Interest Rates                  Investments         Market Value        Market Value           Equity
                                                    ------------------    ---------------    -----------------    ---------------

<S>                                                     <C>                 <C>                       <C>                <C>
200 basis point increase.                               $153,680            $(14,062)                 (8.4)%             (11.4)%
100 basis point increase                                 160,460              (7,282)                 (4.3)               (5.9)
No change                                                167,742                 ---                   ---                 ---
100 basis point decrease                                 175,463                7,721                  4.6                 6.3
200 basis point decrease                                 183,532               15,790                  9.4                12.8
</TABLE>

Equity Price Risk

Equity price risk is the Company's underlying exposure to an economic loss from
the decline of common stock prices. The Company's common equity portfolio was
$8.0 million at December 31, 2001.

The Company attempts to mitigate equity price risk to its common stock portfolio
by investing exclusively in exchange-traded funds, or ETFs. ETFs are securities
that represent an interest in a trust that owns and holds a basket of common
stocks that replicate a major market index (such as the S&P 500 or the Dow Jones
Industrial Average) or a portion of a major market index (such as the Value
Component of the S&P). Since these securities represent an interest in the
equity capital markets as a whole, or a sub-sector thereof, they are a
diversified, index-based exposure to common stocks. As such, the value of these
ETFs will be determined by the performance of the equity capital markets in
general or of a particular sub-sector and reduces equity price risk to a single
issuer of stock.

The table below summarizes the Company's common equity price risk. The table
illustrates the sensitivity of the market value of common stock investments to
selected hypothetical changes in market prices as of December 31, 2001. The
selected scenarios are not predictions of future events, but rather illustrative
of the effect that such events may have on the fair value of the common stock
investment portfolio and stockholders' equity.

<TABLE>
<CAPTION>
                                                             Estimated                                Hypothetical
(dollars in thousands)                                         Market                                  Percentage
                                                              Value of             Estimated            Increase
                                                               Common              Change in         (Decrease) in
                                                               Equity                Market          Stockholders'
Hypothetical Change in Market Price                         Investments              Value               Equity
                                                        ---------------------    ---------------    -----------------
<S>                                                              <C>                  <C>                    <C>
20% price increase                                               $9,572               $1,595                 1.3%
10% price increase                                                8,775                  798                 0.7
No change                                                         7,977                  ---                 ---
10% price decrease                                                7,179                 (798)               (0.7)
20% price decrease                                                6,382              (1,595)                (1.3)
</TABLE>

Impact of Inflation

Inflation can have a significant impact on property and casualty insurers
because premium rates are established before the amounts of losses and loss
adjustment expenses are known. The Company attempts to anticipate increases from
inflation in establishing rates, subject to limitations imposed for competitive
pricing. The Company also considers inflation when estimating liabilities for
losses and loss adjustment expenses, particularly for claims having a long
period between occurrence and settlement. The liabilities for losses and loss
adjustment expenses are management's best estimates of the ultimate net cost of
underlying claims and expenses and are not discounted for the time value of




                                    Page 36
<PAGE>

money. In times of high inflation, the normally higher yields on investments may
be offset partially by higher claims and expenses.

Cautionary Statements

Certain information included in management's discussion and analysis of
financial condition and results of operations and elsewhere in this report are
not historical facts but are forward-looking statements including, but not
limited to, such matters as anticipated financial performance, business
prospects, technological developments, new and existing products, expectations
for market segment growth and similar matters. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company provides the following cautionary remarks regarding important factors
which, among others, could cause the Company's actual results and experience to
differ materially from the anticipated results or other expectations expressed
in the Company's forward-looking statements. The risks and uncertainties that
may affect the operations, performance, development, results of the Company's
business and the other matters referred to above include, but are not limited
to: (1) changes in the business environment in which the Company operates,
including inflation and interest rates; (2) changes in taxes, governmental laws
and regulations; (3) competitive product and pricing activity; and (4)
difficulties of managing growth profitably. For additional disclosure regarding
potential risk factors, please refer to the Company's 2001 10-K and other
documents filed with the Securities and Exchange Commission.


























                                    Page 37
<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Auditors

                         REPORT OF INDEPENDENT AUDITORS


The Board of Directors
Penn America Group, Inc.

         We  have  audited  the  accompanying  consolidated  balance  sheets  of
Penn-America Group, Inc. (the Company) as of December 31, 2001 and 2000, and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the three years in the period ended  December  31,  2001.  Our
audit also included the financial statement schedules listed in Item 14(a) as of
December 31, 2001 and for the year then ended.  These  financial  statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these  financial  statements and schedules  based on
our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States.  Those standards require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

         As discussed in Note 1 to the consolidated  financial  statements,  the
Company has restated its 2001, 2000, and 1999 financial statements regarding the
timing of recording other than temporary declines in the market value of certain
equity securities.

         In our opinion the consolidated  financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Penn-America  Group,  Inc. as restated  at December  31, 2001 and 2000,  and the
consolidated  results of its  operations and its cash flows as restated for each
of the three years in the period  ended  December  31, 2001 in  conformity  with
accounting  principles  generally  accepted in the United  States.  Also, in our
opinion, the related financial statement schedules,  when considered in relation
to the basic  financial  statements  taken as a whole,  present  fairly,  in all
material respects, the information set forth therein.

Philadelphia,  Pennsylvania
January 18, 2002
except for share and per share
information in Notes 2, 11, 14
and 15, the section entitled
"restatement of financial information"
in Note 1, the 7th and 13th paragraphs
in Note 1, all information marked
"restated" in the notes to consolidated
financial statements, the first paragraph
in Note 3, the next-to-last paragraphs in Note 4
and Note 8,and the last paragraph in Note 6,
as to which the date is November 1, 2002



                                    Page 38
<PAGE>



Penn-America Group, Inc. and Subsidiaries
Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                                                                 December 31,
                                                                                     --------------------------------------
(In thousands, except for per share data)                                                     2001                  2000
---------------------------------------------------------------------------------------------------------------------------
                                                                                           (Restated)            (Restated)
<S>                                                                                            <C>                   <C>
AAssets
Investments:
    Fixed maturities:
       Available for sale, at fair value (amortized cost 2001, $130,976; 2000, $123,873)    $135,253              $125,477
       Held to maturity, at amortized cost (fair value 2001, $15,317; 2000, $17,441)          15,084                17,282
    Equity securities, at fair value (cost 2001, $24,720; 2000, $24,895)                      25,149                24,491
                                                                                     --------------------------------------
       Total investments                                                                     175,486               167,250
Cash                                                                                          13,129                11,425
Accrued investment income                                                                      2,199                 2,181
Premiums receivable (net of allowances of $972 in 2001and $422 in 2000)                       12,285                 9,695
Reinsurance recoverable                                                                       25,804                24,447
Prepaid reinsurance premiums                                                                   4,241                 4,635
Deferred policy acquisition costs                                                              9,083                10,317
Capital lease, affiliate                                                                       1,666                 1,753
Deferred income taxes                                                                          3,790                 4,272
Income tax recoverable                                                                            66                 2,982
Other assets                                                                                     366                   529
                                                                                     --------------------------------------
       Total assets                                                                         $248,115              $239,486
                                                                                     --------------------------------------

Liabilities and Stockholders' Equity
Liabilities:
  Unpaid losses and loss adjustment expenses                                                $119,598              $115,314
  Unearned premiums                                                                           41,034                43,239
  Accounts payable and accrued expenses                                                        3,800                 2,353
  Capitalized lease obligation, affiliate                                                      1,570                 1,701
  Other liabilities                                                                            1,722                 2,828
                                                                                     --------------------------------------
         Total liabilities                                                                   167,724               165,435
                                                                                     --------------------------------------

Stockholders' equity:
  Preferred stock, $.01 par value; authorized 2,000,000 shares;
    None issued                                                                                   --                    --
  Common stock, $.01 par value; authorized 20,000,000 shares;
    issued 2001 and 2000, 15,228,351 and 15,114,038 shares, respectively;
    outstanding 2001 and 2000, 11,478,351 and 11,364,038 shares, respectively                    152                   151
  Additional paid-in capital                                                                  70,735                70,114
   Accumulated other comprehensive income                                                      3,106                   792
  Retained earnings                                                                           31,320                27,980
  Treasury stock, 3,750,000 shares, at cost                                                 (24,161)              (24,161)
   Officers' stock loans                                                                       (629)                 (546)
  Unearned compensation from restricted stock awards                                           (132)                 (279)
                                                                                     --------------------------------------
         Total stockholders' equity                                                           80,391                74,051
                                                                                     --------------------------------------

         Total liabilities and stockholders' equity                                         $248,115              $239,486
                                                                                     ======================================
</TABLE>

See accompanying notes to Consolidated Financial Statements




                                    Page 39
<PAGE>

Penn-America Group, Inc. and Subsidiaries
Consolidated Statements of Operations



<TABLE>
<CAPTION>
                                                                             Year ended December 31,
                                                             ------------------------------------------------------
(In thousands, except per share data)                              2001                2000                 1999
--------------------------------------------------------------------------------------------------------------------
                                                              (Restated)            (Restated)           (Restated)
<S>                                                          <C>                  <C>                  <C>
Revenues
    Premiums earned                                          $     88,934         $     91,449         $     85,677
    Net investment income                                          11,339               10,454                9,537
    Net realized investment loss                                   (1,178)              (2,808)                (110)

       Total revenues                                              99,095               99,095               95,104

Losses and expenses
    Losses and loss adjustment expenses                            60,921               75,378               63,187

    Amortization of deferred policy acquisition costs              22,715               25,219               24,802

    Other underwriting expenses                                     8,030                5,850                4,733

    Corporate expenses                                                548                  791                1,306

    Interest expense                                                  160                  161                  145

       Total losses and expenses                                   92,374              107,399               94,173

Income (loss) before income tax                                     6,721               (8,304)                 931

Income tax expense (benefit)                                        1,781               (3,473)                (479)

Net income (loss)                                            $      4,940         $     (4,831)        $      1,410

Net income (loss) per share
         Basic                                               $       0.43         $      (0.42)        $       0.11
         Diluted                                             $       0.43         $      (0.42)        $       0.11

Weighted average shares outstanding
         Basic                                                 11,420,213           11,518,968           12,887,651
         Diluted                                               11,501,703           11,518,968           12,986,603

Cash dividend per share                                      $       0.14         $       0.14         $     0.1383
</TABLE>


See accompanying notes to Consolidated Financial Statements




                                    Page 40
<PAGE>

Penn-America Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>

                                                                                     Accumulated
                                                                Additional                 Other
                                                    Common         Paid-In         Comprehensive        Retained        Treasury
(In thousands, except per share amounts)             Stock         Capital         Income (Loss)        Earnings           Stock
---------------------------------------------------------------------------------------------------------------------------------
                                                                                      (Restated)      (Restated)
<S>                                             <C>               <C>               <C>                <C>            <C>
Balance at December 31, 1998                      $    149          $ 68,985          $  2,714           $ 34,779       $ (5,643)
Net income                                              --                --                --              1,410             --
Other comprehensive loss:
      Unrealized loss on investments, net of
      tax and reclassification adjustment               --                --            (6,410)                --             --
Comprehensive loss
Issuance of common stock                                 1               556                --                 --             --
Unearned compensation from restricted
        stock awards issued                             --                --                --                 --             --
Amortization of compensation expense from
      restricted stock awards issued                    --                --                --                 --             --
Cash dividends paid ($0.1383 per share)                 --                --                --             (1,767)            --
Purchase of treasury stock, at cost                     --                --                --                 --        (13,831)
                                                  --------          --------          --------           --------       --------
Balance at December 31, 1999                      $    150          $ 69,541          $ (3,696)          $ 34,422       $(19,474)
                                                  --------          --------          --------           --------       --------
Net loss                                                --                --                --             (4,831)            --

Other comprehensive income:
      Unrealized gains on investments, net of
      tax and reclassification adjustment               --                --             4,488                 --             --
Comprehensive loss
Issuance of common stock                                 1               573                --                 --             --
Officers' stock loans                                   --                --                --                 --             --
Unearned compensation from restricted
        stock awards issued                             --                --                --                 --             --
Amortization of compensation expense from
      restricted stock awards issued                    --                --                --                 --             --
Cash dividends paid ($0.14 per share)                   --                --                --             (1,611)            --
Purchase of treasury stock, at cost                     --                --                --                 --         (4,687)
                                                  --------          --------          --------           --------       --------
Balance at December 31,2000                       $    151          $ 70,114          $    792           $ 27,980       $(24,161)
                                                  --------          --------          --------           --------       --------
Net income                                              --                --                --              4,940             --

Other comprehensive income:
      Unrealized gains on investments, net of
      tax and reclassification adjustment               --                --             2,314                 --             --
Comprehensive income
Issuance of common stock                                 1               621                --                 --             --
Officers' stock loans                                   --                --                --                 --             --
Forfeiture of restricted stock awards                   --                --                --                 --             --
Amortization of compensation expense from
      restricted stock awards issued                    --                --                --                 --             --
Cash dividends paid ($0.14 per share)                   --                --                --             (1,600)            --
                                                  --------          --------          --------           --------       --------
Balance at December 31, 2001                      $    152          $ 70,735          $  3,106           $ 31,320       $(24,161)
                                                  ========          ========          ========           ========       ========





                                                                               Unearned
                                                                           Compensation
                                                       Officers'                   From             Total
                                                           Stock             Restricted     Stockholders'
(In thousands, except per share amounts)                   Loans           Stock Awards            Equity
----------------------------------------------------------------------------------------------------------

Balance at December 31, 1998                           $       0           $    (354)          $ 100,630
Net income                                                    --                  --               1,410
Other comprehensive loss:
      Unrealized loss on investments, net of
      tax and reclassification adjustment                     --                  --              (6,410)
Comprehensive loss                                                                                (5,000)
Issuance of common stock                                      --                  --                 557
Unearned compensation from restricted
        stock awards issued                                   --                 (91)                (91)

