content: 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, 1998
  
                                         OR
  
  ( )  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR 15 (d)  OF THE  SECURITIES
       EXCHANGE ACT OF 1934
  
  For the transition period from _____________ to _____________
  
  Commission file number                 0-22316
  
                              Penn-America Group, Inc.
               (Exact name of registrant as specified in its charter)
  
  
                 Pennsylvania                                23-2731409
       (State or other jurisdiction of        (I.R.S. Employer Identification No.)
        incorporation or organization)
  
  
                  420 South York Road, Hatboro, Pennsylvania 19040
            (Address of principal executive offices, including zip code)
  
  
                                   (215) 443-3600
                (Registrant's telephone number, including area code)
  
  
  Indicate by check mark whether the registrant (1) has filed all reports required
  to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
  the  preceding  12 months  (or for such other  period  that the  registrant  was
  required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
  requirements for the past 90 days. Yes X No .
  
  At November 12, 1998,  9,416,799 shares of the registrant's  common stock,  $.01
  par value, were outstanding.
  
                                       Page 1
  <PAGE>
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                                        Index
  
                                                                       Page Number
  
  Part I - Financial Information
  
           Consolidated Unaudited Balance Sheets - September 30, 1998 and
                  December 31, 1997                                          3
  
           Consolidated Unaudited Statements of Earnings - For the three
                  and nine months ended September 30, 1998 and 1997          4
  
           Consolidated Unaudited Statement of Stockholders' Equity -
                  For the nine months ended September 30, 1998               5
  
           Consolidated Unaudited Statements of Cash Flows -
                  For the nine months ended September 30, 1998 and 1997      6
  
           Notes to Unaudited Consolidated Financial Statements              7
  
           Management's Discussion and Analysis of Financial Condition
                  and Results of Operations                                 10
  
  Part II - Other Information                                               19
  
  
                                       Page 2
  
  <PAGE>
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                             Consolidated Balance Sheets
                                     (Unaudited)
                   (In thousands, except share and per share data)
  
  <TABLE>
  <CAPTION>
  <S>                                                                                      <C>           <C>   
                                                                                          September 30,  December 31,
                                                                                              1998           1997
                                                                                           ---------      ---------
  ASSETS
  Investments:
      Fixed Maturities:
        Available for sale, at fair value (amortized cost 1998 $109,643; 1997 $89,185)     $ 112,746      $  89,979
        Held to maturity, at amortized cost (fair value 1998 $33,397; 1997 $47,034)           32,750         46,842
      Equity securities, at fair value (cost 1998 $24,742; 1997 $25,662)                      25,789         27,380
      Short-term investments, at cost, which approximates fair value                           9,660         11,455
                                                                                           ---------      ---------
        Total Investments                                                                    180,945        175,656
  Cash                                                                                         2,449          2,163
  Receivables:
      Accrued investment income                                                                2,304          1,973
      Premiums receivable, net                                                                11,575         12,414
      Reinsurance recoverable                                                                 19,083         16,605
                                                                                           ---------      ---------
        Total receivables                                                                     32,962         30,992
  Prepaid reinsurance premiums                                                                 2,808          3,065
  Deferred policy acquisition costs                                                            8,923          8,563
  Capital lease                                                                                2,076          1,865
  Deferred income taxes                                                                        2,127          2,302
  Income tax recoverable                                                                         660             40
  Other assets                                                                                   478            511
                                                                                           ---------      ---------
        Total assets                                                                       $ 233,428      $ 225,157
                                                                                           =========      =========
  
  LIABILITIES AND STOCKHOLDERS' EQUITY
  Liabilities:
    Unpaid losses and loss adjustment expenses                                             $  90,323      $  84,566
    Unearned premiums                                                                         35,692         36,173
    Accounts payable and accrued expenses                                                      1,252          2,338
    Capitalized lease obligations                                                              2,112          1,920
    Other liabilities                                                                          2,748          2,853
                                                                                           ---------      ---------
          Total liabilities                                                                  132,127        127,850
                                                                                           ---------      ---------
  
  Stockholders' equity:
    Preferred stock, $.01 par value; authorized 2,000,000 shares;
      none issued                                                                                 --             --
    Common stock, $.01 par value; authorized 20,000,000 shares;
       issued 9,921,576 and 9,883,384 shares in 1998
       and 1997, respectively                                                                     99             99
    Additional paid-in capital                                                                68,855         68,221
    Accumulated other comprehensive income                                                     2,699          1,649
    Retained earnings                                                                         33,258         27,849
                                                                                           ---------      ---------
                                                                                             104,911         97,818
    Treasury stock, at cost, 285,900 shares                                                   (3,217)            --
    Unearned compensation from restricted stock awards                                          (393)          (511)
                                                                                           ---------      ---------
          Total stockholders' equity                                                         101,301         97,307
                                                                                           ---------      ---------
  
          Total liabilities and stockholders' equity                                       $ 233,428      $ 225,157
                                                                                           =========      =========
  </TABLE>
  
       See accompanying notes to unaudited consolidated financial statements.
  
                                       Page 3
  
  <PAGE>
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                         Consolidated Statements of Earnings
                                     (Unaudited)
  
           For the three and nine months ended September 30, 1998 and 1997
                        (In thousands, except per share data)
  
  <TABLE>
  <CAPTION>
  <S>                                                       <C>           <C>          <C>          <C>     
                                                              Three months ended         Nine months ended 
                                                                 September 30,              September 30,
                                                              1998          1997          1998        1997
  Revenues:
      Premiums earned                                       $ 22,628      $ 23,950     $ 67,737     $ 67,883
      Net investment income                                    2,667         2,521        8,191        6,446
      Net realized investment (losses) gains                    (418)          479           25          588
                                                            --------      --------     --------     --------
        Total revenues                                        24,877        26,950       75,953       74,917
                                                            --------      --------     --------     --------
  
  Losses and expenses:
      Losses and loss adjustment expenses                     14,338        14,876       42,483       42,483
      Amortization of deferred policy acquisition costs        6,351         6,425       18,775       18,396
      Other underwriting expenses                              1,693         1,639        4,867        4,254
      Interest expense                                            44            91          133          477
                                                            --------      --------     --------     --------
        Total losses and expenses                             22,426        23,031       66,258       65,610
                                                            --------      --------     --------     --------
  
  Earnings before income tax                                   2,451         3,919        9,695        9,307
  
  Income tax                                                     667         1,331        2,806        2,951
                                                            --------      --------     --------     --------
  Net earnings                                              $  1,784      $  2,588     $  6,889     $  6,356
                                                            ========      ========     ========     ========
  
  Net earnings per share
           Basic
                                                            $   0.18      $   0.28     $   0.70     $   0.84
           Diluted
                                                            $   0.18      $   0.28     $   0.69     $   0.83
  
  Weighted average number of shares outstanding
           Basic
                                                               9,797         9,134        9,859        7,534
           Diluted
                                                               9,873         9,223        9,962        7,613
  
  Cash dividends per share
                                                            $   0.05      $   0.04     $   0.15     $   0.12
  </TABLE>
  
       See accompanying notes to unaudited consolidated financial statements.
                                       Page 4
  
  
  <PAGE>
  
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
                   Consolidated Statement of Stockholders' Equity
                                     (Unaudited)
  
                    For the nine months ended September 30, 1998
                          (In thousands, except share data)
  <TABLE>
  <CAPTION>
  <S>                                     <C>            <C>      <C>         <C>         <C>       <C>         <C>       <C>
                                                                                                                 Unearned
                                                                                                                Compensation
                                                                              Accumulated                           From
                                                                   Additional    Other                           Restricted
                                                Common Stock         Paid-In  Comprehensive Retained  Treasury      Stock
                                             Shares      Amount      Capital     Income     Earnings    Stock      Awards      Total
  Balance at December 31, 1997              9,883,384      $ 99     $ 68,221    $ 1,649     $ 27,849       --     $ (511)    $ 97,307
  Net earnings                                                                                 6,889                            6,889
  Other comprehensive income, net of tax:
    Unrealized gains on investments, net of
     reclassification adjustment                                                  1,050                                         1,050
                                                                                                                             --------
  Comprehensive income                                                                                                          7,939
                                                                                                                             --------
  
  Issuance of common stock                     38,192                    634                                                      634
  Amortization of compensation expense
     from restricted stock awards                                                                                    118          118
  Cash dividends paid                                                                         (1,480)                          (1,480)
  Purchase of treasury stock                                                                           (3,217)                 (3,217)
                                           -------------------------------------------------------------------------------------------
  Balance at September 30, 1998             9,921,576      $ 99     $ 68,855    $ 2,699     $ 33,258  $(3,217)    $ (393)   $ 101,301
                                           ===========================================================================================
  </TABLE>
  
       See accompanying notes to unaudited consolidated financial statements.
  
                                       Page 5
  
  <PAGE>
  
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                        Consolidated Statements of Cash Flows
                                     (Unaudited)
  
                For the nine months ended September 30, 1998 and 1997
                                   (In thousands)
  <TABLE>
  <CAPTION>
  <S>                                                                                 <C>           <C>     
                                                                                 Nine months ended September 30,
                                                                                         1998          1997
  Cash flows from operating activities:
      Net earnings                                                                    $  6,889      $  6,356
      Adjustments to reconcile net earnings to net cash provided by
        Operating activities:
          Amortization and depreciation expense                                            511           292
          Net realized investment gains                                                    (25)         (588)
          Deferred income tax                                                             (421)         (295)
          Net decrease in premiums receivable, prepaid reinsurance premiums
             and unearned premiums                                                         615         3,516
          Net increase in unpaid losses and loss adjustment expenses
             and reinsurance recoverable                                                 3,279         9,629
          (Increase) in:
             Accrued investment income                                                    (331)         (336)
             Deferred policy acquisition costs                                            (360)       (1,371)
             Income tax recoverable                                                       (620)         (303)
             Other assets                                                                  (71)          (79)
          Increase (decrease) in:
             Accounts payable and accrued expenses                                      (1,086)          231
             Other liabilities                                                            (105)        1,666
                                                                                      --------      --------
                Net cash provided by operating activities                                8,275        18,718
                                                                                      --------      --------
  
  Cash flows from investing activities:
      Purchases of equity securities                                                   (15,539)      (16,484)
      Purchases of fixed maturities available for sale                                 (45,514)      (53,426)
      Purchases of fixed maturities held to maturity                                    (1,015)       (2,027)
      Proceeds from sales of equity securities                                          16,431         3,412
      Proceeds from sales and maturities of fixed maturities available for sale         24,743         9,046
      Proceeds from maturities and calls of fixed maturities held to maturity           15,268        11,591
      Change in short-term investments                                                   1,795         7,000
                                                                                      --------      --------
          Net cash used by investing activities                                         (3,831)      (40,888)
                                                                                      --------      --------
  
  Cash flows from financing activities:
      Issuance of common stock                                                             634        45,897
      Purchase of treasury stock                                                        (3,217)           --
      Principal payments on note payable, bank                                              --        (9,000)
      Principal payments on capital lease obligations                                      (95)          (83)
      Dividends paid                                                                    (1,480)         (933)
                                                                                      --------      --------
          Net cash (used) provided by financing activities                              (4,158)       35,881
                                                                                      --------      --------
  
  Increase in cash                                                                         286        13,711
  Cash, beginning of period                                                              2,163         2,979
                                                                                      --------      --------
  Cash, end of period                                                                 $  2,449      $ 16,690
                                                                                      ========      ========
  
  Supplemental  disclosure of cash flow  information:
     Cash paid during the period for:
        Interest                                                                      $    133      $     31
        Income tax                                                                       3,800         3,196
  Supplemental non-cash disclosure:
       Cost of securities transferred from available for sale to held to maturity           --      $  8,002
       Additional capitalization of capital lease obligation and asset                $    287            --
  </TABLE>
  
       See accompanying notes to unaudited consolidated financial statements.
  
