SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-Q

(Mark One)

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

For the quarterly period ended      June 30, 1998
                              -----------------------

                                       OR

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

For the transition period from                    to

Commission file number      0-22316
                       ---------------------

                            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 Identification No.)
 incorporation or organization)


                420 South York Road, Hatboro, Pennsylvania 19040
    ------------------------------------------------------------------------
          (Address of principal executive offices, including zip code)


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


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 other  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 .

At August 7, 1998,  9,834,524 shares of the registrant's  common stock, $.01 par
value, were outstanding.

                                     Page 1
<PAGE>



                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                                      Index

                                                                    Page Number

Part I - Financial Information

         Consolidated Unaudited Balance Sheets - June 30, 1998 and
                December 31, 1997                                           3

         Consolidated Unaudited Statements of Earnings - For the three
                and six months ended June 30, 1998 and 1997                 4

         Consolidated Unaudited Statement of Stockholders' Equity -
                For the six months ended June 30, 1998                      5

         Consolidated Unaudited Statements of Cash Flows -
                For the six months ended June 30, 1998 and 1997             6

         Notes to Unaudited Consolidated Financial Statements               7

         Management's Discussion and Analysis of Financial Condition
                and Results of Operations                                  10

Part II - Other Information                                                15

                                     Page 2

<PAGE>

                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                                   (Unaudited)
                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                         June 30,          December 31,
                                                                           1998                1997
                                                                      ----------------     --------------
<S>                                                                        <C>                  <C>
ASSETS
Investments:
    Fixed Maturities:
      Available for sale, at fair value 
     (amortized cost 1998 $112,879; 1997 $89,185)                     $  113,826             $ 89,979
      Held to maturity, at amortized cost
     (fair value 1998 $36,109; 1997 $47,034)                              35,831               46,842
     Equity securities, at fair value
     (cost 1998 $26,024; 1997 $25,662)                                    27,858               27,380
    Short-term investments, at cost, which approximates fair value         2,072               11,455
                                                                      ----------------     --------------
      Total Investments                                                  179,587              175,656
Cash                                                                       5,954                2,163
Receivables:
    Accrued investment income                                              2,182                1,973
    Premiums receivable, net                                              11,916               12,414
    Reinsurance recoverable                                               17,565               16,605
                                                                      ----------------     --------------
      Total receivables                                                   31,663               30,992
Prepaid reinsurance premiums                                               2,842                3,065
Deferred policy acquisition costs                                          8,644                8,563
Capital lease                                                              2,100                1,865
Deferred income taxes                                                      2,525                2,302
Income tax recoverable                                                       306                   40
Other assets                                                                 544                  511
                                                                     ================     ==============
      Total assets                                                     $ 234,165            $ 225,157
                                                                     ================     ==============

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Unpaid losses and loss adjustment expenses                            $ 88,359             $ 84,566
  Unearned premiums                                                       35,844               36,173
  Accounts payable and accrued expenses                                      739                2,338
  Capitalized lease obligations                                            2,142                1,920
  Other liabilities                                                        4,790                2,853
                                                                     ----------------     --------------
        Total liabilities                                                131,874              127,850
                                                                     ----------------     --------------

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 and outstanding 1998, 9,921,524 shares and 1997,  9,883,384       99                   99
  Additional paid-in capital                                              68,854               68,221
  Accumulated other comprehensive income                                   1,807                1,649
  Retained earnings                                                       31,963               27,849
                                                                    ----------------     --------------
                                                                         102,723               97,818
  Unearned compensation from restricted stock awards                       (432)                (511)
                                                                    ----------------     --------------
        Total stockholders' equity                                       102,291               97,307
                                                                    ----------------     --------------

        Total liabilities and stockholders' equity                     $ 234,165            $ 225,157
                                                                    ================     ==============

</TABLE>

     See accompanying notes to unaudited consolidated financial statements.
                                     Page 3

<PAGE>


                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                       Consolidated Statements of Earnings
                                   (Unaudited)

          For the three and six months ended June 30, 1998 and 1997 
                    (In thousands, except per share data)
<TABLE>
<CAPTION>