Amortization of compensation expense from
      restricted stock awards issued                          --                 120                 120

Cash dividends paid ($0.1383 per share)                       --                  --              (1,767)

Purchase of treasury stock, at cost                           --                  --             (13,831)
                                                       ---------           ---------           ---------
Balance at December 31, 1999                           $       0           $    (325)          $  80,618
                                                       ---------           ---------           ---------
Net loss                                                      --                  --              (4,831)

Other comprehensive income:
      Unrealized gains on investments, net of
      tax and reclassification adjustment                     --                  --               4,488
Comprehensive loss                                                                                  (343)
Issuance of common stock                                      --                  --                 574
Officers' stock loans                                       (546)                 --                (546)
Unearned compensation from restricted
        stock awards issued                                   --                 (74)                (74)
Amortization of compensation expense from
      restricted stock awards issued                          --                 120                 120
Cash dividends paid ($0.14 per share)                         --                  --              (1,611)
Purchase of treasury stock, at cost                           --                  --              (4,687)
                                                       ---------           ---------           ---------
Balance at December 31,2000                            $    (546)          $    (279)          $  74,051
                                                       ---------           ---------           ---------
Net income                                                    --                  --               4,940
Other comprehensive income:
      Unrealized gains on investments, net of
      tax and reclassification adjustment                     --                  --               2,314
Comprehensive income                                       7,254
Issuance of common stock                                      --                  --                 622
Officers' stock loans                                        (83)                 --                 (83)
Forfeiture of restricted stock awards                         --                  32                  32
Amortization of compensation expense from
      restricted stock awards issued                          --                 115                 115
Cash dividends paid ($0.14 per share)                         --                  --              (1,600)
                                                       ---------           ---------           ---------
Balance at December 31, 2001                           $    (629)          $    (132)          $  80,391
                                                       =========           =========           =========

</TABLE>

See accompanying notes to Consolidated Financial Statements




                                    Page 41
<PAGE>

Penn-America Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                                             Year ended December 31,
 (In thousands)                                                                      2001            2000              1999
                                                                            -----------------------------------------------------

                                                                                  (Restated)        (Restated)        (Restated)
Cash flows from operating activities:
<S>                                                                                <C>              <C>              <C>
    Net income (loss)                                                              $  4,940         $ (4,831)        $  1,410
    Adjustments to reconcile net income (loss) to net cash provided by
        Operating activities:
         Bond amortization (accretion) and depreciation  expense, net                    (5)             393              493
         Net realized investment loss                                                 1,178            2,808              110
         Deferred income tax benefit                                                   (711)          (1,096)            (586)
         Net (increase) decrease in premiums receivable, prepaid
         reinsurance premiums and unearned premiums                                  (4,401)           5,087            2,727
         Net increase in unpaid losses and loss adjustment expenses
           and reinsurance recoverable                                                2,927           15,432            5,264
         Accrued investment income                                                      (18)            (216)             (94)
         Deferred policy acquisition costs                                            1,234           (1,011)            (578)
         Income tax recoverable                                                       2,915           (1,330)            (768)
         Other assets                                                                    23             (134)             (64)
         Accounts payable and accrued expenses                                        1,447              598              576
         Other liabilities                                                           (1,106)            (709)             112
                                                                                ----------------------------------------------
               Net cash provided by operating activities                              8,423           14,991            8,602
                                                                                ----------------------------------------------

Cash flows from investing activities:
    Purchases of equity securities                                                   (4,162)         (10,405)          (8,320)
    Purchases of fixed maturities available for sale                                (28,672)         (87,573)         (38,521)
    Purchases of fixed maturities held to maturity                                       --           (9,974)          (2,785)
    Proceeds from sales of equity securities                                          3,146           11,202            4,462
    Proceeds from sales of fixed maturities available for sale                       21,911           78,154               --
    Proceeds from maturities of fixed maturities available for sale                      --               --           25,995
    Proceeds from maturities and calls of fixed maturities held to maturity           2,250            9,000           13,256
    Change in short-term investments                                                     --              449              548
                                                                                ----------------------------------------------
              Net cash used by investing activities                                  (5,527)          (9,147)          (5,365)
                                                                                ----------------------------------------------

Cash flows from financing activities:
    Issuance of common stock                                                            622              500              465
    Purchase of treasury stock                                                           --           (4,687)         (13,831)
    Officers' stock loans                                                               (83)            (546)              --
    Principal payments on capital lease obligations, affiliate                         (131)            (120)            (136)
    Dividends paid                                                                   (1,600)          (1,611)          (1,767)
                                                                                ----------------------------------------------
              Net cash used by financing activities                                  (1,192)          (6,464)         (15,269)
                                                                                ----------------------------------------------

Increase (decrease) in cash                                                           1,704             (620)         (12,032)
Cash, beginning of period                                                            11,425           12,045           24,077
                                                                                ----------------------------------------------
Cash, end of period                                                                $ 13,129         $ 11,425         $ 12,045
                                                                                ==============================================
Supplemental disclosure of cash flow information:
      Interest paid, affiliate                                                     $    160         $    161         $    145
      Taxes (recovered) paid                                                           (492)            (950)             875


</TABLE>


See accompanying notes to Consolidated Financial Statements



                                    Page 42
<PAGE>

Penn-America Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 1 Summary of Significant Accounting Policies

Basis of Presentation and Description of Business
Penn-America Group, Inc. ("PAGI") is an insurance holding company. Penn
Independent Corporation ("Penn Independent") owned approximately 40% of the
outstanding common stock of PAGI at December 31, 2001. The accompanying
financial statements include the accounts of PAGI and its wholly owned
subsidiary, Penn-America Insurance Company ("Penn-America") and its wholly owned
subsidiary Penn-Star Insurance Company ("Penn-Star"), (collectively the
"Company"). All significant inter-company accounts and transactions have been
eliminated in consolidation. These financial statements are prepared in
conformity with accounting principles generally accepted in the United States,
which differ in some respects from those required by insurance regulatory
authorities.

The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

The Company underwrites commercial property and general liability insurance and
multi-peril insurance for small businesses located primarily in small towns and
suburban and rural areas. The Company can write business in all fifty states and
the District of Columbia. The Company writes business on both an admitted and
non-admitted basis in thirty-six states, on only an admitted basis in two states
and on only a non-admitted basis in twelve states and the District of Columbia.

Restatement of Financial Information
In conjunction with the Company's registration statement filing relating to the
issuance of additional shares of common stock, the Company has resolved various
accounting and disclosure comments from the Securities and Exchange Commission
("SEC"). One of the comments addressed the timing of recording other than
temporary ("OTT") declines in the market value of certain equity securities. In
order to resolve the comment, the Company agreed to amend its accounting policy
and record OTT write-downs on these securities for the periods ending December
31, 2001, 2000, and 1999. This restatement affects net income for each of these
periods but has no affect on stockholders' equity since the unrealized loss on
these securities was already recorded in Accumulated Other Income (Loss) in the
Consolidated Balance Sheets and Statements of Stockholders' Equity. By means of
this filing, the Company is restating its previously issued financial statements
for the years ended December 31, 2001, 2000, and 1999.

Below is a table showing a comparison of previously reported and restated total
revenues, net income and net income per share (basic and diluted) for the
periods affected.

<TABLE>
<CAPTION>
                                                                     For the years ended,
                            -------------------------------------------------------------------------------------------------------
                                   December 31, 2001                   December 31, 2000                  December 31, 1999
                            --------------------------------     -------------------------------    -------------------------------

                            As Reported       As Restated        As Reported      As Restated       As Reported      As Restated
                            --------------    --------------     -------------    --------------    --------------   --------------
<S>                              <C>              <C>            <C>                <C>                <C>               <C>
Total revenues                   $99,718          $99,095        $100,572           $99,095            $96,055           $95,104

Net income (loss)                  5,351            4,940          (3,856)           (4,831)             2,038             1,410
Net income (loss) per share
     Basic                          0.47             0.43           (0.33)            (0.42)              0.16              0.11
     Diluted                        0.47             0.43           (0.33)            (0.42)              0.16              0.11
</TABLE>




                                    Page 43
<PAGE>

Penn-America Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)

In addition, the SEC requested that the Company add certain disclosures. The
consolidated financial statements have been amended as appropriate to respond to
these requests.

Revenue Recognition
Premiums written are recognized as earned ratably over the terms of the
respective policies and include estimates for premiums earned but not yet billed
of $1,185,000 and $0 as of December 31, 2001, and 2000, respectively. Unearned
premiums represent the portion of premiums written applicable to the unexpired
terms of policies in force and are calculated on a semi-monthly pro-rata basis.

Valuation of Premiums Receivable
The Company evaluates the collectibility of premiums receivable based on a
combination of factors. In circumstances in which the Company is aware of a
specific customer's inability to meet its financial obligations to the Company,
a specific reserve for bad debts against amounts due is recorded to reduce the
net receivable to the amount reasonably believed to be collectible. No such
instances occurred in 2001. For all remaining balances, reserves are recognized
for bad debts based on the length of time the receivables are past due based on
historical statistics.

Investments
At the time of purchase of fixed-maturity investments, management makes a
determination as to the investment classification ("Available for Sale" or "Held
to Maturity"). Factors taken into consideration by management in determining the
appropriate investment category are: maturity, yield, cash flow requirements and
anticipated changes in interest rates. Fixed maturities classified as "Available
for Sale" are carried at fair value with unrealized investment gains or losses,
net of deferred income taxes, included as a separate component of accumulated
other comprehensive income in stockholders' equity. "Held to Maturity"
investments are carried at amortized cost.

Investments in fixed-maturity securities are adjusted for amortization of
premium and accretion of discounts to maturity date using the interest method.
Interest income is recognized on the accrual basis.

The amortized cost of mortgage-backed and asset-backed securities is calculated
using the interest method including consideration of anticipated prepayments at
the date of purchase. Significant changes in estimated cash flows from the
original assumptions are accounted for using the composite method.

Equity securities are carried at fair value with the change in unrealized
investment gains or losses, net of deferred income taxes, included as a separate
component of accumulated other comprehensive income in stockholders' equity.

Realized gains or losses represent the difference between the book value of
securities sold and the proceeds realized upon sale. The Company uses the
specific identification method to determine the cost of securities sold. The
cost of securities is adjusted where appropriate to include a provision for a
decline in value that is considered to be other- than-temporary. The Company
considers four factors in determining if an other-than-temporary decline exists:
length of time and extent that a security has been in an unrealized loss
position; the existence of an event that would impair the issuer's future
earnings potential; the near term prospects for recovery of the market value of
a security; and the intent and ability of the Company to hold the security until
the market value recovers. Realized gains or losses, including any provision for
other-than-temporary declines in value, are included in the statement of
operations.



                                    Page 44
<PAGE>

Penn-America Group, Inc. and Subsidiaries Notes to Consolidated
Financial Statements - (Continued)

Policy Acquisition Costs
Policy acquisition costs such as commissions, salaries, premium taxes and
certain other underwriting expenses, which vary with and are directly related to
the production of business, are deferred and amortized over the effective
periods of the related insurance policies. The method followed in computing
deferred policy acquisition costs limits the amount of such deferred costs to
their estimated realizable values, which gives effect to the premium to be
earned, related investment income, losses and loss adjustment expenses and
certain other costs expected to be incurred as the premium is earned.

Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses represents estimates of
amounts needed to pay reported and unreported claims and related expenses. These
estimates are based on certain actuarial and other assumptions related to the
ultimate cost to pay such claims. All estimates are reviewed periodically and as
experience develops and new information becomes known, the reserves are adjusted
as necessary. Such adjustments are reflected in the results of operations in the
period in which they are determined.

Fair Values of Financial Instruments
The Company uses the following methods or assumptions in determining fair
values:

Investment Securities: Fair values are based on quoted market prices or on
quoted market prices of comparable instruments or values obtained from
independent pricing services.

Premium and Reinsurance Receivables and Payables: The carrying amounts reported
in the balance sheet for these instruments approximate their fair values.

Capitalized Lease Obligation: Fair value is based upon the present value of the
underlying cash flows discounted at the Company's incremental borrowing rate at
year-end. The carrying amounts reported in the balance sheet approximate fair
value.

Reinsurance
In the ordinary course of business, the Company reinsures certain risks,
generally on an excess-of-loss basis, with other insurance companies which
principally are rated "A" or higher by A.M. Best. Such reinsurance arrangements
serve to limit the Company's maximum loss. Amounts recoverable from reinsurers
are estimated in a manner consistent with the claim liabilities arising from the
reinsured policies and incurred but not reported losses.

Capitalized Lease
The capitalized lease is carried at cost less accumulated amortization.
Amortization is calculated using the interest method over 20 years, which
represents the term of the mortgage on the office space that the Company rents
from a related party.

Income Tax
Deferred income taxes are accounted for under the liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.




                                    Page 45
<PAGE>

Penn-America Group, Inc. and Subsidiaries Notes to Consolidated
Financial Statements - (Continued)

Comprehensive Income (Loss)
Comprehensive income (loss) encompasses all changes in stockholders' equity
(except those arising from transactions with stockholders) and includes net
income and net unrealized investment gains and losses on fixed-income
investments classified as "available-for-sale" and equity securities, net of
deferred income tax.

Reclassification

Certain prior-year amounts have been reclassified to conform to 2001
classifications.

Note 2 Income Per Share

Basic net income (loss) per share is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for each period. Diluted net income (loss) per share includes the potential
dilution that could occur if the contracts to issue common stock were exercised
and converted into common stock.

