<SUBMISSION>
<ACCESSION-NUMBER>0001135428-03-000197
<TYPE>10-K
<PUBLIC-DOCUMENT-COUNT>8
<PERIOD>20021231
<FILING-DATE>20030328
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>DONEGAL GROUP INC
<CIK>0000800457
<ASSIGNED-SIC>6331
<IRS-NUMBER>232424711
<STATE-OF-INCORPORATION>DE
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>10-K
<ACT>34
<FILE-NUMBER>000-15341
<FILM-NUMBER>03624674
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>1195 RIVER RD PO BOX 302
<CITY>MARIETTA
<STATE>PA
<ZIP>17547-0302
<PHONE>7174261931
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>1195 RIVER ROAD
<STREET2>BOX 302
<CITY>MARIETTA
<STATE>PA
<ZIP>17547
</MAIL-ADDRESS>
</FILER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>d54732_10-k.txt
<TEXT>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K


[X]      ANNUAL  REPORT   PURSUANT  TO  SECTION  13  OR  15(d)  OF  THE
         SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

                                   OR

[ ]      TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________ to _________________

Commission file number 0-15341

                           DONEGAL GROUP INC.
         (Exact name of registrant as specified in its charter)

                DELAWARE                              23-2424711
     (State or other jurisdiction of               (I.R.S. Employer
     incorporation or organization)               Identification No.)


 1195 RIVER ROAD, MARIETTA, PENNSYLVANIA                  17547
 (Address of principal executive offices               (Zip code))


Registrant's telephone number, including area code: (888) 877-0600

Securities registered pursuant to Section 12(b) of the Act:  None.

           Securities registered pursuant to Section 12(g) of the Act:

                      CLASS A COMMON STOCK, $.01 PAR VALUE

                      CLASS B COMMON STOCK, $.01 PAR VALUE
                                (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]. No [ ].


<PAGE>


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ]. No [X].

On June 28, 2002, the aggregate market value (based on the closing sales prices
on that date) of the voting stock held by non-affiliates of the Registrant was
$31,102,112.

Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 6,187,569 shares of Class A
Common Stock and 2,988,757 shares of Class B Common Stock were outstanding on
March 11, 2003.

                      DOCUMENTS INCORPORATED BY REFERENCE:

1.   Portions of the Registrant's annual report to stockholders for the fiscal
     year ended December 31, 2002 are incorporated by reference into Parts I, II
     and IV of this report.

2.   Portions of the Registrant's proxy statement relating to the annual meeting
     of stockholders to be held April 17, 2003 are incorporated by reference
     into Part III of this report.


<PAGE>


                               DONEGAL GROUP INC.

                            INDEX TO FORM 10-K REPORT

<TABLE>

                                                                                                            PAGE
<S>               <C>                                                                                       <C>
PART I ...........................................................................................................1

    Item 1.       Business 1

    Item 2.       Properties.....................................................................................30

    Item 3.       Legal Proceedings..............................................................................30

    Item 4.       Submission of Matters to a Vote of Security Holders............................................30

PART II .........................................................................................................31

    Item 5.       Market for the Registrant's Common Equity and Related Stockholder Matters......................31

    Item 6.       Selected Financial Data........................................................................31

    Item 7.       Management's Discussion and Analysis of Financial Condition and Results of
                  Operations.....................................................................................31

    Item 8.       Financial Statements and Supplementary Data....................................................31

    Item 9.       Changes in and Disagreements with Accountants on Accounting and  Financial
                  Disclosure.....................................................................................31

PART III ........................................................................................................32

    Item 10.      Directors and Executive Officers of the Registrant.............................................32

    Item 11.      Executive Compensation.........................................................................32

    Item 12.      Security Ownership of Certain Beneficial Owners and Management.................................32

    Item 13.      Certain Relationships and Related Transactions.................................................33

    Item 14.      Controls and Procedures........................................................................33

PART IV .........................................................................................................34

    Item 15.      Exhibits, Financial Statement Schedules and Reports on Form 8-K................................34
</TABLE>


                                      -i-
<PAGE>


                                     PART I

ITEM 1.  BUSINESS.

     (a) GENERAL DEVELOPMENT OF BUSINESS.

     Donegal Group Inc. is an insurance holding company formed in August 1986,
which is headquartered in Pennsylvania and engages, through its subsidiaries, in
the property and casualty insurance business in 14 Mid-Atlantic and Southeastern
states. As used in this Report, "DGI" or the "Company" refers to Donegal Group
Inc. and its insurance subsidiaries, Atlantic States Insurance Company
("Atlantic States") and Southern Insurance Company of Virginia ("Southern"). To
reduce expenses and enhance operating efficiencies, during 2001, two of DGI's
former insurance company subsidiaries, Delaware Atlantic Insurance Company
("Delaware Atlantic") and Pioneer Insurance Company, a New York company
("Pioneer New York"), merged into Atlantic States. During 2002, one of DGI's
former insurance company subsidiaries, Pioneer Insurance Company, an Ohio
company ("Pioneer Ohio"), was merged into Atlantic States, and another of DGI's
former insurance subsidiaries, Southern Heritage Insurance Company ("Southern
Heritage"), was merged into Southern. Except as otherwise noted, all financial
information included in this Report for Atlantic States and Southern includes
the financial information of those former subsidiaries through the dates of the
mergers.

     Donegal Mutual Insurance Company (the "Mutual Company") currently owns
approximately 66% of the outstanding Class A Common Stock and approximately 62%
of the outstanding Class B Common Stock of the Company. DGI and its subsidiaries
and the Mutual Company underwrite a broad line of personal and commercial
coverages, consisting of private passenger and commercial automobile,
homeowners, commercial multi-peril, workers' compensation and other lines of
insurance.

     The Company's strategy is to seek growth both internally and through
acquisitions. Since the formation of the Company and Atlantic States in 1986,
the Company has completed the following acquisitions:

<TABLE>
<CAPTION>
                                                                                             NET PREMIUMS
                                                                                             WRITTEN YEAR
                                                                        YEAR                   PRIOR TO
    COMPANY ACQUIRED                                                  ACQUIRED               ACQUISITION
    ----------------                                                  --------               -----------
    <S>                                                               <C>                    <C>
    Southern Insurance Company of Virginia                              1988                     $1,128,843
    Delaware Atlantic Insurance Company(1)                              1995                      2,824,398
    Pioneer Insurance Company (Ohio)(2)                                 1997                      4,499,273
    Southern Heritage Insurance Company(3)                              1998                     32,002,540
    Pioneer Insurance Company (New York)(1)                             2001                      1,917,723
</TABLE>

     ------------
     (1) Merged into Atlantic States in 2001.
     (2) Merged into Atlantic States in 2002.
     (3) Merged into Southern in 2002.


                                      -1-


<PAGE>


     The Company evaluates other acquisition candidates on a continuing basis.
However, there can be no assurance as to whether or when the Company will effect
any additional acquisitions.

     In June 2002, the Mutual Company established an affiliation with Le Mars
Mutual Insurance Company of Iowa, an Iowa property and casualty insurance
company ("Le Mars"), under which the Mutual Company purchased a $4 million
surplus note from Le Mars and provides management services to Le Mars. Designees
of the Mutual Company constitute a majority of the members of the Board of
Directors of Le Mars. Neither the Company nor the Mutual Company owns any equity
interest in Le Mars. The financial results of Le Mars are not consolidated with
the financial results of the Company or the Mutual Company, and neither the
Company nor the Mutual Company bears any responsibility for the insurance
obligations of Le Mars.

     Atlantic States, which DGI organized in September 1986, participates in an
underwriting pool whereby it cedes to the Mutual Company the premiums, losses
and loss expenses from all of its insurance business and assumes from the Mutual
Company a specified portion of the pooled business, which also includes
substantially all of the Mutual Company's property and casualty insurance
business. Effective as of October 1, 1986, DGI entered into a pooling agreement
with the Mutual Company whereby Atlantic States assumed 35% of the pooled
business written or in force on or after October 1, 1986, with the Mutual
Company remaining solely responsible for any losses in the pooled business with
dates of loss on or before the close of business on September 30, 1986. Pursuant
to amendments to the pooling agreement subsequent to October 1, 1986, the Mutual
Company has increased the percentage of retrocessions of the pooled business to
Atlantic States, and, since July 1, 2000, 70% of the pooled business has been
retroceded to Atlantic States.

     From January 1, 1991 to December 31, 2001, Southern ceded 50% of its direct
written premiums to the Mutual Company. This reinsurance arrangement was
terminated effective December 31, 2001. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Item 7
hereof and Note 2 to the Consolidated Financial Statements incorporated by
reference herein.

     DGI and the Mutual Company jointly own Donegal Financial Services
Corporation ("Donegal Financial"), the holding company for Province Bank FSB
("Province Bank"), a federal savings bank headquartered in Marietta,
Pennsylvania. Province Bank opened for business in September 2000, and its
deposits are insured by the Savings Association Insurance Fund of the Federal
Deposit Insurance Corporation. Donegal Financial's capital stock is owned 55% by
the Mutual Company and 45% by the Company.

     Effective as of the close of business on April 19, 2001, the Company: (a)
effected a one-for-three reverse stock split of its previously authorized Common
Stock and redesignated that Common Stock as Class B Common Stock; and (b)
declared a dividend of two shares of Class A Common Stock payable on each share
of Class B Common Stock then outstanding. As a result of the reverse stock split
and the stock dividend, each person who held shares of the Company's previously
authorized Common Stock as of the close of business on April 19, 2001 thereafter
continued to hold, exclusive of any fractional interest in a share of Class B
Common Stock, the

                                      -2-
<PAGE>


same number of shares of the Company's capital stock, two-thirds of which were
shares of Class A Common Stock and one-third of which were shares of Class B
Common Stock. Except as otherwise required by law, each share of Class A Common
Stock is entitled one-tenth of a vote with respect to each matter submitted to
the stockholders of the Company for approval and each share of Class B Common
Stock is entitled to one vote with respect to each matter submitted to the
stockholders of the Company for approval. The Class A Common Stock and the Class
B Common Stock vote together as a single class unless otherwise required by law.
A slightly higher dividend is paid on the Class A Common Stock than on the Class
B Common Stock. All share information set forth in this Report for periods after
April 19, 2001 reflects these transactions.

     (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.

     The Company has three segments, which consist of its investment function,
its personal lines of insurance and its commercial lines of insurance. Financial
information about these segments is set forth in Note 17 to the Consolidated
Financial Statements incorporated by reference herein.

     (c) NARRATIVE DESCRIPTION OF BUSINESS.

RELATIONSHIP WITH THE MUTUAL COMPANY

     DGI's insurance operations are interrelated with the insurance operations
of the Mutual Company and, because of the percentage of the pooled business
assumed by DGI's subsidiary, Atlantic States, DGI's results of operations are
dependent to a material extent upon the success of the Mutual Company. In
addition, various reinsurance agreements exist between the Company's insurance
subsidiaries and the Mutual Company. The Mutual Company is responsible for
underwriting and marketing the pooled business and provides facilities,
employees and services required to conduct the business of DGI on a
cost-allocated basis. As of March 11, 2003, the Mutual Company owned
approximately 66.0% of DGI's Class A Common Stock and approximately 62.0% of
DGI's Class B Common Stock.

     Through the pool and through its insurance subsidiaries, DGI writes
personal and commercial property and casualty insurance lines, including
automobile, homeowners, commercial multi-peril, workers' compensation and other
lines of business.

     The Mutual Company provides all personnel for the Company and its insurance
subsidiaries. Expenses are allocated to the Company and Southern according to a
time allocation and estimated usage agreement, and to Atlantic States in
relation to the relative participation of the Mutual Company and Atlantic States
in the pooling agreement described herein. Expenses allocated to the Company
under such agreement were $28,586,888 in 2002.

     The Mutual Company leases office equipment and automobiles from the Company
under a lease dated January 1, 2000. The Mutual Company made lease payments to
the Company of $789,697 in 2002.

     Under the terms of the intercompany pooling agreement, Atlantic States
cedes to the Mutual Company the premiums, losses and loss expenses on all of its
insurance business.

                                      -3-
<PAGE>

Substantially all of the Mutual Company's property and casualty insurance
business is included in the pooled business. Pursuant to amendments to the
pooling agreement since its commencement on October 1, 1986, the Mutual Company
has increased the percentage of retrocessions of the pooled business to Atlantic
States, and, as most recently amended, effective as of July 1, 2000, 70% of the
pooled business is retroceded to Atlantic States. All premiums, losses, loss
expenses and other underwriting expenses are prorated among the parties on the
basis of their participation in the pool. The pooling agreement may be amended
or terminated at the end of any calendar year by agreement of the parties,
subject to approval by the Coordinating Committee discussed below. The
allocations of pool participation percentages between the Mutual Company and
Atlantic States are based on the pool participants' relative amounts of capital
and surplus, expectations of future relative amounts of capital and surplus and
the ability of the Company to raise capital for Atlantic States. The Company
does not currently anticipate a further increase in Atlantic States' percentage
of participation in the pool, nor does the Company intend to terminate the
participation of Atlantic States in the pooling agreement.

     The underwriting pool is intended to produce a more uniform and stable
underwriting result from year to year for the participants in the pool than they
would experience individually and to spread the risk of loss among all the
participants. Each company participating in the pool has at its disposal the
capacity of the entire pool, rather than being limited to policy exposures of a
size commensurate with its own capital and surplus. The additional capacity
exists because such policy exposures are spread among the pool participants,
each of which has its own capital and surplus.

     The Mutual Company and Province Bank are parties to a lease dated September
1, 2000, whereby Province Bank leases from the Mutual Company 3,600 square feet
of one of the Mutual Company's buildings located in Marietta, Pennsylvania for
an annual rent based on an independent appraisal. The Mutual Company and
Province Bank are also parties to an Administrative Services Agreement dated
September 1, 2000, whereby the Mutual Company is obligated to provide various
human resource services, principally payroll and employee benefits
administration, administrative support, facility and equipment maintenance
services and purchasing, to Province Bank, subject to the overall limitation
that the costs charged by the Mutual Company may not exceed the costs of
independent vendors for similar services and further subject to annual maximum
cost limitations specified in the Administrative Services Agreement. The Mutual
Company and the Company conduct business with Province Bank, primarily through
checking accounts, on the same terms and conditions as are offered to the other
large commercial customers of Province Bank.

     All of the Company's officers are officers of the Mutual Company, four of
the Company's six directors are directors of the Mutual Company and two of the
Company's executive officers are directors of the Mutual Company. The Company
and the Mutual Company maintain a Coordinating Committee, which consists of two
outside directors from each of the Company and the Mutual Company, none of whom
holds seats on both Boards. Under the Company's and the Mutual Company's
By-laws, any new agreement between the Company and the Mutual Company and any
proposed change in any existing agreement between the Company and the Mutual
Company must first be submitted for approval by the respective Boards of
Directors of the Company and the Mutual Company and, if approved, submitted to
the Coordinating Committee for approval. The proposed new agreement or change in
an existing

                                      -4-
<PAGE>


agreement will receive Coordinating Committee approval only if both of the
Company's Coordinating Committee members conclude the new agreement or change in
an existing agreement is fair and equitable to the Company and its stockholders
and if both of the Mutual Company's members conclude the agreement is fair and
equitable to the Mutual Company and its policyholders. The decisions of the
Coordinating Committee are binding on the Company and the Mutual Company. The
purpose of this provision is to protect the interests of the stockholders of the
Company and the interests of the policyholders of the Mutual Company. The
Coordinating Committee meets on an as-needed basis.

DGI'S BUSINESS STRATEGY

     DGI, in conjunction with the Mutual Company, has multiple strategies that
the management of DGI believes have resulted in underwriting results that are
favorable when compared to those of the property and casualty insurance industry
in general over the past five years. The principal strategies comprise the
following:

     o    A regional company concept designed to provide the advantages of local
          marketing, underwriting and claims servicing with the economies of
          scale from centralized accounting, administrative, investment, data
          processing and other services.

     o    An underwriting program and product mix designed to produce a
          Company-wide underwriting profit, i.e., a combined ratio of less than
          100%, from careful risk selection and adequate pricing.

     o    A goal of a closely balanced ratio between commercial business and
          personal business.

     o    An agent selection process that focuses on appointing agencies with
          proven market strategies for the development of profitable business
          and an agent compensation plan providing for incentive commissions
          based upon premium volume and profitability and the right to
          participate in the Company's Agency Stock Purchase Plan.

     o    A continuing effort to attract and retain qualified employees who
          receive incentive compensation based upon underwriting profitability.

     o    A goal of expanding operations in its current marketing areas in the
          Mid-Atlantic and Southeastern regions of the United States and into
          the Mid-Western region of the United States.

     o    A goal of obtaining sufficient rate increases in both commercial and
          personal lines to improve underwriting results while maintaining the
          existing book of business and preserving the Company's ability to
          write new business.

                                      -5-
<PAGE>


PROPERTY AND CASUALTY INSURANCE PRODUCTS AND SERVICES

     The following table indicates the percentage of DGI's net premiums written
represented by commercial lines and by personal lines for the years ended
December 31, 2002, 2001 and 2000:

<TABLE>
<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31,
                                                                        -----------------------------------------
                                                                        2002              2001               2000
                                                                        ----              ----               ----
<S>                                                                     <C>               <C>                <C>
Net Premiums Written:
     Commercial............................................             35.3%             36.9%              37.2%
     Personal..............................................             64.7              63.1               62.8
</TABLE>

     The commercial lines consist primarily of automobile, multi-peril and
workers' compensation insurance. The personal lines consist primarily of
automobile and homeowners insurance. These types of insurance are described in
greater detail below:

COMMERCIAL

     o    Commercial automobile - policies that provide protection against
          liability for bodily injury and property damage arising from
          automobile accidents, and provide protection against loss from damage
          to automobiles owned by the insured.

     o    Workers' compensation - policies purchased by employers to provide
          benefits to employees for injuries sustained during employment. The
          extent of coverage is established by the workers' compensation laws of
          each state.

     o    Commercial multi-peril - policies that provide protection to
          businesses against many perils, usually combining liability and
          physical damage coverages.

PERSONAL

     o    Private passenger automobile - policies that provide protection
          against liability for bodily injury and property damage arising from
          automobile accidents, and provide protection against loss from damage
          to automobiles owned by the insured.

     o    Homeowners - policies that provide coverage for damage to residences
          and their contents from a broad range of perils, including, fire,
          lightning, windstorm and theft. These policies also cover liability of
          the insured arising from injury to other persons or their property
          while on the insured's property and under other specified conditions.

     The  following  table sets forth the  combined  ratios of DGI,  prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") and statutory accounting  principles prescribed or permitted by
state insurance authorities. The GAAP combined ratio is the sum of the ratios of
incurred  losses  and  loss  expenses  to  net  premiums  earned  (loss  ratio),
underwriting  expenses to net premiums earned  (expense ratio) and  policyholder
dividends to net premiums earned (dividend ratio).  The statutory combined ratio
is the sum of the ratios of incurred  losses and loss  expenses to net  premiums
earned (loss  ratio),

                                      -6-
<PAGE>

underwriting  expense to net premiums  written  (expense ratio) and policyholder
dividends to net premiums written (dividend ratio).  These ratios can differ for
various  reasons,  including  the  following:  the Company  does not  anticipate
salvage and subrogation in recording losses for statutory purposes but does so
for GAAP;  and  guaranty  fund  assessments  are  estimated  and accrued when an
insolvency  occurs based on the ultimate loss from the  insolvency for statutory
purposes  while for GAAP the  assessments  are  accrued  on an  annual  basis as
premiums upon which the assessment will be based are written.

     The combined ratio is a traditional measure of underwriting  profitability.
When the  combined  ratio is under  100%,  underwriting  results  are  generally
considered  profitable.  Conversely,  when  the  combined  ratio  is over  100%,
underwriting results are generally considered  unprofitable.  The combined ratio
does not reflect investment income,  federal income taxes or other non-operating
income  or  expense.   DGI's  operating  income  depends  on  income  from  both
underwriting operations and investments.
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                              -------------------------------------
                                               2002            2001           2000
                                              -----           -----           -----

<S>                                            <C>            <C>             <C>
GAAP combined ratio ................           99.6%          103.8%          101.8%
                                              ======          ======          ======

Statutory operating ratios:
     Loss ratio ....................           69.1            70.5            68.8
     Expense ratio .................           28.3            31.4            30.9
     Dividend ratio ................            0.6             1.0             0.9
                                              -----           -----           -----
Statutory combined ratio ...........           98.0%          102.9%          100.6%
                                              =====           =====           =====
Industry statutory combined ratio(1)          105.7%          118.0%          110.5%
                                              =====           =====           =====
</TABLE>

------------
(1) Source: A.M. Best Company, Inc.

     DGI is required to participate in involuntary insurance programs for
automobile insurance, as well as other property and casualty insurance lines, in
states in which DGI operates. These programs include joint underwriting
associations, assigned risk plans, fair access to insurance requirements (FAIR)
plans, reinsurance facilities and windstorm plans. Legislation establishing
these programs requires all companies that write lines covered by these programs
to provide coverage (either directly or through reinsurance) for insureds who
cannot obtain insurance in the voluntary market. The legislation creating these
programs usually allocates a pro rata portion of risks attributable to such
insureds to each company on the basis of direct premiums written or the number
of automobiles insured. Generally, state law requires participation in such
programs as a condition to doing business. The loss ratio on insurance written
under involuntary programs has traditionally been greater than the loss ratio on
insurance in the voluntary market.

     During  2002,  2001 and 2000,  the Company  incurred  assessments  totaling
$486,190, $1,286,578 and $813,000, respectively, from the Pennsylvania Insurance
Guaranty  Association  relating to the insolvencies of three medical malpractice
insurers and Reliance Insurance Company.

     Also during 2002, the Company experienced an increase in costs with
assigned risk buyout programs in the State of New York. Under a buyout program,
one insurer pays another

                                       7

<PAGE>


issuer  to  assume  the  first   insurer's   obligations  to  participate  in  a
state-mandated  involuntary coverage program, such as an assigned risk plan, for
those who are unable to obtain  automobile  insurance  in the  voluntary  market
because of  underwriting  considerations.  Under these  programs,  the servicing
carrier  performs all  administrative  functions  relating to the assigned  risk
policies,  including collecting premiums and making payments for losses and loss
adjustment expenses.  The Company makes payments to the servicing carrier, which
includes an administrative fee, as well as a fee for rate inadequacy costs above
the collected  premiums.  The Company's costs for the buyout program in New York
State were $445,295 for the first five months of 2002,  compared to $146,218 for
all of 2001; as a result,  in June 2002 the Company  suspended  writing  private
passenger and commercial  automobile  lines in New York State. The rise in costs
in the  State  of New  York  was the  result  of  significant  increases  in the
population of assigned risk policies and the deteriorating  rate adequacy in the
residual market.

     The following table sets forth the net premiums written and combined ratios
by line of insurance for the business of DGI, prepared in accordance with
statutory accounting practices prescribed or permitted by state insurance
authorities, for the periods indicated.

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                           ----------------------------------------
                                             2002            2001            2000
                                           --------        --------        --------
                                                     (dollars in thousands)
<S>                                        <C>             <C>             <C>
Net Premiums Written:
Commercial:
     Automobile ....................        $17,451         $16,527         $15,112
     Workers' compensation .........         23,845          22,979          21,174
     Commercial multi-peril ........         25,536          24,174          21,722
     Other .........................          1,895           1,725           1,597
                                           --------        --------        --------
         Total commercial ..........         68,727          65,405          59,605
                                           --------        --------        --------
Personal:
     Automobile ....................         84,643          74,396          65,528
     Homeowners ....................         34,637          31,431          29,413
     Other .........................          6,497           5,796           5,576
                                           --------        --------        --------
         Total personal ............        125,777         111,623         100,517
                                           --------        --------        --------
Total business .....................       $194,504        $177,028        $160,122
                                           ========        ========        ========
Statutory Combined Ratios:
Commercial:
     Automobile ....................           88.9%          108.9%           99.9%
     Workers' compensation .........           94.9           109.9            91.9
     Commercial multi-peril ........           85.8            96.2           102.2
     Other .........................           72.4            77.0            39.0
                                           --------        --------        --------
         Total commercial ..........           89.3           103.7            96.2
                                           --------        --------        --------

Personal:
     Automobile ....................          106.4           104.5           100.3
     Homeowners ....................           97.4           101.6           110.9
     Other .........................           84.1            86.8           103.5
                                           --------        --------        --------
         Total personal ............          102.8           102.7           103.6
                                           --------        --------        --------
Total business .....................           98.0%          102.9%          100.6%
                                           ========        ========        ========
</TABLE>

PROPERTY AND CASUALTY UNDERWRITING

     The underwriting department is responsible for the establishment of
underwriting and risk selection guidelines and criteria for the various
insurance products written by DGI. The underwriting department, in conjunction
with the marketing representatives, works closely with DGI's independent
insurance agents to insure a comprehensive knowledge on the part of the agents
of DGI's underwriting requirements and risk selection process.

                                      -8-
<PAGE>


     DGI's underwriting and pricing strategy is designed to produce an
underwriting profit resulting in a Company-wide combined ratio below 100%. DGI
and the Mutual Company have a conservative underwriting philosophy, which, in
the opinion of management, is one of the prime reasons for DGI's favorable loss
ratios relative to the property and casualty insurance industry over the last
five years.

     The underwriting department has over time initiated risk inspection
procedures and underwriting analyses on a per risk and class of business basis.
It has also automated underwriting processing utilizing technology such as bar
coding. Management has established monitoring and auditing processes to verify
compliance with underwriting requirements and procedures.

     The underwriting department and the research and development department are
responsible for the development of new insurance products and enhancements of
existing products. Underwriting profitability is enhanced by the creation of
niche products focused on classes of business which traditionally have provided
underwriting profits.

     Reference is made to "Risk Factors" for information on risks that affect
the business of the Company and the Mutual Company.

MARKETING

     DGI's insurance products, together with the products of its subsidiaries
and the Mutual Company, are marketed through approximately 1,500 insurance
agencies. Business is written by either DGI or the Mutual Company depending upon
geographic location, agency license and product. Management has developed an
agency appointment procedure that focuses on appointing agencies with proven
marketing strategies for the development of profitable business. DGI regularly
evaluates its agency force and continues to strive to obtain and retain a
significant position within each agency relative to the amount of business
similar to that of DGI placed by the agency with other insurers. DGI and the
Mutual Company have developed a successful contingent commission plan for
agents, under which additional commissions are payable based

                                       9

<PAGE>


upon the volume of premiums  produced and the  profitability  of the business of
the agency  written  by DGI and the  Mutual  Company.  Management  believes  the
contingent commission program and the Company's Agency Stock Purchase Plans have
enhanced the ability of DGI and the Mutual Company to write profitable business.

     DGI has granted certain agents the authority to bind insurance within
underwriting and pricing limits specified by DGI without the prior approval of
DGI. However, DGI generally reviews all coverages placed by its agents and,
subject to applicable insurance regulations, may cancel the coverage if it is
inconsistent with DGI's guidelines.

     DGI believes that its regional structure enables it to compete effectively
with large national companies. This regional structure permits DGI to take
advantage of its knowledge of local operating territories and the opportunity to
form strong, long-term relationships with the agents that represent DGI and the
Mutual Company.

     DGI and the Mutual Company have developed comprehensive growth strategies
for each of the commercial and personal lines of insurance business. DGI has
focused on the small- to medium-sized commercial insurance markets, which have
traditionally been a more stable and profitable segment of the property and
casualty insurance business than the large commercial insurance markets.
Commercial lines marketing is characterized by account selling, in which
multiple lines of insurance are offered to a single policyholder.

     DGI believes that competitive and comprehensive products targeted to
selected classes of personal lines business, along with excellent service to
agents and policyholders, provides a foundation for growth and profitability. As
is customary in the industry, insureds are encouraged to place both their
homeowners and personal automobile insurance with DGI or the Mutual Company and
are offered a discount for doing so.

CLAIMS

     The claims department develops and implements policies and procedures for
the establishment of claim reserves and the timely resolution and payment of
claims. The management and staff of the claims department resolve policy
coverage issues, manage and process reinsurance recoveries and handle salvage
and subrogation matters.

     Insurance claims are normally investigated and adjusted by internal claims
adjusters and supervisory personnel. Independent adjusters are employed as
needed to handle claims in areas in which the volume of claims is not sufficient
to justify hiring internal claims adjusters. The litigation and personal injury
sections manage all claims litigation, and all claims above $35,000 require home
office review and settlement authorization.

     Field office staffs are supported by home office technical, litigation,
material damage, subrogation and medical audit personnel who provide specialized
claims support. An investigative unit attempts to prevent fraud and abuse and to
control losses.


                                       10

<PAGE>


LIABILITIES FOR LOSSES AND LOSS EXPENSES

     Liabilities for losses and loss expenses are estimates at a given point in
time of what the insurer expects to pay to claimants, based on facts and
circumstances then known, and it can be expected that the ultimate liability
will exceed or be less than such estimates. Liabilities are based on estimates
of future trends and claims severity, judicial theories of liability and other
factors. However, during the loss adjustment period, additional facts regarding
individual claims may become known, and consequently it often becomes necessary
to refine and adjust the estimates of liability. Any adjustments are reflected
in operating results in the period in which the changes in estimates are made.

     DGI  maintains  liabilities  for the  eventual  payment  of losses and loss
expenses with respect to both reported and unreported  claims.  Liabilities  for
loss  expenses are intended to cover the ultimate  costs of settling all losses,
including  investigation  and litigation  costs from such losses.  The amount of
liability for reported losses is primarily based upon a case-by-case  evaluation
of the type of risk involved and knowledge of the circumstances surrounding each
claim and the  insurance  policy  provisions  relating to the type of loss.  The
amount of liability for unreported claims and loss expenses is determined on the
basis of historical  information  by line of insurance.  Inflation is implicitly
provided for in the reserving  function through analysis of costs and trends and
reviews of historical  reserving results.  Liabilities are closely monitored and
are  recomputed  periodically  by the Company and the Mutual  Company  using new
information  on  reported  claims  and  a  variety  of  statistical  techniques.
Liabilities for losses are not discounted.

     The establishment of appropriate liabilities is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
exceed DGI's loss and loss expense reserves and have an adverse effect on DGI's
results of operations and financial condition. As is the case for virtually all
property and casualty insurance companies, DGI has found it necessary in the
past to revise estimated future liabilities for losses and loss expenses, and
further adjustments could be required in the future. On the basis of DGI's
internal procedures, which analyze, among other things, DGI's experience with
similar cases and historical trends such as reserving patterns, loss payments,
pending levels of unpaid claims and product mix, as well as court decisions,
economic conditions and public attitudes, management of DGI believes that
adequate provision has been made for DGI's liability for losses and loss
expenses.

     Differences between liabilities reported in DGI's financial statements
prepared on the basis of GAAP and its insurance subsidiaries' financial
statements prepared on a statutory accounting basis result from reducing
statutory liabilities for anticipated salvage and subrogation recoveries. These
differences amounted to $7,334,635, $8,197,948 and $8,042,860 at December 31,
2002, 2001 and 2000, respectively.


                                       11

<PAGE>


     The following tables set forth a reconciliation of the beginning and ending
net liability for unpaid losses and loss expenses for the periods indicated on a
GAAP basis for the Company.

<TABLE>
<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31,
                                                                       ----------------------------------------------
                                                                         2002               2001               2000
                                                                         ----               ----               ----
                                                                                        (in thousands)
<S>                                                                    <C>                <C>                <C>
Gross liability for unpaid losses and loss expenses
     at beginning of year..................................            $179,840           $156,476           $144,180
Less reinsurance recoverable...............................              65,296             53,767             44,946
                                                                       --------           --------           --------
Net liability for unpaid losses and loss expenses
     at beginning of year..................................             114,544            102,709             99,234
Provision for net losses and loss expenses for
     claims incurred in the current year...................             122,434            110,143            103,671
Change in provision for estimated net losses
     and loss expenses for claims incurred in
     prior years...........................................               6,834              8,035                712
                                                                       --------           --------           --------
Total incurred.............................................             129,268            118,178            104,383
Net losses and loss payments for claims
     incurred during:
The current year...........................................              67,656             63,290             61,848
Prior years................................................              46,869             43,053             39,060
                                                                       --------           --------           --------
Total paid.................................................             114,525            106,343            100,908
</TABLE>


<TABLE>
<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31,
                                                                       ----------------------------------------------
                                                                         2002               2001               2000
                                                                         ----               ----               ----
                                                                                        (in thousands)
<S>                                                                    <C>                <C>                <C>
Net liability for unpaid losses and loss expenses
     at end of year........................................             129,485            114,544            102,709
Plus reinsurance recoverable...............................              81,405             65,296             53,767
                                                                       --------           --------           --------
Gross liability for unpaid losses and loss expenses
     at end of year........................................            $210,692           $179,840           $156,476
                                                                       ========           ========           ========
</TABLE>

     The Company  recognized  an increase  in the  liability  of losses and loss
expenses of prior years of $6,834,000, $8,035,000 and $712,000 in 2002, 2001 and
2000, respectively.  These developments are primarily attributable to variations
from expected claim severity in the private passenger and commercial  automobile
liability,   workers'  compensation  and  commercial  multiple  peril  lines  of
business.

