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, 2001
                                       OR

[x]      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
                                      ---    ---

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 ]

On March 15, 2002, the aggregate market value (based on the closing sales price
on that date) of the voting stock held by non-affiliates of the Registrant was
$27,175,970.

Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 6,031,892 shares of Class A
Common Stock and 2,981,870 shares of Class B Common Stock were outstanding on
March 15, 2002.

                      DOCUMENTS INCORPORATED BY REFERENCE:

i.       Portions of the Registrant's annual report to stockholders for the
         fiscal year ended December 31, 2001 are incorporated by reference into
         Parts I, II and IV of this report.

ii.      Portions of the Registrant's proxy statement relating to the annual
         meeting of stockholders to be held April 18, 2002 are incorporated by
         reference into Part III of this report.

                               DONEGAL GROUP INC.

                            INDEX TO FORM 10-K REPORT

                                                                                                                       Page
                                                                                                                       ----
                                                                                                                     
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.....................................................31
                Executive Officers of the Company.......................................................................31

PART II.................................................................................................................32

   Item 5.      Market for the Registrant's Common Equity and Related Stockholder Matters...............................32
   Item 6.      Selected Financial Data.................................................................................32
   Item 7.      Management's Discussion and Analysis of Financial Condition and
                Results of Operations...................................................................................32
   Item 8.      Financial Statements and Supplementary Data.............................................................32
   Item 9.      Changes in and Disagreements with Accountants on Accounting
                and Financial Disclosure................................................................................32

PART III................................................................................................................33

   Item 10.     Directors and Executive Officers of the Registrant......................................................33
   Item 11.     Executive Compensation..................................................................................33
   Item 12.     Security Ownership of Certain Beneficial Owners and Management..........................................33
   Item 13.     Certain Relationships and Related Transactions..........................................................33

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

   Item 14.     Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................................34

                                       -i-

                                     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"), Southern Insurance Company of Virginia
("Southern"), Pioneer Insurance Company ("Pioneer Ohio") and Southern Heritage
Insurance Company ("Southern Heritage"). 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. Except as otherwise noted, all financial information included
in this Report for Atlantic States includes the financial information of those
former subsidiaries through the dates of the mergers.

         Donegal Mutual Insurance Company (the "Mutual Company") currently owns
63.7% of the outstanding Class A Common Stock and 62.1% 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:

                                                                                                         Net Premiums
                                                                                 Net Premiums            Written Year
                                                                                 Written Year                Ended
                                                                  Year             Prior to              December 31,
Company Acquired                                                Acquired         Acquisition                  2001
- ----------------                                                --------         -----------             -------------
                                                                                                  
Southern Insurance Company of Virginia                            1988          $  1,128,843               $15,213,371
Delaware Atlantic Insurance Company(1)                            1995             2,824,398                        --
Pioneer Insurance Company (Ohio)                                  1997             4,499,273                 4,941,980
Southern Heritage Insurance Company                               1998            32,002,540                17,226,133
Pioneer Insurance Company (New York)(1)                           2001             1,917,723                        --

- ----------------
(1)  Merged into Atlantic States in 2001.

                                       -1-

         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.

         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. 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.

         On December 29, 1988, DGI acquired all of the outstanding capital stock
of Southern in exchange for a $3,000,000 equity contribution to Southern. Since
January 1, 1991, Southern has ceded to the Mutual Company 50% of its direct
premiums written and 50% has been retained by Southern. Because the Mutual
Company places substantially all of the business assumed from Southern in the
pool, in which DGI has a 70% allocation, DGI's results of operations include
approximately 85% of the business written by Southern. See Note 2 to the
Consolidated Financial Statements incorporated by reference herein.

         As of December 31, 1995, the Company acquired all of the outstanding
capital stock of Delaware Atlantic pursuant to a Stock Purchase Agreement dated
as of December 21, 1995 between the Company and the Mutual Company. On August 1,
2001, Delaware Atlantic merged into Atlantic States.

         As of March 31, 1997, the Company acquired all of the outstanding
capital stock of Pioneer Ohio pursuant to a Stock Purchase Agreement dated as of
April 7, 1997 between the Company and the Mutual Company. The Company plans to
merge Pioneer Ohio into Atlantic States in 2002 upon the receipt of regulatory
approval, which is expected prior to June 30, 2002.

         On November 17, 1998, DGI purchased all of the outstanding capital
stock of Southern Heritage, a Georgia-domiciled property and casualty insurance
company, from Southern Heritage Limited Partnership for a purchase price, as
finally settled, of $18,824,950 in cash. The Company plans to merge Southern
Heritage into Southern upon the receipt of regulatory approval, which is
expected prior to June 30, 2002.

                                       -2-

         As of January 1, 2001, DGI purchased all of the outstanding capital
stock of Pioneer New York from the Mutual Company pursuant to a Stock Purchase
Agreement dated as of July 20, 2000. The acquisition has been accounted for as a
reorganization of entities under common control, similar to a pooling of
interest, as both Pioneer New York and the Company are under the common
management of the Mutual Company. Accordingly, the Company's financial
statements have been restated to include Pioneer New York as a consolidated
subsidiary. On September 30, 2001, Pioneer New York merged into Atlantic States.

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

                                       -3-

         (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, 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 12, 2002, the
Mutual Company owned 63.5% of DGI's Class A Common Stock and 62.1% 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 certain
of its insurance subsidiaries, including Atlantic States, Southern, Southern
Heritage and Pioneer Ohio. Expenses are allocated to the Company, Southern,
Southern Heritage and Pioneer Ohio 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
$29,298,569 in 2001.

         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 $801,083 in 2001.

         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. 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 has been 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'

                                       -4-

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.

         DGI and the Mutual Company jointly own Donegal Financial, the holding
company for Province Bank, a federal savings bank headquartered in Pennsylvania,
the deposits of which are insured by the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation. In connection with the initial
capitalization of Province Bank, which opened for business in September 2000,
the Mutual Company purchased 55%, for $3,575,000, and the Company purchased 45%,
for $2,925,000, of the capital stock of Donegal Financial. The Company provided
additional cash, in the amount of $117,000, to Donegal Financial subsequent to
September 2000.

         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 to be 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.

         All of the Company's officers are officers of the Mutual Company, five
of the Company's eight 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 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

                                       -5-

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 current and adjacent 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.

                                       -6-

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, 2001, 2000 and 1999:

                                                                                       Year Ended December 31,
                                                                             -----------------------------------------
                                                                             2001              2000               1999
                                                                             ----              ----               ----
                                                                                                         
Net Premiums Written:
     Commercial..................................................            36.9%             37.2%              35.1%
     Personal....................................................            63.1              62.8               64.9

         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.

                                       -7-

         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 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. DGI's combined ratio for 1999 was
adversely impacted by restructuring charges of approximately $1.6 million.

                                                                                      Year Ended December 31,
                                                                             -----------------------------------------
                                                                              2001             2000               1999
                                                                              ----             ----               ----
                                                                                                        
GAAP combined ratio..............................................            103.8%           101.8%             106.5%
                                                                             ------           ------             ------
Statutory operating ratios:
     Loss ratio..................................................             70.5             68.8               68.8
     Expense ratio...............................................             31.4             30.9               37.2
     Dividend ratio..............................................              1.0              0.9                0.9
                                                                             ------           ------             ------
Statutory combined ratio.........................................            102.9%           100.6%             106.9%
                                                                             ======           ======             ======
Industry statutory combined ratio(1).............................            118.0%           110.5%             107.5%
                                                                             ======           ======             ======

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

         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 2001, 2000 and 1999, the Company
incurred assessments totaling $1,286,578, $813,000 and $726,000, respectively,
from the Pennsylvania Insurance Guaranty Association relating to the
insolvencies of two medical malpractice insurers and Reliance Insurance Company.

                                       -8-

         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.

                                                                                        Year Ended December 31,
                                                                       -------------------------------------------------------
                                                                          2001                   2000                   1999
                                                                          ----                   ----                   ----
                                                                                         (dollars in thousands)
                                                                                                            
Net Premiums Written:
Commercial:
     Automobile .........................................               $16,527                $15,112                $12,608
     Workers' compensation ..............................                22,979                 21,174                 17,519
     Commercial multi-peril .............................                24,174                 21,722                 18,949
     Other ..............................................                 1,725                  1,597                  1,433
                                                                       --------               --------               --------
         Total commercial ...............................                65,405                 59,605                 50,509
                                                                       --------               --------               --------

Personal:
     Automobile .........................................                74,396                 65,528                 61,894
     Homeowners .........................................                31,431                 29,413                 26,290
     Other ..............................................                 5,796                  5,576                  5,179
                                                                       --------               --------               --------
         Total personal .................................               111,623                100,517                 93,363
                                                                       --------               --------               --------
Total business ..........................................              $177,028               $160,122               $143,872
                                                                       ========               ========               ========

Statutory Combined Ratios:
Commercial:
     Automobile .........................................                 108.9%                  99.9%                 113.8%
     Workers' compensation ..............................                 109.9                   91.9                   96.7
     Commercial multi-peril .............................                  96.2                  102.2                   95.9
     Other ..............................................                  77.0                   39.0                   80.6
                                                                       --------               --------               --------
         Total commercial ...............................                 103.7                   96.2                  100.0
                                                                       --------               --------               --------

Personal:
     Automobile .........................................                 104.5                  100.3                  106.8
     Homeowners .........................................                 101.6                  110.9                  123.3
     Other ..............................................                  86.8                  103.5                   88.0
                                                                       --------               --------               --------
         Total personal .................................                 102.7                  103.6                  109.9
                                                                       --------               --------               --------

Total business ..........................................                 102.9%                 100.6%                 106.9%
                                                                       =========              =========              =========

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.

                                       -9-

         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.

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 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.

                                      -10-

         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 territories 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
$25,000 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.

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-

                                      -11-

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, 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. However, 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 financial statements prepared on a statutory
accounting basis result from reducing statutory liabilities for anticipated
salvage and subrogation recoveries. These differences amounted to $8,197,948,
$8,042,860 and $7,736,942 at December 31, 2001, 2000 and 1999, respectively.

         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.

                                                          Year Ended December 31,
                                                      ------------------------------
                                                        2001       2000      1999
                                                        ----       ----      ----
                                                               (in thousands)
                                                                   
Gross liability for unpaid losses and loss expenses
     at beginning of year .........................   $156,476   $144,180   $136,727
Less reinsurance recoverable ......................     53,767     44,946     40,712
                                                      --------   --------   --------
Net liability for unpaid losses and loss expenses
     at beginning of year .........................    102,709     99,234     96,015
Provision for net losses and loss expenses for
     claims incurred in the current year ..........    110,143    103,671    100,573
Change in provision for estimated net losses
     and loss expenses for claims incurred in
     prior years ..................................      8,035        712       (493)
                                                      --------   --------   ---------

Total incurred ....................................    118,178    104,383    100,080

                                       -12-

                                                          Year Ended December 31,
                                                      ------------------------------
                                                        2001       2000      1999
                                                        ----       ----      ----
                                                               (in thousands)
                                                                   
Net losses and loss payments for claims
     incurred during:
The current year ..................................     63,290     61,848     59,434
Prior years .......................................     43,053     39,060     37,427
                                                      --------   --------   --------

Total paid ........................................    106,343    100,908     96,861

Net liability for unpaid losses and loss expenses
     at end of year ...............................    114,544    102,709     99,234
Plus reinsurance recoverable ......................     65,296     53,767     44,946
                                                      --------   --------   --------

Gross liability for unpaid losses and loss expenses
     at end of year ...............................   $179,840   $156,476   $144,180
                                                      ========   ========   ========

         The following table sets forth the development of the liability for net
unpaid losses and loss expenses for DGI on a GAAP basis from 1991 to 2001, with
supplemental loss data for 2000 and 2001. 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.

         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 1992 liability has developed an excess after
nine years, in that reestimated net losses and loss expenses are expected to be
$7.8 million less than the estimated liability initially established in 1992 of
$44.3 million.

         The "Cumulative excess" shows the cumulative excess at December 31,
2001 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
1992 column indicates that as of

                                      -13-

December 31, 2001 payments equal to $37.0 million of the currently reestimated
ultimate liability for net losses and loss expenses of $36.5 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 2001, the Company addressed
the deficiencies in these two lines of business by strengthening both case basis
and bulk reserves.

                                      -14-

                                                                   Year Ended December 31
                                               -----------------------------------------------------------
                                                 1991        1992        1993        1994       1995
                                               --------    --------    --------    --------   --------
                                                                      (in thousands)
                                                                                
Net liability at end of
 year for unpaid losses
 and loss expenses .........................   $36,194    $44,339     $52,790     $63,317     $75,372

Net liability
 reestimated as of:
  One year later ...........................    37,514     45,408      50,583      60,227      72,380
  Two years later ..........................    37,765     42,752      48,132      56,656      70,451
  Three years later ........................    35,446     40,693      44,956      54,571      66,936
  Four years later .........................    33,931     38,375      42,157      51,825      64,356
  Five years later .........................    32,907     37,096      41,050      50,493      63,095
  Six years later ..........................    32,234     36,682      40,572      49,593      62,323
  Seven years later ........................    31,976     36,730      39,991      49,504
  Eight years later ........................    31,685     36,437      40,113
  Nine years later .........................    31,543     36,515
  Ten years later ..........................    31,549
Cumulative (excess) deficiency .............   $(4,645)   $(7,824)   $(12,677)   $(13,813)   $(13,049)
                                               =======    =======    ========    ========    ========

Cumulative amount of
 liability paid through:
  One year later ...........................   $13,519    $16,579     $16,126     $19,401     $24,485
  Two years later ..........................    20,942     24,546      25,393      30,354      37,981
  Three years later ........................    25,308     29,385      32,079      38,684      47,027
  Four years later .........................    27,826     32,925      36,726      43,655      53,276
  Five years later .........................    29,605     34,757      39,122      46,331      56,869
  Six years later ..........................    30,719     35,739      40,440      47,802      58,286
  Seven years later ........................    31,173     36,518      40,903      48,520
  Eight years later ........................    31,412     36,809      41,152
  Nine years later .........................    31,585     37,000
  Ten years later ..........................    31,737

[RESTUBBED]

                                                                      Year Ended December 31
                                               --------------------------------------------------------------------
                                                   1996         1997       1998        1999       2000       2001
                                                 --------    --------    --------    --------   --------   --------
                                                                         (in thousands)
                                                                                         
Net liability at end of
 year for unpaid losses
 and loss expenses .........................      $78,889     $80,256     $96,015     $99,234   $102,709   $114,544

Net liability
 reestimated as of:
  One year later ...........................       77,400      77,459      95,556     100,076    110,744
  Two years later ..........................       73,438      76,613      95,315     103,943
  Three years later ........................       71,816      74,851      94,830
  Four years later .........................       69,378      73,456
  Five years later .........................       69,485
  Six years later ..........................
  Seven years later ........................
  Eight years later ........................
  Nine years later .........................
  Ten years later ..........................
Cumulative (excess) deficiency .............      $(9,404)    $(6,800)    $(1,185)     $4,709     $8,035
                                                  =======     =======     =======      ======     ======

Cumulative amount of
 liability paid through:
  One year later ...........................      $27,229     $27,803     $37,427     $39,060    $43,053
  Two years later ..........................       41,532      46,954      57,347      60,622
  Three years later ........................       53,555      58,883      69,973
  Four years later .........................       59,995      65,898
  Five years later .........................       63,048
  Six years later ..........................
  Seven years later ........................
  Eight years later ........................
  Nine years later .........................
  Ten years later ..........................

                                                                             Year Ended December 31
                                        --------------------------------------------------------------------------------------------
                                           1994        1995        1996        1997        1998        1999        2000       2001
                                        ---------   ---------   ---------   ---------   ---------   ---------   ---------  ---------
                                                                               (in thousands)
                                                                                                    
Gross liability at end of year ........  $88,484    $108,118    $113,346    $115,801    $136,727    $144,180    $156,476    $179,840
Reinsurance recoverable ...............   25,167      32,746      34,457      35,545      40,712      44,946      53,767      65,296
Net liability at end of year ..........   63,317      75,372      78,889      80,256      96,015      99,234     102,709     114,544
Gross reestimated liability - latest...   65,646      84,074     101,365     106,188     129,473     153,953     166,312
Reestimated recoverable - latest ......   16,142      21,751      31,880      32,732      34,643      50,010      55,568
Net reestimated liability - latest ....   49,504      62,323      69,485      73,456      94,830     103,943     110,744
Gross cumulative deficiency (excess)...  (22,838)    (24,044)    (11,981)     (9,613)     (7,254)      9,773       9,836

                                      -15-

REINSURANCE

         DGI and the Mutual Company use several different reinsurers, all of
which have a Best rating of A- 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 2001), and "catastrophic
reinsurance," under which the reinsured recovers 95% of an accumulation of many
losses resulting from a single event, including natural disasters (for 2001,
$3,000,000 retention). DGI's principal reinsurance agreement in 2001, other than
that with the Mutual Company, was an excess of loss treaty in which the
reinsurers were Dorinco Reinsurance Company 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. Atlantic States, Southern, Pioneer Ohio and
Southern Heritage each have a catastrophe reinsurance agreement with the Mutual
Company that limits the maximum liability under any one catastrophic occurrence
to $400,000, $300,000, $200,000 and $400,000, respectively, and $1,000,000 for a
catastrophe involving more than one of the companies. The Mutual Company and
Pioneer Ohio are parties to an excess of loss reinsurance agreement in which the
Mutual Company assumes up to $250,000 of losses in excess of $50,000. The Mutual
Company and Southern are parties to an excess of loss reinsurance agreement in
which the Mutual Company assumes up to $50,000 of losses in excess of $100,000
and a quota share agreement whereby Southern cedes 50% of its direct business
less certain reinsurance to the Mutual Company. The Mutual Company and Southern
Heritage are parties to an excess of loss reinsurance agreement in which the
Mutual Company assumes up to $175,000 of losses in excess of $125,000. Southern,
Pioneer Ohio and Southern Heritage each have agreements with the Mutual Company,
under which they cede, and then reassume back, 100% of their business net of
reinsurance. The purpose of the agreements is to provide these subsidiaries with
the same A.M. Best rating (currently "A") as the Mutual Company, which these
subsidiaries could not achieve without these agreements in place.

                                      -16-

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.

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, 2001, all debt securities were rated
investment grade with the exception of one unrated obligation of $252,000, and
the investment portfolio did not contain any mortgage loans or any
non-performing assets.

                                      -17-

         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, 2001:

                                                          December 31, 2001
                                                      -------------------------
Rating(1)                                                Amount       Percent
- ---------                                                ------       -------
                                                        (dollars in thousands)
U.S. Treasury and U.S. agency
   securities(2) ..............................         $116,185        44.85%

Aaa or AAA ....................................           54,497        21.04
Aa or AA ......................................           46,480        17.94
A .............................................           41,267        15.93
BBB ...........................................              361          .14
Not rated(3) ..................................              252          .10
                                                        --------      -------
     Total ....................................         $259,042       100.00%
                                                        ========      ========
- ---------
(1)      Ratings assigned by Moody's Investors Services, Inc. or Standard &
         Poor's Corporation.

(2)      Includes mortgage-backed securities of $23,400,708.

(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 30.9%, 33.0% and 36.4% of the total investment portfolio at
December 31, 2001, 2000 and 1999, respectively.

                                      -18-

         The following table shows the classification of the investments (at
carrying value) of DGI and its subsidiaries at December 31, 2001, 2000 and 1999.

                                                         December 31,
                            --------------------------------------------------------------------
                                     2001                     2000                   1999
                            --------------------       -----------------      ------------------
                                          Percent                 Percent                 Percent
                                            of                      of                      of
                             Amount        Total       Amount      Total       Amount      Total
                            --------       -----       -------     -----      --------     -----
                                                  (dollars in thousands)
                                                                          
Fixed maturities(1):
 Held to maturity:
 U.S. Treasury securities
 and obligations of U.S.
 government corporations
 and agencies ...........    $23,809         7.9%      $38,779      13.4%      $38,976      14.5%
Canadian government
 obligation .............        499         0.2           499       0.2           498       0.2
Obligations of states and
 political subdivisions .     24,982         8.3        66,831      23.1        67,824      25.3
Corporate securities ....     27,423         9.1        21,621       7.5        16,019       6.0
Mortgage-backed
 securities .............      8,610         2.9        15,452       5.3        16,322       6.1
                            --------       -----       -------     -----      --------     -----
Total held to
 maturity ...............     85,323        28.4       143,182      49.5       139,639      52.1
                            --------       -----       -------     -----      --------     -----
Available for sale:
 U.S. Treasury securities
 and obligations of U.S.
 government corporations
 and agencies ...........     68,975        23.0        67,901      23.5        62,444      23.3
Obligations of states and
 political subdivisions .     55,147        18.3        18,256       6.3        20,408       7.6
Corporate securities ....     34,807        11.6        22,908       7.9        15,247       5.7
Mortgage-backed
 securities .............     14,790         4.9         5,546       1.9         4,401       1.6
                            --------       -----       -------     -----      --------     -----
Total available
  for sale ..............    173,719        57.8       114,611      39.6       102,500      38.2
                            --------       -----       -------     -----      --------     -----
Total fixed
  maturities ............    259,042        86.2       257,793      89.1       242,139      90.3
Equity securities(2) ....     17,517         5.8        12,112       4.2         9,283       3.5
Short-term
  investments(3) ........     24,074         8.0        19,440       6.7        16,589       6.2
                            --------       -----       -------     -----      --------     -----
Total investments .......   $300,633       100.0%     $289,345     100.0%     $268,011     100.0%
                            ========       ======     ========     ======     ========     ======

                                      -19-

(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 $86,939,393
         at December 31, 2001, $144,662,436 at December 31, 2000 and
         $137,361,494 at December 31, 1999. The amortized cost of fixed
         maturities available for sale was $170,269,584 at December 31, 2001,
         $114,524,472 at December 31, 2000 and $105,955,784 at December 31,
         1999.

(2)      Equity securities are valued at fair value. Total cost of equity
         securities was $16,630,618 at December 31, 2001, $12,500,558 at
         December 31, 2000 and $9,067,428 at December 31, 1999.

(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,
         2001, December 31, 2000 and December 31, 1999.

