<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, 1998.

[ ]   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)

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)          (ZipCode)

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

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

   Title of Each Class              Name of Each Exchange on Which Registered

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

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

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
preceding 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. $12,586,029

      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. $10,150,433 based on the average of the bid and asked
on the National Association of Securities Dealers Automated Quotation System on
March 26, 1999.*

      State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest publication date. 1,562,018 as of March 26,
1999.

      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 1999 Annual Meeting of Shareholders are incorporated by reference into
Part III hereof.

----------

* Excluded from such market value computation are the approximately 350,026
issued and outstanding shares beneficially owned by executive officers and
directors of Issuer and its subsidiary. Included in such computation are the
72,151 shares beneficially owned by First Union Bank, NA (constituting
approximately 4.6% of the issued and outstanding shares of the Issuer).

  EXHIBIT INDEX APPEARS ON PAGE 49 IN SEQUENTIAL NUMBERING SYSTEM OF THIS FORM
                                     10-KSB


                                       2
<PAGE>

                         MADISON BANCSHARES GROUP, LTD.

                                   Form 10-KSB

                                      INDEX

PART 1                                                               Page

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


                                        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 six branch
      offices.

            As of the date hereof, the Company and Madison Bank have a total of
      82 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, 100 West Main Street, Century Plaza,
      Suite 100, Lansdale, PA and 8000 Verree Road, Philadelphia, 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, the Lansdale office
      in August, 1997 and the Northeast office in June, 1998. As of December 31,
      1997 and 1998, the Bank held deposits totaling $114,838,976 and
      $132,644,741, respectively, including deposits of the Company. As of the
      same dates, the Bank had gross loans receivable of $132,664,741 and
      $126,997,721 (inclusive of residential loans held for sale), respectively.
      The majority of such loans were made for commercial purposes.

            As of December 31, 1997 and 1998, the Company had total assets of
      $133,506,813 and $147,925,863 and total shareholders' equity of $8,738,218
      and $9,450,392, respectively. Investments amounted to $5,261,853 at year
      end 1997, of which $3,656,446 were classified as available for sale and
      the balance were classified as held to maturity and $3,316,193 at the end
      of 1998, of which $1,713,700 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 recently opened its own Mortgage Department to better
      service mortgage applications.

            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 and 3,355 total square feet of space on the second floor for
      its mortgage department operations of the Madison Bank Building, 1767
      Sentry Parkway West, Blue Bell, Pennsylvania, (the "Building"). Of the
      13,381 square feet of space on the first floor, 3,381 square feet was
      leased by the Company on February 1, 1996 and an additional 1,400 square
      feet leased by the Company on January 21, 1997. 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
      1998, the amount of such expenses was $34,272. The maximum allocable
      portion of the Building's operating costs will be $35,988 for 1999 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 and increases to $29,575 through
      February 1, 2000. The second floor space of 3,355 square feet was leased
      at an annual rate of approximately $70,722 and increases to $75,634
      through December 1, 2000.

            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 26, 1999, there were approximately 261 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:

                                         1998
                                         ----
                             1st Qtr    2nd Qtr   3rd Qtr   4th Qtr
                             -------    -------   -------   -------
            High Bid         12-3/16    12-1/2      11      8-1/4

            Low Bid          10-13/16   10-3/8       7        7


                                         1997
                                         ----
                             1st Qtr    2nd Qtr   3rd Qtr   4th Qtr
                             -------    -------   -------   -------
            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

            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, in October, 1997, a 20% stock dividend was declared,
      resulting in the issuance of 208,710 additional shares of common stock,
      and in May, 1998 a 20% stock dividend was declared, resulting in 259,040
      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


                                       8
<PAGE>

      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 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

            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. In May, 1998, a 20% stock dividend
      was declared, resulting in the issuance of 259,040 additional shares of
      common stock being issued. Also, a total of 50,205 shares were exercised
      in 1998 in conjunction with stock options. At December 31, 1998, the
      common stock outstanding was 1,562,018 shares as compared to 1,252,773
      shares at December 31, 1997. The book value per share of the Company's
      common stock at December 31, 1998, 1997 and 1996 was $6.05, $5.59 and
      $5.11, respectively, after giving retroactive effect to the issuance of
      stock dividends.


                                       9
<PAGE>

            The chart below presents various capital ratios applicable to
      state-chartered, Federal Reserve member banks and bank holding companies.
      The requirements are compared to the Company's actual ratios at December
      31, 1998, which exceeded the levels required to be adequately capitalized
      under applicable Federal Deposit Insurance Corporations' regulations.

--------------------------------------------------------------------------------
                             RISK WEIGHTED CATEGORY
                             ----------------------
      Risk Weighted Assets              0%      20%      50%     100%    Total
      -------------------------------------------------------------------------
      Loans                                            49,926   75,487  125,413
      Securities Available for Sale     176    1,538                      1,714
      Securities Held to Maturity              1,602                      1,602
      Federal Funds Sold                       7,500                      7,500
      Cash and Due From Banks         7,406      388                      7,794
      Other Assets                                               3,903    3,903
                                      -----------------------------------------
      -------------------------------------------------------------------------
      Category totals                 7,582   11,028   49,926   79,390  147,926
      -------------------------------------------------------------------------
      Off balance-sheet items (risk
        weighted)                                182    7,047
      -------------------------------------------------------------------------
      Total risk-weighted assets          0    2,242   28,487   79,390  110,119
      =========================================================================

      Average Total Assets         129,507

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

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

      Capital                                     Tier 1   Tier 2     Total
      ---------------------------------------------------------------------
      Shareholders' equity (including 25% of
          Trust Preferred Securities)             10,694             10,694
        Allowance for loan losses                           1,112     1,112

      ---------------------------------------------------------------------
      Total Capital                               10,694    1,112    11,806
      =====================================================================

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


                                       10
<PAGE>

                                              Regulatory
                                                Minimum       Actual     Actual
            Ratio                               12/31/98     12/31/98   12/31/97
            -----                               --------     --------   --------

            Qualifying Total Capital
            to Risk Weighted Assets                8.0%       10.72%      9.98%

            Tier 1 Capital to Risk Weighted
            Assets                                 4.0%        9.71%      9.02%

            Tier 1 Ratio to
            Total Adjusted Average Assets          4.0%        8.26%      7.17%

            The Company's capital-to-assets ratio decreased from 6.55% as of
      December 31, 1997 to 6.39% at December 31, 1998. The year-to-year decrease
      in the capital-to-assets ratio was attributable to the asset growth of the
      Company during 1998. The Company's return on average equity for 1998 was
      4.91% and for 1997 was 9.05%; and its return on average assets was .32%
      for 1998 as compared to .67% for 1997. The decrease in the Company's
      return on equity and return on assets from 1997 to 1998 was directly
      attributable to decreased net income. (See "Management's Discussion and
      Results of Operations.")


            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, 1997 and 1998. 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>
                                                                          1998                                  1997
                                                                    (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)                 $110,761      $ 10,507         9.49%  $ 97,712      $  9,139        9.35%
          Other Investments                                4,135           236         5.71      4,666           290        6.22
          Federal Funds Sold                               6,408           352         5.49      3,750           196        5.23
                                                        --------      --------                --------      --------

      Total Interest-Earning Assets                     $121,304      $ 11,095         9.15   $106,128      $  9,625        9.07
                                                                      --------         ----                 --------        ----
      Non-Interest-Earning Assets                          8,203                                 6,257
                                                        --------                              --------
           Total Assets                                 $129,507                              $112,385
                                                        ========                              ========

      Liabilities & Shareholders' Equity:
      Interest-bearing liabilities:
          Demand Interest-Bearing                       $  9,237      $    189         2.05   $  6,106      $    127        2.08
          Money Market & Savings                          21,932           640         2.92     19,078           608        3.19
          Other Time Deposits                             69,010         3,919         5.68     56,437         3,257        5.77
              Borrowed Funds                                                                     6,550           399        6.09
              Preferred Trust                              2,500           225         9.00
                                                        --------      --------                --------      --------

      Total Interest-Bearing Liabilities                 102,679         4,973         4.84     88,171      $  4,391        4.98
                                                                      --------         ----                 --------        ----
      Other Liabilities                                   18,132                                15,901
                                                        --------                              --------

         Total Liabilities                               120,811                               104,072
                Shareholders' Equity                       8,696                                 8,313
                                                        --------                              --------
      Total Liabilities and Shareholders'
         Equity                                         $129,507                              $112,385
                                                        ========                              ========

