EXHIBIT  13(D)
     HARLEYSVILLE  GROUP
     CONSOLIDATED  BALANCE  SHEETS
     (in  thousands,  except  share  data)

<TABLE>
<CAPTION>

                                                     DECEMBER 31,
                                               --------------------------
                                                  2001            2000
                                               ----------      ----------
          ASSETS
 --------------------------
<S>                                             <C>            <C>
Investments:
  Fixed maturities:
    Held to maturity, at amortized
     cost (fair value $459,588
     and $578,662)                             $  439,499     $  562,603
    Available for sale, at fair value
     (cost $956,047 and $800,954)                 984,264        818,891
    Equity securities, at fair value
     (cost $110,803 and $125,517)                 150,686        193,750
    Short-term investments, at cost,
     which approximates fair value                 36,695         23,881
                                               ----------     ----------
       Total investments                        1,611,144      1,599,125
Cash                                                1,839         28,395
  Receivables:
  Premiums                                        122,508        101,511
  Reinsurance                                      81,640         76,841
  Accrued investment income                        21,862         23,316
                                               ----------     ----------
       Total receivables                          226,010        201,668
Deferred policy acquisition costs                  86,076         84,759
Prepaid reinsurance premiums                       20,096         18,154
Property and equipment, net                        28,873         27,621
Deferred income taxes                              29,435         19,545
Other assets                                       41,817         42,595
                                               ----------     ----------
       Total assets                            $2,045,290     $2,021,862
                                               ==========     ==========

      LIABILITIES AND SHAREHOLDERS' EQUITY
   ------------------------------------------
Liabilities:
  Unpaid losses and loss
    settlement expenses                        $  879,056     $  864,843
  Unearned premiums                               373,737        354,098
  Accounts payable and
    accrued expenses                               96,440        120,210
  Debt                                             96,055         96,450
  Due to affiliate                                  9,704         19,680
                                               ----------     ----------
       Total liabilities                        1,454,992      1,455,281
                                               ----------     ----------
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 2001, 30,444,678
    and 2000, 30,001,852 shares;
    outstanding 2001, 29,444,678
    and 2000, 29,001,852 shares                    30,445         30,002
  Additional paid-in capital                      140,065        131,537
  Accumulated other comprehensive
    income                                         44,265         56,010
  Retained earnings                               391,088        364,597
  Treasury stock, at cost, 1,000,000 shares       (15,565)       (15,565)
                                               ----------     ----------
       Total shareholders' equity                 590,298        566,581
                                               ----------     ----------
       Total liabilities and
         shareholders' equity                  $2,045,290     $2,021,862
                                               ==========     ==========

</TABLE>

See  accompanying  notes  to  consolidated  financial  statements.


Page  18

<PAGE>


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

<CAPTION>


                                        YEAR  ENDED  DECEMBER  31,
                                      -----------------------------
                                        2001       2000      1999
                                      ---------  --------  --------
Revenues:
<S>                                   <C>        <C>        <C>
  Premiums earned                     $729,889   $688,330   $707,200
  Investment income, net
    of investment expense               85,518     86,791     85,894
  Realized investment gains (losses)    (3,071)     9,780     16,222
  Other income                          15,415     17,670     15,440
                                      --------   --------   --------

       Total revenues                  827,751    802,571    824,756
                                      --------   --------   --------

Losses and expenses:
  Losses and loss settlement
    expenses                           519,822    492,801    523,002
  Amortization of deferred
    policy acquisition costs           180,283    177,217    182,337
  Other underwriting expenses           64,267     60,916     60,226
  Interest expense                       6,207      6,612      6,390
  Other expenses                         5,372      7,320      5,049
                                      --------   --------   --------

       Total expenses                  775,951    744,866    777,004
                                      --------   --------   --------

       Income before income taxes
        and cumulative effect of
        accounting change               51,800     57,705     47,752

Income taxes                             8,307      9,013      4,935
                                      --------   --------   --------

       Income before cumulative
        effect of accounting change     43,493     48,692     42,817

Cumulative effect of accounting
  change, net of income tax                                   (2,904)
                                      --------   --------   --------

        Net income                    $ 43,493   $ 48,692   $ 39,913
                                      ========   ========   ========

Per common share:

  Basic:
    Income before cumulative effect
     of accounting change             $   1.49   $   1.69   $   1.47
    Cumulative effect of accounting
     change, net of income tax        --------   --------      (.10)
                                                            --------

    Net income                        $   1.49   $   1.69   $   1.37
                                      ========   ========   ========

  Diluted:
    Income before cumulative effect
     of accounting change             $   1.46   $   1.67   $   1.45
    Cumulative effect of accounting
     change, net of income tax                                  (.10)
                                      --------   --------   --------

    Net income                        $   1.46   $   1.67   $   1.35
                                      ========   ========   ========


  Cash dividends                      $    .58   $    .55   $    .52
                                      ========   ========   ========

</TABLE>

See  accompanying  notes  to  consolidated  financial  statements.