                                                                              December 31,
                                         ---------------------------------------------------------------------------------------
                                                  2001                            2000                            1999
                                         ----------------------          -----------------------          ----------------------
                                                        Percent                          Percent                         Percent
                                                           of                              of                               of
                                         Amount          Total           Amount           Total           Amount          Total
                                         ------          -----           ------           -----           ------          -----
                                                                         (dollars in thousands)
                                                                                                        
Due in(1):
One year or less..............            $37,120        13.1%            $37,731        13.6%             $35,606        13.8%
Over one year
   through three years........             44,845        15.8              35,426        12.8               28,201        10.9
Over three years
   through five years.........             69,585        24.6              41,995        15.1               31,882        12.3
Over five years
   through ten years..........             96,642        34.1             112,396        40.6              105,533        40.8
Over ten years
   through fifteen years                    7,573         2.7              22,243         8.0               30,658        11.8
Over fifteen years............              3,950         1.4               6,445         2.3                6,125         2.4
Mortgage-backed
 securities...................             23,401         8.3              20,997         7.6               20,723         8.0
                                         --------       -----            --------       -----             --------      ------
                                         $283,116       100.0%           $277,233       100.0%            $258,728       100.0%
                                         ========       ======           ========       ======            ========       ======

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

                                      -20-

(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 $23.4 million at December 31, 2001.
Included in these investments are collateralized mortgage obligations ("CMOs")
with a carrying value of $7.5 million at December 31, 2001. The Company has
attempted to reduce the prepayment risks associated with mortgage-backed
securities by investing approximately 99.9%, as of December 31, 2001, 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, 2001, 2000 and 1999 are shown in the following table:

                                                                              Year Ended December 31,
                                                              -------------------------------------------------------
                                                                   2001                  2000                  1999
                                                                   ----                  ----                  ----
                                                                               (dollars in thousands)
                                                                                                 
Invested assets(1)................................              $294,989              $278,678               $264,759
Investment income(2)..............................               15,886                16,395                 13,591
Average yield.....................................                5.3%                  5.9%                   5.1%

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

(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,
Southern, Pioneer Ohio and Southern Heritage is "A", based upon their respective
current financial conditions and historical statutory results of operations.
Management believes that this Best rating is an important factor in marketing
DGI's products to its agents and customers. 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. Best's classifications are A++ and A+ (Superior), A and A- (Excellent),
B++ and B+

                                      -21-

(Very Good), B and B- (Good), C++ and C+ (Fair), C and C- (Marginal), D (below
minimum standards) and E and F (Liquidation). Best's ratings are based upon
factors relevant to policyholders and are not directed toward the protection of
investors. According to Best, an "excellent" rating is assigned to those
companies which, in 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.

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, 2001, 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 and New York), the Mutual Company (Pennsylvania, Ohio, Maryland, New
York, Virginia, Delaware and North Carolina), Southern (Virginia and
Pennsylvania), Pioneer Ohio (Ohio and Pennsylvania) and Southern Heritage
(Alabama, Arkansas, Georgia, Illinois, Louisiana, Mississippi, North Carolina,
South Carolina, Tennessee and Virginia) 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. The Mutual Company, Atlantic States,
Southern, Pioneer Ohio and Southern Heritage have made

                                      -22-

accruals for their portion of assessments related to such insolvencies based
upon the most current information furnished by the guaranty associations. During
2001, 2000 and 1999, the Company incurred assessments totaling $1,286,578,
$813,000 and $726,000, respectively, from the Pennsylvania Insurance Guaranty
Association relating to the insolvencies of two 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
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. 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, 2001, amounts available for payment of dividends in 2001 without
the prior approval of the various insurance commissioners were $8,612,490 from
Atlantic States, $1,086,348 from Southern, $552,447 from Pioneer Ohio and
$3,514,487 from Southern Heritage. See Note 12 to the Consolidated Financial
Statements incorporated by reference herein.

         The NAIC has 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

                                      -23-

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 is as follows: Atlantic States - $6,168,742 increase; Southern
Heritage - $1,083,354 increase; Pioneer Ohio - $313,638 increase; and Southern -
$1,171,204 increase.

THE MUTUAL COMPANY

         The Mutual Company, which was organized in 1889, has a Best rating of A
(Excellent). At December 31, 2001, the Mutual Company had admitted assets of
$179,847,955 and policyholders' surplus of $72,447,287. At December 31, 2001,
the Mutual Company had no debt and, of its total liabilities of $107,400,668,
reserves for net losses and loss expenses accounted for $53,372,948 and unearned
premiums accounted for $27,296,097. Of the Mutual Company's investment portfolio
of $107,762,981 at December 31, 2001, investment-grade bonds accounted for
$31,924,796 and mortgages accounted for $7,924,146. At December 31, 2001, the
Mutual Company owned 3,833,089 shares, or 63.7%, of the Company's Class A Common
Stock, which were carried on the Mutual Company's books at $39,825,804, and
1,852,088 shares, or 62.1%, of the Company's Class B Common Stock, which were
carried on the Mutual Company's books at $19,243,194. The foregoing financial
information is presented on the statutory basis of accounting.

EMPLOYEES

         The Company has no employees. As of December 31, 2001, the Mutual
Company had 437 employees. The Mutual Company's employees provide a variety of
services to DGI, Atlantic States, Southern, Southern Heritage and Pioneer Ohio,
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."

                                      -24-

RISK FACTORS

         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), fluctuations in interest rates 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.

         THE NATURE OF THE INSURANCE INDUSTRY LIMITS THE COMPANY'S ABILITY TO
CHANGE PRICES TO REFLECT RISKS AND TO ESTIMATE THE COMPANY'S RESERVES
ACCURATELY.

         One of the distinguishing features of the property and casualty
industry is that its products generally are priced before its costs are known.
The Company's products are priced in this manner because premium rates usually
are determined at the time the policy is issued and before losses are reported.
Changes in statutory and case law can also dramatically affect the liabilities
associated with known risks after the insurance policy is issued. The number of
competitors and the similarity of products offered, as well as regulatory
constraints, limit the Company's ability to increase prices in response to
declines in profitability. The Company's reported profits and losses are also
determined, in part, by the establishment and adjustment of reserves reflecting
estimates made by management as to the amount of losses and loss adjustment
expenses that will ultimately be incurred in the settlement of claims. The
Company's ultimate liability for all losses and loss adjustment expenses
reserved at any given time will likely be greater or less than these estimates,
and material shortfalls in the estimates may have a material adverse effect on
the Company in future periods.

                                      -25-

         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 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.

         THE COMPANY IS A REGIONAL INSURANCE COMPANY THAT OFFERS INSURANCE
PRODUCTS IN A LIMITED NUMBER OF STATES.

         The Company is headquartered in Pennsylvania and engages in the
insurance business in approximately 14 Middle Atlantic and Southern states. In
2001, the majority of the Company's direct premiums written, including those of
the Mutual Company and DGI's insurance subsidiaries, were geographically
dispersed as follows: 63.0% in Pennsylvania, 14.3% in Virginia and 5.9% in
Maryland. Any single catastrophic occurrence, destructive weather pattern,
general economic trend or other condition disproportionately affecting losses or
business conditions in these states could adversely affect the Company's results
of operations, although the Company and the Mutual Company maintain reinsurance
against catastrophic losses in excess of $3,000,000 per occurrence and the
Company's insurance subsidiaries maintain various catastrophe reinsurance
agreements with the Mutual Company that limit the maximum liability under any
one catastrophe.

                                      -26-

         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.

         THE COMPANY IS SUBJECT TO EXTENSIVE STATE INSURANCE REGULATION.

         The Company is subject to the laws and regulations of the states in
which it conducts business. These laws and regulations address many aspects of
the Company's business and financial condition, including licensure, the payment
of dividends, the establishment of premium rates, the settlement of claims, the
transfer of control and the requirement that the Company participate in assigned
risk pools. Certain of the following laws and regulations could have a material
adverse effect on the Company's results of operations:

         O        state insurance regulations that require the Company to file
                  proposed premium rates in advance of premium rate increases;

         O        state insurance regulations that mandate required levels of
                  statutory surplus;

         O        private rating organization review of the Company's levels of
                  statutory surplus and claims-paying ability; and

         O        NAIC and state insurance department review of the Company's
                  risk-based capital levels.

         Changes in the level of regulation of the insurance industry and laws
or regulations themselves or interpretations by regulatory authorities could
also have a material adverse effect on the Company's operations. Specific
regulatory developments that could have a material adverse effect on the
Company's operations include the potential repeal of the McCarran-Ferguson Act,
which exempts insurance companies from a variety of federal regulatory
requirements, possible rate rollback regulation and legislation to control
premiums, policy terminations and other policy terms.

                                      -27-

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

         The Mutual Company currently owns approximately 63.7% of the Company's
outstanding Class A Common Stock and 62.1% 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 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 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.

                                      -28-

         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'S BUSINESS DEPENDS IN PART ON THE MARKETING EFFORTS OF
INDEPENDENT INSURANCE AGENTS, AND IT IS POSSIBLE THAT THESE AGENTS MAY NOT
MARKET THE COMPANY'S PRODUCTS SUCCESSFULLY OR SELL THE COMPANY'S PRODUCTS WITHIN
THE GUIDELINES THE COMPANY SPECIFIES.

         The Company markets and sells almost all of its insurance products
through independent, non-exclusive insurance agents. These agents are not
obligated to promote the Company's insurance products exclusively and they also
sell competitors' insurance products. The Company's business depends in part on
the marketing efforts of these agents, and the Company's must offer insurance
products and services that meet the requirements of these independent agencies.
If these agencies do not market the Company's products successfully or give
priority to other insurers, the Company's business may be adversely impacted.

         The Company also grants certain agents the authority to bind insurance
without the Company's prior approval within underwriting and pricing limits that
the Company specifies. However, the Company generally reviews all coverages
placed by its agents and may cancel the coverage if it is inconsistent with the
Company's guidelines and permissible to cancel under applicable insurance
regulations. If the Company is unable to cancel the coverage placed by an agent
prior to a claim being placed by the insured, the Company's risk may be
increased and its profitability may suffer.

         THE COMPANY'S ESTABLISHED RESERVES FOR LOSSES AND LOSS ADJUSTMENT
EXPENSES ARE BASED ON ESTIMATES, AND IT IS POSSIBLE THAT THE COMPANY'S ULTIMATE
LIABILITY WILL EXCEED THESE ESTIMATES.

         The Company establishes reserves for losses and loss adjustment
expenses based on estimates of amounts needed to pay reported and unreported
claims and related loss adjustment expenses. These estimates are based on facts
and circumstances then known to the Company. Reserves are based on estimates of
future trends and claims severity, judicial theories of liability and other
factors.

                                      -29-

         The establishment of appropriate reserves is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
exceed the Company's loss and loss adjustment expense reserves and have an
adverse effect on the Company's results of operations and financial condition.
As is the case for most property and casualty insurance companies, the Company
has found it necessary in the past to revise estimated liabilities as reflected
in the Company's loss and loss adjustment expense reserves, and further
adjustments could be required in the future. However, the Company's management
believes that adequate provision has been made for the Company's loss and loss
adjustment expense reserves. This belief is based on the Company's internal
procedures, which analyze the Company'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.

         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.

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
163,500 square feet of office space. Southern has a facility of approximately
10,000 square feet in Glen Allen, Virginia, which it owns. Pioneer Ohio has a
facility of approximately 10,000 square feet in Greenville, Ohio, which it owns.
Southern Heritage has a facility of approximately 14,000 square feet in Duluth,
Georgia, which it leases. Atlantic States has a facility of approximately 6,200
square feet in Greenville, New York, 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.

                                      -30-

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 2001.

Executive Officers of the Company
- ---------------------------------

         The following table sets forth information regarding the persons who
served as executive officers of DGI on March 15, 2002:

         Name                       Age                            Position
         ----                       ---                            --------
                                                                                       
Donald H. Nikolaus                  59           President and Chief Executive Officer since 1981
Ralph G. Spontak                    49           Senior Vice President since 1991; Chief Financial Officer and Vice
                                                 President since 1983; Secretary since 1988
Cyril J. Greenya                    57           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                     49           Senior Vice President - Claims since 1997; Vice President - Claims for
                                                 five years prior thereto
Daniel J. Wagner                    41           Treasurer since 1993; Controller for five years prior thereto

                                      -31-

                                     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
32 of the Company's Annual Report to Stockholders for the year ended December
31, 2001, which is included as Exhibit (13) to this Form 10-K Report. As of
March 15, 2002, the Company had approximately 586 holders of record of its Class
A Common Stock and 532 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 2001 and $.36 per share on its
Common Stock in 2000.

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, 2001,
which is included as Exhibit (13) to this Form 10-K Report.

Item 7.  Management's Discussion and Analysis of Financial Condition
- ------   ------------------------------------------------------------
         and Result of Operations.
         ------------------------

         The response to this Item is incorporated by reference to pages 10
through 14 of the Company's Annual Report to Stockholders for the year ended
December 31, 2001, 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 15
through 31 of the Company's Annual Report to Stockholders for the year ended
December 31, 2001, 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.

                                      -32-

                                    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 pages 7 through 10 of the Company's proxy statement
relating to the Company's annual meeting of stockholders to be held April 18,
2002. 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 12 of the Company's proxy statement relating to the Company's annual
meeting of stockholders to be held April 18, 2002, 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 18, 2002.

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

         The response to this Item is incorporated by reference to pages 3
through 9 and page 15 of the Company's proxy statement relating to the Company's
annual meeting of stockholders to be held April 18, 2002.

                                      -33-

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports
- -------  ---------------------------------------------------
         on Form 8-K.
         -----------

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

         (1)      Consolidated Financial Statements

                                                                                                                 Page*
                                                                                                                 ----

         Report of Independent Auditors..............................................................              31

         Donegal Group Inc. and Subsidiaries:
          Consolidated Balance Sheets as of
            December 31, 2001 and 2000..............................................................               15
          Consolidated Statements of Income and
            Comprehensive Income for the three years ended
            December 31, 2001, 2000 and 1999........................................................               16
          Consolidated Statements of Stockholders'
            Equity for the three years ended
            December 31, 2001, 2000 and 1999........................................................               17
          Consolidated Statements of Cash Flows
            for the three years ended
            December 31, 2001, 2000 and 1999........................................................               18
         Notes to Consolidated Financial Statements..................................................              19

         (2)     Financial Statement Schedules
                                                                                                                  Page
                                                                                                                  ----
         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................................          40
         Schedule II.                 Condensed Financial Information of Parent
                                        Company.........................................................           41
         Schedule III.                Supplementary Insurance Information................................          44
         Schedule IV.                 Reinsurance........................................................          46
         Schedule VI.                 Supplemental Insurance Information Concerning
                                        Property and Casualty Subsidiaries..............................           47

         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 2001 Annual
Report to Stockholders. The Consolidated Financial Statements and Notes to
Consolidated Financial
                                      -34-

Statements and Auditor's Report thereon on pages 15 through 31 are incorporated
herein by 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

    Exhibit No.                              Description of Exhibits                                          Reference
    -----------                              -----------------------                                          ---------
    
      (3)(i)          Certificate of Incorporation of Registrant, as amended                                      (a)

      (3)(ii)         Amended and Restated By-laws of Registrant                                             Filed herewith

                                 Management Contracts and Compensatory Plans or Arrangements
                                 -----------------------------------------------------------

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

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

      (10)(C)         Donegal Group Inc. Amended and Restated 1996 Equity Incentive Plan for Directors            (d)

      (10)(D)         Donegal Group Inc. 2001 Equity Incentive Plan for Directors                                 (c)

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

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

      (10)(G)         Donegal Mutual Insurance Company 401(k) Plan                                                (g)

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

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

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

                                      -35-

    Exhibit No.                              Description of Exhibits                                          Reference
    -----------                              -----------------------                                          ---------

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

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

      (10)(M)         Donegal Mutual Insurance Company Executive Restoration Plan                                 (h)

                                             Other Material Contracts
                                             ------------------------

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

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

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

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

      (10)(R)         Multi-Line Excess of Loss Reinsurance Agreement effective January 1, 1993 between
                      Donegal Mutual Insurance Company, Southern Insurance Company of Virginia,
                      Atlantic States Insurance Company and Pioneer Mutual Insurance Company, and
                      Christiana General Insurance Corporation of New York, Cologne Reinsurance
                      Company of America, Continental Casualty Company, Employers Reinsurance
                      Corporation and Munich American Reinsurance                                                 (k)

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

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

                                       -36-

    Exhibit No.                              Description of Exhibits                                          Reference
    -----------                              -----------------------                                          ---------

      (10)(U)         Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal Mutual
                      Insurance Company and Pioneer Insurance Company                                             (h)

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

      (10)(W)         Reinsurance and Retrocession Agreement effective January 1, 2000 between Donegal
                      Mutual Insurance Company and Southern Heritage Insurance Company                            (g)

      (10)(X)         Property and Catastrophe Excess of Loss Reinsurance Agreement effective January 1,
                      2000 between Donegal Mutual Insurance Company and Southern Heritage Insurance
                      Company                                                                                     (g)

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

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

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

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

      (10)(CC)        Aggregate Excess of Loss Reinsurance Agreement dated as of January 1, 2001 between
                      Donegal Mutual Insurance Company and Pioneer Insurance Company                              (c)

        (13)          2001 Annual Report to Stockholders (electronic filing contains only those portions     Filed herewith
                      incorporated by reference into this Form 10-K Report)

                                      -37-

    Exhibit No.                              Description of Exhibits                                          Reference
    -----------                              -----------------------                                          ---------

        (20)          Proxy Statement relating to the Annual Meeting of Stockholders to be held on
                      April 18, 2002, 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                                               (p)

        (21)          Subsidiaries of Registrant                                                             Filed herewith

        (23)          Consent of Independent Auditors                                                        Filed herewith

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

(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, 1998.

(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, 2000.

(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, 1997.

(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.

                                       -38-

(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 S-2 Registration Statement No. 33-67346
         declared effective September 29, 1993.

(l)      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.

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

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

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

(p)      Such exhibit is hereby incorporated by reference to the Registrant's
         definitive proxy statement filed March 22, 2002.

         (b)      Reports on Form 8-K:

         None.

                                      -39-

                       DONEGAL GROUP INC. AND SUBSIDIARIES

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

                                December 31, 2001

                                                                Amount at Which
                                                       Fair     Shown in the
                                            Cost       Value    Balance Sheet
                                          --------    --------  ---------------
Fixed Maturities:
 Held to maturity:
   United States government and
   Governmental agencies and
   authorities including obligations
   of states and political subdivisions   $ 48,791    $ 49,736    $ 48,791
   Canadian government obligation              499         535         499
   All other corporate bonds                27,423      27,962      27,423
   Mortgage-backed securities                8,610       8,706       8,610
                                           -------     -------     -------
   Total fixed maturities
    held to maturity                        85,323      86,939      85,323
                                           -------     -------     -------
 Available for sale:
   United States government and
   Governmental agencies and
   authorities including obligations
   of states and political subdivisions    121,432     124,122     124,122
   All other corporate bonds                34,094      34,807      34,807
   Mortgage-backed securities               14,744      14,790      14,790
                                           -------     -------     -------
   Total fixed maturities
    available for sale                     170,270     173,719     173,719
                                           -------     -------     -------
   Total fixed maturities                  255,593     260,658     259,042
                                           -------     -------     -------
Equity Securities:
   Preferred stocks
   Public utilities                            227         256         256
   Banks                                     7,201       7,222       7,222
   Industrial and miscellaneous              1,677       1,722       1,722
                                           -------     -------     -------
   Total preferred stocks                    9,105       9,200       9,200
                                           -------     -------     -------
   Common stocks
   Banks and insurance companies             3,978       4,822       4,822
   Industrial and miscellaneous              3,548       3,495       3,495
                                           -------     -------     -------
   Total common stocks                       7,526       8,317       8,317
                                           -------     -------     -------
   Total equity securities                  16,631      17,517      17,517
                                           -------     -------     -------
Short-term investments                      24,074      24,074      24,074
                                           -------     -------     -------
   Total investments                      $296,298    $302,249    $300,633
                                          ========    ========    ========

                                      -40-

                       DONEGAL GROUP INC. AND SUBSIDIARIES

         SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
         ---------------------------------------------------------------

                            Condensed Balance Sheets
                                ($ in thousands)

                           December 31, 2001 and 2000

                                     ASSETS
                                                            2001          2000
                                                          --------      --------

Investment in subsidiaries (equity method)                $152,089      $155,600
Cash                                                           403         2,381
Property and equipment                                       1,623         1,997
Other                                                          264           715
                                                          --------      --------
         Total assets                                     $154,379      $160,693
                                                          ========      ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                                            2001          2000
                                                          --------      --------

Cash dividends declared to stockholders                   $    870      $    797
Line of credit                                              27,600        40,000
Due to affiliate                                             4,441         4,441
Other                                                          540         1,325
                                                          --------      --------
Total liabilities                                           33,451        46,563
                                                          --------      --------

Stockholders' equity                                       120,928       114,130
                                                          --------      --------
Total liabilities and stockholders' equity                $154,379      $160,693
                                                          ========      ========

                                      -41-

                       DONEGAL GROUP INC. AND SUBSIDIARIES

         SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
         ---------------------------------------------------------------
                                   (Continued)
                         Condensed Statements of Income
                                ($ in thousands)

                  Years ended December 31, 2001, 2000 and 1999

                                              2001          2000           1999
                                             ------        ------         ------

Revenues

Dividends-subsidiary                        $14,419        $3,900          $820
Other                                           824           866           865
                                            -------        ------         -----
Total revenues                               15,243         4,766         1,685

Expenses

Operating expenses                            1,761         1,165           938
Interest                                      2,288         3,304         2,463
                                              -----         -----         -----
Total expenses                                4,049         4,469         3,401
                                              -----         -----         -----

Income (loss) before income
 tax benefit and equity in
 undistributed net income of
 subsidiaries                                11,194           297        (1,716)

Income tax benefit                           (1,067)       (1,226)         (807)
                                             -------       -------         -----

Income (loss) before equity in
 undistributed net income
 (loss) of subsidiaries                      12,261         1,523          (909)
                                             ------         -----          -----

Equity in undistributed net
 income (loss) of subsidiaries               (6,443)        7,314         7,704
                                             -------        -----         -----

Net income                                   $5,818        $8,837        $6,795
                                             ======        ======        ======

                                       -42-

                       DONEGAL GROUP INC. AND SUBSIDIARIES

              SCHEDULE II - CONDENSED INFORMATION OF PARENT COMPANY
              -----------------------------------------------------

                       Condensed Statements of Cash Flows
                                ($ in thousands)

                  Years ended December 31, 2001, 2000 and 1999

                                                                2001        2000        1999
                                                              --------    --------    --------
                                                                             
Cash flows from operating activities:
Net income                                                      $5,818      $8,837      $6,795
                                                                ------      ------      ------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed net (income) loss of
   subsidiaries                                                  6,443      (7,314)     (7,704)
Other                                                              252       1,123       2,365
                                                                ------      ------      ------
Net adjustments                                                  6,695      (6,191)     (5,339)
                                                                ------      -------     -------
Net cash provided by operating activities                       12,513       2,646       1,456
                                                                ------      ------      ------

Cash flows from investing activities:
Net purchase of property and equipment                            (122)       (262)       (426)
Sale of subsidiary                                                  --          --         100
Investment in Donegal Financial                                     --      (3,042)         --
Other                                                               38          38        (426)
                                                                ------      ------      -------
Net cash used in investing activities                              (84)     (3,266)       (752)
                                                                -------     -------     -------

Cash flows from financing activities:
Cash dividends paid                                             (3,394)     (3,127)     (2,946)
Issuance of common stock                                         1,387       2,757       2,514
Line of credit, net                                            (12,400)      3,000        (500)
                                                               --------     ------      -------
Net cash provided by (used in) financing
   activities                                                  (14,407)      2,630        (932)
                                                               --------     ------      -------

