UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K
(Mark One)

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934


                  For the fiscal year ended: September 30, 2002

[ ]  TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
     EXCHANGE ACT OF 1934

                         Commission File Number: 0-29709

                   HARLEYSVILLE SAVINGS FINANCIAL CORPORATION
              ----------------------------------------------------
             (Exact name of Registrant as specified in its charter)


     Pennsylvania                                              23-3028464
---------------------------                              -----------------------
(State or other jurisdiction                             (I.R.S. Employer
of incorporation or organization)                        Identification Number)

271 Main Street
Harleysville, Pennsylvania                                       19438
--------------------------------                        ------------------------
(Address of principal executive offices)                      (Zip Code)

Registrant's telephone number, including area code:  (215) 256-8828

                          Common Stock, $.01 par value
                          ----------------------------
                                 Title of Class

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO[ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of the Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
<PAGE>


Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act). YES[ ] NO[X]

The aggregate market value of the 1,903,119  shares of the  Registrant's  Common
Stock held by non-affiliates  (2,316,490 shares  outstanding less 413,371 shares
held by affiliates), based upon the closing price of $20.00 for the Common Stock
on March 31, 2002,  as reported by the Nasdaq Stock  Market,  was  approximately
$38.1  million.  Shares of  Common  Stock  held by each  executive  officer  and
director and by each person who owns 5% or more of the outstanding  Common Stock
have  been  excluded  since  such  persons  may  be  deemed   affiliates.   This
determination of affiliate status is not necessarily a conclusive  determination
for other purposes.

Number of shares of Common Stock outstanding as of December 6, 2002: 2,316,490

                       DOCUMENTS INCORPORATED BY REFERENCE

     Set forth below are the documents incorporated by reference and the part of
the Form 10-K into which the document is incorporated:

(1)  Portions of the Annual Report to Stockholders  for the year ended September
     30, 2002 are incorporated by reference into Part II, Items 5-8 and Part IV,
     Item 15 of this Form 10-K.

(2)  Portions of the definitive  Proxy  Statement for the 2003 Annual Meeting of
     Stockholders  are  incorporated  by reference into Part III, Items 10-13 of
     this Form 10-K.




<PAGE>




                           Forward-Looking Statements

     In the normal  course of business,  the Company,  in an effort to help keep
its  stockholders  and the public informed about the Company's  operations,  may
from time to time issue or make certain statements, either in writing or orally,
that are or contain forward-looking  statements,  as that term is defined in the
federal securities laws. Generally, these statements relate to business plans or
strategies,  projected or  anticipated  benefits  from  potential  acquisitions,
projections  involving anticipated  revenues,  earnings,  profitability or other
aspects of operating results or other future  developments in the affairs of the
Company or the  industry in which it conducts  business.  These  forward-looking
statements, which are based on various assumptions (some of which are beyond the
Company's control), may be identified by reference to a future period or periods
or by the use of  forward-looking  terminology such as "anticipate,"  "believe,"
"commitment,"   "consider,"   "continue,"  "could,"   "encourage,"   "estimate,"
"expect,"  "intend,"  "in the event of," "may,"  "plan,"  "present,"  "propose,"
"prospect,"  "update,"  "whether,"  "will,"  "would," future or conditional verb
tenses,  similar  terms,  variations  on such terms or  negatives of such terms.
Although the Company believes that the anticipated results or other expectations
reflected  in  such   forward-looking   statements   are  based  on   reasonable
assumptions, it can give no assurance that those results or expectations will be
attained.  Actual results could differ  materially  from those indicated in such
statements due to risks,  uncertainties and changes with respect to a variety of
factors,  including,  but not limited to, the  following:  competitive  pressure
among depository and other financial  institutions  may increase  significantly;
changes in the interest rate  environment  may reduce  interest  margins and net
interest  income,  as well as  adversely  affect  loan  originations  and  sales
activities  and the value of  certain  assets,  such as  investment  securities;
general  economic or business  conditions,  either  nationally  or in regions in
which the Company does business, may be less favorable than expected,  resulting
in, among other things,  a  deterioration  in credit quality or a reduced demand
for credit; legislation or changes in regulatory requirements, including without
limitation,  capital requirements,  or accounting standards may adversely affect
the Company and the business in which it is engaged;  adverse  changes may occur
in the securities markets; competitors of the company may have greater financial
resources and develop  products and technology that enable those  competitors to
compete more successfully than the company;  and the growth and profitability of
the Company's noninterest income may be less than expected.

     The Company undertakes no obligation to update  forward-looking  statements
to reflect events or  circumstances  occurring  after the date of this report on
Form 10-K.

     As used in this report,  unless the context otherwise  requires,  the terms
"we,"  "us,"  or  "the  Company"  refer  to   Harleysville   Savings   Financial
Corporation,  a  Pennsylvania  corporation,  and the term "the  Bank"  refers to
Harleysville  Savings  Bank, a  Pennsylvania  chartered  savings bank and wholly
owned  subsidiary  of the  Company.  In addition,  unless the context  otherwise
requires,  references to the operations of the Company include the operations of
the Bank.

                                       1


<PAGE>



                                     PART I

Item 1.  Business.
------------------

General

     Harleysville  Savings Financial  Corporation is a Pennsylvania  corporation
headquartered in Harleysville, Pennsylvania. The Company became the bank holding
company for  Harleysville  Savings Bank in connection  with the holding  company
reorganization  of the Bank in February 2000 (the  "Reorganization").  In August
1987, the Bank's predecessor, Harleysville Savings Association, converted to the
stock  form  of  organization.   The  Bank,  whose  predecessor  was  originally
incorporated in 1915, converted from a Pennsylvania chartered, permanent reserve
fund savings association to a Pennsylvania  chartered stock savings bank in June
1991.  The Bank operates from five  full-service  offices  located in Montgomery
County, Pennsylvania.  The Bank's primary market area includes Montgomery County
and, to a lesser extent, Bucks County. As of September 30, 2002, the Company had
$620.3 million of total assets,  $371.9 million of deposits and $37.9 million of
stockholders'  equity. The Company's  stockholders'  equity constituted 6.10% of
total assets as of September 30, 2002.

     The Bank's  primary  business  consists  of  attracting  deposits  from the
general public through a variety of deposit programs and investing such deposits
principally in first  mortgage  loans secured by  residential  properties in the
Bank's  primary  market  area.  The  Bank  also  originates  construction  loans
primarily on residential properties.  In recent years, the Bank has engaged to a
significant  extent in the origination of a variety of consumer loans.  The Bank
also serves its customers  through  participation  in the Star System  (formerly
MAC), a shared  automated  teller machine  ("ATM")  network  located  throughout
Pennsylvania and a large portion of the east coast.

     Deposits  with the Bank are insured to the maximum  extent  provided by law
through the Savings  Association  Insurance  Fund ("SAIF")  administered  by the
Federal  Deposit  Insurance  Corporation  ("FDIC").   The  Bank  is  subject  to
examination  and  comprehensive  regulation  by the  FDIC  and the  Pennsylvania
Department  of Banking  ("Department").  It is also a member of the Federal Home
Loan Bank of Pittsburgh ("FHLB of Pittsburgh" or "FHLB"), which is one of the 12
regional banks comprising the Federal Home Loan Bank System ("FHLB System"). The
Bank is also  subject to  regulations  of the Board of  Governors of the Federal
Reserve System  ("Federal  Reserve  Board")  governing  reserves  required to be
maintained against deposits and certain other matters.

     The Company's  principal  executive offices are located at 271 Main Street,
Harleysville, Pennsylvania 19438 and its telephone number is (800) 243-8700.

                                       2


<PAGE>



Lending Activities

     Loan Portfolio  Composition.  The Company's loan portfolio is predominantly
comprised  of loans  secured by first  mortgages  on  single-family  residential
properties.  As of  September  30, 2002,  first  mortgage  loans on  residential
properties,  including  loans  on  single-family  and  multi-family  residential
properties and construction loans on such properties, amounted to $243.4 million
or 48.7% of the Company's total loan and mortgage-backed  securities  portfolio.
Loans on the Company's  residential  properties are primarily  long-term and are
conventional (i.e., not insured or guaranteed by a federal agency). At September
30, 2002,  mortgage-backed securities totaled $193.3 million and comprised 38.5%
of the portfolio.

     As of September 30, 2002, loans secured by commercial real estate comprised
$496,000  or 0.1% of the total loan and  mortgage-backed  securities  portfolio.
Consumer loans,  including  installment home equity loans,  home equity lines of
credit,  automobile  loans,  loans on  savings  accounts  and  education  loans,
constituted  $61.6  million  or 12.3%  of the  total  loan  and  mortgage-backed
securities portfolio as of September 30, 2002.

     As of September 30, 2002, the Company had $193.3 million,  or 38.5%, of the
total loan and  mortgage-backed  securities  portfolio  invested in Federal Home
Loan Mortgage  Corporation  ("FHLMC"),  Government National Mortgage Association
("GNMA") or Federal National Mortgage  Association  ("FNMA") backed  securities.
FHLMC  securities  are guaranteed by the FHLMC,  GNMA  securities by the Federal
Housing   Administration   and  FNMA  securities  by  the  FNMA,  which  are  an
instrumentality  of the  United  States  government,  and,  pursuant  to federal
regulations, are deemed to be part of the Company's loan portfolio.

                                       3


<PAGE>







     The following  table sets forth  information  concerning the Company's loan
and mortgage-backed securities portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>


                                                                          As of September 30,
                                             ----------------------------------------------------------------------------
                                                      2002                      2001                       2000
                                             -----------------------    ----------------------    -----------------------
                                              Amount        Percent       Amount     Percent       Amount        Percent
                                              ------        -------       ------     -------       ------        -------
                                                                         (Dollars in Thousands)
<S>                                          <C>               <C>      <C>              <C>      <C>               <C>
Real estate loans:
  Residential:
      Single-family                          $ 233,757         46.8%    $ 224,100        48.2%    $ 205,560         52.1%
      Multi-family                               1,056          0.2           972         0.3         1,016          0.3
      Construction                               8,607          1.7        14,649         3.1         6,580          1.7
  Lot Loans                                      1,247          0.2         1,514         0.3         1,351          0.3
  Mortgage-backed securities                   193,255         38.7       167,727        36.0       123,744         31.4
  Commercial                                       496          0.1           786         0.2           807          0.2
                                               -------         ----       -------        ----       -------         ----
      Total real estate loans and
         mortgage-backed securities            438,418         87.7%      409,748        88.1%      339,058         86.0%
                                               -------         ----       -------        ----       -------         ----

Consumer Loans:
  Education loans                                  334          0.1%        1,041         0.3%        1,414          0.4%
  Installment equity loans                      41,561          8.3        43,401         9.3        44,727         11.3
  Line of credit loans                          18,530          3.7         9,807         2.1         7,889          2.0
  Savings account loans                            479          0.1           617         0.1           619          0.1
  Automobile and other loans                       726          0.1           629         0.1           641          0.2
                                               -------         -----       -------      ------       -------       ------
      Total consumer loans                      61,630         12.3%       55,495        11.9%       55,290         14.0%
      Total loans receivable and
         mortgage-backed securities            500,048      100.0%        465,243       100.0%      394,348        100.0%
                                               -------      -----         -------       -----       -------        -----

Less:
  Loans in process                              (6,503)                    (9,919)                   (3,845)
  Deferred loan fees                            (2,091)                    (2,052)                   (1,946)
  Allowance for loan losses                     (2,035)                    (2,036)                   (2,038)
                                               -------                    -------                    -------
      Total loans receivable and
         mortgage-backed securities, net     $ 489,419                  $ 451,236                 $ 386,519
                                             =========                  =========                 =========
</TABLE>

                                       4


<PAGE>




     Contractual   Maturities.   The  following   table  sets  forth   scheduled
contractual  maturities of the loan and mortgage-backed  securities portfolio of
the Company as of September 30, 2002 by categories of loans and securities.  The
principal  balance  of the  loan is set  forth  in the  period  in  which  it is
scheduled to mature. This table does not reflect loans in process or unamortized
premiums, discounts and fees.

