UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the quarterly period ended June 30, 2004

OR

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

For the transition period from            to            

Commission file number 2-39458

ERIE FAMILY LIFE INSURANCE COMPANY

Registrant’s telephone number, including area code (814) 870-2000

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

     Yes [   ]     No [X]

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date: 9,450,000 shares of Common Stock outstanding on August 13, 2004.

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INDEX

ERIE FAMILY LIFE INSURANCE COMPANY

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PART I. FINANCIAL INFORMATION

ERIE FAMILY LIFE INSURANCE COMPANY

See Notes to Financial Statements.

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ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION

See Notes to Financial Statements.

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ERIE FAMILY LIFE INSURANCE COMPANY

See Notes to Financial Statements.

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ERIE FAMILY LIFE INSURANCE COMPANY

See Notes to Financial Statements.

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ERIE FAMILY LIFE INSURANCE COMPANY

See Notes to Financial Statements.

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ERIE FAMILY LIFE INSURANCE COMPANY

NOTE A — BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in conformity with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2003 as filed with the Securities and Exchange Commission on August 20, 2004.

NOTE B — RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

During the second quarter of 2004, the Company completed a comprehensive analysis of its deferred policy acquisition cost (DAC) asset in response to a material weakness in internal control. The analysis indicated that amounts previously reported as deferred acquisition costs and related amortization were incorrectly calculated. Accordingly, the Company has restated its’ previously issued financial statements. The impact of the restatement to net income and net income per share for the three and six months ended June 30, 2003, and deferred policy acquisition costs and shareholders' equity as of December 31, 2003 is as follows:

NOTE C — EARNINGS PER SHARE

Earnings per share amounts are based on the weighted average number of common shares outstanding during each of the respective periods.

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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(All dollar amounts are in thousands)

NOTE D — INVESTMENTS

At June 30, 2004 and 2003, marketable equity securities consist of common and nonredeemable preferred stock while fixed maturities consist of bonds, notes and redeemable preferred stock. Management considers all fixed maturities as available-for-sale. Management determines the appropriate classification of fixed maturities at the time of purchase and reevaluates such designation as of each statement of financial position date. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of deferred federal income taxes, reported as a separate component of Comprehensive (Loss) Income and Shareholders’ Equity.

The following is a summary of available-for-sale securities:

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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE D — INVESTMENTS (Continued)

Realized gains and losses on the sales of investments are recognized in income using the specific identification method. Investments that have declined in value below cost and for which the decline is considered to be other-than-temporary by management are written down to estimated realizable value. The impairments are made on an individual security basis and are recorded as a component of net realized gains on investments in the Statements of Operations.

The components of net realized gains on investments as reported in the Statements of Operations are included below.

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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE D — INVESTMENTS (Continued)

The gross unrealized losses at June 30, 2004 span the various investment categories of fixed maturities and equity securities. The gross unrealized losses are aged as follows:

No investments in an unrealized loss position at June 30, 2004 had a decline in market value that was considered by management to be other-than-temporary, thereby causing the investment to be impaired based on Company policy. There were no market conditions, industry characteristics or fundamental operating results of a specific issuer that suggested impairment of any of the listed investments. However, as interest rates rise, declines in value of the Company’s substantial fixed income portfolio could occur, which may require impairment charges to be made.

The Company participates in a securities lending program whereby certain securities from its portfolio are loaned to other institutions for short periods of time. A fee is paid to the Company by the borrower. Company policy requires collateral equal to 102% of the fair value of the loaned securities. The Company maintains full ownership rights to the securities loaned and continues to earn interest on them. In addition, the Company has the ability to sell the securities while they are on loan. The Company has an indemnification agreement with the lending agent in the event a borrower becomes insolvent or fails to return securities. Securities lending collateral is recorded by the Company as a liability. The proceeds from the collateral are invested in cash and short-term investments and are reported on the Statements of Financial Position as cash and cash equivalents. The Company shares a portion of the interest received on these short-term investments with the lending agent. Revenue received for the three months ended June 30, 2004 and 2003, related to this program totaled $26 and $27, respectively. For the six months ended June 30, 2004 and 2003, revenue received related to this program totaled $54 and $48, respectively.

