EXHIBIT  13(B)

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


     Certain  of  the  statements  contained  herein  (other  than statements of
historical  facts)  are  forward-looking  statements.  Such  forward-looking
statements  are  made  pursuant  to  the  safe  harbor provisions of the Private
Securities  Litigation  Reform Act of 1995 and include estimates and assumptions
related  to  the  Company's  growth  and  economic,  competitive and legislative
developments.  These  forward-looking  statements  are  subject  to  change  and
uncertainty  which are, in many instances, beyond the Company's control and have
been  made  based  upon  management's expectations and beliefs concerning future
developments  and  their potential effect on Harleysville Group. There can be no
assurance  that  future  developments  will  be  in accordance with management's
expectations  so  that  the  effect of future developments on Harleysville Group
will  be  those  anticipated  by  management. Actual financial results including
premium  growth  and  underwriting  results  could  differ materially from those
anticipated  by  Harleysville Group depending on the outcome of certain factors,
which  may  include  changes  in property and casualty loss trends and reserves;
natural catastrophe losses; competition in insurance product pricing; government
regulation  and  changes therein which may impede the ability to charge adequate
rates;  performance  of  the  financial markets; fluctuations in interest rates;
availability  and price of reinsurance; and the status of labor markets in which
the  Company  operates.

     RESULTS  OF  OPERATIONS

     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.

     Historically,  Harleysville  Group's  results  of  operations  have  been
influenced  by factors affecting the property and casualty insurance industry in
general.  The  operating  results  of  the  United  States property and casualty
insurance  industry  have  been  subject  to  significant  variations  due  to
competition,  weather,  catastrophic  events,  regulation,  general  economic
conditions, judicial trends, fluctuations in interest rates and other changes in
the  investment  environment.

Page  2

<PAGE>


     HARLEYSVILLE  GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     Harleysville Group's premium growth and underwriting results have been, and
continue  to  be,  influenced  by  market  conditions.  Insurance industry price
competition  has  often  made it difficult both to obtain and to retain properly
priced  personal  and  commercial  lines business.  It is management's policy to
maintain  its  underwriting  standards,  even  at the expense of premium growth.

     The  key  elements  of Harleysville Group's business model are the sales of
properly  priced  and underwritten personal and commercial property and casualty
insurance  through  independent  agents  and the investment of the premiums in a
manner  that assures claims and expenses can be paid while providing a return on
the  capital  employed.  Loss  trends  and  investment  performance are critical
factors  in  influencing  the  success  of the business model. These factors are
affected by the factors impacting the insurance industry in general as described
above  and  factors  unique  to Harleysville Group as described in the following
discussion.

     TRANSACTIONS  WITH  AFFILIATES

     The  Company's  property and casualty subsidiaries participate in a pooling
agreement  with  Mutual.  The  pooling  agreement provides for the allocation of
premiums,  losses,  loss  settlement  expenses and underwriting expenses between
Harleysville  Group  and Mutual. Harleysville Group is not liable for any pooled
losses occurring prior to January 1, 1986, the date the pooling agreement became
effective.  Harleysville  Group's  participation  in the pool has been 72% since
January  1,  1998.

     Because  the  pooling  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 pooling agreement
provides  for the right of offset and the net balance of Harleysville Group with
Mutual was not material at December 31, 2002 and 2001.  Mutual has an A. M. Best
rating  of  "A"  (Excellent).

     Harleysville  Group  has  off-balance-sheet  credit  risk  related  to
approximately $68 million and $64 million of premium balances due to Mutual from
agents  and  insureds at December 31, 2002 and 2001, respectively.  Mutual bills
and  collects  such  receivables  on behalf of Harleysville Group for efficiency
reasons.  Harleysville Group recognizes any associated bad debts, which have not
been  material.

Page  3

<PAGE>


     HARLEYSVILLE  GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     TRANSACTIONS  WITH  AFFILIATES  (CONTINUED)

     Harleysville  Group  has attempted to reduce the potential impact of future
catastrophes  by  achieving  greater  geographic distribution of risks, reducing
exposure  in  catastrophe-prone  areas  and  through  reinsurance,  including an
agreement  with  Mutual.  Effective  January 1, 1997, Harleysville Group entered
into  a  reinsurance  agreement  with  Mutual  whereby  Mutual,  in return for a
reinsurance  premium,  reinsured  accumulated  catastrophe  losses  up  to $14.4
million  in a quarter for 2002, 2001 and 2000.  This reinsurance coverage was in
excess  of a retention of $3.6 million in a quarter 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  $7.8  million, $7.0 million and $6.8 million, and losses incurred of
$0.3  million,  $8.0  million  and  $4.4  million  for  2002,  2001  and  2000,
respectively.  The  premiums  for  this  reinsurance  were  established  in
consultation  with  an  independent  actuarial  firm.

     Harleysville Ltd. is a subsidiary of the Company and leases the home office
to  Mutual,  which  shares  the facility with Harleysville Group.  Rental income
under  the  lease  was  $3.5 million for both 2002 and 2001 and $3.4 million for
2000  and  is included in other income after elimination of intercompany amounts
of  $2.2 million in 2002 and $2.1 million in both 2001 and 2000. The lease has a
five-year  term expiring December 31, 2004 and includes a formula for additional
rent  for any additions, improvements or renovations.  Mutual is responsible for
the  building  operating expenses including maintenance and repairs. The pricing
of  the  lease  was  based  upon  an appraisal obtained from an independent real
estate  appraiser.

     Harleysville Group provides certain management services to Mutual and other
affiliates.  Harleysville Group received a fee of $6.8 million, $7.3 million and
$7.4  million in 2002, 2001 and 2000, respectively, for its services under these
management  agreements.  Under  related agreements, Harleysville Group serves as
the  paymaster  for  Harleysville companies, with each company being charged for
its  proportionate share of salary and employee benefits expense based upon time
allocation.  The  level  of  fees  has  been  approved  by  each state insurance
department  having  jurisdiction.

Page  4

<PAGE>


     HARLEYSVILLE  GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     TRANSACTIONS  WITH  AFFILIATES  (CONTINUED)

     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.

     Harleysville  Group  borrowed  $18.5 million from Mutual in connection with
the  acquisition  of Mid-America and HIC New York in 1991.  It was a demand loan
with  a  stated  maturity  in  March  1998.  In  February 1998, the maturity was
extended  to March 2005 and the interest rate became LIBOR plus 0.65%, which was
a  commercially  reasonable  market rate in 1998.  Interest expense on this loan
was  $0.5  million,  $0.9  million  and  $1.3  million  in  2002, 2001 and 2000,
respectively.

     Harleysville  Group  has  no  material relationships with current or former
members  of  management other than compensatory plans and arrangements disclosed
or  described  in  the  Company's  public  filings.

     CRITICAL  ACCOUNTING  POLICIES  AND  ESTIMATES

     The  consolidated  financial  statements  are  prepared  in conformity with
accounting  principles generally accepted in the United States of America, which
require  Harleysville Group to make estimates and assumptions (see Note 1 of the
Notes  to  Consolidated Financial Statements).  Harleysville Group believes that
of  its  significant  accounting  policies,  the  following may involve a higher
degree  of  judgment and estimation.  The judgments, or the methodology on which
the  judgments  are  made,  are  reviewed  quarterly  with  the Audit Committee.

