<PAGE>

                    SECURITIES AND EXCHANGE COMMISSION
                          Washington, D.C. 20549

                 ---------------------------------------

                                Form 10-KSB


(Mark One)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934 (fee required)
 
For the fiscal year ended December 31, 1997.

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 (no fee required)
 
For the transition period from       to       .
                              -------   ------

     Commission file number 0-17539

                      MADISON BANCSHARES GROUP, LTD.
                      ------------------------------
                  (Name of Small Business Issuer In Its Charter)
 
<TABLE>

<S>                                               <C>
Pennsylvania                                      23-25132079
------------                                      -----------
(State or Other jurisdiction of                   (I.R.S. Employer Identification No.)
Incorporation or Organization)

1767 Sentry Parkway West, Blue Bell, PA           19422
---------------------------------------           -----
(Address of Principal Executive Offices)           (Zip Code)

</TABLE>

Issuer's telephone number, including area code: (215) 641-1111
                                                 ---  --- ----

Securities registered pursuant to Section 12(b) of the Act: None.

<TABLE>
<CAPTION>

Title of Each Class             Name of Each Exchange on Which Registered
-------------------         ---------------------------------------------
<S>                         <C>

-------------------         ---------------------------------------------

-------------------         ---------------------------------------------

</TABLE>

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $1.00 par value per share
-------------------------------------------------------------------------
                      (Title of Class)

-------------------------------------------------------------------------
                      (Title of Class

<PAGE>


    Check whether the Issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceeding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been such filing requirements for the past 90 days.
 
    YES  X
        ---      ----

    Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-KSB or any amendment to
this Form 10-KSB. 

/ /

    State the Issuer's revenues for its most recent fiscal year. $10,376,499
                                                                 -----------

    State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
of the bid and asked prices of such stock, as of a specified date within the
past 60 days. $12,077,546 based on the average of the bid and asked on the
National Association of Securities Dealers Automated Quotation System on 
March 20, 1998.*
 
    State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest publication date. 1,252,773 as of March 20,
1998.
 
    Transitional Small Business Disclosure Format (check one). YES       NO X
                                                                  ----     ---
                      DOCUMENTS INCORPORATED BY REFERENCE
 
    Portions of the Proxy Statement to be utilized in connection with the
Issuer's 1998 Annual Meeting of Shareholders presently scheduled for May 19,
1998 are incorporated by reference into Part III hereof.
 
------------------------
 
*   Excluded from such market value computation are the approximately 358,140
issued and outstanding shares beneficially owned by executive officers and
directors of Issuer and its subsidiary. Included in such computation are the
60,126 shares beneficially owned by CoreStates Bank, NA (constituting
approximately 4.8% of the issued and outstanding shares of the Issuer).
 
    EXHIBIT INDEX APPEARS ON PAGE 50 IN SEQUENTIAL NUMBERING SYSTEM OF THIS
                                    FORM 10-KSB


                                       2

<PAGE>

                         MADISON BANCSHARES GROUP, LTD.

                                 Form 10-KSB

                                     INDEX
<TABLE>
<CAPTION>

                                                                         Page
                                                                         ----
<S>    <C>                                                               <C>

PART 1

Item 1  Description of Business......................................      4
Item 2  Description of Property......................................      7
Item 3  Legal Proceedings............................................      7
Item 4  Submission of Matters to a Vote of Security Holders..........      7

PART II

Item 5  Market for Common Equity and Related Stockholder Matters.....      8
Item 6  Management's Discussion and Analysis of 
        Financial Condition and Results of Operations................      8
Item 7  Financial Statements.........................................     24
Item 8  Changes in and Disagreements with Accountants on 
        Accounting and Financial Disclosure..........................     48

PART III

Item 9  Director, Executive Officers, Promoters and Control Persons; 
        Compliance with Section 16(a) of the Exchange Act.............   48
Item 10 Executive Compensation.......................................    48
Item 11 Security Ownership of Certain Beneficial 
        Owners and Management........................................    48
Item 12 Certain Relationships and Related Transactions...............    48
Item 13 Exhibits and Reports on Form 8-K.............................    49

</TABLE>

                                       3
<PAGE>

                                     PART I
 
ITEM 1--Description of Business
 
Madison Bancshares Group, Ltd.
 
    Madison Bancshares Group, Ltd. (the "Company") is a one-bank holding company
registered under the Bank Holding Company Act of 1956, as amended. It was
incorporated under the laws of the Commonwealth of Pennsylvania on May 31, 1988.
The Company became a bank holding company on August 8, 1989 when it consummated
the acquisition of all of the capital stock to be issued of the Madison Bank in
connection with the Bank's formation. The Company provides banking services
through The Madison Bank, and does not engage in any activities other than
banking activities. The principal executive offices of the Company are located
at The Madison Bank Building, 1767 Sentry Parkway West, Blue Bell, PA 19422. Its
telephone number at such location is (215) 641-1111. At present, the Bank has
five branch offices.
 
    As of the date hereof, the Company and Madison Bank have a total of 53
employees.
 
    Madison Bank
 
    The Madison Bank (the "Bank"), the Company's sole subsidiary, commenced
operations on August 16, 1989. The Bank is a commercial bank, chartered pursuant
to the laws of the Commonwealth of Pennsylvania and is a member of the Federal
Reserve System. The deposits held by the Bank are insured, up to applicable
limits, by the Federal Deposit Insurance Corporation (the "FDIC"). The
regulatory agency with principal responsibility for oversight of the Company and
the Bank is the Federal Reserve Board.
 
    The Bank conducts retail and commercial banking through its branch offices
located at 1767 Sentry Parkway West, Blue Bell, PA, 202 West Ridge Pike,
Conshohocken, PA , 1380 Skippack Pike, Center Square, PA, 600 W. Lancaster
Avenue, Strafford, PA and 100 West Main Street, Century Plaza, Suite 100,
Lansdale, PA, offering a broad range of consumer and commercial banking
services. The Bank opened the West Ridge Pike office in September, 1991, the
Center Square office in October, 1995, the Strafford office in August, 1996 and
the Lansdale office in August, 1997. As of December 31, 1996 and 1997, the Bank
held deposits totaling $87,242,280 and $114,838,976, respectively, including
deposits of the Company. As of the same dates, the Bank had gross loans
receivable of $93,945,786 and $103,664,075 (inclusive of residential loans held
for sale), respectively. The majority of such loans were made for commercial
purposes.
 
    As of December 31, 1996 and 1997, the Company had total assets of
$105,970,875 and $133,506,813 and total shareholders' equity of $7,974,220 and
$8,738,218, respectively. Investments amounted to $5,693,612 at year end 1996,
of which $3,585,406 were classified as available for sale and the balance were
classified as held to maturity and $5,261,853 at the end of 1997, of which
$3,656,446 were classified as available for sale and the balance classified as
held to maturity.

                                  4                                   
<PAGE> 

    The Bank's primary service area is Blue Bell, Whitpain Township in
Montgomery County, Pennsylvania, and the surrounding areas within an eight mile
radius. The location of the Bank's building, near the intersection of Walton and
Township Line Roads, places it at the juncture of two of the more heavily
traveled roadways in the area. In addition, its Plymouth Square branch, located
at West Ridge Pike in Conshohocken, PA, has extended its service area to include
certain sections of Whitemarsh and Plymouth Townships and the borough of
Conshohocken. The Center Square Branch has enabled the Bank to have additional
market visibility in its current trade area. The Strafford Branch borders on
three counties. The tri-county corridor has provided the Company with an
extended competitive market in the Chester and Delaware Counties, joining the
existing primary market of Montgomery County. The Lansdale office further
increases the Bank's service area into Montgomery and Bucks Counties. The Bank
currently offers services to residents of approximately 95 Townships/Boroughs.

    The Bank offers a broad range of consumer and commercial deposit banking
services, including, but not limited to, both commercial and consumer insured
deposit accounts, including checking accounts, interest-bearing "NOW" accounts,
money market accounts, certificates of deposit, savings accounts, escrow
accounting deposit services and individual retirement accounts. The Bank places
an emphasis on serving the needs of individuals, small and medium-sized
businesses, executives, professionals and professional organizations in its
service area, offering a high level of personalized service to both its
commercial and consumer customers. The Bank actively solicits non-interest and
interest-bearing deposits from its borrowers.
 
    The Bank also offers a broad range of loan and credit facilities to the
businesses and residents of its service area, including secured and unsecured
loans, home improvement loans, mortgages and home equity lines of credit.
 
    The Bank Stresses Loan Quality.  Management attempts to minimize the Bank's
credit risk through loan application evaluation, approval and post-funding
monitoring procedures.
 
    The Bank's other services include credit cards, traveler's checks and access
to an automated teller network.
 
    The Bank is a state-chartered bank, member of the Federal Reserve System and
is FDIC insured. The Federal Reserve Board, the FDIC and federal and state law
extensively regulate various aspects of the banking business, including, but not
limited to, permissible types and amounts of loans, investment and other
activities, capital adequacy, branching, interest rates on loans and the safety
and soundness of banking practices.
 
    Any Federal Reserve member bank that does not operate in accordance with, or
conform to, Federal Reserve Board regulations, policies and directives, may be
sanctioned for non-compliance. For example, proceedings may be instituted by the
Federal Reserve Board against any bank which, or any director, officer or
employee thereof who, engages in unsafe and unsound banking practices, including
the violation of applicable laws and regulations. As noted above, the FDIC has
the authority to terminate insurance of deposit accounts pursuant to procedures
established for that purpose.
 
    As a consequence of the extensive regulation of commercial banking
activities in the United States, the business of the Bank and the Company will
be particularly impacted by changes in federal and state legislation and
regulations.

                                  5 
<PAGE>

Competition
 
    There is substantial competition among financial institutions in the Bank's
service areas for deposits as well as loan customers. The Bank competes with new
and established local commercial banks, as well as numerous Philadelphia and
regionally-based commercial banks. In addition, the Bank competes directly and
indirectly with savings banks, savings and loan associations, finance companies,
credit unions, mortgage brokers, insurance companies, securities brokerage
firms, mutual funds, money market funds, private lenders and other institutions
for deposits, mortgages and consumer and commercial loans, as well as in
connection with its other services. Competition among financial institutions is
based upon a number of factors, including, but not limited to, the quality of
services rendered, interest rates offered on deposit accounts, interest rates
charged on loans and other credits, service charges, the convenience of banking
facilities, locations and hours of operation and, in the case of loans to larger
commercial borrowers, relative lending limits.
 
    Many of the banks with which the Bank competes have established depositor
and borrowing relationships, greater financial resources than the Bank, a wider
range of deposit and credit instruments, and possess greater depth of management
than the Bank. The Bank is subject to potential additional competition from
additional branch banks which could open in its trade areas.

    In addition, there are banks and other financial institutions which serve
surrounding areas and out-of-state financial institutions which currently, or in
the future, may compete in the Bank's market. The Bank competes to attract
deposits and loan applications both from customers of existing institutions and
from customers new to its service areas.

                                  6
<PAGE> 

ITEM 2--Description of Property
 
    The Company leases approximately 13,381 total square feet on the first floor
of the Madison Bank Building, 1767 Sentry Parkway West, Blue Bell, Pennsylvania,
(the "Building"). This total includes 3,381 square feet leased by the Company on
February 1, 1996 on the first floor of the Building and additional 1,400 square
feet leased by the Company on January 21, 1997 on the first floor of the
Building. This 1,400 square feet of additional space was included in the
original lease, but the Company subsequently surrendered possession. The leased
space is occupied by both the Company and the Bank and serves as the Bank's
primary banking location. The space contains a banking area, lobby, operations
center and a vault together with administrative and executive offices. The
Bank's space also includes a drive-thru banking facility and an automated
walk-up teller machine. The initial term of the original lease (the "Lease")
expired on December 31, 1994. The Lease contains two renewal options of five
years each. The Company exercised its option for the first five year renewal
term. Base rental payments under the Lease until December 31, 1999 (the
expiration of the first renewal option) are payable monthly at an annual rate of
$142,092. In the event that the Company exercises the second renewal option,
beginning January 1, 2000, the amount of base rental payments will increase to
$164,700 per annum. The Lease provides for a redecoration allowance based on
$5.00 per square foot or the sum of $45,395 for each option term. In addition to
the base rents referred to above, the Company is required to pay its pro rata
share of the Building's operating costs, including real estate taxes, water and
sewer charges, equipment maintenance charges, exterior maintenance and upkeep,
common area electric charges, trash removal, and certain other similar items.
For 1997, the amount of such expenses was $32,640. The maximum allocable portion
of the Building's operating costs will be $34,272 for 1998 and will ultimately
increase to $51,684 for the final year of the second option period. The
additional 3,381 square feet are leased at an annual rate of approximately
$58,660 with a 3.5% increase each year through February 1, 2000. The additional
1,400 square feet were leased for approximately $28,078 during 1997.
 
    The Bank also leases space for branch banking facilities at the following
locations and through the years indicated in parentheses: (i) 3,965 square feet
in Lansdale, Pennsylvania (2007), (ii) 3,000 square feet in Strafford,
Pennsylvania (2006); (iii) 3,600 square feet in Center Square, Pennsylvania
(2005); and (iv) 3,620 square feet in Conshohocken, Pennsylvania (2001). The
aggregate annual rent for the space leased for branch banking facilities
(inclusive of the new Lansdale Branch) is $217,539 and is subject to annual
increase. The Bank is also responsible for its allocable share of operating
costs for such space.
 
ITEM 3--Legal Proceedings
 
    The Company and the Bank are involved from time to time in legal proceedings
arising in the ordinary course of business. In the opinion of management, no
pending proceedings will have a material adverse effect on the Company's results
of operations or financial condition.
 
ITEM 4--Submission of Matters to a Vote of Security Holders
 
        NONE.

                                  7

 
<PAGE>
                            PART II
 
ITEM 5--Market For The Registrant's Common Stock and Related 
         Stockholder Matters
 
    The common stock of the Company is traded on the NASDAQ SmallCap Market. As
of March 20, 1998, there were approximately 281 holders of record of the
Company's common stock.
 
    The high and low bid prices for the Company's common stock during each
quarter of the last two fiscal years were as follows:
 
<TABLE>
<CAPTION>
                                                                       1997
                                                 ------------------------------------------------
                                                  1ST Qtr     2ND Qtr      3RD Qtr      4TH Qtr
                                                 ---------  -----------  -----------  -----------
<S>                                              <C>        <C>          <C>          <C>
High Bid.......................................     11-3/4      10-1/2       12-3/4       15-5/8
Low Bid........................................      9-3/4       9-1/2        9-1/2       11-3/4
</TABLE>
 
<TABLE>
<CAPTION>
                                                    1996
                                                   1ST Qtr      2ND Qtr      3RD Qtr      4TH Qtr
                                                 -----------  -----------  -----------  -----------
<S>                                              <C>          <C>          <C>          <C>
High Bid.......................................          11       11-1/2       10-1/2       10-3/4
Low Bid........................................       6-3/4        8-3/4            9            9
</TABLE>
 
    Such quotations reflect inter-dealer prices, without retail mark-ups,
mark-downs or commissions and may not necessarily reflect actual transactions.
Trading in the Company's common stock during such periods was sporadic. The
quotations do not reflect an adjustment for the Stock Dividends described below.
 