     The following table sets forth the development of the liability for net
unpaid losses and loss expenses for DGI on a GAAP basis from 1992 to 2002, with
supplemental loss data for 2001 and 2002. Loss data in the table includes
business assumed from the Mutual Company as part of the pooling arrangement.

     "Net liability at end of year for unpaid losses and loss expenses" sets
forth the estimated liability for net unpaid losses and loss expenses recorded
at the balance sheet date for each of the indicated years. This liability
represents the estimated amount of net losses and loss expenses for claims
arising in the current and all prior years that are unpaid at the balance sheet
date, including losses incurred but not reported.


                                       12

<PAGE>


     The "Liability reestimated as of" portion of the table shows the
reestimated amount of the previously recorded liability based on experience for
each succeeding year. The estimate is increased or decreased as payments are
made and more information becomes known about the severity of the remaining
unpaid claims. For example, the 1993 liability has developed an excess after
nine years, in that reestimated net losses and loss expenses are expected to be
$12.7 million less than the estimated liability initially established in 1993 of
$52.8 million.

     The "Cumulative excess" shows the cumulative excess at December 31, 2002 of
the liability estimate shown on the top line of the corresponding column. An
excess in liability means that the liability established in prior years exceeded
actual net losses and loss expenses or were reevaluated at less than the
original amount. A deficiency in liability would mean that the liability
established in prior years was less than actual net losses and loss expenses or
were reevaluated at more than the original amount.

     The "Cumulative amount of liability paid through" portion of the table
shows the cumulative net losses and loss expense payments made in succeeding
years for net losses incurred prior to the balance sheet date. For example, the
1993 column indicates that as of December 31, 2002 payments equal to $41.4
million of the currently reestimated ultimate liability for net losses and loss
expenses of $40.1 million had been made.

     During the past several years, the Company has experienced a period during
which redundancies in its loss and loss expense reserves have declined. In the
most recent two years, the Company has experienced deficiencies in these
reserves. These deficiencies were primarily related to the workers' compensation
and commercial automobile lines of business. During 2002, the Company addressed
the deficiencies in these two lines of business by strengthening both case basis
and IBNR reserves.

                                      -13-
<PAGE>


<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31
                                          ---------------------------------------------------------------

                                          1992       1993        1994        1995        1996        1997
                                          ----       ----        ----        ----        ----        ----
                                                                  (in thousands)
<S>                                      <C>        <C>         <C>         <C>         <C>         <C>
Net liability at end of
 year for unpaid losses
 and loss expenses.............          $44,339    $52,790     $63,317     $75,372     $78,889     $80,256
Net liability
 reestimated as of:
  One year later...............           45,408     50,583      60,227      72,380      77,400      77,459
  Two years later..............           42,752     48,132      56,656      70,451      73,438      76,613
  Three years later............           40,693     44,956      54,571      66,936      71,816      74,851
  Four years later.............           38,375     42,157      51,825      64,356      69,378      73,456
  Five years later.............           37,096     41,050      50,493      63,095      69,485      73,103
  Six years later..............           36,682     40,572      49,593      62,323      69,949
  Seven years later............           36,730     39,991      49,504      62,534
  Eight years later............           36,437     40,113      49,758
  Nine years later.............           36,515     40,131
  Ten years later..............           36,586
Cumulative (excess) deficiency.          $(7,753)  $(12,659)   $(13,559)   $(12,838)    $(8,940)    $(7,153)
                                         =======    ========   ========    ========     =======     =======
Cumulative amount of
liability paid through:
  One year later...............          $16,579    $16,126     $19,401     $24,485     $27,229     $27,803
  Two years later..............           24,546     25,393      30,354      37,981      41,532      46,954
  Three years later............           29,385     32,079      38,684      47,027      53,555      58,883
  Four years later.............           32,925     36,726      43,655      53,276      59,995      65,898
  Five years later.............           34,757     39,122      46,331      56,869      63,048      70,642
  Six years later..............           35,739     40,440      47,802      58,286      65,595
  Seven years later............           36,518     40,903      48,520      59,160
  Eight years later............           36,809     41,152      48,925
  Nine years later.............           37,000     39,877
  Ten years later..............           37,174
</TABLE>


<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31
                                          ---------------------------------------------------
                                          1998       1999        2000        2001        2002
                                          ----       ----        ----        ----        ----
                                                           (in thousands)
<S>                                      <C>        <C>        <C>         <C>        <C>
Net liability at end of
 year for unpaid losses
 and loss expenses.............          $96,015    $99,234    $102,709    $114,544   $129,287
Net liability
 reestimated as of:
  One year later...............           95,556    100,076     110,744     121,378
  Two years later..............           95,315    103,943     112,140
  Three years later............           94,830    104,073
  Four years later.............           94,354
  Five years later.............
  Six years later..............
  Seven years later............
  Eight years later............
  Nine years later.............
  Ten years later..............
Cumulative (excess) deficiency.          $(1,661)    $4,839      $9,431      $6,834
                                         =======      =====       =====       =====
Cumulative amount of
liability paid through:
  One year later...............          $37,427    $39,060     $43,053      46,869
  Two years later..............           57,347     60,622      67,689
  Three years later............           69,973     76,811
  Four years later.............           78,757
  Five years later.............
  Six years later..............
  Seven years later............
  Eight years later............
  Nine years later.............
  Ten years later..............
</TABLE>

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31
                                        -------------------------------------------------------
                                          1994          1995          1996          1997
                                          ----          ----          ----          ----
                                                            (in thousands)
<S>                                     <C>          <C>           <C>           <C>
Gross liability at end of year .....    $ 88,484     $ 108,118     $ 113,346     $ 115,801
Reinsurance recoverable ............      25,167        32,746        34,457        35,545
Net liability at end of year .......      63,317        75,372        78,889        80,256
Gross reestimated liability - latest      66,058        84,341       102,370       105,667
Reestimated recoverable - latest ...      16,300        21,807        32,421        32,564
Net reestimated liability - latest .      49,758        62,534        69,949        73,103
Gross cumulative deficiency (excess)     (22,426)      (23,777)      (10,976)      (10,134)
</TABLE>


<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31
                                       ----------------------------------------------------------------
                                         1998           1999          2000          2001         2002
                                         ----           ----          ----          ----         ----
                                                             (in thousands)
<S>                                    <C>            <C>           <C>           <C>           <C>
Gross liability at end of year .....   $ 136,727      $144,180      $156,476      $179,840      210,692
Reinsurance recoverable ............      40,712        44,946        53,767        65,296       81,405
Net liability at end of year .......      96,015        99,234       102,709       114,544      129,287
Gross reestimated liability - latest     129,795       158,315       173,051       194,303
Reestimated recoverable - latest ...      35,441        54,242        60,911        72,925
Net reestimated liability - latest .      94,354       104,073       112,140       121,378
Gross cumulative deficiency (excess)      (6,932)       14,135        16,575        14,463
</TABLE>


                                      -14-
<PAGE>


REINSURANCE

     DGI and the Mutual Company use several different reinsurers, all of which
have an A.M. Best rating of A- (Excellent) or better or, with respect to foreign
reinsurers, have a financial condition which, in the opinion of management, is
equivalent to a company with at least an A- rating.

     The external reinsurance purchased by DGI and the Mutual Company includes
"excess treaty reinsurance," under which losses are automatically reinsured over
a set retention ($300,000 for 2002), and "catastrophic reinsurance," under which
the reinsured recovers 95% of an accumulation of many losses resulting from a
single event, including natural disasters (for 2002, $3,000,000 retention).
DGI's principal reinsurance agreement in 2002, other than that with the Mutual
Company, was an excess of loss treaty in which the reinsurers were Dorinco
Reinsurance Company, GMAC Re Corporation and Erie Insurance Group. Reinsurance
is also purchased on an individual policy basis to reinsure losses that may
occur from large risks, specific risk types or specific locations. The amount of
coverage provided under each of these types of reinsurance depends upon the
amount, nature, size and location of the risk being reinsured. For property
insurance, excess of loss treaties provide for coverage up to $1,000,000. For
liability insurance, excess of loss treaties provide for coverage up to
$30,000,000. Property catastrophe contracts provide coverage up to $80,000,000
resulting from one event. On both property and casualty insurance, DGI and the
Mutual Company purchase facultative reinsurance to cover exposures from losses
that exceed the limits provided by their respective treaty reinsurance. Atlantic
States cedes to the Mutual Company all of its insurance business and assumes
from the Mutual Company 70% (65% prior to July 1, 2000) of the Mutual Company's
total pooled insurance business, including that assumed from Atlantic States and
substantially all of the business assumed and retained by the Mutual Company
from Southern prior to 2002. Atlantic States and Southern each have a
catastrophe reinsurance agreement with the Mutual Company that limits the
maximum liability under any one catastrophic occurrence to $400,000 and
$450,000, respectively, and $1,000,000 for a catastrophe involving more than one
of the companies. The Mutual Company and Southern are parties to an excess of
loss reinsurance agreement under which the Mutual Company assumes up to $175,000
of losses in excess of $125,000. Southern also has an agreement with the Mutual
Company, under which it cedes, and then reassumes back, 100% of its business net
of reinsurance. The purpose of this agreement is to provide Southern with the
same A.M. Best rating (currently "A" or Excellent) as the Mutual Company, which
Southern might not achieve without this agreement in place.

COMPETITION

     The property and casualty insurance industry is highly competitive on the
basis of both price and service. There are numerous companies competing for this
business in the geographic areas where the Company operates, many of which are
substantially larger and have greater financial resources than DGI, and no
single company dominates. In addition, because the insurance products of DGI and
the Mutual Company are marketed exclusively through independent insurance
agencies, most of which represent more than one company, DGI faces competition
to retain qualified independent agencies, as well as competition within
agencies.



                                      -15-
<PAGE>

INVESTMENTS

     DGI's return on invested assets is an important element of its financial
results. Currently, the investment objective is to maintain a widely diversified
fixed maturities portfolio structured to maximize after-tax investment income
while minimizing credit risk through investments in high quality instruments. At
December 31, 2002, all debt securities were rated investment grade with the
exception of one unrated obligation of $252,500, and the investment portfolio
did not contain any mortgage loans or any non-performing assets.

     The following table shows the composition of the debt securities investment
portfolio (at carrying value), excluding short-term investments, by rating as of
December 31, 2002:


                                                       DECEMBER 31, 2002
                                                -------------------------------
RATING(1)                                       AMOUNT                  PERCENT
---------                                       ------                  -------
                                                    (dollars in thousands)

U.S. Treasury and U.S. agency
  securities(2)........................         $99,183                   35.24%

Aaa or AAA.............................          90,469                   32.15
Aa or AA...............................          51,870                   18.43
A......................................          19,979                    7.10
BBB....................................          19,679                    6.99
Not rated (3)..........................             253                     .09
                                               --------                  ------
   Total...............................        $281,433                  100.00%
                                               ========                  ======
------------

(1)   Ratings assigned by Moody's Investors Services, Inc. or Standard & Poor's
      Corporation.

(2)   Includes mortgage-backed securities of $28,254,582.

(3)   Represents one unrated obligation of The Lancaster County Hospital
      Authority Mennonite Home Project, which management of DGI believes to be
      equivalent to investment grade securities with respect to repayment risk.

     DGI invests in both taxable and tax-exempt securities as part of its
strategy to maximize after-tax income. Such strategy considers, among other
factors, the alternative minimum tax. Tax-exempt securities made up
approximately 41.0%, 30.9% and 33.0% of the debt securities investment portfolio
at December 31, 2002, 2001 and 2000, respectively.

     The following table shows the classification of the investments (at
carrying value) of DGI and its subsidiaries at December 31, 2002, 2001 and 2000.



                                      -16-
<PAGE>



<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                              ----------------------------------------------------------------------
                                     2002                     2001                      2000
                              -------------------      ---------------------     -------------------
                                          PERCENT                    PERCENT                 PERCENT
                                            OF                         OF                       OF
                              AMOUNT       TOTAL       AMOUNT         TOTAL      AMOUNT       TOTAL
                              ------       -----       ------         -----      ------       -----
                                                       (dollars in thousands)
<S>                           <C>          <C>         <C>            <C>        <C>          <C>
Fixed maturities(1):
  Held to maturity:
  U.S. Treasury securities
  and obligations of U.S.
  government corporations
  and agencies ...........    $ 12,641        3.8%     $ 23,809       7.9%      $ 38,779       13.4%
Canadian government
  obligation .............         499        0.2           499       0.2            499        0.2
Obligations of states and
  political subdivisions .      33,892       10.2        24,982       8.3         66,831       23.1
Corporate securities .....      29,552        8.9        27,423       9.1         21,621        7.5
Mortgage-backed
  securities .............      10,118        3.0         8,610       2.9         15,452        5.3
                              --------      -----      --------     -----       --------      -----
Total held to
  maturity ...............      86,702       26.1        85,323      28.4        143,182       49.5
                              --------      -----      --------     -----       --------      -----
Available for sale:
  U.S. Treasury securities
  and obligations of U.S.
  government corporations
  and agencies ...........      58,287       17.5        68,975      23.0         67,901       23.5
Obligations of states and
  political subdivisions .      81,446       24.5        55,147      18.3         18,256        6.3
Corporate securities .....      36,863       11.1        34,807      11.6         22,908        7.9
Mortgage-backed
  securities .............      18,136        5.5        14,790       4.9          5,546        1.9
                              --------      -----      --------     -----       --------      -----
Total available
  for sale ...............     194,732       58.6       173,719      57.8        114,611       39.6
                              --------      -----      --------     -----       --------      -----
Total fixed
  maturities .............     281,434       84.7       259,042      86.2        257,793       89.1
Equity securities(2) .....      21,836        6.6        17,517       5.8         12,112        4.2
Short-term
  investments(3) .........      29,029        8.7        24,074       8.0         19,440        6.7
                              --------      -----      --------     -----       --------      -----
Total investments ........    $332,299      100.0%     $300,633     100.0%      $289,345      100.0%
                              ========      =====      ========     =====       ========      =====
</TABLE>




                                      -17-
<PAGE>


(1)  The Company accounts for its investments in accordance with Statement of
     Financial Accounting Standards (SFAS) No. 115, "Accounting For Certain
     Investments in Debt and Equity Securities." See Notes 1 and 3 to the
     Consolidated Financial Statements incorporated by reference herein. Fixed
     maturities held to maturity are valued at amortized cost; those fixed
     maturities available for sale are valued at fair value. Total fair value of
     fixed maturities held to maturity was $89,785,318 at December 31, 2002,
     $86,939,393 at December 31, 2001 and $144,662,436 at December 31, 2000. The
     amortized cost of fixed maturities available for sale was $187,495,949 at
     December 31, 2002, $170,269,584 at December 31, 2001 and $114,524,472 at
     December 31, 2000.

(2)  Equity securities are valued at fair value. Total cost of equity securities
     was $21,587,317 at December 31, 2002, $16,630,618 at December 31, 2001 and
     $12,500,558 at December 31, 2000.

(3)  Short-term investments are valued at cost, which approximates market.

     The following table sets forth the maturities (at carrying value) in the
     fixed maturity and short-term investment portfolio at December 31, 2002,
     December 31, 2001 and December 31, 2000.

<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                              ----------------------------------------------------------------------
                                     2002                     2001                      2000
                              -------------------      ------------------       --------------------
                                          PERCENT                    PERCENT                 PERCENT
                                            OF                         OF                      OF
                              AMOUNT       TOTAL        AMOUNT        TOTAL      AMOUNT       TOTAL
                              ------       -----        ------       -------     ------      -------
                                                       (dollars in thousands)
<S>                           <C>          <C>         <C>            <C>        <C>          <C>
Due in(1):
One year or less .........    $ 47,034       15.1%     $ 37,120      13.1%      $ 37,731       13.6%
Over one year
  through three years ....      47,367       15.3        44,845      15.8         35,426       12.8
Over three years
  through five years .....      66,655       21.5        69,585      24.6         41,995       15.1
Over five years
  through ten years ......      64,271       20.7        96,642      34.1        112,396       40.6
Over ten years
  through fifteen years ..      52,517       16.9         7,573       2.7         22,243        8.0
Over fifteen years .......       4,365        1.4         3,950       1.4          6,445        2.3
Mortgage-backed
  securities .............      28,254        9.1        23,401       8.3         20,997        7.6
                              --------      -----      --------     -----       --------      -----
                              $310,463      100.0%     $283,116     100.0%      $277,233      100.0%
                              ========      =====      ========     =====       ========      =====
</TABLE>

------------
(1)  Based on stated maturity dates with no prepayment assumptions. Actual
     maturities will differ because borrowers may have the right to call or
     prepay obligations with or without call or prepayment penalties.

     As shown above, the Company held investments in mortgage-backed securities
having a carrying value of $28.3 million at December 31, 2002. Included in these
investments are

                                      -18-
<PAGE>


collateralized mortgage obligations ("CMOs") with a carrying value of $4.7
million at December 31, 2002. The Company has attempted to reduce the prepayment
risks associated with mortgage-backed securities by investing approximately
100%, as of December 31, 2002, of the Company's holdings of CMOs in planned
amortization and very accurately defined tranches. Such investments are designed
to alleviate the risk of prepayment by providing predictable principal
prepayment schedules within a designated range of prepayments. If principal is
repaid earlier than originally anticipated, investment yields may decrease due
to reinvestment of the proceeds at current interest rates (which may be lower)
and capital gains or losses may be realized since the book value of securities
purchased at premiums or discounts may be different from the prepayment amount.

     Investment results of DGI and its subsidiaries for the years ended December
31, 2002, 2001 and 2000 are shown in the following table:


<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                              -------------------------------------
                                               2002            2001           2000
                                              -----           -----           -----
                                                      (dollars in thousands)
<S>            <C>                         <C>             <C>             <C>
Invested assets(1) .................       $319,066        $294,989        $278,678
Investment income(2) ...............         14,581          15,886          16,395
Average yield ......................            4.6%            5.3%            5.9%
</TABLE>

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

(1)  Average of the aggregate invested amounts at the beginning and end of the
     period, including cash.

(2)  Investment income is net of investment expenses and does not include
     realized investment gains or losses or provision for income taxes.

A.M. BEST RATING

     Currently, the A.M. Best rating of the Mutual Company, Atlantic States and
Southern is "A" (Excellent), based upon their respective current financial
conditions and historical statutory results of operations and retrocessional
agreements. Management believes that this A.M. Best rating is an important
factor in marketing DGI's products to its agents and customers. A.M. Best's
ratings are industry ratings based on a comparative analysis of the financial
condition and operating performance of insurance companies as determined by
their publicly available reports. A.M. Best's classifications are A++ and A+
(Superior), A and A- (Excellent), B++ and B+ (Very Good), B and B- (Good), C++
and C+ (Fair), C and C- (Marginal), D (below minimum standards) and E and F
(Liquidation). A.M. Best's ratings are based upon factors relevant to
policyholders and are not directed toward the protection of investors. According
to A.M. Best, an "excellent" rating is assigned to those companies which, in
A.M. Best's opinion, have achieved excellent overall performance when compared
to the norms of the property and casualty insurance industry and have generally
demonstrated a strong ability to meet policyholder and other contractual
obligations.




                                      -19-
<PAGE>

REGULATION

     Insurance companies are subject to supervision and regulation in the states
in which they transact business. Such supervision and regulation relate to
numerous aspects of an insurance company's business and financial condition. The
primary purpose of such supervision and regulation is the protection of
policyholders. The extent of such regulation varies, but generally derives from
state statutes that delegate regulatory, supervisory and administrative
authority to state insurance departments. Accordingly, the authority of the
state insurance departments includes the establishment of standards of solvency
that must be met and maintained by insurers, the licensing to do business of
insurers and agents, the nature of and limitations on investments, premium rates
for property and casualty insurance, the provisions which insurers must make for
current losses and future liabilities, the deposit of securities for the benefit
of policyholders, the approval of policy forms, notice requirements for the
cancellation of policies and the approval of certain changes in control. State
insurance departments also conduct periodic examinations of the affairs of
insurance companies and require the filing of annual and other reports relating
to the financial condition of insurance companies.

     In addition to state-imposed insurance laws and regulations, the National
Association of Insurance Commissioners (the "NAIC") has established a risk-based
capital system for assessing the adequacy of statutory capital and surplus,
which augments the states' current fixed dollar minimum capital requirements for
insurance companies. At December 31, 2002, DGI's insurance subsidiaries and the
Mutual Company each exceeded the required levels of capital. There can be no
assurance that the capital requirements applicable to DGI's insurance
subsidiaries will not increase in the future.

     The states in which Atlantic States (Pennsylvania, Maryland, Delaware,
Connecticut, Ohio and New York), the Mutual Company (Pennsylvania, Ohio,
Maryland, New York, Virginia, Delaware and North Carolina) and Southern
(Virginia, Alabama, Arkansas, Georgia, Illinois, Louisiana, Mississippi, North
Carolina, South Carolina, Tennessee and Pennsylvania) are licensed to do
business have guaranty fund laws under which insurers doing business in such
states can be assessed on the basis of premiums written by the insurer in that
state in order to fund policyholder liabilities of insolvent insurance
companies. Under these laws in general, an insurer is subject to assessment,
depending upon its market share of a given line of business, to assist in the
payment of policyholder claims against insolvent insurers. Atlantic States, the
Mutual Company and Southern have made accruals for their portion of assessments
related to such insolvencies based upon the most current information furnished
by the guaranty associations. During 2002, 2001 and 2000, the Company incurred
assessments totaling $486,190, $1,286,578 and $813,000, respectively, from the
Pennsylvania Insurance Guaranty Association relating to the insolvencies of
three medical malpractice insurers and Reliance Insurance Company.

     Most states have enacted legislation that regulates insurance holding
company systems. Each insurance company in the holding company system is
required to register with the insurance supervisory agency of its state of
domicile and furnish information concerning the operations of companies within
the holding company system that may materially affect the operations, management
or financial condition of the insurers within the system. Pursuant to these
laws, the respective insurance departments may examine the Mutual Company, the

                                      -20-
<PAGE>


Company and the Company's insurance subsidiaries at any time, require disclosure
of material transactions by the holding company and require prior notice or
prior approval of certain transactions, such as "extraordinary dividends" from
the insurance subsidiaries to the holding company.

     All  transactions  within the holding  company system  affecting the Mutual
Company and the Company's  insurance  subsidiaries  must be fair and  equitable.
Approval  of  the  applicable  insurance   commissioner  is  required  prior  to
consummation  of  transactions  affecting  the  control of an  insurer.  In some
states,  including  Pennsylvania,   the  acquisition  of  10%  or  more  of  the
outstanding capital stock of an insurer or its holding company is presumed to be
a change in control.  Pursuant to an order issued in July 2001, the Pennsylvania
Insurance Department has approved the Mutual Company's ownership of up to 65% of
the outstanding  Class A Common Stock and up to 100% of the outstanding  Class B
Common  Stock of DGI.  The  Mutual  Company  has filed an  application  with the
Insurance Department seeking approval of an amendment to the order to permit the
Mutual Company to own up to 70% of the outstanding  Class A Common Stock of DGI.
These laws also  require  notice to the  applicable  insurance  commissioner  of
certain material  transactions  between an insurer and any person in its holding
company  system  and, in some  states,  certain of such  transactions  cannot be
consummated without the prior approval of the applicable insurance commissioner.

     The Company's insurance subsidiaries are restricted by the insurance laws
of their respective states of domicile as to the amount of dividends or other
distributions they may pay to the Company without the prior approval of the
respective state regulatory authorities. Generally, the maximum amount that may
be paid by an insurance subsidiary during any year after notice to, but without
prior approval of, the insurance commissioners of these states is limited to a
stated percentage of that subsidiary's statutory capital and surplus as of a
certain date, or the net income or net investment income not including realized
capital gains of the subsidiary for the preceding year. As of December 31, 2002,
amounts available for payment of dividends in 2003 without the prior approval of
the various insurance commissioners were $10,646,804 from Atlantic States and
$2,493,398 from Southern. See Note 12 to the Consolidated Financial Statements
incorporated by reference herein.

THE MUTUAL COMPANY

     The Mutual Company, which was organized in 1889, has an A.M. Best rating of
A (Excellent). At December 31, 2002, the Mutual Company had admitted assets of
$192,066,638 and policyholders' surplus of $75,613,870. At December 31, 2002,
the Mutual Company had no debt and, of its total liabilities of $116,452,768,
reserves for net losses and loss expenses accounted for $59,084,662 and unearned
premiums accounted for $29,660,560. Of the Mutual Company's investment portfolio
of $115,505,220 at December 31, 2002, investment-grade bonds accounted for
$20,855,377 and mortgages accounted for $6,295,933. At December 31, 2002, the
Mutual Company owned 4,031,912 shares, or approximately 66.0%, of the Company's
Class A Common Stock, which were carried on the Mutual Company's books at
$46,366,987, and 1,852,088 shares, or approximately 62.0%, of the Company's
Class B Common Stock, which were carried on the Mutual Company's books at
$21,299,012. The foregoing financial information is presented on the statutory
basis of accounting required by the NAIC Accounting Practices and Procedures
Manual. The Mutual Company does not, nor is it required to, prepare financial
statements in accordance with GAAP.


                                      -21-
<PAGE>

EMPLOYEES

     The Company has no employees. As of December 31, 2002, the Mutual Company
had 410 employees. The Mutual Company's employees provide a variety of services
to DGI, Atlantic States and Southern, as well as to the Mutual Company.

CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS

     Certain statements contained in or incorporated by reference in this Report
are forward-looking in nature. These statements can be identified by the use of
forward-looking words such as "believes," "expects," "may," "will," "should,"
"intends," "plans" or "anticipates," or the negative thereof or comparable
terminology, or by discussions of strategy. The Company's business and
operations are subject to a variety of risks and uncertainties and,
consequently, the Company's actual results may materially differ from those
projected by any forward-looking statements. Certain of these risks and
uncertainties are discussed below under "Risk Factors."

RISK FACTORS

     Unless otherwise specified or unless the context otherwise requires, the
following risks not only apply to the Company but also to the Mutual Company.

          RISKS RELATING TO THE PROPERTY AND CASUALTY BUSINESS OF THE COMPANY

     THE COMPANY CONDUCTS BUSINESS IN ONLY 14 STATES WITH A CONCENTRATION OF
BUSINESS IN MARYLAND, VIRGINIA AND, PARTICULARLY, PENNSYLVANIA. ANY SINGLE
CATASTROPHE OCCURRENCE OR OTHER CONDITION DISPROPORTIONATELY AFFECTING LOSSES IN
THESE STATES COULD ADVERSELY AFFECT THE COMPANY'S RESULTS OF OPERATIONS.

     The Company conducts business in only 14 states primarily in the
Mid-Atlantic and Southeastern portions of the United States. A substantial
portion of this business is private passenger and commercial automobile,
homeowners and workers' compensation insurance in Maryland, Virginia and,
particularly, Pennsylvania. As a result, a single catastrophe occurrence,
destructive weather pattern, general economic trend, terrorist attack,
regulatory development or other condition disproportionately affecting one or
more of the states in which the Company conducts substantial business could
materially adversely affect the results of operations of the Company. Common
catastrophe events include hurricanes, earthquakes, tornadoes, wind and hail
storms, fires and explosions. The Company and the Mutual Company maintain
reinsurance against catastrophic losses in excess of $3.0 million per occurrence
and the Company's insurance subsidiaries maintain various catastrophe
reinsurance with the Mutual Company to minimize the liability of the insurance
subsidiaries in any one occurrence.

                                      -22-
<PAGE>

     THE BUSINESS AND RESULTS OF OPERATIONS OF THE COMPANY WILL BE ADVERSELY
AFFECTED IF THE INDEPENDENT AGENTS THAT MARKET THE COMPANY'S PRODUCTS DO NOT
MAINTAIN THEIR CURRENT LEVELS OF PREMIUM WRITING, FAIL TO COMPLY WITH
ESTABLISHED UNDERWRITING GUIDELINES OR OTHERWISE IMPROPERLY MARKET THE COMPANY'S
PRODUCTS.

     The Company markets its insurance products solely through a network of over
1,500 independent insurance agencies. As a result, the Company is wholly
dependent upon these



agencies, each of which has the authority to bind the Company to insurance
contracts. To the extent that these agencies' marketing efforts cannot be
maintained at their current levels of volume and quality or they bind the
Company to unacceptable insurance risks, fail to comply with established
underwriting guidelines or otherwise improperly market the Company's products,
the results of operations and business of the Company will suffer.

     THE BUSINESS OF THE COMPANY MAY NOT CONTINUE TO GROW AND MAY BE MATERIALLY
ADVERSELY AFFECTED IF THE COMPANY CANNOT RETAIN EXISTING, AND ATTRACT NEW,
INDEPENDENT AGENCIES OR IF INSURANCE CONSUMERS INCREASE USE OF OTHER INSURANCE
DELIVERY SYSTEMS.

     The continued growth of the business of the Company is partially dependent
upon the Company's ability to retain existing, and attract new, independent
agencies. The following factors are among those that may cause the growth and
retention in the number of independent agencies of the Company, and thereby its
growth in revenue to be slower than it otherwise would have been:

o    There is significant competition to attract independent agencies;

o    The Company's process to select a new independent agency is intensive and
     typically requires from two to six months;

o    The Company has stringent criteria for new independent agencies and
     requires adherence by independent agencies to consistent underwriting
     standards; and

o    The Company may be required to reduce agents' commissions, bonuses and
     other incentives, thereby reducing its attractiveness to agencies, to
     compete with other insurance delivery systems.

     The Company sells insurance solely through its network of independent
agencies. Many of the Company's competitors sell insurance through a variety of
delivery methods, including independent agencies, captive agencies, the Internet
and direct sales. To the extent that business migrates to a delivery system
other than independent agencies because of changing consumer preferences, the
Company's business will be adversely affected.

     IF RATINGS FOR FINANCIAL STRENGTH ASSIGNED TO THE COMPANY'S INSURANCE
SUBSIDIARIES BY INDUSTRY RATING ORGANIZATIONS WERE SIGNIFICANTLY DOWNGRADED, THE
COMPETITIVE POSITION OF THE COMPANY'S INSURANCE SUBSIDIARIES WOULD BE ADVERSELY
AFFECTED.

     Ratings are a factor in establishing the competitive position of insurance
companies. The Company's insurance subsidiaries receive ratings from A.M. Best &
Company, Inc., which are industry-accepted measures of an insurance company's
financial strength and are specifically designed to provide an independent
opinion of an insurance company's financial health and ability to meet ongoing
obligations to policyholders.



                                      -23-
<PAGE>

     THE COMPANY COMPETES WITH MANY INSURERS THAT ARE FINANCIALLY STRONGER THAN
THE COMPANY.

     The property and casualty insurance industry is intensely competitive.
Competition is based on many factors, including the perceived financial strength
of the insurer, premiums charged, policy terms and conditions, policyholder
service, reputation and experience. The Company competes with many regional and
national property and casualty insurance companies, including direct sellers of
insurance products, insurers having their own agency organizations and other
insurers represented by independent agents. Many of these insurers are better
capitalized than the Company, have substantially greater financial, technical
and operating resources and have equal or higher ratings from A.M. Best Company.

     The superior capitalization of many of the Company's competitors enables
them to withstand lower profit margins and, therefore, to market their products
more aggressively, to take advantage more quickly of new marketing opportunities
and to offer lower premium rates. Moreover, if the Company's competitors price
their premiums more aggressively and the Company meets their pricing, the
Company's profit margins and revenues may be reduced and its ratios of claims
and expenses to premiums may increase.

     The Company's competition may become increasingly better capitalized in the
future as the traditional barriers between insurance companies and banks and
other financial institutions erode and as the property and casualty industry
continues to consolidate. The Company's ability to compete against its larger,
better capitalized competitors depends largely on its ability to provide
superior policyholder service and to maintain its historically strong
relationships with independent insurance agents, on whom the Company is entirely
dependent to generate premium volume.

     There is no assurance that the Company will maintain its current
competitive position in the markets in which it operates, or that it will be
able to expand its operations into new markets. If it fails to do so, its
business could be materially adversely affected.

          RISKS RELATING TO THE PROPERTY AND CASUALTY INSURANCE INDUSTRY

     THE COMPANY FACES SIGNIFICANT EXPOSURE TO TERRORISM.