     Liabilities  for  Losses  and  Loss Settlement Expenses.  The liability for
losses  and loss settlement expenses represents estimates of the ultimate unpaid
cost  of  all  losses  incurred,  including  losses  for  claims which have been
incurred  but  not  yet been reported to Harleysville Group.  The amount of loss
reserves  for  reported claims is based primarily upon a case-by-case evaluation
of  the  type  of risk involved, knowledge of the circumstances surrounding each
claim  and  the  insurance  policy provisions relating to the type of loss.  The
amounts  of loss reserves for incurred but unreported claims and loss settlement
expense  reserves  are  determined  utilizing  historical information by line of
insurance  as  adjusted to current conditions.  Inflation is implicitly provided
for  in  the reserving function through analysis of costs, trends and reviews of
historical  reserving

Page  5

<PAGE>


     HARLEYSVILLE GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     CRITICAL  ACCOUNTING  POLICIES  AND  ESTIMATES  (CONTINUED)

results.  Reserves  are  closely monitored and are recomputed periodically using
the  most  recent  information  on  reported claims and a variety of statistical
techniques.  It  is  expected  that such estimates will be more or less than the
amounts ultimately paid when the claims are settled.  Changes in these estimates
are  reflected  in  current  operations.

     Investments.  Generally,  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.  However, if the fair value of an
investment  declines  below  its  cost  and  that  decline  is deemed other than
temporary,  the  amount  of  the  decline  below  cost  is  charged to earnings.
Harleysville  Group  monitors  its  investment portfolio and reviews investments
that  have  experienced  a  decline  in  fair  value  below cost each quarter to
evaluate  whether  the  decline  is  other  than  temporary.  Such  evaluations
consider,  among  other  things, the magnitude and reasons for a decline and the
prospects  for  the  fair  value  to  recover  in the near term.  Future adverse
investment  market  conditions,  or  poor  operating  results  of  underlying
investments,  could  result  in  an  impairment  charge  in  the  future.

     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.  Future changes in estimates, the most significant of which
is  expected  losses  and  loss  settlement expenses, may require adjustments to
deferred  policy  acquisition  costs.

     Contingencies.  Besides  claims  related  to  its  insurance  products,
Harleysville  Group is subject to proceedings, lawsuits and claims in the normal
course  of  business.  Harleysville Group assesses the likelihood of any adverse
outcomes to these matters as well as potential ranges of probable losses.  There
can  be  no  assurance  that  actual  outcomes  will  be  consistent  with those
assessments.

     The  application  of  certain  of these critical accounting policies to the
years  ended  December  31,  2002 and 2001 is discussed in greater detail below.

Page  6

<PAGE>


     HARLEYSVILLE GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     2002  COMPARED  TO  2001

     Premiums  earned increased $34.7 million, or 5% for the year ended December
31,  2002.  The increase was primarily due to an increase in premiums earned for
commercial  lines  of  $59.8  million, or 12%, partially offset by a decrease of
$25.1  million,  or  11%,  in  personal  lines premiums earned.  The increase in
premiums  earned  for commercial lines primarily was due to higher rates and was
partially  offset  by  fewer  policy  counts.  The  decline in policy counts was
primarily  in  the  workers  compensation  line  of  business.  The  decrease in
premiums  earned for personal lines primarily was due to fewer policy counts and
was  partially  offset  by higher rates.  The reduction in personal lines volume
was  driven  primarily  by  a  planned  reduction  of  business  in certain less
profitable  states  and  the implementation of other more stringent underwriting
processes.  The  trend  of  double-digit  percentage  growth in commercial lines
premiums  earned  is  expected to continue in 2003 while the decline in personal
lines premiums earned is expected to be much lower in 2003 and may turn positive
later  in  2003.

     Investment  income  increased  $0.7  million,  or  1%,  for  the year ended
December  31,  2002,  resulting  from  an increase in invested assets, partially
offset  by  a  lower  yield  on  the  fixed  maturity  investment  portfolio.

     Realized  investment  losses  increased  $15.4  million  for the year ended
December 31, 2002, primarily due to a $3.9 million decrease in gains on the sale
of fixed maturity securities and an $11.5 million increase in losses from equity
securities.

Page  7

<PAGE>


     HARLEYSVILLE GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     2002  COMPARED  TO  2001  (CONTINUED)

     During  2002, Harleysville Group recognized other-than-temporary impairment
charges  as  follows:


<TABLE>
<CAPTION>




                             FIRST      SECOND    THIRD     FOURTH
                             QUARTER    QUARTER   QUARTER   QUARTER
                             -------    -------   -------   -------
                                         (in thousands)
EQUITY SECURITIES:
-----------------
<S>                          <C>        <C>       <C>       <C>
 WorldCom                    $2,444     $1,366    $         $
 AOL Time Warner                         3,641
 AT&T                                    1,358
 AT&T Wireless                           1,162
 Bristol-Myers                           2,677
 Corning Inc.                            1,374
 Solectron Corp.                         1,205
 Sun Microsystems                        1,757
 Tyco                                    2,480
 Williams Cos.                           3,559
 Bank of NY                                        1,273
 EMC Corp.                                         2,090
 Schering-Plough                                   1,186
 Household Intl.                                             670
                             ------    -------    ------    ----
  Total equity securities     2,444     20,579     4,549     670
                             ------    -------    ------    ----

FIXED MATURITIES:
----------------
 MCI Communications                        665
 United Airlines                                             206
                             ------   --------    ------    ----
  Total fixed maturities                   665               206
                             ------    -------    ------    ----

   Total investments         $2,444    $21,244    $4,549    $876
                             ======    =======    ======    ====
</TABLE>


     During  the  third  and  fourth  quarters, Harleysville Group began to sell
equity securities as part of a plan to carry back realized tax losses to recover
taxes  previously  paid.  All  but  two  of  the equity securities recognized as
impaired  were  sold  in  a  subsequent  quarter  of  2002.

Page  8

<PAGE>


     HARLEYSVILLE  GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     2002  COMPARED  TO  2001  (CONTINUED)

     Harleysville  Group  had  gross  realized equity investment losses of $28.6
million in 2002, which consisted of impairment charges of $28.2 million and $0.4
million  from  equity  securities  that were sold.  Harleysville Group had gross
realized  fixed  maturity  losses  of  $2.7  million in 2002, which consisted of
impairment  charges  of  $0.9  million,  $1.8 million from sales of one issuer's
bonds with a cost of $8.3 million that had been below cost for approximately six
months  at  the  time  of  sale.

     Harleysville  Group  evaluates  its  investment  portfolio  quarterly  to
determine  if  a  decline  in  fair  value  below  cost is other than temporary.
Harleysville Group has written down to fair value, without exception, any equity
security  that  has  declined  below  cost  by more than 20% and maintained such
decline  for  six months, or by 50% or more, in the quarter in which either such
decline  occurred.  In  some  cases,  securities  that have declined by a lesser
amount  or  for  a  shorter  period  of  time are written down if the evaluation
indicates the decline is other than temporary.  For example, one equity security
had  declined  for  a short period of time but was written down when the sale of
the  company  at  a value less than our cost was announced. Fair value of equity
securities  is based on the closing market value as reported by a national stock
exchange  or  Nasdaq.  The  fair  value  of  fixed maturities is based upon data
supplied  by  an  independent pricing service.  It can be difficult to determine
the  fair  value  of  non-traded  securities  but  these  are  not  material.

