EXHIBIT  13(D)


     HARLEYSVILLE  GROUP
     CONSOLIDATED  BALANCE  SHEETS
     (in  thousands,  except  share  data)
<TABLE>
<CAPTION>




                                              DECEMBER 31,
                                       ------------------------
                                         2002            2001
                                       ---------       ---------
ASSETS
---------
<S>                                     <C>            <C>
Investments:
  Fixed maturities:
    Held to maturity, at amortized
      cost (fair value $411,235
      and $459,588)                     $  379,940     $  439,499
    Available for sale, at fair value
      (cost $932,889 and $956,047)         995,032        984,264
  Equity securities, at fair value
    (cost $96,849 and $110,803)            107,177        150,686
  Short-term investments, at cost,
    which approximates fair value           89,692         36,695
  Fixed maturity securities on loan:
    Held to maturity, at amortized
      cost (fair value $5,707)               5,222
    Available for sale, at fair value
      (amortized cost $118,991)            129,837
                                        ----------     ----------
      Total investments                  1,706,900      1,611,144
Cash                                         2,944          1,839
Receivables:
  Premiums                                 138,905        122,508
  Reinsurance                               75,488         81,640
  Accrued investment income                 21,552         21,862
                                        ----------     ----------
      Total receivables                    235,945        226,010
Deferred policy acquisition costs           94,896         86,076
Prepaid reinsurance premiums                19,421         20,096
Property and equipment, net                 27,556         28,873
Deferred income taxes                       25,784         29,435
Security lending collateral                139,215
Due from affiliate                          10,709
Other assets                                48,154         41,817
                                        ----------     ----------
      Total assets                      $2,311,524     $2,045,290
                                        ==========     ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
  Unpaid losses and loss
    settlement expenses                 $  928,335     $  879,056
  Unearned premiums                        406,277        373,737
  Accounts payable and accrued
    expenses                               109,965         96,440
  Security lending obligation              139,215
  Debt                                      95,620         96,055
  Due to affiliate                                          9,704
                                        ----------     ----------
      Total liabilities                  1,679,412      1,454,992
                                        ----------     ----------
Shareholders' equity:
  Preferred stock, $1 par value,
    authorized 1,000,000 shares;
    none issued
  Common stock, $1 par value,
    authorized 80,000,000 shares;
    issued 2002, 30,917,575 and
    2001, 30,444,678 shares;
    outstanding 2002, 29,917,575
    and 2001, 29,444,678 shares             30,918         30,445
  Additional paid-in capital               149,091        140,065
  Accumulated other comprehensive
    income                                  49,086         44,265
  Retained earnings                        418,582        391,088
  Treasury stock, at cost,
    1,000,000 shares                       (15,565)       (15,565)
                                        ----------     ----------
      Total shareholders' equity           632,112        590,298
                                        ----------     ----------
      Total liabilities and
       shareholders' equity             $2,311,524     $2,045,290
                                        ==========     ==========
</TABLE>


See  accompanying  notes  to  consolidated  financial  statements.

Page  31

<PAGE>

     HARLEYSVILLE  GROUP
     CONSOLIDATED  STATEMENTS  OF  INCOME
     (in  thousands,  except  per  share  data)
<TABLE>
<CAPTION>



                                             YEAR ENDED DECEMBER 31,
                                       -----------------------------------
                                          2002         2001        2000
                                        --------     --------     --------
<S>                                     <C>          <C>          <C>
Revenues:
  Premiums earned                       $764,636     $729,889     $688,330
  Investment income, net
    of investment expense                 86,265       85,518       86,791
  Realized investment gains (losses)     (18,448)      (3,071)       9,780
  Other income                            15,283       15,415       17,670
                                        --------     --------     --------

      Total revenues                     847,736      827,751      802,571
                                        --------     --------     --------
Expenses:
  Losses and loss settlement
    expenses                             521,617      519,822      492,801
  Amortization of deferred
    policy acquisition costs             185,547      180,283      177,217
  Other underwriting expenses             74,105       64,267       60,916
  Interest expense                         5,698        6,207        6,612
  Other expenses                           4,287        5,372        7,320
                                        --------     --------     --------
      Total expenses                     791,254      775,951      744,866
                                        --------     --------     --------

      Income before income taxes          56,482       51,800       57,705

Income taxes                              10,227        8,307        9,013
                                        --------     --------     --------

      Net income                        $ 46,255     $ 43,493     $ 48,692
                                        ========     ========     ========
Per common share:

  Basic earnings                        $   1.56     $   1.49     $   1.69
                                        ========     ========     ========

  Diluted earnings                      $   1.53     $   1.46     $   1.67
                                        ========     ========     ========

  Cash dividends                        $    .63     $    .58     $    .55
                                        ========     ========     ========
</TABLE>

See  accompanying  notes  to  consolidated  financial  statements.

Page  32

<PAGE>


<TABLE>
<CAPTION>



     HARLEYSVILLE GROUP
     CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
     FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
     (dollars in thousands)

                                                ACCUMULATED
                                    ADDITIONAL  OTHER
                  COMMON STOCK      PAID-IN     COMPREHENSIVE    RETAINED   TREASURY
               SHARES      AMOUNT   CAPITAL     INCOME (LOSS)    EARNINGS   STOCK     TOTAL
               ----------  -------  ---------   -------------    --------   --------  --------

Balance at
<S>            <C>         <C>       <C>        <C>             <C>        <C>         <C>
December 31,
 1999          29,498,651  $29,499   $124,798   $ 51,682        $331,769   $ (10,854)  $526,894
Net income                                                        48,692                 48,692
Other compre-
  hensive
  income,
  net of tax:
   Unrealized
   investment
   gains,
   net of
   reclassify-
   cation
   adjustment                                      4,328                                 4,328
                                                                                      --------
Comprehensive
  income                                                                                53,020
                                                                                      --------
Issuance of
  common stock:
   Incentive
   plans          466,068      466      5,279                                            5,745
   Dividend
    Reinvestment
    Plan           37,133       37        637                                              674
Tax benefit from
  stock options
  exercised                               823                                              823
Cash dividends
  paid                                                           (15,864)              (15,864)
Purchase of
  treasury
   stock,
   313,435 shares                                                            (4,711)    (4,711)
               ----------  -------   --------   --------        --------   --------   --------
Balance at
  December 31,
 2000          30,001,852   30,002    131,537     56,010         364,597    (15,565)   566,581
Net income                                                        43,493                43,493
Other compre-
  hensive income,
  net of tax:
   Unrealized
   investment
   losses,
   net of
   reclassify-
   cation
   adjustment                                    (11,745)                              (11,745)
                                                                                      --------
Comprehensive
  income                                                                                31,748
                                                                                      --------
Issuance of
  common stock:
   Incentive
   plans          413,528      414      6,708                                            7,122
   Dividend
    Reinvestment
    Plan           29,298       29        656                                              685
Tax benefit
  from stock
  options
  exercised                             1,164                                            1,164
Cash
  dividends
  paid                                                           (17,002)              (17,002)
               ----------  -------   --------   --------        --------   --------   --------
Balance at
  December 31,
2001           30,444,678   30,445    140,065     44,265         391,088    (15,565)   590,298


</TABLE>


(Continued)

Page  33


<TABLE>
<CAPTION>



     HARLEYSVILLE GROUP
     CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
     (Continued)
     FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
     (dollars in thousands)

                                                ACCUMULATED
                                    ADDITIONAL  OTHER
                  COMMON STOCK      PAID-IN     COMPREHENSIVE    RETAINED   TREASURY
               SHARES      AMOUNT   CAPITAL     INCOME (LOSS)    EARNINGS   STOCK     TOTAL
               ----------  -------  ---------   -------------    --------   --------  --------