     Although the Company did not incur any losses as a result of the tragic
World Trade Center terrorist attack, that attack resulted in staggering losses
for the insurance industry and has caused uncertainty in the insurance and
reinsurance markets. Accordingly, the industry has been compelled to re-examine
policy language and to address the potential for future threats of terrorist
events and losses. The Company's personal and commercial property and casualty
insurance policies were not priced to cover the risk of terrorist attacks and
losses such as those suffered in the World Trade Center terrorist attack.
Therefore, exposure to terrorism exists under several lines, including personal
lines and workers' compensation, and, in most states, losses caused by an
ensuing fire. The recently enacted Terrorism Risk Insurance Act of 2002
established a program for commercial property and casualty losses, including
workers' compensation, resulting from foreign acts of terrorism. The Terrorism
Risk Insurance Act requires commercial insurers to make terrorism coverage
available and provides limited federal


                                      -24-
<PAGE>


protection above individual company retention levels, based upon a percentage of
direct earned premium, and above aggregate industry retention levels that range
from $10 billion in the first year to $15 billion in the third year. The federal
government will pay 90% of covered terrorism losses that exceed retention
levels. The Terrorism Risk Insurance Act is scheduled to expire on December 31,
2005. Personal lines are not included under the protection of the Terrorism Risk
Insurance Act, and state regulators have not approved exclusions for acts of
terrorism in personal lines policies. The Company could incur large unexpected
losses if future terrorist attacks occur.

     INCREASED LITIGATION AGAINST THE INDUSTRY, WILLINGNESS OF COURTS TO EXPAND
COVERED CAUSES OF LOSS, RISING JURY AWARDS, INCREASING MEDICAL COSTS AND THE
ESCALATION OF LOSS SEVERITY MAY CONTRIBUTE TO INCREASED COSTS AND TO THE
DETERIORATION OF THE COMPANY'S RESERVES.

     Loss severity continues to increase, principally driven by larger court
judgments and increasing medical costs in recent years. In addition, many legal
actions and proceedings have been brought on behalf of classes of complainants,
which can increase the size of judgments. The propensity of policyholders to
litigate and the willingness of courts to expand causes of loss and the size of
awards may render loss reserves inadequate for current and future losses. Loss
reserves are liabilities established by insurers and reinsurers to reflect the
estimated cost of loss payments and the related loss adjustment expenses that
the insurer or reinsurer will ultimately be required to pay in respect of
insurance or reinsurance it has written.

     The Company has exposure to mold claims for which there has recently been a
sharp increase in the industry generally. Sometimes referred to as "sick
building syndrome," tenants claiming to suffer illnesses caused by mold may seek
financial compensation from building owners. Businesses also may claim
loss-of-use business income interruption losses. Homeowners have also been
submitting claims based on mold that has occurred from water damage. The
Company's exposure to mold, to date, including known and expected claims, has
been insignificant.

     CHANGES IN APPLICABLE INSURANCE LAWS, REGULATIONS OR CHANGES IN THE WAY
REGULATORS ADMINISTER THOSE LAWS OR REGULATIONS COULD MATERIALLY ADVERSELY
CHANGE THE COMPANY'S OPERATING ENVIRONMENT AND INCREASE ITS EXPOSURE TO LOSS OR
PUT IT AT A COMPETITIVE DISADVANTAGE.

     Property and casualty insurers are subject to extensive supervision in the
states in which they do business. This regulatory oversight includes, by way of
example, matters relating to licensing and examination, rate setting, market
conduct, policy forms, limitations on the nature and amount of certain
investments, claims practices, mandated participation in involuntary markets and
guaranty funds, reserve adequacy, insurer solvency, transactions between
affiliates, the amount of dividends that may be paid and restrictions on
underwriting standards. Such regulation and supervision are primarily for the
benefit and protection of policyholders and not for the benefit of stockholders.
For instance, the Company is subject to involuntary participation in specified
markets in various states in which it operates, and the rate levels the Company
is permitted to charge do not always correspond with the underlying costs
associated with the coverage issued.

     The NAIC and state insurance regulators are re-examining existing laws and
regulations, specifically focusing on insurance company investments, issues
relating to the solvency of


                                      -25-
<PAGE>


insurance companies, risk-based capital guidelines, interpretations of existing
laws and the development of new laws. Changes in state laws and regulations, as
well as changes in the way state regulators view related party transactions in
particular, could materially change the operating environment for the Company
and significantly increase the amount of loss to which the Company is exposed
after an insurance policy has been issued.

     The state insurance regulatory framework recently has come under increased
federal scrutiny. Congress is considering legislation that would create an
optional federal charter for insurers. Federal chartering has the potential to
create an uneven playing field for insurers. Federally chartered companies could
be subject to different regulatory requirements than state chartered insurers in
areas such as market conduct oversight, solvency regulation, guaranty fund
participation and premium tax burdens. If this occurs, federally chartered
insurers may obtain a competitive advantage over state licensed carriers.
Federal chartering also raises the specter of a matrix of regulation and costly
duplicative, or conflicting, federal and state requirements. Specific federal
regulatory developments include the potential repeal of the McCarran-Ferguson
Act. The repeal of the McCarran-Ferguson Act and its partial exemption for the
insurance industry from federal antitrust laws would make it extremely difficult
for insurers to compile and share loss data, develop standard policy forms and
manuals and predict future loss costs. The ability of the industry, under the
exemption permitted in the McCarran-Ferguson Act, to collect loss cost data and
build a credible database as a means of predicting future loss costs is an
extremely important part of cost-based pricing. If the ability to collect this
data were removed, then the predictability of future loss costs, and hence, the
reliability of pricing would be greatly undermined.

     IF CERTAIN STATE REGULATORS, LEGISLATORS AND SPECIAL INTEREST GROUPS ARE
SUCCESSFUL IN ATTEMPTS TO REDUCE, FREEZE OR SET RATES FOR INSURANCE POLICIES,
ESPECIALLY AUTOMOBILE POLICIES, AT LEVELS THAT DO NOT, IN OUR MANAGEMENT'S VIEW,
CORRESPOND WITH UNDERLYING COSTS, THE COMPANY'S RESULTS OF OPERATIONS WILL BE
ADVERSELY AFFECTED.

     From time to time, the automobile insurance industry in particular has been
under pressure from certain state regulators, legislators and special interest
groups to reduce, freeze or set rates at levels that do not, in the view of the
Company's management, correspond with underlying costs, including initiatives to
roll back automobile and other personal lines rates. This activity may in the
future adversely affect the profitability of the Company's automobile insurance
line of business in various states because increasing costs of litigation and
medical treatment, combined with rising automobile repair costs, continue to
increase the costs of providing automobile insurance coverage. Adverse
legislative and regulatory activity constraining the Company's ability to price
automobile insurance coverage adequately may occur in the future. The impact of
the automobile insurance regulatory environment on the results of operations of
the Company in the future is not predictable.


                                      -26-
<PAGE>


     THE COMPANY IS SUBJECT TO ASSESSMENT, DEPENDING UPON ITS MARKET SHARE OF A
GIVEN LINE OF BUSINESS, TO ASSIST IN THE PAYMENT OF UNPAID CLAIMS AND RELATED
COSTS OF INSOLVENT INSURANCE COMPANIES; SUCH ASSESSMENTS COULD SIGNIFICANTLY
AFFECT THE COMPANY'S FINANCIAL CONDITION.

     The Company is obligated to pay assessments under the guaranty fund laws of
the various states in which it is licensed. Generally, under these laws, an
insurer is subject to assessment, depending upon its market share of a given
line of business, to assist in the payment of unpaid claims and related costs of
insolvent insurance companies. The number and magnitude of future insurance
company failures in the states in which the Company does business cannot be
predicted, but resulting assessments could significantly affect the financial
condition of the Company. The Company believes that it is likely it will receive
an assessment in the next year relating to the insolvency of The Pennsylvania
Hospital Insurance Company (PHICO), the amount of which cannot currently be
estimated.

     PREMIUM RATES AND RESERVES MUST BE ESTABLISHED BY THE COMPANY FROM
FORECASTS OF THE ULTIMATE COSTS EXPECTED TO ARISE FROM RISKS UNDERWRITTEN DURING
THE POLICY PERIOD; THE COMPANY'S PROFITABILITY COULD BE ADVERSELY AFFECTED TO
THE EXTENT ITS PREMIUM RATES OR RESERVES ARE TOO LOW.

     One of the distinguishing features of the property and casualty insurance
industry in general is that its products are priced before its costs are known,
as premium rates are generally determined before losses are reported.
Accordingly, premium rates must be established from forecasts of the ultimate
costs expected to arise from risks underwritten during the policy period and may
not prove to be adequate. Further, property and casualty insurers establish
reserves for losses and loss adjustment expenses based upon estimates, and it is
possible that the ultimate liability will exceed these estimates because of the
future development of known losses, the existence of losses that have occurred
but are currently unreported and larger than historical settlements on pending
and unreported claims. The process of estimating reserves is inherently
judgmental and can be influenced by factors that are subject to variation. If
pricing or reserves established by the Company is not sufficient, its
profitability may be adversely impacted.

     THE CYCLICAL NATURE OF THE PROPERTY AND CASUALTY INSURANCE INDUSTRY MAY
REDUCE THE COMPANY'S REVENUES AND PROFIT MARGINS.

     The property and casualty insurance industry is highly cyclical, and
individual lines of business experience their own cycles within the overall
industry cycle. Premium rate levels are related to the availability of insurance
coverage, which varies according to the level of surplus in the industry. The
level of surplus in the industry varies with returns on invested capital and
regulatory barriers to withdrawal of surplus. Increases in surplus have
generally been accompanied by increased price competition among property and
casualty insurers. If the Company finds it necessary to reduce premiums or limit
premium increases due to these competitive pressures on pricing, the Company may
experience a reduction in profit margins and revenues, an increase in its ratios
of claims and expenses to premiums and, therefore, lower profitability.

     Volatile and unpredictable developments also offset significantly the
cyclical trends in the industry and the industry's profitability. These
developments include natural disasters (such as storms, earthquakes, hurricanes,
floods and fires), terrorism risks, fluctuations in interest rates


                                      -27-
<PAGE>


and other changes in the investment environment that affect the market prices of
the Company's investments and the income from those investments, inflationary
pressures that affect the size of losses and judicial decisions that affect its
liabilities. The occurrence of these developments may adversely affect the
Company's business and financial condition.

          RISKS RELATING TO THE COMPANY'S RELATIONSHIP WITH THIRD PARTIES

     THE REINSURANCE AGREEMENTS ON WHICH THE COMPANY RELIES DO NOT RELIEVE THE
COMPANY FROM LIABILITY TO ITS POLICYHOLDERS.

     The Company relies on reinsurance agreements to limit its maximum net loss
from large single risks or risks in concentrated areas, and to increase its
capacity to write insurance. Each reinsurance agreement satisfies all applicable
regulatory requirements. Reinsurance, however, does not relieve the Company from
liability to its policyholders. To the extent that a reinsurer may be unable to
pay losses for which it is liable under the terms of its reinsurance agreement
with the Company, the Company remains liable for such losses. However, in an
effort to reduce the risk of non-payment, the Company requires all of its
reinsurers to have an A.M. Best rating of A- or better or, with respect to
foreign reinsurers, to have a financial condition that, in the opinion of the
Company's management, is equivalent to a company with at least an A- rating. If
the Company's reinsurers incur losses from their reinsurance arrangements with
the Company, it is probable that the reinsurance premiums payable by the Company
in the future could increase or that the reinsurance might not be renewed.

     THE MUTUAL COMPANY IS THE COMPANY'S LARGEST SHAREHOLDER AND PROVIDES IT
WITH FACILITIES AND SERVICES.

     The Mutual Company currently owns approximately 66% of the Company's
outstanding Class A Common Stock and approximately 62% of the Company's
outstanding Class B Common Stock. Accordingly, the Mutual Company controls the
election of members of the Company's Board of Directors. Although the Mutual
Company could exercise its control in ways that are contrary to the interests of
the Company's stockholders other than the Mutual Company, the Company and the
Mutual Company have established a Coordinating Committee consisting of two
outside directors from each company who do not also serve as directors of the
other company. Under the Company's and the Mutual Company's By-laws, any new
agreement between the Company and the Mutual Company and any proposed change in
any existing agreement between the Company and the Mutual Company must first be
submitted for approval by the respective Boards of Directors of the Company and
the Mutual Company and, if approved, submitted to the Coordinating Committee for
approval. The proposed new agreement or change in an existing agreement will
receive Coordinating Committee approval only if both of the Company's
Coordinating Committee members conclude the new agreement or change in an
existing agreement is fair to the Company and its stockholders and if both of
the Mutual Company's Coordinating Committee members conclude the agreement or
change in an existing agreement is fair and equitable to the Mutual Company and
its policyholders. The decisions of the Coordinating Committee are binding on
the Company and the Mutual Company. The purpose of this provision is to protect
the interests of the stockholders of the Company and the interests of the
policyholders of the Mutual Company.


                                      -28-
<PAGE>


     The Company is dependent upon the Mutual Company for the retention of
agents and the underwriting of insurance, the servicing of policyholder claims
and all other aspects of the Company's operations. All of the Company's officers
are officers and employees of the Mutual Company. The Mutual Company also
provides all of the facilities and data processing and administrative services
required to conduct the Company's business, for which the Company pays a pro
rata portion of the cost.

     BECAUSE THE COMPANY PARTICIPATES IN AN INSURANCE POOLING ARRANGEMENT WITH
THE MUTUAL COMPANY, THE COMPANY'S RESULTS OF OPERATIONS ARE DEPENDENT UPON THE
FINANCIAL SUCCESS OF THE MUTUAL COMPANY.

     The Company's insurance subsidiary, Atlantic States, participates in an
intercompany pooling arrangement with the Mutual Company, under which the
parties share the premiums earned and underwriting results on substantially all
of the property and casualty insurance business written by both companies. Under
the terms of the intercompany pooling agreement, Atlantic States cedes all of
its insurance business to the Mutual Company and assumes from the Mutual Company
70% of the total pooled insurance business of the Mutual Company and Atlantic
States. The allocations of pool participation percentages between the Mutual
Company and Atlantic States are based on the pool participants' relative amounts
of capital and surplus, expectations of future relative amounts of capital and
surplus and the Company's ability to raise capital for Atlantic States.

     Because of the pooled business the Company assumes, the Company's insurance
operations are interrelated with the insurance operations of the Mutual Company
and the Company's results of operations are dependent upon the financial success
of the Mutual Company. Although the underwriting pool is intended to produce a
more uniform and stable underwriting result from year to year for the
participants in the pool than they would experience individually and to spread
the risk of loss among all the participants, if the Mutual Company experiences
unusually severe or frequent losses or does not adequately price its premiums,
the Company's results of operations could suffer. The Company's results of
operations also may suffer if the Mutual Company did not participate in the
pooling arrangement because the pool participants would then be limited to
policy exposures of a size commensurate with their own capital and surplus
instead of having at their disposal the capacity of the entire pool.

     THE COMPANY IS DEPENDENT ON DIVIDENDS FROM ITS SUBSIDIARIES FOR THE PAYMENT
OF ITS OPERATING EXPENSES, ITS DEBT SERVICE AND DIVIDENDS TO STOCKHOLDERS.

     As a holding company, the Company relies primarily on its subsidiaries for
dividends and other permitted payments to meet its obligations for corporate
expenses. Payment of dividends by the Company's subsidiaries is subject to
regulatory restrictions and depends on the surplus of the subsidiaries. From
time to time, the NAIC and various state insurance regulators consider modifying
the method of determining the amount of dividends that may be paid by an
insurance company without prior regulatory approval.


                                      -29-
<PAGE>


ITEM 2.   PROPERTIES.

     DGI and Atlantic States share headquarters with the Mutual Company's
headquarters in a building owned by the Mutual Company. The Mutual Company
charges DGI for an appropriate portion of the building expenses under an
intercompany allocation agreement which is consistent with the terms of the
pooling agreement. The headquarters of the Mutual Company has approximately
172,600 square feet of office space. Southern has a facility of approximately
10,000 square feet in Glen Allen, Virginia, which it owns. Province Bank leases
approximately 3,600 square feet of a building located in Marietta, Pennsylvania
owned by the Mutual Company. The Mutual Company charges Province Bank annual
rent based on an independent appraisal.

ITEM 3.   LEGAL PROCEEDINGS.

     DGI is a party to numerous lawsuits arising in the ordinary course of its
insurance business. DGI believes that the resolution of these lawsuits will not
have a material adverse effect on its financial condition or results of
operations.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     No matter was submitted to a vote of holders of the Company's Class A
Common Stock and/or Class B Common Stock during the fourth quarter of 2002.

EXECUTIVE OFFICERS OF THE COMPANY

     The following table sets forth information regarding the persons who served
as executive officers of DGI on March 24, 2003:

<TABLE>
NAME                              AGE                                      POSITION
----                              ---                                      --------
<S>                               <C>           <C>
Donald H. Nikolaus                60            President and Chief Executive Officer since 1981
Ralph G. Spontak                  50            Senior Vice President since 1991; Chief Financial Officer and Vice
                                                President since 1983; Secretary since 1988
Cyril J. Greenya                  58            Senior Vice President-Commercial Underwriting since 1997; Vice
                                                President-Commercial Underwriting for five years prior thereto;
                                                Manager-Commercial Underwriting for nine years prior thereto
Robert G. Shenk                   50            Senior Vice President-Claims since 1997; Vice President-Claims for
                                                five years prior thereto
Daniel J. Wagner                  42            Treasurer since 1993; Controller for five years prior thereto
</TABLE>


                                      -30-
<PAGE>


                                    PART II


ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
          MATTERS.

     The response to this Item is incorporated in part by reference to page 30
of the Company's Annual Report to Stockholders for the year ended December 31,
2002, which is included as Exhibit (13) to this Form 10-K Report. As of March
20, 2003, the Company had approximately 613 holders of record of its Class A
Common Stock and 513 holders of record of its Class B Common Stock. The Company
declared dividends of $.40 per share on its Class A Common Stock and $.36 per
share on its Class B Common Stock in 2002, and $.40 per share on its Class A
Common Stock and $.36 per share on its Class B Common Stock in 2001.

ITEM 6.   SELECTED FINANCIAL DATA.

     The response to this Item is incorporated by reference to page 1 of the
Company's Annual Report to Stockholders for the year ended December 31, 2002,
which is included as Exhibit (13) to this Form 10-K Report.

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS.

     The response to this Item is incorporated by reference to pages 10 through
13 of the Company's Annual Report to Stockholders for the year ended December
31, 2002, which is included as Exhibit (13) to this Form 10-K Report.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The response to this Item is incorporated by reference to pages 14 through
29 of the Company's Annual Report to Stockholders for the year ended December
31, 2002, which is included as Exhibit (13) to this Form 10-K Report.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE.

     None.


                                      -31-


<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The response to this Item with respect to the Company's directors is
incorporated by reference to page 5 and pages 7 through 8 of the Company's proxy
statement relating to the Company's annual meeting of stockholders to be held
April 17, 2003. The response to this Item with respect to the Company's
executive officers is incorporated by reference to Part I of this Form 10-K
Report.

ITEM 11.  EXECUTIVE COMPENSATION.

     The response to this Item is incorporated by reference to pages 9 through
13 of the Company's proxy statement relating to the Company's annual meeting of
stockholders to be held April 17, 2003, except for the Report of Compensation
Committee, the Performance Graph and the Report of the Audit Committee, which
are not incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The response to this Item is incorporated by reference to pages 3 through 4
of the Company's proxy statement relating to the Company's annual meeting of
stockholders to be held April 17, 2003.

     The following table sets forth information regarding equity compensation
plans of the Company.

                      Equity Compensation Plan Information
<TABLE>
<CAPTION>
                                                                                           NUMBER OF SECURITIES
                                                                                           (CLASS) REMAINING
                                     NUMBER OF SECURITIES                                  AVAILABLE FOR FUTURE
                                     (CLASS) TO BE ISSUED       WEIGHTED-AVERAGE           ISSUANCE UNDER EQUITY
                                     UPON EXERCISE OF           EXERCISE PRICE OF          COMPENSATION PLANS
                                     OUTSTANDING OPTIONS,       OUTSTANDING OPTIONS        (EXCLUDING SECURITIES
PLAN CATEGORY                        WARRANTS AND RIGHTS        WARRANTS AND RIGHTS        REFLECTED IN COLUMN (A))
-------------                        -------------------        -------------------        ------------------------
                                            (a)                          (b)                         (c)
<S>                                     <C>                       <C>                         <C>
Equity compensation plans
approved by security holders            1,080,101 (Class A)       $13.52 (Class A)            1,228,900 (Class A)
                                          313,900 (Class B)       $13.12 (Class B)                   -- (Class B)
Equity compensation plans not
approved by security holders                   --                     --                             --
                                        ---------                 ------                      ---------
         Total                          1,394,001                 $13.43                      1,228,900
</TABLE>



                                      -32-
<PAGE>


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The response to this Item is incorporated by reference to pages 5 through 6
and page 15 of the Company's proxy statement relating to the Company's annual
meeting of stockholders to be held April 17, 2003.

ITEM 14.  CONTROLS AND PROCEDURES.

     Within the 90 days prior to the date of this Form 10-K Report, the Company
carried out an evaluation of the effectiveness of the design and operation of
its disclosure controls and procedures. This evaluation was performed under the
supervision and with the participation of management, including the Company's
President and Chief Executive Officer and the Company's Chief Financial Officer.

     Under the rules of the Securities and Exchange Commission, the term
"disclosure controls and procedures" means controls and other procedures of the
Company that are designed to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in such reports is
accumulated and communicated to the Company's management, including the
President and Chief Executive Officer and the Chief Financial Officer, as
appropriate to permit management to make timely decisions regarding required
disclosure.

     Based on this evaluation, the Company's President and Chief Executive
Officer and the Company's Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective for gathering, analyzing and
disclosing the information that the Company is required to disclose in the
reports it files under the Securities Exchange Act of 1934, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Subsequent to the date of this evaluation, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls.

     A control system, no matter how well-designed and operated, cannot provide
absolute assurance that the objectives of the controls system are met, and no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected.



                                      -33-
<PAGE>


                                    PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

     (a)  Financial statements, financial statement schedules and exhibits
          filed:

     (1)  Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                                                    PAGE*
                                                                                                    -----
<S>                                                                                                 <C>
  Report of Independent Auditors..............................................................        29

  Donegal Group Inc. and Subsidiaries:
   Consolidated Balance Sheets as of
    December 31, 2002 and 2001................................................................        14
  Consolidated Statements of Income and
   Comprehensive Income for the three years ended
    December 31, 2002, 2001 and 2000..........................................................        15
  Consolidated Statements of Stockholders'
   Equity for the three years ended
    December 31, 2002, 2001 and 2000..........................................................        16
  Consolidated Statements of Cash Flows for the three years ended
   December 31, 2002, 2001 and 2000...........................................................        17
  Notes to Consolidated Financial Statements..................................................      18-28
</TABLE>


     (2)  Financial Statement Schedules


<TABLE>
<CAPTION>
                                                                                                        PAGE
                                                                                                        ----
<S>                                                                                                     <C>
  Donegal Group Inc. and Subsidiaries
  Independent Auditors' Consent and Report on Schedules                                              Exhibit 23
  Schedule I.         Summary of Investments - Other
                        Than Investments in Related Parties...................................
  Schedule II.        Condensed Financial Information of Parent Company.......................
  Schedule III.       Supplementary Insurance Information.....................................
  Schedule IV.        Reinsurance.............................................................
  Schedule VI.        Supplemental Insurance Information Concerning
                        Property and Casualty Subsidiaries....................................
</TABLE>

     All other schedules have been omitted since they are not required, not
applicable or the information is included in the financial statements or notes
thereto.


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

*    Refers to the respective page of Donegal Group Inc.'s 2002 Annual Report to
Stockholders. The Consolidated Financial Statements and Notes to Consolidated
Financial Statements and Auditor's Report thereon on pages 14 through 28 are
incorporated herein by


                                      -34-
<PAGE>


reference. With the exception of the portions of such Annual Report specifically
incorporated by reference in this Item and Items 5, 6, 7 and 8 hereof, such
Annual Report shall not be deemed filed as part of this Form 10-K Report or
otherwise subject to the liabilities of Section 18 of the Securities Exchange
Act of 1934.

     (3)  Exhibits

<TABLE>
<CAPTION>
     EXHIBIT NO.                                 DESCRIPTION OF EXHIBITS                                REFERENCE
     -----------                                 -----------------------                                ---------
<S>                    <C>                                                                              <C>
       (3)(i)          Certificate of Incorporation of Registrant, as amended.                             (a)

       (3)(ii)         Amended and Restated By-laws of Registrant.                                         (b)

                    MANAGEMENT CONTRACTS AND COMPENSATORY PLANS OR ARRANGEMENTS

       (10)(A)          Donegal Group Inc. Amended and Restated 1996 Equity                                (c)
                        Incentive Plan.

       (10)(B)          Donegal Group Inc. 2001 Equity Incentive Plan for Employees.                       (d)

       (10)(C)          Donegal Group Inc. 2001 Equity Incentive Plan for Directors.                       (d)

       (10)(D)          Donegal Group Inc. 2001 Employee Stock Purchase Plan, as                           (e)
                        amended.

       (10)(E)          Donegal Group Inc. Amended and Restated 2001 Agency Stock Purchase Plan.           (f)

       (10)(F)          Donegal Mutual Insurance Company 401(k) Plan.                                      (g)

       (10)(G)          Amendment No. 1 effective January 1, 2000 to Donegal Mutual Insurance              (g)
                        Company 401(k) Plan.

       (10)(H)          Amendment No. 2 effective January 6, 2000 to Donegal Mutual Insurance              (b)
                        Company 401(k) Plan.

       (10)(I)          Amendment No. 3 effective July 23, 2001 to Donegal Mutual Insurance                (b)
                        Company 401(k) Plan.

       (10)(J)          Amendment No. 4 effective January 1, 2002 to Donegal Mutual Insurance              (b)
                        Company 401(k) Plan.

       (10)(K)          Amendment No. 5 effective December 31, 2001 to Donegal Mutual Insurance            (b)
                        Company 401(k) Plan.

       (10)(L)          Amendment No. 6 effective July 1, 2002 to Donegal Mutual Insurance                Filed
                        Company 401(k) Plan.                                                            herewith
</TABLE>


                                      -35-
<PAGE>

<TABLE>
<CAPTION>
     EXHIBIT NO.                                 DESCRIPTION OF EXHIBITS                                REFERENCE
     -----------                                 -----------------------                                ---------
<S>                    <C>                                                                              <C>
       (10)(M)          Donegal Mutual Insurance Company Executive Restoration Plan.                       (h)

<CAPTION>
                                                 OTHER MATERIAL CONTRACTS
                                                 ------------------------
<S>                    <C>                                                                              <C>

       (10)(N)          Tax Sharing Agreement dated September 29, 1986 between Donegal Group Inc.          (i)
                        and Atlantic States Insurance Company.

       (10)(O)          Services Allocation Agreement dated September 29, 1986 between Donegal             (i)
                        Mutual Insurance Company, Donegal Group Inc. and Atlantic States
                        Insurance Company.

       (10)(P)          Proportional Reinsurance Agreement dated September 29,
                        1986 between (i) Donegal Mutual Insurance Company and
                        Atlantic States Insurance Company.

       (10)(Q)          Amendment dated October 1, 1988 to Proportional Reinsurance Agreement              (j)
                        between Donegal Mutual Insurance Company and Atlantic States Insurance
                        Company.

       (10)(R)          Multi-Line Excess of Loss Reinsurance Agreement effective January 1, 2002         Filed
                        among Donegal Mutual Insurance Company, Dorinco Reinsurance Company and         herewith
                        Erie Insurance Group.

       (10)(S)          Amendment dated July 16, 1992 to Proportional Reinsurance Agreement                (k)
                        between Donegal Mutual Insurance Company and Atlantic States Insurance
                        Company.

       (10)(T)          Amendment dated as of December 21, 1995 to Proportional Reinsurance                (l)
                        Agreement between Donegal Mutual Insurance Company and Atlantic States
                        Insurance Company.

       (10)(U)          Reinsurance and Retrocession Agreement dated May 21,
                        1996 between Donegal Mutual Insurance Company and
                        Southern Insurance Company of Virginia.

       (10)(V)          Amended and Restated Credit Agreement dated as of July 27, 1998 among              (m)
                        Donegal Group Inc., the banks and other financial institutions from time
                        to time party thereto and Fleet National Bank, as agent.

       (10)(W)          First Amendment and Waiver to the Amended and Restated Credit Agreement            (g)
                        dated as of December 31, 1999.
</TABLE>


                                      -36-
<PAGE>


<TABLE>
<CAPTION>
     EXHIBIT NO.                                 DESCRIPTION OF EXHIBITS                                REFERENCE
     -----------                                 -----------------------                                ---------
<S>                    <C>                                                                              <C>

       (10)(X)          Amendment dated as of April 20, 2000 to Proportional Reinsurance                   (n)
                        Agreement between Donegal Mutual Insurance Company and Atlantic States
                        Insurance Company.

       (10)(Y)          Lease Agreement dated as of September 1, 2000 between Donegal Mutual               (d)
                        Insurance Company and Province Bank FSB.

       (10)(Z)          Aggregate Excess of Loss Reinsurance Agreement dated as of January 1,              (d)
                        2001 between Donegal Mutual Insurance Company and Atlantic States
                        Insurance Company (as successor-in-interest to Pioneer Insurance Company).

          (13)          2002 Annual Report to Stockholders (electronic filing contains only those         Filed
                        portions incorporated by reference into this Form 10-K Report).                 herewith

          (20)          Proxy Statement relating to the Annual Meeting of Stockholders to be held          (o)
                        on April 17, 2003; provided, however, that the Report of the Compensation
                        Committee, the Performance Graph and the Report of the Audit Committee
                        shall not be deemed filed as part of this Form 10-K Report.

          (21)          Subsidiaries of Registrant.                                                  Filed herewith

          (23)          Consent of Independent Auditors.                                             Filed herewith

        (99.1)          Statement of Chief Executive Officer Pursuant to Section 1350 of the         Filed herewith
                        United States Code.

        (99.2)          Statement of Chief Financial Officer Pursuant to Section 1350 of the         Filed herewith
                        United States Code.
</TABLE>

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

(a)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form S-3 Registration Statement No. 333-59828 filed
     April 30, 2001.

(b)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-K Report for the year ended December 31,
     2001.

(c)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-K Report for the year ended December 31,
     1998.


                                      -37-
<PAGE>

EXHIBIT NO.                   DESCRIPTION OF EXHIBITS                  REFERENCE
-----------                   -----------------------                  ---------

(d)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-K Report for the year ended December 31,
     2000.

(e)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form S-8 Registration Statement No. 333-62974 filed
     June 14, 2001.

(f)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form S-2 Registration Statement No. 333-63102
     declared effective February 8, 2002.

(g)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-K Report for the year ended December 31,
     1999.

(h)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-K Report for the year ended December 31,
     1996.

(i)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form S-1 Registration Statement No. 33-8533
     declared effective October 29, 1986.

(j)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-K Report for the year ended December 31,
     1988.

(k)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 10-K Report for the year ended December 31,
     1992.

(l)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 8-K Report dated December 21, 1995.

(m)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 8-K Report dated November 17, 1998.

(n)  Such exhibit is hereby incorporated by reference to the like-described
     exhibit in Registrant's Form 8-K Report dated May 31, 2000.

(o)  Such exhibit is hereby incorporated by reference to the Registrant's
     definitive proxy statement filed March 24, 2003.

     (b)  Reports on Form 8-K:

     None.