Page  19

<PAGE>

     HARLEYSVILLE  GROUP
     CONSOLIDATED  STATEMENTS  OF  SHAREHOLDERS'  EQUITY

     FOR  THE  YEARS  ENDED  DECEMBER  31,  2001,  2000  AND  1999
                       (dollars  in  thousands)
<TABLE>
<CAPTION>


                                                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,
   1998        29,150,518   $ 29,151  $119,302  $ 74,167         $307,038   $           $529,658
Net income                                                         39,913                 39,913
Other compre-
  hensive
  income,
  net of tax:
   Unrealized
   investment
   losses,
   net of
   reclassifi-
   cation
   adjustment                                    (22,485)                               (22,485)
                                                                                       ---------
Comprehensive
  income                                                                                  17,428
                                                                                       ---------
Issuance of
  common stock:
   Incentive
    plans         309,872        310     4,464                                             4,774
   Dividend
    Reinvestment
    Plan           38,261         38       613                                               651
Tax benefit from
  stock options
  exercised                                419                                               419
Cash
  dividends
  paid                                                            (15,182)               (15,182)
Purchase of
  treasury
  stock,
  686,565 shares                                                             (10,854)    (10,854)
               ----------    -------  --------  --------         --------   --------    --------
Balance at
  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
   reclassifi-
   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

</TABLE>

(Continued)

Page  20

<PAGE>

     HARLEYSVILLE  GROUP
     CONSOLIDATED  STATEMENTS  OF  SHAREHOLDERS'  EQUITY
     (CONTINUED)

     FOR  THE  YEARS  ENDED  DECEMBER  31,  2001,  2000  AND  1999
                     (dollars in thousands)
<TABLE>
<CAPTION>


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

<S>            <C>           <C>      <C>       <C>              <C>        <C>         <C>
Net income                   $        $         $                $43,493    $           $ 43,493
Other compre-
  hensive
  income,
  net of tax:
   Unrealized
   investment
   losses,
   net of
   reclassifi-
   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>

See  accompanying  notes  to  consolidated  financial  statements.


Page  21

<PAGE>


     HARLEYSVILLE  GROUP
     CONSOLIDATED  STATEMENTS  OF  CASH  FLOWS
     (in  thousands)
<TABLE>

<CAPTION>




                                                 YEAR ENDED DECEMBER 31,
                                        --------------------------------------
                                          2001            2000         1999
                                        ---------      ---------     ---------

Cash flows from operating activities:
<S>                                      <C>           <C>           <C>
  Net income                             $  43,493     $  48,692     $  39,913
  Adjustments to reconcile net
   income to net cash provided
   (used) by operating activities:
     Cumulative effect of accounting
      change, net of income tax                                          2,904
     Change in receivables, unearned
       premiums, prepaid reinsurance
       and due to affiliate                (16,621)       (2,475)       35,564
     Increase (decrease) in unpaid
       losses and loss settlement
       expenses                             14,213       (36,509)        7,932
     Deferred income taxes                  (3,425)       (1,397)       (2,583)
     Increase in deferred policy
       acquisition costs                    (1,317)       (1,218)       (4,557)
     Amortization and depreciation           2,854         3,215         3,630
     Realized investment (gains)
       losses                                3,071        (9,780)      (16,222)
     Other, net                              3,520        (3,710)          (50)
                                         ---------     ---------     ---------
       Net cash provided (used)
         by operating activities            45,788        (3,182)       66,531
                                         ---------     ---------     ---------
Cash flows from investing activities:
  Held to maturity investments:
    Purchases                                             (3,895)          (11)
    Maturities                              42,329        37,725        41,586
  Available for sale investments:
    Purchases                             (303,610)     (142,691)     (176,297)
    Maturities                              75,662        58,240        71,280
    Sales                                  165,796        37,070        65,381
  Net (purchases) sales or maturities
    of short-term investments              (12,814)       35,342       (44,201)
  Increase (decrease) in collateral
    held for security lending
    transactions                           (26,393)        7,641        18,752
  Purchases of property and
    equipment                               (3,724)       (3,612)       (5,606)
                                         ---------     ---------     ---------
         Net cash provided (used)
           by investing activities         (62,754)       25,820       (29,116)
                                         ---------     ---------     ---------
Cash flows from financing activities:
  Issuance of common stock                   7,807         6,419         5,425
  Repayment of debt                           (395)         (360)         (330)
  Dividends paid                           (17,002)      (15,864)      (15,182)
  Purchase of treasury stock                              (4,711)      (10,854)
                                         ---------     ---------     ---------
         Net cash used by financing
           activities                       (9,590)      (14,516)      (20,941)
                                         ---------     ---------     ---------
Increase (decrease) in cash                (26,556)        8,122        16,474
  Cash at beginning of year                 28,395        20,273         3,799
                                         ---------     ---------     ---------
  Cash at end of year                    $   1,839     $  28,395     $  20,273
                                         =========     =========     =========

</TABLE>


See  accompanying  notes  to  consolidated  financial  statements.

Page  22

<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,  formerly  Minnesota
      Fire  and  Casualty  Company)
   -  Harleysville  Insurance  Company  of  New  Jersey  (HNJ)
   -  Harleysville  Insurance  Company  of  New  York  (HIC  New  York,
      formerly  New  York  Casualty  Insurance  Company)
   -  Harleysville  Insurance  Company  of  Ohio  (HIC  Ohio,  formerly
      Great  Oaks  Insurance  Company)
   -  Harleysville  Lake  States  Insurance  Company  (Lake  States,
      formerly  Lake  States  Insurance  Company)
   -  Harleysville  Preferred  Insurance  Company  (Preferred,
      formerly  Huron  Insurance  Company)
   -  Harleysville  Worcester  Insurance  Company  (Worcester,
      formerly  Worcester  Insurance  Company)
   -  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

Page  23

<PAGE>

     HARLEYSVILLE GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

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

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.