    The Company Has Not Paid Any Cash Dividends.  The Board of Directors does
not intend to declare cash dividends in the immediate future. In April 1995, a
7% stock dividend was declared which resulted in the issuance of 58,599
additional shares of common stock, in January 1996, a 7.5% stock dividend was
declared which resulted in the issuance of 67,185 additional shares of common
stock, in January 1997, a 7.5% stock dividend was declared, resulting in the
issuance of 72,703 additional shares of common stock and in October, 1997, a 20%
stock dividend was declared, resulting in the issuance of 208,710 additional
shares of common stock being issued (collectively, the "Stock Dividends").
 
ITEM 6--Management's Discussion And Analysis of Financial Condition
         and Results of Operations
 
    This report contains "forward-looking" statements. The Company is including
this statement for the express purpose of availing itself of the protections of
the safe harbor provided by the Private Securities Litigation Reform Act of 1995
with respect to all of such forward-looking statements. Examples of
forward-looking statements include, but are not limited to (a) projections of
revenues, income or loss, earnings or loss per share, capital expenditures,
growth prospects, dividends, capital structure and other financial items, (b)
statements of plans and objectives of the Company or its management or Board of
Directors (c) statements of future economic performance and (d) statements of
assumptions underlying other statements and statements about the Company or its
business.
 
    The Company's ability to predict projected results or to predict the effect
of certain events on the Company's operating results is inherently uncertain.
Therefore, the Company wishes to caution each reader of this report to carefully
consider certain factors, including competition for deposits and loans;
potential changes in interest rates; changes in governmental policy and other
factors discussed

                                       8

<PAGE>

herein, because such factors in some cases have affected and in the future 
(together with other factors) could affect, the ability of the Company to 
achieve its anticipated results and may cause actual results to differ 
materially from those expressed herein.

    The Bank commenced operations on August 16, 1989. The Company's first full
fiscal year of operations was 1990.
 
    Capital Resources
 
    The Company was formed on May 31, 1988 pursuant to the laws of the
Commonwealth of Pennsylvania for the purpose of owning and operating the Bank.
On August 8, 1989, the Company completed an initial public offering of its
common stock. The Bank commenced operations on August 16, 1989.
 
    In April and June, 1996, the Company issued 3,725 and 2,876 shares of common
stock, in connection with one former Director exercising his warrants and one
Director exercising his Stock Options, respectively. As described above, in
January, 1997, 72,703 shares of common stock were issued in connection with a
stock dividend and in October, 1997, a 20% stock dividend was declared,
resulting in the issuance of 208,710 additional shares of common stock being
issued. At December 31, 1997, the common stock outstanding was 1,252,773 shares
as compared to 971,360 shares at December 31, 1996. The book value per share of
the Company's common stock at December 31, 1997, 1996 and 1995 was $6.98, $6.37
and $5.90, respectively, after giving retroactive effect to the issuance of
stock dividend.

                                       9

<PAGE>

    The chart below presents various capital ratios applicable to
state-chartered, Federal Reserve member banks. The requirements are compared to
the Bank's actual ratios at December 31, 1997, which exceeded the levels
required for a bank to be adequately capitalized under applicable Federal
Deposit Insurance Corporations' regulations.
 
                             RISK WEIGHTED CATEGORY
 
<TABLE>
<CAPTION>
                                             
     RISK WEIGHTED ASSETS                           0%               20%          50%       100%      Total
                                          -------------------  --------------  ---------  ---------  ---------
<S>                                       <C>                  <C>             <C>        <C>        <C>
Loans....................................                                         30,646     72,762    103,408
Securities Available for Sale............            176                2,480                            2,656
Securities Held to Maturity..............                               2,605                            2,605
Federal Funds Sold.......................                              19,500                           19,500
Cash and Due From Banks..................          3,625                  320                            3,945
Other Assets.............................                                                     2,388      2,388
                                                 -------       --------------  ---------  ---------  ---------
Category totals..........................          3,801               24,904     30,646     75,150    134,502
                                                 -------       --------------  ---------  ---------  ---------
Off balance-sheet items (risk weighted)..                                 215      2,643
                                                 -------       --------------  ---------  ---------  ---------
Total risk-weighted assets...............              0                5,024     16,644     75,150     96,818
                                                 -------       --------------  ---------  ---------  ---------
                                                 -------       --------------  ---------  ---------  ---------
Average Total Assets.....................        121,750
</TABLE>
 
<TABLE>
<CAPTION>

CAPITAL                            TIER 1     TIER 2      TOTAL
-------                           ---------  ---------  ---------
<S>                               <C>        <C>        <C>
Shareholders' equity.............     8,729                 8,729
Allowance for loan losses........                  937        937
                                  ---------  ---------  ---------
Total Capital....................     8,729        937      9,666
                                  ---------  ---------  ---------
                                  ---------  ---------  ---------
</TABLE>

                                       10

<PAGE>

<TABLE>
<CAPTION>
                                                             Regulatory
                                                               Minimum        Actual
Ratio                                                         12/31/97       12/31/97
-----                                                      ---------------  -----------
<S>                                                        <C>              <C>
Qualifying Total Capital to Risk Weighted Assets.........           8.0%          9.98%
Tier 1 Capital to Risk Weighted Assets...................           4.0%          9.02%
Tier 1 Ratio to Total Adjusted Average Assets............           4.0%          7.17%
</TABLE>

    The Company's capital-to-assets ratio decreased from 7.52% as of December 
31, 1996 to 6.55% at December 31, 1997. The year-to-year decrease in the 
capital-to-assets ratio was attributable to the asset growth of the Company 
during 1997. Management anticipates that its capital-to-assets ratio will 
continue to decline as the Company's assets grow. The Company's return on 
average equity for 1997 was 9.05% and for 1996 was 7.04%; and its return on 
average assets was .67% for 1997 as compared to .61% for 1996. The increase 
in the Company's return on equity and return on assets from 1996 to 1997 was 
directly attributable to the increased net income of the Bank.
 
    The following table sets forth certain information from the Bank's average
consolidated statement of financial condition and reflects the weighted average
yield on its assets and weighted average cost of its liabilities for the periods
ended December 31, 1996 and 1997. Such yields and costs were derived by dividing
actual income or expense by the monthly average balance of assets or
liabilities, respectively, for the respective period, and exclude unrecorded
interest income related to non-accrual loans.

                                       11

<PAGE>

<TABLE>
<CAPTION>
                                                                1997                            1996
                                                           (in thousands)             (in thousands)
                                                 ----------------------------   ---------------------------
                                                  Average               Yield    Average              Yield
                                                  Balance    Interest   Cost     Balance   Interest   Cost
                                                 ----------  ---------  -----   ---------  ---------  -----
<S>                                              <C>         <C>        <C>     <C>        <C>        <C>
Assets
Interest-earning assets:
  Loans Receivable (includes mortgage loans
    held for sale).............................  $   97,712  $   9,139  9.35%   $ 81,280     $7,654    9.42%
  Other Investments............................       4,666        290  6.22       6,430        371    5.77
  Federal Funds Sold...........................       3,750        196  5.23       1,576         89    5.65
                                                 ----------  ---------          ---------  ---------

Total Interest-Earning Assets..................  $  106,128  $   9,625  9.07      89,286     $8,114    9.09
                                                             ---------  -----              ---------  -----
Non-Interest-Earning Assets....................       6,257                        4,853
                                                 ----------                     ---------

    Total Assets...............................  $  112,385                     $ 94,139
                                                 ----------                     ---------
                                                 ----------                     ---------

Liabilities & Shareholders' Equity:
Interest-bearing liabilities:
  Demand Interest-Bearing......................  $    6,106  $     127  2.08    $  3,755     $   79    2.10
  Money Market & Savings.......................      19,078        608  3.19      18,943        612    3.23
  Other Time Deposits..........................      56,437      3,257  5.77      43,583      2,475    5.68
  Borrowed Funds...............................       6,550        399  6.09       5,386        281    5.22
                                                 ----------  ---------          ---------  ---------

Total Interest-Bearing Liabilities.............      88,171  $   4,391  4.98      71,667     $3,447    4.81
                                                             ---------  -----              ---------  -----
Other Liabilities..............................      15,901                       14,789
                                                 ----------                      --------

Total Liabilities..............................     104,072                       86,456
Shareholders' Equity...........................       8,313                        7,683
                                                 ----------                      --------

Total Liabilities and Shareholders' Equity.....  $  112,385                     $ 94,139
                                                 ----------                      --------
                                                 ----------                      --------

Net Interest Income/Rate Spread................              $   5,234  4.09%              $   4,667   4.28%
                                                             ---------  -----              ---------  -----
                                                             ---------  -----              ---------  -----

Net Interest Margin............................                         4.93%                          5.23%
                                                                        -----                          -----
                                                                        -----                          -----
</TABLE>
 
    The following table analyzes the rate/volume variances between the Bank's
interest-earning assets and interest-bearing liabilities for the fiscal years
1997 compared to 1996 and 1996 compared to 1995. For each category of
interest-bearing assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (change in volume
multiplied by prior year rate), (ii) changes to rate (change in rate multiplied
by prior year volume), and (iii) total change in rate and volume. The combined
effect of changes in both rate and volume has been allocated proportionately to
the change due to rate and the change due to volume.

                                       12

<PAGE>
<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31
                                                           ----------------------------------------------------------------
                                                                    1997 vs. 1996                 1996 vs. 1995
                                                           -------------------------------  -------------------------------
                                                                                   (in thousands)
                                                           ----------------------------------------------------------------
                                                            Volume      Rate       Total     Volume      Rate       Total
                                                           ---------  ---------  ---------  ---------  ---------  ---------
<S>                                                        <C>        <C>        <C>        <C>        <C>        <C>
Interest Income:
  Loan Portfolio (includes mortgages held for sale)....    $   1,537  $     (57) $   1,480  $   1,688  $    (273) $   1,415
  Other Investments....................................         (108)        27        (81)      (358)        18       (340)
  Federal Funds........................................          114         (7)       107        (11)        (1)       (12)
                                                           ---------  ---------  ---------  ---------  ---------  ---------
Total Interest Earning Assets........................          1,543        (37)     1,506      1,319       (256)     1,063
                                                           ---------  ---------  ---------  ---------  ---------  ---------
Interest Expense:
  Demand Interest-Bearing.............................            49         (1)        48          9         (6)         3
  Money Market & Savings...............................            4         (8)        (4)       (75)      (155)      (230)
  Other Time Deposits..................................          741       (102)       617        573        (86)       487
  Borrowed Funds.......................................           55        (53)         2        239       (219)        20
                                                           ---------  ---------  ---------  ---------  ---------  ---------
                                                                 849       (164)       824        746       (466)       280
                                                           ---------        ---  ---------  ---------  ---------  ---------
Net Change in Net Interest Income....................      $     694  $     127  $     567  $     573  $     210        783
                                                           ---------  ---------  ---------  ---------  ---------  ---------
                                                           ---------  ---------  ---------  ---------  ---------  ---------
</TABLE>

    Liquidity
 
    The Bank's Asset/Liability Management Committee, comprised of the members of
the Bank's Executive Committee and its Treasurer, are responsible for managing
the liquidity position and interest rate sensitivity of the Bank. The
Committee's function is to balance the Bank's interest-sensitive assets and
liabilities, while providing adequate liquidity for projected needs. The primary
objective of the Asset/Liability Management Committee is to optimize net
interest margin in an ever changing rate environment.
 
    Due to the nature of the Company's business, some degree of interest rate
risk is inherent and appropriate. Management attempts to manage the level of
earnings exposure arising from interest rate movements.
 
    Interest rate sensitivity is measured by the difference between
interest-earning assets and interest-bearing liabilities which mature or reprice
within a specific time interval ("Gap"). A positive gap indicates that
interest-earning assets exceed interest-bearing liabilities within a given
interval. A positive gap position results in increased net interest income when
rates increase and the opposite when rates decline.

                                       13

<PAGE>

    At December 31, 1997, the risk management review included an "earnings at
risk" analysis as well as a "risk sensitivity" analysis. Potential monthly net
revenue change indicated that in a static rate environment, increased earnings
would be approximately $12,000. If rates fell 200 basis points, monthly revenues
a year from now would increase approximately $29,000 and a rise in rates by 200
basis points would represent a monthly loss in revenues of approximately
$27,000.
 
    Management attempts to structure the Balance Sheet to provide for the
repricing of assets and liabilities in approximately equal amounts.
 
    The table on the next page represents the interest rate sensitivity of the
Company as of December 31, 1997 by listing major categories of
interest-sensitive assets and compares them to interest-sensitive liabilities
for various time periods. The repricing intervals primarily are determined by
the first opportunity for the Company to change the interest rate on the subject
instrument. The table shows the difference between interest-sensitive assets and
interest-sensitive liabilities, or Gap, for each repricing interval and a
cumulative Gap and certain calculations based on such information.