Net change in cash                                              (1,978)      2,010        (228)
Cash beginning                                                   2,381         371         599
                                                                ------      ------      ------
Cash ending                                                       $403      $2,381        $371
                                                                ======      ======      ======

                                       -43-

                       DONEGAL GROUP INC. AND SUBSIDIARIES

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

                  Years Ended December 31, 2001, 2000 and 1999

                                                                            Amortization
                             Net                Net          Net Losses      of Deferred         Other            Net
                            Earned          Investment        And Loss         Policy         Underwriting     Premiums
     Segment               Premiums          Income           Expense     Acquisition Costs     Expenses        Written
     -------               --------         --------         --------     -----------------    -----------      --------
                                                                                              
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            8,406           59,605
Investments                     ---           16,395              ---              ---              ---              ---
                           --------          -------         --------          -------          -------         --------
                           $151,646          $16,395         $104,383          $25,319          $23,356         $160,122
                           ========          =======         ========          =======          =======         ========

Year Ended
December 31, 1999
- -----------------

Personal lines              $97,713          $   ---          $68,400          $16,741          $19,237          $93,363
Commercial lines             47,804              ---           31,681            8,190            9,412           50,509
Investments                     ---           13,591              ---              ---              ---              ---
                           --------          -------         --------          -------          -------         --------
                           $145,517          $13,591         $100,081          $24,931          $28,649         $143,872
                           ========          =======         ========          =======          =======         ========

                                       -44-

                       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
         -------                -----------              --------               --------             -----------
                                                                                             
         2001
         ----
Personal lines                    $8,394                  $84,726                $70,388                 $ --

Commercial lines                   5,210                   95,114                 43,691                   --

Investments                           --                       --                     --                   --
                                 -------                 --------               --------                 ----

                                 $13,604                 $179,840               $114,079                 $ --
                                 =======                 ========               ========                 ====

         2000
         ----

Personal lines                    $6,759                  $77,546                $54,992                 $ --

Commercial lines                   5,525                   78,930                 44,948                   --

Investments                           --                       --                     --                   --
                                 -------                 --------                -------                 ----

                                 $12,284                 $156,476                $99,940                 $ --
                                 =======                 ========                =======                 ====

                                     -45-

                       DONEGAL GROUP INC. AND SUBSIDIARIES

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

                                                                    Ceded            Assumed        Percentage
                                                  Gross            To Other         from Other           Net            Assumed
                                                  Amount          Companies         Companies           Amount           To Net
                                                  ------          ---------         ---------           ------           ------
                                                                                                           
           Year Ended
        December 31, 2001
        -----------------

Property and casualty premiums                 $105,214,059      $61,249,516       $123,805,311      $167,769,854         74%
                                               ============      ===========       ============      ============         ==

           Year Ended
        December 31, 2000
        -----------------

Property and casualty premiums                  $95,671,588      $52,375,211       $108,349,822      $151,646,199         71%
                                                ===========      ===========       ============      ============         ==

           Year Ended
        December 31, 1999
        -----------------

Property and casualty premiums                  $93,399,834      $46,837,108        $98,954,731      $145,517,457         68%
                                                ===========      ===========        ===========      ============         ==

                                       -46-

                       DONEGAL GROUP INC. AND SUBSIDIARIES

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

                                                                             Discount,
                           Deferred                   Liability               if any,
                            Policy                    For Losses             Deducted
                          Acquisition                  And Loss                From                Unearned
                             Costs                     Expenses              Reserves              Premiums
                             -----                     --------              --------              --------
                                                                                       
 At December 31,

       2001               $13,604,215                $179,839,905               $--                $114,079,264
                          ===========                ============               ===                ============

       2000               $12,284,214                $156,476,124               $--                 $99,940,381
                          ===========                ============               ===                 ===========

       1999               $11,445,572                $144,180,006               $--                 $88,307,928
                          ===========                ============               ===                 ===========

                                                                                                                         (continued)

                                       -47-

                       DONEGAL GROUP INC. AND SUBSIDIARIES

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

                  Years ended December 31, 2001, 2000 and 1999

                                     Losses and Loss
                                   Expenses Related to
                             -----------------------------------
                                                                                          Amortization
                                                                                          of Deferred         Net
                                 Net                                                         Policy       Paid Losses       Net
                                Earned       Investment      Current         Prior         Acquisition     And Loss       Premiums
                               Premiums        Income          Year          Years           Costs         Expenses       Written
                               --------        ------          ----          -----           -----         --------       -------
                                                                                                   
   Year Ended
December 31, 2001            $167,769,854    $15,885,544   $110,142,467    $8,035,082     $27,194,000    $106,342,848   $177,027,654
                             ============    ===========   ============    ==========     ===========    ============   ============

   Year Ended
December 31, 2000            $151,646,199    $16,394,747   $103,671,401      $711,775     $25,319,000    $100,907,860   $160,122,420
                             ============    ===========   ============      ========     ===========    ============   ============

   Year Ended
December 31, 1999            $145,517,457    $13,590,695   $100,573,192     $(492,576)    $24,931,000     $96,861,295   $143,872,389
                             ============    ===========   ============     =========     ===========     ===========   ============

                                       -48-

                                   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, 2002                        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.

       Signature                                      Title                                  Date
       ---------                                      -----                                  ----

/s/Donald H. Nikolaus                         President and a Director                    March 28, 2002
- ----------------------------                  (principal executive officer)
Donald H. Nikolaus

/s/Ralph G. Spontak                           Senior Vice President, Chief                March 28, 2002
- ---------------------------                   Financial Officer and
Ralph G. Spontak                              Secretary (principal financial
                                              and accounting officer)

/s/Robert S. Bolinger                         Director                                    March 28, 2002
- ---------------------------
Robert S. Bolinger

/s/Thomas J. Finley                           Director                                    March 28, 2002
- ---------------------------
Thomas J. Finley

/s/Patricia A. Gilmartin                      Director                                    March 28, 2002
- ---------------------------
Patricia A. Gilmartin

/s/Philip H. Glatfelter                       Director                                    March 28, 2002
- ---------------------------
Philip H. Glatfelter

/s/John J. Lyons                              Director                                    March 28, 2002
- ---------------------------
John J. Lyons

/s/C. Edwin Ireland                           Director                                    March 28, 2002
- ---------------------------
C. Edwin Ireland

/s/R. Richard Sherbahn                        Director                                    March 28, 2002
- ---------------------------
R. Richard Sherbahn

                                       -49-

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

    Exhibit No.                           Description of Exhibits                                             Reference
    -----------                           -----------------------                                             ---------
                                                                                                          
      (3)(i)          Certificate of Incorporation of Registrant, as amended                                      (a)

      (3)(ii)         Amended and Restated By-laws of Registrant                                             Filed herewith

                                 Management Contracts and Compensatory Plans or Arrangements
                                 -----------------------------------------------------------

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

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

      (10)(C)         Donegal Group Inc. Amended and Restated 1996 Equity Incentive Plan for Directors            (d)

      (10)(D)         Donegal Group Inc. 2001 Equity Incentive Plan for Directors                                 (c)

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

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

      (10)(G)         Donegal Mutual Insurance Company 401(k) Plan                                                (g)

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

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

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

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

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

                                       -50-

    Exhibit No.                           Description of Exhibits                                           Reference
    -----------                           -----------------------                                           ---------

      (10)(M)         Donegal Mutual Insurance Company Executive Restoration Plan                                 (h)

                                          Other Material Contracts
                                          ------------------------

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

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

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

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

      (10)(R)         Multi-Line Excess of Loss Reinsurance Agreement effective January 1, 1993
                      between Donegal Mutual Insurance Company, Southern Insurance Company of Virginia,
                      Atlantic States Insurance Company and Pioneer Mutual Insurance Company,
                      and Christiana General Insurance Corporation of New York, Cologne Reinsurance
                      Company of America, Continental Casualty Company, Employers Reinsurance Corporation and
                      Munich American Reinsurance                                                                 (k)

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

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

      (10)(U)         Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal Mutual
                      Insurance Company and Pioneer Insurance Company                                             (h)

                                      -51-

    Exhibit No.                           Description of Exhibits                                           Reference
    -----------                           -----------------------                                           ---------
                                                                                                          
      (10)(V)         Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal Mutual
                      Insurance Company and Southern Insurance Company of Virginia                                (h)

      (10)(W)         Reinsurance and Retrocession Agreement effective January 1, 2000 between Donegal
                      Mutual Insurance Company and Southern Heritage Insurance Company                            (g)

      (10)(X)         Property and Catastrophe Excess of Loss Reinsurance Agreement effective January 1,
                      2000 between Donegal Mutual Insurance Company and Southern Heritage Insurance
                      Company                                                                                     (g)

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

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

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

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

      (10)(CC)        Aggregate Excess of Loss Reinsurance Agreement dated as of January 1, 2001 between
                      Donegal Mutual Insurance Company and Pioneer Insurance Company                              (c)

        (13)          2001 Annual Report to Stockholders (electronic filing contains only those portions     Filed herewith
                      incorporated by reference into this Form 10-K Report)

        (20)          Proxy Statement relating to the Annual Meeting of Stockholders to be held
                      on April 18, 2002, 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                                                      (p)

                                       -52-

    Exhibit No.                           Description of Exhibits                                           Reference
    -----------                           -----------------------                                           ---------

        (21)          Subsidiaries of Registrant                                                             Filed herewith

        (23)          Consent of Independent Auditors                                                        Filed herewith

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

(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, 1998.

(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, 2000.

(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, 1997.

(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.

                                       -53-

(k)      Such exhibit is hereby incorporated by reference to the like-described
         exhibit in Registrant's Form S-2 Registration Statement No. 33-67346
         declared effective September 29, 1993.

(l)      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.

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

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

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

(p)      Such exhibit is hereby incorporated by reference to the Registrant's
         definitive proxy statement filed March 22, 2002.

                                       -54-

                              AMENDED AND RESTATED
                                     BY-LAWS
                                       of
                               DONEGAL GROUP INC.

                                    Article 1

                               CORPORATION OFFICE
                               ------------------

     Section 1.1. Registered Office. The registered office of the Corporation
     -----------  -----------------
shall be 1100 North Market Street Building, Wilmington, County of New Castle,
Delaware, 19801.

     Section 1.2. Principal Office. The principal office of the Corporation
     -----------  ----------------
shall be in Marietta, Pennsylvania.

     Section 1.3. Other Offices. The Corporation may also have offices at such
     -----------  -------------
other places as the Board of Directors may from time to time designate or the
business of the Corporation may from time to time require.

                                    Article 2

                                  STOCKHOLDERS
                                  ------------

     Section 2.1. Place and Time of Meetings. All meetings of the stockholders
     -----------  --------------------------
shall be held at such time and place as may be fixed from time to time by the
Board of Directors and stated in the notice of meeting or in a duly executed
waiver of notice thereof. If no such place is fixed by the Board of Directors,
meetings of the stockholders shall be held at the principal office of the
Corporation.

                                      -1-

     Section 2.2. Annual Meetings. The annual meeting of the stockholders shall
     -----------  ---------------
be held on the third Thursday in April in each year, if not a legal holiday,
and, if a legal holiday, then on the next full business day, at the
Corporation's principal office or at such other place, date and time as shall be
designated from time to time by the Board of Directors and stated in the notice
of meeting or a duly executed waiver of notice thereof.

     At such annual meeting, the stockholders shall elect successors to the
directors whose terms shall expire that year to serve for the following three
years and until their successors shall have been duly elected and qualified or
until their earlier resignation or removal. The stockholders also shall transact
such other business as may properly be brought before the meeting and as are
consistent with the provisions of these By-laws.

     Section 2.3. Stockholder Proposals.
     ----------- ---------------------

     (a)  Stockholder Proposals Relating to Nominations for and Election of
          -----------------------------------------------------------------
Directors.
- ---------

          (i) Nominations of candidates for election by stockholders to the
Board of Directors shall be made exclusively by the Nominating Committee of the
Board of Directors.

          (ii) A proposal by a stockholder for the nomination by the Nominating
Committee of the Board of Directors of a candidate for election by stockholders
as a director at any meeting of stockholders at which directors are to be
elected may only be made by notice in writing, delivered in person or by first
class United States mail postage prepaid or by reputable overnight delivery
service, to the Nominating Committee of the Board of Directors of the
Corporation to the attention of the Secretary of the Corporation at the
principal office of the Corporation, within the time limits specified herein.

                                      -2-

          (iii) In the case of an annual meeting of stockholders, any such
written proposal of nomination must be received by the Nominating Committee not
less than 90 calendar days nor more than 120 calendar days before the first
anniversary of the date on which the Corporation first mailed its proxy
statement to stockholders for the annual meeting of stockholders in the
immediately preceding year; provided, however, that in the case of an annual
meeting of stockholders that is called for a date which is not within 30
calendar days before or after the first anniversary date of the annual meeting
of stockholders in the immediately preceding year, any such written proposal of
nomination must be received by the Board of Directors not less than five
business days after the date the Corporation shall have mailed notice to its
stockholders that an annual meeting of stockholders will be held or issued a
press release, filed a periodic report with the Securities and Exchange
Commission or otherwise publicly disseminated notice that an annual meeting of
stockholders will be held.

          (iv) In the case of a special meeting of stockholders, any such
written proposal of nomination must be received by the Nominating Committee not
less than five business days after the earlier of the date that the Corporation
shall have mailed notice to its stockholders that a special meeting of
stockholders will be held or issued a press release, filed a periodic report
with the Securities and Exchange Commission or otherwise publicly disseminated
notice that a special meeting of stockholders will be held.

                                      -3-

          (v) Such written proposal of nomination shall set forth (A) the name
and address of the stockholder who intends to make the nomination (the
"Nominating Stockholder"), (B) the name, age, business address and, if known,
residence address of each person so proposed, (C) the principal occupation or
employment of each person so proposed for the past five years, (D) the number of
shares of capital stock of the Corporation beneficially owned within the meaning
of Securities and Exchange Commission Rule 13d-3 by each person so proposed and
the earliest date of acquisition of any such capital stock, (E) a description of
any arrangement or understanding between each person so proposed and the
Nominating Stockholder with respect to such person's proposal for nomination and
election as a director and actions to be proposed or taken by such person as a
director, (F) the written consent of each person so proposed to serve as a
director if nominated and elected as a director and (G) such other information
regarding each such person as would be required under the proxy solicitation
rules of the Securities and Exchange Commission if proxies were to be solicited
for the election as a director of each person so proposed.

          (vi) If a written proposal of nomination submitted to the Nominating
Committee fails, in the reasonable judgment of the Nominating Committee, to
contain the information specified in clause (v) hereof or is otherwise
deficient, the Chairperson of the Nominating Committee shall, as promptly as is
practicable under the circumstances, provide written notice to the Nominating
Stockholder of such failure or deficiency in the written proposal of nomination
and such Nominating Stockholder shall have five business days from receipt of
such notice to submit a revised written proposal of nomination that corrects
such failure or deficiency in all material respects.

          (vii) Only candidates nominated for election by stockholders as a
member of the Board of Directors in accordance with the foregoing provisions of
this Section 2.3(a) shall be eligible for election as a member of the Board of
Directors at such meeting of stockholders, and any candidate not nominated in
accordance with such provisions shall not be considered or acted upon for
election as a director at such meeting of stockholders.

                                      -4-

     (b) Stockholder Proposals Relating to Other Than Nominations for and
         ----------------------------------------------------------------
Elections of Directors.
- -----------------------

          (i) A stockholder of the Corporation may bring a matter before a
meeting of stockholders only if (A) (x) such matter is a proper matter for
stockholder action and (y) such stockholder shall have provided notice in
writing, delivered in person or by first class United States mail postage
prepaid or by reputable overnight delivery service, to the Board of Directors of
the Corporation to the attention of the Secretary of the Corporation at the
principal office of the Corporation, within the time limits specified herein or
(B) the stockholder complies with the provisions of Rule 14a-8 under the
Securities Exchange Act of 1934 relating to inclusion of stockholder proposals
in the Corporation's proxy statement.

          (ii) In the case of an annual meeting of stockholders, any such
written notice of presentation of a matter must be received by the Board of
Directors not less than 90 calendar days nor more than 120 calendar days before
the first anniversary of the date on which the Corporation first mailed its
proxy statement to stockholders for the annual meeting of stockholders in the
immediately preceding year; provided, however, that in the case of an annual
meeting of stockholders that is called for a date which is not within 30
calendar days before or after the first anniversary date of the annual meeting
of stockholders in the immediately preceding year, any such written notice of
presentation of a matter must be received by the Board of Directors not less
than five business days after the date the Corporation shall have mailed notice
to its stockholders that an annual meeting of stockholders will be held or
issued a press release, filed a periodic report with the Securities and Exchange
Commission or otherwise publicly disseminated notice that an annual meeting of
stockholders will be held.

                                      -5-

          (iii) In the case of a special meeting of stockholders, any such
written notice of presentation of a matter must be received by the Board of
Directors not less than five business days after the earlier of the date the
Corporation shall have mailed notice to its stockholders that a special meeting
of stockholders will be held or issued a press release, filed a periodic report
with the Securities and Exchange Commission or otherwise publicly disseminated
notice that a special meeting of stockholders will be held.

          (iv) Such written notice of presentation of a matter shall set forth
information regarding such matter equivalent to the information regarding such
matter that would be required under the proxy solicitation rules of the
Securities and Exchange Commission if proxies were solicited for stockholder
consideration of such matter at a meeting of stockholders.

          (v) If a written notice of presentation of a matter submitted to the
Board of Directors fails, in the reasonable judgment of the Board of Directors,
to contain the information specified in clause (iv) hereof or is otherwise
deficient, the Chairperson of the Board of Directors shall, as promptly as is
practicable under the circumstances, provide written notice to the stockholder
who submitted the written notice of presentation of a matter of such failure or
deficiency in the written notice of presentation of a matter and such
stockholder shall have five business days from receipt of such notice to submit
a revised written notice of presentation of a matter that corrects such failure
or deficiency in all material respects.

                                      -6-

          (vi) Only matters submitted in accordance with the foregoing
provisions of this Section 2.3(b) shall be eligible for presentation of such
meeting of stockholders, and any matter not submitted to the Board of Directors
in accordance with such provisions shall not be considered or acted upon at such
meeting of stockholders.

     Section 2.4. Special Meetings. Special meetings of stockholders for any
     -----------  ----------------
purpose or purposes may be called at any time by the President of the
Corporation, and shall be called by the Secretary of the Corporation at the
request in writing of a majority of the Board of Directors or stockholders
owning at least one-fifth of the entire capital stock of the Corporation issued
and outstanding and entitled to vote thereat. Any request for a special meeting
of stockholders shall be signed by the person or persons making the request and
shall state the purpose or purposes of the proposed meeting. Upon receipt of any
such request, it shall be the duty of the Secretary of the Corporation to call a
special meeting of stockholders to be held at such time, not less than ten nor
more than sixty days thereafter, as the Secretary of the Corporation may fix. If
the Secretary of the Corporation shall neglect or refuse to issue such call
within five days from the receipt of such request, the person or persons making
the request may do so. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice of such
meeting or a duly executed waiver of notice thereof.

     Section 2.5. Notice of Meetings. Written notice of all meetings of
     -----------  ------------------
stockholders other than adjourned, postponed or continued meetings of
stockholders, stating the place, date and hour, and, in the case of special
meetings of stockholders, the purpose or purposes thereof, shall be served upon
or mailed, postage prepaid, or telegraphed, charges prepaid, not less than ten
nor more than sixty days before the date of the meeting to each stockholder
entitled to vote thereat at such address as appears on the books of the
Corporation. Such notices may be given at the discretion of, or in the name of,
the Board of Directors, the President, any Vice President, the Secretary or any
Assistant Secretary. When a meeting is adjourned, postponed or continued it
shall not be necessary to give any notice of the adjourned, postponed or
continued meeting or of the business to be transacted at the adjourned,
postponed or continued meeting, other than by announcement at the meeting at
which such adjournment, postponement or continuation is taken.

                                      -7-

     Section 2.6. Participation in Meetings by Conference Telephone. One or more
     -----------  -------------------------------------------------
stockholders may participate in any meeting of the stockholders by means of
conference telephone or similar communications equipment which enables all
persons participating in the meeting to hear one another, and such person or
persons shall be counted for purposes of a quorum.

     Section 2.7. Quorum of and Action by Stockholders. The presence, in person,
     -----------  ------------------------------------
by proxy or by telephonic or similar communications equipment, of stockholders
entitled to cast a majority of the votes which all stockholders are entitled to
cast on the particular matter shall constitute a quorum for purposes of
considering such matter, and, unless otherwise specifically provided by statute,
the acts of such stockholders at a duly organized meeting shall be the acts of
stockholders with respect to such matter.

     If, however, such quorum shall not be present at any meeting of the
stockholders, the stockholders entitled to vote thereat present in person, by
proxy or by such communications equipment may, except as otherwise provided by
statute, adjourn, postpone or continue the meeting from time to time to such
time and place as they may determine, without notice other than an announcement
at the meeting, until a quorum shall be present in person, by proxy or by such
communications equipment.

                                      -8-

     At any adjourned, postponed or continued meeting at which a quorum had been
present, stockholders present in person, by proxy or by such communications
equipment at a duly organized and constituted meeting, can continue to do
business with respect to any matter properly submitted to the meeting until
adjournment, postponement or continuation thereof notwithstanding the withdrawal
of enough stockholders to leave less than a quorum for the purposes of
considering any particular such matter.

     Section 2.8. Voting. Except as may be otherwise provided by statute or by
     -----------  ------
the Certificate of Incorporation, at every meeting of the stockholders, every
holder of Class A Common Stock entitled to vote thereat shall have the right to
one-tenth of one vote for every share of Class A Common Stock standing in his
name on the stock transfer books of the Corporation on the record date fixed for
the meeting and every holder of Class B Common Stock entitled to vote thereat
shall have the right to one vote for every share of Class B Common Stock
standing in his name on the stock transfer books of the Corporation on the
record date fixed for the meeting. No share shall be voted at any meeting if any
installment is due and unpaid thereon.

     When a quorum exists at any meeting, the vote of the holders of Class A
Common Stock and Class B Common Stock having a majority of the voting power
present at such meeting in person, by proxy or by telephonic or similar
communications equipment shall decide any question brought before such meeting,
unless the question is one for which, by express provision of statute or of the
Certificate of Incorporation or of these By-laws, a different vote is required.
Upon demand made by a stockholder at any election of directors before the voting
begins, the election shall be by ballot, in which event the vote shall be taken
by written ballot, and the judge or judges of election or, if none, the
Secretary of the meeting, shall tabulate and certify the results of such vote.

