<PAGE>
                       MARKET INFORMATION

The Company's common stock began trading under the symbol "HRBF"
on the NASDAQ National Market System on August 11, 1994.  At
March 31, 1998, there were 1,693,420 shares of the common stock
outstanding and approximately 426 holders of record of the
common stock.  During fiscal year ended March 31, 1998, two
dividends have been paid on the common stock at $0.10 per share
and two dividends at $0.12 per share.  On April 10, 1998 a
dividend of $0.13 per share was also paid.

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

GENERAL

          The earnings of Harbor Federal depend primarily on
its level of net interest income, which is the difference
between interest earned on Harbor Federal's interest-earning
assets, consisting primarily of mortgage loans, mortgage-backed
securities, interest-bearing deposits at other institutions,
investment securities and other investments, and the interest
paid on interest-bearing liabilities which have consisted
primarily of savings deposits.  Net interest income is a
function of Harbor Federal's interest rate spread, which is the
difference between the average yield on interest-earning assets
and the average rate paid on interest-bearing liabilities, as
well as the average balances of interest-earning assets and
interest-bearing liabilities.  Harbor Federal's earnings are
also affected by its level of noninterest income, including
primarily service fees and charges, and non-interest expense,
including primarily compensation and employee benefits,
occupancy and equipment expenses and SAIF deposit insurance
premiums.  Earnings of Harbor Federal also are affected
significantly by general economic and competitive conditions,
particularly changes in market interest rates, government
policies and actions of regulatory authorities, which events are
beyond the control of Harbor Federal.

          On February 16, 1996, Harbor Federal acquired three
Baltimore area branches from Sequoia National Bank.  These
branches contained deposits of $44.1 million for  which Harbor
Federal paid a premium of $3.2 million.  Harbor Federal received
$13.9 million in various types of loans and $27.0 million in
cash.  After adjusting this premium for real and tangible assets
acquired in the transaction, the premium balance of $3.0 million
is being amortized over an eight year period.

          In addition to historical information, this annual
report may contain forward-looking statements. Forward-looking
statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those
reflected in the forward-looking  statements.  Important factors
that might cause such a difference include, but are not limited
to, those discussed herein.  Readers are cautioned not to place
undue reliance on forward-looking statements, which reflect
management's analysis only as of the date they are made.  The
Company undertakes no obligation to publicly revise or update
forward-looking statements to reflect events or circumstances
that arise thereafter.  Readers should carefully review the
disclosures set forth in other documents the Company files from
time to time with the Securities and Exchange Commission,
including the Annual, Quarterly and Current Reports of Forms 10-
KSB, 10-QSB and 8-K filed in the past and to be filed in the
future.
<PAGE>
<PAGE>
FINANCIAL CONDITION

          Harbor Federal's total assets increased by $11.7
million or 5.3% from $219.5 million at March 31, 1997 to $231.1
million at March 31, 1998, primarily due to increases in
mortgage-backed securities of $7.0 million and investment
securities of $4.3 million.

          Net loans receivable increased $3.2 million or 2.2%
from $144.7 million at March 31, 1997 to $147.9 million at March
31, 1998.  This increase was due primarily to a normal level of
loan originations over repayments which was funded primarily by
an increase in borrowed funds.

          Harbor Federal's borrowings increased by $8.8
million or 53.1% from $16.5 million at March 31, 1997 to $25.3
million at March 31, 1998.  The borrowed funds were used to fund
loan originations.

RESULTS OF OPERATIONS

          Harbor Federal had net income totaling $1.7 million,
$901,000 and $1.0 million for fiscal years 1998, 1997 and 1996,
respectively.

          Interest Income.  Total interest income increased by
$1.0 million, or 6.7% from $15.4 million for the year ended
March 31, 1997 to $16.4 million for the year ended March 31,
1998.  The increase in interest income was principally
attributable to a $11.3 million, or 5.5% increase in the balance
of average interest-earning assets to $217.2 million for the
year ended March 31, 1998 from $205.8 million for the year ended
March 31, 1997, and an increase in the average on Harbor
Federal's average interest-earning assets to 7.55% for the year
ended March 31, 1998 from 7.47% for the year ended March 31,
1997.  The increase in interest-earning assets during the year
ended March 31, 1998 compared to the year ended March 31, 1997
reflects management's use of funds received from deposits and
borrowings.  The increase in average interest-earning assets was
largely the result of a $14.3 million increase in average loans
receivable, partially offset by a $2.0 million decrease in
average investment securities and a $1.0 million decrease in
average mortgage-backed securities.  The increase in average
yield was caused primarily by an increase in adjustable rates on
one-to-four family residential mortgage loans.

          Interest income on first mortgage and other loans
increased by $1.2 million, or 11.7%, to $11.6 million for the
year ended March 31, 1998 from $10.4 million for the year ended
March 31, 1997.  This increase was attributable to the increase
in average investment in first mortgage and other loans to
$148.0 million for the year ended March 31, 1998 from $133.7
million for the year ended March 31, 1997 and an increase in the
average yield on first mortgage and other loans to 7.9% for the
year ended March 31, 1998 from 7.8% for the year ended March 31,
1997.  The higher average yield on mortgage loans reflects
primarily increasing interest rates on adjustable rate mortgage
loans.  Interest income on mortgage-backed securities decreased
by $90,000, or 7.4% to $1.1 million for the year ended March 31,
1998 from $1.2 million for the year ended March 31, 1997.  The
decrease resulted primarily from a $1.0 million, or 6.2%,
decrease in average mortgage-backed securities to $15.8 million
for the year ended March 31, 1998 from $16.8 million for the
year ended March 31, 1997 and a decrease in average yield on
mortgage-backed securities to 7.1% for the year ended March 31,
1998 from 7.2% for the year ended March 31, 1997.  Interest
income on investment securities also decreased $116,000, or
3.4%, to $3.3 million for the year ended March 31, 1998 from
$3.4 million for the year ended March 31, 1997.  The decrease
resulted primarily from a $2.0 million, or 4.1%, decrease in
average investment securities to $46.9 million for the year

<PAGE>
ended March 31, 1998 from $48.9 million for the year March 31,
1997, partially offset by an increase in average yield on
investment securities to 7.1% for the year ended March 31, 1998
from 7.0% for the year ended March 31, 1997.  Interest income
from short-term investments and other interest-earning assets
increased $19,000, or 6.5% to $314,000 for the year ended March
31, 1998 from $295,000 for the year ended March 31, 1997 as a
result of an increase in average short-term investments and
other interest earning assets of $88,000, or 1.4%, to $6.5
million for the year ended March 31, 1998 from $6.4 million for
the year ended March 31, 1997 and an increase in average yield
on short-term investments and other interest-earning assets to
4.8% for the year ended March 31, 1998 from 4.6% for the year
ended March 31, 1997.

          Total interest income increased by $3.6 million, or
30.4%, from $11.8 million for the year ended March 31, 1996 to
$15.4 million for the year ended March 31, 1997.  The increase
in interest income was principally attributable to a $49.3
million, or 31.5% increase in the balance of average interest-
earning assets to $205.8 million for the year ended March 31,
1997 from $156.5 million for the year ended March 31, 1996,
partially offset by a decrease in the average yield on Harbor
Federal's average interest-earning assets to 7.47% for the year
ended March 31, 1997 from 7.53% for the year ended March 31,
1996.  The increase in interest-earning assets during the year
ended March 31, 1997 compared to the year ended March 31, 1996
reflects management's use of the funds received from deposits,
including the deposits acquired in February 1996, and
borrowings.  The increase in average interest-earning assets was
largely the result of a $29.8 million increase in average loans
and a $22.5 million increase in average investment securities,
partially offset by a  $1.3 million decrease in average
mortgage-backed securities and a $1.7 million decrease in
average short-term investment securities and other interest-
earning assets.  The decrease in average yield was caused
primarily by a decrease in fixed and adjustable rates on one-to
four-family residential mortgage loans.

          Interest income on first mortgage and other loans
increased by $2.2 million, or 26.2%, to $10.4 million for the
year ended March 31, 1997 from $8.2 million for the year ended
March 31, 1996.  This increase was attributable to the increase
in the average investment in first mortgage and other loans to
$133.7 million for the year ended March 31, 1997 from $103.9
million for the year ended March 31, 1996, partially offset by a
decrease in the average yield on first mortgage and other loans
to 7.8% for the year ended March 31, 1997 from 8.0% for the year
ended March 31, 1996.  The lower yield on mortgage loans
reflects primarily decreasing interest rates on adjustable rate
mortgage loans.  Interest income on mortgage-backed securities
decreased by $86,000, or 6.6% to $1.2 million for the year ended
March 31, 1997 from $1.3 million for the year ended March 31,
1996.  The decrease resulted primarily from a $1.3 million, or
7.3%, decrease in average mortgage-backed securities to $16.8
million for the year ended March 31, 1997 from $18.1 million for
the year ended March 31, 1996.  Interest income on investment
securities increased $1.5 million, or 80.8%, to $3.4 million for
the year ended March 31, 1997 from $1.9 million for the year
ended March 31, 1996.  The increase resulted from an increase in
average investment securities to $48.9 million for the year
ended March 31, 1997 from $26.4 million for the year ended March
31, 1996.  The increase in the average balance of investment
securities resulted primarily from the reinvestment of a portion
of the proceeds of the deposits acquired in February 1996. 
Interest income from short-term investments and other interest-
earning assets decreased $31,000, or 9.5%, to $294,000 for the
year ended March 31, 1997 from $325,000 for the year ended March
31, 1996 as a result of a decrease in average short-term
investments and other interest-earning assets of $1.6 million,


<PAGE>
or 20.4%, to $6.5 million for the year ended March 31, 1997 from
$8.1 million for the year ended March 31, 1996, partially offset
by an increase in average yield on short-term investments and
other interest-earning assets to 4.6% for the year ended March
31, 1997 from 4.0% for the year ended March 31, 1996.

          Interest Expense.  Total interest expense increased
$468,000, or 5.0% to $9.8 million for the year ended March 31,
1998 from $9.4 million for the year ended March 31,1997.  The
increase resulted from an $8.3 million, or 5.0% , increase in
average deposits to $172.8 million for the year ended March 31,
1998 from $164.5 million for the year ended March 31, 1997, and
$2.3 million or 14.8% increase in average borrowed funds to
$17.5 million for the year ended March 31, 1998 from $15.2
million for the year ended March 31, 1997.  These increases were
partially offset by a reduction in the average cost of funds to
5.17% for the year ended March 31, 1998 from 5.21% for the year
ended March 31, 1997.

          Total interest expense increased by $3.2 million, or
50.8%, to $9.4 million for the year ended March 31, 1997 from
$6.2 million for the year ended March 31, 1996.  The increase
was attributable to an increase in the average cost of deposits
to 5.2% for the year ended March 31, 1997 from 4.9% for the year
ended March 31, 1996, a $41.9 million, or 34.2%, increase in
average deposits to $164.5 million for the year ended March 31,
1997 from $122.6 million for the year ended March 31, 1996, and
a $10.7 million increase in average borrowed funds to $15.2
million for the year ended March 31, 1997 from $4.5 million for
the year ended March 31, 1996.  The borrowed funds were used to
fund loan originations.

          Net Interest Income.  Net interest income increased
by $564,000, or 9.4%, to $6.6 million for the year ended March
31, 1998 from $6.0 million for the year ended March 31, 1997. 
The principal reason for the increase in net interest income was
the increase in average outstanding loans and an increase in the
interest rate spread to 2.4% for the year ended March 31, 1998
from 2.3% for the year ended March 31, 1997.