                                       Page 6
  <PAGE>
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
                Notes to Unaudited Consolidated Financial Statements
  
  Note 1 - Organization and Basis of Presentation
  
           Penn-America Group, Inc. ("PAGI") is an insurance holding company whose
  principal  asset  is  the  common  stock  of  Penn-America   Insurance   Company
  ("Penn-America").  The "Company" refers to PAGI and Penn-America,  as well as to
  Penn-America's wholly-owned subsidiary,  Penn-Star Insurance Company. On July 1,
  1998, Penn-America Insurance Company and its wholly-owned subsidiary,  Penn-Star
  Insurance Company,  entered into an inter-company  pooling agreement whereby all
  premiums  written  would be pooled  amongst both  companies in a ratio of 65% to
  Penn-America  and  35%  to  Penn-Star.  Previously,  the  two  companies  had  a
  reinsurance  agreement,  whereby  all  automobile  premiums  were  reinsured  by
  Penn-Star.   This  agreement  was  cancelled   effective  June  30,  1998.  Penn
  Independent  Corporation ("Penn Independent") currently owns approximately 32.0%
  of the outstanding common stock of PAGI.
  
           The accompanying  unaudited consolidated financial statements should be
  read in conjunction  with the financial  statements and notes for the year ended
  December 31,  1997.  In the opinion of  management,  the  financial  information
  reflects all adjustments (consisting only of normal recurring adjustments) which
  are  necessary for a fair  presentation  of the  Company's  financial  position,
  results of  operations,  and cash flows for the interim  periods.  The Company's
  results of operations for interim periods are not necessarily  indicative of the
  results to be expected for the entire year.
  
  Note 2 - Reinsurance
  
           Premiums earned are net of amounts ceded to reinsurers of $1.9 and $2.0
  million for the three months ended  September  30, 1998 and 1997,  respectively.
  Losses and loss  adjustment  expenses are net of amounts  ceded to reinsurers of
  $1.9 million and $1.5 million for the three months ended  September 30, 1998 and
  1997, respectively.
  
           Premiums  earned are net of amounts ceded to reinsurers of $5.7 million
  for both the nine months ended September 30, 1998 and September 30, 1997. Losses
  and loss  adjustment  expenses are net of amounts  ceded to  reinsurers  of $5.1
  million  and $5.2  million  for the nine  months  ended  September  30, 1998 and
  September 30, 1997, respectively.
  
  Note 3 - Comprehensive Income
  
           In 1997, the Financial  Accounting Standards Board issued SFAS No. 130,
  "Comprehensive  Income".  This statement was  implemented  retroactively  by the
  Company in 1998. The statement requires that an enterprise (a) classify items of
  other  comprehensive  income by their  nature in a financial  statement  and (b)
  display the accumulated  balance of other  comprehensive  income separately from
  retained  earnings and  additional  paid-in  capital in the equity  section of a
  statement of financial position.  Accumulated other comprehensive  income of the
  Company consists solely of net unrealized gains on investment securities.
  
  
                                       Page 7
  <PAGE>
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
                Notes to Unaudited Consolidated Financial Statements
                                     (continued)
  
  The following are components of other comprehensive income (in thousands):
  <TABLE>
  <CAPTION>
                                                                    Nine months ended September 30, 1998
                                                            Before Tax               Tax                Net of Tax
                                                              Amount               Expense                Amount
  <S>                                                       <C>                    <C>                   <C>    
  Unrealized gains on investments:
      Unrealized holding gains arising
        during period                                       $ 1,664                $ (598)               $ 1,066
      Less: reclassification adjustment for
        gains realized in net income                            (25)                    9                    (16)
                                                         ------------------------------------------------------------
  Other comprehensive income                                $ 1,639                $ (589)               $ 1,050
                                                         =============================================================
  
  
                                                                    Nine months ended September 30, 1997
                                                            Before Tax               Tax                Net of Tax
                                                              Amount               Expense                Amount
  Unrealized gains on investments:
      Unrealized holding gains arising
        during period                                       $ 1,493                $ (508)                 $ 985
      Less: reclassification adjustment for
        gains realized in net income                           (588)                  200                   (388)
      Plus:  accretion of net loss on fixed
        maturities transferred to held to maturity               30                   (10)                    20
                                                         ------------------------------------------------------------
  Other comprehensive income                                  $ 935                $ (318)                 $ 617
                                                         =============================================================
  </TABLE>
  
  Comprehensive  income  for  the  three  months  ended  September  30,  1998  was
  $2,676,000 and included net income of $1,784,000 and other comprehensive income,
  net of tax, of $892,000.
  
  Comprehensive  income for the three and nine months ended September 30, 1997 was
  $3,050,000  and  $6,973,000 and included net income of $2,588,000 and $6,356,000
  and  other  comprehensive   income,  net  of  tax,  of  $463,000  and  $617,000,
  respectively.
  
  
                                       Page 8
  
  <PAGE>
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
                Notes to Unaudited Consolidated Financial Statements
                                     (continued)
  
  
  Note 4 - Basic and Diluted Earnings Per Share
  
           The following is a reconciliation of the numerators and denominators of
  the basic and diluted earnings per share computations (in thousands,  except per
  share data):
  <TABLE>
  <CAPTION>
                                              Three months ended              Nine months ended
                                                 September 30,                   September 30,
                                             1998            1997            1998            1997
  <S>                                       <C>             <C>             <C>             <C>   
  Basic EPS:
  
  Net Earnings                              $1,784          $2,588          $6,889          $6,356
                                            ------          ------          ------          ------
  
  Weighted  average common
        shares outstanding                   9,797           9,134           9,859           7,534
                                            ------          ------          ------          ------
  
  Basic EPS                                 $ 0.18          $ 0.28          $ 0.70          $ 0.84
                                            ======          ======          ======          ======
  
  Diluted EPS:
  
  Net Earnings                              $1,784          $2,588          $6,889          $6,356
                                            ------          ------          ------          ------
  
  Weighted  average common
        shares outstanding                   9,797           9,134           9,859           7,534
  
  Additional shares outstanding
        after the assumed exercise
        of options by applying the
        treasury stock method                   76              89             103              79
                                            ------          ------          ------          ------
  
  Total weighted average common
       shares outstanding                    9,873           9,223           9,962           7,613
                                            ======          ======          ======          ======
  
  Diluted EPS                               $ 0.18          $ 0.28          $ 0.69          $ 0.83
                                            ======          ======          ======          ======
  </TABLE>
  
  
                                       Page 9
  <PAGE>
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
             Management's Discussion and Analysis of Financial Condition
                              and Results of Operations
  
  Results of Operations
  
  Three Months Ended September 30, 1998 and 1997
  
           Gross written  premiums  decreased 10.6% to $24.3 million for the three
  months ended  September 30, 1998,  from $27.2 million for the three months ended
  September 30, 1997. The decrease resulted from a 38.6% decline in personal lines
  automobile  gross written premiums to $5.9 million that is partially offset by a
  4.6% increase in commercial lines gross written  premiums to $18.5 million.  The
  slow down in the growth in the  commercial  lines,  from a five year  cumulative
  average  growth of 27.7% to 4.6% for the quarter,  is due to the continued  soft
  market  conditions in this segment.  The decrease in personal  lines  automobile
  gross  written  premium  was due to  continued  actions  taken by the Company to
  improve  profitability.  Specifically,  the Company  terminated its relationship
  with one agent and reduced two agents'  personal  lines  automobile  writings by
  approximately 38.0%. Effective July 1, 1998, the Company filed and received from
  the State of California a 14.2% rate  reduction in its  non-standard  automobile
  rates.  This  action  was  taken  in order to  remain  competitive  with the new
  competition  that has entered this marketplace at lower premium rates. One agent
  accounts for all the California automobile premiums of $3.6 million, or 61.4% of
  the $5.9 million total personal automobile direct written premium written by the
  Company for the three months ended September 30, 1998.
  
           Net written  premiums  decreased  10.6% to $22.5  million for the three
  months ended  September 30, 1998,  from $25.2 million for the three months ended
  September 30, 1997. During the same periods,  net premiums earned decreased 5.5%
  to $22.6 million,  from $24.0 million.  Net premiums earned decreased  primarily
  due to the decline in personal lines automobile gross written premiums in 1998.
  
           Net  investment  income  increased  5.8% to $2.7  million for the three
  months ended  September  30, 1998,  from $2.5 million for the three months ended
  September 30, 1997. This increase  resulted  principally from growth in invested
  assets  funded  primarily  by cash flows from  operating  activities,  partially
  offset by an increase in the  investment in tax-exempt  municipal  securities to
  approximately  $35.8  million at  September  30,  1998  compared  to $550,000 at
  September 30, 1997.
  
           The  tax-equivalent  average  investment  yield of the  fixed  maturity
  portfolio for the three months ended  September 30, 1998 was 6.51%,  compared to
  6.76% for the three months ended  September  30, 1997.  Net realized  investment
  losses before taxes were $418,000 for the three months ended September 30, 1998,
  as compared to net  realized  investment  gains before taxes of $479,000 for the
  three months ended September 30, 1997.
  
                                      Page 10
  <PAGE>
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
             Management's Discussion and Analysis of Financial Condition
                             and Results of Operations
                                     (continued)
  
  
           Losses and loss adjustment expenses decreased 3.6% to $14.3 million for
  the three months ended  September  30,  1998,  from $14.9  million for the three
  months  ended  September  30, 1997,  primarily  due to a decline in net premiums
  earned.
  