The following is a reconciliation of the basic and diluted net income (loss) per
share computations:

<TABLE>
<CAPTION>
                                                                        Year ended December 31,
                                                          -----------------------------------------------------
(In thousands, except per share data)                           2001                 2000              1999
---------------------------------------------------------------------------------------------------------------
                                                             (Restated)           (Restated)        (Restated)
<S>                                                             <C>              <C>                <C>
Basic per share computation:
Net income (loss)                                               $    4,940       $    (4,831)       $    1,410

Weighted average common shares outstanding                      11,420,213         11,518,968       12,887,651
                                                          -----------------------------------------------------

Basic net income (loss) per share                               $     0.43       $     (0.42)       $     0.11
                                                          -----------------------------------------------------

Diluted per share computation:
Net income (loss)                                              $     4,940      $     (4,831)      $     1,410

Weighted average common shares outstanding                      11,420,213         11,518,968       12,887,651
Additional shares outstanding after the
assumed
     exercise of options by applying the

     treasury stock method                                          81,490                  *           98,952
                                                          -----------------------------------------------------


Total shares                                                    11,501,703         11,518,968       12,986,603
                                                          -----------------------------------------------------
Diluted net income (loss) per share                             $     0.43       $     (0.42)       $     0.11
                                                          -----------------------------------------------------
</TABLE>

* As of December 31, 2000, the Company issued options to purchase 538,875 shares
of common stock to employees and directors at prices ranging from $3.61 to
$12.67. These options were not considered in the 2000 computation, as the impact
was anti-dilutive.









                                    Page 46
<PAGE>

Penn-America Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)

Note 3 Transactions with Affiliates

Penn-America was formed by Irvin Saltzman, chairman of PAGI's board of directors
and a director of Penn Independent. Jon S. Saltzman, Irvin Saltzman's son, is
President and Chief Executive Officer of PAGI and a director of Penn
Independent. The Saltzman family, substantially through their ownership of Penn
Independent, owns approximately 40% of the outstanding common stock of PAGI at
December 31, 2001.

Penn-America leases its home office facility from Irvin Saltzman and the lease
is accounted for as a capital lease. The amount of property capitalized of
$2,227,000 is presented net of accumulated amortization of $561,000 and $474,000
as of December 31, 2001 and 2000, respectively. Capitalized lease obligations of
$1,570,000 and $1,701,000 were recorded at December 31, 2001 and 2000,
respectively, representing the lease obligation arising from this lease, which
carries an 8.5% interest rate. Penn Independent and its subsidiaries also lease
a portion of the building in which the Company's home office facility is
located. Management believes that the lease terms are at market rates.

At December 31, 2001, the future minimum lease payments for the capitalized
lease obligation are $281,000 per year in 2002 through 2006 and the total
minimum lease payments are $2,262,000, of which $692,000 is the amount
representing interest.

Penn Independent provides the Company with human resource management and other
services. The Company paid $212,000, $200,000 and $200,000 in 2001, 2000 and
1999, respectively, for such services. Such amounts are based on allocations of
estimated costs. All costs incurred by Penn Independent on behalf of the Company
have been allocated to the Company and are reflected in the financial
statements. Management believes that the methods used to allocate such costs are
reasonable and that the Company's expenses on a stand-alone basis would not be
materially different.

Gross written premiums with insurance agency affiliates of Penn Independent were
$3,888,000, $3,282,000 and $1,732,000 in 2001, 2000 and 1999, respectively.
Commissions paid to such affiliates were $857,000, $740,000 and $441,000 in
2001, 2000 and 1999 respectively. Premiums receivable includes receivable from
affiliates of $454,000 and $535,000 as of December 31, 2001 and 2000,
respectively.












                                    Page 47
<PAGE>







Penn-America Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)

Note 4 Investments

The Company invests primarily in investment-grade fixed maturities,
substantially all of which are rated "A" or higher by Standard & Poor's. The
cost, gross unrealized gains and losses and fair values of investments are as
follows:
<TABLE>
<CAPTION>
                                                                    December 31, 2001
                                              ---------------------------------------------------------------
                                                                     Gross          Gross
                                                  Amortized        Unrealized    Unrealized       Fair
(In thousands)                                       Cost            Gains         Losses         Value
-------------------------------------------------------------------------------------------------------------
                                                  (Restated)       (Restated)     (Restated)
<S>                                                    <C>          <C>             <C>             <C>
Fixed maturities:
  Available for sale:
U.S. Treasury securities and
  obligations of U.S. government agencies              4,013        $    182        $   --          $  4,195

    Corporate securities                              49,981           2,091              51          52,021

    Mortgage-backed securities                        26,483             863              30          27,316

    Other structured securities                       20,758             725              21          21,462

    Municipal securities                              20,569             457              22          21,004

    Public utilities                                   9,172             259             176           9,255
                                              ---------------------------------------------------------------
 Total available for sale                            130,976           4,577             300         135,253
                                              ---------------------------------------------------------------

  Held to maturity:
    U.S. Treasury securities and obligations

      of U.S. government agencies                     13,812             213            --            14,025

    Corporate securities                                 276              14            --               290

    Public utilities                                     996               6            --             1,002
                                              ---------------------------------------------------------------

 Total held to maturity                               15,084             233            --            15,317
                                              ---------------------------------------------------------------

Total fixed-maturity securities                      146,060           4,810             300         150,570


Equity securities                                     24,720             607             178          25,149
                                              ---------------------------------------------------------------
Total investments                                   $170,780        $  5,417        $    478        $175,719
                                              ===============================================================


</TABLE>




                                    Page 48
<PAGE>

Penn-America Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)

<TABLE>
<CAPTION>
                                                                     December 31, 2000
                                               --------------------------------------------------------------
                                                                    Gross          Gross
                                                  Amortized      Unrealized      Unrealized       Fair
(In thousands)                                      Cost            Gains          Losses         Value
-------------------------------------------------------------------------------------------------------------
                                                 (Restated)      (Restated)      (Restated)
<S>                                                 <C>             <C>             <C>             <C>
Fixed maturities:
  Available for sale:
    U.S. Treasury securities and obligations
      of U.S. government agencies                   $  4,015        $    107        $   --          $  4,122

    Corporate securities                              52,084             668             387          52,365

    Mortgage-backed securities                        23,321             629               6          23,944

    Other structured securities                       21,381             497               6          21,872

    Municipal securities                              15,882             537            --            16,419

    Public utilities                                   7,190              44             479           6,755
                                               --------------------------------------------------------------
 Total available for sale                            123,873           2,482             878         125,477
                                              --------------------------------------------------------------

  Held to maturity:
    U.S. Treasury securities and obligations
      of U.S. government agencies                     13,760             162              14          13,908

    Corporate securities                               2,378            --                 4           2,374

    Municipal securities                                 150            --              --               150

    Public utilities                                     994              15            --             1,009
                                              --------------------------------------------------------------

 Total held to maturity                               17,282             177              18          17,441
                                              --------------------------------------------------------------


Total fixed-maturity securities                      141,155           2,659             896         142,918


Equity securities                                     24,895             454             858          24,491
                                              --------------------------------------------------------------
Total investments                                   $166,050        $  3,113        $  1,754        $167,409
                                              --------------------------------------------------------------
</TABLE>

Fixed maturities at December 31, 2001, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or to prepay obligations with or without call or
prepayment penalties.


<TABLE>
<CAPTION>
                                               Available for Sale                    Held to Maturity
                                       -----------------------------------   ---------------------------------
                                           Amortized                            Amortized
(In thousands)                               Cost          Fair Value              Cost         Fair Value
--------------------------------------------------------------------------   ---------------------------------
<S>                                          <C>               <C>                <C>             <C>
Due in one year or less                      $     3,055       $    3,132         $    12,118     $    12,261
Due after one year through
     five years                                   45,659           47,565               2,966           3,056
Due after five years through
     ten years                                    27,198           27,585                   -               -

Due after ten years                                7,823            8,193                   -               -
Mortgage-backed and other
    structured securities                         47,241           48,778                   -               -
                                       -----------------------------------   ---------------------------------
Total                                        $   130,976       $  135,253         $    15,084     $    15,317
                                       -----------------------------------   ---------------------------------
</TABLE>





                                    Page 49
<PAGE>

Penn-America Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)

A summary of net investment income is as follows:

<TABLE>
<CAPTION>
                                                            Year ended December 31,
                                              -----------------------------------------------
(In thousands)                                        2001             2000            1999
---------------------------------------------------------------------------------------------
<S>                                                <C>              <C>              <C>
Interest on fixed maturities                       $  9,835         $  8,508         $  7,629
Dividends on equity securities                        1,421            1,422            1,492
Interest on short-term investments and cash             377              815              787
Other                                                    37               26                4
                                              -----------------------------------------------
Total investment income                              11,670           10,771            9,912
Less investment expense                                (331)            (317)            (375)
                                              -----------------------------------------------
Net investment income                              $ 11,339         $ 10,454         $  9,537
                                              -----------------------------------------------
</TABLE>

All investments in fixed-maturity securities were income-producing during 2001,
2000 and 1999. Realized pre-tax gains (losses) on the sale of investments are as
follows:

<TABLE>
<CAPTION>
                                                  Year ended December 31,
                                  -------------------------------------------------
(In thousands)                                2001           2000           1999
-----------------------------------------------------------------------------------
                                         (Restated)       (Restated)      (Restated)
Fixed maturities:
<S>                                        <C>             <C>             <C>
  Gross realized gains                     $   218         $    24         $    66
  Gross realized losses                       (203)         (1,461)            (23)
                                 -------------------------------------------------
Net realized investment gain (loss)             15          (1,437)             43
Equity securities:
Gross realized gains                           240           1,128           1,266
Gross realized losses                       (1,433)         (2,499)         (1,419)
                                 -------------------------------------------------
Net realized investment loss                (1,193)         (1,371)           (153)
                                 -------------------------------------------------
Total net realized investment loss         $(1,178)        $(2,808)        $  (110)
                                 -------------------------------------------------
</TABLE>


Income tax benefit on net realized losses was $400,000, $955,000 and $38,000 in
2001, 2000, and 1999, respectively. Gross realized losses on equity securities
for the year ended December 31, 2001, 2000 and 1999, included an
other-than-temporary impairment write-down of $1,226,000, $1,770,000, and
$951,000, respectively.

The amortized cost of fixed maturities on deposit with various regulatory
authorities at December 31, 2001 and 2000 amounted to $10,998,000 and
$10,992,000, respectively.

Note 5 Reinsurance

In the normal course of business, the Company seeks to reduce the losses that
may arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risks in various areas of exposure with
other insurance enterprises or reinsurers. Reinsurance contracts do not relieve
the Company of its obligations to policyholders. Failure of reinsurers to honor
their obligations could result in losses to the Company. Allowances have been
established for amounts deemed uncollectible. The Company evaluates the
financial condition of its reinsurers and monitors concentrations of credit risk
arising from similar geographic regions, activities or economic characteristics
of the reinsurers to minimize its exposure to significant losses



                                    Page 50
<PAGE>

Penn-America Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)

from reinsurer insolvencies. At December 31, 2001, reinsurance recoverable and
prepaid reinsurance premiums associated with two major reinsurers, General
Reinsurance Corporation and American Reinsurance Corporation, were $24.3 million
and $5.0 million, respectively.

Written premiums and premiums earned consisted of the following:

<TABLE>
<CAPTION>
                                                                 Year ended December 31,
                                                     ------------------------------------------------
(In thousands)                                                  2001           2000             1999
-----------------------------------------------------------------------------------------------------
Written premiums:
<S>                                                       <C>           <C>              <C>
  Gross                                                   $   98,412     $  109,791      $    95,983

  Ceded                                                       11,289         12,541            8,947
                                                     ------------------------------------------------
Net of reinsurance                                        $   87,123     $   97,250      $    87,036
                                                     ------------------------------------------------

Premiums earned:
  Gross                                                   $  100,617     $  102,883      $    93,904

  Ceded                                                       11,683         11,434            8,227
                                                     ------------------------------------------------
Net of reinsurance                                        $   88,934     $   91,449      $    85,677
                                                     ------------------------------------------------
</TABLE>

Loss and loss adjustment expenses are net of recoveries recognized under
reinsurance contracts as follows: $7,446,000, $9,438,000 and $7,182,000 in 2001,
2000 and 1999, respectively.

Note 6 Unpaid Losses and Loss Adjustment Expenses

Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:

<TABLE>
<CAPTION>
                                                                   Year ended December 31,
                                                       ------------------------------------------------
(In thousands)                                               2001           2000            1999
-------------------------------------------------------------------------------------------------------
<S>                                                        <C>             <C>             <C>
Balance, beginning of year                                 $    115,314    $    93,719     $    88,937

Less reinsurance recoverable                                     24,093         18,086          16,502
                                                       ------------------------------------------------
Net balance, beginning of year
                                                                 91,221         75,633          72,435
Incurred related to:

    Current year                                                 60,885         66,214          54,768

    Prior years                                                      36          9,164           8,419
                                                       ------------------------------------------------
Total incurred
                                                                 60,921         75,378          63,187

Paid related to:

    Current year                                                 19,913         26,273          23,540

    Prior years                                                  38,183         33,517          36,449
                                                       ------------------------------------------------
Total paid
                                                                 58,096         59,790          59,989

Net balance, end of year                                         94,046         91,221          75,633

Plus reinsurance recoverable                                     25,552         24,093          18,086
                                                       ------------------------------------------------
Balance, end of year                                       $    119,598    $   115,314     $    93,719
                                                       ------------------------------------------------
</TABLE>




                                    Page 51
<PAGE>



Penn-America Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)

In 2001, the Company increased incurred losses and loss adjustment expenses
attributable to insured events of prior years by $36,000. This increase related
entirely to the commercial automobile line of business. During 2001, the Company
increased its estimate for the commercial multi-peril liability line of business
by $1.8 million due to the development of outstanding claim reserves on claims
occurring primarily in 1998 and 1999. This increase was almost entirely offset
by a reduction in the Company's estimate for the non-standard personal
automobile line of business due to favorable settlements on closed claims.

