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, 2003
                                              ----------------------------------

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

For the transition period from                      to
                                   ---------------       ---------------

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

                            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
       -----      ----

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

At August 1, 2003, 14,713,480 shares of the registrant's common stock, $0.01 par
value, were outstanding.


                                     Page 1
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                    Penn-America Group, Inc. and SubsidiarIES
                                      Index


                                                                                            Page Number
                                                                                            -----------

Part I - Financial Information

      Item 1. Financial Statements

         Consolidated Balance Sheets - June 30, 2003 (unaudited) and
<S>                      <C> <C>                                                                     <C>
                December 31, 2002                                                                    3

         Consolidated Unaudited Statements of Operations - For the three
                 and six months ended June 30, 2003 and 2002                                         4

         Consolidated Unaudited Statement of Stockholders' Equity -
                For the six months ended June 30, 2003                                               5

         Consolidated Unaudited Statements of Cash Flows -
                For the six months ended June 30, 2003 and 2002                                      6

         Notes to Unaudited Consolidated Financial Statements                                        7

      Item 2. Management's Discussion and Analysis of Financial Condition
                   and Results of Operations                                                        11

      Item 3. Quantitative and Qualitative Disclosure About Market Risk                             21

      Item 4. Controls and Procedures                                                               22

Part II - Other Information                                                                         23


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                                     Page 2
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<CAPTION>



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

                                                                                           June 30,            December 31,
                                                                                              2003                 2002
                                                                                        ----------------     -----------------
                                                                                          (Unaudited)
<S>                                                                                           <C>                  <C>
ASSETS
Investments:
    Fixed maturities:
       Available for sale, at fair value (amortized cost, $272,127 and $237,450)          $ 283,893           $ 246,583
       Held to maturity, at amortized cost (fair value, $1,306 and $2,017)                    1,276               1,963
    Equity securities, at fair value (cost, $10,716 and $17,859)                             12,000              18,625
                                                                                          ---------           ---------
       Total investments                                                                    297,169             267,171
Cash and cash equivalents                                                                    14,871               9,796
Accrued investment income                                                                     3,115               3,196
Premiums receivable                                                                          20,042              12,564
Reinsurance recoverable                                                                      29,582              27,843
Prepaid reinsurance premiums                                                                 10,993               8,965
Deferred policy acquisition costs                                                            14,883              13,159
Capital lease, affiliate                                                                      1,535               1,579
Deferred income taxes                                                                         1,289               2,105
Income tax recoverable                                                                         --                    60
Other assets                                                                                  1,098                 801
                                                                                          ---------           ---------
       Total assets                                                                       $ 394,577           $ 347,239
                                                                                          =========           =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Unpaid losses and loss adjustment expenses                                              $ 148,205           $ 137,747
  Unearned premiums                                                                          76,659              65,365
  Accounts payable and accrued expenses                                                       7,332               7,700
  Capitalized lease obligation, affiliate                                                     1,351               1,428
  Company obligated mandatorily redeemable preferred securities of
         subsidiary trusts holding solely junior subordinated debentures                     30,000              15,000
  Income tax payable                                                                            159                --
  Other liabilities                                                                           4,993               3,404
                                                                                          ---------           ---------
         Total liabilities                                                                  268,699             230,644
                                                                                          ---------           ---------
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, 14,708,980 and 14,572,098 shares                                    147                 146
  Additional paid-in capital                                                                 71,991              70,875
  Accumulated other comprehensive income                                                      8,251               6,401
  Retained earnings                                                                          46,289              39,995
  Officers' stock loans                                                                        (583)               (629)
  Unearned compensation from restricted stock awards                                           (217)               (193)
                                                                                          ---------           ---------
         Total stockholders' equity                                                         125,878             116,595
                                                                                          ---------           ---------
         Total liabilities and stockholders' equity                                       $ 394,577           $ 347,239
                                                                                          =========           =========


</TABLE>
                                     Page 3
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<TABLE>
<CAPTION>



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

            For the three and six months ended June 30, 2003 and 2002
                        (In thousands, except share data)


                                                        Three months ended June 30,          Six months ended June 30,
                                                   ----------------------------------  -------------------------------
                                                         2003                 2002            2003              2002
                                                   ------------------   -------------  -------------------  ----------
<S>                                                  <C>                 <C>                   <C>                 <C>
Revenues
Premiums earned                                       $     36,295     $     27,234      $     70,660     $     50,217
Net investment income                                        3,244            2,925             6,457            5,758
Net realized investment gain (loss)                            431           (1,093)            1,145           (1,345)
                                                      ------------     ------------      ------------     ------------
    Total revenues                                          39,970           29,066            78,262           54,630
                                                      ------------     ------------      ------------     ------------

Losses and expenses
Losses and loss adjustment expenses                         22,185           17,364            44,197           32,650
Amortization of deferred policy acquisition costs            9,073            6,739            17,690           12,750
Other underwriting expenses                                  2,326            2,166             4,372            3,823
Corporate expenses                                             234              233               419              344
Interest expense                                               409               35               713               70
                                                      ------------     ------------      ------------     ------------
    Total losses and expenses                               34,227           26,537            67,391           49,637
                                                      ------------     ------------      ------------     ------------


Income before income tax                                     5,743            2,529            10,871            4,993
Income tax expense                                           1,744              647             3,298            1,325
                                                      ------------     ------------      ------------     ------------

Net income                                            $      3,999     $      1,882      $      7,573     $      3,668
                                                      ============     ============      ============     ============

Net income per share:
   Basic                                              $       0.27     $       0.16      $       0.52     $       0.32
   Diluted                                            $       0.27     $       0.16      $       0.51     $       0.31

Weighted average shares outstanding:
   Basic                                                14,636,147       11,574,913        14,613,746       11,555,944
   Diluted                                              14,905,122       11,791,719        14,852,142       11,754,854

Cash dividends per share                              $    0.04375     $    0.03875      $    0.08750     $    0.07708


</TABLE>

                                     Page 4
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                                                                     PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

                                                                  Consolidated Statement of Stockholders' Equity
                                                                                    (Unaudited)

                                                                         For the six months ended June 30, 2003
                                                                            (In thousands, except share data)

                                                                                                            Unearned
                                                                           Accumulated                     Compensation
                                                             Additional       Other                Officers'  From        Total
                                                   Common     Paid-In     Comprehensive Retained    Stock   Restricted Stockholders'
                                                   Stock      Capital        Income     Earnings    Loans  Stock Awards   Equity
                                                ---------    ---------      -------    ---------    ------   ---------    ---------