                                       14



<PAGE>

                                              Interest Ratio Sensitivity Report
                                                   As of December 31, 1997
                                                   (Dollars in Thousands)
 
<TABLE>
<CAPTION>
                                            1-90       91-180     181-365       1-5       5 Years
                                            days        days        days       years      and over     Total
                                         ----------  ----------  ----------  ----------  ----------  ----------
<S>                                      <C>         <C>         <C>         <C>         <C>         <C>    
Interest-Sensitive Assets
Federal Funds Sold.....................  $   19,500  $      0     $     0     $     0    $      0    $ 19,500
Loans..................................      41,814     3,062       5,685      38,868      13,979     103,408
Interest-Bearing Balances..............           0         0           0           0           0           0
Investment Securities Held
 For Sale..............................           0         0           0         500       1,105       1,605
Investment Securities Held For
  Maturity.............................           0         0           0       3,000         656       3,656
                                         ----------  ----------  ----------  ----------  ----------  ----------
Totals.................................  $   61,314  $  3,062    $  6,185    $ 42,974    $ 14,635    $128,169

Cumulative Total.......................  $   61,314  $ 64,376    $ 70,561    $113,535    $128,170    $128,169

Interest-Sensitive Liabilities
Demand-Interest-bearing................  $    8,164  $      0    $      0    $      0    $      0    $  8,164
Savings Accounts.......................       5,270         0           0           0           0       5,270
Money Market Accounts..................      14,040         0           0           0           0      14,040
Time Deposits..........................      20,796    13,238      18,418      18,830           0      71,282
Borrowed Funds.........................       9,000         0           0           0           0       9,000
                                         ----------  ----------  ----------  ----------  ----------  --------
Totals.................................  $   57,270  $ 13,238    $ 18,418  $   18,830    $      0    $107,756

Cumulative Totals......................  $   57,270  $ 70,508    $ 88,926  $  107,756    $107,756    $107,756

Gap....................................  $    4,044  $(10,176)   $(12,733) $   23,538    $ 15,740    $ 14,635

Cumulative Gap.........................  $    4,044  $ (6,132)   $(18,865) $    4,673    $ 20,413    $ 20,408

Interest-sensitive assets/ 
  Interest-sensitive liabilities 
 (cumulative)..........................        1.07       .91         .79        1.04        1.19        1.19
Cumulative Gap/total earning
 assets................................        3.16%   (4.78%)     (14.72%)       3.65%      15.93%      15.92%

Total Earning Assets...................              $128,169
</TABLE>

                                  15

<PAGE>

    Liquidity management allows a financial institution to meet its potential 
cash needs, at reasonable rates, from a variety of sources. Management 
monitors projected and current cash flows to maintain adequate levels of 
liquidity. Management believes that the utilization of core deposits, 
maturing existing earning assets, such as securities, and relatively 
short-term borrowings are the most appropriate approach to meet the Bank's 
liquidity needs. Management has allocated certain liquid funds and short-term 
liabilities to accommodate the slight decline in primary lending rates. As a 
result of such liability repricing, management has been able to adjust for 
such slight declines during the first 90 days from which interest rates 
changed, with little effect on net interest income. During 1997, the Bank's 
net interest spread was maintained at approximately 4.09%, as compared to 
4.28% in 1996.
 
    Results of Operations
 
    As of December 31, 1997, the Bank held deposits aggregating $114,832,410, 
of which $16,076,381, or approximately 14%, were non-interest-bearing 
deposits, (exclusive of the $6,566 deposits of the Company). To the best of 
the Company's knowledge, none of such deposits were brokered deposits. As of 
the same date, outstanding loans receivable in connection with loans made to 
1,423 loan customers totaled approximately $103,373,175 (exclusive of 
residential mortgage loans held for sale), resulting in an average loan size 
of approximately $72,645.
 
    As of December 31, 1996, the Bank held deposits aggregating $87,199,991, 
of which $14,660,464, or approximately 17%, were non-interest-bearing 
deposits, (exclusive of the $42,289 deposits held by the Company). To the 
best of the Company's knowledge, none of such deposits were brokered 
deposits. As of the same date, outstanding 
loans receivable made to 1,272 loan customers totaled approximately 
$91,834,168, resulting in an average loan size of approximately $72,197.
 
    As of December 31, 1995, the Bank held deposits aggregating $82,870,620, 
of which $14,452,481, or approximately 17%, were non-interest-bearing 
deposits (exclusive of the $21,576 deposits of the Company). To the best of 
the Company's knowledge none of such deposits were brokered deposits. As of 
the same date, outstanding receivables in connection with loans made to 1,048 
loan customers totaled approximately $72,207,628, (exclusive of residential 
mortgage loans held for sale) resulting in an average loan size of 
approximately $68,900.


                                 16

<PAGE>

<TABLE>
<CAPTION>
                              1997                               1996                             1995
                  -----------------------------  ----------------------------  ---------------------------
                                      % of                          % of                        % of
Type of Account      Balance        Portfolio        Balance      Portfolio       Balance       Portfolio
----------------  --------------  -------------   -------------  ------------  ------------  -------------
<S>               <C>             <C>             <C>            <C>              <C>           <C>          
Non-Int. Bearing  $   16,076,381          14.00%  $14,660,464       17.00%      $14,452,481      17.00%
Interest-Bearing       8,164,080           7.00     4,564,916        5.00         3,262,291       4.00
Money Market....      14,039,724          12.00    14,409,382       17.00        16,376,099      20.00
Savings.........       5,270,011           5.00     4,571,352        5.00         4,900,299       6.00
CDs over                                         
  $100,000......      32,244,281          28.00    23,344,356       23.00        16,970,990      23.00
CDs under                                        
  $100,000......      39,037,933          34.00    25,649,521       33.00        26,908,460      30.00
                  --------------  -------------   -----------     ---------     ------------  -------------  
Total                                            
  Deposits......  $  114,832,410         100.00%  $87,199,991      100.00%      $82,870,620     100.00%
                  --------------  -------------   ------------    ---------     ------------  -------------  
                  --------------  -------------   ------------    ---------     ------------  -------------  
</TABLE>

                   [PIE CHARTS OF 1997, 1996 and 1995]

    From its inception in 1989 through December 31, 1997, the Company 
incurred a cumulative deficit of $127,991, which included a charge of 
approximately $2,113,821 in connection with the issuance of the Stock 
Dividends. For the year ended December 31, 1997, the Company's total income 
was $10,376,499 and its total expenses were $9,620,021, resulting in a net 
profit for the year of $756,478. The increase in net income for the year 
ended December 31, 1997 was primarily due to increased interest income on 
loans. For the year ended December 31, 1996, the Company's total income was 
$8,602,744 and its total expenses were $8,062,157, resulting in a net profit 
for the year of $540,587. The slight decline in net income for the year ended 
December 31, 1996 was primarily due to increased operating expenses as a 
result of branch expansion. For the year ended December 31, 1995, the 
Company's total income was $7,228,649 and its total expenses were $6,681,993, 
resulting in a net profit for the year of $546,656.
 
    As of December 31, 1997, the Bank's allowance for loan losses equaled 
approximately .91% of outstanding loans receivable, including non-accrual 
loans. At December 31, 1996, the Bank's allowance for loan losses equaled 
approximately .95% of outstanding loans receivable, including non-accrual 
loans. At December 31, 1995, the allowance equaled approximately 1.04%. The 
chart below shows an analysis of the allowance for loan losses for the years 
ended December 31, 1997, 1996 and 1995. Although the overall reserve has 
decreased slightly from .95% of outstanding loans at December 31, 1996 to 
 .91% of outstanding loans at December 31, 1997, management believes it 
adequately reflects the level of risk in the portfolio.


                                   17

<PAGE>

<TABLE>
<CAPTION>
                                                            Analysis of The Bank's Allowances for Loan Losses
                                                                               December 31,
                                                           -----------------------------------------------------
                                                                 1997              1996               1995
                                                           ----------------  ----------------   ----------------
<S>                                                        <C>               <C>                <C>
Balance at beginning of period:.........................      $ 875,438        $  750,318          $  604,286

Charge-offs:
 Commercial.............................................       (295,581)         (328,100)                  0
 Real estate mortgage...................................              0                 0            (185,968)
 Installment............................................         (4,283)           (6,261)                  0
                                                           ----------------  ----------------   ----------------
  Total.................................................       (299,864)         (334,361)           (185,968)

Recoveries:
 Commercial.............................................          1,400             71,981                   0
 Net Charge-Offs........................................       (298,464)          (262,380)           (185,968)
 Additions charged to operations........................        360,000            387,500             332,000
                                                          -----------------  ----------------    ---------------
Balance at the end of period............................      $ 936,974        $  875,438          $  750,318
                                                          -----------------  ---------------    ----------------
                                                          -----------------  ---------------    ----------------

Ratio of net charge-offs during the period 
  to average loans outstanding during the period........          .31%               .41%                .29%
                                                                 ------             ------              ------
                                                                 ------             ------              ------

</TABLE>

    As of December 31, 1997, the Bank had loans outstanding, totaling 
$103,373,175, excluding residential mortgage loans held for sale.
 
    The Bank manages asset quality through diversification in its loan 
portfolio and adherence to its credit policy. Management strives to identify 
loans experiencing difficulty early enough to correct the problems, to 
recognize non-performing loans in a timely manner, to record charge-offs 
promptly based on realistic assessments of current collateral values and the 
borrower's ability to repay, and to maintain adequate reserves to cover any 
inherent losses in the loan portfolio.
 
    The provision for possible loan losses represents the charge against 
earnings that is required to fund the allowance for possible loan losses. The 
level of the allowance is determined by inherent risks within the Bank's loan 
portfolio. Management's policy is to maintain the allowance for loan losses 
at a level sufficient to absorb all estimated losses inherent in the loan 
portfolio. The allowance for loan losses is increased by the provision for 
loan losses and recoveries and is decreased by charged-off loans.


                                    18



<PAGE>

    Management is currently utilizing a blended general portfolio allocation
with segregated pools of loans and a specific loan-by-loan allocation mirroring
bank regulatory classifications. Each classified credit is assigned a specific
reserve allocation based upon the severity of its classification and its
specific characteristics (i.e., industry, type of project, nature of
collateral). General reserve allocations are also established against the
unclassified major segments of the loan portfolio, as well as against unfunded
commitments and exposures resulting from the issuance of letters of credit. Each
quarter a comprehensive loan portfolio analysis is undertaken, and reserves are
adjusted at such times to more adequately reflect the Bank's exposure in its
loan portfolio. Additionally, past loss experience, current economic conditions,
the results of the most recent regulatory examination, and other relevant
factors are considered in the evaluation.
 
    The Bank places loans on non-accrual status when, (1) in the opinion of
management, the principal or interest is deemed to be not collectable due to a
deterioration in the financial position of the borrower; or (2) when the loan is
more than 90 days delinquent, unless the obligation is both well secured and in
the process of collection; or (3) when borrower declares bankruptcy and current
payment ceases.
 
    In the first quarter of 1998, the Bank contracted with an independent
consulting firm to perform an extensive review of the loan portfolio. The credit
relationships selected for review were evaluated for risk, adequacy of
documentation, compliance with laws, regulations and internal policy. There was
also an evaluation of the adequacy of the allowance for loan losses. Although
the formal report will not be received until early April, the preliminary
results indicate an adequate loan loss reserve.
 
    Additions to the Bank's provision for possible loan losses for the period
ended December 31, 1997, totaled $360,000. Loans charged off against the reserve
in 1997 amounted to $299,864 and recoveries were $1,400, which resulted in net
charged-off loans of $298,464. The principal amount of non-accrual loans at
December 31, 1997 was $891,852, an increase of 21% over 1996. A substantial
portion of the non-accrual loans are partially or fully secured and in the
process of collection.
 
    Additions to the Bank's provision for possible loan losses for the period
ended December 31, 1996, totaled $387,500. Loans charged-off against the reserve
in 1996 amounted to $334,361. Recoveries amounted to $71,981 which resulted in
$262,380 in net charged-off loans. The principal amount of nonaccrual loans at
December 31, 1996 totaled $735,007. This is an increase of $375,773 over year
end 1995.
 
    Additions to the Bank's provisions for possible loan losses for the period
ended December 31, 1995 totaled $332,000. Loans charged off against the reserve
in 1995 amounted to $185,968. Loans on non-accrual status as of December 31,
1995 amounted to $359,234.
 
    Other real estate owned at December 31, 1997 totaled $465,312 as compared to
$511,618 at December 31, 1996. This represents one property in Bryn Mawr,
Pennsylvania which the Bank acquired at sheriff's sale. On November 4, 1996, the
Bank entered into a lease purchase agreement for a consideration of $575,000.
The terms of the agreement call for payment in full before November 1, 1998.
 
    Interest expense of $4,391,096, represented 46% of gross interest income in
1997. Interest expense increased 27% over 1996. This increased expense was due
to an increased average growth in interest-bearing deposits to $88,171 from
$71,667 in 1996 and an increased average cost of funds to 4.98% in 1997 from
4.81% in 1996.

                                     19
<PAGE>

    Interest expense of $3,446,440 represented 42% of gross interest income in
1996. Interest expense increased by 16% over 1995. Even though the average cost
of funds declined from 5.05% to 4.81% in 1996, the increase in interest expense
rose due to interest bearing liabilities increasing from an average of $58,687
in 1995 to $71,667 in 1996, an average increase of 22%.
 
    Interest expense of $2,962,645 represented 43% of gross interest income in
1995. The increase in interest expense was due to the 35% growth in interest
bearing deposits and a higher cost of funds due to increased interest rates over
1994.
 
    Occupancy and equipment expenses totaled $939,804 for the year ended
December 31, 1997, as compared to $757,482 at December 31, 1996. The 24%
increase is representative of continued increased rents to accommodate the
growth of the Bank. Additional increases in maintenance costs and equipment
leases were reflective of the Bank's fifth branch opening in August of 1997.
 
    Occupancy and equipment expenses totaled $757,482 for the year ended
December 31, 1996, as compared to $519,053 at December 31, 1995. The 46%
increase represents increased rents for a full year at the Center Square branch
location and six months of rent expense on the Strafford branch location.
Increased maintenance costs and equipment leases were attributable to the two
new branch locations.
 
    For the year ended December 31, 1995, occupancy and equipment expense
increased 9% to $519,053. The increase in those expenses was attributable to
increased rent expense for the Center Square branch that opened in the fourth
quarter.
 
    Salary and employee benefits of $2,254, 829 represented 51% of total
non-interest expenses, or 25% of total Bank expenses, at December 31, 1997. The
increase in salary and employee benefits of $625,077 or 38% over 1996 is
reflective of hiring additional employees and increased benefits expense,
including group health insurance and company match of the 401(k) Plan.
 
    Salary and employee benefits of $1,629,752 in 1996 represented 42% of total
non-interest expense, or 22% of total bank expenses as compared to $1,359,430 in
1995. The increase in salary and employee benefits of $270,322, or 20%, is
attributable to the hiring of additional employees for branch expansion and to
manage the asset growth of the company.
 
    Other operating expenses in 1997, exclusive of occupancy and equipment and
salary and employee benefits totaled $1,257,479 as compared to $1,522,108 in
1996. The decrease in these operating expenses was primarily related to the
non-recurrence of the additional expenses that were related to the proxy and
annual meeting expenses that occurred in 1996. Computer expenses increased from
$210,688 to $253,196, a 20% increase over 1996. This increase was due to the
increased deposit and loan accounts processed in conjunction with the asset
growth of the Bank. Deposit insurance increased from $1,500 in 1996 to $13,768
in 1997. The Bank pays premiums in accordance with the deposit size of its
portfolio and its insurance category rating which currently is 1A under the FDIC
assessment regulation, Part 327. Legal expenses decreased $29,049 or 36% from
1996. This was a result of fewer legal and collection issues arising in the
normal course of the Bank's business. Business development expenses were
$176,770 in 1997 as compared to $124,637 in 1996. This 42% increase was a direct
result of the Bank's efforts to develop business and become increasingly visible
in its branch location communities. The Bank hired two business development
officers and implemented a bank wide sales call program. The decrease in
advertising expense from $82,009 in 1996 to $56,352 in 1997 was a result of more
monies being allocated to business development rather than advertising. The
Company anticipates an increase in operating expenses of 


                                     20
<PAGE>

approximately $100,000 for 1998 associated with the newly opened Lansdale 
Branch and the soon to open Northeast Philadelphia branch.
 