<TABLE>
<CAPTION>
                                                                                    Principal Repayments Contractually
                                                                                    Due in Years(s) Ended September 30,

                          Principal Balance at
                               September 30,                                      2005-         2008-         2013-        2018 and
                                   2002             2003          2004            2007          2012          2017        Thereafter

                                                                             (In Thousands)
<S>                              <C>              <C>           <C>           <C>           <C>            <C>            <C>
Real estate loans:
 Residential
  Single-family                  $233,757         $  4,315      $  4,609      $ 15,675      $ 35,383       $ 42,233       $131,542
  Multi-family                      1,056               16           17             57           130            186            650
  Construction                      8,607              129          138            465         1,058          1,515          5,302
Lot loans                           1,247               67           74            252           565            289             --
Mortgage-backed securities        193,256            2,899        3,285         10,822        24,350         34,206        117,694
Commercial                            496               18           19             68           157            234             --
Consumer and other loans           61,629            7,580        8,135         28,211        13,867          3,836             --
                                 --------         --------     ----------     --------      --------      ---------     ----------
           Total(1)              $500,048         $ 15,024     $ 16,277       $ 55,550      $ 75,510       $ 82,499       $255,188
                                 ========         ========     ==========     ========      ========      =========      =========
--------------------------
</TABLE>



(1)  With  respect to the $485.0  million  of loans  with  principal  maturities
     contractually due after September 30, 2002, $347.4 million have fixed rates
     of  interest  and $137.6  million  have  adjustable  or  floating  rates of
     interest.
                                       5

<PAGE>



     Contractual  principal  maturities of loans do not necessarily  reflect the
actual term of the Company's loan portfolio.  The average life of mortgage loans
is substantially  less than their contractual terms because of loan payments and
prepayments  and because of enforcement of due-on-sale  clauses,  which give the
Company  the right to declare a loan  immediately  due and payable in the event,
among other things,  that the borrower  sells the real  property  subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends to
increase,  however,  when current mortgage loan rates substantially exceed rates
on existing  mortgage  loans and,  conversely,  decrease  when rates on existing
mortgage loans substantially exceed current mortgage loan rates.

     Interest rates charged by the Company on loans are affected  principally by
the  demand  for such  loans  and the  supply  of funds  available  for  lending
purposes.  These factors are, in turn, affected by general economic  conditions,
monetary  policies  of the federal  government,  including  the Federal  Reserve
Board,  legislative tax policies and government  budgetary matters. The interest
rates charged by the Company are competitive with those of other local financial
institutions.

     Origination,  Purchase and Sale of Loans.  Although the Company has general
authority to originate,  purchase and sell loans secured by real estate  located
throughout the United States,  the Company's  lending  activities are focused in
its assessment area of Montgomery County,  Pennsylvania and surrounding suburban
counties.

     The Company accepts loan applications  through its branch network, and also
accepts  mortgage  applications  from  mortgage  brokers who are approved by the
Board of Directors to do business with the Company.

     The  Company  generally  does not engage in the  purchase of whole loans or
loan participations.

     During the year ended  September  30,  2002,  the  Company did not sell any
residential loans or mortgage-backed  securities.  The Company sold $7.3 million
of  mortgage-backed  securities  during the year ended  September 30, 2001 for a
gain of $151,663 and there were no sales of residential loans or mortgage-backed
securities in fiscal 2000. The Company sold $2.5 million,  $3.3 million and $3.4
million of education  loans during  fiscal 2002,  2001 and 2000,  resulting in a
gain of $31,131, $39,647 and $40,245, respectively.

     The Company's total loan  originations  increased by $20.8 million or 19.3%
in fiscal 2002 and  increased by $47.8  million or 79.4% in fiscal 2001.  Of the
$86.0 million and $54.9 million of single-family loans originated in fiscal 2002
and 2001, $23.1 million and $12.8 million,  respectively,  were loans originated
to refinance property, $62.9 million and $42.1 million, respectively, were loans
to acquire residential property.  During this period, the Company's originations

                                       6

<PAGE>

of consumer loans amounted to $53.4 million and $31.3 million or 41.2% and 29.0%
of total loan originations during fiscal 2002 and 2001, respectively. Management
intends to continue to emphasize  origination  of consumer  loans which may have
adjustable  rates, and generally have shorter terms than residential real estate
loans.

     The following  table shows total loans  originated,  sold and repaid during
the periods indicated.

<TABLE>
<CAPTION>
                                                             Year Ended September 30,
                                                        2002           2001           2000
                                                      --------       --------       --------
                                                                  (In Thousands)
<S>                                                   <C>            <C>            <C>
Real estate loan originations:
   Residential:
     Single-family                                    $ 62,939       $ 54,938       $ 29,712
     Multi-family                                          266             --             --
     Construction                                       11,224         20,909          8,602
    Lot loans                                              815            693            752
                                                      --------       --------       --------
         Total real estate loan originations            75,244         76,540         39,066
Consumer loan originations(1)                           53,444         31,308         21,025
                                                      --------       --------       --------
         Total loan originations                       128,688        107,848         60,091
Purchases of mortgage-backed securities                 87,280         80,176         13,038
                                                      --------       --------       --------
         Total loan originations, and purchases        215,968        188,024         73,129

Principal loan and mortgage-backed securities
  repayments                                           175,276        106,529         58,845
Sales of loans and mortgage-backed securities            2,509         10,600          3,369
                                                      --------       --------       --------
         Total principal repayments and sales          177,785        117,129         62,214
                                                      --------       --------       --------
           Net increase in loans                      $ 38,183       $ 70,895       $ 10,915
                                                      ========       ========       ========
</TABLE>


(1)      Includes installment home equity loans, home equity lines of credit,
         vehicle loans, Pennsylvania Higher Education Assistance loans, secured
         and unsecured personal loans and lines of credit.




     Loan Underwriting  Policies.  Each loan application received by the Company
is underwritten in accordance with the Company's written  underwriting  policies
as adopted by the Company's Board of Directors. The Company's Board of Directors
has granted loan  approval  authority to several  officers and  employees of the
Company, provided that the loan meets the guidelines set out in its written loan
underwriting  policies.  Combined  approval  authority  of $1.0 million has been
granted to the  Company's  Chief  Executive  Officer  ("CEO") and Chief  Lending
Officer.  Individual  approval  authority  of $500,000  has been  granted to the
Company's  CEO  and  Chief  Lending  Officer,  $250,000  to the  Assistant  Vice
President/Loan  Customer  Service  Manager,   $250,000  to  the  Assistant  Vice
President/Loan  Administration  Manager, and $50,000 to a delegated  underwriter
who is an employee of the Company.  All approved loans are ratified by the Board
of Directors at the next succeeding board meeting.  Any loan which does not meet
the  guidelines  set  forth in the  lending  policies  must be  approved  by the
Company's Board of Directors.

                                       7
<PAGE>


     In the exercise of any loan approval authority, the officers of the Company
will take into  account the risk  associated  with the  extension of credit to a
single borrower,  borrowing entity, or affiliation. The Company has an aggregate
loans to one  borrower  limit of 15% of the  Company's  unimpaired  capital  and
unimpaired  surplus in  accordance  with federal  regulations.  At September 30,
2002,  the  largest  aggregate  amount  of loans  outstanding  to any  borrower,
including related entities, was $1.9 million, which did not exceed the Company's
loan to one borrower limitation.

     Real Estate  Lending.  The Company is  permitted  to lend up to 100% of the
appraised value of the real property securing a loan. The Company will generally
lend up to 95% of the  lesser of the  appraised  value or the sale price for the
purchase  of  single-family,  owner-occupied  dwellings  which  conform  to  the
secondary  market  underwriting  standards.  Refinancings  are limited to 90% or
less.  Loans  over  $300,700  and other  non-conforming  loans,  secured  by 1-4
residential,  owner-occupied  dwellings, are limited to 90% of the lesser of the
purchase price or appraised value. The purchase of non-owner occupied,  1-4 unit
dwellings may be financed to 80% of the lower of the appraisal or sale price;  a
refinance is limited to 75% of the appraised value.

     All appraisals  and other property  valuations are performed by independent
fee appraisers approved by the Company's Board of Directors.  On all real estate
loans,  other  than  certain  "streamlined  refinances,"  the  Company  requires
borrowers to obtain title insurance, insuring the Company has a valid first lien
on the mortgaged  real estate.  Borrowers must also obtain and maintain a hazard
insurance  policy  prior to closing  and,  when the real  estate is located in a
flood hazard area designated by the Federal Emergency Management Agency, a flood
insurance policy is required.  Generally,  borrowers  advance funds on a monthly
basis  together with payment of principal  and interest  into a mortgage  escrow
account from which the Company makes disbursements for items such as real estate
taxes and insurance premiums when appropriate as they fall due.

         The Company presently originates fixed-rate loans on single-family
residential properties pursuant to underwriting standards consistent with
secondary market guidelines, and which may or may not be sold into the secondary
mortgage market as conditions warrant. Adjustable rate mortgages ("ARMs"), as
well as non-conforming and jumbo fixed-rate loans in amounts up to $1.0 million,
are held for portfolio. It is the Company's policy to originate both fixed-rate
loans and ARMs for terms up to 30 years. As of September 30, 2002, $242.4
million or 48.5% and $1.0 million or 0.2% of the Company's total loan and
mortgage-backed securities portfolio consisted of single-family (including
construction loans) and multi-family residential loans, respectively. As of
September 30, 2002, approximately $306.4 million or 71.7% of the Company's total
mortgage loans and mortgage-backed securities portfolio consisted of fixed-rate,
single-family residential mortgage loans. As of such date, $120.7 million or
28.3% of the total mortgage loan portfolio consisted of adjustable-rate
single-family residential mortgage loans and mortgage-backed securities. Most of
the Company's residential mortgage loans include "due on sale" clauses.