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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE D — INVESTMENTS (Continued)

The Company had loaned securities with a market value of $43.0 million and $64.1 million and secured collateral of $43.8 million and $65.5 million at June 30, 2004 and December 31, 2003, respectively. The Company records the loaned securities on its Statements of Financial Position as part of its invested assets. The Company has incurred no losses on the loan program since the program’s inception.

Limited partnerships at June 30, 2004 include U.S. and foreign real estate and mezzanine debt investments. Real estate limited partnerships represent 92.5%, while mezzanine debt limited partnerships represent 7.5%, of the total carrying value at June 30, 2004. These partnerships are recorded at fair value using the equity method. The Company has not guaranteed any of the partnership liabilities.

The components of equity in earnings of limited partnerships as reported in the Statements of Operations are as follows:

NOTE E — DEFERRED POLICY ACQUISITION COST ASSET

The Company incurs significant costs in connection with acquiring new business. Many of these acquisition costs, which vary with and are primarily related to the production of new business, are deferred as an asset and are then amortized over a period of time. The Company periodically reviews the DAC asset to assess recoverability from future income. If less than the full amount of DAC is determined to be recoverable, a portion of such costs are expensed at the time of determination.

The DAC on traditional life insurance products is amortized in relation to estimated gross premiums in accordance with Statement of Financial Accounting Standard No. 60, Accounting and Reporting by Insurance Enterprises. The DAC on the annuity and universal life products is amortized in relation to estimated gross profits in accordance with Statement of Financial Accounting Standard No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments (FAS 97).

During the second quarter of 2004, the Company completed a comprehensive analysis of its deferred acquisition cost asset. As described further in Note B, this analysis resulted in a restatement of previously issued financial statements.

In accordance with FAS 97, the Company periodically evaluates certain assumptions in use to determine DAC and amortization related to its interest sensitive products. In the second quarter 2004 evaluation, the Company modified certain assumptions related to lapse, mortality, interest rates, surrender rates and other factors causing an unlocking as provided under accounting guidance. As a result of unlocking assumptions, DAC as of June 30, 2004 increased by $5.9 million and net income for the second quarter 2004 increased by $3.9 million.

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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE F — SEGMENT INFORMATION

The Company offers a range of products and services, but operates as one reportable life insurance segment. The Company’s Traditional Life insurance line includes permanent life, endowment life, term life and whole life policies. The Universal Life line includes all fixed universal life products sold by the Company. The Company does not sell variable universal life products. The Fixed Annuities line includes fixed ordinary deferred annuities, tax advantaged deferred annuities, annuities in pay-out and structured settlements. Neither variable nor equity indexed annuity products are sold by the Company. The Group Life and Other line includes group life insurance and disability income products. The Corporate Account line includes investment income earned from surplus not specifically allocable to any one product type. Investment-related income is allocated based on the assumption that the fixed maturities and preferred stock portfolios support the insurance product lines and the limited partnership and remaining fixed maturity investments support the Corporate Account.

During the second quarter of 2004, the Company unlocked certain assumptions related to determination of DAC for its universal life and fixed annuities. As a result of unlocking these assumptions, DAC was increased and the amortization of DAC was decreased by $5.2 million and $0.7 million for universal life and fixed annuities for the second quarter of 2004, respectively.

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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE F — SEGMENT INFORMATION (Continued)

NOTE G — REINSURANCE

The Company has entered into various reinsurance treaties for the purpose of ceding the excess of life insurance face amounts over Company established retention limits. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company considers all of its reinsurance assets to be collectible; therefore, no allowance has been established for uncollectible amounts.

Generally, the Company’s retention limit is $300 per life for individual coverage. For its two newest products, ERIE Flagship Term2 and ERIE Target Term, the Company has first dollar quota share treaties with several unaffiliated reinsurers. The Company reinsures 50% and 90% of the ERIE Flagship Term2 and Erie Target Term products, respectively, subject to the Company’s $300 retention limit. For its disability income product, the Company has a 50% quota share agreement with its reinsurer. As of June 30, 2004 and 2003, $10.6 billion and $8.2 billion, respectively, of life insurance in force was ceded to other companies. The Company’s most significant reinsurance business is with Generali USA Reassurance Company, which reinsures a portion of the Company’s life and accident and health business. At June 30, 2004, the amount of in-force life insurance ceded to Generali totaled approximately $6.1 billion.