      Net Interest Income/Rate Spread                                 $  6,122         4.31%                $  5,234       4.09%
                                                                      ========         ====                 ========       ==== 

      Net Interest Margin                                                              5.05%                               4.93%
                                                                                       ====                                ==== 
</TABLE>

            The following table analyzes the rate/volume variances between the
      Bank's interest-earning assets and interest-bearing liabilities for the
      fiscal years 1998 compared to 1997 and 1997 compared to 1996. 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
                                                                              ----------------------

                                                                1998 vs. 1997                        1997 vs. 1996
                                                                -------------                        -------------

                                                                                  (in Thousands)

                                                      Volume        Rate         Total       Volume        Rate         Total
                                                      ------        ----         -----       ------        ----         -----
<S>                                                  <C>          <C>          <C>          <C>          <C>          <C>    
     Interest Income:
       Loan Portfolio (includes mortgages
          held for sale)                             $ 1,240      $   128      $ 1,368      $ 1,537      $   (57)     $ 1,480
        Other Investments                                (31)         (23)         (54)        (108)          27          (81)
        Federal Funds                                    147            9          156          114           (7)         107
                                                     -------      -------      -------      -------      -------      -------
      Total Interest Earning Assets                    1,355          115        1,470        1,543          (37)       1,506
                                                     -------      -------      -------      -------      -------      -------
      Interest Expense:
        Demand Interest - Bearing                         64           (2)          62           49           (1)          48
        Money Market & Savings                            86          (54)          32            4           (8)          (4)
        Other Time Deposits                              715          (53)         662          741           40          781
        Borrowed Funds                                  (399)                     (399)          66           48          114
        Preferred Trust                                  225                       225
                                                     -------      -------      -------      -------      -------      -------
      Total Interest Bearing Liabilities                 691         (109)         582          860           79          939
                                                     -------      -------      -------      -------      -------      -------
      Net Change in Net Interest Income              $   604      $   224      $   888      $   683      $  (116)     $   567
                                                     =======      =======      =======      =======      =======      =======
</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 


                                       13
<PAGE>

      positive gap position results in increased net interest income when rates
      increase and the opposite when rates decline.

            At December 31, 1998, 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 $19,007. If rates
      fell 200 basis points, monthly revenues a year from now would increase
      approximately $21,543 and a rise in rates by 200 basis points would
      represent a monthly loss in revenues of approximately $16,579.

            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, 1998 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>

<TABLE>
<CAPTION>
                                                                   Interest Ratio Sensitivity Report
                                                                        As of December 31, 1998
                                                                         (Dollars in Thousands)
                                            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                  $   7,500      $       0      $       0      $       0      $       0     $   7,500
      Loans                                  15,225         10,046         11,810         47,980         40,352       125,413
      Interest-Bearing Balances                   0              0              0              0              0             0
      Investment Securities Held
         For Sale                                 0              0          1,010              0            704         1,714
      Investment Securities Held
         For Maturity                             0              0            500            402            700         1,602
                                          ---------      ---------      ---------      ---------      ---------     ---------
      Totals                              $  22,725      $  10,046      $  13,320      $  48,382      $  41,756     $ 136,229

      Cumulative Total                    $  22,725      $  32,771      $  46,091      $  94,473      $ 136,229     $ 136,229

      Interest-Sensitive Liabilities
      Demand-Interest-bearing             $  11,785      $       0      $       0      $       0      $       0     $  11,785
      Savings Accounts                       11,089              0              0              0              0        11,089
      Money Market Accounts                  17,109              0              0              0              0        17,109
      Time Deposits                          24,816         14,856         20,948          7,152          1,416        69,188
      Borrowed Funds                              0              0              0              0          5,000         5,000
                                          ---------      ---------      ---------      ---------      ---------     ---------
      Totals                              $  64,799      $  14,856      $  20,948      $   7,152      $   6,416     $ 114,171

      Cumulative Totals                   $  64,799      $  79,655      $ 100,603      $ 107,755      $ 114,171     $ 114,171

      Gap                                 $ (42,074)     $  (4,810)     $  (7,628)     $  41,230      $  35,340     $  22,058

      Cumulative Gap                      $ (42,074)     $ (46,884)     $ (54,512)     $ (13,282)     $  22,058     $  22,058

      Interest-sensitive assets/
      Interest-sensitive liabilities
         (cumulative)                           .35            .41            .46            .88           1.19          1.19

      Cumulative Gap/total earning
         assets                                 (31%)          (34%)          (40%)          (10%)           16%           16%

     Total Earning Assets                                 $136,229
</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 1998, the Bank's net interest spread was maintained at
      approximately 4.63%, as compared to 4.09% in 1997.

            Results of Operations

            As of December 31, 1998, the Bank held deposits aggregating
      $132,594,518, of which $23,423,200, or approximately 18%, were
      non-interest-bearing deposits (exclusive of the $50,223 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 1,718 loan customers totaled approximately
      $115,404,086, (exclusive of residential mortgage loans held for sale)
      resulting in an average loan size of approximately $67,174.

            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.


                                       16
<PAGE>

<TABLE>
<CAPTION>
                                              1998                         1997                        1996
                                              ----                         ----                        ----
                                                   % of                          % of                        % of
      Type of Account                 Balance    Portfolio         Balance     Portfolio        Balance    Portfolio
      --------------------------------------------------------------------------------------------------------------
<S>                               <C>               <C>        <C>               <C>        <C>               <C>   
      Non-Int.  Bearing           $ 23,423,200      18.00%     $ 16,076,381      14.00%     $ 14,660,464      17.00%
      Interest-Bearing              11,785,117       9.00         8,164,080       7.00         4,564,916       5.00
      Money Market                  17,109,125      13.00        14,039,724      12.00        14,409,382      17.00
      Savings                       11,089,034       8.00         5,270,011       5.00         4,571,352       5.00
      CDs over $100,000             31,052,033      23.00        32,244,281      28.00        23,344,356      23.00
      CDs under $100,000            38,136,009      29.00        39,037,933      34.00        25,649,521      33.00
                                  ------------     ------      ------------     ------      ------------     ------ 
        Total Deposits            $132,594,518     100.00%     $114,832,410     100.00%     $ 87,199,991     100.00%
                                  ============     ======      ============     ======      ============     ====== 
</TABLE>

            For the year ended December 31, 1998, the Company's total income was
      $12,586,029 and its total expenses were $12,139,667, resulting in a net
      profit for the year of $446,362. The decrease in net income for the year
      ended December 31, 1998 was primarily due to an increase in operating
      expenses due to branch expansion and the start up costs associated with
      the Bank's mortgage department. 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 slight
      increase in net income for the year ended December 31, 1997 as compared to
      December 31, 1996 was primarily due to increased interest income on loans
      due to increased loan volume. 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.

            As of December 31, 1998, the Bank's allowance for loan losses
      equaled approximately .96% of outstanding loans receivable, including
      non-accrual loans. At 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 allowance equaled
      approximately .95%. The chart below shows an analysis of the allowance for
      loan losses for the years ended December 31, 1998, 1997 and 1996. The
      overall reserve has increased slightly from .91% of outstanding loans at
      December 31, 1997 to .96% of outstanding loans at December 31, 1998.
      Management continues to believe that the reserve adequately reflects the
      level of risk in the portfolio.


                                       17
<PAGE>

<TABLE>
<CAPTION>

                                            Analysis of the Bank's Allowances for Loan Losses
                                            -------------------------------------------------
                                                               December 31,
                                                               ------------
                                                  1998             1997             1996
                                                  ----             ----             ----
<S>                                           <C>              <C>              <C>        
      Balance at beginning of period:         $   936,974      $   875,438      $   750,318
                                              -----------      -----------      -----------
      Charge-offs:
        Commercial                               (214,952)        (295,581)        (328,100)
        Installment                               (61,675)          (4,283)          (6,261)
                                              -----------      -----------      -----------
           Total                                 (276,627)        (299,864)        (334,361)

      Recoveries:
        Commercial                                  9,740            1,400           71,981
        Installment                                 1,730
                                              -----------      -----------      -----------

      Net Charge-Offs                            (265,157)        (298,464)        (262,380)
                                              -----------      -----------      -----------
      Additions charged to operations             440,000          360,000          387,500
                                              -----------      -----------      -----------
      Balance at the end of period            $ 1,111,817      $   936,974      $   875,438
                                              ===========      ===========      ===========
      Ratio of net charge-offs during
        the period to average loans
        outstanding during the period                 .24%             .31%             .41%
                                                      ===              ===              === 
</TABLE>

            As of December 31, 1998, the Bank had loans outstanding, totaling
      $115,404,086, 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.