           Amortization of deferred policy  acquisition costs remained  relatively
  flat for the three months  ended  September  30, 1998,  as compared to the three
  months  ended  September  30,  1997 at $6.4  million  for  both  periods.  Other
  underwriting  expenses increased 3.3% to $1.7 million for the three months ended
  September  30,  1998,  compared  to $1.6  million  for the  three  months  ended
  September 30, 1997.
  
           The loss ratio  increased to 63.4% for the three months ended September
  30,  1998,  from  62.1% for the three  months  ended  September  30,  1997.  The
  statutory  expense ratio increased to 35.2% for the three months ended September
  30,  1998,  from  32.1% for the three  months  ended  September  30,  1997.  The
  principal causes for the increase in the expense ratio were the 10.6% decline in
  net premiums  written for the quarter  ended  September 30, 1998 compared to the
  same quarter in 1997, an increase in the commercial lines commission rate to 22%
  from 20%, effective May 1, 1998, and additional underwriting expenses related to
  the start-up of new programs.  The statutory  combined ratio  increased to 98.6%
  for the three months ended  September 30, 1998,  from 94.2% for the three months
  ended September 30, 1997.
  
           As a result of the factors  described  above,  the Company's net income
  for the three months ended September 30, 1998 decreased 31.0% to $1.8 million or
  $0.18 per share (basic and diluted), from $2.6 million or $0.28 per share (basic
  and diluted) for the three months ended September 30, 1997.
  
  Nine Months Ended September 30, 1998 and 1997
  
           Gross  written  premiums  decreased  7.4% to $72.9 million for the nine
  months ended  September  30, 1998,  from $78.7 million for the nine months ended
  September 30, 1997. The decrease resulted from a 33.8% decline in personal lines
  automobile gross written  premiums to $18.7 million,  which was partially offset
  by a 7.5% increase in commercial  lines gross written premiums to $54.2 million.
  The  decrease in personal  lines  automobile  gross  written  premium was due to
  actions taken by the Company to improve profitability. Specifically, the Company
  terminated  its  relationship  with one agent and reduced  two agents'  personal
  lines  automobile  writings  by  approximately  31.0%.  One agent in  California
  accounted  for all of the $11.2 million of  automobile  premium  written in that
  state, or 59.6% of the $18.8 million of all personal  automobile  direct written
  premium written by the Company in the first nine months of 1998.
  
  
                                      Page 11
  <PAGE>
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
             Management's Discussion and Analysis of Financial Condition
                             and Results of Operations
                                     (continued)
  
  
           Net  written  premiums  decreased  7.2% to $67.5  million  for the nine
  months ended  September  30, 1998,  from $72.8 million for the nine months ended
  September 30, 1997. During the same periods,  net premiums earned decreased 0.2%
  to $67.7 million from $67.9 million.
  
           Net  investment  income  increased  27.1% to $8.2  million for the nine
  months ended  September  30,  1998,  from $6.4 million for the nine months ended
  September 30, 1997. This increase  resulted  principally from growth in invested
  assets funded  primarily by the net proceeds from the Company's  secondary stock
  offering in July 1997, and from the net cash provided by operating activities.
  
           In  1998,  the  Company  purchased   approximately   $35.8  million  in
  tax-exempt  municipal  securities  as  compared  to  $550,000  held  during  the
  comparable  period,  September 30, 1997. The  tax-equivalent  average investment
  yield of the fixed  maturity  portfolio for the nine months ended  September 30,
  1998 was 6.58%,  compared to 6.59% for the nine months ended September 30, 1997.
  Net  realized  investment  gains  before  taxes were $25,000 for the nine months
  ended  September 30, 1998, as compared to net realized  investment  gains before
  taxes of $588,000 for the nine months ended September 30, 1997.
  
           Losses and loss  adjustment  expenses  were $42.5 million for both nine
  month periods ended September 30, 1998 and 1997, primarily due to the negligible
  decline in net premiums earned.
  
           Amortization  of deferred  policy  acquisition  costs increased 2.1% to
  $18.8 million for the nine months ended  September 30, 1998,  from $18.4 million
  for the nine months  ended  September  30, 1997.  The  increase is  attributable
  primarily to the increase in the commercial agents' commission to 22% from 20%.
  
           Other  underwriting  expenses  increased  14.4% to $4.9 million for the
  nine months  ended  September  30,  1998,  from $4.3 million for the nine months
  ended September 30, 1997. The increase is  attributable  to expenses  related to
  new programs and other non-recurring expenses of the holding company.
  
           The loss ratio  increased to 62.7% for the nine months ended  September
  30, 1998, from 62.6% for the nine months ended September 30, 1997. The statutory
  expense ratio  increased to 34.0% for the nine months ended  September 30, 1998,
  from 32.1% for the nine months ended September 30, 1997. The statutory  combined
  ratio  increased to 96.7% for the nine months  ended  September  30, 1998,  from
  94.7% for the nine months ended September 30, 1997.
  
           As a result of the factors  described  above,  the Company's net income
  for the nine months ended  September 30, 1998  increased 8.4% to $6.9 million or
  $0.70 per share  (basic)  and $0.69 per share  (diluted),  from $6.4  million or
  $0.84 per share (basic) and $0.83 per share  (diluted) for the nine months ended
  September 30, 1997.
  
  
                                      Page 12
  <PAGE>
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
             Management's Discussion and Analysis of Financial Condition
                             and Results of Operations
                                     (continued)
  
  
  
  Liquidity and Capital Resources
  
           PAGI is a holding  company,  the principal asset of which is the common
  stock of Penn-America. PAGI's cash flows depend primarily on dividends and other
  payments from Penn-America. PAGI uses these funds to pay (i) operating expenses,
  (ii)  taxes  and  other  payments  and  (iii)  dividends  to PAGI  stockholders.
  Penn-America's sources of funds consist primarily of premiums, investment income
  and  proceeds  from  sales and  redemptions  of  investments.  Funds are used by
  Penn-America  principally  to pay claims and  operating  expenses,  to  purchase
  investments and to make dividend and other payments to PAGI.
  
           Net cash  provided  by  operating  activities  decreased  55.8% to $8.3
  million for the nine months ended September 30, 1998, from $18.7 million for the
  nine months ended September 30, 1997, primarily due to the reduction in personal
  lines  automobile  gross  written  premiums  in 1998 and a slowing  of growth in
  commercial lines.
  
           Net cash used by  investing  activities  was $3.8  million for the nine
  months ended  September 30, 1998,  compared to $40.9 million for the nine months
  ended September 30, 1997. The decrease is primarily due to the investment of net
  proceeds of $35.9 million from a secondary offering in July 1997.
  
           Net cash used by  financing  activities  was $4.2  million for the nine
  months  ended  September  30, 1998,  compared to net cash  provided by financing
  activities of $35.9  million for the same period in 1997.  In 1998,  the Company
  purchased  285,900  shares on the open market for an average price of $11.21 and
  has recorded these shares as treasury shares.  The majority of the $35.9 million
  in cash  provided by  financing  activities  in 1997 was due to the net proceeds
  from the secondary offering in July of 1997.
  
           The  Company  believes  that it has  sufficient  liquidity  to meet its
  anticipated  insurance  obligations and operating and capital expenditure needs.
  The   Company's   investment   strategy   emphasizes   quality,   liquidity  and
  diversification, as well as total return. With respect to liquidity, the Company
  considers  liability  durations,  specifically  related to loss  reserves,  when
  determining  desired investment  maturities.  In addition,  maturities have been
  staggered   to  produce   cash  flows  for  loss   payments   and   reinvestment
  opportunities.  The  average  duration  of the fixed  maturity  portfolio  as of
  September 30, 1998 was approximately 3.37 years.
  
           The Company's  fixed maturity  portfolio of $145.5 million was 80.4% of
  the total investment  portfolio as of September 30, 1998.  Approximately  98% of
  these  securities  were  rated "A-" or better by  Standard & Poor's or  Moody's.
  Equities,  the majority of which consist of preferred stocks, were $25.8 million
  or 14.2% of total investments as of September 30, 1998.
  
                                      Page 13
  <PAGE>
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
  
             Management's Discussion and Analysis of Financial Condition
                              and Results of Operations
                                     (continued)
  
  
  
           As of September 30, 1998,  the  investment  portfolio  contained  $35.1
  million of  mortgage/asset-backed  obligations,  which  represents  19.4% of the
  total  investments as of September 30, 1998.  All of these  securities are "AAA"
  rated securities issued by government,  government-related  agencies or publicly
  held corporations,  are publicly traded, and have market values obtained from an
  independent  pricing service.  Changes in estimated cash flows due to changes in
  prepayment  assumptions from the original purchase assumptions are revised based
  on current interest rates and the economic environment. The Company had no other
  derivative  financial  instruments,  real estate or mortgages in the  investment
  portfolio as of September 30, 1998.
  
           The  principal  source of cash to use for the payment of  dividends  to
  PAGI's stockholders is dividends from Penn-America.  Penn-America is required by
  law to maintain a certain minimum surplus on a statutory basis and is subject to
  risk-based capital requirements and regulations under which payment of dividends
  from  statutory  surplus  may  require  prior  approval  from  the  Pennsylvania
  regulatory  authorities.  The  maximum  dividend  that  may be  paid  in 1998 by
  Penn-America  to PAGI  without  prior  approval  of  regulatory  authorities  is
  $9,531,000.
  
           In June of 1998,  the Board of Directors  initially  authorized a stock
  buy-back program of up to 350,000 shares of PAGI's stock.  This buy-back program
  was subsequently increased to 1,000,000 shares. Through September 30, 1998, PAGI
  has repurchased 285,900 shares of its stock on the open market and through block
  trades.  PAGI's  funding  source  for  this  program  will be  through  ordinary
  dividends from its insurance  subsidiary,  existing cash of the holding company,
  as well as draws from its revolving line of credit.  On September 30, 1998, PAGI
  completed a revolving  credit  facility  with First Union  National Bank for $25
  million,  which  will be used  for  general  corporate  purposes  and the  stock
  buy-back program.
  
           On August 4, 1998,  PAGI's  common stock began  trading on the New York
  Stock Exchange (NYSE) under the symbol "PNG."
  