    Other operating expenses in 1996, exclusive of occupancy and equipment 
and salary and employee benefits expense totaled $1,522,108 as compared to 
$1,214,462 at December 31, 1995. This increase of 25% for the 1996 year is a 
result of branch expansion, asset growth and a non-recurring proxy related 
expense in connection with the Company's Annual Meeting. Legal expenses 
increased from $25,316 to $79,380, a 214% increase over 1995. This increase 
was due to loan and collection expenses on certain non-accrual loans and loan 
closings on new loan originations. Professional fees decreased from $99,638 
in 1995 to $60,585 in 1996. This was a result in services from one individual 
being terminated. The $578,955 in other operating expenses was comprised 
primarily of increases of 32% in telephone expense, 29% increase in postage 
and freight, business related auto and travel and miscellaneous expenses of 
22%. Other components of other operating expenses also include insurance 
expense, shares tax expense and accounting and audit fees. These expenses 
increased 74% over 1995 and were directly related to branch expansion and 
marketing efforts to increase business. Deposit insurance decreased by 99% in 
1996 from $72,783 at December 31, 1995 to $1,500 at December 31, 1996. This 
is a continuing direct result from a change in the FDIC assessment regulation.
 
    Other operating expenses in 1995, exclusive of occupancy and equipment and
salary and employee benefits costs, totaled $1,214,462 or approximately 20% of
total Bank expenses as compared to other operating expenses in 1994, exclusive
of occupancy, salary and employee benefits costs, which totaled $1,157,907 or
approximately 25% of total bank expenses. Of the other operating expenses,
Business Development increased 66% from $60,665 to $100,586. This increase was
due to increased expenses to develop the asset growth the bank experienced and
the grand opening expenses of the new branch that opened in the fall of 1995.
Stationery and supplies increased 96%. This increase over 1994 was attributable
to the asset growth and purchases for the new branch.
 
    Interest income on investment securities relates primarily to interest on
U.S. Government Obligations. Interest income of $185,263 for the year ended
December 31, 1997 decreased 37% from $295,389 at December 31, 1996. The decrease
is a direct result of a change in investments from government obligations to
federal funds sold. The average balance of government obligations decreased from
$6,430,000 in 1996 to $4,666,000 in 1997. Interest income of $295,389 for the
year ended December 31, 1996, decreased 27% from $404,520 at December 31, 1995.
The decrease is a direct result of the change in liquidity position of the
Company. Secondary investments decreased by 28% from 1995 to 1996. Interest
income of $404,520 for the period ended December 31, 1995 represented a decrease
of less than 1% from interest income for the period ended December 31, 1994.
 
    Interest income on temporary investments represents Federal Funds sold. At
December 31, 1997, interest income on Federal Funds sold was $196,425, as
compared to $88,664 at December 31, 1996, a 122% increase. The deposit growth of
the Bank allowed for an improved liquidity position as well as a growth in
federal funds to better prepare for potential loan demand. At December 31, 1996
interest income on Federal Funds sold was $88,664, as compared to $101,698 at
December 31, 1995, a 13% decrease. The decrease was a direct result of the
change in liquidity as described above. The December 31, 1995 balance of
$101,698 represents a slight decrease from $103,392 for the period ended
December 31, 1994. This was due to the reduction in average balances outstanding
of over $1 million from 1994, even though the yield was 5.70% as compared to
3.96%. These funds were used to satisfy loan demand. Interest income on Federal
Funds Sold in 1994 was $103,392.
 
    Interest income on other investments represent the Bank's investments in
municipal securities and dividends paid on Federal Reserve and Federal Home Loan
Bank Stocks. For the year ended December 31, 1997, 1996 and 1995, interest
income on other investments was $104,511, $75,840 and 


                                      21
<PAGE>

$78,093, respectively. The fluctuation from year to year is due to changes in 
the amounts of Federal Home Loan Bank dividend payments. The Bank did not 
invest in any new municipal bonds in 1995, 1996 or 1997.
 
    Interest and fees on loans were $9,138,864 in 1997, 95% of gross interest
income as compared to $7,653,898, or 94% in 1996. The average loan portfolio
grew 20% while the Bank's yield decreased slightly from 9.42% to 9.35%. Interest
and fees on loans were $7,653,898 in 1996, 94% of gross interest income, as
compared to $6,263,095 or 91% in 1995. The bank experienced a 28% growth in
average loans while the average yield on the portfolio decreased from 9.87% to
9.47%. The slight decrease in rates had little effect on earnings due to the
ability of the bank to reprice liabilities on a timely basis with market
fluctuations as described above. These factors were directly related to the
change in interest and fees on loans during 1996.
 
    Interest and fees on loans were $6,263,095 in 1995, 91% of gross interest 
income, as compared to $4,458,108 in 1994. The 40% increase over 1994 was 
attributable to the growth of loans outstanding, with an average outstanding 
loan portfolio of $63 million yielding 9.87% as compared to $49 million 
average outstanding in 1994 yielding 8.96%.
 
    An analysis of the Bank's loan portfolio is presented in Note 7, "Loans and
Allowance for Loan Losses", to the consolidated financial statements. The
primary lending activity of the Bank is to originate loans to individuals and
business entities for business related purposes. The Bank's loans receivable
earn interest at either fixed rates or rates that vary overnight with changes in
the Bank's prime rate. Certain loans receivable earn interest at rates that are
fixed to a specific spread over the rate being paid on certificates of deposit
which are pledged as collateral on the loans.
 
    Recent Accounting Pronouncements

    There are several accounting pronouncements that are effective for fiscal
year 1998. These pronouncements are discussed in footnote No. 2 of the
consolidated financial statements.
 
    Year 2000 Matters

    The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions and engage in
similar normal business activities.
 
    An assessment of the readiness of external entities which the Company
interfaces with, such as vendors, counterparties, customers, payment systems and
others has been made and will continue to be ongoing.
 
    The Company has identified all significant applications that will require
modification to ensure year 2000 compliance (Year 2000 Compliance). Internal and
external resources are being used to make the required modifications and test
Year 2000 Compliance. The modification process of all significant applications
is substantially complete. The Company plans on completing the testing process
of all significant applications by December 31, 1998.
 
    In addition, the Company has communicated with others with whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which the Company is 


                                      22
<PAGE>

vulnerable to any third party Year 2000 issues. However, there can be no 
guarantee that the systems of other companies on which the Company's systems 
rely will be timely converted, or that a failure to convert by another 
company, or a conversion that is incompatible with the Company's systems, 
would not have a material adverse effect on the Company.
 
    The total cost of the Company of these Year 2000 Compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on which the
Company plans to complete the Year 2000 modification and testing processes are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ from those plans. Based upon current information, the Company believes
that its Year 2000 expenditures for 1998 will be approximately $50,000.

                                       23


<PAGE>

ITEM 7--Financial Statements and Supplementary Data
 
        Independent Auditors' Report dated March 13, 1998.
 
        Consolidated Statements of Financial Condition as of December 31, 1997
        and 1996.
 
        Consolidated Statements of Income for the years ended December 31, 1997,
        1996 and 1995.
 
        Consolidated Statements of Changes in Shareholders' Equity for the years
        ended December 31, 1997, 1996 and 1995.
 
        Consolidated Statements of Cash Flows for years ended December 31, 1997,
        1996 and 1995.
 
        Notes to Consolidated Financial Statements.
 
    The remainder of this page is intentionally left blank. The Financial
Statements of the Company begin on the following page.

                                       24


<PAGE>

                                 -----------------------------------------------
                                 Madison Bancshares
                                 Group, Ltd.
                                 and Subsidiary
                                 
                                 Consolidated Financial Statements as of
                                 December 31, 1997 and 1996 and for Each of the
                                 Three Years in the Period Ended
                                 December 31, 1997, and Independent Auditors'
                                 Report



                                       25
<PAGE>


INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
Madison Bancshares Group, Ltd.
Blue Bell, Pennsylvania

We have audited the accompanying consolidated statements of financial condition
of Madison Bancshares Group, Ltd. and subsidiary (the "Company") as of December
31, 1997 and 1996 and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Madison Bancshares
Group, Ltd. and subsidiary as of December 31, 1997 and 1996 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.

Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 13, 1998


                                       26
<PAGE>


MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                 1997                 1996
<S>                                                                          <C>             <C>          
ASSETS

CASH AND CASH EQUIVALENTS:

  Cash and amounts due from banks                                            $   3,944,986   $   4,381,957
  Federal funds sold                                                            19,500,000         925,000
                                                                             -------------   -------------

        Total cash and cash equivalents                                         23,444,986       5,306,957

INVESTMENT SECURITIES:

  Held to maturity (fair value - 1997, $1,617,371; 1996, $2,097,349)             1,605,407       2,108,206
  Available-for-sale (amortized cost - 1997, $3,655,536; 1996, $3,595,891)       3,656,446       3,585,406

LOANS (Net of allowance for loan losses - 1997, $936,974; 1996, $875,438)      102,180,556      90,783,582

MORTGAGE LOANS HELD FOR SALE                                                       290,900       2,111,618

REAL ESTATE OWNED                                                                  465,312         511,618

FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET                               916,484         584,533

ACCRUED INTEREST RECEIVABLE                                                        706,448         641,570

OTHER ASSETS                                                                       240,274         337,385
                                                                             -------------   -------------

TOTAL                                                                        $ 133,506,813   $ 105,970,875
                                                                             -------------   -------------
                                                                             -------------   -------------

LIABILITIES AND SHAREHOLDERS' EQUITY

DEPOSITS:

  Noninterest-bearing demand deposits                                        $  16,076,381   $  14,660,464
  Interest-bearing demand deposits                                               8,164,080       4,564,916
  Savings deposits                                                               5,270,011       4,571,352
  Money market deposits                                                         14,039,724      14,409,382
  Time deposits                                                                 71,282,214      48,993,877
                                                                             -------------   -------------

        Total deposits                                                         114,832,410      87,199,991

BORROWED FUNDS                                                                   9,000,000      10,000,000

ACCRUED INTEREST PAYABLE                                                           838,513         704,707

ACCRUED EXPENSES AND OTHER LIABILITIES                                              97,672          91,957
                                                                             -------------   -------------

        Total liabilities                                                      124,768,595      97,996,655
                                                                             -------------   -------------

COMMITMENTS

SHAREHOLDERS' EQUITY:

  Preferred stock, $5 par value - authorized, 5,000,000 shares; issued and
  outstanding, 0 shares Common stock, $1 par value - authorized, 20,000,000
  shares; issued and outstanding, 1997, 1,252,773; 1996, 971,360 shares          1,252,773         971,360
  Capital surplus                                                                7,612,835       7,185,686
  Accumulated deficit                                                             (127,991)       (175,907)
  Net unrealized gain (loss) on available-for-sale securities                          601          (6,919)
                                                                             -------------   -------------

        Total shareholders' equity                                               8,738,218       7,974,220
                                                                             -------------   -------------

TOTAL                                                                        $ 133,506,813   $ 105,970,875
                                                                             -------------   -------------
                                                                             -------------   -------------
</TABLE>

See notes to consolidated financial statements.


                                       27
<PAGE>


MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                           1997        1996        1995
<S>                                                     <C>         <C>         <C>       
  INTEREST INCOME:


    Interest and fees on loans                          $9,138,864  $7,653,898  $6,263,095
    Interest and dividends on investment securities:
      U.S. Government obligations                          185,263     295,389     404,520
      Other securities                                     104,511      75,840      78,093
      Interest on temporary investments                    196,425      88,664     101,698
                                                        ----------  ----------  ----------

             Total interest income                       9,625,063   8,113,791   6,847,406
                                                        ----------  ----------  ----------

  INTEREST EXPENSE:
    Interest on:

      Demand deposits                                      127,143      78,738      76,473
      Savings and money market deposits                    607,838     611,151     841,898
      Time deposits                                      3,256,833   2,475,714   1,987,626
      Other interest                                       399,282     280,837      56,648
                                                        ----------  ----------  ----------

             Total interest expense                      4,391,096   3,446,440   2,962,645
                                                        ----------  ----------  ----------

  NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES   5,233,967   4,667,351   3,884,761

  PROVISION FOR LOAN LOSSES                                360,000     387,500     332,000
                                                        ----------  ----------  ----------

  NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES    4,873,967   4,279,851   3,552,761
                                                        ----------  ----------  ----------

  OTHER NONINTEREST INCOME:

    Service charges on deposit accounts                    573,493     374,897     275,877
    Gain on the sale of mortgage loans                      83,339      59,002      49,505
    Gain on sale of investments                                575      15,812
    Other                                                   94,029      55,054      40,049
                                                        ----------  ----------  ----------

             Total noninterest income                      751,436     488,953     381,243
                                                        ----------  ----------  ----------

  OTHER NONINTEREST EXPENSES:

    Salaries and employee benefits                       2,254,829   1,629,752   1,359,430
    Occupancy                                              715,145     556,977     396,393
    Equipment                                              224,659     200,505     122,660
    Computer processing                                    253,196     210,688     176,559
    Deposit insurance                                       13,768       1,500      72,783
    Legal                                                   50,331      79,380      25,316
    Professional fees                                       51,166      60,585      99,638
    Business development                                   176,770     124,637     100,586
    Office and stationery supplies                         132,818     121,628     101,925
    Advertising                                             56,352      82,009      70,221
    Director's fees                                        107,025     115,325      95,600
    Proxy related expense                                    --        147,401
    Other operating                                        416,053     578,955     471,834
                                                        ----------  ----------  ----------

             Total other noninterest expenses            4,452,112   3,909,342   3,092,945
                                                        ----------  ----------  ----------

  INCOME BEFORE TAXES                                    1,173,291     859,462     841,059

  PROVISION FOR INCOME TAXES                               416,813     318,875     294,403
                                                        ----------  ----------  ----------

  NET INCOME                                            $  756,478  $  540,587  $  546,656
                                                        ----------  ----------  ----------
                                                        ----------  ----------  ----------

  BASIC EARNINGS PER SHARE                              $     0.60  $     0.43  $     0.44
                                                        ----------  ----------  ----------
                                                        ----------  ----------  ----------

  DILUTED EARNINGS PER SHARE                            $     0.56  $     0.43  $     0.44
                                                        ----------  ----------  ----------
                                                        ----------  ----------  ----------
</TABLE>

See notes to consolidated financial statements.

