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         September 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 October 30, 2003, 14,731,853 shares of the registrant's common stock, $0.01
par value, were outstanding.

                                     Page 1

<PAGE>

<TABLE>
<CAPTION>

<S>                      <C> <C>                                                                     <C>
                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                                      Index

                                                                                            Page Number
                                                                                            -----------
Part I - Financial Information

      Item 1. Financial Statements

         Consolidated Balance Sheets - September 30, 2003 (unaudited) and
                December 31, 2002                                                                    3

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

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

         Consolidated Unaudited Statements of Cash Flows -
                For the nine months ended September 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                                                        12

      Item 3. Quantitative and Qualitative Disclosure About Market Risk                             23

      Item 4. Controls and Procedures                                                               24

Part II - Other Information                                                                         25

</TABLE>


                                     Page 2
<PAGE>

<TABLE>
<CAPTION>

<S>                                                       <C>          <C>                 <C>                  <C>

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

                                                                                         September 30,         December 31,
                                                                                              2003                 2002
                                                                                        ----------------     -----------------
                                                                                          (Unaudited)
ASSETS
Investments:
    Fixed maturities:
       Available for sale, at fair value (amortized cost, $301,989 and $237,450)           $  311,028           $  246,583
       Held to maturity, at amortized cost (fair value, $295 and $2,017)                          276                1,963
    Equity securities, at fair value (cost, $11,405 and $17,859)                               11,554               18,625
                                                                                        ----------------     -----------------
       Total investments                                                                      322,858              267,171
Cash and cash equivalents                                                                      31,513                9,796
Accrued investment income                                                                       3,272                3,196
Premiums receivable                                                                            20,967               12,564
Reinsurance recoverable                                                                        31,466               27,843
Prepaid reinsurance premiums                                                                   12,504                8,965
Deferred policy acquisition costs                                                              16,755               13,159
Capital lease, affiliate                                                                        1,514                1,579
Deferred income taxes                                                                           2,939                2,105
Income tax recoverable                                                                             --                   60
Other assets                                                                                    1,010                  801
                                                                                        ----------------     -----------------
       Total assets                                                                        $  444,798           $  347,239
                                                                                        ================     =================

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Unpaid losses and loss adjustment expenses                                               $  159,550           $  137,747
  Unearned premiums                                                                            87,293               65,365
  Accounts payable and accrued expenses                                                         8,152                7,700
  Capitalized lease obligation, affiliate                                                       1,312                1,428
  Payable for investments purchased                                                            26,290                   --
  Company obligated mandatorily redeemable preferred securities of
         subsidiary trusts holding solely junior subordinated debentures                       30,000               15,000
  Income tax payable                                                                              825                   --
  Other liabilities                                                                             3,776                3,404
                                                                                        ----------------     -----------------
         Total liabilities                                                                    317,198              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, 14,729,853 and 14,572,098 shares                                      147                  146
  Additional paid-in capital                                                                   72,175               70,875
  Accumulated other comprehensive income                                                        5,769                6,401
  Retained earnings                                                                            50,280               39,995
  Officers' stock loans                                                                          (569)                (629)
  Unearned compensation from restricted stock awards                                             (202)                (193)
                                                                                        ----------------     -----------------
         Total stockholders' equity                                                           127,600              116,595
                                                                                        ----------------     -----------------
         Total liabilities and stockholders' equity                                        $  444,798           $  347,239
                                                                                        ================     =================

See accompanying notes to Consolidated Financial Statements

</TABLE>


                                     Page 3
<PAGE>

<TABLE>
<CAPTION>

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

         For the three and nine months ended September 30, 2003 and 2002
                        (In thousands, except share data)
<S>                                                  <C>                 <C>                   <C>                 <C>


                                                      Three months ended September 30,          Nine months ended September 30,
                                                   ---------------------------------------   --------------------------------------
                                                         2003                 2002                  2003                2002
                                                   ------------------   ------------------   -------------------  -----------------
Revenues
Premiums earned                                      $      40,337       $       30,705        $      110,997      $       80,922
Net investment income                                        3,277                3,038                 9,734               8,796
Net realized investment gain (loss)                            734                1,172                 1,879                (173)
                                                   ------------------   ------------------   -------------------  -----------------
    Total revenues                                          44,348               34,915               122,610              89,545
                                                   ------------------   ------------------   -------------------  -----------------