            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 


                                       18
<PAGE>

      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.

            Additions to the Bank's provision for possible loan losses for the
      period ended December 31, 1998, totaled $440,000. Loans charged off
      against the reserve in 1998 amounted to $276,627 and recoveries were
      $11,470, which resulted in net charged-off loans of $265,157. The
      principal amount of non-accrual loans at December 31, 1998 was $1,088,946,
      an increase of 22% over 1997. 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, 1997, totaled $360,000. Loans charged-off
      against the reserve in 1997 amounted to $299,864. Recoveries amounted to
      $1,400 which resulted in $298,464 in net charged-off loans. The principal
      amount of nonaccrual loans at December 31, 1997 totaled $891,852. This is
      an increase of $156,845 over year end 1996.

            Additions to the Bank's provisions 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. Loans on non-accrual status as
      of December 31, 1996 amounted to $735,007.

            Other real estate owned at December 31, 1998 totaled $734,089 as
      compared to $465,312 at December 31, 1997. This consists of two properties
      acquired at sheriff's sale. One property in Bryn Mawr, Pennsylvania is
      currently under agreement of sale for $580,000 and is scheduled for
      settlement by April 15, 1999. The expected proceeds from the sale is more
      than sufficient to cover the $485,420 balance in real estate accrual. The
      second property is a commercial building in Upper Darby, Pennsylvania. The
      property is currently listed for sale with a realtor and was appraised for
      $300,000. Management continues to monitor and evaluate the Bank's exposure
      on this property, which is carried at $248,669.

            Interest expense of $4,973,136, represented 45% of gross interest
      income in 1998. Interest expense increased 14% over 1997. This increased
      expense was due to an increased average growth in interest-bearing
      deposits to $102,679,000 in 1998 from $88,171,006 in 1997 even though the
      average cost of funds decreased to 4.84% in 1998 from 4.98% in 1997.

            Interest expense of $4,391,096 represented 46% of gross interest
      income in 1997. Interest expense increased by 28% over 1996. The increase
      in interest expense rose due to interest bearing liabilities increasing
      from an average of $71,667,000 in 1996 to $88,171,000 in 1997, an average
      increase of 23%.

            Interest expense of $3,446,440 represented 42% of gross interest
      income in 1996. The increase in interest expense was due to the 37% growth
      in interest bearing deposits and a higher cost of funds due to increased
      interest rates over 1995.


                                       19
<PAGE>

            Occupancy and equipment expenses totaled $1,169,651 for the year
      ended December 31, 1998, as compared to $939,804 at December 31, 1997. The
      25% 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 sixth branch opening and
      the newly formed Mortgage Department in June of 1998 .

            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 represents an increase in maintenance costs and equipment leases
      reflective of the Bank's fifth branch opening in August, 1997.

            Salary and employee benefits of $3,318,630 represented 52% of total
      non-interest expenses, or 28% of total Bank expenses, at December 31,
      1998. The increase in salary and employee benefits of $1,063,801 or 48%
      over 1997 is reflective of hiring additional employees and increased
      benefits expense (including group health insurance and company match of
      the 401(k) Plan) related to the opening of the Mortgage Department and the
      Bank's sixth branch.

            Salary and employee benefits of $2,254,829 in 1997 represented 51%
      of total non-interest expense, or 24% of total bank expenses as compared
      to $1,629,752 in 1996. The increase in salary and employee benefits of
      $625,077, or 38%, is attributable to the hiring of additional employees
      for branch expansion and to manage the asset growth of the company.

            Other operating expenses in 1998, exclusive of occupancy and
      equipment and salary and employee benefits totaled $1,911,095 as compared
      to $1,257,479 in 1997. The increase in these operating expenses was
      primarily related to computer expense, supplies, telephone, postage, loans
      expense, and outside service fees, for the opening of our sixth branch in
      Philadelphia and our newly formed Mortgage Department in June of 1998.
      Computer expenses increased from $253,196 to $288,378, a 14% increase over
      1997. 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 $13,768 in 1997 to $22,773 in 1998. The Bank pays
      premiums in accordance with the deposit size of its portfolio and its
      insurance category rating. Legal expenses increased $64,682 or 129% from
      1997. This was a result of the legal expenses related to the Bank setting
      up a Mortgage Department and increased legal and collection services.
      Business development expenses were $214,773 in 1998 as compared to
      $176,770 in 1997. This 22% increase was a direct result of the Bank's
      efforts to develop business and become increasingly visible in its branch
      location communities. The decrease in advertising expense from $56,352 in
      1997 to $43,846 in 1998 was a result of more monies being allocated to
      business development rather than advertising.

            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


                                       20
<PAGE>

      increasingly visible in it branch locations 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.

            Other operating expenses in 1996, exclusive of occupancy and
      equipment and salary and employee benefits 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
      of 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.

            Interest income on investment securities relates primarily to
      interest on U.S. Government Obligations. Interest income of $142,652 for
      the year ended December 31, 1998 decreased 23% from $185,263 at December
      31, 1997. The decrease is a direct result of a change in investments from
      government obligations to federal funds sold to provide liquid funds for
      the mortgage activities. The average balance of government obligations
      decreased from $4,666,000 in 1997 to $4,135,000 in 1998. Interest income
      of $185,263 for the year ended December 31, 1997, decreased 38% from
      $295,389 at December 31, 1996. 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, 1998, interest income on Federal Funds sold was
      $352,432, as compared to $196,425 at December 31, 1997, an 80% 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, 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. The average balance of government obligations decreased from
      $6,430,000 in 1996 to $4,666,000 in 1997. Interest income was $295,389 in
      1996.

            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, 1998,
      1997 and 1996, interest income on other investments was $93,490, $104,511
      and $75,840, 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 1996, 1997 or 1998.

            Interest and fees on loans were $10,506,782 in 1998, 95% of gross
      interest income as compared to $9,138,864, or 95% in 1997. The average
      loan portfolio grew 14% while the Bank's yield increased 


                                       21
<PAGE>

      from 9.35% in 1997 to 9.49% in 1998. 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. 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.

            An analysis of the Bank's loan portfolio is presented in Note 4,
      "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 written
      using two digits rather than four to define the applicable year. Any of
      the Company's computer programs, systems or devices that have time
      sensitive software may recognize a date using "00" as the year 1900 rather
      than the year 2000.

            The Company has undertaken a comprehensive upgrade of its computer
      systems for Year 2000 compliance. This included the completion of a
      conversion of the Company's computer system with a Year 2000 compliant
      core processing system, during 1998, and the replacement of personal
      computers with models which will role over (or will be manually reset) to
      the Year 2000 date change. These upgrades were the main result of the
      completion of the Company's awareness, assessment and renovation phases of
      Year 2000 planning. The validation and implementation phases are in
      process. Testing of mission critical systems is currently underway and is
      expected to be completed by the second quarter of 1999 in accordance with
      federal guidelines. Implementation of compliant systems will take place
      during 1999, based on the results of system validation. Contingency plans,
      should they become necessary, will also occur later in 1999.

            The total costs of the Year 2000 issue has not been and is not
      expected to be material to the Company's 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 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 1999
      will be approximately $23,500.


                                       22
<PAGE>

            The risks associated with the Year 2000 issue include system failure
      or miscalculations causing disruptions of operations including, among
      other things, an inability to process transactions and engage in normal
      business activities. Although the Company is actively working towards
      compliance, certain contingency plans have been established to mitigate
      the impact should the aforementioned risks be realized. Contingency plans
      have been established for mission critical systems, which will be
      triggered by established dates during 1999, to include core processing of
      transactions and the Company is currently working on a business resumption
      plan. This plan, to be completed by the third quarter of 1999, should
      enable the Company to temporarily resume operations in the event an
      unforeseen problem occurs and mission critical systems do not function
      properly.


                                       23
<PAGE>

ITEM 7    - Financial Statements and Supplementary Data
            Independent Auditors' Report dated March 5, 1999.
            Consolidated Statements of Financial Condition as of December 31,
            1998 and 1997.
            Consolidated Statements of Income for the years ended December 31,
            1998, 1997 and 1996.
            Consolidated Statements of Changes in Shareholders' Equity for the
            years ended December 31, 1998, 1997 and 1996.
            Consolidated Statements of Cash Flows for years ended December 31,
            1998, 1997 and 1996.
            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>

Deloitte & 
    Touche
---------- 
     [LOGO]
                              --------------------------------------------------
                              Madison Bancshares 
                              Group, Ltd.        
                              and Subsidiary     

                              Consolidated Financial Statements as of  
                              December 31, 1998 and 1997 and for       
                              Each of the Three Years in the Period    
                              Ended December 31, 1998, and             
                              Independent Auditors' Report             

--------------- 
Deloitte Touche
Tohmatsu
--------------- 


                                       25
<PAGE>

                         [Letterhead Deloitte & Touche]

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, 1998 and 1997, and the related consolidated statements of income, changes in
shareholders' equity and comprehensive income and cash flows for each of the
three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.