     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  24

<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.  As such, 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.  For disclosure purposes,
pro  forma  net  income  and  earnings per share are provided in accordance with
Statement  of  Financial  Accounting  Standards  (SFAS) No. 123, "Accounting for
Stock-Based  Compensation."

     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  13.

Page  25

<PAGE>

     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 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  2001,  2000  and  1999.

     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  a liability at December 31, 2001 and 2000.  Mutual has an A. M. Best
rating  of  "A"  (Excellent)  and,  in  accordance with certain state regulatory
requirements,  maintained  $375.5 million (fair value) of investments in a trust
account  to  secure  liabilities  under  the  reinsurance  pooling  agreement at
December  31,  2001.

Page  26

<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>

                              2001        2000        1999
                            --------    --------    --------
                                     (in  thousands)
Ceded:


<S>                         <C>         <C>         <C>
  Premiums written          $649,974    $606,766    $636,476
                            ========    ========    ========
  Premiums earned           $633,298    $603,650    $623,353
                            ========    ========    ========
  Losses incurred           $459,906    $440,973    $467,636
                            ========    ========    ========

Assumed:
  Premiums written          $754,621    $708,289    $731,273
                            ========    ========    ========
  Premiums earned           $736,924    $695,147    $714,135
                            ========    ========    ========
  Losses incurred           $527,773    $497,198    $528,030
                            ========    ========    ========

Net assumed from Mutual:
  Unearned premiums         $ 45,841    $ 44,820    $ 34,795
                            ========    ========    ========
  Unpaid losses and loss
    settlement expenses     $155,301    $145,578    $160,040
                            ========    ========    ========
</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 2001, 2000 and 1999. This
reinsurance  coverage  was in excess of a retention of $3,600,000 for 2001, 2000
and  1999.  The agreement excludes catastrophe losses resulting from earthquakes
or  hurricanes  and  supplements  the  existing external catastrophe reinsurance
program.  Under  this  agreement,  Harleysville  Group  ceded to Mutual premiums
earned  of  $7,035,000,  $6,817,000  and  $6,935,000,  and  losses  incurred  of
$7,951,000,  $4,397,000  and  $5,028,000  for 2001, 2000 and 1999, respectively.

     (B)  PROPERTY

     Harleysville  Ltd.  leases  the home office to Mutual, which shares most of
the  facility  with  Harleysville  Group.  Rental  income  under  the  lease was
$3,512,000, $3,421,000 and $2,816,000 for 2001, 2000 and 1999, respectively, and
is  included  in  other  income  after  elimination  of  intercompany amounts of
$2,149,000,  $2,094,000  and  $1,723,000  in  2001, 2000 and 1999, respectively.

Page  27

<PAGE>

     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 2  -  TRANSACTIONS  WITH  AFFILIATES  (CONTINUED)

     (C)  MANAGEMENT  AGREEMENTS

     Harleysville  Group  Inc. received $7,316,000, $7,425,000 and $7,298,000 of
management  fee  income  in  2001, 2000 and 1999, 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
$936,000,  $1,302,000  and  $1,108,000  in  2001,  2000  and 1999, respectively.

     Harleysville  Group  has  off-balance-sheet  credit  risk  related  to
approximately $64,000,000 and $65,000,000 of premium balances due to Mutual from
agents  and  insureds  at  December  31,  2001  and  2000,  respectively.

Page  28

<PAGE>

     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 3  -  INVESTMENTS

     The  amortized  cost  and  estimated  fair  value  of  investments in fixed
maturity  and  equity  securities  are  as  follows:

<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>


Page  29

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 3  -  INVESTMENTS  (CONTINUED)

<TABLE>

<CAPTION>

                                          DECEMBER  31,  2000
                           -------------------------------------------------
                                         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       $    9,326    $   266      $   (39)     $    9,553

 Obligations of states
  and political
  subdivisions                317,851     12,256          (22)        330,085

 Corporate securities         235,426      5,513       (1,915)        239,024
                           ----------    -------     --------      ----------

Total held to maturity        562,603     18,035       (1,976)        578,662
                           ----------    -------     --------      ----------

Available for sale:
 U.S. Treasury securities
  and obligations of
  U.S. government corpora-
  tions and agencies           70,289      1,956         (104)         72,141

 Obligations of states
  and political
  subdivisions                380,127     13,264         (379)        393,012

 Corporate securities         245,486      4,749       (4,337)        245,898

 Mortgage-backed
  securities                  105,052      3,146         (358)        107,840
                           ----------    -------     --------      ----------

Total available for sale      800,954     23,115       (5,178)        818,891
                           ----------    -------     --------      ----------

Total fixed maturities     $1,363,557    $41,150      $(7,154)     $1,397,553
                           ==========    =======      =======      ==========

Total equity securities    $  125,517    $78,095      $(9,862)     $  193,750
                           ==========    =======      =======      ==========

</TABLE>


     The amortized cost and estimated fair value of fixed maturity securities at
December 31, 2001 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  30

<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       $   47,995     $   49,056

  Due after one year
   through five years              179,222        188,470

  Due after five years
   through ten years               192,133        200,714

  Due after ten years               20,149         21,348
                                ----------     ----------

                                   439,499        459,588
                                ----------     ----------

Available for sale:

  Due in one year or less           27,982         28,577

  Due after one year
   through five years              222,266        231,602

  Due after five years
   through ten years               457,942        472,138

  Due after ten years               83,414         83,778
                                ----------     ----------

                                   791,604        816,095
  Mortgage-backed
   securities                      164,443        168,169
                                ----------     ----------

                                   956,047        984,264
                                ----------     ----------

Total fixed maturities          $1,395,546     $1,443,852
                                ==========     ==========
</TABLE>



     The  amortized  cost of fixed maturities on deposit with various regulatory
authorities  at  December  31,  2001  and  2000  amounted  to  $25,261,000  and
$23,886,000,  respectively.