          Net interest income increased by $428,000, or 7.7%
to $6.0 million for the year ended March 31, 1997 from $5.6
million for the same period in 1996.  The principal reason for
the increase in net interest income was the increase in average
outstanding loans, partially offset by a reduction in the
interest rate spread to 2.3% for the year ended March 31, 1997
from 2.6% for the year ended March 31, 1996.

          Provisions for Losses.  Harbor Federal maintains an
allowance for losses on loans based on management's review and
classification of the loan portfolio and analyses of borrowers'
ability to pay, past collection experience, risk characteristics
of individual loans or groups of similar loans and underlying
collateral, current and prospective economic conditions, status
of nonperforming loans and regulatory reviews conducted in the
regulatory examination process.  There was a $110,000 provision
for losses on loans for the year ended March 31, 1998 as
compared to $33,000 provision for the year ended March 31, 1997
and no provision for the year ended March 31, 1996.  Management
believes that the current level of loan loss allowances is
adequate to provide for losses, although there can be no
assurance that such losses will not exceed estimated amounts. 
See Notes 1 and 4 of the Notes to Consolidated Financial
Statements for additional information on the allowance for
losses on loans.

          Noninterest Income.  Noninterest income increased
$260,000, or 113.5%, to $489,000 for the year ended March 31,
1998 from $229,000 for the year ended March 31, 1997.  The
increase was due primarily to loan origination fees of $160,000


<PAGE>
earned by Bank Street Mortgage Company, a subsidiary of the Bank
formed in June 1997, and a sale of loans in December 1997 which
resulted in a gain of $96,000.

          Noninterest income increased $87,000 or 61.3% to
$229,000 for the year ended March 31, 1997 from $142,000 for the
year ended March 31, 1996.  The increase was due primarily to
fees of $45,000 earned from an ATM machine installed in Ocean
City, Maryland in May 1996.

          Noninterest Expense.  Noninterest expense decreased
by $594,000, or 12.6%, to $4.1 million for the year ended March
31, 1998 from $4.7 million for the year ended March 31, 1997. 
The decrease in noninterest expense was due to a reduction in
the SAIF premiums of $939,000, partially offset by increases in
compensation and benefits expense of $239,000, or 9.9%, to $2.7
million for the year ended March 31, 1998 from $2.4 million for
the year ended March 31, 1997 and other expenses of $127,000, or
18.7%, to $809,000 for the year ended March 31, 1998 from
$682,000 for the year ended March 31, 1997.

          The decrease in SAIF premiums occurred because
premiums for the year ended March 31, 1997 included a
nonrecurring assessment for recapitalization of the SAIF of
$806,000 and because deposit insurance rates were reduced.  The
increases in compensation and benefits expense and other
expenses were due to operations of Bank Street Mortgage Company
and general increases in costs.

          Noninterest expense increased by $656,000 to $4.7
million for the year ended March 31, 1997 from $4.1 million for
the year ended March 31, 1996.  The increase in noninterest
expense was due to a one-time assessment of $806,000 for deposit
insurance due to the federally mandated recapitalization of
Savings Association Insurance Fund as of September 30, 1996.

          There was also an increase in occupancy expense of
$115,000 to $439,000 for the year ended March 31, 1997 from
$324,000 for the year ended March 31, 1996.  This was primarily
due to rentals of two branches purchased from Sequoia National
Bank in February 1996 and rental of space for the ATM machine in
Ocean City, Maryland.  These increases were partially offset by
reductions in legal and accounting fees of $101,000 to $73,000
from $174,000, advertising of $74,000 to $162,000 from $236,000
and compensation and benefits expense of $85,000 to $2.4 million
from $2.5 million.

          Income Taxes.  The changes in the amounts of Harbor
Federal's income tax provision reflect the changes in income
before income taxes.  Income tax provisions for the years ended
March 31, 1998, 1997 and 1996 are generally reflective of the
amounts of Harbor Federal's pre-tax income and the effective
income tax rate then in effect.  See Notes 1 and 9 of the Notes
to Consolidated Financial Statements for additional information
on income taxes.

AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES

          The following tables set forth certain information
relating to Harbor Federal's average interest-earning assets and
interest-bearing liabilities and the average yield on assets and
the average cost of liabilities for the periods indicated.  Such
yields and costs are derived by dividing income or expense by
the average daily balance of assets or liabilities,
respectively, for the periods indicated.  During the periods
indicated, nonaccrual loans are included in the net loan
category.
<PAGE>
<PAGE>
          The table also presents information for the periods
indicated with respect to the difference between the weighted
average yield earned on interest-earning assets and the weighted
average rate paid on interest-bearing liabilities, or "interest
rate spread," which savings institutions have traditionally used
as an indicator of profitability.  Another indicator of an
institution's net interest income is its "net yield on interest-
earning assets," which is its net interest income divided by the
average balance of interest-earning assets.  Net interest income
is affected by the interest rate spread and by the relative
amounts of interest-earning assets and interest-bearing
liabilities.  When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread
will generate net interest income.


<PAGE>
<PAGE>
<TABLE>
<CAPTION>
                                                                   Year Ended March 31,  
                                ------------------------------------------------------------------------------------
                                            1998                         1997                       1996
                                ----------------------------  --------------------------- --------------------------
                                                     Average                      Average                    Average
                                Average               Yield/  Average              Yield/ Average             Yield/
                                Balance   Interest   Cost(1)  Balance   Interest  Cost(1)  Balance  Interest Cost(1)
                                -------   --------   -------  -------   --------  ------- --------  -------- -------
                                                               (Dollars in thousands)
<S>                             <C>       <C>        <C>      <C>       <C>       <C>     <C>       <C>       <C>
Interest-earning assets:
  Loans .  .  .  .  .  .  .  .  $147,967  $11,645    7.87%    $133,674   $10,426  7.80%   $103,861  $ 8,259   7.95%
  Investment securities.  .  .    46,893    3,321    7.08       48,895     3,437  7.03      26,426    1,901   7.19
  Mortgage-backed securities .    15,768    1,121    7.11       16,810     1,211  7.21      18,136    1,297   7.15
  Short-term investments and 
    other interest-earning 
    assets (2). .  .  .  . . .     6,545      314    4.79        6,456       295  4.56       8,115      326   4.01
                                --------  -------             --------   -------          --------  -------
    Total interest-earning 
      assets. . .  .  .  . . .   217,173   16,401    7.55      205,835    15,369  7.47     156,538   11,783   7.53
                                          -------                        -------                    -------
Non-interest-earning assets. .     4,598                         4,347                       4,387
                                --------                      --------                    --------
    Total assets. . .  .  .  .  $221,771                      $210,182                    $160,925
                                ========                      ========                    ========

Interest-bearing liabilities:
  Deposits  .  .  .  .  .  .  . $172,797    8,845    5.12     $164,531     8,468  5.15    $122,575    5,944   4.85
  Borrowed funds  .  .  .  .  .   17,463      994    5.69       15,210       904  5.94       4,554      269   5.90
                                --------  -------             --------   -------          --------  -------
    Total interest-bearing
      liabilities .  .  .  .  .  190,260    9,839    5.17      179,741     9,372  5.21     127,129    6,213   4.89
                                          -------                        -------                    -------

Non-interest bearing 
  liabilities  .  .  .  .  .  .    3,040                         2,489                       2,115
                                --------                      --------                    --------
    Total liabilities.  .  .  .  193,300                       182,230                     129,244
Stockholders' equity .  .  .  .   28,471                        27,952                      31,681
                                --------                      --------                    --------
    Total liabilities and 
      stockholders' equity. . . $221,771                      $210,182                    $160,925
                                ========                      ========                    ========
Net interest income  .  .  .  .           $ 6,562                        $ 5,997                    $ 5,570
                                          =======                        =======                    =======
Interest rate spread (3).  .  .                       2.38%                       2.26%                       2.64%
                                                      ====                        ====                        ====
Net yield on interest-earning
  assets (4).  .  .  .  .  .  .                       3.02%                       2.91%                       3.56%
                                                      ====                        ====                        ====
Ratio of average interest-
  earning assets to average 
  interest-bearing 
  liabilities  .  .  .  .  .                        114.15%                     114.52%                     123.13%
                                                    ======                      ======                      ======
<FN>
____________
(1)  Represents interest income or expense as a percentage of average interest-earning assets or average
     interest-bearing liabilities.
(2)  Includes interest-bearing deposits, certificates of deposit, short-term investments, secured demand
     loans to Bankers Affiliate, Inc. and Federal Home Loan Bank stock.
(3)  Interest rate spread represents the difference between the average yield on interest-earning assets
     and the average cost of interest-bearing liabilities.
(4)  Net yield on interest-earning assets represents net interest income as a percentage of average
    interest-earning assets.
</FN>
/TABLE
<PAGE>
<PAGE>
RATE/VOLUME ANALYSIS

      The table below sets forth certain information
regarding changes in interest income and interest expense of
Harbor Federal for the periods indicated.  For each category of
interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes
in volume (changes in volume multiplied by old rate), (ii)
changes in rates (change in rate multiplied by old volume) and
(iii) changes in rate-volume (changes in rate multiplied by
changes in volume).
<TABLE>
<CAPTION>
                                                               Year Ended March 31,
                                      -------------------------------------------------------------
                                          1998       vs.       1997       1997      vs.      1996
                                      -------------------------------  ----------------------------
                                              Increase (Decrease)           Increase (Decrease)
                                                   Due to                         Due to
                                      -------------------------------  ----------------------------
                                                        Rate/                        Rate/           
                                       Volume   Rate   Volume   Total  Volume  Rate  Volume   Total
                                      -------   ----  --------  -----  ------  ----  ------   -----
<S>                                   <C>       <C>    <C>      <C>    <C>     <C>    <C>     <C>
Interest income:
    Loans  .  .  .  .  .  .  .  .  .  $1,115    $ 94   $10     $1,219  $2,370  $(158) $ (45)  $2,167
    Investment securities .  .  .  .    (141)     24     1       (116)  1,617    (44)   (37)   1,536
    Mortgage-backed securities  .  .     (75)    (17)    2        (90)    (95)    10     (1)     (86)
    Short-term investments and
      other interest-earning
      assets (1) .  .  .  .  .  .  .       4      15     0         19     (67)    45     (9)     (31)
                                      ------    ----   ---     ------  ------  -----  -----   ------
        Total interest income.  .  .     903     116    13      1,032   3,825   (147)   (92)   3,586

Interest expense:
    Deposits  .  .  .  .  .  .  .  .     425     (49)    1        377   2,034    364    126    2,524
    Borrowed funds  .  .  .  .  .  .     134     (38)   (6)        90     628      2      5      635
                                      ------    ----   ---     ------  ------  -----  -----   ------
        Total interest expense  .  .     559     (87)   (5)       467   2,662    366    131    3,159
                                      ------    ----   ---     ------  ------  -----  -----   ------
Change in net interest income.  .  .  $  344    $203   $18     $  565  $1,163  $(513) $(223)  $  427
                                      ======    ====   ===     ======  ======  =====  =====   ======
<FN>
________
(1)  Includes interest on interest-bearing deposits, certificates of deposit,
     short-term investments, secured demand loan to Bankers Affiliate, Inc. and
     dividends on Federal Home Loan Bank stock.
</FN>
</TABLE>

ASSET/LIABILITY MANAGEMENT

      Interest Rate Sensitivity Gap.  The matching of
assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate
sensitive" and by monitoring an institution's interest rate
sensitivity "gap".  An asset or liability is interest rate
sensitive within a specific time period if it will mature or
reprice within that time period.  The interest rate sensitivity
gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time
period and the amount of interest-bearing liabilities maturing
or repricing within that time period.  A gap is considered
positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate liabilities.  A gap is
considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive
assets.  Management believes that, due to its substantial amount
of relatively long term assets and short term liabilities,
Harbor Federal generally has a negative gap.  During a period of
rising interest rates, a negative gap would tend to adversely
affect net interest income while a positive gap would tend to
positively affect net interest income.  Similarly, during a
period of falling interest rates, a negative gap would tend to
positively affect net interest income while a positive gap would
tend to adversely affect net interest income.  As a result,
management expects that during periods of rising rates the
Bank's net interest income could be adversely affected.