                                       8

<PAGE>

     During the year ended  September  30,  2002,  the Company  originated  $2.6
million of ARM mortgages. ARMs represented 2.2% and 14.2% of the Company's total
mortgage loan portfolio originations in fiscal 2002 and 2001, respectively.  The
ARM  mortgages  offered by the Company are  originated  with initial  adjustment
periods varying from one to 10 years,  and provide for initial rates of interest
below the rates which would  prevail were the index used for  repricing  applied
initially.  The Company  expects to emphasize the  origination of ARMs as market
conditions permit, in order to reduce the impact of rising interest rates in the
market place. Such loans,  however,  may not adjust as rapidly as changes in the
Company's cost of funds.

     The  Company  also  originates,  to  a  lesser  extent,  loans  secured  by
multi-family  rental units or properties with some commercial usage. The primary
method used by the Company to evaluate a multi-family  residential or commercial
mortgage  loan is based on both the fair  market  value of the  property  and an
income approach pursuant to which the Company  determines if the income from the
project  will be  sufficient  to support the related  debt and other  associated
costs.  The Company also  considers a review of the costs to develop the project
and the overall  financial  strength of the borrower.  Multi-family  residential
loans are made on an  adjustable  rate basis for a maximum term of 25 years or a
fixed rate of 15 years or less.

     Construction  Loans.  The Company  offers  fixed-rate  and  adjustable-rate
construction loans on residential properties. Residential construction loans are
originated for individuals  who are building their primary  residence as well as
to selected local builders for  construction of single-family  dwellings.  As of
September 30, 2002,  $8.6 million or 1.7% of the total loan and  mortgage-backed
securities portfolio consisted of construction loans.

     Construction  loans to homeowners  are usually made in connection  with the
permanent  financing on the property.  Permanent loans made in conjunction  with
residential  construction  have maximum  terms of 30.5 years.  At the end of the
initial six month term of such a loan,  the  Company  requires  the  borrower to
begin to make principal  repayments on the loan. These loans are reclassified as
permanent  mortgage loans when the residences  securing the loans are completed.
The Company will make construction/permanent loans up to a maximum of 90% of the
fair  market  value  of the  completed  project.  The  rate on the  loan  during
construction  is the same rate as the Company will charge on the permanent  loan
on the completed project.  Advances are made on a percentage of completion basis
with the Company's receipt of a satisfactory inspection report of the project.

     Historically,  the Company has been active in on-your-lot home construction
lending and intends to continue to emphasize such lending. Although construction
lending is generally  considered to involve a higher degree of risk of loss than
long-term financing on improved,  occupied real estate, the Company historically
has not experienced any significant problems.

     The Company also offers mortgage loans on undeveloped  single lots held for
residential construction.  These loans are generally fixed-rate loans with terms
not exceeding 15 years; they are not a significant part of the Company's lending
activities.

                                       9

<PAGE>


     Consumer and Other Loans. The Company actively originates consumer loans to
provide a wider range of financial  services to its customers and to improve the
interest  rate  sensitivity  of its  interest-earning  assets.  Originations  of
consumer  loans as a percent of total loan  originations  amounted  to 41.5% and
29.0% during fiscal 2002 and 2001,  respectively.  The shorter-term and normally
higher  interest  rates on such loans help the Company to maintain a  profitable
spread  between  its  average  loan yield and its cost of funds.  The  Company's
consumer  loan  department  offers a variety  of loans,  including  home  equity
installment loans and lines of credit,  vehicle loans,  personal loans and lines
of credit.  Loans  secured by deposit  accounts  at the Company are also made to
depositors in an amount up to 90% of their account  balances with terms of up to
15 years.

     Home equity loans continue to be a popular  product and  represented  $60.1
million  or  12.0%  of the  loan and  mortgage-backed  securities  portfolio  at
September  30, 2002.  After taking into account  first  mortgage  balances,  the
Company  will lend up to 80% of the value of  owner-occupied  property  on fixed
rate terms up to 15 years.  This  amount may be raised to 100% when  considering
other  factors,  such as  excellent  credit  history  and income  stability.  At
September 30, 2002, the Company had outstanding  approximately 2,700 home equity
loans of which  approximately  1,800 were installment  equity loans and 900 were
line of credit loans. As of such date, the Company had an outstanding balance on
line of credit loans of approximately  $18.5 million and there was approximately
$20.6 million of unused credit available on such loans.

     Consumer loans generally involve more risk of collectibility  than mortgage
loans because of the type and nature of the  collateral  and, in certain  cases,
the absence of collateral. As continued payments are dependent on the borrower's
continuing financial  stability,  these loans may be more likely to be adversely
affected  by job loss,  divorce,  personal  bankruptcy  or by  adverse  economic
conditions.

     Loan Fee and  Servicing  Income.  The  Company  receives  fees both for the
origination  of loans and for  making  commitments  to  originate  and  purchase
residential and commercial  mortgage loans. The Company also receives  servicing
fees with respect to  residential  mortgage  loans it has sold. It also receives
loan fees related to existing  loans,  including  late charges,  and credit life
insurance  premiums.  Loan  origination  and commitment fees and discounts are a
volatile  source  of  income,  varying  with the  volume  and type of loans  and
commitments made and purchased and with competitive and economic conditions.

     Loans fees  generated on  origination  of real estate  mortgage loans under
accounting  principles  generally  accepted in the United  States of America are
deferred  to the extent that they  exceed the costs of  originating  such loans.
Deferred  loan fees and discounts on mortgage  loans  purchased are amortized to
income over the estimated  remaining  terms of such loans using various  methods
which approximate the interest method. The Company generated $635,000,  $268,000
and $137,000 in deferred loan fees in fiscal 2002, 2001 and 2000, respectively.

                                       10
<PAGE>



     In its real  estate  lending,  the  Company  charges  loan  fees  which are
calculated  as a  percentage  of the  amount  borrowed.  The  fees  received  in
connection with the origination of residential  real estate loans and commercial
real  estate  loans  generally  do not exceed 3% of the  principal  amount.  All
origination fees in excess of loan origination  costs are deferred and amortized
into income over the estimated life of the related loans.

     As of September 30, 2002,  the Company was servicing  $3.5 million of loans
for others,  substantially  all of which related to loans sold by the Company to
the FHLMC. The Company receives a servicing fee of 0.25% on such loans.

     Non-performing Loans and Real Estate Owned. When a borrower fails to make a
required  loan payment,  the Company  attempts to cure the default by contacting
the borrower; generally, after a payment is more than 15 days past due, at which
time a late charge is assessed.  Defaults are cured  promptly in most cases.  If
the  delinquency on a mortgage loan exceeds 60 days and is not cured through the
Company's  normal  collection  procedures,  or an acceptable  arrangement is not
worked out with the borrower,  the Company will institute measures to remedy the
default.  This may  include  commencing  a  foreclosure  action  or, in  special
circumstances,  accepting  from the  borrower a  voluntary  deed of the  secured
property in lieu of foreclosure with respect to mortgage loans and equity loans,
or title and  possession  of  collateral  in the case of other  consumer  loans.
Substantial   delays  may  occur  in  instituting  and  completing   residential
foreclosure  proceedings  due to  the  extensive  procedures  and  time  periods
required to be complied with under Pennsylvania law.

     If  foreclosure  is effected,  the property is sold at a public  auction in
which the Company may participate as a bidder.  If the Company is the successful
bidder,  the acquired  real estate  property is then  included in the  Company's
"real estate owned" account until it is sold.  When property is acquired,  it is
recorded at the lower of carrying or market value at the date of acquisition and
any write-down  resulting therefrom is charged to the allowance for loan losses.
Interest  accrual,  if any,  ceases  on the date of  acquisition  and all  costs
incurred in maintaining the property from that date forward are expended.  Costs
incurred for the  improvement or  development of such property are  capitalized.
The Company is permitted under  Department  regulations to finance sales of real
estate owned by "loans to facilitate," which may involve more favorable interest
rates and terms than generally would be granted under the Company's underwriting
guidelines.  The Company had no loans  outstanding  which are  recorded as loans
accounted for on a non-accrual basis as of the end of the period.

                                       11

<PAGE>


     The following table sets forth  information  regarding  non-accrual  loans,
loans which are 90 days or more  delinquent but on which the Company is accruing
interest,  troubled debt restructuring,  and other real estate owned held by the
Company at the dates  indicated.  The Company  continues  to accrue  interest on
loans which are 90 days or more  overdue  where  management  believes  that such
interest is collectible.

<TABLE>
<CAPTION>


                                                             As of September 30,


                                                        2002         2001       2000

<S>                                                    <C>          <C>          <C>
                                                           (Dollars in Thousands)
Residential real estate loans:
  Non-accrual loans                                    $ --         $ --         $ --
  Accruing loans 90 days overdue                        167          298          184
  Troubled debt restructurings                           --           --           --
                                                      ---------     --------    -------
         Total                                          167          298          184
                                                      ---------     --------    -------
Consumer loans:
  Non-accrual loans                                      --           --           --
  Accruing loans 90 days overdue                         --                        --
  Troubled debt restructurings                           --           --           --
                                                      ---------     --------    -------
         Total                                           --           --           --
                                                      ---------     --------    -------

Total non-performing loans:
  Non-accrual loans                                      --           --           --
  Accruing loans 90 days overdue                        167          298          184
  Troubled debt restructurings                           --           --           --
                                                      ---------     --------    -------
         Total                                         $167         $298         $184
                                                      =========     ========    =======

Total non-performing loans to total loans               .05%         .09%         .07%
Total other real estate owned, net of related
  reserves                                               --           --           --
Total non-performing loans and other real
  estate owned to total assets                          .03%         .05%         .04%
</TABLE>



                                       12

<PAGE>



     Management establishes reserves for losses on slow loans when it determines
that losses are  probable.  The  Company did not record a provision  for general
loan losses in fiscal 2001 or 2002 due to the  overall  performance  of the loan
portfolio and  management's  assessment of the overall adequacy of the allowance
for loan losses.  Although management believes that it uses the best information
available  to make  determinations  with respect to loan loss  reserves,  future
adjustments  to  reserves  may  be  necessary  if  economic   conditions  differ
substantially from the assumptions used in making the initial determinations.

     Residential mortgage lending generally entails a lower risk of default than
other  types of  lending.  Consumer  loans  and  commercial  real  estate  loans
generally involve more risk of collectibility  because of the type and nature of
the  collateral  and, in certain  cases,  the absence of  collateral.  It is the
Company's  policy to establish  specific  reserves  for losses on slow  consumer
loans and  commercial  loans when it  determines  that losses are  probable.  In
addition,  consumer loans are charged against reserves if they are more than 120
days delinquent unless a satisfactory  repayment schedule is arranged.  Although
management  has  currently  established  no specific  reserves  for  losses,  no
assurance can be given as to whether future  specific  reserves may be required.
The establishment of any such reserves could affect net income.

     The following table summarizes activity in the Company's allowance for loan
losses during the periods indicated.