<S>                 <C> <C>                     <C>          <C>                  <C>               <C>      <C>          <C>
Balance at December 31, 2002                    $     146    $  70,875            $    $  39,995    $ (629)  $    (193)   $ 116,595
                                                                                                                              6,401
Net income                                           --           --           --           --                                 --
                                                                                                                 7,573        7,573
Other comprehensive gain:
    Unrealized gain on investments, net
       of tax and reclassification adjustment        --           --           --
                                                                                           2,080      --          --          2,080
    Unrealized loss on cash-flow hedging
       instrument, net of tax                        --           --           (230)        --
                                                                                                      --          --           (230)
                                                                                                                          ---------
Comprehensive income
                                                                                                                              9,423
                                                                                                                          ---------
Issuance of common stock                                1        1,070         --           --
                                                                                                      --          --          1,071
Compensation expense on stock
    options                                          --             46         --           --
                                                                                                      --          --             46
Unearned compensation from restricted
    stock awards issued                              --           --           --
                                                                                            --        --           (51)         (51)
Amortization of compensation expense
    from restricted stock awards issued              --           --           --
                                                                                            --        --            27           27
Repayment of officers' stock loans
                                                                                                        46        --             46
Cash dividends paid ($0.08750 per share)             --           --           --
                                                                                          (1,279)     --          --         (1,279)
                                                ---------    ---------      -------    ---------    ------   ---------    ---------
Balance at June 30, 2003                        $     147    $  71,991     $  8,251    $  46,289     $(583)   $   (217)   $ 125,878
                                                =========    =========      =======    =========    ======   =========    =========



</TABLE>
                                     Page 5


<PAGE>
<TABLE>
<CAPTION>


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

                                       For the six months ended June 30, 2003 and 2002
                                                        (In thousands)
                                                                                        Six months ended June 30,
                                                                                 ----------------------------------------
                                                                                       2003                   2002
                                                                                 ------------------     -----------------
Cash flows from operating activities:
<S>                                                                                    <C>                 <C>
    Net income                                                                         $   7,573           $   3,668
    Adjustments to reconcile net income to net cash provided by
      operating activities:
         Amortization (accretion) and depreciation expense                                   813                (185)
         Net realized investment loss (gain)                                              (1,145)              1,345
         Deferred income tax benefit                                                        (137)               (516)
         Net change in premiums receivable, prepaid reinsurance
           premiums and unearned premiums                                                  1,788              13,298
         Net change in unpaid losses and loss adjustment expenses
           and reinsurance recoverable                                                     8,719               8,011
         Decrease (increase) in:
             Accrued investment income                                                        81                (513)
             Deferred policy acquisition costs                                            (1,724)             (3,108)
             Income tax recoverable/payable                                                  219                 177
             Other assets                                                                     67                  11
         Increase (decrease) in:
             Accounts payable and accrued expenses                                          (368)              1,840
             Other liabilities                                                              (827)                 82
                                                                                       ---------           ---------
         Net cash provided by operating activities                                        15,059              24,110
                                                                                       ---------           ---------

Cash flows from investing activities:
    Purchases of fixed maturities available for sale                                    (100,869)            (54,296)
    Proceeds from sales of equity securities                                               6,697               1,000
    Proceeds from sales and maturities of fixed maturities available for sale             69,192               9,451
    Proceeds from maturities and calls of fixed maturities held to maturity                  686              12,130
                                                                                       ---------           ---------
         Net cash used by investing activities                                           (24,294)            (31,715)
                                                                                       ---------           ---------

Cash flows from financing activities:
    Issuance of common stock                                                               1,071                 295
    Net proceeds from the issuance of trust preferred securities                          14,549                --
    Principal payments on capital lease obligations, affiliate                               (77)                (71)
    Repayment of officers' loans                                                              46                --
    Dividends paid                                                                        (1,279)               (891)
                                                                                       ---------           ---------
         Net cash provided (used) by financing activities                                 14,310                (667)
                                                                                       ---------           ---------

Increase (decrease) in cash and cash equivalents                                           5,075              (8,272)
Cash and cash equivalents, beginning of period                                             9,796              13,129
                                                                                       ---------           ---------
Cash and cash equivalents, end of period                                               $  14,871           $   4,857
                                                                                       =========           =========


</TABLE>
                                     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.
Approximately  31% of the  outstanding  common  stock of PAGI was  owned by Penn
Independent  Corporation ("Penn Independent") at June 30, 2003. The accompanying
financial   statements  include  the  accounts  of  PAGI  and  its  wholly-owned
subsidiaries,   Penn-America   Insurance   Company   ("Penn-America")   and  its
wholly-owned subsidiary, Penn-Star Insurance Company ("Penn-Star"); Penn-America
Statutory  Trust I (the "Trust I");  and  Penn-America  Statutory  Trust II (the
"Trust II") (collectively the "Company").

         The  Company  markets and  underwrites  general  liability,  commercial
property,  and multi-peril  insurance for small businesses  located primarily in
small  towns and  suburban  and rural  areas.  The  Company is licensed to write
business in all 50 states and the  District  of  Columbia.  The  Company  writes
business on both an admitted  and  non-admitted  basis in 37 states,  on only an
admitted  basis in one state and on only a  non-admitted  basis in 12 states and
the District of Columbia.

         The accompanying  condensed unaudited consolidated financial statements
and notes have been prepared in accordance with accounting  principles generally
accepted in the United States  ("GAAP") for interim  financial  information  and
with  the   instructions  to  Form  10-Q  and  Article  10  of  Regulation  S-X.
Accordingly,  they do not include all of the  information  and notes required by
GAAP for  complete  financial  statements.  In the  opinion of  management,  all
adjustments   (consisting  of  normal  and  recurring  adjustments)   considered
necessary for a fair  presentation  of results for the interim periods have been
included.  All  significant  intercompany  accounts and  transactions  have been
eliminated in  consolidation.  It is suggested  that these  condensed  unaudited
consolidated  financial  statements  and notes be read in  conjunction  with the
financial  statements  and notes in the  Company's  2002 Annual Report which was
incorporated  by  reference  into the  Company's  Form  10-K for the year  ended
December 31, 2002. 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  presented  net of amounts  ceded to reinsurers of
$6,706,000  and  $4,100,000  for the three  months ended June 30, 2003 and 2002,
respectively.  Losses and loss adjustment  expenses are presented net of amounts
ceded to reinsurers of $4,445,000 and $1,100,000 for the three months ended June
30, 2003 and 2002, respectively.

