<PAGE>
_____________________________________________________________________________
_____________________________________________________________________________

                     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, 1997

                                     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 0-23181

                              PAULA FINANCIAL
           (Exact name of registrant as specified in its charter)

          DELAWARE                             95-4640368
(State or other jurisdiction of              (I.R.S. Employer
incorporation or organization)             identification number)

                               PAULA FINANCIAL
                      300 NORTH LAKE AVENUE, SUITE 300
                              PASADENA, CA 91101
                  (Address of principle executive offices)

                                (626) 304-0401
             (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 shorter period that the 
registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days.

                                Yes     No  X
                                   ---     ---

Indicate the number of shares outstanding of each of the issuer's classes of 
common stock, as of the latest practicable date.  Number of shares of Common 
Stock, $.01 par value, outstanding as of close of business on November 06, 
1997: 6,322,127 shares.

_____________________________________________________________________________
_____________________________________________________________________________



<PAGE>

PAULA FINANCIAL
INDEX TO FORM 10-Q

PART I. FINANCIAL INFORMATION                                  PAGE
                                                               ----
Item 1.  Financial Statements

         Condensed consolidated balance sheets as of 
            December 31, 1996 and September 30, 1997 
            (unaudited) ..........................................2

         Condensed consolidated statements of income for the 
            three and nine months ended September 30, 1996 and 
            1997 (unaudited) .....................................3

         Condensed consolidated statements of cash flows for the 
            nine months ended September 30, 1996 and 1997
            (unaudited) ..........................................4

         Notes to condensed consolidated financial statements 
            for the three and nine months ended September 30, 
            1997 (unaudited) .....................................5

Item 2. Management's Discussion and Analysis of Consolidated 
          Financial Condition and Results of Operations...........7

PART II. OTHER INFORMATION

     Item 2.  Changes in Securities...............................11
     Item 5.  Other Information...................................11
     Item 6.  Exhibits and Reports on Form 8-K....................11

SIGNATURE.........................................................12





<PAGE>

PART I    FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

                       PAULA FINANCIAL AND SUBSIDIARIES
                    CONDENSED CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>


                                             December 31,   September 30,
                   ASSETS                        1996            1997
                                             ------------   -------------
                                                  (*)        (Unaudited)
<S>                                           <C>             <C>
Investments:
  Fixed maturities, available for sale, 
    at market (amortized cost: 1996, 
    $80,252; 1997, $87,496)
                                               $  81,371       $  89,027
  Equity securities, at market
    Common stock (cost: 1996, $734; 
      1997, $408)                                    777             405
  Preferred stock (cost: 1996, $1,014; 
      1997, $3,025)                                1,033           3,119
  Invested cash, at cost (approximates 
      market)                                      3,611          10,396
                                             -----------    ------------
    Total investments                             86,792         102,947
                                             -----------    ------------

Cash (restricted: 1996, $832; 1997, $2,616)        7,096           8,832
Accounts receivable, net of allowance 
  for uncollectible accounts (1996, 
  $500; 1997, $563)                               11,553          20,252
Reinsurance recoverable on paid and unpaid 
  losses and loss adjustment expenses              6,599           6,758
Deferred income taxes                              4,829           4,392
Other assets                                       8,258          10,378
                                             -----------    ------------
                                               $ 125,127       $ 153,559
                                             -----------    ------------
                                             -----------    ------------

       LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Unpaid losses and loss adjustment expenses     $  55,720       $  68,334
Unearned premiums                                 10,655          14,705
Accrued policyholder dividends                     3,981           4,022
Accounts payable and accrued expenses              6,067          13,113
Notes payable                                     11,279          12,029
Obligation on stock held by ESOP                  11,449          10,026
                                             -----------    ------------
                                                  99,151         122,229
                                             -----------    ------------

Series A Preferred Stock, convertible 
  and redeemable, $0.01 par value.  
  (Authorized 5,000,000 shares, issued
  941,177 in 1996 and 1997)                       21,402          23,663

STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value
  (Authorized 15,000,000 shares, issued:
  1996, 2,167,456; 1997, 2,032,076)                   22              20
Additional paid-in-capital                         1,748           1,732
Retained earnings                                 16,668          16,488
Net unrealized gain on investments                   778           1,135
                                             -----------    ------------
  Subtotal                                        19,216          19,375
Less:
Treasury stock, at cost (264,196 shares 
  in 1996 and 132,098 shares in 1997)             (2,972)         (1,486)
Obligation on stock held by ESOP                 (11,449)        (10,026)
Guarantee of notes payable of ESOP                  (221)           (196)
                                             -----------    ------------
  NET STOCKHOLDERS' EQUITY                         4,574           7,667
                                             -----------    ------------
                                              $  125,127      $  153,559
                                             -----------    ------------
                                             -----------    ------------
</TABLE>

*  Derived from audited financial statements.