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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE G — REINSURANCE (Continued)

The effect of ceded reinsurance in the Statements of Operations is as follows:

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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE H — NOTES PAYABLE TO ERIE INDEMNITY COMPANY

The Company has a $15,000 surplus note payable to Erie Indemnity Company (EIC). This note bears an annual interest rate of 6.45%. Interest on the surplus note is scheduled to be paid semi-annually, subject to prior approval of the Pennsylvania Insurance Commissioner. The note is payable on demand on or after December 31, 2005, subject to prior approval by the Pennsylvania Insurance Commissioner. The Company paid interest of $0.5 million on this note during the second quarter of 2004 and 2003.

During the third quarter of 2003, the Company issued a $25,000 surplus note to EIC in exchange for $25,000 in cash. This surplus note bears an annual interest rate of 6.70% and is scheduled to be paid semi-annually, subject to prior approval of the Pennsylvania Insurance Commissioner. The surplus note is payable on demand on or after December 31, 2018, subject to prior approval by the Pennsylvania Insurance Commissioner. The Company paid interest of $0.8 million on this note during the second quarter of 2004.

NOTE I — SUPPLEMENTARY DATA ON CASH FLOWS

A reconciliation of net income to net cash provided by (used in) operating activities as presented in the Statements of Cash Flows is as follows:

NOTE J — COMMITMENTS

The Company has outstanding commitments to invest up to $3.7 million in real estate limited partnerships at June 30, 2004. These commitments will be funded as required through the end of the respective investment periods, which typically span 3 to 5 years.

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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE K — STATUTORY INFORMATION

The minimum statutory capital and surplus requirements under Pennsylvania law for stock life insurance companies (Section 386 of the Pennsylvania Insurance Company Law) amounts to $1,650. In addition, the Company is subject to certain risk based capital surplus requirements. The Company’s total statutory capital and surplus significantly exceed these minimum requirements.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL OPERATIONS

The following discussion and analysis should be read in conjunction with the historical financial information and related notes found on pages 3 through 17, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on August 20, 2004. As further described in Note B, the Company has restated its financial statements.

FINANCIAL OVERVIEW

Net income increased to $13.2 million, or $1.40 per share, in the second quarter of 2004, compared to $7.8 million, or $0.83 per share, for the second quarter of 2003. For the six months ended June 30, 2004, net income increased to $19.8 million, or $2.09 per share, compared to $13.1 million, or $1.38 per share for the same period in 2003. Increases in investment related earnings combined with the unlocking of deferred policy acquisition costs resulted in the large increase in earnings.

REVENUES

Analysis of Policy Revenue

Total net policy revenue increased to $14.6 million in the second quarter of 2004 from $14.3 million during the same period in 2003. Although total net premiums are up in 2004, sales of new traditional policies declined in the second quarter of 2004 when compared to the same period in 2003. Direct new premiums on traditional life insurance policies decreased 4.0% to $2.5 million for the quarter ended June 30, 2004, from $2.6 million for the quarter ended June 30, 2003. In 2003, management of the Erie Insurance Group enhanced its focus on property/casualty underwriting profitability. As the Company’s independent agents focus on underwriting profitability, new property and casualty production and traditional life policy production have declined. In addition, effective December 16, 2003, the Company restructured its bonus program. Changes in the bonus program may be affecting the growth in sales of life and annuity products by ERIE agencies. Total net policy revenue increased $1.2 million, or 4.3%, to $28.6 million for the six months ended June 30, 2004.

Analysis of Investment-related Income

Net investment income decreased $0.1 million to $19.8 million in the second quarter of 2004 when compared to the same period in 2003. The slight decrease in net investment income for the second quarter of 2004 compared to the same period in 2003 is due in part to lower yielding fixed income securities.

Net realized capital gains on investments were $5.6 million in the second quarter of 2004, compared to net realized capital gains of $2.1 million in the second quarter of 2003. Included in the second quarter of 2004 was a gain of $1.4 million from the maturity of a bond that had been recognized as impaired in 2002.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL OPERATIONS (Continued)

The Company’s performance of its fixed maturities and preferred stock compared to market indices is presented below:

     (1) Includes income, realized and unrealized gains and losses.