         Premiums  earned are  presented  net of amounts  ceded to reinsurers of
$12,906,000  and  $7,200,000  for the six months  ended June 30,  2003 and 2002,
respectively.  Losses and loss adjustment  expenses are presented net of amounts
ceded to reinsurers of $8,314,000  and  $2,800,000 for the six months ended June
30, 2003 and 2002, respectively.




                                     Page 7
<PAGE>


                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements
                                   (continued)

Note 3 - Comprehensive Income

         For the three  months  ended June 30,  2003,  comprehensive  income was
$6,051,000,  which consisted of net income of $3,999,000 and other comprehensive
gain of  $2,052,000  related  to net  unrealized  gains  on  investments  and an
unrealized  loss on a cash flow hedging  instrument.  For the three months ended
June 30,  2002,  comprehensive  income was  $4,338,000,  which  consisted of net
income of $1,882,000 and other  comprehensive  gain of $2,456,000 related to net
unrealized gains on investments.

         For the six  months  ended  June 30,  2003,  comprehensive  income  was
$9,423,000,  which consisted of net income of $7,573,000 and other comprehensive
gain of  $1,850,000  related  to net  unrealized  gains  on  investments  and an
unrealized loss on a cash flow hedging instrument. For the six months ended June
30, 2002, comprehensive income was $5,107,000,  which consisted of net income of
$3,668,000 and other  comprehensive gain of $1,439,000 related to net unrealized
gains on investments.

Note 4 - Net Income Per Share

         Basic net income per share is computed by dividing net income available
to  common  stockholders  by  the  weighted  average  number  of  common  shares
outstanding for each period. Diluted net income per share includes the potential
dilution  that could occur if  outstanding  contracts to issue common stock were
exercised and converted to common stock.  The following is a  reconciliation  of
the basic and diluted net income per share computations:

<TABLE>
<CAPTION>

(in thousands, except share data)                        Three months ended June 30,            Six months ended June 30,
                                                    -------------------------------------    -----------------------------
                                                         2003                 2002                 2003           2002
                                                    ----------------    -----------------    --------------- -------------
Basic per share computation:
<S>                                                       <C>              <C>              <C>                        <C>
     Net income                                           $     3,999      $     1,882      $     7,573                $
                                                                                                                   3,668
                                                                                                                   1,786
     Weighted average common shares  (outstanding          14,636,147       11,574,913       14,613,746       11,555,944
                                                                                                              11,536,694
                                                          -----------      -----------      -----------      -----------

Basic net income per share                                $      0.27      $      0.16      $      0.52      $      0.32
                                                          ===========      ===========      ===========      ===========

Diluted per share computation:
     Net income                                                     $      $     1,882      $     7,573      $     3,668
                                                                                                                   3,999
     Weighted average common shares  (1)outstanding        14,636,147       11,574,913       14,613,746       11,555,944
     Additional shares outstanding after the assumed
        assumed exercise of stock options by
        applying the treasury stock method                    268,975          216,806          238,396          198,910
                                                          -----------      -----------      -----------      -----------
     Total shares                                          14,905,122       11,791,719       14,852,142       11,754,854
                                                          ===========      ===========      ===========      ===========

Diluted net income per share                              $      0.27      $      0.16      $      0.51      $      0.31
                                                          ===========      ===========      ===========      ===========


</TABLE>
                                     Page 8

<PAGE>


                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements
                                   (continued)

Note 5 - Segment Information

         The  Company  has only one  reportable  segment.  In 1999,  the Company
exited the non-standard  personal automobile line of business and announced that
it would run-off its remaining portfolio of such business. For the three and six
months  ended  June 30,  2003 and 2002,  amounts  relating  to the  non-standard
personal  automobile  business  were not  material to the  financial  statements
presented, and therefore, are not presented separately.

Note 6 - Stock Options

         On January 1, 2003,  the  Company  adopted  the fair value  recognition
provisions of SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and  Disclosure  ("SFAS  148"),  and SFAS No. 123,  Accounting  for  Stock-Based
Compensation  ("SFAS 123") by implementing the modified  prospective  transition
method  permitted  under SFAS 148.  This method  requires  the Company to record
compensation  expense in 2003,  and  annually  thereafter,  as if the fair value
recognition method had been used since January 1, 1995.  Compensation expense of
$24,000  and $46,000 was  recorded  for the three and six months  ended June 30,
2003.

         Prior  to  January  1,  2003,  the  Company   applied  the  recognition
principles  of APB No.  25,  Accounting  for  Stock  Issued to  Employees,  and,
accordingly,  no compensation expense was recognized. If the Company had applied
the fair value recognition provisions of SFAS 123 in 2002,  compensation expense
of $62,000 and  $124,000  would have been  recorded for the three and six months
ended June 30, 2002. The following  table  illustrates  the effect on net income
and net income per share for the three and six  months  ended June 30,  2003 and
2002 as if the Company had applied the fair value recognition provisions of SFAS
123.

<TABLE>
<CAPTION>

(in thousands, except share data)                     Three months ended June 30,    Six months ended June 30,
                                                      ---------------------------   ---------------------------
                                                       2003             2002            2003           2002
                                                     ---------       ---------       ---------       ---------
<S>                                               <C>             <C>             <C>             <C>
Net income, as reported                           $      3,999    $      1,882    $      7,573    $      3,668
   Add: Stock-based employee compensation



     included in net income, net of tax                                   --                30            --
                                                                                                            16
   Deduct: Stock-based employee compensation
     determined under the fair value based
     method, net of tax                                    (16)            (41)            (30)            (82)
                                                     ---------       ---------       ---------       ---------
Pro forma net income                              $      3,999    $      1,841    $      7,573    $      3,586
                                                     =========       =========       =========       =========

Basic net income per share:
     As reported                                  $       0.27    $       0.16    $       0.52    $       0.32

     Pro forma                                    $       0.27    $       0.16    $       0.52    $       0.31


Diluted net income per share:
     As reported                                  $       0.27    $       0.16    $       0.51    $       0.31

     Pro forma                                    $       0.27    $       0.16    $       0.51    $       0.31


</TABLE>
                                     Page 9

<PAGE>


                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements
                                   (continued)

Note 7  -Company  Obligated  Mandatorily   Redeemable  Preferred  Securities  of
         Subsidiary Trusts Holding Solely Junior Subordinated Debentures

         On May 15, 2003,  Penn-America  Statutory  Trust II ("the Trust II"), a
business trust  subsidiary  formed by PAGI,  issued $15 million of floating rate
trust preferred securities ("Trust Preferred Securities"). These securities have
a thirty-year  maturity,  with a provision that allows the Company to call these
securities at par after five years from the date of issuance. Cash distributions
will be paid quarterly in arrears at a rate of 410 basis points over three-month
London  Interbank  Offered  Rates.  Distributions  on  these  securities  can be
deferred for up to five years,  but in the event of such  deferral,  the Company
may  not  declare  or pay  cash  dividends  on its  common  stock.  The  Company
guarantees  all  obligations of the Trust II with respect to  distributions  and
payments of these securities.

