EXHIBIT  13(B)

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

     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.

     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 to attract and 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.

     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 was 72% for 2001, 2000 and 1999.

     When  the Company's subsidiaries' pooling participation increases, there is
a  larger  retrocession  of  this  pooled  business  from  Mutual.  Through this
retrocession,  Harleysville Group is assuming a larger share of premiums, losses
and  expenses  for  current  and  future  periods  originating  both  from  its
subsidiaries  and  Mutual.  An  increase  in  Harleysville  Group's  pooling
participation  results in a larger share of the pooled liabilities being assumed
by  Harleysville Group.  Cash and investments are received by Harleysville Group
equal  to  this  greater  share  of  loss  reserves, unearned premiums and other
insurance  liabilities  (primarily  commissions and premium taxes) less a ceding
commission

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<PAGE>

     HARLEYSVILLE  GROUP

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

     RESULTS  OF  OPERATIONS  (CONTINUED)

based  on  acquisition  costs related to unearned premiums.  An increase in pool
participation  also  increases  Harleysville  Group's  leverage  and exposure to
adverse  development.  Only  balance sheet entries have been made as of the date
of changes in pool participation, and no gain or loss has been recognized on the
transactions.  There  have  been  no  changes  in pool participation since 1998.

     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 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.

     Harleysville  Group  has  off-balance-sheet  credit  risk  related  to
approximately $64 million and $65 million of premium balances due to Mutual from
agents  and  insureds at December 31, 2001 and 2000, respectively.  Mutual bills
and  collects  such  receivables  on behalf of Harleysville Group for efficiency
reasons.  Harleysville  Group  recognizes  any associated bad debts and such bad
debts  have  not  been  material.

     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.  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  in  a  quarter up to $14.4 million for 2001, 2000 and 1999.
This reinsurance coverage was in excess of a retention of $3.6 million 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  $7.0  million,  $6.8  million and $6.9 million, and losses
incurred of $8.0 million, $4.4 million and $5.0 million for 2001, 2000 and 1999,
respectively.  The  pricing  was established in consultation with an independent
actuarial  firm.

Page  3

<PAGE>

     HARLEYSVILLE  GROUP

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

     RESULTS  OF  OPERATIONS  (CONTINUED)

     Harleysville  Ltd.  leases  the home office to Mutual, which shares most of
the  facility  with  Harleysville Group.  Rental income under the lease was $3.5
million,  $3.4  million  and $2.8 million for 2001, 2000 and 1999, respectively,
and  is  included  in  other income after elimination of intercompany amounts of
$2.1  million  in  2001  and  2000  and  $1.7  million in 1999.  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 $7.3 million in 2001 and 1999
and  $7.4  million  in  2000 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.

     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  $0.9  million,  $1.3  million  and  $1.1  million  in  2001, 2000 and 1999,
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.

Page  4

<PAGE>

     HARLEYSVILLE GROUP

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

     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  judgement  and  estimation.

     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 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. 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.  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.  A decline in fair value of an investment below
its  cost  that  is  deemed  other  than  temporary  is  charged  to  earnings.
Harleysville  Group  monitors  its  investment  portfolio  and quarterly reviews
investments that have experienced a decline in fair value below cost to evaluate
whether  the decline is other than temporary. Such evaluations involve judgement
and  consider  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

Page  5

<PAGE>

     HARLEYSVILLE GROUP

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

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 not differ from those assessments.

     2001  COMPARED  TO  2000

     Premiums  earned  increased  $41.6  million for the year ended December 31,
2001.  The  increase  is  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 is due to higher rates partially offset by fewer policy counts.
The  decrease  in  premiums  earned for personal lines primarily is due to fewer
policy  counts  partially offset by higher rates.  The decline in personal lines
premiums  earned  is  expected  to  continue  in  2002  as Harleysville Group is
planning  to reduce its personal lines volume in certain less profitable states.
Massachusetts  personal  automobile  net  written premium totaling $13.3 million
(with  a  combined  ratio  of  106.5%) was assumed in 2001 from Berkshire Mutual
Insurance  Company  (Berkshire),  which  is managed by Harleysville Group.  This
business  will  not be written in 2002 as Berkshire entered into an agreement to
transfer  all new and renewal business to another carrier as of January 1, 2002.
Harleysville  Group  received  $0.7 million in management fees from Berkshire in
2001  which  are  expected  to  be  nil  in  2002.