BENEFITS AND EXPENSES

Analysis of Policy-related Benefits and Expenses

Net death benefits on life insurance policies increased $0.7 million or 26.0% in the second quarter of 2004 to $3.5 million. For the six months ended June 30, 2004, net death benefits on life insurance policies increased $1.8 million, or 27.0%, to $8.4 million, from $6.6 million during the same period in 2003. Net life insurance inforce has grown from $16.9 billion at June 30, 2003 to $17.8 billion at June 30, 2004, an increase of 5.3%. In addition, random fluctuations in death benefits incurred can be expected when mortality results are measured over a short time period due to the small number of claims. These short-term fluctuations can influence quarterly or annual results without impacting long-term profitability. Management believes its underwriting philosophy and practices are sound.

Interest expense incurred on deposits increased $0.5 million, or 3.7%, to $12.9 million in the second quarter of 2004 from $12.4 million in the second quarter of 2003. This increase can be attributed to the growth of annuities on deposit. At June 30, 2004, the balance of annuity deposits totaled $962.9 million, compared to $902.1 million at June 30, 2003, an increase of 6.7%. The Company has lowered its credited interest rates during the last two years to reflect current market conditions. Interest was credited on annuity and universal life deposits in 2004 and 2003 at the following rates:

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL OPERATIONS (Continued)

Amortization of deferred policy acquisition costs (DAC) was a negative $3.6 million in the second quarter of 2004 compared to amortization of $1.7 million for the same period in 2003. In accordance with FAS 97, the Company periodically evaluates certain assumptions in use to determine DAC and related amortization related to its interest sensitive products. During the second quarter 2004, the Company modified certain assumptions concerning lapse, mortality, interest rates, surrender rates and other factors. As a result of unlocking these assumptions, DAC was increased and the amortization of DAC was decreased by $5.9 million during the second quarter of 2004.

Analysis of Other Expenses

Direct commissions to independent agents include new and renewal commissions, production bonuses and promotional incentives. These direct commission expenses are reported on the Statements of Operations net of commissions received from reinsurers. The reported expense is also affected by the amount of commission expenses capitalized as DAC. Commissions, which vary with and are related primarily to the production of new business, are deferrable as DAC. Most first-year and incentive commissions and some second-year commissions qualify for deferral as DAC. For the second quarter of 2004, net commission expense decreased $0.1 million to $1.0 million, compared to $1.1 million for the second quarter of 2003. This decrease is primarily attributable to the decline in annuity sales. Annuity premiums for the quarter ended June 30, 2004 were $15.2 million, compared to $36.1 million for the same period in 2003. Commissions and bonuses on these premiums, net of DAC, were $0.2 million and $0.7 million for the periods ended June 30, 2004 and 2003, respectively. For the six months ended June 30, 2004, commission expense decreased $0.9 million to $1.6 million, which is attributable to the reduction in annuity sales.

General expenses, net of DAC, increased $0.2 million, or 4.6%, to $4.1 million for the second quarter of 2004, compared to $3.9 million for the same period in 2003. General expenses include wages and salaries, employee benefits, data processing expenses, professional fees, occupancy expenses and other office and general administrative expenses of the Company. Certain general expenses of the Company related to the acquisition and underwriting of new policies are deferred as DAC. Such expenses include medical inspection and exam fees related to new business production, and wages, salaries and employee benefits of underwriting personnel. The increase in general expenses includes professional consulting fees related to the strengthening of controls and increases in allocated information technology costs of Company projects.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL OPERATIONS (Continued)

FINANCIAL CONDITION

Investments

The Company’s investment strategies provide that portfolios are structured to match the features of the life insurance and annuity products sold by the Company. Annuities and life insurance policies are long-term products; therefore, the Company’s investment strategy takes a long-term perspective emphasizing investment quality, diversification and superior investment returns. The Company’s investments are managed on a total return approach that focuses on current income and capital appreciation.

The Company’s invested assets are sufficiently liquid to meet commitments to its policyholders. At June 30, 2004, the Company’s investment portfolio consisting of cash, investment grade bonds and investment grade preferred stock, totaled more than $1.3 billion, or 82.6% of total assets. These resources provide the liquidity the Company requires to meet known and unforeseen demands on its funds.