   See notes to condensed consolidated financial statements.

                                       2

<PAGE>

                         PAULA FINANCIAL AND SUBSIDIARIES
                    CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                  (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>


                                       THREE MONTHS ENDED         NINE MONTHS ENDED
                                          SEPTEMBER 30,              SEPTEMBER 30,
                                         1996      1997             1996       1997
                                       --------  --------         --------   --------
                                          (Unaudited)                 (Unaudited)
<S>                                   <C>        <C>              <C>        <C>
INCOME:
Premiums earned:
   Workers' compensation              $ 15,961   $ 23,190         $ 37,721   $ 64,492
   Group medical and life                  212        228              683        703
Commissions                                998        890            3,060      2,607
Net investment income                    1,171      1,351            3,493      3,850
Net realized investment gains               13        173              440        173
Other                                      180        182              695        529
                                      ---------  ---------        ---------  ---------
                                        18,535     26,014           46,092     72,354
                                      ---------  ---------        ---------  ---------
EXPENSES:
Losses and loss adjustment
   expenses incurred                    10,975     16,051           24,922     44,498
Dividends provided for policyholders       452        436            1,072        745
Operating                                5,950      7,620           16,434     22,372
                                      ---------  ---------        ---------  ---------
                                        17,377     24,107           42,428     67,615
                                      ---------  ---------        ---------  ---------

Income before income tax expense         1,158      1,907            3,664      4,739
Income tax expense                         215        636              658      1,174
                                      ---------  ---------        ---------  ---------
      NET INCOME                      $    943   $   1,271        $  3,006   $  3,565
                                      ---------  ---------        ---------  ---------
                                      ---------  ---------        ---------  ---------

Earnings per share                     $  0.23     $  0.31         $  0.74    $  0.87

Weighed average shares outstanding   4,048,586   4,119,312       4,049,206  4,118,603

</TABLE>

See notes to condensed consolidated financial statements.


                                       3

<PAGE>

                        PAULA FINANCIAL AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (IN THOUSANDS)

<TABLE>
<CAPTION>                                                           
                                                        NINE MONTHS ENDED
                                                           SEPTEMBER 30,
                                                         1996           1997
                                                    ----------     ----------
                                                            (UNAUDITED)
<S>                                                 <C>            <C>
CASH FLOW FROM OPERATING ACTIVITIES:
  Net income                                         $  3,006       $  3,565
ADJUSTMENTS TO RECONCILE NET INCOME TO 
  NET CASH PROVIDED BY  OPERATING 
  ACTIVITIES:
  Depreciation and amortization                         1,057            965
  Amortization of fixed maturity premium, net             626            477
  (Gain) loss on sale of property and equipment           (17)            21
  Gain on sales and calls of fixed maturities            (440)          (173)
  Increase in accounts receivable                      (1,798)        (8,699)
  Increase in reinsurance recoverable                     (79)          (159)
  (Increase) decrease in deferred income taxes           (215)           106
  Increase (decrease) in unpaid losses and loss 
     adjustment expenses                                 (790)        12,614
  Increase (decrease) in accrued policyholder 
     dividends                                           (705)            41
  Increase (decrease) in accounts payable and 
     accrued expenses                                  (2,264)         7,046
  Increase in unearned premiums                         5,535          4,050
  Other, net                                             (453)          (819)
                                                     ---------      ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES               3,463         19,035
                                                     ---------      ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sale of common and preferred stocks         -            499
  Proceeds from sale of available for sale fixed 
     maturities                                         12,564            -
  Proceeds from maturities and calls of 
     available for sale fixed maturities                 4,900        11,605
  Proceeds from sale of property and equipment             100            30
  Purchase of available for sale preferred and 
     common stock                                       (1,717)       (3,202)
  Purchase of available for sale fixed maturities      (17,717)      (19,326)
  Purchase of property and equipment                      (630)         (813)
  Purchase of insurance agency                            (138)          (41)
                                                     ---------      ---------
NET CASH USED IN INVESTING ACTIVITIES                   (2,638)      (11,248)
                                                     ---------      ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Borrowings under line of credit agreement, net         2,118         2,471
  Payments on notes payable                             (1,651)       (1,721)
  Issuance of notes payable                                453            -
  Sale of common stock                                     356            46
  Retirement of common stock                               (21)          (62)
                                                     ---------      ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES                1,255           734
                                                     ---------      ---------