In 2000, the Company increased incurred losses and loss adjustment expenses
attributable to insured events of prior years by $9,164,000. The increase is
primarily attributable to changes in the Company's estimates for losses and loss
adjustment expense reserves of $1.4 million for commercial automobile, $3.9
million for commercial multi-peril liability and $3.4 million for other
liability lines of business. The Company began writing commercial automobile
coverage for vehicles and light trucks in 1998. The Company's initial estimates
for 1998 and 1999 were based on a relatively low level of claims reported. In
2000, the Company received a significant number of claims relating to accidents
incurred in 1998 and 1999. In the fourth quarter of 2000, the Company exited the
commercial automobile line of business due to unsatisfactory underwriting
results. The Company's change in estimates in 2000 for the commercial
multi-peril liability line of business resulted principally from its increased
exposure to liquor liability losses for policies primarily written in 1998 and
1999. In 2000, the Company revised its underwriting approach significantly to
reduce its exposure to liquor liability claims. The Company's change in
estimates in 2000 for the other liability line resulted principally from
construction defect claims, which were new claims that were not anticipated by
the Company when the Company wrote these policies between 1991 and 1996. These
claims predominantly related to residential contractors and sub-contractors in
California. In 2000, the Company completed its withdrawal from the residential
contractors and sub-contractors industry segment.

In 1999, the Company increased incurred losses and loss adjustment expenses
attributable to insured events of prior years by $8,419,000. The increase is
primarily attributable to changes in estimates for losses and loss adjustment
expense reserves for our non-standard personal automobile line of business. For
1999, the Company received a significant number of claims relating to accidents
incurred prior to 1999, resulting in an increase in the Company's loss
estimates. For 1999, the Company exited the nonstandard personal automobile
lines. Incurred losses and loss adjustment expenses include estimates, recorded
as loss and loss adjustment expense reserves on the balance sheet, for the
ultimate payment on both reported and unreported claims. The Company changes its
estimates for loss and loss adjustment expenses reserves as new events occur, as
more loss experience is acquired, or as additional information is received. The
Company's estimates for loss and loss adjustment expense reserves result from a
continuous review process and the change in these estimates, as required by
Financial Accounting Standards Board No. 60, Accounting and Reporting by
Insurance Enterprises, paragraph 18, is recorded in the period that the change
in these estimates is made.







                                    Page 52
<PAGE>




Penn-America Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)

Note 7 Income Tax

The components of income tax expense (benefit) are as follows:

                                          Year ended December 31,
                           -----------------------------------------------
(In thousands)                      2001            2000            1999
---------------------------------------------------------------------------
                                 (Restated)       (Restated)      (Restated)

Current                            $ 2,492         $(2,377)        $   107

Deferred                              (711)         (1,096)           (586)
                           -----------------------------------------------
Total tax expense (benefit)        $ 1,781         $(3,473)        $  (479)
                           -----------------------------------------------

The actual income tax rate differed from the statutory income tax rate
applicable to income before income taxes as follows:

<TABLE>
<CAPTION>
                                                                  Year ended December 31,
                                                      -------------------------------------------------
(In thousands)                                             2001           2000             1999
-------------------------------------------------------------------------------------------------------
                                                        (Restated) (Restated)
(Restated)

<S>                                                             <C>          <C>             <C>
Statutory income tax rate                                       34.0%        (34.0)%         34.0%
Tax-exempt interest and dividends received
  deduction                                                     (7.7)        (10.2)         (44.5)
Other                                                            0.2           2.4          (40.9)
                                                      -------------------------------------------------
                                                              26.5%          (41.8)%        (51.4)%
                                                      -------------------------------------------------
</TABLE>

The tax effects of temporary differences that result in a net deferred tax asset
as of December 31, are summarized as follows:

<TABLE>
<CAPTION>
(In thousands)                                                             2001          2000
------------------------------------------------------------------------------------------------
                                                                        (Restated)    (Restated)
<S>                                                                       <C>           <C>
Assets
Effect of discounting unpaid losses
    and loss adjustment expenses                                          $4,490        $4,070
Excess of tax over financial
    reporting of earned premium                                            2,502         2,625
Realized investment losses due to other-than temporary write-downs         1,241           826
Other                                                                        609           763
                                                              --------------------------------

Total deferred assets                                                      8,842         8,284
                                                              --------------------------------

Liabilities

Deferred policy acquisition costs                                         $3,088        $3,508
Net unrealized investment gain                                             1,600           408
Other                                                                        364            96
                                                              --------------------------------

Total deferred liabilities                                                 5,052         4,012
                                                              --------------------------------
Net deferred tax asset                                                    $3,790        $4,272
                                                              --------------------------------
</TABLE>

The Company is required to establish a valuation allowance for any portion of
the deferred tax asset that management believes will not be realized. In the
opinion of management, it is probable that the Company will realize the benefit
of the deferred tax asset and, therefore, no such valuation allowance has been
established.



                                    Page 53
<PAGE>


Penn-America Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)

Note 8 Segment Information

The Company had two reportable segments: personal lines and commercial lines.
These segments were managed separately because they have different customers,
pricing and expense structures. The Company exited the non-standard personal
automobile business in 1999 and announced that it would run-off its remaining
portfolio of such business. The Company will continue to report on this segment
separately until the amounts relating to the non-standard personal automobile
business become immaterial to the financial statements presented. The Company
does not allocate assets between segments because assets are reviewed in total
by management for decision-making purposes.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates segment profit
based on profit or loss from operating activities. Segment profit or loss from
operations is pre-tax and does not include unallocated expenses but does include
investment income attributable to insurance transactions. Segment profit or loss
therefore excludes income taxes, unallocated expenses and investment income
attributable to equity.

The following is a summary of the Company's segment revenues, expenses and
profit:


<TABLE>
<CAPTION>
                                                                        Year ended December 31, 2001
                                                               ----------------------------------------------
(In thousands)                                                    Commercial       Personal         Total
                                                               ----------------------------------------------
                                                                  (Restated)      (Restated)      (Restated)
<S>                                                                <C>              <C>              <C>
Premiums earned                                                    $ 88,912         $     22         $ 88,934
Net investment income and net realized investment loss from
insurance operations                                                  6,667             --              6,667
                                                               ----------------------------------------------
Total segment revenues
                                                                     95,579               22           95,601
                                                               ----------------------------------------------


Segment losses and loss adjustment expenses                          62,414           (1,493)          60,921

Segment expenses                                                     26,087                8           26,095
                                                               ----------------------------------------------
Total segment expenses
                                                                     88,501           (1,485)          87,016
                                                               ----------------------------------------------

Segment profit                                                     $  7,078         $  1,507         $  8,585
                                                               ----------------------------------------------

Plus unallocated items:

  Net investment income from equity                                                                     3,494

  Unallocated expenses                                                                                 (5,358)

  Income tax expense                                                                                   (1,781)
                                                                                                  -----------

Net income                                                                                            $ 4,940
                                                                                                  -----------


</TABLE>





                                    Page 54
<PAGE>



Penn-America Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)

<TABLE>
<CAPTION>
                                                                          Year ended December 31, 2000
                                                                  ----------------------------------------------
(In thousands)                                                       Commercial      Personal         Total
                                                                  ----------------------------------------------
                                                                     (Restated)     (Restated)      (Restated)
<S>                                                                <C>               <C>              <C>
Premiums earned                                                    $  87,556         $   3,893        $  91,449
Net investment income and net realized investment loss from
insurance operations                                                   3,801               353            4,154
                                                                 ----------------------------------------------
Total segment revenues
                                                                      91,357             4,246           95,603
                                                                 ----------------------------------------------


Segment losses and loss adjustment expenses                           72,893             2,485           75,378

Segment expenses                                                      25,614             1,362           26,976
                                                                 ----------------------------------------------
Total segment expenses
                                                                      98,507             3,847          102,354
                                                                 ----------------------------------------------

Segment profit (loss)                                              ($  7,150)        $     399        $  (6,751)
                                                                 ----------------------------------------------

Plus unallocated items:

  Net investment income from equity                                                                       3,492

  Unallocated expenses                                                                                   (5,045)

  Income tax benefit                                                                                      3,473
                                                                                                  --------------

Net loss                                                                                               $ (4,831)
                                                                                                  --------------
</TABLE>



<TABLE>
<CAPTION>
                                                                          Year ended December 31, 1999
                                                               ----------------------------------------------
(In thousands)                                                     Commercial      Personal         Total
                                                               ----------------------------------------------
                                                                  (Restated)      (Restated)     (Restated)
<S>                                                                <C>              <C>              <C>
Premiums earned                                                    $ 71,731         $ 13,946         $ 85,677
Net investment income and net realized investment gain from
insurance operations                                                  3,917              662            4,579
                                                               ----------------------------------------------
Total segment revenues
                                                                     75,648           14,608           90,256
                                                               ----------------------------------------------


Segment losses and loss adjustment expenses                          49,744           13,443           63,187

Segment expenses                                                     21,905            4,533           26,438
                                                               ----------------------------------------------
Total segment expenses
                                                                     71,649           17,976           89,625
                                                               ----------------------------------------------

Segment profit (loss)                                              $  3,999         $ (3,368)        $    631
                                                            -------------------------------------------------

Plus unallocated items:

  Net investment income from equity                                                                     4,848

  Unallocated Expenses                                                                                 (4,548)

  Income tax benefit                                                                                      479
                                                                                               --------------

Net income                                                                                            $ 1,410
                                                                                               --------------
</TABLE>

Total segment revenues of $95,601,000, $95,603,000 and $90,256,000, plus
unallocated net investment income from equity of $3,494,000, $3,492,000 and
$4,848,000, equals total Company revenues of $99,095,000, $99,095,000 and
$95,104,000 for the years ended December 31, 2001, 2000, and 1999, respectively.



                                    Page 55
<PAGE>


Penn-America Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)

In 2001, the Company had one general agency that accounted for approximately 11%
of gross premiums earned. In 2000 and 1999, no general agent accounted for more
than 10% of gross premiums earned.

Note 9 Dividends from Subsidiaries and Statutory Information

Penn-America and Penn-Star are highly regulated by the state in which they are
incorporated and the states in which they do business. Such regulations, among
other things, limit the amount of dividends, impose restrictions on the amount
and types of investments and regulate rates insurers may charge for various
products.

A source of cash for the payment of common stock dividends to PAGI's
stockholders is dividends from Penn-America. Penn-America is required by law to
maintain a certain minimum surplus on a statutory basis and is subject to
risk-based capital requirements and regulations under which payment of a
dividend from statutory surplus may require prior approval of the Pennsylvania
regulatory authorities. In 2001, the Company paid dividends of $1.6 million to
PAGI. No ordinary dividends were paid in 2000. In 2000, the Penn-America paid a
$6.4 million return of capital to PAGI, after receiving approval from the
Pennsylvania Insurance Department. The maximum dividend that may be paid by
Penn-America to PAGI without prior approval of regulatory authorities in 2002 is
$6,473,325.

The National Association of Insurance Commissioners ("NAIC") has developed
Property and Casualty Risk-Based Capital ("RBC") standards that relate an
insurer's reported statutory surplus to the risks inherent to overall
operations. The RBC formula uses the statutory annual statement to calculate the
minimum indicated capital level to support asset risk and underwriting risk. The
NAIC model law calls for various levels of regulatory action based on the
magnitude of an indicated RBC capital deficiency, if any. The Company regularly
monitors capital requirements along with the NAIC's RBC developments. The
Company has determined that its capital levels are in excess of the minimum
capital requirements for all RBC action levels and that its capital levels are
sufficient to support the level of risk inherent in its operations.

The following tables reconcile statutory surplus and net income (loss) of the
Company as determined in accordance with accounting procedures prescribed by the
insurance regulatory authorities to stockholders' equity and net income (loss)
of the Company calculated in accordance with accounting principles generally
accepted in the United States as reported herein:

<TABLE>
<CAPTION>
                                                               Year ended December 31,
                                                  ----------------------------------------------
(In thousands)                                         2001             2000            1999
------------------------------------------------------------------------------------------------
<S>                                                  <C>              <C>              <C>
Statutory surplus as regards to policyholders        $ 64,733         $ 55,530         $ 69,515

Deferred policy acquisition costs                       9,083           10,317            9,306

Deferred income taxes                                    (574)           4,272            5,483

Net unrealized investment gain (loss)                   4,151            1,974           (5,027)

Non-admitted assets                                     2,171            1,175              896

Provision for uncollectible accounts                   (1,022)            (522)            (522)

Holding company assets                                  1,594            1,156              938

Other, net                                                255              149               29
                                            ---------------------------------------------------
GAAP stockholders' equity                            $ 80,391         $ 74,051         $ 80,618
                                            ---------------------------------------------------

</TABLE>




                                    Page 56
<PAGE>



Penn-America Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)

<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                   ---------------------------------------------------
(In thousands)                                                  2001             2000            1999
-------------------------------------------------------------------------------------------------------
                                                             (Restated)       (Restated)      (Restated)
<S>                                                           <C>             <C>             <C>
Statutory net income (loss)                                   $ 6,827         $(5,020)        $ 1,869

Deferred policy acquisition costs                              (1,268)          1,010             578

Deferred income tax                                               499             594             281

Allowance for uncollectible accounts                             (500)           --               100

Holding company expenses, net of tax                             (345)           (500)           (825)

GAAP restatement - other than temporary impairment (1)           (411)           (975)           (628)

Other, net                                                        138              60              35
                                                  ---------------------------------------------------
GAAP net income (loss)                                        $ 4,940         $(4,831)        $ 1,410
                                                  ---------------------------------------------------
<FN>

(1) See Note 1 to the Consolidated Financial Statements.
</FN>
</TABLE>

The NAIC revised the Statutory Accounting Practices and Procedures Manual in a
process referred to as Codification. The objective of Codification is to
standardize the accounting practices prescribed by each State's Insurance
Department. The revised manual was effective January 1, 2001. Pennsylvania, the
domiciliary state for Penn-America and Penn-Star, has adopted the provisions for
the revised manual. The revised manual has changed, to some extent, prescribed
statutory accounting practices and has resulted in changes to the accounting
practices that Penn-America and Penn-Star use to prepare their statutory-basis
financial statements. These changes resulted in an increase in the
statutory-basis capital and surplus of the Company of $3.3 million at January 1,
2001.