                                                        Three months ended June 30,               Six months ended June 30,
                                                     -------------------------------         --------------------------------
                                                          1998             1997                   1998               1997
                                                     --------------   --------------         --------------     -------------
<S>                                                        <C>              <C>                    <C>                <C>
Revenues:
    Premiums earned                                    $ 22,074         $ 23,034              $ 45,109           $ 43,933
    Net investment income                                 2,749            1,985                 5,524              3,925
    Net realized investment gains                           477              108                   443                109
                                                     --------------   --------------         --------------     -------------
      Total revenues                                     25,300           25,127                51,076             47,967
                                                     --------------   --------------         --------------     -------------

Losses and expenses:
    Losses and loss adjustment expenses                  13,855           14,390                28,146             27,607
    Amortization of deferred policy acquisition costs     6,054            6,274                12,424             11,971
    Other underwriting expenses                           1,779            1,471                 3,173              2,615
    Interest expense                                         45              192                    89                385
                                                     --------------   --------------         --------------     -------------
      Total losses and expenses                          21,733           22,327                43,832             42,578
                                                     --------------   --------------         --------------     -------------

Earnings before income tax                                3,567            2,800                 7,244              5,389

Income tax                                                1,042              781                 2,139              1,620

                                                      ==============   ==============         ==============     =============
Net earnings                                            $ 2,525          $ 2,019               $ 5,105            $ 3,769
                                                      ==============   ==============         ==============     =============

Net earnings per share
         Basic                                                                                             
                                                          $0.25            $0.30                   $0.52             $0.56
         Diluted                                                                             
                                                          $0.25            $0.30                   $0.51             $0.55

Weighted average number of shares outstanding
         Basic                                                                                               
                                                          9,910            6,748                   9,900             6,719
         Diluted                                                                                     
                                                         10,018            6,833                  10,012             6,800

Cash dividends per share                                                                                  
                                                          $0.05            $0.04                   $0.10             $0.08


</TABLE>
     See accompanying notes to unaudited consolidated financial statements
                                     Page 4

<PAGE>

                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

                 Consolidated Statement of Stockholders' Equity
                                   (Unaudited)

                     For the six months ended June 30, 1998
                        (In thousands, except share data)
<TABLE>
<CAPTION>                                                                                                                  
                                                                                                             Unearned          
                                                                                                           Compensation     
                                                                               Accumulated                     From         
                                                 Common Stock     Additional     Other                      Restricted    
                                               ---------------     Paid-In    Comprehensive    Retained       Stock    
                                              Shares     Amount    Capital        Income       Earnings       Awards          Total
                                            ---------   --------  ---------   -------------   ---------   --------------   ---------
<S>                                            <C>         <C>        <C>          <C>             <C>          <C>             <C> 
Balance at December 31, 1997                 9,883,384   $ 99     $ 68,221     $ 1,649         $ 27,849      $ (511)       $ 97,307
Net earnings                                                                                      5,105                       5,105 
Other comprehensive income, net of tax:
   Unrealized gains on investments, net of
    reclassification adjustment                                                    158                                          158
                                                                                                                           ---------
Comprehensive income                                                                                                          5,263
                                                                                                                           ---------
Issuance of common stock                        38,140                 633                                                      633
Amortization of compensation expense
   from restricted stock awards                                                                                   79             79
Cash dividends paid                                                                                (991)                       (991)
                                           =========================================================================================
Balance at June 30, 1998                     9,921,524   $ 99     $ 68,854     $ 1,807         $ 31,963       $ (432)     $ 102,291
                                           =========================================================================================

</TABLE>

     See accompanying notes to unaudited consolidated financial statements.
                                     Page 5

<PAGE>

                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                                   (Unaudited)

                 For the six months ended June 30, 1998 and 1997
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                           Six months ended June 30,
                                                                                      -------------------------------------
                                                                                           1998                  1997
                                                                                      ---------------       ---------------
<S>                                                                                       <C>                    <C>
Cash flows from operating activities:
    Net earnings                                                                            $ 5,105               $ 3,769
    Adjustments to reconcile net earnings to net cash provided by
      Operating activities:
        Amortization and depreciation expense                                                   296                   163
        Net realized investment gains                                                          (443)                 (109)
        Deferred income tax                                                                    (342)                 (150)
        Net decrease in premiums receivable, prepaid reinsurance premiums
           and unearned premiums                                                                392                 2,634
        Net increase in unpaid losses and loss adjustment expenses
           and reinsurance recoverable                                                        2,833                 6,047
        (Increase) decrease in:
           Accrued investment income                                                           (209)                 (230)
           Deferred policy acquisition costs                                                    (81)               (1,079)
           Income tax recoverable                                                              (266)                  (55)
           Other assets                                                                         (99)                   28
        Increase (decrease) in:
           Accounts payable and accrued expenses                                             (1,599)                 (503)
           Other liabilities                                                                  1,937                  (149)
                                                                                      ---------------       ---------------
              Net cash provided by operating activities                                       7,524                10,366
                                                                                      ---------------       ---------------