                                      -38-
<PAGE>


                       DONEGAL GROUP INC. AND SUBSIDIARIES

                       SCHEDULE I - SUMMARY OF INVESTMENTS
                    OTHER THAN INVESTMENTS IN RELATED PARTIES
                    -----------------------------------------
                                ($ in thousands)

                                December 31, 2002

<TABLE>
<CAPTION>
                                                                                                  AMOUNT AT WHICH
                                                                                      FAIR          SHOWN IN THE
                                                                    COST              VALUE        BALANCE SHEET
                                                                  --------          --------       --------------
<S>                                                               <C>               <C>           <C>
Fixed Maturities:
Held to maturity:
  United States government and
  Governmental agencies and authorities ................          $ 12,641          $ 13,049          $ 12,641
  Obligations of states and political subdivisions .....            33,892            34,400            33,892
  Canadian government obligation .......................               499               540               499
  All other corporate bonds ............................            29,552            31,285            29,522
  Mortgage-backed securities ...........................            10,118            10,511            10,118
                                                                  --------          --------          --------
  Total fixed maturities
  held to maturity .....................................            86,702            89,785            86,702
                                                                  --------          --------          --------
Available for sale:
  United States government and
  Governmental agencies and authorities ................            56,344            58,287            58,287
  Obligations of states and political subdivisions .....            78,516            81,446            81,446
  All other corporate bonds ............................            34,849            36,863            36,863
  Mortgage-backed securities ...........................            17,787            18,136            18,136
                                                                  --------          --------          --------
  Total fixed maturities
  available for sale ...................................           187,496           194,732           194,732
                                                                  --------          --------          --------
  Total fixed maturities ...............................           274,198           284,517           281,434
                                                                  --------          --------          --------

Equity Securities:
  Preferred stocks:
  Public utilities .....................................               227               254               254
  Banks ................................................             9,001             9,190             9,190
  Industrial and miscellaneous .........................             1,639             1,663             1,663
                                                                  --------          --------          --------
  Total preferred stocks ...............................            10,867            11,107            11,107
                                                                  --------          --------          --------
  Common stocks:
  Banks and insurance companies ........................             3,673             4,176             4,176
  Industrial and miscellaneous .........................             7,047             6,553             6,553
                                                                  --------          --------          --------
  Total common stocks ..................................            10,720            10,729            10,729
                                                                  --------          --------          --------
  Total equity securities ..............................            21,587            21,836            21,836
                                                                  --------          --------          --------
Short-term investments .................................            29,029            29,029            29,029
                                                                  --------          --------          --------
  Total investments ....................................          $324,814          $335,382          $332,299
                                                                  ========          ========          ========
</TABLE>


                                      -39-
<PAGE>


                       DONEGAL GROUP INC. AND SUBSIDIARIES

               SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
               --------------------------------------------------
                                ($ in thousands)

                  Years Ended December 31, 2002, 2001 and 2000

<TABLE>
<CAPTION>
                                                                                 AMORTIZATION
                                                                                 OF DEFERRED
                             NET                 NET           NET LOSSES          POLICY            OTHER             NET
                            EARNED           INVESTMENT         AND LOSS         ACQUISITION      UNDERWRITING       PREMIUMS
    SEGMENT                PREMIUMS            INCOME           EXPENSES            COSTS           EXPENSES         WRITTEN
    -------                --------            ------           --------            -----           --------         -------
<S>                        <C>               <C>               <C>               <C>               <C>               <C>
Year Ended
December 31, 2002
Personal lines             $119,838          $   --            $ 87,790          $ 19,005          $ 16,335          $125,777
Commercial lines             66,003              --              41,478            10,468             8,997            68,727
Investments                    --              14,581              --                --                --                --
                           --------          --------          --------          --------          --------          --------
                           $185,841          $ 14,581          $129,268          $ 29,473          $ 25,332          $194,504
                           ========          ========          ========          ========          ========          ========
Year Ended
December 31, 2001
Personal lines             $104,893          $   --            $ 72,534          $ 17,002          $ 16,881          $111,623
Commercial lines             62,877              --              45,644            10,192            10,119            65,405
Investments                    --              15,886              --                --                --                --
                           --------          --------          --------          --------          --------          --------
                           $167,770          $ 15,886          $118,178          $ 27,194          $ 27,000          $177,028
                           ========          ========          ========          ========          ========          ========
Year Ended
December 31, 2000
Personal lines             $ 97,065          $   --            $ 68,003          $ 16,206          $ 14,950          $100,517
Commercial lines             54,581              --              36,380             9,113             9,113            59,605
Investments                    --              16,395              --                --                --                --
                           --------          --------          --------          --------          --------          --------
                           $151,646          $ 16,395          $104,383          $ 25,319          $ 25,319          $160,122
                           ========          ========          ========          ========          ========          ========
</TABLE>


                                      -40-
<PAGE>


<TABLE>
<CAPTION>
                                   DONEGAL GROUP INC. AND SUBSIDIARIES
                           SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION, CONTINUED
                           ---------------------------------------------------------------
                                                 ($ in thousands)


                                                  At December 31,
                           ---------------------------------------------------------------
                            DEFERRED         LIABILITY                         OTHER POLICY
                             POLICY          FOR LOSSES                         CLAIMS AND
                           ACQUISITION        AND LOSS         UNEARNED          BENEFITS
    SEGMENT                   COSTS           EXPENSES         PREMIUMS          PAYABLE
    -------                -----------       ----------        --------        ------------
<S>                        <C>               <C>               <C>                    <C>

    2002
    ----
Personal lines             $  9,423          $106,096          $ 78,273          $     --
Commercial lines              5,144           104,596            42,729                --
Investments                      --                --                --                --
                           --------          --------          --------          --------
                           $ 14,567          $210,692          $121,002          $     --
                           ========          ========          ========
    2001
    ----
Personal lines             $  8,394          $ 84,726          $ 70,388          $     --
Commercial lines              5,210            95,114            43,691                --
Investments                      --                --                --                --
                           --------          --------          --------          --------
                           $ 13,604          $179,840          $114,079          $     --
                           ========          ========          ========          ========
</TABLE>


                                      -41-
<PAGE>



                       DONEGAL GROUP INC. AND SUBSIDIARIES

                            SCHEDULE IV - REINSURANCE
                            -------------------------



<TABLE>
<CAPTION>
                                                                        CEDED           ASSUMED                           PERCENTAGE
                                                       GROSS           TO OTHER        FROM OTHER           NET             ASSUMED
                                                      AMOUNT          COMPANIES        COMPANIES           AMOUNT           TO NET
                                                   ============      ===========      ============      ============      ==========
<S>                                                <C>               <C>              <C>               <C>                   <C>
                    Year Ended
                December 31, 2002

          Property and casualty premiums           $110,412,498      $58,817,518      $134,246,213      $185,841,193          72%
                                                   ============      ===========      ============      ============          ==
                    Year Ended
                December 31, 2001

          Property and casualty premiums           $105,214,059      $64,220,420      $126,776,215      $167,769,854          76%
                                                   ============      ===========      ============      ============          ==
                    Year Ended
                December 31, 2000

          Property and casualty premiums           $ 95,671,588      $54,981,016      $110,955,627      $151,646,199          73%
                                                   ============      ===========      ============      ============          ==
</TABLE>



                                      -42-

<PAGE>

                       DONEGAL GROUP INC. AND SUBSIDIARIES

                SCHEDULE VI - SUPPLEMENTARY INSURANCE INFORMATION
                  CONCERNING PROPERTY AND CASUALTY SUBSIDIARIES
                  ---------------------------------------------



<TABLE>
<CAPTION>
                                                                DISCOUNT,
                          DEFERRED             LIABILITY         IF ANY,
                           POLICY             FOR LOSSES        DEDUCTED
                         ACQUISITION           AND LOSS           FROM            UNEARNED
                            COSTS              EXPENSES         RESERVES          PREMIUMS
                            -----              --------         --------          --------
     <S>                <C>                  <C>                   <C>          <C>
     At December 31,
          2002          $14,567,070          $210,691,752          $--          $121,002,447
                        ===========          ============          ===          ============
          2001          $13,604,215          $179,839,905          $--          $114,079,264
                        ===========          ============          ===          ============
          2000          $12,284,214          $156,476,124          $--          $ 99,940,381
                        ===========          ============          ===          ============
</TABLE>

                                                                     (continued)


                                      -43-
<PAGE>


                       DONEGAL GROUP INC. AND SUBSIDIARIES

                SCHEDULE VI - SUPPLEMENTARY INSURANCE INFORMATION
            CONCERNING PROPERTY AND CASUALTY SUBSIDIARIES, CONTINUED
            --------------------------------------------------------

                  Years ended December 31, 2002, 2001 and 2000

<TABLE>
<CAPTION>
                                                                                        LOSSES AND LOSS
                                                                                       EXPENSES RELATED TO
                                                                                ----------------------------------
                                         NET
                                        EARNED                 INVESTMENT             CURRENT              PRIOR
                                       PREMIUMS                  INCOME                 YEAR               YEARS
                                       --------                  ------                 ----               -----
          <S>                        <C>                   <C>                   <C>                     <C>
              Year Ended
          December 31, 2002          $185,841,193          $ 14,581,252          $122,433,653           $  6,834,033
                                     ============          ============          ============           ============
              Year Ended
          December 31, 2001          $167,769,854          $ 15,885,544          $110,142,467           $  8,035,082
                                     ============          ============          ============           ============
              Year Ended
          December 31, 2000          $151,646,199          $ 16,394,747          $103,671,401           $    711,775
                                     ============          ============          ============           ============
</TABLE>

<TABLE>
<CAPTION>

                                                             AMORTIZATION
                                                             OF DEFERRED              NET
                                                                POLICY             PAID LOSSES               NET
                                        ACQUISITION            AND LOSS              PREMIUMS
                                           COST                EXPENSES              WRITTEN
                                           ----                --------              -------
          <S>                          <C>                   <C>                   <C>
              Year Ended
          December 31, 2002            $ 29,473,000          $114,525,368          $194,503,847
                                       ============          ============          ============
              Year Ended
          December 31, 2001            $ 27,194,000          $106,342,848          $177,027,654
                                       ============          ============          ============
              Year Ended
          December 31, 2000            $ 25,319,000          $100,907,860          $160,122,420
                                       ============          ============          ============
</TABLE>



                                      -44-
<PAGE>


                                   SIGNATURES
                                   ----------


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                           DONEGAL GROUP INC.


Date:  March 28, 2003                      By:  s/Donald H. Nikolaus
                                           -------------------------------------
                                           Donald H. Nikolaus, President

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                SIGNATURE                                   TITLE                              DATE
                ---------                                   -----                              ----
<S>                                         <C>                                           <C>
                                            President and a Director                      March 28, 2003
s/Donald H. Nikolaus                        (principal executive officer)
------------------------------
Donald H. Nikolaus

                                            Senior Vice President, Chief                  March 28, 2003
                                            Financial Officer and
                                            Secretary (principal financial
s/Ralph G. Spontak                          and accounting officer)
------------------------------
Ralph G. Spontak

s/Robert S. Bolinger                        Director                                      March 28, 2003
------------------------------
Robert S. Bolinger

s/Patricia A. Gilmartin                     Director                                      March 28, 2003
------------------------------
Patricia A. Gilmartin

s/Philip H. Glatfelter                      Director                                      March 28, 2003
------------------------------
Philip H. Glatfelter

                                            Director                                      March   , 2003
------------------------------
John J. Lyons

                                            Director                                      March   , 2003
------------------------------
R. Richard Sherbahn
</TABLE>


                                      -45-
<PAGE>


                                  CERTIFICATION
                                  -------------

     I, Donald H. Nikolaus, President of Donegal Group Inc., certify that:

     1. I have reviewed this annual report on Form 10-K for the year ended
December 31, 2002 of Donegal Group Inc.;

     2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

     3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

          (a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

          (b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

          (c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

     5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

          (a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

          (b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and


                                      -46-
<PAGE>


     6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.



Date:  March 28, 2003                   s/Donald H. Nikolaus
                                        ----------------------------------------
                                        Donald H. Nikolaus, President


                                      -47-
<PAGE>


                                  CERTIFICATION
                                  -------------

     I, Ralph G. Spontak, Senior Vice President, Chief Financial Officer and
Secretary of Donegal Group Inc., certify that:

     1. I have reviewed this annual report on Form 10-K for the year ended
December 31, 2002 of Donegal Group Inc.;

     2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

     3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

          (a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

          (b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

          (c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

     5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

          (a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

          (b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and


                                      -48-
<PAGE>


     6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.



Date:  March 28, 2003                   s/Ralph G. Spontak
                                        ----------------------------------------
                                        Ralph G. Spontak, Senior Vice
                                        President, Chief Financial Officer
                                        and Secretary


                                      -49-
<PAGE>


EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)

<TABLE>
<CAPTION>
     EXHIBIT NO.                                 DESCRIPTION OF EXHIBITS                                REFERENCE
     -----------                                 -----------------------                                ---------
     <S>                <C>                                                                             <C>
        (3)(i)          Certificate of Incorporation of Registrant, as amended.                            (a)

       (3)(ii)          Amended and Restated By-laws of Registrant.                                        (b)

                            MANAGEMENT CONTRACTS AND COMPENSATORY PLANS OR ARRANGEMENTS
                            -----------------------------------------------------------

       (10)(A)          Donegal Group Inc. Amended and Restated 1996 Equity                                (c)
                        Incentive Plan.

       (10)(B)          Donegal Group Inc. 2001 Equity Incentive Plan for Employees.                       (d)

       (10)(C)          Donegal Group Inc. 2001 Equity Incentive Plan for Directors.                       (d)

       (10)(D)          Donegal Group Inc. 2001 Employee Stock Purchase Plan, as                           (e)
                        amended.

       (10)(E)          Donegal Group Inc. Amended and Restated 2001 Agency Stock Purchase Plan.           (f)

       (10)(F)          Donegal Mutual Insurance Company 401(k) Plan.                                      (g)

       (10)(G)          Amendment No. 1 effective January 1, 2000 to Donegal Mutual Insurance              (g)
                        Company 401(k) Plan.

       (10)(H)          Amendment No. 2 effective January 6, 2000 to Donegal Mutual Insurance              (b)
                        Company 401(k) Plan.

       (10)(I)          Amendment No. 3 effective July 23, 2001 to Donegal Mutual Insurance                (b)
                        Company 401(k) Plan.

       (10)(J)          Amendment No. 4 effective January 1, 2002 to Donegal Mutual Insurance              (b)
                        Company 401(k) Plan.

       (10)(K)          Amendment No. 5 effective December 31, 2001 to Donegal Mutual Insurance            (b)
                        Company 401(k) Plan.

       (10)(L)          Amendment No. 6 effective July 1, 2002 to Donegal Mutual Insurance                Filed
                        Company 401(k) Plan.                                                            herewith

       (10)(M)          Donegal Mutual Insurance Company Executive Restoration Plan.                       (h)
</TABLE>


                                      -50-
<PAGE>

<TABLE>
<CAPTION>
     EXHIBIT NO.                                 DESCRIPTION OF EXHIBITS                                REFERENCE
     -----------                                 -----------------------                                ---------
     <S>                <C>                                                                             <C>

                                                 OTHER MATERIAL CONTRACTS
                                                 ------------------------
       (10)(N)          Tax Sharing Agreement dated September 29, 1986 between Donegal Group Inc.          (i)
                        and Atlantic States Insurance Company.

       (10)(O)          Services Allocation Agreement dated September 29, 1986 between Donegal             (i)
                        Mutual Insurance Company, Donegal Group Inc. and Atlantic States
                        Insurance Company.

       (10)(P)          Proportional Reinsurance Agreement dated September 29,
                        1986 between (i) Donegal Mutual Insurance Company and
                        Atlantic States Insurance Company.

       (10)(Q)          Amendment dated October 1, 1988 to Proportional Reinsurance Agreement              (j)
                        between Donegal Mutual Insurance Company and Atlantic States Insurance
                        Company.

       (10)(R)          Multi-Line Excess of Loss Reinsurance Agreement effective January 1, 2002         Filed
                        among Donegal Mutual Insurance Company, Dorinco Reinsurance Company and         herewith
                        Erie Insurance Group.

       (10)(S)          Amendment dated July 16, 1992 to Proportional Reinsurance Agreement                (k)
                        between Donegal Mutual Insurance Company and Atlantic States Insurance
                        Company.

       (10)(T)          Amendment dated as of December 21, 1995 to Proportional Reinsurance                (l)
                        Agreement between Donegal Mutual Insurance Company and Atlantic States
                        Insurance Company.

       (10)(U)          Reinsurance and Retrocession Agreement dated May 21,
                        1996 between Donegal (h) Mutual Insurance Company and
                        Southern Insurance Company of Virginia.

       (10)(V)          Amended and Restated Credit Agreement dated as of July 27, 1998 among              (m)
                        Donegal Group Inc., the banks and other financial institutions from time
                        to time party thereto and Fleet National Bank, as agent.

       (10)(W)          First Amendment and Waiver to the Amended and Restated Credit Agreement            (g)
                        dated as of December 31, 1999.

       (10)(X)          Amendment dated as of April 20, 2000 to Proportional Reinsurance                   (n)
                        Agreement between Donegal Mutual Insurance Company and Atlantic States
                        Insurance Company.
</TABLE>


                                      -51-
<PAGE>

<TABLE>
<CAPTION>
     EXHIBIT NO.                                 DESCRIPTION OF EXHIBITS                                REFERENCE
     -----------                                 -----------------------                                ---------
     <S>                <C>                                                                             <C>

       (10)(Y)          Lease Agreement dated as of September 1, 2000 between Donegal Mutual               (d)
                        Insurance Company and Province Bank FSB.

       (10)(Z)          Aggregate Excess of Loss Reinsurance Agreement dated as of January 1,              (d)
                        2001 between Donegal Mutual Insurance Company and Atlantic States
                        Insurance Company (as successor-in-interest to Pioneer Insurance Company).

         (13)           2002 Annual Report to Stockholders (electronic filing contains only those         Filed
                        portions incorporated by reference into this Form 10-K Report).                 herewith

         (20)           Proxy Statement relating to the Annual Meeting of Stockholders to be held          (o)
                        on April 17, 2003; provided, however, that the Report of the Compensation
                        Committee, the Performance Graph and the Report of the Audit Committee
                        shall not be deemed filed as part of this Form 10-K Report.

          (21)          Subsidiaries of Registrant. Filed herewith

          (23)          Consent of Independent Auditors.                                             Filed herewith

        (99.1)          Statement of Chief Executive Officer Pursuant to Section 1350 of the         Filed herewith
                        United States Code.

        (99.2)          Statement of Chief Financial Officer Pursuant to Section 1350 of the         Filed herewith
                        United States Code.

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

(a)       Such exhibit is hereby incorporated by reference to the like-described exhibit in
          Registrant's Form S-3 Registration Statement No. 333-59828 filed April 30, 2001.

(b)       Such exhibit is hereby incorporated by reference to the like-described exhibit in
          Registrant's Form 10-K Report for the year ended December 31, 2001.

(c)       Such exhibit is hereby incorporated by reference to the like-described exhibit in
          Registrant's Form 10-K Report for the year ended December 31, 1998.

(d)       Such exhibit is hereby incorporated by reference to the like-described exhibit in
          Registrant's Form 10-K Report for the year ended December 31, 2000.
</TABLE>


                                      -52-
<PAGE>

<TABLE>
<CAPTION>
     EXHIBIT NO.                                 DESCRIPTION OF EXHIBITS                                REFERENCE
     -----------                                 -----------------------                                ---------
<S>                                             <C>                                                     <C>

(e)       Such exhibit is hereby incorporated by reference to the like-described exhibit in
          Registrant's Form S-8 Registration Statement No. 333-62974 filed June 14, 2001.

(f)       Such exhibit is hereby incorporated by reference to the like-described exhibit in
          Registrant's Form S-2 Registration Statement No. 333-63102 declared effective
          February 8, 2002.

(g)       Such exhibit is hereby incorporated by reference to the like-described exhibit in
          Registrant's Form 10-K Report for the year ended December 31, 1999.

(h)       Such exhibit is hereby incorporated by reference to the like-described exhibit in
          Registrant's Form 10-K Report for the year ended December 31, 1996.

(i)       Such exhibit is hereby incorporated by reference to the like-described exhibit in
          Registrant's Form S-1 Registration Statement No. 33-8533 declared effective
          October 29, 1986.

(j)       Such exhibit is hereby incorporated by reference to the like-described exhibit in
          Registrant's Form 10-K Report for the year ended December 31, 1988.

(k)       Such exhibit is hereby incorporated by reference to the like-described exhibit in
          Registrant's Form 10-K Report for the year ended December 31, 1992.

(l)       Such exhibit is hereby incorporated by reference to the like-described exhibit in
          Registrant's Form 8-K Report dated December 21, 1995.

(m)       Such exhibit is hereby incorporated by reference to the like-described exhibit in
          Registrant's Form 8-K Report dated November 17, 1998.

(n)       Such exhibit is hereby incorporated by reference to the like-described exhibit in
          Registrant's Form 8-K Report dated May 31, 2000.

(o)       Such exhibit is hereby incorporated by reference to the Registrant's definitive
          proxy statement filed March 24, 2003.
</TABLE>



                                            -53-



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.10(L)
<SEQUENCE>3
<FILENAME>ex-10l.txt
<TEXT>
                                 AMENDMENT NO. 6

                        Donegal Mutual Insurance Company
                              401 (K) Plan ("Plan")


         In accordance with Section 8.1 of the Plan, the Plan is hereby amended
effective July 1, 2002 as follows:

1.       The second sentence of subsection (a) of Section 3.4 is deleted and the
         following substituted therefore:

         "The amount of Elective Contributions may not be less than 1% nor more
         than 100% of the Participant's compensation as elected by the
         Participant in units of 1% points on forms provided by the Plan
         Committee, which notwithstanding this sentence, may limit the amount of
         the Participant's Elective Contribution if at any time it determines
         that such limitation is necessary to satisfy the requirements of IRC
         Section 401(k)."

2.       There is hereby added at the end of subsection (b) of Section 3.11 the
         following sentence:

         "Rollover amount also does not include after tax contributions of the
         Employee from whatever source derived."

         IN WITNESS WHEREOF and as evidence of the adoption of this Amendment
No. 6, Donegal Mutual Insurance Company has caused its duly authorized officers
to execute this document on its behalf and under its seal this ______ day of
__________, 2002.


                                           Donegal Mutual Insurance Company

ATTEST:                                    By: ______________________________
                                               Donald H. Nikolaus, President

----------------------------
Ralph G. Spontak, Secretary

       (Corporate Seal)





</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.10(R)
<SEQUENCE>4
<FILENAME>ex-10r.txt
<TEXT>

                 MULTI-LINE EXCESS OF LOSS REINSURANCE AGREEMENT

                                     between

                        DONEGAL MUTUAL INSURANCE COMPANY
                                 (Marietta, PA)
                     SOUTHERN INSURANCE COMPANY OF VIRGINIA
                                (Glen Allen, VA)
                       SOUTHERN HERITAGE INSURANCE COMPANY
                                (Duluth, Georgia)
                        ATLANTIC STATES INSURANCE COMPANY
                                 (Marietta, PA)
                            PIONEER INSURANCE COMPANY
                                (Greenville, NY)
                            PIONEER INSURANCE COMPANY
                                (Greenville, OH)
                       DELAWARE ATLANTIC INSURANCE COMPANY
                                (Wilmington, DE)


                (hereinafter collectively called the "Reinsured")

                                       and

         The Reinsurers subscribing to the respective Interests and Liabilities
         Contract to which this Agreement is attached (hereinafter called the
         "Reinsurer")


ARTICLE 1                         BUSINESS COVERED

This Agreement, subject to the terms and conditions herein contained, is to
indemnify the Reinsured in respect of the net excess liability as herein
provided and specified which may accrue to the Reinsured as a result of any loss
or losses which may occur or claims which may be made during the term of this
Agreement arising out of any and all binders, policies, and contracts of
insurance (hereinafter referred to as "policy" or "policies") heretofore or
hereafter issued or entered into by or on behalf of the Reinsured and classified
by the Reinsured as Property and Casualty, to include Property, Multi-Peril
Policies, General Liability, Workers' Compensation and Automobile.


ARTICLE 2                            TERRITORY

This Agreement shall cover wherever the Reinsured's policies cover.


                                       1
<page>


ARTICLE 3                            EXCLUSIONS

This Agreement shall not cover business classified by the Reinsured as:

1.       Pools, Associations, or Syndicates, including State Insurance Guaranty
         Associations. However, such operations which the Reinsured is obliged
         to cover by reason of membership in the National Workers' Compensation
         Reinsurance Pool or any state Workers' Compensation Assigned Risk Pool
         or Plan or participation in any Automobile Assigned Risk Pool, Plan or
         Facility are not to be excluded. Furthermore, this exclusion shall not
         apply to any Inter-Company Pooling.

2.       Insurance on Growing and/or Standing Crops.

3.       Reinsurance of any kind assumed by the Reinsured, except local agency
         reinsurance accepted in the normal course of business.

4.       War, as defined in the original policy.

5.       Bridges, tunnels and art collections valued at over $1,000,000.

6.       Loss or liability excluded by the provisions of:

         a.       Nuclear Incident Exclusion Clause - Physical Damage -
                  Reinsurance

         b.       Nuclear Incident Exclusion Clause - Liability - Reinsurance

         c.       Nuclear Incident Exclusion Clause - Physical Damage and
                  Liability (Boiler and Machinery Policies) - Reinsurance

                         as per clauses attached hereto.

7.       Boiler and Machinery with the exception of that business covered under
         a standard multiple peril policy.

8.       Stevedoring.

9.       United States Longshoremen and Harbor Workers Act Exposure.

10.      Jones Act Exposure.

11.      Workers' Compensation on all mining operations.

                                       2
<page>

12.      Workers' Compensation on operations employing the process of nuclear
         fission or fusion or handling of radioactive material.

13.      Long haul trucking.

14.      Vehicles used as a public or livery conveyance for passengers except
         courtesy cars and civic, charitable or welfare organization buses.

15.      Medical Malpractice.

16.      Professional liability, except Druggists, Morticians, Beauty Shops,
         Pastoral, Opticians, Condominium Directors and Officers Liability and
         Employee Benefits Liability.

17.      Aviation and Ocean Marine.

18.      Fidelity, Surety, Credit, Title, Insolvency and Financial Guaranty with
         the exception of that business covered under a standard multiple peril
         policy.

19.      Insolvency Funds, as per clause attached.

20.      Manufacturing of pharmaceuticals and/or chemicals.

21.      Railroad Operations.

22.      Racing or speed contests.

23.      Earthquake and flood when written as such.

24.      Difference in conditions insurance.

25.      Asbestos manufacturing.

26.      Transportation of liquified petroleum gas and/or explosives.

27.      Commercial ambulance service.

28.      Manufacture of firearms.

Other than as respects risks excluded in 1-6, 11, 12, 15, 17-28 above, the
exclusions listed in this Article shall not be considered applicable when the
excluded Class constitutes an incidental part of the insured's regular business
operations.

In the event the Reinsured is bound on any risk excluded above without the
knowledge of and/or contrary to the instructions of the Reinsured's supervisory
underwriting personnel, the reinsurance provided under this Agreement shall
apply until terminated or first anniversary whichever should first occur.

                                       3
<page>

ARTICLE 4                                TERM AND CANCELLATION

A.       This Agreement shall become effective on January 1, 2002 at 12:01 A.M.,
         Standard Time. It is unlimited as to its duration and may be terminated
         as of any January 1st at 12:01 A.M., Standard Time by either party upon
         giving to the other party hereto no less than ninety (90) days' notice
         of cancellation in writing by mail. In the event either party
         terminates in accordance with the above, the Reinsurer shall continue
         to participate in all reinsurances coming within the terms of this
         Agreement granted or renewed by the Reinsured within the said ninety
         (90) days.

         In the event of termination the Reinsurer shall (1) remain liable for
         losses occurring or claims made prior to such termination date and (2)
         at the option of the Reinsured, shall remain liable at the same terms
         and conditions with respect to policies in force at the date of
         termination until the expiration, cancellation or next anniversary of
         such acceptance, whichever first occurs, but not for any more than
         twelve months following the date of termination plus odd time, if any,
         not to exceed eighteen months in all.

B.       This Agreement shall apply as follows:

         (1)      As respects all policies written on a claims-made basis,
                  claims made during the term of this Agreement. The date of
                  loss, for purposes of this Agreement, shall be understood to
                  mean the date that the claim was made against the Reinsured or
                  the date as otherwise provided under the original claims-made
                  policy.

                  In the event the Reinsured provides an Extended Reporting
                  Period which becomes effective during the term of this
                  Agreement the Reinsurer shall continue to be liable for claims
                  received by the Reinsured or original insured under the
                  reporting provisions of the original claims-made policy during
                  such Extended Reporting Period, provided always that the loss
                  which results in any such claim takes place prior to the
                  effective date of the Extended Reporting Period. For purposes
                  hereof, the date of loss for claims received during the
                  Extended Reporting Period shall be the expiration, anniversary
                  or cancellation date of the policy to which the Extended
                  Reporting Period was attached.

         (2)      As respects all other business covered hereunder, losses
                  arising during the term of this Agreement.

                                       4
<page>

C. In the event of a loss involving one or more policies the following shall
   apply:

         (1)      Where one or more occurrence policies are involved in the same
                  loss, the date of the loss shall determine the recovery
                  hereon.

         (2)      Where one or more claims-made policies are involved in the
                  same loss, the date of the first claim reported during the
                  treaty period, including those reported under an Extended
                  Reporting Period which became effective during the treaty
                  period, shall determine the recovery hereon. Any further
                  claims reported during and subsequent to the annual treaty
                  period relating to the same loss will go toward the retention
                  in the treaty year in which the first claim was made.

         (3)      Where one or more claims-made policies and one or more
                  occurrence policies are involved in the same loss, the date of
                  loss under the occurrence policy shall determine the recovery
                  hereon. Any further claims reported during and subsequent to
                  the annual treaty period relating to the same loss will go
                  toward the retention in the treaty year in which the first
                  claim was made.


ARTICLE 5                           DEFINITION OF LOSS OCCURRENCE

As respects Casualty:

The term "loss occurrence", as used herein, shall mean any one occurrence or
series of occurrences arising out of one event. Occupational Disease under
Workers' Compensation policies shall be deemed to be an occurrence within the
meaning of this Agreement and each case of an employee contracting any disease
for which the Company may be held liable shall be considered as constituting a
separate or distinct occurrence. The date of such occurrence shall be deemed to
be the following:

(1)      If the case is compensable under the Workers' Compensation Law, the
         date of the beginning of the disability for which compensation is
         payable.

(2)      If the case is not compensable under the Workers' Compensation Law, the
         date that disability due to said disease actually began.

(3)      If the claim is made after employment has ceased, the date of cessation
         of such employment.

                                       5
<page>

As respects Property:

The term "Loss Occurrence" as used herein shall mean the sum of all individual
losses occasioned by any one disaster, accident or loss or series of disasters,
accidents or losses arising out of one event which occurs within the area of one
state of the United States or province of Canada and states or provinces
contiguous thereto and to one another. However, the duration and extent of any
one "Loss Occurrence" shall be limited to all individual losses sustained by the
Reinsured occurring during any period of 168 consecutive hours arising out of
and directly occasioned by the same event except that the term "Loss Occurrence"
shall be further defined as follows:

i)       As regards windstorm, hail, tornado, hurricane, cyclone, including
         ensuing collapse and water damage, all individual losses sustained by
         the Reinsured occurring during any period of 72 consecutive hours and
         arising out of and directly occasioned by the same event. However, the
         event need not be limited to one state or province or states or
         provinces contiguous thereto.

ii)      As regards riot, riot attending a strike, civil commotion, vandalism
         and malicious mischief, all individual losses sustained by the
         Reinsured occurring during any period of 72 consecutive hours within
         the area of one municipality or county and the municipalities or
         counties contiguous thereto arising out of and directly occasioned by
         the same event. The maximum duration of 72 consecutive hours may be
         extended in respect of individual losses which occur beyond such 72
         consecutive hours during the continued occupation of an assured's
         premises by strikers, provided such occupation commenced during the
         aforesaid period.

iii)     As regards earthquake (the epicenter of which need not necessarily be
         within the territorial confines referred to in the opening paragraph of
         this article) and fire following directly occasioned by the earthquake,
         only those individual fire losses which commence during the period of
         168 consecutive hours may be included in the Reinsured's "Loss
         Occurrence".

iv)      As regards "Freeze", only individual losses directly occasioned by
         collapse, breakage of glass and water damage (caused by bursting of
         frozen pipes and tanks) may be included in the Reinsured's "Loss
         Occurrence".

Except for those "Loss Occurrences" referred to in (i) and (ii) the Reinsured
may choose the date and time when any such period of consecutive hours commences
provided that it is not earlier than the date and time of the occurrence of the
first recorded individual loss sustained by the Reinsured arising out of that

                                       6
<page>

disaster, accident or loss and provided that only one such period of 168
consecutive hours shall apply with respect to one event.

However, as respects those "Loss Occurrences" referred to in (i) and (ii), if
the disaster, accident or loss occasioned by the event is of greater duration
than 72 consecutive hours, then the Reinsured may divide that disaster, accident
or loss into two or more "Loss Occurrences" provided no two periods overlap and
no individual loss is included in more than one such period and provided that no
period commences earlier than the date and time of the occurrence of the first
recorded individual loss sustained by the Reinsured arising out of that
disaster, accident or loss.

No individual losses occasioned by an event that would be covered by 72 hours
clauses may be included in any "Loss Occurrence" claimed under the 168 hours
provision.

Losses directly or indirectly occasioned by:

i) loss of, alteration of, or damage to

                                       or

ii) a reduction in the functionality, availability or operation of

a computer system, hardware, program, software, data, information repository,
microchip, integrated circuit or similar device in computer equipment or
non-computer equipment, whether the property of the policyholder of the
Reinsured or not, do not in and of themselves constitute an event unless arising
out of one or more of the following perils:

         fire, lightning, explosion, aircraft or vehicle impact, falling
         objects, windstorm, hail, tornado, cyclone, hurricane, earthquake,
         volcano, tsunami, flood, freeze or weight of snow.


ARTICLE 6                             NET RETAINED LINES

This Agreement applies only to that portion of any insurance or reinsurance
covered by this Agreement which the Reinsured retains net for its own account,
and in calculating the amount of any loss hereunder and also in computing the
amount in excess of which this Agreement attaches, only loss or losses in
respect of that portion of any insurance or reinsurance which the Reinsured
retains net for its own account shall be included, it being understood and
agreed that the amount of the Reinsurer's liability hereunder in respect of any

                                       7
<page>

loss or losses shall not be increased by reason of the inability of the
Reinsured to collect from any other reinsurers, whether specific or general, any
amounts which may have become due from them whether such inability arises from
the insolvency of such other reinsurers or otherwise.

