<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 JUNE 30, 2000

                                       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 principal 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 X No ___

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 July 31, 2000:
5,414,967 shares.

--------------------------------------------------------------------------------

<PAGE>

PAULA FINANCIAL
INDEX TO FORM 10-Q

<TABLE>
<CAPTION>

PART I. FINANCIAL INFORMATION                                                                 PAGE
<S>                                                                                           <C>
Item 1.  Financial Statements

           Condensed consolidated balance sheets as of
                  June 30, 2000 and December 31, 1999 (unaudited) .............................2

           Condensed consolidated statements of operations for the three
                  and six months ended June 30, 2000 and 1999 (unaudited)......................3

           Condensed consolidated statements of comprehensive loss for
                  the three and six months ended June 30, 2000 and 1999 (unaudited)............4

            Condensed consolidated statements of cash flows for the six months
                  ended June 30, 2000 and 1999 (unaudited).....................................5

           Notes to condensed consolidated financial statements for the three
                  and six months ended June 30, 2000 (unaudited) ..............................6

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

Item 3.   Quantitative and Qualitative Disclosures about Market Risk ..........................11

PART II. OTHER INFORMATION

Item 4.   Submission of Matters to a Vote of Security Holders..................................12

Item 5.   Other Information....................................................................12

Item 6.   Exhibits and Reports on Form 8-K.....................................................12

SIGNATURE......................................................................................13
</TABLE>

<PAGE>

PART I   FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                        PAULA FINANCIAL AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)

<TABLE>
<CAPTION>

                                                                              June 30,            December 31,
                                 ASSETS                                         2000                  1999
                                                                          ------------------    -----------------
                                                                             (Unaudited)              (*)
<S>                                                                        <C>                   <C>
Investments:
   Fixed maturities, available for sale, at market
      (amortized cost: 2000, $167,289; 1999, $138,294)                            $ 160,315             $130,703
   Equity securities, at market
      Preferred stock (cost: 2000, $999; 1999, $999)                                    820                  828
      Common stock (cost: 2000, $3,252; 1999, $3,252)                                 2,666                2,357
   Invested cash, at cost (approximates market)                                       1,938                  948
                                                                          ------------------    -----------------
         Total investments                                                          165,739              134,836
                                                                          ------------------    -----------------

Cash (restricted: 2000, $2,417; 1999, $2,204)                                         4,190                6,323
Accounts receivable, net of allowance for uncollectible
     accounts (2000, $752; 1999, $758)                                               30,927               28,196
Reinsurance settlement receivable                                                        -                41,989
Reinsurance recoverable on paid and unpaid losses and
     loss adjustment expenses                                                        11,726               11,519
Deferred income taxes                                                                18,133               17,547
Other assets                                                                         19,702               19,408
                                                                          ------------------    -----------------
                                                                                   $250,417             $259,818
                                                                          ==================    =================

                  LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses                                         $152,679            $ 158,944
Unearned premiums                                                                    21,462               21,213
Accrued policyholder dividends                                                          407                  237
Accounts payable and accrued expenses                                                10,759               10,599
Notes payable                                                                        14,754               16,632
                                                                          ------------------    -----------------
                                                                                    200,061              207,625
                                                                          ------------------    -----------------

STOCKHOLDERS' EQUITY:
Preferred Stock, $0.01 par value.  Authorized 4,058,823
    shares, none issued and outstanding                                                   -                    -
Common stock, $0.01 par value
   (Authorized 15,000,000 shares, issued: 2000,
      6,336,867; 1999, 6,338,767)                                                        63                   63
Additional paid-in-capital                                                           67,370               67,386
Accumulated deficit                                                                  (6,042)              (4,488)
Accumulated other comprehensive loss:
   Net unrealized loss on investments                                                (5,108)              (5,715)
                                                                          ------------------    -----------------
                                                                                     56,283               57,246
Treasury stock, at cost (2000, 891,900; 1999, 631,300 shares)                        (5,927)              (5,053)
                                                                          ------------------    -----------------
                                                                                     50,356               52,193
                                                                          ------------------    -----------------
                                                                                   $250,417            $ 259,818
                                                                          ==================    =================
</TABLE>

*  Derived from audited financial statements.