/s/ Deloitte & Touche LLP

Philadelphia, Pennsylvania
March 5, 1999


                                       26
<PAGE>

MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                   1998            1997
<S>                                                                           <C>            <C>
ASSETS 
CASH AND CASH EQUIVALENTS:
  Cash and amounts due from banks                                             $  7,793,484   $  3,944,986
  Federal funds sold                                                             7,500,000     19,500,000
                                                                              ------------   ------------
        Total cash and cash equivalents                                         15,293,484     23,444,986

INVESTMENT SECURITIES:
  Held to maturity (fair value - 1998, $1,613,597; 1997, $1,617,371)             1,602,493      1,605,407
  Available for sale (amortized cost - 1998, $1,000,046; 1997, $2,999,336)       1,010,000      3,000,246
Federal Home Loan Bank Stock                                                       527,300        479,800
Federal Reserve Bank Stock                                                         176,400        176,400

LOANS (Net of allowance for loan losses - 1998, $1,111,817; 1997, $936,974)    113,819,315    102,180,556

MORTGAGE LOANS HELD FOR SALE                                                    11,593,638        290,900

REAL ESTATE OWNED                                                                  734,089        465,312

FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET                             1,583,473        916,484

ACCRUED INTEREST RECEIVABLE                                                      1,076,682        706,448

OTHER ASSETS                                                                       508,989        240,274
                                                                              ------------   ------------
TOTAL                                                                        $ 147,925,863  $ 133,506,813
                                                                              ============   ============

LIABILITIES AND SHAREHOLDERS' EQUITY

DEPOSITS:
  Noninterest-bearing demand deposits                                         $ 23,423,200   $ 16,076,381
  Interest-bearing demand deposits                                              11,785,117      8,164,080
  Savings deposits                                                              11,089,034      5,270,011
  Money market deposits                                                         17,109,125     14,039,724
  Time deposits                                                                 69,188,042     71,282,214
                                                                              ------------   ------------
        Total deposits                                                         132,594,518    114,832,410

BORROWED FUNDS                                                                                  9,000,000

GUARANTEED PREFERRED BENEFICIAL INTEREST IN SUBORDINATED DEBT                    5,000,000

ACCRUED INTEREST PAYABLE                                                           804,222        838,513

ACCRUED EXPENSES AND OTHER LIABILITIES                                              76,731         97,672
                                                                              ------------   ------------
        Total liabilities                                                      138,475,471    124,768,595
                                                                              ------------   ------------

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, 1998, 1,562,018; 1997, 1,252,773 shares        1,562,018      1,252,773
  Capital surplus                                                                7,563,433      7,612,835
  Accumulated earnings (deficit)                                                   318,371       (127,991
  Accumulated other comprehensive income                                             6,570            601
                                                                              ------------   ------------
        Total shareholders' equity                                               9,450,392      8,738,218
                                                                              ------------   ------------
TOTAL                                                                        $ 147,925,863  $ 133,506,813
                                                                              ============   ============
</TABLE>

See notes to consolidated financial statements.


                                       27
<PAGE>

MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                       1998            1997        1996
<S>                                                                 <C>            <C>         <C>           
INTEREST INCOME:
  Interest and fees on loans                                        $10,506,782   $ 9,138,864  $ 7,653,898
  Interest and dividends on investment securities:
    U.S. Government obligations                                         142,652       185,263      295,389
    Other securities                                                     93,490       104,511       75,840
    Interest on temporary investments                                   352,432       196,425       88,664
                                                                     ----------     ---------    ---------
           Total interest income                                     11,095,356     9,625,063    8,113,791
                                                                     ----------     ---------    ---------

INTEREST EXPENSE:
  Interest on:
    Demand deposits                                                     188,770       127,143       78,738
    Savings and money market deposits                                   637,589       607,838      611,151
    Time deposits                                                     3,918,856     3,256,833    2,475,714
    Guaranteed preferred beneficial interest in subordinated debt       225,000
    Other interest                                                        2,921       399,282      280,837
                                                                     ----------     ---------    ---------
           Total interest expense                                     4,973,136     4,391,096    3,446,440
                                                                     ----------     ---------    ---------

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES                  6,122,220     5,233,967    4,667,351

PROVISION FOR LOAN LOSSES                                               440,000       360,000      387,500
                                                                     ----------     ---------    ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                   5,682,220     4,873,967    4,279,851
                                                                     ----------     ---------    ---------

OTHER NONINTEREST INCOME:
  Service charges on deposit accounts                                   719,541       573,493      374,897
  Gain on the sale of mortgage loans                                    599,065        83,339       59,002
  Gain on sale of investments                                                             575
  Other                                                                 172,067        94,029       55,054
                                                                     ----------     ---------    ---------
           Total noninterest income                                   1,490,673       751,436      488,953
                                                                     ----------     ---------    ---------
OTHER NONINTEREST EXPENSES:
  Salaries and employee benefits                                      3,318,630     2,254,829    1,629,752
  Occupancy                                                             842,264       715,145      556,977
  Equipment                                                             327,387       224,659      200,505
  Computer processing                                                   288,378       253,196      210,688
  Deposit insurance                                                      22,773        13,768        1,500
  Legal                                                                 115,013        50,331       79,380
  Professional fees                                                      84,775        51,166       60,585
  Business development                                                  214,773       176,770      124,637
  Office and stationery supplies                                        167,244       132,818      121,628
  Advertising                                                            43,846        56,352       82,009
  Director's fees                                                       154,975       107,025      115,325
  Proxy related expense                                                                            147,401
  Amortization expense                                                   21,050
  Other operating                                                       798,268       416,053      578,955
                                                                    -----------   -----------  -----------
           Total other noninterest expenses                           6,399,376     4,452,112    3,909,342
                                                                    -----------   -----------  -----------
INCOME BEFORE TAXES                                                     773,517     1,173,291      859,462

PROVISION FOR INCOME TAXES                                              327,155       416,813      318,875
                                                                    -----------   -----------  -----------
NET INCOME                                                          $   446,362   $   756,478  $   540,587
                                                                    ===========   ===========  ===========
BASIC EARNINGS PER SHARE                                            $      0.29   $      0.50  $      0.35
                                                                    ===========   ===========  ===========
DILUTED EARNINGS PER SHARE                                          $      0.27   $      0.47  $      0.35
                                                                    ===========   ===========  ===========
</TABLE>

See notes to consolidated financial statements.


                                       28
<PAGE>

MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                               Accumulated
                                                                                                  Other
                                                                                Accumulated   Comprehensive
                                                        Common      Capital       Earnings        Income              
                                                        Stock       Surplus      (Deficit)       (Loss)        Total  
<S>              <C>                                <C>          <C>           <C>            <C>             <C>     
BALANCE, JANUARY 1, 1996                            $  897,574   $6,709,506    $ (212,606)   $   (1,759)  $7,392,715 

    Exercise of stock options and stock warrants         6,601       39,477                                   46,078 

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

  Comprehensive income:
    Net income                                                                    540,587                    540,587 

    Net change in unrealized loss on securities
       available for sale net of taxes of ($2,778)                                               (5,160)      (5,160)
                                                                                                                     
   Comprehensive income                                     --           --            --            --           --
                                                    ----------   ----------    ----------    ----------   ---------- 

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      635,859      (708,562)                           

    Issuance of 20% stock dividend                     208,710     (208,710)                                         

  Comprehensive income:
    Net income                                                                    756,478                    756,478 

    Net change in unrealized loss on securities
       available for sale net of taxes of ($4,049)                                                7,520        7,520 
                                                                                                                     
   Comprehensive income                                                                                              
                                                    ----------   ----------    ----------    ----------   ---------- 

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

    Exercise of stock options and stock warrants        50,205      209,638                                  259,843 

    Issuance of 20% stock dividend                     259,040     (259,040)

  Comprehensive income:
    Net income                                                                    446,362                    446,362 

    Net change in unrealized gain on securities
       available for sale net of taxes of ($3,214)                                                5,969        5,969 
                                                                                                                     