<PAGE>
      Harbor Federal's policy in recent years has been to
reduce its exposure to interest rate risk generally by
emphasizing fixed rate one-to four-family mortgage loans with
terms of 15 years or less, adjustable rate one-to four- family
mortgage loans and investing in mortgage-backed securities,
short and medium term U.S. government and agency securities, and
short term investments such as federal funds, interest-earning
deposits in other institutions, and securities purchased under
agreements to resell.  The advantage of the adjustable rate
loans is somewhat diminished by the fact that Harbor Federal in
recent years has offered these loans with an initial period of
five to seven years before the first interest adjustment.  By
maintaining a significant percentage of its assets in cash and
other liquid investments, Harbor Federal is able to reinvest a
higher percentage of its assets more quickly in response to
changes in market interest rates, thereby reducing its exposure
to interest rate volatility.  However, prevailing market
conditions, regulatory considerations and the need for a
balanced portfolio have necessitated that Harbor Federal
continue to offer fixed rate mortgage loans.  In addition to
emphasizing adjustable rate loans and high levels of liquidity,
Harbor Federal offers competitive rates on deposit accounts and
prices certificates of deposits to provide customers with
incentives to choose certificates of deposit with longer terms. 
Due to the current interest rate environment, however,
certificates of deposit with longer terms are not attractive to
customers.

      Net Portfolio Value.  The OTS has incorporated an
interest rate risk ("IRR") component into the risk-based
regulatory capital rules.  The IRR component is a dollar amount
that would be deducted from total capital for the purpose of
calculating an institution's risk-based capital requirement and
would be measured in terms of the sensitivity of its net
portfolio value ("NPV") to changes in interest rates.  NPV is
the difference between incoming and outgoing discounted cash
flows from assets, liabilities and off-balance sheet contracts. 
An institution's IRR is measured as the reduction in its NPV as
a result of a hypothetical 200 basis point change in market
interest rates.  A resulting change in NPV of more than 2% may
require the institution to deduct from its capital 50% of the
excess change times the estimated market value of its assets. 
Based on the most recent information provided to Harbor Federal
by the OTS, which is as of December 31, 1997, a 200 basis point
change in market interest rates would not be expected to reduce
the Bank's NPV by more than 2%.

LIQUIDITY AND CAPITAL RESOURCES

      Harbor Federal is required to maintain minimum
levels of liquid assets as defined by OTS regulations.  This
requirement, which varies from time to time depending upon
economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings.  The required
ratio currently is 4.0%.  Harbor Federal's liquidity ratio
averaged 7.3% during the month of March 1998.  Liquidity ratios
averaged 7.7% for the year ended March 31, 1998.  Harbor Federal
adjusts its liquidity levels in order to meet funding needs of
deposit outflows, payment of real estate taxes from mortgage
escrow accounts, repayment of borrowings and loan commitments. 
Harbor Federal also adjusts liquidity as appropriate to meet its
asset and liability management objectives.
<PAGE>
<PAGE>
      Harbor Federal's primary sources of funds are
deposits, amortization and prepayment of loans and mortgage-
backed securities, maturities of investment securities and other
investments, and earnings and funds provided from operations. 
While scheduled principal repayments on loans and mortgage-
backed securities are a relatively predictable source of funds,
deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions, and competition. 
Harbor Federal manages the pricing of its deposits to maintain a
desired deposit balance.  In addition, Harbor Federal invests in
short-term interest-earning assets, which provide liquidity to
meet lending requirements.  At March 31, 1998, $6.5 million, or
12.8%, of Harbor Federal's investment portfolio was scheduled to
mature in one year or less, $1.0 million, or 1.9%, was scheduled
to mature in one to five years, and $43.3 million was scheduled
to mature in over five years.  At March 31, 1998, certificates
of deposit which were scheduled to mature in one year or less
totaled $74.3 million.  Assets qualifying for liquidity
outstanding at March 31, 1998 amounted to $12.4 million.

      Harbor Federal had $933,000 in outstanding loan
commitments at March 31, 1998.  Harbor Federal expects to fund
its loan originations through principal and interest payments on
loans and mortgage-backed securities, proceeds from investment
and other securities as maturities occur and, to the extent
necessary, borrowed funds.  Management expects that funds
provided from these sources will be adequate to meet Harbor
Federal's needs.

IMPACT OF INFLATION AND CHANGING PRICES

      The consolidated financial statements and the
related notes thereto have been prepared in accordance with
generally accepted accounting principles, which require the
measurement of financial position and operating results in terms
of historical dollars without considering the change in the
relative purchasing power of money over time and due to
inflation.  The impact of inflation is reflected in the
increased cost of Harbor Federal's operations.  Unlike most
industrial companies, nearly all the assets and liabilities of
Harbor Federal are monetary.  As a result, interest rates have a
greater impact on Harbor Federal's performance than do the
effects of general levels of inflation.  Interest rates do not
necessarily move in the same direction or to the same extent as
the price of goods and services.

YEAR 2000 ACTION PLAN

      In 1997, the Company adopted a Year 2000 Action Plan
(the "Plan").  The Plan identifies the process by which the
Company will address Year 2000 related issues.  It also
establishes a committee, lead by senior management, assigned the
responsibility to complete Year 2000 preparations, with a
targeted completion date of December 31, 1998.  The Plan
includes several phases as follows;  awareness; assessment;
renovation; validation; and implementation.

      The Company relies upon its third party service bureau to
provide its data processing services.  The Company has reviewed
the Year 2000 plan established by its data processing service
bureau and regularly evaluates the progress being made. In
addition, the Company is working with other vendors in pursuit
of timely completion of the Year 2000 project.

      Cost associated with the Year 2000 project will primarily
include costs incurred to upgrade existing software and hardware
not currently Year 2000 compliant.  The Company estimates that
these costs will be incurred in the normal course of business as
software and hardware is ordinarily upgraded to keep pace with
technological advances.  Management currently expects that these
costs could range to $35,000 over a period of eighteen months. 

<PAGE>
NEW ACCOUNTING STANDARDS

      In June 1997, The Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive Income
("SFAS No. 130").  SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components
in a full set of general purpose financial statements.  It
requires all items that are required to be recognized under
accounting standards as components of comprehensive income be
reported in a financial statement that is displayed in equal
prominence with other financial statements.  It requires that an
enterprise display an amount representing total comprehensive
income for each period.  It does not require per share amounts
of comprehensive income to be disclosed.  SFAS No. 130 is
effective for both interim and annual periods beginning after
December 15, 1997.

MARKET PRICE OF COMMON STOCK AND DIVIDEND INFORMATION
-----------------------------------------------------

      The Company's common stock is traded on the over-the-
counter market under the symbol "HRBF" and trading information
is reported by the National Association of Securities Dealers
Automated Quotation (NASDAQ) National Market System.  As of
March 31, 1998, there were 437 stockholders of record and
1,693,420 shares of common stock entitled to vote and receive
dividends of which 1,602,137 shares were considered outstanding
for financial reporting purposes due to nonvesting of certain
ESOP shares.  See Note 12 of Notes to Consolidated Financial
Statements.  The number of stockholders of record does not
reflect the number of persons or entities who hold their stock
in nominee or "street" name.

      Two quarterly dividends of $.10 per share and two
quarterly dividends of $.12 per share were paid during the year
ended March 31, 1998 and four quarterly dividends of $.10 per
share were paid during the year ended March 31, 1997.  On
February 23, 1998, a dividend of $.13 per share was declared
payable April 10, 1998 to holders of record at the close of
business on April 1, 1998.  The high and low closing sale prices
for the Company's common stock as reported on the NASDAQ stock
market during each quarter of fiscal 1998 and 1997 were as
follows (these quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and might not represent
actual transactions):
<TABLE>   
<CAPTION>
                          First   Second    Third   Fourth
                          Quarter Quarter  Quarter  Quarter
                          ------- -------  -------  -------
<S>                       <C>     <C>      <C>      <C>
Market Price Range

Fiscal 1998:
    High                  $19.00  23.00    25.25    25.25
    Low                    15.38  18.25    19.50    21.50

Fiscal 1997:

    High                  $13.75  14.50    16.00    18.25
    Low                    12.50  12.38    14.25    15.38
</TABLE>
<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements

March 31, 1998, 1997 and 1996
________________________________________________________________


(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     
     CONSOLIDATION
     
     The consolidated financial statements include the accounts
     of Harbor Federal Bancorp, Inc. (the Company) and its
     wholly owned subsidiary Harbor Federal Savings Bank (the
     Bank).  All significant intercompany accounts and
     transactions have been eliminated in consolidation.
     
     BUSINESS
     
     The Bank provides a full range of banking services to
     individual and corporate customers through its subsidiaries
     and branch banks in Maryland.  The Bank is subject to
     competition from other financial institutions.  The Bank is
     subject to the regulations of certain federal agencies and
     undergoes periodic examinations by those agencies.
     
     BASIS OF PRESENTATION
     
     The financial statements have been prepared in conformity
     with generally accepted accounting principles.  In preparing
     the financial statements, management is required to make
     estimates and assumptions that affect the reported amounts
     of assets and liabilities and disclosure of contingent
     assets and liabilities as of the dates of the statements of
     financial condition and revenues and expenses for the
     periods.  Actual results could differ from those estimates.
     
     Material estimates that are particularly susceptible to
     significant change in the near-term relate to the
     determination of the allowance for loan losses and the
     valuation of real estate owned.  In connection with the
     determination of the allowance and the valuation of real
     estate, management prepares fair value analyses and obtains
     independent appraisals for significant properties, where
     appropriate.
     
     Management believes that the allowances for losses on loans
     and investments in real estate are adequate.  While
     management uses available information to recognize losses on
     loans and real estate owned, future additions to the
     allowances may be necessary based on changes in economic
     conditions, particularly in Baltimore and the state of
     Maryland.  In addition, various regulatory agencies, as an
     integral part of their examination processes, periodically
     review the Bank's allowances for losses on loans and
     investments in real estate.  Such agencies may require the
     Bank to recognize additions to the allowances based on their
     judgments about information available to them at the time of
     their examinations.
                                                     (Continued)

                               22<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(1)  CONTINUED
     
     CASH AND CASH EQUIVALENTS
     
     Cash equivalents includes Federal funds sold and are carried
     at cost which approximates fair value.  Generally, Federal
     funds are purchased and sold for one-day periods.
     
     INVESTMENT AND MORTGAGE-BACKED SECURITIES
     
     Statement of Financial Accounting Standards (SFAS) No. 115,
     Accounting for Certain Investments in Debt and Equity
     Securities, requires classification of investments into
     three categories.  Debt securities that the Company has the
     positive intent and ability to hold to maturity are
     classified as held to maturity and recorded at amortized
     cost.  Debt securities not classified as held to maturity
     and equity securities with readily determinable fair values
     are classified as trading securities if bought and held
     principally for the purpose of selling them in the near
     term.  Trading securities are reported at fair value, with
     unrealized gains and losses included in income.  Investments
     not classified as held to maturity or trading are considered
     available for sale and are reported at fair value, with
     unrealized holding gains and losses excluded from income and
     reported as a separate component of stockholders' equity
     (net of tax effects).  Fair value is determined based on
     published bid prices or bid quotations received from
     securities dealers.  Realized gains and losses on sales are
     determined using the specific identification method.
     