    See notes to condensed consolidated financial statements.


                                       2
<PAGE>


                       PAULA FINANCIAL AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (In thousands, except share and per share data)


<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED                  SIX MONTHS ENDED
                                                         JUNE 30,                           JUNE 30,
                                                   2000           1999                 2000           1999
                                                ------------   ------------         -----------    -----------
                                                       (Unaudited)                         (Unaudited)
<S>                                                 <C>            <C>                 <C>            <C>
INCOME:
Premiums earned:
   Workers' compensation                            $31,732        $17,502             $59,147        $34,004
   Group medical and life                               261            217                 472            402
Commissions                                           1,302          1,144               2,723          1,976
Net investment income                                 2,666          2,401               5,173          5,141
Net realized investment losses                         (140)        (1,655)               (257)        (1,554)
Other                                                    69            138                 337            346
                                                ------------   ------------         -----------    -----------
                                                     35,890         19,747              67,595         40,315
                                                ------------   ------------         -----------    -----------

EXPENSES:
Losses and loss adjustment
   expenses incurred                                 26,781         11,176              50,207         22,414
Dividends provided for policyholders                    (71)           276                 177            427
Operating                                             9,452          6,874              18,997         14,051
                                                ------------   ------------         -----------    -----------
                                                     36,162         18,326              69,381         36,892
                                                ------------   ------------         -----------    -----------

Equity in net loss of unconsolidated
    affiliate                                         (564)          (186)               (658)          (270)
                                                ------------   ------------         -----------    -----------

Income (loss) before income taxes                     (836)          1,235             (2,444)          3,153
Income tax expense (benefit)                          (315)            390               (890)          1,029
                                                ------------   ------------         -----------    -----------
      NET INCOME (LOSS)                              ($521)           $845            ($1,554)         $2,124
                                                ============   ============         ===========    ===========

Earnings (loss) per share                           ($0.09)          $0.14             ($0.28)          $0.36

Weighted average shares outstanding               5,532,445      5,923,846           5,584,282      5,926,406

Earnings (loss) per share - assuming dilution       ($0.09)          $0.14             ($0.28)          $0.36

Weighted average shares outstanding -
     assuming dilution                            5,532,445      5,927,524           5,584,282      5,932,303

</TABLE>

See notes to condensed consolidated financial statements.


                                       3

<PAGE>


                        PAULA FINANCIAL AND SUBSIDIARIES
             CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                                 (In thousands)

<TABLE>
<CAPTION>

                                                    THREE MONTHS ENDED                  SIX MONTHS ENDED
                                                         JUNE 30,                           JUNE 30,
                                                   2000           1999                 2000           1999
                                                ------------   ------------         -----------    -----------
                                                       (Unaudited)                         (Unaudited)
<S>                                                  <C>           <C>                <C>             <C>
Net income (loss)                                    $(521)        $   845            $(1,554)        $ 2,124

Other comprehensive income (loss), net of tax:
   Unrealized gains (losses) on investments:
        Unrealized holding gains (losses)
             arising during period (tax
             impact: 2000: $215 and $260;
             1999: $1,083 and $1,624)                  419          (2,100)               505          (3,151)

        Reclassifications adjustment for gains
             (losses) included in net income
             (loss)(tax impact:  2000: $27 and
             $53; 1999:  $113 and $17)                  51             218                102             (34)
                                                ------------   ------------         -----------    -----------
                                                       470          (1,882)               607          (3,185)
                                                ------------   ------------         -----------    -----------
      COMPREHENSIVE LOSS                            $ (51)        $(1,037)           $  (947)        $(1,061)
                                                ============   ============         ===========    ===========
</TABLE>

See notes to condensed consolidated financial statements.