<TABLE>
<CAPTION>

                                                            Year Ended September 30,
                                                 ----------------------------------------------
                                                    2002              2001             2000
                                                 -----------       -------------   ------------
<S>                                              <C>               <C>              <C>
Allowances at beginning of year                  $ 2,036,188       $ 2,038,131      $ 2,040,000
 Provision for loan losses charged to
  operating expenses                                     --                 --             --
Loans charged off, net                                (1,356)           (1,943)          (1,869)
                                                 -----------       -------------   ------------
Allowances at end of year                        $ 2,034,832       $ 2,036,188      $ 2,038,131
                                                 ===========       =============   ============

Ratio of net charge-offs to average
 loans outstanding                                       --                --               --
Ratio of allowances to period-end loans                  .68%                .69%           .77%
</TABLE>

Investment Activities

     The Company is required to maintain certain liquidity ratios and does so by
investing in securities  that qualify as liquid  assets under FDIC  regulations.
Such securities  include  obligations  issued or fully  guaranteed by the United
States government, certain federal agency obligations, certain time deposits and
certificates of deposit as well as other specified investments.  See "Regulation
- Federal Home Loan Bank System."

                                       13


<PAGE>








     The  Company's  investment  portfolio  consists  primarily of United States
Treasury  securities and obligations of United States government  agencies.  The
other investments include  interest-bearing  deposits in other banks, tax-exempt
obligations,  ARM mutual funds, and stock of the FHLB of Pittsburgh. The Company
has primarily invested in instruments that reprice within five years; the amount
of such investments as of September 30, 2002 was $86.3 million.

     The  following  table  sets forth the  Company's  investment  portfolio  at
carrying value as of the dates indicated.

<TABLE>
<CAPTION>

                                                     As of September 30,
                                          -------------------------------------------
                                            2002              2001             2000
                                          --------          --------         --------
                                                        (In Thousands)
<S>                                       <C>               <C>              <C>
Interest-bearing deposits at
   other depository institutions          $ 34,872          $  7,588         $  2,856
Tax-exempt obligations                      24,881            23,771           15,381
ARM mutual funds                            12,000             3,294            3,310
U.S. Government Securities
   available-for-sale                          --               --                --

U.S. Government and agency
   obligations held to maturity             30,784            38,431           55,900

FHLB of Pittsburgh stock                    10,497             8,950            7,365
                                          --------          --------          --------
     Total                                $113,034          $ 82,034         $ 84,812
                                          ========          ========          ========
</TABLE>

     The Company's  investment strategy is set and reviewed  periodically by the
entire Board of Directors.

Sources of Funds

     General.  Deposits are the primary source of the Company's funds for use in
lending and for other general business  purposes.  In addition to deposits,  the
Company  obtains  funds from loan  payments and  prepayments,  FHLB advances and
other borrowings, and, to a lesser extent, sales of loans. Loan repayments are a
relatively  stable  source of funds,  while  deposit  inflows and  outflows  are
significantly   influenced  by  general  market   interest  rates  and  economic
conditions.

     Deposits.  Due to changes in regulatory  and economic  conditions in recent
years,  the  Company  has   increasingly   emphasized   deregulated   fixed-rate
certificate  accounts and other authorized types of deposits.  The Company has a
number of different  programs  designed to attract both short-term and long-term
deposits  from the general  public by  providing an  assortment  of accounts and
rates consistent with FDIC regulations. These programs include passbook and club
savings  accounts,  NOW and regular  checking  accounts,  money  market  deposit
accounts, retirement accounts,  certificates of deposit ranging in terms from 90
days to 60 months and jumbo  certificates of deposit in denominations of $98,000

                                       14

<PAGE>

or more.  The interest  rates on the Company's  various  accounts are determined
weekly by the Interest Rate Risk Management Officer based on reports prepared by
members of senior  management.  The  Company  attempts  to  control  the flow of
deposits by pricing  its  accounts to remain  competitive  with other  financial
institutions in its market area.

     The Company's  deposits are obtained primarily from residents of Montgomery
and  Bucks  Counties;  the  Company  does not  utilize  brokered  deposits.  The
principal  methods used by the Company to attract deposit accounts include local
advertising,  offering a wide  variety of  services  and  accounts,  competitive
interest rates and convenient office locations.  The Company also is a member of
the "STAR" ATM network.

     The  following  table  shows  the   distribution   of,  and  certain  other
information  relating  to,  the  Company's  deposits  by  type  as of the  dates
indicated.

<TABLE>
<CAPTION>

                                                               As of September 30,
                                -----------------------------------------------------------------------------------

                                         2002                       2001                          2000
                                ----------------------     ---------------------          -------------------------

                                              Percent                      Percent                        Percent
                                               of                            of                             of
                                  Amount      Deposits       Amount        Deposits         Amount        Deposits
                                ---------     --------     ---------       --------       ---------       ---------
                                                             (Dollars in Thousands)
<S>                             <C>            <C>           <C>             <C>          <C>                 <C>
Passbook and club
  accounts                      $  3,327       0.9%          $ 2,535         0.7%         $  2,396            0.8%
NOW accounts                      12,730       3.4            12,280         3.5            10,749            3.5
Checking accounts                  9,894       2.7             6,859         2.0             5,781            1.9
Money market demand
  accounts                        82,562      22.2            67,383        19.2            49,420           15.9
Certificates of deposit:
         6 month                  16,497       4.4            25,148         7.2             8,520            2.7
         9 month                   5,240       1.4             5,949         1.7             4,246            1.4
         12 month                 20,640       5.6            28,170         8.0            32,121           10.4
         15 month                  8,343       2.2            10,710         3.1             4,660            1.5
         17 month                  5,384       1.5             9,490         2.7            40,896           13.2
         18 month                 39,080      10.5            62,754        17.9            51,037           16.5
         24 month                 32,345       8.7            35,826        10.2            28,820            9.3
         27 month                 19,133       5.1             5,171         1.5             5,045            1.6
         36 month                 22,290       6.0            18,308        5.2             16,519            5.3
         48 month                 11,701       3.2               --          --                --               --
         60 month                 34,257       9.2            18,607         5.3            12,928            4.2
         Other                     5,268       1.4             3,712         1.1             2,638            0.8

Retirement accounts:
 Money market deposit
   accounts                          902       0.2               559         0.2               509            0.2
 Certificates of deposit          42,354      11.4            36,686        10.5            33,551           10.8
                                  ------      ----            ------        ----            ------           ----
Total deposits                  $371,947     100.0%         $350,147       100.0%         $309,836          100.0%
                                ========     ------         ========       ------         ========          =====
</TABLE>

                                       15

<PAGE>



     The large variety of deposit  accounts offered by the Company has increased
the Company's ability to retain deposits and has allowed it to be competitive in
obtaining new funds, although the threat of disintermediation (the flow of funds
away  from  savings   institutions  into  direct  investment  vehicles  such  as
government and corporate securities and non-deposit  products) still exists. The
new types of accounts;  however, have been more costly than traditional accounts
during periods of high interest rates. In addition,  the Company has become more
vulnerable to short-term  fluctuations in deposit flows as customers have become
more rate-conscious and willing to move funds into higher yielding accounts. The
ability of the Company to attract and retain  deposits and the Company's cost of
funds have been, and will continue to be, significantly affected by money market
conditions.

     The following table presents certain  information  concerning the Company's
deposit accounts as of September 30, 2002 and the scheduled quarterly maturities
of its certificates of deposit.
<TABLE>
<CAPTION>

                                                                  Percentage of   Weighted Average
                                                    Amount        Total Deposits    Nominal Rate
                                                   --------       --------------  ----------------
                                                             (Dollars in Thousands)

<S>                                                <C>                   <C>            <C>
Passbook and club accounts                         $  3,327              0.9%           2.09%
NOW accounts                                         12,730              3.4            0.70
Checking accounts                                     9,894              2.7             --
Money market deposits accounts(1)                    83,464             22.4            1.98
                                                   --------             ----            ----
         Total                                     $109,415             29.4%           1.66%
                                                   --------             ----            ----

Certificate accounts maturing by quarter:
     December 31, 2002                             $ 54,306             14.6%           3.98%
     March 31, 2003                                  33,619              9.0            3.58
     June 30, 2003                                   23,801              6.4            3.62
     September 30, 2003                              24,359              6.6            3.79
     December 31, 2003                               18,735              5.0            3.58
     March 31, 2004                                  17,087              4.6            3.83
     June 30, 2004                                    8,077              2.2            4.22
     September 30, 2004                              17,845              4.8            3.99
     December 31, 2004                                9,002              2.4            3.81
     March 31, 2005                                   2,632              0.7            4.57
     June 30, 2005                                    3,434              0.9            4.49
     September 30, 2005                               2,449              0.7            4.54
Thereafter                                           47,186             12.7            4.72
                                                   --------             ----            ----
Total certificate accounts(1)                       262,532             70.6            3.99
                                                   --------             ----            ----
         Total deposits                            $371,947            100.0%           3.31%
                                                   ========            =====            ====
</TABLE>
-----------------------------

(1) Includes retirement accounts.

                                       16

<PAGE>



     Management of the Company expects,  based on historical  experience and its
pricing  policies,  to retain a  significant  portion of the  $136.1  million of
certificates  of deposit which mature  during the 12 months ended  September 30,
2003.

     The following  table sets forth the net deposit flows of the Company during
the periods indicated.

<TABLE>
<CAPTION>

                                                           Year Ended September 30,
                                                      ----------------------------------
                                                        2002         2001         2000
                                                      --------     --------     --------
                                                                (In Thousands)
<S>                                                   <C>          <C>          <C>
Increase/(Decrease) before interest credited          $ 11,241     $ 26,472     $ (6,391)
Interest credited                                       10,559       13,839       12,567
                                                      --------     --------     --------
Net deposit increase                                  $ 21,800     $ 40,311     $  6,176
                                                      ========     ========     ========
</TABLE>


     The  following  table  presents by various  interest  rate  categories  the
amounts of  certificate  accounts as of the dates  indicated  and the amounts of
certificate  accounts as of September  30, 2002 which mature  during the periods
indicated.
<TABLE>
<CAPTION>


                                                      Amounts at September 30, 2002 Maturing
                                     ---------------------------------------------------------------------------
                                         As of
                                     September 30,   One Year or
                                          2002          Less          Two Years       Three Years     Thereafter
                                     -------------   -----------      -----------      -----------     ----------
                                                                  (In Thousands)
<S>                                    <C>             <C>            <C>            <C>             <C>
Certificate accounts:
  0.01% to 2.00%                       $ 12,143        $ 12,143       $     --       $     --        $   --
  2.01% to 4.00%                        116,230          58,693         45,266           9,694          2,577
  4.01% to 6.00%                        111,820          48,429         14,192           7,075         42,124
  6.01% to 8.00%                         22,339          16,493          2,506             842          2,498
                                       --------        --------       --------        --------       --------
Total certificate accounts(1)          $262,532        $135,758       $ 61,964        $ 17,611       $ 47,199
                                       ========        ========       ========        ========       ========
</TABLE>


(1)  Includes retirement accounts.