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

Page  6

<PAGE>

     HARLEYSVILLE  GROUP

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

     2001  COMPARED  TO  2000  (CONTINUED)

     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  securites  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  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 better 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 worsened 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 is 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. Commercial lines results
improved  in  both  2001  and  2000,  but the rate of improvement has slowed and
future  improvement  in  commercial lines results may not be as rapid as in 2001
and  2000. The trend of improving commercial lines results has slowed as workers
compensation losses have been trending higher than those reported in past years.
The  decline  in  personal  lines  profitability primarily is due to higher loss
trends  in the personal automobile lines.  Personal lines profitability declined
in  2001  and 2000, but this trend is expected to improve in 2002 as a result of
higher  prices,  re-underwriting  and  agency  management  efforts.

     The  year  ended December 31, 2001 includes 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 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 includes
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

Page  7

<PAGE>

     HARLEYSVILLE  GROUP

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

     2001  COMPARED  TO  2000  (CONTINUED)

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  favorable development in the provision for
insured  events  of  prior  years of $17.4 million and $48.9 million in 2001 and
2000,  respectively.  The decreased favorable development primarily related to a
lesser  variance  from  expected  claim severity in the workers compensation and
automobile  lines of business and a lesser variance from expected levels of loss
adjustment  expenses.

     The  terrorist acts of September 11, 2001 have given rise to concerns about
the  availability  and  pricing  of  reinsurance  for  the property and casualty
industry.  Harleysville Group's catastrophe reinsurance treaty provides coverage
through  June 30, 2002 and the other property and casualty treaties were renewed
in  early  2002.  As  Harleysville  Group does not market insurance coverage for
large landmark properties or large employer groups and does not have substantial
concentrations  in  major  metropolitan areas, it was able to obtain reinsurance
coverage  for  terrorist  events.  Harleysville  Group  raised  its  reinsurance
retentions  modestly  in  order  to moderate the impact of increased reinsurance
rates  and has added 2% of additional pricing to its 2002 pricing plans in order
to  offset  the  increased  costs  and  retained  exposures.

     Effective  for  one year from July 1, 2001, the Company's subsidiaries, and
Mutual  and  its  wholly  owned  subsidiaries, are reinsured under a catastrophe
reinsurance  treaty  that  provides  coverage ranging from 85.5% to 95% of up to
$137  million in excess of a retention of $30 million for any given catastrophe.
Harleysville  Group's 2001 pooling share of this coverage would range from 85.5%
to  95%  of  up  to  $99 million in excess of a retention of $22 million for any
given catastrophe. Accordingly, pursuant to the terms of the treaty, the maximum
recovery  would  be

Page  8

<PAGE>

     HARLEYSVILLE  GROUP

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

     2001  COMPARED  TO  2000  (CONTINUED)

$124  million  for  any catastrophe involving an insured loss of $167 million or
greater.  Harleysville Group's 2001 pooling share of this maximum recovery would
be  $89 million for any catastrophe involving an insured loss of $120 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.

     2000  COMPARED  TO  1999

     Premiums  earned  decreased  $18.9  million for the year ended December 31,
2000.  Of  the  decline,  $18.6  million  was from personal lines of which $18.4
million  was  from  personal  automobile  business.  There  were $8.9 million of
premiums  earned  in  1999  for  personal  automobile business written through a
managing general agency while there were no premiums earned for such business in
2000.  Premiums  earned  for the remaining personal automobile business declined
$9.5  million  primarily  due  to fewer policy counts partially offset by higher
rates.  Premiums  earned  for  commercial lines decreased $0.2 million primarily
due  to  fewer  policy  counts  mostly  offset  by  higher  prices.