                                       28
<PAGE>

MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                                    Net
                                                                                                   Unrealized
                                                                                                   Gain (Loss)
                                                                                                   on Available-
                                                         Common        Capital      Accumulated    For-Sale
                                                         Stock         Surplus        Deficit      Securities        Total

<S>                <C>                               <C>            <C>            <C>            <C>            <C>
  BALANCE, JANUARY 1, 1995                           $   832,862    $ 6,270,076    $  (305,120)   $   (45,523)   $ 6,752,295

    Issuance of common stock to director                   6,113         43,887                                       50,000

    Issuance of 7% common stock dividend                  58,599        395,543       (454,142)

    Net income                                                                         546,656                        546,656

    Unrealized gain on available-for-sale 
      securities, net of tax                                                                           43,764         43,764
                                                     -----------    -----------    -----------    -----------    -----------

  BALANCE, DECEMBER 31, 1995                             897,574      6,709,506       (212,606)        (1,759)     7,392,715

    Exercise of stock options and stock warrants           6,601         39,477
                                                                                                                      46,076

    Issuance of 7 1/2% stock dividend                     67,185        436,703       (503,888)

    Net income                                                                         540,587                       540,587

    Unrealized loss on available-for-sale
        securities, net of tax                                                                         (5,160)        (5,160)
                                                     -----------    -----------    -----------    -----------    -----------

  BALANCE, DECEMBER 31, 1996                             971,360      7,185,686       (175,907)        (6,919)     7,974,220

    Issuance of 7 1/2% stock dividend                     72,703        110,354       (183,057)

    Issuance of 20% stock dividend                       208,710        316,795       (525,505)

    Net income                                                                         756,478                       756,478

    Unrealized gain on available-for-sale 
        securities, net of tax                                                                          7,520          7,520
                                                     -----------    -----------    -----------    -----------    -----------

  BALANCE, DECEMBER 31, 1997                         $ 1,252,773    $ 7,612,835    $  (127,991)   $       601    $ 8,738,218
                                                     -----------    -----------    -----------    -----------    -----------
                                                     -----------    -----------    -----------    -----------    -----------

</TABLE>

  See notes to consolidated financial statements


                                       29
<PAGE>

MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                             1997           1996            1995
<S>                                                                    <C>             <C>             <C>         
  OPERATING ACTIVITIES:

    Net income                                                        $    756,477    $    540,587    $    546,656
    Adjustments to reconcile net income to net cash provided by 
     (used in) operating activities:
      Depreciation on equipment                                            153,272         144,701          89,748
      Provision for loan losses                                            360,000         387,500         332,000
      Net amortization of bond premium/discount                             (1,913)          1,789         482,259
      Gain on sale of mortgage loans held for sale                         (83,339)        (59,002)        (49,505)
      Gain on sale of investments                                             (575)        (15,812)
      Originations of loans held for sale                              (10,474,740)    (15,684,054)     (7,314,677)
      Proceeds from sale of loans                                       12,402,193      14,013,974       7,313,442
    Changes in assets and liabilities which provided (used) cash:

      Accrued interest receivable                                          401,296         (37,477)        (99,235)
      Other assets                                                        (373,621)       (146,611)        (27,719)
      Accrued interest payable                                             133,806          47,812         334,830
      Accrued expenses and other liabilities                                 5,715        (215,511)        204,584
      Deferred loan fees                                                    80,497          24,880         (72,209)
                                                                       -----------     -----------     ----------- 


          Net cash provided by (used in) operating activities            3,359,068        (981,412)      1,724,362


  INVESTING ACTIVITIES:

    Purchase of investment securities held-to-maturity                                                    (500,000)
    Purchase of investment securities available for sale                (2,499,308)     (1,647,031)     (1,500,000)
    Proceeds from maturities of investment securities held-to-maturit      500,000       2,100,000       5,787,700
    Proceeds from sale of investment securities available for sale       1,444,950                       4,003,438
    Proceeds from maturity of investment securities available for sal    1,000,000       1,000,000
    Loans purchased and originated, net of principal repayments        (11,864,109)    (19,821,593)    (19,512,697)
    Additions to furniture, equipment and leasehold improvements          (484,991)       (232,189)       (269,926)
    Costs capitalized for real estate owned                                                               (552,349)
    Proceeds on sale of real estate owned                                   50,000          40,731


          Net cash used in investing activities                        (11,853,458)    (18,560,082)    (12,543,834)


  FINANCING ACTIVITIES:

    Net increase in demand, savings and time deposits                   27,632,419       4,329,371      20,941,335
    Proceeds from issuance of common stock                                                                  50,000
    Exercise of stock warrants                                                              26,895
    Exercise of stock options                                                               19,183
    Advances of borrowed funds                                           9,000,000      10,000,000
    Repayments of borrowed funds                                       (10,000,000)                     (3,675,000)


          Net cash provided by financing activities                     26,632,419      14,375,449      17,316,335


  NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                  18,138,029      (5,166,045)      6,496,863

  CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                           5,306,957      10,473,002       3,976,139


  CASH AND CASH EQUIVALENTS, END OF YEAR                              $ 23,444,986    $  5,306,957    $ 10,473,002


  SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
    Cash paid during the year for:

      Interest                                                        $  3,858,282    $  3,398,628    $  2,627,815


      Income taxes                                                    $    363,663    $    569,956    $    197,527


  SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITY:

    Issuance of 7.5% and 20% stock dividend in 1997 and 7.5%
     and 7% stock dividend
      in 1996 and 1995, respectively:

      Common stock                                                    $    281,413    $     67,185    $     58,599


      Capital surplus                                                 $    427,149    $    436,703    $    395,543


      Accumulated deficit                                             $   (708,562)   $   (503,888)   $   (454,142)

</TABLE>

See notes to consolidated financial statements.


                                       30
<PAGE>

MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

-------------------------------------------------------------------------------


1.    ORGANIZATION AND NATURE OF OPERATIONS

      Madison Bancshares Group, Ltd. (the "Company") is a one-bank holding
      company formed pursuant to Section 3 (a) (1) of the Bank Holding Company
      Act of 1956, as amended. The Company was incorporated under the laws of
      the Commonwealth of Pennsylvania on May 31, 1988, to engage in the
      business of commercial banking through its wholly owned subsidiary, The
      Madison Bank (the "Bank"). The Bank is a commercial bank chartered under
      the applicable laws of the Commonwealth and is regulated under the Federal
      Reserve System by the Federal Reserve Bank. The Bank offers a variety of
      services to individuals and businesses through its offices in Blue Bell,
      Conshohocken, Center Square, Strafford and its fifth branch location,
      Lansdale, Pennsylvania, opened in 1997. The Bank commenced its operations
      on August 16, 1989 after receiving the necessary regulatory approval.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Principles of Consolidation - The consolidated financial statements
      include the accounts of the Company and its wholly owned subsidiary, the
      Bank. All significant intercompany balances and transactions have been
      eliminated in consolidation.

      Use of Estimates in the Preparation of Financial Statements - The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the
      financial statements and the reported amounts of income and expenses
      during the reporting period. The most significant of these estimates is
      the allowance for loan losses. Actual results could differ from those
      estimates.

      Cash and Cash Equivalents - For purposes of reporting cash flows, cash and
      cash equivalents include cash on hand, amounts due from banks and federal
      funds sold. Generally, federal funds are purchased and sold for one-day
      periods. Cash maintained in vaults on premises of $832,167 and $991,352
      and at December 31, 1997 and 1996, respectively, is sufficient to
      currently meet average reserve balances under federal requirements.

      Investment Securities - The Bank classifies and accounts for debt and
      equity securities as follows:

      o    Securities Held-to-Maturity - Securities held-to-maturity are stated
           at cost adjusted for unamortized purchase premiums and discounts
           based on management's positive intent and the Bank's ability to hold
           such investments until maturity considering all reasonably
           foreseeable conditions and events. Purchase premiums and discounts
           are amortized to income over the life of the related security. The
           adjusted cost of a specific security sold is the basis for
           determining the gain or loss on the sale.


                                       31
<PAGE>

       o   Securities Available-for-Sale - Securities available for sale,
           carried at approximate market or fair value, are those management
           might sell in response to changes in market interest rates, increases
           in loan demand, changes in liquidity needs and other conditions.
           Unrealized gains and losses are excluded from earnings and are
           reported net of tax as a separate component of shareholders' equity
           until realized. Realized gains and losses on the sale of investment
           securities are reported in the consolidated statement of operations
           and are determined using the adjusted cost of the specific security
           sold.

      Loans - Loans are stated at the principal amount outstanding, net of any
      deferred loan fees. Interest income on commercial and mortgage loans is
      recorded on the outstanding balance method, using actual interest rates
      applied to daily principal balances. Accrual of interest income on loans
      will cease when collectibility of interest and/or principal is uncertain.
      If it is determined that the collection of interest previously accrued is
      uncertain, the accrued interest is reversed and charged to current
      earnings; thereafter, income is recognized as payments are received.

      Allowance for Loan Losses - An allowance for loan losses is maintained at
      a level that management considers adequate to provide for estimated losses
      based upon an evaluation of known and inherent risk in the loan portfolio.
      Allowances for loan losses are based on estimated net realizable value
      unless it is probable that loans will be foreclosed, in which case,
      allowances for loan losses are based on fair value. Management's periodic
      evaluation is based upon evaluation of the portfolio, past loss
      experience, current economic conditions, and other relevant factors. While
      management uses the best information available to make such evaluations,
      future adjustments to the allowance may be necessary if economic
      conditions differ substantially from the assumptions used in making the
      evaluations.

      The Company accounts for impairment of loans in accordance with Statement
      of Financial Accounting Standards ("SFAS") No. 114, Accounting by
      Creditors for Impairment of a Loan, and No. 118, Accounting by Creditors
      for of a Loan - Income Recognition and Disclosure. SFAS Nos. 114 and 118
      require that certain impaired loans be measured based on the present value
      of expected future cash flows discounted at the loan's effective interest
      rate, observable market price, or the fair value of the collateral if the
      loan is collateral dependent.

      Deferred Origination Fees - Nonrefundable fees and certain direct costs
      associated with originating and acquiring loans are deferred. For loans
      held for investment, the net amount of fees and costs are amortized using
      a method which approximates the interest method as a yield adjustment over
      the life of the loan. For loans held for sale, the net amount is deferred
      and recognized as part of the gain or loss on the sale of the loans.

      Mortgage Loans Held for Sale - The Company originates residential mortgage
      loans for portfolio investment or for sale in the secondary market with
      servicing released to provide additional funds for lending. Loans held for
      sale are carried at the lower of cost or market value, determined on a net
      aggregate basis.

      Real Estate Owned - Real estate owned consists of one property acquired by
      foreclosure. The asset is carried at the lower of cost or estimated fair
      value less the costs to dispose. Write-downs, if any, at the time of
      foreclosure are charged against the allowance for loan loss. Subsequent
      losses in value are charged directly to operations. Costs relating to the
      development and improvement of real estate owned are capitalized and those
      relating to the holding of the properties are charged to expense.


                                       32
<PAGE>

      Furniture, Equipment and Leasehold Improvements, Net - Furniture,
      equipment and leasehold improvements are stated at cost less accumulated
      depreciation and amortization. Depreciation is computed by the
      straight-line method and charged to operating expenses over the estimated
      useful lives of the related assets. The average life for furniture and
      equipment is 7 years. Leasehold improvements are amortized over the
      shorter of the estimated useful life or the term of the lease.

      Income Taxes - The Company accounts for income taxes in accordance with
      SFAS No. 109, Accounting for Income Taxes. Under this method, deferred
      income taxes are recognized for the tax consequences of "temporary
      differences" by applying enacted statutory tax rates applicable to future
      years to differences between the financial statement carrying amounts and
      the tax bases of existing assets and liabilities. Also, under SFAS No.
      109, the effect on deferred taxes of a change in tax rates is recognized
      in income in the period that includes the enactment date.

      Earnings Per Share - In March 1997, the FASB issued SFAS No. 128, Earnings
      Per Share. The statement requires the Company to disclose both basic
      earnings per share and diluted earnings per share for annual and interim
      periods ending after December 15, 1997. Basic net income per share is
      based on the weighted average number of common shares outstanding, while
      diluted net income per share is based on the weighted average number of
      common shares outstanding and common share equivalents that would arise
      from the exercise of stock options. The average common shares outstanding
      have been retroactively restated to reflect the effect of the 7.5% and 20%
      stock dividends issued in 1997, the 7.5% stock dividend issued in 1996 and
      the 7% stock dividend issued in 1995. The calculation of the weighted
      average shares, after giving effect to the stock split, was as follows:


<TABLE>
<CAPTION>
                                                              1997         1996       1995

<S>                                                         <C>         <C>         <C>      
  Average common shares outstanding                         1,254,685   1,260,931   1,252,837
  Increase in shares due to options and warrants--         
    diluted basis                                              86,918        --          --
                                                           
                                                           
  Adjusted shares outstanding - diluted                     1,341,603   1,260,931   1,252,837
                                                           
                                                           
</TABLE>


      Accounting for Stock Options and Warrants - The Company accounts for stock
      options and warrants in accordance with SFAS No. 123, Accounting for
      Stock-Based Compensation which allows the Company to account for
      compensation expense of the options and warrants using the intrinsic value
      method as defined in Accounting Principles Bulletin ("APB") Opinion No.
      25, Accounting for Stock Issued to Employees. The Company is required to
      disclose the pro-forma net income and earnings per share, calculated using
      the fair value method for measuring compensation as defined in SFAS No.
      123 at the grant date of options and warrants. The Company has not
      recognized any compensation expense under the intrinsic value method.


                                       33
<PAGE>

      Accounting Principles Issued and Not Adopted - In June 1997, the FASB
      issued SFAS No. 130, Reporting Comprehensive Income, which requires an
      entity to present, as a component of comprehensive income, the amounts
      from transactions and other events which currently are excluded from the
      statement of income and are recorded directly to stockholders' equity.
      Also in June 1997, the FASB issued SFAS No. 131, Disclosures About
      Segments of an Enterprise and Related Information. This statement requires
      an entity to disclose financial information in a manner consistent to
      internally used information and requires more detailed disclosures of
      operating and reporting segments than are currently in practice. In
      February 1998, the FASB issued SFAS No. 132, Employers' Disclosure About
      Pensions and Other Postretirement Benefits. This statement revises
      employers' disclosures about pension and other postretirement benefit
      plans. It does not change the measurement or recognition of those plans.
      The adoption of these statements, which concern disclosure standards only,
      is not required until 1998. The adoption will not have any impact on the
      Company's financial position or results of operations.

      Reclassifications - Certain items in the 1995 and 1996 consolidated
      financial statements have been reclassified to conform with the
      presentation in the 1997 consolidated financial statements.