     Borrowings.  The Bank obtains advances from the FHLB of Pittsburgh upon the
security of its  capital  stock in the FHLB of  Pittsburgh  and a portion of its
first  mortgages.  See  "Regulation - Regulation of the Bank - Federal Home Loan
Bank System." At September 30, 2002, the Bank had FHLB advances with  maturities
of one year or less  totaling $1.4 million at an interest rate of 6.52% and FHLB
advances with  maturities of 13 months to 10 years  totaling  $206.1  million at
interest-rates  ranging from 3.88% to 7.23%.  Such advances are made pursuant to
several  different credit programs,  each of which has its own interest rate and
range of  maturities.  Depending  on the program,  limitations  on the amount of
advances  are  based  on  either a fixed  percentage  of  assets  or the FHLB of
Pittsburgh's  assessment  of the  Bank's  creditworthiness.  FHLB  advances  are

                                       17

<PAGE>


generally  available to meet seasonal and other  withdrawals of deposit accounts
to purchase  mortgage-backed  securities,  investment  securities  and to expand
lending.

     The following table sets forth certain information regarding the borrowings
of the Company as of the dates indicated.
<TABLE>
<CAPTION>



                                                                           September 30,
                                          ------------------------------------------------------------------------

                                                  2002                      2001                     2000
                                          ---------------------    ---------------------     ---------------------

                                                      Weighted                  Weighted                  Weighted
                                                       Average                  Average                   Average
                                          Balance       Rate       Balance      Rate         Balance      Rate
                                          --------    ---------    --------     --------     --------     --------
                                                                       (Dollars in Thousands)

<S>                                       <C>             <C>      <C>           <C>         <C>           <C>
Advances from FHLB of Pittsburgh          $207,502        5.37%    $171,309      5.74%       $145,134      6.10%

</TABLE>



     The  following  table  sets  forth  certain   information   concerning  the
short-term borrowings of the Company for the periods indicated.

                                                 Year Ended September 30,
                                             -------------------------------

                                              2002        2001         2000
                                             ------      -------     -------
                                                 (Dollars in Thousands)
Advances from FHLB of Pittsburgh:
   Average balance outstanding               $  --       $ 5,222     $ 6,550

   Maximum amount outstanding at any
      month-end during the period             1,900       16,200      14,600


   Weighted average interest rate
     during the period                         2.08%        6.31%       6.34%

                                       18


<PAGE>


Competition

     The Company faces significant  competition in attracting deposits. Its most
direct  competition for deposits has historically come from commercial banks and
other  savings  institutions  located  in its market  area.  The  Company  faces
additional  significant  competition  for investors'  funds from other financial
intermediaries.  The  Company  competes  for  deposits  principally  by offering
depositors a variety of deposit programs, convenient branch locations, hours and
other  services.  The Company does not rely upon any individual  group or entity
for a material portion of its deposits.

     The  Company's  competition  for real estate loans comes  principally  from
mortgage banking  companies,  other savings  institutions,  commercial banks and
credit unions.  The Bank competes for loan  originations  primarily  through the
interest rates and loan fees it charges,  the efficiency and quality of services
it provides borrowers,  referrals from real estate brokers and builders, and the
variety of its products.  Factors which affect  competition  include the general
and local economic  conditions,  current  interest rate levels and volatility in
the mortgage markets.

     The Financial  Institutions  Reform,  Recovery and  Enforcement Act of 1989
("FIRREA")  eliminated many of the  distinctions  between  commercial  banks and
savings institutions and holding companies and allowed bank holding companies to
acquire savings  institutions.  FIRREA has generally  resulted in an increase in
the  competition  encountered  by savings  institutions  and has  resulted  in a
decrease in both the number of savings  institutions  and the aggregate  size of
the savings industry.

Employees

     The Company had 50 full-time  employees  and 48  part-time  employees as of
September  30,  2002.  None of these  employees is  represented  by a collective
bargaining  agent,  and the Company  believes that it enjoys good relations with
its personnel.

Regulation

     The references to laws and regulations  which are applicable to the Company
and the Bank set forth below and elsewhere  herein are brief  summaries  thereof
which do not  purport to be  complete  and are  qualified  in their  entirety by
reference to such laws and regulations.

     On   November   12,   1999,   President   Clinton   signed   into  law  the
Gramm-Leach-Bliley Act (the "1999 Act") which repealed  Depression-era laws that
generally  separated  the  business  of banking  from other  financial  services
including  the business of  insurance  and  securities.  From time to time other
bills may be  introduced  in the United  States  Congress  which could result in
additional or in less regulation of the business of the Company and the Bank. It
cannot be predicted at this time whether any such  legislation  actually will be
adopted or how such  adoption  would  affect the  business of the Company or the
Bank.

                                       19
<PAGE>


Regulation of the Company

     General.  The Company is a registered bank holding company  pursuant to the
Bank Holding  Company Act ("BHCA") and, as such,  is subject to  regulation  and
supervision  by the Federal  Reserve  Board and the  Department.  The Company is
required to file annually a report of its  operations  with, and will be subject
to examination by, the Federal Reserve Board and the Department.

     BHCA  Activities and Other  Limitations.  The BHCA prohibits a bank holding
company from acquiring  direct or indirect  ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control of any
bank,  without  prior  approval  of the  Federal  Reserve  Board.  The BHCA also
generally  prohibits a bank  holding  company  from  acquiring  any bank located
outside of the state in which the existing bank subsidiaries of the bank holding
company are located unless  specifically  authorized by applicable state law. No
approval under the BHCA is required; however, for a bank holding company already
lawfully  owning or  controlling  50% of the voting  shares of a bank to acquire
additional shares of such bank.

     The BHCA also prohibits a bank holding  company,  with certain  exceptions,
from  acquiring  more than 5% of the voting  shares of any company that is not a
bank and from  engaging  in any  business  other  than  banking or  managing  or
controlling  banks.  Under the BHCA, the Federal  Reserve Board is authorized to
approve the  ownership of shares by a bank holding  company in any company,  the
activities of which the Federal  Reserve  Board has  determined to be so closely
related  to  banking  or to  managing  or  controlling  banks  as to be a proper
incident thereto.  In making such  determinations,  the Federal Reserve Board is
required  to  weigh  the  expected  benefit  to  the  public,  such  as  greater
convenience,  increased competition or gains in efficiency, against the possible
adverse effects,  such as undue concentration of resources,  decreased or unfair
competition,  conflicts of interest or unsound banking  practices.  The 1999 Act
permits a bank holding  company to elect to be  considered  a financial  holding
company ("FHC").  A bank holding company that makes an FHC election is permitted
to engage in  activities  that are  financial  in nature or  incidental  to such
financial activities.  The 1999 Act lists certain activities that are considered
financial in nature and permits the Federal Reserve Board to expand that list to
include  other  activities  that  are  complementary  to the  activities  on the
preapproved   list.   The   preapproved   activities   include  (1)   securities
underwriting,  dealing  and  market  making;  (2)  insurance  underwriting;  (3)
merchant banking; and (4) insurance company portfolio  investments.  The Company
has not made the financial holding company election.

     The  Federal  Reserve  Board  has by  regulation  determined  that  certain
activities are closely related to banking within the meaning of the BHCA.  These
activities  include operating a mortgage company,  finance company,  credit card
company,  factoring company,  trust company or savings  association;  performing
certain data  processing  operations;  providing  limited  securities  brokerage
services;  acting as an investment or financial advisor;  acting as an insurance
agent for certain types of credit-related  insurance;  leasing personal property
on a full-payout,  non-operating  basis;  providing tax planning and preparation
services; operating a collection agency; and providing certain courier services.
The Federal  Reserve Board also has  determined  that certain other  activities,
including real estate  brokerage and  syndication,  land  development,  property
management   and   underwriting   of  life   insurance  not  related  to  credit
transactions,  are not closely related to banking and a proper incident thereto.
However,  under the 1999 Act certain of these  activities are  permissible for a
bank holding company that becomes an FHC.

                                       20

<PAGE>


     Limitations on Transactions with Affiliates.  Transactions  between savings
institutions  and any  affiliate  are  governed by  Sections  23A and 23B of the
Federal  Reserve Act. An affiliate  of a savings  institution  is any company or
entity which  controls,  is  controlled  by or is under common  control with the
savings institution. In a holding company context, the parent holding company of
a  savings  institution  (such  as the  Company)  and any  companies  which  are
controlled  by  such  parent  holding  company  are  affiliates  of the  savings
institution.  Generally,  Sections 23A and 23B (i) limit the extent to which the
savings  institution or its  subsidiaries  may engage in "covered  transactions"
with any one affiliate to an amount equal to 10% of such  institution's  capital
stock and surplus,  and contain an aggregate limit on all such transactions with
all  affiliates  to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such  transactions be on terms  substantially the same, or
at least as favorable,  to the  institution or subsidiary as those provided to a
non-affiliate.  The term  "covered  transaction"  includes  the making of loans,
purchase of assets,  issuance of a guarantee and other similar transactions.  In
addition  to the  restrictions  imposed  by  Sections  23A and 23B,  no  savings
institution may (i) loan or otherwise extend credit to an affiliate,  except for
any affiliate  which engages only in activities  which are  permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds,  debentures,
notes or similar  obligations of any affiliate,  except for affiliates which are
subsidiaries of the savings institution.

     In  addition,  Sections  22(h) and (g) of the  Federal  Reserve  Act places
restrictions   on  loans  to  executive   officers,   directors   and  principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a  greater  than  10%  stockholder  of a  savings  institution,  and  certain
affiliated  interests  of  either,  may not  exceed,  together  with  all  other
outstanding  loans  to  such  person  and  affiliated  interests,   the  savings
institution's  loans  to  one  borrower  limit  (generally  equal  to 15% of the
institution's unimpaired capital and surplus).  Section 22(h) also requires that
loans to directors,  executive  officers and principal  stockholders  be made on
terms  substantially  the same as offered in  comparable  transactions  to other
persons and also requires prior board  approval for certain loans.  In addition,
the aggregate  amount of extensions  of credit by a savings  institution  to all
insiders  cannot  exceed  the  institution's  unimpaired  capital  and  surplus.
Furthermore,  Section 22(g) places additional restrictions on loans to executive
officers.

     Capital  Requirements.  The  Federal  Reserve  Board  has  adopted  capital
adequacy  guidelines  pursuant to which it assesses  the  adequacy of capital in
examining and supervising a bank holding  company and in analyzing  applications
to it under the BHCA.  The Federal  Reserve  Board capital  adequacy  guidelines
generally  require bank holding  companies to maintain total capital equal to 8%
of total risk-adjusted  assets, with at least one-half of that amount consisting
of Tier I or core capital and up to one-half of that amount  consisting  of Tier
II or supplementary capital. Tier I capital for bank holding companies generally
consists of the sum of common stockholders' equity and perpetual preferred stock
(subject in the case of the latter to limitations on the kind and amount of such
stocks which may be included as Tier I capital), less goodwill and, with certain
exceptions,  intangibles.  Tier II capital generally  consists of hybrid capital
instruments;  perpetual  preferred stock which is not eligible to be included as


                                       21

<PAGE>


Tier I capital;  term subordinated debt and  intermediate-term  preferred stock;
and,  subject to  limitations,  general  allowances for loan losses.  Assets are
adjusted  under the  risk-based  guidelines to take into account  different risk
characteristics,  with the  categories  ranging from 0% (requiring no additional
capital)  for  assets  such as cash to 100% for the  bulk of  assets  which  are
typically held by a bank holding company, including multi-family residential and
commercial  real estate loans,  commercial  business  loans and consumer  loans.
Single-family  residential  first mortgage loans which are not past-due (90 days
or more) or  non-performing  and which have been made in accordance with prudent
underwriting  standards are assigned a 50% level in the risk-weighing system, as
are certain  privately-issued  mortgage-backed  securities representing indirect
ownership of such loans.  Off-balance sheet items also are adjusted to take into
account certain risk characteristics.