         Proceeds from the sale of these securities by the Trust II were used to
acquire $15 million of Floating  Rate Junior  Subordinated  Deferrable  Interest
Rate Debentures issued by the Company. These debentures have the same terms with
respect to maturity,  payments,  and  distributions  as the floating  rate trust
preferred  securities  issued by the Trust II. The  intended use of the proceeds
from these debentures is to support growth in the Company's insurance operations
and for general corporate purposes.

          In May 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 150 ("SFAS 150"),  "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
150  establishes  standards  for  classifying  and measuring  certain  financial
instruments with  characteristics  of both  liabilities and equity.  SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the  beginning of the first  interim  period after
June 15, 2003.  In  accordance  with SFAS 150,  the  Company's  Trust  Preferred
Securities were classified as a liability on the Consolidated Balance Sheets and
the related  distributions were recorded as interest expense on the Consolidated
Statements  of  Operations.  Therefore,  the  adoption  of SFAS 150 will have no
effect on the Company's financial statements.

Note 8 - Unpaid Losses and Loss Adjustment Expenses

         During the first six months of 2003,  the  Company  increased  incurred
losses and loss  adjustment  expenses  attributable  to insured  events of prior
years by $0.9  million.  This  increase is primarily  due to an increase of $1.9
million in  estimates  for loss and loss  adjustment  expense  reserves  for the
exited commercial automobile lines of business. In 2003, the Company experienced
an  unanticipated  increase in paid  allocated loss  adjustment  expenses on its
remaining open commercial  automobile liability claims.  Consequently,  combined
with the unanticipated 2003 activity and review of open claims at June 30, 2003,
the  Company  increased  its  estimates  for loss and  loss  adjustment  expense
reserves.

         Significantly  offsetting  the  increase  in  incurred  losses and loss
adjustment expenses attributable to insured events of prior years for the exited
commercial  automobile  lines of  business  is a  reduction  of $1.0  million in
estimates  for the  commercial  property  and casualty  lines of business.  This
reduction  consists of a reduction in the Company's  estimate for the commercial
property  lines of  business  by $2.1  million  relating  primarily  to the 2002
accident year, partially offset by an increase in the Company's estimate for the
commercial liability lines of business of $1.1 million due to the development of
outstanding claim reserves on claims occurring in various accident years.


                                    Page 10
<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, 2003 and 2002

         Premiums  earned  increased 33.3% to $36.3 million for the three months
ended June 30, 2003,  compared  with $27.2  million for the same period in 2002,
due to the growth in net written premiums over the last 12 months.

         Gross written  premiums,  which  represent the amount received or to be
received for insurance policies written without reduction for acquisition costs,
reinsurance  costs or other  deductions,  increased  20.4% for the three  months
ended June 30, 2003 to $54.5 million,  compared with $45.2 million for the three
months ended June 30, 2002.  The increase was  attributable  to rate  increases,
growth in new business and higher average exposures per policy.

         Ceded written premiums, the portion of gross written premiums reinsured
by unaffiliated  insurers,  increased to $8.6 million for the three months ended
June 30,  2003,  compared  with $6.5 million for the three months ended June 30,
2002.  The increase in ceded  written  premiums  was due  primarily to growth in
gross written premiums and an approximately 7.0% percent increase in reinsurance
rates on the Company's multiple-line excess of loss treaty.

         Net  written  premiums,  which are gross  written  premiums  less ceded
written  premiums,  increased  18.7% for the three months ended June 30, 2003 to
$45.9  million,  compared with $38.7 million for the three months ended June 30,
2002. The increase in net written  premiums was consistent  with the increase in
gross written premiums, but was offset partially by higher reinsurance costs.

         Net  investment  income  increased to $3.2 million for the three months
ended June 30, 2003,  compared with $2.9 million for the three months ended June
30, 2002,  primarily  due to the growth in average  invested  assets,  partially
offset by a decrease in average yield on fixed-maturity investments.

         Net realized  investment  gain was $0.4 for the three months ended June
30,  2003,  compared to a net realized  investment  loss of $1.1 million for the
three months ended June 30, 2002. The net realized investment gain for the three
months ended June 30, 2003 was primarily  attributable to the sale of certain of
the Company's  fixed-maturity  securities.  The net realized investment loss for
the  three  months   ended  June  30,  2002  was   primarily   attributable   to
other-than-temporary  impairment  write-downs  of $1.1 million on the  Company's
equity investment in exchange-traded funds.

         Losses and loss  adjustment  expenses  increased 27.8% to $22.2 million
for the three months ended June 30, 2003,  compared  with $17.4  million for the
three months ended June 30, 2002. The loss ratio for the three months ended June
30, 2003 was 61.1,  compared with 63.8 for the three months ended June 30, 2002.
The loss ratio is calculated by dividing losses and loss adjustment  expenses by
premiums earned. The improvement in the loss ratio was primarily attributable to
rate increases  implemented in 2002 and 2003 partially  offset by an increase in
catastrophe  related losses,  which were $1.1 million for the three months ended
June 30, 2003 and $0.7 million for the three  months  ended June 30, 2002.  This
increase in catastrophe related losses was primarily


                                    Page 11
<PAGE>

                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

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


due to  claims  the  Company  received  on a  series  of  severe  storms  in the
Midwestern states which occurred in the second quarter of 2003.

         Amortization of deferred policy  acquisition  costs ("ADAC")  increased
34.6% to $9.1 million for the three months ended June 30, 2003 from $6.7 million
for the three months ended June 30, 2002 primarily due to the growth in premiums
earned.

         Other  underwriting  expenses  increased  7.4% to $2.3  million for the
three  months  ended June 30, 2003 from $2.2  million for the three months ended
June 30,  2002,  primarily  due to  increases  in salary  and  benefit  expenses
associated with the hiring of additional underwriting and marketing personnel.

         The  overall  GAAP  combined  ratio,  which  is the sum of the loss and
expense  ratios,  improved to 92.5 for the three months ended June 30, 2003 from
96.5 for the three months ended June 30, 2002.  The loss ratio  improved to 61.1
for the three  months  ended June 30, 2003 from 63.8 for the three  months ended
June 30, 2002.  The expense  ratio,  which is  calculated by dividing the sum of
ADAC and other  underwriting  expenses by premiums earned,  improved to 31.4 for
the three  months  ended June 30, 2003 from 32.7 for the three months ended June
30,  2002.  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 underwriting profitability.