  The Year 2000
  
           Introduction
  
           The "Year 2000", or Y2K, refers to the problems that automated  systems
  could  encounter  as the  year  2000  approaches  due  to a  computer  or  other
  electronic  device's inability to correctly register the year 2000 as just that,
  the year 2000, rather than the year 1900. In this regard,  the Company relies on
  its  existing  information  technology  systems  ("IT  systems")  to operate and
  monitor all major aspects of the  Company's  business,  including  underwriting,
  claims and various  financial  systems.  The Company  also  relies,  to a lesser
  extent, on the IT systems of its general
  
                                      Page 14
  <PAGE>
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
  
             Management's Discussion and Analysis of Financial Condition
                              and Results of Operations
                                     (continued)
  
  agents  and,  indirectly,  those  of the  producing  retail  insurance  brokers.
  Finally,  the  Company  relies on certain  critical  non-information  technology
  systems ("non-IT systems"), such as electricity, telephones, facsimile machines,
  heating and  air-conditioning and fire protection systems. Any disruption in the
  operation  of the IT and  non-IT  systems  of either  the  Company or any of its
  critical customers, vendors or suppliers could have a material adverse effect on
  the Company's business, results of operations or financial condition.
  
           State of Readiness
  
           IT systems:  In an effort to remediate the problems associated with the
  Year 2000, the Company,  in 1996,  evaluated all its computer codes to determine
  what software  programs would be affected by date-sensitive  fields.  After this
  identification  process was  completed,  the Company hired an outside  vendor to
  implement  the  recoding  that  was  required.  In July  of  1997,  the  Company
  successfully ran its first trial of all the revised programs.  While the Company
  cannot provide any guarantees,  the Company  believes that its programs are Year
  2000 compliant.  The Company,  however,  continues to run tests on a semi-annual
  basis to make sure the programs will function properly.
  
           The  Company's  IT systems have also been tested  against  hypothetical
  information supplied by its general agents. The IT systems are currently able to
  properly read the information provided.  Assuming the general agents don't alter
  their records, the Company reasonably believes that its IT systems will function
  properly.  To the extent the general  agents'  records  change,  the Company has
  demanded that the agents provide notice.
  
           The  Company's  management  information  systems  rely  primarily on an
  integrated property-casualty software package that is processed on an IBM AS/400
  computer system.  The system is leased from IBM and kept current or near current
  in both  hardware  and  operating  systems.  Currently,  the IBM AS/400 model is
  scheduled  in the fourth  quarter of 1998 to be  upgraded  to Version 4 which is
  reported by IBM to be fully Year 2000 compliant.
  
           The  Company  uses a Novell  Local Area  Network  (LAN) to connect  all
  employees to the computer system. The LAN is reported to be Year 2000 compliant.
  The LAN is used primarily for "service" applications, including word processing,
  spreadsheets,  and  e-mail.  The  majority  of the  LAN-based  applications  are
  Microsoft products and are current or near current in their software releases.
  
                                      Page 15
  <PAGE>
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
  
             Management's Discussion and Analysis of Financial Condition
                              and Results of Operations
                                     (continued)
  
           The LAN also consists of personal  computers  ("PCs") that are attached
  to a series of servers.  All PCs have been tested and  recognize  the Year 2000.
  The IT  Department  of the Company  supports  an  Internet  web site and various
  standalone  third  party PC  software  applications.  These  packages  are being
  assessed for any Year 2000 problems.  The Company  anticipates  completing  this
  assessment by the end of December, 1998, and believes that it will implement any
  necessary changes and complete any testing by June, 1999. The IT Department also
  supports FormMaker, a document management software package developed by DocuCorp
  which  is used  by the  majority  of  general  agents  to  produce  Penn-America
  policies.  FormMaker has been tested and, in its current release, is reported by
  DocuCorp to be Year 2000 compliant.
  
           Non-IT  systems:  The  Company  has  identified,  and  relies  on,  the
  following  non-IT  systems  in  its  daily  operations:  telephones,  voicemail,
  facsimile machines and heating and air conditioning and fire protection systems.
  The  telephone  system  was  tested  as  compliant.  The  voicemail  system  was
  identified  as  non-compliant  and  was  replaced  with a  compliant  system  in
  September of 1998. The heating and air conditioning  systems are currently being
  scheduled  for testing.  The Company has been informed that all of the remaining
  systems  will not be  effected  by the year 2000;  and the  Company is  awaiting
  written confirmation to this effect.
  
           Key Customers,  Suppliers and Vendors: As part of its remediation plan,
  the Company is  analyzing  the Year 2000  readiness  of the  Company's  critical
  outside  customers  (including  general  agents),  vendors and  suppliers.  Each
  department  of the Company was asked to identify key  customers,  suppliers  and
  vendors with whom we have an interdependent,  material business relationship. In
  September  of  1998,  the  Company  sent  approximately  188  surveys  to  those
  identified  customers/suppliers/vendors  to ask them:  to  provide  the  current
  status of their Y2K plan;  whether they will be  compliant;  and what plans they
  have in place in the event they will not be  compliant.  As of October 29, 1998,
  the responses  were as follows:  37 indicated  they were already  compliant;  63
  indicated  they  would be  compliant  before  January 1, 2000 and 88 have yet to
  respond.  For those who have yet to respond, a follow-up request will be sent in
  early November of 1998. For those that have indicated  their  compliance  within
  the next year, the Company intends to contact them quarterly  throughout 1999 to
  ascertain their compliance status.
  
           Despite all the  procedures  the Company has in place,  there can be no
  guarantee  that the systems of other  companies on which the Company's  business
  relies will be timely  converted,  or that failure to convert by another company
  or a conversion that is incompatible  with the Company's systems will not have a
  materially adverse effect on the Company and its operations.
  
                                      Page 16
  <PAGE>
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
             Management's Discussion and Analysis of Financial Condition
                              and Results of Operations
                                     (continued)
  
           Cost
  
           The  Company  incurred  approximately  $60,000 to recode  its  internal
  programs.  The costs  incurred  by the  Company  to test  significant  insurance
  hardware and software  that the Company  believes is compliant are (and will be)
  minimal as these costs are built in to the Company's  standard Disaster Recovery
  testing program.  The current standard testing costs  approximately  $28,000 per
  year. The Company does not separately  track the internal costs incurred for the
  Y2K project. Such costs are primarily related to payroll costs for the Company's
  information services personnel.  The Company also incurred an additional $13,000
  to upgrade its voicemail system.  Additional  expenses may arise in the upcoming
  year.  Management  believes  that at this  time  these  costs  will  approximate
  $10,000.
  
           Risks
  
           The risks  associated with the Company's  inability to resolve all Year
  2000  issues  include the  possibility  of system  failures  or  miscalculations
  causing disruption in operations including,  among other things, an inability to
  process transactions,  send invoices,  send or receive e-mail and voice mail, or
  conduct  similar  normal  business  activities.  Additionally,  failure of third
  parties upon whom the Company's  business relies to timely  remediate their Year
  2000  problems  could  result in  disruption  in the receipt and  processing  of
  insurance policies,  claims, payment of receivables and general problems related
  to the Company's daily operations.  If any of these contingencies were to occur,
  the  disruption in business  could be temporary or  permanent,  depending on the
  degree of failure.  Until the Company receives responses from a more significant
  number of the Company's agents and suppliers,  the overall risks associated with
  the Year 2000 remain  difficult to accurately  describe and quantify;  and there
  can be no  guarantee  that the Year 2000 issue will not have a material  adverse
  effect on the Company and its operations.
  
           If the Year 2000  problem is not solved by the Company and its business
  partners,  the Company could face  business  disruption,  operational  problems,
  financial losses, legal liability and similar risks to the business.
  These risks could have a material adverse impact on the Company.
  
           Contingency Plan
  
           The Company has not, to date,  completed a Year 2000 Contingency  Plan,
  though the Company  maintains a Disaster  Recovery Plan to address various other
  potential business  interruptions.  The current Disaster Recovery Plan addresses
  the availability and compatibility of
  
                                      Page 17
  <PAGE>
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
  
             Management's Discussion and Analysis of Financial Condition
                             and Results of Operations
                                     (continued)
  
  hardware  offsite that could be  immediately  placed into action by the Company.
  The Company in September of 1998,  tested the offsite facility and the operation
  of significant  insurance  software that had been made Year 2000  compliant,  as
  well as the operation of the offsite hardware. Under these test conditions,  all
  dates were rolled  forward to January 1, 2000.  The test results  indicated that
  the Company's  significant  insurance  related software would be compliant.  The
  testing  facility has indicated  that the majority of its hardware and equipment
  will be fully compliant by December,  1998. The testing  facility  further noted
  that it will not upgrade  certain of its systems until the first quarter of 1999
  so as to afford all  subscribers an  opportunity  to upgrade their systems.  The
  testing  facility is also  available if electric,  heat,  water,  telephones and
  office space should be required. Management is continuing to develop a more Year
  2000-related  Contingency  Plan as it  identifies  where  potential  operational
  failures may occur. The Company anticipates completing this plan by June, 1999.
  
           Readers are cautioned that forward-looking  statements contained in the
  Year 2000  disclosure  contained  herein should be read in conjunction  with the
  Company's  disclosure titled "Safe Harbor  Provisions of the Private  Securities
  Litigation Reform Act of 1995".  Forward-looking statements include, but are not
  limited to,  whether  the  Company  will timely  complete  its  remediation  and
  testing,  whether  remediation  will cost more than  anticipated,  the impact of
  redeploying  staff, and the effect of third parties on the Company's  ability to
  function after the century date change.
  
  
  New Accounting Standards
  
           In June 1998,  Statement of Financial  Accounting  Standards (SFAS) No.
  133, "Accounting for Derivative Instruments and Hedging Activities",  was issued
  and established standards for accounting and reporting of derivative instruments
  and hedging  activities.  The statement is effective for all fiscal  quarters of
  fiscal years  beginning  after June 15,  1999.  The Company is in the process of
  determining the effect, if any, of this statement on its financial statements.
  
  
  
  Safe Harbor Provisions
  
           Matters  discussed herein may constitute  "forward-looking  statements"
  (within the meaning of Section 27A of the  Securities Act and Section 21E of the
  Exchange Act). Such  forward-looking  information reflects the Company's current
  best estimates  regarding its future  operations.  The Company's  actual results
  could differ materially from those estimated in the  forward-looking  statements
  as a result of several factors, including those discussed herein.
  
