Edgar Filing: PENN TREATY AMERICAN CORP

PROSPECTUS SUPPLEMENT
(To prospectus dated November 15, 2000)
Issued December 24, 2002

Penn Treaty American Corporation
3440 Lehigh Street
Allentown, PA 18103
(610) 965-2222

[GRAPHIC]

RIGHTS TO PURCHASE 6 1/4% CONVERTIBLE SUBORDINATED NOTES DUE 2008
$45,000,000 6 1/4% CONVERTIBLE SUBORDINATED NOTES DUE 2008

We have distributed without charge transferable rights to purchase an
aggregate principal amount of $45 million of 6 1/4% convertible subordinated
notes due 2008 (the "Notes") to holders of (a) our common stock, (b) our 6 1/4%
convertible subordinated notes due 2003 (the "2003 Notes"), and (c) our 6 1/4%
convertible subordinated notes due 2008 (the "2008 Notes" and together with the
2003 Notes, the "Existing Notes") as of November 25, 2002, the record date. The
Notes are convertible into shares of our common stock at a conversion price of
$2.50 per share. A holder of record of our common stock is receiving one right
to purchase a principal amount of $1,000 of Notes for each 973 shares of common
stock beneficially owned on the record date. A holder of record of the 2003
Notes or the 2008 Notes is receiving one right to purchase a principal amount of
$1,000 of Notes for each $27,673 principal amount or $2,433 principal amount of
such notes, respectively, beneficially owned on the record date. Although the
rights will not be listed on an exchange nor will there be an organized trading
market for them, the rights may be transferred but must be exercised before
5:00 p.m., Eastern time, on January 20, 2003, the expiration date. We may extend
the expiration date to a date no later than January 31, 2003, modify the terms
of the offering or cancel the offering by press release at any time prior to the
expiration date.

Each right also entitles the holder to purchase Notes in excess of the
amounts set forth above if all of the rights are not exercised. If the principal
amount of Notes available to satisfy the demand for such additional Notes is
insufficient, requesting holders will receive a pro rata portion of the
principal amount of Notes remaining. We intend to hold an initial closing three
New York Stock Exchange trading days after the expiration date.

Following the sale of Notes pursuant to the rights offering, we will also
offer Notes to the public. We have engaged Merrill Lynch & Co., Advest, Inc. and
Philadelphia Brokerage Corporation as financial advisors to assist us in selling
the Notes subsequent to the expiration date until February 14, 2003.

Our common stock is traded on the New York Stock Exchange under the symbol
"PTA." On December 20, 2002, the last sale price of the common stock, as
reported on the New York Stock Exchange, was $1.97 per share.

INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE
S-6 OF THIS PROSPECTUS SUPPLEMENT AND PAGE 1 OF THE ACCOMPANYING PROSPECTUS.

ESTIMATED
FEES AND NET PROCEEDS
PRICE EXPENSES(1) TO ISSUER
----------- ----------- ------------

Per Note.................................................... $1,000.00 $ 51.11 $ 948.89
Total....................................................... $45,000,000 $2,300,000 $42,700,000

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

(1) Merrill Lynch & Co. and Advest, Inc. will collectively receive 2% of the
aggregate proceeds received pursuant to the exercise of rights and 6.5% of
the aggregate proceeds received from the direct sale of Notes following the
closing on the rights offering. Philadelphia Brokerage Corporation will
receive 0.75% of the aggregate proceeds received pursuant to the exercise of
rights and 1.4% of the aggregate proceeds received from the direct sale of
Notes following the closing on the rights offering. The estimate of fees and
expenses assumes that rights holders purchase $30 million of Notes and that
the balance of the Notes are sold following the closing of the rights
offering. Estimated fees and expenses include the foregoing fees,
professional fees, printing costs, reimbursement of expenses to the
financial advisors, and the fees of the Subscription Agent, Trustee,
Transfer Agent and Information Agent.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this Prospectus Supplement is December 24, 2002.

TABLE OF CONTENTS

PROSPECTUS SUPPLEMENT

PAGE
--------

Prospectus Supplement Summary............................... S-1
Risk Factors................................................ S-6
Chronology of Completed Strategic Milestones and Events..... S-14
Use of Proceeds............................................. S-15
Market For Our Common Stock................................. S-16
Dividend Policy............................................. S-16
Capitalization.............................................. S-17
Computation of Ratio of Earnings to Fixed Charges........... S-18
Description of Rights....................................... S-19
Description of Notes........................................ S-25
Description of Common Stock................................. S-36
Certain United States Federal Income Tax Considerations..... S-37
Selected Financial Data..................................... S-43
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. S-47
Business.................................................... S-73
Debt Exchange Offer......................................... S-97
Management.................................................. S-98
Principal Shareholders...................................... S-101
Plan of Distribution........................................ S-103
Legal Matters............................................... S-104
Experts..................................................... S-104
Where You Can Find More Information......................... S-104
Incorporation of Certain Documents by Reference............. S-104

PROSPECTUS

PAGE
--------

Risk Factors................................................ 1
Where You Can Find More Information......................... 4
Summary..................................................... 4
Penn Treaty................................................. 4
Use of Proceeds............................................. 6
Ratio of Earnings to Fixed Charges.......................... 6
Description of the Securities to be Offered................. 6
Description of Our Senior Debt Securities and Subordinated
Debt Securities........................................... 7
Description of Capital Stock................................ 18
Description of Warrants..................................... 24
Plan of Distribution........................................ 25
Legal Matters............................................... 26
Experts..................................................... 26

You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. Such
information is accurate only as of the dates on the front cover of this
prospectus supplement and the accompanying prospectus, respectively. Our
business, financial condition, results of operations and prospects may have
changed since those dates. We have not authorized anyone to provide you with
information that is different from that contained in this prospectus supplement
and the accompanying prospectus. In this prospectus supplement, references to

"we," "us" and "our" mean Penn Treaty American Corporation and its subsidiaries
and references to "Penn Treaty" mean Penn Treaty American Corporation.

FORWARD-LOOKING STATEMENTS

This prospectus supplement and the accompanying prospectus contain certain
"forward-looking statements" based on our current expectations, assumptions,
estimates and projections about our business and our industry. These
forward-looking statements involve risks and uncertainties. Words such as
"believe," "anticipate," "expect," "intend," "plan," "will," "may," "could" and
other similar expressions identify forward-looking statements. In addition, any
statements that refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements. Our actual
results could differ materially from those anticipated in such forward-looking
statements as a result of several factors more fully described in "Risk
Factors." The forward-looking statements made in this prospectus supplement and
the accompanying prospectus relate only to events as of the date on which the
statements are made. We undertake no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.

PROSPECTUS SUPPLEMENT SUMMARY

This prospectus supplement should be read together with the accompanying
prospectus. This summary highlights selected information from this prospectus
supplement and the accompanying prospectus. This summary is not complete and
does not contain all of the information you should consider before investing in
the Notes. You should carefully read this prospectus supplement and the
accompanying prospectus before making a decision about whether to invest in the
Notes. You should pay particular attention to "Risk Factors" beginning on page
S-6 and our financial statements and the related notes contained or incorporated
by reference herein.

PENN TREATY AMERICAN CORPORATION

We are a leading provider of long-term care insurance in the United States
with one of the largest individual long-term care insurance portfolios in the
country. Our principal products are individual, defined benefit accident and
health insurance policies covering long-term skilled, intermediate and custodial
nursing home and home health care. Our policies are designed to make the
administration of claims simple, quick and sensitive to the needs of our
policyholders. We also own insurance agencies that sell senior-market insurance
products issued by us as well as by other insurers.

We introduced our first long-term nursing home insurance product in 1972 and
our first home health care insurance product in 1983. Since then we have
innovated several new products designed to meet the changing needs of our
customers and that were the first of their kind in the long-term care industry.
Our primary product offerings are:

- The Assisted Living-Registered Trademark- policy, which provides coverage
for all levels of facility care and includes a home health care rider;

- The Personal Freedom-Registered Trademark- policy, which provides
comprehensive coverage for facility and home health care; and

- The Independent Living-Registered Trademark- policy, which provides
coverage for home and community based care furnished by licensed care
providers, as well as unlicensed caregivers, homemakers or companions.

Our sales and marketing efforts through our independent agency distribution
channels were successful between 1995 and 2001, as total premium in force grew
at a compound annual rate of 23% from $102 million to $350 million. Our premium
growth led to diminished surplus levels due to the statutory surplus strain
arising from new business generation. In 2001, we ceased new policy sales
nationwide as a result of our surplus levels until we formulated a Corrective
Action Plan (the "Plan") with the Pennsylvania Insurance Department (the
"Department"). Upon the Department's approval of the Plan in February 2002, we
recommenced new policy sales in 23 states, including Pennsylvania. We have now
recommenced new policy sales in nine additional states, including Florida and
Texas, which have historically represented approximately 25% and 5% of our new
policy sales, respectively. We are actively working with the remaining states to
recommence new policy sales in all jurisdictions.

We entered into an amended consent order with the Florida Insurance
Department that included, among other things, a requirement to raise what we
estimate to be $23 million in additional statutory surplus prior to
December 31, 2002 to satisfy gross premium to surplus ratio requirements
specific to Florida.

To meet this requirement, we intend, and have received approval from the
Department in compliance with statutory accounting principles, to establish a
receivable at our insurance subsidiary for the anticipated surplus infusion as
of December 31, 2002. Our ability to record the surplus infusion in our 2002
statutory filings is conditioned upon the successful completion of this offering
and the receipt

S-1

of sufficient funds to pay the receivable prior to the filing of our year-end
statutory reports on or before February 28, 2003.

One of the intended uses of the net proceeds of the sale of the Notes is to
satisfy this requirement. If we are not successful in raising this capital, the
Florida Insurance Department could suspend our Certificate of Authority in
Florida in which case, we would be unable to write new policies in Florida until
we are able to comply. If we are unable to write new policies in Florida, other
states may suspend our ability to write business or not allow us to recommence
new policy sales and our financial condition and results of operations could be
materially adversely affected in the future.

As part of the Plan, effective December 31, 2001, we entered into a
reinsurance agreement with Centre Solutions (Bermuda) Limited to reinsure, on a
quota share basis, substantially all of our respective long-term care insurance
policies then in-force. The agreement is subject to certain coverage limitations
and an aggregate limit of liability, which may be reduced if we are unable to
obtain premium rate increases required by the agreement. The agreement meets the
requirements to qualify as reinsurance for statutory accounting, but not for
generally accepted accounting principles.

We are issuing the Notes to meet the surplus commitment under our consent
order with the Florida Insurance Department, to pay the amounts due under the
2003 Notes, to raise additional capital to support our insurance subsidiaries'
growth, and to provide liquidity and general working capital for Penn Treaty.
See "Risk Factors" and "Use of Proceeds."

CORPORATE INFORMATION

Penn Treaty was incorporated in Pennsylvania in 1965. Our principal
executive offices are located at 3440 Lehigh Street, Allentown, Pennsylvania
18103. Our telephone number is (610) 965-2222.

TRUSTEE

Wells Fargo Bank Minnesota, N.A. is the trustee for the Notes. Its principal
executive offices are located at Sixth Street and Marquette Avenue, Minneapolis,
Minnesota 55479. Its telephone number is (612) 667-0266.

SUBSCRIPTION AGENT

Wells Fargo Bank Minnesota, N.A. is the Subscription Agent for the offering.
Its principal executive offices are located at Sixth Street and Marquette
Avenue, Minneapolis, Minnesota 55479. Its telephone number is (612) 667-0266.

INFORMATION AGENT

Georgeson Shareholder Communications Inc. is the Information Agent for the
offering. Its principal executive offices are located at 17 State Street, 10th
Floor, New York, New York 10004. Its telephone number is (866) 328-5442.

S-2

SUMMARY DESCRIPTION OF THE NOTES AND COMMON STOCK

NOTES

Issuer....................................... Penn Treaty American Corporation

Debt Securities Offered...................... $45,000,000 aggregate principal amount at issuance of
6 1/4% Convertible Subordinated Notes due 2008 to be
issued under an indenture between Penn Treaty and
Wells Fargo Bank Minnesota, N.A., as trustee.

Issue Date................................... Three New York Stock Exchange trading days following
the expiration date of the rights offering.

Maturity Date................................ October 15, 2008

Interest..................................... Interest on the Notes will accrue at the rate of
6 1/4% per annum and will be payable semiannually on
October 15 and April 15 of each year, commencing on
April 15, 2003. Interest begins accruing on the Notes
as of the issue date.

Conversion................................... Notes are convertible into shares of our common
stock, at a conversion price of $2.50 per share, at
the earlier of April 15, 2003 or such time as Penn
Treaty shareholders have approved an increase in the
authorized number of shares of common stock in an
amount sufficient to cover the conversion of the
Notes and the Existing Notes, the conversion of our
convertible preferred stock issuable upon exercise of
the warrants granted to Centre Solutions (Bermuda)
Limited, and the exercise of outstanding options
granted pursuant to our stock option plans. If a Note
is called for redemption, the holder is entitled to
convert it at any time before the close of business
on the last business day prior to the redemption
date.

Mandatory Conversion......................... If the average closing share price of our common
stock for any 15 consecutive trading days beginning
on or after October 15, 2004 is at least 10% greater
than the conversion price of the Notes (i.e. $2.75)
and we have sufficient shares of common stock
available for issuance, then holders of the Notes are
required to convert their Notes into common stock at
the conversion price of $2.50.

S-3

Ranking; Subordination....................... The Notes will constitute general unsecured
obligations of Penn Treaty, will be senior to the
2003 Notes, will be PARI PASSU with the 2008 Notes
and will be subordinated in right of payment to all
existing and future senior indebtedness of Penn
Treaty. As of September 30, 2002, Penn Treaty had
approximately $1.5 million of senior indebtedness
outstanding. In addition, because our operations are
conducted through subsidiaries, claims of holders of
indebtedness of such subsidiaries, as well as claims
of regulators and creditors of such subsidiaries,
will have priority with respect to the assets and
earnings of such subsidiaries over the claims of
creditors of Penn Treaty, including the Note holders.
As of September 30, 2002, the aggregate liabilities
of such subsidiaries were approximately
$823.4 million. The indenture will not limit the
amount of additional indebtedness which Penn Treaty
can create, incur, assume or guarantee, nor will the
indenture limit the amount of indebtedness which any
subsidiary can create, incur, assume or guarantee.

Listing...................................... The Notes are not listed for trading on any national
securities exchange or authorized to be quoted in any
inter-dealer quotation system of any national
securities association and we do not intend to apply
for either listing or quotation. Several securities
firms, including Philadelphia Brokerage Corporation,
facilitate purchases and sales of the Existing Notes
and we expect such firms to do so with respect to the
Notes as well.

Optional Redemption.......................... The Notes are redeemable, in whole or in part, at our
option, at any time after October 15, 2004, at a
price equal to the principal amount of the Notes plus
accrued and unpaid interest.

Change of Control............................ In the event of a Change of Control (as defined
herein) of Penn Treaty, a holder of the Notes will
have the right, at the holder's option, to require us
to repurchase all or any part of the holder's Notes,
provided that the principal amount must be $1,000 or
an integral multiple of $1,000, at a price equal to
101% of the principal amount of such holder's Notes
plus accrued and unpaid interest.

Tentative Purchase Commitment................ We have received a tentative commitment from a group
of holders of Existing Notes to purchase up to $20
million of the Notes.

Effect of Offering on 2008 Notes............. We intend to lower the conversion price of the 2008
Notes from $4.50 to $2.50 per share upon the sale of
at least $20 million of the Notes.

S-4

COMMON STOCK

Issuer....................................... Penn Treaty American Corporation

Equity Securities Offered.................... Shares of common stock, par value $.10 per share,
issuable upon the conversion of the Notes. (As of the
date of this prospectus supplement, we do not have an
adequate number of shares of common stock authorized
to satisfy our obligations to issue shares of common
stock. We intend to seek the approval of our
shareholders to amend our Articles of Incorporation
to increase the number of authorized shares of common
stock to an amount sufficient to do so.)

Listing...................................... The common stock currently trades on the New York
Stock Exchange under the symbol "PTA." We intend to
apply for listing on the New York Stock Exchange of
the shares of common stock issuable upon the
conversion of the Notes.

Market Price................................. On December 20, 2002, the closing price per share of
our common stock on the New York Stock Exchange was
$1.97.

Dividends.................................... We have never paid any dividends and have no present
intention to pay any dividends in the foreseeable
future.

This summary description of the Notes and the Common Stock is intended to
provide only general terms of this offer. For a complete description of the
terms of this offer, please thoroughly review the remainder of this prospectus
supplement and prospectus, as well as our filings that are incorporated by
reference in this document.

S-5

RISK FACTORS

BEFORE DECIDING TO INVEST IN OUR SECURITIES, YOU SHOULD CONSIDER CAREFULLY
THE RISKS DESCRIBED BELOW AND THE RISKS SET FORTH IN THE PROSPECTUS, AS WELL AS
OTHER INFORMATION WE INCLUDE OR INCORPORATE BY REFERENCE IN THIS PROSPECTUS
SUPPLEMENT AND THE ADDITIONAL INFORMATION IN THE REPORTS THAT WE FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION (THE "SEC"). THE RISKS AND UNCERTAINTIES
DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS AND
UNCERTAINTIES THAT WE DO NOT CURRENTLY KNOW ABOUT, THAT WE CURRENTLY BELIEVE ARE
IMMATERIAL, OR WHICH ARE SIMILAR TO THOSE FACED BY OTHER COMPANIES IN OUR
INDUSTRY OR BUSINESS IN GENERAL, ARE NOT SPECIFICALLY IDENTIFIED BELOW, BUT MAY
NEVERTHELESS ADVERSELY AFFECT OUR BUSINESS. IF ANY OF THE RISKS DESCRIBED
ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR FUTURE RESULTS OF
OPERATIONS COULD BE MATERIALLY AND ADVERSELY AFFECTED. IN SUCH CASE, THE PRICE
OF OUR SECURITIES COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.

RISKS PARTICULAR TO US

OUR BUSINESS WOULD BE MATERIALLY ADVERSELY AFFECTED IF WE WERE UNABLE TO
CONTINUE SELLING POLICIES OR ARE UNSUCCESSFUL IN RECOMMENCING NEW POLICY SALES
IN A FEW KEY STATES.

Historically, our business has been concentrated in a few key states. Over
the past four fiscal years, approximately half of our premiums came from sales
of policies in California, Florida and Pennsylvania. In 2001, we ceased new
policy sales in all states as a result of the diminished statutory surplus level
of our principal insurance subsidiary, Penn Treaty Network America Insurance
Company. Upon the Pennsylvania Insurance Department's approval of our Corrective
Action Plan (the "Plan") in February 2002, we recommenced new policy sales in 23
states, including Pennsylvania. We have since recommenced new policy sales in
nine additional states, including Florida and Texas, which have historically
represented approximately 25% and 5% of our sales, respectively. However, we
have not yet recommenced new policy sales in California, Virginia or Illinois,
which together have traditionally represented approximately 27% of sales, or in
15 other states. We are working with the remaining states to recommence sales in
all jurisdictions.

Each state insurance department may impose conditions on our recommencing or
continuing new policy sales in its state. In particular, we entered into an
amended consent order with the Florida Insurance Department that included, among
other things, a requirement to raise approximately $23 million in additional
statutory surplus prior to December 31, 2002 to satisfy gross premium to surplus
ratio requirements specific to Florida.

Similarly, although we believe we are in compliance with the terms of the
Plan, if we were found not to be in compliance, we could be forced to stop new
policy sales in Pennsylvania. If we are unable to continue selling new policies
or we are unsuccessful in recommencing new policy sales in any of our key
states, our financial condition and results of operations could be materially
adversely affected.

S-6

WE MAY NOT HAVE ENOUGH STATUTORY CAPITAL AND SURPLUS TO CONTINUE TO WRITE
BUSINESS.

Our continued ability to write business is dependent on maintaining adequate
levels of statutory capital and surplus to support the policies we write. Our
new business writing typically results in net losses on a statutory basis during
the early years of a policy, due primarily to differences in accounting
practices between statutory accounting principles and generally accepted
accounting principles. The resultant reduction in statutory surplus, or surplus
strain, limits our ability to seek new business due to statutory restrictions on
premium to surplus ratios and statutory surplus requirements. If we cannot
generate sufficient statutory surplus to maintain minimum statutory requirements
through increased statutory profitability, reinsurance or other capital
generating alternatives, we will be limited in our ability to realize additional
premium from new business writing, which would have a material adverse effect on
our financial condition and results of operations, or, in the event that our
statutory surplus is not sufficient to meet minimum premium to surplus and risk
based capital ratios in any state, we could be prohibited from writing new
policies in such state.

WE MAY BE UNABLE TO SERVICE AND REPAY OUR DEBT OBLIGATIONS, WHICH COULD CAUSE A
PAYMENT DEFAULT.

Our current cash reserves are insufficient to meet our 2003 and 2008 Note
debt service and repayment obligations. One of the intended uses of the net
proceeds from the sale of the Notes is to provide the cash necessary to service
our debt and repay the remaining 2003 Notes. If we do not raise funds sufficient
to do so, we will have to explore other possibilities for raising additional
capital, but there is no assurance that we will succeed in such efforts.
Consequently, if the net proceeds of this offering and the proceeds from any
other capital raising efforts are insufficient, we may default on our debt
obligations. For a more complete discussion on our debt service and repayment
obligations, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

WE COULD SUFFER A LOSS IF OUR PREMIUM RATES ARE NOT ADEQUATE AND WE ARE UNABLE
TO OBTAIN NECESSARY STATE APPROVALS FOR PREMIUM RATE INCREASES.

We set our premiums based on assumptions about numerous variables, including
our estimate of the probability of a policyholder's making a claim, the severity
and duration of such claim, the mortality rate of our policyholders, the
persistency or renewal of our policies in-force, and the amount of interest we
expect to earn from the investment of premiums. In setting premiums, we consider
historical claims information, industry statistics, and other factors.

Based on our recent studies, we believe that policy forms being offered and
currently sold are priced to provide a satisfactory profit margin. However,
those studies also suggest that many of our older policies are only marginally
profitable and some are unprofitable. As a result we are commencing efforts to
obtain rate increases on such polices, which may include some policies that
previously received a rate increase. If our actual experience proves to be less
favorable than we assumed and we are unable to raise our premium rates, our
financial condition and results of operations could be materially adversely
affected.

We generally cannot raise our premiums in any state unless we first obtain
the approval of the insurance regulator in that state. Although we have sought
and received approval for rate increases in the past, we cannot assure you that
we will be able to obtain approval for premium rate increases from existing
requests or requests filed in the future. Consequently, if we are unable to
raise our premium rates because we fail to obtain approval for a rate increase
in one or more states, our financial condition and results of operations could
be materially adversely affected.

As a result of any premium rate increases permitted by state regulators, we
could experience anti-selection, which is the lapsation of policies held by
healthier policyholders. Anti-selection could cause our actual claims to exceed
our expectations based on the higher risk of the remaining policyholders. As a
result, our financial condition and results of operations could be materially
adversely affected.

S-7

OUR RESERVES FOR CURRENT AND FUTURE CLAIMS MAY BE INADEQUATE AND ANY INCREASE TO
SUCH RESERVES MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION.

We calculate and maintain reserves for current and future claims using
assumptions about numerous variables, including our estimate of the probability
of a policyholder's making a claim, the severity and duration of such claim, the
mortality rate of our policyholders, the persistency or renewal of our policies
in-force, and the amount of interest we expect to earn from the investment of
premiums. The adequacy of our reserves depends on the accuracy of our
assumptions. We cannot assure you that actual experience will not differ from
the assumptions used in the establishment of reserves. Any variance from these
assumptions could have a materially adverse effect on our financial condition
and results of operations in the future. For a discussion of prior additions to
our reserves, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

OUR UNAMORTIZED DEFERRED POLICY ACQUISITION COST ASSET MAY NOT BE FULLY
RECOVERABLE, WHICH WOULD RESULT IN AN IMPAIRMENT CHARGE AND COULD MATERIALLY
ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

In connection with the sale of our insurance policies, we defer and amortize
the policy acquisition costs over the related premium paying periods of the life
of the policy. These costs include all expenses that are directly related to,
and vary with, the acquisition of the policy, including commissions,
underwriting and other policy issue expenses. The amortization of deferred
policy acquisition costs ("DAC") is determined using the same projected
actuarial assumptions used in computing policy reserves. DAC can be affected by
unanticipated terminations of policies because, upon such terminations, we are
required to expense fully the DAC associated with the terminated policies. In
addition, we periodically review and update the assumptions underlying DAC and
our policy benefit reserves to reflect current assumptions. In the event that we
would determine that our DAC is not fully recoverable, we would impair the value
of our DAC and would fully expense the impaired amount. As a result, our
financial condition and results of operations could be materially adversely
affected. At September 30, 2002, unamortized DAC was $172.2 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."

DECLINES IN THE VALUE OF OR THE YIELD ON OUR NOTIONAL EXPERIENCE ACCOUNT OR OUR
INVESTMENT PORTFOLIO MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.

Our reinsurance agreement with Centre Solutions (Bermuda) Limited reinsures
(for statutory purposes), on a quota share basis, substantially all of our
long-term care insurance policies in-force at December 31, 2001. The transaction
resulted in the transfer of approximately $563 million of securities to the
reinsurer. The reinsurer maintains a notional experience account for our benefit
in the event of commutation. The notional experience account reflects the
initial premium paid, future premiums collected net of claims, expenses and
accumulated investment earnings. The notional experience account balance
receives an investment credit based on the total return of a series of benchmark
indices and hedges, which are designed to match closely the duration of reserve
liabilities. As a result, we have experienced and may continue to experience
significant volatility in our financial condition and results of operations.

Income from our investment portfolio is an element of our overall net
income. We are susceptible to changes in market interest rates when cash flows
from maturing investments are reinvested at prevailing market rates. If our
investments do not perform well, our financial condition and results of
operations could be materially adversely affected.

In addition, in establishing the level of our reserves for future policy
claims and benefits, we make assumptions about the performance of our
investments. If our investment income or the capital gains in our portfolio are
lower than expected, we may have to increase our reserves, which could
materially adversely affect our financial condition and results of operations.

S-8

OUR REINSURANCE AGREEMENT WITH CENTRE SOLUTIONS (BERMUDA) LIMITED IS SUBJECT TO
AN AGGREGATE LIMIT OF LIABILITY, WHICH, IF EXCEEDED, COULD ADVERSELY IMPACT OUR
FINANCIAL CONDITON AND RESULTS OF OPERATIONS.

Our reinsurance agreement with Centre Solutions (Bermuda) Limited is subject
to certain coverage limitations and an aggregate limit of liability. Moreover,
the aggregate limit of liability may be reduced if we are unable to obtain
premium rate increases deemed necessary by the provisions of the agreement and
if certain other events occur.

Also, our Plan with the Department requires us to increase our statutory
reserves by an additional $125 million, of which $50 million remains to be
increased throughout the 2002-2004 period. Although the reinsurance agreement
currently provides us with the capacity to accomplish this increase, if the
aggregate limit of liability is expected to be exceeded, we would be unable to
receive full statutory credit for the cession of our reserves, resulting in the
reduction of our statutory surplus and the possible breach of this provison of
the Plan.

In the event that the reinsurer's limit of liability is (1) reduced or
exceeded, (2) the reinsurance agreement is cancelled, or (3) our reinsurer is
not able to satisfy its obligations to us, our financial condition, results of
operations and statutory surplus could be materially adversely affected.

WE MAY HAVE INSUFFICIENT CAPITAL AND SURPLUS TO COMMUTE OUR REINSURANCE
AGREEMENT WITH CENTRE SOLUTIONS (BERMUDA) LIMITED, WHICH COULD ADVERSELY IMPACT
OUR FINANCIAL RESULTS AND CAUSE SUBSTANTIAL DILUTION TO SHAREHOLDERS.

We are entitled to commute (i.e., recapture the reserve liabilities on the
underlying policies) our reinsurance agreement with Centre Solutions (Bermuda)
Limited on December 31, 2007 or any December 31 thereafter. To be able to do so,
we would be required to have amounts of statutory capital and surplus which
would support taking back the statutory liability for such policies. We do not
currently have enough statutory capital and surplus to do so, but believe it is
possible that our business will be sufficiently profitable in the future and
that we will have a sufficient amount of statutory capital and surplus to do so
by December 31, 2007. If we do not have a sufficient amount of statutory capital
and surplus to commute the agreement on December 31, 2007, we will be required
to increase substantially the amounts payable to Centre Solutions (Bermuda)
Limited under the reinsurance agreement. In addition, in such circumstances,
Centre Solutions (Bermuda) Limited would become entitled to exercise a fourth
tranche of warrants. The warrants are exercisable for convertible preferred
stock which, if converted, and when combined with the conversion of preferred
stock issuable upon exercise of the first three tranches of warrants, would
result in the issuance to Centre Solutions (Bermuda) Limited of approximately
35% of our common stock outstanding after such issuance on a fully diluted
basis. The issuance of such shares would dilute the interest of existing
security holders of Penn Treaty.

OUR REINSURERS MAY NOT SATISFY THEIR OBLIGATIONS TO US, WHICH COULD MATERIALLY
ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We obtain reinsurance from unaffiliated reinsurers, in addition to Centre
Solutions (Bermuda) Limited, on certain of our policies. Although each such
reinsurer is liable to us to the extent the risk is transferred to such
reinsurer, reinsurance does not relieve us of liability to our policyholders.
Accordingly, we bear credit risk with respect to all of our reinsurers. We
cannot assure you that our reinsurers will pay all of our reinsurance claims or
that they will pay our reinsurance claims on a timely basis. The failure of our
reinsurers to make such payments may have a material adverse effect on our
financial condition or results of operations.

S-9

WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH INSURERS THAT HAVE GREATER
FINANCIAL RESOURCES OR BETTER FINANCIAL STRENGTH RATINGS.

We sell our products in highly competitive markets. We compete with large
national insurers, smaller regional insurers and specialty insurers. Many
insurers are larger than we are and many have greater resources and better
financial strength ratings than we do. Most insurers have not experienced the
regulatory problems we have faced. In addition, we are subject to competition
from insurers with broader product lines. We also may be subject, from time to
time, to new competition resulting from changes in Medicare benefits, as well as
from insurance carriers introducing products similar to those offered by us.
Also, the removal of regulatory barriers (including as a result of the
Gramm-Leach-Bliley Financial Services Modernization Act of 1999) could result in
new competitors entering the long-term care insurance business. These new
competitors may include diversified financial services companies that have
greater financial resources than we do and that have other competitive
advantages, such as large customer bases and extensive branch networks for
distribution.

The financial strength ratings assigned to our insurance company
subsidiaries by A.M. Best Company, Inc. and Standard & Poor's Insurance Rating
Services, two independent insurance industry rating agencies, affect our ability
to expand and to attract new business. A.M. Best's ratings for the industry
range from "A++ (superior)" to "F (in liquidation)." Standard & Poor's ratings
range from "AAA (extremely strong)" to "CC (extremely weak)." A.M. Best and
Standard & Poor's insurance company ratings are based upon factors of concern to
policyholders and insurance agents and are not directed toward the protection of
investors. Our subsidiaries that are rated have A.M. Best ratings of "B- (fair)"
and/or Standard & Poor's ratings of "B- (weak)."

Certain distributors will not sell our products unless we have a financial
strength rating of at least "A-." Similarly, certain prospective customers may
decline to purchase new policies because of a perceived risk of non-payment of
policy benefits due to our financial condition.

WE MAY SUFFER REDUCED INCOME IF GOVERNMENTAL AUTHORITIES CHANGE THE REGULATIONS
APPLICABLE TO THE INSURANCE INDUSTRY.

Our insurance subsidiaries are subject to comprehensive regulation by state
insurance regulatory authorities. The laws of the various states establish
insurance departments with broad powers with respect to such things as licensing
companies to transact business, licensing agents, prescribing accounting
principles and practices, admitting statutory assets, mandating certain
insurance benefits, regulating premium rates, approving policy forms, regulating
unfair trade, regulating market conduct and claims practices, establishing
statutory reserve requirements and solvency standards, limiting dividends,
restricting certain transactions between affiliates and regulating the types,
amounts and statutory valuation of investments. The primary purpose of such
regulation is to protect policyholders, not shareholders.

State legislatures, state insurance regulators and the National Association
of Insurance Commissioners ("NAIC") continually reexamine existing laws and
regulations, and may impose changes in the future that materially adversely
affect our financial condition and results of operations and could make it
difficult or financially impracticable to continue doing business. Some states
limit rate increases on long-term care insurance products and other states have
considered doing so. Because insurance premiums are our primary source of
income, our financial condition and results of operations may be negatively
affected by any of these changes.

Certain legislative proposals could, if enacted or further refined,
adversely affect our financial condition and results of operations. These
include the implementation of minimum consumer protection standards for
inclusion in all long-term care policies, including: guaranteed premium rates;
protection against inflation; limitations on waiting periods for pre-existing
conditions; setting standards for sales practices for long-term care insurance;
and guaranteed consumer access to information about insurers, including lapse
and replacement rates for policies and the percentage of claims denied.

S-10

Enactment of any of these proposals could adversely affect our financial
condition and results of operations. In addition, recent Federal financial
services legislation requires states to adopt laws for the protection of
consumer privacy. Compliance with various existing and pending privacy
requirements also could result in significant additional costs to us.

WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IF WE CANNOT RECRUIT AND RETAIN
INSURANCE AGENTS.

We distribute our products principally through independent agents whom we
recruit and train to market and sell our products. We also engage marketing
general agents from time to time to recruit independent agents and develop
networks of agents in various states. We compete vigorously with other insurance
companies for productive independent agents, primarily on the basis of our
financial position, support services, compensation and product features. When we
ceased sales in 2001, many of our agents continued the sale of long-term care
insurance products issued by our competitors. We may not be able to attract (or
in the case of agents who have began writing long-term care products for our
competitors, to re-engage) and retain independent agents to sell our products,
especially if we are unable to obtain permission to recommence new policy sales
in the 18 states where we are not currently offering new policies. Because our
future profitability depends primarily on new policy sales, our business and
ability to compete would suffer if we are unable to recruit and retain insurance
agents or if we lose the services provided by our marketing agents.

LITIGATION MAY RESULT IN FINANCIAL LOSSES OR HARM OUR REPUTATION AND MAY DIVERT
MANAGEMENT RESOURCES.

Current and future litigation may result in financial losses, harm to our
reputation and require the dedication of significant management resources. We
are regularly involved in litigation. The litigation naming us as a defendant
ordinarily involves our activities as an insurer. In recent years, many
insurance companies have been named as defendants in class actions relating to
market conduct or sales practices, and other long-term care insurance companies
have been sued when they sought to implement premium rate increases. We cannot
assure you that we will not be named as a defendant in similar cases.

Penn Treaty and certain of its key executive officers are defendants in
consolidated actions that were instituted on April 17, 2001 in the United States
District Court for the Eastern District of Pennsylvania by shareholders of Penn
Treaty, on their own behalf and on behalf of a putative class of similarly
situated shareholders who purchased shares of our common stock between July 23,
2000 through and including March 29, 2001. The consolidated amended class action
complaint seeks damages in an unspecified amount for losses allegedly incurred
as a result of misstatements and omissions allegedly contained in Penn Treaty's
periodic reports filed with the SEC, certain of our press releases, and in other
statements made by us. The alleged misstatements and omissions relate, among
other matters, to the statutory capital and surplus position of our largest
subsidiary, Penn Treaty Network America Insurance Company. We believe that the
complaint is without merit and we will continue to defend the matter vigorously.

Penn Treaty and two of its subsidiaries, Penn Treaty Network America
Insurance Company and Senior Financial Consultants Company, are defendants in an
action instituted on June 5, 2002 in the United States District Court for the
Eastern District of Pennsylvania by National Healthcare Services, Inc. The
complaint seeks compensatory damages in excess of $150,000 and punitive damages
in excess of $5 million for an alleged breach of contract and misappropriation.
The claims arise out of a joint venture related to the AllRisk Healthcare
program, which was marketed first by Penn Treaty Network America Insurance
Company and then later by Senior Financial Consultants Company. The defendants
have denied the allegations of the complaint and will continue to defend the
matter vigorously. We have not accrued any amount related to these claims in our
financial statements.

S-11

CERTAIN ANTI-TAKEOVER PROVISIONS IN STATE LAW AND OUR ARTICLES OF INCORPORATION
MAY MAKE IT MORE DIFFICULT TO ACQUIRE US AND THUS MAY DEPRESS THE MARKET PRICE
OF OUR COMMON STOCK.

Our Restated and Amended Articles of Incorporation, the Pennsylvania
Business Corporation Law of 1988, as amended, and the insurance laws of states
in which our insurance subsidiaries do business contain certain provisions which
could delay or impede the removal of incumbent directors and could make a
merger, tender offer or proxy contest involving us difficult, even if such a
transaction would be beneficial to the interests of our shareholders, or
discourage a third party from attempting to acquire control of us. In
particular, the classification and three-year term of our directors could have
the effect of delaying a change in control. Insurance laws and regulations of
Pennsylvania and New York, our insurance subsidiaries states of domicile,
prohibit any person from acquiring control of us, and thus indirect control of
our insurance subsidiaries, without the prior approval of the insurance
commissioners of those states.

RISKS RELATING TO THE OFFERING

THE NOTES ARE SUBORDINATED TO OUR SENIOR INDEBTEDNESS.

The Notes are subordinated to all senior indebtedness, as this term is
defined in the Note indenture, but will be senior to the 2003 Notes. The Notes
will rank PARI PASSU with the 2008 Notes. At September 30, 2002, we had
approximately $1,516,000 of indebtedness outstanding that will rank senior to
the Notes. In addition, because our operations are conducted through
subsidiaries, claims of holders of indebtedness of such subsidiaries, as well as
claims of regulators and creditors (including policyholders) of such
subsidiaries, will have priority with respect to the assets and earnings of such
subsidiaries over the claims of creditors of Penn Treaty, including the Note
holders. As of September 30, 2002, the aggregate liabilities of such
subsidiaries were approximately $823.4 million.

IF THE MARKET PRICE OF OUR COMMON STOCK IS LOWER THAN THE CONVERSION PRICE OF
THE NOTES, THE CONVERSION OF THE NOTES MAY NOT BE PRACTICABLE OR PROFITABLE.

The conversion price for the Notes is $2.50 per share of common stock. As of
December 20, 2002, the closing price per share for our common stock on the New
York Stock Exchange was $1.97. If the market price for our common stock remains
lower than the conversion price for the Notes, the conversion of the Notes may
not be practicable or profitable because a holder would be paying more for our
shares of common stock by converting the Notes than he or she would have to pay
for the same shares on the open market.

THE CONVERSION OF THE NOTES, THE CONVERSION OF THE 2008 NOTES, THE EXERCISE OF
OUR OUTSTANDING WARRANTS AND STOCK OPTIONS AND ANY FUTURE ISSUANCES OF NEW
SHARES OF OUR COMMON STOCK WILL RESULT IN SIGNIFICANT DILUTION TO OUR EXISTING
SHAREHOLDERS.

The Notes and the 2008 Notes can be converted into approximately
32.1 million shares of our common stock (or approximately 43.3 million shares of
our common stock if the conversion price on the 2008 Notes is reduced from $4.50
to $2.50 per share), which would equal 62.4% of our issued and outstanding
shares following such conversion (or 69.1% of our issued and outstanding shares
following such conversion after giving effect to such lower conversion price for
the 2008 Notes). In addition, we have granted warrants to Centre Solutions
(Bermuda) Limited, which are exercisable for preferred stock convertible into
15% of our then outstanding common stock after conversion on a fully diluted
basis and an additional 20% of our then outstanding common stock after
conversion on a fully diluted basis in the event that we do not commute our
reinsurance agreement at or prior to December 31, 2007. We anticipate that to
finance the growth of our business adequately, we may offer and sell our shares
of common stock in private or public offerings in the future. The occurrence of
any or all of the foregoing will result in significant additional dilution to
our existing shareholders.

S-12

THERE IS NO ESTABLISHED MARKET FOR THE NOTES AND THEY MAY BE DIFFICULT TO SELL.

We do not intend to list the Notes for trading on any national securities
exchange or to cause them to be quoted in any inter dealer quotation system.
Whether a market develops for the Notes, and if so, the liquidity of such market
will depend on the number of holders of the Notes, our financial performance,
and the market for similar securities. We cannot assure you that an active
trading market for the Notes will develop or, if it does, at what prices the
Notes may trade. Therefore, you may not be able to sell the Notes when you want
and, if you do, you may not be able to receive the price you want.

WE MAY NOT RECEIVE THE APPROVAL OF OUR SHAREHOLDERS TO AMEND OUR ARTICLES OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK TO AN
AMOUNT SUFFICIENT TO PERMIT THE CONVERSION OF THE NOTES.

We are currently obligated to issue common stock upon (i) the conversion of
our Existing Notes, (ii) the conversion of our convertible preferred stock
issuable upon exercise of the warrants granted to Centre Solutions (Bermuda)
Limited and (iii) the exercise of all outstanding options granted by us pursuant
to our stock option plans. Following the issuance of the Notes, we will also be
obligated to issue common stock upon the conversion of the Notes. We currently
do not have enough authorized shares of common stock available for issuance to
satisfy all of these obligations. We plan to seek the approval of our
shareholders to amend our Articles of Incorporation to increase the number of
authorized shares of common stock to an amount sufficient to (i) permit the
conversion of the Notes and the Existing Notes, (ii) permit the conversion of
our convertible preferred stock issuable upon exercise of the warrants granted
to Centre Solutions (Bermuda) Limited, (iii) satisfy our obligation to issue
shares of common stock upon the exercise of outstanding options granted by us
pursuant to our stock option plans, and (iv) permit us to offer shares of our
common stock in the future to raise additional capital. Our shareholders may not
approve an increase in the number of authorized shares of common stock in an
amount sufficient to cover the foregoing obligations.

In the event that our shareholders do not approve the necessary increase in
the number of shares of our common stock authorized for issuance, we may be
required to pay Note holders and Existing Note holders who desire to convert
their securities an amount in cash equal to the market price of the shares of
common stock into which such securities are then convertible. Our financial
resources may not be sufficient to pay cash to holders of notes in lieu of
delivering common stock.

IF THE PRICE OF OUR COMMON STOCK RISES ABOVE THE CONVERSION PRICE OF THE NOTES
PRIOR TO APRIL 15, 2003, A NOTE HOLDER MAY NOT BE PERMITTED TO CONVERT AND
OBTAIN THE BENEFIT OF THE DIFFERENCE BETWEEN THE CONVERSION PRICE AND THE MARKET
PRICE.

To protect the proceeds of the offering, the Notes are not convertible into
common stock until the earlier of (i) April 15, 2003 or (ii) such time as the
shareholders have approved an amendment to our Articles of Incorporation to
increase the number of authorized shares of common stock to an amount sufficient
to cover (a) the conversion of the Notes and the Existing Notes, (b) the
conversion of our convertible preferred stock issuable upon exercise of the
warrants granted to Centre Solutions (Bermuda) Limited, and (c) the exercise of
outstanding options granted pursuant to our stock option plans. As a result, if
the market price of our common stock rises above the conversion price of the
Notes ($2.50) prior to the earlier of (i) and (ii) above, the Note holders will
not able to convert the Notes and obtain the benefit of the difference.

UPON THE CONVERSION OF THE 2008 NOTES AND THE NOTES, WE COULD BE REQUIRED TO
REDUCE CERTAIN TAX ATTRIBUTES (SUCH AS CREDITS, LOSSES, ETC.) AND THEREBY OWE
GREATER FEDERAL INCOME TAXES.

Depending upon who the owners of the Notes are at the time the Notes are
converted into common stock, the Company could be required to reduce certain of
its tax attributes (such as credits, losses, etc.) and thereby owe greater
taxes. It is not possible for the Company to quantify the impact of such a
reduction in tax attributes and the Company is not certain that any such
reduction would be required.

S-13

CHRONOLOGY OF COMPLETED STRATEGIC MILESTONES AND EVENTS

Throughout 2001 and 2002, we have continued to progress in our plan to
increase statutory surplus, improve Penn Treaty liquidity and evaluate our
product profitiability. We have successfully completed many strategic
initiatives to this end. A chronology of our strategic milestones achieved and
events affecting us in the past twenty-one months follows:

- In March 2001, we engaged a leading actuarial firm to provide consulting
actuarial services and to assist us in the evaluation of our current
product pricing and analysis of reserves. This engagement also provided us
with access to substantial industry experience and insight to supplement
our own historic data.

- In May 2001, we completed our rights offering, which raised approximately
$26 million. The proceeds of the rights offering enabled us to
sufficiently increase statutory capital and parent liquidity until our
Plan was finalized in 2002.

- In October 2001, following extensive analysis and with the assistance of
our consulting actuary, we began the implementation of premium rate
increases on approximately 70% of our existing long-term care business.
Importantly, this analysis determined that our pricing for products
currently available for sale was appropriate and at our anticipated profit
margins.

- In December 2001, we commuted all ($20 million) of our outstanding
financial reinsurance, honoring our commitment to our reinsurer.

- Our Plan was finalized and approved by the Department in February 2002. As
a result, our insurance subsidiary ratings were increased to B- by
both A.M. Best and Standard & Poor's.

- In February 2002, we entered into a 100% quota share reinsurance agreement
(for statutory purposes) on all existing long-term care policies effective
December 31, 2001.

- We recommenced sales in 23 states immediately upon the finalization of our
Plan in February 2002.

- In March 2002, we completed an equity placement to current and new
institutional investors of 510,000 shares of unregistered common stock for
net proceeds of approximately $2.4 million.

- In April 2002, we received an unqualified audit opinion for the year ended
December 31, 2001, because of the steps that we had taken to improve Penn
Treaty liquidity and insurance subsidiary statutory surplus.

- We were successful in recommencing sales in nine additional states
throughout the second quarter of 2002. In particular, in July 2002, we
recommenced sales in Florida, which has historically represented 25% of
our new policy sales.

- Subsequent to September 30, 2002, we exchanged $63.3 million out of
$74.8 million of the 2003 Notes for a like amount of 2008 Notes, which
substantially reduced our near term liquidity requirements.

- In the third quarter of 2002, we reevaluated and changed certain of the
assumptions and processes involved in the development of our reserves for
current claims. As a result, we increased our reserves for the payment of
these claims by approximately $83 million. We expect this increase to
reserves will reduce or eliminate future adverse development (i.e., actual
payments exceeding our reserves), which we have experienced in the past
and believe would continue in future periods in the absence of this
reserve increase.

- In November 2002, we received a tentative commitment from a group of
Existing Note holders to subscribe to purchase $20 million of the Notes.

S-14

We believe that the successful completion of this offering, although
dilutive to our shareholders, is an integral part of the corrective measures we
have taken to date. Our projected earnings are highly dependent upon new policy
sales growth and we are offering the Notes in part to support the goal of
increasing new policy sales.

USE OF PROCEEDS

We expect to use the proceeds from this offering, net of estimated offering
expenses of $2.3 million (including amounts payable to our financial advisors),
to meet the surplus commitment under our consent order with the Florida
Insurance Department, to pay the amounts due under the 2003 Notes, to raise
additional capital to support our insurance subsidiaries' anticipated growth,
and to provide liquidity and general working capital for Penn Treaty. We
estimate that we will need to contribute approximately $23 million to our
subsidiary, Penn Treaty Network American Insurance Company, to satisfy the
Florida consent order.

The following table sets forth the foregoing information on the assumption
that we sell all $45 million of Notes:

DESCRIPTION AMOUNT (IN THOUSANDS) PERCENTAGE
----------- --------------------- ----------

Estimated Expenses of the Offering............. $ 2,300 5.1%
Capital Contribution to Penn Treaty Network
America Insurance Company.................... 23,000 51.1
Retirement of the 2003 Notes................... 11,407 25.4
Working Capital and Liquidity for
Penn Treaty.................................. 8,293 18.4
------- -----
$45,000 100.0%
======= =====

S-15

MARKET FOR OUR COMMON STOCK

Our common stock is traded on the New York Stock Exchange under the symbol
"PTA." The following table sets forth, for the calendar periods indicated, the
high and low sale prices per share of our common stock as reported on the New
York Stock Exchange:

HIGH LOW
-------- --------

FISCAL YEAR ENDED DECEMBER 31, 2000
First Quarter............................................. $18.13 $12.25
Second Quarter............................................ 19.94 13.13
Third Quarter............................................. 18.81 14.88
Fourth Quarter............................................ 21.56 15.63

FISCAL YEAR ENDED DECEMBER 31, 2001
First Quarter............................................. 19.75 8.80
Second Quarter............................................ 9.70 2.15
Third Quarter............................................. 4.29 2.10
Fourth Quarter............................................ 6.42 2.70

FISCAL YEAR ENDING DECEMBER 31, 2002
First Quarter............................................. 6.71 4.10
Second Quarter............................................ 6.85 3.75
Third Quarter............................................. 4.78 3.35
Fourth Quarter (through December 20, 2002)................ 4.05 1.65

DIVIDEND POLICY

We have never paid any dividends and do not intend to pay any dividends in
the foreseeable future.

S-16

CAPITALIZATION

The following table sets forth the capitalization of Penn Treaty as of
September 30, 2002, as adjusted to reflect the exchange of the 2003 Notes for
the 2008 Notes, the issuance of Notes in the aggregate principal amount of
$45 million pursuant to this prospectus supplement, and the application of the
estimated net proceeds therefrom.