     DISCOUNTS AND PREMIUMS ON LOANS AND MORTGAGE-BACKED
     SECURITIES
     
     Discounts and premiums on loans and mortgage-backed
     securities are deferred and amortized to income using the
     level-yield method over the contractual term of the loan or
     security.
     
     UNEARNED INTEREST ON FINANCING LEASES
     
     Leases included in loans receivable are accounted for as
     direct financing leases.  The excess of rentals to be
     received over the cost of the investment in the lease is
     deferred and amortized to income using the level-yield
     method over the lease term.
     
     LOANS HELD FOR SALE
     
     Loans held for sale consisted primarily of mortgage loans at
     March 31, 1998 and 1997.  Loans held for sale are carried at
     the lower of cost or market as determined by outstanding
     commitments from investors or current investor yield
     requirements calculated on an aggregate basis.
                                                     (Continued)

                               23<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(1)  CONTINUED
     
     INVESTMENTS IN REAL ESTATE
     
     Real estate acquired through foreclosure is initially
     recorded at the lower of cost or fair value and subsequently
     at the lower of cost or fair value less estimated costs to
     sell.  Costs relating to holding real estate are charged
     against income, while costs relating to improving real
     estate are capitalized until a salable condition is reached.
     
     PROPERTY AND EQUIPMENT
     
     Property and equipment are carried at cost less accumulated
     depreciation and amortization.  Depreciation and
     amortization are accumulated using the straight-line and
     accelerated methods over the estimated useful lives of the
     related assets.  Additions and betterments are capitalized,
     and costs of repairs and maintenance are expensed when
     incurred.  The related cost and accumulated depreciation or
     amortization are eliminated from the accounts when an asset
     is sold or retired and the resultant gain or loss is
     credited or charged to income.
     
     LOAN FEES
     
     Loan origination and commitment fees are deferred and
     amortized to income over the contractual lives of the
     related loans using the level-yield method.  Under certain
     circumstances, commitment fees are recognized as income over
     the commitment period or upon expiration of the commitment. 
     Direct loan origination costs are deferred and recognized as
     a reduction of the loan yield over the contractual lives of
     the related loans using the level-yield method.  Deferred
     fees and costs are combined where applicable and the net
     amount is amortized.
     
     LOANS RECEIVABLE
     
     Loans are stated at the amount of unpaid principal reduced
     by unearned income and the allowance for credit losses. 
     Interest on loans is not accrued when, in the opinion of
     management, full collection of principal or interest is in
     doubt, or payment of principal or interest has become 90
     days past due.  Interest accrued prior to a loan becoming 90
     days past due is retained in income.  Such interest is
     considered in management's determination of the allowance
     for loan losses.  Any interest received in excess of the
     amount previously accrued on such loans is recorded in
     income in the period of recovery.
     
     The provision for losses on loans is determined based on
     management's review of the loan portfolio and analyses of
     borrowers' ability to pay, past collection experience, risk
     characteristics of individual loans or groups of similar
     loans and underlying collateral, current and prospective
     economic conditions and the status of nonperforming loans. 
     Loans or portions thereof are charged off when considered,
     in the opinion of management, uncollectible.
     
                                                     (Continued)

                               24<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(1)  CONTINUED
     
     A loan is considered impaired when, based on current
     information and events, it is probable that a creditor will
     be unable to collect all amounts due according to the
     contractual terms of the loan agreement.  In accordance with
     SFAS No. 114 Accounting by Creditors for Impairment of a
     Loan(SFAS No. 114), impairment of a loan is measured based
     on the present value of expected future cash flows
     discounted at the loan's effective interest rate, or at the
     loan's observable market price or the fair value of the
     collateral if the loan is collateral dependent.  If the
     measure of the impaired loan is less than the recorded
     investment in the loan, an impairment is recognized through
     a valuation allowance. SFAS No. 114 does not apply to large
     groups of smaller balance homogenous loans, including
     residential mortgage loans and consumer installment loans,
     that are collectively evaluated for impairment.
     
     PREMIUM ON SAVINGS ACCOUNTS
     
     Effective February 16, 1996, the Bank purchased certain
     assets and liabilities, principally loans and deposits,
     relating to three branch offices pursuant to a Purchase and
     Assumption Agreement.  The acquisition was accounted for
     using the purchase method and the excess of the purchase
     cost over the fair values of the acquired assets of
     $3,044,642 was recorded as a premium on savings accounts
     which is being amortized using the straight-line method over
     an estimated life of eight years.
     
     INCOME TAXES
     
     Deferred income taxes are accounted for using the asset and
     liability method.  Under this method, deferred income taxes
     are recognized, with certain exceptions, for temporary
     differences between the financial reporting basis and income
     tax basis of assets and liabilities based on enacted tax
     rates expected to be in effect when such amounts are
     realized or settled.  Deferred tax assets are recognized
     only to the extent that it is more likely than not that such
     amounts will be realized based on consideration of available
     evidence, including tax planning strategies and other
     factors.  The effects of changes in tax laws or rates on
     deferred tax assets and liabilities are recognized in the
     period that includes the enactment date.
     
     Qualified thrift lenders, such as the Bank, are not required
     to provide a deferred tax liability for bad debt reserves
     for tax purposes that arose in fiscal years beginning before
     December 31, 1987.  Such bad debt reserve for the Bank
     amounted to approximately $4,600,000 with an income tax
     effect of approximately $1,750,000 at March 31, 1998 and
     1997.  As specified in legislation enacted in August 1996,
     this bad debt reserve would become taxable in the future if
     certain conditions are not met by the Bank.

                                                     (Continued)

                               25<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(1)  CONTINUED
     
     STOCK-BASED BENEFIT PLANS
     
     The Company uses the intrinsic value method to account for
     stock-based employee compensation plans.  Under this method,
     compensation cost is recognized for awards of shares of
     common stock to employees only if the quoted market price of
     the stock at the grant date (or other measurement date, if
     later) is greater than the amount the employee must pay to
     acquire the stock.  Compensation cost is recorded on a pro-
     rata basis as the employees perform the services required to
     acquire the stock.
     
     The Company has established an Employee Stock Ownership Plan
     (ESOP) for its employees.  The Company recognizes the costs
     associated with the ESOP in accordance with provisions of
     AICPA Statement of Position 93-6, Employers' Accounting for
     Employee Stock Ownership Plans.  Accordingly, compensation
     expense is recorded based on the market value of shares
     committed-to-be-released to the ESOP for allocation to
     participants for services rendered.
     
     NET INCOME PER SHARE OF COMMON STOCK
     
     The Company adopted Statement of Financial Accounting
     Standards No. 128 Earnings per Share (SFAS No. 128) in 1998. 
     SFAS No. 128 establishes revised standards for computing and
     presenting earnings per share (EPS) data.  It requires dual
     presentation of "basic" and "diluted" EPS on the face of the
     statements of income and reconciliation of the numerators
     and denominators used in the basic and diluted EPS
     calculations.  As required by SFAS No. 128, EPS data for
     prior periods presented have been restated to conform to the
     new standard.
     
     Basic EPS is calculated by dividing net income by the
     weighted average number of common shares outstanding for the
     applicable period.  Diluted EPS is calculated after
     adjusting the numerator and the denominator of the basic EPS
     calculation for the effect of all dilutive potential common
     shares outstanding during the period.  The dilutive effects
     of options and 

                                                     (Continued)

                               26<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(1)  CONTINUED
     
     unvested restricted stock awards are computed during the
     "treasury stock" method.  Unearned ESOP shares are not
     included in outstanding shares.  Information related to the
     calculation of net income per share of common stock is
     summarized as follows for the years ended March 31:
<TABLE>
<CAPTION>     
                                     1998                   1997                  1996
                              --------------------     -----------------    -------------------- 
                              Basic       Diluted      Basic    Diluted     Basic      Diluted 
------------------------------------------------------------------------------------------------
<S>                           <C>        <C>          <C>       <C>        <C>        <C>
Net income                    $1,668,807 1,668,807    901,480    901,480   1,004,212  1,004,212
Dividends on unvested
  common stock awards            (14,098)  (11,441)   (18,138)   (16,213)    (17,441)   (15,868)
------------------------------------------------------------------------------------------------
Adjusted net income
  used in EPS
  calculations                $1,654,709 1,657,366    883,342    885,267     986,771    988,344
================================================================================================
Weighted average
  shares outstanding           1,574,314 1,574,314  1,596,392  1,596,392   1,825,883  1,825,883

Dilutive securities:
  Options                             --    51,527         --     24,095          --     15,419
  Unvested common
    stock awards                      --     5,653         --      4,811          --      6,289
------------------------------------------------------------------------------------------------
Adjusted weighted-average
  shares used in EPS
  computation                  1,574,314 1,631,494  1,596,392  1,625,298   1,825,883  1,847,591
================================================================================================
</TABLE>

                                                     (Continued)

                               27<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(2)  INVESTMENT SECURITIES
     
     Investment securities and accrued interest receivable
     thereon are summarized as follows at March 31:
<TABLE>
<CAPTION>
                                                               1998
                                   ----------------------------------------------------------------
                                                 Gross         Gross           
                                   Amortized    unrealized    unrealized     Fair     Carrying
                                     cost         gains         losses       value     amount
---------------------------------------------------------------------------------------------------
<S>                               <C>             <C>        <C>           <C>        <C>
Held to maturity:
  U.S. Government and 
    agency obligations           $14,987,212     4,387          (51,319)   14,940,280   14,987,212
--------------------------------------------------------------------------------------------------
Available for sale:
  U.S. Government and
    agency obligations            35,994,884    41,594         (202,398)   35,834,080   35,834,080
  Preferred stock -
    Federal Home Loan
    Mortgage Corporation              6,339    363,674               --       370,013      370,013
---------------------------------------------------------------------------------------------------
                                 36,001,223    405,268         (202,398)   36,204,093   36,204,093
Accrued interest receivable         635,237         --               --       635,237      635,237
---------------------------------------------------------------------------------------------------
                                $51,623,672    409,655         (253,717)   51,779,610   51,826,542
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
                                                               1997
                                   ----------------------------------------------------------------
                                                 Gross         Gross           
                                   Amortized    unrealized    unrealized     Fair     Carrying
                                     cost         gains         losses       value     amount
---------------------------------------------------------------------------------------------------
<S>                               <C>             <C>        <C>           <C>        <C>
Held to maturity:
  U.S. Government and 
    agency obligations           $24,476,611  $  6,140     $   (580,981)  $23,901,770  $24,476,611
---------------------------------------------------------------------------------------------------
Available for sale:
  U.S. Government and
    agency obligations            22,977,853        --         (671,253)   22,306,600   22,306,600
  Preferred stock -
    Federal Home Loan
    Mortgage Corporation              6,339    206,211               --       212,550      212,550
---------------------------------------------------------------------------------------------------
                                 22,984,192    206,211         (671,253)   22,519,150   22,519,150
Accrued interest receivable         547,657         --               --       547,657      547,657
---------------------------------------------------------------------------------------------------
                                $48,008,460   $212,351       (1,252,234)   46,968,577   47,543,418
===================================================================================================
</TABLE>

     
                                                     (Continued)

                               28<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(2)  CONTINUED
     
     Investment securities mature as follows at March 31:

<TABLE>
<CAPTION>
                                                 1998                         1997
                                        ------------------------    --------------------------
                                        Amortized         Fair      Amortized         Fair
                                           cost           value       cost           value
---------------------------------------------------------------------------------------------
<S>                                     <C>             <C>          <C>           <C>
Held to maturity:
  Due in one year or less              $ 6,499,429      6,490,245     2,000,140    2,001,880
  Due after one through 
    five years                                  --             --     8,494,899    8,403,015
  Due after five through 
    ten years                            8,487,783      8,450,035    12,981,572   12,497,655
  Due after ten years                           --             --     1,000,000      999,220
--------------------------------------------------------------------------------------------
                                        14,987,212     14,940,280    24,476,611   23,901,770
-------------------------------------------------------------------------------------------------------------
Available for sale:                                               
  Due after one through 
    five years                           1,000,000        992,510     1,000,000      966,410
  Due after five through 
    ten years                            8,996,986      9,012,100    17,984,611   17,519,280
  Due after ten years                   25,997,898     25,829,470     3,993,242    3,820,910
--------------------------------------------------------------------------------------------
                                        35,994,884     35,834,080    22,977,853   22,306,600
Accrued interest receivable                635,237        635,237       547,657      547,657
--------------------------------------------------------------------------------------------
                                       $51,617,333     51,409,597    48,002,121   46,756,027
============================================================================================
</TABLE>
     
There were no sales of investment securities during the years
ended March 31, 1998, 1997 and 1996.
     