                                      Page 18
  <PAGE>
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
                             PART II. OTHER INFORMATION
  
  
  
  Item 1.       Legal Proceedings - None
  
  Item 2.       Changes in Securities - None
  
  Item 3.       Default Upon Senior Securities - None
  
  Item 4.       Submission of Matters to a Vote by Security Holders - None
  
  Item 5.       Other Information - None
  
  Item 6.       Exhibits and Reports on Form 8-K - None
  
  
                                      page 19
  <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 13, 1998             By:  /s/ Jon S. Saltzman
        -----------------                  -------------------------------
                                           Jon S. Saltzman
                                           President and
                                           Chief Executive Officer
  
  
  
                                      By:  /s/ Rosemary R. Ferrero
                                           -------------------------------
                                           Rosemary R. Ferrero
                                           Principal Finance and
                                           Accounting Officer
  
  
  
                                      Page 20
metadata_documents: [{"type": "10-Q", "sequence": "1", "secsgml_size_bytes": 59663}]
metadata_filer: {"company-data": {"conformed-name": "PENN AMERICA GROUP INC", "cik": "0000910110", "assigned-sic": "6351", "irs-number": "232731409", "state-of-incorporation": "PA", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "10-Q", "act": "34", "file-number": "001-14309", "film-number": "98749411"}, "business-address": {"street1": "420 S YORK RD", "city": "HATBORO", "state": "PA", "zip": "19040", "phone": "2154433600"}, "mail-address": {"street1": "420 SOUTH YORK ROAD", "city": "HATBORO", "state": "PA", "zip": "19040"}}
text: 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, 1998
  
                                         OR
  
  ( )  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR 15 (d)  OF THE  SECURITIES
       EXCHANGE ACT OF 1934
  
  For the transition period from _____________ to _____________
  
  Commission file number                 0-22316
  
                              Penn-America Group, Inc.
               (Exact name of registrant as specified in its charter)
  
                 Pennsylvania                                23-2731409
       (State or other jurisdiction of        (I.R.S. Employer Identification No.)
        incorporation or organization)
  
                  420 South York Road, Hatboro, Pennsylvania 19040
            (Address of principal executive offices, including zip code)
  
                                   (215) 443-3600
                (Registrant's telephone number, including area code)
  
  Indicate by check mark whether the registrant (1) has filed all reports required
  to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
  the  preceding  12 months  (or for such other  period  that the  registrant  was
  required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
  requirements for the past 90 days. Yes X No .
  
  At November 12, 1998,  9,416,799 shares of the registrant's  common stock,  $.01
  par value, were outstanding.
  
                                       Page 1
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                                        Index
  
                                                                       Page Number
  
  Part I - Financial Information
  
           Consolidated Unaudited Balance Sheets - September 30, 1998 and
                  December 31, 1997                                          3
  
           Consolidated Unaudited Statements of Earnings - For the three
                  and nine months ended September 30, 1998 and 1997          4
  
           Consolidated Unaudited Statement of Stockholders' Equity -
                  For the nine months ended September 30, 1998               5
  
           Consolidated Unaudited Statements of Cash Flows -
                  For the nine months ended September 30, 1998 and 1997      6
  
           Notes to Unaudited Consolidated Financial Statements              7
  
           Management's Discussion and Analysis of Financial Condition
                  and Results of Operations                                 10
  
  Part II - Other Information                                               19
  
                                       Page 2
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                             Consolidated Balance Sheets
                                     (Unaudited)
                   (In thousands, except share and per share data)
  September 30,  December 31,
                                                                                              1998           1997
                                                                                           ---------      ---------
  ASSETS
  Investments:
      Fixed Maturities:
        Available for sale, at fair value (amortized cost 1998 $109,643; 1997 $89,185)     $ 112,746      $  89,979
        Held to maturity, at amortized cost (fair value 1998 $33,397; 1997 $47,034)           32,750         46,842
      Equity securities, at fair value (cost 1998 $24,742; 1997 $25,662)                      25,789         27,380
      Short-term investments, at cost, which approximates fair value                           9,660         11,455
                                                                                           ---------      ---------
        Total Investments                                                                    180,945        175,656
  Cash                                                                                         2,449          2,163
  Receivables:
      Accrued investment income                                                                2,304          1,973
      Premiums receivable, net                                                                11,575         12,414
      Reinsurance recoverable                                                                 19,083         16,605
                                                                                           ---------      ---------
        Total receivables                                                                     32,962         30,992
  Prepaid reinsurance premiums                                                                 2,808          3,065
  Deferred policy acquisition costs                                                            8,923          8,563
  Capital lease                                                                                2,076          1,865
  Deferred income taxes                                                                        2,127          2,302
  Income tax recoverable                                                                         660             40
  Other assets                                                                                   478            511
                                                                                           ---------      ---------
        Total assets                                                                       $ 233,428      $ 225,157
                                                                                           =========      =========
  
  LIABILITIES AND STOCKHOLDERS' EQUITY
  Liabilities:
    Unpaid losses and loss adjustment expenses                                             $  90,323      $  84,566
    Unearned premiums                                                                         35,692         36,173
    Accounts payable and accrued expenses                                                      1,252          2,338
    Capitalized lease obligations                                                              2,112          1,920
    Other liabilities                                                                          2,748          2,853
                                                                                           ---------      ---------
          Total liabilities                                                                  132,127        127,850
                                                                                           ---------      ---------
  
  Stockholders' equity:
    Preferred stock, $.01 par value; authorized 2,000,000 shares;
      none issued                                                                                 --             --
    Common stock, $.01 par value; authorized 20,000,000 shares;
       issued 9,921,576 and 9,883,384 shares in 1998
       and 1997, respectively                                                                     99             99
    Additional paid-in capital                                                                68,855         68,221
    Accumulated other comprehensive income                                                     2,699          1,649
    Retained earnings                                                                         33,258         27,849
                                                                                           ---------      ---------
                                                                                             104,911         97,818
    Treasury stock, at cost, 285,900 shares                                                   (3,217)            --
    Unearned compensation from restricted stock awards                                          (393)          (511)
                                                                                           ---------      ---------
          Total stockholders' equity                                                         101,301         97,307
                                                                                           ---------      ---------
  
          Total liabilities and stockholders' equity                                       $ 233,428      $ 225,157
                                                                                           =========      =========
  See accompanying notes to unaudited consolidated financial statements.
  
                                       Page 3
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                         Consolidated Statements of Earnings
                                     (Unaudited)
  
           For the three and nine months ended September 30, 1998 and 1997
                        (In thousands, except per share data)
  Three months ended         Nine months ended 
                                                                 September 30,              September 30,
                                                              1998          1997          1998        1997
  Revenues:
      Premiums earned                                       $ 22,628      $ 23,950     $ 67,737     $ 67,883
      Net investment income                                    2,667         2,521        8,191        6,446
      Net realized investment (losses) gains                    (418)          479           25          588
                                                            --------      --------     --------     --------
        Total revenues                                        24,877        26,950       75,953       74,917
                                                            --------      --------     --------     --------
  
  Losses and expenses:
      Losses and loss adjustment expenses                     14,338        14,876       42,483       42,483
      Amortization of deferred policy acquisition costs        6,351         6,425       18,775       18,396
      Other underwriting expenses                              1,693         1,639        4,867        4,254
      Interest expense                                            44            91          133          477
                                                            --------      --------     --------     --------
        Total losses and expenses                             22,426        23,031       66,258       65,610
                                                            --------      --------     --------     --------
  
  Earnings before income tax                                   2,451         3,919        9,695        9,307
  
  Income tax                                                     667         1,331        2,806        2,951
                                                            --------      --------     --------     --------
  Net earnings                                              $  1,784      $  2,588     $  6,889     $  6,356
                                                            ========      ========     ========     ========
  
  Net earnings per share
           Basic
                                                            $   0.18      $   0.28     $   0.70     $   0.84
           Diluted
                                                            $   0.18      $   0.28     $   0.69     $   0.83
  
  Weighted average number of shares outstanding
           Basic
                                                               9,797         9,134        9,859        7,534
           Diluted
                                                               9,873         9,223        9,962        7,613
  
  Cash dividends per share
                                                            $   0.05      $   0.04     $   0.15     $   0.12
  See accompanying notes to unaudited consolidated financial statements.
                                       Page 4
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
                   Consolidated Statement of Stockholders' Equity
                                     (Unaudited)
  
                    For the nine months ended September 30, 1998
                          (In thousands, except share data)
  Unearned
                                                                                                                Compensation
                                                                              Accumulated                           From
                                                                   Additional    Other                           Restricted
                                                Common Stock         Paid-In  Comprehensive Retained  Treasury      Stock
                                             Shares      Amount      Capital     Income     Earnings    Stock      Awards      Total
  Balance at December 31, 1997              9,883,384      $ 99     $ 68,221    $ 1,649     $ 27,849       --     $ (511)    $ 97,307
  Net earnings                                                                                 6,889                            6,889
  Other comprehensive income, net of tax:
    Unrealized gains on investments, net of
     reclassification adjustment                                                  1,050                                         1,050
                                                                                                                             --------
  Comprehensive income                                                                                                          7,939
                                                                                                                             --------
  
  Issuance of common stock                     38,192                    634                                                      634
  Amortization of compensation expense
     from restricted stock awards                                                                                    118          118
  Cash dividends paid                                                                         (1,480)                          (1,480)
  Purchase of treasury stock                                                                           (3,217)                 (3,217)
                                           -------------------------------------------------------------------------------------------
  Balance at September 30, 1998             9,921,576      $ 99     $ 68,855    $ 2,699     $ 33,258  $(3,217)    $ (393)   $ 101,301
                                           ===========================================================================================
  See accompanying notes to unaudited consolidated financial statements.
  