     Harleysville  Group holds securities with unrealized losses at December 31,
2002  as  follows:

<TABLE>
<CAPTION>



                                                  LENGTH OF UNREALIZED LOSS
                                               -------------------------------
                                   UNREALIZED   LESS THAN   6 TO 12    OVER 12
                      FAIR VALUE      LOSS      6 MONTHS    MONTHS     MONTHS
                      ----------   ----------   ---------   --------   -------
                                      (in thousands)
<S>                   <C>          <C>          <C>         <C>        <C>
Equity securities     $49,886      $9,871       $3,439      $3,351     $3,081
                      =======      ======       ======      ======     ======
Fixed maturities:
 Obligations of state
  and political
  subdivisions        $21,064      $  256       $  256      $          $
 Corporate bonds       31,655       4,206           35          19     $4,152
                      -------      ------       ------      ------     ------
   Total bonds        $52,719      $4,462       $  291      $   19     $4,152
                      =======      ======       ======      ======     ======
</TABLE>


     Substantially  all  of  the  fixed  maturity  securities  are classified as
available  for  sale  and  are  carried  at  fair  value  on  the balance sheet.

Page  9

<PAGE>


     HARLEYSVILLE  GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     2002  COMPARED  TO  2001  (CONTINUED)

     There  are  24  positions  that  comprise  the  unrealized  loss  in equity
investments  at  December 31, 2002.  While 10 of these positions have been below
cost  for  more than six months, they have had volatile price movements and have
not  been  significantly  below cost for significant continuous amounts of time.
Harleysville  Group has been monitoring these securities and it is possible that
some  may  be  written  down  in  the  income  statement  in  2003.

     There  are  $30.3  million in fixed maturity securities, at amortized cost,
that  at  December  31,  2002, had been below amortized cost for over 12 months.
These  primarily  are comprised of airline enhanced equipment trust certificates
(EETC)  as  follows:


<TABLE>
<CAPTION>



                                FAIR       MATURITY
                     COST       VALUE      DATES
                     -------    -------    -----------
                            (in thousands)
<S>                  <C>        <C>        <C>
American Airlines    $14,472    $12,371         2011
United Airlines        7,012      5,311    2010-2012
Other airlines         2,842      2,693    2011-2015
Other                  6,014      5,813    2004-2008
                     -------    -------

                     $30,340    $26,188
                     =======    =======
</TABLE>

     After  the  events of September 11, 2001, air travel and the value of these
airlines'  EETC  securities  declined.  The  EETCs are all "A tranche" holdings,
which  means  they  are  in  a senior credit position to the underlying airplane
collateral  value  as  compared  to  B  and  C  tranche holders.  At the time of
issuance, the collateral was appraised at approximately twice the value of the A
tranche  EETCs.  At  year  end,  major  investment banks had estimated that in a
distressed sale scenario, the value of the collateral would be approximately the
same  as  the  EETCs'  cost.  During the fourth quarter of 2002, United Airlines
declared  bankruptcy.  At December 31, 2002, all of the EETCs continued to carry
an  investment  grade  rating.  In the first quarter of 2003, the debt rating of
American  Airlines  was  downgraded  by  Moody's  to  non-investment  grade.
Harleysville  Group  is participating in certain EETC creditor committees and is
monitoring  developments. It is possible that these EETCs may be written down in
the  income  statement  in  2003, depending upon developments involving both the
issuers  and  the  threats  of  terrorism and war.  During the fourth quarter of
2002, a $0.2 million impairment charge was recognized for United Airlines bonds,
which  were  not  EETCs  and  were  not  collateralized.

Page  10

<PAGE>


     HARLEYSVILLE  GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     2002  COMPARED  TO  2001  (CONTINUED)

     Income  before  income  taxes  increased  $4.7 million, or 9%, for the year
ended  December  31,  2002  due  to  the  higher  investment  income and a lower
underwriting loss, partially offset by the increased realized investment losses.

     The  statutory  combined  ratio  is  a  standard  measure  of  underwriting
profitability.  This  ratio  is  the sum of (1) the ratio of incurred losses and
loss  settlement  expenses  to  net  earned  premium;  (2) the ratio of expenses
incurred  for  commissions, premium taxes, administrative and other underwriting
expenses to net written premium; and (3) the ratio of dividends to policyholders
to  net  earned premium.  The combined ratio does not reflect investment income,
federal  income  taxes  or  other non-operating income or expense.  Harleysville
Group's  statutory combined ratio improved to 101.9% for the year ended December
31,  2002  from  104.2% for the year ended December 31, 2001.  Such decrease was
due  to  improved  results  in  both  commercial  lines and personal lines.  The
commercial  lines  combined  ratio improved to 99.5% for the year ended December
31,  2002  from 100.0% for the year ended December 31, 2001.  The personal lines
combined  ratio  improved  to  108.1%  for the year ended December 31, 2002 from
113.1%  for  the  year  ended  December 31, 2001.  The improvement in commercial
lines  primarily  was  due  to improved results in the commercial automobile and
commercial  multi-peril  lines of business, partially offset by worse results in
the workers compensation line of business, where losses have trended higher. The
improvement in personal lines primarily was due to benefits from higher pricing,
re-underwriting  and  agency management efforts, partially offset by higher loss
trends  in the personal automobile lines.  The year ended December 31, 2001 also
included  estimated losses of $3.6 million resulting from the September 11, 2001
terrorist acts and a $2.6 million charge for guaranty fund and other assessments
resulting  from  the  liquidation  of Reliance Insurance Company.  These charges
adversely  affected  the  statutory combined ratio by 0.5 points and 0.4 points,
respectively.

     Losses  ceded  under  the  aggregate catastrophe reinsurance agreement with
Mutual  decreased by $7.6 million for the year ended December 31, 2002, as there
were  fewer  severe  storms  than  in  the  prior  year.

     Harleysville  Group  recognized  favorable development in the provision for
insured  events  of  prior  years  of $4.6 million and $17.4 million in 2002 and
2001,  respectively.  Such  development  represents  0.6%  and  2.2%  of the net
liability  for  unpaid losses and loss settlement expenses of $800.9 million and
$792.6  million

Page  11

<PAGE>


     HARLEYSVILLE  GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     2002  COMPARED  TO  2001  (CONTINUED)

at December 31, 2001 and 2000, respectively.  The favorable development for 2002
primarily  related  to lower-than-expected claim severity in both the commercial
and  personal  lines  of  business. The favorable development for 2001 primarily
related  to  lower-than-expected  loss  settlement  expenses.