         Interest expense  increased to $409,000 for the three months ended June
30, 2003 from $35,000 for the three months ended June 30, 2002, primarily due to
interest expense on the Company's Trust Preferred Securities.

         The factors described above resulted in net income for the three months
ended  June 30,  2003 of $4.0  million or $0.27 per share  (basic and  diluted),
compared  with $1.9 million or $0.16 per share (basic and diluted) for the three
months ended June 30, 2002.


Six Months Ended June 30, 2003 and 2002

         Premiums  earned  increased  40.7% to $70.7  million for the six months
ended June 30, 2003,  compared  with $50.2  million for the same period in 2002,
due to the growth in net written premiums over the last 12 months.

         Gross written  premiums,  which  represent the amount received or to be
received for insurance policies written without reduction for acquisition costs,
reinsurance costs or other deductions,  increased 26.1% for the six months ended
June 30, 2003 to $94.9  million,  compared with $75.3 million for the six months
ended June 30, 2002. The increase was attributable to rate increases,  growth in
new business and higher average exposures per policy.



                                    Page 12
<PAGE>

                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES


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

         Ceded written premiums, the portion of gross written premiums reinsured
by  unaffiliated  insurers,  increased to $15.0 million for the six months ended
June 30,  2003,  compared  with $10.2  million for the six months ended June 30,
2002.  The increase in ceded  written  premiums  was due  primarily to growth in
gross  written  premiums  and  an   approximately   16.0%  percent  increase  in
reinsurance rates on the Company's multiple-line excess of loss treaty.

         Net  written  premiums,  which are gross  written  premiums  less ceded
written  premiums,  increased  22.8% for the six months  ended June 30,  2003 to
$79.9  million,  compared  with $65.1  million for the six months ended June 30,
2002. The increase in net written  premiums was consistent  with the increase in
gross written premiums, but was offset partially by higher reinsurance costs.

         Net  investment  income  increased  to $6.5  million for the six months
ended June 30,  2003,  compared  with $5.8 million for the six months ended June
30, 2002,  primarily  due to the growth in average  invested  assets,  partially
offset by a decrease in average yield on fixed-maturity investments.

         Net realized  investment gain was $1.1 million for the six months ended
June 30, 2003,  compared to a net realized  investment  loss of $1.3 million for
the six months ended June 30, 2002. The net realized investment gain for the six
months ended June 30, 2003 was primarily  attributable to the sale of certain of
the Company's  fixed-maturity  securities and all of the Company's  common stock
investments.  The net realized investment loss for the six months ended June 30,
2002 was primarily attributable to  other-than-temporary  impairment write-downs
of $1.3 million on the Company's equity investment in exchange-traded funds.

         Losses and loss  adjustment  expenses  increased 35.4% to $44.2 million
for the six months ended June 30, 2003,  compared with $32.7 million for the six
months  ended June 30,  2002.  The loss ratio for the six months  ended June 30,
2003 was 62.5,  compared  with 65.0 for the six months ended June 30, 2002.  The
loss ratio is  calculated  by dividing  losses and loss  adjustment  expenses by
premiums earned. The improvement in the loss ratio was primarily attributable to
rate increases  implemented in 2002 and 2003, partially offset by an increase in
catastrophe  related  losses,  which were $1.7  million for the six months ended
June 30, 2003 and $0.8  million  for the six months  ended June 30,  2002.  This
increase in  catastrophe  related losses was primarily due to claims the Company
received on a series of severe storms in the Midwestern states which occurred in
the second quarter of 2003.

         Amortization of deferred policy  acquisition  costs ("ADAC")  increased
38.7% to $17.7 million for the six months ended June 30, 2003 from $12.8 million
for the six months ended June 30, 2002,  primarily due to the growth in premiums
earned.

         Other underwriting expenses increased 14.4% to $4.4 million for the six
months  ended June 30, 2003 from $3.8  million for the six months ended June 30,
2002,  primarily due to increases in salary and benefit expenses associated with
the hiring of additional underwriting and marketing personnel.



                                    Page 13
<PAGE>



                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES


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

         The  overall  GAAP  combined  ratio,  which  is the sum of the loss and
expense  ratios,  improved  to 93.7 for the six months  ended June 30, 2003 from
98.0 for the six months ended June 30, 2002. The loss ratio improved to 62.5 for
the six months  ended June 30, 2003 from 65.0 for the six months  ended June 30,
2002.  The expense  ratio,  which is  calculated by dividing the sum of ADAC and
other  underwriting  expenses by premiums  earned,  improved to 31.2 for the six
months ended June 30, 2003 from 33.0 for the six months ended June 30, 2002. 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 underwriting profitability.

         Interest  expense  increased  to $713,000 for the six months ended June
30, 2003 from  $70,000 for the six months ended June 30, 2002  primarily  due to
interest expense on the Company's Trust Preferred Securities.

         The factors  described  above resulted in net income for the six months
ended  June 30,  2003 of $7.6  million  or $0.52 per  basic  share and $0.51 per
diluted share, compared with $3.7 million or $0.32 per basic share and $0.31 per
diluted share for the six months ended June 30, 2002.

Critical Accounting Estimates and Policies

         The  preparation of financial  statements in conformity with accounting
principles  generally accepted in the United States requires the Company to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses during the reporting periods.  Actual results could differ
from those estimates.

         The Company  has  identified  that the  establishment  of reserves  for
unpaid  losses  and  loss  adjustment  expenses  and the  valuation  of  certain
investments are critical accounting estimates because they involve a high degree
of judgment.  Although  variability is inherent in these estimates,  the Company
believes the amounts provided are appropriate based upon facts available at this
time. See the Investment  Portfolio section beginning on page 18 for information
related to the valuation of investments.

         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  its best estimate of 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:

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


                                    Page 14
<PAGE>

                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES


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

         The Company  determines  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:

|X|      the Company's and the industry's experience,
|X|      historical trends in reserving patterns and loss payments,
|X|      the impact of claim inflation,
|X|      the pending level of unpaid claims,
|X|      the cost of claim settlements,
|X|      the line of business mix, and
|X|      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  prospective  broadening of coverage by legislative  action or
judicial  interpretation;  or the extraordinary future emergence of new types of
losses not sufficiently  represented in the Company's historical experience,  or
that  cannot yet be  quantified.  The  Company  regularly  reviews  pricing  and
reserving  methodologies  to assist in  estimating  its  reserves 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 Company received an unexpected increase in the number of new claims
reported relating to four policies issued to a single insured between January 1,
1980 and April 1,  1983.  The  insured  is a  manufacturer  of safety  equipment
including  industrial  masks and the new claims  reported  allege  existing  and
potential bodily injury due to a medical condition called silicosis. This is the
only  insured  with which the Company  has open claims  relating to this type of
injury. The original policies covered products and completed operations only and
were issued with a $500,000  indemnity policy aggregate limit of liability and a
$5,000 insured  deductible per claim. As of June 30, 2003, the Company  believes
that its ultimate obligations for these claims are included in its best estimate
for unpaid losses and loss adjustment expense reserves.  Therefore,  the Company
believes that the amount of losses or loss adjustment  expenses related to these
claims will not have a material  effect on the Company's  financial  position or
results of operations.