                                       Page 5
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                        Consolidated Statements of Cash Flows
                                     (Unaudited)
  
                For the nine months ended September 30, 1998 and 1997
                                   (In thousands)
  Nine months ended September 30,
                                                                                         1998          1997
  Cash flows from operating activities:
      Net earnings                                                                    $  6,889      $  6,356
      Adjustments to reconcile net earnings to net cash provided by
        Operating activities:
          Amortization and depreciation expense                                            511           292
          Net realized investment gains                                                    (25)         (588)
          Deferred income tax                                                             (421)         (295)
          Net decrease in premiums receivable, prepaid reinsurance premiums
             and unearned premiums                                                         615         3,516
          Net increase in unpaid losses and loss adjustment expenses
             and reinsurance recoverable                                                 3,279         9,629
          (Increase) in:
             Accrued investment income                                                    (331)         (336)
             Deferred policy acquisition costs                                            (360)       (1,371)
             Income tax recoverable                                                       (620)         (303)
             Other assets                                                                  (71)          (79)
          Increase (decrease) in:
             Accounts payable and accrued expenses                                      (1,086)          231
             Other liabilities                                                            (105)        1,666
                                                                                      --------      --------
                Net cash provided by operating activities                                8,275        18,718
                                                                                      --------      --------
  
  Cash flows from investing activities:
      Purchases of equity securities                                                   (15,539)      (16,484)
      Purchases of fixed maturities available for sale                                 (45,514)      (53,426)
      Purchases of fixed maturities held to maturity                                    (1,015)       (2,027)
      Proceeds from sales of equity securities                                          16,431         3,412
      Proceeds from sales and maturities of fixed maturities available for sale         24,743         9,046
      Proceeds from maturities and calls of fixed maturities held to maturity           15,268        11,591
      Change in short-term investments                                                   1,795         7,000
                                                                                      --------      --------
          Net cash used by investing activities                                         (3,831)      (40,888)
                                                                                      --------      --------
  
  Cash flows from financing activities:
      Issuance of common stock                                                             634        45,897
      Purchase of treasury stock                                                        (3,217)           --
      Principal payments on note payable, bank                                              --        (9,000)
      Principal payments on capital lease obligations                                      (95)          (83)
      Dividends paid                                                                    (1,480)         (933)
                                                                                      --------      --------
          Net cash (used) provided by financing activities                              (4,158)       35,881
                                                                                      --------      --------
  
  Increase in cash                                                                         286        13,711
  Cash, beginning of period                                                              2,163         2,979
                                                                                      --------      --------
  Cash, end of period                                                                 $  2,449      $ 16,690
                                                                                      ========      ========
  
  Supplemental  disclosure of cash flow  information:
     Cash paid during the period for:
        Interest                                                                      $    133      $     31
        Income tax                                                                       3,800         3,196
  Supplemental non-cash disclosure:
       Cost of securities transferred from available for sale to held to maturity           --      $  8,002
       Additional capitalization of capital lease obligation and asset                $    287            --
  See accompanying notes to unaudited consolidated financial statements.
  
                                       Page 6
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
                Notes to Unaudited Consolidated Financial Statements
  
  Note 1 - Organization and Basis of Presentation
  
           Penn-America Group, Inc. ("PAGI") is an insurance holding company whose
  principal  asset  is  the  common  stock  of  Penn-America   Insurance   Company
  ("Penn-America").  The "Company" refers to PAGI and Penn-America,  as well as to
  Penn-America's wholly-owned subsidiary,  Penn-Star Insurance Company. On July 1,
  1998, Penn-America Insurance Company and its wholly-owned subsidiary,  Penn-Star
  Insurance Company,  entered into an inter-company  pooling agreement whereby all
  premiums  written  would be pooled  amongst both  companies in a ratio of 65% to
  Penn-America  and  35%  to  Penn-Star.  Previously,  the  two  companies  had  a
  reinsurance  agreement,  whereby  all  automobile  premiums  were  reinsured  by
  Penn-Star.   This  agreement  was  cancelled   effective  June  30,  1998.  Penn
  Independent  Corporation ("Penn Independent") currently owns approximately 32.0%
  of the outstanding common stock of PAGI.
  
           The accompanying  unaudited consolidated financial statements should be
  read in conjunction  with the financial  statements and notes for the year ended
  December 31,  1997.  In the opinion of  management,  the  financial  information
  reflects all adjustments (consisting only of normal recurring adjustments) which
  are  necessary for a fair  presentation  of the  Company's  financial  position,
  results of  operations,  and cash flows for the interim  periods.  The Company's
  results of operations for interim periods are not necessarily  indicative of the
  results to be expected for the entire year.
  
  Note 2 - Reinsurance
  
           Premiums earned are net of amounts ceded to reinsurers of $1.9 and $2.0
  million for the three months ended  September  30, 1998 and 1997,  respectively.
  Losses and loss  adjustment  expenses are net of amounts  ceded to reinsurers of
  $1.9 million and $1.5 million for the three months ended  September 30, 1998 and
  1997, respectively.
  
           Premiums  earned are net of amounts ceded to reinsurers of $5.7 million
  for both the nine months ended September 30, 1998 and September 30, 1997. Losses
  and loss  adjustment  expenses are net of amounts  ceded to  reinsurers  of $5.1
  million  and $5.2  million  for the nine  months  ended  September  30, 1998 and
  September 30, 1997, respectively.
  
  Note 3 - Comprehensive Income
  
           In 1997, the Financial  Accounting Standards Board issued SFAS No. 130,
  "Comprehensive  Income".  This statement was  implemented  retroactively  by the
  Company in 1998. The statement requires that an enterprise (a) classify items of
  other  comprehensive  income by their  nature in a financial  statement  and (b)
  display the accumulated  balance of other  comprehensive  income separately from
  retained  earnings and  additional  paid-in  capital in the equity  section of a
  statement of financial position.  Accumulated other comprehensive  income of the
  Company consists solely of net unrealized gains on investment securities.
  
                                       Page 7
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
                Notes to Unaudited Consolidated Financial Statements
                                     (continued)
  
  The following are components of other comprehensive income (in thousands):
  Nine months ended September 30, 1998
                                                            Before Tax               Tax                Net of Tax
                                                              Amount               Expense                Amount
  Unrealized gains on investments:
      Unrealized holding gains arising
        during period                                       $ 1,664                $ (598)               $ 1,066
      Less: reclassification adjustment for
        gains realized in net income                            (25)                    9                    (16)
                                                         ------------------------------------------------------------
  Other comprehensive income                                $ 1,639                $ (589)               $ 1,050
                                                         =============================================================
  
                                                                    Nine months ended September 30, 1997
                                                            Before Tax               Tax                Net of Tax
                                                              Amount               Expense                Amount
  Unrealized gains on investments:
      Unrealized holding gains arising
        during period                                       $ 1,493                $ (508)                 $ 985
      Less: reclassification adjustment for
        gains realized in net income                           (588)                  200                   (388)
      Plus:  accretion of net loss on fixed
        maturities transferred to held to maturity               30                   (10)                    20
                                                         ------------------------------------------------------------
  Other comprehensive income                                  $ 935                $ (318)                 $ 617
                                                         =============================================================
  Comprehensive  income  for  the  three  months  ended  September  30,  1998  was
  $2,676,000 and included net income of $1,784,000 and other comprehensive income,
  net of tax, of $892,000.
  
  Comprehensive  income for the three and nine months ended September 30, 1997 was
  $3,050,000  and  $6,973,000 and included net income of $2,588,000 and $6,356,000
  and  other  comprehensive   income,  net  of  tax,  of  $463,000  and  $617,000,
  respectively.
  
                                       Page 8
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
                Notes to Unaudited Consolidated Financial Statements
                                     (continued)
  
  Note 4 - Basic and Diluted Earnings Per Share
  
           The following is a reconciliation of the numerators and denominators of
  the basic and diluted earnings per share computations (in thousands,  except per
  share data):
  Three months ended              Nine months ended
                                                 September 30,                   September 30,
                                             1998            1997            1998            1997
  Basic EPS:
  
  Net Earnings                              $1,784          $2,588          $6,889          $6,356
                                            ------          ------          ------          ------
  
  Weighted  average common
        shares outstanding                   9,797           9,134           9,859           7,534
                                            ------          ------          ------          ------
  
  Basic EPS                                 $ 0.18          $ 0.28          $ 0.70          $ 0.84
                                            ======          ======          ======          ======
  
  Diluted EPS:
  
  Net Earnings                              $1,784          $2,588          $6,889          $6,356
                                            ------          ------          ------          ------
  
  Weighted  average common
        shares outstanding                   9,797           9,134           9,859           7,534
  
  Additional shares outstanding
        after the assumed exercise
        of options by applying the
        treasury stock method                   76              89             103              79
                                            ------          ------          ------          ------
  
  Total weighted average common
       shares outstanding                    9,873           9,223           9,962           7,613
                                            ======          ======          ======          ======
  
  Diluted EPS                               $ 0.18          $ 0.28          $ 0.69          $ 0.83
                                            ======          ======          ======          ======
  Page 9
  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, 1998 and 1997
  
           Gross written  premiums  decreased 10.6% to $24.3 million for the three
  months ended  September 30, 1998,  from $27.2 million for the three months ended
  September 30, 1997. The decrease resulted from a 38.6% decline in personal lines
  automobile  gross written premiums to $5.9 million that is partially offset by a
  4.6% increase in commercial lines gross written  premiums to $18.5 million.  The
  slow down in the growth in the  commercial  lines,  from a five year  cumulative
  average  growth of 27.7% to 4.6% for the quarter,  is due to the continued  soft
  market  conditions in this segment.  The decrease in personal  lines  automobile
  gross  written  premium  was due to  continued  actions  taken by the Company to
  improve  profitability.  Specifically,  the Company  terminated its relationship
  with one agent and reduced two agents'  personal  lines  automobile  writings by
  approximately 38.0%. Effective July 1, 1998, the Company filed and received from
  the State of California a 14.2% rate  reduction in its  non-standard  automobile
  rates.  This  action  was  taken  in order to  remain  competitive  with the new
  competition  that has entered this marketplace at lower premium rates. One agent
  accounts for all the California automobile premiums of $3.6 million, or 61.4% of
  the $5.9 million total personal automobile direct written premium written by the
  Company for the three months ended September 30, 1998.
  
           Net written  premiums  decreased  10.6% to $22.5  million for the three
  months ended  September 30, 1998,  from $25.2 million for the three months ended
  September 30, 1997. During the same periods,  net premiums earned decreased 5.5%
  to $22.6 million,  from $24.0 million.  Net premiums earned decreased  primarily
  due to the decline in personal lines automobile gross written premiums in 1998.
  
           Net  investment  income  increased  5.8% to $2.7  million for the three
  months ended  September  30, 1998,  from $2.5 million for the three months ended
  September 30, 1997. This increase  resulted  principally from growth in invested
  assets  funded  primarily  by cash flows from  operating  activities,  partially
  offset by an increase in the  investment in tax-exempt  municipal  securities to
  approximately  $35.8  million at  September  30,  1998  compared  to $550,000 at
  September 30, 1997.
  
           The  tax-equivalent  average  investment  yield of the  fixed  maturity
  portfolio for the three months ended  September 30, 1998 was 6.51%,  compared to
  6.76% for the three months ended  September  30, 1997.  Net realized  investment
  losses before taxes were $418,000 for the three months ended September 30, 1998,
  as compared to net  realized  investment  gains before taxes of $479,000 for the
  three months ended September 30, 1997.
  
                                      Page 10
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
             Management's Discussion and Analysis of Financial Condition
                             and Results of Operations
                                     (continued)
  
           Losses and loss adjustment expenses decreased 3.6% to $14.3 million for
  the three months ended  September  30,  1998,  from $14.9  million for the three
  months  ended  September  30, 1997,  primarily  due to a decline in net premiums
  earned.
  