It is understood and agreed that any inter-company pooling shall be disregarded
for purposes of determining the Net Retained Lines hereunder.


ARTICLE 7                             ULTIMATE NET LOSS

The term "Ultimate Net Loss" shall be understood to mean the actual loss or
losses paid or to be paid by the Reinsured under its policies, including 90% of
any losses in Excess of Original Policy Limits, as defined in Article 8, and 90%
of any Extra Contractual Obligations, as defined in Article 9, such loss or
losses to include expenses of litigation, if any, interest accrued where such
interest is part of the judgment and all other loss expenses of the Reinsured
including legal expenses and costs incurred in connection with coverage and
validity questions and legal actions connected thereto which are allocable only
to a specific claim or action on policies covered hereunder (including a pro
rata share of salaries and expenses of the Reinsured's field employees while
adjusting such claims or losses and expenses of the Reinsured's officials
incurred in connection with claims or losses, but no salaries of the Reinsured's
officials or any normal overhead charges such as rent, postal, lighting,
cleaning, heating, etc., shall be included) less proper deductions for all
recoveries (including amounts recoverable under other reinsurance except
reinsurance, if any, inuring to the benefit of the Reinsured) and salvages
actually made by the Reinsured; provided always that nothing in this Article
shall be construed to mean that losses under this Agreement are not recoverable
until the Reinsured's ultimate net loss has been ascertained.

All salvages, recoveries and payments recovered or received subsequent to a loss
settlement under this Agreement shall be applied as if recovered or received
prior to the said settlement and all necessary adjustments shall be made by the
parties hereto.


ARTICLE 8                        EXCESS OF ORIGINAL POLICY LIMITS

This Agreement shall protect the Reinsured, within the limits hereof, in
connection with ultimate net loss in excess of the limit of its original policy,
such loss in excess of the limit having been incurred because of failure by it
to settle within the policy limit or by reason of alleged or actual negligence,

                                       8
<page>

fraud or bad faith in rejecting an offer of settlement or in the preparation of
the defense or in the trial of any action against its Insured or Reassured or in
the preparation or prosecution of an appeal consequent upon such action.

However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Reinsured acting individually or collectively or in collusion with any
individual or corporation or any other organization or party involved in the
presentation, defense or settlement of any claim covered hereunder.

For the purposes of this Article, the word "loss" shall mean any amounts for
which the Reinsured would have been contractually liable to pay had it not been
for the limit of the original policy.

Furthermore, if any provision of this Article shall be rendered illegal or
unenforceable by the laws, regulations or public policy of any state, such
provision shall be considered void in such state, but this shall not affect the
validity or enforceability of any other provision of this Agreement or the
enforceability of such provision in any other jurisdiction.


ARTICLE 9                    EXTRA CONTRACTUAL OBLIGATIONS CLAUSE

This Agreement shall protect the Reinsured within the limits hereof, where the
ultimate net loss includes any Extra Contractual Obligations. "Extra Contractual
Obligations" are defined as those liabilities not covered under any other
provision of this Agreement and which arise from the handling of any claim on
business covered hereunder, such liabilities arising because of, but not limited
to, the following: Failure by the Reinsured to settle within the policy limit,
or by reason of alleged or actual negligence, fraud or bad faith in rejecting an
offer of settlement or in the preparation of the defense or in the trial of any
action against its Insured or Reassured or in the preparation or prosecution of
an appeal consequent upon such action.

The date on which an Extra Contractual Obligation is incurred by the Reinsured
shall be deemed, in all circumstances, to be the date of the original accident,
casualty, disaster or loss occurrence.

However, this Article shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate officer of the
Reinsured acting individually or collectively or in collusion with any

                                       9
<page>

individual or corporation or any other organization or party involved in the
presentation, defense or settlement of any claim covered hereunder.

Furthermore, if any provision of this Article shall be rendered illegal or
unenforceable by the laws, regulations or public policy of any state, such
provision shall be considered void in such state, but this shall not affect the
validity or enforceability of any other provision of this Agreement or the
enforceability of such provision in any other jurisdiction.


ARTICLE 10                        LIMITS AND RETENTIONS

(A)      As respects business classified by the Reinsured as Property:

No claim shall be made upon the Reinsurer unless and until the Reinsured shall
have first sustained an ultimate net loss in excess of $300,000 each risk each
loss and then the Reinsurer shall be liable for the ultimate net loss sustained
by the Reinsured in excess of $300,000 in respect of each risk each loss. The
limit of liability of the Reinsurer in respect of each risk each loss shall be
$700,000 and $2,800,000 in respect of each occurrence.

The Reinsured shall be the sole judge as to what constitutes any one risk.

(B)      As respects business classified by the Reinsured as Casualty:

No claim shall be made upon the Reinsurer unless and until the Reinsured shall
have first sustained an ultimate net loss in excess of $300,000 each and every
loss occurrence and then the Reinsurer shall be liable for the ultimate net loss
sustained by the Reinsured in excess of $300,000 in respect of each such loss
occurrence. The limit of liability of the Reinsurer in respect of any one such
loss occurrence shall be $700,000.

Notwithstanding the foregoing paragraphs, where the original policy or policies
of the Reinsured provide for aggregate limits of liability, this Agreement shall
cover excess of $300,000 ultimate net loss in the aggregate for such aggregate
liability any one original policy year, but such sums recoverable hereunder
shall not exceed $700,000 ultimate net loss in the aggregate any one policy
year.

"Policy year" shall mean "each separate original policy period of not exceeding
twelve months commencing at the inception, anniversary or renewal date as and
from January 1, 2002."

"Aggregate" shall mean "ultimate net loss incurred in the aggregate during any
one policy year".

                                       10
<page>

(C)      In respect of a combination loss involving both (A) and (B) above, the
         limit of the Reinsurer shall be $1,700,000 ultimate net loss and the
         amount retained by the Reinsured shall be $300,000 each loss
         occurrence.

It is agreed, however, that not more than one property risk shall be included in
any such combination accident or occurrence.

Recoveries from a loss or losses caused by Terrorism (as defined in this
Agreement) shall be limited to $2, 100,000 during each 12 month period (January
1 through December 31) this Agreement remains in effect.


ARTICLE 11                      DEFINITION OF TERRORISM

An act of terrorism includes any act or preparation in respect of action, or
threat of action designed to influence the government de jure or de factor of
any nation or any political division thereof, or in pursuit of political,
religious, ideological, or similar purposes to intimidate the public or a
section of the public of any nation by any person or group(s) of persons whether
acting alone or on behalf of or in connection with any organization(s) or
government(s) de jure or de factor, and which:

i)   involves violence against one or more persons; or
ii)  involves damage to property; or
iii) endangers life other than that of the person committing the action; or
iv)  creates a risk to health or safety of the public or a section of the
     public; or
v)   is designed to interfere with or to disrupt an electronic system.

An act of terrorism also includes loss, damage, cost or expense directly or
indirectly caused by, contributed to by resulting from, or arising out of or in
connection with any action in controlling, preventing, suppressing, retaliating
against, or responding to any act of terrorism.


ARTICLE 12                          RATE AND PREMIUM

The Reinsured shall pay to the Reinsurer during each annual period of this
Agreement premium calculated by applying a rate of 3.50% to the gross net earned
premium income of the Reinsured during such period in respect of business the
subject matter of this Agreement.

                                       11
<page>

The term "gross net earned premium income" as used herein shall be understood to
mean gross premiums earned by the Reinsured less premiums paid for reinsurances
which inure to this Agreement. It is understood that 50% of Automobile Physical
Damage premiums, other than collision, shall be deducted for theft during the
period for which computation is being made.

The Reinsured shall pay to the Reinsurer an annual deposit premium of
$7,150,000. Said deposits shall be payable in quarterly installments of
$1,787,500 at each January 1, April 1, July 1 and October 1.

As soon as practicable after each January 1, 2003, the Reinsured shall submit a
statement showing the actual premium due for the term calculated in accordance
with the first paragraph of this Article, and the debtor party shall remit to
the other the amount due, if any, by which the actual premium differs from the
deposit premium, subject to the annual minimum premium of $5,720,000.


ARTICLE 13                                CURRENCY

All premiums and losses paid under this Agreement shall be made in United States
currency.


ARTICLE 14                   NOTICE OF LOSS AND LOSS SETTLEMENTS

In the event of a loss occurrence which either results in or appears to be of
serious enough nature as probably to result in a loss involving this Agreement,
the Reinsured shall give notice as soon as reasonably practicable to the
Reinsurer and the Reinsured shall keep the Reinsurer advised of all subsequent
developments in connection therewith.

The Reinsurer agrees to abide by the loss settlements of the Reinsured, such
settlements to be considered as satisfactory proof of loss, and amounts falling
to the share of the Reinsurer shall be immediately payable to the Reinsured by
them upon reasonable evidence of the amount paid or to be paid by the Reinsured.


ARTICLE 15                          ACCESS TO RECORDS

The Reinsurer, by its duly appointed representatives, shall have the right at
any reasonable time, to examine all papers in the possession of the Reinsured
referring to business effected hereunder.

                                       12
<page>


ARTICLE 16                            STATISTICS

The Reinsured shall furnish the Reinsurer such quarterly and annual statistics
as may be necessary to comply with statutory requirements and in such form as
may be mutually agreed upon.


ARTICLE 17                       ERRORS AND OMISSIONS

Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made. Such delay, omission or error shall
be rectified immediately upon discovery.


ARTICLE 18                              TAXES

In consideration of the terms under which this Agreement is issued, the
Reinsured undertakes not to claim any deduction in respect of the premium hereon
when making tax returns other than Income or Profits Tax returns to any State or
Territory or the District of Columbia.


ARTICLE 19                         FEDERAL EXCISE TAX

(Applies only to those Reinsurers, excepting Underwriters at Lloyd's, London and
other Reinsurers exempt from the Federal Excise Tax, who are domiciled outside
the United States of America.)

The Reinsurer has agreed to allow for the purpose of paying the Federal Excise
Tax the percentage specified by United States law of the premium payable hereon
to the extent such premium is subject to Federal Excise Tax.

In the event of any return of premium becoming due hereunder the Reinsurer will
deduct the percentage specified by United States law from the amount of the
return and the Reinsured or its agent should take steps to recover the Tax from
the U.S. Government.


ARTICLE 20                         LOSS RESERVES

(This Clause is applicable to any Reinsurer who does not qualify for credit by
states having jurisdiction over the Reinsured.)

At annual intervals (or more frequently as determined by the Reinsured, but not
more frequently than quarterly) the Reinsured will submit to the Reinsurer a

                                       13
<page>

statement showing the proportion of losses, as defined below, applicable to the
Reinsurer.

The Reinsurer will apply for, and secure delivery thereof to the Reinsured, a
clean, irrevocable and unconditional Letter of Credit in an amount equal to the
Reinsurer's share of said losses. The Letter of Credit shall be issued by a
United States bank which is a member of the Federal Reserve System and which is
acceptable to the Insurance Departments of such states.

If, as of a statement date, the Reinsurer's share of losses under this Agreement
shall exceed the then available balance of the Letter of Credit, the Reinsurer
shall, within thirty (30) days after receiving such statement, secure delivery
to the Reinsured of an amendment to the clean, irrevocable and unconditional
Letter of Credit increasing the balance of the Letter of Credit available by the
amount of such difference.

If the Reinsurer's share of losses under this Agreement shall be less than the
then available balance of the Letter of Credit, the Reinsured shall, within
thirty (30) days after receipt of written request of Reinsurer, release such
excess amount by agreeing to consent to an amendment to the Letter of Credit
reducing the balance of the Letter of Credit available by the amount of such
excess.

The Reinsured undertakes to use and apply any amounts which it may draw upon the
Letter of Credit, without diminution because of the insolvency of the Reinsured
or Reinsurer, notwithstanding any other provision in this contract, only for one
or more of the following purposes:

         (1)      To pay or reimburse itself for the Reinsurer's share of losses
                  paid by the Reinsured for which the Reinsurer is obligated to
                  reimburse the Reinsured, if not otherwise paid by the
                  Reinsurer.

         (2)      To obtain a cash deposit of the Reinsurer's share under this
                  contract of losses, if the clean, irrevocable and
                  unconditional Letter of Credit is not renewed at least thirty
                  (30) days before the expiration thereof, and the Reinsurer
                  shall continue thereafter to have a share in such losses.

         (3)      To pay any other amounts the Reinsured claims are due under
                  this reinsurance contract.

The Reinsured will immediately return to the Reinsurer any amounts drawn down on
the Letter of Credit that are subsequently determined not to be due.

                                       14
<page>


The term "losses" as used in this Article shall include:

         losses and allocated loss adjustment expenses paid by the Reinsured but
         not recovered (in proportion) from the Reinsurer,

         reserves for losses reported and outstanding, losses incurred but not
         reported, and allocated loss adjustment expenses.


ARTICLE 21                            INSOLVENCY

In the event of the insolvency of the Reinsured, this reinsurance shall be
payable directly to the Reinsured, or to its liquidator, receiver, conservator
or statutory successor on the basis of the liability of the Reinsured without
diminution because of the insolvency of the Reinsured or because the liquidator,
receiver, conservator or statutory successor of the Reinsured has failed to pay
all or a portion of any claim. It is agreed, however, that the liquidator,
receiver, conservator or statutory successor of the Reinsured shall give written
notice to the Reinsurer of the pendency of a claim against the Reinsured
indicating the policy or bond reinsured which claim would involve a possible
liability on the part of the Reinsurer within a reasonable time after such claim
is filed in the conservation or liquidation proceeding or in the receivership,
and that during the pendency of such claim, the Reinsurer may investigate such
claim and interpose, at its own expense, in the proceeding where such claim is
to be adjudicated any defense or defenses that they may deem available to the
Reinsured or its liquidator, receiver, conservator or statutory successor. The
expense thus incurred by the Reinsurer shall be chargeable subject to the
approval of the court, against the Reinsured as part of the expense of
conservation or liquidation to the extent of a pro rata share of the benefit
which may accrue to the Reinsured solely as a result of the defense undertaken
by the Reinsurer.

Where two or more Reinsurers are involved in the same claim and a majority in
interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of the reinsurance agreement as though
such expense had been incurred by the Reinsured.

The reinsurance shall be payable by the Reinsurer to the Reinsured or to its
liquidator, receiver, conservator or statutory successor, except as provided by
subsection a of Section 4118 of the New York Insurance Law or except (a) where
the Agreement specifically provides another payee of such reinsurance in the
event of the insolvency of the Reinsured, or (b) where the Reinsurer with the

                                       15
<page>

consent of the direct insured or insureds has assumed such policy obligations of
the Reinsured as direct obligations of the Reinsurer to the payees under such
policies and in substitution for the obligations of the Reinsured to such
payees.

However, in the event of insolvency of any one of the Reinsureds, each party
agrees to honor the terms set forth herein as if this Agreement were a separate
agreement between the Reinsurer and each individually named Reinsured. Balances
payable or recoverable by any Reinsurer or each individually named Reinsurer or
individually named Reinsured shall not serve to offset any balances payable or
recoverable to or from any other Reinsured party to this Agreement. Reports and
remittances made to the Reinsurer in accordance with Articles 11 and 14 are to
be in sufficient detail to identify both the Reinsurer's loss obligations due
each Reinsured and each Reinsured's premium remittance under the report. In the
event that the policies of two or more individually named Reinsureds are
involved in the same casualty loss occurrence, the retention shall be $300,000
as respects the Ultimate Net Loss for all Reinsureds added together, and the
loss recoverable for each individually named Reinsured shall be in the same
proportion that the individually named Reinsured's loss bears to the total
Ultimate Net Loss. However, regardless of the number of individually named
Reinsureds involved in one loss occurrence, in no event will the Reinsurer be
liable for more than $700,000 each risk each loss and $2,800,000 in respect of
each occurrence as respects property, $700,000 each and every loss occurrence as
respects casualty and $1,700,000 each loss occurrence as respects a combined
property and casualty loss.


ARTICLE 22                             ARBITRATION

As a precedent to any right of action hereunder, if any dispute shall arise
between the Reinsured and the Reinsurer with reference to the interpretation of
this Agreement or their rights with respect to any transaction involved, whether
such dispute arises before or after termination of this Agreement, such dispute
upon the written request of either party, shall be submitted to three
arbitrators, one to be chosen by each party, and the third by the two so chosen.
If either party refuses or neglects to appoint an arbitrator within thirty days
after the receipt of written notice from the other party requesting it to do so,
the requesting party may appoint two arbitrators. If the two arbitrators fail to
agree in the selection of a third arbitrator within thirty days of their
appointment, each of them shall name two, of whom the other shall decline one
and the decision shall be made by drawing lots. All arbitrators shall be active
or retired executive officers of insurance or reinsurance companies not under
the control of either party to this Agreement.

                                       16
<page>

The Arbitrators shall interpret the Agreement and make their decision with
regard to the custom and usage of the insurance and reinsurance business. They
shall issue their decision in writing based upon a hearing in which evidence may
be introduced without following strict rules of evidence, but in which cross
examination and rebuttal shall be allowed. They shall make their award with a
view to effecting the general purpose of this Agreement in a reasonable manner
rather than in accordance with a literal interpretation of the language.

The decision in writing of any two arbitrators, when filed with the parties
hereto, shall be final and binding on both parties. Judgment may be entered upon
the final decision of the arbitrators in any court having jurisdiction. Each
party shall bear the expense of its own arbitrator and shall jointly and equally
bear with the other party the expense of the third arbitrator and of the
arbitration. Said arbitration shall take place in Marietta, Pennsylvania unless
some other place is mutually agreed upon by the Reinsured and the Reinsurer.


ARTICLE 23                             SERVICE OF SUIT

(Applies only to those Reinsurers who are domiciled outside the United States
and/or unauthorized in any state, territory, or district of the United States
having jurisdiction over the Reinsured.)

In the event of the failure of the Reinsurer hereon to pay any amount claimed to
be due hereunder the Reinsurer hereon, at the request of the Reinsured, will
submit to the jurisdiction of any court of competent jurisdiction within the
United States and will comply with all requirements necessary to give such court
jurisdiction and all matters arising hereunder shall be determined in accordance
with the law and practice of such court.

Service of process in such suit may be made upon Messrs. Mendes and Mount, 750
Seventh Avenue, New York, New York 10019-6829, and that any suit instituted
against any one of them under this Agreement, the Reinsurer will abide by the
final decision of such court or of any Appellate Court in the event of an
appeal.

The above-named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of the
Reinsured to give a written undertaking to the Reinsured that they will enter a
general appearance upon the Reinsurer's behalf in the event such suit shall be
instituted. Further, pursuant to any statute of any state, territory or district
of the United States which makes provision therefor, the Reinsurer hereon hereby

                                       17
<page>

designates the Superintendent, Commissioner or Director of Insurance or other
officer specified for that purpose in the statute, or his successor or
successors in office, as their true and lawful attorney upon whom may be served
any lawful process in any action, suit or proceeding instituted by or on behalf
of the Reinsured or any beneficiary hereunder arising out of this Agreement and
hereby designate the above-named as the person to whom the said officer is
authorized to mail such process or a true copy thereof.


ARTICLE 24                          WRITTEN AGREEMENT

There are no other agreements between the Reinsurer and the Reinsured regarding
the reinsurance provided by this Agreement, including but not limited to
agreements which directly or indirectly guarantee a profit under this Agreement
for either party.


ARTICLE 25                             INTERMEDIARY

John P. Woods Co., Inc., is hereby recognized as the intermediary through whom
all communications relating hereto (including but not limited to notices,
statements, premiums, return premiums, commissions, taxes, losses, loss
adjustment expenses, salvage and loss settlement) shall be transmitted to both
parties. It is understood, as regards remittances due either party hereunder,
that payment by the Reinsured to John P. Woods Co., Inc. shall constitute
payment to the Reinsurer, but payment by the Reinsurer to John P. Woods Co.,
Inc., shall only constitute payment to the Reinsured to the extent such payments
are actually received by the Reinsured.



                                       18
<page>




                       NUCLEAR INCIDENT EXCLUSION CLAUSE -
                          PHYSICAL DAMAGE - REINSURANCE

        1. This Reinsurance does not cover any loss or liability accruing to the
Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any
Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or
Nuclear Energy risks.

        2. Without in any way restricting the operation of paragraph (1) of this
Clause, this Reinsurance does not cover any loss or liability accruing to the
Reinsured, directly or indirectly and whether as Insurer or Reinsurer, from any
insurance against Physical Damage (including business interruption or
consequential loss arising out of such Physical Damage) to:

                  I.       Nuclear reactor power plants including all auxiliary
                           property on the site, or

                  II.      Any other nuclear reactor installation, including
                           laboratories handling radioactive materials in
                           connection with reactor installations, and "critical
                           facilities" as such, or

                  III.     Installations for fabricating complete fuel elements
                           or for processing substantial quantities of "special
                           nuclear material", and for reprocessing, salvaging,
                           chemically separating, storing or disposing of
                           "spent" nuclear fuel or waste materials, or

                  IV.      Installations other than those listed in paragraph
                           (2) III above using substantial quantities of
                           radioactive isotopes or other products of nuclear
                           fission.

        3. Without in any way restricting the operations of paragraphs (1) and
(2) hereof, this Reinsurance does not cover any loss or liability by radioactive
contamination accruing to the Reinsured, directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith except that this paragraph (3) shall not
operate

         (a)      where Reinsured does not have knowledge of such nuclear
                  reactor power plant or nuclear installation, or

                                       19
<page>

         (b)      where said insurance contains a provision excluding coverage
                  for damage to property caused by or resulting from radioactive
                  contamination, however caused. However on and after 1st
                  January 1960 this sub-paragraph (b) shall only apply provided
                  the said radioactive contamination exclusion provision has
                  been approved by the Governmental Authority having
                  jurisdiction thereof.

        4. Without in any way restricting the operations of paragraphs (1), (2)
and (3) hereof, this Reinsurance does not cover any loss or liability by
radioactive contamination accruing to the Reinsured, directly or indirectly, and
whether as Insurer or Reinsurer, when such radioactive contamination is a named
hazard specifically insured against.

         5. It is understood and agreed that this Clause shall not extend to
risks using radioactive isotopes in any form where the nuclear exposure is not
considered by the Reinsured to be the primary hazard.

         6. The term "special nuclear material" shall have the meaning given it
in the Atomic Energy Act of 1954, or by any law amendatory thereof.

         7. Reinsured to be sole judge of what constitutes:
            (a)   substantial quantities, and
            (b)   the extent of installation, plant or site.

NOTE: Without in any way restricting the operation of paragraph (1) hereof, it
is understood and agreed that

         (a)      all policies issued by the Reinsured on or before 31st
                  December 1957 shall be free from the application of the other
                  provisions of this Clause until expiry date or 31st December
                  1960 whichever first occurs whereupon all the provisions of
                  this Clause shall apply.

         (b)      with respect to any risk located in Canada policies issued by
                  the Reinsured on or before 31st December 1958 shall be free
                  from the application of the other provisions of this Clause
                  until expiry date or 31st December 1960 whichever first occurs
                  whereupon all the provisions of this Clause shall apply.


                                       20
<page>


                 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY -
                               REINSURANCE, U.S.A.


        (1) This reinsurance does not cover any loss or liability accruing to
the Reinsured as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.

        (2) Without in any way restricting the operation of paragraph (1) of
this Clause it is understood and agreed that for all purposes of this
reinsurance all the original policies of the Reinsured (new, renewal and
replacement) of the classes specified in Clause II of this paragraph (2) from
the time specified in Clause III in this paragraph (2) shall be deemed to
include the following provision (specified as the Limited Exclusion Provision):

        Limited Exclusion Provision.*

           I.     It is agreed that the policy does not apply under any
                  liability coverage, to [injury, sickness, disease, death or
                  destruction, bodily injury or property damage] with respect to
                  which an insured under the policy is also an insured under a
                  nuclear energy liability policy issued by Nuclear Energy
                  Liability Insurance Association, Mutual Atomic Energy
                  Liability Underwriters or Nuclear Insurance Association of
                  Canada, or would be an insured under any such policy but for
                  its termination upon exhaustion of its limit of liability.

          II.     Family Automobile Policies (liability only), Special
                  Automobile Policies (private passenger automobiles, liability
                  only), Farmers Comprehensive Personal Liability Policies
                  (liability only), Comprehensive Personal Liability Policies
                  (liability only) or policies of a similar nature; and the
                  liability portion of combination forms related to the four
                  classes of policies stated above, such as the Comprehensive
                  Dwelling Policy and the applicable types of Homeowners
                  Policies.

         III.     The inception dates and thereafter of all original policies as
                  described in II above, whether new, renewal or replacement,
                  being policies which either


                  (a)  become effective on or after 1st May, 1960, or

                                       21
<page>

                  (b)  become effective before that date and contain the Limited
                       Exclusion Provision set out above;

                  provided this paragraph (2) shall not be applicable to Family
                  Automobile Policies, Special Automobile Policies, or policies
                  or combination policies of a similar nature, issued by the
                  Reinsured on New York risks, until 90 days following approval
                  of the Limited Exclusion Provision by the Governmental
                  Authority having jurisdiction thereof.

         (3) Except for those classes of policies specified in Clause II of
paragraph (2) and without in any way restricting the operation of paragraph (1)
of this Clause, it is understood and agreed that for all purposes of this
reinsurance the original liability policies of the Reinsured (new, renewal and
replacement) affording the following coverages:

                  Owners, Landlords and Tenants Liability, Contractual
                  Liability, Elevator Liability, Owners or Contractors
                  (including railroad) Protective Liability, Manufacturers and
                  Contractors Liability, Product Liability, Professional and
                  Malpractice Liability, Storekeepers Liability, Garage
                  Liability, Automobile Liability (including Massachusetts Motor
                  Vehicle or Garage Liability)

shall be deemed to include, with respect to such coverages, from the time
specified in Clause V of this paragraph (3), the following provision (specified
as the Broad Exclusion Provision):

         Broad Exclusion Provision.*

         It is agreed that the policy does not apply:

         I.       Under any Liability Coverage, to [injury, sickness, disease,
                  death or destruction, bodily injury or property damage]

                  (a)      with respect to which an insured under the policy is
                           also an insured under a nuclear energy liability
                           policy issued by Nuclear Energy Liability Insurance
                           Association, Mutual Atomic Energy Liability
                           Underwriters or Nuclear Insurance Association of
                           Canada, or would be an insured under any such policy
                           but for its termination upon exhaustion of its limit
                           of liability; or

                  (b)      resulting from the hazardous properties of nuclear
                           material and with respect to which (1) any person or
                           organization is required to maintain financial

                                       22
<page>

                           protection pursuant to the Atomic Energy Act of 1954,
                           or any law amendatory thereof, or (2) the insured is,
                           or had this policy not been issued would be, entitled
                           to Indemnity from the United States of America, or
                           any agency thereof, under any agreement entered into
                           by the United States of America, of any agency
                           thereof, with any person or organization.

          II.     Under any Medical Payments Coverage, or under any
                  Supplementary payments Provision relating to [immediate
                  medical or surgical relief, first aid,] to expenses incurred
                  with respect to [bodily injury, sickness, disease, death or
                  bodily injury] resulting from the hazardous properties of
                  nuclear material and arising out of the operation of a nuclear
                  facility by any person or organization.

         III.     Under any Liability Coverage, to [injury, sickness, disease,
                  death or destruction, bodily injury or property damage]
                  resulting from the hazardous properties of nuclear material,
                  if

                  (a)      the nuclear material (1) is at any nuclear facility
                           owned by, or operated by or on behalf of, an insured
                           or (2) has been discharged or dispersed therefrom;

                  (b)      the nuclear material is contained in spent fuel or
                           waste at any time possessed, handled, used, processed
                           stored, transported or disposed of by or on behalf of
                           an insured; or

                  (c)      the [injury, sickness, disease, death or destruction
                           bodily injury or property damage] arises out of the
                           furnishing by an insured of services, materials,
                           parts or equipment in connection with the planning,
                           construction, maintenance, operation or use of any
                           nuclear facility, but if such facility is located
                           within the United States of America, its territories,
                           or possessions or Canada, this exclusion (c) applies
                           only to [injury to or destruction of property at such
                           nuclear facility] property damage to such nuclear
                           facility and any property thereat.

          IV. As used in this endorsement:

                  "hazardous properties" include radioactive, toxic or explosive
                  properties; "nuclear material" means source material, special

                                       23
<page>

                  nuclear material or byproduct material; "source material",
                  "special nuclear material", and "byproduct material" have the
                  meanings given them in the Atomic Energy Act of 1954 or in any
                  law amendatory thereof; "spent fuel" means any fuel element or
                  fuel component, solid or liquid, which has been used or
                  exposed to radiation in a nuclear reactor; "waste" means any
                  waste material (1) containing byproduct material other than
                  the tailings or wastes produced by the extraction or
                  concentration of uranium or thorium from any ore processed
                  primarily for its source material content and (2) resulting
                  from the operation by any person or organization of any
                  nuclear facility included within the definition of nuclear
                  facility under paragraph (a) or (b) thereof; "nuclear
                  facility" means

                  (a)      any nuclear reactor,
                  (b)      any equipment or device designed or used for (1)
                           separating the isotopes of uranium or plutonium, (2)
                           processing or utilizing spent fuel, or (3) handling,
                           processing or packaging waste,
                  (c)      any equipment or device used for the processing,
                           fabricating or alloying of special nuclear material
                           if at any time the total amount of such material in
                           the custody of the insured at the premises where such
                           equipment or device is located consist of or contains
                           more than 25 grams of plutonium or uranium 233 or any
                           combination thereof, or more than 250 grams of
                           uranium 235,
                  (d)      any structure, basin, excavation, premises or place
                           prepared or used for the storage or disposal of
                           waste,

                  and includes the site on which any of the foregoing is
                  located, all operations conducted on such site and all
                  premises used for such operations; "nuclear reactor" means any
                  apparatus designed or used to sustain nuclear fission in a
                  self-supporting chain reaction or to contain a critical mass
                  of fissionable material; [With respect to injury to or
                  destruction of property, the word "injury" or "destruction"]
                  "property damage" includes all forms of radioactive
                  contamination of property. [includes all forms of radioactive
                  contamination of property.]

           V.     The inception dates and thereafter of all original policies
                  affording coverages specified in this paragraph (3), whether
                  new, renewal or replacement, being policies which become

                                       24
<page>

                  effective on or after 1st May, 1960, provided this paragraph
                  (3) shall not be applicable to

                  (i)  Garage and Automobile Policies issued by the Reinsured on
                       New York risks, or

                  (ii) statutory liability insurance required under Chapter 90,
                       General Laws of Massachusetts,

                  until 90 days following approval of the Broad Exclusion
                  Provision by the Governmental Authority having jurisdiction
                  thereof.

         (4) Without in any way restricting the operation of paragraph (1) of
this Clause, it is understood and agreed that paragraphs (2) and (3) above are
not applicable to original liability policies of the Reinsured in Canada and
that with respect to such policies this Clause shall be deemed to include the
Nuclear Energy Liability Exclusion Provisions adopted by the Canadian
Underwriters' Association or the Independent Insurance Conference of Canada.

         *NOTE. The words printed in brackets in the Limited Exclusion Provision
and in the Broad Exclusion Provision shall apply only in relation to original
liability policies which include a Limited Exclusion Provision or a Broad
Exclusion Provision containing those words.



                                       25
<page>


                        NUCLEAR INCIDENT EXCLUSION CLAUSE
                          PHYSICAL DAMAGE AND LIABILITY
               (BOILER AND MACHINERY POLICIES) REINSURANCE, U.S.A.

         1. This reinsurance does not cover any loss or liability accruing to
the Reinsured as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.

         2. Without in any way restricting the operation of paragraph (1) of
this Clause it is understood and agreed that for all purposes of this
reinsurance all original Boiler and Machinery Insurance or Reinsurance contracts
of the Reinsured shall be deemed to include the following provisions of this
paragraph;

This Policy does not apply to "loss", whether it be direct or indirect,
proximate or remote

         (a)      from an Accident caused directly or indirectly by nuclear
                  reaction, nuclear radiation or radioactive contamination, all
                  whether controlled or uncontrolled; or
         (b)      from nuclear reaction, nuclear radiation or radioactive
                  contamination, all whether controlled or uncontrolled, caused
                  directly or indirectly by, contributed to or aggravated by an
                  Accident.

         3.       However, it is agreed that loss arising out of the use of
                  Radioactive Isotopes in any form is not hereby excluded from
                  reinsurance protection.