Losses and expenses
Losses and loss adjustment expenses                         24,594               20,799                68,791              53,449
Amortization of deferred policy acquisition costs            9,901                7,527                27,591              20,277
Other underwriting expenses                                  2,395                2,209                 6,767               6,032
Corporate expenses                                             214                  118                   633                 462
Interest expense                                               515                   35                 1,228                 105
                                                   ------------------   ------------------   -------------------  -----------------
    Total losses and expenses                               37,619               30,688               105,010              80,325
                                                   ------------------   ------------------   -------------------  -----------------


Income before income tax                                     6,729                4,227                17,600               9,220
Income tax expense                                           2,094                1,330                 5,392               2,655
                                                   ------------------   ------------------   -------------------  -----------------

Net income                                           $       4,635       $        2,897        $       12,208      $        6,565
                                                   ==================   ==================   ===================  =================

Net income per share:
   Basic                                             $        0.31       $         0.25        $         0.83      $        0.57
   Diluted                                           $        0.31       $         0.25        $         0.82      $        0.56

Weighted average shares outstanding:
   Basic                                                14,717,350           11,585,043            14,648,660          11,565,749
   Diluted                                              14,945,900           11,775,916            14,883,774          11,765,175

Cash dividends per share                             $     0.04375       $      0.03875        $      0.13125      $     0.11583

See accompanying notes to Consolidated Financial Statements

</TABLE>


                                     Page 4
<PAGE>

<TABLE>
<CAPTION>


                                              PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

                                           Consolidated Statement of Stockholders' Equity
                                                             (Unaudited)

                                            For the nine months ended September 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>          <C>
Balance at December 31, 2002                $     146    $  70,875     $   6,401  $  39,995    $   (629)     $ (193)      $ 116,595

Net income                                         --           --            --     12,208          --          --          12,208
Other comprehensive loss:
    Unrealized loss on investments, net
       of tax and reclassification adjustment      --           --          (562)        --          --          --            (562)
    Unrealized loss on cash-flow hedging
       instrument, net of tax                      --           --           (70)        --          --          --             (70)
                                                                                                                           ---------
Comprehensive income
                                                                                                                             11,576
                                                                                                                           ---------
Issuance of common stock                            1        1,213            --         --          --          --           1,214
Compensation expense on stock
    options                                        --           87            --         --          --          --              87
Unearned compensation from restricted
    stock awards issued                            --           --            --         --          --         (51)            (51)
Amortization of compensation expense
    from restricted stock awards issued            --           --            --         --          --          42             42
Repayment of officers' stock loans
                                                                                                     60          --             60
Cash dividends paid ($0.13125 per share)           --           --            --     (1,923)         --                      (1,923)
                                            ---------    ---------     ---------  ---------      ------      --------      ---------
Balance at September 30, 2003               $     147    $  72,175     $   5,769  $  50,280      $ (569)     $   (202)     $ 127,600
                                            =========    =========     =========  =========      ======      ========      =========
</TABLE>


See accompanying notes to Consolidated Financial Statements


                                     Page 5
<PAGE>

<TABLE>
<CAPTION>

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

              For the nine months ended September 30, 2003 and 2002
<S>                                                                                   <C>                      <C>
                                 (In thousands)
                                                                                          Nine months ended September 30,
                                                                                      ----------------------------------------
                                                                                            2003                   2002
                                                                                      ------------------     -----------------
Cash flows from operating activities:
    Net income                                                                        $      12,208            $     6,565
    Adjustments to reconcile net income to net cash provided by
      operating activities:
         Amortization (accretion) and depreciation expense                                    1,468                   (100)
         Net realized investment loss (gain)                                                 (1,879)                   173
         Deferred income tax benefit                                                           (642)                  (575)
         Net change in premiums receivable, prepaid reinsurance
           premiums and unearned premiums                                                     9,986                 18,698
         Net change in unpaid losses and loss adjustment expenses
           and reinsurance recoverable                                                       18,180                 10,934
         Decrease (increase) in:
             Accrued investment income                                                          (76)                    82
             Deferred policy acquisition costs                                               (3,596)                (4,157)
             Income tax recoverable/payable                                                     885                    461
             Other assets                                                                        80                    (29)
         Increase (decrease) in:
             Accounts payable and accrued expenses                                              452                  3,348
             Other liabilities                                                                  259                    590
                                                                                      ------------------     -----------------
         Net cash provided by operating activities                                           37,325                 35,990
                                                                                      ------------------     -----------------