Note 10 Incentive Savings and Retirement Plan

Penn-America participates in a profit-sharing and a 401(k) plan with Penn
Independent that covers qualified employees. Penn-America's contributions under
the 401(k) plan were $117,000, $72,000 and $105,000 for 2001, 2000, and 1999,
respectively. There were no profit-sharing distributions in 2001, 2000, and
1999.

Note 11 Stock Incentive Plans

Stock options: In August 1993, the Company adopted a Stock Incentive Plan (the
"Plan"), which was later amended and restated in April of 1994 and amended in
April 2000. The purpose of the Plan is to enable officers, employees, directors,
consultants, advisors and service providers of the Company and its affiliates
(as defined in the Plan) to participate in the Company's future and to enable
the Company to attract and retain these persons by offering them proprietary
interests in the Company. The Plan authorized the issuance of up to 1,237,500
shares of common stock pursuant to the exercise of stock options or the award of
restricted stock. Options are exercisable according to the various terms under
which they were granted varying from one year to ten years after the date of
grant. All options are subject in general to earlier termination if the optionee
leaves the employ of the Company.
           ....
The fair value of options is estimated on the grant date using the Black-Scholes
option pricing model. The model assumes the following for 2001, 2000, and 1999,
respectively: expected annual dividend rates of 2.0%, 2.8% and 1.9%; risk-free
interest rates of 2.0% for 2001 and 6.0% for 2000 and 1999; weighted-average
expected life of the options of 4.8 years for 2001 and 2.5 years for 2000 and
1999; and expected stock price volatility of 22% for 2001 and 30% for 2000 and
1999.



                                    Page 57
<PAGE>

Penn-America Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)

The Company has elected to account for these stock options in accordance with
the provisions of Accounting Principles Board Opinion ("APB") #25, "Accounting
for Stock Issued to Employees" and accordingly, no compensation expense has been
recorded for such grants. Statement of Financial Accounting Standards ("SFAS")
#123 "Accounting for Stock-Based Compensation," effective in 1996, would require
that compensation expense be recorded for these option grants. Accounting for
such options using APB 25 and SFAS 123 are both acceptable alternatives under
GAAP. Had the Company elected to adopt SFAS 123, the effect on the Company's net
income and per share results would have been:

<TABLE>
<CAPTION>
                                                      Year ended December 31,
                                            ----------------------------------------------
(in thousands)                                  2001             2000             1999
------------------------------------------------------------------------------------------
                                             (Restated)       (Restated)        (Restated)
Net income (loss):
<S>                                         <C>              <C>               <C>
  As reported                               $   4,940        $  (4,831)        $   1,410

  Pro forma                                     4,914           (4,973)            1,385

Diluted net income (loss) per share:

  As reported                               $     0.43      $     (0.42)       $     0.11

  Pro forma                                       0.43            (0.43)             0.11

</TABLE>

A summary of the status of and changes in the Company's stock option plan is
presented below:

<TABLE>
<CAPTION>
                                                                                 Year ended December 31,
                                                                         -----------------------------------------
                                                                             2001        2000          1999
------------------------------------------------------------------------------------------------------------------
                                                                          (in thousands, except per share data)
<S>                                                                            <C>        <C>            <C>
Outstanding at beginning of year
(average price of $4.75, $4.73 and $4.65)                                      539        461            447

Granted (average price of $5.17, $4.96 and $7.09 per share)                     54        111             14


Exercised (average price of $4.12 and $2.95 per share)                         (81)       (24)             -


Forfeited (average price of $4.95 and $10.92 per share)                        (20)        (9)             -
                                                                         -----------------------------------------

Outstanding at end of year (average price of $4.87, $4.75 and $4.73)           492        539            461
                                                                         =========================================

Options exercisable at end of year                                             418        442            447
                                                                         -----------------------------------------

Weighted average fair value of options
granted during the year                                                     $ 0.81      $1.94          $2.19

</TABLE>






                                    Page 58
<PAGE>



Penn-America Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)


The following table summarizes information about stock options outstanding at
December 31, 2001:

<TABLE>
<CAPTION>
                                            Options Outstanding                       Options Exercisable
                             --------------------------------------------------  ------------------------------
                                               Weighted
                                 Number         Average         Weighted           Number        Weighted
                               Outstanding     Remaining         Average         Exercisable     Average
                                12/31/01      Contractual       Exercise          12/31/01       Exercise
Exercise Prices                (in 000's)    Life (Years)         Price          (in 000's)       Price
-------------------------------------------------------------------------------  ------------------------------
<S>                               <C>               <C>             <C>                <C>      <C>
  $3.60 - $3.80                     12                0.4             $  3.63            12       $  3.63
  $3.81 - $5.07                    347                2.8             $  4.17           323       $  4.11
  $5.07 - $6.33                     54                2.9             $  5.56            36       $  5.76
  $6.34 - $7.60                     45                3.4             $  6.79            13       $  7.09
  $7.61 - $10.13                    21                1.4             $  9.17            21       $  9.17
  $10.14 - $12.67                   13                2.4             $ 12.67            13       $ 12.67

</TABLE>

On January 2, 2002, the Company granted 262,335 stock options to employees at an
exercise price equal to the market price on the date of the grant. These stock
option grants vest over a five-year period beginning January 2, 2003.

Restricted Stock: The Company has awarded shares of restricted stock to certain
employees. Such shares are held by the Company and released to each grantee at
the rate of 20% per year provided that the grantee is still employed by the
Company or its affiliates. The Company charged $115,000 in 2001 and $120,000 in
2000 and 1999 to compensation expense relating to these awards. During 2001,
2000 and 1999, 15,750, 9,750 and 9,750 shares, respectively, of the restricted
stock were released to the applicable employees as allowed by the provisions of
the grant.

Agents' Contingent Commission Plan: The Company's Agents' Contingent Commission
Plan allows its agents to receive up to 100% of their contingent profit
commission awards in PAGI common stock. Agents' common stock awards for the
2000, 1999 and 1998 years, which were issued in May of 2001, 2000 and 1999,
amounted to 35,189, 89,384, and 63,053 shares, respectively.

Note 12 Commitments and Contingencies

The Company's insurance subsidiaries are subject to routine legal proceedings in
connection with their property and casualty business. Penn-America has been
named as a defendant in litigation commenced in the Superior Court of
California, County of Los Angeles, on November 6, 2000 and in an identical suit
on December 18, 2000 in the County of Orange relating to our exited non-standard
personal automobile business. It is not possible at this time to evaluate the
probability of a favorable or unfavorable outcome, nor is it possible to
estimate the amount of loss, if any. Management believes that its position is
defensible as to such litigation and is of the opinion that the amount of loss,
if any, will not have a material affect on the Company's financial statements.
The Company is involved in no other pending or threatened legal or
administrative proceedings which management believes might have a material
adverse effect on the Company's financial condition or results of operations.



                                    Page 59
<PAGE>


Penn-America Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)

The Company leases various computer equipment for use by its insurance
subsidiaries. These leases have terms primarily expiring in less than a
three-year period. Rental expenses for these operating leases were $391,000
$349,000 and $392,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.

At December 31, 2001, the future minimum rental payments required under
operating leases that have initial or remaining non-cancellable lease terms in
excess of one year were $341,000, $150,000 and $11,000 for 2002, 2003 and 2004,
respectively.

Note 13 Other Comprehensive Income

Accumulated other comprehensive income (loss) of the Company consists solely of
net unrealized gains and losses. The following table illustrates the components
of accumulated other comprehensive income:

<TABLE>
<CAPTION>
                                                              Year ended December 31, 2001
                                                         -------------------------------------------
(In thousands)                                             Pre-tax       Tax Expense   Net of Tax
                                                            Amount                        Amount
----------------------------------------------------------------------------------------------------
                                                          (Restated)     (Restated)    (Restated)
Unrealized gains on investments:
<S>                                                       <C>              <C>               <C>
  Unrealized holding gains arising during period          $ 2,328          $  (792)          $ 1,536
  Reclassification adjustments for losses
      realized in net income                                1,178             (400)              778
                                                          ------------------------------------------
Other comprehensive income                                $ 3,506          $(1,192)          $ 2,314
                                                          ------------------------------------------



                                                                 Year ended December 31, 2000
                                                         -------------------------------------------
(In thousands)                                             Pre-tax       Tax Expense   Net of Tax
                                                            Amount                        Amount
----------------------------------------------------------------------------------------------------
                                                          (Restated)     (Restated)    (Restated)
Unrealized gains on investments:
  Unrealized holding gains arising during period          $ 3,992          $(1,357)          $ 2,635
  Reclassification adjustments for losses
      realized in net income                                2,808             (955)            1,853
                                                          ------------------------------------------
Other comprehensive income                                $ 6,800          $(2,312)          $ 4,488
                                                          ------------------------------------------



                                                                    Year ended December 31, 1999
                                                          ------------------------------------------
(In thousands)                                             Pre-tax       Tax Expense   Net of Tax
                                                            Amount                        Amount
----------------------------------------------------------------------------------------------------
                                                          (Restated)     (Restated)    (Restated)
Unrealized losses on investments:
  Unrealized holding losses arising during period          $(9,822)        $ 3,340           $(6,482)
  Reclassification adjustments for losses
      realized in net income                                   110             (38)               72
                                                          ------------------------------------------
Other comprehensive loss                                   $(9,712)        $ 3,302           $(6,410)
                                                          ------------------------------------------


</TABLE>


                                    Page 60
<PAGE>

Penn-America Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)

Note 14 Unaudited Quarterly Financial Information

<TABLE>
<CAPTION>
                                                                                  2001
                              -------------------------------------------------------------------------------------------------
(In thousands except
 per share data)                   First               Second              Third                Fourth                Total
-------------------------------------------------------------------------------------------------------------------------------
                                                                                             (Restated)
<S>                            <C>                 <C>                  <C>                  <C>             <C>
Revenues                       $   25,994          $   24,687           $   23,837           $   24,577      $        99,095
Net income                            967                 994                1,551                1,428                4,940

Net income per share:
   Basic                             0.09                0.09                 0.14                 0.12                 0.43
   Diluted                           0.08                0.09                 0.13                 0.12                 0.43


                                                                                 2000
                              -------------------------------------------------------------------------------------------------
(In thousands except
 per share data)                   First               Second              Third                Fourth                Total
-------------------------------------------------------------------------------------------------------------------------------
                                                                                             (Restated)


Revenues                       $   23,933          $   24,923           $   24,971           $   25,268           $   99,095

Net income (loss)                   1,583                (662)              (5,078)                (674)              (4,831)
Net income per share:
   Basic                             0.13               (0.06)               (0.45)               (0.06)               (0.42)

   Diluted                           0.13               (0.06)               (0.45)               (0.06)               (0.42)


</TABLE>


Note 15--Subsequent Event

On April 11, 2002, the Company announced a three-for-two stock split to be
effected in the form of a 50% Stock dividend payable to shareholders of record
as of April 25, 2002. The distribution date was May 9, 2002. The number of
shares of common stock issued and outstanding and shares of treasury stock in
the stockholders' equity section of the consolidated balance sheet have been
adjusted to reflect the effect of the stock split. The balances for common stock
and additional paid-in capital have been adjusted to reflect the effect of the
stock split. The basic and diluted net income per share and basic and diluted
weighted average shares outstanding on the consolidated statement of operations
have been adjusted to reflect the effect of the stock split. The cash dividend
paid per share and the balances of common stock and additional paid-in capital
on the consolidated statement of stockholders' equity have been adjusted to
reflect the effect of the stock split. The per share information in notes 2, 11
and 14 have been adjusted to reflect the effect of the stock split.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

None.




                                    Page 61
<PAGE>

                                    PART III

ITEM 10.          Directors and Executive Officers of the registrant

The Director's information will be in the Company's definitive Proxy Statement
with respect to the Company's 2002 Annual Meeting of Shareholders, to be filed
with the Securities and Exchange Commission within 120 days following the end of
the Company's fiscal year, and is hereby incorporated by reference thereto.

Executive Officers of the Registrant as of March 15, 2002 are as follows:

Irvin Saltzman           79      Chairman of the Board of  Directors  of PAGI
                                 and Penn-America

Jon S. Saltzman          44      President  and Chief  Executive  Officer  of
                                 PAGI and Penn-America

Joseph F. Morris         47      Senior  Vice   President,   Chief  Financial
                                 Officer   and    Treasurer   of   PAGI   and
                                 Penn-America

Garland P. Pezzuolo      37      Vice   President,   Secretary   and  General
                                 Counsel of PAGI and Penn-America

ITEM 11.          EXECUTIVE COMPENSATION

This information will be contained in the Company's definitive Proxy Statement
with respect to the Company's 2002 Annual Meeting of Shareholders, to be filed
with the Securities and Exchange Commission within 120 days following the end of
the Company's fiscal year, and is hereby incorporated by reference thereto.


ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                  AND MANAGEMENT

This information will be contained in the Company's definitive Proxy Statement
with respect to the Company's 2002 Annual Meeting of Shareholders, to be filed
with the Securities and Exchange Commission within 120 days following the end of
the Company's fiscal year, and is hereby incorporated by reference thereto.