         4. Without in any way  restricting  the  operation of paragraph (1)
hereof,  it is  understood  and agreed that

         (a)      all policies issued by the Reinsured effective on or before
                  30th April, 1958, shall be free from the application of the
                  other provisions of this Clause until expiry date or 30th
                  April, 1961, whichever first occurs, whereupon all the
                  provisions of this Clause shall apply.
         (b)      with respect to any risk located in Canada policies issued by
                  the Reinsured effective on or before 30th June, 1958, shall be
                  free from the application of the other provisions of this
                  Clause until expiry date of 30th June, 1961, whichever first
                  occurs, whereupon all the provisions of this Clause shall
                  apply.


                                       26
<page>


                        INSOLVENCY FUNDS EXCLUSION CLAUSE


This Agreement excludes all liability of the Company arising, by contract,
operation of law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, howsoever denominated, established or governed; which provides for
any assessment of or payment or assumption by the Company of part or all of any
claim, debt, charge, fee, or other obligation of an insurer, or its successors
or assigns, which has been declared by any competent authority to be insolvent,
or which is otherwise deemed unable to meet any claim, debt, charge, fee or
other obligation in whole or in part.







NOTES:   Wherever used herein the terms:
-----

                  "Company"                 shall be understood to mean
                                            "Company", "Reinsured", "Reassured"
                                            or whatever other term is used in
                                            the attached reinsurance contract to
                                            designate the reinsured company or
                                            companies.

                  "Agreement"               shall be understood to mean
                                            "Agreement", "Contract", "Policy" or
                                            whatever other term is used to
                                            designate the attached reinsurance
                                            document.

                  "Reinsurers"              shall be understood to mean
                                            "Reinsurers", "Underwriters" or
                                            whatever other term is used in the
                                            attached reinsurance contract to
                                            designate the reinsurer or
                                            reinsurers.




                                       27

<page>



                                    I N D E X
         CLAUSE                                                     ARTICLE

         BUSINESS COVERED                                                1

         TERRITORY                                                       2

         EXCLUSIONS                                                      3

         TERM AND CANCELLATION                                           4

         DEFINITION OF LOSS OCCURRENCE                                   5

         NET RETAINED LINES                                              6

         ULTIMATE NET LOSS                                               7

         EXCESS OF ORIGINAL POLICY LIMITS                                8

         EXTRA CONTRACTUAL OBLIGATIONS CLAUSE                            9

         LIMITS AND RETENTIONS                                          10

         DEFINITION OF TERRORISM                                        11

         RATE AND PREMIUM                                               12

         CURRENCY                                                       13

         NOTICE OF LOSS AND LOSS SETTLEMENTS                            14

         ACCESS TO RECORDS                                              15

         STATISTICS                                                     16

         ERRORS AND OMISSIONS                                           17

         TAXES                                                          18

         FEDERAL EXCISE TAX                                             19

         LOSS RESERVES                                                  20

         INSOLVENCY                                                     21

         ARBITRATION                                                    22

         SERVICE OF SUIT                                                23

         WRITTEN AGREEMENT                                              24

         INTERMEDIARY                                                   25


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.13
<SEQUENCE>5
<FILENAME>ex-13.txt
<TEXT>

                                    FINANCIAL
                                   INFORMATION

<TABLE>
<S>                                                                                                     <C>
Management's Discussion and Analysis of Results of Operations and Financial Condition ................  10
Consolidated Balance Sheets ..........................................................................  14
Consolidated Statements of Income and Comprehensive Income ...........................................  15
Consolidated Statements of Stockholders' Equity ......................................................  16
Consolidated Statements of Cash Flows ................................................................  17
Notes to Consolidated Financial Statements ...........................................................  18
Independent Auditors' Report .........................................................................  29
Corporate Information ................................................................................  30
</TABLE>


                                     page 9
<PAGE>

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

OVERVIEW

Donegal Group Inc. ("DGI" or the "Company") is a regional insurance holding
company doing business in the Mid-Atlantic and Southern states through its two
wholly owned property-casualty insurance subsidiaries, Atlantic States Insurance
Company ("Atlantic States") and Southern Insurance Company of Virginia
("Southern") (collectively "Insurance Subsidiaries"). The Company has three
operating segments: the investment function, the personal lines of insurance and
the commercial lines of insurance. Products offered in the personal lines of
insurance consist primarily of homeowners and private passenger automobile
policies. Products offered in the commercial lines of insurance consist
primarily of commercial automobile, commercial multiple peril and workers'
compensation policies. The Insurance Subsidiaries are subject to regulation by
insurance departments in those states in which they operate and undergo periodic
examination by those departments. The Insurance Subsidiaries are also subject to
competition from other insurance carriers in their operating areas. DGI was
formed in September 1986 by Donegal Mutual Insurance Company (the "Mutual
Company"), which owns 64% of the outstanding common shares of the Company as of
December 31, 2002.

      Atlantic States participates in an intercompany pooling arrangement with
the Mutual Company and assumes 70% of the pooled business. As of January 1,
2002, the Company's results of operations include 100% of the business written
by Southern. Prior to January 1, 2002, Southern ceded 50% of its business to the
Mutual Company. Because the Mutual Company placed substantially all of the
business assumed from Southern into the pool, from which the Company has a 70%
allocation, the Company's results of operations included approximately 85% of
the business written by Southern prior to January 1, 2002.

      During 2000, the Company acquired 45% of the outstanding stock of Donegal
Financial Services Corporation ("DFSC"), a thrift holding company. The remaining
55% of the outstanding stock of DFSC is owned by the Mutual Company.

      On January 1, 2001, the Company purchased all of the outstanding stock of
Pioneer Insurance Company of New York ("Pioneer-New York") from the Mutual
Company. The purchase price was $4,441,311, representing Pioneer-New York's
adjusted statutory equity at December 31, 2000. The acquisition has been
accounted for as a reorganization of entities under common control, similar to a
pooling of interests, as both Pioneer-New York and the Company are under the
common management and control of the Mutual Company. As such, the Company's
financial statements have been restated to include Pioneer-New York as a
consolidated subsidiary. In connection with the transaction, the Company issued
the Mutual Company a $4,441,311 note, which bore a 6% rate and was due in
January 2002. The 6% rate was based upon commercial market rates in effect as of
January 1, 2001. The date was subsequently extended to January 2004, and the
rate adjusted to 5.5%, based upon commercial market rates in effect as of
January 1, 2003.

      Southern Heritage Insurance Company ("Southern Heritage"), previously a
wholly owned subsidiary, was merged into Southern on May 1, 2002. Pioneer
Insurance Company of Ohio ("Pioneer-Ohio") and Delaware Atlantic Insurance
Company ("Delaware"), previously wholly owned subsidiaries, and Pioneer-New York
were merged into Atlantic States on May 1, 2002, August 1, 2001, and September
30, 2001, respectively. The mergers were accounted for as statutory mergers and
had no financial impact on the consolidated entity.

TRANSACTIONS WITH AFFILIATES

The Company's Insurance Subsidiaries have various reinsurance arrangements with
the Mutual Company, which include a pooling agreement with Atlantic States,
catastrophe reinsurance agreements with each of the Insurance Subsidiaries, an
excess of loss reinsurance agreement with Southern, and, prior to January 1,
2002, a 50% quota share contract with Southern. The Mutual Company also has a
100% retrocessional agreement with Southern. A Coordinating Committee exists
that is comprised of two board members of the Company and two board members of
the Mutual Company who do not serve on the other board. All agreements and all
changes to existing agreements between the Company's subsidiaries and the Mutual
Company are subject to approval by the Coordinating Committee. In order to
approve an agreement or a change in an agreement, the Company's members on the
Coordinating Committee must conclude that the agreement or change is fair to the
Company and its stockholders, and the Mutual Company's members on the Committee
must conclude that the agreement or change is fair to the Mutual Company and its
policyholders.

      The pooling agreement between the Mutual Company and Atlantic States is
intended to produce a more uniform and stable underwriting result from year to
year for the participants in the pool than they would experience individually
and to spread the risk of loss among the participants based on their relative
amounts of surplus and relative access to capital. Each company participating in
the pool has at its disposal the capacity of the entire pool, rather than being
limited to policy exposure of a size commensurate with its own capital and
surplus. In addition, the ability of the Company to raise capital, and infuse
that capital into Atlantic States, provides the participants of the pool with an
ability to grow their total direct premiums at a greater rate than would be
possible without the existence of the pool. Premiums, losses, loss expenses and
underwriting expenses are shared proportionately by each of the participants,
with Atlantic States currently assuming 70% of the pooled business and the
Mutual Company retaining 30% of the pooled business.

      The excess of loss and catastrophe reinsurance agreements are intended to
lessen the effects of a single large loss, or an accumulation of losses arising
from one event, to a level that is more in line with each company's size,
underwriting profile and surplus position. The retention levels of these
contracts are less than the retention levels included within reinsurance
contracts with outside reinsurers, where the retention levels are appropriate
for the insurance companies taken as a whole but would be too great a level of
risk for an individual company within the group.


                                    page 10
<PAGE>

      Prior to January 1, 2002, the 50% quota share reinsurance contract between
Southern and the Mutual Company provided additional capacity for direct premium
growth to Southern during periods of growth that exceeded Southern's ability to
support that growth through its own surplus. Premiums, losses and loss expenses
were shared equally by the participants with the Mutual Company paying
commissions to Southern to reimburse its costs related to the underwriting
process.

      The 100% retrocessional contract is intended to provide Southern with the
same A.M. Best rating (currently "A") as the Mutual Company, which Southern
could not achieve without this contract in place.

      The Mutual Company provides facilities, management and other services to
the Company, and the Company reimburses the Mutual Company for such services on
a periodic basis under usage agreements and pooling arrangements. The charges
are based upon the relative participation of the Company and the Mutual Company
in the pooling arrangement, and management of both the Company and the Mutual
Company consider this allocation to be reasonable. Charges for these services
totalled $28,586,888, $29,298,569 and $26,985,080 for 2002, 2001 and 2000,
respectively.

CRITICAL ACCOUNTING POLICIES

The Company's financial statements are combined with those of the Insurance
Subsidiaries and presented on a consolidated basis in accordance with U.S.
generally accepted accounting principles.

      The Company uses estimates and assumptions that can have a significant
effect on the amounts that are reported in its financial statements. The Company
believes the following accounting policies are the most significant as they may
require a higher degree of judgment and estimation.

LIABILITY FOR LOSSES AND LOSS EXPENSES

The most significant estimates relate to reserves for losses and loss expenses.
The liability represents estimates of the ultimate unpaid cost of claims
incurred, including claims incurred but not reported to the Company as of the
close of the reporting period. The estimates of losses for reported claims are
based on reviews of the individual claims considering known information and the
policy provisions relating to the loss. Estimates of losses and loss expenses
for claims incurred but not reported to the Company are established based on
historical data by line of insurance as adjusted for current conditions.
Significant components of estimates used to establish reserves for both reported
claims and unreported claims include a variety of factors such as medical cost
inflation trends, regulatory and judicial rulings, legal settlements, property
replacement and repair cost trends, the propensity of policyholders to litigate
and the willingness of courts to expand causes of loss and the size of awards.
In recent years, certain of these component costs such as medical inflation
trends and legal settlements have experienced significant volatility that
contribute to incurred amounts higher than our original estimates. The Company
continually reviews and analyzes these trends and factors them into its loss
estimates. The Company believes its estimates are appropriate but the ultimate
amounts may differ from the estimates provided.

INVESTMENTS

The Company regularly monitors estimates related to the valuation of its
investment portfolio and the recognition of other than temporary declines in the
value of those investments. All investments are individually monitored for other
than temporary declines. When a decline in value of an individual investment is
considered to be other than temporary, the investment is written down to its
estimated net realizable value and reflected as a realized loss in the statement
of income. The Company makes judgments about when there are other than temporary
declines in its investments. Generally, if an individual equity security has
depreciated in value by more than 20% from its cost basis and has been in such
unrealized loss position for more than six months, or if it is likely that
contractual payments will not be received on debt securities, the Company
assumes there has been an other than temporary decline in value. In addition,
the Company may write-down other securities in an unrealized loss position
depending on the existence of certain other factors such as the significance of
the decline in fair value to the cost basis, deterioration in financial
condition of the issuer, downgrades in the ratings of securities or specific
industry events.

POLICY ACQUISITION COSTS

Policy acquisition costs, consisting primarily of commissions, premium taxes and
certain other underwriting costs that vary with and are directly related to the
production of business, are deferred and amortized over the period in which the
premiums are earned. The method followed in computing deferred policy
acquisition costs limits the amount of such deferred costs to their estimated
realizable value, which gives effect to the premium to be earned, related
investment income, losses and loss expenses, and certain other costs expected to
be incurred as the premium is earned.

RESULTS OF OPERATIONS 2002 COMPARED TO 2001

Total revenues for 2002 were $203,803,561, which were $18,639,938, or 10.1%,
greater than 2001. Net premiums earned increased to $185,841,193, an increase of
$18,071,339, or 10.8%, over 2001. Direct premiums written of the combined pool
of Atlantic States and the Mutual Company increased $22,510,292 or 11.0%. A 3.3%
increase in the direct premiums written of Southern accounted for the majority
of the remaining change. The Company reported net realized investment gains of
$144,190 in 2002 compared to net realized investment losses of $880,254 in 2001.
During 2002 and 2001, certain investments trading below cost had declined on an
other-than-temporary basis. Losses of $378,672 and $1,462,913 were included in
net realized investment gains (losses) for these investments in 2002 and 2001,
respectively. The remaining realized gains and losses in both years resulted
from normal turnover of the Company's investment portfolio. As of December 31,
2002, 93.3% of the Company's bond portfolio was classified as Class 1 (highest
quality) by the National Association of Insurance Commissioners' Securities
Valuation Office. Investment income decreased $1,304,292 in 2002 compared to
2001. In 2002, an increase in average invested assets from $294,988,999 to
$316,466,225 was more than offset by a decrease in the average yield to 4.6% in
2002 from 5.3% in 2001.


                                    page 11
<PAGE>

      The GAAP combined ratio of the Insurance Subsidiaries was 99.6% in 2002,
compared to 103.8% in 2001. The combined ratio is the sum of the ratios of
incurred losses and loss expenses to premiums earned (loss ratio), underwriting
expenses to premiums earned (expense ratio) and policyholder dividends to
premiums earned (dividend ratio). The loss ratio in 2002 was 69.6% compared to
70.5% in 2001. The commercial lines loss ratio decreased significantly to 61.5%
in 2002 compared to 72.7% in 2001. The personal lines loss ratio increased from
69.2% in 2001 to 73.3% in 2002. The commercial automobile and workers'
compensation loss ratios showed considerable improvement in 2002 with the
commercial automobile loss ratio decreasing to 61.6% in 2002 compared to 85.0%
in 2001 and the workers' compensation loss ratio decreasing to 73.1% in 2002
compared to 82.5% in 2001. Net losses and loss expenses for 2002 and 2001
included adverse development of prior accident year losses amounting to $6.8
million and $8.0 million, respectively. In 2001, the adverse loss development
was primarily in commercial lines of business with workers' compensation
representing $3.2 million, commercial auto liability $1.7 million and commercial
multi-peril $1.3 million of the total loss development. Included in those
amounts were $4.2 million of reserve strengthening primarily in the workers'
compensation and commercial auto lines of business. In 2002, the adverse loss
developments in commercial lines were lower with workers' compensation
representing $1.6 million, commercial multi- peril $1.4 million and commercial
auto liability $0.1 million of the total loss development. Private passenger
auto liability's loss development worsened in 2002, representing $2.2 million of
the development in 2002 compared to $1.3 million in 2001, with auto physical
damage representing approximately $1 million in 2002 compared to $0.2 million in
2001. The loss development in 2002 resulted principally from accident year 2001
claims and resulted primarily from the normal claims review process and not from
any change in key assumptions or changes in reserving philosophy. The expense
ratio for 2002 was 29.5% compared to 32.3% in 2001, primarily due to the
Company's cost reduction program, with the dividend ratio decreasing slightly to
0.6% in 2002 compared to 1.0% in 2001. The expense ratio in 2001 included a
guaranty fund assessment of approximately $543,000 resulting from the insolvency
of Reliance Insurance Company. This assessment also contributed to the change in
the expense ratio from 2001 to 2002.

      Income tax expense was $4,491,862, an effective rate of 27.2%, compared to
$1,273,598, or an effective rate of 18.0% in 2001. Tax exempt interest
represented a smaller proportion of net income before taxes in 2002 compared to
2001, and accounted for most of this difference.

RESULTS OF OPERATIONS 2001 COMPARED TO 2000

Total revenues for 2001 were $185,163,623, which were $14,582,036, or 8.5%,
greater than 2000. Net premiums earned increased to $167,769,854, an increase of
$16,123,655, or 10.6%, over 2000. The change in Atlantic State's share of the
pooling arrangement with the Mutual Company from 65% to 70% effective July 1,
2000, accounted for $4,273,297 of the increase in net premiums earned in 2001.
Direct premiums written of the combined pool of Atlantic States and the Mutual
Company increased $23,152,222 or 13.2% in 2001. A 4.0% increase in the direct
premiums written of Southern, an 8.6% increase in the direct premiums written of
Pioneer-Ohio and a 9.6% increase in the direct premiums written of Southern
Heritage accounted for the majority of the remaining change. The Company
reported net realized investment losses of $880,254 in 2001, compared to net
realized investment gains of $170,852 in 2000. During 2001 and 2000, certain
investments trading below cost had declined on an other-than-temporary basis.
Losses of $1,462,913 and $436,943 were included in net realized investment gains
(losses) for these investments in 2001 and 2000, respectively. The remaining
realized gains and losses in both years resulted from normal turnover of the
Company's investment portfolio. As of December 31, 2001, 100.0% of the Company's
bond portfolio was classified as Class 1 (highest quality) by the National
Association of Insurance Commissioners' Securities Valuation Office. Investment
income decreased $509,203 in 2001 compared to 2000. An increase in the average
invested assets from $278,677,748 to $294,988,999 was more than offset by a
decrease in the average yield to 5.3% from 5.9% in 2000, and accounted for the
change.

      The GAAP combined ratio of the Insurance Subsidiaries was 103.8% in 2001,
compared to 101.8% in 2000. The combined ratio is the sum of the ratios of
incurred losses and loss expenses to premiums earned (loss ratio), underwriting
expenses to premiums earned (expense ratio) and policyholder dividends to
premiums earned (dividend ratio). The loss ratio in 2001 was 70.5% compared to
68.8% in 2000. The increased loss ratio reflected the impact of loss and loss
expense reserve strengthening of approximately $4.2 million. The commercial
lines loss ratio increased significantly to 72.7% in 2001 compared to 67.0% in
2000. The personal lines loss ratio decreased from 70.3% in 2000 to 69.2% in
2001. The commercial automobile and workers' compensation loss ratios showed
considerable deterioration in 2001 with the commercial automobile loss ratio
increasing to 85.0% in 2001 compared to 78.1% in 2000 and the workers'
compensation loss ratio increasing to 82.5% in 2001 compared to 64.2% in 2000.
Net losses and loss expenses for 2001 included adverse loss development of prior
accident year losses amounting to $8.0 million compared to $0.7 million in 2000.
In 2001, the loss development was primarily in commercial lines of business with
workers' compensation representing $3.2 million, commercial auto liability $1.7
million and commercial multi-peril $1.3 million of the total loss development.
Those amounts included $4.2 million of reserve strengthening primarily in
workers' compensation and commercial auto lines of business and due primarily to
severity. The expense ratio for 2001 was 32.3% compared to 32.1% in 2000, with
the dividend ratio increasing slightly to 1.0% in 2001 compared to 0.9% in 2000.
The expense ratio in 2001 included a guaranty fund assessment of approximately
$543,000 resulting from the insolvency of Reliance Insurance Company. This
assessment accounted for most of the increase in the expense ratio in 2001
compared to 2000.

      Income tax expense was $1,273,598 for 2001, an effective rate of 18.0%,
compared to $2,906,248, or an effective rate of 24.7% in 2000. Tax exempt
interest represented a larger proportion of net income before taxes in 2001
compared to 2000, and accounted for most of this difference.


                                    page 12
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company generates sufficient funds from its operations and maintains a high
degree of liquidity in its investment portfolio. The primary source of funds to
meet the demands of claim settlements and operating expenses are premium
collections, investment earnings and maturing investments. As of December 31,
2002, the Company had no material commitments for capital expenditures.

      In investing funds made available from operations, the Company maintains
securities' maturities consistent with its projected cash needs for the payment
of claims and expenses. The Company maintains a portion of its investment
portfolio in relatively short-term and highly liquid assets to ensure the
availability of funds.

      As of December 31, 2002, pursuant to a credit agreement dated December 29,
1995, and amended as of July 27, 1998, with Fleet National Bank, the Company had
unsecured borrowings of $19.8 million. Such borrowings were made in connection
with the acquisitions of Delaware, Pioneer-Ohio and Southern Heritage and
various capital contributions to the subsidiaries. As of December 31, 2002, the
Company may borrow up to $24 million at interest rates equal to the bank's then
current prime rate or the then current London interbank Eurodollar bank rate
plus 1.70%. At December 31, 2002, the interest rates were 3.45% on an
outstanding Eurodollar rate balance of $4.8 million and 3.46% on another
Eurodollar rate balance of $15 million. In addition, the Company pays a fee of
3/10 of 1% per annum on the average daily unused portion of the bank's
commitment. On each July 27, the credit line is reduced by $8 million. Any
outstanding loan in excess of the remaining credit line, after such reduction,
is then payable.

      The Company's principal sources of cash with which to meet obligations and
pay stockholder dividends are dividends from the Insurance Subsidiaries which
are required by law to maintain certain minimum surplus on a statutory basis and
are subject to regulations under which payment of dividends from statutory
surplus is restricted and may require prior approval of their domiciliary
insurance regulatory authorities. The Insurance Subsidiaries are also subject to
Risk Based Capital (RBC) requirements that may further impact their ability to
pay dividends. At December 31, 2002, the Insurance Subsidiaries' statutory
capital and surplus were substantially above the RBC requirements. Amounts
available for distribution as dividends to DGI without prior approval of the
insurance regulatory authorities in 2003 are $10,646,804 from Atlantic States
and $2,493,398, from Southern.

      Net unrealized gains resulting from fluctuations in the fair value of
investments reported in the balance sheet at fair value (net of applicable
federal income tax) were $4,911,953 and $2,861,765 at December 31, 2002, and
2001, respectively.

CREDIT RISK

The Company provides property and liability coverages through its subsidiaries'
independent agency systems located throughout its operating area. The majority
of this business is billed directly to the insured, although a portion of the
Company's commercial business is billed through its agents, who are extended
credit in the normal course of business.

The Company's Insurance Subsidiaries have reinsurance agreements in place with
the Mutual Company, as described in Note 2 of the financial statements, and with
a number of major authorized reinsurers, as described in Note 8 of the financial
statements. The Company monitors the financial strength of its unaffiliated
reinsurers, requiring that companies rated by A.M. Best Company maintain a
rating of A- or higher and that foreign reinsurers not rated by A.M. Best
Company maintain a level of financial strength equivalent to companies
qualifying for an A.M. Best Company rating of A- or higher.

IMPACT OF INFLATION

Property and casualty insurance premiums are established before the amount of
losses and loss expenses, or the extent to which inflation may impact such
expenses, are known. Consequently, the Company attempts, in establishing rates,
to anticipate the potential impact of inflation.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

INTEREST RATE RISK

The Company's exposure to market risk for changes in interest rates is
concentrated in its investment portfolio and, to a lesser extent, its debt
obligations. The Company monitors this exposure through periodic reviews of
asset and liability positions. Estimates of cash flows and the impact of
interest rate fluctuations relating to the investment portfolio are modeled
regularly.

      Principal cash flows and related weighted-average interest rates by
expected maturity dates for financial instruments sensitive to interest rates at
December 31, 2002 are as follows:

                                          PRINCIPAL      WEIGHTED-AVERAGE
                                          CASH FLOWS       INTEREST RATE
-------------------------------------------------------------------------
Fixed maturities and
   short-term investments:
      2003                               $ 46,729,420         2.85%
      2004                                 15,700,000         5.81%
      2005                                 30,250,156         5.27%
      2006                                 37,872,512         5.63%
      2007                                 36,687,380         5.49%
      Thereafter                          132,547,410         5.37%
-------------------------------------------------------------------------
   Total                                 $299,786,878
=========================================================================
   Market value                          $313,546,396
=========================================================================
Debt
      2003                               $  3,800,000         3.46%
      2004                                  8,000,000         3.46%
      2005                                  8,000,000         3.46%
-------------------------------------------------------------------------
   Total                                 $ 19,800,000
=========================================================================
   Fair value                            $ 19,800,000
=========================================================================

      Actual cash flows from investments may differ from those stated as a
result of calls and prepayments.

EQUITY PRICE RISK

The combined total of realized and unrealized equity investment losses were
$515,320, $131,146, and $650,229 in 2002, 2001, and 2000, respectively. During
these three years, the largest total equity investment gain and (loss) in a
quarter was $829,914 and $(440,947), respectively.


                                    page 13
<PAGE>

Donegal Group Inc.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,                                                                                      2002             2001
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>              <C>
ASSETS
Investments
   Fixed maturities
      Held to maturity, at amortized cost (fair value $89,785,318 and $86,939,393)           $  86,701,556    $  85,322,965
      Available for sale, at fair value (amortized cost $187,495,949 and $170,269,584)         194,731,660      173,718,844
   Equity securities, available for sale, at fair value (cost $21,587,317 and $16,630,618)      21,836,460       17,517,346
   Short-term investments, at cost, which approximates fair value                               29,029,418       24,074,200
---------------------------------------------------------------------------------------------------------------------------
      Total investments                                                                        332,299,094      300,633,355
Cash                                                                                             1,124,604        4,075,288
Accrued investment income                                                                        3,815,449        3,765,076
Premiums receivable                                                                             26,286,482       24,143,531
Reinsurance receivable                                                                          83,207,272       67,853,174
Deferred policy acquisition costs                                                               14,567,070       13,604,215
Federal income taxes receivable                                                                         --          292,618
Deferred tax asset, net                                                                          6,955,707        7,474,730
Prepaid reinsurance premiums                                                                    27,853,996       29,593,467
Property and equipment, net                                                                      4,430,394        4,568,652
Accounts receivable--securities                                                                    146,507           50,023
Other                                                                                              531,589          578,243
---------------------------------------------------------------------------------------------------------------------------
Total assets                                                                                 $ 501,218,164    $ 456,632,372
===========================================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
   Losses and loss expenses                                                                  $ 210,691,752    $ 179,839,905
   Unearned premiums                                                                           121,002,447      114,079,264
   Accrued expenses                                                                              6,583,825        7,186,107
   Reinsurance balances payable                                                                  1,100,443          839,156
   Federal income taxes payable                                                                    357,547               --
   Cash dividend declared to stockholders                                                          887,315          869,877
   Borrowings under line of credit                                                              19,800,000       27,600,000
   Accounts payable--securities                                                                  2,121,619               --
   Due to affiliate                                                                              4,080,415        4,015,074
   Other                                                                                         1,409,951        1,274,640
---------------------------------------------------------------------------------------------------------------------------
      Total liabilities                                                                        368,035,314      335,704,023
---------------------------------------------------------------------------------------------------------------------------

Stockholders' Equity
   Preferred stock, $1.00 par value, authorized 2,000,000 shares; none issued                           --               --
   Class A common stock, $.01 par value, authorized 30,000,000 shares,
      issued 6,269,093 and 6,097,214 shares and outstanding 6,187,569 and 6,015,690 shares          62,691           60,972
   Class B common stock, $.01 par value, authorized 10,000,000 shares,
      issued 3,024,742 and 3,021,965 shares and outstanding 2,983,980 and 2,981,203 shares          30,247           30,220
   Additional paid-in capital                                                                   60,651,751       58,887,715
   Accumulated other comprehensive income                                                        4,911,953        2,861,765
   Retained earnings                                                                            68,417,956       59,979,425
   Treasury stock, at cost                                                                        (891,748)        (891,748)
---------------------------------------------------------------------------------------------------------------------------
      Total stockholders' equity                                                               133,182,850      120,928,349
---------------------------------------------------------------------------------------------------------------------------
      Total liabilities and stockholders' equity                                             $ 501,218,164    $ 456,632,372
===========================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                    page 14
<PAGE>

Donegal Group Inc.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                                       2002             2001             2000
------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME

Revenues
<S>                                                                      <C>              <C>              <C>
      Net premiums earned (includes affiliated reinsurance of
         $86,195,962, $71,989,136 and $63,989,424)                       $ 185,841,193    $ 167,769,854    $ 151,646,199
      Investment income, net of investment expenses                         14,581,252       15,885,544       16,394,747
      Installment payment fees                                               2,447,229        1,587,396        1,532,792
      Lease income                                                             789,697          801,083          836,997
      Net realized investment gains (losses)                                   144,190         (880,254)         170,852
------------------------------------------------------------------------------------------------------------------------
         Total revenues                                                    203,803,561      185,163,623      170,581,587
------------------------------------------------------------------------------------------------------------------------

Expenses
      Net losses and loss expenses (includes affiliated reinsurance of
         $54,684,955, $50,283,481 and $36,767,436)                         129,267,686      118,177,549      104,383,176
      Amortization of deferred policy acquisition costs                     29,473,000       27,194,000       25,319,000
      Other underwriting expenses                                           25,331,777       27,000,485       23,355,781
      Policy dividends                                                       1,056,790        1,691,759        1,330,330
      Interest                                                               1,119,204        2,247,465        3,285,036
      Other                                                                  1,060,520        1,760,636        1,165,236
------------------------------------------------------------------------------------------------------------------------
         Total expenses                                                    187,308,977      178,071,894      158,838,559
------------------------------------------------------------------------------------------------------------------------
Income before income tax expense                                            16,494,584        7,091,729       11,743,028
Income tax expense                                                           4,491,862        1,273,598        2,906,248
------------------------------------------------------------------------------------------------------------------------
Net income                                                               $  12,002,722    $   5,818,131    $   8,836,780
========================================================================================================================

Net income per common share
      Basic                                                              $        1.32    $         .65    $        1.01
========================================================================================================================
      Diluted                                                            $        1.31    $         .64    $        1.01
========================================================================================================================

STATEMENTS OF COMPREHENSIVE INCOME
Net income                                                               $  12,002,722    $   5,818,131    $   8,836,780
------------------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax
   Unrealized gains on securities:
      Unrealized holding gain arising during the period,
         net of income tax expense of
         $1,148,224, $1,277,504, and $1,057,179                              2,144,813        2,479,860        2,020,267
      Reclassification adjustment for (gains) losses included
         in net income, net of income tax expense (benefit) of
         $49,565, $(299,286), and $58,090                                      (94,625)         580,968         (112,762)
------------------------------------------------------------------------------------------------------------------------
Other comprehensive income                                                   2,050,188        3,060,828        1,907,505
------------------------------------------------------------------------------------------------------------------------
Comprehensive income                                                     $  14,052,910    $   8,878,959    $  10,744,285
========================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                    page 15
<PAGE>

Donegal Group Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                        COMMON STOCK
                            ----------------------------------------------------------------------
                              PRIOR       CLASS A    CLASS B     PRIOR        CLASS A    CLASS B
                              SHARES      SHARES     SHARES      AMOUNT       AMOUNT     AMOUNT
--------------------------------------------------------------------------------------------------
<S>                         <C>          <C>        <C>        <C>          <C>         <C>
Balance,
January 1, 2000              8,574,210                         $8,574,210   $       --  $     --
--------------------------------------------------------------------------------------------------
Issuance of common stock       406,767                            406,767
Net income
Other comprehensive income
Grant of stock options
Cash dividends
--------------------------------------------------------------------------------------------------
Balance,
December 31, 2000            8,980,977                         $8,980,977   $       --  $     --
--------------------------------------------------------------------------------------------------
Issuance of common stock        61,830      60,144      3,758      61,830          601        38
Recapitalization            (9,042,807)  6,027,975  3,013,987  (9,042,807)      60,280    30,140
Net income
Cash dividends
Exercise of stock options                    9,095      4,220                       91        42
Grant of stock options
Other comprehensive income
--------------------------------------------------------------------------------------------------
Balance,
December 31, 2001                   --   6,097,214  3,021,965  $       --   $   60,972  $ 30,220
--------------------------------------------------------------------------------------------------
Issuance of common stock                   166,972                               1,670
Net income
Cash dividends
Exercise of stock options                    4,907      2,777                       49        27
Grant of stock options
Other comprehensive income
--------------------------------------------------------------------------------------------------
Balance,
December 31, 2002                   --   6,269,093  3,024,742          --   $   62,691  $ 30,247
==================================================================================================