     In addition to the risk-based  capital  requirements,  the Federal  Reserve
Board  requires bank holding  companies to maintain a minimum  leverage  capital
ratio of Tier I capital to total  assets of 3.0%.  Total assets for this purpose
does not include goodwill and any other  intangible  assets and investments that
the Federal Reserve Board determines should be deducted from Tier I capital. The
Federal Reserve Board has announced that the 3.0% Tier I leverage  capital ratio
requirement is the minimum for the top-rated bank holding  companies without any
supervisory,  financial or operational weaknesses or deficiencies or those which
are not  experiencing or  anticipating  significant  growth.  Other bank holding
companies  will be  expected to maintain  Tier I leverage  capital  ratios of at
least 4.0% to 5.0% or more, depending on their overall condition.

     Financial Support of Affiliated  Institutions.  Under Federal Reserve Board
policy,  the Company is expected to act as a source of financial strength to the
Bank and to commit resources to support the Bank in circumstances  when it might
not do so absent such policy.  The Congress attempted to clarify the application
of this "source-of-strength"  doctrine by an amendment to Section 18 of the FDIA
that was included in the Gramm-Leach-Bliley Act of 1999. The amendment describes
the circumstances under which a Federal banking agency would be protected from a
claim by an  affiliate or a  controlling  shareholder  of an insured  depository
institution  seeking the return of assets of such an  affiliate  or  controlling
shareholder.  Under the amended provision, a claim would not be permitted if (1)
the insured  depository  institution  was under a written  Federal  directive to
raise capital,  (2) the  institution was  undercapitalized,  and (3) the subject
Federal  banking agency followed the procedures set forth in Section 5(g) of the
BHCA.

     Sarbanes-Oxley Act of 2002. On July 30, 2002, the President signed into law
the  Sarbanes-Oxley  Act of 2002  implementing  legislative  reforms intended to
address  corporate and accounting  fraud. In addition to the  establishment of a
new accounting oversight board which will enforce auditing,  quality control and
independence  standards  and will be  funded by fees  from all  publicly  traded
companies, the bill restricts provision of both auditing and consulting services
by accounting  firms.  To ensure auditor  independence,  any non-audit  services
being  provided to an audit client will  require  preapproval  by the  company's
audit committee members.  In addition,  the audit partners must be rotated.  The
bill requires chief executive  officers and chief financial  officers,  or their
equivalent,  to certify to the accuracy of periodic  reports filed with the SEC,

                                       22

<PAGE>


subject to civil and criminal  penalties if they knowingly or willfully  violate
this  certification  requirement.  In addition,  under the Act,  counsel will be
required to report evidence of a material  violation of the securities laws or a
breach of  fiduciary  duty by a company  to its chief  executive  officer or its
chief legal officer,  and, if such officer does not  appropriately  respond,  to
report such evidence to the audit  committee or other  similar  committee of the
board of directors or the board itself.

     Longer  prison  terms  will also be  applied to  corporate  executives  who
violate federal  securities laws, the period during which certain types of suits
can be brought against a company or its officers has been extended,  and bonuses
issued  to  top  executives  prior  to  restatement  of  a  company's  financial
statements  are now  subject  to  disgorgement  if such  restatement  was due to
corporate misconduct. Executives are also prohibited from insider trading during
retirement  plan  "blackout"  periods,  and  loans  to  company  executives  are
restricted.  In addition, a provision directs that civil penalties levied by the
SEC as a result  of any  judicial  or  administrative  action  under  the Act be
deposited to a fund for the benefit of harmed  investors.  The Federal  Accounts
for Investor  Restitution  ("FAIR")  provision  also requires the SEC to develop
methods of improving  collection  rates.  The  legislation  accelerates the time
frame for disclosures by public companies, as they must immediately disclose any
material  changes in their  financial  condition or  operations.  Directors  and
executive  officers must also provide  information for most changes in ownership
in a company's securities within two business days of the change.

     The Act also increases the oversight of, and codifies certain  requirements
relating to audit  committees of public companies and how they interact with the
company's "registered public accounting firm" ("RPAF").  Audit committee members
must be independent and are barred from accepting consulting,  advisory or other
compensatory fees from the issuer. In addition,  companies must disclose whether
at least one member of the committee is a "financial  expert" (as such term will
be defined by the SEC) and if not, why not.  Under the Act, a RPAF is prohibited
from  performing  statutorily  mandated  audit  services  for a company  if such
company's chief executive officer, chief financial officer,  comptroller,  chief
accounting  officer  or any  person  serving in  equivalent  positions  has been
employed by such firm and  participated  in the audit of such company during the
one-year period  preceding the audit initiation date. The Act also prohibits any
officer  or  director  of a  company  or any other  person  acting  under  their
direction from taking any action to fraudulently influence,  coerce,  manipulate
or mislead any independent  public or certified  accountant engaged in the audit
of the company's financial statements for the purpose of rendering the financial
statement's  materially  misleading.  The Act also requires the SEC to prescribe
rules  requiring  inclusion  of an internal  control  report and  assessment  by
management in the annual report to shareholders.  The Act requires the RPAF that
issues the audit report to attest to and report on  management's  assessment  of
the  company's  internal  controls.  In  addition,  the Act  requires  that each
financial  report  required to be prepared in accordance with (or reconciled to)
accounting  principles  generally  accepted in the United  States of America and
filed  with  the SEC  reflect  all  material  correcting  adjustments  that  are
identified by a RPAF in accordance with accounting principles generally accepted
in the United States of America and the rules and regulations of the SEC.

                                       23
<PAGE>


Regulation of the Bank

     General. The Bank is subject to extensive regulation and examination by the
Department  and by the FDIC,  which  insures its deposits to the maximum  extent
permitted  by law.  The  federal  and  state  laws  and  regulations  which  are
applicable to banks regulate,  among other things,  the scope of their business,
their  investments,   their  reserves  against  deposits,   the  timing  of  the
availability  of deposited funds and the nature and amount of and collateral for
certain loans. There are periodic examinations by the Department and the FDIC to
test the Bank's compliance with various regulatory requirements. This regulation
and supervision  establishes a comprehensive framework of activities in which an
institution  can engage and is  intended  primarily  for the  protection  of the
insurance  fund  and  depositors.   The  regulatory  structure  also  gives  the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement  activities and examination  policies,  including  policies with
respect to the  classification  of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulation, whether by
the Department, the FDIC or the Congress could have a material adverse impact on
the Bank and their operations.

     Pennsylvania  Savings Bank Law. The  Pennsylvania  Banking Code of 1965, as
amended  (the  "Banking  Code")  contains  detailed  provisions   governing  the
organization,  location of offices,  rights and  responsibilities  of directors,
officers,  employees  and  members,  as well as  corporate  powers,  savings and
investment operations and other aspects of the Bank and its affairs. The Banking
Code delegates extensive  rulemaking power and administrative  discretion to the
Department so that the  supervision  and regulation of  state-chartered  savings
banks may be flexible and readily  responsive to changes in economic  conditions
and in savings and lending practices.

     One of the  purposes of the Banking Code is to provide  savings  banks with
the  opportunity  to be  competitive  with each other and with  other  financial
institutions existing under other Pennsylvania laws and other state, federal and
foreign laws. A  Pennsylvania  savings bank may locate or change the location of
its  principal   place  of  business  and   establish  an  office   anywhere  in
Pennsylvania, with the prior approval of the Department.

     The  Department  generally  examines each savings bank not less  frequently
than once every two years.  Although the Department may accept the  examinations
and  reports of the FDIC in lieu of the  Department's  examination,  the present
practice  is  for  the  Department  to  conduct  individual  examinations.   The
Department  may order any savings bank to  discontinue  any  violation of law or
unsafe or  unsound  business  practice  and may  direct  any  trustee,  officer,
attorney or employee of a savings  bank  engaged in an  objectionable  activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.

     Interstate   Acquisitions.   The  Interstate  Banking  Act  allows  federal
regulators  to  approve  mergers  between  adequately   capitalized  banks  from
different  states  regardless of whether the transaction is prohibited under any
state law,  unless one of the banks'  home  states has  enacted a law  expressly
prohibiting  out-of-state mergers before June 1997. This act also allows a state

                                       24

<PAGE>


to permit  out-of-state  banks to  establish  and operate  new  branches in this
state. The Commonwealth of Pennsylvania has "opted in" to this interstate merger
provision.  Therefore,  the prior requirement that interstate acquisitions would
only be permitted when another state had  "reciprocal"  legislation that allowed
acquisitions by  Pennsylvania-based  bank holding companies has been eliminated.
The new  Pennsylvania  legislation,  however,  retained the requirement  that an
acquisition   of   a   Pennsylvania   institution   by  a   Pennsylvania   or  a
non-Pennsylvania-based   holding   company  must  be  approved  by  the  Banking
Department.

     FDIC Insurance Premiums.  The deposits of the Bank are insured by the SAIF,
which is administered by the FDIC. Under current FDIC regulations,  SAIF-insured
institutions  are assigned to one of three capital groups which are based solely
on the level of an institution's capital. SAIF assessment rates are then tied to
the level of an institution's  supervisory concern based on risk classifications
derived from the capital groups. Rates during the last six months of 2002 ranged
from zero for well capitalized,  healthy  institutions,  such as the Bank, to 27
basis points for  undercapitalized  institutions  with  substantial  supervisory
concerns.

     In  addition,  all  institutions  with  deposits  insured  by the  FDIC are
required to pay  assessments  to fund  interest  payments on bonds issued by the
Financing Corporation,  a mixed-ownership  government corporation established to
recapitalize  the  predecessor to the SAIF.  The  assessment  rate for the third
quarter of 2002 was is .0172% of insured  deposits  and is  adjusted  quarterly.
These assessments will continue until the Financing  Corporation bonds mature in
2019.

     Under the Federal Deposit Insurance Act ("FDIA"), insurance of deposits may
be terminated by the FDIC upon a finding that the  institution has engaged or is
engaging in unsafe and unsound  practices,  is in an unsafe or unsound condition
to continue  operations or has violated any applicable  law,  regulation,  rule,
order or condition  imposed by the FDIC or written  agreement  entered into with
the FDIC. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.  At September 30,
2002, the Bank's regulatory capital exceeded all of its capital requirements.