Cash flows from investing activities:
    Purchases of equity securities                                                          (11,739)                 (874)
    Purchases of fixed maturities available for sale                                        (38,891)              (15,988)
    Purchases of fixed maturities held to maturity                                                0                (3,027)
    Proceeds from sales of equity securities                                                 11,790                   943
    Proceeds from sales and maturities of fixed maturities available for sale                15,080                 3,000
    Proceeds from maturities and calls of fixed maturities held to maturity                  11,067                 3,214
    Change in short-term investments                                                          9,383                 3,352
                                                                                      ---------------       ---------------
        Net cash used by investing activities                                                (3,310)               (9,380)
                                                                                      ---------------       ---------------

Cash flows from financing activities:
    Issuance of common stock                                                                    633                   990
    Principal payments on capital lease obligations                                             (65)                  (55)
    Dividends paid                                                                             (991)                 (539)
                                                                                      ---------------       ---------------
        Net cash (used) provided by financing activities                                       (423)                  396
                                                                                      ---------------       ---------------

Increase in cash                                                                              3,791                 1,382
Cash, beginning of period                                                                     2,163                 2,979
                                                                                      ===============       ===============
Cash, end of period                                                                         $ 5,954               $ 4,361
                                                                                      ===============       ===============

Supplemental  disclosure of cash flow  information:  Cash paid during the period
    for:
      Interest                                                                             $     89              $    404
      Income tax                                                                              2,748                 1,825
     Supplemental non-cash disclosure:
      Cost of securities transferred from available for sale to held to maturity                 --               $ 8,002
      Capital lease obligation incurred                                                         287                    --

</TABLE>
     See accompanying notes to unaudited consolidated financial statements.
                                     Page 6

<PAGE>



                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements

Note 1 - Organization and Basis of Presentation

         Penn-America Group, Inc. ("PAGI") is an insurance holding company whose
principal  asset  is  the  common  stock  of  Penn-America   Insurance   Company
("Penn-America").  The "Company" refers to PAGI and Penn-America,  as well as to
Penn-America's  wholly-owned  subsidiary,   Penn-Star  Insurance  Company.  Penn
Independent  Corporation ("Penn Independent") currently owns approximately 31.1%
of the outstanding common stock of PAGI.

         The accompanying  unaudited consolidated financial statements should be
read in conjunction  with the financial  statements and notes for the year ended
December 31,  1997.  In the opinion of  management,  the  financial  information
reflects all adjustments (consisting only of normal recurring adjustments) which
are  necessary for a fair  presentation  of the  Company's  financial  position,
results of  operations,  and cash flows for the interim  periods.  The Company's
results of operations for interim periods are not necessarily  indicative of the
results to be expected for the entire year.

Note 2 - Reinsurance

         Premiums  earned are net of amounts ceded to reinsurers of $1.9 million
for both the three months ended June 30, 1998 and June 30, 1997. Losses and loss
adjustment  expenses are net of amounts  ceded to reinsurers of $1.5 million and
$1.9  million  for the  three  months  ended  June 30,  1998 and June 30,  1997,
respectively.

         Premiums  earned are net of amounts ceded to reinsurers of $3.8 million
and $3.7  million  for the six  months  ended June 30,  1998 and June 30,  1997,
respectively.  Losses and loss  adjustment  expenses are net of amounts ceded to
reinsurers  of $3.2  million and $3.7  million for the six months ended June 30,
1998 and June 30, 1997, respectively.