                                                     (Continued)

                               29<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(3)  MORTGAGE-BACKED SECURITIES
     
     Mortgage-backed securities and accrued interest
     receivable thereon are summarized as follows at
     March 31:
<TABLE>
<CAPTION>
                                                               1998
                                   -----------------------------------------------------------------
                                                 Gross         Gross           
                                   Amortized    unrealized    unrealized     Fair     Carrying
                                     cost         gains         losses       value     amount
----------------------------------------------------------------------------------------------------
<S>                               <C>             <C>        <C>           <C>        <C>
Held to maturity:
  Government National
    Mortgage Association
    (GNMA)                        $1,042,252       70,645        --        1,112,897   1,042,252
  Federal National
    Mortgage Association
    (FNMA)                         1,747,152       56,724    (2,980)       1,800,896   1,747,152
  Federal Home Loan
    Mortgage Corporation
    (FHLMC)                        1,286,191       41,576    (1,123)       1,326,644   1,286,191
---------------------------------------------------------------------------------------------------
                                   4,075,595      168,945    (4,103)       4,240,437   4,075,595
Available for sale:
  GNMA                            14,127,943      139,307        --       14,267,250  14,267,250
  FHLMC                            2,663,085          448        --        2,663,533   2,663,533
---------------------------------------------------------------------------------------------------
                                  16,791,028      139,755        --       16,930,783  16,930,783
Accrued interest receivable          153,576           --        --          153,576     153,576
---------------------------------------------------------------------------------------------------
                                 $21,020,199      308,700    (4,103)      21,324,796  21,159,954
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
                                                               1998
                                   ---------------------------------------------------------------
                                                 Gross         Gross           
                                   Amortized    unrealized    unrealized     Fair     Carrying
                                     cost         gains         losses       value     amount
--------------------------------------------------------------------------------------------------
<S>                               <C>             <C>        <C>           <C>        <C>
Held to maturity:
  GNMA                            $ 1,319,880      66,667            --     1,386,547   1,319,880
  FNMA                              2,243,013      58,086       (31,432)    2,269,667   2,243,013
  FHLMC                             2,392,199      45,693       (48,801)    2,389,091   2,392,199
--------------------------------------------------------------------------------------------------
                                    5,955,092     170,446       (80,233)    6,045,305   5,955,092
Available for sale:
  GNMA                              4,814,984          --       (87,215)    4,727,769   4,727,769
  FHLMC                             3,347,231      13,966            --     3,361,197   3,361,181
--------------------------------------------------------------------------------------------------
                                    8,162,215      13,966       (87,215)    8,088,966   8,088,950
Accrued interest receivable           117,197          --            --       117,197     117,197
--------------------------------------------------------------------------------------------------
                                  $14,234,504     184,412      (167,448)   14,251,468  14,161,239
==================================================================================================
</TABLE>
                                                     (Continued)

                               30<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(3)  CONTINUED
     
     Contractual maturities of mortgage-backed
     securities are as follows at March 31:

<TABLE>
<CAPTION>
                                                 1998                         1997
                                        ------------------------    --------------------------
                                        Amortized         Fair      Amortized       Fair
                                           cost           value       cost          value
---------------------------------------------------------------------------------------------
<S>                                     <C>             <C>          <C>           <C>
Held to maturity:
   Due in one year or less              $   465,345        464,222      695,097       692,776
   Due after one through five years       1,010,984      1,012,661    1,832,768     1,753,954
   Due after five through ten years         143,118        150,467       58,590        60,201
   Due after ten years                    2,456,148      2,613,087    3,368,637     3,538,374
---------------------------------------------------------------------------------------------
                                          4,075,595      4,240,437    5,955,092     6,045,305

Available for sale:
   Due after ten years                   16,791,028     16,930,783    8,162,215     8,088,950

Accrued interest receivable                 153,576        153,576      117,197       117,197
---------------------------------------------------------------------------------------------
                                        $21,020,199     21,324,796   14,234,504    14,251,452
=============================================================================================
</TABLE>
     
Contractual maturities do not consider possible prepayments.

During the year ended March 31, 1997, mortgage-backed securities
with an amortized cost of $3,538,099 were sold at a loss of
$7,787.  There were no sales of mortgage-backed securities
during the years ended March 31, 1998 and 1996.

                                                     (Continued)

                               31<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(4)  LOANS RECEIVABLE
     
     Loans receivable and accrued interest receivable thereon
     are summarized as follows at March 31: 
<TABLE>
<CAPTION>
                                                     1998           1997
------------------------------------------------------------------------------
<S>                                               <C>           <C>
First mortgage loans on real estate:
   One to four-family residential                 $118,814,885   119,924,528
   Multifamily residential                             929,111       955,952
   Commercial                                       16,392,236    12,182,568
   Construction                                      8,296,150     6,632,972
   Land                                              2,934,061     1,473,445
   Loans held for sale                               2,755,614     3,865,888
------------------------------------------------------------------------------
Total first mortgage loans                         150,122,057   145,035,353
   Loans secured by savings accounts                   621,080       650,540
   Home equity loans                                   455,744       400,088
   Home improvement loans                              224,493       112,163
   Financing leases                                    850,046       277,112
   Commercial loans                                    811,022     1,118,630
   Accrued interest receivable                         758,781       760,571
------------------------------------------------------------------------------
                                                   153,843,223   148,354,457
------------------------------------------------------------------------------
Less:                                             
   Undisbursed portion of loans in process           4,438,239     2,306,965
   Unearned discount on loans purchased                 38,638        46,130
   Unearned loan fees                                  975,327       919,616
   Allowance for losses                                490,000       380,000
------------------------------------------------------------------------------
                                                     5,942,204     3,652,711
------------------------------------------------------------------------------
Loans receivable, net                             $147,901,019   144,701,746
==============================================================================
</TABLE>

     Substantially all of the loans receivable are mortgage
     loans secured by residential and commercial real estate
     properties located in the state of Maryland.  Loans are
     extended only after evaluation by management of customers'
     creditworthiness and other relevant factors on a case-by-
     case basis.  The Bank generally does not lend more than 90%
     of the appraised value of a property and requires private
     mortgage insurance on residential mortgages with
     loan-to-value ratios in excess of 80%.  In addition, the
     Bank generally obtains personal guarantees of repayment
     from borrowers and/or others for construction, commercial
     and multifamily residential loans and disburses the
     proceeds of construction and similar loans only as work
     progresses on the related projects.
                                                     (Continued)

                               32<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(4)  CONTINUED
     
     Residential lending is generally considered to involve less
     risk than other forms of lending, although payment
     experience on these loans is dependent to some extent on
     economic and market conditions in the Bank's lending area. 
     Commercial and construction loan repayments are generally
     dependent on the operations of the related properties or 
     the financial condition of the borrowers or guarantors. 
     Accordingly, repayment of such loans can be more
     susceptible to adverse conditions in the real estate market
     and the regional economy.
     
     Nonperforming loans amounted to approximately $975,000 and
     $289,000 at March 31, 1998 and 1997, respectively.  For the
     years ended March 31, 1998, 1997 and 1996, the amount of
     interest income that would have been recorded on loans in
     nonaccrual status at year end had such loans performed in
     accordance with their terms, was approximately $79,000,
     $11,000 and $14,000, respectively.  The actual interest
     income recorded on these loans for the years ended March
     31, 1998, 1997 and 1996 was approximately $67,000, $5,000
     and $11,000, respectively.
     
     The Bank, through its normal asset review process, has
     identified certain loans which management believes involve
     a degree of risk warranting additional attention.  Such
     loans, totaling approximately $385,000 and $1,170,000 at
     March 31, 1998 and 1997, respectively, are not included
     above in nonperforming loans, but have exhibited potential
     or actual weaknesses, which, if not corrected, would cause
     management to have doubts as to the ability of the
     borrowers to comply with the present loan repayment terms
     and which could result in classification of such loans as
     nonperforming in the future.
     
     Changes in the allowance for losses were as follows for the
     years ended March 31: 

<TABLE>
<CAPTION>

                                      1998      1997     1996
-----------------------------------------------------------------
<S>                                 <C>      <C>       <C>
Beginning balance                   $380,000  438,500  465,000
Provision for losses on loans        110,000   32,605       --
Charge-offs                               --  (91,105) (26,500)
-----------------------------------------------------------------
Ending balance                      $490,000  380,000  438,500
=================================================================
</TABLE>
     
                                                     (Continued)

                               33<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________
     
(4)  CONTINUED
     
     The following table allocates the allowance for losses on
     loans by loan category at March 31 of the years indicated. 
     The allocation of the allowance to each category is not
     necessarily indicative of future losses and does not
     restrict the use of the allowance to absorb losses in any
     category.
<TABLE>
<CAPTION>

                                      1998      1997     1996
-----------------------------------------------------------------
<S>                                 <C>      <C>       <C>
Residential mortgage                $265,000  155,000  155,000
Commercial mortgage                  175,000  100,000  100,000
Construction                          50,000  125,000  125,000
Commercial and financing leases           --       --   58,500
-----------------------------------------------------------------
                                    $490,000  380,000  438,500
=================================================================
</TABLE>
     At March 31, 1998, 1997 and 1996, the Bank was servicing
     loans owned by others of approximately $13,718,000,
     $9,215,000 and $9,550,000, respectively.
     
     The Bank made loans to certain of its directors and a
     company in which an executive officer holds a 50% interest. 
     These loans, which were repaid in 1998, were made on
     substantially the same terms, including interest rate and
     collateral requirements, as those prevailing at the time for
     comparable transactions with unrelated customers.  The
     balance outstanding at March 31, 1997 on such loans was
     approximately $432,000. 
    
(5)  INVESTMENT IN AND ADVANCES TO AFFILIATED CORPORATION
     
     Bankers Affiliate, Inc. was organized in April 1983 as a
     service corporation.  It is owned by the Bank and two other
     thrift institutions and makes consumer loans to their
     customers.  Advances are due on demand and bear interest at
     a rate determined by the Bank and the two other thrift
     institutions.  The interest rate at March 31, 1998 was 7.5%. 
     The Bank accounts for its investment using the equity
     method.  As of March 31, 1998, all profits to date have been
     reinvested.  Each of the three investors share profits and
     losses equally at 33-1/3%.
     