                                      -9-

     Section 2.9. Voting by Proxy. Every stockholder entitled to vote at a
     -----------  ---------------
meeting of the stockholders or to express consent or dissent to corporate action
in writing without a meeting may authorize another person or persons to act for
him by proxy. Every proxy shall be executed in writing by the stockholder or his
duly authorized attorney in fact and filed with the Secretary of the
Corporation. A proxy, unless coupled with an interest, shall be revocable at
will, notwithstanding any other agreement or any provision in the proxy to the
contrary, but the revocation of a proxy shall not be effective until written
notice thereof has been given to the Secretary of the Corporation. No unrevoked
proxy shall be voted or acted upon after three years from the date of its
execution, unless a longer time is expressly provided therein. A proxy shall not
be revoked by the death or incapacity of the maker, unless, before the vote is
counted or the authority is exercised, written notice of such death or
incapacity is given to the Secretary of the Corporation.

     Section 2.10. Record Date. The Board of Directors may fix a time, not more
     ------------  -----------
than sixty nor less than ten days prior to the date of any meeting of the
stockholders, or the date fixed for the payment of any dividend or distribution,
or the date for the allotment of rights or the date when any change or
conversion or exchange of shares will be made or go into effect, as the record
date for the determination of the stockholders entitled to notice of, or to vote
at, such meeting, or to receive any such allotment of rights or to exercise the
rights in respect to any such change or conversion or exchange of shares. In
such case, only such stockholders as shall be stockholders of record on the date
so fixed shall be entitled to notice of, or to vote at, such meeting or to
receive payment of such dividend, or to receive such allotment of rights or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the Corporation after any record date fixed as aforesaid.

                                      -10-

     The Board of Directors may close the books of the Corporation against
transfers of shares during the whole or any part of such period, and in such
case written or printed notice thereof shall be mailed at least ten days before
the closing thereof to each stockholder of record at the address appearing on
the stock transfer books of the Corporation or supplied by him to the
Corporation for the purpose of notice. While the stock transfer books of the
Corporation are closed, no transfer of shares shall be made thereon. If no
record date is fixed by the Board of Directors for the determination of
stockholders who are entitled to receive notice of, or to vote at, a meeting of
the stockholders, or to receive payment of any such dividend or distribution, or
to receive any such allotment of rights or to exercise the rights in respect to
any such change or conversion or exchange of shares, transferees of shares which
are transferred on the stock transfer books of the Corporation within the ten
days immediately preceding the date of such meeting, dividend, distribution,
allotment of rights or exercise of such rights shall not be entitled to notice
of, or to vote at, such meeting, or to receive payment of any dividend or
distribution, or to receive any such allotment of rights or to exercise the
rights in respect to any such change or conversion or exchange of shares.

     Section 2.11. Stockholders List. The officer or agent having charge of the
     ------------  -----------------
stock transfer books for shares of the Corporation shall make, at least ten days
before each meeting of the stockholders, a complete alphabetical list of the
stockholders entitled to vote at the meeting, with their addresses and the
number of shares held by each, which list shall be kept on file either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting or if not so specified, at the place
where the meeting is to be held and shall be subject to inspection by any
stockholder for any purpose germane to the meeting at any time during usual
business hours for a period of at least ten days prior to the meeting. Such list
shall be produced at the meeting and shall be kept open for inspection by any
stockholder during the entire meeting. The original stock transfer books of the
Corporation shall be prima facie evidence as to who are the stockholders
entitled to exercise the rights of a stockholder.

                                      -11-

     Section 2.12. Inspectors of Election. In advance of any meeting of the
     ------------  ----------------------
stockholders, the Board of Directors shall appoint inspectors of election, who
need not be stockholders, to act at such meeting or any adjournment,
postponement or continuation thereof. If no inspector of election so appointed
is able to act at a meeting of stockholders, the chairman of any such meeting
shall make such appointment at the meeting. The number of inspectors of election
shall be one or three. No person who is a candidate for office shall act as an
inspector of election.

     The inspectors of election shall do all such acts as may be proper to
conduct the election or vote and such other duties as may be prescribed by
statute with fairness to all stockholders, and shall make a written report of
any matter determined by them and execute a certificate as to any fact found by
them. If there are three inspectors of election, the decision, act or
certificate of a majority shall be the decision, act or certificate of all.

     Section 2.13. Action by Written Consent of the Stockholders. Any action
     ------------  ---------------------------------------------
required to be taken at an annual or special meeting of stockholders, or of a
class thereof, or any action which may be taken at any annual or special meeting
of such stockholders, or of a class thereof, may be taken without a meeting,
without prior notice and without a vote, if a consent or consents in writing
setting forth the action so taken shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted and shall be delivered to the Secretary of
the Corporation at its principal place of business as specified in Section 1.2
hereof.

                                      -12-

                                    Article 3

                                    DIRECTORS
                                    ---------

     Section 3.1. Powers.
     -----------  ------

     (a) General Powers. The Board of Directors shall have all the power and
         --------------
authority granted by law to the Board of Directors, including all powers
necessary or appropriate to the management of the business and affairs of the
Corporation.

     (b) Specific Powers. Without limiting the general powers conferred by the
         ---------------
last preceding clause and the powers conferred by the Certificate of
Incorporation and the By-laws of the Corporation, it is hereby expressly
declared that the Board of Directors shall have the following powers:

          (i) To appoint any person, firm or corporation to accept and hold in
trust for the Corporation any property belonging to the Corporation or in which
it is interested, and to authorize any such person, firm or corporation to
execute any documents and perform any duties that may be requisite in relation
to any such trust;

          (ii) To appoint a person or persons to vote shares of another
corporation held and owned by the Corporation and, in the absence of any such
appointment, the Board of Directors of the Corporation shall have the authority
to vote any such shares;

                                      -13-

          (iii) By resolution adopted by a majority of the whole Board of
Directors, to designate one or more committees, each committee to consist of two
or more of the directors of the Corporation. To the extent provided in any such
resolution, and to the extent permitted by law, a committee so designated shall
have and may exercise the authority of the Board of Directors in the management
of the business and affairs of the Corporation. The Board of Directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. If
specifically granted this power by the Board of Directors in its resolution
establishing the committee, in the absence or disqualification of any member and
all designated alternates of such committee or committees or if the whole Board
of Directors has failed to designate alternate members, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another director to act
at the meeting in the place of any such absent or disqualified member;

          (iv) To fix the place, time and purpose of meetings of the
stockholders; and

          (v) To fix the compensation of directors and officers for their
services.

     Section 3.2. Number and Terms of Directors. The number of directors which
     -----------  -----------------------------
shall constitute the whole Board of Directors shall be not less than seven nor
more than twelve, who shall be natural persons of full age and need not be
residents of Delaware or stockholders of the Corporation. Within the limits
above specified, the number of directors shall be as determined from time to
time by resolution of the Board of Directors. Except as hereinafter provided in
the case of vacancies, each director shall be elected by the affirmative vote of
a plurality of the votes cast by the holders of Class A Common Stock and of
Class B Common Stock for a term of three years and until his successor has been
elected, subject to removal as provided by statute.

                                      -14-

     Section 3.3. Classes. The Board of Directors shall be divided into three
     -----------  -------
classes: Class A, Class B and Class C. At each annual meeting of the
stockholders, the successors to the directors of the class whose term shall
expire in that year shall be elected for a term of three years so that the term
of office of one class of directors shall expire in each year. The number of
directors in each class shall be as nearly equal as possible so that, except for
temporary vacancies, the number in any class shall not exceed the number in any
other class by more than one.

     Section 3.4. Powers and Duties of the Chairman of the Board of Directors.
     -----------  -----------------------------------------------------------
The Board of Directors shall appoint one of their number as the Chairman of the
Board who shall preside at all meetings of the Board of Directors and who shall
have such other powers and duties as may be assigned to him from time to time by
the Board of Directors.

     Section 3.5. Powers and Duties of the Vice Chairman of the Board of
     -----------  ------------------------------------------------------
Directors. The Board of Directors may, in its discretion, appoint one of its
- ---------
number as a Vice Chairman of the Board of Directors. In the absence of the
Chairman of the Board of Directors, the Vice Chairman of the Board of Directors
shall preside at all meetings of the Board of Directors. In addition, the Vice
Chairman of the Board of Directors shall have such other powers and duties as
may be assigned to him from time to time by the Board of Directors.

     Section 3.6. Vacancies. Vacancies on the Board of Directors, including
     -----------  ---------
vacancies resulting from an increase in the number of directors, shall be filled
by a majority of the remaining members of the Board of Directors, though less
than a quorum, or by the sole remaining director, as the case may be,
irrespective of whether holders of any class or series of stock or other voting
securities of the Corporation are entitled to elect one or more directors to
fill such vacancies or newly created directorships at the next annual meeting of
the stockholders. Each person so elected shall be a director until his successor
is elected by the stockholders at the annual meeting of the stockholders at
which the class of directors to which he was elected is up for election or at
any special meeting of the stockholders prior thereto duly called for that
purpose.

                                      -15-

     Section 3.7. Organization Meetings. The organization meeting of each newly
     -----------  ---------------------
elected Board of Directors shall be held immediately following each annual
meeting of the stockholders at which directors were elected without the
necessity of notice to such directors to constitute a legally convened meeting
or at such time and place as may be fixed by a notice, or a waiver of notice, or
a consent signed by all of such directors. At such meeting, the Board of
Directors shall elect officers of the Corporation and may also choose an
Executive Committee consisting of two members of the Board of Directors in
addition to the President.

     Section 3.8. Regular Meetings. The Board of Directors shall have the power
     -----------  ----------------
to fix by resolution the place, date and hour of regular meetings of the Board
of Directors.

     Section 3.9. Special Meetings. Special meetings of the Board of Directors
     -----------  ----------------
may be called by the President of the Corporation on one day's notice to each
director, either personally or by mail, telephone or telegram. Special meetings
of the Board of Directors shall be called by the President or the Secretary of
the Corporation in like manner and on like notice upon the written request of
any five directors.

                                      -16-

     Section 3.10. Notices of Meetings. All meetings of the Board of Directors
     ------------  -------------------
may be held at such times and places as may be specified in the notice of
meeting or in a duly executed waiver of notice thereof. Notice of regular
meetings of the Board of Directors shall be given to each director at least
three days before each meeting either personally or by mail, telegram or
telephone. One or more directors may participate in any meeting of the Board of
Directors, or of any committee thereof, by means of a conference telephone or
similar communications equipment which enables all persons participating in the
meeting to hear one another, and such participation in a meeting shall
constitute presence in person at the meeting.

     Section 3.11. Quorum. At all meetings of the Board of Directors, the
     ------------  ------
presence, in person or by telephonic or similar communications equipment, of a
majority of the members of the Board of Directors shall constitute a quorum for
the transaction of business, and the acts of a majority of the directors present
at a duly convened meeting at which a quorum is present shall be the acts of the
Board of Directors, except as may be otherwise specifically provided by statute,
by the Certificate of Incorporation of the Corporation or by these By-laws. If a
quorum shall not be present, in person or by telephonic or similar
communications equipment, at any meeting of the Board of Directors, the
directors present may adjourn, postpone or continue the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be so present.

     Section 3.12. Action by Unanimous Written Consent. Any action required or
     ------------  -----------------------------------
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if all members of the Board of
Directors or a committee thereof, as the case may be, consent thereto in
writing, and such consent is filed with the minutes of proceedings of the Board
of Directors, or committee.

                                      -17-

     Section 3.13. Compensation. Directors, as such, may receive a stated salary
     ------------  ------------
for their services, or a fixed sum and expenses for attendance at regular or
special meetings of the Board of Directors, or any committee thereof, or any
combination of the foregoing as may be determined from time to time by
resolution of the Board of Directors, and nothing contained herein shall be
construed to preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor.

     Section 3.14. The Coordinating Committee. The Coordinating Committee shall
     ------------  --------------------------
consist of two members of the Corporation's Board of Directors, each of whom is
not a member of the Board of Directors or an officer of Donegal Mutual Insurance
Company, and two members of the Board of Directors of Donegal Mutual Insurance
Company, each of whom is not a member of the Board of Directors or an officer of
the Corporation. The Coordinating Committee shall review and either approve or
disapprove all contracts and other matters involving actual or potential
conflicts of interest between the Corporation and Donegal Mutual Insurance
Company. Whenever any new contract between the Corporation and Donegal Mutual
Insurance Company is proposed or any change is proposed in any existing contract
between the Corporation and Donegal Mutual Insurance Company or any other matter
arises that presents an actual or potential conflict of interest between the
Corporation and Donegal Mutual Insurance Company, such new contract, change in
an existing contract or other matter shall (i) first be submitted for approval
to the respective Boards of Directors of the Corporation and of Donegal Mutual
Insurance Company, (ii) only following approval by the respective Boards of
Directors of the Corporation and Donegal Mutual Insurance Company shall the new
contract, change in an existing contract or other matter be submitted to the
Coordinating Committee for its consideration thereof and (iii) the

                                      -18-

proposed new contract, change in an existing contract or other matter shall be
consummated only if (A) both of the Corporation's members of the Coordinating
Committee conclude that such new contract, change in an existing contract or
other matter is fair and equitable to the Corporation and its stockholders and
(B) both of Donegal Mutual Insurance Company's members of the Coordinating
Committee conclude that such new contract, change in an existing contract or
other matter is fair and equitable to Donegal Mutual Insurance Company and its
policyholders. For purposes of this Section 3.14, the term "the Corporation"
shall mean Donegal Group Inc. and its direct and indirect wholly owned
subsidiaries and the term "Donegal Mutual Insurance Company" shall mean Donegal
Mutual Insurance Company and its direct and indirect wholly owned subsidiaries.

                                    Article 4

                                    OFFICERS
                                    --------

     Section 4.1. Election and Office. The officers of the Corporation shall be
     -----------  -------------------
elected annually by the Board of Directors at its organization meeting and shall
consist of a President, a Secretary and a Treasurer. The Board of Directors may
also elect one or more Vice Presidents and such other officers and appoint such
agents as it shall deem necessary. Each officer of the Corporation shall hold
office for such term, have such authority and perform such duties as set forth
in these By-laws or as may from time to time be prescribed by the Board of
Directors in consultation with the President. Any two or more offices may be
held by the same person.

     Section 4.2. Salaries. The salaries of all officers of the Corporation
     -----------  --------
shall be fixed by the Board of Directors.

                                      -19-

     Section 4.3. Removal and Vacancies. The Board of Directors may remove any
     -----------  ---------------------
officer or agent elected or appointed at any time and within the period, if any,
for which such person was elected or employed whenever in the judgment of the
Board of Directors it is in the best interests of the Corporation, and all
persons shall be elected and employed subject to the provisions hereof. If the
office of any officer becomes vacant for any reason, the vacancy shall be filled
by the Board of Directors.

     Section 4.4. Powers and Duties of the President. Unless otherwise
     -----------  ----------------------------------
determined by the Board of Directors, the President shall have the usual duties
of a chief executive officer with general supervision over and direction of the
affairs of the Corporation. In the exercise of these duties and subject to the
limitations of the laws of the State of Delaware or any other applicable law,
these By-laws and the actions of the Board of Directors, he may appoint, suspend
and discharge employees, agents and assistant officers, may fix the compensation
of all officers and assistant officers, shall preside at all meetings of the
stockholders at which he shall be present, and, unless there is a Chairman of
the Board of Directors, shall preside at all meetings of the Board of Directors
and shall be a member of all committees. He shall also do and perform such other
duties as from time to time may be assigned to him by the Board of Directors.

     Unless otherwise determined by the Board of Directors, the President shall
have full power and authority on behalf of the Corporation to attend and to act
and to vote at any meeting of the stockholders of any corporation in which the
Corporation may hold stock, and, at any such meeting, shall possess and may
exercise any and all the rights and powers incident to the ownership of such
stock and which, as the owner thereof, the Corporation might have possessed and
exercised.

                                      -20-

     Section 4.5. Powers and Duties of Vice Presidents. Each Vice President
     -----------  ------------------------------------
shall have such duties as may be assigned to him from time to time by the Board
of Directors, the Executive Committee or the President. In the event of a
temporary absence of the President on vacation or business, the President may
designate a Vice President or Vice Presidents who will perform the duties of the
President in such absence. In the event of a prolonged absence of the President
due to illness or disability or for any other reason, the Board of Directors
shall designate a Vice President or Vice Presidents who will perform the duties
of the President during such absence.

     Section 4.6. Powers and Duties of the Secretary. The Secretary of the
     -----------  ----------------------------------
Corporation shall attend all meetings of the Board of Directors and of the
stockholders and shall keep accurate records thereof in one or more minute books
kept for that purpose, shall give, or cause to be given, the required notice of
all meetings of the stockholders and of the Board of Directors, shall keep in
safe custody the corporate seal of the Corporation and affix the same to any
instrument requiring it, and when so affixed, it shall be attested by his
signature or by the signature of the Treasurer or any Assistant Secretary or
Assistant Treasurer of the Corporation. The Secretary also shall keep, or cause
to be kept, the stock certificate books, stock transfer books and stock ledgers
of the Corporation, in which shall be recorded all stock issues, transfers, the
dates of same, the names and addresses of all stockholders and the number of
shares held by each, shall, when necessary, prepare new certificates upon the
transfer of shares and the surrender of the old certificates, shall cancel such
surrendered certificates and shall perform such other duties as may be assigned
to him by the President.

                                      -21-

     Section 4.7. Powers and Duties of the Treasurer. The Treasurer of the
     -----------  ----------------------------------
Corporation shall have the custody of the Corporation's funds and securities,
shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation, shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories as
shall be designated by the President, shall disburse the funds of the
Corporation as may be ordered by the President or the Board of Directors, taking
proper vouchers for such disbursements, shall render to the President and the
Board of Directors, at the regular meetings of the Board of Directors or
whenever they may require it, an account of all his transactions as Treasurer
and of the financial condition of the Corporation and shall have the right to
affix the seal of the Corporation to any instrument requiring it, and to attest
to the same by his signature and, if so required by the Board of Directors, he
shall give bond in such sum and with such surety as the Board of Directors may
from time to time direct.

     Section 4.8. Designation of a Chief Financial Officer. The Board of
     -----------  ----------------------------------------
Directors shall have the power to designate from among the President, any Vice
President or the Treasurer of the Corporation a Chief Financial Officer who
shall be deemed the principal financial and accounting officer. In the event
that the Treasurer is not designated by the Board of Directors as the Chief
Financial Officer, the Treasurer shall report to the Chief Financial Officer
from time to time concerning all duties which the Treasurer is obligated to
perform and the Chief Financial Officer shall, subject to the reasonable
direction of the President or the Board of Directors, at his election, assume
such of the duties of the Treasurer as are provided in Section 4.7 hereof as he
shall deem appropriate.

                                      -22-

                                    Article 5

                                 INDEMNIFICATION
                                 ---------------

     Section 5.1. Indemnification. The Corporation shall indemnify any director
     -----------  ---------------
or officer of the Corporation and any director or officer of its subsidiaries
against expenses, including legal fees, judgments, fines and amounts paid in
settlement, actually and reasonably incurred by him to the fullest extent now or
hereafter permitted by law in connection with any threatened, pending or
completed action, suit or proceeding, whether derivative or nonderivative, and
whether civil, criminal, administrative or investigative, brought or threatened
to be brought against him by reason of his performance or status as a director
or officer of the Corporation, any of its subsidiaries or any other entity in
which he was serving at the request of the Corporation or in any other capacity
on behalf of the Corporation, its parent or any of its subsidiaries if such
officer or director acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.

     Notwithstanding the foregoing, in the case of any threatened, pending or
completed action or suit by or in the right of the Corporation, no
indemnification shall be made in respect of any claim, issue or matter as to
which such officer or director shall have been adjudged to be liable to the
Corporation unless and only to the extent the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the court
shall deem proper.

                                      -23-

     The Board of Directors by resolution adopted in each specific instance may
similarly indemnify any person other than a director or officer of the
Corporation for liabilities incurred by him in connection with services rendered
by him for or at the request of the Corporation or any of its subsidiaries.

     The provisions of this Section 5.1 shall be applicable to all actions,
suits or proceedings commenced after its adoption, whether such arise out of
acts or omissions which occurred prior or subsequent to such adoption and shall
continue as to a person who has ceased to be a director or officer or to render
services for or at the request of the Corporation and shall inure to the benefit
of the heirs, executors and administrators of such a person. The rights of
indemnification provided for herein shall not be deemed the exclusive rights to
which any such director, officer or other person may be entitled.

     Section 5.2. Authorization and Determination of Indemnification. Any
     -----------  --------------------------------------------------
indemnification under this Article 5, unless ordered by a court, shall be made
by the Corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer or other person is proper in the
circumstances because he has met the applicable standard of conduct as specified
in Section 5.1 of this Article 5. A person shall be deemed to have met such
applicable standard of conduct if his action is based on the records or books of
account of the Corporation or another enterprise, or on information supplied to
him by the officers of the Corporation or another enterprise in the course of
their duties, or on the advice of legal counsel for the Corporation or another
enterprise or on information or records given or reports made to the Corporation
or another enterprise by an independent certified public accountant or by an
appraiser or other expert selected with reasonable care by the Corporation or
another enterprise.

                                      -24-

     Such determination shall be made (i) by the Board of Directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even
if obtainable, a majority vote of a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion or (iii) by the
stockholders. To the extent, however, that a director, officer or other person
has been successful on the merits or otherwise in defense of any action, suit or
proceeding described above, or in defense of any claim, issue or matter therein,
he shall be indemnified against expenses, including attorneys' fees, actually
and reasonably incurred by him in connection therewith, without the necessity of
authorization in the specific case.

     The provisions of this Section 5.2 shall not be deemed to be exclusive or
to limit in any way the circumstances in which a person may be deemed to have
met such applicable standard of conduct.

     Section 5.3. Advances. Expenses incurred in defending or investigating a
     -----------  --------
threatened or pending action, suit or proceeding shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding as authorized by the Board of Directors upon receipt of an
undertaking by or on behalf of the director, officer or other person to repay
such amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Corporation as authorized in this Article 5.

     Section 5.4. Scope and Alteration of Indemnification Provisions. The
     -----------  --------------------------------------------------
indemnification and advancement of expenses provided by, or granted pursuant to,
the other sections of this Article 5 shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any By-law, agreement, contract, vote of the stockholders or
disinterested directors or pursuant to the direction, howsoever embodied, of any
court of competent jurisdiction or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, it
being the policy of the Corporation that indemnification of, and advancement of
expenses to, the persons specified in Section 5.1 of this Article 5 shall be
made to the fullest extent permitted by law.

                                      -25-

     To this end, the provisions of this Article 5 shall be deemed to have been
amended for the benefit of such persons effective immediately upon any
modification of the General Corporation Law of the State of Delaware which
expands or enlarges the power or obligation of corporations organized under such
law to indemnify, or advance expenses to, such persons. The provisions of this
Article 5 shall not be deemed to preclude the indemnification of, or advancement
of expenses to, any person who is not specified in this Section 5.4 or Section
5.1 of this Article 5 but whom the Corporation has the power or obligation to
indemnify, or to advance expenses for, under the provisions of the General
Corporation Law of the State of Delaware or otherwise.