Balance at
<S>            <C>         <C>       <C>        <C>             <C>        <C>        <C>
Net  income                $         $          $               $ 46,255   $          $ 46,255
Other  compre-
  hensive
   income,
   net  of  tax:
  Unrealized
   investment
   gains,  net  of
   reclassifi-
   cation
   adjustment                                     9,891                                  9,891
  Minimum
   pension
   liability
   adjustment                                    (5,070)                                (5,070)
                                                                                       --------
Other  compre-
  hensive  income                                                                         4,821
                                                                                       --------
Comprehensive
  income                                                                                 51,076
                                                                                       --------
Issuance of
  common stock:
   Incentive
    plans         446,982      447     6,920                                              7,367
   Dividend
    Reinvestment
    Plan           25,915       26       658                                                684
Tax  benefit
  from  stock
  options
  exercised                            1,448                                              1,448
Cash
  dividends
  paid                                                           (18,761)               (18,761)
               ----------  -------   --------   --------        --------   --------   --------
Balance  at
 December  31,
 2002          30,917,575  $30,918   $149,091   $ 49,086        $418,582   $(15,565)  $632,112
               ==========  =======   ========   ========        ========   ========   ========

</TABLE>

See  accompanying  notes  to  consolidated  financial  statements.

Page  34

<PAGE>


<TABLE>
<CAPTION>



     HARLEYSVILLE GROUP
     CONSOLIDATED STATEMENTS OF CASH FLOWS
     (in thousands)

                                                 YEAR ENDED DECEMBER 31,
                                            --------------------------------
                                               2002         2001         2000
                                            ----------   ----------   ----------
<S>                                         <C>          <C>          <C>
Cash flows from operating activities:
  Net income                                $  46,255    $  43,493    $  48,692
  Adjustments to reconcile net
    income to net cash provided
    (used) by operating activities:
       Change in receivables, unearned
         premiums, prepaid reinsurance
         and due to affiliate                   2,867      (16,621)      (2,475)
       Increase (decrease) in unpaid
         losses and loss settlement
         expenses                              49,279       14,213      (36,509)
       Deferred income taxes                    1,055       (3,425)      (1,397)
       Increase in deferred policy
         acquisition costs                     (8,820)      (1,317)      (1,218)
       Amortization and depreciation            3,116        2,854        3,215
       Realized investment (gains)
         losses                                18,448        3,071       (9,780)
       Other, net                                 967        3,520       (3,710)
                                            ---------    ---------     ---------
         Net cash provided (used)
           by operating activities            113,167       45,788       (3,182)
                                            ---------    ---------     ---------
Cash flows from investing activities:
  Held to maturity investments:
    Purchases                                  (1,038)                    (3,895)
    Maturities                                 55,547       42,329        37,725
  Available for sale investments:
    Purchases                                (260,262)    (303,610)     (142,691)
    Maturities                                 56,950       75,662        58,240
    Sales                                     103,322      165,796        37,070
  Net (purchases) sales or maturities
    of short-term investments                 (52,997)     (12,814)       35,342
  Purchases of property and
    equipment                                  (2,439)      (3,724)      (3,612)
                                            ---------    ---------    ---------
         Net cash provided (used)
           by investing activities           (100,917)     (36,361)      18,179
                                            ---------    ---------    ---------
Cash flows from financing activities:
  Issuance of common stock                      8,051        7,807        6,419
  Repayment of debt                              (435)        (395)        (360)
  Dividends paid                              (18,761)     (17,002)     (15,864)
  Purchase of treasury stock                                             (4,711)
                                            ---------    ---------    ---------
         Net cash used by financing
           activities                         (11,145)      (9,590)     (14,516)
                                            ---------    ---------    ---------

Increase (decrease) in cash                     1,105         (163)         481

  Cash at beginning of year                     1,839        2,002        1,521
                                           ---------     ---------    ---------

  Cash at end of year                      $   2,944     $   1,839    $   2,002
                                           =========     =========    =========
</TABLE>

See  accompanying  notes  to  consolidated  financial  statements.

Page  35

<PAGE>



     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS

 1  -     DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     DESCRIPTION  OF  BUSINESS

     Harleysville Group consists of Harleysville Group Inc. and its subsidiaries
(all  wholly  owned).   Those  subsidiaries  are:
     -     Harleysville-Atlantic  Insurance  Company  (Atlantic)
     -     Harleysville  Insurance  Company  (HIC)
     -     Harleysville  Insurance  Company  of  New  Jersey  (HNJ)
     -     Harleysville  Insurance  Company  of  New  York  (HIC  New  York)
     -     Harleysville  Insurance  Company  of  Ohio  (HIC  Ohio)
     -     Harleysville  Lake  States  Insurance  Company  (Lake  States)
     -     Harleysville  Preferred  Insurance  Company  (Preferred)
     -     Harleysville  Worcester  Insurance  Company  (Worcester)
     -     Mid-America  Insurance  Company  (Mid-America)
     -     Harleysville  Ltd.,  a  real  estate  partnership  that owns the home
office

     Harleysville  Group  is  approximately  56%  owned  by  Harleysville Mutual
Insurance  Company  (Mutual).

     Harleysville  Group underwrites property and casualty insurance in both the
personal  and  commercial  lines  of  insurance. The personal lines of insurance
include  both  auto  and  homeowners,  and  the  commercial  lines include auto,
commercial  multi-peril  and  workers  compensation.  The  business  is marketed
primarily  in  the  eastern  and  midwestern  United  States through independent
agents.

     PRINCIPLES  OF  CONSOLIDATION  AND  BASIS  OF  PRESENTATION

     The  accompanying financial statements include the accounts of Harleysville
Group  prepared  in  conformity with accounting principles generally accepted in
the  United States of America, which differ in some respects from those followed
in  reports  to  insurance regulatory authorities.  All significant intercompany
balances  and  transactions  have  been  eliminated  in  consolidation.

     The  preparation  of  financial  statements  in  conformity with accounting
principles  generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the reported amounts of
assets  and  liabilities,  including  loss  and  loss  settlement  expenses, the
disclosure  of  contingent  assets  and liabilities at the date of the financial
statements,  and  the  reported  amounts of revenues and expenses, including the
determination  of  other-than-temporary  declines  in  investments,  during  the
reporting  period.  Actual  results  could  differ  from  these  estimates.

Page  36

<PAGE>


     HARLEYSVILLE GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 1  -     DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

     INVESTMENTS

     Accounting  for fixed maturities depends on their classification as held to
maturity,  available for sale or trading. Fixed maturities classified as held to
maturity  are  carried  at  amortized  cost.  Fixed  maturities  classified  as
available  for  sale  are  carried  at  fair  value.  There  were no investments
classified  as trading.  Equity securities are carried at fair value. Short-term
investments  are  recorded  at  cost,  which  approximates  fair  value.

     Realized  gains  and  losses  on sales of investments are recognized in net
income  on the specific identification basis.  A decline in the fair value of an
investment  below  its  cost  that  is deemed other than temporary is charged to
earnings.  Unrealized  investment gains or losses on investments carried at fair
value,  net  of applicable income taxes, are reflected directly in shareholders'
equity  as  a component of comprehensive income and, accordingly, have no effect
on  net  income.

     PREMIUMS

     Premiums are recognized as revenue ratably over the terms of the respective
policies.  Unearned  premiums  are  calculated  on  a  pro  rata  basis.