3.    INVESTMENT SECURITIES

      A summary of investment securities and their expected maturities, as well
      as estimated fair values at December 31, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>


                                                                                Gross          Gross
                                                                Amortized     Unrealized    Unrealized          Fair
                                                                   Cost         Gains         Losses           Value

<S>                                                            <C>           <C>            <C>            <C>        
  Securities to be held to maturity:
    December 31, 1997:

      Debt securities:

        U.S. Government and Federal Agencies                   $   500,000   $    10,156                   $   510,156
        Municipal and State Government bonds                     1,105,407         1,808                     1,107,215
                                                               -----------   -----------    -----------    -----------
  Total                                                        $ 1,605,407   $    11,964    $              $ 1,617,371
                                                               -----------   -----------    -----------    -----------
                                                               -----------   -----------    -----------    -----------
  Securities available for sale:
    December 31, 1997:

      Debt securities - U.S. Government and Federal Agencies   $ 2,999,336   $       910                   $ 3,000,246
      Equity securities:
        Federal Home Loan Bank Stock                               479,800                                     479,800
        Federal Reserve Bank Stock                                 176,400                                     176,400
                                                               -----------   -----------    -----------    -----------

  Total                                                        $ 3,655,536   $       910    $              $ 3,656,446
                                                               -----------   -----------    -----------    -----------
                                                               -----------   -----------    -----------    -----------

  Securities to be held to maturity:
    December 31, 1996:
      Debt securities:
        U.S. Government and Federal Agencies                   $ 1,000,000   $    11,719    $    (4,219)   $ 1,007,500
        Municipal and State Government bonds                     1,108,206                      (18,357)     1,089,849
                                                               -----------   -----------    -----------    -----------

  Total                                                        $ 2,108,206   $    11,719    $   (22,576)   $ 2,097,349
                                                               -----------   -----------    -----------    -----------
                                                               -----------   -----------    -----------    -----------

  Securities available for sale:
    December 31, 1996:

      Debt securities -- U.S. Government and Federal Agencies  $ 2,493,491   $       350    $   (10,835)   $ 2,483,006
      Equity securities:
        Federal Home Loan Bank Stock                               926,000                                     926,000
        Federal Reserve Bank Stock                                 176,400                                     176,400
                                                               -----------   -----------    -----------    -----------


                                                               $ 3,595,891   $       350    $   (10,835)   $ 3,585,406
                                                               -----------   -----------    -----------    -----------
                                                               -----------   -----------    -----------    -----------

</TABLE>


                                       34
<PAGE>

      The scheduled maturities of debt securities to be held to maturity and
      debt securities available for sale at December 31, 1997 were as follows:

<TABLE>
<CAPTION>


                                            Securities to be                      Securities
                                            Held to Maturity                   Available for Sale
                                ------------------------------------------------------------------------
                                    Amortized              Fair         Amortized               Fair
                                      Cost                Value            Cost                 Value

<S>                             <C>                 <C>                <C>                  <C>         
Due from 1 to 5 years           $     500,000       $   510,156        $  2,999,336         $  3,000,246
Due from 5 to 10 years              1,105,407         1,107,215                                         
                                -------------       ------------       ------------         ------------


Total                           $   1,605,407       $  1,617,371       $  2,999,336         $  3,000,246
                                -------------       ------------       ------------         ------------
                                -------------       ------------       ------------         ------------

</TABLE>



      Gross proceeds from the sale of investment securities available for sale
      in 1997 totaled $998,750, resulting in a gross gain of $575. Gross
      proceeds from the sale of investment securities available for sale in 1995
      total $4,003,438, resulting in a gross gain of $16,309 and a gross loss of
      $495. There were no sales of investment securities in 1996.

4.    LOANS AND ALLOWANCE FOR LOAN LOSSES

      Loans outstanding are summarized as follows:
<TABLE>
<CAPTION>

                                                                   December 31,
                                          ------------------------------------------------------------
                                                       1997                                  1996
<S>                                          <C>                                     <C>           
Real estate mortgage loans                  $      40,594,799                        $   44,800,169
Commercial loans                                   52,722,906                            38,685,537
Consumer loans                                     10,055,470                             8,348,462
                                             ----------------                        --------------

  Total                                           103,373,175                            91,834,168
Less:
  Allowance for loan losses                         (936,974)                             (875,438)
  Deferred origination fees, net                    (255,645)                             (175,148)
                                             ----------------                        --------------


                                             $    102,180,556                        $   90,783,582
                                             ----------------                        --------------
                                             ----------------                        --------------


</TABLE>




      The Bank grants loans to customers primarily in its local market area
      which consists primarily of Montgomery County, Pennsylvania. The ultimate
      repayment of these loans is dependent to a certain degree on the local
      economy and real estate market.

      At December 31, 1997, commercial loans have maturities ranging from six
      months to five years. Further, these loans are granted at both fixed and
      adjustable rates. Fixed rates range from 4.7 % to 13.0% with adjustable
      rates ranging from the Bank's prime rate to 3.0% in excess of prime.


                                       35
<PAGE>

      The composition of fixed and adjustable rate loans as of December 31, 1997
      was as follows:

<TABLE>
<CAPTION>

                   Fixed Rate                                               Adjustable Rate
--------------------------------------------                -------------------------------------------------
                                                            Term to Rate
Term to Maturity                  Book Value                Adjustment                          Book Value

<S>                           <C>                           <C>                             <C>           
1 month - 1 year              $   12,059,968                Less than 1 month               $   33,968,585
1 year - 3 years                  15,866,238                1 month to 1 year                    4,494,428
3 years - 5 years                 22,125,199                1 year - 3 years                       880,100
5 years - 30 years                13,953,395                3 years - 30 years                      25,262
                              --------------                                                --------------

                              $   64,004,800                                                $   39,368,375
                              --------------                                                --------------
                              --------------                                                --------------

</TABLE>




      An analysis of the activity in the allowance for loan losses is as
follows:

<TABLE>
<CAPTION>


                                                      Year Ended December 31,
                                                  -----------------------------
                                                      1997               1996
<S>                                                <C>                <C>      
Balance, beginning of year                         $ 875,438          $ 750,318
                                                   ---------          ---------

Provision charged to operations                      360,000            387,500
                                                   ---------          ---------
Loans charged off:
  Commercial loans                                 (295,581)          (328,100)
  Consumer loans                                     (4,283)            (6,261)
                                                   ---------          ---------

                                                   (299,864)          (334,361)
                                                   ---------          ---------

Recoveries - commercial loans                          1,400             71,981
                                                   ---------          ---------

Balance, end of year                               $ 936,974          $ 875,438
                                                   ---------          ---------
                                                   ---------          ---------

</TABLE>



      The provision for loan losses charged to expense is based upon past loan
      and loss experience and an evaluation of losses in the current loan
      portfolio, including the evaluation of impaired loans under SFAS Nos. 114
      and 118. A loan is considered to be impaired when, based upon current
      information and events, it is probable that the Bank will be unable to
      collect all amounts due according to the contractual terms of the loan. An
      insignificant delay or insignificant shortfall in amount of payments does
      not necessarily result in the loan being identified as impaired. For this
      purpose, delays less than 90 days are considered to be insignificant. As
      of December 31, 1997 and 1996, 100% of the impaired loan balance was
      measured for impairment based on the fair value of the loans' collateral.
      Impairment losses are included in the provision for loan losses. SFAS Nos.
      114 and 118 do not apply to large groups of smaller balance homogeneous
      loans that are collectively evaluated for impairment, except for those
      loans restructured under a troubled debt restructuring. Loans collectively
      evaluated for impairment include consumer loans and residential real
      estate loans, and are not included in the data that follows:


                                       36
<PAGE>

      The following table summarizes impaired loan information.

<TABLE>
<CAPTION>

                                                                       December 31,
                                                            ------------------------------
                                                                1997            1996
                                                            -------------   --------------
<S>                                                         <C>             <C>           
Impaired loans with related reserve for loan losses         $           0   $            0
  calculated under SFAS No. 114
Impaired loans with no related reserve for loan losses
  calculated under SFAS No. 114                                 1,571,209        1,037,043
                                                            -------------   --------------
Total                                                       $   1,571,209   $    1,037,043
                                                            -------------   --------------
                                                            -------------   --------------
</TABLE>

<TABLE>
<CAPTION>


                                                                    Year Ended
                                                                    December 31,
                                                            ----------------------------
                                                                 1997            1996
<S>                                                         <C>             <C>        
Average impaired loans                                      $   1,571,209   $   407,581
Interest income recognized on impaired loans                       71,966        43,882
Cash basis interest income recognized on impaired loans            32,382         3,161
</TABLE>


      At December 31, 1997, all of the Bank's nonaccrual loans were considered
      to be impaired loans.

      Interest payments on impaired loans are typically applied to principal
      unless collectibility of the principal amount is fully assured, in which
      case interest is recognized on the cash basis.

      Commercial loans and commercial real estate loans are placed on nonaccrual
      at the time the loan is 90 days delinquent unless the credit is well
      secured and in the process of collection. Generally, commercial loans are
      charged off no later than 120 days delinquent unless the loan is well
      secured and in the process of collection, or other extenuating
      circumstances support collection. Residential real estate loans are
      typically placed on nonaccrual at the time the loan is 90 days delinquent.
      Other consumer loans are typically charged off at 90 days delinquent. In
      all cases, loans must be placed on nonaccrual or charged off at an earlier
      date if collection of principal or interest is considered doubtful.

      The principal amount of nonaccrual loans at December 31, 1997 and 1996
      totaled $891,852 and $735,007, respectively. Additional interest income
      that would have been recorded in 1997 and 1996 under the original terms of
      nonaccrual loans totaled approximately $81,061 and $58,656, respectively.

      Accruing loans which are contractually past due 90 days or more totaled
      $778,825 and $251,823 at December 31, 1997 and 1996, respectively.
      Interest due on these loans totaled $51,748 and $7,741 at December 31,
      1997 and 1996, respectively.


                                       37
<PAGE>

5.    FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

      A summary of furniture, equipment and leasehold improvements is as
follows:

<TABLE>
<CAPTION>

                                                       December 31,
                                              ----------------------------
                                                    1997           1996
<S>                                           <C>            <C>      
Furniture and equipment                       $   1,289,171   $    850,047
Leasehold improvements                              360,954        315,087
                                                  ---------      ---------

  Total                                           1,650,125      1,165,134
Accumulated depreciation and amortization          (733,641)      (580,601)
                                                  ---------      ---------

                                              $     916,484   $    584,533
                                                  ---------      ---------
                                                  ---------      ---------

</TABLE>




6.    DEPOSITS

      Interest-bearing deposits have stated rates ranging from 2.15% to 5.75%
      with a weighted average cost on all deposits of 5.16% at December 31, 1997
      and from 2.15% to 5.69% with a weighted average cost on all deposits of
      4.81% at December 31, 1996

      Time deposit accounts outstanding at December 31, 1997 and 1996 mature as
follows:

<TABLE>
<CAPTION>

                                           Year Ended December 31,
                                      -------------------------------
                                             1997             1996
<S>                                   <C>              <C>           
Three months or less                  $   20,795,591   $   10,392,000
Three to twelve months                    31,657,409       26,035,000
Over one year                             18,829,214       12,566,877
                                      --------------   --------------

                                      $   71,282,214   $   48,993,877
                                      --------------   --------------
                                      --------------   --------------
</TABLE>




      The aggregate amount of certificates of deposit in denominations of
      $100,000 or more at December 31, 1997 and 1996 was $34,113,040 and
      $23,344,356, respectively. Interest expense attributable to these deposits
      for the years ended December 31, 1997, 1996 and 1995 amounted to
      $1,355,577, $962,149, and $784,646, respectively. These certificates and 
      their remaining maturities are as follows:


<TABLE>
<CAPTION>
                                         December 31,
                                             1997

<S>                                   <C>           
Three months or less                  $   16,629,305
Three through twelve months               13,473,700
Over 12 months                             4,010,035
                                      --------------

                                      $   34,113,040
                                      --------------
                                      --------------

</TABLE>


                                       38
<PAGE>

7.    OTHER BORROWED MONEY

      Other borrowed money is summarized as follows:

<TABLE>
<CAPTION>

                                                               December 31,
                                            Interest  ----------------------------
                                Due          Rate           1997            1996
<S>                                                   <C>             <C>          
FHLB repurchase agreement   January 1998     6.75 %   $   9,000,000   
FHLB advance                February 1997    5.82 %                   $  5,000,000
FHLB repurchase agreement   January 1997     5.46 %                      5,000,000
                                                      -------------   ------------
                                                      $   9,000,000   $ 10,000,000
                                                      -------------   ------------
                                                      -------------   ------------


</TABLE>

      Advances are collateralized under blanket collateral lien agreements.

8.    INCOME TAXES

      The Bank's provision for income taxes differs from the amounts determined
      by applying the statutory federal income tax rate to income before income
      taxes for the following reasons:
<TABLE>
<CAPTION>

                                                                                 December 31, 1997
                                       --------------------------------------------------------------------------------------------
                                                 1997                   1996                         1995
                                          Amount    Percentage     Amount      Percentage    Amount         Percentage

<S>                                     <C>         <C>          <C>             <C>        <C>             <C>  
  Tax at federal tax rate               $ 410,652       35.0%    $ 382,985       35.0%      $ 294,371       35.0%
                                                                                          
  Increase (decrease) resulting from:                                                     
                                                                                          
    Benefit of surtax exemptions          (11,733)      (1.0)      (10,943)      (1.0)         (8,411)      (1.0)
    Meals and entertainment                                                               
                                                                                          
      disallowed                           30,051        2.6        21,188        1.9          17,072        2.0
    Tax exempt income                     (18,355)      (1.6)      (18,331)      (1.7)        (13,925)      (1.6)
    Other                                   6,198        0.5       (56,024)      (5.1)          5,296        0.6
                                        ---------       ----     ---------       ----       ---------       ---- 
                                                                                          
                                        $ 416,813       35.5%    $ 318,875       29.1%      $ 294,403       35.0%
                                        ---------       ----     ---------       ----       ---------       ---- 
                                        ---------       ----     ---------       ----       ---------       ---- 
                                                                                          
</TABLE>


                                       39
<PAGE>


      Items that give rise to significant portions of the Company's deferred tax
      asset, calculated at 34%, are as follows:

<TABLE>
<CAPTION>

                                                              December 31,
                                                         ----------------------
                                                            1997        1996
<S>                                                      <C>          <C>      
  Deferred tax assets:

    Allowance for loan losses                            $ 179,252    $ 157,723
    Deferred fees                                            8,567       10,801
    Unrealized losses on available-for-sale securities                    3,565
    Other                                                   37,793
                                                         ---------    ---------

             Subtotal                                      225,612      172,089
                                                         ---------    ---------

  Deferred tax liabilities:

    Unrealized gains on available-for-sale securities         (309)
    Other                                                                (7,920)
                                                         ---------    ---------
             Subtotal                                         (309)      (7,920)
                                                         ---------    ---------

  Net deferred tax asset                                 $ 225,303    $ 164,169
                                                         ---------    ---------
                                                         ---------    ---------

</TABLE>

      The deferred tax asset is included in other assets on the consolidated
statements of financial condition.