         During the first six months of 2003,  the  Company  increased  incurred
losses and loss  adjustment  expenses  attributable  to insured  events of prior
years by $0.9  million.  This  increase is primarily  due to an increase of $1.9
million in  estimates  for loss and loss  adjustment  expense  reserves  for the
exited commercial

                                    Page 15
<PAGE>


                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES


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


automobile lines of business. In 2003, the Company experienced an unanticipated
increase in paid allocated loss adjustment expenses on its remaining open
commercial automobile liability claims. Consequently, combined with the
unanticipated 2003 activity and review of open claims at June 30, 2003, the
Company increased its estimates for loss and loss adjustment expense reserves.

          Significantly  offsetting  the  increase in  incurred  losses and loss
adjustment expenses attributable to insured events of prior years for the exited
commercial  automobile  lines of  business  is a  reduction  of $1.0  million in
estimates  for the  commercial  property  and casualty  lines of business.  This
reduction  consists of a reduction in the Company's  estimate for the commercial
property  lines of  business  by $2.1  million  relating  primarily  to the 2002
accident year, partially offset by an increase in the Company's estimate for the
commercial liability lines of business of $1.1 million due to the development of
outstanding claim reserves on claims occurring in various accident years.

Liquidity and Capital Resources

         PAGI is a holding  company,  the principal asset of which is the common
stock of  Penn-America  Insurance  Company.  At June 30,  2003,  PAGI's  capital
structure consisted of common stockholders' equity of $125.9 million and Company
Obligated  Mandatorily  Redeemable  Preferred  Securities of  Subsidiary  Trusts
Holding Solely Junior Subordinated Debentures of $30.0 million.

         On May 15, 2003,  Penn-America  Statutory  Trust II ("the Trust II"), a
business trust  subsidiary  formed by PAGI,  issued $15 million of floating rate
trust preferred securities ("Trust Preferred Securities"). These securities have
a thirty-year  maturity,  with a provision that allows the Company to call these
securities at par after five years from the date of issuance. Cash distributions
will be paid quarterly in arrears at a rate of 410 basis points over three-month
London  Interbank  Offered  Rates.  Distributions  on  these  securities  can be
deferred for up to five years,  but in the event of such  deferral,  the Company
may  not  declare  or pay  cash  dividends  on its  common  stock.  The  Company
guarantees  all  obligations of the Trust II with respect to  distributions  and
payments of these securities.

         Proceeds from the sale of these securities by the Trust II were used to
acquire $15 million of Floating  Rate Junior  Subordinated  Deferrable  Interest
Rate Debentures issued by the Company. These debentures have the same terms with
respect to maturity,  payments,  and  distributions  as the floating  rate trust
preferred  securities  issued by the Trust II. The  intended use of the proceeds
from these debentures is to support growth in the Company's insurance operations
and for general corporate purposes.

          In May 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 150 ("SFAS 150"),  "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
150  establishes  standards  for  classifying  and measuring  certain  financial
instruments with  characteristics  of both  liabilities and equity.  SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the  beginning of the first  interim  period after
June 15, 2003.  In  accordance  with SFAS 150,  the  Company's  Trust  Preferred
Securities were classified as a liability on the Consolidated Balance Sheets and
the related  distributions were recorded as interest expense on the Consolidated
Statements  of  Operations.  Therefore,  the  adoption  of SFAS 150 will have no
effect on the Company's financial statements.



                                    Page 16
<PAGE>

                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

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

         PAGI's  principal  source  of  cash to meet  short-term  and  long-term
liquidity needs,  including the payment of dividends to stockholders,  corporate
expenses  and  interest  on  its  debentures,  is  dividends  from  Penn-America
Insurance Company.  PAGI has no planned capital  expenditures that could have an
impact on 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  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  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 2003 is $11,026,200. For the six months ended June
30, 2003, ordinary dividends paid by Penn-America Insurance Company to PAGI were
$1,400,000.  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 statutory surplus, which, in turn, is dependent
upon Penn-America  Insurance Company and Penn-Star  Insurance Company generating
net  income  in  excess  of  dividends  paid  to  PAGI.  As of  June  30,  2003,
Penn-America  Insurance  Company's  statutory  surplus  was  $116,760,000,   and
included unassigned surplus of $31,220,000.

         Penn-America  and  Penn-Star  are required by law to maintain a certain
minimum  level  of  statutory  surplus.   Statutory  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, 2002, the
statutory  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  statutory  surplus at December  31, 2002 was
$110,262,000  and  its  regulatory  action  level  was  $22,532,000.   Penn-Star
Insurance  Company's  statutory surplus at December 31, 2002 was $37,356,000 and
its regulatory action level was $8,276,000.

         The Company has generated  positive cash flows from  operations to meet
its short-term liquidity requirements. Net cash provided by operating activities
was $15.1  million for the six months ended June 30, 2003 and $24.1  million for
the six months ended June 30, 2002.

         Net cash used by  investing  activities  was $24.3  million for the six
months  ended June 30, 2003 and $31.7  million for the six months ended June 30,
2002.

         Net cash provided by financing activities was $14.3 million for the six
months ended June 30, 2003 due  primarily  to the  issuance of $15.0  million of
Trust  Preferred  Securities in the second  quarter of 2003 compared to net cash
used by financing  activities  of $0.7 million for the six months ended June 30,
2002.


                                    Page 17
<PAGE>

                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES


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

Investment Portfolio

         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 Company outsources the management of its investment portfolio
to Gen Re New England Asset Management,  Inc. ("NEAMS").  In accordance with the
asset  management  agreement  between  the  Company  and NEAMS,  all  investment
transactions  are approved by the Investment  Committee of the Company within 60
days of their initiation by NEAMS. At June 30, 2003, the Company held a total of
$312.0  million  in  cash  and  investments.  Of  this  amount,  cash  and  cash
equivalents represented $14.9 million,  equity securities,  consisting solely of
preferred  stock,  represented  $12.0  million,  and  fixed-maturity  securities
represented $285.1 million.