The Company continually reviews the investment portfolio to evaluate positions that might incur other-than-temporary declines in value. For investment holdings, general economic conditions and/or conditions specifically affecting the underlying issuer or its industry, including downgrades by the major rating agencies, are considered in evaluating impairment in value. In addition to specific factors, other factors considered in the Company’s review of investment valuation are the length of time the market value is below cost and the amount the market value is below cost.

For fixed maturity and preferred stock investments, the Company individually analyzes all positions with emphasis on those that, in management’s opinion, have declined significantly below cost. The Company considers market conditions, industry characteristics and the fundamental operating results of the issuer to determine if declines in value are due to changes in interest rates, changes relating to a decline in credit quality, or other issues affecting the investment. Positions that have incurred significant market price declines for extended periods, in which the creditworthiness of the issuer or other factors indicate a decline that is other-than-temporary, are recognized as impaired and reflected as a charge to the Company’s operations.

If the Company’s policy for determining the recognition of impaired positions were different, the Company’s Results of Operations could be significantly impacted. Management believes its investment valuation philosophy and accounting practices result in appropriate and timely measurement of value and recognition of impairment.

The Company’s investments are subject to certain risks, including interest rate price risk and credit risk. The Company monitors exposure to interest rate risk 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 monitored regularly. The Company’s objective is to earn competitive relative returns by investing in a diverse portfolio of high-quality, liquid securities. Portfolio characteristics are analyzed regularly and market risk is actively managed through a variety of techniques. Portfolio holdings are diversified across industries, and concentrations in any one company or industry are limited by parameters established by Company management and the Board of Directors.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL OPERATIONS (Continued)

Reserve Liabilities

The Company’s primary commitment is its obligation to meet the payment of future policy benefits under the terms of its life insurance and annuity contracts. To meet these future obligations, the Company establishes life insurance reserves based upon the type of policy, the age of the insured and the number of years the policy has been in force. The Company also establishes annuity and universal life reserves based on the amount of policyholder deposits (less applicable insurance and expense charges) plus interest earned on those deposits. Life insurance and annuity reserves are supported primarily by the Company’s long-term, fixed-income investments as the underlying policy reserves are generally also of a long-term nature.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measure of the Company’s ability to secure enough cash to meet its contractual obligations and operating needs. Generally, insurance premiums are collected prior to claims and benefit disbursements and these funds are invested to provide necessary cash flows in future years. The Company’s major sources of cash from operations are life insurance premiums and investment income. Major cash outflows from operations are for benefits to policyholders and commissions to agents. The net positive cash flow from operations is used to fund Company commitments and to build the investment portfolio, thereby increasing future investment returns. Net cash provided by operating activities for the three months ended June 30, 2004 was $5.3 million. The Company’s liquidity position remains strong. Investments and cash and cash equivalents totaled $1.5 billion at June 30, 2004.

Annuity and universal life deposits, which do not appear as revenue on the Statement of Operations, are a source of funds. These deposits do not involve a mortality or morbidity risk and are accounted for using methods applicable to comparable interest-bearing obligations of other types of financial institutions. This method of accounting records deposits as a liability rather than as revenue. Annuity and universal life deposits were $24.8 million in the second quarter of 2004 and $45.5 million in the second quarter of 2003. The Company’s ability to attract deposits depends in large part on the relative attractiveness of its products compared to other investment alternatives. Annuity deposits began to slow during the second half of 2003 as the Company lowered its credited interest rates and the equity market improved.

All Company commitments are met by cash flows from policy revenue, annuity and universal life deposits and investment income. Management believes its cash flow from operations and its liquid assets and marketable securities will also enable the Company to meet any foreseeable cash requirements. Also available as a source of funds to the Company is a $10.0 million committed line of credit and letter agreement with PNC Bank, N.A. The Company may use extensions of credit from the bank to fund working capital needs of the Company and for other general corporate purposes. At June 30, 2004 and December 31, 2003, securities held as collateral on the committed line of credit totaled $14.6 million and $15.1 million, respectively. At June 30, 2004 and December 31, 2003, there were no borrowings on this line of credit.

For a complete discussion of the fixed contractual obligations see Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the amended Annual Report on Form 10-K/A for the year ended December 31, 2003 as filed with the Securities and Exchange Commission on August 20, 2004.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL OPERATIONS (Continued)

FACTORS THAT MAY AFFECT FUTURE RESULTS

Products with Interest Rate Guarantees

Several of the Company’s annuity and universal life products offer guaranteed interest rates to policyholders. In response to the current interest rate environment, the Company has reduced the credited interest rates to historically low levels. Certain products are now at the minimum interest rates guaranteed under these policy forms.