Page  31

<PAGE>

     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 3  -  INVESTMENTS  (CONTINUED)

     A  summary  of  net  investment  income  is  as  follows:

<TABLE>
<CAPTION>


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

                                             (in thousands)
<S>                                <C>         <C>         <C>
Interest on fixed maturities       $83,191     $83,958     $83,457
Dividends on equity securities       1,768       2,007       1,925
Interest on short-term
  investments                        1,712       1,846       1,885
                                   -------     -------     -------

Total investment income             86,671      87,811      87,267

Investment expense                   1,153       1,020       1,373
                                   -------     -------     -------

Net investment income              $85,518     $86,791     $85,894
                                   =======     =======     =======
</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>



                                 2001         2000         1999
                               ---------    ---------    ---------
                                         (in thousands)
Fixed maturity securities:
Held to maturity:
<S>                            <C>          <C>          <C>
    Gross gains                $    183     $     48     $    393
    Gross losses                     (1)        (988)          (7)

  Available for sale:
    Gross gains                   5,717           52        1,341
    Gross losses                 (1,394)        (916)        (475)

Equity securities:
  Gross gains                    11,217       15,898       18,459
  Gross losses                  (18,793)      (4,314)      (3,489)
                               ---------    --------    ---------

Net realized investment
  gains (losses)               $ (3,071)    $  9,780     $ 16,222
                               ========     ========     ========

Change in difference between
 fair value and cost of
 investments(1):
  Fixed maturity securities    $ 14,310     $ 46,321     $(89,345)
  Equity securities             (28,350)     (23,739)      12,837
                               --------     --------     --------

Total                          $(14,040)    $ 22,582     $(76,508)
                               ========     ========     ========
</TABLE>


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

Page  32

<PAGE>


     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 3  -  INVESTMENTS  (CONTINUED)

     Income  taxes  (benefit)  on  realized  investment  gains  (losses)  were
$(1,075,000),  $3,423,000  and $5,480,000 for 2001, 2000 and 1999, respectively.

     Deferred  income  taxes  applicable  to  net  unrealized  investment  gains
included  in  shareholders'  equity were $23,835,000 and $30,160,000 at December
31,  2001  and  2000,  respectively.

     At  December  31,  2000,  Harleysville  Group  held  cash  collateral  of
$26,393,000  related  to  securities on loan with a market value of $25,371,000.
Harleysville Group's policy is to require collateral of 102% of the then-current
market  value  of  loaned securities as of the close of trading on the preceding
business  day.  Acceptable collateral includes government securities, letters of
credit  or  cash.

     Under  provisions  of  SFAS No. 133, "Accounting for Derivative Instruments
and  Hedging  Activities,"  and  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  33

<PAGE>

     HARLEYSVILLE GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 4  -  REINSURANCE  (CONTINUED)

<TABLE>

<CAPTION>



                            2001        2000         1999
                         ---------    ---------    ---------
                                    (in thousands)
Premiums written:

<S>                      <C>          <C>          <C>
  Direct                 $781,190     $740,425     $762,866
  Assumed                  29,683       26,415       25,588
  Ceded                   (63,286)     (65,368)     (64,115)
                         --------     --------     --------

Net premiums written     $747,587     $701,472     $724,339
                         ========     ========     ========

Premiums earned:

  Direct                 $761,792     $738,797     $729,386
  Assumed                  29,442       25,653       25,130
  Ceded                   (61,345)     (76,120)     (47,316)
                         --------     --------     --------

Net premiums earned      $729,889     $688,330     $707,200
                         ========     ========     ========
</TABLE>


     Losses  and  loss  settlement expenses are net of reinsurance recoveries of
$68,852,000,  $55,638,000 and $32,719,000 for 2001, 2000 and 1999, respectively.

 5  -  CONTINGENCY

     On  December  31,  2001,  Mutual received a written request for arbitration
from  GE  Reinsurance  Corporation  (GE  Re)  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.  The notice
indicates  that  GE  Re  intends  to  seek  rescission  of  the  agreement  and
reimbursement  for  its  losses.  Harleysville  Group's  share  of  underwriting
losses,  assumed  under the pooling agreement, that have been ceded to GE Re was
$33,220,000  from  inception  through  December  31,  2001.  GE  Re's claims are
apparently  based on alleged non-disclosures by Mutual at the time the agreement
was  entered  into  in  1999.  GE  Re terminated payments under the agreement in
January  2002.

     On  January 8, 2002, Mutual gave written notice of its election pursuant to
the  agreement  to  have  GE  Re's  claims  heard  in the U.S. District Court in
Philadelphia,  and  on  January  11,  2002, Mutual filed an action for breach of
contract  against GE Re in the U.S. District Court in Philadelphia.  GE Re filed
motions to compel arbitration and to dismiss Mutual's complaint and such motions
were  denied  by  the  court.

Page  34

<PAGE>

     HARLEYSVILLE GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 5  -  CONTINGENCY  (CONTINUED)

     Since  2000,  only  renewal business as required by law has been written by
Mutual through the managing general agent. Harleysville Group's pooling share of
the  written  premium  ceded  by  Mutual  under  the  agreement was $13,897,000,
$22,389,000  and $24,502,000 in 2001, 2000 and 1999, respectively, and is likely
to  decline  further  in  2002.