     POLICY  ACQUISITION  COSTS

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

Page  37

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 1  -     DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

     LOSSES  AND  LOSS  SETTLEMENT  EXPENSES

     The  liability for losses and loss settlement expenses represents estimates
of  the  ultimate  unpaid  cost of all losses incurred, which includes the gross
liabilities  to  Harleysville  Group's  policyholders  plus the net liability to
Mutual  under the pooling agreement.  See Note 2(a).  Such estimates may be more
or  less  than  the  amounts  ultimately paid when the claims are settled. These
estimates  are periodically reviewed and adjusted as necessary; such adjustments
are  reflected  in  current  operations.

     STOCK-BASED  COMPENSATION

     Stock-based  compensation  plans  are accounted for under the provisions of
Accounting  Principles  Board (APB) Opinion No. 25, "Accounting for Stock Issued
to  Employees,"  and  related  interpretations.  Accordingly,  no  compensation
expense  is  recognized  for  fixed  stock  option  grants and an employee stock
purchase  plan.  Compensation  expense  would be recorded on the date of a stock
option  grant  only if the current market price of the underlying stock exceeded
the exercise price. The following table illustrates the effect on net income and
earnings  per  share  as  if the provisions of Statement of Financial Accounting
Standards  (SFAS)  No.  123  (as  amended  by  SFAS  No.  148),  "Accounting for
Stock-Based  Compensation,"  had  been  applied  to  all  periods  presented.

<TABLE>
<CAPTION>



                                          2002        2001       2000
                                        --------    --------    --------
                                     (in thousands, except per share data)
<S>                                     <C>         <C>         <C>
  Net income, as reported               $46,255     $43,493     $48,692
  Plus:  Stock-based employee
    compensation expense included
    in reported net income, net
    of related tax effects                2,631         687       1,258
  Less:  Total stock-based
   employee compensation expense
   determined under fair value
   based method for all awards,
   net of related tax effects            (5,212)     (3,185)    (3,103)
                                        -------     -------     -------
  Pro forma net income                  $43,674     $40,995     $46,847
                                        =======     =======     =======

  Basic earnings
   per share:
    As reported                         $  1.56     $  1.49     $  1.69
    Pro forma                           $  1.47     $  1.40     $  1.62

  Diluted earnings
   per share:
    As reported                         $  1.53     $  1.46     $  1.67
    Pro forma                           $  1.44     $  1.38     $  1.61

</TABLE>

Page  38

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

     PROPERTY  AND  EQUIPMENT

     Property  and  equipment are carried at cost less accumulated depreciation.
Depreciation  is  calculated  primarily  on  the  straight-line  basis  over the
estimated  useful  lives  of  the assets (40 years for buildings and three to 15
years  for  equipment).

     INCOME  TAXES

     Deferred  income  tax  assets and liabilities are recognized for the future
tax  consequences  attributable  to  differences between the financial statement
carrying  amounts  of  existing  assets and liabilities and their respective tax
bases.

     EARNINGS  PER  SHARE

     Basic  earnings  per  share  is  computed  by  dividing  earnings  by  the
weighted-average  number  of common shares outstanding during the year.  Diluted
earnings  per  share  includes  the dilutive effect of the stock incentive plans
described  in  Note  12.

 2  -  TRANSACTIONS  WITH  AFFILIATES

     (A)  UNDERWRITING

     The  insurance  subsidiaries participate in a reinsurance pooling agreement
with  Mutual  whereby  such  subsidiaries  cede to Mutual all of their insurance
business  and  assume  from Mutual an amount equal to their participation in the
pooling  agreement.  All  losses  and  loss  settlement  expenses  and  other
underwriting  expenses  are  prorated  among  the  parties  on  the  basis  of
participation in the pooling agreement.  The agreement pertains to all insurance
business  written  or  earned on or after January 1, 1986.  Harleysville Group's
participation  was  72%  for  2002,  2001  and  2000.

     Because  this  agreement  does  not  relieve  Harleysville Group of primary
liability  as  the  originating insurer, there is a concentration of credit risk
arising  from  business  ceded  to  Mutual.  However,  the  reinsurance  pooling
agreement  provides  for  the  right of offset, and the net pooling balance with
Mutual  is not material at December 31, 2002 and 2001.  Mutual has an A. M. Best
rating  of  "A"  (Excellent).

Page  39

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 2  -  TRANSACTIONS  WITH  AFFILIATES  (CONTINUED)

     (A)  UNDERWRITING  (CONTINUED)

     The  following  amounts  represent  reinsurance  transactions  between
Harleysville  Group  and  Mutual  under  the  pooling  arrangement:

<TABLE>
<CAPTION>



                             2002        2001       2000
                           --------    --------    --------
                                   (in thousands)
Ceded:
<S>                        <C>         <C>         <C>
  Premiums written         $689,597    $649,974    $606,766
                           ========    ========    ========
  Premiums earned          $664,576    $633,298    $603,650
                           ========    ========    ========
  Losses incurred          $451,105    $459,906    $440,973
                           ========    ========    ========

Assumed:
  Premiums written         $805,641    $754,621    $708,289
                           ========    ========    ========
  Premiums earned          $772,426    $736,924    $695,147
                           ========    ========    ========
  Losses incurred          $521,948    $527,773    $497,198
                           ========    ========    ========

Net assumed from Mutual:
  Unearned premiums        $ 54,035    $ 45,841    $ 44,820
                           ========    ========    ========
  Unpaid losses and loss
    settlement expenses    $166,188    $155,301    $145,578
                           ========    ========    ========
</TABLE>


     Harleysville  Group  and  Mutual  are  parties  to  a reinsurance agreement
whereby  Mutual,  in  return  for  a  reinsurance premium, reinsured accumulated
catastrophe  losses in a quarter up to $14,400,000 for 2002, 2001 and 2000. This
reinsurance  coverage  was in excess of a retention of $3,600,000 for 2002, 2001
and  2000. The agreement excludes catastrophe losses resulting from earthquakes,
terrorism  or  hurricanes  and  supplements  the  existing  external catastrophe
reinsurance  program.  Under  this agreement, Harleysville Group ceded to Mutual
premiums earned of $7,791,000, $7,035,000 and $6,817,000, and losses incurred of
$334,000,  $7,951,000  and  $4,397,000  for  2002,  2001 and 2000, respectively.

     (B)  PROPERTY

     Harleysville  Ltd.  leases  the  home  office  to  Mutual, which shares the
facility with Harleysville Group.  Rental income under the lease was $3,531,000,
$3,512,000 and $3,421,000 for 2002, 2001 and 2000, respectively, and is included
in  other  income  after  elimination  of  intercompany  amounts  of $2,161,000,
$2,149,000  and  $2,094,000  in  2002,  2001  and  2000,  respectively.

Page  40

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 2  -  TRANSACTIONS  WITH  AFFILIATES  (CONTINUED)

     (C)  MANAGEMENT  AGREEMENTS

     Harleysville  Group  Inc. received $6,808,000, $7,316,000 and $7,425,000 of
management  fee  income  in  2002, 2001 and 2000, respectively, under agreements
whereby Harleysville Group Inc. provides management services to Mutual and other
affiliates.  Such  amounts  are  included  in  other  income.


     (D)  INTERCOMPANY  BALANCES

     Intercompany  balances  are  created primarily from the pooling arrangement
(settled  quarterly),  allocation  of  common  expenses,  collection  of premium
balances  and  payment  of  claims (settled monthly).  No interest is charged or
received  on intercompany balances due to the timely settlement terms and nature
of  the items.  Interest expense on the loan from Mutual described in Note 8 was
$483,000,  $936,000  and  $1,302,000  in  2002,  2001  and  2000,  respectively.