                                       4
<PAGE>

                        PAULA FINANCIAL AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>

                                                                                  SIX MONTHS ENDED
                                                                                      JUNE 30,
                                                                              2000                1999
                                                                         ----------------    ----------------
                                                                                     (Unaudited)
<S>                                                                             <C>                   <C>
CASH FLOW FROM OPERATING ACTIVITIES:
   Net income (loss)                                                            ($1,554)              $2,124
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY
   (USED IN) OPERATING ACTIVITIES:
   Depreciation and amortization                                                     857                 852
   Amortization of fixed maturity premium, net                                       325                 330
   Equity in net loss of unconsolidated affiliate                                    658                 270
   Loss on sale of property and equipment                                             19                  28
   Loss on sales and calls of investments                                            257               1,554
   (Increase) decrease in receivables                                             38,576            (23,294)
   (Increase) decrease in deferred income taxes                                    (899)               1,009
   Decrease in unpaid losses and loss adjustment expenses                        (6,265)                (17)
   Increase in accrued policyholder dividends                                        170                 344
   Increase (decrease) in accounts payable and accrued expenses                      160             (7,217)
   Increase in unearned premiums                                                     249                 607
   Other, net                                                                      (790)                 685
                                                                         ----------------    ----------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                               31,763            (22,725)
                                                                         ----------------    ----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from sale of available for sale fixed maturities                       5,007              20,231
   Proceeds from maturities and calls of available for sale fixed                  4,369               3,924
      maturities
   Proceeds from sale of property and equipment                                       91                  53
   Purchase of available for sale fixed maturities                              (38,951)             (4,980)
   Purchase of property and equipment                                              (654)             (1,005)
   Purchase of book of business                                                        -               (105)
   Purchase of insurance agency                                                        -             (3,049)
   Investment in unconsolidated affiliate                                              -             (5,500)
                                                                         ----------------    ----------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                             (30,138)               9,569
                                                                         ----------------    ----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Borrowings (repayments) under line of credit agreement, net                   (1,878)               7,470
   Issuance of notes payable                                                           -               1,659
   Payments on notes payable                                                           -                (43)
   Dividends paid                                                                      -               (474)
   Repurchase of common stock                                                      (874)               (241)
   Retirement of common stock                                                       (16)                 (2)
   Issuance of common stock                                                            -                   2
                                                                         ----------------    ----------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                              (2,768)               8,371
                                                                         ----------------    ----------------

NET DECREASE IN CASH AND INVESTED CASH                                           (1,143)             (4,785)
Cash and invested cash at beginning of period                                      7,271               6,717
                                                                         ----------------    ----------------
CASH AND INVESTED CASH AT END OF PERIOD                                           $6,128              $1,932
                                                                         ================    ================
</TABLE>

See notes to condensed consolidated financial statements.


                                       5
<PAGE>


                        PAULA FINANCIAL AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
          FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 (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 primarily for
agribusiness clients in California, Arizona, Oregon, Idaho, Alaska, Texas,
Florida, New Mexico and Nevada.

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 six months ended June 30, 2000 are not
necessarily indicative of the results to be expected for the year ended December
31, 2000. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1999.

NOTE B - NEW ACCOUNTING STANDARDS NOT YET ADOPTED

In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and establishes standards for the reporting for
derivative instruments. It requires changes in the fair value of a derivative
instrument and the changes in fair value of assets or liabilities hedged by that
instrument to be included in income. To the extent that the hedge transaction is
effective, income is equally offset by both investments. Currently changes in
fair value of derivative instruments and hedged items are reported in net
unrealized gain (loss) on securities. The Company has not yet adopted SFAS 133.
However, the effect of adoption on the condensed consolidated financial
statements at June 30, 2000 would not have been material.


                                       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").

The Company's revenues consist 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.
Gross premiums written for the three months ended June 30, 2000 and 1999, were
$28.1 million and $28.7 million, respectively. Gross premiums written for the
six months ended June 30, 2000 and 1999, were $61.6 million and $58.2 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 consist 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 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.