     The investment in and advances to Bankers Affiliate, Inc.
     are as follows at March 31:
<TABLE>
<CAPTION>
                                       1998         1997
-----------------------------------------------------------------
<S>                                 <C>           <C>
Capital stock, at cost              $   25,000       25,000
Advances                             2,825,000    2,750,000
-----------------------------------------------------------------
                                    $2,850,000    2,775,000
=================================================================
</TABLE>
                                                     (Continued)

                               34<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(5)  CONTINUED
     
     Summarized financial information as of June 30, 1997 and
     1996 and for the years ended June 30, 1997, 1996 and 1995
     for Bankers Affiliate, Inc. is as follows:
<TABLE>
<CAPTION>
                                       1997         1996
-----------------------------------------------------------------
<S>                                 <C>            <C>
Cash                                $  191,991       233,189
Finance receivables, net             8,333,119     8,124,742
Other assets                            32,811        24,461
Real estate owned                      101,851       117,729
-----------------------------------------------------------------
                                    $8,659,772     8,500,121
=================================================================
Loans payable to Harbor Federal     $2,850,000     2,800,000
Other loans payable                  5,700,000     5,600,000
Other liabilities                       27,670        34,162
-----------------------------------------------------------------
                                     8,577,670     8,434,162
Stockholders' equity                    82,102        65,959
-----------------------------------------------------------------
                                    $8,659,772     8,500,121
=================================================================
</TABLE>
<TABLE>
<CAPTION>
                                      1997      1996     1995
-----------------------------------------------------------------
<S>                                 <C>      <C>       <C>
Income:
  Interest                          $830,949  897,767  852,817
  Other income                        37,865   33,866   28,920
-----------------------------------------------------------------
                                     868,814  931,633  881,737
-----------------------------------------------------------------
Expenses:
  Interest                           588,769  686,482  594,761
  Salaries                           128,006  120,997  119,428
  Provision for losses                67,788   40,392   73,694
  Other expenses                      75,744   78,013   78,890
-----------------------------------------------------------------
                                     860,307  925,884  866,773
-----------------------------------------------------------------
Income before income taxes (benefit)   8,507    5,749   14,964
Income taxes (benefit)                (7,636)   3,050   15,688
-----------------------------------------------------------------
Net income (loss)                   $ 16,143    2,699     (724)
=================================================================
</TABLE>
     
                                                     (Continued)

                               35<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(6)  PROPERTY AND EQUIPMENT
     
     Property and equipment are summarized as follows at March
     31:
<TABLE>
<CAPTION>
                                         1998         1997       Useful life 
------------------------------------------------------------------------------
<S>                                   <C>           <C>          <C>
Land                                  $  733,189      733,189            --
Buildings and improvements             1,356,498    1,356,498    15-30 years
Leasehold improvements                    33,000       33,000     5-10 years
Furniture, fixtures and equipment        847,131      829,189     5-10 years
Automobiles                               24,128       24,128        3 years
------------------------------------------------------------------------------
Total, at cost                         2,993,946    2,976,004
Less accumulated depreciation 
  and amortization                     1,173,037    1,037,305
--------------------------------------------------------------
Property and equipment, net           $1,820,909    1,938,699
==============================================================
</TABLE>
     
     At March 31, 1998, the Bank was obligated under
     noncancellable long-term operating leases for two of its
     branch offices.  These leases expire at dates to 2000 and
     provide for approximate aggregate rentals of $47,000 in
     1999 and $25,000 in 2000.
     
     Rent expense was $89,495, $103,618 and $6,248 for the years
     ended March 31, 1998, 1997 and 1996, respectively.
     
     
                                                     (Continued)

                               36<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________
          
(7)  SAVINGS ACCOUNTS
     
     Savings accounts are summarized as follows at March 31:

<TABLE>
<CAPTION>
                            Weighted average rate           1998                1997   
                            ---------------------   -------------------   --------------------
                             1998          1997     Amount         %       Amount        %
----------------------------------------------------------------------------------------------
<S>                          <C>           <C>      <C>           <C>     <C>          <C>
Certificates                 6.08%         5.99%    $114,623,651   65.4%  111,226,244   63.9%
Money market                 3.57%         3.65%      23,374,603   13.4%   24,799,745   14.2%
Passbook                     3.05%         3.05%      29,656,504   16.9%   31,254,100   18.0%
NOW                          1.00%         0.96%       5,704,768    3.3%    5,425,414    3.1%
Christmas Club               3.05%         3.05%         336,619    0.2%      333,075    0.2%
Commercial checking            --            --        1,463,259    0.8%    1,065,995    0.6%
----------------------------------------------------------------------------------------------
                                                     175,159,404  100.0%  174,104,573  100.0%
                                                                  =====                =====
Acquisition premium, net of 
  accumulated amortization 
  of $788,082 and $406,698, 
  respectively                                        (2,256,560)          (2,637,944)
                                                    ------------          -----------
                                                    $172,902,844          171,466,629
                                                    ============          ===========
Certificate accounts maturing:
  Under 12 months                                   $ 74,322,514   64.8%   52,551,230   47.2%
  12 months to 24 months                              23,687,061   20.7%   32,311,982   29.1%
  24 months to 36 months                              12,243,493   10.7%   17,203,594   15.5%
  36 months to 48 months                               3,059,413    2.7%    6,710,506    6.0%
  48 months to 60 months                               1,311,170    1.1%    2,448,932    2.2%
                                                    ------------  -----   -----------  -----
                                                    $114,623,651  100.0%  111,226,244  100.0%
                                                    ============  =====   ===========  =====
</TABLE>

     At March 31, 1998 and 1997, customer deposits in savings
     accounts of $100,000 or more were approximately $13,240,000
     and $12,540,000, respectively.
     
                                                     (Continued)

                               36<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(8)   BORROWED FUNDS
     
     Borrowed funds are summarized as follows at March 31:
<TABLE>
<CAPTION>
                                                  1998         1997
-------------------------------------------------------------------------
<S>                                              <C>            <C>

Securities sold under agreements to 
  repurchase with interest rates
  and maturities as follows:
      5.7% due June 1997                        $        --      4,500,000
      5.7% due October 1997                              --     10,000,000
      5.6% due November 1997                             --      2,000,000
      5.7% due April 1998                           966,250             --
      5.8% due April 1998                           990,000             --
      5.8% due May 1998                           3,880,000             --
      5.9% due December 1998                      7,500,000             --
      5.6% due March 1999                         1,930,000             --
Federal Home Loan Bank advances, 
  5.05%, due December 2007                       10,000,000             --   
---------------------------------------------------------------------------
                                                $25,266,250     16,500,000
===========================================================================
</TABLE>
     The Bank enters into sales of mortgage-backed
     securities and investment securities with
     agreements to repurchase.  Such agreements are
     treated as financings, and the obligations to
     repurchase securities sold are reported as
     liabilities in the consolidated statements of
     financial condition.  The securities underlying
     the agreements are book-entry securities.  The
     securities are delivered by appropriate entry into
     the counterparties' accounts maintained at the
     Federal Reserve Bank of New York.  The mortgage-
     backed securities remain in the asset accounts.
     
     Information with respect to reverse repurchase
     agreements is as follows for the years ended March
     31:
<TABLE>
<CAPTION>
                                                  1998        1997        1996 
---------------------------------------------------------------------------------
<S>                                            <C>          <C>         <C>
Amount outstanding at year-end                 $15,266,250  16,500,000  4,500,000
Maximum outstanding at any month-end            16,500,000  21,415,000  7,500,000
Average outstanding                             14,210,000  15,210,000  4,700,000
Fair value of securities sold under 
  reverse repurchase agreements at year-end:
     Mortgage-backed securities                  2,017,108   9,354,892  4,886,383
     Investment securities                      13,950,500   8,734,950         --
Amortized cost of securities sold under 
  reverse repurchase agreements at year-end:
     Mortgage-backed securities                  1,980,396   9,478,744  4,995,156
     Investment securities                      14,000,000   9,000,000         --
==================================================================================
</TABLE>
     
                                                     (Continued)

                               38<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(8)   CONTINUED
     
     Under a blanket floating lien security agreement
     with the Federal Home Loan Bank of Atlanta (FHLB),
     the Bank is required to maintain as collateral for
     its advances qualifying first mortgage loans in an
     amount equal to 100% of the advances.  First
     mortgage loans of $10,000,000 were pledged as
     collateral at March 31, 1998.  At the discretion
     of the FHLB, the interest rate can be converted to
     a variable rate subsequent to December 1998.
     
     
(9)  INCOME TAXES
     
     The income tax provision is composed of the
     following for the years ended March 31:
<TABLE>
<CAPTION>
                                   1998       1997      1996
----------------------------------------------------------------
<S>                             <C>          <C>       <C>
Current:
  Federal                       $1,005,289   549,850   510,822
  State                            222,550   121,724   113,085
----------------------------------------------------------------
                                 1,227,839   671,574   623,907
Deferred:
  Federal                          (71,948)  (85,457)   11,688
  State                            (15,928)  (18,917)    2,587
----------------------------------------------------------------
                                   (87,876) (104,374)   14,275
----------------------------------------------------------------
                                $1,139,963   567,200   638,182
================================================================ 
</TABLE>   
     The net deferred tax asset at March 31, 1998 and
     1997 consists of total deferred tax assets of
     $775,388 and $887,301, respectively, and total
     deferred tax liabilities of $592,522 and $448,267,
     respectively.  The tax effects of temporary
     differences between the financial reporting and
     income tax basis of assets and liabilities relate
     to the following at March 31:
<TABLE>
<CAPTION>
                                                        1998       1997 
----------------------------------------------------------------------------
<S>                                                    <C>          <C>
Interest and fees on loans                             $  46,480    51,457
Allowance for losses on loans                            189,238   146,949
Accrual basis of accounting and deferred compensation    401,868   408,271
Unamortized premium on savings deposits                  137,802    68,901
Federal Home Loan Bank stock dividends                  (207,351) (207,351)
Prepaid pension cost                                     (40,983)  (29,771)
Tax bad debt reserve in excess of base year             (211,867) (211,145)
Unrealized (gain) loss on investments available 
  for sale                                              (132,321)  211,723
----------------------------------------------------------------------------
                                                       $ 182,866   439,034
============================================================================
</TABLE>
     
                                                     (Continued)

                               39<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(9)  CONTINUED
     
     A reconciliation between the income tax provision
     computed by multiplying income before income taxes
     by the statutory Federal income tax rate of 34%
     and the actual provision for income taxes is as
     follows for the years ended March 31:
<TABLE>
<CAPTION>
                                   1998       1997      1996
----------------------------------------------------------------
<S>                             <C>          <C>       <C>
Tax at statutory rate           $  954,982   499,351   558,414
State income taxes, net of
  Federal income tax benefit       136,371    67,853    76,344
Other, net, primarily 
  nondeductible compensation
  costs in 1998                     48,610        (4)    3,424
----------------------------------------------------------------
Income tax provision            $1,139,963   567,200   638,182
================================================================
</TABLE>

(10)  REGULATORY MATTERS
     
     The Federal Deposit Insurance Corporation, through
     the Savings Association Insurance Fund (SAIF),
     insures deposits of accountholders up to $100,000. 
     The Bank pays an annual premium to provide for
     this insurance.  The Bank is also a member of the
     Federal Home Loan Bank System and is required to
     maintain an investment in the stock of the Federal
     Home Loan Bank of Atlanta equal to at least 1% of
     the unpaid principal balances of its residential
     mortgage loans, .3% of its total assets or 5% of
     its outstanding advances from the Bank, whichever
     is greater.  Purchases and sales of stock are made
     directly with the Federal Home Loan Bank of
     Atlanta at par value.
     