     Harleysville  Group  has  off-balance-sheet  credit  risk  related  to
approximately $68,000,000 and $64,000,000 of premium balances due to Mutual from
agents  and  insureds  at  December  31,  2002  and  2001,  respectively.

Page  41

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 3  -  INVESTMENTS

     The  amortized  cost  and  estimated  fair  value of investments, including
amounts  on  loan  under the securities lending agreement, in fixed maturity and
equity  securities  are  as  follows:
<TABLE>
<CAPTION>



                                             DECEMBER 31, 2002
                             -------------------------------------------------
                                        GROSS        GROSS         ESTIMATED
                           AMORTIZED    UNREALIZED   UNREALIZED    FAIR
                           COST         GAINS        LOSSES        VALUE
                           ---------    ----------   ----------    -----------
                                             (in thousands)
<S>                        <C>           <C>         <C>           <C>
Held to maturity:
 U.S. Treasury securities
  and obligations of
  U.S. government corpora-
  tions and agencies       $    5,324    $    354    $             $    5,678

 Obligations of states
  and political
  subdivisions                228,438      16,878                     245,316

 Corporate securities         151,400      14,554         (6)         165,948
                           ----------    --------    -------       ----------

Total held to maturity        385,162      31,786         (6)         416,942
                           ----------    --------    -------       ----------

Available for sale:
 U.S. Treasury securities
  and obligations of
  U.S. government corpora-
  tions and agencies           62,965       7,189        (33)          70,121

 Obligations of states
  and political
  subdivisions                446,115      29,261       (256)         475,120

 Corporate securities         328,347      26,932     (4,018)         351,261

 Mortgage-backed
  securities                  214,453      14,063       (149)         228,367
                           ----------    --------    -------       ----------

Total available for sale    1,051,880      77,445     (4,456)       1,124,869
                           ----------    --------    -------       ----------

Total fixed maturities     $1,437,042    $109,231    $(4,462)      $1,541,811
                           ==========    ========    =======       ==========

Total equity securities    $   96,849    $ 20,199    $(9,871)      $  107,177
                           ==========    ========    =======       ==========
</TABLE>


Page  42

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 3  -  INVESTMENTS  (CONTINUED)

<TABLE>
<CAPTION>



                                            DECEMBER 31, 2001
                             ------------------------------------------------
                                          GROSS         GROSS         ESTIMATED
                           AMORTIZED      UNREALIZED    UNREALIZED    FAIR
                           COST           GAINS         LOSSES        VALUE
                           ----------     ----------    ----------    -----------
                                              (in thousands)
<S>                         <C>           <C>           <C>           <C>
Held to maturity:
 U.S. Treasury securities
  and obligations of
  U.S. government corpora-
  tions and agencies        $    6,407    $   320       $   (48)      $    6,679

 Obligations of states
  and political
  subdivisions                 257,833     11,153           (19)         268,967

 Corporate securities          175,259      8,826          (143)         183,942
                            ----------    -------       -------       ----------


Total held to maturity         439,499     20,299          (210)         459,588
                            ----------    -------       -------       ----------

Available for sale:
 U.S. Treasury securities
  and obligations of
  U.S. government corpora-
  tions and agencies            63,546      3,256          (156)          66,646

 Obligations of states
  and political
  subdivisions                 353,826     12,540          (794)         365,572

 Corporate securities          374,232     12,751        (3,106)         383,877

 Mortgage-backed
  securities                   164,443      5,121        (1,395)         168,169
                            ----------    -------       -------       ----------

Total available for sale       956,047     33,668        (5,451)         984,264
                            ==========    =======       =======       ==========
Total fixed maturities      $1,395,546    $53,967       $(5,661)      $1,443,852
                            ==========    =======       =======       ==========

Total equity securities     $  110,803    $47,968       $(8,085)      $  150,686
                            ==========    =======       =======       ==========
</TABLE>



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

Page  43

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 3  -  INVESTMENTS  (CONTINUED)

<TABLE>
<CAPTION>


                                            ESTIMATED
                             AMORTIZED      FAIR
                             COST           VALUE
                             ----------     ------------
                                   (in thousands)
Held to maturity:
<S>                          <C>            <C>
  Due in one year or less    $   56,446     $     57,432

  Due after one year
   through five years           189,633          205,841

  Due after five years
   through ten years            128,086          141,707

  Due after ten years            10,997           11,962
                             ----------       ----------
                                385,162          416,942
                             ----------       ----------

Available for sale:

  Due in one year or less        66,963           68,243

  Due after one year
   through five years           227,052          245,800

  Due after five years
   through ten years            442,297          473,614

  Due after ten years           101,115          108,845
                             ----------       ----------


                                837,427          896,502
  Mortgage-backed
   securities                   214,453          228,367
                             ----------       ----------
                              1,051,880        1,124,869
                             ----------       ----------
Total fixed maturities       $1,437,042       $1,541,811
                             ==========       ==========
</TABLE>

     The  amortized  cost of fixed maturities on deposit with various regulatory
authorities  at  December  31,  2002  and  2001  amounted  to  $25,555,000  and
$25,261,000,  respectively.

Page  44

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 3  -  INVESTMENTS  (CONTINUED)

     A  summary  of  net  investment  income  is  as  follows:

<TABLE>
<CAPTION>



                                   2002       2001       2000
                                 -------    --------   --------
                                       (in thousands)
<S>                              <C>        <C>        <C>
Interest on fixed maturities     $84,438    $83,191    $83,958
Dividends on equity securities     1,787      1,768      2,007
Interest on short-term
  investments                      1,078      1,712      1,846
                                 -------    -------    -------

Total investment income           87,303     86,671     87,811

Investment expense                 1,038      1,153      1,020
                                 -------    -------    -------
Net investment income            $86,265    $85,518    $86,791
                                 =======    =======    =======
</TABLE>

     Realized gross gains (losses) from investments and the change in difference
between  fair value and cost of investments, before applicable income taxes, are
as  follows:

<TABLE>
<CAPTION>



                                  2002       2001        2000
                               ---------   ---------    ---------
                                        (in thousands)
Fixed maturity securities:
Held to maturity:
<S>                            <C>         <C>         <C>
    Gross gains                $    410    $    183    $    48
    Gross losses                   (226)         (1)      (988)

  Available for sale:
    Gross gains                   2,944       5,717          52
    Gross losses                 (2,470)     (1,394)       (916)

Equity securities:
  Gross gains                     9,479      11,217      15,898
  Gross losses                  (28,585)    (18,793)     (4,314)
                               --------    --------    --------
Net realized investment
  gains (losses)               $(18,448)   $ (3,071)   $  9,780
                               ========    ========    ========

Change in difference between
 fair value and cost of
 investments(1):
  Fixed maturity securities    $ 56,463    $ 14,310    $ 46,321
  Equity securities             (29,555)    (28,350)    (23,739)
                               --------    --------    --------

Total                          $ 26,908    $(14,040)   $ 22,582
                               ========    ========    ========
</TABLE>


(1)  Parentheses  indicate  a  net  unrealized  decline  in  fair  value.

Page  45

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 3  -  INVESTMENTS  (CONTINUED)

     Income  taxes  (benefit)  on  realized  investment  gains  (losses)  were
$(6,441,000), $(1,075,000) and $3,423,000 for 2002, 2001 and 2000, respectively.

     Deferred  income  taxes  applicable  to  net  unrealized  investment  gains
included  in  shareholders'  equity were $29,161,000 and $23,835,000 at December
31,  2002  and  2001,  respectively.