NET INCREASE IN CASH AND INVESTED CASH                   2,080         8,521
Cash and invested cash at beginning of period            6,659        10,707
                                                     ---------      ---------
CASH AND INVESTED CASH AT END OF PERIOD               $  8,739      $ 19,228
                                                     ---------      ---------
                                                     ---------      ---------

</TABLE>

See notes to condensed consolidated financial statements.

                                       4

<PAGE>

                         PAULA FINANCIAL AND SUBSIDIARIES
               NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
        FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 31, 1997 (UNAUDITED)



Note A - Basis of Presentation

PAULA Financial and subsidiaries (the "Company") is an integrated insurance 
organization specializing in the production, underwriting and servicing of 
workers' compensation and accident and health insurance for agribusiness 
clients in California, Arizona, Oregon, Idaho, Alaska, Texas and Florida.  

The accompanying unaudited condensed consolidated financial statements of the 
Company have been prepared in accordance with generally accepted accounting 
principles ("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 footnotes required by GAAP for 
complete financial statements.  In the opinion of management, all 
adjustments, including normally occurring accruals, considered necessary for 
a fair presentation have been included.  

Operating results for the three and nine months ended September 30, 1997 are 
not necessarily indicative of the results to be expected for the year ended 
December 31, 1997.  For further information, refer to the consolidated 
financial statements and footnotes thereto included in the Company's 
Registration Statement on Form S-1, dated October 23, 1997.

Note B - New Accounting Standards

In February 1997, the Financial Accounting Standards Board ("FASB") issued 
Statement No. 128, "Earnings Per Share" ("SFAS 128"), which is effective for 
fiscal periods ending after December 15, 1997.  At that time, the Company 
will be required to change the method currently used to compute per share 
results and to restate all prior periods.  The impact of SFAS 128 is not 
expected to have a material effect on the Company's earnings per share.

In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive 
Income" ("SFAS 130").  SFAS 130 is effective for periods ending after 
December 15, 1997, including interim periods.  SFAS 130 requires companies to 
report comprehensive income and its components in a financial statement and 
display the accumulated balance of other comprehensive income separately from 
retained earnings and additional paid-in-capital.  Comprehensive income 
includes all changes in equity during a period except those resulting from 
investments by stockholders and distributions to stockholders.  The Company 
has not determined the impact of SFAS 130.

                                       5

<PAGE>

                         PAULA FINANCIAL AND SUBSIDIARIES
           NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

Also, in June 1997, the FASB issued Statement of Financial Accounting 
Standards, No. 131, "Disclosures about Segments of an Enterprise and Related 
Information" ("SFAS 131").  This statement specifies revised guidelines for 
determination of an entity's operating segments and the type and level of 
financial information to be disclosed.  SFAS 131 is effective for periods 
ending after December 15, 1997, including interim periods.  The Company has 
not determined the impact of SFAS 131.

Note C -  Initial Public Offering

On October 24, 1997, the Company completed its initial public offering by 
selling 2,400,314 shares of its common stock to the underwriters of the 
Company's initial public offering at $18.50 per share for net proceeds of 
$41,285,000 after deducting estimated expenses of the offering.