     Section 5.5. Insurance. The Corporation may purchase and maintain insurance
     -----------  ---------
on behalf of any person who is or was a director, officer or employee of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer or employee of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power or the obligation to
indemnify him against such liability under the provisions of this Article 5.

                                      -26-

     Section 5.6. Definitions. For purposes of this Article 5, references to the
     -----------  -----------
"Corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer or employee of
such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer or employee of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position under the provisions of this Article 5 with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.

     The term "another enterprise" as used in this Article 5 shall mean any
other corporation or any partnership, joint venture, trust or other entity of
which such person is or was serving at the request of the Corporation as a
director, officer, employee or agent and shall include employee benefit plans.

                                    Article 6

                                  CAPITAL STOCK
                                  -------------

     Section 6.1. Stock Certificates. The certificates for shares of the
     -----------  ------------------
Corporation's capital stock shall be numbered and registered in a share register
as they are issued, shall bear the name of the registered holder, the number and
class of shares represented thereby and the par value of each share or a
statement that such shares are without par value, as the case may be, shall be
signed by the President or any Vice President of the Corporation and the
Secretary, any Assistant Secretary or the Treasurer of the Corporation or any
other person properly authorized by the Board of Directors and shall bear the
seal of the Corporation, which seal may be a facsimile engraved or printed.
Where the certificate is signed by a transfer agent or a registrar, the
signature of any corporate officer on such certificate may be a facsimile
engraved or printed. In case any officer who has signed, or whose facsimile
signature has been placed upon, any share certificate shall have ceased to be
such officer because of death, resignation or otherwise, before the certificate
is issued, it may be issued by the Corporation with the same effect as if the
officer had not ceased to be such at the date of its issue.

                                      -27-

     Section 6.2. Transfer of Shares. Upon surrender to the Corporation of a
     -----------  ------------------
share certificate duly endorsed by the person named in the certificate or by an
attorney duly appointed in writing and accompanied where necessary by proper
evidence of succession, assignment or authority to transfer, a new certificate
shall be issued to the person entitled thereto and the old certificate cancelled
and the transfer recorded upon the stock transfer books and share register of
the Corporation.

     Section 6.3. Lost Certificates. Should any stockholder of the Corporation
     -----------  -----------------
allege the loss, theft or destruction of one or more certificates for shares of
the Corporation and request the issuance by the Corporation of a substitute
certificate therefor, the Board of Directors may direct that a new certificate
of the same tenor and for the same number of shares be issued to such person
upon such person's making of an affidavit in form satisfactory to the Board of
Directors setting forth the facts in connection therewith, provided that prior
to the receipt of such request the Corporation shall not have either registered
a transfer of such certificate or received notice that such certificate has been
acquired by a bona fide purchaser. When authorizing such issuance of a new
certificate, the Board of Directors may, in its discretion and as a condition
precedent to the issuance of such certificate, require the owner of such lost,
stolen or destroyed certificate, or his heirs or legal representatives, as the
case may be, to advertise the same in such manner as the Board of Directors
shall require and/or to give the Corporation a bond in such form and for such
sum and with such surety or sureties, with fixed or open penalty, as shall be
satisfactory to the Board of Directors, as indemnity for any liability or
expense which it may incur by reason of the original certificate remaining
outstanding.

                                      -28-

     Section 6.4. Dividends. The Board of Directors may, from time to time, at
     -----------  ---------
any duly convened regular or special meeting or by unanimous consent, declare
and pay dividends upon the outstanding shares of capital stock of the
Corporation in cash, property or shares of the Corporation.

     Before payment of any dividend, there may be set aside out of any funds of
the Corporation available for dividends such sum or sums as the Board of
Directors from time to time, in its absolute discretion, shall deem proper as a
reserve fund to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation or for such other
purposes as the Board of Directors shall believe to be in the best interests of
the Corporation, and the Board of Directors may reduce or abolish any such
reserve in the manner in which it was created.

                                    Article 7

                        FINANCIAL REPORT TO STOCKHOLDERS
                        --------------------------------

     The President of the Corporation and the Board of Directors shall present
at each annual meeting of the stockholders a full and complete statement of the
business and affairs of the Corporation for the preceding year. Such statement
shall be prepared and presented in whatever manner the Board of Directors shall
deem advisable and need not be verified by a certified public accountant or sent
to the stockholders of the Corporation.

                                      -29-

                                    Article 8

                                CHECKS AND NOTES
                                ----------------

     All checks or demands for money and notes of the Corporation shall be
signed by such officer or officers or such other person or persons as the Board
of Directors or the President may from time to time designate.

                                    Article 9

                                   FISCAL YEAR
                                   -----------

     The fiscal year of the Corporation shall be as determined from time to time
by resolution of the Board of Directors.

                                   Article 10

                                      SEAL
                                      ----

     The seal of the Corporation shall have inscribed thereon the name of the
Corporation, the year of its organization and the words "Corporate Seal,
Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or in any manner reproduced.

                                      -30-

                                   Article 11

                         NOTICES; COMPUTING TIME PERIODS
                         -------------------------------

     Section 11.1. Method and Contents of Notice. Whenever, under the provisions
     ------------  -----------------------------
of statute or of the Certificate of Incorporation or of these By-laws, written
notice is required to be given to any person, it may be given to such person
either personally or by sending a copy thereof through the mail, postage
prepaid, or by telegram, charges prepaid, to his address appearing on the books
of the Corporation or supplied by him to the Corporation for the purpose of
notice. If the notice is sent by mail or telegraph, it shall be deemed to have
been given to the person entitled thereto when deposited in the United States
mail or with a telegraph office for transmission to such person. Such notice
shall specify the place, day and hour of the meeting, if any, and, in the case
of a special meeting of the stockholders, the general nature of the business to
be transacted.

     Section 11.2. Waiver of Notice. Any written notice required to be given to
     ------------  ----------------
any person may be waived in a writing signed by the person entitled to such
notice whether before or after the time stated therein. Attendance of any person
entitled to notice, whether in person or by proxy, at any meeting shall
constitute a waiver of notice of such meeting, except where any person attends a
meeting for the express purpose of objecting to the transaction of any business
because the meeting was not lawfully called or convened. Where written notice is
required for any meeting, the waiver thereof must specify the purpose only if it
is for a special meeting of the stockholders.

     Section 11.3. Computing Time Periods. In computing the number of days for
     ------------  ----------------------
purposes of these By-laws, all days shall be counted, including Saturdays,
Sundays or holidays; provided, however, that if the final day of any time period
falls on a Saturday, Sunday or holiday, then the final day shall be deemed to be
the next day which is not a Saturday, Sunday or holiday. In computing the number
of days for the purpose of giving notice of any meeting, the date upon which the
notice is given shall be counted but the day set for the meeting shall not be
counted.

                                      -31-

                                   Article 12

                                   AMENDMENTS
                                   ----------

     These By-laws may be altered, amended or repealed by a majority vote of the
stockholders entitled to vote thereon at any annual or special meeting duly
convened after notice to the stockholders of that purpose or by a majority vote
of the members of the Board of Directors at any regular or special meeting of
the Board of Directors duly convened after notice to the Board of Directors of
that purpose, subject always to the power of the stockholders to change such
action of the Board of Directors.

                                   Article 13

                            INTERPRETATION OF BY-LAWS
                            -------------------------

     All words, terms and provisions of these By-laws shall be interpreted and
defined by and in accordance with the General Corporation Law of the State of
Delaware, as amended, and as amended from time to time hereafter.

Last Amended December 20, 2001

                                      -32-

                                 Amendment No. 2
                                 ---------------

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

     WHEREAS, Donegal Mutual Insurance Company (the "Company") sponsors and
maintains the Donegal Mutual Insurance Company 401(K) Plan (the "PLAN"); and

     WHEREAS, the Plan reserves to the Company in Section 8.1 the authority to
amend the Plan; and

     WHEREAS, the Company desires to amend the Plan to clarify provisions
concerning the acquisition, holding and disposition of qualifying employer
securities;

     NOW, THEREFORE, the Plan is hereby amended, subject to the condition
subsequent that the Plan, as amended by this Amendment No. 2, be approved by the
District Director of Internal Revenue as continuing to be in compliance with the
requirements of section 401(a) of the Code, such Amendment to be effective
January 6, 2000, as follows:

     1.   THE PARAGRAPH AT THE END OF PARAGRAPH (B) OF SECTION 4.5 IS DELETED
          AND THE FOLLOWING SUBSTITUTED THEREFORE:

          "Effective January 1, 2000, up to 100 percent of Plan assets may be
invested in Qualifying Employer Securities. Moreover, as of such date, each
Participant may direct the investment of all or a portion of the Participant's
Account in Qualifying Employer Securities which consist of Employer Stock. The
duties of the Employer and Trustees concerning such investment and the rights of
Participants concerning an investment in Employer Stock are set forth in Section
4.6 below."

     2.   SECTION 4.6 IS DELETED AND THE FOLLOWING IS SUBSTITUTED THEREFORE:

          "4.6 Investment in Employer Stock.
               ----------------------------

          (a)  Definitions.

               (i) Employer Stock means the common stock of Donegal Group Inc.,
the majority-owned subsidiary of the Employer, as traded on the Nasdaq National
Market. Employer Stock which shall be acquired under the Plan shall be purchased
on the open market, but the Trustees reserve the power to acquire such Employer
Stock directly from Donegal Group Inc.

               (ii) Qualifying Employer Security means an Employer Security
which is a stock or a marketable obligation (within the meaning of sections
407(d)(5) and 407(e) of ERISA) of the Employer or of its majority-owned
subsidiary, Donegal Group Inc. The

Employer Securities which are Qualifying Employer Securities under the Plan
shall be limited to Employer Stock (within the meaning of Section 4.6(a)(i)).

               (iii) Employer Security means an employer security (as such term
is defined in section 407(d)(1) of ERISA) issued by the Employer or by an
affiliate (as such term is defined by section 407(d)(7) of ERISA) of the
Employer.

               (iv) Custodian means Reliance Trust Company, a Georgia
corporation. Custodian is an "investment manager" as defined in Section 3(38) of
ERISA with respect to Employer Stock.

               (v) Record Keeper means TransAmerica. The Record Keeper will
maintain all records of the Participants' accounts with respect to investments
in Employer Stock.

          (b)  Purchase and Sale of Employer Stock.

               (i) A Participant may direct the Trustee to invest all or a
specified portion of the Participant's Elective Contributions and Employer
Matching Contributions made on his behalf in Employer Stock. Such direction
shall be made on form supplied by the Trustees and maintained by the Record
Keeper and in accordance with such procedures as the Plan Administrator may
establish. Notwithstanding anything to the contrary contained in this Plan or
the Trust Agreement, the Trustees shall, upon receipt of a Participant's
direction to invest in Employer Stock in accordance with this Section, direct
the Custodian to purchase shares of Employer Stock upon the receipt by the
Custodian of contributions from the employees unless such purchase is prohibited
by applicable law. Such purchases shall be made pursuant to a nondiscretionary
purchasing program developed by the Custodian to effect such purchases in an
orderly manner without disruption of the market for such stock or may purchase
Employer Stock directly from Donegal Group Inc. and, in either event, in
accordance with Section 408(e) of ERISA and other applicable law.

               (ii) If a Participant's vested interest in the Participant's
Accounts or a portion thereof is to be distributed on account of the
Participant's retirement, disability, death, termination of employment, pursuant
to a hardship withdrawal, withdrawal of a rollover contribution or as a result
of a qualified domestic relations order or because of the minimum distribution
rules, the Trustees will direct the Custodian to sell the Participant's shares
of Employer Stock or distribute such stock in kind, at the election of the
Participant or the Participant's designated beneficiary. If the Participant
elects to take a cash distribution, the amount of cash to be distributed to the
Participant attributable to the Participant's shares of Employer Stock will be
determined in accordance with Section 4.6(d). Notwithstanding the foregoing, the
Custodian may net out transactions internally (so as not to be both a buyer and
a seller on the open market) at the prices as determined by the Custodian under
Section 4.6(d).

          (c)  Voting of Shares. Notwithstanding anything to the contrary
contained in this Plan or the Trust Agreement, whenever any proxies or consents
are solicited from shareholders, each Participant (or designated beneficiary in
the case of deceased Participant) whose account contains Employer Stock will
have the right to direct the Trustees, in writing, as

to the voting of such shares. The Trustees or the Custodian will use their best
efforts to distribute or cause to be distributed in a timely manner to each
Participant or designated beneficiary a copy of the proxy solicitation material
sent to shareholders, together with a form addressed to the Trustees or the
Custodian containing confidential, written instructions as to the manner in
which said shares will be voted. If the instructions are sent to the Custodian,
the Custodian must communicate the instructions to the Trustees. Upon receipt of
such instructions, the Trustees will vote said shares as instructed. Shares of
Employer Stock as to which the Trustees do not receive instructions will be
voted by the Trustees in the proportion to the voting of shares with respect to
which instructions are received. Each Participant (or designated beneficiary)
will be entitled to one vote for each full share of Employer Stock allocated to
the Participant's accounts. Fractional shares of Employer Stock will not be
permitted to vote.

          (d)  Valuation. Employer Stock will be valued as of any business day
of each Plan Year at the closing price for such stock on the Nasdaq National
Market on the date on which such valuation is being made or under such other
method of determining fair market value as shall be authorized by the Code, or
the rules or regulations thereunder, and adopted by the Custodian. Any dividends
received on Employer Stock will be reinvested and become part of the
Participant's Accounts. The Record Keeper will maintain adequate records of the
cost basis of Employer Stock for each Participant's account. The Record Keeper
may from time to time modify its accounting procedures to achieve equitable and
nondiscriminatory allocations among the Matching Contribution Accounts of
Participants in accordance with the provisions of this Plan and the requirements
of applicable law.

          (e)  Named Fiduciary Status / Confidentiality. Each Participant or
designated beneficiary shall be deemed to be a named fiduciary within the
meaning of Section 402(a) of ERISA with respect to the voting of the shares of
Employer Stock as to which such Participant or designated beneficiary has the
right of direction. Directions received from Participants or designated
beneficiaries by the Trustees or the Custodian with respect to the acquisition,
holding, disposition or voting of Employer Stock shall be held in strict
confidence and shall not be divulged or released to any person, including
employees, officers or directors of the Employer, to the extent required by and
in accordance with Section 404(c) of ERISA, except if disclosure is otherwise
required by applicable law, and except to the extent necessary for the operation
of the Plan, such directions may be relayed by the Trustees to the Record Keeper
or auditor for the Plan, which Record Keeper or auditor is not the Employer.

     IN WITNESS WHEREOF and as evidence of the adoption of this Amendment No. 2,
Donegal Mutual Insurance Company has caused its duly authorized officers to
execute this document of its behalf and under its seal as of this 6th day of
January, 2000.

                                        DONEGAL MUTUAL INSURANCE COMPANY
ATTEST:

/s/ Ralph G. Spontak                    By: /s/ Donald H. Nikolaus
- -------------------------------------       ------------------------------------
Ralph G. Spontak, Secretary                  Donald H. Nikolaus, President and
                                             Chief Executive Officer

[Corporate Seal]

                                 Amendment No. 3
                                 ---------------

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

     In accordance with Section 8.1 of the Plan, the Plan is hereby amended
effective January 1, 2000, except as otherwise provided herein:

     1.   Subsection (d) of Section 1.1 is deleted and the following substituted
          therefore:

     "1.1(d) `Employee' means any individual employed by the Employer or an
affiliated Employer, except that such term does not include:

          (i) Any Leased Employee as defined herein and

          (ii) Any Employee who is hired as a temporary employee and whose
               employment is to be of limited duration generally not in excess
               of six (6) months.

     Leased Employee means any person (other than an Employee of the Recipient)
     who pursuant to an agreement between the Recipient and any other person
     ("Leasing Organization") has performed services for the Recipient or for
     the Recipient and related persons determined in accordance with IRC Section
     414(n)(6) on a substantially fulltime basis for a period of at least one
     year, and such services are performed under the Recipient's primary
     direction or control. For purposes of the preceding sentence Recipient
     means the Employer as defined herein.

          1.A. Subsection (j) of Section 1.1 is amended by revising subparagraph
     1 of the last paragraph of that sentence so that the subparagraph as
     amended reads as follows:

          "(1) Compensation is compensation within the meaning of IRC Section
     415(c)(3) including elective or salary reduction contributions to a
     cafeteria plan, cash or deferred arrangement or tax sheltered annuity and
     elective amounts that are not includable in the gross income of an Employee
     by reason of Section 132(f)(4) of the Code' and"

          1.B. Paragraph (d) of Section 1.3 is amended by revising the last
     sentence thereof so that it reads as follows:

          "The foregoing notwithstanding, compensation shall include any
     elective contributions made by the Employer that are not includable in the
     Employee's gross income under Code Sections 125, 132(f)(4), 402(g)(3),
     402(h), 403(b) or any compensation deferred under Code Section 457(b)."

     2.   The words "calendar quarter" in Section 3.2 are deleted and the word
          "month" is substituted therefore.

     3.   Subsections (f) and (g) of Section 3.8 are deleted.

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

          "Rollover amount does not include hardship withdrawals as defined in
          Code Section 401(k)(2)(B)(i)(IV) which are attributable to the
          Participant's Elective Deferrals.

     5.   Subsection (c) of Section 4.3 is deleted and the following substituted
          therefore: "(c) Increased by the Employer's matching contributions
          which shall be allocated to each Participant's Employer matching
          contribution account to the extent not previously so allocated; and"

     6.   Section 4.4 is hereby deleted.

     7.   There is hereby added to subsection (d) of Section 3.6 new paragraph 5
          reading as follows:

          "5. The ADP test will be conducted using the Prior Year testing
     method; provided that the Employer may at any time amend the Plan to change
     to the current year testing method, but only with the prior permission of
     the Secretary of the Treasury or his delegate. For the first year of
     operation of the qualified cash or deferred arrangement under this Plan,
     the ADP of non-highly compensated Employees shall be deemed to be 3%."

     8.   Section 10.2 is deleted and the following substituted therefore:

          Section 10.2 Alienation. (a) In General. Except as provided in
     Subsections (b) and (c) of this Section, or pursuant to an order of a court
     of competent jurisdiction to the contrary, none of the payments, benefits
     or rights of any Participant, Beneficiary, prospective beneficiary or
     alternate payee shall be subject to any claim of any creditor. In
     particular, to the fullest extent permitted by law, all such payments,
     benefits and rights shall be free from attachment, garnishment, trustee's
     process, or any other legal or equitable process available to any creditor
     of such Participant, Beneficiary, prospective beneficiary or alternate
     payee. Except as provided in Subsection (b) of this Section, no person
     entitled to any payment, benefit or right under the Plan shall have the
     right to alienate, anticipate, commute, pledge, encumber or assign any of
     the payments, benefits or rights which he may expect to receive,
     contingently or otherwise, under the Plan.

          (b) Exceptions. The following shall not be precluded by the operation
     of Subsection (a) hereof:

              (1) the withholding of income taxes from distributions (whether by
     legal mandate or by election of the prospective distributee) and
     transmittal of the amounts so withheld to appropriate tax collection
     authorities;

              (2) the pledge by a borrower from the Plan (and foreclosure on the
     pledged amount by the lender or other hold of the borrower's debt
     obligation) of any portion of his interest in the Plan as security for the
     repayment of the amount borrowed, interest payable in respect thereof, and
     costs and expenses associated therewith;

              (3) any arrangement for the recovery by the Plan of overpayments
     of benefits previously made to or for the benefit of the Participant or
     other person with respect to whom such arrangement applies:

              (4) transfer of any eligible rollover distribution amount from the
     Plan to any other benefit plan qualified under section 401(a) of the Code
     or to an individual retirement arrangement established under section 408 of
     the Code;

              (5) direct deposit arrangements with respect to benefits if the
     direct deposits authorized by such arrangement is to an account of the
     payee (or a joint account of the payee and his spouse) at a bank or other
     financial institution;

              (6) any assignment or alienation of benefits in pay status to the
     extent that such assignment or alienation (i) is voluntary and revocable,
     (ii) is not for the purpose of, nor has the effect of, defraying Plan
     administration costs; and (iii) does not, when combined with all other such
     assignments in the aggregate, exceed ten percent (10%) of any benefit
     payment;

              (7) any assignment to the Plan Sponsor if (i) such assignment is
     revocable at any time, and (ii) the Plan Sponsor files with the Plan
     Administrator a written acknowledgment meeting the requirements of Treas.
     Reg. Section 1.401(a)-13(e)(2) (or a successor regulation of similar
     purpose); and

              (8) the enforcement of a federal tax levy made pursuant to section
     6331 of the Code or the collection by the United States on a judgment
     resulting from an unpaid tax assessment.

          (c) Applicability of a QDRO. Compliance with the provisions and
     conditions of any QDRO shall not be deemed a violation of the provisions of
     Subsection (a) hereof."

     9. There is hereby added to the Plan new Section 10.5(a) reading as
follows:

     "Section 10.5(a) Restrictions-Assets from Money Purchase Pension Plan.
Notwithstanding any provision of this Plan to the contrary, if any optional form
of benefit under this Plan permits a distribution prior to a Participant's
retirement, death or disability or severance from employment and prior to Plan
termination, that optional form of benefit shall not be available with respect
to the benefits attributable to assets (including post transfer earnings and

appreciation thereon) and liabilities that are transferred within the meaning
IRC 414(l) to this Plan from a money purchase plan (other than any portion of
those assets and liabilities attributable to voluntary Employee contributions)."

     IN WITNESS WHEREOF and as evidence of the adoption of this amendment,
Donegal Mutual Insurance Company has caused its duly authorized officers to
execute this document on its behalf and under its seal this 29th day of October,
2001, to be effective as of the 23rd day of July 2001.

                                         Donegal Mutual Insurance Company

ATTEST:

/s/ Ralph G. Spontak                     By:  /s/ Donald H. Nikolaus
- --------------------------------------        ----------------------------------
Ralph G. Spontak, Secretary                     Donald H. Nikolaus, President

[Corporate Seal]

                                 Amendment No. 4
                                 ---------------

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

                                EGTRRA AMENDMENT

     In accordance with Section 8.1 of the Plan, the Plan is amended as follows:

     Preamble. This amendment is intended as good faith compliance with the
requirements of EGTRRA and is to be construed in accordance with EGTRRA and the
guidance issued thereunder. Except as otherwise expressly provided, this
amendment is effective as of the first day of the first Plan Year beginning
after December 31, 2001. This amendment supercedes the provisions of the Plan to
extent they are inconsistent with the provisions of this amendment.

     1. Section 3.4(b), Limitation on Contributions.

        (b) Maximum Annual Addition. Except to the extent permitted under
Section 8 of this amendment and Section 414(v) of the Code, if applicable, the
annual addition that may be contributed or allocated to a Participant's account
under the Plan for any limitation year, shall not exceed the lesser of:

            1. $40,000.00 as adjusted for increases in the cost of living under
Section 415(d) of the Code, or

            2. 100% of the Participant's compensation, within the meaning of
Section 415(c)(3) of the Code, for the limitation year.