SEPTEMBER 30, 2002
---------------------------------------------
AS ADJUSTED
FOR ISSUANCE AS FURTHER
OF THE 2008 ADJUSTED FOR
ACTUAL NOTES THIS OFFERING
---------- ------------ -----------------
(IN THOUSANDS)

Debt:
Mortgage loan.......................................... $ 1,516 $ 1,516 $ 1,516
2003 Notes............................................. 74,750 11,407 0
2008 Notes............................................. 0 63,343 63,343
Notes.................................................. 0 0 45,000
---------- -------- -----------------
Total debt........................................... $ 76,266 $ 76,266 $ 109,859
---------- -------- -----------------
Shareholders' equity:
Preferred Stock, par value $1.00; 5,000 shares
authorized; none outstanding......................... $ -- $ -- $ --
Common Stock, par value $.10; 40,000 shares authorized;
20,321 shares issued and outstanding(1).............. 2,032 2,032 2,032
Additional paid-in capital............................. 96,992 96,992 96,992
Other comprehensive income, net of deferred taxes...... 1,119 1,119 1,119
Retained earnings...................................... 60,810 60,810 60,810
Less 915 shares of Common Stock in treasury, at cost... (6,705) (6,705) (6,705)
---------- -------- -----------------
Total shareholders' equity........................... $ 154,248 $154,248 154,248
---------- -------- -----------------
Total capitalization..................................... $ 230,514 $230,514 264,107
========== ======== =================

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

(1) Excludes 40 shares issuable to Philadelphia Brokerage Corporation following
completion of this offering and the exchange of 2003 Notes for 2008 Notes.

S-17

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

2001
--------------------------
1997 1998 1999 2000 ACTUAL(1) PROFORMA(1)(3)
-------- -------- -------- -------- --------- --------------

Fixed charges, as
defined:
Interest on long-term
debt................. $ 4,804 $ 4,809 $ 5,187 $ 5,134 $ 4,999 $ 7,099
Amortization of debt
expense.............. 359 359 359 359 359 742
Estimated interest
component of
operating rentals.... 67 87 210 229 187 187
------- ------- ------- ------- -------- --------
Total fixed
charges.......... $ 5,230 $ 5,255 $ 5,756 $ 5,722 $ 5,545 $ 8,028
======= ======= ======= ======= ======== ========
Earnings, as defined:
Net income............. $ 7,599 $24,048 $21,320 $22,750 $(48,589) $(50,228)
Add (Deduct):
Cumulative effect of
accounting change...... -- -- -- -- -- --
Income taxes........... 2,695 11,578 10,837 11,720 (16,280) (17,124)
Total fixed charges as
above................ 5,230 5,255 5,756 5,722 5,545 8,028
------- ------- ------- ------- -------- --------
Total earnings..... $15,524 $40,881 $37,913 $40,192 $(59,324) $(59,324)
======= ======= ======= ======= ======== ========
Ratio of earnings to
fixed charges.......... 3.0x 7.8x 6.6x 7.0x

NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2002
--------------------------
2001 ACTUAL(2) PROFORMA(2)(3)
------------ --------- --------------

Fixed charges, as
defined:
Interest on long-term
debt................. $ 3,760 $ 3,585 $ 5,160
Amortization of debt
expense.............. 269 269 557
Estimated interest
component of
operating rentals.... 140 137 137
------- -------- --------
Total fixed
charges.......... $ 4,169 $ 3,991 $ 5,853
======= ======== ========
Earnings, as defined:
Net income............. $ 4,170 $(31,331) $(32,604)
Add (Deduct):
Cumulative effect of
accounting change...... -- 5,151 5,151
Income taxes........... 2,148 (13,487) (14,120)
Total fixed charges as
above................ 4,169 3,991 5,853
------- -------- --------
Total earnings..... $10,487 $(35,676) $(35,676)
======= ======== ========
Ratio of earnings to
fixed charges.......... 2.5x

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

(1) In 2001, earnings were deficient to cover fixed charges by $64,869.

(2) In the nine months ending September 30, 2002, earnings were deficient to
cover fixed charges by $39,667.

(3) Proforma results are presented as if the Notes had been issued and the
2003 Notes had been defeased at the beginning of the period and include
amortization of the costs associated with the issuance of the Notes.

S-18

DESCRIPTION OF RIGHTS

THE RIGHTS

We have distributed without charge to holders of our common stock and
Existing Notes as of November 25, 2002, the record date, transferable rights to
purchase an aggregate principal amount of $45 million of Notes, convertible into
shares of our common stock at a conversion price of $2.50 per share. A holder of
our common stock will receive one right to purchase a principal amount of $1,000
of Notes for each 973 shares of common stock beneficially owned on the record
date. A holder of the 2003 Notes or the 2008 Notes will receive one right to
purchase a principal amount of $1,000 of Notes for each $26,673 principal amount
or $2,433 principal amount of such notes, respectively, beneficially owned on
the record date.

We will not issue fractional rights or pay cash. The number of rights
distributed to each holder will be rounded up to the nearest whole number.
However, in the event of oversubscription, rights to purchase Notes will be
allocated in the manner described below. Banks, brokers and other nominee rights
holders holding shares of common stock or Existing Notes on the record date for
more than one beneficial owner may exchange its rights certificate to obtain
rights certificates for the number of rights to which each such beneficial owner
would have been entitled had each been a record holder on the record date.

Because the number of rights distributed to each record holder will be
rounded up to the nearest whole number, beneficial owners of our common stock
who are also the record holders of such shares might receive slightly more
rights under certain circumstances than beneficial owners of our common stock
who are not the record holders of their shares and who do not obtain (or cause
the record owner of their shares of our common stock to obtain) a separate
rights certificate with respect to the shares beneficially owned by them,
including shares held in an investment advisory or similar account. To the
extent that record holders of our common stock or beneficial owners of our
common stock who obtain a separate rights certificate receive more rights, they
will be able to subscribe for more Notes.

Rounding the number of rights distributed to each holder up to the nearest
whole number results in the distribution of rights to purchase Notes in an
aggregate amount in excess of $45 million. Doing so, therefore, creates the
possibility that holders could subscribe, in the aggregate, to purchase Notes in
an amount exceeding $45 million. In such event, we will accept subscriptions,
first, from all holders for the number of whole rights (before rounding) which
they exercise. Thereafter, each holder receiving an additional right as a result
of rounding will be ordered according to the fraction of a right such holder
would have received in the absence of such rounding. We will then accept
subscriptions from those holders entitled to receive the largest such fraction,
and then from holders entitled to receive the next largest such fraction, and so
on until subscriptions to purchase Notes in the aggregate amount of $45 million
have been accepted. In the event that subscriptions from holders with the same
fraction of a right would cause the issuance of more than $45 million after
application of the foregoing process, we will accept subscriptions from such
holders in the order in which we received all required documents properly
executed.

EXPIRATION DATE

The rights will expire at 5:00 p.m., Eastern time, on January 20, 2002,
unless we extend the expiration date to a date no later than January 31, 2003.
After the expiration date, unexercised rights will be null and void. We will not
honor any purported exercise of rights received after the expiration date,
regardless of when the documents relating to such exercise were sent, except
pursuant to the Guaranteed Delivery Procedures described below. Notice of any
extension of the expiration date will be made through a press release we issue.

S-19

SUBSCRIPTION PRIVILEGES

BASIC SUBSCRIPTION PRIVILEGE.

Each right will entitle the holder to purchase one Note in the principal
amount of $1,000.

OVERSUBSCRIPTION PRIVILEGE.

Subject to the allocation described below, each right also carries the right
to subscribe for additional Notes. A rights holder must exercise all of the
rights held by such holder pursuant to the basic subscription privilege to
subscribe for additional Notes pursuant to the oversubscription privilege.

Notes will be available for subscription pursuant to the oversubscription
privilege only to the extent that the principal aggregate amount of $45 million
is not purchased through the basic subscription privilege. If the principal
amount not purchased through the basic subscription privilege is insufficient to
satisfy fully all subscriptions pursuant to the oversubscription privilege, such
remaining principal amount will be prorated as equitably as possible (in
increments of $1,000) among all rights holders who subscribe pursuant to the
oversubscription privilege in proportion, not to the amount subscribed for
pursuant to the oversubscription privilege, but to the principal amount each
beneficial holder subscribing pursuant to the oversubscription privilege has
purchased pursuant to the basic subscription privilege; provided, however, that
if such allocation results in any rights holder being allocated Notes
representing a greater amount of principal than such holder subscribed for
pursuant to such holder's oversubscription privilege, then such holder will be
allocated only such amount of remaining principal as such holder subscribed for
pursuant to the oversubscription privilege. If a proration of the remaining
principal results in any rights holder being allocated Notes representing a
lesser amount than such holder subscribed for pursuant to the oversubscription
privilege, then the excess purchase price paid by such holder for Notes not
issued to such subscriber will be returned without interest or deduction.

Banks, brokers and other nominee rights holders who subscribe pursuant to
the oversubscription privilege on behalf of beneficial owners of rights will be
required to certify, in connection with such oversubscription, as to the
aggregate number of rights that have been exercised and the amount of principal
that is being subscribed for by each such beneficial owner.

PURCHASE PRICE/ISSUE DATE

The purchase price for each Note is $1,000 plus accrued and unpaid interest
from the issue date. The issue date will be three New York Stock Exchange
trading days after the expiration date.

EXERCISE OF RIGHTS

Rights may be exercised by delivering to Wells Fargo Bank Minnesota, N.A.
(the "Subscription Agent"), prior to 5:00 p.m., Eastern time, on the expiration
date, the properly completed and executed rights certificate evidencing such
rights with any required signatures guaranteed, together with payment in full of
the principal amount of Notes subscribed for pursuant to the exercise of the
rights including any Notes subscribed for pursuant to the oversubscription
privilege. Such payment in full must be made by (a) check or bank draft drawn on
a U.S. bank or postal, telegraphic or express money order payable to the order
of Wells Fargo Bank Minnesota, N.A., as Subscription Agent, or (b) wire transfer
of funds to the account maintained by the Subscription Agent for such purpose at
Wells Fargo Bank Minnesota, N.A. ABA Routing No. 121000248; Beneficiary Account
No. 0001038377; FFC Penn Treaty Subscription Account No. 14073501. Reference:
Penn Treaty American Corporation and name of registered owner. Any wire transfer
of funds should clearly indicate the identity of the subscriber. The purchase
price will be deemed to have been received by the Subscription Agent only upon
(i) clearance of any uncertified check, (ii) receipt by the Subscription Agent
of any certified check or bank draft drawn on a U.S. bank or of any postal,
telegraphic or express money order, or (iii) receipt of good

S-20

funds in the Subscription Agent's account designated above. IF PAYING BY
UNCERTIFIED PERSONAL CHECK, PLEASE NOTE THAT THE FUNDS PAID THEREBY MAY TAKE UP
TO TEN BUSINESS DAYS TO CLEAR. ACCORDINGLY, HOLDERS OF RIGHTS WHO WISH TO PAY
THE PRINCIPAL AMOUNT OF THE NOTES SUBSCRIBED FOR BY MEANS OF UNCERTIFIED
PERSONAL CHECK ARE URGED TO MAKE PAYMENT SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE TO ENSURE THAT SUCH PAYMENT IS RECEIVED AND CLEARS BY SUCH DATE
AND ARE URGED TO CONSIDER PAYMENT BY MEANS OF CERTIFIED OR CASHIER'S CHECK,
MONEY ORDER OR WIRE TRANSFER OF FUNDS. WE RESERVE THE RIGHT TO REJECT ANY
UNCERTIFIED PERSONAL CHECK THAT HAS NOT CLEARED BY THE EXPIRATION DATE.

The address to which the rights certificates and payment of the purchase
price for the Notes (unless such purchase price is wired as provided for above)
should be delivered is:

Wells Fargo Bank Minnesota, N.A.
MAC # N9303-110
Corporate Trust Services
6th & Marquette Avenue
Minneapolis, MN 55479

If a rights holder whose common stock or Existing Notes are held through a
broker wishes to exercise rights, but time will not permit such holder to cause
the rights certificate or rights certificates evidencing such rights to reach
the Subscription Agent on or prior to the expiration date, such rights may
nevertheless be exercised if all of the following conditions (the "Guaranteed
Delivery Procedures") are met:

(i) such holder has caused payment in full of the principal amount of
the Notes subscribed for pursuant to the exercise of the rights to be
received (in the manner set forth above) by the Subscription Agent within
three New York Stock Exchange trading days following the expiration date;

(ii) the Subscription Agent receives, on or prior to the expiration
date, a guarantee notice (a "Notice of Guaranteed Delivery"), substantially
in the form provided with the Instructions as to Use of Rights Certificates
(the "Instructions") distributed with the rights certificates, from a member
firm of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. (the "NASD"), or from a
commercial bank or trust company having an office or correspondent in the
United States (each, an "Eligible Institution"), stating the name of the
exercising rights holder, the number of rights represented by the rights
certificate or rights certificates held by such exercising rights holder,
the principal amount of Notes being subscribed for and guaranteeing the
delivery to the Subscription Agent of any rights certificate evidencing such
rights within three New York Stock Exchange trading days following the date
of the Notice of Guaranteed Delivery; and

(iii) the properly completed rights certificate evidencing the rights
being exercised, with any required signatures guaranteed, is received by the
Subscription Agent within three New York Stock Exchange trading days
following the date of the Notice of Guaranteed Delivery relating thereto.
The Notice of Guaranteed Delivery may be delivered to the Subscription Agent
in the same manner as rights certificates at the address set forth above, or
may be transmitted to the Subscription Agent by telegram or facsimile
transmission (facsimile no. (612) 667-2134). Additional copies of the form
of Notice of Guaranteed Delivery are available upon request from Georgeson
Shareholder Communications Inc. (the "Information Agent") at the following
telephone numbers:

Holders of Common Stock and Existing Notes call
Toll free: (866) 328-5442
For Banks and Brokers: (212) 440-9800

S-21

If a rights holder does not indicate the number of rights being exercised,
or does not forward full payment of the principal amount for the number of
rights that the rights holder indicates are being exercised, then the rights
holder will be deemed to have exercised the basic subscription privilege with
respect to the maximum number of rights that may be exercised for the principal
amount delivered by the rights holder and, to the extent that the principal
amount delivered by the rights holder exceeds the aggregate purchase price for
the Notes such holder is entitled to purchase pursuant to the basic subscription
privilege (such excess being the "subscription excess"), the rights holder will
be deemed to have subscribed pursuant to the oversubscription privilege to
purchase, to the extent available, that number of Notes in a face amount equal
to the subscription excess (only in increments of $1,000).

Funds received as payment for a portion of the remaining principal amount
subscribed for pursuant to the oversubscription privilege will be held in a
segregated account pending issuance of Notes representing such portion of the
remaining principal amount. If a rights holder subscribing pursuant to the
oversubscription privilege is allocated less than all of the remaining principal
amount which such holder wished to subscribe for pursuant to the
oversubscription privilege, the excess funds paid by such holder for Notes not
issued will be returned by mail without interest or deduction as soon as
practicable after the expiration date.

Unless a rights certificate (i) provides that the Notes to be issued
pursuant to the exercise of rights represented thereby are to be delivered to
the record holder of such rights or (ii) is submitted for the account of an
Eligible Institution, signatures on such rights certificate must be guaranteed
by an Eligible Institution.

Persons who hold shares of our common stock or Existing Notes for the
account of others, such as banks, brokers or other nominee rights holders,
should notify the respective beneficial owners of such securities as soon as
possible to ascertain such beneficial owners' intentions and to obtain
instructions with respect to the rights. If the beneficial owner so instructs,
the record holder of such rights should complete rights certificates and submit
them to the Subscription Agent with the proper payment. In addition, a
beneficial owner of our common stock or Existing Notes or rights held through
such a holder should contact the holder and request the holder to effect
transactions in accordance with such beneficial owner's instructions.

The instructions accompanying the rights certificates should be read
carefully and followed in detail. DO NOT SEND RIGHTS CERTIFICATES TO PENN
TREATY.

THE METHOD OF DELIVERY OF RIGHTS CERTIFICATES AND PAYMENT OF THE PRINCIPAL
AMOUNT OF THE NOTES SUBSCRIBED FOR WILL BE AT THE ELECTION AND RISK OF EACH
RIGHTS HOLDER. IF SENT BY MAIL WE RECOMMEND THAT SUCH CERTIFICATES AND PAYMENTS
BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, AND
THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO THE
SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., EASTERN TIME, ON
THE EXPIRATION DATE.

All questions concerning the timeliness, validity, form and eligibility of
any exercise of rights or subscriptions pursuant to the oversubscription
privilege will be determined by us, and our determination will be final and
binding. We may waive any defect or irregularity, or permit a defect or
irregularity to be corrected within such time as we may determine, or reject the
purported exercise of any right or subscriptions pursuant to the
oversubscription privilege. Subscriptions will not be deemed to have been
received or accepted until all irregularities have been waived or cured within
such time as we determine in our sole discretion. Neither we nor the
Subscription Agent will be under any duty to give notification of any defect or
irregularity in connection with the submission of rights certificates or will
incur any liability for failure to give such notification.

Any questions or requests for assistance concerning the method of exercising
rights or requests for additional copies of this prospectus supplement, the
Instructions or the Notice of Guaranteed Delivery should be directed to the
Information Agent.

S-22

NO REVOCATION

ONCE A HOLDER OF RIGHTS HAS EXERCISED THE SUBSCRIPTION PRIVILEGE GRANTED BY
THE RIGHTS, SUCH EXERCISE MAY NOT BE REVOKED EXCEPT UPON MODIFICATION OR
TERMINATION OF THE RIGHTS OFFERING.

METHOD OF TRANSFERRING RIGHTS

We do not intend to list the rights for trading on any national securities
exchange or cause them to be quoted in any inter-dealer quotation system. We do
not expect there to be an organized market for the rights.

Nonetheless, the rights evidenced by a rights certificate may be transferred
in whole by endorsing the rights certificate for transfer in accordance with the
Instructions. A portion of the rights evidenced by a rights certificate (but not
fractional rights) may be transferred by delivering to the Subscription Agent a
rights certificate properly endorsed for transfer, with instructions to register
such portion of the rights evidenced thereby in the name of the transferee (and
to issue a new rights certificate to the transferee evidencing such transferred
rights). In such event, a new rights certificate evidencing the balance of the
rights will be issued to the rights holder or, if the rights holder so
instructs, to one or more additional transferees. To transfer rights to any
person other than a bank or broker, signatures on the rights certificate must be
guaranteed by an Eligible Institution.

Holders wishing to transfer all or a portion of their rights (but not
fractional rights) should allow a sufficient amount of time prior to the
expiration date for (i) the transfer instructions to be received and processed
by the Subscription Agent, (ii) a new rights certificate to be issued and
transmitted to the transferee or transferees with respect to transferred rights,
and to the transferor with respect to retained rights, if any, and (iii) the
rights evidenced by such new rights certificates to be exercised by the
recipients thereof. Neither we nor the Subscription Agent will have any
liability to a transferee or transferor of rights if rights certificates are not
received in time for exercise prior to the expiration date.

MODIFICATIONS AND CANCELLATION

We reserve the right to extend the expiration date (to a date no later than
January 31, 2003) and to modify the terms of this offering. If we modify the
terms of this offering, a new prospectus supplement, or an amendment to this
prospectus supplement, will be distributed to all rights holders who have
previously exercised rights and to holders of record of unexercised rights on
the date we modify the terms. In addition, all rights holders who have
previously exercised rights, or who exercise rights within four (4) business
days after the mailing of the new prospectus supplement or an amendment to this
prospectus supplement, shall be provided with a form of Consent to Modified
Rights Offering Terms, on which they can confirm their exercise of rights and
their subscriptions under the terms of this rights offering as modified by us. A
rights holder who has previously exercised any rights, or who exercises rights
within four (4) business days after the mailing of any such new prospectus
supplement, or an amendment to this prospectus supplement, and who does not
return such consent within ten (10) business days after the mailing of such
consent by us will be deemed to have canceled his or her exercise of rights, and
the full amount of the subscription price previously paid by such rights holder
will be returned by mail, without interest or deduction. Any completed rights
certificate received by the Subscription Agent five (5) or more business days
after the date of the amendment will be deemed to constitute the consent to the
modified terms by the rights holder who completed such rights certificate to the
modified terms.

We also reserve the right to cancel the offering at any time. Such
cancellation would be effected by our giving oral or written notice of such
cancellation to the Subscription Agent and making a public announcement by press
release. If the rights offering is cancelled, the purchase price will be
returned by mail to exercising rights holders, without interest or deduction.
Neither we nor any rights holder will

S-23

have any obligation to a transferee of rights, whether such transfer was made
through the Subscription Agent or otherwise, in the event that this offering is
cancelled. If the rights offering is cancelled, the rights will not be
exercisable.

SUBSCRIPTION AGENT

We have appointed Wells Fargo Bank Minnesota, N.A. as Subscription Agent for
the offering. The Subscription Agent's address, which is the address to which
the rights certificates and payment of the purchase price for the Notes (unless
such purchase price is wired as provided for above) should be delivered, as well
as the address to which a Notice of Guaranteed Delivery must be delivered, is:

Wells Fargo Bank Minnesota, N.A.
MAC # N9303-110
Corporate Trust Services
6th & Marquette Avenue
Minneapolis, MN 55479

The Subscription Agent's telephone number is (612) 667-0266.

We will pay the fees and expenses of the Subscription Agent and have also
agreed to indemnify the Subscription Agent from certain liabilities which it may
incur in connection with the rights offering.

FINANCIAL ADVISORS

We have engaged Merrill Lynch & Co., Advest, Inc. and Philadelphia Brokerage
Corporation as financial advisors to assist us in selling the Notes and will pay
them fees for such services. We have agreed to indemnify Merrill Lynch & Co. and
Advest, Inc. against certain liabilities that relate to or may arise out of this
offering.

NO BOARD OR FINANCIAL ADVISOR RECOMMENDATIONS

An investment in the Notes must be made pursuant to each prospective
investor's evaluation of its, his or her best interests. Accordingly, neither
our Board of Directors nor any financial advisor we engaged has made any
recommendation to any rights holder or prospective investor regarding the
exercise of rights.

S-24

DESCRIPTION OF NOTES

The Notes are to be issued under an indenture, to be dated on the issue date
between Penn Treaty and Wells Fargo Bank Minnesota, N.A., as trustee. The
following summaries of certain provisions of the Notes and the indenture do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all the provisions of the Notes and the indenture, including
the definitions therein of certain terms which are not otherwise defined in this
prospectus supplement. Wherever particular provisions or defined terms of the
indenture (or of the form of Notes which is a part thereof) are referred to,
such provisions or defined terms are incorporated herein by reference in their
entirety.

GENERAL

The Notes will represent general unsecured subordinated obligations of Penn
Treaty and will be convertible into common stock as described below under the
subheadings "--Conversion of the Notes" and "--Mandatory Conversion of the
Notes." The Notes will be limited to an aggregate principal amount of
$45 million, will be issued in fully registered form only in denominations of
$1,000 in principal amount or any integral multiple thereof, and will mature on
October 15, 2008, unless earlier redeemed at the option of Penn Treaty,
repurchased at the option of the Note holder upon a change of control, or
converted to common stock.

The indenture will not contain any financial covenants or any restrictions
on the payment of dividends, the repurchase of securities of Penn Treaty or the
incurrence of debt by Penn Treaty or any of its subsidiaries.

The Notes will bear interest from the issue date at the annual rate of
6.25%, payable semi-annually on October 15 and April 15, commencing on
April 15, 2003, to holders of record at the close of business on the preceding
October 1 and April 1, respectively. Interest will be computed on the basis of a
360-day year composed of twelve 30-day months.

Interest may, at the option of Penn Treaty, be paid by check mailed to the
address of such holder as it appears in the note register. Any holder of Notes
with an aggregate principal amount of $5 million or more may request that
interest be paid by wire transfer by giving written notice to the trustee in
accordance with the provisions of the indenture. Principal will be payable, and
the Notes may be presented for conversion, registration of transfer and
exchange, without service charge, at the office of the trustee in New York, New
York. Reference is made to the information set forth below under the subheading
"--Delivery and Form."

DELIVERY AND FORM

The Notes will be issued in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof.

GLOBAL NOTE; BOOK ENTRY FORM. A recipient of Notes pursuant to this
offering will receive a beneficial interest in an unrestricted global note. The
global note will be deposited with, or on behalf of, The Depository Trust
Company ("DTC"), and registered in the name of Cede & Co. ("Cede") as DTC's
nominee. Upon issuance of the global note, DTC will credit, on its book-entry
registration and transfer systems, the respective principal amounts of the Notes
represented by the global note to the accounts of institutions or persons,
commonly known as participants, that have accounts with DTC or its nominee.
Ownership of beneficial interests in the global note will be limited to
participants or persons that may hold beneficial interests through participants.
Except as set forth below, the record ownership of the global note may be
transferred, in whole or in part, only to another nominee of DTC or to a
successor of DTC or its nominee.

S-25

Payment of interest on and the redemption and repurchase price of the global
note will be made to Cede as registered owner of the global note, by wire
transfer of immediately available funds on each interest payment date, each
redemption date and each repurchase date, as applicable. None of Penn Treaty,
the trustee or any paying agent will have any responsibility or liability for
any aspect of the records relating to or payments made on account of beneficial
ownership interests in the global note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.

We have been informed by DTC that, with respect to any payment of interest
on, or the redemption or repurchase price of, the global note, DTC's practice
is, upon receipt of payment, to credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount represented by the global note as shown on the records of DTC. Payments
by participants to owners of beneficial interests in the principal amount
represented by the global note held through such participants will be the
responsibility of such participants, as is now the case with securities held for
the accounts of customers registered in "street name."

Transfers between participants will be effected in the ordinary way in
accordance with DTC rules and will be settled in immediately available funds.
The laws of some states require that certain persons take physical delivery of
securities in definitive form. Consequently, the ability to transfer beneficial
interests in the global note to such persons may be limited. Because DTC can
only act on behalf of participants, who in turn act on behalf of persons who
hold interests through them and certain banks, the ability of a person having a
beneficial interest in the principal amount represented by the global note to
pledge such interest to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such interest, may be affected
by the lack of a physical certificate evidencing such interest.

Neither Penn Treaty nor the trustee (or any registrar, paying agent or
conversion agent under the indenture) will have responsibility for the
performance of DTC or its participants or persons who hold interests through the
participants of their respective obligations under the rules and procedures
governing their operations. DTC has advised us that it will take any action
permitted to be taken by a holder of Notes (including, without limitation, the
presentation of Notes for exchange as described below) only at the direction of
one or more participants to whose account with DTC interests in the global note
are credited, and only in respect of the principal amount of the Notes
represented by the global note as to which such participant or participants has
or have given such direction.

DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Securities Exchange Act of 1934 (the "Exchange Act"). DTC was
created to hold securities for its participants and to facilitate the clearance
and settlement of securities transactions between participants through
electronic book-entry changes to accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations. Certain of such participants (or
their representatives), together with other entities, own DTC. Indirect access
to the DTC system is available to others such as banks, brokers, dealers and
trust companies that clear through, or maintain a custodial relationship with, a
participant, either directly or indirectly.

Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the global note among participants, it is under no obligation to
perform or continue to perform such procedures, and such procedures may be
discontinued at any time. If DTC is at any time unwilling or unable to continue
as depositary and a successor depositary is not appointed by Penn Treaty within
90 days, Penn Treaty will cause the Notes to be issued in definitive form in
exchange for the global note.

S-26

CERTIFICATED NOTES. Owners of Notes may request that certificated Notes be
issued in exchange for Notes represented by the global note. Furthermore,
certificated Notes may be issued in exchange for Notes represented by the global
note if no successor depositary is appointed by Penn Treaty as set forth above.

CONVERSION OF THE NOTES

Holders may convert their Notes or portions thereof (in denominations of
$1,000 in principal amount or integral multiples thereof) into common stock
(subject to the next paragraph) until the close of business on October 15, 2008.
The conversion right becomes exercisable on the earlier of (i) April 15, 2003 or
(ii) at such time as Penn Treaty shareholders shall have approved an amendment
to our Articles of Incorporation to increase the number of authorized shares of
Common Stock to an amount sufficient to cover the conversion of the Notes, the
Existing Notes, the convertible preferred stock issuable upon exercise of the
warrants granted to Centre Solutions (Bermuda) Limited, and the exercise of
outstanding options granted pursuant to our stock option plans. The conversion
price is $2.50 per share, subject to adjustment as described below; provided,
that in the case of Notes called for redemption, conversion rights will expire
at the close of business on the business day immediately preceding the date
fixed for redemption, unless Penn Treaty defaults in payment of the redemption
price. A Note (or portion thereof) in respect of which a holder is exercising
its option to require repurchase upon a Change of Control (as defined below) may
be converted only if such holder withdraws its election to exercise such
redemption option in accordance with the terms of the indenture.

Penn Treaty currently does not have a sufficient number of shares of common
stock authorized for issuance to accommodate the conversion of the Notes, the
Existing Notes, the exercise of outstanding options granted pursuant to our
stock option plans, and the conversion of our convertible preferred stock
issuable upon exercise of the warrants granted to Centre Solutions (Bermuda)
Limited. To provide a sufficient number of shares to cover all of these
obligations, Penn Treaty is seeking and recommending the approval of its
shareholders to amend its Articles of Incorporation to increase the number of
authorized shares of common stock to an amount sufficient to do so. In the event
a holder desires to convert all, or any portion, of its Notes into shares of
common stock after the earlier of the two dates referred to in the preceding
paragraph and Penn Treaty does not have a sufficient number of shares of common
stock available for such conversion, in lieu of delivering shares of common
stock upon conversion of that portion of such holder's Notes for which there is
an insufficient number of shares of common stock, Penn Treaty will cancel such
holder's Note and pay such holder an amount in cash equal to the market price of
the shares of common stock into which the Notes are then convertible. "Market
price" means the average of the last reported closing prices of the common stock
for the ten trading day period (appropriately adjusted to take into account the
occurrence during such period of certain events that would result in an
adjustment of the conversion price), commencing on the first trading day after
delivery of notice to such holder that Penn Treaty must pay cash in lieu of
delivering shares of common stock. Any cash paid to the holder in lieu of shares
of common stock will generally result in taxable gain or loss to the holder
converting such Notes. See "Certain United States Federal Income Tax
Considerations." However, the ability of Penn Treaty to pay cash to holders of
Notes in lieu of delivering common stock will be limited by our then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required cash payments in lieu of
delivering common stock to Note holders seeking to convert their Notes into
shares of common stock. See "Risk Factors--Risks Relating to the Offering."

Except as described below, no adjustment will be made on conversion of any
Notes for interest accrued thereon or for dividends paid on any common stock
issued. A holder of Notes at the close of business on a record date will be
entitled to receive the interest payable on such Notes on the corresponding
interest payment date. Any unpaid interest on any Note or portion thereof as of
the date

S-27

such Note or portion thereof is surrendered for conversion shall (unless such
Note or portion thereof being converted shall have been called for redemption on
a redemption date during the period from the close of business on or after any
record date for the payment of interest to the close of business on the business
day following the corresponding interest payment date) be paid in cash to the
former holder of such Note or portion thereof on the next succeeding interest
payment date. We are not required to issue fractional shares of common stock
upon conversion of Notes and, in lieu thereof, will pay a cash adjustment based
upon the closing price of the common stock on the last business day prior to the
date of conversion.

The conversion price is subject to adjustment (under formulae set forth in
the Note indenture) upon the occurrence of certain events, including: (i) the
issuance of common stock as a dividend or distribution on the outstanding common
stock, (ii) the issuance to all holders of common stock of certain rights,
options or warrants to purchase common stock at less than the Current Market
Price (as defined in the indenture), (iii) certain subdivisions, combinations
and reclassifications of common stock, (iv) distributions to all holders of
common stock of Penn Treaty of any class of capital stock of Penn Treaty (other
than distributions of common stock as a dividend or distribution) or evidences
of indebtedness of Penn Treaty or assets (including securities, but excluding
those rights, options and warrants referred to in clause (ii) above and
dividends and distributions in connection with the liquidation, dissolution or
winding up of Penn Treaty and dividends and distributions paid exclusively in
cash), (v) distributions consisting exclusively of cash (excluding any cash
portion of distributions referred to in clause (iv) or in connection with a
consolidation, merger or sale of assets of Penn Treaty as referred to in
clause (ii) of the third paragraph below) to all holders of common stock in an
aggregate amount that, together with (x) all other such all-cash distributions
made within the preceding 12 months in respect of which no adjustment has been
made and (y) any cash and the fair market value of other consideration payable
in respect of any tender offers by Penn Treaty or any of its subsidiaries for
common stock concluded within the preceding 12 months in respect of which no
adjustment has been made, exceeds 20% of Penn Treaty's market capitalization
(being the product of the then current market price of the common stock times
the number of shares of common stock then outstanding) on the record date for
such distribution and (vi) the purchase of common stock pursuant to a tender
offer made by Penn Treaty or any of its subsidiaries which involves an aggregate
consideration that, together with (x) any cash and the fair market value of any
other consideration payable in any other tender offer by Penn Treaty or any of
its subsidiaries for common stock expiring within the 12 months preceding such
tender offer in respect of which no adjustment has been made and (y) the
aggregate amount of any such all-cash distributions referred to in clause (v)
above to all holders of common stock within the 12 months preceding the
expiration of such tender offer in respect of which no adjustments have been
made, exceeds 20% of Penn Treaty's market capitalization on the expiration of
such tender offer. No adjustment of the conversion price will be made for shares
issued pursuant to a plan for reinvestment of dividends or interest.

No adjustment will be made pursuant to clause (iv) of the preceding
paragraph if Penn Treaty makes proper provision for each holder of Notes who
converts a Note (or portion thereof) to receive, in addition to the common stock
issuable upon such conversion, the kind and amount of assets (including
securities) that such holder would have been entitled to receive if such holder
had been a holder of the common stock at the time of the distribution of such
assets or securities. Rights, options or warrants distributed by Penn Treaty to
all holders of the common stock that entitle the holders thereof to purchase
shares of Penn Treaty's capital stock and that, until the occurrence of an event
(a "Triggering Event"), (i) are deemed to be transferred with the common stock,
(ii) are not exercisable and (iii) are also issued in respect of future
issuances of common stock, shall not be deemed to be distributed (and no
adjustment in the Conversion Price shall be required) until the occurrence of
the Triggering Event.

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Except as stated above, the conversion price will not be adjusted for the
issuance of common stock or any securities convertible into or exchangeable for
common stock or carrying the right to purchase any of the foregoing. No
adjustment in the conversion price will be required unless such adjustment would
require a change of at least 1% in the conversion price then in effect; provided
that any adjustment that would otherwise be required to be made shall be carried
forward and taken into account in any subsequent adjustment.

In the case of (i) any reclassification or change of the common stock (other
than changes in par value or from par value to no par value as a result of a
subdivision or a combination) or (ii) a consolidation, merger or combination
involving Penn Treaty or a sale or conveyance to another entity of the property
and assets of Penn Treaty as an entirety or substantially as an entirety
(determined on a consolidated basis), in each case as a result of which holders
of common stock shall be entitled to receive stock, other securities, other
property or assets (including cash) with respect to or in exchange for such
common stock, the holders of the Notes then outstanding will be entitled
thereafter to convert such Notes into the kind and amount of shares of stock,
other securities or other property or assets which they would have owned or been
entitled to receive upon such reclassification, change, consolidation, merger,
sale or conveyance had such Notes been converted into common stock immediately
prior to such reclassification, change, consolidation, merger, sale or
conveyance assuming that a holder of Notes did not exercise any rights of
election, if any, as to the stock, other securities or other property or assets
receivable in connection therewith.

In the event of a taxable distribution to holders of common stock (or other
transaction) which results in any adjustment of the conversion price, the
holders of Notes may, in certain circumstances, be deemed to have received a
distribution subject to the United States income tax as a dividend; in certain
other circumstances, the absence of such an adjustment may result in a taxable
dividend to the holders of common stock. See "Certain United States Federal
Income Tax Considerations--Adjustments to Conversion Price."

We may from time to time to the extent permitted by law, reduce the
conversion price by any amount for any period of at least 20 days, in which case
Penn Treaty shall give at least 15 days' notice of such decrease, if the Board
of Directors has made a determination that such decrease would be in the best
interests of Penn Treaty, which determination shall be conclusive. We may, at
our option, make such reductions in the conversion price, in addition to those
set forth above, as we deem advisable to avoid or diminish any income tax to
Penn Treaty's shareholders resulting from any dividend or distribution of stock
(or rights to acquire stock) or from any event treated as such for income tax
purposes. See "Certain United States Federal Income Tax Considerations."

MANDATORY CONVERSION OF THE NOTES

If the average closing share price of our common stock for any 15
consecutive trading days beginning on or after October 15, 2004 is at least 10%
greater than the conversion price of the Notes (i.e., $2.75) and we have a
sufficient number of shares of our common stock authorized for issuance, then
holders of the Notes are required to convert their Notes into common stock at
the conversion price of $2.50.

RANKING; SUBORDINATION

The payment of principal of, premium, if any, and interest on the Notes
will, to the extent set forth in the indenture, be senior to the 2003 Notes,
will rank PARI PASSU with the 2008 Notes, but will be subordinated in right of
payment to the prior payment in full of all Senior Indebtedness (defined below).
Upon any distribution to creditors of Penn Treaty in a liquidation or
dissolution of Penn Treaty or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding related to Penn Treaty or its property, in an
assignment for the benefit of creditors or any marshaling of Penn Treaty's
assets

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and liabilities, the holders of all Senior Indebtedness will first be entitled
to receive payment in full of all amounts due or to become due thereon before
the holders of the Notes will be entitled to receive any payment in respect of
the principal of, premium, if any, or interest on the Notes (except that holders
of Notes may receive securities that are subordinated at least to the same
extent as the Notes to Senior Indebtedness and any securities issued in exchange
for Senior Indebtedness).

Penn Treaty also may not make any payment upon or in respect of the Notes
(except in such subordinated securities) and may not acquire from the trustee or
the holder of any Note for cash or property (other than securities subordinated
to at least the same extent as the Note to (i) Senior Indebtedness and (ii) any
securities issued in exchange for all Senior Indebtedness) until Senior
Indebtedness has been paid in full if (i) a default in the payment of the
principal of, premium, if any, or interest on Senior Indebtedness occurs and is
continuing beyond any applicable period of grace or (ii) any other default
occurs and is continuing with respect to Senior Indebtedness that permits
holders of the Senior Indebtedness as to which such default relates to
accelerate its maturity and the trustee receives a notice of such default (a
"Payment Blockage Notice") from the representative or representatives of holders
of at least a majority in principal amount of Senior Indebtedness then
outstanding. Payments on the Notes may and shall be resumed (i) in the case of a
payment default, upon the date on which such default is cured or waived, or
(ii) in the case of a default other than a non-payment default, 179 days after
the date on which the applicable Payment Blockage Notice is received, unless the
maturity of any Senior Indebtedness has been accelerated. No new period of
payment blockage may be commenced within 360 days after the receipt by the
trustee of any prior Payment Blockage Notice. No default, other than a
nonpayment default, that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice, unless such default shall have been cured or
waived for a period of not less than 180 days.

"Senior Indebtedness" with respect to the Notes means the principal of,
premium, if any, and interest on, and any fees, costs, expenses and any other
amounts (including indemnity payments) related to the following, whether
outstanding on the date of the indenture or thereafter incurred or created:
(i) indebtedness, matured or unmatured, whether or not contingent, of Penn
Treaty for money borrowed evidenced by notes or other written obligations,
(ii) any interest rate contract, interest rate swap agreement or other similar
agreement or arrangement designed to protect Penn Treaty or any of its
subsidiaries against fluctuations in interest rates, (iii) indebtedness, matured
or unmatured, whether or not contingent, of Penn Treaty evidenced by notes,
debentures, bonds or similar instruments or Letters of Credit (or reimbursement
agreements in respect thereof), (iv) obligations of Penn Treaty as lessee under
capitalized leases and under leases of property made as part of any sale and
leaseback transactions, (v) indebtedness of others of any of the kinds described
in the preceding clauses (i) through (iv) assumed or guaranteed by Penn Treaty,
and (vi) renewals, extensions, modifications, amendments and refundings of, and
indebtedness and obligations of a successor person issued in exchange for or in
replacement of, indebtedness or obligations of the kinds described in the
preceding clauses (i) through (iv), unless the agreement pursuant to which any
such indebtedness described in clauses (i) through (vi) is created, issued,
assumed or guaranteed expressly provides that such indebtedness is not senior or
superior in right of payment to the Notes; provided, however, that the following
shall not constitute Senior Indebtedness: (w) any indebtedness or obligation of
Penn Treaty in respect of the Notes or the Existing Notes, (x) any indebtedness
of Penn Treaty to any of its subsidiaries or other affiliates; (y) any
indebtedness that is subordinated or junior in any respect to any other
indebtedness of Penn Treaty other than Senior Indebtedness; and (z) any
indebtedness incurred for the purchase of goods or materials in the ordinary
course of business.

In the event that the trustee (or paying agent if other than the trustee) or
any holder receives any payment of principal or interest with respect to the
Notes at a time when such payment is prohibited under the indenture, such
payment shall be held in trust for the benefit of, and immediately shall be

S-30

paid over and delivered to, the holders of Senior Indebtedness or their
representative as their respective interests may appear. After all Senior
Indebtedness is paid in full and until the Notes are paid in full, holders shall
be subrogated (equally and ratably with all other indebtedness PARI PASSU with
the Notes) to the rights of holders of Senior Indebtedness to receive
distributions applicable to Senior Indebtedness to the extent that distributions
otherwise payable to the holders have been applied to the payment of Senior
Indebtedness.

As of September 30, 2002, we had approximately $1.5 million outstanding
under the mortgage, constituting all the currently outstanding Senior
Indebtedness. We will not have any other Senior Indebtedness outstanding
immediately following completion of this offering; however, the indenture does
not prohibit or limit the incurrence of Senior Indebtedness in the future. As of
December 20, 2002, Penn Treaty had approximately $63.3 million principal amount
of 2008 Notes outstanding.

In addition, because our operations are conducted primarily through our
subsidiaries, claims of holders of indebtedness of such subsidiaries, as well as
claims of regulators and creditors of such subsidiaries, will have priority with
respect to the assets and earnings of such subsidiaries over the claims of
creditors of Penn Treaty, including holders of the Notes. As of September 30,
2002, the aggregate liabilities of such subsidiaries were approximately
$823.4 million. The indenture does not limit the amount of additional
indebtedness which any of our subsidiaries can create, incur, assume or
guarantee.

Because of these subordination provisions, in the event of a liquidation or
insolvency of Penn Treaty or any of its subsidiaries, holders of Notes may
recover less, ratably, than the holders of Senior Indebtedness.

OPTIONAL REDEMPTION BY PENN TREATY

The Notes are not redeemable at the option of Penn Treaty prior to
October 15, 2004. At any time on or after that date, the Notes may be redeemed
at Penn Treaty's option on at least 30 but not more than 60 days' notice, in
whole at any time or in part from time to time, at a price equal to the
principal amount of the Notes, together with accrued interest to the date fixed
for redemption.

If fewer than all the Notes are to be redeemed, the trustee will select the
Notes to be redeemed in principal amounts of $1,000 or integral multiples
thereof by lot or, in its discretion, on a pro rata basis. If any Note is to be
redeemed in part only, a new Note or Notes in principal amount equal to the
unredeemed principal portion thereof will be issued. If a portion of a holder's
Notes is selected for partial redemption and such holder converts a portion of
such Notes, such converted portion shall be deemed to be taken from the portion
selected for redemption.

No sinking fund is provided for the Notes.

CHANGE OF CONTROL

Upon the occurrence of a Change of Control (as defined below), each holder
of Notes shall have the right to require that Penn Treaty repurchase such
holder's Notes in whole or in part in integral multiples of $1,000, at a
purchase price in cash in an amount equal to 101% of the principal amount
thereof, together with accrued and unpaid interest to the date of repurchase,
pursuant to an offer (the "Change of Control Offer") made in accordance with the
procedures described below and the other provisions in the indenture.

A "Change of Control" means an event or series of events in which (i) any
"person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act) acquires "beneficial ownership" (as determined in accordance with
Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of more
than 50% of the total Voting Stock (as defined below) of Penn Treaty at an
Acquisition Price (as defined below) less than the conversion price then in
effect with respect to the

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Notes and (ii) the holders of the common stock receive consideration which is
not all or substantially all common stock that is (or upon consummation of or
immediately following such event or events will be) listed on a United States
national securities exchange or approved for quotation on the Nasdaq Stock
Market or any similar United States system of automated dissemination of
quotations of securities' prices; provided, however, that any such person or
group shall not be deemed to be the beneficial owner of, or to beneficially own,
any Voting Stock tendered in a tender offer until such tendered Voting Stock is
accepted for purchase under the tender offer. "Voting Stock" means capital stock
of the class or classes pursuant to which the holders thereof have the general
voting power under ordinary circumstances to elect directors, managers or
trustees of a corporation (irrespective whether or not at the time capital stock
of any other class or classes shall have or might have voting power by reason of
the happening of any contingency). "Acquisition Price" means the weighted
average price paid by the person or group in acquiring the Voting Stock.

Within 30 days following any Change of Control, we shall send by first-class
mail, postage prepaid, to the trustee and to each holder of Notes, at such
holder's address appearing in the Note register, a notice stating, among other
things, that a Change of Control has occurred, the repurchase price, the
repurchase date, which shall be a business day no earlier than 30 days nor later
than 60 days from the date such notice is mailed, and certain other procedures
that a holder of Notes must follow to accept a Change of Control Offer or to
withdraw such acceptance.

We will comply, to the extent applicable, with the requirements of
Rule 13e-4 and Rule 14e-1 promulgated under the Exchange Act and other
securities laws or regulations, to the extent such laws are applicable, in
connection with the repurchase of the Notes as described above.

Future indebtedness of Penn Treaty may contain prohibitions of certain
events which would constitute a Change of Control or require Penn Treaty to
offer to repurchase such indebtedness upon a Change of Control. Moreover, the
exercise by the holders of Notes of their right to require Penn Treaty to
purchase the Notes could cause a default under such indebtedness, even if the
Change of Control itself does not, due to the financial effect of such purchase
on Penn Treaty. Finally, our ability to pay cash to holders of Notes upon a
purchase may be limited by Penn Treaty's then existing financial resources.
There can be no assurance that sufficient funds will be available when necessary
to make any required purchases. See "Risk Factors." Furthermore, the Change of
Control provisions may in certain circumstances make more difficult or
discourage a takeover of Penn Treaty and the removal of incumbent management.

MERGER, CONSOLIDATION AND SALE OF ASSETS

The indenture prohibits Penn Treaty from consolidating with or merging with
or into, or conveying, transferring or leasing all or substantially all its
assets (determined on a consolidated basis), to any person unless: (i) either
Penn Treaty is the resulting, surviving or transferee person (the "Successor
Company") or the Successor Company is a person organized and existing under the
laws of the United States or any state thereof or the District of Columbia, and
the Successor Company (if not Penn Treaty) expressly assumes by a supplemental
indenture, executed and delivered to the trustee, in form satisfactory to the
trustee, all the obligations of Penn Treaty under the indenture and the Notes,
including the conversion rights described above under "--Conversion of the
Notes," (ii) immediately after giving effect to such transaction no Event of
Default (as defined below) has occurred and is continuing, and (iii) Penn Treaty
has delivered to the trustee an officers' certificate and an opinion of counsel,
each stating that such consolidation, merger or transfer and such supplemental
indenture (if any) comply with the indenture.

S-32

EVENTS OF DEFAULT AND REMEDIES

An Event of Default is defined in the indenture as being, among other
things: default in payment of the principal of or premium, if any, on the Notes
when due at maturity, upon redemption or otherwise, including failure by Penn
Treaty to purchase the Notes when required as described under "--Change of
Control" (whether or not such payment shall be prohibited by the subordination
provisions of the indenture); default for 30 days in payment of any installment
of interest on the Notes (whether or not such payment shall be prohibited by the
subordination provisions of the indenture); default by Penn Treaty for 90 days
after notice in the observance or performance of any other covenants in the
indenture; final judgments or decrees entered into by a court of competent
jurisdiction against Penn Treaty or any subsidiary involving liabilities of
$25 million or more after deducting the portion of such liabilities accepted by
an insurance company; or certain events involving bankruptcy, insolvency or
reorganization of Penn Treaty. The indenture provides that the trustee may
withhold notice to the holders of Notes of any default (except in payment of
principal, premium, if any, or interest with respect to the Notes) if the
trustee, in good faith, considers it in the interest of the holders of the Notes
to do so.

The Note indenture provides that if an Event of Default (other than an Event
of Default with respect to certain events, including bankruptcy, insolvency or
reorganization of Penn Treaty) shall have occurred and be continuing, the
trustee or the holders of not less than 25% in principal amount of the Notes
then outstanding may declare the principal of and premium, if any, on the Notes
to be due and payable immediately, but if Penn Treaty shall pay or deposit with
the trustee a sum sufficient to pay all matured installments of interest on all
Notes and the principal and premiums, if any, on all Notes that have become due
other than by acceleration and certain expenses and fees of the trustee and if
all defaults (except the nonpayment of interest on, premium, if any, and
principal of any Notes which shall have become due by acceleration) shall have
been cured or waived and certain other conditions are met, such declaration may
be canceled and past defaults may be waived by the holders of a majority in
principal amount of the Notes then outstanding.

The holders of a majority in principal amount of the Notes then outstanding
shall have the right to direct the time, method and place of conducting any
proceedings for any remedy available to the trustee, subject to certain
limitations specified in the indenture. The indenture provides that, subject to
the duty of the trustee following an Event of Default to act with the required
standard of care, the trustee will not be under an obligation to exercise any of
its rights or powers under the indenture at the request or direction of any of
the holders, unless the trustee receives satisfactory indemnity against any
associated costs, liability or expense.