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

This information will be contained in the Company's definitive Proxy Statement
with respect to the Company's 2002 Annual Meeting of Shareholders, to be filed
with the Securities and Exchange Commission within 120 days following the end of
the Company's fiscal year, and is hereby incorporated by reference thereto.

ITEM 14.          CONTROLS AND PROCEDURES

As of December 31, 2001, an evaluation was performed under the supervision and
with the participation of the Company's management, including the President and
CEO and Senior Vice President, CFO and Treasurer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including the President and CEO
and Senior Vice President, CFO and Treasurer, concluded that the Company's
disclosure controls and procedures were effective as of December 31, 2001. There
have been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to December
31, 2001.




                                    Page 62
<PAGE>

                                     PART IV

ITEM 15.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
                  REPORTS ON FORM 8-K

a.) The following consolidated financial statements, financial statement
    schedules and exhibits are filed as part of this report:

1.  Consolidated Financial Statements (Restated)
<TABLE>
<CAPTION>
                                                                                                                          Page
                                                                                                                      --------------

<S>                                                                                                                       <C>
              Consolidated Balance Sheets at December 31, 2001 and 2000                                                    39
              Consolidated Statements of Operations for the years ended December 31, 2001, 2000, and 1999
                                                                                                                           40
              Consolidated  Statements of  Stockholders'  Equity for the years ended December 31, 2001, 2000
                       and 1999.                                                                                           41
              Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999
                                                                                                                           42
              Notes to Consolidated Financial Statements                                                                  43-61
              Independent Auditors' Report for the years 2001, 2000 and 1999                                               38

     The following consolidated financial statement schedules for the years
2001, 2000, and 1999 are submitted herewith:

2. Financial Statement Schedules.
                                                                                                                             Page
                                                                                                                           ---------

              Schedule I.    Summary of Investments - Other Than Investments in Related Parties                               71
              Schedule II.      Condensed Financial Information of Parent Company                                           72-74
              Schedule III.     Supplementary Insurance Information                                                           75
              Schedule IV.      Reinsurance                                                                                   76
              Schedule VI.   Supplemental Insurance Information Concerning Property and Casualty                              77
                      Operations
              Independent Auditors' Consent and Report on Schedules (filed as Exhibit 23)
</TABLE>

All other schedules are omitted because they are not applicable or the required
information is included in the financial statements or notes thereto.

3.      Exhibit Index: 64-70




                                    Page 63
<PAGE>

                                  Exhibit Index


     Exhibit No.  Description

            3.1         Articles of Incorporation of the Registrant,
                        incorporated by reference to Exhibit 3.1 to the
                        Registrant's Registration Statement on Form S-1 (No.
                        33-66892) filed with the Securities and Exchange
                        Commission on August 2, 1993.

            3.2         Bylaws of the Registrant, incorporated by reference to
                        Exhibit 3.2 to the Registrant's Registration Statement
                        on Form S-1 (No. 33-66892) filed with the Securities and
                        Exchange Commission on August 2, 1993.

            10.3        1993 Casualty Excess of Loss Reinsurance Agreement with
                        National Reinsurance Corporation, incorporated by
                        reference to Exhibit 10.3 to the Registrant's
                        Registration Statement on Form S-1 (No. 33-66892) and
                        filed with the Securities and Exchange Commission on
                        August 2, 1993.

            10.3(i)     Endorsements Nos. 4 through 6 (Termination Endorsement)
                        to 1993 Casualty Excess of Loss Reinsurance Agreement
                        with National Reinsurance Corporation, filed with the
                        Securities and Exchange Commission with Registrant's
                        Report on Form S-2 Amendment No. 1 (No. 333-91362) on
                        September 6, 2002.

            10.7        Agreement dated August 20, 1993, between Penn
                        Independent Corporation ("Penn Independent") and the
                        Registrant regarding the reimbursement of certain
                        employment costs, incorporated by reference to Exhibit
                        10.7 to Amendment No. 1 to the Registrant's Registration
                        Statement on Form S-1 (No. 33-66892) and filed with the
                        Securities and Exchange Commission on August 26, 1993.

            10.7(i)     Amendment effective January 1, 1995 to August 20, 1993
                        Agreement between Penn Independent and Registrant
                        regarding the sharing of certain operating costs, filed
                        with Registrant's Report on Form 10-K for the period
                        ended December 31, 1995, which has been filed with the
                        Securities and Exchange Commission.

            10.7(ii)    Amendments dated January 1, 1996, and March 1, 1996, to
                        August 20, 1993 Agreement between Penn Independent and
                        Registrant regarding the sharing of certain operating
                        costs, filed with Registrant's Report on Form 10-K for
                        the period ended December 31, 1996, which has been filed
                        with the Securities and Exchange Commission.

            10.7(iii)   Amendment dated March 1, 1997, to August 20, 1993
                        Agreement between Penn Independent and Registrant
                        regarding the sharing of certain operating costs, filed
                        with Registrant's Report on Form 10-K for the period
                        ended December 31, 1997, which has been filed with the
                        Securities and Exchange Commission.

            10.7(iv)    Amendment dated January 1, 1999, to August 20, 1993
                        Agreement between Penn Independent and Registrant
                        regarding the sharing of certain operating costs, filed
                        with the Registrant's Report on Form 10-K for the period
                        ended December 31, 1998, which has been filed with the
                        Securities and Exchange Commission.

                                    Page 64

<PAGE>

     Exhibit No.           Description

            10.7(v)     Amendment dated January 1, 2000, to August 20, 1993
                        Agreement between Penn Independent and Registrant
                        regarding the sharing of certain operating costs, filed
                        with Registrant's Report on Form 10-K for the period
                        ended December 31, 1999, which has been filed with the
                        Securities and Exchange Commission.

            10.7(vi)    Amendment dated July 1, 2000, to August 20, 1993
                        Agreement between Penn Independent and Registrant
                        regarding the sharing of certain operating costs, filed
                        with Registrant's Report on Form 10-K for the period
                        ended December 31, 2000, which has been filed with the
                        Securities and Exchange Commission.

            10.7(vii)   Amendment dated January 1, 2001, to August 20, 1993
                        Agreement between Penn Independent and Registrant
                        regarding the sharing of certain operating costs, filed
                        with Registrant's Report on Form 10-K for the period
                        ended December 31, 2001, which has been filed with the
                        Securities and Exchange Commission.

            10.9        Restated Investment Advisory Agreement effective July 1,
                        1990, between Penn America and Carl Domino Associates,
                        L.P., incorporated by reference to Exhibit 10.9 to the
                        Registrant's Registration Statement on Form S-1 (No.
                        33-66892) and filed with the Securities and Exchange
                        Commission on August 2, 1993.

            10.9(i)     Amended Investment Advisory Agreement effective
                        September 1, 1997, between and among Penn-America, its
                        subsidiary, Penn-Star and Carl Domino Associates, L.P.,
                        filed with the Registrant's Report on Form 10-K for the
                        period ending December 31, 1997, which was filed with
                        the Securities and Exchange Commission.

            10.9(ii)    Agreement dated April 15, 1997, between and among
                        General Re New England Asset Management, Inc.,
                        Penn-America, and its subsidiary, Penn-Star filed with
                        the Registrant's Report on Form 10-K for the period
                        ending December 31, 1997, which was filed with the
                        Securities and Exchange Commission.

            10.9(iii)   Investment Advisory Agreement effective February 19,
                        1999, between Penn-America Insurance Company and Madison
                        Monroe, Inc., filed with Registrant's Report on Form
                        10-K for the period ended December 31, 1999, which has
                        been filed with the Securities and Exchange Commission.

            10.9(iv)    Notice of Termination effective July 1, 2000, of
                        Investment Advisory Agreement dated September 1, 1997,
                        between and among Penn-America Insurance Company, its
                        subsidiary, Penn-Star Insurance Company and Carl Domino
                        Associates, L.P., filed with Registrant's Report on Form
                        10-K for the period ended December 31, 2000, which has
                        been filed with the Securities and Exchange Commission.

            10.9(v)     Amendment dated November 7, 2000, to Agreement dated
                        April 15, 1997, between and among General Re New England
                        Asset Management, Inc., Penn-America Insurance Company,
                        and its subsidiary, Penn-Star, filed with Registrant's
                        Report on Form 10-K for the period ended December 31,
                        2000, which has been filed with the Securities and
                        Exchange Commission.




                                    Page 65
<PAGE>

       Exhibit No.         Description

            10.9(vi)    Amendment dated August 2, 2000, to Investment Management
                        Agreement dated February 25, 1999, between Penn-America
                        Insurance Company and Madison Monroe, Inc., filed with
                        Registrant's Report on Form 10-K for the period ended
                        December 31, 2000, which has been filed with the
                        Securities and Exchange Commission.

            10.9(vii)   Notice of Termination dated November 2, 2000, of
                        Investment Management Agreement dated February 25, 1999,
                        between Penn-America Insurance Company and Madison
                        Monroe, Inc., filed with Registrant's Report on Form
                        10-K for the period ended December 31, 2000, which has
                        been filed with the Securities and Exchange Commission.

            10.10       1993 Stock Incentive Plan, incorporated by reference to
                        Exhibit 10.10 to Amendment No. 4 to the Registrant's
                        Registration Statement on Form S-1 (No. 33-66892) and
                        filed with the Securities and Exchange Commission on
                        September 29, 1993.

            10.10(i)    Penn-America Group, Inc. 1993 Stock Incentive Plan, as
                        amended and restated April 4, 1994, incorporated by
                        reference to Exhibit 4.1 to the Registrant's
                        Registration Statement on Form S-8 (No. 33-82728) and
                        filed with the Securities and Exchange Commission on
                        August 11, 1994.

            10.10(ii)   Employee Bonus Plan dated January 1, 2000, filed with
                        Registrant's Report on Form 10-K for the period ended
                        December 31, 1999, which has been filed with the
                        Securities and Exchange Commission.

            10.10(iii)  Amendment dated April 1, 2000, to Penn-America Group,
                        Inc. 1993 Stock Incentive Plan, as amended and restated
                        April 4, 1994, filed with Registrant's Report on Form
                        10-K for the period ended December 31, 2001, which has
                        been filed with the Securities and Exchange Commission.

            10.11       Lease effective July 1, 2000, between Penn-America
                        Insurance Company and Irvin Saltzman, filed with
                        Registrant's Report on Form 10-K for the period ended
                        December 31, 2000, which has been filed with the
                        Securities and Exchange Commission.

            10.14       1995 Multiple Line Excess of Loss (Casualty and
                        Property) Reinsurance Agreement with National
                        Reinsurance Corporation, effective as of January 1,
                        1995, filed with Registrant's Report on Form S-2
                        Amendment No. 1 (No. 333-91362) with the Securities and
                        Exchange Commission on September 6, 2002.

            10.14(i)    Endorsement No. 1 to Multiple Line Excess of Loss
                        Reinsurance Agreement with National Reinsurance
                        Corporation, effective as of January 1, 1995, filed with
                        Registrant's Report on Form S-2 Amendment No. 1 (No.
                        333-91362) with the Securities and Exchange Commission
                        on September 6, 2002.

            10.14(ii)   Endorsement No. 2 to Multiple Line Excess of Loss
                        Reinsurance Agreement with National Reinsurance
                        Corporation, effective as of January 1, 1995, filed with
                        Registrant's Report on Form S-2 Amendment No. 1 (No.
                        333-91362) with the Securities and Exchange Commission
                        on September 6, 2002.


                                    Page 66
<PAGE>

       Exhibit No.         Description

            10.14(iii)  1996 Property & Liability Reinsurance Agreement with
                        General Re Corporation effective May 1, 1996, filed with
                        Registrant's Report on Form S-2 Amendment No. 1 (No.
                        333-91362) with the Securities and Exchange Commission
                        on September 6, 2002.

            10.14(iv)   Property Catastrophe Excess of Loss Reinsurance Program
                        between subscribing reinsurers and Penn-America and
                        Penn-Star Insurance Companies effective January 1, 2000,
                        to January 1, 2002, filed with Registrant's Report on
                        Form 10-K for the period ended December 31, 2001, which
                        has been filed with the Securities and Exchange
                        Commission.

            10.16       Penn-America Group, Inc. 1995 Key Employee Incentive
                        Compensation Plan, incorporated as Part I to
                        Registrant's Registration Statement on Form S-8 (No.
                        333-00050) and filed with the Securities and Exchange
                        Commission on January 4, 1996.

            10.16(i)    Penn-America Insurance Company 2001 Key Employee
                        Incentive Compensation Plan, effective January 1, 2001,
                        filed with Registrant's Report on Form 10-K for the
                        period ended December 31, 2000, which has been filed
                        with the Securities and Exchange Commission.

            10.17       Penn-America Insurance Company's Agency Award and Profit
                        Sharing Plan, incorporated as Exhibit 4 to Registrant's
                        Registration Statement on Form S-3 (No. 333-00046) and
                        filed with the Securities and Exchange Commission on
                        January 4, 1996.

            10.17(i)    Penn-America Insurance Company's Agency Award and Profit
                        Sharing Plan, attached as Exhibit 4 to Registrant's
                        Registration Statement on Form S-3 (No. 333-49055) and
                        filed with the Securities and Exchange Commission on
                        March 31, 1998.

            10.17(ii)   Amended General Agency Profit Sharing Addendum to Agency
                        Award & Profit Sharing Plan, filed with Registrant's
                        Report on Form 10-K for the period ended December 31,
                        1999, which has been filed with the Securities and
                        Exchange Commission.

            10.17(iii)  General Agent Contingent Profit Commission Addendum
                        between agents and Penn-America and Penn-Star Insurance
                        Companies effective January 1, 2001, filed with
                        Registrant's Report on Form 10-K for the period ended
                        December 31, 2001, which has been filed with the
                        Securities and Exchange Commission.