     Of the $4.6 million of favorable development in 2002, $2.9 million was from
commercial  lines  and  was  net of $6.7 million of favorable development in the
2001  accident year and $4.8 million of adverse development in the 1999 accident
year  and  smaller amounts of development in every other accident year.  The net
liability  for  commercial  lines  unpaid losses and loss settlement expenses at
December  31,  2001  for the 2001 and 1999 accident years was $236.2 million and
$91.9  million,  respectively.  Favorable development in personal lines was $1.7
million  for  2002  and  was net of $3.8 million of favorable development in the
2001  accident year and $0.9 million of adverse development in the 1998 accident
year  and  smaller amounts of development in every other accident year.  The net
liability  for  personal  lines  unpaid  losses  and loss settlement expenses at
December  31,  2001  for  the 2001 and 1998 accident years was $71.5 million and
$11.7  million,  respectively.  Actuarial  loss  reserving  techniques  and
assumptions, which rely on historical information as adjusted to reflect current
conditions,  have  been  consistently  applied  during  the  periods  presented.
Changes  in  the estimate of the liability for unpaid losses and loss settlement
expenses  were  not  actuarially  significant  and  reflect  actual payments and
evaluations  of  new  information and data since the last reporting date.  These
changes  correlate  with  actuarial  trends  and  primarily  relate  to
lower-than-expected  claim  severity.

     Of  the  $17.4  million of favorable development in 2001, $14.8 million was
derived  from a reduction in anticipated loss settlement expenses.  During 2000,
Harleysville Group completed a plan to consolidate its claims operations from 23
general  claims  offices  into  a  centralized  direct reporting center and four
specialized  regional  claims  centers, which resulted in the termination of 173
employees.  At  December 31, 2000, the liability for loss settlement expenses of
$151.0  million  was  established  based on historical trends with consideration
given  to  benefits  from staffing reductions that were expected from the claims
reorganization.  When  establishing  this  liability, Harleysville Group did not
have  historical  experience  or  data  regarding  such  a  reorganization  that
indicated  that additional benefits were likely to be realized. During 2001, the
actual  loss  settlement  payments and actuarial data indicated, with increasing
certainty,  that  the  benefits from the claims reorganization were greater than
originally  anticipated  due  to  the  benefits  of

Page  12

<PAGE>


     HARLEYSVILLE  GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     2002  COMPARED  TO  2001  (CONTINUED)

greater specialization of the staff and the favorable development was recognized
throughout  2001  as  the  experience developed.  Of the $14.8 million favorable
development  from  loss  settlement  expenses,  $13.5 million is from commercial
lines  and  is  from all of the accident years roughly in proportion to the loss
reserves in those accident years.  In addition to the $14.8 million of favorable
loss  settlement  expense  development,  there was $2.6 million of net favorable
loss  development  with  no  significant variances from a varied mix of accident
years  and  lines.

     The  net  liability  at  December  31,  2002  for  unpaid  losses  and loss
settlement  expenses  was $702.7 million for commercial lines and $154.5 million
for personal lines.  Harleysville Group has recorded the actuarial best estimate
of the ultimate unpaid cost of all losses and loss settlement expenses incurred,
including losses for claims that have been incurred but not yet been reported to
Harleysville  Group.  The  amount  of loss reserves for reported claims is based
primarily upon a case-by-case evaluation of the type of risk involved, knowledge
of  the circumstances surrounding each claim and the insurance policy provisions
relating to the type of loss. The amounts of loss reserves for unreported claims
and  loss  settlement  expense  reserves  are  determined  utilizing  historical
information  by  line of insurance as adjusted to current conditions.  Inflation
is  implicitly provided for in the reserving function through analysis of costs,
trends  and reviews of historical reserving results.  A statistically determined
range  of estimates for commercial lines is $616.4 million to $822.1 million and
for  personal lines is $129.7 million to $176.4 million.  The range of estimates
around  the  actuarial  best  estimates  is statistically determined in order to
provide  information  regarding the variability of the actuarial best estimates.
The  ranges  were  determined using both paid and incurred loss development data
with  a 1,000 trial simulation run against each set of data. Development factors
within  each 12-month development period were assumed to be normally distributed
with  the  means  equal  to  the  estimated age-to-age factors, and the standard
deviations  equal  to  the  actual  standard  deviations  of the data used.  The
resulting  ranges  produced  by  the  simulation  were  then  used  to  create a
reasonable representation of a 90% confidence interval using the 5% point as the
low  end  of  the  range  and  the  95%  point  as  the  high  end of the range.

     Because of the nature of insurance claims, there are uncertainties inherent
in  the  estimates of ultimate losses.  The aforementioned reorganization of the
claims  operation  has resulted in new people and processes involved in settling
claims.

Page  13

<PAGE>


     HARLEYSVILLE  GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     2002  COMPARED  TO  2001  (CONTINUED)

As  a  result,  more recent statistical data reflects different patterns than in
the  past.  For  example, the rate of settlement of liability cases is generally
slower  than it had been before the reorganization.  Harleysville Group believes
that this reflects the impact of more specialized claims settlement activity and
a  related  increase  in  litigation and has considered this in establishing its
best  estimates.  On  the other hand, smaller, routine property claims are being
handled  by  a centralized claims unit that has led to faster settlement of such
claims.  These  changes  resulting  from  the claims reorganization give rise to
uncertainty  as  to  the  pattern  of  future  loss  settlements.  There  are
uncertainties  regarding future loss cost trends particularly related to medical
treatments  and  automobile  repair.  Court  decisions,  regulatory  changes and
economic  conditions can affect the ultimate cost of claims that occurred in the
past.  Accordingly, the ultimate liability for unpaid losses and loss settlement
expenses is likely to differ from the amount recorded at December 31, 2002.  For
every  1%  change  in  the  estimate, the effect on pre-tax income would be $8.6
million.

     The  property  and  casualty  industry  has  had substantial aggregate loss
experience  from  claims  related  to  asbestos-related illnesses, environmental
remediation,  product  and  construction  defect  liability,  mold,  and  other
uncertain  exposures.  Harleysville Group has not experienced significant losses
from  such  claims.

     Effective  for  one  year from July 1, 2002, the pool in which Harleysville
Group and Mutual participate is reinsured under a catastrophe reinsurance treaty
that  provides  coverage  ranging  from  84.8% to 94.3% of up to $140 million in
excess  of  a  retention  of $30 million for any given catastrophe. Harleysville
Group's  2002  pooling share of this coverage would range from 84.8% to 94.3% of
up  to  $100.8  million  in excess of a retention of $21.6 million for any given
catastrophe.  Accordingly,  pursuant  to  the  terms  of the treaty, the maximum
recovery  would  be $126.5 million for any catastrophe involving an insured loss
of  $170  million  or  greater.  Harleysville Group's 2002 pooling share of this
maximum recovery would be $91.1 million for any catastrophe involving an insured
loss of $122.4 million or greater.  The treaty includes reinstatement provisions
for  coverage  for  a second catastrophe and payment of an additional premium in
the  event of a first catastrophe occurring.  Most terrorism losses would not be
covered  by  the treaty.  A separate property per risk reinsurance treaty covers
certain  terrorism  losses.  The  maximum recovery by Harleysville Group on such
terrorism  losses  would  be  $27  million.

Page  14

<PAGE>


     HARLEYSVILLE  GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     2001  COMPARED  TO  2000

     Premiums earned increased $41.6 million, or 6%, for the year ended December
31, 2001.  The increase was due to an increase in premiums earned for commercial
lines  of  $55.5  million,  partially  offset  by a decrease of $13.9 million in
personal  lines premiums earned.  The increase in premiums earned for commercial
lines  primarily  was  due  to  higher  rates,  partially offset by fewer policy
counts.  The decrease in premiums earned for personal lines primarily was due to
fewer  policy  counts,  partially  offset  by  higher  rates.