Cash flows from investing activities:
    Purchases of equity securities                                                           (7,651)                (1,500)
    Purchases of fixed maturities available for sale                                       (168,196)               (69,372)
    Proceeds from sales of equity securities                                                 14,439                  1,494
    Proceeds from sales and maturities of fixed maturities available for sale               104,040                 35,924
    Proceeds from maturities and calls of fixed maturities held to maturity                   1,686                 13,130
    Increase in payable for investments purchased                                            26,290                     --
                                                                                      ------------------     -----------------
         Net cash used by investing activities                                              (29,392)               (20,324)
                                                                                      ------------------     -----------------

Cash flows from financing activities:
    Issuance of common stock                                                                  1,214                    300
    Net proceeds from the issuance of trust preferred securities                             14,549                     --
    Principal payments on capital lease obligations, affiliate                                 (116)                  (106)
    Repayment of officers' loans                                                                 60                     --
    Dividends paid                                                                           (1,923)                (1,340)
                                                                                      ------------------     -----------------
         Net cash provided (used) by financing activities                                    13,784                 (1,146)
                                                                                      ------------------     -----------------

Increase in cash and cash equivalents                                                        21,717                 14,520
Cash and cash equivalents, beginning of period                                                9,796                 13,129
                                                                                      ------------------     -----------------
Cash and cash equivalents, end of period                                                $    31,513          $      27,649
                                                                                      ==================     =================


See accompanying notes to Consolidated Financial Statements


</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  September  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
$7,503,000  and  $5,057,000  for the three months ended  September  30, 2003 and
2002,  respectively.  Losses and loss  adjustment  expenses are presented net of
amounts ceded to reinsurers of $2,576,000  and  $3,188,000  for the three months
ended September 30, 2003 and 2002, respectively.

         Premiums  earned are  presented  net of amounts  ceded to reinsurers of
$20,409,000  and  $12,257,000  for the nine months ended  September 30, 2003 and
2002,  respectively.  Losses and loss  adjustment  expenses are presented net of
amounts ceded to reinsurers of  $10,890,000  and  $5,988,000 for the nine months
ended September 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 September 30, 2003, comprehensive income was
$2,153,000,  which consisted of net income of $4,635,000 and other comprehensive
loss  of  $2,482,000  related  to net  unrealized  loss  on  investments  and an
unrealized  gain on a cash flow hedging  instrument.  For the three months ended
September 30, 2002, comprehensive income was $5,197,000,  which consisted of net
income of $2,897,000 and other  comprehensive  gain of $2,300,000 related to net
unrealized gains on investments.

         For the nine months ended September 30, 2003,  comprehensive income was
$11,576,000,   which   consisted  of  net  income  of   $12,208,000   and  other
comprehensive loss of $632,000 related to net unrealized loss on investments and
an unrealized loss on a cash flow hedging instrument.  For the nine months ended
September 30, 2002, comprehensive income was $10,304,000, which consisted of net
income of $6,565,000 and other  comprehensive  gain of $3,739,000 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 September 30,        Nine months ended September 30,
                                                      --------------------------------          ----------------------------
                                                         2003            2002                       2003            2002
                                                      -----------     -----------                -----------     -----------
Basic per share computation:
<S>                                                   <C>             <C>                        <C>             <C>
     Net income                                       $     4,635     $     2,897                $    12,208     $     6,565
     Weighted average common shares  (outstanding      14,717,350      11,585,043                 14,648,660      11,565,749
                                                      -----------     -----------                -----------     -----------

Basic net income per share                            $      0.31     $      0.25                $      0.83     $      0.57
                                                      ===========     ===========                ===========     ===========

Diluted per share computation:
     Net income                                       $     4,635     $     2,897                $    12,208     $     6,565