Note 3 - Comprehensive Income

         In 1997, the Financial  Accounting Standards Board issued SFAS No. 130,
"Comprehensive  Income".  This statement was  implemented  retroactively  by the
Company in 1998. The statement requires that an enterprise (a) classify items of
other  comprehensive  income by their  nature in a financial  statement  and (b)
display the accumulated  balance of other  comprehensive  income separately from
retained  earnings and  additional  paid-in  capital in the equity  section of a
statement of financial position.  Accumulated other comprehensive  income of the
Company consists solely of net unrealized gains on investment securities.


                                     Page 7
<PAGE>



                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements
                                   (continued)

The following are components of other comprehensive income (in thousands):

<TABLE>
<CAPTION>
                                                                           Six months ended June 30, 1998
                                                       ------------------------------------------------------------
                                                          Before Tax               Tax                Net of Tax
                                                            Amount               Expense                Amount
                                                       -----------------    -------------------     ---------------
<S>                                                         <C>                   <C>                    <C>                 
Unrealized gains on investments:
    Unrealized holding gains arising
      during period                                         $ 684                $ (236)                 $ 448
    Less: reclassification adjustment for
      gains realized in net income                           (443)                  153                   (290)
                                                       ================= == =================== === ===============
Other comprehensive income                                  $ 241                 $ (83)                 $ 158
                                                       ================= == =================== === ===============



                                                                           Six months ended June 30, 1997
                                                       ------------------------------------------------------------
                                                          Before Tax               Tax                Net of Tax
                                                            Amount               Expense                Amount
                                                       -----------------    -------------------     ---------------
Unrealized gains on investments:
    Unrealized holding gains arising
      during period                                         $ 314                $ (107)                 $ 207
    Less: reclassification adjustment for
      gains realized in net income                           (109)                   37                    (72)
    Plus:  accretion of net loss on fixed
      maturities transferred to held to maturity               29                   (10)                    19
                                                       ================= == =================== === ================
Other comprehensive income                                  $ 234                 $ (80)                 $ 154
                                                       ================= == =================== === ================

</TABLE>

Comprehensive  income  for the  three and six  months  ended  June 30,  1997 was
$2,698,000  and  $3,923,000 and included net income of $2,019,000 and $3,769,000
and  other  comprehensive   income,  net  of  tax,  of  $679,000  and  $154,000,
respectively.

Comprehensive income for the three months ended June 30, 1998 was $2,226,000 and
included net income of $2,525,000 and other  comprehensive loss,  net of tax, of
$299,000.

                                     Page 8

<PAGE>



                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements
                                   (continued)


Note 4 - Basic and Diluted Earnings Per Share

         The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations (in thousands,  except per
share data):

<TABLE>
                                             Three months ended June 30,                    Six months ended June 30,
                                          -----------------------------------          -------------------------------------
                                              1998                 1997                     1998                  1997
                                              ----                 ----                     ----                  ----
<S>                                           <C>                   <C>                      <C>                   <C>
Basic EPS:

Net Earnings                                 $  2,525             $  2,019                $  5,105              $  3,769
                                          --------------       --------------          ---------------       ---------------

Weighted  average common
      shares outstanding                         9,910                6,748                   9,900                 6,719
                                          ==============       ==============          ===============       ===============

Basic EPS                                    $    0.25            $    0.30               $    0.52             $    0.56
                                          ==============       ==============          ===============       ===============

Diluted EPS:

Net Earnings                                 $  2,525             $  2,019                $  5,105              $  3,769
                                          --------------       --------------          ---------------       ---------------

Weighted  average common
      shares outstanding                         9,910                6,748                   9,900                 6,719

Additional shares outstanding
      after the assumed exercise
      of options by applying the
      treasury stock method                        108                    85                     112                     81
                                          --------------       --------------          ---------------       ---------------

Total weighted average common
     shares outstanding                        10,018                 6,833                 10,012                  6,800
                                          ==============       ==============          ===============       ===============

Diluted EPS                                  $    0.25            $    0.30               $    0.51             $    0.55
                                          ==============       ==============          ===============       ===============