           Amortization of deferred policy  acquisition costs remained  relatively
  flat for the three months  ended  September  30, 1998,  as compared to the three
  months  ended  September  30,  1997 at $6.4  million  for  both  periods.  Other
  underwriting  expenses increased 3.3% to $1.7 million for the three months ended
  September  30,  1998,  compared  to $1.6  million  for the  three  months  ended
  September 30, 1997.
  
           The loss ratio  increased to 63.4% for the three months ended September
  30,  1998,  from  62.1% for the three  months  ended  September  30,  1997.  The
  statutory  expense ratio increased to 35.2% for the three months ended September
  30,  1998,  from  32.1% for the three  months  ended  September  30,  1997.  The
  principal causes for the increase in the expense ratio were the 10.6% decline in
  net premiums  written for the quarter  ended  September 30, 1998 compared to the
  same quarter in 1997, an increase in the commercial lines commission rate to 22%
  from 20%, effective May 1, 1998, and additional underwriting expenses related to
  the start-up of new programs.  The statutory  combined ratio  increased to 98.6%
  for the three months ended  September 30, 1998,  from 94.2% for the three months
  ended September 30, 1997.
  
           As a result of the factors  described  above,  the Company's net income
  for the three months ended September 30, 1998 decreased 31.0% to $1.8 million or
  $0.18 per share (basic and diluted), from $2.6 million or $0.28 per share (basic
  and diluted) for the three months ended September 30, 1997.
  
  Nine Months Ended September 30, 1998 and 1997
  
           Gross  written  premiums  decreased  7.4% to $72.9 million for the nine
  months ended  September  30, 1998,  from $78.7 million for the nine months ended
  September 30, 1997. The decrease resulted from a 33.8% decline in personal lines
  automobile gross written  premiums to $18.7 million,  which was partially offset
  by a 7.5% increase in commercial  lines gross written premiums to $54.2 million.
  The  decrease in personal  lines  automobile  gross  written  premium was due to
  actions taken by the Company to improve profitability. Specifically, the Company
  terminated  its  relationship  with one agent and reduced  two agents'  personal
  lines  automobile  writings  by  approximately  31.0%.  One agent in  California
  accounted  for all of the $11.2 million of  automobile  premium  written in that
  state, or 59.6% of the $18.8 million of all personal  automobile  direct written
  premium written by the Company in the first nine months of 1998.
  
                                      Page 11
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
             Management's Discussion and Analysis of Financial Condition
                             and Results of Operations
                                     (continued)
  
           Net  written  premiums  decreased  7.2% to $67.5  million  for the nine
  months ended  September  30, 1998,  from $72.8 million for the nine months ended
  September 30, 1997. During the same periods,  net premiums earned decreased 0.2%
  to $67.7 million from $67.9 million.
  
           Net  investment  income  increased  27.1% to $8.2  million for the nine
  months ended  September  30,  1998,  from $6.4 million for the nine months ended
  September 30, 1997. This increase  resulted  principally from growth in invested
  assets funded  primarily by the net proceeds from the Company's  secondary stock
  offering in July 1997, and from the net cash provided by operating activities.
  
           In  1998,  the  Company  purchased   approximately   $35.8  million  in
  tax-exempt  municipal  securities  as  compared  to  $550,000  held  during  the
  comparable  period,  September 30, 1997. The  tax-equivalent  average investment
  yield of the fixed  maturity  portfolio for the nine months ended  September 30,
  1998 was 6.58%,  compared to 6.59% for the nine months ended September 30, 1997.
  Net  realized  investment  gains  before  taxes were $25,000 for the nine months
  ended  September 30, 1998, as compared to net realized  investment  gains before
  taxes of $588,000 for the nine months ended September 30, 1997.
  
           Losses and loss  adjustment  expenses  were $42.5 million for both nine
  month periods ended September 30, 1998 and 1997, primarily due to the negligible
  decline in net premiums earned.
  
           Amortization  of deferred  policy  acquisition  costs increased 2.1% to
  $18.8 million for the nine months ended  September 30, 1998,  from $18.4 million
  for the nine months  ended  September  30, 1997.  The  increase is  attributable
  primarily to the increase in the commercial agents' commission to 22% from 20%.
  
           Other  underwriting  expenses  increased  14.4% to $4.9 million for the
  nine months  ended  September  30,  1998,  from $4.3 million for the nine months
  ended September 30, 1997. The increase is  attributable  to expenses  related to
  new programs and other non-recurring expenses of the holding company.
  
           The loss ratio  increased to 62.7% for the nine months ended  September
  30, 1998, from 62.6% for the nine months ended September 30, 1997. The statutory
  expense ratio  increased to 34.0% for the nine months ended  September 30, 1998,
  from 32.1% for the nine months ended September 30, 1997. The statutory  combined
  ratio  increased to 96.7% for the nine months  ended  September  30, 1998,  from
  94.7% for the nine months ended September 30, 1997.
  
           As a result of the factors  described  above,  the Company's net income
  for the nine months ended  September 30, 1998  increased 8.4% to $6.9 million or
  $0.70 per share  (basic)  and $0.69 per share  (diluted),  from $6.4  million or
  $0.84 per share (basic) and $0.83 per share  (diluted) for the nine months ended
  September 30, 1997.
  
                                      Page 12
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
             Management's Discussion and Analysis of Financial Condition
                             and Results of Operations
                                     (continued)
  
  Liquidity and Capital Resources
  
           PAGI is a holding  company,  the principal asset of which is the common
  stock of Penn-America. PAGI's cash flows depend primarily on dividends and other
  payments from Penn-America. PAGI uses these funds to pay (i) operating expenses,
  (ii)  taxes  and  other  payments  and  (iii)  dividends  to PAGI  stockholders.
  Penn-America's sources of funds consist primarily of premiums, investment income
  and  proceeds  from  sales and  redemptions  of  investments.  Funds are used by
  Penn-America  principally  to pay claims and  operating  expenses,  to  purchase
  investments and to make dividend and other payments to PAGI.
  
           Net cash  provided  by  operating  activities  decreased  55.8% to $8.3
  million for the nine months ended September 30, 1998, from $18.7 million for the
  nine months ended September 30, 1997, primarily due to the reduction in personal
  lines  automobile  gross  written  premiums  in 1998 and a slowing  of growth in
  commercial lines.
  
           Net cash used by  investing  activities  was $3.8  million for the nine
  months ended  September 30, 1998,  compared to $40.9 million for the nine months
  ended September 30, 1997. The decrease is primarily due to the investment of net
  proceeds of $35.9 million from a secondary offering in July 1997.
  
           Net cash used by  financing  activities  was $4.2  million for the nine
  months  ended  September  30, 1998,  compared to net cash  provided by financing
  activities of $35.9  million for the same period in 1997.  In 1998,  the Company
  purchased  285,900  shares on the open market for an average price of $11.21 and
  has recorded these shares as treasury shares.  The majority of the $35.9 million
  in cash  provided by  financing  activities  in 1997 was due to the net proceeds
  from the secondary offering in July of 1997.
  
           The  Company  believes  that it has  sufficient  liquidity  to meet its
  anticipated  insurance  obligations and operating and capital expenditure needs.
  The   Company's   investment   strategy   emphasizes   quality,   liquidity  and
  diversification, as well as total return. With respect to liquidity, the Company
  considers  liability  durations,  specifically  related to loss  reserves,  when
  determining  desired investment  maturities.  In addition,  maturities have been
  staggered   to  produce   cash  flows  for  loss   payments   and   reinvestment
  opportunities.  The  average  duration  of the fixed  maturity  portfolio  as of
  September 30, 1998 was approximately 3.37 years.
  
           The Company's  fixed maturity  portfolio of $145.5 million was 80.4% of
  the total investment  portfolio as of September 30, 1998.  Approximately  98% of
  these  securities  were  rated "A-" or better by  Standard & Poor's or  Moody's.
  Equities,  the majority of which consist of preferred stocks, were $25.8 million
  or 14.2% of total investments as of September 30, 1998.
  
                                      Page 13
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
             Management's Discussion and Analysis of Financial Condition
                              and Results of Operations
                                     (continued)
  
           As of September 30, 1998,  the  investment  portfolio  contained  $35.1
  million of  mortgage/asset-backed  obligations,  which  represents  19.4% of the
  total  investments as of September 30, 1998.  All of these  securities are "AAA"
  rated securities issued by government,  government-related  agencies or publicly
  held corporations,  are publicly traded, and have market values obtained from an
  independent  pricing service.  Changes in estimated cash flows due to changes in
  prepayment  assumptions from the original purchase assumptions are revised based
  on current interest rates and the economic environment. The Company had no other
  derivative  financial  instruments,  real estate or mortgages in the  investment
  portfolio as of September 30, 1998.
  
           The  principal  source of cash to use for the payment of  dividends  to
  PAGI's stockholders is dividends from Penn-America.  Penn-America is required by
  law to maintain a certain minimum surplus on a statutory basis and is subject to
  risk-based capital requirements and regulations under which payment of dividends
  from  statutory  surplus  may  require  prior  approval  from  the  Pennsylvania
  regulatory  authorities.  The  maximum  dividend  that  may be  paid  in 1998 by
  Penn-America  to PAGI  without  prior  approval  of  regulatory  authorities  is
  $9,531,000.
  
           In June of 1998,  the Board of Directors  initially  authorized a stock
  buy-back program of up to 350,000 shares of PAGI's stock.  This buy-back program
  was subsequently increased to 1,000,000 shares. Through September 30, 1998, PAGI
  has repurchased 285,900 shares of its stock on the open market and through block
  trades.  PAGI's  funding  source  for  this  program  will be  through  ordinary
  dividends from its insurance  subsidiary,  existing cash of the holding company,
  as well as draws from its revolving line of credit.  On September 30, 1998, PAGI
  completed a revolving  credit  facility  with First Union  National Bank for $25
  million,  which  will be used  for  general  corporate  purposes  and the  stock
  buy-back program.
  
           On August 4, 1998,  PAGI's  common stock began  trading on the New York
  Stock Exchange (NYSE) under the symbol "PNG."
  