     At  December  31,  2002,  Harleysville  Group  held  cash  collateral  of
$139,215,000  related to securities on loan with a market value of $135,544,000.
Harleysville  Group's  policy  is  to  require initial collateral of 102% of the
market value of loaned securities plus accrued interest, which is required to be
maintained  daily by the borrower at no less than 100% of such market value plus
accrued  interest over the life of the loan. Acceptable collateral includes cash
and  money  market  instruments,  government  securities,  "A"  rated  corporate
obligations,  "AAA" rated asset-backed securities or GICs and Funding Agreements
from  issuers  rated  "A"  or  better.

     Under  provisions  of  SFAS No. 133, "Accounting for Derivative Instruments
and  Hedging  Activities,"  and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of SFAS No. 133," fixed
maturity  investments  classified  as held to maturity with an amortized cost of
$81,021,000 and unrealized gains of $1,547,000 were transferred to the available
for  sale  classification  on  January  1,  2001.

     Harleysville Group has not held or issued derivative financial instruments.

 4  -  REINSURANCE

     In  the ordinary course of business, Harleysville Group cedes insurance to,
and assumes insurance from, insurers to  limit its maximum loss exposure through
diversification  of its risks.  See Note 2(a) for discussion of reinsurance with
Mutual.  Reinsurance  contracts  do  not  relieve  Harleysville Group of primary
liability  as the originating insurer.  After excluding reinsurance transactions
with  Mutual  under  the pooling arrangement, the effect of Harleysville Group's
share  of  other  reinsurance  on  premiums  written  and  earned is as follows:

Page  46

<PAGE>


                               HARLEYSVILLE GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 4  -  REINSURANCE  (CONTINUED)

<TABLE>
<CAPTION>



                         2002        2001         2000
                       --------    --------     --------
                                 (in thousands)
Premiums written:
<S>                    <C>         <C>         <C>
  Direct               $842,897    $781,190     $740,425
  Assumed                22,189      29,683       26,415
  Ceded                 (67,236)    (63,286)    (65,368)
                       --------    --------     --------

Net premiums written   $797,850    $747,587     $701,472
                       ========    ========     ========

Premiums earned:

  Direct               $807,332    $761,792     $738,797
  Assumed                25,215      29,442       25,653
  Ceded                 (67,911)    (61,345)    (76,120)
                       --------    --------     --------
Net premiums earned    $764,636    $729,889     $688,330
                       ========    ========     ========
</TABLE>


     Losses  and  loss  settlement expenses are net of reinsurance recoveries of
$38,172,000,  $68,852,000 and $55,638,000 for 2002, 2001 and 2000, respectively.

 5  -  CONTINGENCY

     GE  Reinsurance  Corporation (GE Re) had sought rescission of a reinsurance
agreement  between  Mutual  and  GE  Re relating to certain automobile insurance
policies  written  in  California  through a managing general agent beginning in
1999.

     On December 13, 2002, Mutual and GE Re settled this matter by agreeing to a
commutation  and termination of the reinsurance agreement effective December 31,
2002.  The  settlement  agreement did not materially impact Harleysville Group's
financial  statements.

 6  -  PROPERTY  AND  EQUIPMENT

     Property  and  equipment  consisted  of  land  and buildings with a cost of
$30,511,000  and  $29,867,000, and equipment, including software, with a cost of
$15,569,000  and  $14,782,000  at  December  31,  2002  and  2001, respectively.
Accumulated  depreciation related to such assets was $18,524,000 and $15,776,000
at  December  31,  2002  and  2001,  respectively.

Page  47

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

6  -  PROPERTY  AND  EQUIPMENT  (CONTINUED)

     Rental  expense  under  leases  with non-affiliates amounted to $1,960,000,
$2,832,000  and  $3,519,000  for  2002,  2001 and 2000, respectively.  Operating
lease  commitments  were  not  material  at  December  31,  2002.

 7  -  LIABILITY  FOR  UNPAID  LOSSES  AND  LOSS  SETTLEMENT  EXPENSES

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

<TABLE>
<CAPTION>



                                      2002         2001        2000
                                    --------     --------     --------
                                            (in thousands)
<S>                                 <C>          <C>          <C>
Liability at January 1              $879,056     $864,843     $901,352
  Less reinsurance recoverables       78,195       72,259       77,438
                                    --------     --------     --------

Net liability at January 1           800,861      792,584      823,914
                                    --------     --------     --------

Incurred related to:
  Current year                       526,265      537,172      541,738
  Prior years                         (4,648)     (17,350)     (48,937)
                                    --------     --------     --------

    Total incurred                   521,617      519,822      492,801
                                    --------     --------     --------


Paid related to:
  Current year                       199,874      229,435      244,978
  Prior years                        265,422      282,110      279,153
                                    --------     --------     --------

    Total paid                       465,296      511,545      524,131
                                    --------     --------     --------

Net liability at December 31         857,182      800,861      792,584
  Plus reinsurance recoverables       71,153       78,195       72,259
                                    --------     --------     --------

Liability at December 31            $928,335     $879,056     $864,843
                                    ========     ========     ========
</TABLE>

     Harleysville  Group  recognized  favorable development in the provision for
insured  events  of  prior  years  of $4,648,000, $17,350,000 and $48,937,000 in
2002,  2001 and 2000, respectively. The favorable development for 2002 primarily
relates  to  lower-than-expected  claim  severity in the commercial and personal
lines  of  business.  The  favorable  development  for 2001 primarily relates to
lower-than-expected  loss settlement expenses and, for 2000, lower-than-expected
loss  settlement  expenses  and  lower-than-expected  claim  severity  in  the
commercial  and  personal  lines  of  business.  The  2001  and  2000  favorable
development  includes

Page  49

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 7  -  Liability  for  Unpaid  Losses  and  Loss  Settlement  Expenses
     (Continued)

$14,772,000  and $20,186,000 of reductions in loss settlement expenses.  In both
years,  such reductions are related to benefits from initiatives to reduce costs
of  adjusting  claims  and  to  the  favorable  development  on  losses.

     In  establishing  the  liability  for  unpaid  losses  and  loss settlement
expenses,  management  considers  facts currently known and the current state of
the  law  and  coverage  litigation. Liabilities are recognized for known losses
(including  the cost of related litigation) when sufficient information has been
developed  to  indicate  the  involvement  of  a  specific insurance policy, and
management can reasonably estimate its liability.  In addition, liabilities have
been  established  to  cover  additional  exposures on both known and unasserted
losses.  Estimates  of  the  liabilities  are  reviewed and updated continually.

     The  property  and  casualty  insurance  industry  has received significant
publicity  about  environmental-related losses from exposures insured many years
ago.  Since  the  intercompany  pooling agreement pertains to insurance business
written  or  earned  on  or  after  January  1, 1986, Harleysville Group has not
incurred  significant  environmental-related  losses.

 8  -  DEBT

     Debt  is  as  follows:

<TABLE>
<CAPTION>



                                  DECEMBER 31,
                              --------------------
                                2002        2001
                              -------     -------
                                 (in thousands)
<S>                           <C>         <C>
  Notes, 6.75%, due 2003      $75,000     $75,000
  Demand term-loan payable
    to Mutual, LIBOR plus
    0.65%, due 2005            18,500      18,500
  Economic Development
    Corporation (EDC)
    Revenue Bond obligation     2,120       2,555
                              -------     -------

  Total debt                  $95,620     $96,055
                              =======     =======
</TABLE>


Page  49

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 8  -  DEBT  (CONTINUED)

     The fair value of the notes was $76,069,000 and $76,388,000 at December 31,
2002  and  2001,  respectively,  based  on  quoted market prices for the same or
similar debt.  The carrying value of the remaining debt approximates fair value.