   Comprehensive income                                                                                              
                                                    ----------   ----------    ----------    ----------   ---------- 
BALANCE, DECEMBER 31, 1998                          $1,562,018   $7,563,433    $  318,371    $    6,570   $9,450,392
                                                    ==========   ==========    ==========    ==========   ==========

<CAPTION>
                                                       Comprehensive
                                                          Income
<S>              <C>                                   <C>       
BALANCE, JANUARY 1, 1996                                             

    Exercise of stock options and stock warrants                     

    Issuance of 7 1/2% stock dividend                                

  Comprehensive income:
    Net income                                          $  540,587

    Net change in unrealized loss on securities
       available for sale net of taxes of ($2,778)          (5,160)
                                                        ----------
   Comprehensive income                                 $  535,427
                                                        ==========

BALANCE, DECEMBER 31, 1996                             

    Issuance of 7 1/2% stock dividend                             

    Issuance of 20% stock dividend                                

  Comprehensive income:
    Net income                                          $  756,478

    Net change in unrealized loss on securities
       available for sale net of taxes of ($4,049)           7,520
                                                        ----------
   Comprehensive income                                 $  763,998
                                                        ==========

BALANCE, DECEMBER 31, 1997                                        

    Exercise of stock options and stock warrants                  

    Issuance of 20% stock dividend                   

  Comprehensive income:
    Net income                                          $  446,362

    Net change in unrealized gain on securities
       available for sale net of taxes of ($3,214)           5,969
                                                        ----------
   Comprehensive income                                 $  452,331
                                                        ==========
BALANCE, DECEMBER 31, 1998
</TABLE>

See notes to consolidated financial statements


                                       29
<PAGE>

MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                             1998            1997            1996
<S>                                                                      <C>            <C>           <C>
OPERATING ACTIVITIES:
  Net income                                                             $   446,362    $   756,478    $   540,587
  Adjustments to reconcile net income to net cash
   provided by (used in) operating activities:
    Depreciation on equipment                                                245,048        153,271        144,701
    Provision for loan losses                                                440,000        360,000        387,500
    Net amortization of bond premium/discount                                  2,204         (1,913)         1,789
    Gain on sale of mortgage loans held for sale                            (599,065)       (83,339)       (59,002) 
    Gain on sale of investments                                                                (575)
    Originations of loans held for sale                                  (41,628,024)   (10,474,740)   (15,684,054) 
    Proceeds from sale of loans                                           30,924,351     12,402,193     14,013,974
  Changes in assets and liabilities which provided (used) cash:
    Accrued interest receivable                                             (370,234)       401,296        (37,477) 
    Other assets                                                            (271,790)      (373,621)      (146,611) 
    Accrued interest payable                                                 (34,291)       133,806         47,812
    Accrued expenses and other liabilities                                   (20,942)         5,715       (215,511) 
    Deferred loan fees                                                       129,976         80,497         24,880
                                                                         -----------    -----------    -----------
        Net cash provided by (used in) operating activities              (10,736,405)     3,359,068       (981,412) 
                                                                         -----------    -----------    -----------

INVESTING ACTIVITIES:
  Purchase of investment securities available for sale                                   (2,499,308)    (1,647,031)
  Purchase of Federal Home Loan Bank Stock                                   (47,500)
  Proceeds from maturities of investment securities held to maturity                        500,000      2,100,000
  Proceeds from sale of investment securities available for sale                            998,750
  Proceeds from maturities of investment securities available for sale     2,000,000      1,446,200      1,000,000
  Loans purchased and originated, net of principal repayments            (12,457,404)   (11,864,109)   (19,821,593) 
  Cost capitalized for real estate owned                                     (20,108)
  Additions to furniture, equipment and leasehold improvements              (912,037)      (484,991)      (232,189) 
  Proceeds on sale of real estate owned                                                      50,000         40,731
                                                                         -----------    -----------    -----------
        Net cash used in investing activities                            (11,437,049)   (11,853,458)   (18,560,082) 
                                                                         -----------    -----------    -----------

FINANCING ACTIVITIES:
  Net increase in demand, savings and time deposits                       17,762,109     27,632,419      4,329,371
  Exercise of stock warrants                                                 250,845                        26,895
  Exercise of stock options                                                    8,998                        19,183
  Proceeds from issuance of capital securities                             5,000,000
  Advances of borrowed funds                                                              9,000,000     10,000,000
  Repayments of borrowed funds                                            (9,000,000)   (10,000,000)             
                                                                         -----------    -----------    -----------
        Net cash provided by financing activities                         14,021,952     26,632,419     14,375,449
                                                                         -----------    -----------    -----------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                      (8,151,502)    18,138,029     (5,166,045) 

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                              23,444,986      5,306,957     10,473,002
                                                                         -----------    -----------    -----------

CASH AND CASH EQUIVALENTS, END OF YEAR                                   $15,293,484    $23,444,986    $ 5,306,957
                                                                         ===========    ===========    ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the year for:
    Interest                                                             $ 4,503,465    $ 3,858,282    $ 3,398,628
                                                                         ===========    ===========    ===========

    Income taxes                                                         $   357,000    $   363,663    $   569,956
                                                                         ===========    ===========    ===========

SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
  Issuance of 20% stock dividend in 1998,
    7.5% and 20% stock dividend in 1997
    and 7.5% stock dividend in 1996:
    Common stock                                                         $   259,040    $   281,413    $    67,185
                                                                         ===========    ===========    ===========

    Capital surplus                                                      $  (259,040)   $   427,149    $   436,703
                                                                         ===========    ===========    ===========

    Accumulated deficit                                                                 $  (708,562)   $  (503,888) 
                                                                                        ===========    ===========

  Transfers from loans to real estate owned                              $   248,669
                                                                         ===========
</TABLE>

See notes to consolidated financial statements.


                                       30
<PAGE>

MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

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 (the "Commonwealth") 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, Lansdale and
      its sixth branch location in Northeast Philadelphia opened which was in
      1998. 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 $773,342 and $832,167 at
      December 31, 1998 and 1997, 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.

      o     Securities Available for Sale - Securities available for sale,
            carried at approximate 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.


                                       31
<PAGE>

      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 two properties acquired
      by foreclosure. These assets are 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.

      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. Buildings are depreciated over 40
      years. 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.


                                       32
<PAGE>

      Earnings Per Share - 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
      dilutive securities. The average common shares outstanding have been
      retroactively restated to reflect the effect of the 20% stock dividend
      issued in 1998, the 7.5% and 20% stock dividends issued in 1997 and the
      7.5% stock dividend issued in 1996. The calculation of the weighted
      average shares, after giving effect to the stock split, was as follows:

                                                1998           1997       1996
Average common shares outstanding              1,540,453   1,505,622   1,513,117
Increase in shares due to
  options and warrants -
  diluted basis                                   88,877     104,302          --
                                               ---------   ---------   ---------
Adjusted shares outstanding - diluted          1,629,330   1,609,924   1,513,117
                                               =========   =========   =========

      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.

      Comprehensive Income - 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 shareholders' equity.

      Accounting Principles Issued and Not Yet Adopted - In June 1998, SFAS No.
      133, Accounting for Derivative Instruments and Hedging Activities, was
      issued. This statement requires an entity to recognize all derivatives as
      either assets or liabilities in the statement of financial position and
      measure those instruments at fair value. The accounting for changes in the
      fair value of a derivative depends on the intended use of the derivative
      and the resulting designation. This statement is effective for all fiscal
      quarters of fiscal years beginning after June 15, 1999, and will not be
      applied retroactively to financial statements of prior periods. The impact
      of this statement will depend on the extent of derivatives and embedded
      derivatives at the date this statement is adopted.

      Reclassifications - Certain items in the 1996 and 1997 consolidated
      financial statements have been reclassified to conform with the
      presentation in the 1998 consolidated financial statements.