     Weighted average common shares                    14,717,350      11,585,043                 14,648,660      11,565,749
(1)outstanding
     Additional shares outstanding after the
assumed
        assumed exercise of stock options by
        applying the treasury stock method
                                                          228,550         190,873                    235,114         199,426
                                                      -----------     -----------                -----------     -----------
     Total shares                                      14,945,900      11,775,916                 14,883,774      11,765,175
                                                      ===========     ===========                ===========     ===========

Diluted net income per share                          $      0.31     $      0.25                $      0.82     $      0.56
                                                      ===========     ===========                ===========     ===========

</TABLE>


                                     Page 8
<PAGE>


                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements
                                   (continued)

Note 5 - Segment Information

         The Company has one reportable  segment that consists of its commercial
property  and  casualty  lines of  business.  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 nine months
ended September 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
$41,000 and $87,000 was recorded  for the three and nine months ended  September
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 $186,000  would have been  recorded for the three and nine months
ended  September 30, 2002.  The following  table  illustrates  the effect on net
income and net income per share for the three and nine  months  ended  September
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 September 30,      Nine months ended September 30,
                                                -------------------------------        ---------------------------
                                                     2003          2002                      2003           2002
                                                -------------   ---------------        ------------    -----------

<S>                                                <C>         <C>                      <C>              <C>
Net income, as reported                            $    4      $   2,897                $    12,208      $ 6,565
  Add: Stock-based employee compensation



    included in net income, net of tax
                                                       27           --                           57         --
  Deduct: Stock-based employee compensation
    determined under the fair value based
    method, net of tax
                                                      (27)           (41)                       (57)        (123)
                                                   ------      ---------                 ----------      -------
Pro forma net income                               $    4      $   2,856                $    12,208      $ 6,442
                                                   ======      =========                 ==========      =======

Basic net income per share:
     As reported
                                                $    0.31   $       0.25              $        0.83      $  0.57
     Pro forma
                                                $    0.31   $       0.25              $        0.83      $  0.56

Diluted net income per share:
     As reported
                                                $    0.31   $       0.25              $        0.82      $  0.56
     Pro forma                                  $    0.31   $       0.24              $        0.82      $  0.55


</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  ("Trust
Preferred Securities")

         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. 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 proceeds from these debentures
will be used to support  growth in the Company's  insurance  operations  and for
general corporate purposes.

         On July 1, 2003, the Company adopted 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.  The Company's Trust Preferred
Securities are classified as a liability on the Consolidated  Balance Sheets and
the related  distributions  are recorded as interest expense on the Consolidated
Statements of Operations,  which is in accordance with SFAS 150. Therefore,  the
adoption of SFAS 150 had no effect on the Company's financial statements.



                                    Page 10
<PAGE>



                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements
                                   (continued)

Note 8 - Unpaid Losses and Loss Adjustment Expenses

         During the first nine months of 2003,  the Company  increased  incurred
losses and loss  adjustment  expenses  attributable  to insured  events of prior
years  by  $1,974,000.  This  increase  was  primarily  due  to an  increase  of
$1,928,000 in estimates for loss and loss  adjustment  expense  reserves for the
exited  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,  the Company
increased its  estimates  for loss and loss  adjustment  expense  reserves.  The
remaining  increase of $46,000 in incurred losses and loss  adjustment  expenses
attributable  to insured  events of prior years  related to the  Company's  core
commercial property and casualty lines of business. This increase consisted of a
reduction  in the  Company's  estimate  for the  commercial  property  lines  of
business by $2,143,000  relating  primarily to the 2002 accident year, offset by
an increase in the  Company's  estimate for the  commercial  liability  lines of
business of $2,189,000 due to the  development of outstanding  claim reserves on
claims occurring in various accident years.

         In October 2003, the Eighteenth  Circuit Court in the State of Michigan
entered a judgment of $4.9 million against one of the Company's insureds,  which
judgment the Company has appealed.  While the Company issued only a $1.0 million
policy  limit,  the insured  could  allege the Company is  responsible  for this
entire judgment.  This policy is applicable to the Company's reinsurance program
that  provides  coverage  for losses  and loss  adjustment  expenses,  including
judgments  in excess  of  policy  limits,  of $2.75  million  in excess of $0.25
million.  The Company believes that the judgment has no merit and the likelihood
of a loss in excess  of the  Company's  reinsurers  limit of  liability  of $3.0
million is remote.  Therefore, the Company has not included any amounts over its
reinsurers  limit of  liability  of $3.0  million in its unpaid  losses and loss
adjustment expenses at September 30, 2003.