     Investment  income  decreased  $1.3  million,  or  1%,  for  the year ended
December  31,  2001  due  to  a  lower  yield  on  the  investment  portfolio.

     Realized  investment  gains  (losses)  decreased $12.9 million for the year
ended  December  31, 2001 primarily resulting from greater losses on the sale of
equity  securities  and  an  increase  of  $5.5  million in losses recognized on
investments that were trading below cost on an other-than-temporary basis.  Such
increased  losses  were  partially  offset by greater gains on the sale of fixed
maturities.

     Income  before  income  taxes  decreased $5.9 million, or 10%, for the year
ended  December  31, 2001, due to the lower investment income and lower realized
investment  gains  (losses),  partially  offset  by  a  lower underwriting loss.
Harleysville  Group's  statutory  combined ratio improved to 104.2% for the year
ended  December 31, 2001 from 106.1% for the year ended December 31, 2000.  Such
decrease  is  primarily  due  to improved results in commercial lines, partially
offset  by worse results in personal lines.  The commercial lines combined ratio
improved to 100.0% for the year ended December 31, 2001 from 104.5% for the year
ended  December  31, 2000.  The personal lines combined ratio declined to 113.1%
for the year ended December 31, 2001 from 108.7% for the year ended December 31,
2000.  The  improvement  in  commercial lines primarily was due to benefits from
higher  pricing, re-underwriting and agency management efforts, partially offset
by  $3.6  million  of  net  estimated  losses ($.08 per basic share after taxes)
resulting  from  the September 11, 2001 terrorist acts.  The decline in personal
lines  profitability  primarily  was  due  to higher loss trends in the personal
automobile  lines.

     The  year  ended December 31, 2001 included a $2.6 million charge ($.06 per
basic  share after taxes) for guaranty fund and other assessments resulting from
the  liquidation  of Reliance Insurance Company.  This charge adversely affected
the  statutory

Page  15

<PAGE>


     HARLEYSVILLE GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     2001  COMPARED  TO  2000  (CONTINUED)

combined  ratio  by  0.4  points and the September 11 terrorist losses adversely
affected  it by 0.5 points.  The year ended December 31, 2000 included a pre-tax
charge  of  $1.1  million  ($.03  per  basic  share  after taxes) related to the
consolidation  of  selected  non-claims  support  services  and office functions
throughout  the  field operations.  This restructuring charge adversely affected
the statutory combined ratio by 0.2 points for the year ended December 31, 2000.
Income before income taxes for the year ended December 31, 2000 also was reduced
by  $1.9  million  ($.04 per basic share after taxes) to reflect the effect of a
settlement  of  litigation  between  the  North  Carolina  Rate  Bureau  and the
Commissioner  of Insurance over personal automobile insurance rate levels dating
back  to  1994.  The  settlement,  which mandated a refund of premium be made to
policyholders,  adversely  affected  the  combined  ratio  by  0.3  points.

     Losses  ceded  under  the  aggregate catastrophe reinsurance agreement with
Mutual  increased by $3.6 million for the year ended December 31, 2001, as there
were  more  severe  storms, particularly in the Midwest, than in the prior year.

     Harleysville Group recognized $48.9 million of favorable development in the
provision  for insured events of prior years in 2000, of which $20.2 million was
from loss settlement expenses and $28.7 million is from losses.  At December 31,
1999,  the  liability  for  loss  settlement  expenses  of  $158.5  million  was
established  based  on  historical  trends.  The  aforementioned  claims
reorganization plan was being implemented and was not complete at that time.  As
a  result,  Harleysville Group was unable to accurately estimate the benefits to
the ultimate loss settlement expenses associated with claims that occurred prior
to  December 31, 1999.  During 2000, the claims reorganization was completed and
staffing  efficiencies  were achieved and the estimate of the liability for loss
settlement  expenses  was  adjusted  in  correlation  with  this  information.

     Of  the  $28.7 million of favorable loss development in 2000, $21.0 million
was from commercial lines and $7.7 million was from personal lines.  For both of
these  lines,  the  favorable  development  correlated with actuarial trends and
primarily  was  in  the three most recent accident years.  Within the commercial
lines, workers compensation claims developed favorably by $8.9 million primarily
due  to  benefits  of  reform  legislation  that  was passed in Pennsylvania and
resulted  in  a  reduction  of  medical  cost  trends from rules that controlled
medical  fees  and a reduction in indemnity costs through rules that resulted in
injured  workers  returning  to work quicker.  Such benefits affected almost all
accident  years.

Page  16

<PAGE>


     HARLEYSVILLE  GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     NEW  ACCOUNTING  STANDARDS

     In  June  2001,  SFAS  No.  142, "Goodwill and Other Intangible Assets" was
issued.  SFAS  No.  142  requires  that  goodwill  and  intangible  assets  with
indefinite  useful  lives  no  longer  be  amortized,  but instead be tested for
impairment  at least annually in accordance with the provisions of SFAS No. 142.
Harleysville  Group  adopted the provisions of SFAS No. 142 effective January 1,
2002,  at  which  time  Harleysville Group ceased to record amortization expense
related  to  its  goodwill.  The  adoption  of  SFAS  No. 142 resulted in a $0.8
million  reduction  in  amortization  expense  in  2002  as  compared  to  2001.
Harleysville  Group's  goodwill  balance was $23.4 million at December 31, 2002.
Harleysville  Group  completed  its  analysis of any potential impairment of the
goodwill  during  the  second  quarter  of 2002 and no adjustment was necessary.

     Other  new  accounting  standards that have been issued did not, or are not
expected  to,  have  a material impact on the consolidated financial statements.

     LIQUIDITY  AND  CAPITAL  RESOURCES

     Liquidity  is  a measure of the ability to generate sufficient cash to meet
cash obligations as they come due.  Harleysville Group's primary sources of cash
are  premium  income, investment income and maturing investments.  Cash outflows
can  be  variable  because  of  uncertainties  regarding  settlement  dates  for
liabilities  for  unpaid  losses  and because of the potential for large losses,
either  individually  or  in  the  aggregate.  Accordingly,  Harleysville  Group
maintains  investment  and  reinsurance  programs  generally intended to provide
adequate  funds to pay claims without forced sales of investments.  Harleysville
Group  models  its  exposure  to  catastrophes and has the ability to pay claims
without  selling  held to maturity securities even for events having a low (less
than  1%)  probability.  Even  in  years  of  greater  catastrophe  frequency,
Harleysville  Group  has  been  able  to  pay  claims  without  liquidating  any
investments.  Harleysville  Group  has  also considered scenarios of declines in
revenue  and  increases  in  loss  payments,  and  has  the ability to meet cash
requirements  under  such scenarios without selling held to maturity securities.
Harleysville  Group's  policy  with  respect to fixed maturity investments is to
purchase  only  those  that  are  of  investment  grade  quality.

     Net  cash  provided  by  operating  activities was $113.2 million and $45.8
million  for  2002 and 2001, respectively.  The increase in net cash provided by
operating  activities  primarily  consists  of  an  increase in cash provided by
underwriting  activities.