     2. Section 1.1(d)(1), Increase in Compensation Limit.

        (1) The annual compensation of each Participant taken into account in
determining allocations for any Plan Year beginning after December 31, 2001,
shall not exceed $200,000.00, as adjusted for cost of living increases in
accordance with Section 401(a)(17)(B) of the Code. Annual compensation means
compensation during the Plan Year or such other consecutive 12 month period over
which compensation is otherwise determined hereunder. A cost of living
adjustment in effect for a calendar year applies to the annual compensation for
the determination period that begins with or within such calendar year.

     3. Modification of Top-Heavy Rules.

        Article IX - Top Heavy Provisions and Definitions.
        --------------------------------------------------

        9.1(d). Key employee. Key employee means any employee or former employee
(including any deceased employee) who at any time during the Plan Year that
includes the determination date was an officer of the Employer having annual
compensation greater than

$130,000.00 (as adjusted under Section 416(i)(1) of the Code for Plan Years
beginning after December 31, 2002), a 5-percent owner of the Employer, or a
1-percent owner of the Employer having annual compensation of more than
$150,000.00. For this purpose, annual compensation means compensation within the
meaning of Section 415(c)(3) of the Code. The determination of who is a key
employee will be made in accordance with Section 4169(i)(1) of the Code and the
applicable regulations and other guidance of general applicability issued
thereunder.

        9.1(i). Determination of present values and amounts. This Section 9.1(i)
shall apply for purposes of determining the present values of accrued benefits
and the amounts of account balances of employees as of the determination date.

                (a) Distributions during year ending on the determination date.
The present value of accrued benefits and the amounts of account balances of an
employee as of the determination date shall be increased by the distributions
made with respect to the employee under the Plan and any plan aggregated with
the Plan under Section 416(g)(2) of the Code during the 1-year period ending on
the determination date. The preceding sentence shall also apply to distributions
under a terminated Plan which, had it not been terminated, would have been
aggregated with the plan under Section 416(g)(2)(A)(i) of the Code. In the case
of a distribution made for a reason other than separation from service, death,
or disability, this provision shall be applied by substituting 5-year period for
1-year period.

                (b) Employees not performing services during year ending on the
determination date. The accrued benefits and accounts of any individual who has
not performed services for the Employer during the 1-year period ending on the
determination date shall not be taken into account.

                9.7 Minimum benefits.

                    (a) Matching contributions. Employer matching contributions
shall be taken into account for purposes of satisfying the minimum contribution
requirements of Section 416(c)(2) of the Code and the Plan. The preceding
sentence shall apply with respect to matching contributions under the Plan or,
if the Plan provides that the minimum contribution requirement shall be met in
another plan, such other plan. Employer matching contributions that are used to
satisfy the minimum contribution requirements shall be treated as matching
contributions for purposes of the actual contribution percentage test and other
requirements of Section 401(m) of the Code.

                    (b) The minimum contribution requirements of Section
416(c)(2) of the Code shall be met in this Plan.

     4. Direct Rollovers of Plan Distribution.

        A. Modification of Definitions. For purposes of the direct roll over
provisions in Section 3.5, an eligible retirement plan shall also mean an
annuity contract described in Section 403(b) or 457(b) of the Code an ineligible
plan under Section 457(b) of the Code which is maintained by a state, political
subdivision of a state, or any agency or

instrumentality of a state or a political subdivision thereof which agrees to
separately account for amounts transferred into such plan from this Plan. The
definition of eligible retirement plan shall also apply in the case of a
distribution to a surviving spouse or to a spouse or former spouse who is the
alternate payee under a qualified domestic relations order as defined in Section
414(p) of the Code.

        B. Any amount that is distributed on account of hardship shall not be an
eligible rollover distribution and the distributee may not elect to have any
portion of such distribution paid directly to an eligible retirement plan.

     5. Rollovers from other plans.

        A. Direct rollovers. Pursuant to Section 3.3, the Plan will accept
Participant rollover contributions and direct rollover of an eligible
distribution from

           (i) A qualified plan described in Section 401(a) or 403(a) of the
Code, excluding after tax employee contributions.

           (ii) An annuity contract described in Section 403(b) of the Code,
excluding after tax employee contributions.

           (iii) An eligible plan under Section 457(b) of the Code which is
maintained by a state, political subdivision of the state or any agency or
instrumentality of a state or political subdivision of a state.

           (iv) A participant rollover contribution of the portion of the
distribution from an individual retirement account or annuity described in
Section 408(a) or 408(b) of the Code that is eligible to be rolled over and
would otherwise be includable in gross income.

        B. Rollovers disregarded in involuntary cash outs. The value of a
Participant's non-forfeitable account balance shall be determined without regard
to that portion of the account balance that is attributable to rollover
contributions (and earnings allocable thereto) within the meaning of Sections
402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii) and 457(e)(16) of the Code. If
the value of the Participant's nonforfeitable account balance as so determined
is $5,000.00 or less, the Plan shall immediately distribute the participant's
entire nonforfeitable account balance.

     6. Repeal of multiple use test. The multiple use test described in Treasury
Regulation Section 1.401(m)-2 shall not apply to Plan Years beginning after
December 31, 2001.

     7. Elective deferrals - contribution limitation. No Participant shall be
permitted to have Elective Deferrals under this Plan or any other qualified plan
maintained by the Employer during any taxable year in excess of the dollar
limitation contained in Section 402(g) of the Code in effect for such taxable
year, except to the extent permitted under Section 8 of this amendment (catch up
contribution).

     8. Catch-up contributions. All employees who are eligible to make Elective
Deferrals hereunder and who have attained age 50 before the close of the Plan
Year shall be eligible to make catch-up contributions in accordance with, and
subject to the limitation of, Section 414(v) of the Code. Such catch-up
contributions shall not be taken into account for purposes of the provisions of
this Plan implementing the required limitations of Sections 402(g) and 415 of
the Code. This Plan shall not be treated as failing to satisfy the provisions of
the Plan implementing the requirements of Sections 401(k)(3), 401(k)(11),
401(k)(12), 410(b) or 416 of the Code as applicable, by reason of the making of
such catch-up contributions.

     9. Suspension period following hardship distributions. A Participant who
receives a distribution of Elective Deferrals after December 31, 2001 on account
of hardship shall be prohibited from making Elective Deferrals under this and
all other plans maintained by the Employer for 6 months after receipt of the
distribution. A Participant who receives a distribution of Elective Deferrals in
calendar year 2001 on account of hardship shall be prohibited from making
Elective Deferrals and employee contributions under this Plan and all other
plans maintained by the Employer for 6 months after the receipt of the
distribution or until January 2, 2002, if later.

     10. Distribution upon severance of employment. A Participant's Elective
Deferrals, qualified non-elective contributions, qualified matching
contributions and earning attributable thereto shall be distributed on account
of the Participant's severance from employment. However, such distribution shall
be subject to the other provisions of this Plan regarding distributions, other
than provisions that require a separation from service before such amounts may
be distributed. This Section shall apply to a Participant's severance from
employment occurring after December 31, 2001.

     In Witness Whereof, the Employer has caused its duly authorized officers to
execute this amendment as of the day and year first above written.

                                          Donegal Mutual Insurance Company

                                          By: /s/ Donald H. Nikolaus
                                              ----------------------------------
                                               Donald H. Nikolaus

Attest:

/s/ Ralph G. Spontak
- ------------------------------------
Ralph G. Spontak, Secretary

[Corporate Seal]

                                 Amendment No. 5
                                 ---------------

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

     In accordance with Section 8.1 of the Plan, the Plan is hereby amended
effective December 31, 2001 as follows:

     1. Sections 12.2, 12.3 and 12.4 are deleted and the following substituted
therefore:

     "Section 12.2 Profit Sharing Benefit. The term Profit Sharing Benefit means
the account balance of the Participant in the Participant's Profit Sharing
Account as of December 31, 2001. Effective December 31, 2001, the full amount of
that benefit shall be transferred to and become a part of the Participant's
Elective Deferral Account in this Plan and thereafter be subject to the
provisions of this Plan other than this Article XII."

     IN WITNESS WHEREOF and as evidence of the adoption of this Amendment No. 5,
Donegal Mutual Insurance Company has caused its duly authorized officers to
execute this document on its behalf and under its seal this 20th day of
December, 2001.

                                           Donegal Mutual Insurance Company

ATTEST:

                                           By: /s/ Donald H. Nikolaus
                                               ---------------------------------
/s/ Ralph G. Spontak                           Donald H. Nikolaus, President
- ------------------------------------
Ralph G. Spontak, Secretary

(Corporate Seal)

                                                                       FINANCIAL INFORMATION

Management's Discussion and Analysis of Results of Operations and Financial Condition..   10

Consolidated Balance Sheets ...........................................................   15

Consolidated Statements of Income and Comprehensive Income ............................   16

Consolidated Statements of Stockholders' Equity .......................................   17

Consolidated Statements of Cash Flows .................................................   18

Notes to Consolidated Financial Statements ............................................   19

Independent Auditors' Report ..........................................................   31

Corporate Information .................................................................   32

                                                                               9

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

Donegal Group Inc. ("DGI" or the "Company") is a regional insurance holding
company doing business in the Mid-Atlantic and Southern states through its four
wholly owned property-casualty insurance subsidiaries, Atlantic States Insurance
Company ("Atlantic States"), Southern Insurance Company of Virginia
("Southern"), Southern Heritage Insurance Company ("Southern Heritage") and
Pioneer Insurance Company of Ohio ("Pioneer-Ohio") (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 63% of the
outstanding common shares of the Company as of December 31, 2001.

     Atlantic States participates in an intercompany pooling arrangement with
the Mutual Company and assumes 70% of the pooled business (65% prior to July 1,
2000). Southern cedes 50% of its business to the Mutual Company. Because the
Mutual Company places 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 include approximately 85% of the business written by
Southern.

     In addition to the Company's Insurance Subsidiaries, it also owned all of
the outstanding stock of Atlantic Insurance Services, Inc., ("AIS"), an
insurance services organization. The Company sold all of the outstanding shares
of AIS on October 1, 1999.

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

     On January 3, 2001, the Company announced that it had purchased all of the
outstanding stock of Pioneer Insurance Company of New York ("Pioneer-New York")
from the Mutual Company effective January 1, 2001. 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 this transaction, the Company issued the Mutual Company a $4,441,311 note,
which bears a 6% rate and was due in one year. The due date was subsequently
extended to January 2003. The 6% rate was based upon commercial market rates in
effect as of January 1, 2001.

     Delaware Atlantic Insurance Company ("Delaware"), previously a wholly owned
subsidiary, and Pioneer-New York were merged into Atlantic States Insurance
Company on 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, a
50% quota share contract with Southern, catastrophe reinsurance agreements with
each of the subsidiaries and excess of loss reinsurance agreements with
Southern, Southern Heritage and Pioneer-Ohio. The Mutual Company also has 100%
retrocessional agreements with Southern, Southern Heritage and Pioneer-Ohio.
Each contract is reviewed by a Coordinating Committee comprised of two board
members of the Company and two board members of the Mutual Company. This
committee reviews the business purpose and terms of each agreement based on
degree of risk, fairness to the participating companies and market conditions.
The committee must unanimously approve all agreements and all changes to
existing agreements between the Company's subsidiaries and the Mutual Company.

     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

10

among the participants. 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 50% quota share reinsurance contract between Southern and the Mutual
Company provides additional capacity for direct premium growth to Southern
during periods of growth that exceeds Southern's ability to finance that growth
through internal equity. Premiums, losses and loss expenses are shared equally
by the participants with the Mutual Company paying commissions to Southern to
reimburse its costs related to the underwriting process.

     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 equity position. The retention levels of these
contracts are more appropriate for each company than the retention levels
included within reinsurance contracts with outside reinsurers, which may be
appropriate for the insurance companies taken as a whole but would be excessive
for any individual company within the group.

     The 100% retrocessional agreements are intended to provide the subsidiaries
with the same A.M. Best rating (currently "A") as the Mutual Company, which
these companies could not achieve without these contracts 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 $29,298,569, $26,985,080 and $27,466,898 for 2001, 2000 and 1999,
respectively.

CRITICAL ACCOUNTING POLICIES

The Company's financial statements are combined with those of its subsidiaries
and presented on a consolidated basis in accordance with U.S. generally accepted
accounting principle.

     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 are its most significant accounting policies 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 unreported claims are established based on historical data by line of
insurance as adjusted for current conditions considering factors such as
inflation, recent trends and other analysis of costs. The Company continually
reviews and analyzes its estimates, but actual losses may turn out to be
significantly different than expected when the estimates were made.

INVESTMENTS

In the Company's investment portfolio, the difference between cost and the fair
value of investments is monitored regularly. The Company evaluates significant
declines in fair value below cost on an individual investment basis. This
evaluation considers the magnitude of the decline below cost, the period of time
the investment has been significantly below cost and the prospects for the fair
value to recover in the near term. If any investment experiences a decline in
value that is believed to be other than temporary, the cost basis of the
investment is written down and a realized loss is recorded in earnings.

REINSURANCE

Reinsurance accounting is followed when risk transfer requirements have been
met. These requirements may involve significant assumptions being made related
to the amount and timing of expected cash flows, as well as interpretation of
the underlying contract terms.

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 estimated in the determination of the recoverability of deferred acquisition
costs. Future changes in estimates, the most significant of which is expected
loss and loss expenses, may require adjustment to policy acquisition costs.

                                                                              11

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. Direct
premiums written of the combined pool of Atlantic States and the Mutual Company
increased $23,152,222 or 13.2%. 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. An increase in the average invested assets from $278,677,748 to
$294,988,999, offset by a decrease in the average yield to 5.3% from 5.9% in
2000, accounted for the change.

     The GAAP combined ratio of insurance operations 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 in the commercial
automobile and workers' compensation lines of business. 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. 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.

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

RESULTS OF OPERATIONS 2000 COMPARED TO 1999

Total revenues for 2000 were $170,581,587, which were $8,842,251, or 5.5%,
greater than 1999. Net premiums earned increased to $151,646,199, an increase of
$6,128,742, or 4.2%, over 1999. 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 $4,113,078 of the increase in net premiums earned. Direct
premiums written of the combined pool of Atlantic States and the Mutual Company
increased $13,851,692 or 9.0%. A 5.1% increase in the direct premiums written of
Southern, a 2.1% decrease in the direct premiums written of Delaware, a 13.2%
increase in the direct premiums written of Pioneer-New York, a 25.4% increase in
the direct premiums written of Pioneer-Ohio and a 15.6% decrease in the direct
premiums written of Southern Heritage accounted for the majority of the
remaining change. The Company reported net realized investment gains of
$170,852, compared to net realized investment losses of $38,702 in 1999. During
2000, certain investments trading below cost had declined on an
other-than-temporary basis. Losses of $436,943 were included in net realized
investment gains for these investments in 2000. Net realized gains and losses in
1999 resulted from normal turnover of the Company's investment portfolio. As of
December 31, 2000, 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 increased
$2,804,052 in 2000. An increase in the average invested assets from $264,758,816
to $278,677,748, and an increase in the average yield to 5.9% from 5.1% in 1999,
accounted for the change.

12

     The GAAP combined ratio of insurance operations was 101.8% in 2000,
compared to 106.5% in 1999. The GAAP 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 both 2000 and 1999 was
68.8%. The commercial lines loss ratio decreased from 68.8% in 1999 to 67.0% in
2000. The personal lines loss ratio increased from 69.7% in 1999 to 70.3% in
2000. The expense ratio for 2000 was 32.1%, compared to 36.8% in 1999, with the
dividend ratio remaining unchanged at 0.9%. The expense ratio in 1999 was
adversely affected by a charge to earnings resulting from a restructuring charge
of $1.6 million which increased the expense ratio by 1.1%.

     Income tax expense (benefit) was $2,906,248, compared to $(2,950,556) in
1999. The Company benefited from a federal income tax law change in 1999.

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,
2001, the Company had no material commitment 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, 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 $27.6 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, 2001, the
Company may borrow up to $32 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, 2001, the interest rates were 4.75% on an
outstanding prime rate balance of $2.6 million, 3.825% on an outstanding
Eurodollar rate balance of $10 million and 3.6375% on another Eurodollar rate
balance of $15 million. In addition, the Company pays a rate 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 will then be 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 which may further impact their ability to
pay dividends. At December 31, 2001, all four companies' 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 2002 are $8,612,490 from Atlantic States, $1,086,348,
from Southern, $552,447 from Pioneer-Ohio and $3,514,487 from Southern Heritage.

     Net unrealized gains (losses) resulting from fluctuations in the fair value
of investments reported in the balance sheet at fair value were $2,861,765 (net
of applicable federal income tax benefit) at December 31, 2001, and $(199,063)
(net of applicable federal income tax) at December 31, 2000.

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 other major authorized reinsurers, as described in Note 8 of
the financial statements.

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.

                                                                              13

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, 2001 are as follows:

                                             Principal         Weighted-Average
                                               Cash                Interest
                                              Flows                  Rate
- --------------------------------------------------------------------------------
Fixed maturities and
   short-term investments:
      2002                                 $ 37,038,816              3.84%
      2003                                   19,700,000              5.74%
      2004                                   24,025,000              5.79%
      2005                                   28,632,768              5.91%
      2006                                   48,879,557              5.83%
      Thereafter                            119,957,853              5.93%
- --------------------------------------------------------------------------------
   Total                                   $278,233,994
================================================================================
   Market value                            $284,732,437
================================================================================
Debt
      2002                                 $  3,600,000              3.81%
      2003                                    8,000,000              3.81%
      2004                                    8,000,000              3.81%
      2005                                    8,000,000              3.81%
- --------------------------------------------------------------------------------
   Total                                   $ 27,600,000
================================================================================
   Fair value                              $ 27,600,000
================================================================================

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

EQUITY PRICE RISK

The Company's portfolio of equity securities, which is carried on the balance
sheet at market value, has exposure to price risk. Price risk is defined as the
potential loss in market value resulting from an adverse change in prices.
Portfolio characteristics are analyzed regularly and market risk is actively
managed through a variety of techniques. The portfolio is diversified across
industries, and concentrations in any one company or industry are limited by
parameters established by management.

     The combined total of realized and unrealized equity investment losses were
$131,146, $650,229, and $394,931 in 2001, 2000, and 1999, respectively. During
these three years the largest total equity investment gain and (loss) in a
quarter was $829,914 and $(730,481), respectively.

14

Donegal Group Inc.

CONSOLIDATED BALANCE SHEETS

December 31,                                                                                             2001            2000*
- ---------------------------------------------------------------------------------------------------------------------------------

ASSETS
Investments
   Fixed maturities
     Held to maturity, at amortized cost (fair value $86,939,393 and $144,662,436)                  $ 85,322,965     $143,181,718
     Available for sale, at fair value (amortized cost $170,269,584 and $114,524,472)                173,718,844      114,611,183
   Equity securities, available for sale, at fair value (cost $16,630,618
     and $12,500,558)                                                                                 17,517,346       12,112,236
   Short-term investments, at cost, which approximates fair value                                     24,074,200       19,439,505
- ---------------------------------------------------------------------------------------------------------------------------------
     Total investments                                                                               300,633,355      289,344,642
Cash                                                                                                   4,075,288        5,182,988
Accrued investment income                                                                              3,765,076        4,002,464
Premiums receivable                                                                                   24,143,531       21,758,502
Reinsurance receivable                                                                                67,853,174       54,543,884
Deferred policy acquisition costs                                                                     13,604,215       12,284,214
Federal income taxes receivable                                                                          292,618          259,962
Deferred tax asset, net                                                                                7,474,730        7,690,886
Prepaid reinsurance premiums                                                                          29,593,467       24,712,384
Property and equipment, net                                                                            4,568,652        5,236,483
Accounts receivable-securities                                                                            50,023          234,817
Other                                                                                                    578,243          757,554
- ---------------------------------------------------------------------------------------------------------------------------------
     Total assets                                                                                   $456,632,372     $426,008,780
=================================================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
   Losses and loss expenses                                                                         $179,839,905     $156,476,124
   Unearned premiums                                                                                 114,079,264       99,940,381
   Accrued expenses                                                                                    7,186,107        5,877,475
   Reinsurance balances payable                                                                          839,156        1,634,975
   Cash dividend declared to stockholders                                                                869,877          797,282
   Borrowings under line of credit                                                                    27,600,000       40,000,000
   Accounts payable-securities                                                                                --          959,652
   Due to affiliate                                                                                    4,015,074        4,528,996
   Other                                                                                               1,274,640        1,664,304
- ---------------------------------------------------------------------------------------------------------------------------------
     Total liabilities                                                                               335,704,023      311,879,189
- ---------------------------------------------------------------------------------------------------------------------------------

Stockholders' Equity
   Preferred stock, $1.00 par value, authorized 2,000,000 shares; none issued
   Common stock, $1.00 par value, authorized 20,000,000 shares,
     issued 0 and 8,980,977 shares and outstanding
     0 and 8,858,689 shares                                                                                   --        8,980,977
   Class A common stock, $.01 par value, authorized 30,000,000 shares,
     issued 6,097,214 and 0 shares and outstanding 6,015,690 and 0 shares                                 60,972               --
   Class B common stock, $.01 par value, authorized 10,000,000 shares,
     issued 3,021,965 and 0 shares and outstanding 2,981,203 and 0 shares                                 30,220               --
   Additional paid-in capital                                                                         58,887,715       46,969,840
   Accumulated other comprehensive income (loss)                                                       2,861,765         (199,063
   Retained earnings                                                                                  59,979,425       59,269,593
   Treasury stock, at cost                                                                              (891,748)        (891,756
- ---------------------------------------------------------------------------------------------------------------------------------
     Total stockholders' equity                                                                      120,928,349      114,129,591
- ---------------------------------------------------------------------------------------------------------------------------------
     Total liabilities and stockholders' equity                                                     $456,632,372     $426,008,780
=================================================================================================================================

*Restated - see note 1
See accompanying notes to consolidated financial statements.