SATISFACTION AND DISCHARGE; DEFEASANCE

The Note indenture will cease to be of further effect as to all outstanding
Notes (except as to (i) rights of the holders of Notes to receive payments of
principal of, premium, if any, and interest on, the Notes, (ii) rights of
holders of Notes to convert to common stock or, in certain circumstances, cash,
(iii) Penn Treaty's right of optional redemption, (iv) rights of registration of
transfer and exchange, (v) substitution of apparently mutilated, defaced,
destroyed, lost or stolen Notes, (vi) rights, obligations and immunities of the
trustee under the indenture and (vii) rights of the holders of Notes as
beneficiaries of the indenture with respect to the property so deposited with
the trustee payable to all or any of them) if (A) Penn Treaty will have paid or
caused to be paid the principal of, premium, if any, and interest on the Notes
as and when the same will have become due and payable or (B) all outstanding
Notes (except lost, stolen or destroyed Notes which have been replaced or paid)
have been delivered to the trustee for cancellation or (C) (x) the Notes not
previously delivered to the trustee for cancellation will have become due and
payable or are by their terms to become due and payable within one year or are
to be called for redemption tender arrangements satisfactory to the trustee upon
delivery of notice and (y) Penn Treaty will have irrevocably deposited with the
trustee, as trust funds,

S-33

cash, in an amount sufficient to pay principal of and interest on the
outstanding Notes, to maturity or redemption, as the case may be. Such trust may
only be established if such deposit will not result in a breach or violation of,
or constitute a default under, any agreement or instrument pursuant to which
Penn Treaty is a party or by which it is bound and Penn Treaty has delivered to
the trustee an officers' certificate and an opinion of counsel, each stating
that all conditions related to such defeasance have been complied with.

The Note indenture will also cease to be in effect (except as described in
clauses (i) through (vii) in the immediately preceding paragraph) and the
indebtedness on all outstanding Notes will be discharged on the 123rd day after
the irrevocable deposit by Penn Treaty with the trustee, in trust, specifically
pledged as security for, and dedicated solely to, the benefit of the holders of
the Notes, of cash, U.S. Government Obligations (as defined in the indenture) or
a combination thereof, in an amount sufficient, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the trustee, to pay the principal of,
premium, if any, and interest on the Notes then outstanding in accordance with
the terms of the indenture and the Notes ("legal defeasance"). Such legal
defeasance may only be effected if (i) no Event of Default has occurred or is
continuing, (ii) such deposit will not result in a breach or violation of, or
constitute a default under, any agreement or instrument to which Penn Treaty is
a party or by which it is bound, (iii) Penn Treaty has delivered to the trustee
an opinion of counsel stating that (A) Penn Treaty has received from, or there
has been published by, the Internal Revenue Service (the "Service") a ruling or
(B) since the date of the indenture, there has been a change in the applicable
Federal income tax law, in either case to the effect that, based thereon, the
holders of the Notes will not recognize income, gain or loss for Federal income
tax purposes as a result of such deposit, defeasance and discharge by Penn
Treaty and will be subject to Federal income tax on the same amount and in the
same manner and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred, (iv) Penn Treaty has delivered to the
trustee an opinion of counsel to the effect that after the 123rd day following
the deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally and (v) Penn Treaty has delivered to the trustee an officers
certificate and an opinion of counsel stating that all conditions related to the
defeasance have been complied with.

Penn Treaty may also be released from its obligations under the covenants
described above captioned "--Change of Control" and "--Merger, Consolidation and
Sale of Assets" with respect to the Notes outstanding on the 123rd day after the
irrevocable deposit by Penn Treaty with the trustee, in trust, specifically
pledged as security for, and dedicated solely to, the benefit of the holders of
the Notes, of cash, U.S. Government Obligations or a combination thereof, in an
amount sufficient in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof delivered to the
trustee, to pay the principal of, premium, if any, and interest on the Notes
then outstanding in accordance with the terms of the indenture and the Notes
("covenant defeasance"). Such covenant defeasance may only be effected if
(i) no Event of Default has occurred or is continuing (ii) such deposit will not
result in a breach or violation of, or constitute a default under, any agreement
or instrument to which Penn Treaty is a party or by which it is bound,
(iii) Penn Treaty has delivered to the trustee an officers' certificate and an
opinion of counsel to the effect that the holders of the Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such deposit and covenant defeasance by Penn Treaty and will be subject to
federal income tax on the same amount, in the same manner and at the same times
as would have been the case if such deposit and covenant defeasance had not
occurred, (iv) Penn Treaty has delivered to the trustee an opinion of counsel to
the effect that after the 123rd day following the deposit, the trust funds will
not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally and
(v) Penn Treaty has delivered to the trustee an officers' certificate and an
opinion of counsel stating that all conditions related to the covenant
defeasance have been complied with. Following such covenant defeasance, Penn
Treaty will no longer be required to comply with the

S-34

obligations described above under "Merger, Consolidation and Sale of Assets" and
will have no obligation to repurchase the Notes pursuant to the provisions
described under "--Change of Control."

Notwithstanding any satisfaction and discharge or defeasance of the
indenture, the obligations of Penn Treaty described under "--Conversion of the
Notes" will survive to the extent provided in the indenture until the Notes
cease to be outstanding.

MODIFICATIONS OF THE INDENTURE

The Note indenture contains provisions permitting Penn Treaty and the
trustee, with the consent of the holders of not less than a majority in
principal amount of the Notes at the time outstanding, to modify the indenture
or any supplemental indenture or the rights of the holders of the Notes, except
that no such modification shall (i) extend the fixed maturity of any Note,
reduce the rate or extend the time of payment of interest thereon, reduce the
principal amount thereof or premium, if any, thereon, reduce any amount payable
upon redemption thereof, change the obligation of Penn Treaty to repurchase the
Notes, at the option of the holder, upon the happening of a Change of Control,
impair or affect the right of a holder to institute suit for the payment
thereof, change the currency in which the Notes are payable, modify the
subordination provisions of the indenture in a manner adverse to the holders of
the Notes or impair the right to convert the Notes into common stock subject to
the terms set forth in the indenture, without the consent of the holder of each
Note so affected or (ii) without the consent of holders of all the Notes then
outstanding, reduce the aforesaid percentage of Notes, the holders of which are
required to consent to any such modification or supplemental indenture. The
trustee may modify or supplement the indenture without notice to or consent of
any holder in certain events, such as to make provision for certain conversion
rights, to provide for the issuance of Notes in coupon form, to correct or
supplement any inconsistent or deficient provision in the indenture, to comply
with the provisions of the Trust indenture Act of 1939 or to appoint a successor
trustee.

CONCERNING THE TRUSTEE

Wells Fargo Bank Minnesota, N.A., the trustee under the indenture, has been
appointed by Penn Treaty as the paying agent, conversion agent, registrar and
custodian with regard to the Notes. The trustee and/or its affiliates may in the
future provide banking and other services to us in the ordinary course of their
respective businesses. Under the indenture, each holder or former holder of a
Note agrees to indemnify Penn Treaty and the trustee against any liability that
may result from the transfer, exchange or assignment of such holder's or former
holder's Note in violation of any provision of the indenture or applicable
United States Federal or state securities laws.

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DESCRIPTION OF COMMON STOCK

The following summary description of our common stock is qualified in its
entirety by reference to our Restated and Amended Articles of Incorporation, as
amended and our Amended and Restated By-Laws, copies of which are filed as
exhibits to our Registration Statement on Form S-1 (Reg. No. 33-92690) and our
Registration Statement on Form S-3 (Reg. No. 333-22125).

Our authorized common stock is currently 40,000,000 shares.

At December 23, 2002, there were 19,375,741 shares of Common Stock
outstanding.

COMMON STOCK

DIVIDENDS.

Subject to the rights of the holders of preferred stock, our common stock
holders are entitled to receive dividends and other distributions in cash, stock
or property, when, as and if declared by the Board of Directors out of our
assets or funds legally available therefor and shall share equally on a per
share basis in all such dividends and other distributions.

VOTING RIGHTS.

At every meeting of shareholders, every common stock holder is entitled to
one vote per share. Subject to any voting rights which may be granted to holders
of preferred stock, any action submitted to shareholders is approved if the
number of votes cast in favor of such action exceeds the number of votes
required by the provisions of our Articles of Incorporation or by applicable
law, subject to applicable quorum requirements. Our Articles of Incorporation
require the affirmative vote of at least 67% of the voting power of all of our
shareholders with respect to fundamental corporate transactions including
mergers, consolidations and sales of all or substantially all assets. Our Bylaws
provide for action by written consent.

MISCELLANEOUS. The holders of common stock have no preemptive rights,
cumulative voting rights, or conversion rights and the common stock is not
subject to redemption.

The transfer agent and registrar with respect to the common stock is
Wachovia Bank, N.A.

All shares of common stock issuable upon conversion of the securities
offered by this prospectus supplement will, when properly authorized and issued,
be fully paid and non-assessable. The common stock is traded on the New York
Stock Exchange under the symbol "PTA."

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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

The following is a general summary of the principal Federal income tax
considerations relevant to holders of our common stock and Existing Notes upon
the issuance of the rights, upon the exercise or disposition of the rights and
of holding the Notes. This summary is qualified in its entirety by reference to,
and is based upon, the Internal Revenue Code of 1986 (the "Code"), and other
laws, regulations, rulings and decisions in effect on the date of this
prospectus supplement as those laws, regulations, rulings and decisions were
interpreted on such date. This summary does not discuss all aspects of Federal
income taxation that may be relevant to a particular investor or to certain
types of investors subject to special treatment under the Federal income tax
laws (for example, banks, dealers in securities, life insurance companies,
tax-exempt organizations and foreign taxpayers), or any aspect of state, local
or foreign tax laws. Rights holders should consult their own tax advisors to
determine the tax consequences of the offering that are relevant to their
particular situations.

ISSUANCE OF THE RIGHTS

Holders of our common stock on the record date will not be required to
recognize taxable income upon the receipt of the rights provided that no record
date holder of common stock is permitted to elect to receive either a
distribution in rights or some other form of property, and provided that the
distribution does not have the result of causing some shareholders to receive
property and causing other shareholders to have an increase in their
proportionate interest in our assets or our earnings and profits. Because no
record date holder of common stock may elect to receive a distribution other
than in the form of rights, and because the distribution should not have the
effect of causing some shareholders to receive property and other shareholders
to receive an increase in their proportionate interest in our assets or our
earnings and profits, no income should be recognized by any of the record date
holders of our common stock in connection with the issuance of the rights.

Holders of our Existing Notes on the record date also should not be required
to recognize taxable income upon receipt of the rights, although there is no
specific Code provision governing the tax consequences of the issuance of the
rights to such holders.

Holders of our common stock and Existing Notes should not be required to
recognize taxable income if they exercise their oversubscription privilege.
Although the oversubscription privilege may enable such holders to increase
their proportionate interest in our assets or earnings and profits, no
shareholders or Existing Noteholders will concurrently receive property in lieu
of having such privilege granted to them.

BASIS AND HOLDING PERIOD OF THE RIGHTS

Except as provided in the following sentence, the basis of the rights
received by a record date rights holder with respect to such shareholder's
common stock will be zero. If either (i) the fair market value of the rights on
the date of issuance is 15% or more of the fair market value (on that same date)
of the common stock with respect to which they are received (which could occur
in the case of a shareholder's exercising an oversubscription privilege if such
privilege is aggregated with the basic subscription privilege in determining the
value of the rights in the case of an oversubscription), or (ii) the record date
holder elects under Section 307 of the Code, on the record date holder's Federal
income tax return for the taxable year in which the rights are received, to
allocate part of the basis of the record date rights holder's shares of common
stock to the rights, then, upon exercise or transfer of the rights, the record
date rights holder's basis in those shares of common stock will be allocated
between shares of the common stock and the rights in proportion to the fair
market values of each on the date of issuance. Because the holders of our
Existing Notes are assumed not to recognize taxable income upon receipt of the
rights and there is no specific Code provision governing the determination

S-37

of the basis of the rights to such holders, the basis of the rights received by
such holders should in all cases be zero.

The holding period of a record date rights holder with respect to rights
received in respect of that holder's common stock will include the shareholder's
holding period for the common stock with respect to which the rights were
issued. The holding period of a record date rights holder with respect to rights
received in respect of that holder's Existing Notes should also include the
holder's holding period for such Existing Notes with respect to which the rights
were issued, although no specific Code provision requires that result.

In the case of a purchaser of rights (a "Purchaser"), the basis of the
Purchaser's rights will be equal to the purchase price paid therefor, and the
holding period for those rights will commence on the date following the date of
purchase.

TRANSFER OF THE RIGHTS

A record date rights holder or a purchaser who sells or exchanges rights
will recognize gain or loss equal to the difference between the amount realized
and the basis, if any, of the rights sold or exchanged. Such gain or loss will
be capital gain or loss if the common stock obtainable upon the exercise of the
rights would be a capital asset in the hands of the record date rights holder or
purchaser.

EXPIRATION OF THE RIGHTS

Record date rights holders who allow such rights to expire unexercised will
not recognize any gain or loss, and no adjustment will be made to the basis of
their common stock or convertible subordinated notes.

A purchaser who allows rights to expire unexercised will recognize a loss
equal to the basis of those rights. Any loss recognized by a purchaser on the
expiration of the rights will be a capital loss if the common stock obtainable
upon the exercise of the rights would be a capital asset in the hands of the
purchaser.

EXERCISE OF THE RIGHTS, BASIS AND HOLDING PERIOD OF ACQUIRED NOTES

Rights holders will not recognize any gain or loss upon the exercise of
their rights. The basis of each Note acquired through exercise of the rights
will be equal to the sum of the subscription price paid therefor and the basis,
if any, of the rights. The holding period for the Note acquired through exercise
of the rights will begin on the date the rights are exercised.

THE NOTES

We intend to treat the Notes as indebtedness for United States Federal
income tax purposes. Such characterization is binding on us (but not the Service
or a court). Each holder of a Note also must treat the Notes as indebtedness
unless the holder makes adequate disclosure on its income tax return; however,
by exercising a right, a holder of a Note agrees to treat the Note as
indebtedness under these rules.

As used herein, a "U.S. holder" means a beneficial owner of existing notes
or Notes received in the exchange offer that is a citizen or resident (within
the meaning of Section 7701(b) of the Code) of the United States, a corporation
(including a non-corporate entity taxable as a corporation), formed under the
laws of the United States or any political subdivision thereof, an estate the
income of which is subject to United States federal income taxation regardless
of its source and a trust subject to the primary supervision of a court within
the United States and the control of a United States fiduciary as described in
Section 7701(a)(30) of the Code or any other person whose income or gain with
respect to

S-38

an exchange note is effectively connected with the conduct of a United States
trade or business. If an entity treated as a partnership for Federal income tax
purposes holds existing or Notes, the tax treatment of a partner depends upon
the status of the partner and the activities of the partnership. A "non-U.S.
holder" is any beneficial owner of existing notes or Notes other than a U.S.
holder.

Shareholders or Existing Note Holders are urged to consult their own tax
advisors to determine their potential tax consequences of acquisition of the
rights and ownership and disposition of the Notes.

TAX TREATMENT OF THE OWNERSHIP AND DISPOSITION OF NOTES

STATED INTEREST AND ORIGINAL ISSUE DISCOUNT ON THE NOTES

The stated interest on the Notes will be includable in a U.S. holder's gross
income as ordinary income for United States Federal income tax purposes at the
time it is paid or accrued in accordance with the U.S. holder's regular method
of tax accounting.

We do not anticipate that the Notes will be issued with original issue
discount. As a result, we anticipate that a U.S. holder will not be subject to
tax on original issue discount but instead will be subject to tax only on stated
interest on the Notes. If, however, the issue price of the Notes, which for this
purpose is their face amount, is determined to be significantly less than the
stated redemption price at maturity of the Notes so that the original issue
discount on the Notes is not considered to be DE MINIMIS, the United States
Federal income tax consequences set forth below will apply.

The amount of original issue discount on a debt instrument generally is
equal to the difference between the stated redemption price at maturity of the
debt instrument and the debt instrument's issue price. However, if the original
issue discount on a debt instrument is less than 1/4 of 1 percent of the stated
redemption price at maturity of the debt instrument multiplied by the number of
complete years to maturity, the original issue discount on the debt instrument
is considered DE MINIMIS and will be deemed to be zero. The stated redemption
price at maturity of a debt instrument will equal the sum of all amounts
provided under the debt instrument, regardless of whether denominated as
principal or interest, other than "qualified stated interest" payments. For such
purposes, "qualified stated interest" generally means stated interest that is
unconditionally payable in cash or property, other than debt instruments of the
issuer, at least annually at a single fixed rate. The stated interest on the
Notes will constitute "qualified stated interest."

A U.S. holder, other than holders with amortizable bond premium or
offsetting acquisition premium, must include any original issue discount on the
Notes as ordinary interest income as it accrues (in advance of the receipt of
any cash payments attributable to such income) in accordance with a constant
yield method based on a compounding of interest, regardless of such U.S.
holder's regular method of tax accounting. Subject to making an appropriate
election, a U.S. holder generally will be permitted to include all interest that
accrues or is to be paid on the Notes in income under the constant yield method
applicable to original issue discount, subject to certain limitations and
exceptions.

AMORTIZABLE BOND PREMIUM AND ACQUISITION PREMIUM

If a U.S. holder's initial tax basis in the Notes is greater than the stated
redemption price at maturity, such U.S. holder generally will not be required to
include original issue discount, if any, in income. If a U.S. holder's initial
tax basis in the Notes is greater than the issue price of the Notes but less
than the stated redemption price at maturity, such U.S. holder generally will be
considered to have "acquisition premium" with respect to the Notes, which may
reduce the amount of original issue discount, if any, that the U.S. holder is
required to include in income.

S-39

SALE, EXCHANGE OR RETIREMENT OF THE NOTES

A U.S. holder generally will recognize gain or loss on the sale, exchange or
retirement of Notes equal to the difference between the amount realized on the
sale, exchange or retirement of the Notes and the U.S. holder's adjusted tax
basis in the Notes. Any gain or loss recognized on the sale, exchange or
retirement of Notes will generally be long-term capital gain or loss if the U.S.
holder has held the Notes as capital assets for more than one year, other than
amounts attributable to accrued interest. A U.S. holder's holding period for a
Note will begin when the rights are exercised. However, under the market
discount rules, any gain recognized by a U.S. holder will be ordinary income to
the extent of the accrued market discount which has not previously been included
in income. The amount realized on a redemption by us of a Note for stock is the
fair market value of the stock on the redemption payment date. To the extent any
cash is received by the holder of a Note in lieu of fractional shares, the cash
will be treated as if received in exchange for the fractional share.

CONSTRUCTIVE DIVIDEND

If at any time we make a distribution of property to shareholders that would
be taxable to such shareholders as a dividend for United States Federal income
tax purposes and, pursuant to the anti-dilution provisions of the indenture, the
conversion price of the Notes is reduced, such reduction may be deemed to be the
payment of a taxable dividend to U.S. holders of Notes. If the conversion rate
is increased at our discretion, this increase may be deemed to be the payment of
a taxable dividend to U.S. holders of Notes.

CONVERSION OF NOTES INTO COMMON STOCK

A U.S. holder's conversion of a Note into common stock generally will not be
a taxable event. The U.S. holder's tax basis in the common stock received on
conversion of Notes will be the same as the U.S. holder's adjusted tax basis in
the Notes at the time of conversion, exclusive of any tax basis allocable to a
fractional share for which the holder receives cash. The holding period for the
common stock received on conversion will include the holding period of the Notes
converted. The receipt of cash in lieu of fractional shares of common stock
should generally result in capital gain or loss. This capital gain or loss will
be measured by the difference between the cash received for the fractional share
interest and the U.S. holder's tax basis in the fractional share interest.

COMMON STOCK

Distributions, if any, paid on the common stock after a conversion, to the
extent made from our current or accumulated earnings and profits, will be
included in a U.S. holder's income as ordinary income as they are paid.
Distributions in excess of our current and accumulated earnings and profits will
reduce a U.S. holder's basis for the common stock until the basis is zero and
any additional distributions in excess or our current and accumulated earnings
and profits will be short term or long term gain, depending upon whether the
U.S. holder's holding period for the common stock exceeds one year. Gain or loss
realized on a sale or exchange of common stock will equal the difference between
the amount realized on such sale or exchange and the holder's adjusted tax basis
in such stock. Such gain or loss will generally be long-term capital gain or
loss if the U.S. holder's holding period in the common stock is more than one
year. However, under the market discount rules, any gain recognized by a U.S.
holder will be ordinary income to the extent of the accrued market discount that
has not previously been included in income.

NON-U.S. HOLDERS

The following discussion is a summary of the principal U.S. Federal income
and estate tax consequences resulting from the ownership of the Notes or common
stock by non-U.S. holders.

S-40

WITHHOLDING TAX ON PAYMENTS OF PRINCIPAL AND INTEREST ON NOTES

The payment of principal and interest on Notes to a non-U.S. holder will not
be subject to U.S. federal withholding tax if:

- such interest is not effectively connected with an office or other fixed
place of business in the U.S.,

- the non-U.S. holder does not actually or constructively own 10% or more of
the total voting power of all of our voting stock, including any common
stock that may be received as a result of the conversion of Notes, and is
not a controlled foreign corporation that is related to us within the
meaning of the Code; and

- the beneficial owner of the Notes certifies to us or our agent, under
penalties of perjury, that it is not a U.S. holder and provides its name
and address on United States Treasury Form W-8 (or a suitable substitute
form) or a securities clearing organization, bank or other qualified
financial institution that holds customers' securities in the ordinary
course of its trade or business (a "financial institution") and holds the
Note certifies under penalties of perjury that such a Form W-8 (or
suitable substitute form) has been received from the beneficial owner by
it or by a financial institution between it and the beneficial owner and
furnishes the payor with a copy thereof.

GAIN ON DISPOSITION OF THE NOTES AND COMMON STOCK

Provided that we are at no time a United States real property holding
corporation within the meaning of Section 897(c) of the Code (a "USRPHC"), a
non-U.S. holder generally will not be subject to U.S. federal income tax on gain
or income realized on the sale, exchange or redemption of Notes, including the
conversion of Notes for common stock, or the sale or exchange of common stock
unless in the case of an individual non-U.S. holder:

- such holder is present in the United States for 183 days or more in the
year of such sale, exchange or redemption;

- has a "tax home" in the U.S. and the gain or income is not attributable to
an office or other fixed place of business maintained by such non-U.S.
holder outside of the U.S.; or

- the gain from the disposition is attributable to an office or other fixed
place of business in the U.S.

Even if we are determined to be a USRPHC, a non-U.S. holder not described in
the preceding sentence will not be subject to U.S. federal income tax on any
such gain or income provided that such holder does not actually or
constructively own more than 5% of the common stock, including any common stock
that may be received as a result of the conversion of Notes and does not own, on
any date on which the holder acquires Notes, Notes with an aggregate value of 5%
or more of the aggregate value of the outstanding common stock on such date.
Under present law we would not at any time within a specified (generally
five-year) period be a USRPHC so long as during a specified (generally
five-year) period:

- the fair market value of our United States real property interests is less
than 50% of the sum of the fair market value of our United States real
property interests, our interests in real property located outside the
U.S. and other of our assets that are used or held for use in a trade or
business.

We believe that we are not presently a USRPHC, but there can be no assurance
that we will not become a USRPHC in the future.

S-41

COMMON STOCK

Dividends, if any, paid on the common stock to a non-U.S. holder generally
will be subject to a 30% U.S. federal withholding tax, subject to reduction for
non-U.S. holders eligible for the benefits of certain income tax treaties.
Common stock held by an individual who at the time of death is not a citizen or
resident of the U.S. (as specially defined for U.S. federal estate tax purposes)
will be included in the individual's gross estate subject to reduction of such
estate tax if the individual is eligible for the benefits of an estate tax
treaty.

INFORMATION REPORTING AND BACKUP WITHHOLDING

Payments on the Notes, and payments of dividends on the common stock to
certain non-corporate holders generally will be subject to information reporting
and possible to "backup withholding" at a rate of 30% (29% in 2003 and 28%
beginning January 1, 2004).

Payment of proceeds from the sale of a Note or common stock to or through
the U.S. office of a broker is subject to information reporting and backup
withholding unless the holder or beneficial owner certifies as to its non-U.S.
status or otherwise establishes an exemption from information reporting and
backup withholding. Payment outside the U.S. of the proceeds of the sale of an
exchange note or common stock to or through a foreign office of a "broker" (as
defined in applicable Treasury Regulations) will not be subject to information
reporting or backup withholding, except that, if the broker is a U.S. person, a
controlled foreign corporation for U.S. tax purposes or a foreign person
50 percent or more of whose gross income is from a U.S. trade or business,
information reporting will apply to such payment unless the broker has
documentary evidence in its records that the beneficial owner is not a U.S.
holder and certain other conditions are met, or the beneficial owner otherwise
establishes an exemption.

Any amounts withheld from a payment to a non-U.S. holder under the backup
withholding rules will be allowed as a credit against such holder's U.S. federal
income tax, and may entitle such holder to a refund, provided that the required
information is furnished to the Service.

OUR TAX CONSEQUENCES

S-42

SELECTED FINANCIAL DATA

The following table presents our selected consolidated financial data for
each of the years ended December 31, 1997, 1998, 1999, 2000 and 2001, which have
been derived from our consolidated financial statements. The following table
also presents selected consolidated financial data for each of the nine month
periods ended September 30, 2001 and 2002, which have been derived from our
unaudited consolidated financial statements, and reflect in the opinion of our
management, all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results for such periods. The results
for the nine month period ended September 30, 2002 are not necessarily
indicative of results for the full year. The selected financial data should be
read in conjunction with our unaudited consolidated financial statements and
related notes set forth in our Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 2002 and our audited consolidated financial statements and
related notes set forth in our Annual Report on Form 10-K/A for the year ended
December 31, 2001, each of which is incorporated herein by reference. All
amounts in the table are expressed in thousands, except per share data and
ratios. The consolidated financial statements in our SEC filings are
incorporated by reference in this prospectus supplement. See "Incorporation of
Certain Documents by Reference."

NINE MONTHS
ENDED
SEPTEMBER 30,
-------------------
1997 1998 1999 2000 2001 2001 2002
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
(UNAUDITED)

STATEMENT OF OPERATIONS DATA:
Revenues:
Total premiums................................... $167,680 $223,692 $292,516 $357,113 $350,391 $266,646 $251,777
Net investment income............................ 17,009 20,376 22,619 27,408 30,613 22,481 29,829
Net realized gains (losses)...................... 1,417 9,209 5,393 652 (4,367) (1,168) 14,649
Trading account loss............................. -- -- -- -- (3,428) (2,830) --
Market gain on experience account (1)............ -- -- -- -- -- -- 56,745
Other income..................................... 417 885 6,297 8,096 9,208 7,313 9,523
-------- -------- -------- -------- -------- -------- --------
Total revenues................................... 186,523 254,162 326,825 393,269 382,417 292,442 362,523
-------- -------- -------- -------- -------- -------- --------
Benefits and expenses:
Benefits to policyholders (2).................... 123,865 154,300 200,328 243,571 239,155 179,592 306,872
Commissions...................................... 55,240 80,273 96,752 102,313 76,805 62,744 36,034
Net acquisition costs (deferred) amortized (3)... (28,294) (46,915) (51,134) (43,192) 9,860 3,608 7,854
Impairment of net unamortized policy
acquisition costs (4).......................... -- -- -- -- 61,800 300 1,100
General and administrative expenses.............. 20,614 26,069 40,736 49,973 49,282 36,370 33,829
Expense and risk charge and excise tax (5)....... -- -- -- -- 5,635 -- 12,916
Loss due to impairment of property and equipment
(6)............................................ -- -- 2,799 -- -- -- --
Change in reserve for claim litigation........... -- -- -- 1,000 (250) (250) --
Interest expense................................. 4,804 4,809 5,187 5,134 4,999 3,760 3,585
-------- -------- -------- -------- -------- -------- --------
Total benefits and expenses...................... 176,229 218,536 294,668 358,799 447,286 286,124 402,190
-------- -------- -------- -------- -------- -------- --------
Income (loss) before federal income taxes and
cumulative effect of accounting change........... 10,294 35,626 32,157 34,470 (64,869) 6,318 (39,667)
Provision (benefit) for federal income taxes....... 2,695 11,578 10,837 11,720 (16,280) 2,148 (13,487)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) before cumulative effect of
accounting change (7)............................ $ 7,599 $ 24,048 $ 21,320 $ 22,750 $(48,589) $ 4,170 $(26,180)
======== ======== ======== ======== ======== ======== ========
Net income (loss).................................. $ 7,599 $ 24,048 $ 21,320 $ 22,750 $(48,589) $ 4,170 $(31,331)
======== ======== ======== ======== ======== ======== ========
Net income (loss) adjusted for accounting change
(8).............................................. $ 7,599 $ 24,048 $ 21,975 $ 23,603 $(47,736) $ 4,810 $(26,180)
Basic earnings per share before cumulative effect
of accounting change (7)......................... $ 1.01 $ 3.17 $ 2.83 $ 3.13 $ (3.41) $ 0.33 $ (1.36)
======== ======== ======== ======== ======== ======== ========
Diluted earnings per share before cumulative effect
of accounting change (7)......................... $ 0.98 $ 2.40 $ 2.64 $ 2.61 $ (3.41) $ 0.33 $ (1.36)
======== ======== ======== ======== ======== ======== ========
Basic earnings per share........................... $ 1.01 $ 3.17 $ 2.83 $ 3.13 $ (3.41) $ 0.33 $ (1.63)
======== ======== ======== ======== ======== ======== ========
Diluted earnings per share......................... $ 0.98 $ 2.40 $ 2.64 $ 2.61 $ (3.41) $ 0.33 $ (1.63)
======== ======== ======== ======== ======== ======== ========

S-43

Basic earnings per share adjusted for accounting
change (8)....................................... $ 0.98 $ 2.40 $ 2.92 $ 3.25 $ (3.35) $ 0.38 $ (1.63)
Diluted earnings per share adjusted for accounting
change (8)....................................... $ 0.98 $ 2.40 $ 2.70 $ 2.70 $ (3.35) $ 0.38 $ (1.36)
Weighted average shares outstanding (9)............ 7,540 7,577 7,533 7,279 14,248 12,703 19,194
Weighted average diluted shares outstanding (10)... 7,758 10,402 10,293 9,976 14,248 12,826 19,194

GAAP RATIOS:
Loss ratio (2)..................................... 73.9% 69.0% 68.5% 68.2% 68.3% 67.4% 121.9%
Expense ratio (11)................................. 31.2% 28.7% 31.3% 32.0% 59.0% 39.3% 37.4%
-------- -------- -------- -------- -------- -------- --------
Total (12)......................................... 105.1% 97.7% 99.8% 100.2% 127.3% 106.7% 159.3%
======== ======== ======== ======== ======== ======== ========
Return on average equity (13)...................... 6.0% 16.6% 13.5% 13.1% (25.5)% 0.7% (6.0)%

DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -----------------------
1997 1998 1999 2000 2001 2001 2002
-------- -------- -------- -------- -------- ---------- ----------

BALANCE SHEET DATA:
Total investments (14).......................... $301,787 $338,889 $373,001 $366,126 $488,591 $ 538,311 $ 27,506
Total assets.................................... 465,772 580,552 697,639 856,131 940,367 968,474 1,053,930
Total debt...................................... 76,752 76,550 82,861 81,968 79,190 79,210 76,266
Shareholders' equity............................ 132,756 157,670 158,685 188,062 192,796 230,710 154,248
Book value per share............................ $ 17.53 $ 20.79 $ 21.81 $ 25.81 $ 10.24 $ 12.25 $ 7.95

SELECTED STATUTORY DATA:
Net premiums written (15)....................... $167,403 $143,806 $208,655 $130,676 $(64,689) $ 160,476 8,711
Statutory surplus (beginning of period)......... $ 81,795 $ 67,249 $ 76,022 $ 67,070 $ 30,137 $ 30,137 $ 35,808
Ratio of net premiums written to statutory
surplus....................................... 2.0x 2.1x 2.7x 1.9x (2.2)x 5.3x 0.3x

S-44

NOTES TO SELECTED FINANCIAL DATA (IN THOUSANDS)

(1) Effective December 31, 2001, we entered into a reinsurance agreement for
substantially all of our long-term care insurance policies, which we are
accounting for as deposit accounting. The reinsurer maintains a notional
experience account for our benefit in the event of commutation. The notional
experience account receives an investment credit, derived from the separate
components of the notional experience account. This gain represents the
income from the embedded derivative portion of our notional experience
account, similar to that of an unrealized gain or loss on a bond.

(2) During the third quarter of 2002, we determined to change certain of our
processes and assumptions in the establishment of our reserves for current
claims. As a result of this change, we increased our reserves for current
claims by approximately $83,000. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

(3) Effective September 10, 2001, we discontinued the sale, nationally, of all
new long-term care insurance policies until our Plan was completed and
approved by the Department. As a result, there was a substantial reduction
in the deferral of costs associated with new policy issuance, while we
continued to amortize existing deferred acquisition costs.

(4) Our reinsurance agreement requires us to accrue an annual expense and risk
charge to the reinsurer. As a result of these anticipated charges, we
impaired the value of our net unamortized policy acquisition costs by
$61,800 in 2001. In the third quarter of 2002, we impaired the value of our
deferred acquisition cost asset by approximately $1,100 as a result of the
change in our assumptions regarding the future profitability of our existing
business in force. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations."

(5) As a result of our December 31, 2001 reinsurance agreement with a foreign
reinsurer, we must pay Federal excise tax of 1% on all ceded premium. The
2001 expense represents excise taxes due for premiums transferred at the
inception of the contract. Beginning in 2002, we also accrue an annual
expense and risk charge payable to the reinsurer in the event of future
commutation of the agreement.

(6) During 1999, we discontinued the implementation of a new computer system,
for which we had previously capitalized $2,799 of licensing, consulting and
software costs. When we decided not to use this system, its value became
fully impaired. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

(7) Excludes $5,151 impairment charge of goodwill from the adoption of SFAS Nos.
141 and 142, which was recorded as a cumulative effect from accounting
change. In 2002, in accordance with SFAS No. 142, we determined that the
goodwill associated with our insurance subsidiaries was impaired and
recognized an impairment loss of $5,151, net of related tax effect, which we
recorded as a cumulative effect of change in accounting principle.

(8) As a result of the adoption of SFAS No. 142 in 2002, we discontinued the
amortization of goodwill. We have adjusted net income for the fiscal periods
1999, 2000 and 2001 and the interim nine month period for 2001 to reflect
the impact of this accounting change in prior periods as though the SFAS
No. 142 had been adopted at that time. Net income would have been increased
in each adjusted period by $655, $853, $853 and $640, respectively.

(9) On May 25, 2001, we issued approximately 11,547 new common shares of our
common stock, for net proceeds of $25,726, through an investor rights
offering. We also issued approximately 570 new shares in 2002 through a
direct equity placement.

(10) Diluted shares outstanding includes shares issuable upon the conversion of
our existing convertible debt and exercise of options outstanding, except in
2001 and for the period ending September 30, 2002, for which the inclusion
of such shares would be anti-dilutive. The inclusion of converted

S-45

shares from the Notes is expected to produce significant dilution in
earnings per share in future periods.

(11) Expense ratios exclude the impact of reduced commissions and increased
general and administrative expenses resulting from the 1999 and 2000
acquisitions of our agency subsidiaries. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

(12) We measure our combined ratio as the total of all expenses, including
benefits to policyholders, related to policies in-force divided by premium
revenue. This ratio provides an indication of the portion of premium revenue
that is devoted to the coverage of policyholder related expenses. We depend
on our investment returns to offset the amounts by which our combined ratio
is greater than 100%. In 2001, reduced premium revenue, the impairment of
our DAC asset in the fourth quarter (see note 4) and the payment of excise
taxes on the initial premium for our new reinsurance agreement (see note 5)
increased our combined ratio above what it otherwise would have been.

(13) Return on equity, which is the ratio of net income or losses to average
shareholders' equity, measures the current period return provided to
shareholders on invested equity. New or existing shareholders could be
dissuaded from future investment in our common stock if they are not
satisfied with our return on equity.

(14) As a result of our reinsurance agreement, which was effective December 31,
2001, we transferred substantially all of our investable assets to the
reinsurer.

(15) Under statutory accounting principles, ceded reserves are accounted for as
offsetting negative benefits and negative premium. Our 2001, 2000 and 1999
premium is reduced by $408,093, $225,741 and $90,230, respectively from
reinsurance transactions.

S-46

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW (AMOUNTS IN THOUSANDS)

Our principal products are individual, defined benefit accident and health
insurance policies that consist of nursing home care, home health care, Medicare
supplement, life and long-term disability insurance. We experienced significant
reductions in new premium sales during 2001 due to the cessation of new business
generation in all states and as a result of market concerns regarding our
insurance subsidiaries' statutory surplus. Under our Plan, which was approved by
the Department in February 2002, we recommenced sales in certain states, but
intend to limit new business growth to levels that will allow us to maintain
sufficient statutory surplus. Our underwriting practices rely upon the base of
experience that we have developed in over 30 years of providing nursing home
care insurance, as well as upon available industry and actuarial information. As
the home health care market has developed, we have encouraged our customers to
purchase both nursing home and home health care coverage, thus providing our
policyholders with enhanced protection and broadening our policy base.

Our insurance subsidiaries are subject to the insurance laws and regulations
of the states in which they are licensed to write insurance. These laws and
regulations govern matters such as payment of dividends, settlement of claims,
and loss ratios. State regulatory authorities must approve premiums charged for
insurance products. In addition, our insurance subsidiaries are required to
establish and maintain reserves with respect to reported and incurred but not
reported claims, as well as estimated future benefits payable under our
insurance policies. These reserves must, at a minimum, comply with mandated
standards. Our reserves are certified annually by our consulting actuary as to
standards required by the insurance departments for our domiciliary state and
for the other states in which we conduct business. We believe we maintained
adequate reserves as mandated by each state in which we are currently writing
business at September 30, 2002. For a description of current regulatory matters
affecting our insurance subsidiaries, see "--Liquidity and Capital Resources"
and "--Subsidiary Operations."

Our results of operations are affected significantly by the following other
factors:

LEVEL OF REQUIRED RESERVES FOR POLICIES IN-FORCE. Our insurance policies
are accounted for as SFAS 60 long duration contracts. As a result, there are two
components of policyholder liabilities. The first is a policy reserve liability
as required by SFAS 60 for future policyholder benefits, represented by the
present value of future benefits less future premium collection. These reserves
are calculated based on assumptions that include estimates for mortality,
morbidity, interest rates, premium rate increases and policy persistency. The
assumptions are consistent with industry experience and historical results, as
modified for our own experience.

The second is a reserve for incurred, either reported or not yet reported,
policy and contract claims, which represents the benefits for current claims.
The amount of reserves relating to reported and unreported claims incurred is
determined by periodically evaluating statistical information with respect to
the number and nature of historical claims. We compare actual experience with
estimates and adjust our reserves on the basis of such comparisons to the extent
that our analysis suggests that adverse development is likely to continue or
occur in future periods.

Additions to, or reductions in, reserves are recognized in our current
consolidated statements of operations and comprehensive income as expense or
income, respectively, through benefits to policyholders and are a material
component of our net income or loss. A portion of premium collected in each
period is set aside to establish reserves for future policy benefits.
Establishing reserves is based upon current assumptions and we cannot assure you
that actual claims expense will not differ materially

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from the claims expense anticipated by the assumptions used in the establishment
of reserves. Any variance from these assumptions could affect our profitability
in future periods.

POLICY PREMIUM LEVELS. We attempt to set premium levels to maximize
profitability. Premium levels on new products, as well as rate increases on
existing products, are subject to government review and regulation.

DEFERRED POLICY ACQUISITION COSTS. In connection with the sale of our
insurance policies, we defer and amortize a portion of the policy acquisition
costs over the related premium paying periods of the life of the policy. These
costs include all expenses that are directly related to, and vary with, the
acquisition of the policy, including commissions, underwriting and other policy
issue expenses. The amortization of deferred policy acquisition costs ("DAC") is
determined using the same projected actuarial assumptions used in computing
policy reserves. DAC can be affected by unanticipated terminations of policies
because, upon such terminations, we are required to expense fully the DAC
associated with the terminated policies. In addition, the assumptions underlying
DAC and our policy benefit reserves are periodically reviewed and updated to
reflect current assumptions. Whenever we determine that our DAC is not fully
recoverable, we impair the carrying value of our DAC through an expense to our
consolidated statement of operations and comprehensive income. See "--Results of
Operations--Deferred Policy Acquisition Costs."

INVESTMENT INCOME AND EXPERIENCE ACCOUNT. Our investment portfolio,
excluding our notional experience account, consists primarily of investment
grade fixed income securities. Income generated from this portfolio is largely
dependent upon prevailing levels of interest rates. Due to the duration of our
investments (approximately 5.0 years), investment income does not immediately
reflect changes in market interest rates.

In connection with our reinsurance agreement with Centre, we transferred
substantially all of our investment portfolio to the reinsurer as the initial
premium payment. The initial and future premium for the reinsured policies, less
claims payments, ceding commissions and risk charges is credited to a notional
experience account, the balance of which also receives an investment credit. The
notional experience account balance represents an amount to be paid to us in the
event of commutation of the agreement. Based on our analysis of SFAS 133, we
believe that the experience account represents a hybrid instrument, containing
both a fixed debt host contract and an embedded derivative.

1. The fixed debt host yields a fixed return based upon the yield to
maturity of the underlying benchmark indices. The return on the fixed
debt host is reported as investment income in the Statement of
Operations.

2. The change in fair value of the embedded derivative represents the
percentage change in the underlying indices applied to the notional
experience account, similar to that of an unrealized gain/loss on a bond.
The change in the fair value of the embedded derivative is reported as
market gain on experience account in the Statement of Operations.

As a result, our results of operation are subject to significant volatility.
Recorded market value gains or losses, although recognized in current earnings,
are expected to be offset in future periods as a result of our receipt of the
most recent market rates, and, therefore, have no anticipated long-term effect
on shareholder value. The benchmark indices are comprised of U.S. Treasury
strips, agencies and investment grade corporate bonds, with weightings of
approximately 25%, 15% and 60%, respectively, and have a duration of
approximately 11 years.

LAPSATION AND PERSISTENCY. Factors that affect our results of operations
include lapsation and persistency, both of which relate to the renewal of
insurance policies. Lapsation is the termination of a policy by non-renewal.
Lapsation is automatic if and when premiums become more than 31 days overdue
although, in some cases, a lapsed policy may be reinstated within six months.
Persistency

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represents the percentage of premiums renewed, which we calculate by dividing
the total annual premiums at the end of each year (less first year premiums for
that year) by the total annual premiums in-force for the prior year. For
purposes of this calculation, a decrease in total annual premiums in-force at
the end of any year would be the result of non-renewal of policies, including
policies that have terminated by reason of death, lapsed due to nonpayment of
premiums and/or been converted to other policies we offered. First year premiums
are premiums covering the first twelve months a policy is in-force. Renewal
premiums are premiums covering all subsequent periods.

Policies renew or lapse for a variety of reasons. We believe that our
efforts to address policyholder concerns or questions help to ensure policy
renewals. We work closely with our licensed agents, who play an integral role in
policy persistency and policyholder communication.

Economic cycles can influence a policyholder's ability to continue the
payment of insurance premiums when due. We believe that publicity regarding
newly enacted Federal and state tax legislation allowing medical deductions for
certain long-term care insurance premiums has raised public awareness of the
escalating costs of long-term care and the value provided to the consumer of
long-term care insurance. The ratings assigned to our insurance subsidiaries by
independent rating agencies also influence consumer decisions.

Lapsation and persistency can both positively and adversely affect future
earnings. Reduced lapsation and higher persistency generally result in higher
renewal premiums and lower amortization of deferred acquisition costs, but may
lead to increased claims in future periods. Higher lapsation can result in
reduced premium collection, a greater percentage of higher-risk policyholders,
and accelerated expensing of deferred acquisition costs. However, higher
lapsation may also lead to decreased claims in future periods.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (AMOUNTS IN THOUSANDS)

PREMIUMS. Total premium revenue earned in the three month period ended
September 30, 2002 (the "2002 quarter"), including long-term care, disability,
life and Medicare supplement, increased 3.8% to $83,635, compared to $80,588 in
the same period in 2001 (the "2001 quarter"). Premium in the 2001 quarter was
reduced $10,009 as a result of the accounting treatment for the reinsurance of
our disability business to an unaffiliated insurer.

Total first year premiums earned in the 2002 quarter decreased 82.0% to
$1,279, compared to $7,118 in the 2001 quarter. First year long-term care
premiums earned in the 2002 quarter decreased 84.2% to $1,046, compared to
$6,629 in the 2001 quarter. We experienced significant reductions in new premium
sales due to the cessation of new business generation in all states and due to
continued market concerns regarding our insurance subsidiaries' statutory
surplus. Under our Corrective Action Plan (the "Plan"), which was approved by
the Pennsylvania Insurance Department (the "Department") in the first quarter of
2002, we recommenced sales in certain states, but intend to limit new business
growth to levels that will allow us to maintain sufficient statutory surplus.
See "Liquidity and Capital Resources."

Effective September 10, 2001, we discontinued the sale nationally of all new
long-term care insurance policies until the Plan was completed and approved by
the Department. This decision resulted from our concern about further depletion
of statutory surplus from new policy sales prior to the completion and approval
of the Plan and from increasing concern with respect to the status of the Plan
expressed by many states in which the Company is licensed to conduct business.
Upon the approval by the Department of the Plan in February 2002, we recommenced
new policy sales in 23 states, including Pennsylvania. We have since recommenced
new policy sales in nine additional states, including Florida and Texas (See
"Liquidity and Capital Resources"), which have historically

S-49

represented approximately 25% and 5%, respectively of our new policy sales.
However, we have not yet commenced new policy sales in California, Virginia or
Illinois, which together have traditionally represented approximately 27% of
sales, or in 15 other states. We are actively working with the remaining states
to recommence new policy sales in all jurisdictions.

Total renewal premiums earned in the 2002 quarter decreased 1.3% to $82,356,
compared to $83,479 in the 2001 quarter. Renewal long-term care premiums earned
in the 2002 quarter decreased .8% to $79,575, compared to $80,215 in the 2001
quarter. We may continue to experience reduced renewal premiums in the future,
especially given our recent premium rate increases, which are anticipated to
cause additional policy lapses. Current declines in first year premiums, as
discussed above, will negatively impact future renewal premium growth.

NET INVESTMENT INCOME. Net investment income earned for the 2002 quarter
increased 18.1% to $10,122, from $8,571 for the 2001 quarter.

As a result of our new reinsurance agreement, substantially all of our
investable assets from business written prior to December 31, 2001, were
transferred to the reinsurer. The reinsurer maintains a notional experience
account on our behalf in the event that the reinsurance agreement is later
commuted. As discussed above in "Overview," the notional experience account is
credited with an investment credit equal to the most recent yield to maturity on
a series of benchmark indices and hedges, which are designed to closely match
the duration of our liabilities. See "Liquidity and Capital Resources."

Our average yield on invested assets at cost, including cash and cash
equivalents, was 6.1% in both the 2002 and 2001 quarters. Although market
interest rates have declined, the yield in the 2002 quarter resulted from having
investments only in higher yielding bonds (including the makeup of the
underlying experience account indices, which have a duration of approximately
11 years), rather than in bonds and common stocks, as were present in the 2001
quarter. The investment income component of our notional experience account
investment credit generated $9,798 in the 2002 quarter.

NET REALIZED CAPITAL GAINS AND TRADING ACCOUNT ACTIVITY. During the 2002
quarter, we recognized capital gains of $85, compared to capital losses of $314
in the 2001 quarter. The results in the 2002 and 2001 quarters were recorded as
a result of our normal investment management operations.

During 2001, we classified our convertible bond portfolio as trading account
investments. Changes in trading account investment market values were recorded
in our statement of operations during the period in which the change occurred,
rather than as an unrealized gain or loss recorded directly through equity. As a
result, we recorded a trading account loss in the 2001 quarter of $1,506, which
reflected the unrealized and realized loss of our convertible portfolio that
arose during that quarter. No investments were classified as trading during the
2002 quarter.

MARKET GAIN (LOSS) ON NOTIONAL EXPERIENCE ACCOUNT. We recorded a market
gain on our notional experience account balance of $62,747 in the 2002 quarter.

As discussed in "Overview" and "Net Investment Income" above, the reinsurer
of our new reinsurance agreement maintains a notional experience account for our
benefit in the event of future recapture. The notional experience account
receives an investment credit based upon the total return of a series of
benchmark indices and derivative hedges, which are designed to closely match the
duration of our reserve liabilities. Periodic changes in the market values of
the benchmark indices and derivative hedges are recorded in our financial
statements as a realized gain or loss in the period in which they occur. As a
result, our future financial statements are subject to significant volatility.

OTHER INCOME. We recorded $4,361 in other income during the 2002 quarter,
up from $2,548 in the 2001 quarter. The increase is attributable primarily to a
recognition of a deferred gain from the

S-50

sale of our disability business in the 2001 quarter. The sale was done as a 100%
quota share agreement, in contemplation of a subsequent assumption of the
business, where actual ownership of the policies would change. In the 2002
quarter, approximately 50% of the policies were assumed and we recorded the
corresponding portion of the deferred gain as a gain to other income.