<CAPTION>
                                           ACCUMULATED
                             ADDITIONAL      OTHER                                    TOTAL
                              PAID-IN     COMPREHENSIVE   RETAINED      TREASURY   STOCKHOLDERS'
                              CAPITAL     INCOME (LOSS)   EARNINGS       STOCK        EQUITY
------------------------------------------------------------------------------------------------
<S>                         <C>          <C>             <C>           <C>         <C>
Balance,
January 1, 2000             $44,595,437  $  (2,106,568)  $53,621,011   $(891,756)  $103,792,334
------------------------------------------------------------------------------------------------
Issuance of common stock      2,349,773                                               2,756,540
Net income                                                 8,836,780                  8,836,780
Other comprehensive income                   1,907,505                                1,907,505
Grant of stock options           24,630                      (24,630)                        --
Cash dividends                                            (3,163,568)                (3,163,568)
------------------------------------------------------------------------------------------------
Balance,
December 31, 2000           $46,969,840  $    (199,063)  $59,269,593   $(891,756)  $114,129,591
------------------------------------------------------------------------------------------------
Issuance of common stock      1,200,202                                               1,262,671
Recapitalization              8,949,361                                        8         (3,018)
Net income                                                 5,818,131                  5,818,131
Cash dividends                                           (3,466,947)                 (3,466,947)
Exercise of stock options       126,960                                                 127,093
Grant of stock options        1,641,352                   (1,641,352)                        --
Other comprehensive income                   3,060,828                                3,060,828
------------------------------------------------------------------------------------------------
Balance,
December 31, 2001           $58,887,715  $   2,861,765   $59,979,425   $(891,748)  $120,928,349
------------------------------------------------------------------------------------------------
Issuance of common stock      1,641,547                                               1,643,217
Net income                                               12,002,722                  12,002,722
Cash dividends                                           (3,526,157)                 (3,526,157)
Exercise of stock options        84,455                                                  84,531
Grant of stock options           38,034                      (38,034)                        --
Other comprehensive income                   2,050,188                                2,050,188
------------------------------------------------------------------------------------------------
Balance,
December 31, 2002           $60,651,751     $4,911,953   $68,417,956   $(891,748)  $133,182,850
================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                    page 16
<PAGE>

Donegal Group Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                         2002            2001            2000
--------------------------------------------------------------------------------------------------------
<S>                                                         <C>             <C>             <C>
Cash Flows from Operating Activities:
   Net income                                               $ 12,002,722    $  5,818,131    $  8,836,780
--------------------------------------------------------------------------------------------------------
   Adjustments to reconcile net income to net cash
         provided by operating activities:
      Depreciation and amortization                            1,236,592       1,127,510         982,926
      Realized investment (gains) losses                        (144,190)        880,254        (170,852)
   Changes in Assets and Liabilities:
      Losses and loss expenses                                30,851,847      23,363,781      12,296,118
      Unearned premiums                                        6,923,183      14,138,883       7,788,243
      Accrued expenses                                          (602,282)      1,308,632        (165,997)
      Premiums receivable                                     (2,142,951)     (2,385,029)     (3,296,815)
      Deferred policy acquisition costs                         (962,855)     (1,320,001)       (316,463)
      Deferred income taxes                                     (579,654)     (1,360,633)        499,976
      Reinsurance receivable                                 (15,354,098)    (13,309,290)     (8,970,330)
      Accrued investment income                                  (50,373)        237,388        (455,059)
      Amounts due to/from affiliate                               65,341        (513,922)        350,639
      Reinsurance balances payable                               261,287        (795,819)        262,686
      Prepaid reinsurance premiums                             1,739,471      (4,881,083)     (3,156,232)
      Current income taxes                                       650,165         (32,656)        374,620
      Change in pooling participation                                 --              --       3,322,031
      Other, net                                                 181,965        (271,364)        268,316
--------------------------------------------------------------------------------------------------------
         Net adjustments                                      22,073,448      16,186,651       9,613,807
--------------------------------------------------------------------------------------------------------
      Net cash provided by operating activities               34,076,170      22,004,782      18,450,587
--------------------------------------------------------------------------------------------------------

Cash Flows from Investing Activities:
   Purchase of fixed maturities
      Held to maturity                                       (35,867,577)    (45,201,470)    (17,340,175)
      Available for sale                                     (75,783,783)    (71,700,918)    (30,355,507)
   Purchase of equity securities                             (18,325,041)    (12,440,994)    (28,286,533)
   Sale of fixed maturities
      Held to maturity                                           415,000              --              --
      Available for sale                                         461,965      16,250,109       8,719,165
   Maturity of fixed maturities
      Held to maturity                                        34,967,828      51,313,296      13,490,715
      Available for sale                                      58,798,825      50,781,533      11,928,622
   Sale of equity securities                                  13,394,123       7,089,532      24,572,288
   Net purchase of property and equipment                       (552,005)       (161,269)       (275,982)
   Net sales (purchases) of short-term investments            (4,955,218)     (4,634,695)     (2,850,343)
--------------------------------------------------------------------------------------------------------
      Net cash used in investing activities                  (27,445,883)     (8,704,876)    (20,397,750)
--------------------------------------------------------------------------------------------------------

Cash Flows from Financing Activities:
   Issuance of common stock                                    1,727,748       1,386,746       2,756,540
   Borrowings (payments) under line of credit, net            (7,800,000)    (12,400,000)      3,000,000
   Cash dividends paid                                        (3,508,719)     (3,394,352)     (3,126,959)
--------------------------------------------------------------------------------------------------------
      Net cash provided by (used in) financing activities     (9,580,971)    (14,407,606)      2,629,581
--------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash                               (2,950,684)     (1,107,700)        682,418
Cash at beginning of year                                      4,075,288       5,182,988       4,500,570
--------------------------------------------------------------------------------------------------------
Cash at end of year                                         $  1,124,604    $  4,075,288    $  5,182,988
========================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                    page 17
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

Donegal Group Inc. ("DGI" or the "Company") was organized as a regional
insurance holding company by Donegal Mutual Insurance Company (the "Mutual
Company") and operates in the Mid-Atlantic and Southern states through its
wholly owned stock insurance companies, Atlantic States Insurance Company
("Atlantic States") and Southern Insurance Company of Virginia ("Southern")
(collectively "Insurance Subsidiaries"). The Company has three operating
segments: the investment function, the personal lines of insurance and the
commercial lines of insurance. Products offered in the personal lines of
insurance consist primarily of homeowners and private passenger automobile
policies. Products offered in the commercial lines of insurance consist
primarily of commercial automobile, commercial multiple peril and workers'
compensation policies. The Insurance Subsidiaries are subject to regulation by
Insurance Departments in those states in which they operate and undergo periodic
examination by those departments. The Insurance Subsidiaries are also subject to
competition from other insurance carriers in their operating areas. Atlantic
States participates in an intercompany pooling arrangement with the Mutual
Company and assumes 70% of the pooled business. Prior to January 1, 2002,
Southern ceded 50% of its business to the Mutual Company. At December 31, 2002,
the Mutual Company held 64% of the outstanding common stock of the Company.

      During 2000, the Company acquired 45% of the outstanding stock of Donegal
Financial Services Corporation ("DFSC"), a bank holding company, for $3,042,000
in cash. The remaining 55% of the outstanding stock of DFSC is owned by the
Mutual Company.

      On January 1, 2001, the Company purchased all of the outstanding stock of
Pioneer Insurance Company of New York ("Pioneer-New York") from the Mutual
Company. The purchase price was $4,441,311, representing Pioneer-New York's
adjusted statutory equity at December 31, 2000. The acquisition was accounted
for as a reorganization of entities under common control, similar to a pooling
of interests, as both Pioneer-New York and the Company were under the common
management and control of the Mutual Company. As such, the Company's financial
statements were restated to include Pioneer-New York as a consolidated
subsidiary. In connection with the transaction, the Company issued the Mutual
Company a $4,441,311 note, which bears a 5.5% rate and is due in January 2004.
The Company classifies this note in Due to Affiliate.

      Pioneer Insurance Company of Ohio ("Pioneer-Ohio"), Delaware Atlantic
Insurance Company ("Delaware") and Pioneer-New York, previously wholly owned
subsidiaries, were merged into Atlantic States on May 1, 2002, August 1, 2001
and September 30, 2001, respectively. Southern Heritage Insurance Company,
previously a wholly owned subsidiary, was merged into Southern on May 1, 2002.
The mergers were accounted for as statutory mergers and had no financial impact
on the consolidated entity.

BASIS OF CONSOLIDATION

The consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America,
include the accounts of DGI and its wholly owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation.
The term "Company" as used herein refers to the consolidated entity.

USE OF ESTIMATES

In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.

      Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the liabilities for losses and
loss expenses. While management uses available information to provide for such
liabilities, future changes to these liabilities may be necessary based on
changes in trends in claim frequency and severity.

INVESTMENTS

The Company classifies its debt and equity securities into the following
categories:

      Held to Maturity--Debt securities that the Company has the positive intent
      and ability to hold to maturity; reported at amortized cost.

      Available for Sale--Debt and equity securities not classified as held to
      maturity; reported at fair value, with unrealized gains and losses
      excluded from income and reported as a separate component of stockholders'
      equity (net of tax effects).

      Short-term investments are carried at amortized cost, which approximates
fair value.

      If there is a decline in fair value below amortized cost which is other
than temporary, the cost basis for such investments in the held to maturity and
available for sale categories is reduced to fair value. Such decline in cost
basis is recognized as a realized loss and charged to income.

      Premiums and discounts on debt securities are amortized over the life of
the security as an adjustment to yield using the effective interest method.
Realized investment gains and losses are computed using the specific
identification method.

      Premiums and discounts for mortgage-backed debt securities are amortized
using anticipated prepayments.


                                    page 18
<PAGE>

FAIR VALUES OF FINANCIAL INSTRUMENTS

The Company has used the following methods and assumptions in estimating its
fair value disclosures:

      Investments--Fair values for fixed maturity securities are based on quoted
      market prices, when available. If quoted market prices are not available,
      fair values are based on quoted market prices of comparable instruments or
      values obtained from independent pricing services through a bank trustee.
      The fair values for equity securities are based on quoted market prices.

      Cash and Short-Term Investments--The carrying amounts reported in the
      balance sheet for these instruments approximate their fair values.

      Premium and Reinsurance Receivables and Payables--The carrying amounts
      reported in the balance sheet for these instruments approximate their fair
      values.

      Borrowings Under Line of Credit--The carrying amounts reported in the
      balance sheet for the line of credit approximate fair value due to the
      variable rate nature of the line of credit.

REVENUE RECOGNITION

Insurance premiums are recognized as income over the terms of the policies.
Unearned premiums are calculated on a daily pro-rata basis.

POLICY ACQUISITION COSTS

Policy acquisition costs, consisting primarily of commissions, premium taxes and
certain other variable underwriting costs, are deferred and amortized over the
period in which the premiums are earned. Anticipated losses and loss expenses,
expenses for maintenance of policies in force and anticipated investment income
are considered in the determination of the recoverability of deferred
acquisition costs.

PROPERTY AND EQUIPMENT

Property and equipment are reported at depreciated cost that is computed using
the straight-line method based upon estimated useful lives of the assets.

LOSSES AND LOSS EXPENSES

The liability for losses and loss expenses includes amounts determined on the
basis of estimates for losses reported prior to the close of the accounting
period and other estimates, including those for incurred but not reported losses
and salvage and subrogation recoveries.

      These liabilities are continuously reviewed and updated by management, and
management believes that such liabilities are adequate to cover the ultimate net
cost of claims and expenses. When management determines that changes in
estimates are required, such changes are included in current earnings.

      The Company has no material exposures to environmental liabilities.

INCOME TAXES

The Company and its subsidiaries currently file a consolidated federal income
tax return.

      The Company accounts for income taxes using the asset and liability
method. The objective of the asset and liability method is to establish deferred
tax assets and liabilities for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are realized or
settled.

CREDIT RISK

The Company provides property and liability coverages through its Insurance
Subsidiaries' independent agency systems located throughout its operating area.
The majority of this business is billed directly to the insured, although a
portion of the Company's commercial business is billed through its agents, who
are extended credit in the normal course of business.

      The Company's Insurance Subsidiaries have reinsurance agreements in place
with the Mutual Company and with a number of other authorized reinsurers with at
least an A.M. Best rating of A- or an equivalent financial condition.

REINSURANCE ACCOUNTING AND REPORTING

The Company relies upon reinsurance agreements to limit its maximum net loss
from large single risks or risks in concentrated areas, and to increase its
capacity to write insurance. Reinsurance does not relieve the primary insurer
from liability to its policyholders. To the extent that a reinsurer may be
unable to pay losses for which it is liable under the terms of a reinsurance
agreement, the Company is exposed to the risk of continued liability for such
losses. However, in an effort to reduce the risk of non-payment, the Company
requires all of its reinsurers to have an A.M. Best rating of A- or better or,
with respect to foreign reinsurers, to have a financial condition which, in the
opinion of management, is equivalent to a company with at least an A- rating.

STOCK-BASED COMPENSATION

Effective July 1, 2000, the Company adopted Financial Accounting Standards Board
Interpretation No. 44 (FIN No. 44), "Accounting for Certain Transactions
involving Stock Compensation," and Emerging Issues Task Force Issue No. 00-23
(EITF 00-23), "Issues Related to the Accounting for Stock Compensation under
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and FIN No. 44, Accounting for Certain Transactions involving Stock
Compensation." FIN No. 44 states that APB Opinion No. 25 does not apply in the
separate financial statements of a subsidiary to the accounting for stock
compensation granted by the subsidiary to employees of the parent or another
subsidiary. EITF 00-23 states that when employees of a controlling entity are
granted stock compensation, the entity granting the stock compensation should
measure the fair value of the award at the grant date and recognize that fair
value as a dividend to the controlling entity. These provisions apply to the
Company, as the Mutual Company is the employer of record for all employees that
provide services to the Company.


                                    page 19
<PAGE>

      Through June 30, 2000, the Company applied APB Opinion No. 25 in
accounting for its stock-based compensation plans. Accordingly, no compensation
cost has been recognized for grants prior to that date for its fixed stock
option plans and certain of its stock purchase plans. Had the Company recognized
stock compensation expense in accordance with SFAS No. 123, net income and
earnings per share would have been reduced to the pro-forma amounts shown below:

                                    2002          2001          2000
------------------------------------------------------------------------
Net income:
   As reported                   $12,002,722   $ 5,818,131   $ 8,836,780
   Pro-forma                      11,767,787     5,617,773     8,071,825
Basic earnings per share:
   As reported                          1.32           .65          1.01
   Pro-forma                            1.30           .63           .92
Diluted earnings per share:
   As reported                          1.31           .64          1.01
   Pro-forma                            1.28           .62           .92

      The weighted-average grant date fair value of options granted for the
various plans during 2000 was $2.23.

      The fair values above were calculated based upon risk-free interest rates
of 5.75% for the Stock Purchase Plans and the Equity Incentive Plans, expected
lives of 6 months for the Stock Purchase Plans and 5 years for the Equity
Incentive Plans, expected volatility of 54% for 2000 and an expected dividend
yield of 4.5% for 2000.

EARNINGS PER SHARE

Basic earnings per share are calculated by dividing net income by the
weighted-average number of common shares outstanding for the period, while
diluted earnings per share reflects the dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock.

2--TRANSACTIONS WITH AFFILIATES

The Company conducts business and has various agreements with the Mutual Company
which are described below:

A. REINSURANCE POOLING AND OTHER REINSURANCE ARRANGEMENTS

Atlantic States cedes to the Mutual Company all of its insurance business and
assumes from the Mutual Company 70% (65% prior to July 1, 2000) of the Mutual
Company's total pooled insurance business, including that assumed from Atlantic
States and substantially all of the business assumed by the Mutual Company from
Southern (prior to January 1, 2002) and Delaware (prior to January 1, 2000). The
Mutual Company and Atlantic States write business with different risk profiles.
Through the pooling arrangement, each is able to share proportionately in the
results of all policies written by the other. Atlantic States ceded premiums
earned of $45,229,457, $37,345,259 and $30,414,395 and ceded losses and loss
expenses incurred of $34,471,381, $29,094,804 and $22,966,106 under this
arrangement during 2002, 2001 and 2000, respectively. It also assumed premiums
earned of $134,236,778, $126,769,521 and $110,943,962 and assumed losses and
loss expenses incurred of $96,517,930, $93,470,958 and $75,007,089 under this
arrangement during 2002, 2001 and 2000, respectively. Atlantic States had
prepaid reinsurance premiums of $26,517,322, $20,942,093 and $16,251,612 and a
ceded liability for losses and loss expenses of $47,862,627, $39,321,214 and
$31,068,101 under this arrangement as of December 31, 2002, 2001 and 2000,
respectively. It also had assumed unearned premiums of $69,208,310, $63,636,858
and $54,578,621 and an assumed liability for losses and loss expenses of
$113,850,952, $99,664,285 and $84,805,937 under this arrangement at December 31,
2002, 2001 and 2000, respectively.

      Prior to January 1, 2002, the Mutual Company and Southern had a quota
share agreement whereby Southern ceded 50% of its direct business, less
reinsurance, to the Mutual Company. The business assumed by the Mutual Company
from Southern became part of the pooling arrangement between the Mutual Company
and Atlantic States. Southern ceded premiums earned of $0, $14,995,606 and
$14,413,261 and ceded losses and loss expenses incurred of $488,055, $9,898,422
and $9,885,436 under this agreement during 2002, 2001 and 2000, respectively.
Southern had prepaid reinsurance premiums of $0, $7,310,471 and $7,084,729 and a
ceded liability for losses and loss expenses of $6,399,727, $10,068,604 and
$7,924,750 under this agreement at December 31, 2002, 2001 and 2000,
respectively. This agreement was terminated as of January 1, 2002.

      Atlantic States and Southern each have a catastrophe reinsurance agreement
with the Mutual Company which limits the maximum liability under any one
catastrophic occurrence to $400,000 and $450,000, respectively, and $1,000,000
for a catastrophe involving both of the companies. Prior to merging into
Atlantic States, Pioneer-Ohio, Delaware and Pioneer-New York each had a
catastrophe reinsurance agreement with the Mutual Company which limited the
maximum liability under any one catastrophic occurrence to $200,000, $300,000
and $400,000, respectively. Prior to merging into Southern, Southern Heritage
had a catastrophe reinsurance agreement with the Mutual Company which limited
the maximum liability under any one catastrophic occurrence to $400,000. Prior
to merging into Atlantic States, Delaware and the Mutual Company had an excess
of loss reinsurance agreement in which the Mutual Company assumed up to $250,000
of losses in excess of $50,000 and prior to January 1, 2000, a workers'
compensation quota share agreement whereby Delaware ceded 70% of that business.
Prior to merging into Atlantic States, Pioneer-Ohio and the Mutual Company had
an excess of loss reinsurance agreement in which the Mutual Company assumed up
to $250,000 ($200,000 in 2000) of losses in excess of $50,000. The Mutual
Company and Southern have an excess of loss reinsurance agreement in which the
Mutual Company assumes up to $175,000 ($50,000 in 2001 and $25,000 in 2000) of
losses in excess of $125,000 ($100,000 in 2001 and 2000). Prior to merging into
Atlantic States, Pioneer-New York and the Mutual Company had an excess of loss
reinsurance agreement in which the Mutual Company assumed up to $250,000
($200,000 in 2000) of losses in excess of $50,000. Effective October 1, 2000 and
prior to merging into Southern, Southern Heritage and the Mutual Company had an
excess of loss reinsurance agreement in which the Mutual Company assumed up to
$175,000 ($125,000 in 2000) of losses in excess of $125,000. The Mutual Company
has agreements in place


                                    page 20
<PAGE>

with Southern (and Pioneer-Ohio and Delaware prior to merging into Atlantic
States) to reallocate the loss results of workers' compensation business written
by those companies as part of commercial accounts primarily written by the
Mutual Company or Atlantic States. These agreements provide for the workers'
compensation loss ratios of Southern to be no worse than the average workers'
compensation loss ratio for all of the companies combined. The Mutual Company
and Pioneer-New York also had an aggregate excess of loss reinsurance agreement,
entered into as part of the sale of Pioneer-New York from the Mutual Company to
DGI, in which the Mutual Company agreed to assume the adverse loss development
of claims with dates of loss prior to December 31, 2000, as developed through
December 31, 2002, and to assume losses in excess of a 60% loss ratio through
December 31, 2002. The subsidiaries ceded premiums earned of $2,811,359,
$2,439,520 and $2,126,882 and ceded losses and loss expenses incurred of
$6,873,539, $4,194,251 and $5,388,111 under these various agreements during
2002, 2001 and 2000, respectively. The subsidiaries had a ceded liability for
losses and loss expenses of $6,397,326, $5,395,528 and $4,941,116 under these
various agreements at December 31, 2002, 2001, and 2000, respectively.

      Southern (and Delaware, Pioneer-Ohio, Southern Heritage and and
Pioneer-New York prior to mergers) has an agreement with the Mutual Company
under which it cedes, and then reassumes back, 100% of its business net of
reinsurance. The primary purpose of the agreement is to provide Southern with
the same A.M. Best rating (currently "A") as the Mutual Company, which this
subsidiary could not achieve without this contract in place. This agreement does
not transfer insurance risk. While these subsidiaries ceded and reassumed
amounts received from policyholders of $48,921,377, $41,142,936 and $25,790,126
and claims of $28,859,644, $23,348,952 and $15,325,638 under these agreements in
2002, 2001 and 2000, respectively, the amounts are not reflected in the
consolidated financial statements. The aggregate liabilities ceded and reassumed
under these agreements were $43,541,766 and $36,494,487 at December 31, 2002,
and 2001, respectively.

B. EXPENSE SHARING

The Mutual Company provides facilities, management and other services to the
Company, and the Company reimburses the Mutual Company for such services on a
periodic basis under usage agreements and pooling arrangements. The charges are
based upon the relative participation of the Company and the Mutual Company in
the pooling arrangement, and management of both the Company and the Mutual
Company consider this allocation to be reasonable. Charges for these services
totalled $28,586,888, $29,298,569 and $26,985,080 for 2002, 2001 and 2000,
respectively.

C. LEASE AGREEMENT

The Company leases office equipment and automobiles to the Mutual Company under
a 10-year lease dated January 1, 2000.

D. LEGAL SERVICES

Donald H. Nikolaus, President and a director of the Company, is also a partner
in the law firm of Nikolaus & Hohenadel. Such firm has served as general counsel
to the Company since 1986, principally in connection with the defense of claims
litigation arising in Lancaster, Dauphin and York counties. Such firm is paid
its customary fees for such services.

E. PROVINCE BANK

As of December 31, 2002, the Company had $122,295 in checking accounts with
Province Bank, a wholly owned subsidiary of DFSC. The Company earned $39,118 in
interest on these accounts during 2002.

3--INVESTMENTS

The amortized cost and estimated fair values of fixed maturities and equity
securities at December 31, 2002 and 2001, are as follows:

<TABLE>
<CAPTION>
                                                      2002
------------------------------------------------------------------------------------
                                             GROSS           GROSS       ESTIMATED
                            AMORTIZED      UNREALIZED      UNREALIZED       FAIR
HELD TO MATURITY              COST           GAINS           LOSSES        VALUE
------------------------------------------------------------------------------------
<S>                        <C>            <C>            <C>            <C>
U.S. Treasury securities
   and obligations of
   U.S. government
   corporations
   and agencies            $ 12,641,126   $    407,958   $         --   $ 13,049,084
Canadian government
   obligation                   499,250         40,750             --        540,000
Obligations of states
   and political
   subdivisions              33,891,385        574,768         66,463     34,399,690
Corporate securities         29,551,491      1,745,990         12,103     31,285,378
Mortgage-backed
   securities                10,118,304        393,857            995     10,511,166
------------------------------------------------------------------------------------
   Totals                  $ 86,701,556   $  3,163,323   $     79,561   $ 89,785,318
====================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                      2002
------------------------------------------------------------------------------------
                                             GROSS           GROSS       ESTIMATED
                            AMORTIZED      UNREALIZED      UNREALIZED       FAIR
AVAILABLE FOR SALE            COST           GAINS           LOSSES        VALUE
------------------------------------------------------------------------------------
<S>                        <C>            <C>            <C>            <C>
U.S. Treasury securities
   and obligations of
   U.S. government
   corporations
   and agencies            $ 56,344,340   $  1,943,229   $        337   $ 58,287,232
Obligations of states
   and political
   subdivisions              78,515,340      3,083,256        152,996     81,445,600
Corporate securities         34,848,807      2,016,526          2,783     36,862,550
Mortgage-backed
   securities                17,787,462        363,649         14,833     18,136,278
Equity securities            21,587,317      1,007,030        757,887     21,836,460
------------------------------------------------------------------------------------
   Totals                  $209,083,266   $  8,413,690   $    928,836   $216,568,120
====================================================================================
</TABLE>


                                    page 21
<PAGE>

<TABLE>
<CAPTION>
                                                      2001
------------------------------------------------------------------------------------
                                             GROSS           GROSS       ESTIMATED
                            AMORTIZED      UNREALIZED      UNREALIZED       FAIR
HELD TO MATURITY              COST           GAINS           LOSSES        VALUE
------------------------------------------------------------------------------------
<S>                        <C>            <C>            <C>            <C>
U.S. Treasury securities
   and obligations of
   U.S. government
   corporations
   and agencies            $ 23,808,841   $    336,288   $     27,500   $ 24,117,629
Canadian government
   obligation                   498,894         36,106             --        535,000
Obligations of states
   and political
   subdivisions              24,981,562        690,700         53,312     25,618,950
Corporate securities         27,423,039        659,961        121,021     27,961,979
Mortgage-backed
   securities                 8,610,629        113,541         18,335      8,705,835
------------------------------------------------------------------------------------
   Totals                  $ 85,322,965   $  1,836,596   $    220,168   $ 86,939,393
====================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                      2001
------------------------------------------------------------------------------------
                                             GROSS           GROSS       ESTIMATED
                            AMORTIZED      UNREALIZED      UNREALIZED       FAIR
AVAILABLE FOR SALE            COST           GAINS           LOSSES        VALUE
------------------------------------------------------------------------------------
<S>                        <C>            <C>            <C>            <C>
U.S. Treasury securities
   and obligations of
   U.S. government
   corporations
   and agencies            $ 67,468,897   $  1,755,874   $    249,306   $ 68,975,465
Obligations of states
   and political
   subdivisions              53,962,895      1,269,340         85,535     55,146,700
Corporate securities         34,094,195        828,344        115,939     34,806,600
Mortgage-backed
   securities                14,743,597         78,666         32,184     14,790,079
Equity securities            16,630,618      1,270,239        383,511     17,517,346
------------------------------------------------------------------------------------
   Totals                  $186,900,202   $  5,202,463   $    866,475   $191,236,190
====================================================================================
</TABLE>

      The amortized cost and estimated fair value of fixed maturities at
December 31, 2002, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.

--------------------------------------------------------------------
                                                          ESTIMATED
                                           AMORTIZED        FAIR
                                             COST           VALUE
--------------------------------------------------------------------
HELD TO MATURITY
Due in one year or less                  $  2,705,133   $  2,767,000
Due after one year through five years      29,998,375     31,448,150
Due after five years through ten years     19,563,775     20,636,662
Due after ten years                        24,315,969     24,422,340
Mortgage-backed securities                 10,118,304     10,511,166
--------------------------------------------------------------------
      Total held to maturity             $ 86,701,556   $ 89,785,318
====================================================================
AVAILABLE FOR SALE
Due in one year or less                  $ 15,008,947   $ 15,298,500
Due after one year through five years      80,418,332     84,023,582
Due after five years through ten years     42,212,603     44,707,600
Due after ten years                        32,068,605     32,565,700
Mortgage-backed securities                 17,787,462     18,136,278
--------------------------------------------------------------------
      Total available for sale           $187,495,949   $194,731,660
====================================================================

      The amortized cost of fixed maturities on deposit with various regulatory
authorities at December 31, 2002 and 2001, amounted to $5,400,597 and
$5,667,959, respectively.

      Net investment income of the Company, consisting primarily of interest and
dividends, is attributable to the following sources:

                            2002          2001          2000
----------------------------------------------------------------
Fixed maturities         $14,285,049   $15,145,949   $15,180,008
Equity securities            804,087       546,243       635,049
Short-term investments       564,738       920,538     1,221,724
Other                         29,249       255,250       255,250
----------------------------------------------------------------
Investment income         15,683,123    16,867,980    17,292,031
Investment expenses        1,101,871       982,436       897,284
----------------------------------------------------------------
Net investment income    $14,581,252   $15,885,544   $16,394,747
================================================================

      Gross realized gains and losses from investments and the change in the
difference between fair value and cost of investments, before applicable income
taxes, are as follows:

<TABLE>
<CAPTION>
                                             2002           2001           2000
-----------------------------------------------------------------------------------
Gross realized gains:
<S>                                      <C>            <C>            <C>
   Fixed maturities                      $   128,714    $   554,560    $   237,748
   Equity securities                         911,994        323,451      1,813,242
-----------------------------------------------------------------------------------
                                           1,040,708        878,011      2,050,990
-----------------------------------------------------------------------------------
Gross realized losses:
   Fixed maturities                          106,789         28,618         20,597
   Equity securities                         789,729      1,729,647      1,859,541
-----------------------------------------------------------------------------------
                                             896,518      1,758,265      1,880,138
-----------------------------------------------------------------------------------
Net realized gains (losses)              $   144,190    $  (880,254)   $   170,852
===================================================================================
Change in difference between
   fair value and cost of investments:
   Fixed maturities                      $ 5,253,785    $ 3,498,259    $ 7,300,279
   Equity securities                        (637,585)     1,275,050       (603,930)
-----------------------------------------------------------------------------------
                                         $ 4,616,200    $ 4,773,309    $ 6,696,349
===================================================================================
</TABLE>

      Income taxes (benefit) on realized investment gains (losses) were $49,565,
$(299,286), and $58,090 for 2002, 2001 and 2000, respectively. Deferred income
taxes applicable to net unrealized investment gains included in shareholders'
equity were $2,572,901 and $1,474,242 at December 31, 2002 and 2001,
respectively.

      During 2002, 2001 and 2000, certain investments trading below cost had
declined on an other-than-temporary basis. Losses of $378,672, $1,462,913 and
$436,943 were included in net realized investment gains (losses) for these
investments in 2002, 2001 and 2000, respectively.

      The Company has no derivative instruments or hedging activities. On
January 1, 2001, the Company transferred investments with an amortized cost of
$51,640,154 and fair value of $52,444,675 from the held to maturity
classification to the available for sale classification under the provisions of
SFAS No. 133 and 138. The unrealized holding gain of $804,521 at January 1, 2001
was reported in other comprehensive income. The transfer had no impact on net
income.


                                    page 22
<PAGE>

4--DEFERRED POLICY ACQUISITION COSTS

Changes in deferred policy acquisition costs are as follows:

                                2002          2001          2000
--------------------------------------------------------------------
Balance, January 1           $13,604,215   $12,284,214   $11,445,572
Acquisition costs deferred    30,435,855    28,514,001    26,157,642
Amortization charged
      to earnings             29,473,000    27,194,000    25,319,000
--------------------------------------------------------------------
Balance, December 31         $14,567,070   $13,604,215   $12,284,214
====================================================================

5--PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2002 and 2001, consisted of the
following:

--------------------------------------------------------------------
                                                          ESTIMATED
                                                            USEFUL
                              2002           2001            LIFE
--------------------------------------------------------------------
Cost--office equipment     $ 5,441,882    $ 5,012,290     5-15 years
      automobiles              785,572        992,412      3 years
      real estate            3,105,851      3,063,646    15-50 years
      software                 561,146        561,146      5 years
--------------------------------------------------------------------
                             9,894,451      9,629,494
Accumulated depreciation    (5,464,057)    (5,060,842)
--------------------------------------------------------------------
                           $ 4,430,394    $ 4,568,652
====================================================================

      Depreciation expense for 2002, 2001, and 2000 amounted to $690,263,
$829,100 and $899,750, respectively.

6--LIABILITY FOR LOSSES AND LOSS EXPENSES

Activity in the liability for losses and loss expenses is summarized as follows:

                               2002           2001           2000
---------------------------------------------------------------------
Balance at January 1       $179,839,905   $156,476,124   $144,180,006
   Less reinsurance
      recoverable            65,295,790     53,766,710     44,945,908
---------------------------------------------------------------------
Net balance at January 1    114,544,115    102,709,414     99,234,098
---------------------------------------------------------------------
Incurred related to:
   Current year             122,433,653    110,142,467    103,671,401
   Prior years                6,834,033      8,035,082        711,775
---------------------------------------------------------------------
Total incurred              129,267,686    118,177,549    104,383,176
---------------------------------------------------------------------
Paid related to:
   Current year              67,655,902     63,289,736     61,848,261
   Prior years               46,869,466     43,053,112     39,059,599
---------------------------------------------------------------------
Total paid                  114,525,368    106,342,848    100,907,860
---------------------------------------------------------------------
Net balance at
      December 31           129,286,433    114,544,115    102,709,414
   Plus reinsurance
      recoverable            81,405,319     65,295,790     53,766,710
---------------------------------------------------------------------
Balance at December 31     $210,691,752   $179,839,905   $156,476,124
=====================================================================

      The Company recognized an increase in the liability for losses and loss
expenses of prior years of $6.8 million, $8.0 million and $0.7 million in 2002,
2001 and 2000, respectively. These developments are primarily attributable to
variations from expected claim severity in the private passenger and commercial
automobile liability, workers' compensation and commercial multiple peril lines
of business.