Page  17

<PAGE>


     HARLEYSVILLE  GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     LIQUIDITY  AND  CAPITAL  RESOURCES  (CONTINUED)

     Net  cash used by investing activities was $100.9 million and $36.4 million
for  2002  and 2001, respectively.  The change is primarily due to increased net
purchases  of  investments  due  to  the  increase in cash provided by operating
activities.

     Financing  activities  used  net  cash of $11.1 million in 2002 compared to
$9.6  million in 2001.  The change was primarily due to an increase in dividends
paid,  partially  offset  by  an  increase  in  the  issuance  of  common stock.

     Harleysville  Group  participates  in  a securities lending program whereby
certain  fixed  maturity  securities from the investment portfolio are loaned to
other  institutions for a short period of time in return for a fee.  At December
31,  2002,  Harleysville Group held cash collateral of $139.2 million related to
securities  on  loan with a market value of $135.5 million. 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.

     The  Company  had  $8.7 million of cash and marketable securities and $42.0
million  of  dividends  receivable  from  its subsidiaries at December 31, 2002,
which  are  available  for  general corporate purposes including dividends, debt
service,  capital contributions to subsidiaries, acquisitions and the repurchase
of stock.  The Company's $75.0 million of notes payable are due in November 2003
and  are  expected to be refinanced.  The Company has adopted a stock repurchase
plan  under  which the Company may purchase up to 500,000 shares of Harleysville
Group  Inc.  common stock.  Mutual has authorized purchases of the common shares
of  Harleysville  Group  Inc. in an equal amount.  At March 6, 2003, the Company
and  Mutual  each  have  repurchased  1,250  of  the  shares  authorized  to  be
repurchased.  Harleysville  Group  has  no  material  commitments  for  capital
expenditures  as  of  December  31,  2002.

     As  a  holding  company,  the  Company's  principal  source of cash for the
payment of dividends is dividends from its subsidiaries. The Company's insurance
subsidiaries  are  subject  to  state  laws  that  restrict their ability to pay
dividends.

Page  18

<PAGE>


     HARLEYSVILLE  GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     LIQUIDITY  AND  CAPITAL  RESOURCES  (CONTINUED)

     Applying the current regulatory restrictions as of December 31, 2002, $11.0
million  would  be available for distribution to the Company by its subsidiaries
without  prior  regulatory  approval  until  October  1, 2003, after which $52.9
million  would  be available for distribution to Harleysville Group Inc. without
prior  approval.  See the Business-Regulation section of the Company's 2002 Form
10-K,  which includes a reconciliation of net income and shareholders' equity as
determined  under statutory accounting practices to net income and shareholders'
equity  as  determined  in  accordance  with  generally  accepted  accounting
principles. Also, see Note 10 of the Notes to Consolidated Financial Statements.

     The  National  Association  of  Insurance  Commissioners  (NAIC)  adopted
risk-based capital (RBC) standards that require insurance companies to calculate
and  report  statutory  capital  and  surplus needs based on a formula measuring
underwriting,  investment  and  other  business  risks inherent in an individual
company's  operations.  These  RBC standards have not affected the operations of
Harleysville  Group  since  each  of  the  Company's  insurance subsidiaries has
statutory  capital  and  surplus  in  excess  of  RBC  requirements.

     The  NAIC  has  adopted the Codification of Statutory Accounting Principles
with an effective date of January 1, 2001.  The codified principles are intended
to  provide  a  basis of 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 $0.4 million to an
increase  of $6.4 million and was an increase of $21.0 million on a consolidated
basis.

     Harleysville  Group  had  off-balance-sheet  credit  risk  related to $68.0
million  of  premium balances due to Mutual from agents and insureds at December
31,  2002.

     The  following  summarizes  Harleysville Group's contractual obligations at
December  31,  2002.


                                      LESS THAN                 AFTER
                            TOTAL     1 YEAR       1-3 YEARS    3 YEARS
                           -------    ---------    ---------    -------
(in thousands)
Contractual obligations:
Debt                       $95,620    $75,475      $19,585      $560


Page  19

<PAGE>



     HARLEYSVILLE GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     LIQUIDITY  AND  CAPITAL  RESOURCES  (CONTINUED)

     In  2001,  GE  Reinsurance  Corporation  (GE  Re)  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.

     IMPACT  OF  INFLATION

     Property  and casualty insurance premiums are established before the amount
of  losses  and  loss  settlement expenses, or the extent to which inflation may
affect  such  expenses, are known. Consequently, Harleysville Group attempts, in
establishing  rates,  to  anticipate  the potential impact of inflation.  In the
past,  inflation  has  contributed  to  increased  losses  and  loss  settlement
expenses.

     RISK  FACTORS

     You  should  consider  carefully  the following risks, as well as the other
information  contained in our 2002 Report on Form 10-K.  If any of the following
risks  actually  occur,  our  business,  financial  condition  and  results  of
operations  could  be  adversely  affected.  You  should  refer  to  the  other
information set forth in our 2002 Report on Form 10-K including our consolidated
financial  statements  and  the  related  notes.

OUR  RESERVES MAY NOT BE ADEQUATE TO COVER OUR ULTIMATE LIABILITY FOR LOSSES AND
LOSS  SETTLEMENT  EXPENSES.

     We  are  required to maintain loss reserves for our estimated liability for
losses  and  loss  settlement  expenses  associated with reported and unreported
claims for each accounting period.  We regularly review our reserving techniques
and  our overall amount of reserves and, based on our estimated liability, raise
or lower the levels of our reserves accordingly.  If our estimates are incorrect
and  our reserves are inadequate, we are obligated to increase our reserves.  An
increase in reserves results in an increase in losses and a reduction in our net
income  for  the  period  in  which  the  deficiency  in reserves is identified.
Accordingly, an increase in reserves could have a material adverse effect on our
results  of  operations,  liquidity  and

Page  20

<PAGE>


     HARLEYSVILLE GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     RISK  FACTORS  (CONTINUED)

financial  condition.  Our reserve amounts are estimated based on what we expect
our  ultimate  liability  for  losses and loss settlement expenses to be.  These
estimates  are  based  on  facts  and  circumstances  of  which  we  are  aware,
predictions  of future events, trends in claims severity and frequency and other
subjective factors.  Although we use a number of methods to project our ultimate
liability,  there  is  no  method  that  can always exactly predict our ultimate
liability  for  losses  and  loss  settlement  expenses.

     In addition to reviewing our reserving techniques, as part of our reserving
process  we  also  consider:

   -  information  regarding  each  claim  for  losses;

   -  our  loss  history  and  the  industry's  loss  history;

   -  legislative enactments, judicial decisions and legal developments
      regarding damages;

   -  changes  in  political  attitudes;  and

   -  trends  in  general  economic  conditions,  including  inflation.

     We  cannot  be  certain  that the reserves we establish are adequate now or
will  be  adequate  in  the  future.

CATASTROPHIC  EVENTS  CAN  HAVE  A  SIGNIFICANT  IMPACT  ON  OUR  FINANCIAL  AND
OPERATIONAL  CONDITION.

     Results  of  property  insurers  are  subject  to  weather and other events
prevailing  in  any  given year.  While one year may be relatively free of major
weather  or  other disasters, another year may have numerous such events causing
results  for  that  year  to  be  materially  worse  than  for  other  years.