If the interest rates on fixed income securities continue to decline, the interest rates available in the marketplace may be insufficient to produce target profit margins or, in extreme situations, could produce negative profit margins on annuity and universal life deposits.

Effective July 10, 2003, the Company revised its current deferred annuity products to lower interest rate guarantees on newly issued policies to 1.5% in all policy years. This change has been approved in all states in which the Company operates.

Annuity contracts issued between February 25, 2003 and July 9, 2003 have a guaranteed interest rate of 3.0%. Contract forms issued before February 2003 have a stepped-down guaranteed interest rate structure. The guaranteed interest rates and approximate current deposit liabilities for deferred annuity products with credited interest rates subject to change by the Company are as follows:

The Company has some ability to restrict new deposits on its universal life and annuity policy contracts. New deposits can be limited under the terms of the Company’s universal life and annuity contracts as follows:

	•		Universal life products provide for planned premium amounts. Additional unplanned premium payments may be made at any time during the insured’s lifetime and before the end of the payment period. The amounts of such payments must be acceptable to the Company and be within IRS guidelines. Policies in force at June 30, 2004 have an annualized planned premium of $30.4 million.
	•		Flexible premium deferred annuity (FPDA) contracts allow the Company to limit deposits to a maximum of $25,000 per year. The Company began limiting deposits to the contractual maximum effective July 10, 2003 on products with interest rate guarantees exceeding 3.0% to insure that overall product interest spreads are maintained. Currently, there are 23,833 FPDA contracts in force, of which 20,206 have guarantees in excess of 3.0%. No additional payments are permitted on single premium deferred annuity contracts.

During the second quarter of 2004, the average rate credited on flexible premium deferred annuity and universal life account values was 4.1% and 4.6%, respectively. The current coupon yield on fixed maturities matched against universal life and annuity products at June 30, 2004, is 5.9%.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL OPERATIONS (Continued)

Market Conditions for Competing Products

The Company’s deposit-type products compete with a wide variety of investment options. Among other factors affecting the investment decisions of policyholders and potential policyholders are general investment market conditions, particularly the market interest rate environment and the performance of the equity markets. Changes in interest rates affect pricing and the relative attractiveness of interest-sensitive investment options, which bears directly on the ability of the Company to attract new policyholders and retain existing holders of annuity, universal life and certain permanent life insurance products.

Financial Ratings

The combination of Company growth and declines in investment returns exposes the Company to reduced statutory surplus levels. Surplus levels are an important element of the rating process used by such agencies as A.M. Best and Standard & Poor’s, which are industry-accepted measures of an insurance company’s financial health and ability to meet ongoing obligations to policyholders. These ratings are a factor in establishing the competitive position of insurance companies.

If the Company were to incur reductions in statutory surplus for an extended period of time, the ratings of the Company may be downgraded. Future downgrades in these or other ratings would reduce the competitive position of the Company by making it more difficult to attract business in the highly competitive life insurance industry. In such circumstances, the Company may need to take measures to increase surplus levels in order to maintain adequate ratings. The Company may increase surplus through a variety of means, including the issuance of additional surplus notes.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL OPERATIONS (Continued)

Introduction of ERIEConnection®

In 2001, the Erie Insurance Group, including the Company, began the development of several eCommerce initiatives in support of the Group’s business model of distributing insurance products exclusively through independent agents. These initiatives include customer interaction systems that are intended to improve service and efficiency, as well as result in increased sales.

The implementation of the new system will require a significant investment in training and orientation for the independent agency force. During implementation, as agency resources are dedicated to learning the new system, sales of new business could be adversely affected over the short term. The amount of lost sales will correlate to the timing and duration of the systems rollout effort as well as the number and types of system issues encountered. Precise measurement of the impact on sales is not estimable.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s exposure to market risk is primarily related to fluctuations in prices and interest rates. Quantitative and qualitative disclosures about market risk resulting from changes in prices and interest rates are included in Item 7A in the Company’s 2003 Annual Report on Form 10-K/A. The risks associated with interest rate guarantees on the Company’s universal life and annuity products are discussed in the Company’s Annual Report on Form 10-K/A for 2003 in Factors That May Affect Future Results. The information contained in the Investments section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2003 Annual Report on Form 10-K/A is incorporated herein by reference.