                                    Page 11
<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 September 30, 2003 and 2002

         Premiums  earned  increased 31.4% to $40.3 million for the three months
ended  September  30, 2003,  compared  with $30.7 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  35.6% for the three  months
ended  September 30, 2003 to $58.5 million,  compared with $43.1 million for the
three months ended  September 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 36.3% to $9.0 million for the three months
ended September 30, 2003,  compared with $6.6 million for the three months ended
September 30, 2002. The increase in ceded written  premiums was due primarily to
growth  in  gross  written  premiums  and  an  approximately  4.0%  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 35.5% for the three months ended September 30, 2003
to $49.5  million,  compared  with  $36.5  million  for the three  months  ended
September 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 $3.3 million for the three months
ended September 30, 2003,  compared with $3.0 million for the three months ended
September  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 $0.7  million for the three  months
ended  September 30, 2003,  compared to a net realized  investment  gain of $1.2
million  for the  three  months  ended  September  30,  2002.  The net  realized
investment  gain for the three months  ended  September  30, 2003 was  primarily
attributable to the sale of certain of the Company's preferred stock securities.
The net realized  investment  gain for the three months ended September 30, 2002
consists  primarily of $2.3 million in net realized gains recognized on the sale
of certain of the Company's fixed-maturity securities,  partially offset by $1.1
million other-than-temporary  impairment write-downs on certain of the Company's
common stocks.

         Losses and loss  adjustment  expenses  increased 18.2% to $24.6 million
for the three months ended  September 30, 2003,  compared with $20.8 million for
the three months ended  September 30, 2002.  The loss ratio for the three months
ended September 30, 2003 was 61.0, compared with 67.7 for the three months ended
September 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 $1.3 million for
the three  months  ended  September  30, 2003 versus $0.4  million for the three
months ended September 30, 2002. This increase in


                                    Page 12
<PAGE>



                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

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


catastrophe-related  losses was  primarily  due to claims the  Company  received
related to Hurricane Isabel which occurred in the third quarter of 2003.

         Amortization of deferred policy  acquisition  costs ("ADAC")  increased
31.5% to $9.9 million for the three months  ended  September  30, 2003 from $7.5
million for the three months ended  September  30,  2002,  primarily  due to the
growth in premiums earned.

         Other  underwriting  expenses  increased  8.4% to $2.4  million for the
three  months  ended  September  30, 2003 from $2.2 million for the three months
ended  September  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 91.5 for the three months ended September 30, 2003
from 99.4 for the three months ended September 30, 2002. The loss ratio improved
to 61.0 for the three  months ended  September  30, 2003 from 67.7 for the three
months ended  September  30, 2002.  The expense  ratio,  which is  calculated by
dividing  the sum of ADAC and other  underwriting  expenses by premiums  earned,
improved to 30.5 for the three months ended September 30, 2003 from 31.7 for the
three months ended  September 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 $515,000  for the three  months  ended
September  30, 2003 from $35,000 for the three months ended  September 30, 2002,
primarily due to interest expense on the Company's Trust Preferred Securities.

         Income tax expense increased to $2.1 million for the three months ended
September  30, 2003 from $1.3 million for the three months ended  September  30,
2002, primarily due to improved underwriting profitability.

         The factors described above resulted in net income for the three months
ended September 30, 2003 of $4.6 million or $0.31 per share (basic and diluted),
compared  with $2.9 million or $0.25 per share (basic and diluted) for the three
months ended September 30, 2002.


Nine Months Ended September 30, 2003 and 2002

         Premiums  earned  increased 37.2% to $111.0 million for the nine months
ended  September  30, 2003,  compared  with $80.9 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 29.5% for the nine months ended
September 30, 2003 to $153.3 million,  compared with $118.4 million for the nine
months  ended  September  30,  2002.  The  increase  was  attributable  to  rate
increases, growth in new business and higher average exposures per policy.