     Both  Mutual  and  the  Company believe GE Re's claims to be wholly without
merit and are defending the matter vigorously. While the Company does not expect
this  matter  to  materially  affect  its  financial  condition  or  results  of
operations,  there  can  be  no  assurance  of  any  particular  outcome.

 6  -  PROPERTY  AND  EQUIPMENT

     Property  and  equipment  consisted  of  land  and buildings with a cost of
$29,867,000  and  $29,646,000, and equipment, including software, with a cost of
$14,782,000  and  $11,849,000  at  December  31,  2001  and  2000, respectively.
Accumulated  depreciation related to such assets was $15,776,000 and $13,874,000
at  December  31,  2001  and  2000,  respectively.

     Rental  expense  under  leases  with non-affiliates amounted to $2,832,000,
$3,519,000  and  $3,704,000  for  2001,  2000 and 1999, respectively.  Operating
lease  commitments  were  not  material  at  December  31,  2001.

Page  35

<PAGE>

     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 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>


                                     2001       2000        1999
                                   --------   --------    --------
                                          (in  thousands)


<S>                                <C>        <C>        <C>
Liability at January 1             $864,843   $901,352   $893,420
  Less reinsurance recoverables      72,259     77,438     79,901
                                   ---------  --------   --------
Net liability at January 1          792,584    823,914    813,519
                                   --------   --------   --------

Incurred related to:
  Current year                      537,172    541,738    582,534
  Prior years                       (17,350)   (48,937)   (59,532)
                                   --------   --------   --------

    Total incurred                  519,822    492,801    523,002
                                   --------   --------   --------

Paid related to:
  Current year                      229,435    244,978    259,635
  Prior years                       282,110    279,153    252,972
                                   --------   --------   --------

    Total paid                      511,545    524,131    512,607
                                   --------   --------   --------

Net liability at December 31        800,861    792,584    823,914
  Plus reinsurance recoverables      78,195     72,259     77,438
                                   --------   --------   --------

Liability at December 31           $879,056   $864,843   $901,352
                                   ========   ========   ========
</TABLE>

     Harleysville  Group  recognized  favorable development in the provision for
insured  events  of  prior  years of $17,350,000, $48,937,000 and $59,532,000 in
2001,  2000 and 1999, respectively. The favorable development for 2001 primarily
relates  to  lower-than-expected loss adjusting expenses and, for 2000 and 1999,
lower-than-expected  claim  severity  in the workers compensation and automobile
lines of business.  The 2001 and 2000 favorable development includes $14,772,000
and  $20,186,000 of reductions in loss adjustment 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.

Page  36

<PAGE>

     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 7  -  LIABILITY  FOR  UNPAID  LOSSES  AND  LOSS  SETTLEMENT  EXPENSES
     (CONTINUED)

     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,
                                -------------------
                                  2001       2000
                                --------    -------
                                  (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       2,555      2,950
                                 -------    -------

    Total debt                   $96,055    $96,450
                                 =======    =======
</TABLE>


     The fair value of the notes was $76,388,000 and $72,332,000 at December 31,
2001  and  2000,  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 (2.2% at December 31, 2001) 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 $6,134,000, $6,507,000 and $6,278,000 in 2001, 2000 and
1999,  respectively.

Page  37

<PAGE>

     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 9  -  RESTRUCTURING  CHARGES

     On  July  29,  1999, Harleysville Group announced a plan to consolidate its
claims  operations  from  23  general  claims  offices into a centralized direct
reporting  center  and four specialized regional claims centers.  As a result of
this  consolidation,  the  Company  recorded  a restructuring charge in 1999 for
employee  termination benefits to be paid and occupancy charges that is included
in  losses  and  loss  settlement  expenses.

     Employee  termination  benefits  includes  severance  payments  and related
benefits  and  outplacement  services  for  173  employees.  Severance  payments
totaling  $1,793,000  have been made to 172 employees, and the remaining accrual
for  employee termination benefits is $10,000 at December 31, 2001.  Included in
occupancy  charges  are  future  lease  obligations,  less  anticipated sublease
benefits,  for  leased  premises  that  are  no  longer being used by the claims
operation.  Operations  in  the  23  general  claims  offices  have been closed.
Payments  totaling  $593,000  have  been  made,  and  the  remaining accrual for
occupancy  charges  is  $112,000  at  December  31,  2001.

     On  February  7,  2000,  Harleysville Group announced a plan to consolidate
selected  support services and office functions throughout its field operations.
As  a  result of this consolidation, the Company recorded a restructuring charge
in  2000  for  employee termination benefits to be paid, occupancy charges and a
write-down  of  equipment  to  fair  value.  This  charge  was included in other
underwriting  expenses.

     Employee  termination  benefits  includes  severance  payments  and related
benefits  and outplacement services for 109 field employees.  Severance payments
totaling  $883,000  have  been made to the 109 employees.  Included in occupancy
charges  is  a  future lease obligation, less anticipated sublease benefits, for
leased  premises  that  will no longer be used.  Payments totaling $116,000 have
been  made  against the accrual for occupancy charges.  Also, as a direct result
of  the  consolidation,  a  loss  of  $52,000  was  realized  on the disposal of
equipment  in  2000.

Page  38

<PAGE>

     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

 9  -  RESTRUCTURING  CHARGES  (CONTINUED)

     Both  consolidations  were  completed  by  June  30,  2000.