                                       33
<PAGE>

3.    INVESTMENT SECURITIES

      A summary of investment securities and their expected maturities, as well
      as estimated fair values at December 31, 1998 and 1997 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, 1998:
    Debt securities:
      U.S. Government and Federal Agencies                   $  500,000  $    7,031   $               $  507,031
      Municipal and State Government bonds                    1,102,493       4,073#                   1,106,566
                                                             ----------  ----------   -------------   ----------
Total                                                        $1,602,493  $   11,104   $               $1,613,597
                                                             ==========  ==========   =============   ==========

Securities available for sale:
  December 31, 1998:
    Debt securities - U.S. Government and Federal Agencies   $1,000,046  $    9,954   $               $1,010,000
                                                             ----------  ----------   -------------   ----------
Total                                                        $1,000,046  $    9,954   $               $1,010,000
                                                             ==========  ==========   =============   ==========

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
                                                             ----------  ----------   -------------   ----------
Total                                                        $2,999,336  $      910   $               $3,000,246
                                                             ==========  ==========   =============   ==========
</TABLE>

      The scheduled maturities of debt securities to be held to maturity and
      debt securities available for sale at December 31, 1998 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 in less than 1 year            $  500,000         $  507,031         $1,000,046            $1,010,000
Due from 1 to 5 years                 402,225            403,040                        
Due from 5 to 10 years                700,268            703,526               
                                   ----------         ----------         ----------            ----------
Total                              $1,602,493         $1,613,597         $1,000,046            $1,010,000
                                   ==========         ==========         ==========            ==========
</TABLE>

Gross proceeds from the sale of investment securities available for sale in 1997
totaled $998,750, resulting in a gross gain of $575. There were no sales of
investment securities in 1998 or 1996.


                                       34
<PAGE>

4.    LOANS AND ALLOWANCE FOR LOAN LOSSES

      Loans outstanding are summarized as follows:

                                                      December 31,
                                            ------------------------------
                                                1998            1997
Real estate mortgage loans                  $ 33,743,039    $ 40,594,799
Commercial loans                              72,425,657      52,722,906
Consumer loans                                 9,235,390      10,055,470
                                            ------------    ------------

  Total                                      115,404,086     103,373,175
Less:
  Allowance for loan losses                   (1,111,817)       (936,974)
  Deferred origination fees, net                (472,954)       (255,645)
                                            ------------    ------------

                                           $ 113,819,315   $ 102,180,556
                                            ============    ============


      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, 1998, 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 5.75% to 12% with adjustable
      rates ranging from the Bank's prime rate to 3% in excess of prime.

      The composition of fixed and adjustable rate loans as of December 31, 1998
      was as follows:

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

1 month - 1 year                                                  $ 3,001,477
1 year - 3 years                                                   22,897,087
3 years - 5 years                                                  22,785,536
5 years - 30 years                                                 27,620,284
                                                                  -----------
                                                                  $76,304,384
                                                                  ===========

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

Less than 1 month                                                 $ 3,284,243
 1 month to 1 year                                                 18,122,530
 1 year - 3 years                                                  14,458,791
 3 years - 30 years                                                 3,234,138
                                                                  -----------
                                                                  $39,099,702
                                                                  ===========


                                       35
<PAGE>

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

                                                 Year Ended December 31,
                                     -----------------------------------------
                                          1998            1997         1996
Balance, beginning of year            $  936,974      $  875,438    $  750,318
                                      ----------      ----------    ----------

Provision charged to operations          440,000         360,000       387,500
                                      ----------      ----------    ----------
Loans charged off:
  Commercial loans                      (214,952)       (295,581)     (328,100)
  Consumer loans                         (61,675)         (4,283)       (6,261)
                                      ----------      ----------    ----------

                                        (276,627)       (299,864)     (334,361)
                                      ----------      ----------    ----------

Recoveries - commercial loans             11,470           1,400        71,981
                                      ----------      ----------    ----------

Balance, end of year                  $1,111,817      $  936,974    $  875,438
                                      ==========      ==========    ==========

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, 1998 and 1997, 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:

The following table summarizes impaired loan information.

<TABLE>
<CAPTION>
                                                                  December 31,
                                                        ---------------------------
                                                           1998             1997
<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                             2,142,265       1,571,209
                                                          -----------    ------------

Total                                                     $ 2,142,265      $1,571,209
                                                          ===========    ============
<CAPTION>
                                                                       Year Ended
                                                                   December 31,
                                                            ------------------------------
                                                                 1998              1997
<S>                                                        <C>                 <C>        
Average impaired loans                                       $1,842,643        $1,571,209 
Interest income recognized on impaired loans                     78,724            71,966 
Cash basis interest income recognized on impaired loans          46,353            32,382 
</TABLE>

      At December 31, 1998, all of the Bank's nonaccrual loans were considered
      to be impaired loans.


                                       36
<PAGE>

      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, 1998 and 1997
      totaled $1,088,946 and $891,852, respectively. Additional interest income
      that would have been recorded in 1998 and 1997 under the original terms of
      nonaccrual loans totaled approximately $92,000 and $81,000, respectively.

      Accruing loans which are contractually past due 90 days or more totaled
      $2,321,101 and $778,825 at December 31, 1998 and 1997, respectively.
      Interest due on these loans totaled $221,608 and $51,748 at December 31,
      1998 and 1997, respectively.

5.    FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

                                                      December 31,
                                            -----------------------------
                                                1998                 1997
Building and land                            $  678,236        $  262,765
Furniture and equipment                       1,515,903         1,026,406
Leasehold improvements                          368,022           360,954
                                             ----------        ----------

  Total                                       2,562,161         1,650,125
Accumulated depreciation and amortization      (978,688)         (733,641)
                                             ----------        ----------
                                             $1,583,473        $  916,484
                                             ==========        ==========

6.    DEPOSITS

      Interest-bearing deposits have stated rates ranging from 2.05% to 5.68%
      with a weighted average cost on all deposits of 4.74% at December 31, 1998
      and from 2.15% to 5.75% with a weighted average cost on all deposits of
      5.16% at December 31, 1997.

      Time deposit accounts outstanding at December 31, 1998 and 1997 mature as
      follows:

                                                Year Ended December 31,
                                          -------------------------------
                                              1998             1997

Three months or less                      $24,816,936         $20,795,591
Three to twelve months                     35,803,925          31,657,409
Over one year                               8,567,181          18,829,214
                                          -----------         -----------
                                          $69,188,042         $71,282,214
                                          ===========         ===========


                                       37
<PAGE>

      The aggregate amount of certificates of deposit in denominations of
      $100,000 or more at December 31, 1998 and 1997 was $31,052,033 and
      $34,113,040, respectively. Interest expense attributable to certificates
      of deposit in denominations of $100,000 or more for the years ended
      December 31, 1998, 1997 and 1996 amounted to $1,593,915, $1,355,577, and
      $784,646, respectively. These certificates and their remaining maturities
      are as follows:

                                               December 31,
                                                   1998

Three months or less                          $14,582,349
Three through twelve months                    12,721,928
Over 12 months                                  3,747,756
                                              -----------
                                              $31,052,033
                                              ===========

7.    OTHER BORROWED MONEY

      Other borrowed money at December 31, 1997 consisted of a $9,000,000 FHLB
      repurchase agreement. The borrowing had an interest rate of 6.75% and
      matured in January 1998.

8.    GUARANTEED PREFERRED BENEFICIAL INTEREST IN SUBORDINATED DEBT

      On June 26, 1998, Madison Capital Trust I (the "Trust"), a statutory
      business trust created under Delaware law that is a subsidiary of the
      Company, issued $5,000,000, 9.00% Capital Securities ("Capital
      Securities") with a stated value and liquidation preference of $1,000 per
      share. The Trust's obligations under the Capital Securities issued are
      fully and unconditionally guaranteed by the Company. The proceeds from the
      sale of the Capital Securities of the Trust were utilized by the Trust to
      invest in $5,000,000, 9.00% Junior Subordinated Debentures (the
      "Debentures") of the Company. The Debentures are unsecured and rank
      subordinate and junior in right of payment to all indebtedness,
      liabilities and obligations of the Company. The Debentures represent the
      sole assets of the Trust. Interest on the Capital Securities is cumulative
      and payable semi-annually in arrears. The Company has the right to
      optionally redeem the Debentures prior to the maturity date of June 30,
      2028, on or after June 30, 2003, at 100% of the stated liquidation amount,
      plus accrued and unpaid distributions, if any, to the redemption date.
      Under the occurrence of certain events, the Company may redeem in whole,
      but not in part, the Debentures prior to June 30, 2003. Proceeds from any
      redemption of the Debentures would cause a mandatory redemption of the
      Capital Securities having an aggregate liquidation amount equal to the
      principal amount of the Debentures redeemed.

      The Trust is a wholly owned subsidiary of the Company, has no independent
      operations and issued securities that contained the full and unconditional
      guarantee of its parent, the Company.