      The provision for income taxes for the years ended December 31, 1997, 1996
and 1995 includes the following:

<TABLE>
<CAPTION>

                                  1997         1996         1995
                               
<S>                            <C>          <C>          <C>      
  Current taxes                $ 481,821    $ 369,875    $ 358,355
  Deferred taxes                 (65,008)     (51,000)     (63,952)
                               ---------    ---------    ---------
                               
  Total                        $ 416,813    $ 318,875    $ 294,403
                               ---------    ---------    ---------
                               ---------    ---------    ---------
</TABLE>


9.    COMMITMENTS

      Letters of Credit and Commitments to Lend:

      In the normal course of business, the Bank had commitments to advance
      funds under outstanding letters of credit of $1,076,000 and $1,382,000 and
      unadvanced loan commitments of $12,330,000 and $13,906,000 at December 31,
      1997 and 1996, respectively. The unadvanced loan commitments at December
      31, 1997 and 1996 were primarily at variable rates. In addition, the Bank
      had commitments to sell fixed rate residential mortgages of $290,900 and
      $2,111,618 at December 31, 1997 and 1996, respectively. Commitments are
      issued in accordance with the same loan policies and underwriting
      standards as settled loans and represent credit risk should the borrowers
      fail to repay the amounts extended.

      Leasing Arrangements:

      The Company leases branch offices and certain equipment under
      noncancelable agreements requiring various minimum annual rentals. In
      addition to the minimum rents, the Company pays its pro rata share

      of the building's operating costs. Total operating lease expense for 1997,
      1996 and 1995 was $456,489, $384,501, and $346,363, respectively.


                                       40
<PAGE>

      Future minimum lease payments under noncancelable leases are as follows:

<TABLE>
<CAPTION>

                                                           Year Ending
                                                           December 31,
<S>                                                       <C>          
1998                                                      $     545,478
1999                                                            565,557
2000                                                            367,074
2001                                                            189,572
Thereafter                                                      386,100
                                                          -------------
                                             
Total                                                     $   2,053,781
                                                          -------------
                                                          -------------
</TABLE>


10.   STOCK OPTION PLANS

      In 1989, the Company's shareholders adopted a Stock Incentive Plan (the
      "1989 Plan") providing for the issuance of qualified and non-qualified
      stock options to the officers and key executives of the Company. A total
      of 47,562 shares of common stock had been reserved for issuance pursuant
      to the 1989 Plan. The price at which such options were issued was
      determined by a special committee. The exercise price of options under the
      1989 Plan has been equal to the fair market value of the Company's common
      stock at the date of grant. All options expire ten years after issuance.

      In 1995, the Board of Directors approved the adjustment of the exercise
      price to reflect stock dividends issued.

      In 1997, the Company's shareholders adopted the 1997 Stock Option Plan
      (the "Plan") providing for the issuance of qualified and non-qualified
      stock options to the officers and key executives of the Company. The
      purpose of the Plan is to promote the interests of the Company by
      providing incentives to (i) designated officers and other key employees of
      the Company and (ii) nonemployee members of the Company's Board of
      Directors, to attract and retain such persons and to encourage them to
      acquire or increase their proprietary interest in the Company and to
      maximize the Company's performance during the term of their employment or
      period of service with the Company. A total of 61,355 shares of common
      stock have been reserved for issuance pursuant to the 1997 Plan. The price
      at which such options may be issued is determined by a special committee.
      At December 31, 1997, no options have been granted under the 1997 Plan.

      The per share price of exercisable options at December 31, 1997 reflects
      the adjusted exercise price resulting from stock dividends.


                                       41
<PAGE>

      Transactions during each of the last three years, adjusted for stock
dividends, are as follows:

<TABLE>
<CAPTION>

                                                Exercise Price     Weighted
                                                Per Share      Average Exercise
                                     Shares      Price         Price Per Share

<S>       <C>                        <C>      <C>              <C>       
  January 1, 1995                    37,738   $4.94-$5.34      $   5.30
  Granted                            12,612   $5.60-$6.02      $   5.82
                                     ------                   
                                                              
                                                              
  Exercisable, December 31, 1995     50,350   $4.79-$5.34      $   5.64
                                     ------                   
                                                              
  Exercised                           4,538   $5.13            $   5.34
                                     ------                   
                                                              
  Exercisable, December 31, 1996     45,812   $4.79-$5.34      $   5.24
                                     ------                   

  Exercisable, December 31, 1997     45,812   $4.79-$5.34      $   5.24
                                     ------                   
                                     ------                   
</TABLE>


      The Company accounts for stock-based compensation in accordance with SFAS
      No. 123, Accounting for Stock-Based Compensation which permits the use of
      the intrinsic value method described in APB Opinion No. 25, Accounting for
      Stock Issued to Employees, and requires the Company to disclose the pro
      forma effects of accounting for stock-based compensation using the fair
      value method as described in the optional accounting requirements of SFAS
      No. 123. As permitted by SFAS No. 123, the Company will continue to
      account for stock-based compensation under APB Opinion No. 25, under which
      the Company has recognized no compensation expense.

      Had compensation cost for the Company's stock option plan been determined
      based on the fair value at the dates of awards under the fair value method
      of SFAS No. 123, the Company's net income and income per share would have
      been reduced to the pro forma amounts indicated below:

                                  
<TABLE>
<CAPTION>

                                                                        1995
<S>                                    <C>                           <C>
Net income:                            As reported                   $ 546,656
                                       Pro forma                     $ 514,536

Net income per common share:           As reported                        0.44
                                       Pro forma                          0.41

</TABLE>


      Significant assumptions used to calculate the above fair value of the
awards are as follows:

<TABLE>
<CAPTION>

                                                                     1995

<S>                                                              <C>    
Risk free interest rates of return                               6.50%; 5.97%
Expected option life                                              120 months
Expected dividends                                                  $ 0
</TABLE>

      There were no grants of options in 1997 or 1996.


                                       42
<PAGE>

11.   WARRANTS AUTHORIZED

      In connection with the initial offering of the Company's common stock, the
      Company's directors received warrants to purchase, in the aggregate, up to
      70,107 shares of common stock. These offering warrants are nontransferable
      and expire between 1999 and 2002. The warrants had an initial exercise
      price of $10 per share. As a result of stock dividends issued by the
      Company, the exercise price was adjusted by the Board of Directors. At
      December 31, 1997, warrants have an exercise price of $5.34 per share. As
      of December 31, 1997, there were 117,563 warrants outstanding and 3,725
      have been exercised. Warrants outstanding have been adjusted to reflect
      stock dividends.

12.   PROFIT SHARING

      Effective March 1, 1993, the Bank adopted a 401(k) profit sharing plan to
      provide eligible employees with additional income upon their retirement.
      Participants may contribute up to 15% of their annual compensation to the
      plan subject to Internal Revenue Service limitations. The Bank contributes
      an amount equal to 50% of each participant's contribution, up to 2% of
      their compensation. Contributions made by the Bank during the years ended
      December 31, 1997, 1996 and 1995 were approximately $20,313, $13,977, and
      $16,600 respectively.

13.   SHAREHOLDERS' EQUITY

      In December 1994, in conjunction with the appointment of a new director,
      the Company entered into an agreement with the new director whereby 12,225
      shares of newly issued unregistered common stock would be purchased by the
      director based upon the book value of the Company. As of December 31,
      1994, 6,112 shares were purchased and total proceeds from the issuance
      were $50,000. The remaining 6,113 shares were purchased on February 8,
      1995 and total proceeds from the issuance were $50,000.

      On April 13, 1995, the Board of Directors declared a 7% stock dividend
      payable to all holders of record of the Company's common stock as of April
      30, 1995.

      On January 11, 1996, the Board of Directors declared a 7.5% stock dividend
      payable to all holders of record of the Company's common stock as of
      February 15, 1996.

      On January 22, 1997, the Board of Directors declared a 7.5% stock dividend
      payable to all holders of record of the Company's common stock as of
      February 5, 1997. On October 9, 1997, the Board of Directors declared a
      20% stock dividend payable to all shareholders of record on October 7,
      1997. Per share computations reflect the changes in the number of shares
      resulting from these dividends.

14.   RELATED PARTY TRANSACTIONS

      Loans to directors, officers, employees, and their affiliates and/or
      business interests must be made on substantially the same terms, including
      interest rates, as those prevailing for comparable transactions and must
      not involve more than the normal risk of repayment.

      A summary of unpaid principal balances of loans outstanding to directors,
      officers, employees and their business interests is as follows:


                                       43
<PAGE>

<TABLE>
<CAPTION>

                                                          December 31,
                                                    --------------------------
                                                        1997           1996
<S>                                                 <C>            <C>        
  Beginning of period                               $ 5,929,059    $ 5,594,284
  Borrowings                                            816,369      1,722,607
  Principal repayments                                 (622,327)    (1,387,832)
                                                    -----------    -----------
                                                    
  End of period                                     $ 6,123,101    $ 5,929,059
                                                    -----------    -----------
                                                    -----------    -----------
</TABLE>




      Certain directors of the Company are partners in an entity from which the
      Bank leases office space (Note 9). Rental payments for the office space
      were approximately $263,570, $256,000, and $214,000, for the years ended
      December 31, 1997, 1996 and 1995, respectively. In the opinion of
      management, all aspects of this transaction, including the lease and
      amendments thereto, have been negotiated on an arms-length basis and the
      resultant terms are no less favorable than those that could be obtained
      from third parties.

15.   FAIR VALUE OF FINANCIAL INSTRUMENTS

      The following disclosure of the carrying amounts and the estimated fair
      value of financial instruments is made in accordance with the requirements
      of SFAS No. 107, Disclosures about Fair Value of Financial Instruments.
      The estimated fair value amounts have been determined by the Company using
      available market information and appropriate valuation methodologies.
      However, considerable judgment is necessarily required to interpret market
      data to develop the estimates of fair value. Accordingly, the estimates
      presented herein are not necessarily indicative of amounts the Company
      could realize in a current market exchange. The use of different market
      assumptions and/or estimation methodologies may have a material effect on
      the estimated fair value amounts.

<TABLE>
<CAPTION>

                                                      1997                    1996
                                               ---------------------------------------------
                                                           Estimated               Estimated
                                               Carrying      Fair      Carrying     Fair
                                                 Amount      Value      Amount      Value
                                                  (In Thousands)          (In Thousands)
<S>                                            <C>         <C>         <C>         <C>   
  Assets:                                                                       
                                                                                
    Cash and cash equivalents                  $ 23,445    $ 23,445    $  5,307    $  5,307
    Investment securities held-to-maturity        1,605       1,617       2,108       2,097
    Investment securities available for sale      3,656       3,656       3,585       3,585
    Loans, net                                  102,181     104,766      90,783      91,158
    Mortgage loans held for sale                    291         291       2,112       2,112
                                                                                
  Liabilities:                                                                  
    Deposits:                                                                   
                                                                                
      Noninterest-bearing deposits               16,076      16,076      14,660      14,660
      Interest-bearing deposits                   8,164       8,164       4,565       4,565
      Savings deposits                            5,270       5,270       4,571       4,571
      Money market deposits                      14,040      14,040      14,409      14,409
      Time deposits                              71,282      71,464      48,994      48,664
      Borrowed funds                              9,000       9,000      10,000      10,000

</TABLE>


                                       44
<PAGE>

      Cash and Cash Equivalents -- For cash and cash equivalents, the carrying
      amount is a reasonable estimate of fair value.

      Investment Securities -- For investment securities, fair values are based
      on quoted market prices or dealer quotes.

      Loans -- The fair value was estimated based on quoted market prices and
      current rates.

      Mortgage Loans Held for Sale -- The carrying amount is a reasonable
      estimate of fair value.

      Deposits -- The fair value of all deposit accounts except time deposits is
      the amount payable on demand at the reporting date. The fair value of time
      deposits is estimated using rates currently offered for deposits of
      similar remaining maturities.

      Borrowed Funds -- The fair value of borrowed funds is the amount payable 
      on demand at the reporting date.

      Commitments to Extend Credit and Letters of Credit -- The majority of the
      Company's commitments to extend credit and letters of credit carry current
      market interest rates if converted to loans. Because commitments to extend
      credit and letters of credit are generally unassignable by either the
      Company or the borrower, they only have value to the Company and the
      borrower. The estimated fair value approximates the recorded deferred fee
      amounts, which are not significant.

      The fair value estimates presented herein are based on pertinent
      information available to management as of December 31, 1997 and 1996.
      Although management is not aware of any factors that would significantly
      affect the fair value amounts, such amounts have not been comprehensively
      revalued for purposes of these consolidated financial statements since
      that date and, therefore, current estimates of fair value may differ
      significantly from the amounts presented herein.

16.   REGULATORY MATTERS

      The Company and the Bank are subject to various regulatory capital
      requirements administered by the federal banking agencies. Failure to meet
      minimum capital requirements can initiate certain mandatory -- and
      possibly additional discretionary -- actions by regulators, that, if
      undertaken, could have a direct material effect on the Company's financial
      statements. Under capital adequacy guidelines and the regulatory framework
      for prompt corrective action, the Company and the Bank must meet specific
      capital guidelines that involve quantitative measures of the Company's and
      the Bank's assets, liabilities, and certain off-balance sheet items as
      calculated under regulatory accounting practices. The Company's and the
      Bank's capital amounts and classifications are also subject to qualitative
      judgments by the regulators about components, risk weightings, and other
      factors.

      Quantitative measures established by regulation to ensure capital adequacy
      require the Company and the Bank to maintain minimum amounts and ratios
      (set forth in the table below) of total and Tier 1 capital (as defined in
      the regulations) to risk-weighted assets (as defined), and of Tier 1
      capital (as defined) to average assets (as defined). Management believes,
      as of December 31, 1997, that the Company and the Bank meet all capital
      adequacy requirements to which it is subject.

P
      The most recent notification from the Commonwealth of Pennsylvania
      Department of Banking (as of June 30, 1997) categorized the Bank as well
      capitalized under the regulatory framework for prompt corrective action.
      Due to the growth of assets, the capital ratios at December 31, 1997 do
      not meet the requirement to be categorized as well capitalized. At
      December 31, 1997, the Bank meets the requirement to be categorized as
      adequately capitalized. To be categorized as adequately capitalized, the
      Bank must maintain minimum Tier 1 Capital, Total Risk-Based Capital and
      Leverage Ratios as set forth in the table.