         The Company's cash and investment portfolio mix as of June 30, 2003 was
as follows:
<TABLE>
<CAPTION>

  Fixed maturities:
<S>                                                                              <C>
       U.S. Treasury securities and obligations of U.S. government agencies          5.1%
       Corporate securities                                                         32.8
       Mortgage-backed securities                                                   18.3
       Other structured securities                                                  16.0
       Municipal securities                                                         19.2
                                                                                 --------
Total fixed maturities                                                              91.4
Cash and cash equivalents                                                            4.8
Equity securities                                                                    3.8
                                                                                 --------
                                                                                   100.0%
                                                                                 ========


         The Company's  fixed-maturity  portfolio of $285.1 million was 91.4% of
the total cash and investments as of June 30, 2003.  Approximately  94% of these
securities  were  rated "A" or better by  Standard  & Poor's.  Standard & Poor's
rates  publicly  traded  securities  in 20  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,  which
consist solely of preferred stocks, were $12.0 million or 3.8% of total cash and
investments as of June 30, 2003.

         The quality of the fixed-maturity portfolio as of June 30, 2003 was as
follows:

"AAA"                           53.6%
"AA"                            13.8
"A"                             26.3
"BBB"                            5.3
Below "BBB"                      1.0
                              --------
                               100.0%
                              ========




                                    Page 18
<PAGE>

                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES



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

         As of June 30, 2003, the investment  portfolio contained $107.0 million
of mortgage-backed,  asset-backed and collateralized mortgage obligations. These
securities  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 real
estate or mortgages in the investment portfolio as of June 30, 2003. The quality
of the  Company's  mortgage-backed,  asset-backed  and  collateralized  mortgage
obligations as of June 30, 2003 was as follows:


      "AAA"                     86.0%
      "AA"                      12.1
      "A"                        1.4
      "BBB"                      0.5
                              ---------
                              100.0%
                              =========

         As of June 30,  2003,  the  Company's  investment  portfolio  contained
corporate  fixed-maturity  and preferred stock securities with a market value of
$114.4 million. A summary of these securities by industry segment is as follows:

      Financial institutions         31.4%
      Consumer, non-cyclical         21.9
      Utilities                      20.1
      Communications                  9.5
      Energy                          5.0
      Industrial                      4.2
      Consumer, cyclical              3.4
      Basic materials                 3.0
      Technology                      1.5
                                  -----------
                                   100.0%
                                  ===========


</TABLE>







                                    Page 19
<PAGE>



                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES



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

         The Company  regularly  evaluates its investment  portfolio to identify
other-than-temporary impairments of individual securities. The Company considers
many  factors  in  determining  if an  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  the  Company's  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 June 30, 2003:
<TABLE>
<CAPTION>


                                 Number                                          Gross               Six                More
                                   of            Fair           Book          Unrealized            Months              Than
(in thousands)                 Securities       Value          Value            Losses             or Less           Six Months
--------------------------- -- ----------- -- ----------- -- ----------- -- ---------------- -- --------------- --- --------------

<S>                                  <C>        <C>           <C>                 <C>                   <C>
Fixed-maturity securities            29         $ 27,282      $ 27,463             $ 181                 $ 181
                                                                                                                        --
Equity securities                     1            1,020         1,025                5
                                                                                                             5          --
</TABLE>


         As of June 30, 2003, the Company's fixed-maturity  investment portfolio
had 29  securities  with $181  thousand of gross  unrealized  losses.  No single
issuer had an unrealized  loss position of greater than $27 thousand.  There was
one equity security, a preferred stock, in an unrealized loss position of $5,000
as of June 30, 2003.


Forward-Looking 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 and 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,  results of the company's business, and
the other matters  referred to above include,  but are not limited to: (1) risks
inherent  in  establishing  loss  and  loss  adjustment  expense  reserves;  (2)
uncertainties  relating  to the  financial  ratings of the  company's  insurance
subsidiaries;  (3) uncertainties relating to government and regulatory policies;
(4)  uncertainties  arising from the cyclical nature of the company's  business;
(5)  changes in the  company's  relationships  with,  and the  capacity  of, its
general agents;  and (6) the risk that the company's  reinsurers may not be able
to fulfill their obligations to the company. For additional disclosure regarding
potential  risk  factors,  refer  to  documents  filed by the  company  with the
Securities and Exchange  Commission,  including the Company's 2002 Annual Report
on Form 10-K.



                                    Page 20
<PAGE>




                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

           Quantitative and Qualitative Disclosures About Market Risk

         The  Company's  primary  market  risk is the  potential  economic  loss
principally  arising from adverse  changes in the market value of its investment
portfolio. The major component of market risk affecting the Company's investment
portfolio is interest rate risk. The Company eliminated its underlying  exposure
to equity  price risk,  as all of its common stock  investments  was sold in the
first quarter of 2003.

         The Company had  fixed-maturity  and preferred stock investments with a
market value of $297.2  million at June 30, 2003 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 liability and capital position of the Company.

         The  Company's  market risk  associated  with exposure to interest rate
risk at June  30,  2003 has not  materially  changed  from  that  identified  at
December 31, 2002.







                                    Page 21
<PAGE>






                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

                             Controls and Procedures


          As of June 30, 2003, 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 June 30, 2003.

         There  have  been no  significant  changes  in the  Company's  internal
controls or in other factors that could  significantly  affect internal controls
subsequent to June 30, 2003.






                                    Page 22
<PAGE>




                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES


                           PART II. OTHER INFORMATION


Item 1.       Legal Proceedings - None

Item 2.       Changes in Securities and Use of Proceeds - None

Item 3.       Defaults Upon Senior Securities - None

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

         On May 14, 2003,  Penn-America  Group,  Inc. held its annual meeting of
stockholders.  Nine board  nominees for director were elected for terms expiring
at the 2004 annual meting of  stockholders.  There was one stockholder  proposal
presented  and  voted  on at  the  meeting.  A  stockholder  proposal  regarding
amendments  to the 2002 Stock  Incentive  Plan  relating  to an  increase in the
number of shares  available for issuance under the Plan and to amendments to the
definition  of "change in  control"  did  receive a majority  vote of the shares
represented and entitled to vote at the meeting.