                                       38
<PAGE>

9.    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
                                       -----------------------------------------------------------------------------------------
                                           1998                       1997                             1996           
                                          Amount     Percentage      Amount         Percentage        Amount          Percentage
<S>                                    <C>                  <C>     <C>                   <C>       <C>                 <C>  
Tax at federal tax rate                $270,731             35.0%   $410,652              35.0%     $382,985            35.0%

Increase (decrease) resulting from:
  Benefit of surtax exemptions           (7,735)            (1.0)    (11,733)             (1.0)      (10,943)           (1.0)
  Meals and entertainment
    disallowed                           36,512              4.7      30,051               2.6        21,188             1.9
  Tax exempt income                     (18,653)            (2.4)    (18,355)             (1.6)      (18,331)           (1.7)
  Other                                  46,300              6.0       6,198               0.5       (56,024)           (5.1)
                                        -------             ----     -------              ----       -------            ---- 
                                       $327,155             42.3%   $416,813              35.5%     $318,875            29.1%
                                        =======             ====     =======              ====       =======            ==== 
</TABLE>

      Items that give rise to significant portions of the Company's deferred tax
      asset, calculated at 35%, are as follows:

                                                           December 31,
                                                         ---------------------
                                                           1998           1997
Deferred tax assets:
  Allowance for loan losses                               $ 242,381   $ 179,252
  Deferred fees                                               7,133       8,567
  Other                                                      68,343      37,793
  Unrealized gain on securities available for sale            2,234          --
                                                          ---------   ---------
           Subtotal                                         320,091     225,612
                                                          ---------   ---------

Deferred tax liabilities -
  Unrealized gains on securities available for sale              --        (309)
                                                          ---------   ---------

           Subtotal                                              --        (309)
                                                          ---------   ---------

Net deferred tax asset                                    $ 320,091   $ 225,303
                                                          =========   =========

      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, 1998, 1997
      and 1996 includes the following:

                                     1998               1997               1996

Current taxes                       $ 419,400        $ 481,821        $ 369,875
Deferred taxes                        (92,245)         (65,008)         (51,000)
                                    ---------        ---------        ---------
Total                               $ 327,155        $ 416,813        $ 318,875
                                    =========        =========        =========


                                       39
<PAGE>

10.   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 $911,954 and $1,076,000 and
      unadvanced loan commitments of $13,074,237 and $12,330,000 at December 31,
      1998 and 1997, respectively. The unadvanced loan commitments at December
      31, 1998 and 1997 were primarily at variable rates. In addition, the Bank
      had commitments to sell fixed rate residential mortgages of $11,593,638
      and $290,900 at December 31, 1998 and 1997, 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 1998, 1997
      and 1996 was $541,901, $456,489, and $384,501, respectively.

      Future minimum lease payments under noncancelable leases are as follows:

                                                                    Year Ending
                                                                    December 31,
                                                                    ------------
1999                                                                  687,871  
2000                                                                  714,917  
2001                                                                  661,818  
2002                                                                  295,328  
2003                                                                  656,624  
                                                                   ----------  
Thereafter                                                         $3,288,177  
                                                                   ==========  

11.   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. 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 1996, 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 "1997 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 1997 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. The 1997 Plan replaced the 1989
      Plan which was due to expire in 1999. A total of 774,633 shares of common
      stock have been reserved for issuance pursuant to the 1997 Plan including
      options which remained issuable under the 1989 Plan. The price at which
      such options may be issued is determined by a special committee.


                                       40
<PAGE>

      At December 31, 1998, a total of 708,057 options were available for grant
      under the 1997 Plan. The per share price of exercisable options at
      December 31, 1998 reflects the adjusted exercise price resulting from
      stock dividends.

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

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

Exercisable, January 1, 1996      58,262        $4.79 - $5.34         $ 5.64

Exercised                         (5,446)       $5.13
                                  ------                            
Exercisable, December 31, 1996    52,816        $4.79 - $5.34         $ 5.24
                                                                    
Issued                             8,698        $7.22
                                  ------                            
Exercisable, December 31, 1997    61,514        $4.79 - $7.22         $ 5.24
                                                                    
Issued                             7,200        $10.40

Exercised                         (2,138)       $4.94 - $5.13       
                                  ------                            
Exercisable, December 31, 1998    66,576        $3.83 - $10.40        $ 4.94
                                  ======

      At December 31, 1998, the options exercisable had a weighted average
      remaining contractual life of 3.91 years.

      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:

                                                       1998         1997

Net income:                           As reported  $  446,362   $  756,478
                                      Pro forma       412,695      699,465

Diluted earnings per share            As reported  $     0.27    $    0.47
                                      Pro forma          0.25         0.43

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

                                                        1998             1997
Risk free interest rate of return                       6.00%            6.00% 
Expected option life                                 120 months       120 months
Expected dividends                                       $0               $0
Expected volatility                                    35.00%           35.00% 


                                       41
<PAGE>

12.   WARRANTS AUTHORIZED

      In connection with the initial offering of the Company's common stock, the
      Company's directors received warrants to purchase 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, 1998, warrants have an
      exercise price of $4.27 per share. As of December 31, 1998, there were
      84,412 warrants outstanding and 48,423 were exercised in 1998. Warrants
      outstanding have been adjusted to reflect stock dividends.

13.   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, 1998, 1997 and 1996 were approximately $41,881, $20,313, and
      $13,977 respectively.

14.   SHAREHOLDERS' EQUITY

      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.

      On May 19, 1998, the Board of Directors declared a 20% stock dividend
      payable to all shareholders of record on June 3, 1998. Per share
      computations reflect the changes in the number of shares resulting from
      these dividends.

15.   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:

                                                        December 31,
                                            ------------------------------------
                                                     1998                  1997

Beginning of period                            $6,123,101            $5,929,059
Borrowings                                      2,414,893               816,369
Principal repayments                             (707,353)             (622,327)
                                               ----------            ----------
                                                                 
End of period                                  $7,830,641            $6,123,101
                                               ==========            ==========

      Certain directors of the Company are partners in an entity from which the
      Bank leases office space (Note 10). Rental payments for the office space
      were approximately $284,000, $263,000, and $256,000, for the years ended
      December 31, 1998, 1997 and 1996, respectively. In the opinion of
      management, all aspects of this transaction, including the lease and
      amendments thereto, have been 


                                       42
<PAGE>

      negotiated on an arms-length basis and the resultant terms are no less
      favorable than those that could be obtained from third parties.

16.   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>
                                               1998                                        1997
                                          ---------------------------     -------------------------  
                                                            Estimated                     Estimated
                                              Carrying         Fair         Carrying        Fair
                                               Amount          Value          Amount        Value
                                           (In Thousands)                 (In Thousands)
<S>                                          <C>           <C>           <C>           <C>        
Assets:
  Cash and cash equivalents                  $ 15,293      $ 15,293      $ 23,445     $ 23,445
  Investment securities held to maturity        1,602         1,614         1,605        1,617
  Investment securities available for sale      1,010         1,010         3,000        3,000
  Federal Home Loan Bank Stock                    527           527           480          480
  Federal Reserve Bank Stock                      176           176           176          176
  Loans, net                                  113,819       113,957       102,181      104,766
  Mortgage loans held for sale                 11,594        11,594           291          291
                                                                                     
Liabilities:                                                                         
  Deposits:                                                                          
    Noninterest-bearing deposits               23,423        23,423        16,076       16,076
    Interest-bearing deposits                  11,785        11,785         8,164        8,164
    Savings deposits                           11,089        11,089         5,270        5,270
    Money market deposits                      17,109        17,109        14,040       14,040
    Time deposits                              69,188        69,238        71,282       71,464
    Borrowed funds                                 --            --         9,000        9,000
    Guaranteed preferred beneficial                                                  
      interest in subordinated debt             5,000         5,000            --           --
</TABLE>

      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.

      Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) Stock
      Although FHLB and FRB stock is an equity interest in an FHLB or FRB, it is
      carried at cost because it does not have a readily determinable fair value
      as its ownership is restricted and it lacks a market. The estimated fair
      value approximates the carrying amount.

      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.


                                       43
<PAGE>

      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.

      Guaranteed Preferred Beneficial Interest in Subordinated Debt - The fair
      value is based on a present value estimate using rates currently offered
      for instruments of similar remaining maturity.

      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, 1998 and 1997.
      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.

17.   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, 1998, that the Company and the Bank meet all capital
      adequacy requirements to which it is subject.

      The most recent notification from the Commonwealth of Pennsylvania
      Department of Banking (as of December 31, 1998) categorized the Bank as
      adequately capitalized under the regulatory framework for prompt
      corrective action. Due to the growth of assets, the capital ratios at
      December 31, 1998 do not meet the requirement to be categorized as well
      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.