                                       7

<PAGE>


The following combined ratio information is derived from the insurance
subsidiaries, PICO and PACO, GAAP operating results:

<TABLE>
<CAPTION>

                                               Three Months Ended                          Six Months Ended
                                                      Adjusted     Reported                     Adjusted     Reported
                                       6/30/00         6/30/99      6/30/99         6/30/00      6/30/99      6/30/99
                                      ----------- ------------- -----------     ----------- ------------- -----------
<S>                                       <C>           <C>         <C>             <C>           <C>         <C>
Loss ratio                                 83.7%         78.3%       63.1%           84.2%         82.1%       65.1%
Expense ratio                              24.1%         28.1%       32.7%           25.6%         29.0%       34.0%
Policyholder dividend ratio               (0.2)%          1.0%        1.6%            0.3%          0.8%        1.2%
                                      ----------- ------------- -----------     ----------- ------------- -----------

Combined ratio                            107.6%        107.4%       97.4%          110.1%        111.9%      100.3%
                                      =========== ============= ===========     =========== ============= ===========
</TABLE>

The "Adjusted 6/30/99" columns exclude the impact of low layer reinsurance
treaties which were not in effect in 2000.

The Company's revenues are seasonal, and have tended to be highest in the second
and third quarters of each year. This is due primarily to the seasonality of the
size of the workforce employed by the Company's agribusiness clients.

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED
TO THE THREE AND SIX MONTHS ENDED JUNE 30, 1999:

GROSS PREMIUMS WRITTEN. The Company's gross premiums written for the three
months ended June 30, 2000 decreased 2.1% to $28.1 million from $28.7 million
for the comparable 1999 period. The Company's gross premiums written for the six
months ended June 30, 2000 increased 5.7% to $61.6 million from $58.2 million
for the comparable 1999 period. The decrease in gross premiums written in the
second quarter relates primarily to a 15.7% decline in California writings. For
the first six months of 2000, a 5.4% decline in California gross premiums
written was offset by an increase in premiums written in other states.

NET PREMIUMS EARNED. The Company's net premiums earned for the three months
ended June 30, 2000 increased 80.6% to $32.0 million from $17.7 million for
comparable 1999 period and increased 73.3% to $59.6 million for the six
months ended June 30, 2000 from $34.4 million for the comparable 1999 period.
Net premiums earned in the 1999 periods were reduced by $11.2 million in the
three month period and $21.7 million in the six month period related to
premiums ceded under low layer reinsurance treaties which were not in effect
during the first six months of 2000.

COMMISSION INCOME. For the three months ended June 30, 2000 commission income
increased 13.8% to $1.3 million compared to $1.1 million for the comparable 1999
period. For the six months ended June 30, 2000 commission income increased 37.8%
to $2.7 million compared to $2.0 million for the comparable 1999 period. The
increase is primarily a result of increased premiums placed with insurance
carriers other than PICO and PACO, largely due the acquisition of two new branch
offices effective May 1, 1999. Commissions paid to Pan Am on PICO and PACO
business are eliminated in the Company's consolidated financial statements.


                                       8

<PAGE>


NET INVESTMENT INCOME. Net investment income increased 11.0% to $2.7 million for
the three months ended June 30, 2000 from $2.4 million for the comparable 1999
period. Net investment income increased 0.6% to $5.2 million for the six months
ended June 30, 2000 from $5.1 million for the comparable 1999 period. Average
invested assets decreased to $158.5 million for the six months ended June 30,
2000 from $166.7 million for the comparable period in 1999. The Company's
average yield on its portfolio was 6.5% for the six month period in 2000 and
6.2% for the six month period in 1999. The 2000 average invested assets and
yield calculations are skewed by a significant increase in invested assets in
January 2000 following the receipt of the $42.0 million reinsurance settlement.

NET REALIZED INVESTMENT LOSSES. Net realized investment losses were $0.1 million
for the three months ended June 30, 2000 compared to $1.7 million for the
comparable 1999 period. Net realized investment losses were $0.3 million for the
six months ended June 30, 2000 compared to $1.6 million for the comparable 1999
period. The net realized investment losses in the 1999 periods are due to the
realization of an "other than temporary" decline of $1.6 million on a
non-performing investment in the second quarter of 1999.

LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED. The Company's net loss ratio for
the three months ended June 30, 2000 was 83.7% compared to an adjusted loss
ratio for the 1999 period of 78.3%. The adjusted loss ratio for the 1999 period
does not include the impact of low layer reinsurance treaties, which were not in
effect in the 2000 period. While the 1999 adjusted loss ratio includes the
benefit of 2.2% in favorable development on prior accident years, the 2000 loss
ratio includes the negative impact of 4.0% in unfavorable development on prior
accident years.