The Company also has exposure to credit risk through its portfolios of fixed maturity securities, preferred stock, mortgage loans, and to a lesser extent, short-term investments. This risk is defined as the potential loss in market value resulting from adverse changes in the borrower’s ability to repay the debt. The Company’s objective is to earn competitive returns by investing in a diversified portfolio of securities. The Company manages this risk by performing up front underwriting analysis and regular reviews by its investment staff. The fixed maturity investments are also maintained between minimum and maximum percentages of invested assets.

“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995: Certain forward-looking statements contained herein involve risks and uncertainties. These statements include certain discussions relating to underwriting, premium and investment income volume, business strategies, profitability and business relationships and the Company’s other business activities during 2004 and beyond. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions. These forward-looking statements reflect the Company’s current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that may cause results to differ materially from those anticipated in those statements. Many of the factors that will determine future events or achievements are beyond our ability to control or predict.

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ITEM 4. CONTROLS AND PROCEDURES

In its Form 10-K Annual Report for 2003 as originally filed with the Securities and Exchange Commission (the “SEC”) on March 8, 2004, as amended on April 1, 2004 (the “Original Filing”), the Company reported a weakness in internal control over the processes used to determine the recorded amount of deferred acquisition costs (“DAC”) and related DAC amortization. The Company’s independent auditors, Ernst & Young, LLP, in conjunction with their audit of the Company’s 2003 financial statements, characterized this weakness as a material weakness, as defined in Statement on Auditing Standards No. 60. The material weakness was communicated to the Company’s management and the Audit Committee of the Board of Directors.

As reported in the Original Filing, management developed a plan in collaboration with the Audit Committee of the Board to correct this weakness in internal control during 2004. The plan entails evaluation of DAC accounting issues, implementation of improved procedures and controls over periodic DAC computations and balances, ongoing evaluation of underlying assumptions, monitoring of DAC trends and ratios and the installation of improved valuation systems. The plan has been reviewed with, and progress is being monitored by, the Audit Committee of the Board and Company management, including the Chief Executive Officer and the Chief Financial Officer.

Subsequent to the Original Filing and pursuant to the plan, the Company completed its evaluation of DAC accounting issues and identified adjustments to its previously issued financial statements that required restatement (the “Restatement”). For additional discussion of the Restatement, see the Company’s Form 10-K/A filed August 20, 2004.

The Company has made substantive progress in correcting the material weakness through the date of the filing of this Form 10-Q. An independent consulting actuary engaged by the Company is providing oversight over the team of internal actuarial and accounting personnel implementing the plan, and providing direction and guidance in evaluating past practices and in implementing procedures and controls regarding actuarial functions.

The Company has effected certain improvements to its DAC accounting procedures. For example, actuarial and financial personnel have developed management reports to enable management to better monitor DAC trends and ratios which increase transparency in understanding the periodic results of operations. The Company has also purchased a new valuation system. Installation of this new system began in the second quarter of 2004 and is expected to extend through year-end.

As of the end of the period covered by this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, pursuant to Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. In making the evaluation described above, the Company considered matters relating to the Restatement including the above described control weakness.

Based on management’s evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, except for the material weakness described above, the Company’s disclosure controls and procedures are effective for gathering, analyzing and disclosing the information the Company is required to disclose in the reports it files under the Exchange Act within the time periods specified in the SEC’s rules and forms. Other than the improvements made to the Company’s processes and controls over accounting for DAC, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of management’s evaluation.

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PART II. OTHER INFORMATION

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

On April 27, 2004, the Registrant held its Annual Meeting of Shareholders:

The following directors were elected for a one-year term and until a successor is elected and qualified:

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibits

Reports on Form 8-K

On May 27, 2004, the Company filed a report on Form 8-K reporting under Item 5, the resignation, effective immediately, of Samuel P. Katz, President, Wynnefield Capital Advisors, Inc. from the Company’s Board of Directors for personal reasons. The Nominating and Governance Committee has initiated the process to determine whether to fill the vacated position prior to the 2005 Annual Shareholders’ Meeting or reduce the number of directors from 15 to 14.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.