     The EDC obligation is secured by Lake States' building. Interest is payable
semiannually  at a variable rate (1.7% at December 31, 2002) equal to the market
interest  rate  that  would  allow the bonds to be remarketed at par value.  The
bonds  are  subject  to redemption prior to maturity in 2006 at levels dependent
upon  the  occurrence  of  certain  events.

     Interest  paid  was $5,599,000, $6,134,000 and $6,507,000 in 2002, 2001 and
2000,  respectively.

 9  -  RESTRUCTURING  CHARGES

     In  1999  and  2000,  Harleysville  Group recorded restructuring charges in
connection  with  the  consolidation of its claims offices and field operations.
There  is  no remaining liability for these restructurings at December 31, 2002.
The  charge  (benefit)  to earnings for these restructuring charges was $15,000,
$(118,000)  and  $949,000  for  2002, 2001 and 2000, respectively.  The 2002 and
2001  amounts  primarily  are  from  changes in the estimate of occupancy costs.

Page  50

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

10  -  SHAREHOLDERS'  EQUITY

     Comprehensive  income  consisted  of  the  following:
<TABLE>
<CAPTION>



                                2002        2001        2000
                              -------     --------     -------
(in thousands)
<S>                           <C>         <C>         <C>
Net income                    $46,255     $ 43,493    $48,692
                              -------     --------    -------
Other comprehensive
 income:
  Unrealized investment
   holding gains (losses)
   arising during period,
   net of taxes (benefits)
   of $(1,195), $(7,463)
   and $6,082                  (2,220)     (13,859)     11,296
 Less:
  Reclassification
   adjustment for (gains)
   losses included in net
   income, net of taxes
   (benefits) of $(6,521),
   $(1,139) and $3,752         12,111        2,114      (6,968)
                              -------     --------     -------

  Net unrealized
   investment gains (losses)    9,891      (11,745)      4,328
                              -------     --------     -------

  Minimum pension liability
   net of taxes (benefits)
   of $(2,730)                 (5,070)
                              -------     --------     -------
Other comprehensive income      4,821      (11,745)      4,328
                              -------     --------     -------

Comprehensive income          $51,076     $ 31,748     $53,020
                              =======     ========     =======
</TABLE>


     A  source  of  cash  for  the  payment  of  dividends  is  dividends  from
subsidiaries.  Harleysville  Group Inc.'s insurance subsidiaries are required by
law to maintain certain minimum surplus on a statutory basis, and are subject to
risk-based  capital  requirements  and  to  regulations under which payment of a
dividend  from statutory surplus is restricted and may require prior approval of
regulatory  authorities.  Applying  the  current  regulatory  restrictions as of
December  31,  2002,  $10,960,000  would  be  available  for  distribution  to
Harleysville  Group  Inc.  without  prior  approval until October 1, 2003, after
which $52,860,000 would be available for distribution to Harleysville Group Inc.
without  prior  approval.

Page  51

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

10  -  SHAREHOLDERS'  EQUITY  (CONTINUED)

     The  National Association of Insurance Commissioners (NAIC) has adopted the
Codification of Statutory Accounting Principles, which were effective 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 January
1,  2001  statutory  capital and surplus of the Company's insurance subsidiaries
ranged  from  a  decrease  of  $442,000  to an increase of $6,397,000 and was an
increase  of  $21,003,000  on  a  consolidated  basis.

     The  following  table  contains selected information for Harleysville Group
Inc.'s property and casualty insurance subsidiaries, as determined in accordance
with  prescribed  statutory  accounting  practices:

<TABLE>
<CAPTION>



                                          DECEMBER 31,
                                -------------------------------
                                   2002       2001        2000
                                 --------    --------    --------
                                         (in thousands)
<S>                              <C>         <C>         <C>
Statutory capital and surplus    $509,344    $538,878    $515,679
                                 ========    ========    ========

Statutory unassigned surplus     $375,075    $404,609    $381,410
                                 ========    ========    ========

Statutory net income             $ 42,338    $ 41,095    $ 48,412
                                 ========    ========    ========

</TABLE>


11  -  INCOME  TAXES

     The  components  of  income  tax  expense  (benefit)  are  as  follows:

<TABLE>
<CAPTION>



                2002      2001       2000
              -------    -------    -------
<S>           <C>        <C>         <C>
Current       $ 9,172    $11,732    $10,410
Deferred        1,055     (3,425)    (1,397)
              -------    -------    -------
              $10,227    $ 8,307    $ 9,013
              =======    =======    =======
</TABLE>


     Cash  paid for federal income taxes in 2002, 2001 and 2000 was $13,250,000,
$13,158,000  and  $6,499,000,  respectively.

Page  52

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

11  -  INCOME  TAXES  (CONTINUED)

     The  actual  income tax rate differed from the statutory federal income tax
rate  applicable  to  income  before  income  taxes  as  follows:

<TABLE>
<CAPTION>



                             2002      2001      2000
                            ------    ------    ------
<S>                         <C>       <C>       <C>
Statutory federal income
  tax rate                   35.0%     35.0%     35.0%
Tax-exempt interest         (16.8)    (19.3)    (19.7)
Other, net                   (0.1)      0.3       0.3
                            -----     -----     -----
                             18.1%    16.0%      15.6%
                            =====    =====      =====
</TABLE>

     The  tax effects of the significant temporary differences that give rise to
deferred  tax  liabilities  and  assets  are  as  follows:
<TABLE>
<CAPTION>



                                       DECEMBER 31,
                                --------------------------
                                 2002        2001
                               --------    --------
                                   (in thousands)
<S>                             <C>        <C>
Deferred tax liabilities:
  Deferred policy acquisition
    costs                       $33,214    $30,127
  Unrealized investment          29,161     23,835
  Other                           9,373      6,169
                                -------    -------
    Total deferred tax
      liabilities                71,748     60,131
                                -------    -------

Deferred tax assets:
  Unearned premiums              27,080     24,755
  Losses incurred                42,494     41,811
  Pension plan                    8,077      4,842
  AMT credit carryforward         6,141      4,811
  Other                          13,740     13,347
                                -------    -------
    Total deferred tax
      assets                     97,532     89,566
                                -------    -------
    Net deferred tax asset      $25,784    $29,435
                                =======    =======
</TABLE>

     A  valuation allowance is required to be established for any portion of the
deferred  tax  asset  that  management  believes  will  not be realized.  In the
opinion  of  management,  it  is  more  likely  than not that the benefit of the
deferred  tax asset will be realized and, therefore, no such valuation allowance
has  been  established.

Page  53

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

12  -  INCENTIVE  PLANS

Fixed  Stock  Option  Plans
------------------------

     Harleysville  Group  has  an Equity Incentive Plan (EIP) for key employees.
Awards  may  be  made  in  the  form of stock options, stock appreciation rights
(SARs),  restricted  stock or any combination of the above.  The EIP was amended
in  1997  and  limited  future  awards  to  an  aggregate of 4,260,946 shares of
Harleysville Group Inc.'s common stock. The plan provides that stock options may
become  exercisable  from  six months to 10 years from the date of grant with an
option  price not less than fair market value on the date of grant.  The options
normally  vest  50%  at the end of one year and 50% at the end of two years from
the  date  of  grant.  SARs  have  not  been  material.

     The  income  tax benefit related to the difference between the market price
at the date of exercise and the option price for non-qualified stock options was
credited  to  additional  paid-in  capital.