                                    Page 13
<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 42.6% to $23.9 million for the nine months
ended September 30, 2003,  compared with $16.8 million for the nine months ended
September 30, 2002. The increase in ceded written  premiums was due primarily to
growth in gross written premiums and an approximately  11.0% 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 27.4% for the nine months ended September 30, 2003
to $129.4  million,  compared  with $101.6  million  for the nine  months  ended
September 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 $9.7 million for the nine months
ended  September 30, 2003,  compared with $8.8 million for the nine months ended
September  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 $1.9 million for the nine months ended
September 30, 2003,  compared to a net realized  investment loss of $0.2 million
for the nine months ended  September 30, 2002. The net realized  investment gain
for the nine months ended  September 30, 2003 was primarily  attributable to the
sale of certain of the Company's fixed-maturity securities, preferred stocks and
common  stocks.  The net  realized  investment  loss for the nine  months  ended
September 30, 2002 consists of $2.1 million in  other-than-temporary  impairment
write-downs on certain of the Company's  preferred  stocks and common stocks and
$0.4  million in net  realized  losses on the sale of  certain of the  Company's
common  stocks,  partially  offset by $2.3 million in net realized  gains on the
sale of certain of the Company's fixed-maturity securities.

         Losses and loss  adjustment  expenses  increased 28.7% to $68.8 million
for the nine months ended  September  30, 2003,  compared with $53.4 million for
the nine months ended  September  30,  2002.  The loss ratio for the nine months
ended September 30, 2003 was 62.0,  compared with 66.1 for the nine months ended
September 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 $3.0 million for
the nine months  ended  September  30, 2003 and $1.2 million for the nine months
ended  September  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 and claims the
Company received related to Hurricane Isabel which occurred in the third quarter
of 2003.

         Amortization of deferred policy  acquisition  costs ("ADAC")  increased
36.1% to $27.6  million for the nine months ended  September 30, 2003 from $20.3
million for the nine months  ended  September  30,  2002,  primarily  due to the
growth in premiums earned.

         Other  underwriting  expenses  increased  12.2% to $6.8 million for the
nine months ended September 30, 2003 from $6.0 million for the nine months ended
September 30, 2002,  primarily  due to increases in salary and benefit  expenses
associated with the hiring of additional underwriting and marketing personnel.


                                    Page 14
<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 93.0 for the nine months ended  September 30, 2003
from 98.6 for the nine months ended  September 30, 2002. The loss ratio improved
to 62.0 for the nine  months  ended  September  30,  2003 from 66.1 for the nine
months ended  September  30, 2002.  The expense  ratio,  which is  calculated by
dividing  the sum of ADAC and other  underwriting  expenses by premiums  earned,
improved to 31.0 for the nine months ended  September 30, 2003 from 32.5 for the
nine months ended  September  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 $1.2 million for the nine months ended
September  30, 2003 from $0.1  million for the nine months ended  September  30,
2002  primarily  due to  interest  expense  on  the  Company's  Trust  Preferred
Securities.

         Income tax expense  increased to $5.4 million for the nine months ended
September  30, 2003 from $2.7  million for the nine months ended  September  30,
2002, primarily due to improved underwriting profitability.

         The factors  described above resulted in net income for the nine months
ended September 30, 2003 of $12.2 million or $0.83 per basic share and $0.82 per
diluted share, compared with $6.6 million or $0.57 per basic share and $0.56 per
diluted share for the nine months ended September 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 19 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.




                                    Page 15
<PAGE>






                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES


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

         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.

         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.


                                    Page 16
<PAGE>




                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES


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


         In the first  quarter  of 2003,  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.   The  original  policies  covered  products  and  completed
operations only and were issued with a $500,000 indemnity policy aggregate limit
of liability.  As of September 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.

         In October 2003, the Eighteenth  Circuit Court in the State of Michigan
entered a judgment of $4.9 million against one of the Company's insureds,  which
judgment the Company has appealed.  While the Company issued only a $1.0 million
policy  limit,  the insured  could  allege the Company is  responsible  for this
entire judgment.  This policy is applicable to the Company's reinsurance program
that  provides  coverage  for losses  and loss  adjustment  expenses,  including
judgments  in excess  of  policy  limits,  of $2.75  million  in excess of $0.25
million.  The Company believes that the judgment has no merit and the likelihood
of a loss in excess  of the  Company's  reinsurers  limit of  liability  of $3.0
million is remote.  Therefore, the Company has not included any amounts over its
reinsurers  limit of  liability  of $3.0  million in its unpaid  losses and loss
adjustment expenses at September 30, 2003.