Note D - Pro Forma Capitalization Table

The following table sets forth the capitalization of the Company as of 
September 30, 1997 and as adjusted to reflect the use of proceeds as 
described in the Company's Registration Statement on Form S-1, dated October 
23, 1997:



                                              AS OF SEPT 30, 1997
                                           ACTUAL         AS ADJUSTED
                                         ----------      -------------
                                                 (IN THOUSANDS)

Notes payable                             $  12,029           $  196
Obligation on stock held by ESOP             10,026                0

Preferred stock, $0.01 par value, 
  5,000,000 shares authorized;
  941,177 shares outstanding 
  (0 as adjusted)                            23,663                0

Stockholders' Equity:
  Common stock, $0.01 par value, 
    15,000,000 shares authorized;
    2,032,076 shares issued 
    (6,322,127 as adjusted)                      20               63
  Additional paid-in-capital                  1,732           67,246
    Retained earnings                        16,488           14,454
    Net unrealized gain on investments        1,135            1,135
    Less:
       Treasury stock, at cost                1,486                0
       Guarantee of notes payable of ESOP       196              196
       Obligation on stock held by ESOP      10,026                0
                                           ---------         ---------
Net stockholders' equity                      7,667           82,702
                                           ---------         ---------

Total capitalization                         53,385           82,898
                                           ---------         ---------
                                           ---------         ---------

                                       6

<PAGE>

PART I   FINANCIAL INFORMATION

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS


OVERVIEW

The Company is a California-based specialty underwriter and distributor of 
commercial insurance products which, through its subsidiary PAULA Insurance 
Company ("PICO"), is one of the largest underwriters specializing in workers' 
compensation insurance products and services for the agribusiness industry.  
The Company sells complementary products through the Company's insurance 
agency subsidiaries (collectively "Pan Am"), including group health and life 
products provided by the Company's subsidiary PAULA Assurance Company 
("PACO"), and third-party claims administration services provided by the 
Company's subsidiary Pan Pacific Benefit Adminstrators, Inc. to self-insured 
group medical benefit plans.

The Company's revenues have consisted primarily of premiums earned from 
workers' compensation insurance underwriting, premiums earned from group 
medical insurance, commission income, net investment income and other income. 
 Premiums earned during a period represent the portion of direct premiums 
written for which all or a portion of the coverage period has expired, net of 
reinsurance. Premiums written for the three months ended September 30, 1997 
and 1996, were $25.5 million and $17.6 million, respectively.  Premiums 
written for the nine months ended September 30, 1997 and 1996, were $71.4 
million and $45.3 million, respectively.  Commission income is earned from 
Pan Am's distribution of insurance for insurers other than PICO and PACO.  
Net investment income represents earnings on the Company's investment 
portfolio, less investment expenses.  Other income consists of third party 
administration fees and other miscellaneous items.

The Company's expenses have consisted of losses and loss adjustment expenses 
incurred, dividends provided for policyholders and operating expenses.  
Losses include reserves for future payments for medical care and 
rehabilitation costs and indemnity payments for lost wages.  Loss adjustment 
expenses include expenses incurred in connection with services provided by 
third parties, including expenses of independent medical examinations, 
surveillance costs, and legal expenses as well as staff and related expenses 
incurred to administer and settle claims.  Loss and loss adjustment expenses 
are offset in part by estimated recoveries from reinsurers under excess of 
loss reinsurance treaties. Operating expenses include commission expenses to 
third party insurance agencies and other expenses that vary with premium 
volume, such as premium taxes, state guaranty fund assessments and 
underwriting and marketing expense, as well as general and administrative 
expenses, which are less closely related to premium volume.

RESULTS OF OPERATIONS:

PREMIUMS WRITTEN.  The Company's premiums written for the three months ended 
September 30, 1997 increased 45.1% to $25.5 million from $17.6 million for 
the comparable 1996 period. The Company's premiums written for the nine 
months ended September 30, 1997 increased 57.5% to $71.4 million from $45.3 
million for the comparable 1996 period.  The growth in premiums written was 
primarily attributable to the net addition of new policyholders and increased 
policyholder payrolls, partially offset by lower premium rates resulting from 
increased price competition.

                                       7

<PAGE>

PREMIUMS EARNED.  For the reasons described above for premiums written, the 
Company's premiums earned for the three months ended September 30, 1997 
increased 44.8% to $23.4 million from $16.2 million for comparable 1996 
period and increased 69.8% to $65.2 million for the nine months ended 
September 30, 1997 from $38.4 million for comparable 1996 period.

COMMISSION INCOME.  Commission income decreased 10.8% to $0.9 million for the 
three months ended September 30, 1997 from $1.0 million for the comparable 
1996 period.  Commission income decreased 14.8% to $2.6 million for the nine 
months ended September 30, 1997 from $3.1 million for the comparable 1996 
period.  The decrease was primarily the result of decreased premiums placed 
with carriers other than PICO and PACO, as a result of the Company's decision 
to focus on writing PICO workers' compensation insurance.