     The  Harleysville  Group  Inc.  Year  2000  Directors' Stock Option Program
provides for the granting of options to eligible directors to purchase a maximum
of 123,500 shares of common stock.  Options are granted at exercise prices equal
to  fair  market  value  on  the  date  of grant.  The options vest immediately,
although no option is exercisable until six months after the date of grant.  The
options  have  a  term  of  10  years.

     Harleysville  Group  maintains  stock  option  plans  for substantially all
employees  and certain designated agents.  The plans provide for the granting of
options  to  purchase  a  maximum  of 850,000 shares of common stock.  The plans
provide that the options become exercisable from three to 10 years from the date
of  grant  with  an  option price not less than fair market value on the date of
grant.

Page  54

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

12  -  INCENTIVE  PLANS  (CONTINUED)

     Information  regarding  activity in Harleysville Group's fixed stock option
plans  is  presented  below:

<TABLE>
<CAPTION>


                                          WEIGHTED-AVERAGE
                           NUMBER         EXERCISE PRICE
                           OF SHARES      PER SHARE
                          ----------      ----------------
<S>                       <C>                <C>
Outstanding at
    December 31, 1999     2,115,944          $16.30
  Granted--2000             434,361           16.48
  Exercised--2000          (254,567)          12.65
  Forfeited--2000          (187,948)          18.09
                          ---------           ------

  Outstanding at
    December 31, 2000     2,107,790            16.62
  Granted--2001             475,850            26.36
  Exercised--2001          (259,912)           14.26
  Forfeited--2001           (84,180)           16.31
                          ---------           ------

  Outstanding at
    December 31, 2001     2,239,548            18.97
  Granted--2002             495,917            27.20
  Exercised--2002          (323,611)           14.98
  Forfeited--2002          (291,313)           15.93
                          ---------           ------

  Outstanding at
    December 31, 2002     2,120,541           $21.92
                          =========           ======

  Exercisable at:
    December 31, 2000     1,552,506           $16.37
                          =========           ======

    December 31, 2001     1,608,426           $17.21
                          =========           ======

    December 31, 2002     1,455,606           $19.64
                          =========           ======
</TABLE>


Page  55

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

12  -  INCENTIVE  PLANS  (CONTINUED)

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

<TABLE>
<CAPTION>



                                  RANGE OF EXERCISE PRICES
                          ----------------------------------------
                          $11.13-16.69   $17.94-24.50   $26.36-27.20
                          ------------   ------------   ------------
<S>                        <C>           <C>            <C>
Options outstanding at
  December 31, 2002:

  Number of options          546,240        664,556        909,745
                          ==========     ==========     ==========

  Weighted-average
   remaining contractual
   life                    5.3 years      5.5 years      8.9 years
                          ==========     ==========     ==========

  Weighted-average
   exercise price         $    14.76     $    21.12     $    26.81
                          ==========     ==========     ==========

Options exercisable at
  December 31, 2002:

  Number of options          546,240        662,556        246,810
                          ==========     ==========     ==========

  Weighted-average
   exercise price         $    14.76     $    21.13     $    26.45
                          ==========     ==========     ==========

</TABLE>


     The  per  share weighted-average fair value of options granted during 2002,
2001  and  2000 was $9.04, $8.45 and $4.80, respectively. The fair value of each
option  grant  is  estimated  on  the  date  of  grant  using  the Black-Scholes
option-pricing  model  with  the following weighted-average assumptions used for
grants in 2002, 2001 and 2000, respectively:  dividend yield of 2.21%, 2.12% and
3.31%; expected volatility of 37.34%, 34.89% and 31.84%; risk-free interest rate
of  4.60%,  4.77%  and  6.76%;  and  an  expected  life  of  5.25  years.

Page  56

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

12  -  INCENTIVE  PLANS  (CONTINUED)

Other  Stock  Purchase  and  Incentive  Plans
----------------------------------------

     Harleysville  Group  Inc.  is authorized to issue up to 1,000,000 shares of
common  stock  under  the  terms  of  the  1995  Employee  Stock  Purchase Plan.
Virtually  all  employees are eligible to participate in the plan, under which a
participant may elect to have up to 15% of base pay withheld to purchase shares.
The  purchase  price  of  the  stock  is  85%  of  the  lower  of  the
beginning-of-the-subscription-period  or  end-of-the-subscription-period  fair
market value.  Each subscription period runs from January 15 through July 14, or
July  15  through  January  14.  Under  the plan, Harleysville Group Inc. issued
92,175,  93,637  and  156,958  shares  to  employees  in  2002,  2001  and 2000,
respectively.

     Under  Harleysville  Group Inc.'s 1995 Agency Stock Purchase Plan, eligible
independent  insurance  agencies  may  invest  up to $12,500 in shares of common
stock  at 90% of the fair market value at the end of each six-month subscription
period.  There  are  1,000,000  shares of common stock available under the plan.
There  were  43,174,  29,980  and  60,844 shares issued under the plan for which
$76,000,  $180,000 and $66,000 of expense was recognized in 2002, 2001 and 2000,
respectively.

     The  1996 Directors' Stock Purchase Plan provides for the issuance of up to
200,000  shares  of Harleysville Group Inc. common stock to outside directors of
Harleysville  Group  Inc.  and Mutual. The purchase price of the stock is 85% of
the  lower  of  the  beginning-of-the-subscription-period  or
end-of-the-subscription-period  fair  market  value.  In  2002,  2001  and  2000
respectively, there were 9,647, 7,999 and 4,965 shares issued under the plan for
which  $31,000,  $75,000  and  $20,000  of  expense  was  recognized.

     Harleysville  Group  has  incentive  bonus  plans.  Cash  and  common stock
bonuses  are  earned  on  a  formula  basis  depending  upon  the performance of
Harleysville Group and Mutual in relation to certain targets.  There are 600,000
shares  of common stock available under the Long Term Incentive Plan and none of
these  shares  has been issued.  Harleysville Group's expense for such plans was
$7,291,000,  $1,808,000  and  $2,963,000  for 2002, 2001 and 2000, respectively.

Page  57

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

13  -  PENSION  AND  OTHER  BENEFIT  PLANS

     Harleysville  Group  Inc.  has a pension plan that covers substantially all
full-time  employees.  Retirement  benefits  are a function of both the years of
service  and  level of compensation. Harleysville Group Inc.'s funding policy is
to  contribute  annually  an  amount  equal  to  at  least  the minimum required
contribution  in accordance with minimum funding standards established by ERISA.
Contributions  are  intended  to  provide  not  only  for benefits attributed to
service  to  date,  but  also  for  those  expected  to be earned in the future.

Page  58

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

13  -  PENSION  AND  OTHER  BENEFIT  PLANS  (CONTINUED)

     The  following  table  sets forth the year-end status of the plan including
Mutual:

<TABLE>
<CAPTION>



                                           2002         2001
                                         --------     --------
                                              (in thousands)
Change in benefit obligation
<S>                                      <C>          <C>
  Benefit obligation at January 1        $126,900     $110,066
  Service cost                              5,632        4,745
  Interest cost                             9,137        8,348
  Amendments                                  28
  Net actuarial loss                      12,780         8,035
  Benefits paid                           (4,645)       (4,294)
                                         -------      --------

      Benefit obligation at
       December 31                       $149,832     $126,900
                                         ========     ========

Change in plan assets
  Fair value of plan assets at
    January 1                            $101,967     $118,727
  Actual return on plan assets            (17,549)     (12,657)
  Contributions                             2,493
  Benefits paid                            (4,448)      (4,103)
                                         --------     --------

      Fair value of plan assets
       at December 31                    $ 82,463     $101,967
                                         ========     ========