     Capital  Requirements.  The FDIC has promulgated  regulations and adopted a
statement of policy  regarding  the capital  adequacy of  state-chartered  banks
which, like the Bank, are not members of the Federal Reserve System.  The FDIC's
capital regulations establish a minimum 3.0% Tier I leverage capital requirement
for the most highly-rated state-chartered,  non-member banks, with an additional
cushion  of at least 100 to 200  basis  points  for all  other  state-chartered,
non-member  banks,  which  effectively will increase the minimum Tier I leverage
ratio for such other banks to 4.0% to 5.0% or more. Under the FDIC's regulation,
highest-rated  banks are those that the FDIC determines are not  anticipating or
experiencing  significant  growth and have well diversified  risk,  including no
undue interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and, in general,  which are considered a strong  banking  organization,
rated  composite  1 under the  Uniform  Financial  Institutions  Rating  System.
Leverage or core  capital is defined as the sum of common  stockholders'  equity
(including  retained  earnings),  noncumulative  perpetual  preferred  stock and
related surplus, and minority interests in consolidated subsidiaries,  minus all


                                       25

<PAGE>

intangible  assets  other than  certain  qualifying  supervisory  goodwill,  and
certain   purchased   mortgage   servicing   rights  and  purchased  credit  and
relationships.

     The FDIC  also  requires  that  savings  banks  meet a  risk-based  capital
standard.  The  risk-based  capital  standard  for savings  banks  requires  the
maintenance   of  total   capital  which  is  defined  as  Tier  I  capital  and
supplementary (Tier 2 capital) to risk weighted assets of 8%. In determining the
amount of  risk-weighted  assets,  all assets,  plus  certain off balance  sheet
assets,  are multiplied by a risk-weight  of 0% to 100%,  based on the risks the
FDIC believes are inherent in the type of asset or item.

     The  components of Tier I capital are equivalent to those  discussed  above
under the 3% leverage standard. The components of supplementary (Tier 2) capital
include  certain  perpetual  preferred  stock,  certain  mandatory   convertible
securities,  certain  subordinated  debt and  intermediate  preferred  stock and
general  allowances  for loan and  lease  losses.  Allowance  for loan and lease
losses  includable in supplementary  capital is limited to a maximum of 1.25% of
risk-weighted   assets.   Overall,   the  amount  of  capital   counted   toward
supplementary capital cannot exceed 100% of core capital. At September 30, 2002,
the Bank met each of its capital requirements.

     A bank which has less than the minimum leverage capital  requirement shall,
within 60 days of the date as of which it fails to comply with such requirement,
submit to its FDIC regional  director for review and approval a reasonable  plan
describing  the means and timing by which the bank  shall  achieve  its  minimum
leverage capital requirement. A bank which fails to file such plan with the FDIC
is deemed to be operating in an unsafe and unsound manner, and could subject the
bank to a  cease-and-desist  order  from the FDIC.  The FDIC's  regulation  also
provides that any insured depository  institution with a ratio of Tier I capital
to total assets that is less than 2.0% is deemed to be operating in an unsafe or
unsound  condition  pursuant  to  Section  8(a) of the  FDIA and is  subject  to
potential  termination of deposit insurance.  However,  such an institution will
not be subject to an enforcement  proceeding thereunder solely on account of its
capital  ratios  if it has  entered  into and is in  compliance  with a  written
agreement  with the FDIC to increase its Tier I leverage  capital  ratio to such
level as the FDIC  deems  appropriate  and to take such  other  action as may be
necessary for the  institution  to be operated in a safe and sound  manner.  The
FDIC capital  regulation also provides,  among other things, for the issuance by
the FDIC or its  designee(s)  of a  capital  directive,  which is a final  order
issued to a bank that fails to maintain  minimum  capital to restore its capital
to the minimum leverage capital requirement within a specified time period. Such
directive is enforceable in the same manner as a final cease-and-desist order.

     The Bank is also subject to more stringent  Department capital  guidelines.
Although  not  adopted in  regulation  form,  the  Department  utilizes  capital
standards requiring a minimum of 6% leverage capital and 10% risk-based capital.
The components of leverage and risk-based  capital are substantially the same as
those defined by the FDIC.

     Loans-to-One Borrower Limitation.  Under federal regulations,  with certain
limited exceptions,  a Pennsylvania  chartered savings bank may lend to a single
or related group of borrowers on an "unsecured"  basis an amount equal to 15% of
its unimpaired  capital and surplus.  An additional amount may be lent, equal to

                                       26

<PAGE>

10%  of   unimpaired   capital  and   surplus,   if  such  loan  is  secured  by
readily-marketable  collateral,  which is defined to include certain  securities
and bullion, but generally does not include real estate.

     Activities and Investments of Insured  State-Chartered Banks. Section 24 of
the FDIA, as amended by the Federal Deposit  Insurance  Corporation  Improvement
Act  of  1991,  generally  limits  the  activities  and  equity  investments  of
FDIC-insured,  state-chartered  banks to those that are permissible for national
banks. Under regulations dealing with equity investments,  an insured state bank
generally may not directly or indirectly acquire or retain any equity investment
of a type,  or in an amount,  that is not  permissible  for a national  bank. An
insured state bank is not prohibited from, among other things,  (i) acquiring or
retaining  a majority  interest in a  subsidiary,  (ii)  investing  as a limited
partner  in a  partnership  the sole  purpose  of which is  direct  or  indirect
investment in the acquisition, rehabilitation or new construction of a qualified
housing  project,  provided that such limited  partnership  investments  may not
exceed 2% of the bank's total  assets,  (iii)  acquiring up to 10% of the voting
stock of a company that solely provides or reinsures  directors',  trustees' and
officers'  liability insurance coverage or bankers' blanket bond group insurance
coverage for insured  depository  institutions,  and (iv) acquiring or retaining
the voting shares of a depository institution if certain requirements are met.

     The FDIC has adopted final  regulations  pertaining  to the other  activity
restrictions  imposed  upon  insured  savings  banks and their  subsidiaries  by
Section 24.  Pursuant to such  regulations,  insured  savings banks  engaging in
impermissible  activities  may seek  approval  from the  FDIC to  continue  such
activities.  Savings  banks not engaging in such  activities  but that desire to
engage in otherwise  impermissible  activities  may apply for approval  from the
FDIC  to do so,  however,  if  such  bank  fails  to meet  the  minimum  capital
requirements or the activities  present a significant risk to the FDIC insurance
funds, such application will not be approved by the FDIC.

     Regulatory Enforcement Authority.  FIRREA included substantial  enhancement
to  the  enforcement  powers  available  to  federal  banking  regulators.  This
enforcement authority includes,  among other things, the ability to assess civil
money  penalties,  to issue  cease-and-desist  or removal orders and to initiate
injunctive  actions against  banking  organizations  and  institution-affiliated
parties, as defined. In general,  these enforcement actions may be initiated for
violations  of laws and  regulations  and  unsafe or  unsound  practices.  Other
actions or inactions  may provide the basis for  enforcement  action,  including
misleading  or  untimely  reports  filed  with  regulatory  authorities.  FIRREA
significantly  increased the amount of and grounds for civil money penalties and
requires,  except  under  certain  circumstances,  public  disclosure  of  final
enforcement actions by the federal banking agencies.

                                       27

<PAGE>



Federal and State Taxation

     General. The Bank is subject to federal income taxation in the same general
manner as other  corporations with some exceptions,  including  particularly the
reserve for bad debts  discussed  below.  The  following  discussion  of federal
taxation is intended  only to summarize  certain  pertinent  federal  income tax
matters and is not a  comprehensive  description of the tax rules  applicable to
the Bank.

     Method of Accounting.  For federal income tax purposes,  the Bank currently
reports its income and expenses on the accrual  method of accounting  and uses a
tax year ending September 30 for filing its federal income tax returns.

     Allowance for Loan Losses.  As of January 1, 1996, the Company  changed its
method of computing  reserves for bad debts to the  experience  method.  The bad
debt  deduction  allowable  under this method is  available  to small banks with
assets less than $500 million.  Beginning  October 1, 2000, the Company  changed
its  method  of  computing  reserves  for bad debts to the  specific  charge-off
method. The bad debt deduction allowable under this method is available to large
banks with assets greater than $500 million.  Generally,  this method allows the
Company to deduct an annual  addition  to the  reserve for bad debts equal to it
its net charge-offs.

     A thrift  institution  required to change its method of computing  reserves
for bad debts to the experience  method treats such change as a change in method
of accounting determined solely with respect to the "applicable excess reserves"
of the  institutions.  The amount of  applicable  excess  reserves is taken into
account ratably over a six taxable-year period, beginning with the first taxable
year beginning after December 31, 1995. For financial  reporting  purposes,  the
Company has not  incurred  any  additional  tax  expense.  Amounts that had been
previously  deferred will be reversed for financial  reporting purposes and will
be  included  in the  income tax return of the  Company,  increasing  income tax
payable. The change from the experience method to the specific charge-off method
in the current year will not result in a recapture of bad debt  reserves for tax
purposes.   Retained   earnings  at  September   30,  2002  and  2001   included
approximately  $1,325,000 representing bad debt deductions for which no deferred
income taxes have been provided.

     Distributions.   If  the  Bank   distributes   cash  or   property  to  its
stockholders,  and the  distribution  is treated  as being from its  accumulated
pre-1988 tax bad debt  reserves,  the  distribution  will cause the Bank to have
additional taxable income. A distribution to stockholders is deemed to have been
made from  accumulated  bad debt  reserves to the extent  that (a) the  reserves
exceed the amount that would have been  accumulated  on the basis of actual loss
experience,  and  (b)  the  distribution  is a  "non-dividend  distribution."  A
distribution  in respect of stock is a non-dividend  distribution  to the extent
that, for federal income tax purposes,  (i) it is in redemption of shares,  (ii)
it is pursuant to a liquidation  of the  institution,  or (iii) in the case of a
current  distribution,  together  with all other such  distributions  during the
taxable year, it exceeds the Bank's current and post-1951  accumulated  earnings
and profits.  The amount of additional  taxable income created by a non-dividend
distribution  is an amount that when  reduced by the tax  attributable  to it is
equal to the  amount of the  distribution.

                                       28

<PAGE>



     Minimum Tax. The Code imposes an  alternative  minimum tax at a rate of 20%
on a base of regular taxable income plus certain tax  preferences  ("alternative
minimum  taxable income" or "AMTI").  The alternative  minimum tax is payable to
the extent such AMTI is in excess of an exemption amount. The Code provides that
an item of tax preference is the excess of the bad debt deduction  allowable for
a taxable year  pursuant to the  percentage  of taxable  income  method over the
amount allowable under the experience  method. The other items of tax preference
that constitute AMTI include (a) tax exempt interest on newly-issued (generally,
issued on or after  August 8, 1986)  private  activity  bonds other than certain
qualified  bonds and (b) for taxable  years  beginning  after  1989,  75% of the
excess (if any) of (i) adjusted  current  earnings as defined in the Code,  over
(ii) AMTI  (determined  without regard to this preference and prior to reduction
by net operating  losses).  Net operating  losses can offset no more than 90% of
AMTI. Certain payments of alternative minimum tax may be used as credits against
regular tax liabilities in future years.