         During the first nine months of 2003,  the Company  increased  incurred
losses and loss  adjustment  expenses  attributable  to insured  events of prior
years by $2.0  million.  This  increase was primarily due to an increase of $1.9
million in  estimates  for loss and loss  adjustment  expense  reserves  for the
exited  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,  the Company
increased its  estimates  for loss and loss  adjustment  expense  reserves.  The
remaining  increase  of $0.1  million in  incurred  losses  and loss  adjustment
expenses  attributable to insured events of prior years related to the Company's
core commercial property and casualty lines of business. This increase consisted
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 $2.2 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 September 30, 2003, PAGI's capital
structure consisted of common stockholders' equity of $127.6 million and Company
Obligated  Mandatorily  Redeemable  Preferred  Securities of  Subsidiary  Trusts
Holding Solely Junior Subordinated  Debentures ("Trust Preferred Securities") 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. 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


                                    Page 17
<PAGE>


                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES


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


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 proceeds from these debentures
will be used to support  growth in the Company's  insurance  operations  and for
general corporate purposes.

         On July 1, 2003, the Company adopted 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.  The Company's Trust Preferred
Securities are classified as a liability on the Consolidated  Balance Sheets and
the related  distributions  are recorded as interest expense on the Consolidated
Statements of Operations,  which is in accordance with SFAS 150. Therefore,  the
adoption of SFAS 150 had no effect on the Company's financial statements.

         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 nine months  ended
September 30, 2003, ordinary dividends paid by Penn-America Insurance Company to
PAGI were $1,900,000.  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
September  30, 2003,  Penn-America  Insurance  Company's  statutory  surplus was
$118,452,000, and included unassigned surplus of $32,912,000.




                                    Page 18
<PAGE>




                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES


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


         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 $37.3 million for the nine months ended September 30, 2003 and $36.0 million
for the nine months ended September 30, 2002.

         Net cash used by investing  activities  was $29.4  million for the nine
months  ended  September  30, 2003 and $20.3  million for the nine months  ended
September 30, 2002.

         Net cash  provided by financing  activities  was $13.8  million for the
nine months  ended  September  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 $1.1 million for the nine months ended
September 30, 2002.


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 September  30, 2003,  the Company held a
total of $354.4 million in cash and investments.  Of this amount,  cash and cash
equivalents  represented  $31.5  million,   equity  securities,   consisting  of
preferred  stocks  and mutual  funds  invested  in  adjustable  rate  mortgages,
represented $11.6 million,  and  fixed-maturity  securities  represented  $311.3
million.





                                    Page 19
<PAGE>




                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>


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


         The Company's cash and investment portfolio mix as of September 30,
2003 was as follows:

Fixed maturities:
<S>                                                                                 <C>
       U.S. Treasury securities and obligations of U.S. government agencies         4.8%
       Corporate securities                                                        27.0
       Mortgage-backed securities                                                  23.2
       Other structured securities                                                  9.2
       Municipal securities                                                        23.6
                                                                                -------
Total fixed maturities                                                             87.8
Cash and cash equivalents                                                           8.9
Equity securities                                                                   3.3
                                                                                -------
                                                                                  100.0%
                                                                                =======
</TABLE>



         The Company's  fixed-maturity  portfolio of $311.3 million was 87.8% of
the total cash and investments as of September 30, 2003.  Approximately 94.3% 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 of  preferred  stocks and  mutual  funds  invested  in  adjustable  rate
mortgages,  were  $11.6  million  or 3.3% of total  cash and  investments  as of
September 30, 2003.