     Our insurance subsidiaries have experienced, and are expected in the future
to  experience, catastrophe losses.  It is possible that a catastrophic event or
a series of multiple catastrophic events could have a material adverse effect on
the  operating  results  and  financial condition of our insurance subsidiaries,
thereby  limiting  the ability of our insurance subsidiaries to pay dividends to
us.

Page  21

<PAGE>



     HARLEYSVILLE GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     RISK  FACTORS  (CONTINUED)

     Various  events  can  cause  catastrophes, including severe winter weather,
hurricanes, windstorms, earthquakes, hail, terrorism, explosions and fires.  The
frequency  and severity of these catastrophes are inherently unpredictable.  The
extent  of  losses  from a catastrophe is a function of both the total amount of
insured  exposures  in  the  area  affected by the event and the severity of the
event.

     Our  insurance  subsidiaries seek to reduce the impact on our business of a
catastrophe  through  geographic  diversification  and  through  the purchase of
reinsurance  covering  various  categories  of  catastrophes,  which  generally
excludes  terrorism.  Nevertheless,  reinsurance  may  prove  inadequate  if:

   -  a  major  catastrophic  loss  exceeds  the  reinsurance  limit,  or

   -  an  insurance  subsidiary pays a number of smaller catastrophic
      loss claims  that,  individually,  fall  below  the  subsidiary's
      retention  level.

WE  FACE  SIGNIFICANT  COMPETITION  FROM  OTHER  REGIONAL AND NATIONAL INSURANCE
COMPANIES,  AGENTS  AND  FROM  SELF-INSURANCE.

     We compete with local, regional and national insurance companies, including
direct writers of insurance coverage.  Many of these competitors are larger than
we  are  and many have greater financial, technical and operating resources.  In
addition,  we  face  competition  within  each  insurance  agency that sells our
insurance  because we sell through independent agencies that represent more than
one  insurance  company.

     The  property  and casualty insurance industry is highly competitive on the
basis  of  product,  price  and service.  If our competitors offer products with
more coverage, or price their products more aggressively, our ability to grow or
renew  our  business  may  be  adversely  impacted.  There  are  many  companies
competing  for  the same insurance customers in the geographic areas in which we
operate.  The  internet  also  could  emerge  as  a  significant  source  of new
competition, both from existing competitors using their brand name and resources
to  write  business  through  this  new  distribution  channel  and  from  new
competitors.

Page  22

<PAGE>


     HARLEYSVILLE GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     RISK  FACTORS  (CONTINUED)

     We also face competition because of entities that self-insure, primarily in
the  commercial  insurance  market.  From time to time, certain of our customers
and potential customers may examine the benefits and risks of self-insurance and
other  alternatives  to  traditional  insurance.

     A number of new, proposed or potential legislative or industry developments
could  further  increase  competition  in  the  property  and casualty insurance
industry.  These  developments  include:

   -  the  enactment of the Gramm-Leach-Bliley Act of 1999, which could
      result in increased competition from new entrants to the insurance
      market, including banks and  other  financial  service  companies;

   -  programs  in  which  state-sponsored entities provide property insurance
      in catastrophe-prone  areas  or  other  alternative  market  types of
      coverage; and

   -  changing  practices  caused  by  the  internet,  which  have led to
      greater competition  in  the insurance business and, in some cases,
      greater expectations for  customer  service.

     New  competition  from  these developments could cause the supply or demand
for  insurance to change, which could adversely affect our results of operations
and  financial  condition.

WE  ARE  HEAVILY  REGULATED  IN  THE  STATES  IN  WHICH  WE  OPERATE.

     We  are  subject  to  extensive supervision and regulation in the states in
which  we  transact business.  The primary purpose of supervision and regulation
is  to protect individual policyholders and not shareholders or other investors.
Our business can be adversely affected by private passenger automobile insurance
regulations  and any other regulations affecting property and casualty insurance
companies.  For  example, laws and regulations can reduce or set rates at levels
that  we  do  not  believe are adequate for the risks we insure.  Other laws and
regulations  can  limit  our  ability  to cancel or refuse to renew policies and
require us to offer coverage to all consumers.  Changes in laws and regulations,
or  their  interpretations,  pertaining  to  insurance,  including  workers
compensation,  may  also  have  an adverse effect on our business.  Although the
federal  government  does  not directly regulate the insurance industry, federal
initiatives,  such as federal terrorism backstop legislation, from time to time,
also  can  impact  the  insurance  industry.

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     HARLEYSVILLE GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     RISK  FACTORS  (CONTINUED)

     In  addition,  proposals  intended  to control the cost and availability of
health  care  services  have  been  debated  in  the  U.S.  Congress  and  state
legislatures.  Although we do not write health insurance, rules affecting health
care  services  can  affect  other  insurance  that  we write, including workers
compensation, and commercial and personal automobile and liability insurance. We
cannot  determine  whether or in what form health care reform legislation may be
adopted by the U.S. Congress or any state legislature.  We also cannot determine
the  nature  and effect, if any, that the adoption of health care legislation or
regulations,  or  changing  interpretations, at the federal or state level would
have  on  us.

THE  PROPERTY  AND  CASUALTY  INSURANCE  INDUSTRY  IS  CYCLICAL.

     Historically,  the  results of the property and casualty insurance industry
have  been  subject to significant fluctuations over time due to competition and
due  to  unpredictable  developments,  including:

   -  natural  and  man-made  disasters;

   -  fluctuations  in  interest  rates  and  other  changes  in  the
      investment environment  that  affect  returns  on  our
      investments;

   -  inflationary  pressures  that  affect  the  size  of  losses;
      and

   -  legislative  and  regulatory  changes  and  judicial  decisions
      that affect insurers'  liabilities.

     The  demand  for  property  and casualty insurance, particularly commercial
lines,  also  can vary with the overall level of economic activity.  In addition
to the cyclicality of the property and casualty industry, our surety business is
affected adversely by economic downturns that make it difficult for the insureds
whose  obligations  we  guarantee  to  fulfill  their  obligations.

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     HARLEYSVILLE GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     RISK  FACTORS  (CONTINUED)

OUR ABILITY TO REDUCE OUR EXPOSURE TO RISKS DEPENDS ON THE AVAILABILITY AND COST
OF  REINSURANCE.

     We  transfer a portion of our exposure to selected risks to other insurance
and  reinsurance  companies  through  reinsurance  arrangements.  Under  our
reinsurance  arrangements,  another  insurer  assumes a specified portion of our
losses  and  loss  adjustment  expenses  in  exchange for a specified portion of
policy  premiums.  The  availability,  amount  and cost of reinsurance depend on
market conditions and may vary significantly.  Any decrease in the amount of our
reinsurance  will increase our risk of loss.  Furthermore, we face a credit risk
when we obtain reinsurance because we are still liable for the transferred risks
if  the  reinsurer  cannot  meet  the  transferred  obligations.  Therefore, the
inability  of  any  of  our  reinsurers  to meet its financial obligations could
materially  and  adversely  affect  our  operations.

     Many  reinsurers  experienced  significant  losses related to the terrorist
acts  of September 11, 2001, and future terrorist acts may have similar effects.
As  a  result,  we  may  incur  significantly  higher reinsurance costs and more
restrictive  terms  and  conditions,  or may be unable to attain reinsurance for
some  types  of  commercial  exposures.