</TABLE>

                                     Page 9

<PAGE>


                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

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

Results of Operations

Three Months Ended June 30, 1998 and 1997

         Gross written  premiums  decreased 12.8% to $24.0 million for the three
months ended June 30, 1998,  from $27.5  million for the three months ended June
30,  1997.  The  decrease  resulted  from a  40.4%  decline  in  personal  lines
automobile gross written premiums to $5.4 million which is partially offset by a
1.0% increase in commercial lines gross written  premiums to $18.6 million.  The
decrease in personal lines  automobile  gross written premium was due to actions
taken  by the  Company  to  improve  profitability.  Specifically,  the  Company
terminated  its  relationship  with one agent and reduced  two agents'  personal
lines  automobile  writings  by  approximately  33.0%.  Because of these  agency
cutbacks,  coupled  with the slow  start-up  of new  personal  lines  automobile
programs,  direct  personal lines  automobile  written premium for 1998 could be
approximately 30% less than 1997.  Effective July 1, 1998, the Company filed and
received from the State of California a 14.2% rate reduction in its non-standard
automobile rates. This action was taken in order to remain  competitive with the
new  competition  that has entered  this  marketplace  at lower  premium  rates.
California  automobile  direct written premium  represented  $3.2 million of the
$5.4 million written by the Company for the three months ended June 30, 1998.

         The Company  began new  personal  automobile  programs in the states of
Arizona, North Dakota and Montana in the second quarter of 1998, and is planning
to implement  new programs in Illinois  and Hawaii  during the third  quarter of
1998.

         Net written  premiums  decreased  12.5% to $22.2  million for the three
months ended June 30, 1998,  from $25.4  million for the three months ended June
30, 1997.  During the same periods,  net premiums earned decreased 4.2% to $22.1
million, from $23.0 million. Net premiums earned decreased due to the decline in
personal lines automobile gross written premiums in 1998.

         Net  investment  income  increased  38.5% to $2.7 million for the three
months  ended June 30,  1998,  from $2.0 million for the three months ended June
30, 1997.  This increase  resulted  principally  from growth in invested  assets
funded primarily by the net proceeds from the Company's secondary stock offering
in July 1997, and from cash flows from operating activities.

         During the second quarter of 1998, the Company purchased  approximately
$13.6  million in tax free  municipal  securities  as compared to $649,000  held
during  the  comparable  period,  June  30,  1997.  The tax  equivalent  average
investment yield of the fixed maturity portfolio for the three months ended June
30, 1998 was 6.63%,  compared to 6.86% for the three months ended June 30, 1997.
Net realized  investment  gains before taxes were  $477,000 for the three months
ended June 30, 1998, as compared to net realized  investment  gains before taxes
of $108,000 for the three months ended June 30, 1997.


                                    Page 10


<PAGE>


                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

         Management's Discussion and Analysis of Financial Condition and
                              Results of Operations
                                   (continued)


         Losses and loss adjustment expenses decreased 3.7% to $13.9 million for
the three months ended June 30,  1998,  from $14.4  million for the three months
ended June 30, 1997, primarily due to a decline in net premiums earned.

         Amortization  of deferred  policy  acquisition  costs decreased 3.5% to
$6.1 million for the three months ended June 30, 1998, from $6.3 million for the
three months ended June 30, 1997. The decrease was attributable to a decrease in
net premiums earned.

         Other underwriting expenses increased 21% to $1.8 million for the three
months  ended June 30,  1998,  from $1.5 million for the three months ended June
30, 1997.  The increase is attributable to expenses related to new programs, and
other non-recurring expenses of the holding company.

         The loss ratio  increased  to 62.8% for the three months ended June 30,
1998, from 62.5% for the three months ended June 30, 1997. The statutory expense
ratio  increased to 34.1% for the three  months ended June 30, 1998,  from 31.9%
for the three months ended June 30, 1997. The principal  causes for the increase
in the  expense  ratio were the 12.5%  decline in net  premiums  written for the
quarter ended June 30, 1998 compared to the same quarter in 1997, an increase in
the commercial  lines commission rate to 22% from 20% effective May 1, 1998, and
additional  underwriting  expenses related to the start-up of new programs.  The
statutory  combined ratio increased to 96.9% for the three months ended June 30,
1998 from 94.4% for the three months ended June 30, 1997.

         As a result of the factors  described  above,  the Company's net income
for the three  months  ended June 30, 1998  increased  25.1% to $2.5  million or
$0.25 per share (basic and diluted), from $2.0 million or $0.30 per share (basic
and diluted) for the three months ended June 30, 1997.