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

      "AAA"                                                  56.8%
      "AA"                                                   15.0
      "A"                                                    22.5
      "BBB"                                                   4.8
      Below "BBB"                                             0.9
                                                          --------
                                                           100.0%
                                                          ========

         As of September 30, 2003, the  investment  portfolio  contained  $114.8
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
September 30, 2003. The quality of the Company's  mortgage-backed,  asset-backed
and collateralized mortgage obligations as of September 30, 2003 was as follows:


      "AAA"                                                   87.6%
      "AA"                                                    10.7
      "A"                                                      1.2
      "BBB"                                                    0.5
                                                           -------
                                                             100.0%
                                                           =======


                                    Page 20
<PAGE>


                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES



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

         As of September 30, 2003, the Company's  investment portfolio contained
corporate  fixed-maturity  and preferred stock securities with a market value of
$100.4 million. A summary of these securities by industry segment is as follows:

      Financial institutions                                 29.8%
      Consumer, non-cyclical                                 21.9
      Utilities                                              20.7
      Communications                                         10.7
      Industrial                                              4.7
      Consumer, cyclical                                      3.9
      Energy                                                  3.4
      Basic materials                                         3.3
      Technology                                              1.6
                                                          -----------
                                                            100.0%
                                                          ===========

         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 September 30, 2003:

<TABLE>
<CAPTION>

                                 Number                                          Gross               Six             Between Six
                                   of            Fair           Book          Unrealized            Months           And Twelve
(in thousands)                 Securities       Value          Value            Losses             or Less             Months
----------------------------------------------------------------------------------------------------------------------------------

<S>                                  <C>        <C>           <C>                 <C>                   <C>           <C>
Fixed-maturity securities            36         $ 55,909      $ 56,544            $ 635                 $ 609         $ 26
Equity securities                     3            8,257         8,282               25                    25           --

</TABLE>

         As of  September  30, 2003,  the  Company's  fixed-maturity  investment
portfolio had 36 securities with $635 thousand of gross  unrealized  losses.  No
single issuer had a gross unrealized loss position of greater than $175 thousand
or 3% of its original cost.  The Company held two preferred  stocks and a mutual
fund invested in adjustable rate mortgages,  included in equity securities, in a
gross unrealized loss position totaling $25,000 as of September 30, 2003.





                                    Page 21
<PAGE>


                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES



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


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 22
<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.  As of September  30,  2003,  the Company had
fixed-maturity,  preferred  stock and mutual funds  invested in adjustable  rate
mortgages with a market value of $322.9 million at September 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 September 30, 2003 has not materially  changed from that identified
at December 31, 2002.

         As of September  30, 2003,  the Company  believes  that its exposure to
equity price risk is minimal.  The market value of its equity securities,  which
consist of  preferred  stocks and  mutual  funds  invested  in  adjustable  rate
mortgages,  are primarily  effected by changes in interest rates. As of December
31, 2002,  the  Company's  exposure to equity price risk was its  investment  in
common stocks,  consisting  solely of  exchange-traded  funds.  The Company sold
these securities in the first quarter of 2003.



                                    Page 23
<PAGE>




                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

                             Controls and Procedures


         As of  September  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
September 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 September 30, 2003.






                                    Page 24
<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 - None

Item 5.       Other Information - None

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 July 2,  2003,  the  Company  filed a current  report on Form 8-K
            announcing  the  registrant  was added to the Russell 2000 Index,  a
            benchmark  of  small-capitalization  stocks  compiled  by the  Frank
            Russell Company,  one of the world's leading  investment  management
            and advisory firms.

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

            On August 15, 2003,  the Company filed a current  report on Form 8-K
            announcing the availability of its second 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.

            On September 2, 2003, the Company filed a current report on Form 8-K
            announcing a presentation by Jon S. Saltzman,  President and CEO and
            Joseph F.  Morris,  Sr. Vice  President,  CFO and  Treasurer  at two
            industry conferences.



                                    Page 25
<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: November 6, 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 26
<PAGE>


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

          10        Endorsement   to  Property  and  Casualty   Excess  of  Loss
                    Reinsurance   Agreement   between   Penn-America   Insurance
                    Company,    Penn-Star   Insurance   Company   and   American
                    Re-Insurance  Company  effective May 1, 2003 to December 31,
                    2003.

          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 November 3, 2003
                    in  accordance  with  18  U.S.C.  Section  1350  as  adopted
                    pursuant to Section 906 of Sarbanes-Oxley Act of 2002.




                                      E-1