OUR  PERFORMANCE  IS  TIED  TO  THE  ECONOMIC  AND  REGULATORY  CONDITIONS  AND
WEATHER-RELATED  EVENTS  IN  THE  EASTERN  AND  MIDWESTERN  UNITED  STATES.

     We  write  property  and  casualty  insurance  business  in the eastern and
midwestern  United  States.  Consequently,  unusually  severe  storms  or  other
natural  or  man-made  disasters  that  destroy  property  in these states could
adversely affect our operations. Our revenues and profitability also are subject
to prevailing economic and regulatory conditions in the states in which we write
insurance.  We  may be exposed to risks of adverse developments that are greater
than  if  we  conducted  business  nationwide.

WE  DEPEND  ON  OUR  INVESTMENTS  TO  SUPPORT  OUR  OPERATIONS  AND TO PROVIDE A
SIGNIFICANT  PORTION  OF  OUR  REVENUES  AND  EARNINGS.

     We,  like  many  other property and casualty insurance companies, depend on
income  from  our investment portfolio for a significant portion of our revenues
and  earnings.  Any  significant decline in our investment income as a result of

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     HARLEYSVILLE GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     RISK  FACTORS  (CONTINUED)

falling  interest  rates,  decreased  dividend  payment  rates or general market
conditions would have an adverse effect on our results.  Any significant decline
in the market value of our investments would reduce our shareholders' equity and
our  policyholders'  surplus, which could impact our ability to write additional
business.

WE  DEPEND  ON  INDEPENDENT  INSURANCE  AGENTS.

     We  market  and  sell  our  insurance  products  through  independent,
non-exclusive  insurance agencies.  These agencies are not obligated to sell our
insurance  products,  and  generally  they  also sell our competitors' insurance
products.  As  a result, our business depends in part on the marketing and sales
efforts  of  these  agencies.  If  we  diversify  and  expand  our  business
geographically,  then  we  may  need  to  expand  our  network  of  agencies  to
successfully market our products.  If these agencies fail to market our products
successfully,  our business may be adversely impacted.  Also, independent agents
may  decide to sell their businesses to banks, other insurance agencies or other
businesses.  Changes  in ownership of agencies, or expansion of agencies through
acquisition,  could  adversely  affect an agency's ability to control growth and
profitability,  thereby  adversely  affecting  our  business.

WE  MAY  BE  ADVERSELY  IMPACTED  BY  A  CHANGE  IN  OUR  RATING.

     Insurance  companies  are subject to financial strength ratings produced by
external rating agencies.  Higher ratings generally indicate financial stability
and  a strong ability to pay claims.  Ratings are assigned by rating agencies to
insurers  based  upon  factors  that they believe are relevant to policyholders.
Ratings  are  not  recommendations  to  buy,  hold  or  sell  our  securities.

     The  principal  agencies  that cover the property and casualty industry are
A.M.  Best  Company,  Standard  &  Poor's and Moody's. We believe our ability to
write  business  is  most influenced by our rating from A.M. Best.  According to
A.M.  Best,  its  ratings are designed to assess an insurer's financial strength
and  ability  to meet ongoing obligations to policyholders.  A rating below "A-"
from  A.M.  Best  could  materially  adversely affect the business we write.  We
believe that ratings from Standard & Poor's or Moody's, although important, have
less  of  an  impact  on  our

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     HARLEYSVILLE GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     RISK  FACTORS  (CONTINUED)

business.  An unfavorable change in either of these ratings, however, could make
it  more  expensive for us to access capital markets.  We cannot be sure that we
will  maintain  our  current  A.M.  Best,  Standard & Poor's or Moody's ratings.

BECAUSE  WE  ARE  AN  INSURANCE  HOLDING  COMPANY, WE RELY ON RECEIVING ADEQUATE
DIVIDENDS  FROM  OUR  INSURANCE  SUBSIDIARIES.

     Our  principal  assets  are  the  shares  of capital stock of our insurance
company  subsidiaries.  We  rely  on  dividends  from  our  insurance  company
subsidiaries  to  meet  our  obligations  for  paying  principal and interest on
outstanding  debt obligations and for paying corporate expenses and dividends to
shareholders.  The payment of dividends by our insurance company subsidiaries is
subject  to  regulatory  restrictions  and will depend on the surplus and future
earnings  of these subsidiaries, as well as other regulatory restrictions.  As a
result, we may not be able to receive dividends from these subsidiaries at times
and  in  amounts  necessary  to  meet  our  obligations  or  to  allow us to pay
dividends.

APPLICABLE INSURANCE LAWS MAKE IT DIFFICULT TO EFFECT A CHANGE OF CONTROL, AND A
LARGE  SHAREHOLDER  MAY  HAVE  SIGNIFICANT  INFLUENCE  OVER  POTENTIAL CHANGE OF
CONTROL  TRANSACTIONS.

     Under  applicable insurance laws and regulations of the states in which our
subsidiaries  are  domiciled,  no  person  may acquire control of us unless that
person has filed a statement containing specified information with the insurance
commissioner  of  each  state and obtains advance approval for such acquisition.
Under  applicable  laws  and  regulations,  any  person  acquiring,  directly or
indirectly (by revocable proxy or otherwise), 10% or more of the voting stock of
any  other  person  is  presumed  to have acquired control of such person, and a
person  who  beneficially  acquires  10%  or  more  of  our common stock without
obtaining  advance approval of the insurance commissioner of each state would be
in  violation  of  applicable  insurance laws and would be subject to injunctive
action requiring disposition or seizure of the shares and prohibiting the voting
of such shares, as well as other action determined by the insurance commissioner
of  each  such  state.

     In  addition,  many  state insurance laws require prior notification to the
state insurance department of a change of control of a non-domiciliary insurance
company  licensed  to  transact  insurance  in  that state.  Although these pre-

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     HARLEYSVILLE GROUP
     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS
     OF  OPERATIONS  AND  FINANCIAL  CONDITION
     (Continued)

     RISK  FACTORS  (CONTINUED)

notification  statutes  do  not  authorize  the  state  insurance departments to
disapprove the change of control, they authorize regulatory action - including a
possible  revocation  of our authority to do business - in the affected state if
particular  conditions  exist  such  as  undue market concentration.  Any future
transactions  that  would constitute a change of control of us may require prior
notification  in  the  states  that  have  pre-acquisition  notification  laws.

     As  of December 31, 2002, Mutual owned approximately 56% of our outstanding
common  stock.  Mutual's  stock  ownership  and  ability,  by  reason  of  such
ownership,  to  elect  our  board  of  directors,  provides  it with significant
influence  over  potential  change  of  control  transactions.

     Finally, our certificate of incorporation permits the Board of Directors to
issue  up  to one million shares of preferred stock having such terms, including
voting  rights,  as  the  Board  shall  fix  and  determine.

WE  DEPEND  ON  KEY  PERSONNEL.

     The success of our business is dependent, to a large extent, on our ability
to  attract and retain key employees, in particular our senior officers, and key
management,  sales,  information  systems,  underwriting,  claims  and corporate
personnel.  Competition to attract and retain key personnel is intense. Although
we  have  change of control agreements with a number of key managers, in general
we  do  not  have  employment  contracts  or  non-compete  arrangements with our
employees,  including  our  key  employees.

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