     During 1997, the Bank paid a special assessment of
     approximately $806,000 as a result of the
     federally-mandated recapitalization of the SAIF. 
     The assessment was required of substantially all
     SAIF-insured depository institutions and was
     charged to noninterest expense.
     
     The Bank is 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 Bank's financial
     statements.  Under capital adequacy guidelines and
     the regulatory framework for prompt corrective
     action, the Bank must meet specific capital
     guidelines that involve quantitative measures of
     the Bank's assets, liabilities, and certain off-
     balance-sheet items as calculated under regulatory
     accounting practices.  The Bank's capital amounts
     and classification are also subject to qualitative
     judgments by the regulators about components, risk
     weightings and other factors.
                                                     (Continued)
                               40<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(10)  CONTINUED
     
     Quantitative measures established by regulation to
     ensure capital adequacy require the Bank to
     maintain minimum capital amounts and ratios (as
     defined in the regulations and as set forth in the
     table below).  As of December 31, 1997, the most
     recent notification from the Office of Thrift
     Supervision (OTS) categorized the Bank as well
     capitalized under the regulatory framework for
     prompt corrective action.  There are no conditions
     or events since that notification that management
     believes have changed the Bank's category.
     
     Regulatory capital amounts and ratios for the Bank
     are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                   To be well
                                                                                capitalized under
                                                              For capital       prompt corrective
                                         Actual            adequacy purposes    action provisions
                                  ---------------------   -------------------   -----------------
                                   Amount        Ratio     Amount      Ratio     Amount     Ratio
-------------------------------------------------------------------------------------------------
<S>                                <C>           <C>      <C>          <C>      <C>        <C>
As of March 31, 1998:
  Tier I core capital (a)          $22,215        9.69%   $9,169       4%       $11,462    >5%
  Tier I risk-based capital (b)     22,215       21.59%    4,115       4%         6,173    >6%
  Total risk-based capital (b)      22,705       22.07%    8,231       8%        10,289    >10%

As of March 31, 1997:
  Tier I core capital (a)           24,479       11.24%    8,715       4%        13,072    >5%
  Tier I risk-based capital (b)     24,479       26.83%    3,650       4%         5,475    >6%
  Total risk-based capital (b)      24,859       27.17%    7,320       8%         9,150    >10%
=================================================================================================
<FN>
(a) percentage of capital to ending assets.                                                                   
(b) Percentage of risk-based capital to ending risk-weighted assets.
</FN>
</TABLE>
          
(11)  STOCKHOLDERS' EQUITY AND RELATED MATTERS
     
     In 1994, the Board of Directors approved a plan of
     reorganization from a mutual savings association
     to a capital stock savings bank and the concurrent
     formation of a holding company.  The conversion
     was accomplished through amendment of the Bank's
     charter and the sale (on August 11, 1994) of the
     Company's common stock in an amount equal to the
     consolidated pro forma market value of the Company
     and the Bank after giving effect to the
     conversion.
     
     Federal regulations require that, upon conversion
     from mutual to stock form of ownership, a
     "liquidation account" be established by restricting
     a portion of net worth for the benefit of eligible
     savings account holders who maintain their savings
     accounts with the Bank after conversion.  In the
     event of complete liquidation (and only in such
     event), each savings account holder who continues
     to maintain a savings account shall be entitled to
     receive a 
                                                     (Continued)
                               41<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(11)  CONTINUED
     
     distribution from the liquidation account after
     payment to all creditors, but before any
     liquidation distribution with respect to capital
     stock.  This account will be proportionately
     reduced for any subsequent reduction in the
     eligible holders' savings accounts.  At
     conversion, the liquidation account totaled
     approximately $14,500,000.
     
     OTS regulations impose limitations on all capital
     distributions by savings institutions.  Capital
     distributions include cash dividends, payments to
     repurchase or otherwise acquire the institution's
     capital stock, payments to shareholders of another
     institution in a cash-out merger and other
     distributions charged against capital.  The
     regulations establish three tiers of institutions. 

     An institution that exceeds all fully phased-in
     capital requirements before and after a proposed
     capital distribution (Tier 1 Institution) may,
     after prior notice but without the approval of the
     OTS, make capital distributions during a calendar
     year up to 100% of its net income to date during
     the calendar year plus the amount that would
     reduce by one-half its "surplus capital ratio"
     (the excess capital over its fully phased-in
     capital requirements) at the beginning of the
     calendar year or 75% of its net income over the
     most recent four-quarter period.  Any additional
     capital distributions require prior OTS approval.
     
     An institution that meets its regulatory capital
     requirements, but not its fully phased-in capital
     requirements before or after its capital
     distribution (Tier 2 Institution) may, after prior
     notice but without the approval of the OTS, make
     capital distributions of: up to 75% of its net
     income over the most recent four-quarter period if
     it satisfies the risk-based capital requirement
     that was applicable to it on January 1, 1993,
     computed based on its current portfolio; up to 50%
     of its net income over the most recent four-
     quarter period if it satisfies the risk-based
     capital standard that was applicable to it on
     January 1, 1991, computed based on its current
     portfolio; and up to 25% of its net income over
     the most recent four-quarter period if it
     satisfies its current risk-based capital
     requirement.  In computing the institution's
     permissible percentage of capital distributions,
     previous distributions made during the prior four-
     quarter period must be included.
     
     An institution that does not meet its current
     regulatory capital requirements before or after
     payment of a proposed capital distribution (Tier 3
     Institution) may not make any capital distributions
     without the prior approval of the OTS.
     
     In addition, the OTS would prohibit a proposed
     capital distribution by any institution which
     would otherwise be permitted by the regulation, if
     the OTS determines that such distribution would
     constitute an unsafe or unsound practice.  In
     addition, the Federal Deposit Insurance
     Corporation Improvement Act of 1991 provides that,
     as a general rule, a financial institution may not
     make a capital distribution if it would be
     undercapitalized after making the capital
     distribution.  Also, an institution meeting the
     Tier 1 capital criteria which has been notified
     that it needs more than normal supervision will be
     treated as a Tier 2 or Tier 3 Institution unless
     the OTS deems otherwise.
                                                     (Continued)
                               42<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(11)  CONTINUED
     
     In addition to the foregoing, bad debt reserves
     deducted from income for federal income tax
     purposes and included in retained income of the
     Bank are not available for the payment of cash
     dividends or other distributions to stockholders,
     without payment of taxes at the then-current tax
     rate by the Bank on the amount removed from the
     reserves for such distributions.
     
     On February 23, 1998 the Company's Board of
     Directors declared a $.13 per share dividend on
     common stock payable April 10, 1998, to holders of
     record on April 1, 1998.
     
(12)  STOCK-BASED BENEFIT PLANS
     
     EMPLOYEE STOCK OWNERSHIP PLAN
     
     On August 11, 1994, the ESOP acquired 174,407
     shares of the Company's common stock in exchange
     for a note in conjunction with the conversion to a
     capital stock form of organization.  The ESOP
     holds the common stock in a trust for allocation
     among participating employees.  Shares are
     allocated to participants annually based on
     principal payments made on the note.  The ESOP's
     sources of repayment of the note are dividends on
     the common stock, if any, and an annual
     contribution to the ESOP and earnings thereon.
     All employees who attain the age of 21 and
     complete six months of service are eligible to
     participate in the ESOP.  Participants are 100%
     vested in their accounts after seven years of
     service or, if earlier, upon death, disability or
     attainment of normal retirement age.  Participants
     received credit for service with the Bank prior to
     the establishment of the ESOP.
     
     For the years ended March 31, 1998, 1997 and 1996,
     compensation expense related to the ESOP was
     approximately $378,000, $284,000 and $259,000,
     respectively.  Dividends on ESOP shares used for
     debt service by the ESOP for the years ended
     March 31, 1998, 1997 and 1996 were approximately
     $50,000, $52,000 and $32,000, respectively.
     
     The ESOP shares were as follows at March 31:
<TABLE>
<CAPTION>
                                       1998         1997
----------------------------------------------------------------
<S>                                 <C>            <C>
Allocated shares                     83,124        60,723
Unearned shares                      91,283       113,684
----------------------------------------------------------------
                                    174,407       174,407
----------------------------------------------------------------
Fair value of unearned shares 
  at March 31                    $2,282,075     1,847,365
================================================================
</TABLE>
                                                     (Continued)
                               43<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(12)  CONTINUED
     
     MANAGEMENT RECOGNITION PLAN
     
     Effective January 13, 1995, the Company established a
     Management Recognition Plan (MRP) to retain personnel of
     experience and ability in key positions of responsibility. 
     Members of the Board of Directors and certain executive
     officers were awarded a total of 87,203 shares of stock
     which are held in a separate trust that manages the MRP. 
     The Company funded the MRP in 1996 by purchasing 87,203
     shares of its common stock in the open market.  Shares
     awarded to participants in the MRP vest at a rate of 20%
     per year on each anniversary of the effective date of the
     MRP.  If a participant terminates employment for reasons    
     other than death or disability, he or she forfeits all
     rights to unvested shares.  For the years ended March 31,
     1998, 1997 and 1996, compensation expense related to the
     MRP was $113,790, $150,650 and $383,520, respectively.
     
     DIRECTORS RETIREMENT PLAN
     
     On August 11, 1994, the Bank established a Directors
     Retirement Plan for certain directors.  Participants
     include the President of the Bank and other directors who
     were members of the Board of Directors at the date of
     conversion to a capital stock form of organization and were
     not employees at that date.  Participants become one-third
     vested per full year of service from the date of
     conversion.  The President's benefits are equal to 60% of
     his average salary for the final three years of service. 
     Nonemployee directors' benefits are equal to annual
     directors' fees times a benefit percentage.  Such benefit
     percentages are 33-1/3%, 66-2/3% and 100% for 6 to 14
     years, 15 to 24 years, and 25 years or more of service on
     the Board of Directors, respectively.  Participants
     receive on each of the ten anniversary dates following
     retirement, an amount equal to the vesting percentage times
     the benefit percentage times the annual fee received for
     service on the Board of Directors during the calendar year
     preceding retirement.  For the years ended March 31, 1998,
     1997 and 1996, compensation expense related to the
     Directors Retirement Plan was $97,034, $214,668 and
     $214,668, respectively.
 
     STOCK OPTION PLAN

     Effective January 13, 1995, Company established a stock
     option plan which provides for the granting of options to
     acquire common stock to directors greater than the 
     estimated fair market value of the common stock at the date
     of grant.  Employee options vest at 20% per year from the
     date of grant.  Director options may be exercised at any
     time after the date of grant.  Options expire ten years
     after the date of grant or one year after the date of an
     employee's termination.
     
                                                     (Continued)
                               44<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(12)  CONTINUED
     
     Information with respect to options is as follows
     for the years ended March 31:

<TABLE>
<CAPTION>
                                                       1998       1997      1996
                                                     (shares)   (shares)  (shares)
----------------------------------------------------------------------------------
<S>                                                   <C>        <C>      <C>
Outstanding at beginning of year - $10.625 per share  172,505   203,409   218,009
   Granted                                                 --        --        --
   Exercised                                           (9,970)   (6,429)  (12,020)
   Forfeited                                           (1,361)  (24,475)   (2,580)
----------------------------------------------------------------------------------
Outstanding at end of year - $10.625 per share        161,174   172,505   203,409
----------------------------------------------------------------------------------
Exercisable at end of year                            105,279    87,701    64,682
==================================================================================
</TABLE>

     In connection with the Stock Option Plan, the
     Company established a Stock Option Trust to
     purchase shares in the open market or unissued
     shares of stock.  The Company purchased 698 shares
     for $8,987 and 58,707 shares for $875,242 in 1997
     and 1996, respectively.  No shares were purchased
     in 1998.  The Company is authorized to purchase up
     to 49,600 shares for the Stock Option Trust in the
     open market at March 31, 1998.
     