NET INVESTMENT INCOME.  Net investment income increased 15.4% to $1.4 million 
for the three months ended September 30, 1997 from $1.2 million for the 
comparable 1996 period.  Net investment income increased 10.2% to $3.9 
million for the nine months ended September 30, 1997 from $3.5 million for 
the comparable 1996 period.  The increase was the result of significant cash 
flow increases from PICO's underwriting activity.  Average invested assets 
increased to $93.4 million for the nine months ended September 30, 1997 from 
$83.0 million for the comparable period in 1996.  The Company's average yield 
on its portfolio was 5.5% for the nine month period in 1997 and 5.6% for the 
nine month period in 1996.

LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED.  The Company's loss ratio for 
the three months ended September 30, 1997 increased slightly to 68.5% from 
67.9% for the comparable 1996 period. The Company's loss ratio for the nine 
months ended September 30, 1997 increased to 68.3% from 64.9% for the 
comparable 1996 period. The Company's loss ratio for the nine months ended 
September 30, 1996 was positively impacted by net recoveries from loss and 
loss adjustment expense reserves for prior years of $3.3 million compared 
with a positive impact of net recoveries from prior years of $0.6 million for 
the comparable 1997 period.

DIVIDENDS PROVIDED FOR POLICYHOLDERS.  Dividends provided for policyholders 
decreased to $0.4 million for the three months ended September 30, 1997 from 
$0.5 million for the comparable 1996 period and decreased as a percentage of 
premiums earned for the three months ended September 30, 1997 to 1.9% from 
2.8% for the comparable 1996 period.  Dividends provided for policyholders 
decreased 30.5% to $0.7 million for the nine months ended September 30, 1997 
from $1.1 million for the comparable 1996 period and decreased as a 
percentage of premiums earned for the nine months ended September 30, 1997 to 
1.2% from 2.8% for the comparable 1996 period.  With the advent of open 
rating in California and an emphasis on, among other things, competitive 
pricing at inception, the Company's dividends provided for policyholders 
decreased significantly commencing in late 1995.

OPERATING EXPENSES.  Operating expenses increased 28.1% to $7.6 million for the
three months ended September 30, 1997 from $6.0 million for the comparable 1996
period primarily due to a $1.4 million increase in commissions paid to
unaffiliated agencies.  Operating expenses increased 36.1% to $22.4 million for
the nine months ended September 30, 1997 from $16.4 million for the comparable
1996 period largely due to a $3.6 million increase in variable expenses,
principally

                                       8

<PAGE>

commissions.  Fixed expenses also increased primarily due to an increase in 
salary related expenses of $1.8 million for the nine months ended September 
30, 1997 over the comparable 1996 period.

INCOME TAXES.  Income tax expense for the three months ended September 30, 
1997 increased to $0.6 million from $0.2 million for the comparable 1996 
period. Income tax expense for the nine months ended September 30, 1997 
increased to $1.2 million from $0.7 million for the comparable 1996 period.  
The effective combined income tax rates for the nine months ended September 
30, 1997 and 1996 were 24.8% and 18.0%, respectively.  These rates are below 
the combined statutory rate due to the significant portion of the Company's 
investment portfolio consisting of tax-exempt securities.

LIQUIDITY AND CAPITAL RESOURCES:

As a holding company, PAULA Financial's principal sources of funds are 
expense reimbursements and dividends from its operating subsidiaries, 
proceeds from loans, and proceeds from the sale of its capital stock.  PAULA 
Financial's principal uses of funds are payments of operating expenses and 
dividends to its stockholders and capital contributions to its subsidiaries.  
As of September 30, 1997, the primary obligations of the Company were $10.0 
million principal amount of borrowings under the Company's $15.0 million 
revolving credit agreement (the "Credit Agreement"), $1.9 million principal 
amount of notes due to former stockholders incurred to repurchase their 
Common Stock and a liability of $10.0 million representing the Company's 
commitments to repurchase Common Stock under the terms of the Company's ESOP. 
In October,  1997, following the consummation of the initial public 
offering, the Company's obligation to the ESOP was eliminated and the Company 
repaid approximately $10.3 million in principal and interest under the Credit 
Agreement and approximately $1.8 million of principal and interest on 
stockholder notes.  In addition, the Company contributed capital of 
$10,000,000 to PICO and anticipates contributing additional capital of 
approximately $11,800,000 to PICO over the next 18 months.