BENEFITS TO POLICYHOLDERS. Total benefits to policyholders in the 2002
quarter increased 248% to $164,170, compared to $47,220 in the 2001 quarter. Our
loss ratio, or policyholder benefits to premiums, was 196.3% in the 2002
quarter, compared to 58.6% in the 2001 quarter.

As discussed in "Overview" above, we establish reserves for current claims
based upon current and historical experience of our policyholder benefits,
including an expectation of claims incidence and duration, as well as the
establishment of a reserve for claims that have been incurred but are not yet
reported. We continuously monitor our experience to determine the best estimate
of reserves to be held for future payments of these claims. As a result, we
periodically refine our process to incorporate the most recent known information
in establishing these reserves.

Claims experience can differ from our expectations due to numerous factors,
including mortality rates, duration of care and type of care utilized. When we
experience deviation from our estimates, we typically seek premium rate
increases that are sufficient to offset future deviation. During the third
quarter 2001, we filed for premium rate increases on the majority of our policy
forms. These rate increases were necessary because we expect higher loss ratios
as a result of higher claims expectations than existed at the time of the
original form filings. We have currently received approval for more than 90% of
the rate increases requested as measured by premiums. We have been generally
successful in the past in obtaining state insurance department approvals for
increases. If we are unsuccessful in obtaining future rate increases when deemed
necessary, or if we do not pursue rate increases when actual claims experience
exceeds our expectations, we would suffer a financial loss.

Our benefit reserves, which are held for policyholders not currently on
claim, are highly dependent upon policyholder persistency. As a result of our
recently implemented premium rate increases, we experienced a decline in
persistency, or "shock lapse," because certain policyholders elected not to pay
the higher premium amounts. During the 2002 quarter, although lapses were within
the bounds of our expectations, we believe that a greater portion of lapses
occurred in policies with shorter benefit periods than was expected. The
resultant mix of policies for which we hold reserves is comprised of a greater
percentage of policies with longer benefit periods. As a result, our benefit
reserves in the 2002 quarter were approximately $5,000 higher than anticipated.

We establish reserves for the future payment of all currently incurred
claims. The amount of reserves relating to reported and unreported claims
incurred is determined by periodically evaluating historical claims experience
and statistical information with respect to the probable number and nature of
such claims. Claim reserves reflect actual experience through the most recent
time period. Claim reserves include current assumptions as to type and duration
of care, remaining policy benefits and interest rates. We compare actual
experience with estimates and adjust our reserves on the basis of such
comparisons.

To estimate reserves for future claims payments more precisely, we have
refined our assumptions and processes for developing these reserves. We have
recently completed an analysis of the adverse deviation recognized in the past
development of our reserves for current claims. As a result of this analysis,
our actuarial modeling suggests that future claim payments will likely exceed
our past assumptions, which, if unaddressed, could continue to cause future
adverse deviation.

S-51

As a result, we have made two modifications to our process for developing
claims reserves:

a) Redefinition of Claims:

Over the past ten years, our percentage of policies-in-force offering
benefits for both nursing facility and in-home health care coverage has
increased. We have recorded claims that begin in one type of care and later move
to another type of care as two separate claims. Defining claims in this manner
has projected a greater number of expected claims from certain types of
policies. However, we believe that we have also underestimated the expected
length of individual claims. We have now determined to define this as one claim,
using the earliest date of service as the incurral date. This redefinition of
claims results in fewer expected future claims, but anticipates that each claim
will last longer.

b) Continuance Assumptions:

Once a claim occurs, we develop claim reserves by using continuance tables,
which measure the likelihood of a claim continuing in the future. Historically,
we have applied every claim to a set of uniform continuance tables. Our
actuarial modeling suggests that this method no longer reflects the increasing
number of claims from policies with longer benefit periods or increased benefit
amounts. We have developed improved assumptions and processes by creating
separate continuance patterns for facility, home health and comprehensive care,
as well as for tax qualified and non-qualified plans. In addition, we have
established separate continuance tables for claims caused by cognitive
impairment. As a result, we believe that the duration of existing claims will be
longer than was previously expected and have adopted this assumption and process
change.

By redefining these "multiple" claims as a single claim and by employing new
assumptions and processes for predicting the continuance of claims, we believe
that we can predict future claims development with a much higher degree of
precision than was true in the past. By retrospectively applying these findings
to earlier periods in multiple tests, we would have seen substantially less
adverse deviation from expected results in the development of claims reserves.
We further believe that the new assumptions will serve to reduce future reserve
volatility by more closely predicting future claims development.

As a result of this redefinition of claims and employment of new continuance
tables for separate types of claims, we increased our policy and contract claims
reserves by $83,000 in the 2002 quarter, which is primarily attributable to
claims incurred prior to January 1, 2002.

Further, by employing a lower discount rate of 5.7% in the 2002 quarter,
rather than the 6.5% that had been used prior to the current quarter, we
increased our claims reserves by approximately $5,000. We believe that, as a
result of lower market interest rates, the lower discount rate more closely
matches our currently anticipated return from the investment of assets
supporting these reserves.

COMMISSIONS. Commissions to agents decreased 31.9% to $11,527 in the 2002
quarter, compared to $16,920 in the 2001 quarter.

First year commissions on accident and health business in the 2002 quarter
decreased 88.4% to $579, compared to $4,968 in the 2001 quarter, due to the
decrease in first year accident and health premiums. The ratio of first year
accident and health commissions to first year accident and health premiums was
45.3% in the 2002 quarter and 71.2% in the 2001 quarter. We believe that the
decrease in the first year commission ratio is primarily attributable to the
increased sale of our Secured Risk-Registered Trademark- and Medicare Supplement
Policy as a percentage of total sales. These policies pay a lower commission.
Our Secured Risk-Registered Trademark- policy provides limited benefits to
higher risk policyholders at a substantially increased premium rate. We believe
that we are likely to experience an increase in the sale of these policies as a
percentage of new sales when we reenter sales in many states as a result of our
lower financial ratings with A.M. Best and Standard and Poor's rating services.

S-52

Renewal commissions on accident and health business in the 2002 quarter
decreased 17.6% to $10,282, compared to $12,476 in the 2001 quarter, due to the
decrease in renewal premiums discussed above. The ratio of renewal accident and
health commissions to renewal accident and health premiums was 12.6% in the 2002
quarter and 15.2% in the 2001 quarter. We began the implementation of premium
rate increases of approximately 20% on our existing policy premium in the 2001
quarter, for which we do not pay commissions. As a result, commission ratios are
reduced.

During the 2002 quarter, we reduced commission expense, as an intercompany
elimination, by netting $625 from override commissions affiliated insurers paid
to our agency subsidiaries. During the 2001 quarter, we reduced commissions by
$892.

NET POLICY ACQUISITION COSTS AMORTIZED. The net policy acquisition costs
amortized in the 2002 quarter decreased to $3,403, compared to $7,255 in the
2001 quarter.

Deferred costs are typically all costs that are directly related to, and
vary with, the acquisition of new premiums. The deferred costs include the
variable portion of commissions, which are defined as the first year commissions
less ultimate renewal commissions, and variable general and administrative
expenses related to policy underwriting. Deferred costs are amortized over the
life of the policy based on actuarial assumptions, including persistency of
policies in-force. In the event a policy lapses prematurely due to death or
termination of coverage, the remaining unamortized portion of the deferred
amount is immediately recognized as expense in the current period.

The net amortization of deferred policy acquisition costs is affected by new
business generation, imputed interest on prior reserves and policy persistency.
During the 2002 quarter, higher policyholder lapses (as noted under "Premiums"),
resulted in increased amortization of deferred policy acquisition costs.
However, the amortization of deferred costs is generally offset largely by the
deferral of costs associated with new premium generation. Lower new premium
sales during the 2002 and 2001 quarters produced significantly less expense
deferral to offset amortized costs. In addition, at December 31, 2001, the
Company impaired its deferred acquisition cost asset by approximately $61,800,
which resulted in reduced future periodic amortization expense, including that
for the third quarter of 2002.

At September 30, 2002, we reviewed the appropriateness and recoverability of
DAC. From this review, we determined to recognize a DAC impairment charge of
$1,100 during the third quarter of 2002 primarily as a result of the
incorporation of certain assumptions related to the future profitability of our
current business in force. These assumptions included the use of a lower
discount rate, which reflects the current interest rate environment, higher
anticipated claims costs due to newly estimated claim duration and reasonably
expected future premium rate increases on policies for which we have already
filed or anticipate filing. In the event that premium rate increases cannot be
obtained as needed, our DAC could be further impaired and we would incur an
expense in the amount of the impairment. Also, these new assumptions are now
utilized in the determination of our policy reserves. At September 30, 2002
unamortized DAC was $172,198.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses in
the 2002 quarter increased 20.4% to $13,344, compared to $11,079 in the 2001
quarter. The 2002 and 2001 quarters include $1,462 and $1,625, respectively of
general and administrative expenses related to United Insurance Group expense.
The ratio of total general and administrative expenses to premium revenues,
excluding United Insurance Group, was 14.2% in the 2002 quarter, compared to
11.7% in the 2001 quarter.

Although certain expenses have declined as a result of reduced new policy
sales, related underwriting and policy issuance expenses and management
initiatives to reduce operating expenses, the 2002 quarter includes the
following additional expenses that are not related to policy issuance: 1) we
expensed approximately $600 related to consulting costs in the development of
our system replacement project, 2) we expensed $650 related to our losing a
lawsuit we had filed against an

S-53

unaffiliated party, 3) we expensed approximately $650 related to the warrants
issued as part of the reinsurance agreement entered on December 31, 2001, which
represents a recurring quarterly amount through 2007, and 4) we expensed
approximately $200 for legal and printing costs related to the exchange of our
convertible debt.

We believe that if we remain unable to write new business in certain states
where we have ceased new production, or if we are unable to use our existing
staff and infrastructure capacity to generate additional premiums, we will need
to decrease production expenses, which could result in decisions to reduce our
staff or other operating functions.

EXPENSE AND RISK CHARGES ON REINSURANCE AND EXCISE TAX EXPENSE. Our
reinsurance agreement provides the reinsurer with annual expense and risk
charges, which are charged against our notional experience account in the event
of future commutation of the agreement. The annual charge consists of a fixed
cost and a variable component based upon reserve and capital levels needed to
support the reinsured business. In the 2002 quarter, we incurred an expense of
$3,577 for this charge. In addition, we are subject to an excise tax for premium
payments made to a foreign reinsurer. We recorded $812 for excise tax expenses
in the 2002 quarter as a result.

PROVISION FOR FEDERAL INCOME TAXES. Due to the loss we recognized in the
2002 quarter, our provision for Federal income taxes for the 2002 quarter
decreased 700% to a tax benefit of $12,607, compared to an income tax provision
of $2,100 for the 2001 quarter. The effective tax rate of 34% in the 2002 and
2001 quarters is below the normal Federal corporate income tax rate as a result
of anticipated credits from our investments in corporate owned life insurance.

COMPREHENSIVE INCOME. During the 2002 quarter, our investment portfolio
generated pre-tax unrealized gains of $890, compared to unrealized gains of
$14,341 in the 2001 quarter. The reduced unrealized gain at September 30, 2002,
is primarily attributable to the sale of the majority of our investment
portfolio in conjunction with the initial premium payment for our reinsurance
agreement. After accounting for deferred taxes from these gains, shareholders'
equity decreased by $24,471 from comprehensive losses during the 2002 quarter,
compared to gains of $14,850 in the 2001 quarter.

NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (AMOUNTS IN THOUSANDS)

PREMIUMS. Total premium revenue earned in the nine month period ended
September 30, 2002 (the "2002 period"), including long-term care, disability,
life and Medicare supplement, decreased 5.6% to $251,777, compared to $266,646
in the same period in 2001 (the "2001 period").

Total first year premiums earned in the 2002 period decreased 87.9% to
$4,830, compared to $39,934 in the 2001 period. First year long-term care
premiums earned in the 2002 period decreased 89.2% to $4,123, compared to
$38,153 in the 2001 period. We experienced significant reductions in new premium
sales due to the cessation of new business generation in all states and due to
continued market concerns regarding our insurance subsidiaries' statutory
surplus. Under our Plan, which was approved by the Department in the first
quarter 2002, we recommenced sales in certain states, but intend to limit new
business growth to levels that will allow us to maintain sufficient statutory
surplus. See "Liquidity and Capital Resources."

S-54

including Florida and Texas (See "Liquidity and Capital Resources"), which have
historically represented approximately 25% and 5%, respectively of our new
policy sales. However, we have not yet commenced new policy sales in California,
Virginia or Illinois, which together have traditionally represented
approximately 27% of sales, or in 15 other states. We are actively working with
the remaining states, to recommence new policy sales in all jurisdictions.

Total renewal premiums earned in the 2002 period increased 4.3% to $246,947,
compared to $236,721 in the 2001 period. Renewal long-term care premiums earned
in the 2002 period increased 5.8% to $238,825, compared to $225,715 in the 2001
period. This increase reflects renewals of a larger base of in-force policies
and premium rate increases. We may experience reduced renewal premiums if
policies lapse, especially given our recent premium rate increases, which are
anticipated to cause additional policy lapses. Current declines in first year
premiums, as discussed above, will negatively impact future renewal premium
growth.

NET INVESTMENT INCOME. Net investment income earned for the 2002 period
increased 32.7% to $29,829, from $22,481 for the 2001 period.

As a result of our new reinsurance agreement, substantially all of our
investable assets from business written prior to December 31, 2001, were
transferred to the reinsurer. The reinsurer maintains a notional experience
account on our behalf in the event that the reinsurance agreement is later
commuted. As discussed above in "Overview," the notional experience account is
credited with an investment credit equal to the most recent yield to maturity of
a series of benchmark indices and hedges, which are designed to closely match
the duration of our liabilities. See "Liquidity and Capital Resources."

Our average yield on invested assets at cost, including cash and cash
equivalents, was 6.3% and 5.7%, respectively, in the 2002 and 2001 periods.
Although market rates have declined, the higher yield in the 2002 period
resulted from having investments only in higher yielding bonds (including the
makeup of the underlying experience account indices, which have a duration of
approximately 11 years), rather than in bonds and common stocks as were present
in the 2001 period. The investment income component of our experience account
investment credit generated $28,391 in the 2002 period.

NET REALIZED CAPITAL GAINS AND TRADING ACCOUNT ACTIVITY. During the 2002
period, we recognized capital gains of $14,649, compared to capital losses of
$1,168 in the 2001 period. We accounted for the transfer of the securities
portion of the initial premium payment for our new reinsurance agreement as a
sale of these assets. Substantially all of the recognized capital gains in the
2002 period resulted from the transfer of the initial premium of approximately
$563,000 to the reinsurer. The results in the 2001 period were recorded as a
result of our normal investment management operations.

During the 2001 period, we classified our convertible bond portfolio as
trading account investments. Changes in trading account investment market values
were recorded in our statement of operations during the period in which the
change occurred, rather than as an unrealized gain or loss recorded directly
through equity. As a result, we recorded a trading account loss in the 2001
period of $2,830, which reflected the unrealized and realized loss of our
convertible portfolio that arose during that period. No investments were
classified as trading during the 2002 period.

MARKET GAIN (LOSS) ON EXPERIENCE ACCOUNT. We recorded a market gain on our
experience account balance of $56,745 in the 2002 period.

S-55

hedges are recorded in our financial statements as a realized gain or loss in
the period in which they occur. As a result, our future financial statements are
subject to significant volatility.

OTHER INCOME. We recorded $9,523 in other income during the 2002 period, up
from $7,313 in the 2001 period. The increase is attributable primarily to an
increase in commissions earned by United Insurance Group on sales of insurance
products underwritten by unaffiliated insurers, to income generated from our
ownership of corporate owned life insurance policies, and to a recognition of
deferred gain from the sale of our disability business in the 2001 period. The
sale was done as a 100% quota share agreement, in contemplation of a subsequent
assumption of the business, where actual ownership of the policies would change.
In the 2002 period, approximately 50% of the policies were assumed and we
recorded the corresponding portion of the deferred gain as a gain to other
income.

BENEFITS TO POLICYHOLDERS. Total benefits to policyholders in the 2002
period increased 70.9% to $306,872 compared to $179,592 in the 2001 period. Our
loss ratio, or policyholder benefits to premiums, was 121.9% in the 2002 period,
compared to 67.4% in the 2001 period.

As discussed in "Overview" "Level of required reserves for policies
in-force" above, we establish reserves for current claims based upon current and
historical experience of our policyholder benefits, including an expectation of
claims incidence and duration, as well as the establishment of a reserve for
claims that have been incurred but are not yet reported ("IBNR"). We
continuously monitor our experience to determine the best estimate of reserves
to be held for future payments of these claims. As a result, we periodically
refine our process to incorporate the most recent known information in
establishing these reserves.

Claims experience can differ from our expectations due to numerous factors,
including mortality rates, duration of care and type of care utilized. When we
experience deviation from our estimates, we typically seek premium rate
increases that are sufficient to offset future deviation. During the third
quarter 2001, we filed for premium rate increases on the majority of our policy
forms. These rate increases were sought as a result of increased loss ratios
resulting from higher claims expectations than existed at the time of the
original form filings. The assumptions used in requesting and supporting the
premium rate increase filings are consistent with those incorporated in our
newest policy form offerings. We have currently received approval for more than
90% of the rate increases requested, as measured by premiums. We have been
generally successful in the past in obtaining state insurance department
approvals for increases. If we are unsuccessful in obtaining future rate
increases when deemed necessary, or if we do not pursue rate increases when
actual claims experience exceeds our expectations, we would suffer a financial
loss.

We establish reserves for the future payment of all currently incurred
claims. The amount of reserves relating to reported and unreported claims
incurred is determined by periodically evaluating historical claims experience
and statistical information with respect to the probable number and nature of
such claims. Claim reserves reflect actual experience through the most recent
time period. Claim reserves include current assumptions as to type and duration
of care, remaining policy benefits, and interest rates. We compare actual
experience with estimates and adjust reserves on the basis of such comparisons.

S-56

As a result, we have made two modifications to our process for developing
claims reserves:

a) Redefinition of Claims:

Over the past 10 years, our percentage of policies in-force offering
benefits for both nursing facility and in-home health care coverage has
increased. We have recorded claims that begin in one type of care and later move
to another type of care as two separate claims. Defining claims in this manner
has projected a greater number of expected claims from certain types of
policies. However, we believe that we have also underestimated the expected
length of individual claims. We have now determined to define this as one claim,
using the earliest date of service as the incurral date. This redefinition of
claims results in fewer expected future claims, but anticipates that each claim
will last longer.

b) Continuance Assumptions:

Once a claim occurs, we develop claim reserves by using continuance tables,
which measure the likelihood of a claim continuing in the future. Historically,
we have applied every claim to a set of uniform continuance tables. Our
actuarial modeling suggests that this assumption and process method no longer
reflects the increasing number of claims from policies with longer benefit
periods or increased benefit amounts. We have developed improved assumptions and
processes by creating separate continuance patterns for facility, home health
and comprehensive care, as well as for tax qualified and non-qualified plans. In
addition, we have established separate continuance tables for claims caused by
cognitive impairment. As a result, we believe that the duration of existing
claims will be longer than was previously expected and have adopted this
assumption and process change.

By redefining these `multiple' claims as a single claim and by employing new
assumptions and processes for predicting the continuance of claims, we are
confident that we can predict future claims development with a much higher
degree of precision. By retrospectively applying these findings to earlier
periods in multiple tests, we would have seen substantially less adverse
deviation from expected results in the development of claims reserves. We
believe that the new assumptions will serve to reduce future reserve volatility
by more closely predicting future claims development.

As a result of this redefinition of claims and employment of new continuance
tables for separate types of claims, we have increased our policy and contract
claims by $83,000 in the 2002 period, which is primarily attributable to claims
incurred prior to January 1, 2002.

Further, by employing a lower discount rate of 5.7% at September 30, 2002,
rather than the 6.5% that had been used prior to the current quarter, we
increased our claims reserves by approximately $5,000. We believe that, as a
result of lower market interest rates, the lower discount rate more closely
matches our currently anticipated return from the investment of assets
supporting these reserves.

During the 2002 period, we experienced a change in the composition of our
aggregate policyholder base. The resultant composition included more policies
with inflation protection, shorter elimination periods and type of care
protection than we had previously seen. As a result, during the 2002 period, we
are holding higher reserves per policy than in the 2001 period. This change in
composition has caused us to hold approximately $21,500 in additional benefit
reserves.

COMMISSIONS. Commissions to agents decreased 42.6% to $36,034 in the 2002
period, compared to $62,744 in the 2001 period.

First year commissions on accident and health business in the 2002 period
decreased 89.6% to $2,754, compared to $26,528 in the 2001 period, due to the
decrease in first year accident and health premiums. The ratio of first year
accident and health commissions to first year accident and health premiums was
57.0% in the 2002 period and 67.5% in the 2001 period. We believe that the
decrease in the first year commission ratio is primarily attributable to the
increased sale of our Secured Risk-Registered Trademark- and Medicare Supplement
policies as a percentage of total sales. These policies pay a lower commission.
Our Secured Risk-Registered Trademark- policy provides limited benefits to
higher risk policyholders at a substantially increased premium rate. We believe
that we are likely to experience an increase in the sale of these

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policies as a percentage of new sales when we reenter sales in many states as a
result of our lower financial ratings with A.M. Best and Standard and Poor's
rating services.

Renewal commissions on accident and health business in the 2002 period
decreased 9.2% to $34,264, compared to $37,744 in the 2001 period, due to the
decrease in renewal premiums discussed above. The ratio of renewal accident and
health commissions to renewal accident and health premiums was 14.0% in the 2002
period and 16.4% in the 2001 period. We began the implementation of premium rate
increases of approximately 20% at the end of the 2001 period, for which we do
not pay commissions. As a result, commission ratios are reduced.

During the 2002 period, we reduced commission expense by netting, as an
intercompany elimination, $2,051 from override commissions affiliated insurers
paid to our agency subsidiaries. During the 2001 period, we reduced commissions
by $2,973.

NET POLICY ACQUISITION COSTS AMORTIZED (DEFERRED). The net deferred policy
acquisition costs in the 2002 period increased to a net amortization of costs of
$7,854, compared to $3,608 in the 2001 period.

Deferred costs are typically all costs that are directly related to, and
vary with, the acquisition of new premiums. These costs include the variable
portion of commissions, which are defined as the first year commission rate less
ultimate renewal commission rates, and variable general and administrative
expenses related to policy underwriting. Deferred costs are amortized over the
life of the policy based upon actuarial assumptions, including persistency of
policies in-force. In the event that a policy lapses prematurely due to death or
termination of coverage, the remaining unamortized portion of the deferred
amount is immediately recognized as expense in the current period.

The amortization of deferred costs is generally offset largely by the
deferral of costs associated with new premium generation. Lower new premium
sales during the 2002 period produced significantly less expense deferral to
offset amortized costs.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses in
the 2002 period decreased 4.7% to $34,929, compared to $36,670 in the 2001
period. The 2002 and 2001 periods include $4,526 and $4,995, respectively, of
general and administrative expenses related to United Insurance Group expense.
The ratio of total general and administrative expenses to premium revenues,
excluding United Insurance Group, was 12.1% in the 2002 period, compared to
11.9% in the 2001 period.

Certain expenses have declined as a result of reduced new premium sales,
related underwriting and policy issuance expenses and management initiatives to
reduce operating expenses. However, we believe that if we remain unable to write
new business in certain states where we have ceased new production, or if we are
unable to utilize our existing staff and infrastructure capacity to generate
additional premiums, we will need to decrease production expenses further.

EXPENSE AND RISK CHARGES ON REINSURANCE AND EXCISE TAX EXPENSE. Our
reinsurance agreement provides the reinsurer with annual expense and risk
charges, which are charged against our experience account in the event of future
commutation of the agreement. The annual charge consists of a fixed cost and a
variable component based upon reserve and capital levels needed to support the
reinsured business. In the 2002 period, we incurred an expense of $10,731 for
this charge. In addition, we are subject to an excise tax for premium payments
made to a foreign reinsurer. We recorded $2,185 for excise tax expenses in the
2002 period.

PROVISION FOR FEDERAL INCOME TAXES. As a result of current losses, our
provision for Federal income taxes for the 2002 period decreased 728% to an
income tax benefit of $13,487, compared to an income tax provision of $2,148 for
the 2001 period. The effective tax rate of 34% in the 2002 and 2001 periods is
below the normal Federal corporate income tax rate as a result of anticipated
credits from our investments in corporate owned life insurance and the
Cumulative effect of accounting change. We

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recognized an impairment loss of $5,151 in the 2002 period as a result of our
transitional impairment test of goodwill. See "New Accounting Principles."

COMPREHENSIVE INCOME. During the 2002 period, our investment portfolio
generated pre-tax unrealized gains of $347, compared to unrealized gains of
$15,519 in the 2001 period. The reduced unrealized gain at September 30, 2002 is
primarily attributable to the sale of the majority of our investment portfolio
in conjunction with the initial premium payment for our reinsurance agreement.
After accounting for deferred taxes from these gains, shareholders' equity
decreased by $40,770 from comprehensive losses during the 2002 period, compared
to comprehensive income of $16,855 in the 2001 period.

TWELVE MONTHS ENDED DECEMBER 31, 2001 AND 2000 (AMOUNTS IN THOUSANDS)

PREMIUMS. Total premium revenue earned in the twelve month period ended
December 31, 2001, including long-term care, disability, life and Medicare
supplement, decreased 1.9% to $350,391, compared to $357,113 in the twelve month
period ended December 31, 2000. Total premium in the 2001 period was reduced by
$10,009 as a result of premium ceded for the reinsurance of our disability
product line.

Total first year premiums earned in 2001 decreased 54.5% to $44,539,
compared to $97,888 in 2000. First year long-term care premiums earned in 2001
decreased 56.0% to $42,135, compared to $95,693 in 2000. We experienced
significant reductions in new premium sales due to the cessation of new business
generation in all states during the third and fourth quarters and as a result of
the market's concerns regarding our insurance subsidiaries' statutory surplus.

Effective September 10, 2001, we discontinued the sale, nationally, of all
new long-term care insurance policies until our Corrective Action Plan was
completed and approved by the Department. This decision resulted from our
concern about further depletion of statutory surplus from new sales prior to the
completion and approval of the Corrective Action Plan and from increasing
concern regarding our financial status expressed by many states in which we are
licensed to conduct business. Under our Corrective Action Plan, we intend to
limit future new business growth to levels that will allow us to maintain
sufficient statutory surplus. See "Liquidity and Capital Resources." Since the
approval of our Corrective Action Plan on February 12, 2002, we have recommenced
sales in 26 states and are continuing efforts to recommence new policy sales in
all states upon individual state approvals.

Total renewal premiums earned in 2001 increased 18.0% to $305,852, compared
to $259,225 in 2000. Renewal long-term care premiums earned in 2001 increased
18.7% to $290,632, compared to $244,945 in 2000. This increase reflects renewals
of a larger base of in-force policies, as well as a continued increase in
policyholder persistency.

NET INVESTMENT INCOME. Net investment income earned during 2001 increased
11.7% to $30,613, from $27,408 for 2000. Management attributes this growth to an
increase in invested assets, which resulted from premium receipts and from the
investment of additional funds generated from the exercise of rights to purchase
shares of our common stock distributed to our shareholders and holders of our
Subordinated Notes. Our average yield on invested assets at cost, including cash
and cash equivalents, was 5.6% in 2001, compared to 6.2% in 2000. The average
yield is lower due to reduced market rates for reinvesting of maturing
investments and due to higher cash balances held during 2001.

The total return of the Lehman Brothers US Aggregate Bond Index was 8.44%
and 11.63% for 2001 and 2000, respectively. Including the effect of realized and
unrealized capital gains and losses and trading account results arising during
the period, the total return of our fixed income portfolio was 8.92% and 8.83%
in the 2001 and 2000 periods, respectively. While the performance in the 2001
was similar to the total return of the Lehman Brothers US Aggregate Bond Index,
our 2000 performance was below the benchmark index due primarily to significant
declines in the market value of three bonds during the year, totaling
approximately $5,100.

S-59

NET REALIZED CAPITAL GAINS AND TRADING ACCOUNT ACTIVITY. During 2001, we
recognized capital losses of $4,367, compared to capital gains of $652 in 2000.
The results of both years were recorded due to realized gains and losses from
our normal investment management operations and from impairment losses of
approximately $5,800 in 2001 and $3,200 in 2000 on equity and debt securities,
which we deemed to be other than temporary. At December 31, 2001, we entered a
reinsurance agreement for which a substantial portion of our investment
portfolio was later ceded as the initial premium for this agreement. As a result
of this intended transfer or sale of assets, we determined that all gross
unrealized losses on our debt and equities securities would not be recovered and
therefore were deemed other than temporary impairments. We recognized a loss of
$3,867 from this determination.

We classified our convertible bond portfolio as trading account investments
as a result of Statement of Financial Accounting Standards No. 133 "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). Changes in
trading account investment market values are recorded in our statement of
operations during the period in which the change occurs, rather than as an
unrealized gain or loss recorded directly through equity. Therefore, we recorded
a trading account loss in 2001 of $3,428, which reflects the unrealized and
realized loss of our convertible portfolio that arose during the year ended
December 31, 2001. We sold all of our convertible bond investments during 2001.

OTHER INCOME. We recorded $9,208 in other income during 2001, up from
$8,096 in 2000. The increase is attributable to an increase of commissions
earned by United Insurance Group on sales of insurance products underwritten by
unaffiliated insurers and to income generated from corporate owned life
insurance policies.

BENEFITS TO POLICYHOLDERS. Total benefits to policyholders in 2001
decreased 1.8% to $239,115, compared to $243,571 in 2000. Our loss ratio, or
policyholder benefits to premiums, was 68.3% in 2001, compared to 68.2% in 2000.

We review the adequacy of our deferred acquisition costs on an annual basis,
utilizing assumptions for future expected claims and interest rates. If we
determine that the future gross profits of our in-force policies are not
sufficient to recover our deferred acquisition costs, we recognize a premium
deficiency and "unlock" (or change) our original assumptions and reset our
reserves to appropriate levels using new assumptions. During the second quarter
of 2001, we performed a DAC recoverability analysis on our existing business,
utilizing our most current assumptions. Upon the completion of the analysis, we
determined to record an impairment charge of approximately $300 and utilized the
new assumptions in the establishment of our current DAC and policy benefit
reserves, in accordance with SFAS 60. This reset of DAC and reserves resulted in
a decrease of approximately $7,600 to reserves and a decrease to DAC of
approximately $7,900, representing 2% and 4% of the respective balances. The
resultant net GAAP liability (reserves less DAC) is $300 higher than before the
impairment charge. We believe that the new levels of DAC and reserves more
appropriately represent the future anticipated development of both accounts.

Claims experience can differ from our expectations due to numerous factors,
including mortality rates, duration of care and type of care utilized. When we
experience adverse deviation from our estimates, we typically seek premium rate
increases that are sufficient to offset future deviation. During 2001, we filed
premium rate increases on the majority of our policy forms in a majority of
states. These rate increases were sought as a result of higher claims
expectations and policyholder persistency than existed at the time of the
original form filings. The assumptions used in requesting and supporting the
premium rate increase filings are consistent with those incorporated in our
newest policy form offerings. We have been generally successful in the past in
obtaining state insurance department approvals for increases. If we are
unsuccessful in obtaining rate increases when deemed necessary, or if we do not
pursue rate increases when actual claims experience exceeds our expectations, we
could suffer a financial loss.

S-60

Due to the utilization of assumptions in establishing reserves, it has been
necessary in the past for us to increase the estimated liabilities reflected in
our reserves for claims and policy expenses. In the year in which a claim is
first incurred, we establish policy and contract claims reserves that are
actuarially determined to be the present value of all future payments required
for that claim. We assume that our current reserve amount and interest income
earned on invested assets will be sufficient to make all future payments. We
evaluate our prior year assumptions by reviewing the development of reserves for
the prior period. This amount of $17,477 and $13,427, in 2001 and 2000,
respectively, includes imputed interest from prior year-end reserve balances
plus adjustments to reflect actual versus estimated claims experience. These
adjustments (particularly when calculated as a percentage of the prior year-end
reserve balance) provide a relative measure of deviation in actual performance
as compared to our initial assumptions.

The adjustments to reserves for claims incurred in prior periods are
primarily attributable to claims incurred from our long-term care insurance
policies, which represent approximately 95% of our premium in-force.

We evaluate the assumptions utilized at the time the claim is incurred
compared to our most current assumptions. In 2001, two factors affected the
reserves we held for claims incurred in prior years. (1) Excluding $7,050 from
the effect of imputed interest, we added $8,845 to our claim reserves for 2000
and prior claim incurrals. Prior to 2001, we based our expectations on claim
continuance patterns determined from our historical claims payments. In 2001, we
engaged a new consulting actuary that provided us with additional industry data
to incorporate in our revised continuance expectations (the probability that a
claim in one duration will continue to another). Our analysis of this
supplemental data suggested that we would recognize higher future payments on
currently incurred claims than was previously anticipated. As a result, we
lengthened our continuance tables for claim durations beyond the third year, and
increased our reserves held for claims incurred to record this liability. We
believe that our experience for claims in the first, second and third duration
was consistent with industry data and, therefore, did not alter this portion of
our continuance tables. (2) In 2001, we reduced the discount rate used in the
establishment of reserves to appropriately reflect the current investment rate
earned on assets supporting this liability. As a result, reserves for claims
incurred in prior years was increased $1,582.

In 2000, excluding the effect of $6,863 from imputed interest, we added
$6,565 for claims incurred in prior years. While this increase in reserves for
prior year incurred claims of 4.8% does not reflect a material variance from our
expectations, we believe that the increases were attributable to the method we
employed for determining incurred but not reported claims ("IBNR"). This method
sought to project a ratio of incurred claims to earned premium based upon
historic experience and current trends. The actual number and type of claims
that were ultimately reported to us exceeded the amount of IBNR that we had
recorded at the original estimated date.

The establishment of reserves for claims liabilities incorporates
assumptions regarding the duration of claims, lag in reporting of claims, and
interest discount rates. We periodically reevaluate these assumptions based upon
actual results. Although we believe that our current reserves accurately reflect
our most recent assumptions, continued adverse claims experience could result in
additional future increases. Adverse development of our claim reserves, however,
will not generally be known until future payments occur or other evidence exists
to cause us to change our assumptions. As a result, we could experience positive
or negative deviation from the established reserves, which would impact our
results of operations.

COMMISSIONS. Commissions to agents decreased 24.9% to $76,805 in 2001,
compared to $102,313 in 2000.

First year commissions on accident and health business in 2001 decreased
54.9% to $29,371, compared to $65,117 in 2000, due to the decrease in first year
accident and health premiums. The mix of policyholder issue ages for new
business affects the percentage of commissions paid for new business

S-61

due to our age-scaled commission rates. Generally, sales to younger
policyholders result in a higher commission percentage. The ratio of first year
accident and health commissions to first year accident and health premiums was
67.4% in 2001 and 67.1% in 2000.

Renewal commissions on accident and health business in 2001 increased 25.8%
to $49,536, compared to $39,390 in 2000, consistent with the increase in renewal
premiums discussed above. The ratio of renewal accident and health commissions
to renewal accident and health premiums was 16.3% in 2001 and 15.7% in 2000,
which varies as a result of the weighting of policies written by agents with
differing contracts.

During 2001 and 2000, we reduced commission expense, as an intercompany
elimination, by netting $3,706 and $4,923, respectively, from override
commissions that affiliated insurers paid to our subsidiary agencies. The
reduction in commission overrides earned by these agencies in 2001 resulted from
our suspension of new sales in all states at varying times throughout 2001.

NET POLICY ACQUISITION COSTS AMORTIZED (DEFERRED) AND IMPAIRMENT OF
DAC. The net deferred policy acquisition costs in 2001 decreased 22.8% to a net
amortization of $9,860, compared to net deferrals of $43,192 in 2000.

Deferred costs typically include all costs that are directly related to, and
vary with, the acquisition of policies. These costs include the variable portion
of commissions, which are defined as the first year commission rate less
ultimate renewal commission rates, and variable general and administrative
expenses related to policy underwriting. Deferred costs are amortized over the
life of the policy based upon actuarial assumptions, including persistency of
policies in-force. In the event a policy lapses prematurely due to death or
termination of coverage, the remaining unamortized portion of the deferred
amount is immediately recognized as expense in the current period.

The amortization of deferred costs is generally offset largely by the
deferral of costs associated with new premiums generation. Lower new premium
sales during 2001 produced significantly less expense deferral to offset
amortized costs.

During 2001, with the assistance of our consulting actuary, we completed an
analysis to determine if existing policy reserves and policy and contract claim
reserves, together with the present value of future gross premiums, would be
sufficient to (1) cover the present value of future benefits to be paid to
policyholders and settlement and maintenance costs and (2) recover unamortized
deferred policy acquisition costs, referred to as recoverability analysis. We
determined that we would require premium rate increases on certain of our
existing products in order to fully recover our present deferred acquisition
cost asset from future profits. We perform the recoverability analysis each
quarter. During the second quarter we recognized an impairment charge of $300 as
a result of this analysis. Effective December 31, 2001, we entered a reinsurance
agreement for substantially all of our long-term care insurance policies. The
reinsurance agreement includes an annual expense and risk charges. These
additional expense and risk charges reduced our anticipated future gross profits
and resulted in a further impairment of our deferred policy acquisition cost
asset of $61,500. We also amortized approximately $10,000 more of deferred
acquisition cost asset during 2001 due to changing our future assumptions. "See
Premiums."

When an impairment occurs, the historical assumptions utilized in the
establishment of the reserves and DAC are "unlocked" and based on current
assumptions. Changes in policy reserves and unamortized deferred policy
acquisition costs will be based on these revised assumptions in future periods.
In determining the impairment, we evaluated future claims expectations, premium
rates and our ability to obtain future rate increases, persistency and expense
projections.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses in
2001 decreased 1.4% to $49,282, compared to $49,973 in 2000. The amounts for the
years ended 2001 and 2000, respectively, include $6,591 and $8,138 related to
United Insurance Group. The ratio of total general and

S-62

administrative expenses, excluding United Insurance Group expense, to premium
revenues was 12.2% in 2001, compared to 11.7% in 2000.

General and administrative expenses were increased during 2001 as a result
of supplemental accounting and actuarial fees, legal fees, depreciation expenses
and the recognition of $434 of compensation expense related to the variable
treatment of options granted to employees. The compensation expense represents
the December 31, 2001 market value of our common stock in excess of the grant
price of the options. Throughout 2001 we took certain actions to reduce costs,
including staff eliminations, marketing reductions and overhead eliminations. We
believe that if we remain unable to write new policies in states where we have
ceased new production, we will need to decrease production expenses further.

As a result of our December 31, 2001 reinsurance agreement with a foreign
reinsurer, we must pay federal excise tax of 1% on all ceded premium. At
December 31, 2001, we accrued $5,635 of excise tax, which represents the total
amount due for the transfer of premium at the inception of the agreement. This
amount was paid in the first quarter 2002.

RESERVE FOR CLAIM LITIGATION. In the second quarter 2000, a jury awarded
compensatory damages of $24 and punitive damages of $2,000 in favor of the
plaintiff in a disputed claim case against one of our subsidiaries. We
subsequently appealed the decision. During the second quarter 2001, we agreed to
settle the claim for $750 rather than pursuing the appeal process.

PROVISION FOR FEDERAL INCOME TAXES. Our provision for Federal income taxes
for 2001 decreased 276.8% to a tax benefit of $16,280, compared to a tax
provision of $11,720 for 2000 as a result of net losses in 2001. During 2001, we
determined that the net operating loss carryforward attributable to our non-life
parent may be impaired due to the life subsidiary's inability to utilize these
losses within the allowed future periods. As a result, we recognized a valuation
allowance of $5,775 to our deferred tax asset in 2001.

COMPREHENSIVE INCOME. During 2001, our investment portfolio generated
pre-tax, unrealized gains of $11,606, compared to $10,350 in 2000. After
accounting for deferred taxes from these gains, shareholders' equity decreased
by $37,345 from comprehensive losses during 2001, compared to comprehensive
income of $29,151 in 2000.

TWELVE MONTHS ENDED DECEMBER 31, 2000 AND 1999 (AMOUNTS IN THOUSANDS)

PREMIUMS. Total premiums earned in the twelve month period ended
December 31, 2000, including long-term care, disability, life and Medicare
supplement, increased 22.1% to $357,113, compared to $292,516 in the twelve
month period ended December 31, 1999.

First year long-term care premiums earned in 2000 increased 1.8% to $95,693,
compared to $93,957 in 1999. We attribute our growth to continued improvements
in product offerings, which competitively meet the needs of the long-term care
marketplace, and growth from expansion into new states, such as New Jersey,
Connecticut and New York. In addition, we introduced our group plan, which
offers long-term care insurance to group members on a guaranteed acceptance
basis. Group plan sales accounted for approximately $4,000 in 2000 first year
premium. We believe that our growth was otherwise hampered during 2000 as a
result of the introduction of higher priced products in many states and
unfavorable press reports regarding the long-term care industry and our company
as a market leader.

Renewal premiums earned in 2000 increased 33.5% to $259,225, compared to
$194,243 in 1999. Renewal long-term care premiums earned in 2000 increased 35.3%
to $244,945, compared to $181,010 in 1999. This increase reflects renewals of a
larger base of in-force policies and policyholder persistency, which remained
constant at approximately 87%, as well as rate increases.

S-63

NET INVESTMENT INCOME. Net investment income earned for 2000 increased
21.2% to $27,408, from $22,619 for 1999. Management attributes this growth to an
increase in invested assets as a result of higher established reserves.
Investment income was reduced, however, by our use of $6,000 of invested cash
for the acquisition of Network Insurance Senior Health Division on January 1,
2000. Our average yield on invested assets at cost, including cash and cash
equivalents, was 6.2% in 2000, compared to 5.8% in 1999. Average yields
generally increased due to cash from maturing bonds invested at higher rates.
These yields are reduced as a result of investments in equity securities, which
generate low or no dividend yields.

NET REALIZED CAPITAL GAINS. During 2000, we recognized capital gains of
$652, compared to gains of $5,393 in 1999. Capital gains and losses are
generally recorded as a result of our normal investment management operations.
At December 31, 2000, however, we realized a capital loss of $3,200 by marking
the cost basis of one of our bonds to its current market value. The issuer of
this bond declared bankruptcy, which prompted the bond's impairment. In 1999, we
recognized capital gains to offset expenses of approximately $2,800 as a result
of the impairment of certain of our fixed assets as discussed below.

OTHER INCOME. We recorded $8,096 in other income during 2000, up from
$6,297 in 1999. The increase is attributable to the partial settlement of a
previously disclosed lawsuit, the details of which are confidential in
accordance with the settlement agreement, and to income generated from corporate
owned life insurance policies.

BENEFITS TO POLICYHOLDERS. Total benefits to policyholders in 2000
increased 21.6% to $243,571, compared to $200,328 in 1999. Our loss ratio, or
policyholder benefits to premiums, was 68.2% in 2000, compared to 68.5% in 1999.
This ratio is expected to grow as new business premiums as a percentage of total
premiums decreases.

Policyholder benefits include additions to reserves and claims payments for
policyholders' incurring claims in the current and prior years. In 2000, we paid
$37,864 related to current year incurrals and $85,153 related to claims incurred
in 1999 and prior years. In 1999, we paid $25,145 for current year claims and
$69,887 related to prior year incurrals. Paid claims as a percentage of premiums
were 34.4% in 2000, compared to 32.5% in 1999. This ratio increased as a result
of aging policies and a reduction in new premium as a percentage of total
premium reduction.

In the year in which a claim is first incurred, we establish reserves that
are actuarially determined to be the present value of all future payments
required for that claim. We assume that our current reserve amount and interest
income earned on invested reserves will be sufficient to make all future
payments. We measure the validity of our prior year assumptions by reviewing the
development of reserves for the prior period (i.e., incurred from prior years).
This amount, $13,427 and $9,231 in 2000 and 1999, respectively, includes imputed
interest from prior year-end reserve balances of $6,863 and $5,085,
respectively, plus adjustments to reflect actual versus estimated claims
experience. These adjustments, particularly as a percentage of the prior
year-end reserve balance, yield a relative measure of deviation in actual
performance to our initial assumptions. In 2000, we added approximately $6,600
or 4.8% of prior year-end reserves to our claim reserves for 1999 and prior
claim incurrals. In 1999, we added approximately $4,100 or 3.9% of prior
year-end reserves to our claim reserves for 1998 and prior claim incurrals.

COMMISSIONS. Commissions to agents increased 5.7% to $102,313 in 2000,
compared to $96,752 in 1999.

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First year commissions on accident and health business in 2000 decreased .6%
to $65,117, compared to $65,538 in 1999, due primarily to the lack of
commissions paid for our new group policies. The ratio of first year accident
and health commissions to first year accident and health premiums was 67.1% in
2000 and 69.4% in 1999, which also reflects the lack of group product
commissions. The mix of policyholder issue ages for new business affects the
overall percentage of commissions paid for new business due to our age-scaled
commission rates. Generally, sales to younger policyholders have a higher
commission percentage.

Renewal commissions on accident and health business in 2000 increased 32.5%
to $39,390 compared to $29,736 in 1999, consistent with the increase in renewal
premiums discussed above. The ratio of renewal accident and health commissions
to renewal accident and health premiums was 15.7% in 2000 and 16.0% in 1999.
This ratio fluctuates in relation to the age of the policies in-force and the
rates of commissions paid to the producing agents.

Commission expense during 2000 was reduced by the netting, as an
intercompany elimination, of $4,923 from override commissions paid to our
insurance agency subsidiaries by affiliated insurers. During 1999, commissions
were reduced by $2,593. In 2000, override commission reductions included
approximately $1,991 from the insurance agency that we purchased in
January 2000.

NET POLICY ACQUISITION COSTS DEFERRED. The net deferred policy acquisition
costs in 2000 decreased 15.5% to $43,192, compared to $51,134 in 1999.

Although new premiums increased in 2000, lower first year commissions from
our group product line resulted in lower deferred acquisition costs. In
addition, amortization of previously deferred costs offsets a greater portion of
the current period deferral, especially when new premium growth slows, as has
been the case in 2000.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses in
2000 increased 22.7% to $49,973, compared to $40,736 in 1999. In 2000 and 1999
general and administrative expenses included $8,138 and $7,748, respectively,
related to United Insurance Group. Generally, costs such as premium taxes and
salaries related to business processing increase proportionately to premium
growth. Management believes that current cost savings initiatives, such as
remote office consolidation and outsourcing of certain administrative functions,
has helped to contain the level of our expenses. 2000 expenses increased due to
the depreciation of capitalized costs for new internal software development,
legal expenses and sales promotion expense. General and administrative expenses
as a percentage of premiums (excluding United Insurance Group and goodwill
amortization related to its purchase) were 11.8% in 2000, compared to 11.3% in
1999.

LOSS DUE TO IMPAIRMENT OF PROPERTY AND EQUIPMENT. During 1999, we
discontinued the implementation of a new computer system. At June 30, 1999, we
had capitalized $2,799 of expenditures related to this project, including
licensing costs and fees paid to outside parties for system development and
implementation. As the system was not yet in service, none of these costs had
previously been depreciated. When we decided not to use these fixed assets,
their value became fully impaired and we recognized the entire amount as current
period expense.

In conjunction with our decision to discontinue our implementation of this
computer system, we filed suit against the software manufacturer and several
consultants, alleging misrepresentations regarding the system's capabilities and
ability to meet our expectations. We received $1,119 in settlement of a portion
of the lawsuit in 2000. In 2001, we received settlement in our favor of $357
from two additional parties who acted as consultants on the project.

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PROVISION FOR FEDERAL INCOME TAXES. Our provision for Federal income taxes
for 2000 increased 8.1% to $11,720, compared to $10,837 for 1999. The effective
tax rates of 34.0% and 33.7% in 2000 and 1999, respectively, are at or below the
normal Federal corporate rate as a result of credits from our investments in
tax-exempt bonds and corporate owned life insurance and dividends we receive
that are partially exempt from taxation and are partially offset by
non-deductible goodwill amortization and other non-deductible expenses.

COMPREHENSIVE INCOME. During 2000, our investment portfolio generated
pre-tax unrealized gains of $10,350, compared to 1999 unrealized losses of
$18,009. After accounting for deferred taxes from these gains, shareholders'
equity increased by $29,151 from comprehensive income during 2000, compared to
comprehensive income of $5,875 in 1999.

LIQUIDITY AND CAPITAL RESOURCES (AMOUNTS IN THOUSANDS)

Our consolidated liquidity requirements have historically been met from the
operations of our insurance subsidiaries, from our agency subsidiaries and from
funds raised in the capital markets. Our primary sources of cash are premiums,
investment income and maturities of investments. We have obtained, and may in
the future obtain, cash through public and private offerings of our common
stock, the exercise of stock options and warrants, other capital markets
activities or debt instruments. Our primary uses of cash are policy acquisition
costs (principally commissions), payments to policyholders, investment purchases
and general and administrative expenses.

Our 2000 Report of Independent Accountants contained a going concern opinion
resulting from uncertainty regarding Penn Treaty liquidity and insurance
subsidiary statutory surplus. Our 2001 Report of Independent Accountants does
not contain a going concern opinion because of the steps that we have taken to
improve parent company liquidity and insurance subsidiary statutory surplus,
including the approval of our Corrective Action Plan with the Pennsylvania
Insurance Department, our reinsurance agreement with Centre Solutions (Bermuda)
Limited (see "Subsidiary Operations") and the public and private placement of
additional shares of our Common Stock (see "Penn Treaty Operations"). However,
we cannot make assurances that parent company liquidity and insurance subsidiary
statutory surplus will not cause uncertainty with respect to our ability to
continue as a going concern without additional resources in the future. See
"Parent Company Operations."