                                                                              15

Donegal Group Inc.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

Year Ended December 31,                                                     2001            2000*           1999*
- ---------------------------------------------------------------------------------------------------------------------
                                                                                               
STATEMENTS OF INCOME
Revenues
   Net premiums earned (includes affiliated reinsurance of
     $71,989,136, $63,989,424 and $60,234,261)                         $167,769,854     $151,646,199    $145,517,457
   Investment income, net of investment expenses                         15,885,544       16,394,747      13,590,695
   Installment payment fees                                               1,587,396        1,532,792       1,456,918
   Lease income                                                             801,083          836,997         819,474
   Service fees                                                                  --               --         393,494
   Net realized investment gains (losses)                                  (880,254)         170,852         (38,702)
- ---------------------------------------------------------------------------------------------------------------------
     Total revenues                                                     185,163,623      170,581,587     161,739,336
- ---------------------------------------------------------------------------------------------------------------------

Expenses
   Net losses and loss expenses (includes affiliated reinsurance of
     $50,283,481, $36,767,436 and $38,549,795)                          118,177,549      104,383,176     100,080,616
   Amortization of deferred policy acquisition costs                     27,194,000       25,319,000      24,931,000
   Other underwriting expenses                                           27,000,485       23,355,781      28,648,951
   Policy dividends                                                       1,691,759        1,330,330       1,341,294
   Interest                                                               2,247,465        3,285,036       1,535,249
   Other                                                                  1,760,636        1,165,236       1,357,585
- ---------------------------------------------------------------------------------------------------------------------
     Total expenses                                                     178,071,894      158,838,559     157,894,695
- ---------------------------------------------------------------------------------------------------------------------
Income before income tax expense (benefit)                                7,091,729       11,743,028       3,844,641
Income tax expense (benefit)                                              1,273,598        2,906,248      (2,950,556)
- ---------------------------------------------------------------------------------------------------------------------
Net income                                                             $  5,818,131     $  8,836,780    $  6,795,197
====================================================================================================================
Net income per common share
   Basic                                                               $        .65     $       1.01    $        .82
====================================================================================================================
   Diluted                                                             $        .64     $       1.01    $        .82
====================================================================================================================

STATEMENTS OF COMPREHENSIVE INCOME
Net income                                                             $  5,818,131     $  8,836,780    $  6,795,197
- ---------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
   Unrealized gains (losses) on securities:
     Unrealized holding gain (loss) arising during the period,
       net of income tax expense (benefit) of
       $1,277,504, $1,057,179, and $(1,804,294)                           2,479,860        2,020,267      (3,459,669)
     Reclassification adjustment for (gains) losses included
       in net income, net of income tax expense (benefit) of
       $(299,286), $58,090, and $(13,159)                                   580,968         (112,762)         25,543
- ---------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss)                                         3,060,828        1,907,505      (3,434,126)
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive income                                                   $  8,878,959     $ 10,744,285    $  3,361,071
====================================================================================================================

*Restated - see note 1
See accompanying notes to consolidated financial statements.

16

Donegal Group Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                                     `
                                                                Common Stock
                                 --------------------------------------------------------------------------
                                   Prior       Class A      Class B        Prior        Class A     Class B
                                   Shares       Shares       Shares        Amount        Amount      Amount
- -----------------------------------------------------------------------------------------------------------
                                                                                   
Balance,
   January 1, 1999*              8,325,221                               $8,325,221     $           $
- -----------------------------------------------------------------------------------------------------------
Issuance of common stock           248,989                                  248,989
Net income
Other comprehensive loss
Cash dividends
- -----------------------------------------------------------------------------------------------------------
Balance,
   December 31, 1999*            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
===========================================================================================================

                                                Accumulated
                                Additional         Other                                         Total
                                 Paid-In       Comprehensive     Retained      Treasury      Stockholders'
                                  Capital      Income (Loss)     Earnings        Stock          Equity
- ----------------------------------------------------------------------------------------------------------
                                                                              
Balance,
   January 1, 1999*             $42,330,011     $ 1,327,558     $49,824,144    $(891,756)    $100,915,178
- ----------------------------------------------------------------------------------------------------------
Issuance of common stock          2,265,426                                                     2,514,415
Net income                                                        6,795,197                     6,795,197
Other comprehensive loss                         (3,434,126)                                   (3,434,126)
Cash dividends                                                   (2,998,330)                   (2,998,330)
- ----------------------------------------------------------------------------------------------------------
Balance,
   December 31, 1999*           $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
==========================================================================================================

*Restated - see note 1
See accompanying notes to consolidated financial statements.

                                                                              17

Donegal Group Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,                                              2001            2000            1999
- ------------------------------------------------------------------------------------------------------------
                                                                                       
Cash Flows from Operating Activities:
   Net income                                                   $  5,818,131    $  8,836,780    $  6,795,197
- ------------------------------------------------------------------------------------------------------------
   Adjustments to reconcile net income to net cash
          provided by operating activities:
      Depreciation and amortization                                1,127,510         982,926       1,078,594
      Realized investment (gains) losses                             880,254        (170,852)         38,702
   Changes in Assets and Liabilities, net of acquisition:
      Losses and loss expenses                                    23,363,781      12,296,118       7,452,899
      Unearned premiums                                           14,138,883       7,788,243       2,395,965
      Accrued expenses                                             1,308,632        (165,997)      1,166,287
      Premiums receivable                                         (2,385,029)     (3,296,815)      1,477,671
      Deferred policy acquisition costs                           (1,320,001)       (316,463)         64,545
      Deferred income taxes                                       (1,360,633)        499,976      (3,783,354)
      Reinsurance receivable                                     (13,309,290)     (8,970,330)     (3,809,600)
      Accrued investment income                                      237,388        (455,059)       (311,975)
      Amounts due to/from affiliate                                 (513,922)        350,639      (1,133,037)
      Reinsurance balances payable                                  (795,819)        262,686        (499,423)
      Prepaid reinsurance premiums                                (4,881,083)     (3,156,232)     (4,041,033)
      Current income taxes                                           (32,656)        374,620        (388,577)
      Change in pooling participation                                     --       3,322,031              --
      Other, net                                                    (271,364)        268,316         508,807
- ------------------------------------------------------------------------------------------------------------
          Net adjustments                                         16,186,651       9,613,807         216,471
- ------------------------------------------------------------------------------------------------------------
      Net cash provided by operating activities                   22,004,782      18,450,587       7,011,668
- ------------------------------------------------------------------------------------------------------------

Cash Flows from Investing Activities:
   Purchase of fixed maturities
      Held to maturity                                           (45,201,470)    (17,340,175)    (23,782,305)
      Available for sale                                         (71,700,918)    (30,355,507)    (32,890,963)
   Purchase of equity securities                                 (12,440,994)    (28,286,533)    (14,258,861)
   Sale of fixed maturities
      Available for sale                                          16,250,109       8,719,165         503,895
   Maturity of fixed maturities
      Held to maturity                                            51,313,296      13,490,715      15,563,638
      Available for sale                                          50,781,533      11,928,622      19,049,880
   Sale of equity securities                                       7,089,532      24,572,288      11,767,268
   Sale of Atlantic Insurance Services, net                               --              --         (48,810)
   Net purchase of property and equipment                           (161,269)       (275,982)       (461,669)
   Net sales (purchases) of short-term investments                (4,634,695)     (2,850,343)     14,619,107
- ------------------------------------------------------------------------------------------------------------
          Net cash used in investing activities                   (8,704,876)    (20,397,750)     (9,938,820)
- ------------------------------------------------------------------------------------------------------------

Cash Flows from Financing Activities:
   Issuance of common stock                                        1,386,746       2,756,540       2,514,415
   Borrowings (payments) under line of credit, net               (12,400,000)      3,000,000        (500,000)
      Cash dividends paid                                         (3,394,352)     (3,126,959)     (2,946,170)
- ------------------------------------------------------------------------------------------------------------
          Net cash provided by (used in) financing activities    (14,407,606)      2,629,581        (931,755)
- ------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash                                   (1,107,700)        682,418      (3,858,907)
Cash at beginning of year                                          5,182,988       4,500,570       8,359,477
- ------------------------------------------------------------------------------------------------------------
Cash at end of year                                             $  4,075,288    $  5,182,988    $  4,500,570
============================================================================================================

*Restated - see note 1
See accompanying notes to consolidated financial statements.

18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

Donegal Group Inc. (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"), Southern
Insurance Company of Virginia ("Southern"), Southern Heritage Insurance Company
("Southern Heritage") and Pioneer Insurance Company of Ohio ("Pioneer-Ohio")
(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 (65% prior to July 1, 2000).
Southern cedes 50% of its business to the Mutual Company. At December 31, 2001,
the Mutual Company held 63% of the outstanding common stock of the Company.

     In addition to the Company's Insurance Subsidiaries, it also owned all of
the outstanding stock of Atlantic Insurance Services, Inc. ("AIS"), an insurance
services organization. The Company sold all of the stock of AIS on October 1,
1999.

     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 3, 2001, the Company announced that it had purchased all of the
outstanding stock of Pioneer Insurance Company of New York ("Pioneer-New York")
from the Mutual Company effective January 1, 2001. 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 bears a 6% rate and is due in January 2003. The Company classifies this
note in Due to Affiliate.

     Delaware Atlantic Insurance Company ("Delaware"), previously a wholly owned
subsidiary, and Pioneer-New York were merged into Atlantic States Insurance
Company on 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.

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 Donegal Group Inc. 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.

                                                                              19

     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.

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.

20

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.

     Prior to July 1, 2000, the Company's stock-based compensation plans were
accounted for under the provisions of APB Opinion No. 25 and related
interpretations. As such, compensation expense was recorded on the date of stock
option grant only if the current market price of the underlying stock exceeded
the exercise price. Additionally, the Company provides the pro-forma net income
and earnings per share disclosures required by Statement of Financial Accounting
Standards (SFAS No. 123), "Accounting for Stock-Based Compensation," for grants
prior to the adoption of FIN No. 44.

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.

RECLASSIFICATIONS

Certain amounts in these financial statements have been reclassified from those
previously presented. Gross and ceded premiums earned and losses and loss
expenses are no longer presented in the statements of income. Reinsurance
receivable, prepaid reinsurance premiums, unearned premiums, and the liabilities
for losses and loss expenses have been reduced in the consolidated balance sheet
as they no longer include the amounts under the agreements discussed in the last
paragraph of note 2a. The amounts in note 6 as well as the consolidated
statements of cash flows have been revised to conform to the changes in the
consolidated balance sheets. Note 2a has been expanded to include the purpose of
the various agreements and to separately disclose amounts under the various
arrangements versus the aggregate disclosure previously provided. These
reclassifications had no effect on total revenues, total expenses, net income,
net income per share, cash flows provided by operating activities, or
stockholders' equity.

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 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
$37,345,259, $30,414,395 and $23,745,989 and ceded losses and loss expenses
incurred of $29,094,804, $22,966,106 and $15,625,894 under this arrangement
during 2001, 2000 and 1999, respectively. It also assumed premiums earned of
$126,769,521, $110,943,962 and $101,017,767 and assumed losses and loss expenses
incurred of $93,470,958, $75,007,089 and $68,563,183 under this arrangement
during 2001, 2000 and 1999, respectively. Atlantic States had prepaid
reinsurance premiums of $20,942,093, $16,251,612 and $12,978,863 and a ceded
liability for losses and loss expenses of $39,321,214, $31,068,101 and
$24,025,502 under this arrangement as of December 31, 2001, 2000 and 1999,
respectively. It also had assumed unearned premiums of $63,636,858, $54,578,621
and $46,283,485 and an assumed liability for losses and loss expenses of
$99,664,285, $84,805,937 and $80,258,589 under this arrangement at December 31,
2001, 2000 and 1999, respectively.

     The Mutual Company and Southern have a quota share agreement whereby
Southern cedes 50% of its direct business, less reinsurance, to the Mutual
Company. The business assumed by the Mutual Company from Southern becomes part
of the pooling arrangement between the Mutual Company and Atlantic States.
Southern ceded premiums earned of $14,995,606, $14,413,261 and $13,517,603 and
ceded losses and loss expenses incurred of $9,898,422, $9,885,436 and $9,986,718
under this agreement during 2001, 2000 and 1999, respectively. Southern had
prepaid reinsurance premiums of $7,310,471, $7,084,729 and $6,683,001 and a
ceded liability for losses and loss expenses of $10,068,604, $7,924,750 and
$7,054,012 under this agreement at December 31, 2001, 2000 and 1999,
respectively. This agreement was terminated as of January 1, 2002.

     Atlantic States, Southern, Pioneer-Ohio and Southern Heritage each have a
catastrophe reinsurance agreement with the Mutual Company which limits the
maximum liability under any one catastrophic occurrence to $400,000, $300,000,
$200,000 and $400,000 (effective January 1, 2000), respectively, and $1,000,000
($700,000 in 1999) for a catastrophe involving more than one of the companies.
Prior to merging into Atlantic States, 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 $300,000 and
$400,000, respectively. Prior to merging into Atlantic States, Delaware and the
Mutual Company had an excess of loss reinsurance agreement in

                                                                              21

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. The Mutual Company and Pioneer-Ohio
have an excess of loss reinsurance agreement in which the Mutual Company assumes
up to $250,000 ($200,000 in 2000 and 1999) 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 $50,000 ($25,000 in 2000 and 1999) of
losses in excess of $100,000. 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 and 1999) of losses
in excess of $50,000. Effective October 1, 2000 the Mutual Company and Southern
Heritage have 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 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
each company 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 Donegal Group Inc., 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 $2,439,520, $2,126,882 and
$3,519,914 and ceded losses and loss expenses incurred of $4,194,251, $5,388,111
and $4,400,776 under these various agreements during 2001, 2000 and 1999,
respectively. The subsidiaries had prepaid reinsurance premiums of $0, $0 and
$733,183 and a ceded liability for losses and loss expenses of $5,395,528,
$4,941,116 and $2,689,825 under these various agreements at December 31, 2001,
2000, and 1999, respectively.

     Southern, Pioneer-Ohio and Southern Heritage (and Delaware and Pioneer-New
York prior to merging into Atlantic States) each have agreements with the Mutual
Company under which they cede, and then reassume back, 100% of their business
net of reinsurance. The primary purpose of the agreements is to provide these
subsidiaries with the same A.M. Best rating (currently "A") as the Mutual
Company, which these subsidiaries could not achieve without these contracts in
place. These agreements do not transfer insurance risk. While these subsidiaries
ceded and reassumed amounts received from policyholders of $41,142,936,
$25,790,126 and $22,486,490 and claims of $23,348,952, $15,325,638 and
$13,177,186 under these agreements in 2001, 2000 and 1999, respectively, the
amounts are not reflected in the consolidated financial statements. The
aggregate liabilities ceded and reassumed under these agreements were
$36,494,487 and $26,572,959 at December 31, 2001, and 2000, 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 $29,298,569, $26,985,080 and $27,466,898 for 2001, 2000 and 1999,
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, 2001, the Company had $3,585,566 in checking accounts with
Province Bank, a wholly owned subsidiary of DFSC. The Company earned $6,350 in
interest on these accounts during 2001.

3--INVESTMENTS

The amortized cost and estimated fair values of fixed maturities and equity
securities at December 31, 2001 and 2000, are as follows:

                                                             2001
- ----------------------------------------------------------------------------------------------------------------------------
                                                                         Gross                 Gross             Estimated
                                                 Amortized            Unrealized             Unrealized             Fair
HELD TO MATURITY                                   Cost                  Gains                 Losses               Value
- ----------------------------------------------------------------------------------------------------------------------------
                                                                                                    
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
============================================================================================================================

22

                                                             2001
- ----------------------------------------------------------------------------------------------------------------------------
                                                                         Gross                 Gross             Estimated
                                                 Amortized            Unrealized             Unrealized             Fair
AVAILABLE FOR SALE                                 Cost                  Gains                 Losses               Value
- ----------------------------------------------------------------------------------------------------------------------------
                                                                                                    
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
============================================================================================================================

                                                           2000
- ----------------------------------------------------------------------------------------------------------------------------
                                                                         Gross                 Gross             Estimated
                                                 Amortized            Unrealized             Unrealized             Fair
HELD TO MATURITY                                   Cost                  Gains                 Losses               Value
- ----------------------------------------------------------------------------------------------------------------------------
                                                                                                    
U.S. Treasury securities
   and obligations of
   U.S. government
   corporations
   and agencies                                $ 38,779,230           $  343,819             $ 255,049          $ 38,868,000
Canadian government
   obligation                                       498,559               11,441                    --               510,000
Obligations of states
   and political
   subdivisions                                  66,831,090            1,499,955                45,904            68,285,141
Corporate securities                             21,621,472              228,851               195,287            21,655,036
Mortgage-backed
   securities                                    15,451,367               47,120               154,228            15,344,259
- ----------------------------------------------------------------------------------------------------------------------------
   Totals                                      $143,181,718           $2,131,186             $ 650,468          $144,662,436
============================================================================================================================

                                                             2000
- ----------------------------------------------------------------------------------------------------------------------------
                                                                         Gross                 Gross             Estimated
                                                 Amortized            Unrealized             Unrealized             Fair
AVAILABLE FOR SALE                                 Cost                  Gains                 Losses               Value
- ----------------------------------------------------------------------------------------------------------------------------
                                                                                                    
U.S. Treasury securities
   and obligations of
   U.S. government
   corporations
   and agencies                                $ 68,007,634           $  544,135            $  650,339          $ 67,901,430
Obligations of states
   and political
   subdivisions                                  17,965,179              327,256                36,885            18,255,550
Corporate securities                             22,902,588              312,426               306,664            22,908,350
Mortgage-backed
   securities                                     5,649,071               14,790               118,008             5,545,853
Equity securities                                12,500,558              880,419             1,268,741            12,112,236
- ----------------------------------------------------------------------------------------------------------------------------
   Totals                                      $127,025,030           $2,079,026            $2,380,637          $126,723,419
============================================================================================================================

     The amortized cost and estimated fair value of fixed maturities at December
31, 2001, 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                              $  1,000,081   $  1,012,500
Due after one year through five years                  33,277,659     33,857,210
Due after five years through ten years                 38,671,342     39,626,349
Due after ten years                                     3,763,254      3,737,500
Mortgage-backed securities                              8,610,629      8,705,834
- --------------------------------------------------------------------------------
      Total held to maturity                         $ 85,322,965   $ 86,939,393
================================================================================
AVAILABLE FOR SALE
Due in one year or less                              $ 11,815,944   $ 12,046,000
Due after one year through five years                  79,085,686     81,151,668
Due after five years through ten years                 56,670,691     57,971,097
Due after ten years                                     7,953,666      7,760,000
Mortgage-backed securities                             14,743,597     14,790,079
- --------------------------------------------------------------------------------
      Total available for sale                       $170,269,584   $173,718,844
================================================================================

     The amortized cost of fixed maturities on deposit with various regulatory
authorities at December 31, 2001 and 2000, amounted to $5,667,959 and
$6,056,374, respectively.

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

                                            2001          2000          1999
- --------------------------------------------------------------------------------
Fixed maturities                        $15,145,949   $15,180,008   $13,046,603
Equity securities                           546,243       635,049       440,268
Short-term investments                      920,538     1,221,724       809,949
Other                                       255,250       255,250       316,139
- --------------------------------------------------------------------------------
Investment income                        16,867,980    17,292,031    14,612,959
Investment expenses                         982,436       897,284     1,022,264
- --------------------------------------------------------------------------------
Net investment income                   $15,885,544   $16,394,747   $13,590,695
================================================================================

     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:

                                           2001           2000          1999
- --------------------------------------------------------------------------------
Gross realized gains:
   Fixed maturities                   $   554,560     $   237,748  $         --
   Equity securities                      323,451       1,813,242       586,745
- --------------------------------------------------------------------------------
                                          878,011       2,050,990       586,745
- --------------------------------------------------------------------------------
Gross realized losses:
   Fixed maturities                        28,618          20,597         6,083
   Equity securities                    1,729,647       1,859,541       619,364
- -------------------------------------------------------------------------------
                                        1,758,265       1,880,138       625,447
- -------------------------------------------------------------------------------
Net realized gains (losses)           $  (880,254)    $   170,852  $    (38,702)
===============================================================================
Change in difference between
   fair value and cost of
   investments:
   Fixed maturities                   $ 3,498,259     $ 7,300,279  $(11,668,991)
   Equity securities                    1,275,050        (603,930)     (362,312)
- --------------------------------------------------------------------------------
                                      $ 4,773,309     $ 6,696,349  $(12,031,303)
================================================================================

                                                                              23

     Income taxes (benefit) on realized investment gains (losses) were
$(299,286), $58,090, and $(13,159) for 2001, 2000 and 1999, respectively.
Deferred income taxes (benefits) applicable to net unrealized investment gains
(losses) included in shareholders' equity were $1,474,242 and $(102,548) at
December 31, 2001 and 2000, respectively.

     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 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.

4--DEFERRED POLICY ACQUISITION COSTS

Changes in deferred policy acquisition costs are as follows:

                                       2001             2000             1999
- --------------------------------------------------------------------------------
Balance, January 1                 $12,284,214      $11,445,572      $11,510,117
Acquisition costs deferred          28,514,001       26,157,642       24,866,455
Amortization charged
   to earnings                      27,194,000       25,319,000       24,931,000
- --------------------------------------------------------------------------------
Balance, December 31               $13,604,215      $12,284,214      $11,445,572
================================================================================

5--PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2001 and 2000, consisted of the
following:

- --------------------------------------------------------------------------------
                                                                   Estimated
                                                                     Useful
                                      2001            2000            Life
- --------------------------------------------------------------------------------
Cost--office equipment             $5,012,290      $4,981,970       5-15 years
      automobiles                     992,412         947,865         3 years
      real estate                   3,063,646       3,063,646       15-50 years
      software                        561,146         561,146         5 years
- --------------------------------------------------------------------------------
                                    9,629,494       9,554,627
Accumulated depreciation           (5,060,842)     (4,318,144)
- --------------------------------------------------------------------------------
                                   $4,568,652      $5,236,483
================================================================================

     Depreciation expense for 2001, 2000, and 1999 amounted to $829,100,
$899,750 and $970,331, respectively.

6--LIABILITY FOR LOSSES AND LOSS EXPENSES

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

                                      2001            2000            1999
- --------------------------------------------------------------------------------
Balance at January 1              $156,476,124    $144,180,006    $136,727,107
   Less reinsurance
      recoverable                   53,766,710      44,945,908      40,712,330
- --------------------------------------------------------------------------------
Net balance at January 1           102,709,414      99,234,098      96,014,777
- --------------------------------------------------------------------------------
Incurred related to:
   Current year                    110,142,467     103,671,401     100,573,192
   Prior years                       8,035,082         711,775        (492,576)
- --------------------------------------------------------------------------------
Total incurred                     118,177,549     104,383,176     100,080,616
- --------------------------------------------------------------------------------
Paid related to:
   Current year                     63,289,736      61,848,261      59,434,306
   Prior years                      43,053,112      39,059,599      37,426,989
- --------------------------------------------------------------------------------
Total paid                         106,342,848     100,907,860      96,861,295
- --------------------------------------------------------------------------------
Net balance at
      December 31                  114,544,115     102,709,414      99,234,098
   Plus reinsurance
      recoverable                   65,295,790      53,766,710      44,945,908
- --------------------------------------------------------------------------------
Balance at December 31            $179,839,905    $156,476,124    $144,180,006
================================================================================

     The Company recognized an increase (decrease) in the liability for losses
and loss expenses of prior years of $8.0 million, $0.7 million and $(0.5
million) in 2001, 2000 and 1999, 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, 2001 and 2000, 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 $27.6 million and $40 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, 2001, the Company may borrow up to $32 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, 2001,
the interest rates were 4.75% on an outstanding prime rate balance of $2.6
million, 3.825% on an outstanding Eurodollar rate balance of $10 million and
3.6375% on another Eurodollar rate balance of $15 million. In addition, the
Company pays a rate 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, will then be payable.