<TABLE>

<CAPTION>



                                     ACTIVITY IN THE RESTRUCTURING ACCRUALS
                                     --------------------------------------
                                               (IN THOUSANDS)

                        CLAIMS                             FIELD
                        RESTRUCTURING                      RESTRUCTURING
                        ---------------------------------  -------------------------------
                        EMPLOYEE                            EMPLOYEE
                        TERMINATION                         TERMINATION
                        BENEFITS      OCCUPANCY   TOTAL     BENEFITS    OCCUPANCY    TOTAL
                        -----------   ---------   --------  ----------  -----------  ------
<S>                     <C>           <C>         <C>       <C>         <C>          <C>
Restructuring charge    $ 2,017       $ 594       $ 2,611
Change in prior
 accrual due to
 voluntary
 terminations greater
 than anticipated
 and additional
 sublease benefits          (42)        (57)          (99)
                        -------       -----        ------

Balance at
 December 31, 1999        1,975         537         2,512
Restructuring
 charge                                                     $ 899       $188         $1,087
Cash payments            (1,793)       (371)       (2,164)   (883)       (50)          (933)
Change in prior
 accrual due to
 voluntary
 terminations
 greater than
 anticipated and
 reduced sublease
 benefits                  (172)         50         (122)     (16)                      (16)
                        -------       -----      -------     -----       ----         ------

Balance at
 December 31, 2000           10         216          226                  138            138
Cash payments                          (222)        (222)                 (66)           (66)
Change in prior
 accrual due to
 reduced sublease
 benefits                               118           118
                        -------       -----       -------   -----       ----         ------
Balance at
 December 31, 2001      $    10       $ 112       $   122               $ 72         $   72
                        =======       =====       =======   =====       ====         ======
</TABLE>

Page  39

<PAGE>

     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

10  -  INSURANCE-RELATED  ASSESSMENTS

     The  Consolidated  Statement of Income for the year ended December 31, 1999
reflects  a  $2,904,000  charge,  net  of  a  tax benefit of $1,564,000, for the
cumulative  effect of adopting American Institute of Certified Public, Statement
of  Position  (SOP) No. 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related  Assessments."

11  -  SHAREHOLDERS'  EQUITY

     Comprehensive  income  consisted  of  the  following:
<TABLE>

<CAPTION>



                               2001       2000      1999
                             ---------  --------  --------
                                     (in thousands)
<S>                          <C>        <C>       <C>
Net income                   $ 43,493   $48,692   $ 39,913
                             --------   -------   --------
Other comprehensive
 income:
  Unrealized investment
   holding gains (losses)
   arising during period,
   net of taxes (benefits)
   of $(7,463), $6,082
   and $(6,565)               (13,859)   11,296    (12,192)
 Less:
  Reclassification
   adjustment for (gains)
   losses included in net
   income, net of taxes
   (benefits) of $(1,139),
   $3,752 and $5,543            2,114    (6,968)   (10,293)
                             --------   -------   --------

Net unrealized
 investment gains (losses)    (11,745)    4,328    (22,485)
                             --------   -------   --------

Comprehensive income         $ 31,748   $53,020   $ 17,428
                             ========   =======   ========
</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,  2001,  $54,022,000  would  be  available  for  distribution  to
Harleysville  Group  Inc.  during  2002  without  prior  approval.

Page  40

<PAGE>

     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

11  -  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,
                                 ------------------------------
                                   2001       2000       1999
                                 --------   -------    --------
                                        (in thousands)
<S>                              <C>        <C>        <C>
Statutory capital and surplus    $538,878   $515,679   $502,863
                                 ========   ========   ========

Statutory unassigned surplus     $404,609   $381,410   $368,594
                                 ========   ========   ========

Statutory net income             $ 41,095   $ 48,412   $ 38,710
                                 ========   ========   ========
</TABLE>


12  -  INCOME  TAXES

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

<TABLE>
<CAPTION>



                  2001        2000        1999
                --------    --------    --------
                       (in thousands)
<S>             <C>         <C>         <C>
Current         $11,732     $10,410     $ 7,518
Deferred         (3,425)     (1,397)     (2,583)
                -------     -------     -------

                $ 8,307     $ 9,013     $ 4,935
                =======     =======     =======
</TABLE>

     Cash  paid for federal income taxes in 2001, 2000 and 1999 was $13,158,000,
$6,499,000  and  $9,820,000,  respectively.

Page  41

<PAGE>

     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

12  -  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>



                             2001       2000       1999
                            ------     ------     ------
<S>                         <C>        <C>        <C>
Statutory federal income
  tax rate                  35.0 %     35.0 %     35.0 %
Tax-exempt interest        (19.3)     (19.7)     (24.8)
Other, net                   0.3        0.3        0.1
                           ------     ------     ------
                           16.0 %      15.6%      10.3%
                           ======     ======     ======
</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,
                                  --------------------
                                    2001        2000
                                  -------      -------
(in thousands)
<S>                               <C>          <C>
Deferred tax liabilities:
  Deferred policy acquisition
    costs                         $30,127      $29,666
  Unrealized investment gains      23,835       30,160
  Other                             6,169        5,945
                                  -------      -------

    Total deferred tax
      liabilities                  60,131       65,771
                                  -------      -------

Deferred tax assets:
  Unearned premiums                24,755       23,516
  Losses incurred                  41,811       42,487
  AMT credit carryforward           4,811        5,086
  Other                            18,189       14,227
                                  -------      -------

    Total deferred tax
      assets                       89,566       85,316
                                  -------      -------