Six Months Ended June 30, 1998 and 1997

         Gross  written  premiums  decreased  5.6% to $48.6  million for the six
months ended June 30, 1998, from $51.5 million for the six months ended June 30,
1997. The decrease  resulted from a 31.3% decline in personal  lines  automobile
gross written  premiums to $12.9 million,  which was partially  offset by a 9.1%
increase in  commercial  lines gross  written  premiums  to $35.7  million.  The
decrease in personal lines  automobile  gross written premium was due to actions
taken  by the  Company  to  improve  profitability.  Specifically,  the  Company
terminated  its  relationship  with one agent and reduced  two agents'  personal
lines automobile  writings by  approximately  27.0%.  California  personal lines
automobile direct written premium  represented $7.6 million of the $12.9 million
written by the Company in the first six months of 1998.

                                    Page 11

<PAGE>


                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

         Management's Discussion and Analysis of Financial Condition and
                              Results of Operations
                                   (continued)


         Net written premiums decreased 5.5% to $45.0 million for the six months
ended June 30, 1998,  from $47.6 million for the six months ended June 30, 1997.
During the same periods,  net premiums  earned  increased  2.7% to $45.1 million
from $43.9 million.  Net premiums earned increased despite the decline in direct
written  premiums  in 1998  due to the  significant  growth  in  direct  written
premiums in the third and fourth quarters of 1997.

         Net  investment  income  increased  40.8% to $5.5  million  for the six
months ended June 30, 1998,  from $3.9 million for the six months ended June 30,
1997. This increase  resulted  principally from growth in invested assets funded
primarily by the net proceeds from the  Company's  secondary  stock  offering in
July 1997, and from the net cash provided by operating activities.

         In 1998, the Company purchased  approximately $26.3 million in tax free
municipal  securities as compared to $649,000 held during the comparable period,
June 30, 1997. The tax equivalent average investment yield of the fixed maturity
portfolio  for the six months  ended June 30, 1998 was 6.59%,  compared to 6.82%
for the six months ended June 30, 1997.  Net  realized  investment  gains before
taxes were  $443,000 for the six months ended June 30, 1998,  as compared to net
realized investment gains before taxes of $109,000 for the six months ended June
30, 1997.

         Losses and loss adjustment expenses increased 2.0% to $28.1 million for
the six months ended June 30, 1998,  from $27.6 million for the six months ended
June 30, 1997, primarily due to an increase in net premiums earned.

         Amortization  of deferred  policy  acquisition  costs increased 3.8% to
$12.4 million for the six months ended June 30, 1998, from $12.0 million for the
six months ended June 30, 1997. The increase was  attributable to an increase in
net premiums earned.

         Other underwriting expenses increased 21.4% to $3.2 million for the six
months ended June 30, 1998,  from $2.6 million for the six months ended June 30,
1997.  The increase is  attributable  to expenses  related to new  programs, and
other  non-recurring expenses of the holding company.

         The loss ratio  decreased  to 62.4% for the six  months  ended June 30,
1998,  from 62.8% for the six months ended June 30, 1997. The statutory  expense
ratio  increased to 33.4% for the six months ended June 30, 1998, from 32.2% for
the six months ended June 30, 1997. The statutory  combined  ratio  increased to
95.8% for the six  months  ended  June 30,  1998,  from 95.0% for the six months
ended June 30, 1997.


                                    Page 12

<PAGE>


                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES


         Management's Discussion and Analysis of Financial Condition and
                             Results of Operations
                                   (continued)



         As a result of the factors  described  above,  the Company's net income
for the six months ended June 30, 1998 increased  35.5% to $5.1 million or $0.52
per share (basic) and $0.51 per share (diluted),  from $3.8 million or $0.56 per
share  (basic) and $0.55 per share  (diluted)  for the six months ended June 30,
1997.


Liquidity and Capital Resources

         PAGI is a holding  company,  the principal asset of which is the common
stock of Penn-America. PAGI's cash flows depend primarily on dividends and other
payments from Penn-America. PAGI uses these funds to pay (i) operating expenses,
(ii)  taxes  and  other  payments  and  (iii)  dividends  to PAGI  stockholders.
Penn-America's sources of funds consist primarily of premiums, investment income
and  proceeds  from  sales and  redemptions  of  investments.  Funds are used by
Penn-America  principally  to pay claims and  operating  expenses,  to  purchase
investments and to make dividend and other payments to PAGI.