In the 2002 period, our cash flows were attributable to cash provided by
operations, cash used in investing and cash provided by financing. Our cash
decreased $90,897 in the 2002 period primarily due to payments made to our
reinsurer and the purchase of $25,543 in bonds and equity securities. Cash was
provided primarily from the maturity and sale of $486,773 in bonds and equity
securities. These sources of funds were supplemented by $59,165 from operations.
The major source of cash from operations was premium and investment income
received.

In 2001, our cash decreased by $1,996, primarily from funds used to purchase
bonds and equity securities of $263,388. Our cash was primarily increased by
proceeds from the sale and maturity of investment securities of $128,881. These
sources of funds were supplemented with $111,277 from operations and $25,726
generated from the exercise of rights to purchase shares of our common stock
distributed to our shareholders and holders of our subordinated notes.

In 2000, our cash increased by $99,249, primarily due to the maturity and
sale of $250,765 of our bond and equity securities portfolio. These sources of
funds were supplemented with $92,415 from operations. The major source of cash
from operations was premium revenue used to fund reserve additions of $116,227.
The primary uses of cash during 2000 were the purchase of $233,539 in bonds and
equity securities, $102,313 paid as agent commissions and $6,000 used to
purchase Network Insurance Senior Health Division.

In 1999, our cash decreased $21,055, primarily due to $192,990 used to
purchase bonds and equity securities, $4,999 used to purchase our common stock,
which is held as treasury stock, and $9,194 used to purchase United Insurance
Group. Cash was provided primarily from the maturity and sale of

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$140,892 in bonds and equity securities. These sources of funds were
supplemented with $50,533 from operations. The major provider of cash from
operations was premium revenue used to fund reserve additions of $104,610.

We invest in securities and other investments authorized by applicable state
laws and regulations and follow an investment policy designed to maximize yield
to the extent consistent with liquidity requirements and preservation of assets.
As of September 30, 2002, shareholders' equity was increased by $1,125 due to
unrealized gains of $1,730 in the investment portfolio. As of December 31, 2001,
shareholders' equity was increased by $10,581 due to unrealized gains of $16,032
in the investment portfolio.

SUBSIDIARY OPERATIONS

Our insurance subsidiaries are regulated by various state insurance
departments. In its ongoing effort to improve solvency regulation, the National
Association of Insurance Commissioners ("NAIC") has adopted Risk-Based Capital
("RBC") requirements for insurance companies to evaluate the adequacy of
statutory capital and surplus in relation to investment and insurance risks,
such as asset quality, mortality and morbidity, asset and liability matching,
benefit and loss reserve adequacy, and other business factors. The RBC formula
is used by state insurance regulators as an early warning tool to identify, for
the purpose of initiating regulatory action, insurance companies that
potentially are inadequately capitalized. In addition, the formula defines
minimum capital standards that an insurer must maintain. Regulatory compliance
is determined by a ratio of the enterprise's regulatory Total Adjusted Capital,
to its Authorized Control Level RBC, as defined by the NAIC. Companies below
specific trigger points or ratios are classified within certain levels, each of
which may require specific corrective action depending upon the insurer's state
of domicile.

Our insurance subsidiaries, Penn Treaty Network America Insurance Company,
American Network Insurance Company, and American Independent Network Insurance
Company of New York (representing approximately 92%, 6% and 2% of our in-force
premium, respectively) are required to hold statutory surplus that is above a
certain required level. If the statutory surplus of either of our Pennsylvania
subsidiaries falls below such level, the Department would be required to place
such subsidiary under regulatory control, leading to rehabilitation or
liquidation. At December 31, 2000, Penn Treaty had Total Adjusted Capital at the
Regulatory Action level. As a result, it was required to file a Corrective
Action Plan (the "Plan") with the insurance commissioner.

On February 12, 2002, the Department approved the Plan. As a primary
component of the Plan, effective December 31, 2001, Penn Treaty Network America
Insurance Company and American Network Insurance Company entered a reinsurance
transaction to reinsure, on a quota share basis, substantially all of our
long-term care insurance policies then in-force. The agreement is subject to
certain coverage limitations, including an aggregate limit of liability that is
a function of certain factors and that may be reduced in the event that the rate
increases that the reinsurance agreement may require are not obtained. As part
of this agreement we incur annual risk charges in excess of $10,000. The risk
charges increase to approximately $13,000 annually if we do not commute before
January 1, 2008. This agreement meets the requirements to qualify for
reinsurance treatment under statutory accounting rules. However, this agreement
does not qualify for reinsurance treatment in accordance with FASB No. 113
because, based on our analysis, the agreement does not result in the reasonable
possibility that the reinsurer may realize a significant loss. This is due to a
number of factors related to the agreement, including experience refund
provisions, expense and risk charges due to the reinsurer and the aggregate
limit of liability.

The initial premium of the treaties was approximately $619,000, comprised of
$563,000 of cash and qualified securities transferred in February 2002, and
$56,000 as funds held due to the reinsurer. The initial premium and future cash
flows from the reinsured policies, less claims payments, ceding commissions and
risk charges, is credited to a notional experience account, which is held for
our

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benefit in the event of commutation and recapture on or after December 31, 2007.
The notional experience account balance receives an investment credit based upon
the total return from a series of benchmark indices and derivative hedges that
are intended to match the duration of our reserve liability.

The reinsurance agreement contains commutation provisions and allows us to
recapture the statutory reserve liabilities and the notional experience account
balance as of December 31, 2007, or on December 31 of any year thereafter. Our
intention to commute the agreement on December 31, 2007 is predicated upon our
actuarial modeling, which suggested that, by that time, Penn Treaty Network
America Insurance Company would have sufficient statutory surplus to support the
reinsured business under regulatory requirements. In the event we determine, due
to future revisions of our actuarial projections, that our planned commutation
is likely to occur after December 31, 2007, we would record annual expense and
risk charges that incorporate future escalation provisions through the newly
determined commutation date, as well as extend the period of time over which the
initial costs are amortized. We would also evaluate and potentially record an
impairment of our DAC asset due to any additional expense and risk charges.

As a result of our intention to commute, we assessed only the expense and
risk charges anticipated prior to the commutation date in our most recent DAC
recoverability analyses and are not recording the potential of future escalating
charges in our current financial statements. In addition, we are recognizing the
up front costs of entering the agreement, such as the fair value of the warrants
granted to the reinsurer, over the period of time to the expected commutation
date.

The agreement also granted the reinsurer an option to participate in
reinsuring new business sales up to 50% on a quota share basis. In August 2002,
the reinsurer exercised its option to reinsure a portion of future sales.
Subsequent to September 30, 2002, we submitted a preliminary draft of the
proposed reinsurance agreement to the Department for review. Because the
proposed reinsurance agreement has not yet been agreed upon by the entering
parties or the Pennsylvania Insurance Department, no impact has been reflected
in our statements of operations.

The Plan requires Penn Treaty to comply with certain other agreements at the
direction of the Department, including, but not limited to:

- New investments are limited to NAIC 1 or 2 rated securities.

- Affiliated transactions are limited and require Department approval.

- An agreement to increase statutory reserves by an additional $50,000
throughout 2002-2004, such that our subsidiaries' policy reserves will be
based on new, current claims assumptions and will not include any rate
increases. These claim assumptions are applied to all policies, regardless
of issue year and are assumed to have been present since the policy was
first issued. The reinsurance agreement has provided the capacity to
accommodate this increase.

Effective September 10, 2001, we determined to discontinue the sale
nationally of all new long-term care insurance policies until the Plan was
approved by the Department. The decision resulted from our concern about further
depletion of statutory surplus from new sales prior to the completion and
approval of the Plan and from increasing concern regarding our status by many
states in which we are licensed to conduct business. The form of our cessation
varied by state, ranging from no action to certificate suspensions.

Upon the approval by the Department of the Plan in February 2002, we
recommenced new policy sales in 23 states, including Pennsylvania. We have since
recommenced new policy sales in nine additional states, including Florida and
Texas (See "Liquidity and Capital Resources"), which have historically
represented approximately 25% and 5%, respectively of our new policy sales.
However, we have not yet commenced new policy sales in California, Virginia or
Illinois, which together have traditionally represented approximately 27% of
sales, or in 15 other states. We are actively working with the remaining states
to recommence new policy sales in all jurisdictions.

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The majority of our insurance subsidiaries' cash flow results from our
existing long-term care policies, which have been ceded to the reinsurer under
this agreement. Our subsidiaries' ability to meet additional liquidity needs and
fixed expenses in the future is highly dependent upon our ability to issue new
policies and to control expense growth.

Our future growth is dependent upon our ability to continue to expand our
historical markets, retain and expand our network of agents and effectively
market our products and our ability to fund our marketing and expansion while
maintaining minimum statutory levels of capital and surplus required to support
such growth. Under the insurance laws of Pennsylvania and New York, where our
insurance subsidiaries are domiciled, insurance companies can pay ordinary
dividends only out of earned surplus. In addition, under Pennsylvania law, our
Pennsylvania insurance subsidiaries (including our primary insurance subsidiary)
must give the Department at least 30 days' advance notice of any proposed
"extraordinary dividend" and cannot pay such a dividend if the Department
disapproves the payment during that 30-day period. For purposes of that
provision, an extraordinary dividend is a dividend that, together with all other
dividends paid during the preceding twelve months, exceeds the greater of 10% of
the insurance company's surplus as shown on the company's last annual statement
filed with Department or its statutory net income as shown on that annual
statement. Statutory earnings are generally lower than earnings reported in
accordance with generally accepted accounting principles due to the immediate or
accelerated recognition of all costs associated with premium growth and benefit
reserves. Additionally, the Plan requires the Department to approve all dividend
requests made by Penn Treaty Network America, regardless of normal statutory
requirements for allowable dividends. We believe that the Department is unlikely
to consider any dividend request in the forseeable future, as a result of Penn
Treaty Network America's current statutory surplus position. Although not
stipulated in the Plan, this requirement is likely to continue until such time
as Penn Treaty meets normal statutory allowances, including reported net income
and positive cumulative earned surplus. We do not expect that this will occur in
the foreseeable future.

Under New York law, our New York insurance subsidiary (American Independent)
must give the New York Insurance Department 30 days' advance notice of any
proposed dividend and cannot pay any dividend if the regulator disapproves the
payment during that 30-day period. In addition, our New York insurance company
must obtain the prior approval of the New York Insurance Department before
paying any dividend that, together with all other dividends paid during the
preceding twelve months, exceeds the lesser of 10% of the insurance company's
surplus as of the preceding December 31 or its adjusted net investment income
for the year ended the preceding December 31.

Penn Treaty Network America Insurance Company and American Network Insurance
Company have not paid any dividends to Penn Treaty for the past three years and
are unlikely in the foreseeable future to be able to make dividend payments due
to insufficient statutory surplus and anticipated earnings. However, our New
York subsidiary is not subject to the Plan and was permitted by New York statute
to make a dividend payment following December 31, 2001. Consequently, in 2002,
Penn Treaty received a dividend from our New York subsidiary of $651.

Our subsidiaries' debt currently consists primarily of a mortgage note in
the amount of $1,516 that was issued by a former subsidiary and assumed by us
when that subsidiary was sold. The mortgage note is currently amortized over
15 years, and has a balloon payment due on the remaining outstanding balance in
December 2003. Although the note carries a variable interest rate, we have
entered into an amortizing swap agreement with the same bank with a nominal
amount equal to the outstanding debt, which has the effect of converting the
note to a fixed rate of interest of 6.85%.

PENN TREATY OPERATIONS

Penn Treaty is a non-insurer that directly controls 100% of the voting stock
of our insurance subsidiaries. If we are unable to meet our financial
obligations, become insolvent or discontinue

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operations, the financial condition and results of operations of our insurance
subsidiaries could be materially affected.

On April 27, 2001, we distributed rights to our shareholders and holders of
our 6.25% convertible subordinated notes due 2003 ("Rights Offering") for the
purpose of raising new equity capital. Pursuant to the Rights Offering, holders
of our common stock and holders of our convertible subordinated notes received
rights to purchase 11,547 newly issued shares of common stock at a set price of
$2.40 per share. The Rights Offering was completed on May 25, 2001 and generated
net proceeds of $25,726 in additional equity capital. We contributed $18,000 of
the net proceeds to the statutory capital of our subsidiaries.

In March 2002, we completed a private placement of 510 shares of common
stock for net proceeds of $2,352. The common stock was sold to several current
and new institutional investors, at $4.65 per share. The offering price was a
10 percent discount to the 30-day average price of our common stock prior to the
issuance of the new shares. Our common stock is listed on the New York Stock
Exchange. We filed a registration statement with the Securities and Exchange
Commission on June 5, 2002 to register these shares for resale.

In June 2002, we completed a private placement of 60 shares of common stock
as compensation to our financial advisor. We filed a registration statement for
30 of these additional shares with the Securities and Exchange Commission on
June 5, 2002.

In October 2002, we announced our intention to raise additional equity
capital prior to March 31, 2003 in order to support future sales growth, provide
additional parent company liquidity and to continue to meet statutory
requirements. We are required to raise an amount we estimate to be approximately
$23,000 of additional equity capital prior to December 31, 2002 in order for
Penn Treaty Network America Insurance Company to remain in compliance with its
Consent Order entered with the Florida Insurance Department upon the
recommencement of sales in July 2002. The Consent Order includes, among other
requirements for which our subsidiary is currently in compliance, a requirement
to raise sufficient equity capital to meet Florida requirements for gross
premium to surplus ratios.

If we are unsuccessful in our efforts to raise additional capital and are
unable to report December 31, 2002 statutory capital sufficient to meet the
required Florida gross premium to surplus ratio, our subsidiary could be
required to cease new sales in Florida and its certificate of authority could be
suspended by the Florida Insurance Department until sufficient capital could be
raised.

Penn Treaty debt currently consists of $11,407 of 6.25% convertible
subordinated notes due 2003 ("the 2003 Notes") and $63,343 of 6.25% convertible
subordinated notes due 2008 ("the 2008 Notes").

The 2003 Notes, issued in November 1996, are convertible into common stock
at $28.44 per share until maturity in December 2003. At maturity, to the extent
that any portion has not been converted into common stock, we will have to repay
their entire principal amount in cash. The 2003 Notes carry a fixed interest
coupon of 6.25%, payable semi-annually. Because we do not have sufficient cash
flow to retire the debt upon maturity, and the conversion price of $28.44 per
share is not likely to be met, we expect that we will need to refinance the
remaining 2003 Notes on or before maturity in 2003.

In September 2002, we commenced an offer of up to $74,750 in aggregate
principal amount of 2008 Notes in exchange for up to all of our then outstanding
2003 Notes. Under the terms of the exchange offer, the new notes would have
terms similar to the former notes but mature in

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October 2008 and would be convertible into shares of our common stock at a
conversion price of $5.31. Prior to the termination of the exchange offer, we
reduced our offered conversion price to $4.50. In addition, beginning in
October 2004, the 2008 Notes are mandatorily convertible if, at any time, the
15-day average closing price of our common stock exceeds 110% of the conversion
price. Subsequent to September 30, 2002, we exchanged approximately $63,343 of
the 2003 Notes for 2008 Notes.

On January 1, 1999, we purchased all of the common stock of United Insurance
Group, a Michigan based consortium of long-term care insurance agencies, for
$18,192. As part of the purchase, we issued a note payable for $8,078, which was
in the form of a three-year zero-coupon installment note. The installment note,
after discounting for imputed interest, was recorded as a note payable of
$7,167, and had an outstanding balance of $2,858 at December 31, 2001. The
remainder of the purchase price was paid in cash. The total outstanding balance
of the note was repaid in January 2002.

At September 30, 2002, our total debt and financing obligations through 2008
adjusted on a pro forma basis for the exchange of 2003 Notes for 2008 Notes were
as follows:

LEASE
DEBT OBLIGATIONS TOTAL
-------- ----------- --------

2002........................................... $ -- $245 $ 245
2003........................................... 12,923 344 13,267
2004........................................... -- 252 252
2005........................................... -- 18 18
2006........................................... -- 18 18
2007........................................... -- 18 18
2008........................................... 63,343 18 63,361
------- ---- -------
Total........................................ $76,266 $913 $77,179
======= ==== =======

Other amounts due after 2008 are immaterial.

In December 1999, we contributed $1,000 to initially capitalize another
subsidiary, which concurrently lent us $750 in exchange for a demand note, which
is still outstanding.

As part of our reinsurance agreement, effective December 31, 2001, the
reinsurer was granted four tranches of warrants to purchase shares of non-voting
convertible preferred stock. The first three tranches of warrants are
exercisable through December 31, 2007 at common stock equivalent prices ranging
from $4.00 to $12.00 per share. If exercised for cash, at the reinsurer's
option, the warrants could yield additional capital and liquidity of
approximately $20,000 and the convertible preferred stock would represent, if
converted, approximately 15% of the then outstanding shares of our common stock
on a fully diluted basis. If the agreement is not commuted on or after
December 31, 2007, the reinsurer may exercise the fourth tranche of convertible
preferred stock purchase warrants at a common stock equivalent price of $2.00
per share, potentially generating additional capital of $12,000 and, if
converted, the convertible preferred stock would represent an additional 20% of
the then outstanding common stock on a fully diluted basis. No assurance can be
given that the reinsurer will exercise any or all of the warrants granted or
that it will pay cash in connection with their exercise.

Cash flow needs of Penn Treaty primarily include interest payments on
outstanding debt and operating expenses. The funding is primarily derived from
the operating cash flow of our agency subsidiary operations and dividends from
the insurance subsidiaries. However, as noted above, the dividend capabilities
of the insurance subsidiaries are limited and we may need to rely upon the
dividend capabilities of our agency subsidiaries to meet current liquidity
needs. Our current cash on hand and these sources of funds are expected to be
sufficient to meet our liquidity needs through March 31, 2003, but may be
insufficient to meet our interest payments in April and June 2003, and will be
insufficient to meet our interest payments in October and December 2003,
including any remaining repayment of our 2003 Notes upon maturity in
December 2003. We believe that we will need to raise

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additional equity capital in order to meet our parent company needs in 2003 and
for the foreseeable future.

NEW ACCOUNTING PRINCIPLES (AMOUNTS IN THOUSANDS)

In June 2001, the Financial Accounting Standards Board ("FASB") issued two
Statements of Financial Accounting Standards ("SFAS"). SFAS No. 141, "Business
Combinations," requires usage of the purchase method for all business
combinations initiated after June 30, 2001, and prohibits the usage of the
pooling of interests method of accounting for business combinations. The
provisions of SFAS No. 141 relating to the application of the purchase method
are generally effective for business combinations completed after July 1, 2001.
Such provisions include guidance on the identification of the acquiring entity,
the recognition of intangible assets other than goodwill acquired in a business
combination and the accounting for negative goodwill. The transition provisions
of SFAS No. 141 require an analysis of goodwill acquired in purchase business
combinations prior to July 1, 2001 to identify and reclassify separately
identifiable intangible assets currently recorded as goodwill.

SFAS No. 142, "Goodwill and Other Intangible Assets," primarily addresses
the accounting for goodwill and intangible assets subsequent to their
acquisition. We adopted SFAS No. 142 on January 1, 2002 and ceased amortizing
goodwill at that time. During the second quarter 2002, we completed an
impairment analysis of goodwill, in accordance with FASB No. 142. Our goodwill
was recorded as a result of the purchase of its agencies and its insurance
subsidiaries. As part of our evaluation, we completed numerous steps in
determining the revocerability of its goodwill. The first required step was the
measurement of total enterprise fair value versus book value. Because our fair
market value, as measured by our stock price, was below book value at
January 1, 2002, goodwill was next evaluated at a reporting unit level, which
comprised our insurance agencies and insurance subsidiaries.

Upon completion of our evaluation, we determined that the goodwill
associated with the agency purchases was fully recoverable. The deficiency of
current market value to book value was assigned to the insurance subsidiary
values. As a result, we determined that the goodwill associated with our
insurance subsidiaries was impaired and recognized an impairment loss of $5,151
from our transitional impairment test of goodwill, which we recorded as a
cumulative effect of change in accounting principle. The impairment has been
recorded effective January 1, 2002. Management has completed an assessment of
other intangible assets and has determined to continue to amortize these assets
so as to closely match the future profit emergence from these assets.

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BUSINESS

THE FOLLOWING DESCRIPTION OF OUR BUSINESS CONTAINS FORWARD-LOOKING
STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS
A RESULT OF CERTAIN FACTORS. SEE "RISK FACTORS" BEGINNING ON PAGE S-6.

PENN TREATY AMERICAN CORPORATION

We are a leading provider of long-term care insurance in the United States.
Our principal products are individual, defined benefit accident and health
insurance policies covering long-term skilled, intermediate and custodial
nursing home and home health care. Our policies are designed to provide
meaningful benefits if and when the insured is no longer capable of functioning
independently. We also own insurance agencies that sell senior-market insurance
products issued by us as well as other insurers.

We introduced our first long-term nursing home insurance product in 1972 and
our first home health care insurance product in 1983. Since then we have
innovated several new products designed to meet the changing needs of our
customers that were the first of their kind in the long-term care industry. Our
primary product offerings are:

- The Assisted Living-Registered Trademark- policy, which provides coverage
for all levels of facility care and includes a home health care rider;

- The Personal Freedom-Registered Trademark- policy, which provides
comprehensive coverage for facility and home health care; and

Although nursing home and home health care policies accounted for 95.5% of
our total annualized premiums in-force as of September 30, 2002, we also market
and sell life, disability and Medicare supplement products.

We maintain and administer one of the largest individual long-term care
insurance portfolios in the country. Our sales and marketing efforts through our
independent agency distribution channels were very successful between 1995 and
2001 as total in-force premiums grew at a compound annual rate of 22.7% from
$102 million to $350 million.

To eliminate the statutory capital strain associated with additional premium
growth, we ceased all sales and marketing initiatives in mid-2001 while we
developed our Plan. Upon the successful execution of the major provisions of the
Plan (see "Business--Government Regulation--Recent State Regulatory Actions"),
we expect a full reengagement of sales and marketing activities in an effort to,
once again, become a premier writer of new long-term care insurance policies.
See "Our Strategy."

THE LONG-TERM CARE INSURANCE INDUSTRY

The long-term care insurance market has grown rapidly in recent years.
According to studies by Conning & Co. and LifePlans, Inc., the long-term care
insurance market experienced a compound average growth rate of 20.1% from 1994
to 1999, rising from approximately $1.7 billion of net written premiums in 1994
to approximately $4.2 billion of net written premiums in 1999. We expect this
growth to continue based on the projected demographics of the United States
population, the rising costs of health care and a regulatory environment that
supports the use of private long-term care insurance.

The population of senior citizens (people age 65 and over) in the United
States is projected to grow from an estimated level of approximately 35 million
to approximately 70 million by 2030, according to a 1996 U.S. Census Bureau
report. Furthermore, health and medical technologies are

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improving life expectancy and, by extension, increasing the number of people
requiring some form of long-term care. According to a 1999 report by Conning &
Co., market penetration of long-term care insurance products in the over-65 age
group ranges from 5% to 7%. The size of the target population and the lack of
penetration of the existing market indicate a substantial growth opportunity for
companies providing long-term care insurance products.

We believe that the rising cost of nursing home and home health care
services, along with the increasing strain these services are having on the
state and Federally-financed Medicaid system (which is the largest payer of
long-term care services) makes long-term care insurance an attractive means to
pay for these services. According to a 2001 report by the Centers for Medicare
and Medicaid Services, the combined cost of home health care and nursing home
care was $20.0 billion in 1980. By 2000, this cost had risen to $124.7 billion.

OUR STRATEGY

We seek to enhance shareholder value by strengthening our position as a
leading provider of long-term care insurance. Our value proposition incorporates
innovative product development, stratification of risk, efficient and effective
underwriting and an individualized service culture for agents and policyholders.
We expect that these characteristics will provide for the reengagement of
currently licensed agents and the recruitment of new agents to generate new
policy sales. We intend to achieve our goal of profitable growth by executing
the following strategies:

RECOMMENCEMENT OF SALES AND MARKETING EFFORTS IN ALL STATES. In 2001, we
ceased new policy sales nationwide as a result of diminished surplus levels. We
have recommenced new policy sales in 32 states. However, we have yet to
recommence new policy sales in 18 other states. The key states which remain
closed include California, Virginia, Arizona, Illinois and Ohio. These state
insurance departments are evaluating our Plan. We are working closely with these
insurance departments and the insurance departments of the remaining states to
recommence new policy sales in all jurisdictions.

The sale of our current policies, which we believe are priced with
appropriate profit margins, is an important component of our earnings per share
growth in the future. We have reached this conclusion because over the past
year, we have evaluated the profitability of our in-force business and our
policies currently being sold with the assistance of our in-house and consulting
actuaries. Although the current in-force business, including our agency
subsidiaries, remains marginally profitable, sales of new policies are expected
to be the driving force in generating profits in the future.

As a requirement to recommence sales and marketing activities in the State
of Florida, we entered into an amended consent order with the Florida Insurance
Department that included a requirement to raise additional statutory surplus
prior to December 31, 2002, to satisfy gross premium to surplus ratio
requirements specific to Florida. We expect that we will need approximately
$23 million to meet these requirements.

A portion of the $45 million which we are attempting to raise in this
offering will be used to support future sales activities. If we are not
successful in raising this capital, the Florida Insurance Department could
suspend our Certificate of Authority in Florida, in which case, we would be
unable to write new policies in Florida until we are able to comply. We have
received a tentative commitment from a group of holders of our 2008 Notes to
purchase up to $20 million of the Notes. Further,

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increased growth through new policy sales will probably require us to raise
additional capital surplus in the future to maintain compliance in Florida and
other states.

REENGAGEMENT OF OUR EXISTING SALES FORCE AND THE EXPANSION OF DISTRIBUTION
OPPORTUNITIES. In connection with our efforts to recommence sales, we have also
been actively involved in reengaging our network of agents. We recognize that
our ability to generate new policy sales is highly dependent on experienced and
talented agents who understand the needs of our target market. We intend to
continue to recruit agents as we recommence new policy sales throughout the
United States.

Besides providing innovative products, competitive commissions and
personalized service, our strategy to reengage our sales force is highly
dependent upon our claims paying ability, ratings from independent rating
agencies, our financial strength, and reputation with agents and policyholders.
We believe that the actions taken pursuant to the Plan and the additional
statutory capital provided by the issuance of the Notes will enhance our ability
to receive favorable treatment by the rating agencies. In addition, we plan to
continue our focus on agent communication and education by providing our sales
force with periodic updates regarding the progress achieved in the execution of
the Plan.

ENHANCEMENT OF OUR LEADERSHIP TEAM AND FINANCIAL MANAGEMENT CAPABILITY. We
have significantly strengthened our leadership team through the addition of
individuals with the experience and skills necessary to create value for all of
the Company's stakeholders, which include our investors, policyholders, agents
and employees.

Our senior executives have a wide breadth of financial services industry
experience. We recently added a new Chief Accounting Officer and a senior
actuary. At our last annual meeting shareholders elected a new outside member to
the Board of Directors who brings over 25 years of capital markets experience
and is a Managing Director at a New York investment firm. Our President and
Chief Operating Officer was recruited in May 2001 and appointed to his current
position in May 2002. We hired our Vice President and Chief Actuary in June
2001.

In addition to our efforts to grow our business and serve our agents and
policyholders, our management team will be focusing on our business via the
utilization of customized actuarial models and other financial projection tools.

INCREASE OUR OPERATIONAL EFFICIENCY THROUGH TECHNOLOGICAL IMPROVEMENTS. We
have embarked on a system replacement project ("SRP") that will redesign our
long-term care administration systems over the next three years. Our SRP
includes the assessment of each major task performed in our daily operations and
the identification of all value and non-value added functions. As part of our
SRP, we are redesigning each major process within our business model in order to
gain operational efficiency through the redesign and deployment of Company
resources. Our SRP design is specific to the processing and administration of
long-term care insurance and, we believe, is unique in the industry. Each
program component is modular and allows us to custom design its functionality.
We expect to recuperate our initial expenses for the program through consistent
underwriting, policy issuance and claims processing efficiencies.

Upon completion of the SRP, we expect to use our new long-term care
insurance administration system not only to provide our Company with a more
efficient and effective business model, but also to provide third-party
administration services for other long-term care insurance carriers. We expect
this service will diversify our future revenue and profit streams by
capitalizing on our core competencies as a leader in the long-term care
insurance marketplace. See "Business--Administration--Systems Operations."

DEVELOPMENT AND APPROVAL OF NEW PRODUCTS. We have sold long-term care
insurance for over 30 years. As an innovator in nursing home and home health
care insurance products, we have introduced many new policies over the years,
including four new products in the last four years. We continually discuss
long-term care insurance needs with our agency sales force and policyholders. As
a

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result, we are able to design new products and to offer what we believe to be
the most comprehensive benefit features in the industry. The development of new
products enables us to generate new business and provide advancements in the
benefits we offer. We are currently in the process of developing the next
generation of insurance products designed to meet the needs of of policyholders
and their families. We anticipate introducing these products in 2003. See
"Business--Insurance Products"

CORPORATE BACKGROUND

Penn Treaty is registered and approved as a holding company under the
Pennsylvania Insurance Code. Penn Treaty was incorporated in Pennsylvania on
May 13, 1965 under the name Greater Keystone Investors, Inc. and changed its
name to Penn Treaty American Corporation on March 25, 1987. Our primary business
is the sale of long-term care insurance, which we conduct through the following
subsidiaries:

- Penn Treaty Network America Insurance Company--a Pennsylvania based
insurance company, formed from the merger of Penn Treaty Life (formerly
Greater Keystone Investors, Inc.) and Network America Life Insurance
Companies (formerly Amicare Insurance Company, which we purchased in
1989);

- American Network Insurance Company--a Pennsylvania based insurance company
we acquired in 1996; and

- American Independent Network Insurance Company of New York--a New York
based insurance company we incorporated in 1998.

We also conduct insurance agency operations through the following
subsidiaries:

- Senior Financial Consultants Company--a Pennsylvania based insurance
agency brokerage company we incorporated in 1988;

- United Insurance Group Agency, Inc.--a Michigan based consortium of
long-term care insurance agencies we acquired in 1999; and

- Network Insurance Senior Health Division--a Florida based insurance agency
brokerage company we purchased in 2000.

In 1999, we incorporated Penn Treaty (Bermuda), Ltd., a Bermuda based
reinsurer, for the purpose of reinsuring affiliated long-term insurance
contracts at a future date.

INSURANCE PRODUCTS

Since 1972, we have developed, marketed and sold defined benefit accident
and health insurance policies designed to be responsive to changes in:

- the characteristics and needs of the senior insurance market;

- governmental regulations and governmental benefits available for senior
citizens; and

- the health care and long-term care delivery systems.

As of September 30, 2002, 95.5% of our total annualized premiums in-force
were derived from long-term care policies, which include nursing home and home
health care policies. Our other lines of insurance include life, disability and
Medicare supplement products. We solicit input from both our independent agents
and our policyholders with respect to the changing needs. In addition, our
representatives regularly attend regulatory meetings and seminars to monitor
significant trends in the long-term care industry.

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Our focus on long-term care insurance has enabled us to gain expertise in
claims and underwriting which we have applied to product development. Through
the years, we have continued to build on our brand names by offering the
independent agency channel a series of differentiated products.

The following table sets forth, at the dates indicated, information related
to our policies in force:

(ANNUALIZED PREMIUMS IN $000'S)
------------------------------------------------------------------------------------------
DECEMBER 31,
SEPTEMBER 30, ---------------------------------------------------------------
2002 2001 2000 1999
------------- -------- -------- --------

LT facility, home and
comprehensive care:
Annualized premiums........ $344,311 95.5% $351,268 95.0% $360,600 95.2% $313,222 94.6%
Number of policies......... 209,439 242,644 242,075 208,955
Average premium per
policy................... $ 1,644 $ 1,448 $ 1,490 $ 1,499
Disability insurance:
Annualized premiums........ $ 3,272 0.9% $ 6,415 1.7% $ 6,634 1.8% $ 7,126 2.2%
Number of policies......... 6,897 13,226 13,502 14,963
Average premium per
policy................... $ 474 $ 485 $ 491 $ 476
Medicare supplement:
Annualized premiums........ $ 9,464 2.6% $ 8,449 2.3% $ 7,314 1.9% $ 6,131 1.9%
Number of policies......... 8,504 8,216 7,696 5,934
Average premium per
policy................... $ 1,113 $ 1,028 $ 950 $ 1,033
Life insurance:
Annualized premiums........ $ 3,026 0.8% $ 3,310 0.9% $ 3,785 1.0% $ 4,095 1.2%
Number of policies......... 5,328 5,756 6,315 6,677
Average premium per
policy................... $ 568 $ 575 $ 599 $ 613
Other insurance:
Annualized premiums........ $ 301 0.1% $ 398 0.1% $ 609 0.2% $ 548 0.2%
Number of policies......... 2,302 2,459 3,900 2,968
Average premium per
policy................... $ 131 $ 162 $ 156 $ 185
Total annualized premiums in
force...................... $360,374 100% $369,840 100% $378,942 100% $331,122 100%
Total Policies............... 232,470 272,301 273,488 239,497

We received an insurance license in 1972, which permitted us to write
insurance in 12 states. In 1974, we offered our first long-term care policy,
which provided a five year benefit for nursing facility coverage care. This was
the first long-term care insurance product to cover all levels of facility care,
including skilled, intermediate and custodial care, and with an extended five
year benefit period.

In 1983, we began the sale of home health care riders, which pay for
licensed nurses, certified nurses' aides and home health care workers who
provide care/assistance in the policyholder's home. In 1987, we began offering a
stand-alone home care policy, which was the first in the industry to include a
limited benefit for homemaker care provided by an unskilled, unlicensed
individual such as a friend or neighbor.

In 1986, we began the use of table-based underwriting, which enables higher
risk policyholders to receive coverage at a risk-adjusted premium rate. The
table-based underwriting method considers medical conditions and the likelihood
of inability to perform daily activities to determine appropriate premium
levels. Multiple rate classes enabled us to penetrate an untapped market in
long-term care insurance sales.

In 1994, we introduced the Independent Living -Registered Trademark-
policy--the first to provide benefits for care provided by family members,
subject to our preapproval. In 1996, we introduced the Personal

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Freedom -Registered Trademark- product line. This comprehensive policy provides
benefits for both nursing facility and home health care based upon one "pool" of
benefit dollars, to be used for either type of care as needed. In 1997, we
offered our Pledge and Promise, committing to allow policyholders the ability to
convert their policy from non-tax qualified to qualified in the event benefit
payments were determined to be taxable for a non-tax qualified plan. In 1998, we
introduced the Secured Risk -Registered Trademark- product, a highly
underwritten, limited benefit policy, designed solely for previously uninsurable
risks.

LONG-TERM NURSING HOME CARE. Our long-term nursing home care policies
provide a benefit payable during periods of nursing facility confinement
prescribed by a physician or necessitated by the policyholder's cognitive
impairment or inability to perform two or more activities of daily living (such
as bathing or dressing, for example). These policies also include built-in
benefits for alternative plans of care, waivers of premiums after 90 days of
benefit payments on a claim, and restoration of the policy's maximum benefit
period. All levels of nursing care, including skilled, intermediate and
custodial (assisted living), are covered and benefits continue even when the
policyholder's required level of care changes. Skilled nursing care refers to
professional nursing care provided by a medical professional (a doctor or
registered or licensed practical nurse) located at a licensed facility that
cannot be provided by a non-medical professional. Intermediate nursing care is
designed to cover situations that would otherwise fall between skilled and
custodial care and includes situations in which an individual may require
skilled assistance on a sporadic basis. Custodial care generally refers to
non-medical care, which does not require professional treatment and can be
provided by a non-medical professional with minimal or no training.

Our current long-term nursing home care policies provide benefits that are
payable for defined benefit periods ranging from one to five years, or the
lifetime of the policyholder. Certain of these policies provide for a maximum
daily benefit on an expense-incurred basis or on an indemnity basis ranging in
either case from $60 to $300 per day. We also offer a policy that provides
comprehensive coverage for nursing home and home health care, offering benefit
"pools of coverage" ranging from $75,000 to $300,000, as well as unlimited
coverage.

LONG-TERM HOME HEALTH CARE. Our home health care policies generally provide
a benefit payable on an expense-incurred basis during periods of home care
prescribed by a physician or necessitated by the policyholder's cognitive
impairment or inability to perform two or more activities of daily living. These
policies cover the services of registered nurses, licensed practical nurses,
home health aides, physical therapists, speech therapists, medical social
workers, and unlicensed or unskilled homemakers. Benefits for our currently
marketed home health care policies are payable for defined benefit periods
ranging from six months to five years, or the lifetime of the policyholder, and
provide from $60 to $300 per day. Our home health care policies generally also
include built-in benefits for waivers of premiums after 90 days of benefit
payments, and unlimited restoration of the policy's maximum benefit period.

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We currently offer the following products:

PERSONAL FREEDOM-REGISTERED TRADEMARK- POLICY. Our Personal
Freedom-Registered Trademark- policy (offered since 1996) provides comprehensive
coverage through a pool of money which is available to pay for long-term care in
services received in a nursing facility, an assisted living facility, or the
policyholder's home.

ASSISTED LIVING-REGISTERED TRADEMARK- POLICY. The Assisted
Living-Registered Trademark- policy (offered since 1999) provides facility
coverage in either a traditional nursing home setting or in an assisted living
facility. This policy is a lower priced alternative to the Personal
Freedom-Registered Trademark- policy. When, coupled with an optional home health
care rider, the Assisted Living-Registered Trademark- policy offers benefits
similar to those of the Personal Freedom-Registered Trademark- policy, but with
the flexibility to determine how much coverage is available for each type of
care.

INDEPENDENT LIVING-REGISTERED TRADEMARK- POLICY. The Independent
Living-Registered Trademark- policy (offered since 1994) provides coverage for
all levels of care received at home. Besides covering skilled care and care by
home health care aides, this policy pays for care provided by unlicensed,
unskilled homemakers. This care includes assistance with instrumental activities
of daily living, such as cooking, shopping and housekeeping when determined to
be medically necessary. Family members also may be reimbursed for any training
costs incurred to provide in-home care.

SECURED RISK-REGISTERED TRADEMARK- POLICY. Our Secured
Risk-Registered Trademark- policy (offered since 1998) provides limited facility
care benefits to people who would most likely not qualify for long-term care
insurance under traditional policies. Table-based underwriting allows us to
examine these applicants based on their level of activity and independence. This
policy provides coverage for all types of care, but with limited benefits for
home health care. This policy includes coverage limitations and longer
elimination period requirements than our other policies.

POST ACUTE RECOVERY(SM) POLICY. The PAR policy was introduced in 1999 and
offers short-term benefits for long-term care services. The plan is generally
purchased as a supplemental coverage provider due to its limited benefits and
reduced price.

RIDERS. We offer numerous riders to our base policies, including inflation
protection, which provides escalating benefit amounts, and a non-forfeiture
benefit that guarantees certain paid-up benefits in the event the policy lapses
in the future Our return of premium benefit rider provides for the return of a
portion of the previously paid premium amount in the event of death.

TAX QUALIFIED AND NON-QUALIFIED POLICIES. With the enactment of the Health
Insurance Portability and Accountability Act of 1996, we began offering a tax
qualified policy, which was narrowly defined by the United States Congress and
allowed for certain income tax deductions for premium payments and stipulated
that benefit payments would not be subject to tax. A tax qualified policy only
pays benefits for claims that are expected to exceed 90 days and includes
restrictive benefit triggers.

Congress did not provide guidance as to the taxation of benefit payments
made on non-tax qualified policies, leading to policyholder concern about the
taxation of future benefits for these non-qualified plans. In response, we
designed the Pledge and Promise program, which allows policyholders to convert
from a less restrictive non-qualified plan to a tax qualified plan in the future
in the event that the United States Congress determines that benefit payments
would be otherwise taxable. We continue to offer both types of plan.

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MARKETING

MARKETS. The following chart shows premium revenues by state (dollar
amounts in thousands):

NINE MONTHS ENDED
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30,
YEAR SEPTEMBER 30, ------------------------------ 2002
STATE ENTERED 2002 2001 2000 1999 % OF TOTAL
----- -------- ----------------- -------- -------- -------- -----------------

Arizona(2).................. 1988 $ 10,640 $ 15,392 $ 15,677 $ 13,715 4.2%
California(2)............... 1992 36,561 51,498 50,165 43,514 14.5%
Colorado.................... 1969 3,345 4,701 3,564 2,563 1.3%
Florida..................... 1987 45,329 65,067 71,588 63,218 18.0%
Georgia(2).................. 1990 3,504 5,066 4,764 3,350 1.4%
Illinois(2)................. 1990 13,396 19,525 19,748 15,970 5.3%
Iowa........................ 1990 3,685 5,361 5,097 4,317 1.5%
Maryland.................... 1987 2,480 3,948 3,896 3,427 1.0%
Michigan(2)................. 1989 4,563 6,654 6,357 5,469 1.8%
Missouri(2)................. 1990 2,695 4,061 4,391 4,297 1.1%
Nebraska(2)................. 1990 3,066 4,263 4,358 3,952 1.2%
New Jersey(2)............... 1996 5,570 8,374 7,856 4,707 2.2%
New York.................... 1998 2,898 4,103 2,665 676 1.2%
North Carolina(2)........... 1990 7,436 10,399 9,690 8,089 3.0%
Ohio(2)..................... 1989 8,315 11,880 11,935 10,149 3.3%
Pennsylvania................ 1972 33,006 43,126 48,692 37,661 13.1%
Texas....................... 1990 12,347 17,847 16,105 11,879 4.9%
Virginia(2)................. 1989 15,911 22,638 22,370 19,597 6.3%
Washington.................. 1993 7,684 10,670 9,814 7,485 3.1%
All Other States (1)........ 29,346 35,818 38,381 28,481 11.7%
-------- -------- -------- -------- ------
All States.................. $251,777 $350,391 $357,113 $292,516 100.0%
======== ======== ======== ======== ======

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

(1) Includes all states in which premiums comprised less than one percent of
total premiums in 2001.

(2) We have not recommenced new policy sales in these states or in seven
other unlisted states. For a further discussion of the states in which we have
recommenced sales see "Business-Our Strategy."

Historically, our business has been concentrated in a few key states. Over
the past four fiscal years, approximately half of our premiums came from sales
of policies in California, Florida and Pennsylvania. In 2001, we ceased new
policy sales in all states as a result of the diminished statutory surplus level
of our principal insurance subsidiary, Penn Treaty Network America Insurance
Company. Upon the Department's approval of our Plan in February 2002, we
recommenced new policy sales in 23 states, including Pennsylvania. We have since
recommenced new policy sales in nine additional states, including Florida and
Texas, which have historically represented approximately 25% and 5% of our
sales, respectively. However, we have not yet recommenced new policy sales in
California, Virginia or Illinois, which together have traditionally represented
approximately 27% of sales, or in 15 other states. We are working with the
remaining states to recommence sales in all jurisdictions.

The following table summarizes our sales of new policies in the periods
indicated (in thousands):

YEAR ENDED DECEMBER 31,
NINE MONTHS ------------------------------
ENDED
SEPTEMBER 30,
2002 2001 2000 1999
------------- -------- -------- --------

Number of new policies sold....................... 2 20 65 66
Annualized premiums............................... $2,941 $34,786 $111,572 $118,175

S-80

Our goal is to strengthen our position as a leader in providing long-term
care insurance by marketing and selling our products throughout the United
States. We focus our marketing efforts primarily in those states where we have
successfully developed networks of agents and that have the highest
concentration of individuals whose financial status and insurance needs are
compatible with our products.

AGENTS. We market our products principally through independent agents. We
also employ agents through our subsidiary agencies selling our products as well
as the products of other insurance companies. We provide assistance to our
agents through seminars, underwriting training and field representatives who
consult with agents on underwriting matters, assist agents in research and
accompany agents on marketing visits to current and prospective policyholders.

Each independent agent must be authorized by contract to sell our products
in each state in which the agent and our companies are licensed. Some of our
independent agents are large general agencies with many sales persons
(sub-agents), while others are individuals operating as sole proprietors. Some
independent agents sell multiple lines of insurance, while others concentrate
primarily or exclusively on accident and health insurance. We do not have
exclusive agency agreements with any of our independent agents and they are free
to sell policies of other insurance companies, including our competitors.

We generally do not impose production quotas or assign exclusive territories
to single agents; however, some commission levels are subject to production
requirements. We periodically review and terminate our agency relationships with
non-producing or under-producing agents and agents who do not comply with our
guidelines and policies with respect to the sale of our products.

We are actively engaged in recruiting and training new agents. Sub-agents
are recruited by the general agents. Independent agents are generally paid
higher commissions than those employed directly by insurance companies, in part
to account for the expenses of operating as an independent agent. We believe
that the commissions we pay to independent agents are competitive with the
commissions paid by other insurance companies selling similar policies. The
independent agent's right to renewal commissions is vested and commissions are
paid as long as the policy remains in-force, provided the agent continues to
abide by the terms of the contract. We provide assistance to our independent
agents in connection with the processing of paperwork and other administrative
services.

We have developed a proprietary agent sales system for long-term care
insurance, LTCWorks!-C-, which enables agents to sell products utilizing
downloadable software. We believe that LTCWorks!-C- increases the potential
distribution of our products by enhancing agents' ability to present the
products, assist policyholders in the application process and submit
applications over the Internet. LTCWorks!-C- provides agents who specialize in
the regular sale of long-term care insurance products with a unique and easy to
use sales tool and enables agents who are less familiar with long-term care
insurance to present our products and to do preliminary underwriting when they
are discussing other products such as life insurance or annuities.

MARKETING GENERAL AGENTS. We selectively use marketing general agents for
the purpose of recruiting independent agents and developing networks of agents
in various states. Marketing general agents receive an override commission on
business written in return for recruiting, training and motivating the
independent agents. No single grouping of agents accounted for more than 10% of
our new premiums or renewal premiums written in 2001 or 2000. One agency
accounted for 16% of total premiums earned in 1999. We acquired a division of
this agency during 2000, which reduced our reliance on this unaffiliated agency.
We have not delegated any underwriting or claims processing authority to any
agents.

FRANCHISE INSURANCE. We sell franchise insurance, which is a series of
individually underwritten policies sold to an association or group. Although
franchise insurance is generally presented to groups

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that endorse the insurance, policies are issued to individual group members.
Each application is underwritten and issuance of policies is not guaranteed to
members of the franchise group.

ADMINISTRATION

UNDERWRITING

We believe that the underwriting process through which we choose to accept
or reject an applicant for insurance is critical to our success. We have offered
long-term care insurance products for 30 years and we believe we have benefited
significantly from our longstanding focus on this specialized line. Through our
experience with this family of products, we have been able to establish a system
of underwriting designed to permit us to process our new business and assess the
risks presented with new applications more effectively and efficiently. This
experience has also enabled us to devise a risk stratification system whereby we
can accept a broad array of risks with correspondingly appropriate premium
levels.

Applicants for insurance must complete detailed medical questionnaires. All
long-term care applications are reviewed by our underwriting department and all
applicants are also interviewed by members of our underwriting department via
telephone. This "personal history interview" is aimed at not only confirming the
information disclosed on the application, but also at gaining more insight into
the applicant's physical abilities, activity level and cognitive functioning.

We consider age, cognitive status and medical history, among other factors,
in deciding whether to accept an application for coverage and, if accepted, the
appropriate rate class for the applicant. Applicants between ages 65-74 and
younger applicants seeking high benefit amounts are screened for cognitive
impairment, a major contributor to future claims, using the Minnesota Cognitive
Accuity Score performed by an outside vendor. In addition, applicants over 75
are assessed by a visiting nurse and the cognitive test is performed in person.
We frequently require medical records and attending physician statements as
well. Pre-existing conditions disclosed on an application for new long-term
nursing home care and most home health care policies are covered immediately
upon approval of the policy. Undisclosed pre-existing conditions are covered
after six months in most states and two years in certain other states. Our
underwriting process extends beyond current conditions, however, and takes into
account how existing health conditions are likely to progress and to what degree
the independence of the applicant is likely to change as the applicant ages.

We use table-based underwriting, or multiple rate classifications, as a
means to approve a greater number of applicants by obtaining the premiums for
appropriate additional risk levels. Applicants are placed in different risk
classes for acceptance and premium calculation based on medical conditions and
level of activity during the underwriting process. In conjunction with the
development of our LTCWorks!-C- system, we developed an underwriting
credit-scoring system, which provides consistent underwriting and rate
classification for applicants with similar medical histories and conditions. We
currently offer Preferred, Premier, Select, Standard and Secured risk
classifications. If we determine that we cannot offer the requested coverage, we
may suggest an alternative product suitable for coverage for higher risk
applicants. Accepted policies are usually issued within seven working days from
receipt of the information necessary to underwrite the application.

CLAIMS

Claims for policy benefits, except with respect to Medicare supplement and
disability claims, are processed by our claims department, which includes nurses
employed or retained as consultants. We use third party administrators to
process our Medicare supplement claims due to the large number of claims and the
small benefit amount typically paid for each claim.

For nursing home claims, a personal claims assistant is assigned to review
all necessary documentation, including verification of the claimant's
confinement and continued care. A claims examiner verifies eligibility of the
claim under the policy. Every effort is made to facilitate the

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processing of the claim, recognizing that service efficiency provides
substantial value to the policyholder and his or her family. The personal claims
assistant verifies the continued residence of the policyholder in the facility
each month and expedites payment of the claim by obtaining required information
without placing this burden on the policyholder.