California law places significant restrictions on the ability of the 
insurance subsidiaries to pay dividends to PAULA Financial.  Based on these 
restrictions and the Company's results, as of December 31, 1996, PAULA 
Financial would be able to receive $5.4 million in dividends in 1997 from its 
insurance subsidiaries without obtaining prior regulatory approval from the 
California Department of Insurance ("DOI").

The Company expects to retain approximately $6.6 million from the proceeds of 
its initial public offering at the parent company level.  Management believes 
that this cash, funds available under the Credit Agreement, expense 
reimbursements and dividends from its operating subsidiaries will be 
sufficient to meet the parent company's operating cash needs for at least 
three years.

In March 1997, PAULA Financial entered into the Credit Agreement with a 
commercial bank providing PAULA Financial with a revolving credit facility of 
$15.0 million until December 31, 1999.  At such time PAULA Financial may 
elect to convert all or a portion of the borrowings then outstanding under 
such facility into a term loan payable in quarterly installments and maturing 
on December 31, 2001.  Each of PAULA Financial's non-insurance subsidiaries 
has guaranteed all obligations of PAULA Financial under the Credit Agreement. 
As of October 31, 1997, the entire amount of the credit facility was 
available to be drawn upon by the Company.

                                      9

<PAGE>

The Company's investments consist primarily of taxable and tax-exempt United 
States government and other investment grade securities and investment grade 
fixed maturity commercial paper and, to a lesser extent, equity securities.  
The Company does not generally invest in below investment grade fixed 
maturity securities, mortgage loans or real estate.  The Company has invested 
in the equity securities of two of its unaffiliated distributors.  The 
Company's investments in fixed maturity securities are carried at market 
value as such securities may be sold in response to changes in interest 
rates, tax planning considerations or other aspects of asset/liability 
management.  As of September 30, 1997, the carrying value of the Company's 
fixed maturity securities portfolio was $89.0 million and all of the 
portfolio was rated "A" or better by S&P, Moody's or Fitch.

California workers' compensation insurance companies are required to maintain 
some of their investments on deposit with the California DOI for the 
protection of policyholders.  Other states in which PICO is licensed have 
also required PICO to post deposits for the protection of those states' 
policyholders. Pursuant to applicable state laws, PICO had, as of September 
30, 1997, securities with a book value of $67.1 million held by authorized 
depositories pursuant to these deposit requirements.  In addition to the 
deposits, the Company's insurance company operating subsidiaries must 
maintain capital and surplus levels related to premiums written and the risks 
retained by the subsidiaries.







                                      10

<PAGE>

PART II. OTHER INFORMATION

Item 2:  Changes in Securities and Use of Proceeds.

         During the three months ended September 30, 1997, the Company issued:
         (i) 949,989 shares of Common Stock, par value $.01 per share 
         ("Shares") and 941,177 shares of Series A Preferred Stock, par value
         $.01 per share ("Preferred Shares") in exchange for the cancellation
         of its predecessor's outstanding equity securities upon its 
         reincorporation from California to Delaware; (ii) 949,989 Shares 
         pursuant to a stock split in the form of a one for one stock dividend
         on the Shares, and (iii) 2,000 Shares in consideration of services. 
         Such issuances were exempt from registration under Section 4(2) of 
         the Securities Act of 1933, as amended.

Item 5:  Other Information.

         On October 24, 1997 the Company completed its initial public offering
         by selling 2,400,314 Shares to the underwriters of the Company's IPO.

Item 6:  Exhibits and Reports on Form 8-K:

         (a)  Exhibits.

              11.  Computation of Earnings Per Share
              27.  Financial Data Schedule.

         (b)  Reports on Form 8-K.

              There were no reports filed on Form 8-K during the three months
              ended September 30, 1997.







                                     11

<PAGE>

                                 SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed
on its behalf by the undersigned thereunto duly authorized.

Date:  November 13, 1997               PAULA FINANCIAL

                                       By:  /s/ James A. Nicholson
                                            ----------------------
                                       Senior Vice President and Chief Financial
                                       Officer












                                      12