         Net cash  provided  by  operating  activities  decreased  27.4% to $7.5
million for the six months ended June 30, 1998,  from $10.4  million for the six
months ended June 30, 1997,  primarily  due to the  reduction in personal  lines
automobile gross written premiums in 1998.

         Net cash used by  investing  activities  was $3.3  million  for the six
months  ended June 30,  1998,  compared to $9.4 million for the six months ended
June 30, 1997.

         Net cash used by financing  activities  was $423,000 for the six months
ended June 30, 1997, compared to net cash  provided by financing  activities of 
$396,000 for the same period in 1997.

         The  Company  believes  that it has  sufficient  liquidity  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.  The average duration of the fixed maturity  portfolio as of June
30, 1998 was approximately 3.44 years.

         The Company's  fixed maturity  portfolio of $149.7 million was 83.3% of
the total investment  portfolio as of June 30, 1998.  Approximately 99% of these
securities were rated "A-" or better by Standard & Poor's or Moody's.  Equities,
the majority of which consist of preferred stocks,  were $ 27.9 million or 15.5%
of total investments as of June 30, 1998.



                                    Page 13

<PAGE>


                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES


         Management's Discussion and Analysis of Financial Condition and
                              Results of Operations
                                   (continued)



         As of June 30, 1998, the investment  portfolio  contained $36.7 million
of  mortgage/asset-backed  obligations  which  represents  20.4%  of  the  total
investments  as of June  30,  1998.  All of these  securities  are  "AAA"  rated
securities  issued by government,  government-related  agencies or publicly held
corporations,  are publicly  traded,  and have 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 other
derivative  financial  instruments,  real estate or mortgages in the  investment
portfolio as of June 30, 1998.

         The  principal  source of cash to use for the payment of  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 dividends
from  statutory  surplus  may  require  prior  approval  from  the  Pennsylvania
regulatory  authorities.  The  maximum  dividend  that  may be  paid  in 1998 by
Penn-America  to PAGI  without  prior  approval  of  regulatory  authorities  is
$9,531,000.

         In June of 1998,  the Board of  Directors  of the Company  authorized a
stock buy-back program of up to 350,000 shares of the Company's  stock.  Through
August 7, 1998,  the Company has  repurchased  87,000 shares of its stock on the
open market and through block  trades.  The  Company's  funding  source for this
program  will be  through  ordinary  dividends  from its  insurance  subsidiary,
existing cash of the holding company, as well as draws from a its revolving line
of credit.  On July 17, 1998, the Company signed a commitment  letter with First
Union  National  Bank to obtain a revolving  credit  facility  in the  principle
amount  of $25  million,  which  will be used  for  general  corporate purposes,
such as the stock buy-back program.

         The Company also  announced that its Common Stock has been approved for
listing  on the New York Stock  Exchange  (NYSE).  The  Company's  shares  began
trading on the NYSE on August 4, 1998 under the symbol "PNG."

         The Company relies on its existing  management  information  systems to
operate and  monitor  all major  aspects of the  Company's  business,  including
underwriting  claims and various financial  systems.  Additionally,  the Company
relies, to a lesser extent, on the information systems of its general agents and
indirectly those of the producing retail  insurance  brokers.  Any disruption in
the operation of the management  information systems of the Company, its general
agents or their retail insurance  brokers,  could have a material adverse effect
on the Company's business,  results of operations or financial  condition.  Like
many computer systems, the

                                    Page 14
<PAGE>



                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES


         Management's Discussion and Analysis of Financial Condition and
                             Results of Operations
                                   (continued)


Company's  systems used two-digit data fields which  recognized  dates using the
assumption  that the first two digits are "19" (e.g. the number 97 is recognized
as the year 1997). Therefore,  the Company's date critical functions relating to
the year 2000 and beyond,  such as underwriting,  claims and financial  systems,
would have been affected  adversely  unless  changes were made to these computer
systems.  During 1997,  the Company  addressed  this issue and  implemented  and
tested the revised lines of code in the applicable programs of the Company to be
year 2000 compliant.