The Company's net loss ratio for the six months ended June 30, 2000 was 84.2%
compared to an adjusted loss ratio for the 1999 period of 82.1%. The adjusted
loss ratio for the 1999 period does not include the impact of low layer
reinsurance treaties, which were not in effect in the 2000 period. While the
1999 adjusted loss ratio includes the benefit of 1.5% in favorable development
on prior accident years, the 2000 loss ratio includes the negative impact of
2.9% in unfavorable development on prior accident years.

OPERATING EXPENSES. Operating expenses increased 37.5% to $9.5 million for the
three months ended June 30, 2000 from $6.9 million for the comparable 1999
period. Operating expenses in 1999 included the benefit of $2.4 million in
ceding commissions received in conjunction with a low layer reinsurance
arrangement that was not in effect in 2000. The GAAP expense ratio for the
insurance company operations was 24.1% for the three months ended June 30, 2000
compared to a 1999 adjusted expense ratio of 28.1%. The adjusted expense ratio
for the 1999 period does not include the impact of low layer reinsurance
treaties, which were not in effect in the 2000 period. Expense reductions at the
insurance companies were largely offset by increased expenses associated with
Pan Am's acquisition of two new branch offices effective May 1, 1999.

Operating expenses increased 35.2% to $19.0 million for the six months ended
June 30, 2000 from $14.1 million for the comparable 1999 period. Operating
expenses in 1999 include the benefit of $4.6 million in ceding commissions
received in conjunction with low layer reinsurance treaties which were not in
effect in 2000. The GAAP expense ratio for the insurance company operations
was 25.6% for the six months ended June 30, 2000 compared to a 1999 adjusted
expense ratio of 29.0%. The adjusted expense ratio for the 1999 period does
not include the impact of low layer

                                       9

<PAGE>


reinsurance treaties, which were not in effect in the 2000 period. Expense
reductions at the insurance companies were largely offset by increased
expenses associated with Pan Am's acquisition of two new branch offices
effective May 1, 1999.

INCOME TAXES. Income tax benefit for the three months ended June 30, 2000 was
$0.3 million compared to an income tax expense of $0.4 million for the
comparable 1999 period. Income tax benefit for the six months ended June 30,
2000 was $0.9 million compared to an income tax expense of $1.0 million for the
comparable 1999 period. The effective combined income tax rates for the six
months ended June 30, 2000 and 1999 were (36.4%) and 32.6%, respectively.

EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATE. The equity in net loss of
unconsolidated affiliate represents the Company's share of the net loss of
Montlake Insurance Holdings, LLC. The Company is accounting for this investment
using the equity method.

LIQUIDITY AND CAPITAL RESOURCES:

As a holding company, PAULA Financial's principal sources of funds are dividends
and expense reimbursements from its operating subsidiaries, proceeds from the
sale of its capital stock and income from its investment portfolio. PAULA
Financial's principal uses of funds are capital contributions to its
subsidiaries, payment of operating expenses, investments in new ventures,
dividends to its stockholders and repurchase of Company common stock.

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 for the year ended December 31, 1999, PAULA Financial
would be able to receive $1.9 million in dividends in 2000 from its insurance
subsidiaries without obtaining prior regulatory approval from the California
Department of Insurance ("DOI"). No dividends were paid by the insurance
subsidiaries to PAULA Financial during the six months ended June 30, 2000. In
the second quarter of 2000, PAULA Financial received cash dividends totaling
$950,000 from Pan Am.

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. On December 31, 1999, PAULA Financial
elected to convert all the borrowings into a term loan payable in quarterly
installments and maturing on December 31, 2001. At the date of conversion, the
line of credit had an outstanding balance of $15.0 million. As of July 31, 2000
balances under the term loan bear interest at 11.5%. The use of the Credit
Agreement was for repurchase of the Company's common stock and investments in
new ventures.