            10.18       Stipulation of Termination of Property and Liability
                        Reinsurance Agreement with National Reinsurance
                        Corporation effective May 1, 1996, filed with
                        Registrant's Report on Form S-2 Amendment No. 1 (No.
                        333-91362) with the Securities and Exchange Commission
                        on September 6, 2002.

            10.19       Multiple Line Excess of Loss Agreement of Reinsurance
                        including Endorsement No. 1 between General Reinsurance
                        Corporation and Penn-America and Penn-Star Insurance
                        Companies effective January 1, 2000, filed with
                        Registrant's Report on Form 10-K for the period ended
                        December 31, 2001, which has been filed with the
                        Securities and Exchange Commission.




                                    Page 67
<PAGE>

       Exhibit No.         Description

            10.19(i)    Endorsement No. 2 to the Multiple Line Excess of Loss
                        Agreement of Reinsurance including Endorsement No. 1
                        (Exhibit 10.19) between General Reinsurance Corporation
                        and Penn-America and Penn-Star Insurance Companies,
                        effective September 1, 2001, filed with Registrant's
                        Report on Form 10-K for the period ended December 31,
                        2001, which has been filed with the Securities and
                        Exchange Commission.

            10.20       Property and Casualty Excess of Loss Reinsurance
                        Agreement between American Re-Insurance Company and
                        Penn-America and Penn-Star Insurance Companies effective
                        September 1, 2001, filed with Registrant's Report on
                        Form 10-K for the period ended December 31, 2001, which
                        has been filed with the Securities and Exchange
                        Commission.

            11          Statement re: computation of per share earnings,
                        incorporated by reference from Note 2 to the
                        Consolidated Financial Statements, filed with
                        Registrant's Report on Form 10-K/A for the period ended
                        December 31, 2001, which has been filed with the
                        Securities and Exchange Commission.

            21          As of December 31, 2001, the Registrant's only
                        subsidiary is Penn-America Insurance Company, a
                        Pennsylvania Corporation.

            28.2        Credit Agreement among Registrant, Certain Lenders and
                        First Union National Bank dated September 28, 1998,
                        filed with the Securities and Exchange Commission, filed
                        with the Registrant's Report on Form 10-K for the period
                        ended December 31, 1998, which has been filed with the
                        Securities and Exchange Commission.

            28.3        First Amendment to Credit Agreement, dated May 12, 1999,
                        among registrant, certain lenders and First Union
                        National Bank, dated September 28, 1998, filed with
                        Registrant's Report on Form 10-K for the period ended
                        December 31, 1999, which has been filed with the
                        Securities and Exchange Commission.

            28.4        Second Amendment to Credit Agreement, dated August 26,
                        1999, among registrant, certain lenders and First Union
                        National Bank, dated September 28, 1998, filed with
                        Registrant's Report on Form 10-K for the period ended
                        December 31, 1999, which has been filed with the
                        Securities and Exchange Commission.

            28.5        Third Amendment to Credit Agreement, dated March 15,
                        2000, among registrant, certain lenders and First Union
                        National Bank, dated September 28, 1998, filed with
                        Registrant's Report on Form 10-K for the period ended
                        December 31, 1999, which has been filed with the
                        Securities and Exchange Commission.

            28.6        Notice of Termination of Credit Agreement, dated July
                        31, 2000, among Registrant, Certain Lenders, and First
                        Union National Bank, parties to the Credit Agreement
                        dated September 28, 1998, filed with the Registrant's
                        Report on Form 10-K for the period ended December 31,
                        2000, which has been filed with the Securities and
                        Exchange Commission.



                                    Page 68
<PAGE>


     Exhibit No.  Description

            30.0        Reinsurance Pooling Agreement between Penn-America
                        Insurance Company and Penn- Star Insurance Company dated
                        July 1, 1998, filed with the Securities and Exchange
                        Commission.

            31.0        Amended and Restated Promissory Note and Security
                        Agreement effective January 2, 2001, between Jon S.
                        Saltzman and Penn-America Insurance Company which amends
                        and restates in its entirety, including any amendments
                        thereto, the Promissory Note and Security Agreement
                        dated January 17, 2000, filed with Registrant's Report
                        on Form 10-K for the period ended December 31, 2001,
                        which has been filed with the Securities and Exchange
                        Commission.

            31.0(i)     Amended and Restated Promissory Note and Security
                        Agreement effective January 2, 2001, between Jon S.
                        Saltzman and Penn-America Insurance Company which amends
                        and restates in its entirety, including any amendments
                        thereto, the Promissory Note and Security Agreement
                        dated March 10, 2000, filed with Registrant's Report on
                        Form 10-K for the period ended December 31, 2001, which
                        has been filed with the Securities and Exchange
                        Commission.

            31.0(ii)    Amended and Restated Promissory Note and Security
                        Agreement effective January 2, 2001, between Jon S.
                        Saltzman and Penn-America Insurance Company which amends
                        and restates in its entirety, including any amendments
                        thereto, the Promissory Note and Security Agreement
                        dated September 19, 2000, filed with Registrant's Report
                        on Form 10-K for the period ended December 31, 2001,
                        which has been filed with the Securities and Exchange
                        Commission.

            31.0(iii)   Amended and Restated Promissory Note and Security
                        Agreement effective January 2, 2001, between J. Ransley
                        Lennon and Penn-America Insurance Company which amends
                        and restates in its entirety, including any amendments
                        thereto, the Promissory Note and Security Agreement
                        dated February 16, 2000, filed with Registrant's Report
                        on Form 10-K for the period ended December 31, 2001,
                        which has been filed with the Securities and Exchange
                        Commission.

            31.0(iv)    Amended and Restated Promissory Note and Security
                        Agreement effective January 2, 2001, between Garland P.
                        Pezzuolo and Penn-America Insurance Company which amends
                        and restates in its entirety, including any amendments
                        thereto, the Promissory Note and Security Agreement
                        dated February 11, 2000, filed with Registrant's Report
                        on Form 10-K for the period ended December 31, 2001,
                        which has been filed with the Securities and Exchange
                        Commission.

            31.0(v)     Promissory Note and Security Agreement effective March
                        9, 2001, between Joseph F. Morris and Penn-America
                        Insurance Company, filed with Registrant's Report on
                        Form 10-K for the period ended December 31, 2001, which
                        has been filed with the Securities and Exchange
                        Commission.




                                    Page 69
<PAGE>

       Exhibit No.         Description

            31.0(vi)    Promissory Note and Security Agreement effective March
                        28, 2001, between Joseph F. Morris and Penn-America
                        Insurance Company, filed with Registrant's Report on
                        Form 10-K for the period ended December 31, 2001, which
                        has been filed with the Securities and Exchange
                        Commission.

            31.0(vii)   Promissory Note and Security Agreement effective March
                        9, 2001, between Garland P. Pezzuolo and Penn-America
                        Insurance Company, filed with Registrant's Report on
                        Form 10-K for the period ended December 31, 2001, which
                        has been filed with the Securities and Exchange
                        Commission.

            31.0(viii)  Promissory Note and Security Agreement effective
                        February 16, 2001, between Thomas P. Bowie and
                        Penn-America Insurance Company, filed with Registrant's
                        Report on Form 10-K for the period ended December 31,
                        2001, which has been filed with the Securities and
                        Exchange Commission.

            31.0(ix)    Promissory Note and Security Agreement effective
                        February 23, 2001, between Thomas P. Bowie and
                        Penn-America Insurance Company, filed with Registrant's
                        Report on Form 10-K for the period ended December 31,
                        2001, which has been filed with the Securities and
                        Exchange Commission.

            31.0(x)     Promissory Note and Security Agreement effective
                        February 27, 2001, between Thomas P. Bowie and
                        Penn-America Insurance Company, filed with Registrant's
                        Report on Form 10-K for the period ended December 31,
                        2001, which has been filed with the Securities and
                        Exchange Commission.

            31.0(xi)    Promissory Note and Security Agreement effective March
                        21, 2001, between Thomas P. Bowie and Penn-America
                        Insurance Company, filed with Registrant's Report on
                        Form 10-K for the period ended December 31, 2001, which
                        has been filed with the Securities and Exchange
                        Commission.

       (b)

            (1)         Form 8-K dated November 14, 2001 re: Quarterly
                        Statements of Penn-America Insurance Company and
                        Penn-Star Insurance Company, which was filed with the
                        Securities and Exchange Commission.

            (2)         Form 8-K dated December 4, 2001, re: delivering a
                        presentation including a slide show to interested
                        parties outlining the Company's business strategies and
                        an overview of the Company's historical and financial
                        results, which was filed with the Securities and
                        Exchange Commission.



                                    Page 70

<PAGE>

                            PENN-AMERICA GROUP, INC.
 Schedule I - Summary of Investments - Other than Investments in Related Parties
                                 (in thousands)

<TABLE>
<CAPTION>
                                                           December 31, 2001
                                  --------------------------------------------------------------------

                                                 Amortized            Fair             Amount shown
                                                   Cost              Value           on Balance Sheet
                                  --------------------------------------------------------------------
                                               (Restated)
<S>                                               <C>               <C>               <C>
Fixed maturities
Available for sale
U.S. Treasury securities and obligations
    of U.S. government agencies                   $  4,013          $  4,195          $  4,195

Corporate securities                                49,981            52,021            52,021

Mortgage-backed securities                          26,483            27,316            27,316

Other structured securities                         20,758            21,462            21,462

Municipal securities                                20,569            21,004            21,004

Public utilities                                     9,172             9,255             9,255
                                  ------------------------------------------------------------
Total available for sale                           130,976           135,253           135,253
                                  ------------------------------------------------------------

Held to maturity
U.S. Treasury securities and obligations
    of U.S. government agencies                     13,812            14,025            13,812

Corporate securities                                   276               290               276

Public utilities                                       996             1,002               996
                                  ------------------------------------------------------------
Total held to maturity                              15,084            15,317            15,084
                                  ------------------------------------------------------------


Total fixed-maturity securities                    146,060           150,570           150,337

Equity securities:
Common stock                                         7,814             7,977             7,977
Preferred stock                                     16,906            17,172            17,172
                                  ------------------------------------------------------------
Total equity securities                             24,720            25,149            25,149
                                  ------------------------------------------------------------
Total investments                                 $170,780          $175,719          $175,486
                                  ============================================================

</TABLE>




                                    Page 71
<PAGE>



<TABLE>
<CAPTION>
                                            PENN-AMERICA GROUP, INC.
                         Schedule II--Condensed Financial Information of Parent Company
                                            Condensed Balance Sheets
                                        (in thousands except share data)



                                                                                        December 31,
                                                                             ----------------------------------
                                                                                  2001                2000
                                                                             ---------------   ----------------

                                                                                  (Restated)         (Restated)
ASSETS
<S>                                                                                 <C>                <C>
     Cash                                                                           $  1,261           $    972
     Investment in subsidiary, equity method                                          79,425             73,441
     Other assets                                                                        359                357
                                                                             ---------------   ----------------
           Total assets                                                             $ 81,045           $ 74,770
                                                                             ===============   ================

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
     Accounts payable and accrued expenses                                          $     25           $    173
                                                                             ---------------   ----------------

            Total liabilities                                                             25                173
                                                                             ---------------   ----------------

Stockholders' equity:
     Preferred stock, $ .01 par value; authorized 2,000,000 shares;
         none issued
     Common stock, $.01 par value; authorized 20,000,000 in 2001 and 2000;
         issued 2001, 15,228,351 and 2000, 15,114,038 shares; outstanding
         2001, 11,478,351 and 2000, 11,364,038 (1)                                       152                151
     Additional paid-in capital (1)                                                   70,735             70,114
     Accumulated other comprehensive loss, net                                         3,106                792
     Treasury stock 3,750,000 shares at cost (1)                                     (24,161)           (24,161)
     Retained earnings                                                                31,320             27,980
     Unearned compensation from restricted stock awards                                 (132)              (279)
                                                                             ---------------    ---------------
         Total stockholders' equity                                                   81,020             74,597
                                                                             ---------------   ----------------
         Total liabilities and stockholders' equity                                 $ 81,045           $ 74,770
                                                                             ===============   ================
<FN>
(1) Adjusted to reflect the three-for-two split of the Company's common stock
effected on May 9, 2002.
</FN>
</TABLE>




                                                    Page 72
<PAGE>

<TABLE>
<CAPTION>
                                               PENN-AMERICA GROUP, INC.
                            Schedule II--Condensed Financial Information of Parent Company
                                          Condensed Statements of Operations
                                         (in thousands except per share data)


                                                                                Years ended December 31,
                                                                    --------------------------------------------------
                                                                        2001              2000              1999
                                                                    -------------     -------------     --------------
                                                                     (Restated)         (Restated)        (Restated)
Revenue:
<S>                                                                    <C>               <C>              <C>
     Dividend income                                                   $1,600            $    -           $ 2,200
     Other income                                                          26                27                56
Operating expenses                                                       (548)             (791)           (1,306)
                                                                    -------------     -------------     --------------
Income before income tax and undistributed net income (loss)
    of subsidiary                                                       1,078              (764)              950
Income tax benefit                                                        177               260               425
                                                                    -------------     -------------     --------------
Income before equity in undistributed
     net income of subsidiary                                           1,255              (504)            1,375
Equity in undistributed net income (loss)
     of subsidiary                                                      3,685            (4,327)               35
                                                                    -------------     -------------     --------------

Net income (loss)                                                      $4,940           ($4,831)         $  1,410
                                                                    =============     =============     ==============

Net income (loss)  per share
    Basic                                                               $0.43            ($0.42)         $   0.11
                                                                    =============     =============     ==============

    Diluted                                                             $0.43            ($0.42)         $   0.11
                                                                    =============     =============     ==============

NOTE:  Certain prior year amounts have been reclassified to conform to the 2001 presentation.