     
(13) PENSION PLAN
     
     Substantially all employees are included in a
     defined contribution pension plan.  Benefits under
     the plan are funded partly by contributions to
     trust funds and partly by payments of premiums on
     life insurance policies.  For the years ended
     March 31, 1998, 1997 and 1996, pension expense was
     $112,459, $84,370 and $99,581, respectively.
     
     
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
     
     SFAS No. 107, Disclosures about Fair Value of
     Financial Instruments  requires disclosure of
     estimated fair values for certain on- and off-
     balance sheet financial instruments.  Fair value
     estimates and the methods and assumptions used to
     determine them are set forth below for financial
     instruments outstanding as of March 31, 1998 and
     1997.
                                                     (Continued)
                               45<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(14) CONTINUED
     
     The carrying amounts and estimated fair values of
     financial instruments are summarized as follows at
     March 31:
<TABLE>
<CAPTION>
                                         1998                        1997
                                  ---------------------   ------------------------
                                  Carrying       Fair       Carrying        Fair
                                  amount         value       amount        value
------------------------------------------------------------------------------------
<S>                               <C>           <C>         <C>          <C>

Assets:
  Cash and interest-bearing
    deposits                      $2,926,358    2,926,000   1,758,834    1,759,000
  Federal funds sold                 313,047      313,000   3,939,419    3,939,000
  Investment securities           51,826,542   51,780,000  47,543,418   46,969,000
  Mortgage-backed securities      21,159,954   21,325,000  14,161,239   14,251,000
  Loans receivable               147,901,019  146,354,000 144,701,746  144,975,000
                                                                 
Liabilities:
  Savings accounts               172,902,844  174,024,000 171,466,629  175,433,000
  Borrowed funds                  25,266,250   25,266,000  16,500,000   16,500,000
  Advances payments by borrowers
    for taxes, insurance and
    ground rents                   1,935,804    1,936,000   1,902,414    1,902,000
====================================================================================
</TABLE>
     CASH AND INTEREST-BEARING DEPOSITS
     
     The carrying amounts for cash on hand and due from
     banks and interest-bearing deposits approximate
     fair value due to the short maturity of these
     instruments.
     
     FEDERAL FUNDS SOLD
     
     The carrying amount for Federal funds sold
     approximates fair value due to the overnight
     maturity of these instruments.
     
     INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
     
     The fair values of investment securities and
     mortgage-backed securities are based on bid prices
     received from an external pricing service or bid
     quotations received from securities dealers. 

                                                     (Continued)
                               46<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________
          
(14) CONTINUED
     
     LOANS
     
     The fair value of residential loans is calculated
     by discounting anticipated cash flows determined
     based on weighted-average contractual maturity,
     weighted-average coupon and certain prepayment
     assumptions.  Prepayment speed estimates are
     derived from published historical prepayment
     experience in the mortgage pass-through market and
     recent issuance activity in the primary and
     secondary mortgage markets.  The discount rate
     used is calculated by adding to the Treasury yield
     for the corresponding weighted average maturity
     associated with each prepayment assumption a
     market spread as observed for mortgage-backed
     securities with similar characteristics.  The fair
     values of multifamily and nonresidential loans are
     calculated by discounting the contractual cash
     flows at the Bank's current nonresidential loan
     origination rate.  Construction, land and
     commercial loans, loans secured by savings
     accounts and mortgage lines of credit are
     considered to be at fair value due to their
     adjustable rate nature.  The fair value of second
     mortgage loans is calculated by discounting
     scheduled cash flows through the estimated
     maturity date using estimated market discount
     rates that reflect the credit and interest rate
     risk inherent in the portfolio.  The fair value of
     consumer loans is calculated by discounting the
     contractual cash flows at the Bank's current
     consumer loan origination rate.  The fair value of
     nonperforming loans is determined by reducing the
     carrying value of the loans by the Bank's
     historical loss percentage for each specific loan
     category.
     
     ACCRUED INTEREST RECEIVABLE
     
     The carrying amount of accrued interest receivable
     approximates its fair value.
     
     SAVINGS ACCOUNTS
     
     The fair value of deposits with no stated
     maturity, such as noninterest bearing deposits,
     interest bearing NOW accounts, money market and
     statement savings accounts, is equal to the
     carrying amounts.  The fair value of certificates
     of deposit is based on the discounted value of
     contractual cash flows.  The discount rates are
     based on the rates currently offered by the Bank
     for deposits of similar maturities.
     
     BORROWED FUNDS
     
     Securities sold under agreements to repurchase are
     considered to be at fair value.
     
     ACCRUED INTEREST PAYABLE
     
     The carrying amount of accrued interest payable
     approximates its fair value.
                                                     (Continued)
                               47<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
________________________________________________________________

(14) CONTINUED
     
     ADVANCE PAYMENTS BY BORROWERS FOR TAXES, INSURANCE
     AND GROUND RENTS
     
     The carrying amount of advance payments by
     borrowers for taxes, insurance and ground rents
     approximates its fair value.
     
     OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
     
     The Bank is a party to financial instruments with
     off-balance sheet risk in the normal course of
     business, including mortgage loan commitments and
     lines of credit on commercial business loans. 
     These instruments involve, to various degrees,
     elements of credit and interest rate risk in
     excess of the amount recognized in the
     consolidated statements of financial condition.
     
     The Bank's exposure to credit loss in the event of
     nonperformance by the other party to the financial
     instrument is represented by the contract amount
     of the financial instrument.
     
     The Bank uses the same credit policies in making
     commitments for off-balance-sheet financial
     instruments as it does for on-balance-sheet
     financial instruments.  The contract amounts of
     financial instruments with off-balance-sheet risk
     were approximately as follows at March 31:
<TABLE>
<CAPTION>
                                                            1998
                                                  ---------------------------
                                                  Fixed rate    Floating Rate
-----------------------------------------------------------------------------
<S>                                               <C>           <C>
Residential mortgage loans to be funded          $  852,500            --
Commercial mortgage loans to be funded               80,000            --
Undisbursed lines of credit                              --     1,116,000
------------------------------------------------------------------------------
                                                 $  932,500     1,116,000
==============================================================================
</TABLE>

     Residential mortgage loan commitments usually
     expire within thirty days.  The interest rate
     range on fixed rate mortgage loan commitments was
     from 6.50% to 8.75% at March 31, 1998.  These
     mortgage loan commitments and undisbursed lines of
     credit are expected to be settled at face amount
     or expire unused.
     
     The disclosure of fair value amounts does not
     include the fair values of any intangibles,
     including core deposit intangibles.  Core deposit
     intangibles represent the value attributable to
     total deposits based on an expected duration of
     customer relationships.  
                                                    (Continued)
                               48<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
______________________________________________________________

(14) CONTINUED
     
     LIMITATIONS
     
     Fair value estimates are made at a specific point
     in time, based on relevant market information and
     information about financial instruments.  These
     estimates do not reflect any premium or discount
     that could result from offering for sale at one
     time the entire holdings of a particular financial
     instrument.  Fair value estimates are based on
     judgments regarding future expected loss
     experience, current economic conditions, risk
     characteristics of various financial instruments
     and other factors.  These estimates are subjective
     in nature and involve uncertainties and matters of
     significant judgment and therefore cannot be
     determined with precision.  Changes in assumptions
     could significantly affect the estimates.

(15) CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
     
     Summarized financial information for the Company
     is as follows as of and for the years ended March
     31:
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
                                               1998         1997
-------------------------------------------------------------------------
<S>                                           <C>            <C>
Cash and cash equivalents                    $ 8,000,267    $ 5,178,382
Investment in the Bank                         8,303,510     10,542,516
Federal and state income taxes receivable         17,654        226,254
-------------------------------------------------------------------------
                                             $16,321,431     15,947,152
=========================================================================
Loan payable - Bank                          $   912,830      1,136,840
Other liabilities                                232,506        185,450
-------------------------------------------------------------------------
                                               1,145,336      1,322,290
Stockholders' equity                          15,176,095     14,624,862
-------------------------------------------------------------------------
                                             $16,321,431     15,947,152
=========================================================================
</TABLE>     
                                                    (Continued)
                               49<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
______________________________________________________________

(15)  CONTINUED

<TABLE>
<CAPTION>
STATEMENT OF INCOME
                                                  1998        1997        1996 
---------------------------------------------------------------------------------
<S>                                            <C>          <C>         <C>
Income:
  Interest income                              $  194,673     112,763     258,840
---------------------------------------------------------------------------------
Expenses:                                                   
  Interest expense                                 89,742     110,349     233,434
  Professional fees                                32,837      19,200      75,000
  Other expenses                                   36,891      30,565      42,247
---------------------------------------------------------------------------------
                                                  159,470     160,114     350,681
---------------------------------------------------------------------------------
Income (loss) before equity in net income of
  subsidiary and income taxes                      35,203     (47,351)    (91,841)
Equity in net income of subsidiary              1,647,204     930,531   1,060,703
---------------------------------------------------------------------------------
Income before income taxes                      1,682,407     883,180     968,862
Income taxes (benefit)                             13,600     (18,300)    (35,350)
---------------------------------------------------------------------------------
Net income                                     $1,668,807     901,480   1,004,212
=================================================================================
</TABLE>


                                                    (Continued)
                               50<PAGE>
<PAGE>
HARBOR FEDERAL BANCORP, INC.  AND SUBSIDIARY

Notes to Consolidated Financial Statements
______________________________________________________________

(15)  CONTINUED

<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
                                                  1998        1997        1996 
---------------------------------------------------------------------------------
<S>                                            <C>          <C>         <C>
Operating activities:
  Net income                                  $ 1,668,807    901,480    1,004,212
  Adjustments to reconcile net income 
   to net cash provided by operating 
   activities:
     Equity in net income of subsidiary        (1,647,204)  (930,531)  (1,060,703)
     Noncash compensation under stock-
       based benefit plans                        541,401    462,650      658,087
     Other, net                                    94,462   (396,157)    (261,656)
---------------------------------------------------------------------------------
Net cash provided by operating activities         657,466     37,442      339,940
---------------------------------------------------------------------------------
Investing activities - dividend
  distribution from Bank                        4,000,000         --    4,000,000
---------------------------------------------------------------------------------
Net cash provided by investing activities       4,000,000         --    4,000,000
---------------------------------------------------------------------------------
Financing activities:
  Purchases of common stock                      (966,297)    (8,987)  (7,220,210)
  Exercise of stock options by 
    Stock Option Trust                            105,930     68,308      127,713
  Repayment of borrowings                        (224,010)  (226,410)    (206,410)
  Dividends paid                                 (751,204)  (701,768)    (403,833)
---------------------------------------------------------------------------------
Net cash used in financing activities          (1,835,581)  (868,857)  (7,702,740)
---------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents     2,821,885   (831,415)  (3,362,800)

Cash and cash equivalents at beginning of year  5,178,382  6,009,797    9,372,597
---------------------------------------------------------------------------------
Cash and cash equivalents at end of year       $8,000,267  5,178,382    6,009,797
=================================================================================
</TABLE>

                             51