Since December 31, 1999, the Company has been out of compliance with certain
of its debt covenants. However, PAULA Financial is current on the term loan's
regularly scheduled principal and interest payments. Under the terms of the
Credit Agreement, the bank has the right to call the note and demand its
immediate payment. The Company continues to negotiate with the bank in an
effort to obtain waivers with respect to its non-compliance and to amend the
Credit Agreement, including modifications of certain covenants. If these
covenants are not amended, it is probable that the Company will continue to
be out of compliance with these covenants on measurement dates at least
through December 31, 2000. Each of PAULA Financial's non-insurance
subsidiaries has guaranteed all obligations of PAULA Financial under the
Credit Agreement.

                                     10

<PAGE>

As of June 30, 2000, the carrying value of the Company's fixed maturity
securities portfolio was $160.3 million of which $160.0 million was rated. Of
the rated fixed maturities portfolio 95.4% was rated "A" or better by S&P,
Moody's or Fitch. 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.

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 June 30, 2000, securities with a par
value of $153.2 million held by authorized depositories pursuant to these
deposit requirements. In addition to the deposits, the Company's insurance
company operating subsidiaries must maintain regulated levels of capital and
surplus in relation to premiums written and the risks retained by the
subsidiaries.

FORWARD-LOOKING STATEMENTS

In connection with, and because it desires to take advantage of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company cautions readers to recognize the existence of certain forward-looking
statements in this Form 10-Q and in any other statement made by, or on behalf
of, the Company, whether or not in future filings with the Securities and
Exchange Commission. Forward-looking statements are statements not based on
historical information and which relate to future operations, strategies,
financial results or other developments. Some forward-looking statements may be
identified by the use of terms such as "expects," "believes," "anticipates,"
"intends," or "judgment." Forward-looking statements are necessarily based upon
estimates and assumptions that are inherently subject to significant business,
economic and competitive uncertainties, many of which are beyond the Company's
control and many of which, with respect to future business decisions, are
subject to change. Examples of such uncertainties and contingencies include,
among other important factors, those affecting the insurance industry in
general, such as the economic and interest rate environment, legislative and
regulatory developments and market pricing and competitive trends, and those
relating specifically to the Company and its businesses, such as the level of
its insurance premiums and fee income, the claims experience of its insurance
products, the performance of its investment portfolio, acquisitions of companies
or blocks of business, and the ratings by major rating organizations of its
insurance subsidiaries. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those expressed
in any forward-looking statements made by, or on behalf of, the Company.
The Company disclaims any obligation to update forward-looking information.

Item 3:  Quantitative and Qualitative Disclosures About Market Risk.

There have been no significant changes since the annual report Form 10-K filed
for the year ended December 31, 1999.


                                       11

<PAGE>


PART II.  OTHER INFORMATION

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

The Company held its 2000 Annual Meeting of Stockholders on Wednesday, May 24,
2000 for the purpose of electing two directors. At the Meeting, the Company's
stockholders re-elected Messrs. Jeffrey A. Snider and John B. Clinton to the
Company's Board of Directors for three year terms.

The election of directors was the only matter before the Meeting. The following
table shows the number of shares voted for each nominee for director and the
number of shares withheld for each director:

<TABLE>
<CAPTION>

NOMINEE                   SHARES VOTED FOR ELECTION          SHARES WITHHELD
-------                   -------------------------          ---------------
<S>                               <C>                             <C>
Jeffrey A. Snider                 5,174,162                       6,280
John B. Clinton                   5,168,147                      12,295
</TABLE>

The term of office of each of the following directors continued after the
meeting held May 24, 2000. They are Messrs. Jerry M. Miller, James A. Nicholson
and Ronald W. Waisner. Mr. Robert A. Puccinelli has resigned his position as
Director. (See Part II, Item 5: Other Information).

Item 5:  Other Information.

In May 2000, the Board of Directors made the decision to reduce the number of
directors from six to five. Consequently, Mr. Robert A. Puccinelli, an outside
director, resigned as a director for the Company. Mr. Puccinelli's resignation
was not a result of any disagreement with the Company, its management or the
Board of Directors.

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 June 30, 2000.


                                       12

<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:  August 11, 2000                     PAULA FINANCIAL



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


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