24

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 following amounts represent ceded reinsurance
transactions with unaffiliated reinsurers during 2001, 2000 and 1999:

                                          2001          2000          1999
- ----------------------------------------------------------------------------
Premiums written                     $ 9,348,853   $ 8,241,416   $ 8,391,805
============================================================================
Premiums earned                      $ 9,440,035   $ 8,026,478   $ 8,549,509
============================================================================
Losses and loss expenses             $ 6,907,947   $ 3,027,810   $ 5,537,410
============================================================================
Prepaid reinsurance premiums         $ 1,340,903   $ 1,376,043   $ 1,161,105
============================================================================
Liability for losses and
   loss expenses                     $10,510,444   $ 9,832,743   $11,176,569
============================================================================

TOTAL REINSURANCE

The following amounts represent the total of all ceded reinsurance transactions
with both affiliated and unaffiliated reinsurers during 2001, 2000, and 1999:

                                         2001          2000          1999
- ----------------------------------------------------------------------------
Premiums earned                      $64,220,420   $54,981,016   $49,333,015
============================================================================
Losses and loss expenses             $50,095,424   $41,267,463   $35,550,798
============================================================================
Prepaid reinsurance premiums         $29,593,467   $24,712,384   $21,556,152
============================================================================
Liability for losses and
   loss expenses                     $65,295,790   $53,766,710   $44,945,908
============================================================================

     The following amounts represent the effect of reinsurance on premiums
written for 2001, 2000, and 1999:

                                       2001           2000           1999
- ----------------------------------------------------------------------------
Direct                            $110,298,533   $ 99,042,235   $ 91,854,011
Assumed                            135,830,624    119,217,433    105,392,426
Ceded                               69,101,503     58,137,248     53,374,048
- ----------------------------------------------------------------------------
Net premiums written              $177,027,654   $160,122,420   $143,872,389
============================================================================

     The following amounts represent the effect of reinsurance on premiums
earned for 2001, 2000, and 1999:

                                       2001           2000           1999
- ----------------------------------------------------------------------------
Direct                            $105,214,059   $ 95,671,588   $ 93,399,834
Assumed                            126,776,215    110,955,627    101,450,638
Ceded                               64,220,420     54,981,016     49,333,015
- ----------------------------------------------------------------------------
Net premiums earned               $167,769,854   $151,646,199   $145,517,457
============================================================================

9--INCOME TAXES

The provision for income tax consists of the following:

                                       2001           2000           1999
- -----------------------------------------------------------------------------
Current                            $ 2,634,231    $ 2,406,272    $   832,798
Deferred                            (1,360,633)       499,976     (3,783,354)
- ----------------------------------------------------------------------------
Federal tax provision              $ 1,273,598    $ 2,906,248    $(2,950,556)
============================================================================

     The effective tax rate is different than the amount computed at the
statutory federal rate of 34% for 2001, 2000 and 1999. The reason for such
difference and the related tax effect are as follows:

                                       2001           2000           1999
- -----------------------------------------------------------------------------
Income before
   income taxes                     $7,091,729    $11,743,028    $ 3,844,641
=============================================================================
Computed "expected"
   taxes at 34%                      2,411,188      3,992,630      1,307,178
Recognition of net operating
   loss carryover of
   Southern Heritage                        --             --     (3,004,524)
Tax-exempt interest                 (1,399,238)    (1,347,959)    (1,355,816)
Dividends received deduction           (21,908)       (25,423)       (83,948)
Other, net                             283,556        287,000        186,554
- -----------------------------------------------------------------------------
Federal income
   tax provision                    $1,273,598    $ 2,906,248    $(2,950,556)
=============================================================================

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2001 and 2000, are as follows:

                                                      2001           2000
- -----------------------------------------------------------------------------
Deferred tax assets:
   Unearned premium                               $ 5,778,529     $ 5,139,217
   Loss reserves                                    5,433,005       4,878,850
   Net operating loss carryforward -
      Southern Heritage                             2,032,094       2,339,133
   Unrealized loss                                         --         102,548
   Other                                            1,013,899         174,886
- -----------------------------------------------------------------------------
      Total                                       $14,257,527     $12,634,634
=============================================================================
Deferred tax liabilities:
   Depreciation expense                           $   379,594     $   464,235
   Deferred policy acquisition costs                4,625,433       4,176,632
   Salvage recoverable                                303,528         302,881
   Unrealized gain                                  1,474,242              --
- -----------------------------------------------------------------------------
      Total                                       $ 6,782,797     $ 4,943,748
=============================================================================
      Net deferred tax assets                     $ 7,474,730     $ 7,690,886
=============================================================================

     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, 2001, 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.

     A change in the federal income laws was enacted during 1999 which allows
net operating loss carryforwards of an acquired company to be used to offset
future taxable income of other affiliated companies filing as part of a
consolidated tax return. Prior law allowed such net operating loss carryforward
to be used to offset taxable income of the acquired company only. Due to this
law change, the net operating loss carryforward, obtained as part of the
acquisition of Southern Heritage, can now be used to offset taxable income
generated by the other consolidated affiliates. This was the primary factor in
management's determination that no valuation allowance was required at the end
of 1999. Accordingly, the tax benefit of this carryforward, as adjusted for the
1998 tax return as filed, of $3,004,524 was recognized in 1999.

                                                                              25

     At December 31, 2001, the Company has a net operating loss carryforward of
$5,976,747, 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 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, 2001, the Company has 76,112 unexercised options under
these plans. Additionally 1,947, 1,947 and 2,124 shares of restricted stock were
issued on January 2, 2001, 2000 and 1999, 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, 1998               1,091,120      $15.73
   Granted - 1999                                433,500        8.00
   Exercised - 1999                                   --          --
   Forfeited - 1999                               28,227       15.52
- --------------------------------------------------------------------------------
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
================================================================================
Exercisable at:
   December 31, 1999                             897,338      $15.99
================================================================================
   December 31, 2000                           1,190,004      $16.68
================================================================================
   December 31, 2001                           1,321,905      $13.89
================================================================================

     Options available for future grants at December 31, 2001 are 1,241,000.

     The following table summarizes information about fixed stock options at
December 31, 2001:

                    Number of           Weighted-Average         Number of
  Exercise           Options                Remaining             Options
   Price           Outstanding          Contractual Life        Exercisable
- --------------------------------------------------------------------------------
   $ 8.00           457,685                 3.0 years             305,123
   $ 9.00             9,500                 4.5 years               2,000
   $13.50           524,448                 0.1 years             524,448
   $14.00           452,500                 4.5 years                  --
   $18.00           490,334                1.25 years             490,334

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.

26

     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, 1999                                     $13.28125         10,227
July 1, 1999                                        $ 9.66875         11,876
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

     On January 1, 2002, the Company issued an additional 12,769 shares at a
price of $8.84850 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 Donegal Group Inc. 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 2001, 2000 and 1999, 16,557, 46,603, and
47,841 shares, respectively, were issued under this plan. Expense recognized
under the plan was not material.

PRO-FORMA DISCLOSURES

The weighted-average grant date fair value of options granted for the various
plans during 2000 and 1999 was $2.23 and $1.98, respectively.

     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 47% for 1999, and an
expected dividend yield of 4.5% for 2000 and 5.0% for 1999.

     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 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:

                                 2001             2000              1999
- --------------------------------------------------------------------------------
Net income:
  As reported                 $5,818,131       $8,836,780        $6,795,197
  Pro-forma                    5,617,773        8,071,825         5,595,851
Basic earnings per share:
  As reported                        .65             1.01               .82
  Pro-forma                          .63              .92               .68
Diluted earnings per share:
  As reported                        .64             1.01               .82
  Pro-forma                          .62              .92               .68

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):

                                       2001            2000            1999
- ------------------------------------------------------------------------------
ATLANTIC STATES
Statutory capital
   and surplus                    $ 86,124,896    $ 88,620,380    $ 82,401,227
                                  ============================================
Statutory unassigned
   surplus                        $ 44,464,032    $ 46,959,516    $ 40,740,363
                                  ============================================
Statutory net income (loss)       $    (54,605)   $  8,134,135    $  4,832,737
- ----------------------------------============================================
SOUTHERN
Statutory capital
   and surplus                    $ 10,863,481    $  9,082,587    $  7,293,856
                                  ============================================
Statutory unassigned
   surplus                        $  5,761,211    $  3,980,317    $  2,191,586
                                  ============================================
Statutory net income              $  1,666,477    $  1,543,128    $    184,285
- ----------------------------------============================================
PIONEER-OHIO
Statutory capital
   and surplus                    $  5,524,466    $  5,811,315    $  5,677,926
                                  ============================================
Statutory unassigned
   deficit                        $ (1,475,534)   $ (1,188,685)   $ (1,322,074)
                                  ============================================
Statutory net income              $   (621,520)   $   (176,011)   $    108,322
- ----------------------------------============================================
SOUTHERN HERITAGE
Statutory capital
   and surplus                    $ 19,867,276    $ 16,975,171    $ 16,508,422
                                  ============================================
Statutory unassigned
   deficit                        $(12,648,039)   $(15,540,144)   $(16,006,893)
                                  ============================================
Statutory net income              $  3,514,487    $  1,486,698    $    487,098
                                  ============================================

     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, Southern, Pioneer-Ohio and Southern
Heritage are also subject to Risk Based Capital (RBC) requirements which may
further impact their ability to pay dividends. At December 31, 2001, all four
companies' statutory capital and surplus were substantially above the RBC
requirements. Amounts available for distribution as dividends to Donegal Group
Inc. without prior approval of insurance regulatory authorities in 2002 are
$8,612,490 from Atlantic States, $1,086,348 from Southern, $552,447 from
Pioneer-Ohio and $3,514,487 from Southern Heritage.

     The National Association of Insurance Commissioners (NAIC) has 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 is as follows: Atlantic States - $6,168,742 increase; Southern
Heritage - $1,083,354 increase; Pioneer-Ohio - $313,638 increase; and Southern -
$1,171,204 increase.

                                                                              27

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,
                                                -----------------------
                                           2001           2000          1999
- --------------------------------------------------------------------------------
Statutory net income of
   Insurance Subsidiaries              $ 4,504,839    $10,987,950   $ 5,612,442
Increases (decreases):
   Deferred policy
      acquisition costs                  1,320,001        838,642       (64,545)
   Deferred federal
      income taxes                       1,360,633       (499,976)    3,783,354
   Salvage and subrogation
      recoverable                          155,088        305,918      (226,617)
   Consolidating eliminations
      and adjustments                  (13,783,695)    (4,318,624)   (1,387,864)
   Parent-only net income (loss)        12,261,265      1,522,870      (908,987)
   Non-insurance subsidiary
      net income (loss)                         --             --       (12,586)
- --------------------------------------------------------------------------------
Net income as
   reported herein                     $ 5,818,131    $  8,836,780  $ 6,795,197
================================================================================

                                                      December 31,
                                      ------------------------------------------
                                           2001           2000         1999
- --------------------------------------------------------------------------------
Statutory capital and surplus
   of Insurance Subsidiaries          $122,380,119   $120,489,453  $111,881,431
Increases (decreases):
   Deferred policy
      acquisition costs                 13,604,215     12,284,214    11,445,572
   Deferred federal
      income taxes                        (820,313)     7,690,886     9,221,874
   Salvage and subrogation
      recoverable                        8,197,948      8,042,860     7,736,942
   Statutory reserves                           --      2,623,921     5,154,062
   Non-admitted assets and
      other adjustments, net               334,092        911,370       942,170
   Fixed maturities                      3,793,048        493,055    (2,968,655)
   Consolidating eliminations
      and adjustments                  (39,693,089)   (40,973,097)  (41,072,150)
   Parent-only equity                   13,132,329      2,566,929     1,451,088
- --------------------------------------------------------------------------------
Stockholders' equity as
   reported herein                    $120,928,349   $114,129,591  $103,792,334
================================================================================

14--SUPPLEMENTARY INFORMATION ON STATEMENT OF CASH FLOWS

The following reflects income taxes and interest paid during 2001, 2000 and
1999:

                                           2001           2000          1999
- --------------------------------------------------------------------------------
Income taxes                            $2,666,887     $2,031,652    $1,221,375
================================================================================
Interest                                $3,049,844     $2,731,048    $1,370,155
================================================================================

     During 1999, the Company wrote off fixed assets with a net carrying value
of $407,000 which was a non-cash charge to earnings.

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, 2001, 2000 and 1999:

                                                       Weighted-
                                                        Average       Earnings
                                            Net          Shares          Per
                                          Income      Outstanding       Share
- --------------------------------------------------------------------------------
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
================================================================================
1999:
Basic                                   $6,795,197      8,327,356       $ .82
Effect of stock options                         --             --          --
- --------------------------------------------------------------------------------
Diluted                                 $6,795,197      8,327,356       $ .82
================================================================================

     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:

                                            2001          2000          1999
- --------------------------------------------------------------------------------
Options excluded from
  diluted earnings per share             1,467,282      1,045,338    1,496,393
================================================================================

28

16--CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

                            CONDENSED BALANCE SHEETS
                                ($ in thousands)

December 31,                                               2001         2000
- --------------------------------------------------------------------------------
ASSETS
Investment in subsidiaries (equity method)               $152,089     $155,600
Cash                                                          403        2,381
Property and equipment                                      1,623        1,997
Other                                                         264          715
- --------------------------------------------------------------------------------
      Total assets                                       $154,379     $160,693
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
   Cash dividends declared to stockholders               $    870     $    797
   Line of credit                                          27,600       40,000
   Due to affiliate                                         4,441        4,441
   Other                                                      540        1,325
- --------------------------------------------------------------------------------
      Total liabilities                                    33,451       46,563
- --------------------------------------------------------------------------------
Stockholders' equity                                      120,928      114,130
- --------------------------------------------------------------------------------
      Total liabilities and stockholders' equity         $154,379     $160,693
================================================================================

                         CONDENSED STATEMENTS OF INCOME
                                ($ in thousands)

Year Ended December 31,                           2001       2000       1999
- --------------------------------------------------------------------------------
Revenues
Dividends-subsidiaries                          $14,419     $3,900     $  820
Other                                               824        866        865
- --------------------------------------------------------------------------------
      Total revenues                             15,243      4,766      1,685
- --------------------------------------------------------------------------------
Expenses
Operating expenses                                1,761      1,165        938
Interest                                          2,288      3,304      2,463
- --------------------------------------------------------------------------------
      Total expenses                              4,049      4,469      3,401
- --------------------------------------------------------------------------------
Income (loss) before income tax benefit
   and equity in undistributed net
   income of subsidiaries                        11,194        297     (1,716)
Income tax benefit                               (1,067)    (1,226)      (807)
- --------------------------------------------------------------------------------
Income (loss) before equity in
   undistributed net income (loss)
   of subsidiaries                               12,261      1,523       (909)
Equity in undistributed
   net income (loss)
   of subsidiaries                               (6,443)     7,314      7,704
- --------------------------------------------------------------------------------
Net income                                      $ 5,818     $8,837     $6,795
================================================================================

                       CONDENSED STATEMENTS OF CASH FLOWS
                                ($ in thousands)

Year Ended December 31,                           2001        2000        1999
- --------------------------------------------------------------------------------
Cash flows from operating activities:
   Net income                                  $  5,818     $ 8,837     $ 6,795
- --------------------------------------------------------------------------------
   Adjustments:
      Equity in undistributed
       net loss (income)
       of subsidiaries                            6,443      (7,314)     (7,704)
      Other                                         252       1,123       2,365
- --------------------------------------------------------------------------------
          Net adjustments                         6,695      (6,191)     (5,339)
- --------------------------------------------------------------------------------
      Net cash provided                          12,513       2,646       1,456
- --------------------------------------------------------------------------------
Cash flows from investing activities:
   Net purchase of property and
      equipment                                    (122)       (262)       (426)
   Sale of AIS                                       --          --         100
   Investment in Donegal Financial
      Services Corp.                                 --      (3,042)         --
   Other                                             38          38        (426)
- --------------------------------------------------------------------------------
      Net cash used                                 (84)     (3,266)       (752)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
   Cash dividends paid                           (3,394)     (3,127)     (2,946)
   Issuance of common stock                       1,387       2,757       2,514
   Line of credit, net                          (12,400)      3,000        (500)
- --------------------------------------------------------------------------------
      Net cash provided (used)                  (14,407)      2,630        (932)
- --------------------------------------------------------------------------------
Net change in cash                               (1,978)      2,010        (228)
   Cash at beginning of year                      2,381         371         599
- --------------------------------------------------------------------------------
   Cash at end of year                         $    403     $ 2,381     $   371
================================================================================

                                                                              29

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:

                                             2001         2000         1999
                                           -------------------------------------
                                                    ($ in thousands)
- --------------------------------------------------------------------------------
Revenues:
   Premiums earned:
      Commercial lines                     $ 62,877     $ 54,581     $ 47,804
      Personal lines                        104,893       97,065       97,713
- --------------------------------------------------------------------------------
          Total premiums earned             167,770      151,646      145,517
- --------------------------------------------------------------------------------
      Net investment income                  15,886       16,395       13,591
      Realized investment
         gains (losses)                        (880)         171          (39)
      Other                                   2,388        2,370        2,670
- --------------------------------------------------------------------------------
Total revenues                             $185,164     $170,582     $161,739
================================================================================
Income before income taxes:
   Underwriting income (loss):
      Commercial lines                     $ (3,037)    $    763     $   (839)
      Personal lines                         (5,090)      (4,649)      (8,461)
- --------------------------------------------------------------------------------
          SAP underwriting loss              (8,127)      (3,886)      (9,300)
      GAAP adjustments                        1,833        1,144         (184)
- --------------------------------------------------------------------------------
          GAAP underwriting loss             (6,294)      (2,742)      (9,484)
   Net investment income                     15,886       16,395       13,591
   Realized investment gains (losses)          (880)         171          (39)
   Other                                     (1,620)      (2,081)        (223)
- --------------------------------------------------------------------------------
Income before income taxes                 $  7,092     $ 11,743     $  3,845
================================================================================

18--RESTRUCTURING CHARGE

On September 29, 1999, the Company announced a plan to consolidate certain
subsidiary support functions into its Marietta, Pennsylvania office. As a result
of this consolidation, the Company recorded a restructuring charge of $2,206,000
in 1999 for employee termination benefits, occupancy charges, lease cancellation
costs, and asset impairments. The charge was included in other underwriting
expenses. The consolidation was completed by the end of the first quarter of
2000.

     Employee termination benefits of $782,000 included severance payments,
which were paid in a lump sum or over a defined period, and related benefits for
approximately 60 employees. Of the terminated employees, approximately 50% were
from subsidiary support functions and approximately 50% were from the Marietta,
Pennsylvania office. By December 31, 1999, all of the terminated employees had
left the employment of the Company.

     Included in occupancy charges of $488,000 were future lease obligations,
less anticipated sublease benefits, for leased space which is no longer used by
the Delaware and Southern Heritage subsidiary support functions.

     Also included in the restructuring charge was $529,000 related to contract
cancellation costs that represented the estimated cost to buy out of the
remaining term on printer, copier, and computer processing contracts that
provided no future benefit to the Company as a result of the restructuring. All
such assets have been taken out of service.

     Asset impairments, which were a direct result of the consolidation of
subsidiary functions, amounted to $407,000. They consisted of capitalized
programming and data center costs, voice systems, and leasehold and office
improvements. These assets were written-down to zero. All such assets have been
taken out of service.

     Activity in the restructuring accrual is as follows:

                            Employee
                          Termination                  Contract
                            Benefits     Occupancy   Cancellations     Total
- --------------------------------------------------------------------------------
Restructuring
   charge                  $ 782,000     $ 488,000     $ 529,000    $1,799,000
Cash payments               (343,000)      (47,000)     (365,000)     (755,000)
Reversal of
   prior accrual             (71,000)           --       (91,000)     (162,000)
- --------------------------------------------------------------------------------
Balance at
   December 31,
   1999                    $ 368,000     $ 441,000     $  73,000    $  882,000
- --------------------------------------------------------------------------------
Cash payments               (339,000)     (155,000)      (73,000)     (567,000)
Accrual adjustment                --        12,000            --        12,000
- --------------------------------------------------------------------------------
Balance at
   December 31,
   2000                    $  29,000     $ 298,000     $      --    $  327,000
Cash payments                (10,000)      (91,000)           --      (101,000)
- --------------------------------------------------------------------------------
Balance at
   December 31,
   2001                    $  19,000     $ 207,000     $      --    $  226,000
================================================================================

     Based on revised estimates, $162,000 of the restructuring accrual was
reversed by a reduction to the restructuring charge in other underwriting
expenses in the fourth quarter of 1999. Employee termination benefits and
contract cancellation costs were lower than original estimates.

19--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 $3,605,090 and $880,154 at December
31, 2001 and 2000, respectively. These liabilities included $676,149 and
$397,832 related to surcharges collected by the Company on behalf of regulatory
authorities for 2001 and 2000, respectively.

30

20--INTERIM FINANCIAL DATA (UNAUDITED)

                                                 2001
                          ------------------------------------------------------
                             First        Second          Third       Fourth
                            Quarter       Quarter        Quarter      Quarter
- --------------------------------------------------------------------------------
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)

                                                2000
                          ------------------------------------------------------
                             First        Second          Third       Fourth
                            Quarter       Quarter        Quarter      Quarter
- --------------------------------------------------------------------------------
Net premiums
   earned                 $36,088,698   $36,447,134    $39,149,006  $39,961,361
Total revenues             40,357,333    41,333,363     44,229,060   44,661,831
Net losses and loss
   expenses                25,948,912    24,823,941     26,795,640   26,814,683
Net income                  1,162,682     2,502,499      2,566,975    2,604,624
Net income per
   common share
      Basic                      $.14          $.29           $.29         $.29
      Diluted                     .14           .29            .29          .29
- --------------------------------------------------------------------------------

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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.

KPMG LLP

Philadelphia, Pennsylvania
February 21, 2002

                                                                              31

CORPORATE INFORMATION

ANNUAL MEETING
April 18, 2002 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 2001 and 2000:

                                         CASH DIVIDEND
                                            DECLARED
        QUARTER          HIGH      LOW     PER SHARE

         2000

         1st             8.625    5.750       --
         2nd             8.250    5.750      .09
         3rd             8.000    5.750      .09
         4th            13.938    7.125      .18

         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

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, 2001:

Class A common stock       586
Class B common stock       532

32

                                                                      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

Pioneer Insurance Company                                       Ohio

Southern Heritage Insurance Company                             Georgia

                                                                     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 21, 2002 include the related
financial statement schedules as of December 31, 2001, and for each of the years
in the three-year period ended December 31, 2001, 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, 333-94301, 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 21,
2002, relating to the consolidated balance sheets of Donegal Group Inc. as of
December 31, 2001 and 2000, 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, 2001, which reports are incorporated by reference or appear
in the December 31, 2001 annual report on Form 10-K of Donegal Group Inc.

KPMG LLP

Philadelphia, Pennsylvania
March 25, 2002