7--LINE OF CREDIT

At December 31, 2002 and 2001, pursuant to a credit agreement dated December 29,
1995, and amended as of July 27, 1998, with Fleet National Bank, the Company had
unsecured borrowings of $19.8 million and $27.6 million, respectively. Such
borrowings were made in connection with the acquisitions of Delaware,
Pioneer-Ohio, and Southern Heritage and various capital contributions to the
subsidiaries. As of December 31, 2002, the Company may borrow up to $24 million
at interest rates equal to the bank's then current prime rate or the then
current London interbank Eurodollar bank rate plus 1.70%. At December 31, 2002,
the interest rates were 3.45% on an outstanding Eurodollar rate balance of $4.8
million and 3.46% on another Eurodollar rate balance of $15 million. In
addition, the Company pays a fee of 3/10 of 1% per annum on the average daily
unused portion of the bank's commitment. On each July 27, the credit line is
reduced by $8 million. Any outstanding loan in excess of the remaining credit
line, after such reduction, is then payable.

8--REINSURERS

UNAFFILIATED REINSURERS

In addition to the primary reinsurance in place with the Mutual Company, the
Insurance Subsidiaries have other reinsurance in place, principally with four
unaffiliated reinsurers. The Company monitors the financial strength of its
unaffiliated reinsurers, requiring that companies rated by A.M. Best Company
maintain a rating of A- or higher and that foreign reinsurers not rated by A.M.
Best Company maintain a level of financial strength equivalent to companies
qualifying for an A.M. Best Company rating of A- or higher. The following
amounts represent ceded reinsurance transactions with unaffiliated reinsurers
during 2002, 2001 and 2000:

                                  2002          2001          2000
----------------------------------------------------------------------
Premiums written               $10,772,473   $ 9,348,853   $ 8,241,416
======================================================================
Premiums earned                $10,776,702   $ 9,440,035   $ 8,026,478
======================================================================
Losses and loss expenses       $13.693,184   $ 6,907,947   $ 3,027,810
======================================================================
Prepaid reinsurance premiums   $ 1,336,674   $ 1,340,903   $ 1,376,043
======================================================================
Liability for losses and
   loss expenses               $20,745,639   $10,510,444   $ 9,832,743
======================================================================


                                    page 23
<PAGE>

TOTAL REINSURANCE

The following amounts represent the total of all ceded reinsurance transactions
with both affiliated and unaffiliated reinsurers during 2002, 2001 and 2000:

                                  2002          2001          2000
----------------------------------------------------------------------
Premiums earned                $58,817,518   $64,220,420   $54,981,016
======================================================================
Losses and loss expenses       $55,526,159   $50,095,424   $41,267,463
======================================================================
Prepaid reinsurance premiums   $27,853,996   $29,593,467   $24,712,384
======================================================================
Liability for losses and
   loss expenses               $81,405,319   $65,295,790   $53,766,710
======================================================================

      The following amounts represent the effect of reinsurance on premiums
written for 2002, 2001 and 2000:

                           2002           2001           2000
-----------------------------------------------------------------
Direct                 $111,767,756   $110,298,533   $ 99,042,235
Assumed                 139,814,138    135,830,624    119,217,433
Ceded                    57,078,047     69,101,503     58,137,248
-----------------------------------------------------------------
Net premiums written   $194,503,847   $177,027,654   $160,122,420
=================================================================

      The following amounts represent the effect of reinsurance on premiums
earned for 2002, 2001 and 2000:

                          2002           2001           2000
----------------------------------------------------------------
Direct                $110,412,498   $105,214,059   $ 95,671,588
Assumed                134,246,213    126,776,215    110,955,627
Ceded                   58,817,518     64,220,420     54,981,016
----------------------------------------------------------------
Net premiums earned   $185,841,193   $167,769,854   $151,646,199
================================================================

9--INCOME TAXES

The provision for income tax consists of the following:

                           2002           2001           2000
-----------------------------------------------------------------
Current                 $ 5,071,516    $ 2,634,231    $ 2,406,272
Deferred                   (579,654)    (1,360,633)       499,976
-----------------------------------------------------------------
Federal tax provision   $ 4,491,862    $ 1,273,598    $ 2,906,248
=================================================================

      The effective tax rate is different than the amount computed at the
statutory federal rate of 34% for 2002, 2001 and 2000. The reason for such
difference and the related tax effect are as follows:

                                   2002            2001            2000
----------------------------------------------------------------------------
Income before
   income taxes                $ 16,494,584    $  7,091,729    $ 11,743,028
============================================================================
Computed "expected"
   taxes at 34%                   5,608,159       2,411,188       3,992,630
Tax-exempt interest              (1,304,197)     (1,399,238)     (1,347,959)
Dividends received deduction        (31,830)        (21,908)        (25,423)
Other, net                          219,730         283,556         287,000
----------------------------------------------------------------------------
Federal income
   tax provision               $  4,491,862    $  1,273,598    $  2,906,248
============================================================================

      The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2002 and 2001, are as follows:

                                          2002          2001
----------------------------------------------------------------
Deferred tax assets:
   Unearned premium                    $ 6,438,461   $ 5,778,529
   Loss reserves                         5,786,195     5,433,005
   Net operating loss carryforward -
      Southern Heritage                  1,744,081     2,032,094
   Other                                 1,133,488     1,013,899
----------------------------------------------------------------
      Total                            $15,102,225   $14,257,527
================================================================
Deferred tax liabilities:
   Depreciation expense                $   343,362   $   379,594
   Deferred policy acquisition costs     5,007,431     4,625,433
   Salvage recoverable                     222,824       303,528
   Unrealized gain                       2,572,901     1,474,242
----------------------------------------------------------------
      Total                            $ 8,146,518   $ 6,782,797
================================================================
      Net deferred tax assets          $ 6,955,707   $ 7,474,730
================================================================

      A valuation allowance is provided when it is more likely than not that
some portion of the tax asset will not be realized. Management has determined
that it is not required to establish a valuation allowance for any deferred tax
asset at December 31, 2002, since it is more likely than not that the deferred
tax assets will be realized through reversals of existing temporary differences,
future taxable income, carryback to taxable income in prior years and the
implementation of tax planning strategies.

      At December 31, 2002, the Company has a net operating loss carryforward of
$5,073,691, which is available to offset taxable income of the Company. Such net
operating loss carryforward will expire beginning in 2009. Federal income tax
laws limit the amount of net operating loss carryforward that the Company can
use in any one year to approximately $1 million.

10--STOCKHOLDERS' EQUITY

On April 19, 2001 the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation. Among other things, the amendment
reclassified the Company's common stock as Class B common stock and effected a
one-for-three reverse split of the Company's Class B common stock effective
April 19, 2001. The amendment also authorized a new class of common stock with
one-tenth of a vote per share designated as Class A common stock. The Company's
Board also approved a dividend of two shares of Class A common stock for each
share of Class B common stock, after the one-for-three reverse split, held of
record at the close of business April 19, 2001. The effect of the reverse split
and the stock dividend taken together is that the Company had the same total
number of shares outstanding after the reverse split and the stock dividend as
it did before the reverse split and the stock dividend. Therefore, there is no
change in the historical earnings per share of the Class A common stock and the
Class B common stock after the reverse split and the stock dividend compared to
before the reverse split and the stock dividend.

      Each share of Class A common stock outstanding at the time of the
declaration of any dividend or other distribution payable in cash upon the
shares of Class B common stock is entitled to a dividend or distribution payable
at the same time and to stockholders of record on the same date in an amount at
least 10% greater than any dividend declared upon each share of Class B common
stock. In the event of a


                                    page 24
<PAGE>

merger or consolidation of the Company with or into another entity, the holders
of Class A common stock and the holders of Class B common stock are entitled to
receive the same per share consideration in such merger or consolidation. In the
event of any liquidation, dissolution or winding-up of the Company, any assets
available to common stockholders will be distributed pro-rata to the holders of
Class A and Class B common stock.

11--STOCK COMPENSATION PLANS

EQUITY INCENTIVE PLANS

During 1996 the Company adopted an Equity Incentive Plan for key employees.
During 2001 the Company adopted a nearly identical plan that made a total of
1,500,000 shares of Class A common stock available. Each plan provides for the
granting of awards by the Board of Directors in the form of stock options, stock
appreciation rights, restricted stock or any combination of the above. The plans
provide that stock options may become exercisable up to 10 years from date of
grant, with an option price not less than fair market value on date of grant.
The stock appreciation rights permit surrender of the option and receipt of the
excess of current market price over option price in cash. No stock appreciation
rights have been issued.

      During 1996 the Company adopted an Equity Incentive Plan For Directors.
During 2001 the Company adopted a nearly identical plan that made 200,000 shares
of Class A common stock available. Awards may be made in the form of stock
options, and the plan additionally provides for the issuance of 175 shares of
restricted stock to each director on the first business day of January in each
year. As of December 31, 2002, the Company has 5,000 unexercised options under
these plans. Additionally 2,100, 1,947 and 1,947 shares of restricted stock were
issued on January 2, 2002, 2001 and 2000, respectively.

      All options issued prior to 2001 were converted to options on Class A and
Class B common stock as a result of the Company's recapitalization. No further
shares are available for plans in effect prior to 2001.

      Information regarding activity in the Company's stock option plans is
presented below:

                                                     WEIGHTED-AVERAGE
                                       NUMBER OF      EXERCISE PRICE
                                        OPTIONS         PER SHARE
---------------------------------------------------------------------
Outstanding at December 31, 1999      1,496,393         $   13.50
   Granted - 2000                        59,500              8.05
   Exercised - 2000                          --                --
   Forfeited - 2000                      39,555             12.84
---------------------------------------------------------------------
Outstanding at December 31, 2000      1,516,338         $   13.19
   Granted - 2001                       459,000             13.93
   Exercised - 2001                      13,315              8.00
   Forfeited - 2001                      27,556             13.50
---------------------------------------------------------------------
Outstanding at December 31, 2001      1,934,467         $   13.27
   Granted - 2002                        10,000             14.00
   Exercised - 2002                       7,684              8.00
   Forfeited - 2002                      18,334             14.36
   Expired - 2002                       524,448         $   13.50
---------------------------------------------------------------------
Outstanding at December 31, 2002      1,394,001         $   13.43
=====================================================================
Exercisable at:
   December 31, 2000                  1,190,004         $   16.68
=====================================================================
   December 31, 2001                  1,321,905         $   13.89
=====================================================================
   December 31, 2002                  1,085,000         $   13.29
=====================================================================

      Options available for future grants at December 31, 2002 are 1,228,900.

      The following table summarizes information about fixed stock options at
December 31, 2002:

            NUMBER OF    WEIGHTED-AVERAGE    NUMBER OF
EXERCISE     OPTIONS        REMAINING         OPTIONS
 PRICE     OUTSTANDING   CONTRACTUAL LIFE   EXERCISABLE
-------------------------------------------------------
$ 8.00       445,334        2.0 years         445,334
$ 9.00         9,500        3.5 years           5,499
$14.00       457,500        3.5 years         152,500
$18.00       481,667        0.25 years        481,667

EMPLOYEE STOCK PURCHASE PLANS

During 1996 the Company adopted an Employee Stock Purchase Plan. During 2001,
the Company adopted a nearly identical plan that made 300,000 shares of Class A
common stock available for issuance.

      The new plan extends over a 10-year period and provides for shares to be
offered to all eligible employees at a purchase price equal to the lesser of 85%
of the fair market value of the Company's common stock on the last day before
the first day of the enrollment period (June 1 and December 1) of the plan or
85% of the fair market value of the Company's common stock on the last day of
the subscription period (June 30 and December 31). A summary of plan activity
follows:

                     SHARES ISSUED
                  ------------------
                    PRICE     SHARES
------------------------------------
January 1, 2000   $5.41875    23,906
July 1, 2000      $4.88750    21,714
January 1, 2001   $5.95000    16,438
July 1, 2001      $8.71250    11,377
January 1, 2002   $8.84850    12,769
July 1, 2002      $8.77200    10,520

      On January 1, 2003, the Company issued an additional 9,425 shares at a
price of $9.13750 per share under this plan.

AGENCY STOCK PURCHASE PLANS

On December 31, 1996, the Company adopted an Agency Stock Purchase Plan. During
2001, the Company adopted a nearly identical plan that made 300,000 shares of
Class A common stock available for issuance. The plan provides for agents of
affiliated companies of DGI to invest up to $12,000 per subscription period
(April 1 to September 30 and October 1 to March 31) under various methods. Stock
is issued at the end of the subscription period at a price equal to 90% of the
average market price during the last ten trading days of the subscription
period. During 2002, 2001 and 2000, 16,310, 16,557, and 46,603 shares,
respectively, were issued under this plan. Expense recognized under the plan was
not material.


                                    page 25
<PAGE>

12--STATUTORY NET INCOME, CAPITAL AND SURPLUS AND DIVIDEND RESTRICTIONS

The following is selected information, as filed with insurance regulatory
authorities, for the Insurance Subsidiaries as determined in accordance with
accounting practices prescribed or permitted by such insurance regulatory
authorities (restated for mergers):

                                  2002            2001            2000
--------------------------------------------------------------------------
ATLANTIC STATES
Statutory capital
   and surplus                $ 95,405,603    $ 91,649,362    $ 94,431,695
                              ============================================
Statutory unassigned
   surplus                    $ 46,744,739    $ 42,988,498    $ 45,770,831
                              ============================================
Statutory net income (loss)   $ 10,646,804    $   (676,125)   $  7,958,124
                              ============================================
--------------------------------------------------------------------------
SOUTHERN
Statutory capital
   and surplus                $ 31,243,897    $ 30,730,757    $ 26,057,758
                              ============================================
Statutory unassigned
   surplus                    $ (6,373,688)   $ (6,886,828)   $(11,559,827)
                              ============================================
Statutory net income          $  2,505,891    $  5,180,964    $  3,029,826
                              ============================================

      The Company's principal source of cash for payment of dividends are
dividends from its Insurance Subsidiaries which are required by law to maintain
certain minimum capital and surplus on a statutory basis and are subject to
regulations under which payment of dividends from statutory surplus is
restricted and may require prior approval of their domiciliary insurance
regulatory authorities. Atlantic States and Southern are also subject to Risk
Based Capital (RBC) requirements which may further impact their ability to pay
dividends. At December 31, 2002, the companies' statutory capital and surplus
were substantially above the RBC requirements. Amounts available for
distribution as dividends to DGI without prior approval of insurance regulatory
authorities in 2003 are $10,646,804 from Atlantic States and $2,493,398 from
Southern.

      The National Association of Insurance Commissioners (NAIC) adopted the
Codification of Statutory Accounting Principles with an effective date of
January 1, 2001. The codified principles are intended to provide a basis of
accounting recognized and adhered to in the absence of conflict with, or silence
of, state statutes and regulations. The impact of the codified principles on the
statutory capital and surplus of the Company's Insurance Subsidiaries as of
January 1, 2001 was as follows: Atlantic States - $6,482,380 increase and
Southern -$2,254,558 increase.

13--RECONCILIATION OF STATUTORY FILINGS TO AMOUNTS REPORTED HEREIN

The Company's Insurance Subsidiaries are required to file statutory financial
statements with state insurance regulatory authorities. Accounting principles
used to prepare these statutory financial statements differ from financial
statements prepared on the basis of generally accepted accounting principles.

      Reconciliations of statutory net income and capital and surplus, as
determined using statutory accounting principles, to the amounts included in the
accompanying financial statements are as follows:

                                           YEAR ENDED DECEMBER 31,
                                --------------------------------------------
                                    2002            2001            2000
----------------------------------------------------------------------------
Statutory net income of
   Insurance Subsidiaries       $ 13,152,695    $  4,504,839    $ 10,987,950
Increases (decreases):
   Deferred policy
      acquisition costs              962,855       1,320,001         838,642
   Deferred federal
      income taxes                   579,654       1,360,633        (499,976)
   Salvage and subrogation
      recoverable                   (863,313)        155,088         305,918
   Consolidating eliminations
      and adjustments            (11,264,732)    (13,783,695)     (4,318,624)
   Parent-only net income          9,435,563      12,261,265       1,522,870
----------------------------------------------------------------------------
Net income as
   reported herein              $ 12,002,722    $  5,818,131    $  8,836,780
============================================================================

                                                  DECEMBER 31,
                                -----------------------------------------------
                                     2002             2001             2000
-------------------------------------------------------------------------------
Statutory capital and surplus
   of Insurance Subsidiaries    $ 126,649,500    $ 122,380,119    $ 120,489,453
Increases (decreases):
   Deferred policy
      acquisition costs            14,567,070       13,604,215       12,284,214
   Deferred federal
      income taxes                 (3,499,656)        (820,313)       7,690,886
   Salvage and subrogation
      recoverable                   7,334,635        8,197,948        8,042,860
   Statutory reserves                      --               --        2,623,921
   Non-admitted assets and
      other adjustments, net          735,946          334,092          911,370
   Fixed maturities                 7,517,290        3,793,048          493,055
   Consolidating eliminations
      and adjustments             (40,891,418)     (39,693,089)     (40,973,097)
   Parent-only equity              20,769,483       13,132,329        2,566,929
-------------------------------------------------------------------------------
Stockholders' equity as
   reported herein              $ 133,182,850    $ 120,928,349    $ 114,129,591
===============================================================================

14--SUPPLEMENTARY INFORMATION ON STATEMENT OF CASH FLOWS

The following reflects income taxes and interest paid during 2002, 2001 and
2000:

                  2002         2001         2000
---------------------------------------------------
Income taxes   $4,410,000   $2,666,887   $2,031,652
===================================================
Interest       $1,047,237   $3,049,844   $2,731,048
===================================================


                                    page 26
<PAGE>

15--EARNINGS PER SHARE

The following information illustrates the computation of net income, outstanding
shares and earnings per share on both a basic and diluted basis for the years
ending December 31, 2002, 2001 and 2000:

                                          WEIGHTED-
                                           AVERAGE      EARNINGS
                              NET          SHARES         PER
                             INCOME      OUTSTANDING     SHARE
------------------------------------------------------------------
2002:
Basic                     $12,002,722     9,085,914   $      1.32
Effect of stock options            --       107,199          (.01)
------------------------------------------------------------------
Diluted                   $12,002,722     9,193,113   $      1.31
------------------------------------------------------------------
2001:
Basic                     $ 5,818,131     8,941,781   $       .65
Effect of stock options            --       136,669          (.01)
------------------------------------------------------------------
Diluted                   $ 5,818,131     9,078,450   $       .64
==================================================================
2000:
Basic                     $ 8,836,780     8,715,899   $      1.01
Effect of stock options            --        21,011            --
------------------------------------------------------------------
Diluted                   $ 8,836,780     8,736,910   $      1.01
==================================================================

      The following options to purchase shares of common stock were not included
in the computation of diluted earnings per share because the exercise price of
the options was greater than the average market price:

                                2002        2001        2000
------------------------------------------------------------
Options excluded from
  diluted earnings per share   939,167   1,467,782   1,045,338
============================================================

16--CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

                         CONDENSED BALANCE SHEETS
                             ($ in thousands)

DECEMBER 31,                                            2002       2001
-------------------------------------------------------------------------
ASSETS
Investment in subsidiaries (equity method)            $156,684   $152,089
Cash                                                       604        403
Property and equipment                                   1,640      1,623
Other                                                       99        264
-------------------------------------------------------------------------
         Total assets                                 $159,027   $154,379
=========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
   Cash dividends declared to stockholders            $    887   $    870
   Line of credit                                       19,800     27,600
   Due to affiliate                                      4,441      4,441
   Other                                                   716        540
-------------------------------------------------------------------------
         Total liabilities                              25,844     33,451
-------------------------------------------------------------------------
Stockholders' equity                                   133,183    120,928
-------------------------------------------------------------------------
         Total liabilities and stockholders' equity   $159,027   $154,379
=========================================================================

                   CONDENSED STATEMENTS OF INCOME
                          ($ in thousands)

YEAR ENDED DECEMBER 31,                2002        2001        2000
---------------------------------------------------------------------
Revenues
Dividends-subsidiaries               $ 10,400    $ 14,419    $  3,900
Other                                     797         824         866
---------------------------------------------------------------------
         Total revenues                11,197      15,243       4,766
---------------------------------------------------------------------
Expenses
Operating expenses                      1,057       1,761       1,165
Interest                                1,139       2,288       3,304
---------------------------------------------------------------------
         Total expenses                 2,196       4,049       4,469
---------------------------------------------------------------------
Income before income tax benefit
   and equity in undistributed net
   income of subsidiaries               9,001      11,194         297
Income tax benefit                       (435)     (1,067)     (1,226)
---------------------------------------------------------------------
Income before equity in
   undistributed net income (loss)
   of subsidiaries                      9,436      12,261       1,523
Equity in undistributed
   net income (loss)
   of subsidiaries                      2,567      (6,443)      7,314
---------------------------------------------------------------------
Net income                           $ 12,003    $  5,818    $  8,837
=====================================================================

                   CONDENSED STATEMENTS OF CASH FLOWS
                            ($ in thousands)

YEAR ENDED DECEMBER 31,                   2002        2001        2000
------------------------------------------------------------------------
Cash flows from operating activities:
   Net income                           $ 12,003    $  5,818    $  8,837
------------------------------------------------------------------------
   Adjustments:
      Equity in undistributed
      net loss (income)
      of subsidiaries                     (2,567)      6,443      (7,314)
      Other                                  788         252       1,123
------------------------------------------------------------------------
         Net adjustments                  (1,779)      6,695      (6,191)
------------------------------------------------------------------------
      Net cash provided                   10,224      12,513       2,646
------------------------------------------------------------------------
Cash flows from investing activities:
   Net purchase of property and
      equipment                             (480)       (122)       (262)
   Investment in Donegal Financial
      Services Corp.                          --          --      (3,042)
Other                                         38          38          38
------------------------------------------------------------------------
      Net cash used                         (442)        (84)     (3,266)
------------------------------------------------------------------------
Cash flows from financing activities:
   Cash dividends paid                    (3,509)     (3,394)     (3,127)
   Issuance of common stock                1,728       1,387       2,757
   Line of credit, net                    (7,800)    (12,400)      3,000
------------------------------------------------------------------------
      Net cash provided (used)            (9,581)    (14,407)      2,630
------------------------------------------------------------------------
Net change in cash                           201      (1,978)      2,010
   Cash at beginning of year                 403       2,381         371
------------------------------------------------------------------------
   Cash at end of year                  $    604    $    403    $  2,381
========================================================================


                                    page 27
<PAGE>

17--SEGMENT INFORMATION

As an underwriter of property and casualty insurance, the Company has three
reportable segments which consist of the investment function, the personal lines
of insurance and the commercial lines of insurance. Using independent agents,
the Company markets personal lines of insurance to individuals and commercial
lines of insurance to small and medium-sized businesses.

      The Company evaluates the performance of the personal lines and commercial
lines primarily based upon underwriting results as determined under statutory
accounting practices (SAP) for the total business of the Company.

      Assets are not allocated to the personal and commercial lines and are
reviewed in total by management for purposes of decision making. Donegal Group
Inc. operates only in the United States and no single customer or agent provides
10 percent or more of revenues.

      Financial data by segment is as follows:

                                           2002         2001         2000
                                        -----------------------------------
                                                 ($ in thousands)
---------------------------------------------------------------------------
Revenues:
   Premiums earned:
      Commercial lines                  $  66,003    $  62,877    $  54,581
      Personal lines                      119,838      104,893       97,065
---------------------------------------------------------------------------
         Total premiums earned            185,841      167,770      151,646
---------------------------------------------------------------------------
      Net investment income                14,581       15,886       16,395
      Realized investment
         gains (losses)                       144         (880)         171
      Other                                 3,238        2,388        2,370
---------------------------------------------------------------------------
Total revenues                          $ 203,804    $ 185,164    $ 170,582
===========================================================================
Income before income taxes:
   Underwriting income (loss):
      Commercial lines                  $   6,326    $  (3,037)   $     763
      Personal lines                       (5,056)      (5,090)      (4,649)
---------------------------------------------------------------------------
         SAP underwriting
         income (loss)                      1,270       (8,127)      (3,886)
      GAAP adjustments                       (558)       1,833        1,144
---------------------------------------------------------------------------
         GAAP underwriting
         income (loss)                        712       (6,294)      (2,742)
   Net investment income                   14,581       15,886       16,395
   Realized investment gains (losses)         144         (880)         171
   Other                                    1,058       (1,620)      (2,081)
---------------------------------------------------------------------------
Income before income taxes              $  16,495    $   7,092    $  11,743
===========================================================================

18--GUARANTY FUND AND OTHER INSURANCE-RELATED ASSESSMENTS

The Company accrues for guaranty-fund and other insurance-related assessments in
accordance with Statement of Position (SOP) 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments." SOP 97-3 provides guidance
for determining when an entity should recognize a liability for guaranty-fund
and other insurance-related assessments, how to measure that liability, and when
an asset may be recognized for the recovery of such assessments through premium
tax offsets or policy surcharges. The Company's liabilities for guaranty-fund
and other insurance-related assessments were $2,970,182 and $3,605,090 at
December 31, 2002 and 2001, respectively. These liabilities included $538,578
and $676,149 related to surcharges collected by the Company on behalf of
regulatory authorities for 2002 and 2001, respectively.

19--INTERIM FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                   2002
                        ---------------------------------------------------------
                            FIRST          SECOND         THIRD          FOURTH
                           QUARTER        QUARTER        QUARTER        QUARTER
---------------------------------------------------------------------------------
<S>                     <C>            <C>            <C>            <C>
Net premiums
   earned               $ 45,452,260   $ 46,110,512   $ 46,792,748   $ 47,485,673
Total revenues            50,034,046     50,736,803     51,085,417     51,947,295
Net losses and loss
   expenses               31,297,569     32,136,019     32,423,893     33,410,205
Net income                 2,180,716      3,178,834      3,015,676      3,627,496
Net income per
   common share
      Basic                      .24            .35            .33            .40
      Diluted                    .24            .35            .33            .39
---------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                   2001
                        ---------------------------------------------------------
                            FIRST          SECOND         THIRD          FOURTH
                           QUARTER        QUARTER        QUARTER        QUARTER
---------------------------------------------------------------------------------
<S>                     <C>            <C>            <C>            <C>
Net premiums
   earned               $ 40,040,902   $ 41,651,990   $ 42,598,703   $ 43,478,259
Total revenues            44,792,026     46,496,969     46,365,986     47,508,642
Net losses and loss
   expenses               26,158,684     27,931,189     30,026,448     34,061,228
Net income (loss)          2,954,595      2,697,269      1,023,422       (857,155)
Net income (loss) per
   common share
      Basic                      .33            .30            .11           (.10)
      Diluted                    .33            .30            .11           (.10)
---------------------------------------------------------------------------------
</TABLE>


                                    page 28
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Stockholders and Board of Directors
Donegal Group Inc.

We have audited the accompanying consolidated balance sheets of Donegal Group
Inc. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income and comprehensive income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Donegal
Group Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.


KPMG LLP

Philadelphia, Pennsylvania
February 20, 2003


                                    page 29

<PAGE>


                                   CORPORATE
                                  INFORMATION



ANNUAL MEETING
April 17, 2003 at the Company's headquarters at 10:00 a.m.
FORM 10-K
A copy of Donegal Group's Annual Report on Form 10-K will be furnished free upon
written request to Ralph G. Spontak, Senior Vice President and Chief Financial
Officer, at the corporate address.
MARKET INFORMATION
Donegal Group's Class A common stock and Class B
common stock are traded on the Nasdaq National
Market under the symbols "DGICA" and "DGICB."
The Class A common stock and Class B common
stock have traded on the Nasdaq National Market
since April 20, 2001. All information given prior to
that date relates to the Company's Common Stock,
which previously traded on the Nasdaq National
Market under the symbol "DGIC." The following
table shows the dividends paid per share and the stock
price range for each quarter during 2002 and 2001:
                                                                  Cash Dividend
                                                                    Declared
Quarter                        High               Low               Per Share
2001 - Class A
 1st                          12.750              8.688                --
 2nd                          14.500              10.000              .10
 3rd                          14.590              12.170              .10
 4th                          13.880               9.100              .20
2001 - Class B
 1st                          12.750               8.688               --
 2nd                          12.500               8.750              .09
 3rd                          13.100              11.010              .09
 4th                          11.750               9.000              .18
2002 - Class A
 1st                          10.770               8.750               --
 2nd                          12.250               9.050              .10
 3rd                          10.990               9.120              .10
 4th                          12.120               9.250              .20
2002 - Class B
 1st                          12.800               8.780               --
 2nd                          11.000               9.750              .09
 3rd                          11.500               9.510              .09
 4th                          11.440               9.200              .18

CORPORATE OFFICES
1195 River Road
P.O. Box 302
Marietta, Pennsylvania 17547-0302
(717) 426-1931
E-mail Address: info@donegalgroup.com
Donegal Web Site: www.donegalgroup.com

TRANSFER AGENT
EquiServe Trust Company, N.A.
P.O. Box 2500
Jersey City, New Jersey 07303-2500
(800) 317-4445
Web Site: www.equiserve.com
Hearing Impaired: TDD: 201-222-4955

DIVIDEND REINVESTMENT PLAN
The Company offers a dividend
reinvestment plan through its
transfer agent.
For information contact:
Donegal Group Inc.
Dividend Reinvestment Plan
EquiServe Trust Company, N.A.
P.O. Box 2500
Jersey City, New Jersey 07303-2500

STOCKHOLDERS
The following represent the number of
common stockholders of record
as of December 31, 2002:

Class A common stock 615
Class B common stock 514



                          page 30


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.21
<SEQUENCE>6
<FILENAME>d54732_ex21.txt
<TEXT>
                                                                      EXHIBIT 21


                           SUBSIDIARIES OF REGISTRANT


          Registrant owns 100% of the outstanding stock of the following
          insurance companies:

           NAME                                               STATE OF FORMATION
           ----                                               ------------------
           Atlantic States Insurance Company                  Pennsylvania
           Southern Insurance Company of Virginia             Virginia

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.23
<SEQUENCE>7
<FILENAME>d54732_ex23.txt
<TEXT>
                                                                      EXHIBIT 23


              Independent Auditors' Consent and Report on Schedules



The Board of Directors
Donegal Group Inc.:


The audits referred to in our report dated February 20, 2003 include the related
financial statement schedules as of December 31, 2002, and for each of the years
in the three-year period ended December 31, 2002, included in the annual report
on Form 10-K. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits. In our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.

We consent to incorporation by reference in the registration statements (Nos.
333-06681, 333-25541, 333-26693, 333-61095, 333-93785, 333-943301, 333-89644,
333-62970, 333-62972, 333-62974 and 333-62976) on Forms S-8 and registration
statement (No. 333-59828) on Form S-3 of Donegal Group Inc. of our reports dated
February 20, 2003, relating to the consolidated balance sheets of Donegal Group
Inc. as of December 31, 2002 and 2001, and the related consolidated statements
of income and comprehensive income, stockholders' equity and cash flows and
related financial statement schedules for each of the years in the three-year
period ended December 31, 2002, which reports are incorporated by reference or
appear in the December 31, 2002 annual report on Form 10-K of Donegal Group Inc.


/s/ KPMG LLP

Philadelphia, Pennsylvania
March 26, 2003

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>8
<FILENAME>d54732_ex99-1.txt
<TEXT>
                                                                    Exhibit 99.1



                      Statement of Chief Executive Officer
         Pursuant to Section 1350 of Title 18 of the United States Code



     Pursuant to Section 1350 of Title 18 of the United States Code, I, Donald
H. Nikolaus, the President of Donegal Group Inc. (the "Company"), hereby certify
that, to the best of my knowledge:

     1. The Company's Form 10-K Annual Report for the year ended December 31,
2002 (the "Report") fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

     2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.



Date:  March 28, 2003                                      s/Donald H. Nikolaus
                                                           ---------------------
                                                           Donald H. Nikolaus

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2
<SEQUENCE>9
<FILENAME>d54732_ex99-2.txt
<TEXT>
                                                                    Exhibit 99.2



                      Statement of Chief Financial Officer
         Pursuant to Section 1350 of Title 18 of the United States Code



     Pursuant to Section 1350 of Title 18 of the United States Code, I, Ralph G.
Spontak, the Senior Vice President, Chief Financial Officer and Secretary of
Donegal Group Inc. (the "Company"), hereby certify that, to the best of my
knowledge:

     1. The Company's Form 10-K Annual Report for the year ended December 31,
2002 (the "Report") fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

     2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.



Date:  March 28, 2003                         s/Ralph G. Spontak
                                              ----------------------------------
                                              Ralph G. Spontak, Senior Vice
                                              President, Chief Financial Officer
                                              and Secretary

</TEXT>
</DOCUMENT>
</SUBMISSION>