    Net deferred tax asset        $29,435      $19,545
                                  =======      =======
</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  42

<PAGE>

     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

13  -  INCENTIVE  PLANS

     Harleysville  Group  applies  APB  Opinion  No.  25  in  accounting for its
stock-based  compensation  plans.  Accordingly,  no  compensation  cost has been
recognized  for  its  fixed stock option plans and certain of its stock purchase
plans.  Had  compensation  cost  for  these  stock-based compensation plans been
determined  under SFAS No. 123, Harleysville Group's net income and earnings per
share  would  have  been  reduced  to  the  pro  forma  amounts indicated below:

<TABLE>
<CAPTION>



                                   2001       2000      1999
                                 -------    -------    -------
                             (in thousands, except per share data)
<S>                              <C>        <C>        <C>
     Net income:
         As reported             $43,493    $48,692    $39,913
         Pro forma               $40,995    $46,847    $38,094

     Basic earnings
      per share:
         As reported             $  1.49    $  1.69    $  1.37
         Pro forma               $  1.40    $  1.62    $  1.30

     Diluted earnings
      per share:
         As reported             $  1.46    $  1.67    $  1.35
         Pro forma               $  1.38    $  1.61    $  1.29
</TABLE>

     The  per  share weighted-average fair value of options granted during 2001,
2000  and  1999 was $8.45, $4.80 and $5.71, 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 2001, 2000 and 1999, respectively:  dividend yield of 2.12%, 3.31% and
2.55%; expected volatility of 34.89%, 31.84% and 30.42%; risk-free interest rate
of  4.77%,  6.76%  and  5.65%;  and  an  expected  life  of  5.25  years.

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.

Page  43

<PAGE>

     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

13  -  INCENTIVE  PLANS  (CONTINUED)

     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.

     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, 1998     1,950,229        $15.42
     Granted--1999             367,293         19.40
     Exercised--1999          (139,391)        11.22
     Forfeited--1999           (62,187)        19.07
                             ---------        ------

     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
                             =========        ======

     Exercisable at:
       December 31, 1999     1,614,632        $14.84
                             =========        ======

       December 31, 2000     1,552,506        $16.37
                             =========        ======

       December 31, 2001     1,608,426        $17.21
                             =========        ======
</TABLE>


Page  44

<PAGE>

     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

13  -  INCENTIVE  PLANS  (CONTINUED)

     The  following  table  summarizes  information about fixed stock options at
December  31,  2001:
<TABLE>
<CAPTION>



                                     RANGE OF EXERCISE PRICES
                           -------------------------------------------

                           $9.50-13.63    $13.75-19.63    $20.13-26.36
                           -----------    ------------    ------------
<S>                        <C>            <C>             <C>
Options outstanding at
  December 31, 2001:

  Number of options           648,145        841,681        749,722
                           ==========     ==========     ==========

  Weighted-average
   remaining contractual
   life                     2.2 years      7.2 years      8.3 years
                           ==========     ==========     ==========

  Weighted-average
   exercise price              $13.03         $17.68         $25.57
                           ==========     ==========     ==========

Options exercisable at
  December 31, 2001:

  Number of options           648,145        662,994        297,287
                           ==========     ==========     ==========

  Weighted-average
   exercise price              $13.03         $18.03         $24.52
                           ==========     ==========     ==========
</TABLE>

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
93,637,  156,958  and  114,948  shares  to  employees  in  2001,  2000 and 1999,
respectively.

Page  45

<PAGE>

     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

13  -  INCENTIVE  PLANS  (CONTINUED)

     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  29,980,  60,844  and  57,186 shares issued under the plan for which
$180,000,  $66,000 and $88,000 of expense was recognized in 2001, 2000 and 1999,
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  2001,  2000  and  1999
respectively, there were 7,999, 4,965 and 7,940 shares issued under the plan for
which  $75,000,  $20,000  and  $23,000  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
$1,808,000,  $2,963,000  and  $1,419,000  for 2001, 2000 and 1999, respectively.

14  -  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  46

<PAGE>

     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

14  -  PENSION  AND  OTHER  BENEFIT  PLANS  (CONTINUED)

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

<TABLE>
<CAPTION>



                                       2001        2000
                                     --------    --------
                                        (in thousands)
<S>                                  <C>         <C>
Change in benefit obligation
  Benefit obligation at January 1    $110,066    $ 96,113
  Service cost                          4,745       4,434
  Interest cost                         8,348       7,482
  Amendments                                          295
  Net actuarial loss                    8,035       7,459
  Benefits paid                        (4,294)     (3,518)
  Curtailment                                      (2,199)
                                     --------    --------

      Benefit obligation at
       December 31                   $126,900    $110,066
                                     ========    ========

Change in plan assets
  Fair value of plan assets at
    January 1                        $118,727    $123,564
  Actual return on plan assets        (12,657)     (1,471)
  Benefits paid                        (4,103)     (3,366)
                                     --------    --------

      Fair value of plan assets
       at December 31                $101,967    $118,727
                                     ========    ========

Funded status                        $(24,933)   $  8,661
Unrecognized net actuarial gain          (845)    (31,285)
Unrecognized prior service cost         1,608       2,196
Unrecognized transition obligation        266         285
                                     --------    --------
Accrued pension cost:
  Entire plan                        $(23,904)   $(20,143)
                                     ========    ========

  Harleysville Group portion         $(16,364)   $(13,701)
                                     ========    ========
</TABLE>

Page  47

<PAGE>

     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

14  -  PENSION  AND  OTHER  BENEFIT  PLANS  (CONTINUED)