      The Bank's actual capital amounts and ratios are presented in the table
      below:

<TABLE>
<CAPTION>
                                                                                        To be Considered
                                                                                        Well Capitalized
                                                                      Required for         Under Prompt
                                                                    Capital Adequacy    Corrective Action
                                                    Actual              Purposes            Provisions
                                             --------------------   -----------------   ------------------
                                               Amount      Ratio      Amount    Ratio    Amount     Ratio
<S>                                          <C>           <C>      <C>         <C>     <C>         <C>  
At December 31, 1997:
  Tier 1 capital (to risk-weighted
     assets)                                 $   8,729      9.02%   $   3,795   4.00%   $   5,693    6.00%
                                                                                                    
  Total capital  (to risk-weighted
     assets)                                     9,666      9.98        7,749   8.00        9,685   10.00
                                                                                                  
  Tier 1 capital (to average assets)             8,729     7.17        4,870    4.00        6,087    5.00
                                                                                                    

At December 31, 1996:
  Tier 1 capital (to risk-weighted
     assets)                                 $   7,884      9.08%   $   3,332   4.00%   $   4,998    6.00%
                                                                                                  
  Total capital (to risk-weighted
    assets)                                      8,759     10.09        6,664   8.00        8,330   10.00
                                                                                                  
  Tier 1 capital (to average assets)             7,884      8.37        4,092   4.00        5,115    5.00

</TABLE>


      The Company's Tier 1 capital (to risk-weighted assets), total capital (to
      risk-weighted assets) and Tier 1 capital (to average assets) ratios 9.03%,
      9.99%, and 6.55% at December 31, 1997, and 9.19%, 10.20% and 7.52% at
      December 31, 1996, respectively.


                                       45
<PAGE>

17.   PARENT COMPANY FINANCIAL INFORMATION

      The financial statements of Madison Bancshares Group, Ltd. (Parent Only)
      as of December 31, 1997 and 1996 and for each of the three years in the
      period ended December 31, 1997 are presented herein.

<TABLE>
<CAPTION>

                                                                    December 31,
                                                            ---------------------------
  BALANCE SHEETS                                                 1997          1996
<S>                                                         <C>            <C>        
    Deposits with subsidiary                                $     6,566   $    42,289
    Investment in subsidiary                                   8,731,152      7,879,815
    Other assets                                                     500            500
    Receivable from subsidiary                                                   63,110
                                                             -----------    -----------

 TOTAL                                                      $ 8,738,218    $ 7,985,714
                                                             -----------    -----------
                                                             -----------    -----------

  LIABILITIES - Accrued expenses and other liabilities      $              $    11,494
                                                             -----------    -----------

  SHAREHOLDERS' EQUITY:

    Common stock                                               1,252,773        971,360
    Capital surplus                                            7,612,835      7,185,686
    Accumulated deficit                                         (127,991)      (175,907)
    Net unrealized losses on available-for-sale securities           601         (6,919)
                                                             -----------    -----------

             Total shareholders' equity                        8,738,218      7,974,220
                                                             -----------    -----------

  TOTAL                                                     $ 8,738,218   $ 7,985,714
                                                             -----------    -----------
                                                             -----------    -----------

</TABLE>

<TABLE>
<CAPTION>

                                                                      Year Ended December 31,
                                                               -----------------------------------
  STATEMENTS OF OPERATIONS                                        1997         1996         1995
<S>                                                            <C>          <C>          <C>      
  Interest income                                              $     274    $     444    $   2,241
  Operating expenses                                             (87,613)    (235,224)     (58,393)
                                                               ---------    ---------    ---------

  Loss before equity in undistributed income from subsidiary     (87,339)    (234,780)     (56,152)

  Equity in undistributed income of subsidiary, Madison Bank     843,817      775,367      602,808
                                                               ---------    ---------    ---------

  NET INCOME                                                   $ 756,478    $ 540,587    $ 546,656
                                                               ---------    ---------    ---------
                                                               ---------    ---------    ---------

  STATEMENTS OF CASH FLOWS

  Operating Activities:

    Net income                                                 $ 756,478    $ 540,587    $ 546,656
    Adjustments to reconcile net income to net
      cash used in operating activities:

    Equity in undistributed income of subsidiary                (843,817)    (775,367)    (602,808)
    Decrease in accrued expenses and other liabilities           (11,494)     (15,506)     (18,068)
    Decrease (increase) in receivable from subsidiary             63,110       25,001      (15,000)
                                                               ---------    ---------    ---------

             Net cash used in operating activities               (35,723)    (225,285)     (89,220)
                                                               ---------    ---------    ---------

  Investing Activities:                                                                            

    Exercise of stock options                                                  19,183
    Exercise of stock warrants                                                 26,895
    Dividend from subsidiary                                                  199,920
                                                                            ---------

             Net cash provided by investing activities                        245,998
                                                                            ---------
                                                                              
  Financing Activities:                                                       
                                                                                           
    Proceeds from issuance of common stock                                                  50,000
                                                                                         ---------
                                                                                           
             Net cash provided by financing activities                                      50,000
                                                                                         ---------
                                                                 
  NET INCREASE (DECREASE) IN CASH                                (35,723)      20,713      (39,220)

  CASH, BEGINNING OF YEAR                                         42,289       21,576       60,796
                                                               ---------    ---------    ---------

  CASH, END OF YEAR                                            $   6,566    $  42,289    $  21,576
                                                               ---------    ---------    ---------
                                                               ---------    ---------    ---------
</TABLE>


                                       46
<PAGE>

18.   QUARTERLY DATA (UNAUDITED)

      The unaudited quarterly results of operations for 1997 and 1996 were as
follows:

<TABLE>
<CAPTION>

                                                                        Year Ended December 31, 1997
                                                   ---------------------------------------------------------------------
                                                     March 31     June 30    September 30    December 31        Total
                                                  
<S>                                                <C>          <C>          <C>             <C>             <C>       
  Interest income                                  $2,261,812   $2,339,168   $ 2,440,729      $2,583,354      $9,625,063
  Interest expense                                  1,009,988    1,062,554     1,094,673       1,223,881       4,391,096
                                                   ----------   ----------    ----------      ----------      ----------
                                                                                                           
  Net interest income                               1,251,824    1,276,614     1,346,056       1,359,473       5,233,967
  Provision for loan losses                            90,000       90,000        90,000          90,000         360,000
                                                   ----------   ----------    ----------      ----------      ----------
                                                                                                           
    Net                                             1,161,824    1,186,614     1,256,056       1,269,473       4,873,967
                                                                                                           
  Other noninterest income                            155,280      190,218       198,588         207,350         751,436
  Other noninterest expenses                        1,068,447    1,120,503     1,016,191       1,246,971       4,452,112
                                                   ----------   ----------    ----------      ----------      ----------
                                                                                                           
  Net income before income taxes                      248,657      256,329       438,453         229,852       1,173,291
                                                                                                           
  Provision for income taxes                           86,000       92,000       122,271         116,542         416,813
                                                   ----------   ----------    ----------      ----------      ----------
                                                                                                           
  Net income                                       $  162,657   $  164,329    $  316,182      $  113,310      $  756,478
                                                   ----------   ----------    ----------      ----------      ----------
                                                   ----------   ----------    ----------      ----------      ----------
                                                                                                           
  Per share data - Diluted earnings per share      $     0.16   $     0.16    $     0.22      $     0.16      $     0.56

                                                   ----------   ----------    ----------      ----------      ----------
                                                   ----------   ----------    ----------      ----------      ----------
</TABLE>
 

<TABLE>
<CAPTION>
                                                                         Year Ended December 31, 1996
                                                       --------------------------------------------------------------------
                                                         March 31    June 30     September 30    December 31        Total

<S>                                                    <C>          <C>          <C>             <C>             <C>       
  Interest income                                      $1,937,211   $1,959,218   $2,014,278      $2,203,084      $8,113,791
  Interest expense                                        839,125      801,971      863,348         941,996       3,446,440
                                                       ----------   ----------   ----------      ----------      ----------
                                                                                                              
  Net interest income                                   1,098,086    1,157,247    1,150,930       1,261,088       4,667,351
                                                                                                       
  Provision for loan losses                                90,000      127,500       80,000          90,000         387,500
                                                       ----------   ----------   ----------      ----------      ----------
                                                                                                                 
                                                                                                              
    Net                                                 1,008,086    1,029,747    1,070,930       1,171,088       4,279,851
                                                                                                   
                                                                                                              
  Other noninterest income                                100,737      110,813      129,401         148,002         488,953
                                                                                                         
  Other noninterest expenses                              870,822      970,172      964,956       1,103,392       3,909,342
                                                       ----------   ----------   ----------      ----------      ----------
                                                                                                              
  Net income before income taxes                          238,001      170,388       235,375        215,698         859,462
                                                                                                        
                                                                                                              
  Provision for income taxes                               79,060      103,415       80,665          55,735         318,875
                                                       ----------   ----------   ----------      ----------      ----------
                                                                                                               
  Net income                                           $  158,941   $   66,973   $  154,710      $  159,963      $  540,587
                                                       ----------   ----------   ----------      ----------      ----------
                                                       ----------   ----------   ----------      ----------      ----------
                                                                                                              
  Per share data - Diluted earnings per share          $     0.13   $     0.06   $     0.13      $     0.12      $     0.43
                                                       ----------   ----------   ----------      ----------      ----------
                                                       ----------   ----------   ----------      ----------      ----------
</TABLE>





Notes:    Certain reclassifications have been made to the quarterly data
          from those classifications used in reporting such data in Form
          10-Q. Per share data has been retroactively restated to reflect
          the effect of stock dividends.

          Net income per common share is computed independently for each
          period presented. Consequently, the sum of the quarters may not
          equal the total net income per common stock.

                                     ******

                                       47
<PAGE>
 
ITEM 8--Changes in and Disagreements With Accountants on
        Accounting and Financial Disclosure
 
    Not applicable.
 
                                    PART III
 
ITEM 9--Directors and Executive Officers, Promoters and COntrol
        Persons; Compliance With Section 16(a) of the Exchange Act
 
    The information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Commission in
connection with the Company's 1998 annual meeting of Shareholders presently
scheduled for May 19, 1998.
 
ITEM 10--Executive Compensation
 
    The information required by the Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Commission in
connection with the Company's 1998 annual meeting of the shareholders presently
scheduled for May 19, 1998.
 
ITEM 11--Security Ownership of Certain Beneficial Owners and
         Management
 
    The information required by the Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Commission in
connection with the Company's 1998 annual meeting of the shareholders presently
scheduled for May 19, 1998.
 
ITEM 12--Certain Relationships and Related Transactions
 
    The information required by the Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Commission in
connection with the Company's 1998 annual meeting of the shareholders presently
scheduled for May 19, 1998.

                                       48

<PAGE>
 
ITEM 13--Exhibits and Reports on Form 8-K

    (a) Exhibits:
 
    The following Exhibits are filed as part of this report. (Exhibit numbers
correspond to the exhibits required by Item 601 of Regulation S-B for an annual
report on Form 10KSB)
 
<TABLE>
<CAPTION>
                                                                                                        Page Number in
  Exhibit                                                                                                 Sequential
  Number                                          Description                                          Numbering System
-----------  --------------------------------------------------------------------------------------  ---------------------
<C>          <S>                                                                                     <C>
       3(a)  Amended and Restated Articles of Incorporation of the Company*.......................              N/A

       3(b)  Amended and Restated Bylaws of the Company**.........................................              N/A

       4(c)  Form of Warrant of the Company***....................................................              N/A

      10(a)  Lease Agreement, dated February 20, 1989, by and between Madison Bancshares Group,
             Ltd. and Blue Bell Office Campus Associates****......................................              N/A

      10(b)  Madison Bancshares Group, Ltd. 1997 Stock Option Plan*****...........................              N/A

        21   Subsidiaries of the Registrant.......................................................

        27   Financial Data Schedule

</TABLE>
 
------------------------
         
*       Incorporated by reference from Exhibit No. 3 to the Registration 
        Statement on Form S-1 of the Company, as amended, 
        Registration No. 33-22492.
        
**      Incorporated by reference from Exhibit No. 3 to the Registration 
        Statement on Form S-1 of the Company, as amended, 
        Registration No. 33-22492.
        
***     Incorporated by reference from Exhibit No. 4 to the Registration 
        Statement on Form S-1 of the Company, as amended, 
        Registration No. 33-22492.
        
****    Incorporated by reference from Exhibit No. 10(d) to the Registration
        Statement on Form S-1 of the Company, as amended, Registration No. 
        33-22492.
        
*****   Incorporated by reference from Exhibit A to the Company's 1997 
        Proxy Statement, dated April 18, 1997.

        All other schedules and exhibits are omitted because they are not 
        applicable or the required information is set out in the financial 
        statements or the notes thereto.
 
    (b) Reports on Form 8-K:
 
    On October 21, 1997, the Company filed a current report on Form 8-K
regarding the issuance of a 20% stock dividend.

                                       49

<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities 
Exchange Act of 1934, the Issuer has duly caused this Report to be signed on 
its behalf by the undersigned, thereunto duly authorized.

                                      MADISON BANCSHARES GROUP, LTD.

                                      By: /s/ Peter DePaul
                                          --------------------------
                                          Chairman of the Board


                                      By: /s/ Vito A. DeLisi
                                          --------------------------
                                          Vito A. DeLisi, President


                                      By: /s/ E. Cheryl Hinkle
                                          --------------------------
                                          E. Cheryl Hinkle 
                                          Assistant Secretary and Treasurer 
                                          (Principal Accounting and Financial
                                          Officer)


                            ------------------------ 

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the date indicated.


March 20, 1998                            /s/ Gary E. Daniels 
                                          -----------------------------
                                          Gary E. Daniels, Director


March 20, 1998                            /s/ Vito A. DeLisi 
                                          -----------------------------
                                          Vito A. DeLisi, President 
                                          and Director 


March 20, 1998                            /s/ Peter DePaul 
                                          -----------------------------
                                          Peter DePaul 
                                          Chairman of the Board 


March 20, 1998                            /s/ Philip E. Hughes, Jr. 
                                          -----------------------------
                                          Philip E. Hughes, Jr. 
                                          Director and Vice Chairman of 
                                          the Board 


March 20, 1998                            /s/ Frank R. Iacobucci 
                                          -----------------------------
                                          Frank R. Iacobucci, Director 


March 20, 1998                            /s/ Arnold M. Katz 
                                          -----------------------------
                                          Arnold M. Katz, Director 

                                       50

<PAGE>

March 20, 1998                            /s/ Lorraine C. King 
                                          -----------------------------
                                          Lorraine C. King, Director 


March 20, 1998                            /s/ Kathleen A. Kucer 
                                          -----------------------------
                                          Kathleen A. Kucer, Director 


March 20, 1998                            /s/ Michael O'Donoghue 
                                          -----------------------------
                                          Michael O'Donoghue, Director 


March 20, 1998                            /s/ Donald J. Reape 
                                          -----------------------------
                                          Donald J. Reape, Director 


March 20, 1998                            /s/ Alan T. Schiffman 
                                          -----------------------------
                                          Alan T. Schiffman, Director 


March 20, 1998                            /s/ Blaine W. Scott Blaine 
                                          -----------------------------
                                          W. Scott, Director
 
                                       51