Election of Directors

<TABLE>
<CAPTION>

Nominee                             Votes for             Votes Withheld
--------------------------------------------------------------------------------

<S>                               <C>                        <C>
Irvin Saltzman                    12,606,966                  964,676
Jon S. Saltzman                   12,607,166                  964,476
Richard L. Duszak                 12,607,466                  964,176
Charles Ellman                    13,391,616                  180,026
Robert A. Lear                    12,607,916                  963,726
Jami Saltzman-Levy                12,607,716                  963,926
M. Moshe Porat                    12,607,916                  963,726
E. Anthony Saltzman               12,607,716                  963,926
Paul Simon                        12,589,016                  173,126

Stockholder proposal for amendments to the 2002 Stock Incentive Plan relating to
an increase in the number of shares available for issuance under the Plan and to
amendments to the definition of "change in control"

Votes For                          Votes Against            Votes Withheld
--------------------------------------------------------------------------------

9,002,563                            1,540,298                291,203

</TABLE>

Item 5.       Other Information - None

                                    Page 23
<PAGE>

                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES


                     PART II. OTHER INFORMATION (continued)

Item 6.       Exhibits and Reports on Form 8-K

          (a)  Exhibits

          An   Exhibit Index has been filed as part of this report on page E-1

          (b)  Reports on Form 8-K

          On April 2,  2003,  the  Company  filed a  current  report on Form 8-K
          announcing the  availability of its Combined Annual  Statement for its
          insurance  subsidiaries,  Penn-America Insurance Company and Penn-Star
          Insurance Company,  on the Company's  web-site,  in hard copy from the
          Company, or from the Pennsylvania Department of Insurance.

          On April 23,  2003,  the  Company  filed a current  report on Form 8-K
          announcing  that the  Company  released  its  earnings  for the  first
          quarter of 2003.

          On April 25,  2003,  the  Company  filed a current  report on Form 8-K
          announcing  that the  Company  executed an  agreement  for the private
          placement  sale of $15  million  of  thirty-year  floating  rate trust
          preferred securities through a wholly owned trust subsidiary.

          On May 2,  2003,  the  Company  filed a  current  report  on Form  8-K
          announcing  that Richard W.  Slomiany,  CPCU,  AIM was appointed  vice
          president of Claims for the registrant's insurance subsidiaries.

          On May 6,  2003,  the  Company  filed a  current  report  on Form  8-K
          announcing  the  dismissal  of  Ernst  &  Young  LLP  ("E&Y")  as  its
          independent auditors and its appointment of PricewaterhouseCoopers LLP
          ("PwC")  as  independent  auditors  for 2003 and  retained  E&Y as its
          consulting actuary.

          On May 9,  2003,  the  Company  filed a  current  report  on Form  8-K
          announcing the  availability  of materials  presented by Jon Saltzman,
          President  and CEO and Joseph  Morris,  Sr.  Vice  President,  CFO and
          Treasurer presented to various groups of investors.

          On May 15,  2003,  the  Company  filed a  current  report  on Form 8-K
          announcing the  availability  of its first quarter  statements for its
          insurance  subsidiaries,  Penn-America Insurance Company and Penn-Star
          Insurance Company,  on the Company's  web-site,  in hard copy from the
          Company, or from the Pennsylvania Department of Insurance.




                                    Page 24
<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, 2003                          By:   /s/ Jon S. Saltzman
      ------------------                                -------------------
                                                        Jon S. Saltzman
                                                        President and
                                                        Chief Executive Officer



                                                By:   /s/ Joseph F. Morris
                                                      --------------------
                                                      Joseph F. Morris
                                                      Senior Vice President,
                                                      Chief Financial Officer
                                                      Chief Financial Officer
                                                      and Treasurer



                                    Page 25


<PAGE>



         Exhibit No.                        Description
         ----------                         ------------


            4           Placement Agreement between Registrant and it financing
                        subsidiary, Penn-America Statutory Trust II, and FTN
                        Capital Markets and Keefe, Bruyette & Woods, Inc., date
                        April 25, 2003.

            4(i)        Subscription Agreement among Penn-America Statutory
                        Trust II, Registrant and I-Preferred Term Securities II,
                        Ltd., dated May 15, 2003.

            4(ii)       Indenture between Registrant and U.S. Bank National
                        Association, dated May 15, 2003.

            4(iii)      Amended and Restated Declaration of Trust by and among
                        U.S. Bank National Association, Registrant, and Jon S.
                        Saltzman, Joseph F. Morris, and Brian Riley, dated May
                        15, 2003.

            4(iv)       Guarantee Agreement by and between Registrant and U.S.
                        Bank National Association, dated May 15, 2003.

            10.1        Certified Terrorism Loss Aggregate Quota Share Agreement
                        between Penn-America Insurance Company, Penn-Star
                        Insurance Company and American Re-Insurance Company
                        effective January 1, 2003 to December 31, 2004.

            10.2        General Liability and Commercial Umbrella Liability
                        Quota Share Reinsurance Agreement between Penn-America
                        Insurance Company, Penn-Star Insurance Company and
                        American Re-Insurance Company effective September 1,
                        2001.

            10.2(i)     Endorsement No. 1 to General Liability and Commercial
                        Umbrella Liability Quota Share Reinsurance Agreement
                        between Penn-America Insurance Company, Penn-Star
                        Insurance Company and American Re-Insurance Company
                        effective September 1, 2001.

            10.2(ii)    Endorsement No. 2 to General Liability and Commercial
                        Umbrella Liability Quota Share Reinsurance Agreement
                        between Penn-America Insurance Company, Penn-Star
                        Insurance Company and American Re-Insurance Company
                        effective January 1, 2003.

            10.2(iii)   Endorsement No. 3 to General Liability and Commercial
                        Umbrella Liability Quota Share Reinsurance Agreement
                        between Penn-America Insurance Company, Penn-Star
                        Insurance Company and American Re-Insurance Company
                        effective June 1, 2003.

            10.3        Investment Management Agreement between Registrant and
                        General Re - New England Asset Management, Inc., date
                        May 15, 2003.

                                       E-1

<PAGE>


         Exhibit No.                        Description
         ----------                         ------------

            10.4        Registrant's 2002 Stock Incentive Plan (f/k/a Amended
                        and Restated 1993 Stock Incentive Plan.

            31.1        Certification of Chief Executive Officer as adopted
                        pursuant to section 302(a) of the Sarbanes-Oxley Act of
                        2002.

            31.2        Certification of Chief Financial Officer as adopted
                        pursuant to section 302(a) of the Sarbanes-Oxley Act of
                        2002.

            32          Certification  of  Chief  Executive  Officer  and  Chief
                        Financial  Officer of Penn-America  Group,  Inc.,  dated
                        August 12,  2003 in  accordance  with 18 U.S.C.  Section
                        1350   as   adopted   pursuant   to   Section   906   of
                        Sarbanes-Oxley Act of 2002.





                                       E-2