<FN>
(1) Adjusted to reflect a three-for-two stock split of the Company's common
stock effected on May 9, 2002.
</FN>
</TABLE>




                                                       Page 73
<PAGE>


<TABLE>
<CAPTION>
                                               PENN-AMERICA GROUP, INC.
                            Schedule II - Condensed Financial Information of Parent Company
                                          Condensed Statements of Cash Flows
                                                    (in thousands)


                                                                                            Years ended
                                                                                            December 31,
                                                                           -----------------------------------------------
                                                                               2001            2000             1999
                                                                            (Restated)      (Restated)       (Restated)
Cash flows from operating activities:
<S>                                                                           <C>            <C>              <C>
     Net income (loss)                                                        $ 4,940        $  (4,831)       $ 1,410
     Adjustments to reconcile net income (loss) to net
         cash provided by operating activities:
             Return of capital from subsidiary                                     --            6,400         12,300
             Equity in undistributed net (income) loss of subsidiary           (3,685)           4,327            (35)
             Amortization/depreciation                                             86              246            256
             Increase (decrease) in :
                 Accounts payable and accrued expenses                           (148)             108             65
                 Other, net                                                        74               16            328
                                                                           --------------   ------------   ---------------
                    Net cash provided by operating activities                   1,267            6,266         14,324
                                                                           --------------   ------------   ---------------

Cash flows from investing activities:
     Change in short-term investments                                               -              449            548
                                                                           --------------   ------------   ---------------
             Net cash provided by investing activities                              -              449            548
                                                                           --------------   ------------   ---------------

Cash flows from financing activities:
     Issuance of common stock (net of expenses)                                   622              500            465
     Purchase of treasury stock                                                     -           (4,687)       (13,831)
     Dividends paid to common stockholders                                     (1,600)          (1,611)        (1,767)
                                                                           --------------   ------------   ---------------
            Net cash used by financing activities                                (978)          (5,798)       (15,133)
                                                                           --------------   ------------   ---------------

Increase (decrease) in cash                                                       289              917           (261)
Cash, beginning of period                                                         972               55            316
                                                                           --------------   ------------   ---------------
Cash, end of period                                                           $ 1,261       $      972        $    55
                                                                           ==============   ============   ===============



NOTE:  Certain prior year amounts have been reclassified to conform to the 2001 presentation.
</TABLE>


                                                       Page 74
<PAGE>



<TABLE>
<CAPTION>
                                                    PENN-AMERICA GROUP, INC.
                                       Schedule III - Supplementary Insurance Information
                                          Years Ended December 31, 2001, 2000 and 1999
                                                         (in thousands)

                                         Liability
                                        for Unpaid
                       Deferred         Losses and                                                                Losses
                        Policy             Loss                                                  Net             and Loss
                     Acquisition        Adjustment          Unearned          Earned          Investment        Adjustment
                        Costs            Expenses           Premiums         Premiums           Income           Expenses

2001
<S>                       <C>              <C>               <C>               <C>               <C>                 <C>
Commercial                $  9,067         $ 117,555         $  40,989         $ 88,912          $  7,665            $ 62,414
Personal                        16             2,043                45               22                 -             (1,493)
Unallocated                      -                 -                 -                -             3,674                   -
                    ---------------    --------------     -------------    -------------     -------------    ----------------
     Total                $  9,083         $ 119,598         $  41,034         $ 88,934         $  11,339           $  60,921
                    ---------------    --------------     -------------    -------------     -------------    ----------------

2000
Commercial               $  10,310         $ 109,377         $  43,218         $ 87,556          $  5,904           $  72,893
Personal                         7             5,937                21            3,893               549               2,485
Unallocated                      -                 -                 -                -             4,001                   -
                    ---------------    --------------     -------------    -------------     -------------    ----------------
     Total               $  10,317         $ 115,314         $  43,239         $ 91,449         $  10,454           $  75,378
                    ---------------    --------------     -------------    -------------     -------------    ----------------

1999
Commercial                $  8,914         $  82,192         $  35,188        $  71,731          $  4,347           $  49,744
Personal                       392            11,527             1,144           13,946               735              13,443
Unallocated                      -                 -                 -                -             4,455                   -
                    ---------------    --------------     -------------    -------------     -------------    ----------------
     Total                $  9,306         $  93,719         $  36,332        $  85,677          $  9,537           $  63,187
                    ---------------    --------------     -------------    -------------     -------------    ----------------




                        Amortization
                             of
                          Deferred
                           Policy              Other               Net
                        Acquisition         Underwriting         Premiums
                           Costs              Expenses           Written

2001
Commercial                  $  22,707            $  3,380          $ 87,121
Personal                            8                   -                 2
Unallocated                         -               5,358                 -
                       ---------------     ---------------     -------------
     Total                  $  22,715            $  8,738          $ 87,123
                       ---------------     ---------------     -------------

2000
Commercial                  $  23,857            $  1,757          $ 94,481
Personal                        1,362               1,362             2,769
Unallocated                         -               5,045                 -
                       ---------------     ---------------     -------------
     Total                  $  25,219            $  6,802          $ 97,250
                       ---------------     ---------------     -------------

1999
Commercial                  $  20,269            $  1,596         $  75,574
Personal                        4,533                   -            11,462
Unallocated                         -               4,443                 -
                       ---------------     ---------------     -------------
     Total                  $  24,802            $  6,039         $  87,036
                       ---------------     ---------------     -------------




</TABLE>





                                                            Page 75
<PAGE>














<TABLE>
<CAPTION>
                                          PENN-AMERICA GROUP, INC.
                                         Schedule IV - Reinsurance
                                Years Ended December 31, 2001, 2000 and 1999
                                               (in thousands)



                                             Ceded to         Assumed      Net Premium       Percentage
Property and Liability                         Other        from Other       Written         of Assumed
Insurance Premiums           Direct          Companies       Companies                          to Net
                          --------------   --------------   ------------   -------------    --------------

<S>                           <C>             <C>                 <C>        <C>                     <C>
         2001                  $98,328         $11,289             $84        $87,123                 0.1%
                          ==============   ==============   ============   =============    ==============


         2000                 $108,622         $12,540         $ 1,169       $ 97,250                 1.2%
                          ==============   ==============   ============   =============    ==============


         1999                $  94,967        $  8,947         $ 1,016       $ 87,036                 1.2%
                          ==============   ==============   ============   =============    ==============
</TABLE>









                                                  Page 76
<PAGE>




<TABLE>
<CAPTION>
                                                    PENN-AMERICA GROUP, INC.
                                   Schedule VI- Supplemental Insurance Information Concerning
                                                Property and Casualty Operations
                                          Years Ended December 31, 2001, 2000 and 1999
                                                         (in thousands)



                                       Liability                                 Loss and Loss
                                       for Unpaid        Discount             Adjustment Expenses
                                       Losses and         If Any,             (Benefits) Incurred             Paid Losses
                                          Loss           Deducted                 Related to                    and Loss
                                                                         ------------------------------
                                       Adjustment          From            Current          Prior              Adjustment
                                        Expenses         Reserves            Year            Year               Expenses
                                     ---------------   --------------    ------------    --------------    -------------------

Years Ended
<S>                                  <C>                 <C>             <C>                   <C>              <C>
        December 31, 2001               $119,598             -             $60,885               36               $58,096
        December 31, 2000                115,314             -              66,214            9,164                59,790
        December 31, 1999                 93,719             -              54,768            8,419                59,989



</TABLE>







                                                            Page 77
<PAGE>


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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-America Group, Inc.
Date:  November 12, 2002              By: /s/ Jon S. Saltzman
                                           Jon S. Saltzman,
                                           President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
<S>                                        <C>                                                                <C>
/s/ Irvin Saltzman                          Chairman of the Board of Directors                                   November 12, 2002
Irvin Saltzman                              and Director

/s/ Jon S. Saltzman                         President, Chief Executive Officer and                               November 12, 2002
Jon S. Saltzman                             Director (Principal Executive Officer)

/s/ Robert A. Lear                          Director                                                             November 12, 2002
Robert A. Lear

/s/ Joseph F. Morris                        Senior Vice President, Chief Financial Officer                       November 12, 2002
Joseph F. Morris                            and Treasurer

/s/ Garland P. Pezzuolo                     Vice President, Secretary and General Counsel                        November 12, 2002
Garland P. Pezzuolo

/s/ Paul Simon                              Director                                                             November 12, 2002
Paul Simon

/s/ Charles Ellman                          Director                                                             November 12, 2002
Charles Ellman

/s/ M. Moshe Porat                          Director                                                             November 12, 2002
M. Moshe Porat

/s/ Jami Saltzman-Levy                      Director                                                             November 12, 2002
Jami Saltzman-Levy

/s/ Martin Sheffield                        Director                                                             November 12, 2002
Martin Sheffield

/s/ E. Anthony Saltzman                     Director                                                             November 12, 2002
E. Anthony Saltzman

</TABLE>






                                                            Page 78
<PAGE>

                                 CERTIFICATIONS

I, Jon S. Saltzman, certify that:

1.       I have reviewed this annual report on Form 10-K/A of Penn-America
         Group, Inc.;

2.       Based on my knowledge, this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances under which
         such statements were made, not misleading with respect to the period
         covered by this annual report;

3.       Based on my knowledge, the financial statements, and other financial
         information included in this annual report, fairly present in all
         material respects the financial condition, results of operations and
         cash flows of the registrant as of, and for, the periods presented in
         this annual report;

4.       The registrant's other certifying officer and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         have:

          a)   designed such  disclosure  controls and procedures to ensure that
               material  information  relating to the registrant,  including its
               consolidated  subsidiaries,  is made known to us by others within
               those  entities,  particularly  during  the  period in which this
               annual report is being prepared;

          b)   evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this annual report (the "Evaluation Date"); and

          c)   presented  in  this  annual  report  our  conclusions  about  the
               effectiveness of the disclosure  controls and procedures based on
               our evaluation as of the Evaluation Date;

5.       The registrant's other certifying officer and I have disclosed, based
         on our most recent evaluation, to the registrant's auditors and the
         audit committee of the registrant's board of directors (or persons
         performing the equivalent functions):

          a)   all  significant  deficiencies  in the  design  or  operation  of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors any material
               weaknesses in internal controls; and

          b)   any fraud,  whether or not material,  that involves management or
               other employees who have a significant  role in the  registrant's
               internal controls; and

6.       The registrant's other certifying officer and I have indicated in this
         annual report whether there were significant changes in internal
         controls or in other factors that could significantly affect internal
         controls subsequent to the date of our most recent evaluation,
         including any corrective actions with regard to significant
         deficiencies and material weaknesses.


Date: November 12, 2002
                                                         /s/ Jon S. Saltzman
                                                         Jon S. Saltzman
                                                         President & CEO




                                     Page 79
<PAGE>

                                 CERTIFICATIONS

I, Joseph F. Morris, certify that:

1.       I have reviewed this annual report on Form 10-K/A of Penn-America
         Group, Inc.;

2.       Based on my knowledge, this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances under which
         such statements were made, not misleading with respect to the period
         covered by this annual report;

3.       Based on my knowledge, the financial statements, and other financial
         information included in this annual report, fairly present in all
         material respects the financial condition, results of operations and
         cash flows of the registrant as of, and for, the periods presented in
         this annual report;

4.       The registrant's other certifying officer and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         have:

          a)   designed such  disclosure  controls and procedures to ensure that
               material  information  relating to the registrant,  including its
               consolidated  subsidiaries,  is made known to us by others within
               those  entities,  particularly  during  the  period in which this
               annual report is being prepared;

          b)   evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this annual report (the "Evaluation Date"); and

          c)   presented  in  this  annual  report  our  conclusions  about  the
               effectiveness of the disclosure  controls and procedures based on
               our evaluation as of the Evaluation Date;

5.       The registrant's other certifying officer and I have disclosed, based
         on our most recent evaluation, to the registrant's auditors and the
         audit committee of the registrant's board of directors (or persons
         performing the equivalent functions):

          d)   all  significant  deficiencies  in the  design  or  operation  of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors any material
               weaknesses in internal controls; and

          e)   any fraud,  whether or not material,  that involves management or
               other employees who have a significant  role in the  registrant's
               internal controls; and

6.       The registrant's other certifying officer and I have indicated in this
         annual report whether there were significant changes in internal
         controls or in other factors that could significantly affect internal
         controls subsequent to the date of our most recent evaluation,
         including any corrective actions with regard to significant
         deficiencies and material weaknesses.

Date: November 12, 2002
                                                 /s/ Joseph F. Morris
                                                 Joseph F. Morris
                                                 Senior Vice President, CFO
                                                 and Treasurer




                                    Page 80
<PAGE>

                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER

                       PURSUANT TO 18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Penn-America Group, Inc. (the "Company")
on Form 10-K/A for the period ending December 31, 2001, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Jon S.
Saltzman , Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:

         (1) The Report fully complies with the requirements of section 13(a)
and 15(d) of the Securities Exchange Act of 1934; and

          (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.

/s/ Jon S. Saltzman

Jon S. Saltzman
President and Chief Executive Officer

November 12, 2002



                                    Page 81
<PAGE>

                    CERTIFICATION OF CHIEF FINANCIAL OFFICER

                       PURSUANT TO 18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Penn-America Group, Inc. (the "Company")
on Form 10-K/A for the period ending December 31, 2001, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Joseph
F. Morris, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:

         (1) The Report fully complies with the requirements of section 13(a)
and 15(d) of the Securities Exchange Act of 1934; and

          (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.

/s/ Joseph F. Morris

Joseph F. Morris
Senior Vice President, Chief Financial Officer
and Treasurer
November 12, 2002












                                    Page 82