                                       44
<PAGE>

      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, 1998:
  Tier 1 capital (to risk-weighted
     assets)                              $10,694      10.72%    $ 4,405       4.00%   $ 6,607      6.00%
  Total capital (to risk-weighted
    assets)                                11,806       9.71       8,809       8.00     11,012     10.00
  Tier 1 capital (to average assets)       10,694       8.26       5,180       4.00      6,475      5.00

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
</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 were
      10.72%, 9.71%, and 8.26% at December 31, 1998, and 9.02%, 9.98% and 7.17%
      at December 31, 1997, respectively.


                                       45
<PAGE>

18.   PARENT COMPANY FINANCIAL INFORMATION

      The financial statements of Madison Bancshares Group, Ltd. (Parent Only)
      as of December 31, 1998 and 1997 and for each of the three years in the
      period ended December 31, 1998 are presented herein.

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                   -----------------------------
                                                                        1998             1997
<S>                                                                 <C>                <C>           
BALANCE SHEETS
ASSETS:
  Cash                                                               $    50,223      $     6,566
  Investment in subsidiary                                            14,168,134        8,731,152
  Other assets                                                           232,035              500
                                                                     -----------      -----------
TOTAL                                                                $14,450,392      $ 8,738,218
                                                                     ===========      ===========
                                                                                  
LIABILITIES:
  Accrued expenses and other liabilities                             $         0      $         0
  Guaranteed preferred beneficial interest in subordinated debt        5,000,000               --
                                                                     -----------      -----------
           Total liabilities                                           5,000,000                0
                                                                     -----------      -----------

SHAREHOLDERS' EQUITY:
  Common stock                                                         1,562,018        1,252,773
  Capital surplus                                                      7,563,433        7,612,835
  Accumulated earnings (deficit)                                         318,371         (127,991)
  Accumulated other comprehensive income                                   6,570              601
                                                                     -----------      -----------
           Total shareholders' equity                                  9,450,392        8,738,218
                                                                     -----------      -----------
TOTAL                                                                $14,450,392      $ 8,738,218
                                                                     ===========      ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                               -------------------------------------------------
                                                                     1998               1997             1996
<S>                                                            <C>                <C>              <C>          
STATEMENTS OF OPERATIONS
Interest income                                                 $    25,512       $       274       $       444
Operating expenses                                                 (335,163)          (87,613)         (235,224)
                                                                -----------       -----------       -----------
Loss before equity in undistributed income from subsidiary         (309,651)          (87,339)         (234,780)

Equity in undistributed income of subsidiary, Madison Bank          756,013           843,817           775,367
                                                                -----------       -----------       -----------
NET INCOME                                                      $   446,362       $   756,478       $   540,587
                                                                ===========       ===========       ===========

STATEMENTS OF CASH FLOWS

Operating Activities:
  Net income                                                    $   446,362       $   756,478       $   540,587
  Adjustments to reconcile net income to net
    cash used in operating activities:
  Equity in undistributed income of subsidiary                     (756,013)         (843,817)         (775,367)
  Decrease in accrued expenses and other liabilities                                  (11,494)          (15,506)
  Decrease (increase) in receivable from subsidiary              (4,675,000)           63,110            25,001
  Increase in other assets                                         (231,535)
                                                                -----------       -----------       -----------
           Net cash used in operating activities                 (5,216,186)          (35,723)         (225,285)
                                                                -----------       -----------       -----------

Financing Activities:
  Proceeds from issuance of debentures                            5,000,000
  Exercise of stock options                                           8,998                              19,183
  Exercise of stock warrants                                        250,845                              26,895
  Dividend from subsidiary                                                                              199,920

                                                                -----------                         -----------
           Net cash provided by financing activities              5,259,843                             245,998
                                                                -----------                         -----------
NET INCREASE (DECREASE) IN CASH                                      43,657           (35,723)           20,713

CASH, BEGINNING OF YEAR                                               6,566            42,289            21,576

                                                                -----------       -----------       -----------
CASH, END OF YEAR                                               $    50,223       $     6,566       $    42,289
                                                                ===========       ===========       ===========
</TABLE>


                                       46
<PAGE>

19.   QUARTERLY DATA (UNAUDITED)

      The unaudited quarterly results of operations for 1998 and 1997 were as
      follows:

<TABLE>
<CAPTION>
                                                                     Year Ended December 31, 1998
                                 ----------------------------------------------------------------------------------------
                                        March 31            June 30      September 30      December 31          Total
<S>                               <C>                <C>               <C>              <C>                <C>           
Interest income                      $ 2,633,727       $ 2,596,151        $ 2,864,574       $ 3,000,904       $11,095,356
Interest expense                       1,218,746         1,185,654          1,242,921         1,325,815         4,973,136
                                     -----------       -----------        -----------       -----------       -----------

Net interest income                    1,414,981         1,410,497          1,621,653         1,675,089         6,122,220
Provision for loan losses                120,000           110,000             90,000           120,000           440,000
                                     -----------       -----------        -----------       -----------       -----------

  Net                                  1,294,981         1,300,497          1,531,653         1,555,089         5,682,220

Other noninterest income                 231,404           213,589            380,098           665,582         1,490,673
Other noninterest expenses             1,266,111         1,500,397          1,675,283         1,957,585         6,399,376
                                     -----------       -----------        -----------       -----------       -----------

Net income before income taxes           260,274            13,689            236,468           263,086           773,517

Provision for income taxes                72,244            26,000             75,302           153,609           327,155
                                     -----------       -----------        -----------       -----------       -----------

Net income                           $   188,030       $   (12,311)       $   161,166       $   109,477       $   446,362
                                     ===========       ===========        ===========       ===========       ===========

Per share data - Diluted
  earnings per share                 $      0.14       $     (0.01)       $      0.11       $      0.07       $      0.27
                                     ===========       ===========        ===========       ===========       ===========
</TABLE>

<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                           $     0.13         $     0.13         $     0.18       $     0.13        $     0.47
                                      ==========         ==========         ==========       ==========        ==========
</TABLE>


Notes: 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 1999 annual meeting of
      Shareholders.

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 1999 annual meeting of the
      shareholders.

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 1999 annual meeting of the
      shareholders.

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 1999 annual meeting of the
      shareholders.


                                       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)

                                                                Page Number in
Exhibit                                                           Sequential
Number         Description                                     Numbering System

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

10(c) Amended and Restated Declaration of Trust of Madison Capital
      Trust I dated July 13, 1998.******                                  N/A

10(d) Indenture between Madison Bancshares Group, Ltd. and Christiana
      Bank and Trust Company, as Trustee, dated July 13, 1998.******      N/A

10(e) Capital Securities Guarantee between Madison Bancshares Group,
      Ltd. and Christiana Bank and Trust Company, as Trustee, dated
      July 13, 1998.******                                                N/A

10(f) Agreement, dated May 5, 1998, as Amended, to Conduct Mortgage 
      Banking Business

21    Subsidiaries of the Registrant

27    Financial Data Schedule

----------

*           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
            Definitive 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.
******      Incorporated by reference from Exhibit No. 10 to the Company's
            Quarterly Report on Form 10-QSB for the quarterly period ended
            September 30, 1998.



                                       49
<PAGE>

      (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.


                                       50
<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 30, 1999                    /s/Vito A. DeLisi
                                        ---------------------------------------
                                        Vito A. DeLisi, President
                                        and Director

      March 30, 1999                    /s/Peter DePaul
                                        ---------------------------------------
                                        Peter DePaul
                                        Chairman of the Board

      March 30, 1999                    /s/Philip E. Hughes, Jr.
                                        ---------------------------------------
                                        Philip E. Hughes, Jr.
                                        Director and Vice Chairman of the Board

      March 30, 1999                    /s/Frank R. Iacobucci
                                        ---------------------------------------
                                        Frank R. Iacobucci, Director

      March 30, 1999                    /s/Arnold M. Katz
                                        ---------------------------------------
                                        Arnold M. Katz, Director

      March 30, 1999                    /s/Lorraine C. King
                                        ---------------------------------------
                                        Lorraine C. King, Director


                                       51
<PAGE>

      March 30, 1999                    /s/Kathleen A. Kucer
                                        ---------------------------------------
                                        Kathleen A. Kucer, Director

      March 30, 1999                    /s/ Michael O'Donoghue
                                        ---------------------------------------
                                        Michael O'Donoghue, Director

      March 30, 1999                    /s/Salvatore Paone
                                        ---------------------------------------
                                        Salvatore Paone, Director

      March 30, 1999                    /s/Donald J. Reape
                                        ---------------------------------------
                                        Donald J. Reape, Director

      March 30, 1999                    /s/Blaine W. Scott
                                        ---------------------------------------
                                        Blaine W. Scott, Director


                                       52