We frequently use the services of "care managers" to review certain claims,
particularly those filed under home health care policies. When a claim is filed,
we may engage a care manager to review the claim, including the specific health
problem of the insured and the nature and extent of the health care services
being provided. This review may include visiting the claimant to conduct a face
to face assessment of his or her current condition. The care manager assists the
insured and us by ensuring that the services provided to the insured, and the
corresponding benefits paid, are appropriate under the circumstances. The care
manager then follows the claimant's progress with periodic contact to ensure
that the plan of care, which sets forth the type, frequency and duration of
services, continues to be appropriate and that it is adjusted if warranted by
improvement in the claimant's condition.

Home care claims require the greatest amount of diligent overview and we
have used care management tools for nearly ten years. Our policies with home
care benefits provide an incentive, via increased benefits, to work with one of
our care managers to develop and maintain an ongoing plan of care. Over 90% of
our home care claims involve some form of care management. Most of these
services are performed by our in-house care management unit, which is comprised
of over a dozen registered nurses. We also use external care management firms
when face to face assessments are warranted.

SYSTEMS OPERATIONS

We maintain our own computer system for most aspects of our operations,
including policy issuance, billing, claims processing, commission reports,
premium production (by agent, state, and product), and general ledger. We
consider it critical to continue to provide the quality of service for which we
are known to our policyholders and agents. We believe that our overall systems
are an integral component in delivering that service. Accordingly, Penn Treaty
has started development of the System Replacement Project, known as SRP. This is
a three phase project estimated to cost from $7.5 - $9.0 million. This effort
will essentially reengineer the application infrastructure of the entire
business. We believe this process will result in annual savings once the entire
system is in place. These savings are expected to be achieved through
productivity improvements, labor avoidance costs, and a reduction in the
transaction error rates. In addition, we believe the SRP will allow us to be a
third party administrator and offer back office support to other insurance
carriers on a transaction fee basis.

The SRP will provide us with a system that will support our business plan,
will allow us to grow the business without a significant increase in staffing,
will transform our existing processes from clerical-based to knowledge based,
and will allow us to continue to provide and improve our services to both agents
and policyholders. We believe the SRP will position us to be the leader in the
long-term care insurance market arena by allowing us to reduce policy issue time
from 5-13 days to 3 days, to reduce claims processing time from 7-10 days to
3 days, and to reduce our transaction error rates from as much as 5% to 1% or
less.

We expect phase 1 of this project to be completed during the second quarter
of 2003. Benefits associated with phase 1 will start to accrue during the third
and fourth quarters of 2003. We believe the project and anticipated benefits
will be fully implemented by the end of 2004.

We have an outsourcing agreement with a computer services vendor providing
for the daily operations of our systems, future program development and
assurance of continued operations in the event of a disaster or business
interruption. We believe that this vendor can provide better expertise in the
evolving arena of information technology than we can provide by running our own
operations.

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PREMIUMS

Our long-term care policies provide for guaranteed renewability, at the
option of the insured, at then current premium rates. The insured may elect to
pay premiums on a monthly, quarterly, semi-annual or annual basis. In addition,
we offer an automatic payment feature that allows policyholders to have premiums
automatically withdrawn from a checking account.

Premium rates for all lines of insurance are subject to state regulation.
Premium regulations vary greatly among jurisdictions. Rates for our insurance
policies are established by our actuarial staff with the assistance of our
actuarial consultants. All rates, including changes to previously approved
rates, must be approved by the insurance regulatory authorities in each state.
However, regulators may not approve the increases we request, may approve them
only with respect to certain types of policies, or may approve increases that
are smaller than those we request.

As a result of minimum statutory loss ratio standards imposed by state
regulations, the premiums on our accident and health polices are subject to
reduction and/or corrective measures in the event insurance regulatory agencies
in states where we do business determine that our loss ratios either have not
reached or will not reach required minimum levels. See "Government Regulation."

FUTURE POLICY BENEFITS AND CLAIMS RESERVES

We began offering home health care coverage in 1983 and have written a
significant number of home health care policies, either as stand alone policies
or as riders to long term nursing home policies. Claims experience with respect
to our policies offering home health care coverage is much more limited than the
corresponding claims experience for policies offering nursing home care because
the former have been offered for a much shorter time period. Accordingly, we
believe that wide variations in claims experience may be more likely in home
health care insurance than in nursing home insurance. Our actuarial consultants
use both our experience and other industry data in the computation of reserves
for the home health care product line.

In addition, newer long-term care products, developed as a result of
regulation or market conditions, may incorporate more benefits with fewer
limitations or restrictions. For instance, the NAIC has recently adopted model
long-term care policy language providing nonforfeiture benefits and a rate
stabilization standard for long-term care policies, either or both of which have
been or may be adopted by the states in which we write policies. The fluidity in
market and regulatory forces may limit our ability to rely on historical claims
experience for the development of new premium rates and reserve allocations. See
"Government Regulation."

We use an independent firm of actuarial consultants and an in-house
actuarial staff to assist us in pricing insurance products and establishing
reserves. Additionally, actuaries assist us in improving the documentation of
our reserve methodology and in determining the adequacy of our reserves and
their underlying assumptions, a process that has resulted in adjustments to our
reserve levels from time to time. Although we believe that our reserves are
adequate to cover all policy liabilities, we cannot assure you that reserves are
adequate or that future claims experience will be similar to, or accurately
predicted by, our past or current claims experience.

Our insurance policies are accounted for as SFAS 60 long duration contracts.
As a result, there are two components of policyholder liabilities. The first is
a policy reserve liability as required by SFAS 60 for future policyholder
benefits, represented by our estimate of the present value of future benefits
less future premium collection. These reserves are calculated based on
assumptions that include estimates for mortality, morbidity, interest rates,
premium rate increases and persistency. The assumptions are consistent with
industry experience and historical results, as modified for our own experience.

The second is a reserve for claims which have already been incurred, whether
or not they have yet been reported. The amount of reserves relating to reported
and unreported claims incurred is determined by periodically evaluating
statistical information with respect to the number and nature of historical
claims. We compare actual experience with estimates and adjust our reserves on
the basis of

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such comparisons to the extent that our analysis suggests that an adverse
development is likely to continue or occur in future periods.

REINSURANCE

GENERAL

We purchase reinsurance to increase the number and size of the policies we
may underwrite. Reinsurance is purchased by insurance companies to insure their
liability under policies written to their insureds. By transferring, or ceding,
certain amounts of premium (and the risk associated with that premium) to
reinsurers, we can limit our exposure to risk. However, if a reinsurance company
becomes insolvent or otherwise fails to honor its obligations under any
reinsurance agreements, we would remain fully liable to the policyholder.

We currently reinsure our ordinary life policies through Reassurance Company
of Hanover. We also have a reinsurance agreement with Transamerica Occidental
Life Insurance Company to reinsure term life policies whose risk exceeds
$15,000, and with Employer's Reassurance Corporation to reinsure credit life
policies whose risk exceeds $15,000.

We have ceded, through a fronting arrangement, 100% of certain whole life
and deferred annuity policies to Provident Indemnity Life Insurance Company. No
new policies have been ceded under this arrangement since December 31, 1995. We
have recently entered an agreement with an unaffiliated insurer to cede 100% of
these policies and related reserves on an assumption basis. The new agreement
will be effective December 31, 2002.

We also entered into a reinsurance agreement to cede 100% of certain life,
accident, health and Medicare supplement insurance policies to Life and Health
of America. These fronting arrangements are used when one insurer wishes to take
advantage of another insurer's ability to procure and issue policies. As the
fronting company, we remain ultimately liable to the policyholder, even though
all of our risk is reinsured. Therefore, the agreements require the maintenance
of securities in escrow for our benefit in the amount equal to our statutory
reserve credit.

We have also entered into a reinsurance agreement with Cologne Life
Reinsurance Company with respect to home health care policies with benefit
periods exceeding 36 months. No new policies have been reinsured under this
agreement since 1998.

We have also entered into funds withheld financial reinsurance treaties,
which allow us to temporarily increase statutory surplus. The agreements met the
requirements to qualify for reinsurance treatment under statutory accounting
rules. However, the agreements did not qualify for reinsurance treatment in
accordance with SFAS 113 because, based on our analysis, the agreements did not
result in the reasonable possibility that the reinsurer could realize a
significant loss in the event of adverse development. As a result, our
accounting and results of operations reflect only the annual fee paid to the
reinsurer. Since the contracts were funds withheld, there was no reinsurance
recoverable or payable on a GAAP basis on the balance sheet. We do not currently
have any funds withheld financial reinsurance treaties.

We have stop-loss reinsurance on our disability business that limits our
liability in aggregate for the life of the policy or above monthly loss amounts.
This coverage is ceded to Employer's Reassurance Corporation, Reassurance
America Life Insurance Company and Lincoln National Life Insurance Company.
Since January 1, 2000, no new policies have been ceded to Employer's Reassurance
Corporation, which has historically provided the majority of our stop-loss
reinsurance. In 2001, we ceded substantially all of our disability policies to
Assurity Life Insurance Company on a 100% quota share basis. The reinsurer may
assume ownership of the policies as a sale upon various state and policyholder
approvals. We received a ceding allowance of approximately $5,000,000 and ceded
reserves to the reinsurer of approximately $10,300,000.

S-85

The following table shows our historical use of reinsurance, excluding
financial reinsurance:

(IN THOUSANDS)
----------------------------------------------------------
AS OF
A.M. BEST SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
REINSURANCE RECOVERABLE COMPANY RATING 2002 2001 2000
------------------------------- --------- -------------- ------------- -------------

General and Cologne Life Re of America........ A+ $14,355 $10,365 $8,196
Assurity Life Insurance Company............... A- 4,559 8,403 --
Provident Indemnity Life Insurance Company.... NR3 4,362 4,362 4,643
Lincoln National Life Insurance Company (1)... A 544 999 1,142
Employer's Reassurance Corporation (1)........ A++ 275 510 662
Reassure America Life Insurance Company (1)... A++ 230 426 400
Life and Health of America.................... B- 419 388 409
Transamerica Occidental Life Insurance
Company..................................... A+ 30 30 1
Reassurance Company of Hanover................ A 15 15 11
Swiss Reassurance Life and Health America..... A++ 7 7 6

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

(1) We determine the amount of reinsurance recoverable in accordance with GAAP
on an aggregate basis for multiple companies that provide reinsurance on our
disability business. In order to segregate the risk by reinsurer, we have
listed the amount reported for Reassure America Life Insurance Company and
Lincoln National Life Insurance Company for reserve credits as calculated
under statutory accounting principles as of September 30, 2002,
December 31, 2001 and December 31, 2000. The amounts reported for Employer's
Reassurance Corporation include the net differences between statutory and
GAAP reporting for our disability reinsurance.

REINSURANCE AGREEMENT WITH CENTER SOLUTIONS (BERMUDA) LIMITED

Effective December 31, 2001, we entered into a reinsurance agreement with
Centre Solutions (Bermuda) Limited to reinsure, on a quota share basis,
substantially all of our respective long-term care insurance policies then
in-force. The following is a summary of the reinsurance agreement and is
qualified in its entirety by reference to the reinsurance agreement which has
been filed with the Securities and Exchange Commission as an exhibit to one of
our periodic reports. The agreement is subject to certain coverage limitations
and an aggregate limit of liability which may be reduced if we are unable to
obtain premium rate increases. This agreement meets the requirements to qualify
for reinsurance treatment under statutory accounting rules. However, this
agreement does not qualify for reinsurance treatment in accordance with FASB
No. 113 because, based on our analysis, the agreement does not result in the
reasonable possibility that the reinsurer may realize a significant loss. This
is due to a number of factors related to the agreement, including experience
refund provisions, expense and risk charges due to the reinsurer and the
aggregate limit of liability.

The initial premium paid by us under the agreement was approximately
$619 million, comprised of $563 million of cash and securities, and $56 million
held as funds due to the reinsurer. Such withheld funds are scheduled to be
released to the reinsurer in increments between December 31, 2003 and
December 31, 2008, subject to Centre Solutions (Bermuda) Limited's right to
demand that the withheld funds be released in their entirety at any time by
giving us fifteen business days prior written notice. The initial premium and
future cash flows from the reinsured policies, less claims payments, ceding
commissions and risk charges, will be credited to a notional experience account,
which is held for our benefit in the event of commutation and recapture on or
after December 31, 2007. The notional experience account balance also receives
an investment credit based upon the total return of a series of benchmark
indices and hedges, which are designed to closely match the duration of our
reserve liabilities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."

For each of the first seven years of the reinsurance agreement, Centre
Solutions (Bermuda) Limited will receive a base fee of $2.8 million plus 0.4% of
the statutory reserves ceded to it. Thereafter, the fees rise to a maximum in
year twelve and each year thereafter of $5.4 million plus

S-86

0.8% of the statutory reserves ceded to it. These fees are to be deducted from
the notional experience account on a quarterly basis.

We receive a monthly payment based on a yearly reinsurance allowance equal
to approximately 19.65% of the net premiums received by Centre Solutions
(Bermuda) Limited, subject to certain adjustments for premium rate increases and
actual commissions paid in 2002, plus 3.5% of certain paid net losses and
statutory claim reserves. The yearly reinsurance allowance is not permitted to
exceed 25% of the net premiums received in the applicable calendar year. We will
also receive a fixed amount of $2 million for each of the 2002 and 2003 calendar
years and we pay $1.2 million for each of the 2004, 2005, 2006 and 2007 calendar
years.

The reinsurance agreement excludes certain losses from coverage, including
liabilities arising from (i) our actions or failure to act, (ii) insolvency
funds, (iii) nuclear hazards, (iv) terrorism, and (v) war or military action.

The reinsurance agreement is subject to certain coverage limitations,
including an aggregate limit of liability, which is the sum of
(i) $200 million, (ii) the initial premium of approximately $619 million,
(iii) net premiums received and retained by the reinsurer on or after
December 31, 2001, less reinsurance allowance and taxes related to such
premiums, and (iv) 4.5% of (i) through (iii), less certain losses.

The reinsurance agreement requires us to review the performance of our
policies to ascertain their actual to expected loss experience at least every
six months and to conduct an analysis of our underlying actuarial assumptions to
ascertain the future morbidity experience at least once a year. If we have
reason to believe that future experience is likely to be worse than projected at
the later of December 31, 2002 or the date of the most recent rate increase
approval, and that such deterioration in expected experience would justify an
increase in premium rates of 5% or more on any individual policy form, we are
required to file for and obtain increases in premium rates. Failure to obtain
such increases will constitute a material breach under the agreement resulting
in a reduction in the aggregate limit of liability. We are in the process of
completing the most recent analysis required by the reinsurance agreement. We
anticipate that in light of our recent assumption and process changes for
claims, reserves premium rate increases are likely to be required on some
policies.

The reinsurance agreement contains commutation provisions and allows us to
recapture the reserve liabilities and the notional experience account balance as
of (i) a change in control of our subsidiaries Penn Treaty Network America
Insurance Company or American Network Insurance Company, (ii) an insolvency of
either of these subsidiaries, (iii) our material breach of the reinsurance
agreement, or (iv) December 31, 2007 or December 31 of any year thereafter. We
intend to commute the reinsurance agreement on December 31, 2007; therefore, we
are accounting for the reinsurance agreement in anticipation of this
commutation. In the event we do not commute the reinsurance agreement on
December 31, 2007, we will be subject to escalating expenses and a fourth
tranche of warrants held by Centre Solutions (Bermuda) Limited will become
exercisable for Penn Treaty convertible preferred stock that, if converted,
would represent approximately 20% of the outstanding common stock following such
conversion on a fully diluted basis (and approximately 35% of the outstanding
common stock following such conversion on a fully diluted basis if all four
tranches of warrants have been exercised).

As a result of our intention to commute, we assessed only the expense and
risk charges anticipated prior to the commutation date in our most recent DAC
recoverability analyses and are not recording the potential of future escalating
charges in our current financial statements. In addition, we are recognizing the
up front costs of entering into the agreement, including the fair value of the
warrants granted to the reinsurer, over the period of time to the expected
commutation date.

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The reinsurance agreement also granted the reinsurer an option to
participate in reinsuring new business sales up to 50% on a quota share basis.
In August 2002, the reinsurer exercised its option to reinsure a portion of
future sales. We have recently submitted the new agreement to the Pennsylvania
Insurance Department for approval. The agreement, if approved, will provide for
50% reinsurance, subject to a limitation of the reinsurer's risk, for the next
$100 million in new policy premium issued after January 1, 2002. We believe the
potential of exceeding this limitation is unlikely. The reinsurer retains the
option to provide additional reinsurance for the next $1 billion in new policy
premiums.

Pennsylvania insurance regulations require that funds ceded for reinsurance
provided by a foreign or "unauthorized" reinsurer must be secured by funds held
in a trust account or by a letter of credit for the protection of policyholders.
We received approximately $648 million in statutory reserve credits from this
transaction as of December 31, 2001, of which $619 million was held by us and
$29 million was backed by letters of credit, which increased our statutory
surplus by $29 million as well.

INVESTMENTS (DOLLARS IN THOUSANDS)

We have categorized all of our investment securities as available for sale
because they may be sold in response to changes in interest rates, prepayments
and similar factors. Investments in this category are reported at their current
market value with net unrealized gains and losses, net of the applicable
deferred income tax effect, being added to or deducted from total shareholders'
equity on the balance sheet. As of September 30, 2002, shareholders' equity was
increased by $1,125 due to unrealized gains of $1,730 in the investment
portfolio. As of December 31, 2001, shareholders' equity was increased by
$10,581 due to unrealized gains of $16,032 in the investment portfolio. The
amortized cost and estimated market value of our available for sale investment
portfolio as of September 30, 2002 and December 31, 2001 are as follows:

SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------------ ------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST MARKET VALUE COST MARKET VALUE
--------- ------------ --------- ------------

U.S. Treasury securities and obligations of
U.S. Government authorities and agencies....... $14,532 $15,767 $164,712 $172,063
Obligations of states and political
sub-divisions.................................. -- -- 572 612
Mortgage backed securities....................... 1,824 1,899 42,587 43,331
Debt securities issued by foreign governments.... 206 217 11,954 12,089
Corporate securities............................. 9,214 9,623 243,793 250,513
Equities......................................... -- -- 8,760 9,802
Policy Loans..................................... 237 237 181 181
------- ------- -------- --------
Total Investments................................ $26,013 $27,743 $472,559 $488,591
======= ========
Net unrealized gain.............................. 1,730 16,032
------- --------
$27,743 $488,591
======= ========

Our investment portfolio, excluding our notional experience account,
consists primarily of investment grade fixed income securities. Income generated
from this portfolio is largely dependent on prevailing levels of interest rates.
Due to the duration of our investments (approximately 5.0 years), investment
income does not immediately reflect changes in market interest rates.

In 2001, we classified our convertible portfolio as trading account
investments. Changes in trading account investment market values are recorded in
our statement of operations during the period in which the change occurs, rather
than as an unrealized gain or loss recorded directly through equity. We recorded
a trading account loss in 2001 of $3,428, which reflects the unrealized and
realized loss of our convertible portfolio that arose during the year ended
December 31, 2001. At December 31, 2001, we had liquidated our entire trading
portfolio.

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In connection with our reinsurance agreement with Centre Solutions (Bermuda)
Limited, we transferred substantially all of our investment portfolio to the
reinsurer as the initial premium payment. The initial and future premium for the
reinsured policies, less claims payments, ceding commissions and risk charges is
credited to a notional experience account, the balance of which also receives an
investment credit. The notional experience account balance represents an amount
to be paid to us in the event of commutation of the agreement. Based on our
analysis of SFAS 133, we believe that the experience account represents a hybrid
instrument, containing both a fixed debt host contract and an embedded
derivative.

1. the fixed debt host yields a fixed return based upon the yield to
maturity of the underlying benchmark indices. The return on the fixed debt host
is reported as investment income in the Statement of Operations.

2. the change in fair value of the embedded derivative represents the
percentage change in the underlying indices applied to the notional experience
account, similar to that of an unrealized gain/loss on a bond. The change in the
fair value of the embedded derivative is reported a Market gain on experience
account in the Statement of Operations.

As a result, our results of operation are subject to significant volatility.
Recorded market value gains or losses, although recognized in current earnings,
are expected to be offset in future periods as a result of our receipt of the
most recent market rates, and, therefore, have no anticipated long-term impact
on shareholder value. The benchmark indices are comprised of United States
treasury strips, agencies and investment grade corporate bonds, with weightings
of approximately 25%, 15% and 60%, respectively, and have a duration of
approximately 11 years.

SELECTED FINANCIAL INFORMATION: STATUTORY BASIS

The following table shows certain ratios derived from our insurance
regulatory filings with respect to our accident and health policies presented in
accordance with accounting principles prescribed or permitted by insurance
regulatory authorities ("SAP"), which differ from the presentation under
generally accepted accounting principles ("GAAP") and, which also differ from
the presentation under SAP for purposes of demonstrating compliance with
statutorily mandated loss ratios. See "Business--Government Regulation."

YEAR ENDED DECEMBER 31, AS OF SEPTEMBER 30,
------------------------------------- ---------------------------------
1999 2000 2001 2001 2002
-------- -------- --------------- --------------- ---------------

Loss ratio (1) (4)........ 70.4% 67.1% 154.4% 78.3% 76.7%
Expense ratio (2) (4)..... 44.1% 114.4% (201.3)% 52.7% 31.5%
------ ------ --------------- --------------- ---------------
Combined loss and expense
ratio................... 114.5% 181.5% (46.9)% 131.0% 108.2%
Persistency (3)........... 86.7% 86.4% 88.0%

------------------------
(1) Loss ratio is defined as incurred claims and increases in policy reserves
divided by collected premiums.

(2) Expense ratio is defined as commissions and expenses incurred divided by
collected premiums.

(3) Persistency represents the percentage of premiums renewed, which we
calculate by dividing the total annual premiums in-force at the end of each
year (less first year premiums for such year) by the total annual premiums
in-force for the prior year. For purposes of this calculation, a decrease in
total annual premiums in-force at the end of any year would be a result of
non-renewal policies, including those policies that have terminated by
reason of death, lapse due to nonpayment of premiums and/or conversion to
other policies offered by us. Persistency is not calculated for the interim
periods.

(4) The 2001, 2000 and 1999 loss ratios and expense ratios are significantly
affected by the reinsurance of approximately $408 million, $226 million and
$90 million, respectively, in premium on a statutory basis under financial
and other reinsurance treaties reserves are accounted for as offsetting
negative benefits and negative premium, causing substantial deviation in
reported ratios.

S-89

STATUTORY ACCOUNTING PRACTICES. State insurance regulators require our
insurance subsidiaries to have statutory surplus at a level sufficient to
support existing policies and new business growth. Under SAP, we charge costs
associated with sales of new policies against earnings as such costs are
incurred. These costs, together with required reserves, generally exceed first
year premiums and accordingly, cause a reduction in statutory surplus during
periods of increasing first year sales. The commissions paid to agents are
generally higher for new policies than for renewing policies. Because statutory
accounting requires commissions to be expensed as paid, rapid growth in first
year policies generally results in higher expense ratios.

Effective December 31, 2001, we entered a reinsurance transaction that,
according to Pennsylvania insurance regulation, required the reinsurer to
provide us with Letters of Credit in order for us to receive statutory reserve
and surplus credit from the reinsurance. The Letters of Credit were dated
subsequent to December 31, 2001, as a result of the final closing of the
agreement. In addition, the initial premium paid for the reinsurance included
investment securities carried at amortized cost but valued at market price for
purposes of the premium transfer and the experience account. The Pennsylvania
Insurance Department permitted us to receive credit of $29 million for the
Letters of Credit, and to accrue the anticipated, yet unknown, gain of
$18 million from the sale of securities at market value, in our statutory
financial results for December 31, 2001. The impact of this permitted practice
served to increase the statutory surplus of our insurance subsidiaries by
approximately $47 million at December 31, 2001. Had we not been granted a
permitted practice, our statutory surplus would have been negative until the
first quarter 2002 reporting period, when a permitted practice would no longer
be required due to our receipt of the Letters of Credit prior to March 31, 2002.

INSURANCE INDUSTRY RATING AGENCIES

Our subsidiaries have A.M. Best ratings of "B- (fair)" and Standard & Poor's
ratings of "B- (weak)." A.M. Best and Standard & Poor's ratings are based on a
comparative analysis of the financial condition and operating performance for
the prior year of the companies rated, as determined by their publicly available
reports. A.M. Best's classifications range from "A++ (superior)" to "F (in
liquidation)." Standard & Poor's ratings range from "AAA (extremely strong)" to
"CC (extremely weak)." A.M. Best and Standard & Poor's ratings are based upon
factors of concern to policyholders and insurance agents and are not directed
toward the protection of investors and are not recommendations to buy, hold or
sell a security. In evaluating a company's financial and operating performance,
the rating agencies review profitability, leverage and liquidity, as well as
book of business, the adequacy and soundness of reinsurance, the quality and
estimated market value of assets, the adequacy of reserves and the experience
and competence of management.

Certain distributors will not sell our group products unless we have a
financial strength rating of at least an "A-." The inability of our subsidiaries
to obtain higher A.M. Best or Standard & Poor's ratings could adversely affect
the sales of our products if customers favor policies of competitors with better
ratings. In addition, a downgrade in our ratings may cause our policyholders to
allow their existing policies to lapse. Increased lapsation would reduce our
premium income and would also cause us to expense fully the deferred policy
costs relating to lapsed policies in the period in which those policies lapsed.
Recent downgrades or further downgrades in our ratings also may lead some
independent agents to sell less of our products or to cease selling our policies
altogether.

COMPETITION

We operate in a highly competitive industry. We believe that competition is
based on a number of factors, including service, products, premiums, commission
structure, financial strength, industry ratings and name recognition. We compete
with a large number of national insurers, smaller regional insurers and
specialty insurers, many of whom have considerably greater financial resources,
higher ratings from A.M. Best and Standard and Poor's and larger networks of
agents than we do. Many insurers

S-90

offer long-term care policies similar to those we offer and utilize similar
marketing techniques. In addition, we are subject to competition from insurers
with broader product lines. We also may be subject, from time to time, to new
competition resulting from changes in Medicare benefits.

We also actively compete with other insurers in attracting and retaining
agents to distribute our products. Competition for agents is based on quality of
products, commission rates, underwriting, claims service and policyholder
service. We continuously recruit and train independent agents to market and sell
our products. We also engage marketing general agents from time to time to
recruit independent agents and develop networks of agents in various states. Our
business and ability to compete may suffer if we are unable to recruit and
retain insurance agents and if we lose the services provided by our marketing
general agents.

We also compete with non-insurance financial services companies such as
banks, securities brokerage firms, investment advisors, mutual fund companies
and other financial intermediaries marketing insurance products, annuities,
mutual funds and other retirement-oriented investments. The Gramm-Leach-Bliley
Financial Services Modernization Act of 1999 implemented fundamental changes in
the regulation of the financial services industry, permitting mergers that
combine commercial banks, insurers and securities firms under one holding
company. The ability of banks to affiliate with insurers may adversely affect
our ability to remain competitive.

The insurance industry may undergo further change in the future and,
accordingly, new products and methods of service may also be introduced. In
order to keep pace with any new developments, we may need to expend significant
capital to offer new products and to train our agents and employees to sell and
administer these products and services. Our ability to compete with other
insurers depends on our success in developing new products.

GOVERNMENT REGULATION

GENERAL

Insurance companies are subject to supervision and regulation in all states
in which they transact business. Penn Treaty is registered and approved as a
holding company under the Pennsylvania Insurance Code. Our insurance company
subsidiaries are chartered in the states of Pennsylvania and New York.

The extent of regulation of insurance companies varies, but generally
derives from state statutes which delegate regulatory, supervisory and
administrative authority to state insurance departments. Although many states'
insurance laws and regulations are based on models developed by the National
Association of Insurance Commissioners ("NAIC"), and are therefore similar,
variations among the laws and regulations of different states are common.

The NAIC is a voluntary association of all of the state insurance
commissioners in the United States. The primary function of the NAIC is to
develop model laws on key insurance regulatory issues that can be used as
guidelines for individual states in adopting or enacting insurance legislation.
While the NAIC model laws are accorded substantial deference within the
insurance industry, these laws are not binding on insurance companies unless
adopted by states, and variation from the model laws within states is common.

The Pennsylvania Insurance Department, the New York Insurance Department and
the insurance regulators in other jurisdictions have broad administrative and
enforcement powers relating to the granting, suspending and revoking of licenses
to transact insurance business, the licensing of agents, the regulation of
premium rates and trade practices, the content of advertising material, the form
and content of insurance policies and financial statements and the nature of
permitted investments. In addition, regulators have the power to require
insurance companies to maintain certain deposits, capital, surplus and reserve
levels calculated in accordance with prescribed statutory standards. The

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NAIC has developed minimum capital and surplus requirements utilizing certain
risk-based factors associated with various types of assets, credit, underwriting
and other business risks. This calculation, commonly referred to as RBC, serves
as a benchmark for the regulation of insurance company solvency by state
insurance regulators. The primary purpose of such supervision and regulation is
the protection of policyholders, not investors.

Most states mandate minimum benefit standards and policy lifetime loss
ratios for long-term care insurance policies and for other accident and health
insurance policies. A significant number of states, including Pennsylvania and
Florida, have adopted the NAIC's proposed minimum loss ratio of 60% for both
individual and group long-term care insurance policies. Certain states,
including New Jersey and New York, have adopted a minimum loss ratio of 65% for
long-term care. The states in which we are licensed have the authority to change
these minimum ratios, the manner in which these ratios are computed and the
manner in which compliance with these ratios is measured and enforced.

In December 1986, the NAIC adopted the Long-Term Care Insurance Model Act
("Model Act"), which was adopted to promote the availability of long-term care
insurance policies, to protect applicants for such insurance and to facilitate
flexibility and innovation in the development of long-term care coverage. The
Model Act establishes standards for long-term care insurance, including
provisions relating to disclosure and performance standards for long-term care
insurers, incontestability periods, nonforfeiture benefits, severability,
penalties and administrative procedures. Model regulations were also developed
by the NAIC to implement the Model Act. Some states have also adopted standards
relating to agent compensation for long-term care insurance. In addition, from
time to time, the federal government has considered adopting standards for
long-term care insurance policies, but it has not enacted any such legislation
to date.

Some state legislatures have adopted proposals to limit rate increases on
long-term care insurance products. In the past, we have been generally
successful in obtaining rate increases when necessary. We currently have rate
increases on file with various state insurance departments and anticipate that
increases on other products may be required in the future. If we are unable in
the future to obtain rate increases, or in the event of legislation limiting
rate increases, we believe it would have a negative impact on our future
earnings.

In September 1996, Congress enacted the Health Insurance Portability and
Accountability Act ("HIPAA"), which permits premiums paid for eligible long-term
care insurance policies after December 31, 1996 to be treated as deductible
medical expenses for federal income tax purposes. The deduction is limited to a
specified dollar amount ranging from $200 to $2,500, with the amount of the
deduction increasing with the age of the taxpayer. In order to qualify for the
deduction, the insurance contract must, among other things, provide for
limitations on pre-existing condition exclusions, prohibitions on excluding
individuals from coverage based on health status and guaranteed renewability of
health insurance coverage. Although we offer tax-deductible policies, we will
continue to offer a variety of non-deductible policies as well. We have
long-term care policies that qualify for tax exemption under HIPAA in all states
in which we are licensed.

In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification") guidance, which replaced the current Accounting
Practices and Procedures manual as the NAIC's primary guidance on statutory
accounting as of January 1, 2001. The Codification provides guidance for areas
where statutory accounting has been silent and changes current statutory
accounting in some areas, including the recognition of deferred income taxes.

The Pennsylvania and New York Insurance Departments have adopted the
Codification guidance, effective January 1, 2001. The Codification guidance
serves to reduce the insurance subsidiaries' surplus, primarily due to certain
limitations on the recognition of goodwill and EDP equipment and the recognition
of other than temporary declines in investments. In 2001, our statutory surplus
was reduced by approximately $2 million as a result of the Codification
guidance. These reductions are partially

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offset by certain other items, including the recognition of deferred tax assets
subject to certain limitations.

We are also subject to the insurance holding company laws of Pennsylvania
and of the other states in which we are licensed to do business. These laws
generally require insurance holding companies and their subsidiary insurers to
register and file certain reports, including information concerning their
capital structure, ownership, financial condition and general business
operations. Further, states often require prior regulatory approval of changes
in control of an insurer and of intercompany transfers of assets within the
holding company structure. The Pennsylvania Insurance Department and the New
York Insurance Department must approve the purchase of more than 10% of the
outstanding shares of our common stock by one or more parties acting in concert,
and may subject such party or parties to the reporting requirements of the
insurance laws and regulations of Pennsylvania and New York and to the prior
approval and/or reporting requirements of other jurisdictions in which we are
licensed. In addition, our officers, directors and 10% shareholders and those of
our insurance subsidiaries are subject to the reporting requirements of the
insurance laws and regulations of Pennsylvania and New York, as the case may be,
and may be subject to the prior approval and/or reporting requirements of other
jurisdictions in which they are licensed.

Under Pennsylvania law, public utilities and their affiliates, subsidiaries,
officers and employees may not be licensed or admitted as insurers. If any
public utility or affiliate, subsidiary, officer or employee of any public
utility acquires 5% or more of the outstanding shares of our common stock, such
party may be deemed to be an affiliate, in which event our Certificate of
Authority to do business in Pennsylvania may be revoked upon a determination by
the Pennsylvania Insurance Department that such party exercises effective
control over us. Although several entities own more than 5% of our common stock,
no public utility or affiliate, subsidiary, officer or employer of any public
utility holds sufficient voting authority to exercise effective control over us.

States also restrict the dividends our insurance subsidiaries are permitted
to pay. Dividend payments will depend on profits arising from the business of
our insurance company subsidiaries, computed according to statutory formulae.
Under the insurance laws of Pennsylvania and New York, where our insurance
subsidiaries are domiciled, insurance companies can pay ordinary dividends only
out of earned surplus. In addition, under Pennsylvania law, our Pennsylvania
insurance subsidiaries (including our primary insurance subsidiary) must give
the Department at least 30 days' advance notice of any proposed "extraordinary
dividend" and cannot pay such a dividend if the Department disapproves the
payment during that 30-day period. For purposes of that provision, an
extraordinary dividend is a dividend that, together with all other dividends
paid during the preceding twelve months, exceeds the greater of 10% of the
insurance company's surplus as shown on the company's last annual statement
filed with Department or its statutory net income as shown on that annual
statement. Statutory earnings are generally lower than earnings reported in
accordance with generally accepted accounting principles due to the immediate or
accelerated recognition of all costs associated with premium growth and benefit
reserves. Additionally, our Plan requires the Department to approve all dividend
requests made by Penn Treaty, regardless of normal statutory requirements for
allowable dividends. We believe that the Department is unlikely to consider any
dividend request in the foreseeable future, as a result of Penn Treaty's current
statutory surplus position. Although not stipulated in the Plan, this
requirement is likely to continue until such time as Penn Treaty meets normal
statutory allowances, including reported net income and positive cumulative
earned surplus.

Under New York law, our New York insurance subsidiary (American Independent
Network Insurance Company of New York) must give the New York Insurance
Department 30 days' advance notice of any proposed dividend and cannot pay any
dividend if the regulator disapproves the payment during that 30-day period. In
addition, our New York insurance company must obtain the prior approval of the
New York Insurance Department before paying any dividend that, together with all
other dividends paid during the preceding twelve months, exceeds the lesser of
10% of the insurance

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company's surplus as of the preceding December 31 or its adjusted net investment
income for the year ended the preceding December 31.

Penn Treaty Network America Insurance Company and American Network Insurance
Company have not paid any dividends to Penn Treaty for the past three years and
are unlikely in the foreseeable future to be able to make dividend payments due
to insufficient statutory surplus and anticipated earnings. However, our New
York subsidiary is not subject to the Plan and in March 2002, we received a
dividend from our New York subsidiary of $651,000. American Network Insurance
Company was permitted to make a special dividend payment of $5 million following
December 31, 2001 to Penn Treaty Network America Insurance Company.

Periodically, the Federal government has considered adopting a national
health insurance program. Although it does not appear that the Federal
government will enact an omnibus health care reform law in the near future, the
passage of such a program could have a material impact on our operations. In
addition, other legislation enacted by Congress could impact our business. Among
proposals sometimes considered are the implementation of certain minimum
consumer protection standards for inclusion in all long-term care policies,
including guaranteed renewability, protection against inflation, and limitations
on waiting periods for pre-existing conditions. These proposals would also
prohibit "high pressure" sales tactics in connection with long-term care
insurance and would guarantee consumers access to information regarding
insurers, including lapse and replacement rates for policies and the percentage
of claims denied. As with any pending legislation, it is possible that any laws
finally enacted will be substantially different from the current proposals.
Accordingly, we are unable to predict the impact of any such legislation on our
business and operations.

Compliance with multiple Federal and state privacy laws may affect our
profits. Congress enacted the Gramm-Leach-Bliley Financial Services
Modernization Act in 1999. Federal agencies have adopted regulations to
implement this legislation. The Gramm-Leach-Bliley Act empowers states to adopt
their own measures to protect the privacy of consumers and customers of insurers
that are covered by the Gramm-Leach-Bliley Act, so long as those protections are
at least as stringent as those required by the Gramm-Leach-Bliley Act. If states
do not enact their own insurance privacy laws or adopt regulations, the privacy
requirements of the Gramm-Leach-Bliley Act will apply to insurers, although no
enforcement mechanism has yet been adopted for insurers. The Department of
Health and Human Services has adopted privacy rules, which will also apply to at
least some of our products. The NAIC has adopted the Insurance Information and
Privacy Model Act, but no state has yet adopted this model act. Individual state
insurance regulators have indicated that their states may adopt privacy laws or
regulations that are more stringent than the NAIC's model act and those provided
for under federal law. Compliance with different laws in states where we are
licensed could prove extremely costly.

We monitor economic and regulatory developments that have the potential to
affect our business. Recently enacted federal legislation will allow banks and
other financial organizations to have greater participation in securities and
insurance businesses. This legislation may present an increased level of
competition for sales of our products. Furthermore, the market for our products
is enhanced by the tax incentives available under current law. Any legislative
changes that lessen these incentives could negatively impact the demand for
these products.

RECENT STATE REGULATORY ACTIONS

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inadequately capitalized. In addition, the formula defines minimum capital
standards that an insurer must maintain. Regulatory compliance is determined by
a ratio of the enterprise's regulatory Total Adjusted Capital, to its Authorized
Control Level RBC, as defined by the NAIC. Companies below specific trigger
points or ratios are classified within certain levels, each of which may require
specific corrective action depending upon the insurer's state of domicile.

Our insurance subsidiaries, Penn Treaty Network America Insurance Company,
American Network Insurance Company, and American Independent Network Insurance
Company of New York (representing approximately 92%, 6% and 2% of our in-force
premium, respectively), are each required to hold statutory surplus that is,
above a certain required level. If the statutory surplus of either of our
Pennsylvania subsidiaries falls below such level, the Department would be
required to place such subsidiary under regulatory control, leading to
rehabilitation or liquidation. At December 31, 2000, Penn Treaty Network America
Insurance Company had Total Adjusted Capital below the Regulatory Action level.
As a result, it was required to file the Plan with the insurance commissioner.

On February 12, 2002, the Department approved the Plan.

The Corrective Order requires Penn Treaty to comply with certain other
agreements at the direction of the Department, including, but not limited to:

- New investments are limited to NAIC 1 or 2 rated securities.

- Affiliated transactions are limited and require Department approval.

- An agreement to increase statutory reserves by an additional $125 million
by December 31, 2004, of which $50 million remains to be done, such that
our subsidiaries' policy reserves will be based on new, current claims
assumptions and will not include any rate increases. These claim
assumptions are applied to all policies, regardless of issue year and are
assumed to have been present since the policy was first issued. The
reinsurance agreement has provided the capacity to accommodate this
increase.

- Enter into a reinsurance treaty with Centre Solutions (Bermuda) Limited
through which Penn Treaty Network America Insurance Company and American
Network Insurance Company reinsure 100% of their individual long term care
insurance business in effect on December 31, 2001;

- File copies of the fully executed reinsurance agreement and trust
agreement with the Department no later than ten days after execution;

- File with the Department monthly statements of the balance of the trust
account required under the trust agreement among them, Centre Solutions
(Bermuda) Limited, and The Bank of New York within five days of receipt of
any such statement;

- Compute contract and unearned premium reserves using the initial level net
premium reserve methodology;

- Notify the Department within five days of the date of the Corrective Order
of the licensing status of Penn Treaty Network America Insurance Company
and American Network Insurance Company in all jurisdictions in which they
are authorized to write insurance;

- Submit to the Department all filings with the Securities and Exchange
Commission made by Penn Treaty, and all press releases issued by Penn
Treaty, Penn Treaty Network America Insurance Company or American Network
Insurance Company;

- Not enter into any new reinsurance contract or treaty, or amend, commute
or terminate any existing reinsurance treaty without the prior written
approval of the Department, such approval not to be unreasonably withheld;

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- Not make any new special deposits or make any changes to existing special
deposits without the prior written approval of the Department, such
approval not to be unreasonably withheld;

- Not enter into any new agreements or amend any existing agreements with
Penn Treaty or any affiliate in excess of $100,000 or make any dividends
or distributions to Penn Treaty or any affiliate without the prior written
approval of the Department, such approval not to be unreasonably withheld;

- Notify the Department within five days of receiving notification of
default on Penn Treaty debt requiring acceleration of repayment; and

We are in compliance with all terms of the Corrective Order as of the date
of this Prospectus Supplement. If we fail to continue to comply with the terms
of the Corrective Order, the Department could take action to suspend our ability
to continue to write new policies, or impose other sanctions on us.

The Florida Department of Insurance issued a Consent Order dated July 30,
2002, as amended, reinstating Penn Treaty's Certificate of Authority in Florida
as a foreign issuer. The Consent Order sets forth the following obligations
which Penn Treaty Network America Insurance Company must satisfy to maintain its
Certificate of Authority in Florida:

- Maintain compliance with Florida laws which establish minimum surplus
required for health and life insurers;

- Comply, by December 31, 2002, with Florida laws which establish a maximum
writing ratio limitation on accident and health premiums to policyholders'
capital/surplus, which we expect will require approximately $23 million;

- Submit monthly financial statements to the Department of Insurance;

- Maintain compliance with Florida laws governing investments in
subsidiaries and related corporations;

- Limit direct premiums on new business in the State of Florida so as not to
exceed $4 million during 2002 (which we will not have exceeded) and
$15 million during 2003;

- Limit direct premium growth in Florida to ten percent annually after 2003
unless otherwise approved in writing by the Department of Insurance based
upon evidence of adequate capitalization;

- Maintain a Risk Based Capital ratio in excess of 2.0; and

- Submit quarterly reports to the Department of Insurance demonstrating all
claims that have been assumed by Centre Solutions (Bermuda) Limited.

In the event that Penn Treaty Network America Insurance Company fails to
maintain compliance with Florida laws or the above requirements, the Department
of Insurance will notify Penn Treaty Network America Insurance Company and could
require it to take corrective action. If the Department of Insurance determines
that the corrective action is not timely, Penn Treaty Network America Insurance
Company's Certificate of Authority could be suspended and it could be required
to cease writing new direct business in Florida, until such time as it took any
required corrective action.

EMPLOYEES

As of November 30, 2002, we had 300 full-time employees (not including
independent agents). We are not a party to any collective bargaining agreements.

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PROPERTIES

Our principal offices in Allentown, Pennsylvania occupy two buildings,
totaling approximately 33,000 square feet of office space in a 40,000 square
foot building and all of an 16,000 square foot building. We own both buildings
and a 2.42 acre undeveloped parcel of land located across the street from our
home offices. We also lease additional office space in Michigan and New York.

LEGAL PROCEEDINGS

Our subsidiaries are parties to various lawsuits generally arising in the
normal course of their business. We do not believe that the eventual outcome of
any of the suits to which we are party will have a material adverse effect on
our financial condition or results of operations. However, the outcome of any
single event could have a material impact upon the quarterly or annual financial
results of the period in which it occurs.

Penn Treaty and certain of its key executive officers are defendants in
consolidated actions that were instituted on April 17, 2001 in the United States
District Court for the Eastern District of Pennsylvania by shareholders of the
Company, on their own behalf and on behalf of a putative class of similarly
situated shareholders who purchased shares of Penn Treaty's common stock between
July 23, 2000 through and including March 29, 2001. The consolidated amended
class action complaint seeks damages in an unspecified amount for losses
allegedly incurred as a result of misstatements and omissions allegedly
contained in our periodic reports filed with the SEC, certain press releases
issued by us, and in other statements made by our officials. The alleged
misstatements and omissions relate, among other matters, to the statutory
capital and surplus position of our largest subsidiary, Penn Treaty Network
America Insurance Company. We believe that the complaint is without merit, and
we will continue to vigorously defend the matter. On July 1, 2002, the
defendants filed an answer to the complaint, denying all liability. Plaintiffs
filed a motion for class certification on August 15, 2002, which is currently
pending.

Penn Treaty and two of its subsidiaries, Penn Treaty Network America
Insurance Company and Senior Financial Consultants Company, are defendants in an
action instituted on June 5, 2002 in the United States District Court for the
Eastern District of Pennsylvania by National Healthcare Services, Inc. The
complaint seeks compensatory damages in excess of $150,000 and punitive damages
in excess of $5,000,000 for an alleged breach of contract and misappropriation.
The claims arise out of a joint venture related to the AllRisk Healthcare
program, which was marketed first by Penn Treaty Network America Insurance
Company and then later by Senior Financial Consultants Company. The defendants
have denied the allegations of the complaint and will continue to defend the
matter vigorously. We have not accrued any amount related to these claims in our
financial statements.

DEBT EXCHANGE OFFER

On August 28, 2002 we commenced an offer to exchange the $74.8 million
principal amount of 2003 Notes outstanding for a like amount of 2008 Notes. On
October 25, 2002, we completed the exchange offer with $63.3 million of the
Notes exchanged for 2008 Notes. The exchange offer was a significant component
of our ongoing plan for balance sheet and capital reformation.

By exchanging notes, the 2003 Note holder were able (i) to extend the
maturity date to 2008, (ii) gain seniority over 2003 Note holders remaining
after the completion of the exchange, and (iii) obtain a conversion price on the
2008 Notes of $4.50 per share, compared to a conversion price of $28.44 per
share for the 2003 Notes. Further, we intend to lower the conversion price of
the 2008 Notes from $4.50 to $2.50 per share upon the sale of at least
$20 million of the Notes.

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MANAGEMENT

As of December 22, 2002, our directors and executive officers were:

NAME AGE POSITION
---- -------- --------

Irving Levit........................... 73 Chairman and Chief Executive Officer
Jack D. Baum........................... 69 Director and Vice President, Agency Management
A. J. Carden........................... 69 Director and Executive Vice President
Alexander M. Clark..................... 69 Director
Francis R. Grebe....................... 70 Director
Michael F. Grill....................... 52 Director and Treasurer and Comptroller
Gary E. Hindes......................... 52 Director
James Heyer............................ 39 Senior Vice President, Risk Management
William W. Hunt, Jr.................... 43 President and Chief Operating Officer
Matthew W. Kaplan...................... 44 Director
Domenic P. Stangherlin................. 75 Director
Cameron B. Waite....................... 42 Executive Vice President and Chief Financial Officer

Irving Levit has served as Chairman of the Board of Directors and Chief
Executive Officer of Penn Treaty since 1972. Mr. Levit also served as President
from 1972 to May 2002. Mr. Levit has also served as President of PTNA, ANIC and
AINIC from December 2000 to September 2002, as the Chairman of the Board of
Directors and Chief Executive Officer of PTNA since 1989, ANIC since 1996 and of
AINIC since its inception in 1997 and as the Chairman of the Board of Directors,
President and Chief Executive Officer of the Agency since 1988. Mr. Levit also
serves as Chairman of the Board, President and Chief Executive Officer of NISHD,
and Chairman of the Board of UIG. In addition, Mr. Levit has been the sole owner
of the Irv Levit Insurance Management Corporation ("IMC"), an insurance agency,
since 1961. Mr. Levit has over 40 years experience in the insurance business.

Jack D. Baum has served as a Vice President of Penn Treaty since 1985, of
the Agency since 1988, of PTNA since 1989, of ANIC since 1996 and of AINIC since
its inception in 1997. Prior to joining Penn Treaty, Mr. Baum served as Vice
President of Marketing for National Security General Insurance Company in
Lancaster, Pennsylvania from 1983 to 1985 and as a Director of Group Sales and
Marketing for Educators Mutual Life Insurance in Lancaster, Pennsylvania from
1976 to 1983. Mr. Baum has over 25 years experience in the insurance business.

A. J. Carden has served as Executive Vice President of Penn Treaty since
1983. Mr. Carden has also served as Executive Vice President and Director of the
Agency since 1988, of PTNA since 1989, of ANIC since 1996 and of AINIC since its
inception in 1997. Mr. Carden also serves as Vice President, Secretary and
Director of NISHD. From 1970 to 1983, Mr. Carden served as Assistant to the
President and Vice President of Claims for Columbia Life Insurance Company and
Columbia Accident and Health Insurance Company located in Bloomsburg,
Pennsylvania. Mr. Carden has over 40 years experience in the insurance business.