     Investment  income  increased  $0.9 million for the year ended December 31,
2000  primarily  due  to  an  increase  in  invested  assets.

     Realized  investment  gains  decreased  $6.4  million  for  the  year ended
December  31,  2000  primarily due to sales of investments at lesser gains and a
$3.0  million  increase  in  losses  recognized for investments that declined in
value  on  an  other-than-temporary  basis.

     Income  before  income  taxes  and  cumulative  effect of accounting change
increased $10.0 million for the year ended December 31, 2000, primarily due to a
lower underwriting loss partially offset by the lower realized investment gains.
Harleysville  Group's  statutory  combined ratio declined to 106.1% for the year
ended  December  31, 2000 from 107.8% for the year ended December 31, 1999.  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 and
cumulative effect of accounting change for the year ended December 31, 2000 also
was

Page  9

<PAGE>

     HARLEYSVILLE  GROUP

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

     2000  COMPARED  TO  1999  (CONTINUED)

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 mandates a refund of premium be made to
policyholders,  adversely  affected the combined ratio by 0.3 points.  Hurricane
Floyd, which struck the east coast of the United States during the third quarter
of  1999,  caused losses of $15.1 million ($.33 per basic share after taxes) and
adversely affected the statutory combined ratio by 2.1 points for the year ended
December  31,  1999.  Hurricane  losses  are  not  covered  under  the aggregate
catastrophe  reinsurance  agreement  with  Mutual.

     The  year ended December 31, 1999 included a pre-tax charge of $2.5 million
($.06  per  basic  share  after taxes) related to the consolidation of 23 claims
offices into a centralized direct reporting center and four specialized regional
claims service centers.  This claims restructuring charge adversely affected the
statutory  combined  ratio  by  0.4 points for the year ended December 31, 1999.
Excluding  the  impacts of the field and claims restructuring charges, the North
Carolina  Rate  Bureau  settlement  and  Hurricane Floyd, the statutory combined
ratio increased 0.3 points for the year ended December 31, 2000 primarily due to
worse  results  in  personal  lines, particularly personal automobile, partially
offset  by  better  results  in  commercial  lines.

     Losses  ceded  under  the  aggregate catastrophe reinsurance agreement with
Mutual  decreased by $0.6 million for the year ended December 31, 2000, as there
were  fewer  and  less  severe  storms  than  in  the  prior  year.

     Harleysville  Group  recognized  favorable development in the provision for
insured  events  of  prior  years of $48.9 million and $59.5 million in 2000 and
1999,  respectively.  The decreased favorable development primarily related to a
lesser  variance  from  expected  claim severity in the workers compensation and
automobile  lines  of  business  partially  offset  by  a  greater variance from
expected  levels  of  loss  adjustment  expenses.

     The  2000  effective tax expense rate increased to 15.6% from 10.3% in 1999
primarily  due to tax-exempt investment income comprising a lesser proportion of
income  before  income  taxes  in  2000.

Page  10

<PAGE>

     HARLEYSVILLE  GROUP

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

     NEW  ACCOUNTING  STANDARDS

     Harleysville  Group  has no derivative instruments or hedging activities as
defined  in accordance with SFAS No. 133, "Accounting for Derivative Instruments
and  Hedging  Activities,"  and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of SFAS No. 133," which
became effective on January 1, 2001.  Harleysville Group transferred investments
with  an  amortized  cost  of $81.0 million and unrealized gains of $1.5 million
from  the  held  to  maturity  classification  to  the  available  for  sale
classification  on January 1 2001, under the provisions of SFAS No. 133 and 138.

     In  July  2001,  the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets."  SFAS No. 141 requires the
purchase  method  of  accounting to be used for all future business combinations
and  contains  provisions for the accounting for goodwill and intangible assets.
SFAS  No.  142  became  effective January 1, 2002 and requires that goodwill and
intangible  assets  with  indefinite  useful  lives  no longer be amortized, but
instead  be  evaluated  for  impairment.