Funded status                            $(67,369)    $(24,933)
Unrecognized net actuarial loss
  (gain)                                   39,559         (845)
Unrecognized prior service cost             1,229        1,608
Unrecognized transition obligation            213          266
                                         --------     --------
Accrued pension cost:
  Entire plan                            $(26,368)    $(23,904)
                                         ========     ========

  Harleysville Group portion             $(18,159)    $(16,364)
                                         ========     ========

Amounts recognized in the statement
 of financial position consist of:
  Accrued pension cost                   $(26,780)    $(16,608)
  Intangible asset                            821          244
  Accumulated other comprehensive
    income                                  7,800
                                         --------     --------
     Net amount recognized               $(18,159)    $(16,364)
                                         ========     ========
</TABLE>


Page  59

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

13  -  PENSION  AND  OTHER  BENEFIT  PLANS  (CONTINUED)

     The net periodic pension cost for the plan including Mutual consists of the
following  components:
<TABLE>
<CAPTION>



                                 2002         2001        2000
                               --------      --------    --------
                                          (in thousands)
<S>                            <C>           <C>         <C>
Components of net periodic
  pension cost:
    Service cost                $  5,632     $ 4,745     $4,434
    Interest cost                  9,137       8,348      7,482
    Expected return on
     plan assets                 (10,076)     (9,596)    (8,580)
    Recognized net actuarial
     loss (gain)                       1        (152)      (478)
    Amortization of prior
     service cost                    407         588        610
    Net transition
     amortization                     53          19       (117)
    Curtailment                   (1,962)
                                --------     -------     -------

Net periodic pension cost:
  Entire plan                   $  5,154     $ 3,952     $ 1,389
                                ========     =======     =======
  Harleysville Group
   portion                      $  3,477     $ 2,663     $   788
                                ========     =======     =======


                                   2002        2001       2000
                                 --------    --------   --------

Weighted-average assumptions
  as of December 31:
    Discount rate                  6.75%      7.25%       7.50%
    Expected long-term rate
     of return on plan
     assets                        9.00%      9.50%       9.50%
    Rate of compensation
     increase                      4.50%      4.50%       4.50%
</TABLE>

     Harleysville  Group  has profit-sharing plans covering qualified employees.
Harleysville  Group's  expense  under  the  plans was $1,573,000, $1,601,000 and
$2,821,000  for  2002,  2001  and  2000,  respectively.

Page  60

<PAGE>


                               HARLEYSVILLE GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

14  -  SEGMENT  INFORMATION

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

     Harleysville  Group  evaluates  the  performance  of the personal lines and
commercial  lines  primarily based upon underwriting results as determined under
statutory  accounting  practices (SAP). Assets are not allocated to the personal
and  commercial  lines,  and are reviewed in total by management for purposes of
decision  making.  Harleysville Group 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:
<TABLE>
<CAPTION>



                                 2002        2001       2000
                               --------     --------     --------
                                         (in thousands)
<S>                            <C>          <C>          <C>
Revenues:
  Premiums earned:
    Commercial lines           $553,194     $493,362     $437,873
    Personal lines              211,442      236,527      250,457
                               --------     --------     --------
      Total premiums
       earned                   764,636      729,889      688,330
    Net investment income        86,265       85,518       86,791
    Realized investment
      gains (losses)            (18,448)      (3,071)       9,780
    Other                        15,283       15,415       17,670
                               --------     --------     --------


Total revenues                 $847,736     $827,751     $802,571
                               ========     ========     ========

Income before income taxes:
  Underwriting loss:
    Commercial lines           $(11,473)    $ (7,128)    $(22,925)
    Personal lines              (13,963)     (29,372)     (23,281)
                               --------     --------     --------
      SAP underwriting
      loss                      (25,436)     (36,500)     (46,206)
      GAAP adjustments            8,803        2,017        3,602
                               --------     --------     --------

      GAAP underwriting
       loss                     (16,633)     (34,483)     (42,604)
    Net investment income        86,265       85,518       86,791
    Realized investment
      gains (losses)            (18,448)      (3,071)       9,780
    Other                         5,298        3,836        3,738
                               --------     --------     --------

Income before income taxes     $ 56,482     $ 51,800     $ 57,705
                               ========     ========     ========
</TABLE>


Page  61

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

15  -  EARNINGS  PER  SHARE

     The  computation  of  basic  and  diluted earnings per share is as follows:

<TABLE>
<CAPTION>



                               2002          2001         2000
                            ---------      --------     --------
                       (dollars in thousands, except per share data)
<S>                         <C>            <C>          <C>
Numerator for basic
  and diluted earnings
  per share:
    Net income              $46,255        $43,493       $48,692
                            =======        =======       =======

Denominator for basic
  earnings per share --
  weighted-average
  shares outstanding     29,699,201     29,267,587     28,838,824

Effect of stock
  incentive plans           596,748        550,942        297,582
                           --------       --------       --------
Denominator for
  diluted earnings
  per share              30,295,949     29,818,529     29,136,406
                         ==========     ==========     ==========

Basic earnings
  per share                 $  1.56        $  1.49        $  1.69
                            =======        =======        =======

Diluted earnings
  per share                 $  1.53        $  1.46        $  1.67
                            =======        =======        =======

</TABLE>

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


                      2002    2001    2000
                      ----    ----    ----
                       (in  thousands)

Number of options     491     284     566
                      ===     ===     ===


Page  62

<PAGE>


     HARLEYSVILLE GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

16  -  QUARTERLY  RESULTS  OF  OPERATIONS  (UNAUDITED)

<TABLE>
<CAPTION>

                                             2002
                  -------------------------------------------------------
                           (in thousands, except per share data)

                     FIRST       SECOND        THIRD       FOURTH       TOTAL
                   ---------    --------     --------     --------     ---------
<S>                 <C>          <C>          <C>          <C>         <C>
Revenues            $208,210     $192,149     $222,287     $225,090    $847,736
Losses and
 expenses            191,287      195,353      202,562      202,052     791,254
Net income            13,340          296       15,216       17,403      46,255
Earnings per
 common share:
  Basic             $    .45     $    .01     $    .51     $    .58     $  1.56
  Diluted           $    .44     $    .01     $    .50     $    .57     $  1.53


                                             2001
                  -------------------------------------------------------
                           (in thousands, except per share data)

                     FIRST       SECOND        THIRD       FOURTH       TOTAL
                   ---------    --------     --------     --------     ---------
Revenues           $200,320     $203,442     $205,821     $218,168     $827,751
Losses and
 expenses           189,523      190,309      197,396      198,723      775,951
Net income            9,718       10,978        7,855       14,942       43,493
Earnings per
 common share:
  Basic            $    .33     $    .38     $    .27     $    .51     $   1.49
  Diluted          $    .33     $    .37     $    .26     $    .50     $   1.46
</TABLE>


Page  63

<PAGE>



     Independent  Auditors'  Report


The  Board  of  Directors
 and  Shareholders
Harleysville  Group  Inc.:


We  have  audited  the  accompanying consolidated balance sheets of Harleysville
Group  as of December 31, 2002 and 2001, and the related consolidated statements
of  income,  shareholders'  equity,  and cash flows for each of the years in the
three-year  period  ended  December  31,  2002.  These  consolidated  financial
statements  are  the  responsibility  of  the  Company's  management.  Our
responsibility  is  to express an opinion on these 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 Harleysville Group
as  of December 31, 2002 and 2001, and the results of their operations and their
cash  flows  for  each  of the years in the three-year period ended December 31,
2002,  in conformity with accounting principles generally accepted in the United
States  of  America.


          /s/KPMG  LLP



Philadelphia,  Pennsylvania
February  14,  2003


Page  64

<PAGE>