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



                                 2001       2000       1999
                               --------   --------   --------
                                      (in thousands)
<S>                            <C>        <C>        <C>
Components of net periodic
  pension cost:
    Service cost               $ 4,745    $ 4,434    $ 5,213
    Interest cost                8,348      7,482      6,860
    Expected return on
     plan assets                (9,596)    (8,580)    (6,873)
    Recognized net
     actuarial gain               (152)      (478)
    Amortization of prior
     service cost                  588        610        637
    Net transition
     amortization                   19       (117)     (117)
    Curtailment                            (1,962)     (218)
                               -------    -------    -------
Net periodic pension cost:
  Entire plan                  $ 3,952    $ 1,389    $ 5,502
                               =======    =======    =======
  Harleysville Group
   portion                     $ 2,663    $   788    $ 3,647
                               =======    =======    =======


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

Weighted-average assumptions
  as of December 31
    Discount rate                 7.25%    7.50%    7.75%
    Expected long-term rate
     of return on plan
     assets                       9.50%    9.50%    9.00%
    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 $1,601,000, $2,821,000 and
$3,220,000  for  2001,  2000  and  1999,  respectively.

15  -  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.

Page  48

<PAGE>

     HARLEYSVILLE GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

15  -  SEGMENT  INFORMATION  (CONTINUED)

     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>



                               2001       2000       1999
                             --------   --------   --------
                                     (in thousands)
<S>                          <C>        <C>        <C>
Revenues:
  Premiums earned:
    Commercial lines         $493,362   $437,873   $438,111
    Personal lines            236,527    250,457    269,089
                             --------   --------   --------
      Total premiums
       earned                 729,889    688,330    707,200
    Net investment income      85,518     86,791     85,894
    Realized investment
      gains (losses)           (3,071)     9,780     16,222
    Other                      15,415     17,670     15,440
                             --------   --------   --------
Total revenues               $827,751   $802,571   $824,756
                             ========   ========   ========

Income before income taxes
  and cumulative effect
  of accounting change:
  Underwriting loss:
    Commercial lines         $ (7,128)  $(22,925)  $(44,052)
    Personal lines            (29,372)   (23,281)   (17,098)
                             --------   --------   --------
      SAP underwriting
       loss                   (36,500)   (46,206)   (61,150)
      GAAP adjustments          2,017      3,602      2,785
                             --------   --------   --------
      GAAP underwriting
       loss                   (34,483)   (42,604)   (58,365)
    Net investment income      85,518     86,791     85,894
    Realized investment
      gains (losses)           (3,071)     9,780     16,222
    Other                       3,836      3,738      4,001
                             --------   --------   --------
Income before income taxes
  and cumulative effect
  of accounting change       $ 51,800   $ 57,705   $ 47,752
                             ========   ========   ========
</TABLE>

Page  49

<PAGE>

     HARLEYSVILLE  GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

16  -  EARNINGS  PER  SHARE

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

<TABLE>
<CAPTION>



                                   2001         2000         1999
                               -----------  -----------  -----------
                          (dollars in thousands, except per share data)
<S>                            <C>           <C>           <C>
Numerator for basic
  and diluted earnings
  per share:
    Net income                   $ 43,493      $ 48,692      $ 39,913
                                 ========      ========      ========

Denominator for basic
  earnings per share --
  weighted-average
  shares outstanding           29,267,587    28,838,824    29,238,372

Effect of stock
  incentive plans                 550,942       297,582       327,006
                                 --------      --------      --------

Denominator for
  diluted earnings
  per share                    29,818,529    29,136,406    29,565,378
                               ==========    ==========    ==========

Basic earnings
  per share                       $  1.49       $  1.69       $  1.37
                                  =======       =======       =======

Diluted earnings
  per share                       $  1.46       $  1.67       $  1.35
                                  =======       =======       =======
</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:

<TABLE>
<CAPTION>



                       2001     2000     1999
                       ----     ----     ----
                       (in thousands)
<S>                   <C>      <C>      <C>
Number of options      284      566      521
                       ===      ===      ===
</TABLE>
Page  50

<PAGE>

     HARLEYSVILLE GROUP
     NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
     (Continued)

17  -  QUARTERLY  RESULTS  OF  OPERATIONS  (UNAUDITED)

<TABLE>
<CAPTION>



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

                       FIRST     SECOND     THIRD      FOURTH     TOTAL
                    ---------   --------   --------   --------   --------
<S>                  <C>        <C>        <C>        <C>        <C>
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



                                              2000
                     ---------------------------------------------------
                            (in thousands, except per share data)

                       FIRST     SECOND     THIRD      FOURTH     TOTAL
                     --------   --------   --------   --------   --------

Revenues             $197,419   $198,934   $200,152   $206,066   $802,571
Losses and
 expenses             190,644    186,812    184,416    182,994    744,866
Net income              7,241     10,705     13,040     17,706     48,692
Earnings per
 common share:
  Basic              $    .25   $    .37   $    .45   $    .61   $   1.69
  Diluted            $    .25   $    .37   $    .45   $    .60   $   1.67
</TABLE>

Page  51

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

As  discussed in Note 10, Harleysville Group adopted the provisions of Statement
of  Position  No.  97-3,  "Accounting  by  Insurance  and  Other Enterprises for
Insurance-Related  Assessments,"  effective  January  1,  1999.

          /s/KPMG  LLP



Philadelphia,  Pennsylvania
February  14,  2002

Page  52

<PAGE>