         Additionally,  the Company is  instituting  company-wide  a remediation
plan which  specifically  addresses the  implementations of Y2K and our external
business  relationships with various outside vendors and business  relationships
such as with our general  agents and their  retailers.  Each  department  of the
Company has been asked to identify key vendors,  suppliers and agents with which
we have an interdependent, material business relationship. The Company will send
a survey to that vendor/supplier/agent to ask them to provide the current status
of their Y2K plan, whether they will be compliant, what plans they have in place
and the in the  event  they are not  compliant,  and if there  are any  business
implications  to our Company if they are not compliant in time. Once the results
of the  surveys  have been  reviewed,  the  Company  will need to take  whatever
necessary action to address any and all material non-compliant matters which may
affect the  ongoing  continued  operations  of the Company and will use its best
efforts to ensure it is complaint by the year 2000.

         The Company believes that most of the necessary changes and most of the
expenses related to year 2000 have been expensed to date. The amount expensed in
1997 was not significant.  Additional  expenses may arise in the upcoming years,
but management believes that they would not be material.


New Accounting Standards

         In June 1998,  Statement of Financial  Accounting  Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities",  was issued
and established standards for accounting and reporting of derivative instruments
and hedging  activities.  The statement is effective for all fiscal  quarters of
fiscal years  beginning  after June 15,  1999.  The Company is in the process of
determining the effect, if any, of this statement on its financial statements.

                                    Page 15

<PAGE>




                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

                           PART II. OTHER INFORMATION



Item 1.       Legal Proceedings - None

Item 2.       Changes in Securities - None

Item 3.       Default Upon Senior Securities - None

Item 4.       Submission of Matters to a Vote by Security Holders -See Attached

Item 5.       Other Information - None

Item 6.       Exhibits and Reports on Form 8-K

              On June 18,  1998,  the  Company  filed  with the  Securities  and
              Exchange  Commission  a Form 8-K which  reported  that on June 18,
              1998, the Company issued a press release reporting the anticipated
              earnings  for the second  quarter of 1998 and for the 1998  fiscal
              year and that the  Company's  Board of Directors  had approved the
              purchase by the Company of up to 350,000  shares of the  Company's
              common stock over the next 18 months.


                                    Page 16
<PAGE>


PART II, ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY
                           HOLDERS


         The annual meeting of the Shareholders of Penn-America  Group, Inc. was
held on May 20, 1998 (the "Annual  Meeting" or  "Meeting"),  with the  following
results:

         The total number of shares  represented at the Annual Meeting in person
or by proxy was  8,326,591 of the 9,898,013  shares of common stock  outstanding
and entitled to vote at the meeting.

         On the  proposal to elect Irvin  Saltzman,  Jon S.  Saltzman,  James E.
Heerin, Jr., Robert A. Lear, Jami Saltzman-Levy, M. Moshe Porat, Charles Ellman,
Paul Simon and Thomas Spiro as Directors to serve until the 1999 Annual  Meeting
and until their  successors  are duly  elected and  qualified,  the nominees for
Director received the number of votes set forth opposite their respective names.

                                             Number of Votes


                                      For                    Withheld

Irvin Saltzman                      8,323,841                 2,750
Jon S. Saltzman                     8,323,841                 2,750
James E. Heerin, Jr.                8,323,841                 2,750
Robert A. Lear                      8,323,841                 2,750
Jami Saltzman-Levy                  8,323,841                 2,750
M. Moshe Porat                      8,323,841                 2,750
Charles Ellman                      8,323,841                 2,750
Paul Simon                          8,323,841                 2,750
Thomas M. Spiro                     8,323,841                 2,750

         There  were no  broker  non-votes  recorded.  On the basis of the above
vote,  Irvin Saltzman,  Jon S. Saltzman,  James E. Heerin,  Jr., Robert A. Lear,
Jami Saltzman-Levy,  M. Moshe Porat, Charles Ellman, Paul Simon and Thomas Spiro
were elected as Directors to serve until the 1999 Annual Meeting and until their
respective successors are duly elected and qualified.



                                    Page 17

<PAGE>



                                    SIGNATURE



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




                                             Penn-America Group, Inc.




Date: August 7, 1998           By:/s/ Jon S. Saltzman
                                  ------------------------
                                    Jon S. Saltzman
                                    President and
                                    Chief Executive Officer



                              By:/s/ Rosemary R. Ferrero
                                 -------------------------
                                   Rosemary R. Ferrero
                                   Principal Finance and
                                   Accounting Officer