Alexander M. Clark has served as Director of Penn Treaty since 1999 and of
AINIC since its inception in 1997. Mr. Clark is a Managing Director of
Advest, Inc., a position he has held since 1993. He previously served as Senior
Vice President at Gramercy Partners and McKinley Allsopp, both of New York; as
President of John Alden Life Insurance Company of New York; and as Associate
Director of Research of Dean Witter & Co. Mr. Clark is a member of the
Association of Insurance and Financial Analysts(CFA-1968). Mr. Clark has also
served as Director of Pennsylvania National Insurance Group since 1989, and of
Great American Life Insurance Company of New York, a subsidiary of Great
American Financial Resources, Inc., since 2001.

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Francis R. Grebe has served as a Director of Penn Treaty since 1999.
Mr. Grebe is a partner at the investment counseling firm of Davidson Investment
Counselors, formerly James M. Davidson and Company. He has held this position
since 1988. Mr. Grebe has also served as an Administrative Officer of Davidson
Trust Company, formerly The Main Line Trust Company, a private fiduciary, since
1996. Mr. Grebe has over 40 years experience with leading financial institutions
in the trust and investment area, including Girard Trust Bank, Philadelphia
National Bank and U.S. Trust Company of Florida. Mr. Grebe currently serves as a
Director of the Athenaeum of Philadelphia and as a Trustee of The Guthrie
Healthcare System. He is also a Director and former President of Family Services
of Montgomery County, Pennsylvania and currently serves on The Board of Surrey
Services for Seniors. He also serves as Trustee of the Meshewa Farm Foundation
and The Sylvan Foundation. Mr. Grebe is a Phi Beta Kappa graduate of the
University of Rochester and the University of Michigan Law School, and is
admitted to practice law in Michigan, Illinois and New York.

Michael F. Grill has served as Treasurer and Comptroller of Penn Treaty
since 1981, of the Agency since 1988, of PTNA since 1989, of ANIC since 1996 and
of AINIC since its inception in 1997. Mr. Grill became a Director of the Agency
in 1988, of PTNA in 1989, of ANIC in 1996, of AINIC in 1997 and of NISHD in
2000. Prior to joining Penn Treaty, Mr. Grill served as Chief Accountant for
World Life and Health Insurance Company located in King of Prussia, Pennsylvania
from 1973 to 1981. Mr. Grill has over 25 years experience in the insurance
business.

Gary E. Hindes has served as Managing Director of Deltec Asset Management,
LLC, a professional investment management firm located in New York City, since
2000. From 1996 to 2000, Mr. Hindes was a principal of PMG Capital, Inc., a
Philadelphia investment banking and brokerage concern. From 1986 to 1996,
Mr. Hindes served as Chief Executive Officer of the Delaware Bay Company, Inc.
Mr. Hindes has formerly served on the board of directors of Lancer Industries
and Intranet Corporation. Mr. Hindes has also served as the Chairman of the
Board of Trustees of Wilmington Head Start, Inc. since 1982 and served by
presidential appointment from 1993 to 2001 as a trustee of the John F. Kennedy
Center for the Performing Arts. Mr. Hindes is currently a member of the
Investment Oversight Committee of the United States Holocaust Memorial Museum
and is a commissioner of the Wilmington Housing Authority.

James M. Heyer has served as Senior Vice President of Penn Treaty and its
insurance company subsidiaries since September 2002. Mr. Heyer served as Chief
Operating Officer of Penn Treaty's insurance company subsidiaries from
January 1999 to September 2002. Mr. Heyer served as a director of Penn Treaty
from May 2001 to May 2002, of ANIC since 1996, and of AINIC since 1997. From
1993 to 1998, Mr. Heyer served as the companies' Vice President of
Administration. Mr. Heyer oversees all aspects of claims, underwriting,
compliance and product development for Penn Treaty's insurance company
subsidiaries. Prior to joining Penn Treaty in 1988, Mr. Heyer was employed by
The Guardian Life Insurance Company of North America. Mr. Heyer received his
B.S. in Business Administration and Marketing from Penn State University.
Mr. Heyer has over 15 years experience in the insurance business.

William W. Hunt, Jr. has served as President and Chief Operating Officer of
Penn Treaty since May 2002. Mr. Hunt served as Senior Vice President of Penn
Treaty from May 2001 to May 2002. Mr. Hunt has served as the President and Chief
Operating Officer of PTNA, ANIC and AINIC since September 2002. Mr. Hunt
formerly served as Vice President and Chief Financial Officer of the Individual
Life Insurance Unit of Prudential Insurance Company of America from 1999 to
2000. He was responsible for financial management, planning and analysis
functions for Prudential's Individual Life Insurance profit center and its third
party distribution channel. From 1997 to 1999, Mr. Hunt served as Vice President
of Corporate Planning and Development at Provident Mutual Life Insurance Company
("Provident"), where he was responsible for the development and management of
the strategic planning process and for providing leadership in the facilitation
of major corporate development projects. Provident is a multi-billion dollar
diversified Financial Services organization that

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develops and distributes fixed and variable life insurance and annuity products,
pension products and mutual funds. Prior to joining Provident, Mr. Hunt served
in financial management roles at Advanta Corporation, Covenant Life Insurance
Company and Reliance Insurance Companies. Mr. Hunt, a Certified Public
Accountant, began his career as an auditor with Touche Ross & Co.

Matthew W. Kaplan has served as Director of Penn Treaty and AINIC since
2001. Mr. Kaplan has served as Chief Executive Officer and Director of Crown
Reinsurance Company (Cayman) Limited since 1999; as Chairman of Northstar
TeleFilm, Inc. since 1999; and as a Principal of Northstar Consulting since
2001. Mr. Kaplan previously served as Vice President of Bench International, LLC
during 2001, and as President and Chief Executive Officer of U.S. Care, Inc.
from 1996 to 2001. From 1995 to 1996, Mr. Kaplan served as Chief Marketing
Officer for U.S. Care, Inc. Prior to joining U.S. Care, Inc., Mr. Kaplan served
as General Manager and Vice Chairman of the North Melbourne Giants Basketball
Pty. Ltd.; Consultant, Strategic Planning and Evaluation for the World Health
Organization, Regional Office for Europe and for the Commission for the European
Communities; Managing Partner for B&K Development LLP; and held several
positions with U.S. Administrators, Inc., the last position being that of
Executive Vice President. Mr. Kaplan is a member of the Board of Trustees for
the UCLA Center on Aging and is a Founding Director of Cancervive. Mr. Kaplan
also currently serves on the Board of Directors of the American Manufacturers
Warranty Association, Healant, Inc., and U.S. Care. U.S. Care is an integrated
chronic care management company, whose services include the design and
management of long-term care insurance programs.

Domenic P. Stangherlin has served as Director of Penn Treaty since 1971, of
the Agency since 1988, of PTNA since 1989, and of ANIC since 1996.
Mr. Stangherlin also served as Secretary of Penn Treaty from 1971 to 1999, of
the Agency from 1988 to 2000, of PTNA from 1989 to 2000, of ANIC from 1996 to
2000, and of AINIC from 1997 to 2000. Mr. Stangherlin is the owner and manager
of the Line Tool Company, a manufacturer of micropositioners, located in
Allentown, Pennsylvania.

Cameron B. Waite has served as Executive Vice President of Penn Treaty since
May 2002 and Chief Financial Officer since May 1996. Mr. Waite has served as a
Director of ANIC since 1996 and of AINIC since 1997. Mr. Waite also serves as
Director, Treasurer and Chief Financial Officer of NISHD. From 1994 to 1996,
Mr. Waite was Chief Financial Officer and Treasurer of Blue Fish
Clothing, Inc., a manufacturer, wholesaler and retailer of women's clothing.
From 1983 to 1994, Mr. Waite held various positions with Independence
Bancorp. Inc., which merged with CoreStates Financial Corporation, his last
position being Vice President of Asset Liability Management. Mr. Waite holds a
B.A. in Economics from Dickinson College and an M.B.A. from Lehigh University.

S-100

PRINCIPAL SHAREHOLDERS

The following table sets forth, as of November 30, 2002, information with
respect to the beneficial ownership of our Common Stock by (i) each person known
to Penn Treaty to own 5% or more of the outstanding shares of Common Stock,
(ii) each Director, the Chief Executive Officer and the four most highly
compensated Executive Officers, and (iii) all Directors and Executive Officers
as a group:

SHARES BENEFICIALLY PERCENTAGE
NAME AND ADDRESS(1) OWNED(2) OWNERSHIP
------------------- ------------------- ----------

CERTAIN BENEFICIAL OWNERS:
Wellington Management Co., LLP (3).......................... 1,593,082 8.0%
75 State Street
Boston, MA 02109

WLR Recovery Fund II, L.P. (4).............................. 2,160,444 9.79%
101 East 52nd Street, 19th Floor
New York, NY 10022

DIRECTORS AND EXECUTIVE OFFICERS:
Irving Levit (5)............................................ 2,497,895 12.5%
Jack D. Baum (6)............................................ 50,658 *
A. J. Carden (7)............................................ 50,000 *
Alexander M. Clark.......................................... 5,000 *
Francis R. Grebe............................................ -- *
Michael F. Grill (7)........................................ 49,919 *
James Heyer (8)............................................. 37,694 *
Gary E. Hindes (9).......................................... 30,100 *
William W. Hunt, Jr. (7).................................... 30,000 *
Matthew W. Kaplan........................................... -- *
Domenic P. Stangherlin...................................... 87,963 *
Cameron B. Waite (10)....................................... 9,000 *
All Directors and Executive Officers as a group 2,848,229 14.3%
(14 persons) (11)...........................................

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

* Less than 1%

(1) Unless otherwise noted, the address of each person named above is in care of
Penn Treaty American Corporation 3440 Lehigh Street, Allentown, Pennsylvania
18103.

(2) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission. Shares of Common Stock subject to
options currently exercisable or exercisable within 60 days of November 30,
2002 are deemed outstanding for purposes of computing the percentage
beneficially owned by such holder but are not deemed outstanding for
purposes of computing the percentage beneficially owned by any other person.
Except as otherwise indicated, Penn Treaty believes that the beneficial
owners of the Common Stock listed above, based on information furnished by
such owners, have sole investment and voting power with respect to such
shares, subject to community property laws where applicable, and that there
are no other affiliations among the shareholders listed in the table.

(3) According to the Schedule 13G filed with the SEC by Wellington Management
Company, LLP for the year ended December 31, 2001. Wellington Management
Company, LLP reported shared voting power with respect to 920,324 shares and
shared dispositive power with respect to 1,593,082 shares.

[FOOTNOTES CONTINUED ON FOLLOWING PAGE]

S-101

(FOOTNOTES CONTINUED FROM PREVIOUS PAGE)

(4) According to the Schedule 13G filed with the SEC by WLR Recovery Fund II,
L.P., WLR Recovery Associates II, LLC, WL Ross & Co. LLC and Wilbur Ross
dated October 21, 2002, each of the reporting persons reported shared voting
power and shared dispositive power with respect to all shares. For each of
the reporting persons, beneficial ownership of the shares represents the
total number of shares issuable upon conversion of the 2008 Notes held by
WLR Recovery Fund, L.P. If we decrease the conversion price of the 2008
Notes to $2.50 per share (which we have agreed to do if we sell at least
$20 million of Notes), WLR Recovery Fund II, L.P. will be beneficial owner
of 3,888,799 shares assuming no other change in the holdings of the
reporting persons.

(5) Includes 46,350 shares held by a private foundation of which Mr. Levit is an
officer and director, 45,007 shares held by Mr. Levit as trustee of a
retirement account, 147,167 shares held by Mr. Levit as co-trustee of an
irrevocable trust for Mr. Levit's children and exercisable options to
purchase 241,455 shares of Common Stock. Also includes 46,000 shares held by
Mr. Levit's wife as to which he disclaims beneficial ownership. Excludes
59,233 shares held by other family members as to which he also disclaims
beneficial ownership.

(6) Includes exercisable options to purchase 50,577 shares of Common Stock.

(7) Consists of exercisable options to purchase shares of Common Stock.

(8) Includes exercisable options to purchase 37,500 shares of Common Stock.

(9) Includes 23,100 shares owned by Fallen Angels Fund, L.P., a limited
partnership of which Mr. Hindes has sole voting power as the managing member
of the general partnership, 1,500 shares held by Mr. Hindes' wife as to
which he disclaims beneficial ownership and 1,700 shares held by
Mr. Hindes' children as to which he disclaims beneficial ownership.

(10) Includes exercisable options to purchase 8,000 shares of Common Stock.

(11) Includes exercisable options held by members of the group to purchase
467,451 shares of Common Stock.

S-102

PLAN OF DISTRIBUTION

We have distributed without charge to holders of our common stock and our
Existing Notes transferable rights to purchase an aggregate principal amount of
$45 million of Notes. Holders of our common stock will receive one right to
purchase a principal amount of $1,000 of Notes for each 973 shares of common
stock that they held on the record date. Holders of the 2003 Notes or the 2008
Notes will receive one right to purchase a principal amount of $1,000 of Notes
for each $26,673 or $2,433 principal amount of such notes, respectively, that
they held on the record date.

Each right entitles the holders to purchase Notes in excess of the amounts
set forth above if all of the rights are not exercised. If the principal amount
of Notes available to satisfy the demand for such additional Notes is
insufficient, requesting holders will receive a pro rata portion of the
principal amount of Notes remaining.

If rights to purchase the entire aggregate principal amount of $45 million
of Notes are not exercised, any remaining Notes will be sold directly by us,
with or without the assistance of our financial advisors, Merrill Lynch & Co.,
Advest, Inc., and Philadelphia Brokerage Corporation.

We have entered into agreements with Merrill Lynch & Co. and Advest, Inc.
pursuant to which we have agreed to pay them collectively 2% of the aggregate
proceeds raised through the exercise of rights by existing securityholders of
Penn Treaty and 6.5% of the aggregate proceeds raised through the direct sale of
Notes to persons who are not existing securityholders of Penn Treaty. Merrill
Lynch & Co. is entitled to 2/3 of such fees and Advest, Inc. is entitled to 1/3
of such fees. We also have entered into an agreement with Philadelphia Brokerage
Corporation pursuant to which we have agreed to pay it .75% of the aggregate
proceeds raised through the exercise of rights by existing securityholders of
Penn Treaty and 1.4% of the aggregate proceeds raised through the direct sale of
Notes to persons who are not existing securityholders of Penn Treaty.

In addition to the fees described above, we have agreed to reimburse Merrill
Lynch & Co. and Advest, Inc. for their reasonable out-of-pocket expenses
incurred in connection with the transactions contemplated herein. The agreements
also provide that we will indemnify each of Merrill Lynch & Co. and
Advest, Inc. and their affiliates and their respective directors, officers,
employees, agents and controlling persons against certain liabilities, including
liabilities under the Securities Act of 1933. Each of the agreements with
Merrill Lynch & Co. and Advest, Inc. specifies that they may be terminated by
either party at any time upon written notice to the other party, provided,
however, that the provisions of the agreements relating to fees and expenses and
indemnification shall survive any such termination indefinitely.

Alexander M. Clark, a director of Penn Treaty, is a Managing Director of
Advest, Inc. In addition, Penn Treaty has an ongoing relationship with
Philadelphia Brokerage Corporation, pursuant to which Penn Treaty has paid
Philadelphia Brokerage Corporation fees in the form of cash and securities for
various services.

There is no existing market for the Notes. We do not intend to apply for
listing of the Notes on any national securities exchange or interdealer
quotations system. There can be no assurance as to the liquidity of any market
that may develop for the Notes, the ability of holders of the Notes to sell
their Notes, or the price at which holders would be able to sell their Notes.
Future trading prices of the Notes will depend on many factors including, among
other things, prevailing interest rates, our operating results and the market
for similar securities.

Penn Treaty will pay all expenses, including fees of our financial advisors,
estimated to be approximately $2.3 million, associated with the rights offering
and the direct sale of the Notes.

S-103

LEGAL MATTERS

Ballard Spahr Andrews & Ingersoll, LLP, Philadelphia, Pennsylvania will pass
on the validity of the Notes offered pursuant to this prospectus supplement.

EXPERTS

PricewaterhouseCoopers LLP, independent auditors, have audited our
consolidated financial statements included in our Annual Report on Form 10-K/A
as of December 31, 2001 and 2000 and for each of the three years in the period
ended December 31, 2001, as set forth in their report, which is incorporated by
reference in this prospectus supplement. Our financial statements are
incorporated by reference in reliance on the report of PricewaterhouseCoopers
LLP, given on their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the reporting requirements of the Exchange Act, and we
file reports and other information with the SEC. We have also filed with the SEC
a registration statement on Form S-3 under the Securities Act relating to the
offer and sale of the Notes and common shares under this prospectus. Neither the
prospectus nor this prospectus supplement, filed as a part of the registration
statement, contains all of the information set forth in the registration
statement or the exhibits and schedules to the registration statement as
permitted by the rules and regulations of the SEC. You should read these
exhibits for a more complete description of the matters involved. Our reports,
the registration statement and the exhibits and schedules to the registration
statement filed with the SEC may be inspected, without charge, and copies may be
obtained at prescribed rates, at the public reference facility maintained by the
SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. The public may obtain information regarding the SEC's public
reference facility by calling 1-800-SEC-0330. Our reports, the registration
statement and other information filed by us with the SEC are also available at
the SEC's Website on the Internet at http://www.sec.gov. Our common shares are
listed on the New York Stock Exchange under the symbol "PTA."

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The SEC allows us to "incorporate by reference" the information we file with
it, which means that we can disclose important information to you by referring
to those documents. The information incorporated by reference is an important
part of this prospectus supplement, and the information that we file later with
the SEC will automatically update and supersede this information. We incorporate
by reference the documents listed below and any future filings made with the SEC
under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
until this offering is completed:

- Annual Report on Form 10-K/A for the fiscal year ended December 31, 2001;

- Quarterly Report on Form 10-Q/A for the fiscal quarter ended
September 30, 2002;

- Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2002;

- Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2002;

- Current Reports on Form 8-K filed February 21, 2002 and December 24, 2002;

- Proxy Statement for the 2002 Annual Meeting of Shareholders; and

- The description of our common stock contained in our registration
statement on Form 8-A, including any amendments or reports filed for the
purpose of updating such description.

S-104

You may request a copy of these filings, at no cost, by writing to us at the
address below or calling us at the telephone number below. However, we will not
provide copies of the exhibits to these filings unless we specifically
incorporated by reference the exhibits in this prospectus.

Penn Treaty American Corporation
Attention: Cameron B. Waite
Executive Vice President and Chief Financial Officer
3440 Lehigh Street
Allentown, PA 18103
(610) 965-2222

S-105

SUBJECT TO COMPLETION, DATED NOVEMBER 15, 2000

PROSPECTUS

[LOGO]

PENN TREATY AMERICAN CORPORATION
3440 Lehigh Street
Allentown, Pennsylvania 18103
(610) 965-2222

$75,000,000

PENN TREATY AMERICAN
CORPORATION

Debt Securities
Preferred Stock
Common Stock
Warrants

Penn Treaty American Corporation has listed its shares of common stock on
the New York Stock Exchange under the symbol "PTA".

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

We will provide specific terms of these securities in supplements to this
prospectus. You should read this prospectus and any supplement carefully before
you invest.

YOU SHOULD ALSO CAREFULLY CONSIDER THE RISK FACTORS RELATING TO THESE
SECURITIES THAT WE DESCRIBE STARTING ON PAGE 1 OF THIS PROSPECTUS.

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

THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF THE SECURITIES
OFFERED BY THIS PROSPECTUS UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SHARES NOR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

THIS PROSPECTUS IS DATED NOVEMBER 15, 2000.

PENN TREATY IS A HOLDING COMPANY THAT CONTROLS INSURANCE COMPANY SUBSIDIARIES
DOMICILED IN PENNSYLVANIA, NEW YORK AND BERMUDA. THE INSURANCE LAWS AND
REGULATIONS OF EACH OF PENNSYLVANIA AND NEW YORK PROVIDE, AMONG OTHER THINGS,
THAT WITHOUT THE CONSENT OF THE INSURANCE COMMISSIONER OF THAT STATE, NO PERSON
MAY ACQUIRE CONTROL OF US AND THAT ANY PERSON POSSESSING 10% OR MORE OF THE
AGGREGATE VOTING POWER OF OUR COMMON STOCK (INCLUDING SHARES THAT MAY BE ISSUED
IF ALL CONVERTIBLE SECURITIES ARE CONVERTED) WILL BE PRESUMED TO HAVE ACQUIRED
CONTROL UNLESS EACH INSURANCE COMMISSIONER, UPON APPLICATION, HAS DETERMINED
OTHERWISE.

TABLE OF CONTENTS

PAGE
--------

Risk Factors................................................ 1
Where You Can Find More Information......................... 4
Summary..................................................... 4
Penn Treaty............................................... 4
Use of Proceeds............................................. 6
Ratio of Earnings To Fixed Charges.......................... 6
Description of the Securities To Be Offered................. 6
Description of Our Senior Debt Securities and Subordinated
Debt Securities......................................... 7
Description of Capital Stock.............................. 18
Description of Warrants................................... 24
Plan of Distribution........................................ 25
Legal Matters............................................. 26
Experts..................................................... 26

RISK FACTORS

You should carefully consider the following factors and other information in
this prospectus before deciding to invest in any of our securities.

WE WOULD SUFFER A FINANCIAL LOSS IF ACTUAL LOSSES AND EXPENSES ARE GREATER
THAN THE RESERVES.

Our reserves for losses and expenses are estimates for actual, future
reported and unreported claims and expenses. We compute the amount of these
reserves based on facts and circumstances known at the time the reserves are
established. In establishing these reserves, we use historical claims
information, industry statistics and other factors. We would suffer a financial
loss if our reserves are not sufficient to cover our actual losses and expenses.

WE MAY HAVE TO REDUCE OR REFUND PREMIUMS ON NEW PRODUCTS IF LOSS RATIOS ARE
TOO LOW AND MAY SUFFER FINANCIAL LOSS IF LOSS RATIOS ARE TOO HIGH.

We are subject to a greater risk for new insurance products because we
cannot estimate policy claims as well for new products. If as a result of actual
claims, we do not meet state mandated loss ratios for a new product, state
insurance regulators may require us to reduce or refund the premiums on these
new products. Because of our relatively limited claims experience with newer
product areas and the introduction of existing products in new markets, we may
also incur higher than expected loss ratios. In response to these higher than
expected loss ratios, we may increase our reserve levels for these new products.
If we fail to anticipate the need for reserve increases, we may suffer a
financial loss because the reserves may not be adequate to cover the actual
losses.

WE MAY RECOGNIZE A DISPROPORTIONATE AMOUNT OF POLICY COSTS IN ONE FINANCIAL
REPORTING PERIOD IF OUR ESTIMATE FOR THE LIFE OF A POLICY IS INACCURATE OR
IF POLICIES ARE TERMINATED EARLY.

In our sale of insurance policies, we recognize the policy acquisition costs
over the life of the policy. These costs include all expenses that are directly
related to and vary with the acquisition of the policy, including commission,
underwriting and other expenses. We use actuarial assumptions to determine the
time period over which to spread these policy costs. If these actuarial
assumptions are inaccurate, we would recognize a disproportionate amount of
these expenses at one time which would negatively affect our results of
operations for that period. In addition, these acquisition costs cannot be
spread over time if either we or the insured party terminates the policy early.
In that case, we would recognize the remaining costs in one lump sum at the time
of termination.

IF ANY OF THE POLICIES WE OFFER ARE NOT IN COMPLIANCE WITH STATE MINIMUM
STATUTORY LOSS RATIOS, WE MAY HAVE TO REDUCE OR REFUND PREMIUMS.

We are licensed by a number of states to do business as an insurance company
in those states. These states may change the minimum mandated statutory loss
ratios required for insurance companies, like ours, to maintain. These state
regulations also mandate the manner in which insurance companies, like ours, may
compute these ratios and the manner in which the states measure and enforce
compliance with these ratios. We are unable to predict the impact of:

- any changes in the mandatory statutory loss ratios for individual or group
long-term care policies;

- any changes in the minimum loss ratios for individual or group long-term
care or Medicare supplement policies; or

- any change in the manner in which these minimums are computed or enforced
in the future.

If we offer policies which are not in compliance with state minimum
statutory loss ratios, state regulators may require us to reduce or refund
premiums.

IF GOVERNMENTAL AUTHORITIES CHANGE THE REGULATIONS APPLICABLE TO THE
INSURANCE INDUSTRY, WE MAY HAVE TO REDUCE PREMIUMS.

We, as an insurance company, are subject to stringent state governmental
requirements including:

- licensure;

- benefit structure;

- payment of dividends;

- settlement of claims;

- capital levels;

- premium increases; and

- transfer of control of insurers.

The applicable governmental authority may change these laws and regulations,
including any of the following changes:

- rate rollback legislation;

- legislation to control premiums; and

- policy terminations and other policy terms, including premium levels.

Any of these changes may affect the amount we may charge for insurance
premiums. Because insurance premiums are our primary source of income, our
income may be negatively affected by any of these changes.

In addition, from time to time, our income may be affected by significant
federal and state legislative developments in long-term care and Medicare
coverage. Among the proposals currently pending in the United States Congress
that may affect our income are the implementation of minimum consumer protection
standards for inclusion in all long-term care policies, including:

- guaranteed premium rates;

- protection against inflation;

- limitations on waiting periods for pre-existing conditions;

- prohibiting "high pressure" sales tactics for long-term care insurance;

- guaranteed consumer access to information about insurers, including lapse
and replacement rates for policies and the percentage of claims our
insurance company have denied; and

- permitting premiums paid for long-term care insurance to be treated as
deductible medical expenses, with the amount of the deduction increasing
with the age of the taxpayer.

BECAUSE OUR COMPETITORS HAVE GREATER RESOURCES AND LARGER NETWORKS OF AGENTS
AND HIGHER RATINGS, WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.

We sell our products in highly competitive markets. We compete with large
national and smaller regional insurers, as well as specialty insurers. Many
insurers are larger, have greater resources, larger networks of agents and
higher ratings than us. In addition, we are also subject to competition from
other insurers with better breadth, flexibility of coverage and pricing. In
addition, we may be subject,

from time to time, to new competition resulting from changes in Medicare
benefits, as well as from additional private insurance carriers introducing
products similar to those offered by us. In addition, we compete with other
insurance companies for producing agents to market and sell our products.

Over the past three fiscal years, more than half of our premiums were from
sales of policies in Florida and Pennsylvania. Our ability to compete
successfully may suffer from competitive changes in these markets.

WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IF WE CANNOT RECRUIT AND RETAIN
INSURANCE AGENTS.

We continuously recruit and train independent agents to market and sell our
products. We may not be able to continue to attract and retain independent
agents to sell our products. We also engage marketing general agents from time
to time to recruit independent agents and develop networks of agents in various
states. Our business and ability to compete may suffer from the inability to
recruit and retain insurance agents and from the loss of services provided by
our marketing agents.

WE ARE LIABLE TO POLICYHOLDERS IF ANY OF OUR REINSURANCE AGREEMENTS ARE
INEFFECTIVE OR EXCEED ANTICIPATED LEVELS.

We obtain reinsurance from unaffiliated reinsurers on some of our policies
to:

- increase the number and size of the policies we may underwrite; and

- reduce the risk to which we are exposed.

If a third party insurer becomes insolvent or otherwise fails to honor its
obligations to us under any of our reinsurance agreements, we remain fully
liable to the policyholder.

We also act as reinsurer on some in-force policies which we have acquired
from unrelated insurance companies. We may have increased liability with respect
to these reinsurance policies if actual losses on these policies exceed levels
anticipated by us.

IF SENIOR CITIZENS ARE NOT ABLE TO AFFORD OUR POLICIES, OUR INCOME MAY
DECREASE.

Our insurance products are designed primarily for sale to persons age 65 and
over. Many of these persons live on fixed incomes and, as a result, are highly
sensitive to inflation and interest rate fluctuations, which affect their buying
power. Senior citizens are less able to afford our products in times of adverse
economic conditions and high interest rates. If senior citizens do not purchase
our policies, our income may decrease.

WE MAY EXPEND SIGNIFICANT CAPITAL TO KEEP PACE WITH DEVELOPMENTS IN THE
INSURANCE INDUSTRY AND FOR INTERNAL GROWTH.

The insurance industry may undergo development and change in the future and,
accordingly, new products and methods of service may also be introduced. In
order to keep pace with any new developments, we may need to expend significant
capital to offer new products and to train our employees for these products and
services. We may not be successful in developing new products and these capital
expenditures may have a material adverse effect on us.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission ("SEC") a
registration statement under the Securities Act for senior debt securities,
subordinated debt securities, preferred stock, common stock and warrants. This
prospectus, which is part of the registration statement, omits information from
the registration statement and its exhibits and schedules. We file annual,
quarterly and special reports, proxy statements and other information with the
SEC which you may read and copy at the SEC's public reference rooms located at
450 Fifth Street, N.W., Washington, D.C. 20549, 75 Park Place, New York, New
York 10007 and 219 South Dearborn Street, Chicago, Illinois 60604. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
You can also obtain copies of our filings with the SEC over the Internet at the
SEC's web site at http://www.sec.gov. Our common stock is listed on the NYSE
and, as a result, we also file reports, proxy statements and other information
with the NYSE.

The SEC allows us to "incorporate by reference" the information that we
file, which means that we can disclose important information by referring to
those documents. The information incorporated by reference is an important part
of this prospectus, and information that we file later with the SEC will
automatically supersede this information. We incorporate by reference the
documents filed with the SEC (File No. 0-15972) listed below and any future
filings made with the SEC under Sections 13(a), 13(c), 14 and 15(d) of the
Exchange Act, until this offering is terminated:

- our Annual Report on Form 10-K for the year ended December 31, 1999;

- our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2000,
June 30, 2000 and September 30, 2000;

- our Current Report on Form 8-K filed April 12, 2000; and

- the description of our common stock contained in our registration
statement filed pursuant to Section 12 of the Exchange Act, and any
amendments or reports filed for the purpose of updating this description.

We will provide at no cost to each person who receives a copy of this
prospectus, upon written or oral request, a copy of any and all of the documents
(without exhibits) incorporated by reference in this prospectus. You should
request copies from: Penn Treaty American Corporation, 3440 Lehigh Street,
Allentown, Pennsylvania 18103, Attention: Cameron B. Waite, Chief Financial
Officer (telephone number (610) 965-2222).

SUMMARY

This summary calls your attention to selected information about us and our
business, but may not contain all the information that is important to you. This
summary is qualified in its entirety by, and should be read in conjunction with,
the more detailed information and financial statements, including the notes
thereto, appearing elsewhere in this prospectus or incorporated herein by
reference. In this prospectus, we frequently use the terms "we" and "our" to
refer to Penn Treaty American Corporation and our subsidiaries.

PENN TREATY

We are one of the leading providers of long-term nursing home care and home
health care insurance. We market our products primarily to persons age 65 and
over through independent insurance agents and underwrite our policies through
three subsidiaries, Penn Treaty Network America Insurance Company, American
Network Insurance Company and American Independent Network Insurance Company of
New York. Our principal products are individual fixed, defined benefit accident
and health insurance policies covering long-term skilled, intermediate and
custodial nursing home care

and home health care. We design our policies to make the administration of
claims simple, quick and sensitive to the needs of our policyholders. As of
December 31, 1999, long-term nursing home care and home health care policies
accounted for approximately 95% of our total annualized premiums in-force.

We introduced our first long-term nursing home care insurance product in
1972 and our first home health care product in 1987. In late 1994, we introduced
our Independent Living(SM) policy which provides coverage over the full term of
the policy for home care services furnished by an unlicensed homemaker or
companion as well as a licensed care provider. In late 1996 and throughout 1997,
we began the introduction of our Personal Freedom policies, which provide
comprehensive coverage for nursing home and home health care. In late 1996, we
also introduced our Assisted Living policy, which, as a nursing home plan,
provides enhanced benefits and includes a home health care rider. During 1998,
we developed our Secured Risk Nursing Facility and Post Acute Recover Plans,
which provide limited benefits to higher risk applicants. Insureds may tailor
their policies and include an automatic annual benefit increase, benefits for
adult day-care centers and a return of premium benefit. We also market and sell
life, disability, Medicare supplement and other hospital care insurance
products.

Our objective is to strengthen our position as a leader in providing
long-term care insurance to senior citizens. To meet this objective and to
continue to increase profitability, we are implementing the following
strategies:

- developing and qualifying new products with state insurance regulatory
authorities;

- increasing the size and productivity of our network of independent agents;

- seeking to acquire complementary insurance companies and blocks of
in-force policies underwritten by other insurance companies;

- introducing existing products in newly licensed states;

- utilizing internet strategies for the marketing and underwriting of our
products; and

- entering marketing and administration agreements with third parties.

The shift in the population towards individuals over age 55 represents
significant opportunities for the long-term care insurance market as these
individuals begin to focus on their long-term care needs. According to a 1996
report by the U.S. Census Bureau, there are projected to be 39.7 million
individuals over age 65 and 75.1 million individuals over age 55 by 2010, as
compared to 1980 when there were 25.5 million individuals over age 65 and
47.3 million individuals over age 55. Trends in life expectancy of the United
States population also support the projected growth in long-term care insurance.
According to a 1999 report by the U.S. National Center for Life Statistics, life
expectancy has been increasing and is expected to increase to 77.4 years by 2010
from a current level of 76.4 years. At the same time, life expectancy among
individuals over age 65 has been steadily improving, which has resulted in
people living longer, healthy lives. Overall, we expect these trends to generate
awareness and demand for long-term care insurance while providing some
assurances that claim costs will not increase more than anticipated.

The rising cost of nursing and home health care further supports the
potential for long-term care insurance as a means to pay for such services.
According to a 1998 report by the U.S. Healthcare Financing Administration, the
combined cost of home health care and nursing home care was $20.0 billion in
1980. By 1996, this cost had risen to $108.7 billion. In addition, recent
legislative changes have continued to encourage individuals to use private
insurance for long-term care needs through the implementation of tax incentives
at both the national and state levels.

We believe that one of the principal methods of supporting our growth is
increasing the number of agents licensed to sell our products. We attract and
retain agents through competitive compensation arrangements, timely payment of
claims and a history of satisfied customers. Through seminars and

lectures, we train and educate our agents about our products and our operations,
including our rigorous underwriting procedures, in order to increase our agents'
productivity. In 2000, our policies were marketed through approximately 10,000
producing agents.

We are currently licensed to market products in 50 states and the District
of Columbia. Although not all of our products are currently eligible for sale in
all of these jurisdictions, we actively seek to expand the regions where we sell
our products. Our business is generated primarily in Florida, California,
Pennsylvania, Virginia, Illinois, and Arizona.

Our principal executive offices are located at 3440 Lehigh Street,
Allentown, Pennsylvania 18103, and our telephone number is (610) 965-2222.

USE OF PROCEEDS

Unless otherwise indicated in a supplement or supplements to this
prospectus, the net proceeds we receive from the sale of the securities offered
by this prospectus are expected to be used for general corporate purposes and as
statutory surplus to our subsidiary insurers. Any specific allocation of the
proceeds to a particular purpose that has been made at the date of any
prospectus supplement will be described in that supplement.

RATIO OF EARNINGS TO FIXED CHARGES

The following are our consolidated ratios of earnings to fixed charges for
each of the periods indicated:

SIX MONTHS YEARS ENDED DECEMBER 31,
ENDED ----------------------------------------------------
JUNE 30, 2000 1999 1998 1997 1996 1995
------------- -------- -------- -------- -------- --------
(UNAUDITED)

Ratio of earnings to fixed charges............... 7.0x 7.1x 8.3x 3.1x 24.5x 34.3x

The ratio of earnings to combined fixed charges and preferred stock
dividends for the identified periods are identical to the ratios of earnings to
fixed charges in the table because we had no issued and outstanding preferred
stock in any of those periods.

We determined the earnings in the calculation of the ratio of earnings to
fixed charges by increasing income before federal income taxes by an amount
equal to fixed charges. Fixed charges consist of interest expense on borrowings
(including capitalized interest) and one-third (the proportion deemed
representative of the interest portion) of rent expense.

DESCRIPTION OF THE SECURITIES TO BE OFFERED

We may offer and sell from time to time (i) our unsecured senior debt
securities or unsecured subordinated debt securities, consisting of notes or
other evidences of indebtedness, (ii) shares of our common stock, $.10 par
value, (iii) shares of our series preferred stock, $1.00 par value or
(iv) warrants to purchase Senior Debt Securities, Subordinated Debt Securities,
Common Stock or Preferred Stock. We may offer these securities in one or more
separate classes or series, in amounts, at prices and on terms to be determined
by market conditions at the time of sale and to be set forth in a prospectus
supplement. We may sell these securities for U.S. dollars, foreign denominated
currency or currency units. Amounts payable with respect to any such securities
may likewise be payable in U.S. dollars, foreign denominated currency or
currency units.

The securities offered by this prospectus may be offered in amounts, at
prices and on terms to be determined at the time of offering; provided, however,
that the aggregate initial public offering price of all the securities offered
by this prospectus will be limited to $75,000,000. Specific terms of the

securities offered by this prospectus will be set forth in an accompanying
prospectus supplement or supplements at the time of that offering, together with
the net proceeds from their sale.

DESCRIPTION OF OUR SENIOR DEBT SECURITIES AND SUBORDINATED DEBT SECURITIES

Our Senior Debt Securities and Subordinated Debt Securities (collectively,
"Debt Securities"), consisting of notes or other evidences of indebtedness, may
be issued from time to time under in one or more series, in the case of Senior
Debt Securities, under a Senior Debt Indenture (the "Senior Debt Indenture")
between us and the named trustee, which we anticipate to be First Union National
Bank, and in the case of Subordinated Debt Securities under a Subordinated Debt
Indenture (the "Subordinated Debt Indenture") between us and the named trustee,
which we anticipate to be First Union National Bank. The Senior Debt Indenture
and the Subordinated Debt Indenture are sometimes referred to in this prospectus
individually as an "Indenture" and together as the "Indentures." First Union
National Bank, in its capacity as the anticipated trustee under the Indentures,
is referred to hereinafter as "indenture trustee".

Each of the Indentures shall be included as an exhibit to the relevant
prospectus supplement pursuant to which the respective Debt Securities are
offered. The following description summarizes the material terms of the
Indentures and Debt Securities and is qualified in its entirety by reference to
the detailed provisions of the Debt Securities and the Indentures, which will
contain the full text of these provisions and other information regarding the
Debt Securities, including definitions of some of the terms used in this
prospectus. Wherever particular sections are defined or defined terms of the
Indentures are referred to, these sections or defined terms are incorporated
herein by reference as part of the statement made and the statement is qualified
in its entirety by such reference.

The Indentures will be substantially identical except for provisions
relating to subordination.

GENERAL

The Indentures will not limit the aggregate principal amount of Debt
Securities that may be issued and will provide that Debt Securities may be
issued from time to time in one or more series and may be denominated and
payable in U.S. dollars, foreign currencies or currency units.

The specific terms of a series of Debt Securities will be established in or
pusuant to a resolution of our Board of Directors or in one or more indentures
supplemental to an Indenture (each, an "Indenture Supplement"). Pursuant to the
Indentures, we will be able to establish different rights with respect to each
series of Debt Securities issued under such Indentures, including, pursuant to
an Indenture Supplement, different covenants and events of default.

The applicable prospectus supplement will provide information regarding the
specific terms of the Debt Securities, including: (i) the classification as
senior or subordinated Debt Securities and the specific title and designation,
aggregate principal amount (including any limit thereon), purchase price and
denominations of those Debt Securities; (ii) currency in which principal of,
premium, if any, on and/or any interest on those Debt Securities will or may be
payable; (iii) the date or dates on which the principal of those Debt Securities
is payable or the method of determining the same, if applicable; (iv) the rate
or rates (which may be fixed or variable) at which those Debt Securities will
bear interest, if any, or the method of determining interest payment dates, if
applicable; (v) the date or dates from which such interest, if any, will accrue
or the method of determining interest payment dates, if applicable, the interest
payment dates, if any, on which interest will be payable or the manner of
determining the same, if applicable, and the record dates for the determination
of holders to whom interest is payable on those Debt Securities; (vi) the place
or places where the principal of and premium, if any, on and interest on the
Debt Securities will be payable; (vii) any redemption, repayment or sinking fund
provisions; (viii) whether those Debt Securities are convertible into or
exchangeable for our common stock or other securities or rights of us or other
issuers and, if so, the

applicable conversion or exchange terms and conditions; (ix) whether the Debt
Securities will be issuable in registered form ("Registered Debt Securities") or
bearer form ("Bearer Debt Securities") or both and, if Bearer Debt Securities
are issuable, any restrictions applicable to the place of payment of any
principal of and premium, if any, on and interest on those Bearer Debt
Securities, to the exchange of one form for another and to the offer, sale and
delivery of those Bearer Debt Securities (except that under current United
States federal income tax law, Registered Debt Securities will not be
exchangeable into Bearer Debt Securities); (x) any applicable material United
States federal income tax consequences, including those related to the Debt
Securities issued at a discount below their stated principal amount; (xi) the
proposed listing; if any, of the Debt Securities on any securities exchange or
market; and (xii) any other specific terms pertaining to the Debt Securities,
whether in addition to, or modification or deletion of, the terms described
herein.

Unless otherwise specified in a prospectus supplement, Registered Debt
Securities will be issued only in denominations of U.S. $1,000 and any integral
multiple thereof.

Debt Securities will bear interest, if any, at a fixed rate or a floating
rate. Debt Securities bearing no interest or interest at a rate that at the time
of issuance is below the prevailing market rate will be sold at a discount below
their stated principal amount. Special United States federal income tax
considerations applicable to any discounted Debt Securities or to Debt
Securities issued at par which are treated as having been issued at a discount
for United States federal income tax purposes will be described in the relevant
prospectus supplement.

REGISTRATION AND TRANSFER

Debt Securities may be presented for exchange and Registered Debt Securities
may be presented for transfer in the manner, at the places and subject to the
restrictions described in the applicable prospectus supplement. These services
will be provided without charge, other than any tax or other governmental charge
payable in connection therewith, but subject to the limitations described in the
applicable prospectus supplement. Bearer Debt Securities and the related
coupons, if any, will be transferable by delivery.

GLOBAL DEBT SECURITIES

Registered Debt Securities of a series may be issued in the form of one or
more global securities (a "Global Security") that will be deposited with, or on
behalf of, a depositary (a "Depositary") or with a nominee for a Depositary
identified in the prospectus supplement relating to that series. In that case,
one or more Global Securities will be issued in a denomination or aggregate
denominations equal to the portion of the aggregate principal amount of
outstanding Registered Debt Securities of the series to be represented by the
Global Security or Securities. Unless and until it is exchanged in whole for
Registered Debt Securities in definitive registered form, a Global Security may
not be transferred except as a whole by the Depositary for the Global Security
to a nominee of the Depositary or by a nominee of the Depositary to the
Depositary or another nominee of the Depositary or by the Depositary or any such
nominee to a successor of the Depositary or a nominee of such successor.

Bearer Debt Securities of a series may also be issued in the form of one or
more Global Securities (a "Bearer Global Security") that will be deposited with
a Depositary for Euroclear System and Cedel Bank, S.A., or with a nominee for
the Depositary identified in the prospectus supplement relating to that series.
The specific terms and procedures, including the specific terms of the
depositary arrangement and any specific procedures for the issuance of Debt
Securities in definitive form in exchange for a Bearer Global Security, with
respect to any portion of a series of Debt Securities to be represented by a
Bearer Global Security will be described in the prospectus supplement relating
to that series.

The specific terms of the depositary arrangement with respect to any portion
of a series of Debt Securities to be represented by a Global Security will be
described in the prospectus supplement relating to that series. However, except
for Debt Securities issued in foreign currencies, unless otherwise specified in
the applicable prospectus supplement, The Depository Trust Company ("DTC") will
be the Depositary and the following depositary arrangements will apply.

DTC has advised us that DTC is a limited-purpose trust company organized
under the laws of the State of New York, a member of the Federal Reserve System,
a "clearing corporation" within the meaning of the Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its participating
organizations (collectively, the "Participants") and to facilitate the clearance
and settlement of transactions in those securities between Participants through
electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of certificates. The Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly (collectively, the "Indirect Participants").
Persons who are not Participants may beneficially own securities held by or on
behalf of DTC only through the Participants or the Indirect Participants. The
ownership interest and transfer of ownership interest of each actual purchaser
of each security held by or on behalf of DTC are recorded on the records of the
Participants and Indirect Participants.

DTC has also advised us that, pursuant to procedures established by it,
(i) upon deposit of a Global Security representing Debt Securities, DTC will
credit the accounts of the designated Participants with the applicable portions
of the principal amount of such Debt Securities and (ii) ownership of beneficial
interests in a Global Security representing Debt Securities will be shown on,
and the transfer of ownership thereof will be effected only through, records
maintained by DTC (with respect to the Participants) or by the Participants and
the Indirect Participants (with respect to other owners of beneficial
interests).

Investors in a Global Security representing Debt Securities may hold their
interests therein directly through DTC if they are Indirect Participants or
indirectly through organizations that are Indirect Participants. All beneficial
interests in a Global Security representing Debt Securities will be subject to
procedures and requirements of DTC. The laws of some states require that certain
persons take physical delivery of securities that they own in definitive form.
Consequently, the ability to transfer beneficial interests in a Global Security
representing Debt Securities to such persons will be limited to that extent.
Because DTC can act only on behalf of Participants, which in turn act on behalf
of Indirect Participants and certain banks, the ability of a person having
beneficial interests in a Global Security representing Debt Securities to pledge
such interests to persons or entities that do not participate in the DTC system,
or otherwise take actions in respect of such interests, may be affected by the
lack of a physical certificate evidencing such interests.

Payments in respect of a Global Security representing Debt Securities will
be payable in same-day funds by the indenture trustee to Cede & Co. as nominee
of DTC in its capacity as the holder thereof under the applicable Indenture.
Under the terms of each Indenture, the indenture trustee will treat the persons
in whose names Debt Securities, including a Global Security representing Debt
Securities, are registered as the owners thereof for the purpose of receiving
such payments and for any and all other purposes whatsoever. Consequently,
neither the indenture trustee nor any agent thereof has or will have any
responsibility or liability for (i) any aspect of DTC's records or any
Participant's or Indirect Participant's records relating to or payments made on
account of beneficial interests in a Global Security representing Debt
Securities, or for maintaining, supervising or reviewing any of DTC's records or
any Participant's or Indirect Participant's records relating to the beneficial
interests in a Global Security representing Debt Securities or (ii) any other
matter relating to the actions and

practices of DTC or any of its Participants or Indirect Participants. DTC has
advised us that its current practice, upon receipt of any payment in respect of
securities, such as a Global Security representing Debt Securities, is to credit
the accounts of the relevant Participants with the payment on the payment date,
in amounts proportionate to their respective holdings in principal amount of
beneficial interests in the relevant security as shown on the records of DTC
unless DTC has reason to believe it will not receive payment on such payment
date. Payments by the Participants and the Indirect Participants to the owners
of beneficial interests in a Global Security representing Debt Securities will
be governed by standing instructions and customary practices and will be the
responsibility of the Participants or the Indirect Participants and will not be
our responsibility or the responsibility of DTC or the indenture trustee.
Neither we nor the indenture trustee will be liable for any delay by DTC or any
of its Participants in identifying the owners of beneficial interests in a
Global Security representing Debt Securities, and we and the indenture trustee
may conclusively rely on and will be protected in relying on instructions from
DTC or its nominee for all purposes.

Beneficial interests in a Global Security representing Debt Securities will
trade in DTC's Same-Day Funds Settlement System and secondary market trading
activity in such interests will therefore settle in immediately available funds,
subject in all cases to the rules and procedures of DTC, the Participants and
the Indirect Participants.

Conveyance of notices and other communications by DTC to Participants, by
Participants to Indirect Participants and by Participants and Indirect
Participants to beneficial owners, and vice versa, will be governed by
arrangements among them, subject to statutory or regulatory requirements as may
be in effect from time to time. Neither we nor the indenture trustee will have
any responsibility or liability with respect thereto.

Prior to any redemption of Debt Securities covered by a Global Security, we
will provide DTC with notices of redemption containing all information required
by DTC's rules and procedures. Such notices will be provided to DTC for
distribution to Participants within the time periods established by DTC. If less
than the entire principal amount of Subordinated Debt Securities of a series
represented by a Global Security is to be redeemed, DTC's practice is to
determine by lot the amount of the interest of each Participant to be redeemed.

DTC has advised us that it will take any action permitted to be taken by a
holder of Debt Securities only at the direction of one or more Participants to
whose account with DTC interests in a Global Security representing Debt
Securities are credited and only in respect of such portion of the principal
amount of Debt Securities as to which such Participant or Participants has or
have given such direction.

The foregoing information concerning DTC and its book-entry system has been
obtained from sources that we and the indenture trustee believe to be reliable,
but neither we nor the indenture trustee takes responsibility for the accuracy
thereof.

Although DTC has agreed to the foregoing procedures to facilitate transfers
of beneficial interests in a Global Security representing Debt Securities among
Participants in DTC, it is under no obligation to follow or to continue to
follow such procedures, and such procedures may be discontinued at any time.
Neither we nor the indenture trustee will have any responsibility for the
performance by DTC, the Participants or the Indirect Participants of their
respective obligations under the rules and procedures governing DTC's
operations.

Under the applicable Indenture, a Global Security representing Debt
Securities will be exchangeable for Debt Securities in definitive form if
(i) DTC (x) notifies us that it is unwilling or unable to continue as depositary
therefor or (y) has ceased to be a clearing agency registered under the Exchange
Act, and we thereupon fail to appoint a successor depositary within 90 days,
(ii) we, in our sole discretion, elect to cause the issuance of our Debt
Securities in definitive form or (iii) there shall

have occurred and be continuing an Event of Default under the applicable
Indenture or any event which after notice or lapse of time or both would be an
Event of Default under such Indenture.