     At  December  31,  2001, Harleysville Group has unamortized goodwill in the
amount  of  $23.4 million which will be subject to transition provisions of SFAS
No.  142.  Amortization  expense  related to goodwill was $0.8 million for 2001,
2000  and  1999.  Harleysville  Group  has not yet determined an estimate of the
impact  of adopting SFAS No. 142 on its financial statements at the date of this
report.

     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

Page  11

<PAGE>

     HARLEYSVILLE  GROUP

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

     LIQUIDITY  AND  CAPITAL  RESOURCES  (CONTINUED)

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  (used)  by  operating activities was $45.8 million and
$(3.2)  million  for  2001  and  2000,  respectively.  The  increase in net cash
provided by operating activities primarily reflects an increase in cash provided
by  underwriting  activities.

     Net  cash  used by investing activities was $62.8 million for 2001, and net
cash of $25.8 million was provided by investing activities for 2000.  The change
is  primarily  due  to  a  decrease  in  collateral  held  for  security lending
transactions, increased net purchases of investments due to the increase in cash
provided  by  operating activities and by the decrease in cash used by financing
activities.

     Financing  activities  used  net  cash  of $9.6 million in 2001 compared to
$14.5  million  in  2000.  The  change  was  primarily  due to a decrease in the
purchase  of  treasury  stock.

     The  Company  had  $6.4 million of cash and marketable securities and $12.0
million  of  dividends  receivable  from  its subsidiaries at December 31, 2001,
which  is  available  for  general  corporate purposes including dividends, debt
service,  capital contributions to subsidiaries, acquisitions and the repurchase
of  stock.  In 1999, the Company adopted a stock repurchase plan under which the
Company  and  Mutual  may each purchase up to 1.0 million shares of Harleysville
Group  Inc.  common stock, up to a total of 2.0 million shares.  The Company has
repurchased  all  of the shares authorized to be repurchased. Harleysville Group
has  no  material  commitments for capital expenditures as of December 31, 2001.

     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.

     Applying the current regulatory restrictions as of December 31, 2001, $54.0
million  would  be available for distribution to the Company by its subsidiaries
without  prior  regulatory  approval  during  2002.  See the Business-Regulation
section  of the Company's 2001 Form 10-K, which includes a reconciliation of net
income  and

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<PAGE>

     HARLEYSVILLE  GROUP

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

     LIQUIDITY  AND  CAPITAL  RESOURCES  (CONTINUED)

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 11 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 million on a consolidated
basis.

     Harleysville Group had off-balance-sheet credit risk related to $64 million
of  premium  balances  due  to  Mutual  from  agents  at  December  31,  2001.

     The  following  summarizes  Harleysville Group's contractual obligations at
December  31,  2001.

                                          LESS  THAN                   AFTER
                                TOTAL      1  YEAR     1-3  YEARS     3  YEARS
                               -------    ---------    ----------     --------
                                              (in  thousands)
   Contractual  obligations:
     Debt                      $96,055     $435        $75,995        $19,625


     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
indicated  that  GE  Re  intended  to  seek  rescission  of  the  agreement  and
reimbursement  for  its  losses.  Harleysville  Group's  share  of

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<PAGE>

     HARLEYSVILLE  GROUP

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

     LIQUIDITY  AND  CAPITAL  RESOURCES  (CONTINUED)

underwriting  losses,  assumed under the pooling agreement, that have been ceded
to  GE  Re  was $33.2 million from inception through December 31, 2001.  Of this
amount,  Harleysville Group has collected $17.1 million in cash.  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.

     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 $13.9 million, $22.4
million and $24.5 million 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  litigating  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.

     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  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

Page  14

<PAGE>

     HARLEYSVILLE  GROUP

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

     LIQUIDITY  AND  CAPITAL  RESOURCES  (CONTINUED)

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.

     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.

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<PAGE>