  The Year 2000
  
           Introduction
  
           The "Year 2000", or Y2K, refers to the problems that automated  systems
  could  encounter  as the  year  2000  approaches  due  to a  computer  or  other
  electronic  device's inability to correctly register the year 2000 as just that,
  the year 2000, rather than the year 1900. In this regard,  the Company relies on
  its  existing  information  technology  systems  ("IT  systems")  to operate and
  monitor all major aspects of the  Company's  business,  including  underwriting,
  claims and various  financial  systems.  The Company  also  relies,  to a lesser
  extent, on the IT systems of its general
  
                                      Page 14
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
             Management's Discussion and Analysis of Financial Condition
                              and Results of Operations
                                     (continued)
  
  agents  and,  indirectly,  those  of the  producing  retail  insurance  brokers.
  Finally,  the  Company  relies on certain  critical  non-information  technology
  systems ("non-IT systems"), such as electricity, telephones, facsimile machines,
  heating and  air-conditioning and fire protection systems. Any disruption in the
  operation  of the IT and  non-IT  systems  of either  the  Company or any of its
  critical customers, vendors or suppliers could have a material adverse effect on
  the Company's business, results of operations or financial condition.
  
           State of Readiness
  
           IT systems:  In an effort to remediate the problems associated with the
  Year 2000, the Company,  in 1996,  evaluated all its computer codes to determine
  what software  programs would be affected by date-sensitive  fields.  After this
  identification  process was  completed,  the Company hired an outside  vendor to
  implement  the  recoding  that  was  required.  In July  of  1997,  the  Company
  successfully ran its first trial of all the revised programs.  While the Company
  cannot provide any guarantees,  the Company  believes that its programs are Year
  2000 compliant.  The Company,  however,  continues to run tests on a semi-annual
  basis to make sure the programs will function properly.
  
           The  Company's  IT systems have also been tested  against  hypothetical
  information supplied by its general agents. The IT systems are currently able to
  properly read the information provided.  Assuming the general agents don't alter
  their records, the Company reasonably believes that its IT systems will function
  properly.  To the extent the general  agents'  records  change,  the Company has
  demanded that the agents provide notice.
  
           The  Company's  management  information  systems  rely  primarily on an
  integrated property-casualty software package that is processed on an IBM AS/400
  computer system.  The system is leased from IBM and kept current or near current
  in both  hardware  and  operating  systems.  Currently,  the IBM AS/400 model is
  scheduled  in the fourth  quarter of 1998 to be  upgraded  to Version 4 which is
  reported by IBM to be fully Year 2000 compliant.
  
           The  Company  uses a Novell  Local Area  Network  (LAN) to connect  all
  employees to the computer system. The LAN is reported to be Year 2000 compliant.
  The LAN is used primarily for "service" applications, including word processing,
  spreadsheets,  and  e-mail.  The  majority  of the  LAN-based  applications  are
  Microsoft products and are current or near current in their software releases.
  
                                      Page 15
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
             Management's Discussion and Analysis of Financial Condition
                              and Results of Operations
                                     (continued)
  
           The LAN also consists of personal  computers  ("PCs") that are attached
  to a series of servers.  All PCs have been tested and  recognize  the Year 2000.
  The IT  Department  of the Company  supports  an  Internet  web site and various
  standalone  third  party PC  software  applications.  These  packages  are being
  assessed for any Year 2000 problems.  The Company  anticipates  completing  this
  assessment by the end of December, 1998, and believes that it will implement any
  necessary changes and complete any testing by June, 1999. The IT Department also
  supports FormMaker, a document management software package developed by DocuCorp
  which  is used  by the  majority  of  general  agents  to  produce  Penn-America
  policies.  FormMaker has been tested and, in its current release, is reported by
  DocuCorp to be Year 2000 compliant.
  
           Non-IT  systems:  The  Company  has  identified,  and  relies  on,  the
  following  non-IT  systems  in  its  daily  operations:  telephones,  voicemail,
  facsimile machines and heating and air conditioning and fire protection systems.
  The  telephone  system  was  tested  as  compliant.  The  voicemail  system  was
  identified  as  non-compliant  and  was  replaced  with a  compliant  system  in
  September of 1998. The heating and air conditioning  systems are currently being
  scheduled  for testing.  The Company has been informed that all of the remaining
  systems  will not be  effected  by the year 2000;  and the  Company is  awaiting
  written confirmation to this effect.
  
           Key Customers,  Suppliers and Vendors: As part of its remediation plan,
  the Company is  analyzing  the Year 2000  readiness  of the  Company's  critical
  outside  customers  (including  general  agents),  vendors and  suppliers.  Each
  department  of the Company was asked to identify key  customers,  suppliers  and
  vendors with whom we have an interdependent,  material business relationship. In
  September  of  1998,  the  Company  sent  approximately  188  surveys  to  those
  identified  customers/suppliers/vendors  to ask them:  to  provide  the  current
  status of their Y2K plan;  whether they will be  compliant;  and what plans they
  have in place in the event they will not be  compliant.  As of October 29, 1998,
  the responses  were as follows:  37 indicated  they were already  compliant;  63
  indicated  they  would be  compliant  before  January 1, 2000 and 88 have yet to
  respond.  For those who have yet to respond, a follow-up request will be sent in
  early November of 1998. For those that have indicated  their  compliance  within
  the next year, the Company intends to contact them quarterly  throughout 1999 to
  ascertain their compliance status.
  
           Despite all the  procedures  the Company has in place,  there can be no
  guarantee  that the systems of other  companies on which the Company's  business
  relies will be timely  converted,  or that failure to convert by another company
  or a conversion that is incompatible  with the Company's systems will not have a
  materially adverse effect on the Company and its operations.
  
                                      Page 16
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
             Management's Discussion and Analysis of Financial Condition
                              and Results of Operations
                                     (continued)
  
           Cost
  
           The  Company  incurred  approximately  $60,000 to recode  its  internal
  programs.  The costs  incurred  by the  Company  to test  significant  insurance
  hardware and software  that the Company  believes is compliant are (and will be)
  minimal as these costs are built in to the Company's  standard Disaster Recovery
  testing program.  The current standard testing costs  approximately  $28,000 per
  year. The Company does not separately  track the internal costs incurred for the
  Y2K project. Such costs are primarily related to payroll costs for the Company's
  information services personnel.  The Company also incurred an additional $13,000
  to upgrade its voicemail system.  Additional  expenses may arise in the upcoming
  year.  Management  believes  that at this  time  these  costs  will  approximate
  $10,000.
  
           Risks
  
           The risks  associated with the Company's  inability to resolve all Year
  2000  issues  include the  possibility  of system  failures  or  miscalculations
  causing disruption in operations including,  among other things, an inability to
  process transactions,  send invoices,  send or receive e-mail and voice mail, or
  conduct  similar  normal  business  activities.  Additionally,  failure of third
  parties upon whom the Company's  business relies to timely  remediate their Year
  2000  problems  could  result in  disruption  in the receipt and  processing  of
  insurance policies,  claims, payment of receivables and general problems related
  to the Company's daily operations.  If any of these contingencies were to occur,
  the  disruption in business  could be temporary or  permanent,  depending on the
  degree of failure.  Until the Company receives responses from a more significant
  number of the Company's agents and suppliers,  the overall risks associated with
  the Year 2000 remain  difficult to accurately  describe and quantify;  and there
  can be no  guarantee  that the Year 2000 issue will not have a material  adverse
  effect on the Company and its operations.
  
           If the Year 2000  problem is not solved by the Company and its business
  partners,  the Company could face  business  disruption,  operational  problems,
  financial losses, legal liability and similar risks to the business.
  These risks could have a material adverse impact on the Company.
  
           Contingency Plan
  
           The Company has not, to date,  completed a Year 2000 Contingency  Plan,
  though the Company  maintains a Disaster  Recovery Plan to address various other
  potential business  interruptions.  The current Disaster Recovery Plan addresses
  the availability and compatibility of
  
                                      Page 17
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
             Management's Discussion and Analysis of Financial Condition
                             and Results of Operations
                                     (continued)
  
  hardware  offsite that could be  immediately  placed into action by the Company.
  The Company in September of 1998,  tested the offsite facility and the operation
  of significant  insurance  software that had been made Year 2000  compliant,  as
  well as the operation of the offsite hardware. Under these test conditions,  all
  dates were rolled  forward to January 1, 2000.  The test results  indicated that
  the Company's  significant  insurance  related software would be compliant.  The
  testing  facility has indicated  that the majority of its hardware and equipment
  will be fully compliant by December,  1998. The testing  facility  further noted
  that it will not upgrade  certain of its systems until the first quarter of 1999
  so as to afford all  subscribers an  opportunity  to upgrade their systems.  The
  testing  facility is also  available if electric,  heat,  water,  telephones and
  office space should be required. Management is continuing to develop a more Year
  2000-related  Contingency  Plan as it  identifies  where  potential  operational
  failures may occur. The Company anticipates completing this plan by June, 1999.
  
           Readers are cautioned that forward-looking  statements contained in the
  Year 2000  disclosure  contained  herein should be read in conjunction  with the
  Company's  disclosure titled "Safe Harbor  Provisions of the Private  Securities
  Litigation Reform Act of 1995".  Forward-looking statements include, but are not
  limited to,  whether  the  Company  will timely  complete  its  remediation  and
  testing,  whether  remediation  will cost more than  anticipated,  the impact of
  redeploying  staff, and the effect of third parties on the Company's  ability to
  function after the century date change.
  
  New Accounting Standards
  
           In June 1998,  Statement of Financial  Accounting  Standards (SFAS) No.
  133, "Accounting for Derivative Instruments and Hedging Activities",  was issued
  and established standards for accounting and reporting of derivative instruments
  and hedging  activities.  The statement is effective for all fiscal  quarters of
  fiscal years  beginning  after June 15,  1999.  The Company is in the process of
  determining the effect, if any, of this statement on its financial statements.
  
  Safe Harbor Provisions
  
           Matters  discussed herein may constitute  "forward-looking  statements"
  (within the meaning of Section 27A of the  Securities Act and Section 21E of the
  Exchange Act). Such  forward-looking  information reflects the Company's current
  best estimates  regarding its future  operations.  The Company's  actual results
  could differ materially from those estimated in the  forward-looking  statements
  as a result of several factors, including those discussed herein.
  
                                      Page 18
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
                             PART II. OTHER INFORMATION
  
  Item 1.       Legal Proceedings - None
  
  Item 2.       Changes in Securities - None
  
  Item 3.       Default Upon Senior Securities - None
  
  Item 4.       Submission of Matters to a Vote by Security Holders - None
  
  Item 5.       Other Information - None
  
  Item 6.       Exhibits and Reports on Form 8-K - None
  
                                      page 19
  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 13, 1998             By:  /s/ Jon S. Saltzman
        -----------------                  -------------------------------
                                           Jon S. Saltzman
                                           President and
                                           Chief Executive Officer
  
                                      By:  /s/ Rosemary R. Ferrero
                                           -------------------------------
                                           Rosemary R. Ferrero
                                           Principal Finance and
                                           Accounting Officer
  
                                      Page 20