RANKING

SENIOR DEBT SECURITIES. Payment of the principal of and premium, if any, on
and interest on Senior Debt Securities will rank PARI PASSU with all of our
other unsecured and unsubordinated debt.

SUBORDINATED DEBT SECURITIES. Payment of the principal of, premium, if any,
and interest on Subordinated Debt Securities will, to the extent set forth in
the Subordinated Debt Indenture, be subordinated in right of payment to the
prior payment in full of all senior indebtedness. Upon any distribution to our
creditors in a liquidation or dissolution of us or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding related to us or
our property, in an assignment for the benefit of creditors or any marshalling
of our assets and liabilities, the holders of all senior indebtedness will first
be entitled to receive payment in full of all amounts due or to become due
thereon before the holders of the Subordinated Debt Securities will be entitled
to receive any payment in respect of the principal of, premium, if any, or
interest on the Subordinated Debt Securities (except that holders of
Subordinated Debt Securities may receive securities that are subordinated at
least to the same extent as the Subordinated Debt Securities to senior
indebtedness and any securities issued in exchange for senior indebtedness).

We also may not make any payment upon or in respect of the Subordinated Debt
Securities (except in Subordinated Debt Securities) and may not acquire from the
indenture trustee or the holder of any Subordinated Debt Securities for cash or
property (other than securities subordinated to at least the same extent as the
Subordinated Debt Securities to (i) senior indebtedness and (ii) any securities
issued in exchange for senior indebtedness) until senior indebtedness has been
paid in full if (i) a default in the payment of the principal of, premium, if
any, or interest on senior indebtedness occurs and is continuing beyond any
applicable period of grace, or (ii) any other default occurs and is continuing
with respect to senior indebtedness that permits holders of the senior
indebtedness as to which that default relates to accelerate its maturity and the
indenture trustee receives a notice of that default (a "Payment Blockage
Notice") from the representative or representatives of holders of at least a
majority of principal amount of senior indebtedness then outstanding. Payments
on the Subordinated Debt Securities may be resumed (i) in the case of a payment
default, upon the date on which that default is cured or waived, or (ii) in the
case of a default other than a non-payment default, the number of days after the
date on which the applicable Payment Blockage Notice is received as provided in
the relevant prospectus supplement unless the maturity of any senior
indebtedness has been accelerated. No new period of payment blockage may be
commenced within 360 days after the receipt by the indenture trustee of any
prior Payment Blockage Notice. No default, other than a nonpayment default, that
existed or was continuing on the date of delivery of any Payment Blockage Notice
to the indenture trustee will be, or be made, the basis for a subsequent Payment
Blockage Notice, unless that default has been cured or waived for a period of
not less than the number of days set forth in the relevant prospectus
supplement.

The term "senior indebtedness," with respect to the Subordinated Debt
Securities, means the principal of, premium, if any, on and interest on, and any
fees, costs, expenses and any other amounts (including indemnity payments)
related to the following, whether outstanding on the date of the Subordinated
Debt Indenture or thereafter incurred or created: (i) our indebtedness, matured
or unmatured, whether or not contingent, for money borrowed evidenced by notes
or other written obligations, (ii) any interest rate contract, interest rate
swap agreement or other similar agreement or arrangement designed to protect us
or any of our subsidiaries against fluctuations in interest rates, (iii) our
indebtedness, matured or unmatured, whether or not contingent, evidenced by
notes, debentures, bonds or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) including indebtedness under any
outstanding Senior Debt Securities, (iv) our obligations as

lessee under capitalized leases and under leases of property made as part of any
sale and leaseback transactions, (v) indebtedness of others of any of the kinds
described in the preceding clauses (i) through (iv) assumed or guaranteed by us
and (vi) renewals, extensions, modifications, amendments and refundings of, and
indebtedness or obligations of the kinds described in the preceding clauses
(i) through (iv), unless the agreement pursuant to which any such indebtedness
described in clauses (i) through (iv) is created, issued, assumed or guaranteed
expressly provides that the indebtedness is not senior or superior in right of
payment to the Subordinated Debt Securities. The following will not constitute
senior indebtedness: (i) any of our indebtedness or obligations in respect of
the Subordinated Debt Securities; (ii) any of our indebtedness to any of our
subsidiaries or other affiliates; (iii) any indebtedness that is subordinated or
junior in any respect to any of our other indebtedness other than senior
indebtedness; and (iv) any indebtedness incurred for the purchase of goods or
materials in the ordinary course of business.

In the event that the indenture trustee or any holder receives any payment
of principal or interest with respect to the Subordinated Debt Securities at a
time when payment is prohibited under the Subordinated Debt Indenture, the
payment shall be held in trust for the benefit of, and immediately be paid over
and delivered to, the holders of senior indebtedness or their representative as
their respective interests may appear. After all senior indebtedness is paid in
full and until the Subordinated Debt Securities are paid in full, holders will
be subrogated (equally and ratably with all other indebtedness PARI PASSU with
the Subordinated Debt Securities) to the rights of holders of senior
indebtedness to receive distributions applicable to senior indebtedness to the
extent that distributions otherwise payable to the holders have been applied to
the payment of senior indebtedness.

In addition, because our operations are conducted primarily through our
subsidiaries, claims of holders of indebtedness of our subsidiaries, as well as
claims of regulators and creditors of our subsidiaries, will have priority with
respect to the assets and earnings of our subsidiaries over the claims of our
creditors including holders of the Subordinated Debt Securities. The
Subordinated Debt Indenture will not limit the amount of additional indebtedness
which any of our subsidiaries can create, incur, assume or guarantee.

Because of these subordination provisions, in the event of our liquidation
or insolvency or the liquidation or insolvency of any of our subsidiaries,
holders of Subordinated Debt Securities may recover less, ratably, than the
holders of senior indebtedness.

PAYMENT AND PAYING AGENTS

Unless otherwise indicated in the relevant prospectus supplement, payment of
principal of and premium, if any, on and interest on Debt Securities will be
made at the office of the indenture trustee in the City of Philadelphia or at
the office of any other paying agent or paying agents as we may designate from
time to time, except that at our option, payment of any interest may be made,
except in the case of a Global Security representing Debt Securities, by
(i) check mailed to the address of the person appearing in the applicable
securities register or (ii) transfer to an account maintained by the person as
specified in the securities register, provided that proper transfer instructions
have been received by the relevant record date. Payment of any interest on any
Debt Securities will be made to the person in whose name those Debt Securities
are registered at the close of business on the record date for interest, except
in the case of defaulted interest. We may at any time designate additional
paying agents or rescind the designation of any paying agent; provided, however,
we will at all times be required to maintain a paying agent in each place of
payment for Debt Securities.

Any moneys deposited with the indenture trustee or any paying agent, or then
held by us in trust, for the payment of the principal of and premiums, if any,
on or interest on any Debt Securities and remaining unclaimed for two years
after such principal and premium, if any, or interest has become due and payable
shall, at our request, be paid to us and the holder of Debt Securities shall
thereafter look, as a general unsecured creditor, only to us for payment.

CONVERSION RIGHTS

The terms and conditions, if any, on which Debt Securities are convertible
into or exchangeable for our common stock or our other securities will be set
forth in the prospectus supplement. These terms will include the conversion or
exchange price, the conversion or exchange date(s) or period(s), provisions as
to whether conversion or exchange will be at our option or the option of the
holder, the events requiring an adjustment of the conversion or exchange price
and provisions affecting conversion or exchange in the event of the redemption
of Debt Securities.

MERGER, CONSOLIDATION AND SALE OF ASSETS

Each Indenture will prohibit us from consolidating with or merging with or
into, or conveying, transferring or leasing all or substantially all our assets
(determined on a consolidated basis), to any person unless: (i) either we are
the successor company which results or survives or the successor company is a
person organized and existing under the laws of the United States or any state
thereof or the District of Columbia, and the successor company (if not us)
expressly assumes by a supplemental indenture, executed and delivered to the
indenture trustee, in form satisfactory to the indenture trustee, all of our
obligations under the applicable Indenture and Debt Securities, including the
conversion rights described in any prospectus supplement, (ii) immediately after
giving effect to the transaction, no event of default has happened and is
continuing and (iii) we deliver to the indenture trustee an officers'
certificate and an opinion of counsel, each stating that the transaction and the
supplemental indenture (if any) comply with the applicable Indenture.

CHANGE OF CONTROL

Upon the occurrence of a change of control, each holder of Debt Securities
will have the right to require that we repurchase that holder's Debt Securities
in whole or in part in integral multiples of $1,000, at a purchase price in cash
in an amount equal to the principal amount thereof, together with accrued and
unpaid interest to the date of purchase, pursuant to an offer (the "change of
control offer") made in accordance with the procedures described below and the
other provisions in the applicable Indenture.

The term "change of control" means an event or series of events in which
(i) any "person" or "group (as these terms are used in Sections 13(d) and 14(d)
of the Exchange Act) acquires "beneficial ownership" (as determined in
accordance with Rule 13d-3 under the Exchange Act), directly or indirectly, of
more than 50% of our total voting stock (as defined below) at an Acquisition
Price (as defined below) less than the conversion price then in effect with
respect to Debt Securities and (ii) the holders of the common stock receive
consideration which is not all or substantially all common stock that is (or
upon consummation of or immediately following these event or events will be)
listed on a United States national securities exchange or approved for quotation
on the Nasdaq Stock Market or any similar United States system of automated
dissemination of quotations of securities' prices; provided, however, that any
person or group will not be deemed to be the beneficial owner of, or to
beneficially own, any voting stock tendered in a tender offer until the tendered
voting stock is accepted for purchase under the tender offer. The term "voting
stock" means stock of the class or classes pursuant to which the holders have
the general voting power under ordinary circumstances to elect at least a
majority of the board of directors.

Within 30 days following any change of control, we shall send by first-class
mail, postage prepaid, to the indenture trustee and to each holder of Debt
Securities, at the holder's address appearing in the securities register, a
notice stating, among other things, that a change of control has occurred, the
purchase price, the purchase date, which shall be a business day no earlier than
30 days nor later than 60 days from the date such notice is mailed, and certain
other procedures that a holder of

Subordinated Debt Securities must follow to accept a change of control offer or
to withdraw such acceptance.

We will comply, to the extent applicable, with the requirements of
Rule 13e-4 and Rule 14e-1 under the Exchange Act and other securities laws or
regulations, to the extent these laws are applicable, in connection with the
repurchase of Debt Securities as described above.

The occurrence of some of the events that would constitute a change of
control may constitute a default under our mortgage. Our future indebtedness may
contain prohibitions of some events which would constitute a change of control
or require us to offer to repurchase such indebtedness upon a change of control.
Moreover, the exercise by the holders of Debt Securities of their right to
require us to purchase Debt Securities could cause a default under such
indebtedness, even if the change of control itself does not, due to the
financial effect of such purchase on us. Finally, our ability to pay cash to
holders of Debt Securities upon a purchase may be limited by our then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required purchases. Furthermore, the change
of control provisions may in certain circumstances make more difficult or
discourage a takeover of us and the removal of the incumbent management.

EVENTS OF DEFAULT AND REMEDIES

An Event of Default will be defined in each Indenture as being: default in
payment of the principal of or premium, if any, on Debt Securities when due at
maturity, upon redemption or otherwise, including our failure to purchase Debt
Securities when required (whether or not such payment shall be prohibited by the
subordination provisions of the applicable Indenture); default for 30 days in
payment of any installment of interest on Debt Securities (whether or not such
payment shall be prohibited by the subordination provisions of the applicable
Indenture); our default for 90 days after notice in the observance or
performance of any other covenants in the applicable Indenture; or certain
events involving our bankruptcy, insolvency or reorganization. Each Indenture
will provide that the indenture trustee may withhold notice to the holders of
Debt Securities of any default (except in payment of principal, premium, if any,
or interest with respect to Debt Securities) if the indenture trustee, in good
faith, considers it in the interest of the holders of Debt Securities to do so.

Each Indenture will provide that if an Event of Default (other than an Event
of Default with respect to certain of our payment obligations or the entering of
a judgment against us or any of our subsidiaries involving liabilities of
$10,000,000 or more and such judgment has not been vacated, discharged or
satisfied within 60 days) shall have occurred and be continuing, unless
otherwise provided in a prospectus supplement, the indenture trustee or the
holders of not less than 25% in principal amount of Debt Securities then
outstanding may declare the principal of and premium, if any, on Debt Securities
to be due and payable immediately, but if we shall pay or deposit with the
indenture trustee a sum sufficient to pay all matured installments of interest
on all Debt Securities and the principal and premiums, if any, on all Debt
Securities that have become due other than by acceleration and certain expenses
and fees on the indenture trustee and if we shall deem all defaults (except the
nonpayment of interest on, premium, if any, and principal of any Debt Securities
which shall have become due by acceleration) and certain other conditions are
met, such declaration may be canceled and past defaults may be waived by the
holders of a majority in principal amount of Debt Securities then outstanding.

The holders of a majority in principal amount of Debt Securities then
outstanding shall have the right to direct the time, method and place of
conducting any proceedings for any remedy available to the indenture trustee,
subject to certain limitations that will be specified in the applicable
Indenture. The applicable Indenture will provide that, subject to the duty of
the indenture trustee following an Event of Default to act with the required
standard of care, the indenture trustee will not be under an obligation to
exercise any of its rights or powers under such Indenture at the request or
direction of

any of the holders, unless the indenture trustee receives satisfactory indemnity
against any associated costs, liability or expense.

SATISFACTION AND DISCHARGE; DEFEASANCE

Each Indenture will cease to be of further effect as to all outstanding Debt
Securities (except as to (i) rights of the holders of Debt Securities to receive
payments of principal of, premium, if any, and interest on, the Debt Securities,
(ii) rights of holders of Debt Securities to convert to common stock, (iii) any
right of optional redemption, (iv) any rights of registration of transfer and
exchange, (v) substitution of apparently mutilated, defaced, destroyed, lost or
stolen Debt Securities, (vi) rights, obligations and immunities of the indenture
trustee under the applicable Indenture and (vii) rights of the holders of Debt
Securities as beneficiaries of the applicable Indenture with respect to the
property so deposited with the indenture trustee payable to all or any of them)
if (A) we will have paid or caused to be paid the principal of, premium, if any,
and interest on Debt Securities as and when the same will have become due and
payable or (B) all outstanding Debt Securities (except lost, stolen or destroyed
Debt Securities which have been replaced or paid) have been delivered to the
indenture trustee for cancellation or (C) (x) Debt Securities not previously
delivered to the indenture trustee for cancellation will have become due and
payable or are by their terms to become due and payable within one year or are
to be called for redemption under arrangements satisfactory to the indenture
trustee upon delivery of notice and (y) we will have irrevocably deposited with
the indenture trustee, the trust funds, cash, in an amount sufficient to pay
principal of and interest on the outstanding Debt Securities, to maturity or
redemption, as the case may be. Such trust may only be established if such
deposit will not result in a breach or violation of, or constitute a default
under, any agreement or instrument pursuant to which we are a party or by which
we are bound and we have delivered to the indenture trustee an officers'
certificate and an opinion of counsel, each stating that all conditions related
to such defeasance have been complied with.

Each Indenture will also cease to be in effect (except as described in
clauses (i) through (vii) in the immediately preceding paragraph) and the
indebtedness on all outstanding Debt Securities will be discharged on a
specified day set forth in the relevant prospectus supplement after our
irrevocable deposit with the indenture trustee in trust, specifically pledged as
security for, and dedicated solely to, the benefit of the holders of Debt
Securities of cash, U.S. Government Obligations (as will be defined in the
applicable Indenture) or a combination thereof, in an amount sufficient, in the
opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the indenture trustee,
to pay the principal of, premium, if any, and interest on Debt Securities then
outstanding in accordance with the terms of the applicable Indenture and Debt
Securities ("legal defeasance"). Such legal defeasance may only be effected if
(i) such deposit will not result in a breach or violation of, or constitute a
default under, any agreement or instrument to which we are a party or by which
we are bound, (ii) we have delivered to the indenture trustee an opinion of
counsel stating that (A) we have received from, or there has been published by,
the Internal Revenue Service a ruling or (B) since the date of the applicable
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, based thereon, the holders of Debt Securities
will not recognize income, gain or loss for federal income tax purposes as a
result of such deposit, defeasance and discharge by us and will be subject to
federal income tax on the same amount and in the same manner and at the same
time as would have been the case if such deposit, defeasance and discharge had
not occurred, (iii) we have delivered to the indenture trustee an opinion of
counsel to the effect that after the specified day in the relevant prospectus
supplement following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally and (iv) we have delivered to the
indenture trustee an officers' certificate and an opinion of counsel stating
that all conditions related to the defeasance have been complied with.

We may also be released from our obligations under the covenants described
above under "--Merger, Consolidation and Sale of Assets" with respect to Debt
Securities outstanding on the specified day in the relevant prospectus
supplement after our irrevocable deposit with the indenture trustee, in trust,
specifically pledged as security for, and dedicated solely to, the benefit of
the holders of Debt Securities, of cash, U.S. Government Obligations or a
combination thereof, in an amount sufficient in the opinion of a nationally
recognized firm of independent public accountants expressed in written
certification thereof delivered to the indenture trustee, to pay the principal
of, premium, if any, and interest on Debt Securities then outstanding in
accordance with the terms of the applicable Indenture and Debt Securities
("covenant defeasance"). Such covenant defeasance may only be effected if
(i) such deposit will not result in a breach or violation of, or constitute a
default under, any agreement or instrument to which we are a party or by which
we are bound, (ii) we have delivered to the indenture trustee an officers'
certificate and an opinion of counsel to the effect that the holders of Debt
Securities will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and covenant defeasance by us and will be
subject to federal income tax on the same amount, in the same manner and at the
same times as would have been the case if such deposit and covenant defeasance
had not occurred, (iii) we have delivered to the indenture trustee an opinion of
counsel to the effect that after the specified day in the relevant prospectus
supplement following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally and (iv) we have delivered to the
indenture trustee an officers' certificate and an opinion of counsel stating
that all conditions relating to the covenant defeasance have been complied with.
Following such covenant defeasance, we will no longer be required to comply with
the obligations described above under "--Merger, Consolidation and Sale of
Assets" and will have no obligation to repurchase Debt Securities.

MODIFICATIONS OF THE INDENTURES

Each Indenture will contain provisions permitting us and the indenture
trustee, with the consent of the holders of not less than a majority in
principal amount of Debt Securities at the time outstanding, to modify the
applicable Indenture or any supplemental indenture or the rights of the holders
of Debt Securities, except that no such modification shall (i) extend the fixed
maturity of any Debt Securities, reduce the rate or extend the time of payment
of interest thereon, reduce the principal amount thereof or premium, if any,
thereon, reduce any amount payable upon redemption thereof, change our
obligation to repurchase of any Debt Securities upon the happening of a change
of control, impair or affect the right of a holder to institute suit for the
payment thereof, change the currency in which Debt Securities are payable,
modify the subordination provisions of the applicable Indenture in a manner
adverse to the holders of Debt Securities or impair the right to convert Debt
Securities into our Common Stock subject to the terms set forth in the
applicable Indenture, without the consent of the holder of Debt Securities so
affected or (ii) reduce the aforesaid percentage of Debt Securities, without the
consent of the holders of all of Debt Securities then outstanding.

CERTAIN COVENANTS OF THE COMPANY

RESTRICTIONS ON CREATION OF SECURED DEBT. We will covenant that, so long as
any of Debt Securities remain outstanding, we will not, nor will we permit any
of our subsidiaries to issue, assume or guarantee any debt for money borrowed
(herein referred to as "debt") if such debt is secured by a mortgage, security
interest, pledge, lien or other encumbrance (any of such are hereinafter
referred to as a "lien") on any property, or on any shares of stock or
indebtedness of any subsidiary (whether such property, shares of stock or
indebtedness are now owned or acquired after the date of the applicable
Indenture), without, in any such case, effectively providing concurrently with
the issuance, assumption of or guarantee of any such debt that Debt Securities
(together with, if we shall so determine, any of our other indebtedness of or
guarantee ranking equally with Debt Securities issued under the applicable
Indenture and then existing or thereafter created) shall be secured equally and
ratably with

such debt. This restriction, however, shall not apply to debt secured by liens:
(i) on property, shares of stock or indebtedness of any corporation existing at
the time such corporation becomes a subsidiary, (ii) on property existing at the
time that it is acquired or to secure debt incurred for the purpose of financing
the purchase price of such property or improvements or construction on the
property, which debt is incurred prior to or within one year after the later of
such acquisition, completion of such construction, or the commencement of
commercial operation of such property; provided, however, that in the case of
any such acquisition, construction or improvement the lien shall not apply to
any property theretofore owned by us or a subsidiary, other than in the case of
any such construction or improvement, any theretofore unimproved real
improvement, on which the property is constructed, or the improvements are
located; (iii) securing debt owed by any of our subsidiaries to us or another
subsidiary; (iv) on property of a corporation existing at the time such
corporation is merged into or consolidated with us or one of our subsidiaries or
at the time of a sale, lease or other disposition of the properties of a
corporation as an entirety or substantially as an entirety to us or our
subsidiaries; (v) existing at the date of the applicable Indenture; or (vi) any
extension, renewal or replacement (or successive extensions, renewals or
replacements), in whole or in part, of any lien referred to in the foregoing
clauses (i) through (v) inclusive; provided, however, that the principal amount
of debt secured thereby shall not exceed the principal amount of debt so secured
at the time of such extension, renewal or replacement and that such extension,
renewal or replacement shall be limited to all or a part of the property which
secured the lien so extended, renewed or replaced (plus improvements on such
property).

Notwithstanding the above, we may, without securing Debt Securities, issue,
assume or guarantee secured debt which would otherwise be subject to the
foregoing restrictions, provided that the aggregate amount of debt secured by a
lien then outstanding (not including secured debt permitted under the foregoing
exceptions) does not exceed 5% of our consolidated shareholders' equity as of
the end of the last preceding year.

RESTRICTIONS OF SALE AND LEASEBACK TRANSACTIONS. Each Indenture will
restrict us or any of our subsidiaries from entering into sale and leaseback
transactions of any property (except for a temporary lease for a term of not
more than three years, leases between us and a subsidiary or between
subsidiaries, leases previously entered into or leases agreed to by the
indenture trustee) unless (i) we or one of our subsidiaries would be entitled to
issue, assume or guarantee debt secured by a lien upon the property involved at
least equal to the present value (discounted as provided in the applicable
Indenture) of the obligation of a lessee for rental payment during the remaining
term of any lease ("attributable debt") in respect of such transaction without
equally and ratably securing Debt Securities, provided that such attributable
debt shall then be deemed for all purposes under the applicable Indenture and
the provisions of this covenant to be debt subject to the covenant described
above under "--Restrictions on Creation of Secured Debt," or (ii) an amount in
cash equal to such attributable debt is applied to the retirement of debt then
having a maturity of more than one year.

GOVERNING LAW

The Indentures and Debt Securities will be governed by, and construed in
accordance with, the laws of the Commonwealth of Pennsylvania.

CONCERNING THE INDENTURE TRUSTEE

We anticipate appointing First Union National Bank, the anticipated
indenture trustee, as the paying agent, conversion agent, registrar and
custodian with regard to the Subordinated Debt Securities. The indenture trustee
and/or its affiliates may in the future provide banking and other services to us
in the ordinary course of their respective businesses. First Union National Bank
is also the trustee under our Indenture dated as of November 26, 1996.

DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock currently consists of 25,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock.

Our Preferred Stock may be issued from time to time in one or more series
with such designations, preferences and rights of the shares of such series and
the qualifications, limitations or restrictions thereon, including, but not
limited to, dividend rights, dividend rate or rates, conversion rights, voting
rights, rights and terms of redemption and the liquidation preference
established by our Board of Directors, without approval of the shareholders,
pursuant to the provisions of our Restated and Amended Articles of
Incorporation, as amended. The issuance of Preferred Stock may have the effect
of delaying, deferring or preventing a change in control without further action
by our shareholders.

At November 3, 2000, there were outstanding (i) 7,819,384 shares of Common
Stock and (ii) no shares of Preferred Stock.

The following summary description of our capital stock is qualified in its
entirety by reference to our Restated and Amended Articles of Incorporation, as
amended and our Amended and Restated By-Laws, copies of which are filed as
exhibits to our Registration Statement on Form S-1 (Reg. No. 33-92690) and our
Registration Statement on Form S-3 (Reg. No. 333-22125).

COMMON STOCK

DIVIDENDS.

Subject to the rights of the holders of Preferred Stock, our Common Stock
holders are entitled to receive dividends and other distributions in cash, stock
or property, when, as and if declared by the Board of Directors out of our
assets or funds legally available therefor and shall share equally on a per
share basis in all such dividends and other distributions.

VOTING RIGHTS.

At every meeting of shareholders, every Common Stock holder is entitled to
one vote per share. Subject to any voting rights which may be granted to holders
of Preferred Stock, any action submitted to shareholders is approved if the
number of votes cast in favor of such action exceeds the number of votes
required by the provisions of our Articles of Incorporation or by applicable
law, subject to applicable quorum requirements. Our Articles of Incorporation
require the affirmative vote of at least 67% of the voting power of all of our
shareholders with respect to fundamental corporate transactions including
mergers, consolidations and sales of all or substantially all assets. Our Bylaws
provide for action by written consent.

MISCELLANEOUS. The holders of Common Stock have no preemptive rights,
cumulative voting rights, or conversion rights and the Common Stock is not
subject to redemption.

The transfer agent and registrar with respect to the Common Stock is First
Union National Bank.

All shares of Common Stock offered pursuant to a prospectus supplement, or
issuable upon conversion, exchange or exercise of the securities offered by this
prospectus, will, when issued, be fully paid and non-assessable. The Common
Stock is traded on the New York Stock Exchange under the symbol "PTA."

Reference is made to the applicable prospectus supplement relating to the
Common Stock offered thereby for specific terms, including: (i) the number of
shares offered, (ii) the initial offering price, if any, and market price and
(iii) dividend information.

PREFERRED STOCK

The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any prospectus supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of our Articles of Incorporation (including any future
amendments thereto) and By-Laws (including any future amendments thereto).

GENERAL

Subject to limitations prescribed by Pennsylvania law and our Articles of
Incorporation, our Board of Directors is authorized to fix the number of shares
constituting each series of Preferred Stock and the designations, preferences
and relative or special rights and qualifications, limitations or restrictions
thereof, including such provisions as may be desired concerning voting,
redemption, dividends, dissolution or the distribution of assets, conversion or
exchange, and such other subjects or matters as may be fixed by resolution of
our Board of Directors. The Preferred Stock will, when issued, be fully paid and
non-assessable.

Reference is made to the prospectus supplement relating to the series of
Preferred Stock offered thereby for specific terms, including: (i) the series
and title, if any, of such Preferred Stock; (ii) the number of shares of such
Preferred Stock offered and the liquidation preference per share and the initial
offering price, if any, of such Preferred Stock; (iii) the dividend rate(s),
period(s) and/or payment date(s) or method(s) of calculation thereof applicable
to such Preferred Stock; (iv) whether dividends on such Preferred Stock shall be
cumulative or not and, if cumulative, the date from which dividends on such
Preferred Stock shall accumulate; (v) any voting rights granted to the holders
of such Preferred Stock or required by law; (vi) the procedures for any auction
and remarketing, if any, for such Preferred Stock; (vii) provisions for a
sinking fund, if any, for such Preferred Stock; (viii) provisions for
redemption, if applicable, of such Preferred Stock; (ix) any listing of such
Preferred Stock on any securities exchange; (x) the terms and conditions, if
applicable, upon which such Preferred Stock will be convertible into or
exchangeable for other securities or rights, or a combination of the foregoing,
including the name of the issuer of such securities or rights, the conversion or
exchange price or rate (or manner of calculation thereof) and the conversion or
exchange date(s) or period(s); (xi) a discussion of certain material U.S.
federal income tax considerations applicable to such Preferred Stock; and
(xiii) any other material terms, preferences, rights, limitations or
restrictions of such Preferred Stock.

RANK

Unless otherwise specified in the prospectus supplement, our Preferred Stock
will, with respect to (as applicable) dividend rights and rights upon our
liquidation, dissolution or winding-up, rank (i) senior to all series of our
Common Stock and to all of our equity securities the terms of which provide that
such equity securities are subordinated to our Preferred Stock; (ii) on a parity
with all of our equity securities other than those referred to in clauses
(i) and (iii); and (iii) junior to all of our equity securities which the terms
of such Preferred Stock provide will rank senior to it.

DIVIDENDS

Our holders of Preferred Stock of each series shall be entitled to receive,
when, as and if declared by our Board of Directors, out of our assets legally
available for payment, cash, property or stock dividends at such rates and on
such dates as will be set forth in the applicable prospectus supplement. Each
such dividend shall be payable to holders of record as they appear on our stock
transfer books on the record dates as shall be fixed by our Board of Directors.

Dividends on any series of the Preferred Stock may be cumulative or
non-cumulative, as provided in the applicable prospectus supplement. Dividends,
if cumulative, will accumulate from and after the date set forth in the
applicable prospectus supplement. If our Board of Directors fails to declare a
dividend payable on a dividend payment date on any series of the Preferred Stock
for which dividends are non-cumulative, then the holders of such series of the
Preferred Stock will have no right to receive a dividend in respect of the
dividend period ending on such dividend payment date, and we will have no
obligation to pay the dividend accrued for such period, whether or not dividends
on such series are declared payable on any future dividend payment date.

If any shares of the Preferred Stock of any series are outstanding, no full
dividends shall be declared or paid or set apart for payment on our Preferred
Stock of any other series ranking, as to dividends, on parity with or junior to
the Preferred Stock of such series for any period unless (i) if such series of
Preferred Stock has a cumulative dividend, full cumulative dividends on the
Preferred Stock of such series have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for all past dividend periods and the then current dividend period or
(ii) if such series of Preferred Stock does not have a cumulative dividend, full
dividends on the Preferred Stock of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for such payment for the then current dividend period ((i) and
(ii) are hereinafter collectively referred to as "all required dividends are
paid"). When dividends are not paid in full (or a sum sufficient for such full
payment is not so set apart) upon the shares of Preferred Stock of any series
and the shares of any other series of Preferred Stock ranking on a parity as to
dividends with the Preferred Stock of such series, all dividends declared upon
shares of Preferred Stock of such series and any other series of Preferred Stock
ranking on a parity as to dividends with such Preferred Stock shall be declared
PRO RATA so that the amount of dividends declared per share on the Preferred
Stock of such series and such other series of Preferred Stock shall in all cases
bear to each other the same ratio that accrued and unpaid dividends per share on
the shares of Preferred Stock of such series (which shall not include any
accumulation in respect of unpaid dividends for prior dividend periods if such
Preferred Stock does not have a cumulative dividend) and such other series of
Preferred Stock bear to each other. No interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments on
Preferred Stock of such series which may be in arrears.

Except as provided in the immediately preceding paragraph, unless all
required dividends are paid, no dividends (other than in Common Stock or other
stock ranking junior to the Preferred Stock of such series as to dividends and
upon our liquidation, dissolution or winding-up) shall be declared or paid or
set aside for payment or other distribution shall be declared or made upon the
Common Stock or any other of our stock ranking junior to or on parity with the
Preferred Stock of such series as to dividends or upon liquidation, nor shall
any Common Stock or any of our other capital stock ranking junior to or on
parity with the Preferred Stock of such series as to dividends or upon
liquidation, dissolution or winding-up of the Company be redeemed, purchased or
otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any shares of any such stock)
(except by conversion into or exchange for any of our other stock ranking junior
to the Preferred Stock of such series as to dividends and upon our liquidation,
dissolution or winding-up).

Any dividend payment made on shares of a series of Preferred Stock shall
first be credited against the earliest accrued but unpaid dividend due with
respect to shares of such series which remains payable.

REDEMPTION

If so provided in the applicable prospectus supplement, the shares of
Preferred Stock will be subject to mandatory redemption or redemption at our
option, as a whole or in part, in each case upon the terms, at the times and at
the redemption prices set forth in such prospectus supplement.

The prospectus supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by us in each year commencing after a
date to be specified, at a redemption price per share to be specified, together
with an amount equal to all accumulated and unpaid dividends thereon (which
shall not, if such Preferred Stock does not have a cumulative dividend, include
any accumulation in respect of unpaid dividends for prior dividend periods) to
the date of redemption. The redemption price may be payable in cash or other
property, as specified in the applicable prospectus supplement. If the
redemption price for Preferred Stock of any series is payable only from the net
proceeds of the issuance of our stock, the terms of such Preferred Stock may
provide that, if no such stock shall have been issued or to the extent the net
proceeds from any issuance are insufficient to pay in full the aggregate
redemption price then due, such Preferred Stock shall automatically and
mandatorily be converted into shares of our applicable stock pursuant to
conversion provisions specified in the applicable prospectus supplement.

Notwithstanding the foregoing, unless provided otherwise for any series of
Preferred Stock, unless all required dividends are paid: (i) no shares of the
applicable series of Preferred Stock shall be redeemed unless all outstanding
shares of Preferred Stock of such series are simultaneously redeemed and
(ii) we shall not purchase or otherwise acquire directly or indirectly any
shares of the applicable series of Preferred Stock (except by conversion into or
exchange for our stock ranking junior to the Preferred Stock of such series as
to dividends and upon our liquidation, dissolution or winding-up), provided,
however, that the foregoing shall not prevent the purchase or acquisition of
shares of Preferred Stock of such series pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding shares of Preferred
Stock of such series.

LIQUIDATION PREFERENCE

Upon any voluntary or involuntary liquidation, dissolution or winding-up of
us, then, before any distribution or payment shall be made to the holders of any
Common Stock or any other class or series of our stock ranking junior to such
series of Preferred Stock in the distribution of assets upon any liquidation,
dissolution or winding-up of us, the holders of each series of Preferred Stock
shall be entitled to receive out of our assets legally available for
distribution to shareholders liquidating distributions in the amount of the
liquidation preference per share (set forth in the applicable prospectus
supplement), plus an amount equal to all dividends accrued and unpaid thereon
(which shall not include any accumulation in respect of unpaid dividends for
prior dividend periods if such series of Preferred Stock does not have a
cumulative dividend). After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of such series of
Preferred Stock will have no right or claim to any of our remaining assets. In
the event that, upon any voluntary or involuntary liquidation, dissolution or
winding-up of us, our legally available assets are insufficient to pay the
amount of the liquidating distributions on all outstanding shares of such series
of Preferred Stock and the corresponding amounts payable on all shares of other
series of our stock ranking on a parity with such series of Preferred Stock in
the distribution of assets upon any liquidation, dissolution or winding-up of
us, then the holders of such class or series of Preferred Stock and all other
such classes or series of stock shall share ratably in any such distribution of
assets in proportion to the full liquidating distributions to which they would
otherwise be respectively entitled.

If liquidating distributions shall have been made in full to all holders of
shares of such series of Preferred Stock, our remaining assets shall be
distributed among the holders of any other series of

stock ranking junior to such series of Preferred Stock upon any liquidation,
dissolution or winding-up of us, according to their respective rights and
preferences and in each case according to their respective number of shares.

For such purposes, neither the consolidation or merger of us with or into
any other company nor the sale, lease, transfer or conveyance of all or
substantially all of our property or business shall be deemed to constitute our
liquidation, dissolution or winding-up.

VOTING RIGHTS

Holders of such series of Preferred Stock will not have any voting rights,
except as set forth below (unless otherwise specified in a prospectus
supplement) or as otherwise from time to time required by law or as indicated in
the applicable prospectus supplement.

Unless provided otherwise for any series of Preferred Stock, so long as any
shares of Preferred Stock remain outstanding, we shall not, without the
affirmative vote or consent of the holders of at least two-thirds of the shares
of each series of Preferred Stock outstanding at the time, given in person or by
proxy, either in writing or at a meeting (such series voting separately as a
class), (i) authorize or create, or increase the authorized or issued amount of,
any class or series of stock ranking senior to such series of Preferred Stock
with respect to payment of dividends or the distribution of assets upon our
liquidation, dissolution or winding-up or reclassify any of our authorized stock
into any such shares, or create, authorize or issue any obligation or security
convertible into or exchangeable for, or evidencing the right to purchase, any
such shares; or (ii) amend, alter or repeal the provisions of our Articles of
Incorporation in respect of such series of Preferred Stock, whether by merger,
consolidation or otherwise, so as to materially and adversely affect any right,
preference, privilege or voting power of such series of Preferred Stock or the
holders thereof; provided, however, that any increase in the amount of the
authorized Preferred Stock or the creation or issuance of any other series of
Preferred Stock, or any increase in the amount of authorized shares of such
series, in each case ranking on a parity with or junior to the Preferred Stock
of such series with respect to payment of dividends and the distribution of
assets upon liquidation, dissolution or winding-up, shall not be deemed to
materially and adversely affect such rights, preferences, privileges or voting
powers.

The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Stock shall have
been redeemed or called for redemption upon proper notice and sufficient funds
shall have been irrevocably deposited in trust to effect such redemption.

CONVERSION RIGHTS

The terms and conditions, if any, upon which shares of any series of
Preferred Stock are convertible into or exchangeable for other securities or
rights of us or other issuers, including, without limitation, Common Stock, Debt
Securities or another series of Preferred Stock, or any combination of the
foregoing, will be set forth in the applicable prospectus supplement relating
thereto. Such terms will include the name of the issuer of such other securities
or rights and the number or principal amount of the securities or rights into
which the Preferred Stock is convertible or exchangeable, the conversion or
exchange price or rate (or manner of calculation thereof), the conversion or
exchange date(s) or period(s), provisions as to whether the conversion or
exchange will be at the option of the holders of such series of Preferred Stock
or at our option and the events requiring an adjustment of the conversion or
exchange price or rate.

ANTI-TAKEOVER PROVISIONS

Our Board of Directors is divided into three classes, each of which is
comprised of three directors elected for a three-year term, with one class being
elected each year. Directors may be removed

without cause only with the approval of 67% of the voting power of our
shareholders entitled to vote in the election of directors. Any director elected
to fill a vacancy, however created, serves for the remainder of the term of the
director which he or she is replacing.

Our Restated and Amended Articles of Incorporation, as amended require the
affirmative vote of shareholders owning at least 67% of the outstanding shares
of our Common Stock in order for us to: amend, repeal or add any provision to
the Restated and Amended Articles of Incorporation, as amended; merge or
consolidate with another corporation, other than a wholly-owned subsidiary;
exchange shares of our Common Stock in such a manner that a corporation, person
or entity acquires our issued or outstanding shares of our Common Stock pursuant
to a vote of shareholders; sell, lease, convey, encumber or otherwise dispose of
all or substantially all of our property or business; or liquidate or dissolve
us.

In addition, the Restated and Amended Articles of Incorporation, as amended,
permit the Board of Directors to oppose a tender offer or other offer of our
securities, and allow the Board to consider any pertinent issue in determining
whether to oppose any such offer.

Pursuant to our Amended and Restated By-laws, shareholder nominations for
election to the Board of Directors must be made in writing and delivered or
mailed to our President not less than fifty days nor more than seventy-five days
prior to any meeting of shareholders called for the election of directors;
provided, however, that if less than fifty days' notice of the meeting is given
to shareholders, such nominations shall be mailed or delivered to the President
not later than the close of business on the seventh day following the day on
which the notice of the meeting was mailed.

The Pennsylvania Business Corporation Law of 1988, as amended (the "1988
BCL"), includes certain shareholder protection provision, some of which apply to
us and two of which, relating to "Disgorgement by Certain Controlling
Shareholders" and "Control Share Acquisitions," we have specifically opted out
of pursuant to an amendment to our by-laws. The following is a description of
those provisions of the 1988 BCL that still apply to us and that may have an
anti-takeover effect. This description of the 1988 BCL is only a summary
thereof, does not purport to be complete and is qualified in its entirety by
reference to the full text of the 1988 BCL.

(i) The control transaction provisions allow holders of voting shares of a
corporation to "put" their stock to an acquiror for fair value in the
event of a control transaction (the acquisition of twenty percent of the
voting stock of the corporation). Fair value is defined as not less than
the highest price paid by the accquiror during a certain 90 day period.

(ii) An interested shareholder (the beneficial owner of twenty percent of
the voting stock either of a corporation or of an affiliate of the
corporation who was at any time within the five-year period immediately
prior the date in question the beneficial owner of twenty percent of
the voting stock of the corporation) cannot engaged in a business
combination with the corporation for a period of five years unless:
(a) the board approves the business combination or the acquisition of
shares in advance, or (b) if the interested shareholder owns eighty
percent of such stock, the business combination is approved by a
majority of the disinterested shareholders and the transaction
satisfies certain "fair price" provisions. After the five-year period,
the same restrictions apply, unless the transaction either is approved
by a majority of the disinterested shareholders or satisfies the fair
price provisions.

(iii) Corporations may adopt shareholders' rights plans with discriminatory
provisions (sometimes referred to as poison pills) whereby options to
acquire shares or corporate assets are created and issued which contain
terms that limit persons owning or offering to acquire a specified
percentage of outstanding shares from exercising, converting,
transferring or receiving options and allows the exercise of options to
be limited to shareholders or triggered based upon control
transactions. Such poison pills take effect only in the event of a
control transaction.

Pursuant to the 1988 BCL, such poison pills may be adopted by the Board
without shareholder approval.

(iv) In taking action with respect to tender offers or takeover proposals
(as for any other action), directors may, in considering the best
interests of the corporation, consider the effects of any action upon
employees, suppliers, customers, communities where located and all
other pertinent factors.

(v) Shareholders of a corporation no longer have a statutory right to call
special meetings of shareholders or to propose amendments to the
articles under the provisions of the 1988 BCL.

The foregoing provisions may discourage certain types of transactions that
involve a change of control of us and ensure a measure of continuity in the
management of our business and affairs. While we do not currently have a
shareholder rights plan or poison pill, the effect of the above-described
provisions may be to deter hostile takeovers at a price higher than the
prevailing market price for our Common Stock and to permit current management to
remain in control of us. In some circumstances, certain shareholders may
consider these anti-takeover provisions to have disadvantageous effects. Tender
offers or other non-open market acquisitions of stock are frequently made at
prices above the prevailing market price of the company's stock. In addition,
acquisitions of stock by persons attempting to acquire control through market
purchases may cause the market price of the stock to reach levels that are
higher than would otherwise be the case. These anti-takeover provisions may
discourage any or all of such acquisitions, particularly those of less than all
of our shares, and may thereby deprive certain holders of our Common Stock of
any opportunity to sell their stock at a temporarily higher market price.

Pursuant to an amendment to our Amended and Restated By-laws adopted on
July 19, 1990, we opted out of the applicability of two additional statutory
anti-takeover provisions. The first, titled "Disgorgement by Certain Controlling
Shareholders Following Attempts to Acquire Control," would otherwise allow us to
recover all profits derived by any person or group that acquired control or
disclosed an intention to acquire voting power over twenty percent of our equity
securities on the disposition of any of our securities acquired within two years
prior or eighteen months after acquiring such control or announcing an intention
to that effect. The second, titled "Control Share Acquisition," would otherwise
suspend the voting rights of a shareholder when his or her ownership of our
securities crossed any of three thresholds (20%, 33% or 50%). The voting rights
are held in abeyance until the shareholders holding a majority of disinterested
shares vote to restore them. The inapplicability of these provisions mitigates
somewhat the deterrence of hostile anti-takeover attempts at prices in excess of
the prevailing market prices and lessens the ability of current management to
retain control of us.

In addition to provisions of the 1988 BCL, the Pennsylvania Insurance Code
provides that no person may acquire control of us unless such person has given
prior written notice to us and received the prior approval of the Pennsylvania
Insurance Commissioner. Any purchaser or holder of shares is presumed to have
acquired such control unless the Pennsylvania Insurance Commissioner, upon
receipt of an application, has determined otherwise.

DESCRIPTION OF WARRANTS

We may issue Warrants to purchase Debt Securities, Preferred Stock or Common
Stock (collectively, the "Underlying Warrant Securities"), and such Warrants may
be issued independently or together with any such Underlying Warrant Securities
and may be attached to or separate from such Underlying Warrant Securities. Each
series of Warrants will be issued under a separate warrant agreement (each a
"Warrant Agreement") to be entered into between us and a warrant agent ("warrant
agent"). The warrant agent will act solely as our agent in connection with the
Warrants of such series and will not assume any obligation or relationship of
agency for or with holders or beneficial owners of Warrants.

The applicable prospectus supplement will describe the specific terms of any
Warrants offered thereby, including: (i) the title of such Warrants; (ii) the
aggregate number of such Warrants; (iii) the price or prices at which such
Warrants will be issued; (iv) the currency or currencies, including composite
currencies, in which the exercise price of such Warrants may be payable;
(v) the designation and terms of the Underlying Warrant Securities purchasable
upon exercise of such Warrants; (vi) the price at which the Underlying Warrant
Securities purchasable upon exercise of such Warrants may be purchased;
(vii) the date on which the right to exercise such Warrants shall commence and
the date on which such right shall expire; (viii) whether such Warrants will be
issued in registered form or bearer form; (ix) if applicable, the minimum or
maximum amount of such Warrants which may be exercised at any one time; (x) if
applicable, the designation and terms of the Underlying Warrant Securities with
which such Warrants are issued and the number of such Warrants issued with each
such Underlying Warrant Security; (xi) if applicable, the date on and after
which such Warrants and the related Underlying Warrant Securities will be
separately transferable; (xii) information with respect to book-entry
procedures, if any; (xiii) if applicable, a discussion of certain United States
federal income tax considerations; and (xiv) any other terms of such Warrants,
including terms, procedures and limitations relating to the exchange and
exercise of such Warrants.

PLAN OF DISTRIBUTION

We may sell the securities offered by this prospectus (i) through
underwriters or dealers; (ii) through agents; (iii) directly to purchasers; or
(iv) through a combination of any such methods of sale. Any such underwriter,
dealer or agent may be deemed to be an underwriter within the meaning of the
Securities Act. The prospectus supplement relating to a series of the securities
being offered will set forth its offering terms, including the name or names of
any underwriters, dealers or agents, the purchase price of the securities being
offered and the proceeds to us from such sale, any underwriting discounts,
commissions and other items constituting underwriters' compensation, any public
offering price and any underwriting discounts, commissions and other items
allowed or reallowed or paid to dealers or agents and any securities exchanges
on which the securities offered by this prospectus may be listed.

If underwriters are used in the sale, the securities offered by this
prospectus will be acquired by the underwriters for their own account and may be
resold from time to time in one or more transactions, including negotiated
transactions, at a fixed price or prices, which may be changed, or at market
prices prevailing at the time of sale, or at prices related to such prevailing
market prices, or at negotiated prices. The securities offered by this
prospectus may be offered to the public either through underwriting syndicates
represented by one or more managing underwriters or directly by one or more of
such firms. Unless otherwise set forth in a prospectus supplement, the
obligations of the underwriters to purchase the securities offered by this
prospectus will be subject to certain conditions precedent and the underwriters
will be obligated to purchase all the securities if any are purchased. Any
public offering price and any discounts or concessions allowed or reallowed or
paid to dealers may be changed from time to time.

Any agent involved in the offer or sale of the securities offered by this
prospectus will be named, and any commissions payable by us to such agent will
be set forth, in a prospectus supplement. Unless otherwise indicated in a
prospectus supplement, any such agent will be acting on a reasonable efforts
basis for the period of its appointment.

If so indicated in a prospectus supplement, we will authorize underwriters,
dealers or agents to solicit offers by certain specified institutions to
purchase the securities offered by this prospectus from us at the public
offering price set forth in such prospectus supplement pursuant to delayed
delivery contracts providing for payment and delivery on a specified date in the
future. Such contracts will be subject to any conditions set forth in a
prospectus supplement and the prospectus supplement will set forth the
commission payable for solicitation of such contracts. The underwriters and
other persons

soliciting such contracts will have no responsibility for the validity or
performance of any such contracts.

The securities offered by this prospectus may also be offered and sold, if
so indicated in the prospectus supplement, in connection with a remarketing upon
their purchase, in accordance with a redemption or repayment pursuant to their
terms, or otherwise, by one or more firms ("marketing firms"), acting as
principals for their own accounts or as our agents. Any remarketing firm will be
identified and the terms of its agreement, if any, with us and our compensation
will be described in the prospectus supplement. Remarketing firms may be deemed
to be underwriters in connection with their remarketing of the securities
offered by this prospectus.

Underwriters, dealers, remarketing firms and agents may be entitled under
agreements entered into with us to indemnification by us against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
by us to payments they may be required to make in respect thereof, and may be
customers of, engage in transactions with or perform services for us in the
ordinary course of business.

LEGAL MATTERS

Ballard Spahr Andrews & Ingersoll, LLP, Philadelphia, Pennsylvania, has
passed on the validity of the issuance of each of the securities offered by this
prospectus, unless otherwise specified in a prospectus supplement.

EXPERTS

Our consolidated financial statements which are included in our most recent
Annual Report on Form 10-K have been audited and reported upon by
PricewaterhouseCoopers LLP, independent accountants, and are incorporated by
reference in this prospectus. These financial statements are incorporated by
reference in this prospectus in reliance on the report of PricewaterhouseCoopers
LLP, given on the authority of that firm as experts in accounting and auditing.

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[GRAPHIC]

PENN TREATY AMERICAN CORPORATION

Rights to Purchase 6 1/4% Convertible Subordinated Notes due 2008
$45,000,000 6 1/4% Convertible Subordinated Notes due 2008

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Prospectus Supplement

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DECEMBER 24, 2002

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