     Net Operating Loss Carryovers.  A financial  institution may carry back net
operating  losses  to the  preceding  three  taxable  years and  forward  to the
succeeding 15 taxable years.  Effective for net operating  losses arising in tax
years  beginning  after October 1, 1997,  the  carryback  period is reduced from
three years to two years and the  carryforward  period is extended from 15 years
to 20  years.  At  September  30,  2002,  the  Bank  had no net  operating  loss
carryforwards for federal income tax purposes.

     Corporate  Dividends-Received  Deduction. The corporate  dividends-received
deduction is 80% in the case of dividends  received from corporations with which
a corporate  recipient does not file a consolidated tax return, and corporations
which own less than 20% of the stock of a  corporation  distributing  a dividend
may deduct only 70% of dividends received or accrued on their behalf. However, a
corporation  may deduct 100% of dividends  from a member of the same  affiliated
group of corporations.

     Other Matters.  The Company's  federal income tax returns for its tax years
1993 and beyond are open under the  statute of  limitations  and are  subject to
review by the Internal Revenue Service ("IRS").

     Pennsylvania  Taxation.  The Bank is subject to tax under the  Pennsylvania
Mutual Thrift  Institutions Tax Act, which imposes a tax at the rate of 11.5% on
the Bank's net earnings,  determined in accordance  with  accounting  principles
generally  accepted in the United States of America,  as shown on its books. For
fiscal years  beginning in 1983,  and  thereafter,  net operating  losses may be
carried forward and allowed as a deduction for three succeeding  years. This Act
exempts the Bank from all other  corporate  taxes  imposed by  Pennsylvania  for
state tax purposes,  and from all local taxes imposed by political  subdivisions
thereof, except taxes on real estate and real estate transfers.

                                       29

<PAGE>

Subsidiary

     The Bank is the only direct  wholly owned  subsidiary  of the Company.  The
Bank formed HSB, Inc., a Delaware  company,  as a wholly owned subsidiary of the
Bank during  fiscal  1997.  HSB,  Inc.  was formed in order to  accommodate  the
transfer  of  certain  assets  that are  legal  investments  for the Bank and to
provide for a greater  degree of protection to claims of creditors.  The laws of
the State of Delaware and the court system create a more  favorable  environment
for the proposed business affairs of the subsidiary. HSB, Inc. currently manages
the investment  securities for the Bank, which as of September 30, 2002 amounted
to approximately $98.7 million.  The Bank formed two limited liability companies
in 2002, Freedom Financial Solutions LLC ("FFS") and HARL LLC ("HARL").  FFS was
established to engage in the sale of insurance  products  through a third party.
HARL was  established  for the purpose of investing  in FDIC  insured  financial
institutions/holding  company equity securities. Both FFS and HARL were inactive
during fiscal 2002.

Item 2. Properties.

     As of September 30, 2002, the Company  conducted its business from its main
office in Harleysville, Pennsylvania and four other full service branch offices.
The Company is also part of the STAR ATM System,  which provides  customers with
access to their deposits at locations  throughout  Pennsylvania,  Delaware,  New
York and New Jersey.
<TABLE>
<CAPTION>

                                                                                     Net Book Value
                                                                                     of Property and
                                                                                       Leasehold
                                                                     Lease           Improvements at
                                                    Owned or        Expiration        September 30,
 County                Address                      Leased            Date                2002          Deposits

                                                                                            (In Thousands)
<S>                                                   <C>              <C>                  <C>              <C>
Montgomery         271 Main Street
                   Harleysville, Pennsylvania         Owned            --             $  1,232         $139,504

Montgomery         640 East Main Street
                   Lansdale, Pennsylvania            Leased           May 2043(1)        1,003           19,324

Montgomery         1550 Hatfield Valley Road
                   Hatfield, Pennsylvania            Leased        January 2064(1)         939           86,377

Montgomery         2301 West Main Street
                   Norristown, Pennsylvania           Owned             --                 638           84,213

Montgomery         3090 Main Street
                   Sumneytown, Pennsylvania           Owned             --                 146           42,529
                                                                                           ---           ------
                                                                      Total           $  3,958          $371,947
                                                                                     ==========        =========
-----------------------
</TABLE>

(1)  The land at this  office is leased,  however,  the Bank owns the  building.
     Item 3. Legal Proceedings.


                                       30

<PAGE>


     The Company is not  involved in any legal  proceedings  except  nonmaterial
litigation incidental to the ordinary course of business.

Item 4.  Submission of Matters to a Vote of Security Holders.

         Not Applicable.

                                     PART II

Item 5. Market for the Company's Common Stock and Related Stockholder Matters.

     The  information  required herein is incorporated by reference from page 26
of the Company's 2002 Annual Report to Stockholders  ("Annual  Report") and from
Part III, Item 12 hereof.

Item 6.  Selected Financial Data.

     The information required herein is incorporated by reference from page 1 of
the Annual Report.

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations.

     The  information  required herein is incorporated by reference from pages 4
to 8 of the Annual Report.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

     The  information  required herein is incorporated by reference from pages 6
to 8 of the Annual Report.

Item 8.  Financial Statements and Supplementary Data.

     The information  required herein is incorporated by reference from pages 10
to 25 of the Annual Report.

Item  9.  Changes  in and  Disagreements  With  Accountants  on  Accounting  and
Financial Disclosure.

         Not Applicable.
                                       31

<PAGE>


                                    PART III

Item 10.  Directors and Executive Officers of the Company.

     The  information  required  by  Item  10  of  Form  10-K  with  respect  to
identification of directors and executive  officers is incorporated by reference
from the  information  contained  in the  section  captioned  "Information  with
Respect to Nominees for Director,  Directors  Whose Terms Continue and Executive
Officers" in the Company's  definitive Proxy Statement for the Annual Meeting of
Stockholders  to be held  January 22, 2003 (the  "Proxy  Statement"),  a copy of
which will be filed  with the  Securities  and  Exchange  Commission  before the
meeting date.

Item 11.  Executive Compensation.

     The  information  required  by  Item 11 of Form  10-K  is  incorporated  by
reference from the information  contained in the sections captioned  "Management
Compensation" in the Proxy Statement.

Item 12.  Security  Ownership of Certain  Beneficial  Owners and  Management and
Related Stockholder Matters.

     The  information  required by Item 403 of Regulation S-K is incorporated by
reference from the information  contained in the section  captioned  "Beneficial
Ownership  of Common Stock by  Beneficial  Owners and  Management"  in the Proxy
Statement.

     Equity  Compensation  Plan  Information.  The  following  table  sets forth
certain   information   for  all  equity   compensation   plans  and  individual
compensation  arrangements  (whether with  employees or  non-employees,  such as
directors), in effect as of September 30, 2002.

<TABLE>
<CAPTION>

                                 Number of Shares to be issued    Weighted-Average      Number of Shares Remaining
                                    upon the Exercise of         Exercise Price of               Available
                                    Outstanding Options,           Outstanding        for Future Issuance (Excluding
                                    Warrants and Rights             Options                     Shares
Plan Category                                                                          Reflected in the First Column)
---------------------------      -----------------------------   -----------------    -------------------------------
<S>                                         <C>                   <C>                             <C>
Equity Compensation Plans
   Approved by Security                     128,208               $   13.51                       89,325
   Holders
Equity Compensation Plans Not
   Approved by Security                         --                     --                             --
   Holders
                                            -------               ---------                       ------
Total                                       128,208               $   13.51                       89,325
                                            =======               =========                       ======
</TABLE>


Item 13.  Certain Relationships and Related Transactions.

     The  information  required  by  Item 13 of Form  10-K  is  incorporated  by
reference from the information contained in the section captioned  "Indebtedness
of Management" in the Proxy Statement.

                                       32

<PAGE>

Item 14.  Controls and Procedures.

     Under  the  supervision  and  with  the  participation  of our  management,
including  our chief  executive  officer and chief  financial  officer,  we have
evaluated  the  effectiveness  of the design  and  operation  of our  disclosure
controls and procedures within 90 days of the filing date of this annual report,
and based on their  evaluation,  our chief executive officer and chief financial
officer have concluded  that these controls and procedures are effective.  There
were no  significant  changes in our internal  controls or in other factors that
could  significantly  affect  these  controls  subsequent  to the  date of their
evaluation.

     Disclosure  controls and procedures  are our controls and other  procedures
that are designed to ensure that  information  required to be disclosed by us in
the  reports  that  we  file or  submit  under  the  Exchange  Act is  recorded,
processed,  summarized  and reported,  within the time periods  specified in the
Securities and Exchange  Commission's rules and forms.  Disclosure  controls and
procedures  include,  without  limitation,  controls and procedures  designed to
ensure that  information  required to be  disclosed by us in the reports that we
file under the Exchange Act is accumulated  and  communicated to our management,
including  our  chief  executive  officer  and  chief  financial   officer,   as
appropriate to allow timely decisions regarding required disclosure.

                                     PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

     (a)  Contents

     (1)  The following financial  statements are incorporated by reference from
          Item 8 hereof (see Exhibit 13):

          Independent Auditors' Report

          Consolidated  Statements  of Financial  Condition as of September  30,
          2002 and 2001

          Consolidated  Statements  of Income for the Years Ended  September 30,
          2002, 2001 and 2000

          Consolidated  Statements of  Stockholders'  Equity for the Years Ended
          September 30, 2002, 2001 and 2000

          Consolidated  Statements  of Cash Flows for the Years Ended  September
          30, 2002, 2001 and 2000

          Notes to Consolidated Financial Statements

                                       33




<PAGE>

     (b) Reports on Form 8-K

     No  reports on Form 8-K were  filed  during the last  quarter of the period
     covered by this report.

     (c) Exhibits


     (2)  The  following  exhibits  are filed as part of this Form 10-K and this
          list includes the Exhibit Index.
<TABLE>
<CAPTION>


 No.                        Exhibits                                                                 Location
<S>              <C>                                                                            <C>
3.1              Articles of Incorporation                                                             (1)
3.2              Bylaws                                                                                (1)
4                Common Stock Certificate                                                              (1)
10.1             Stock Compensation Program*                                                           (2)
10.2             1995 Employee Stock Purchase Plan*                                                    (3)
10.3             1995 Stock Option Plan*                                                               (3)
10.4             2000 Stock Option Plan*                                                               (4)
10.5             Profit Sharing Incentive Plan*                                                        (5)
10.6             Employment Agreements with Edward J. Molnar, Ronald B.
                    Geib, and Marian Bickerstaff*                                                      (2)
13               Annual Report to Stockholders                                                  Filed herewith
22               Subsidiaries of the Registrant - Reference is made to "Item 1.
                    Business - Subsidiaries" of this Form 10-K for the required
                    information                                                                        --
23               Consent of Deloitte & Touche                                                   Filed herewith
99.1             Certification of President and Chief Executive Officer pursuant
                    to Section 906 of the Sarbanes-Oxley Act of 2002                            Filed herewith
99.2             Certification of Chief Financial Officer pursuant to Section 906
                    of the Sarbanes-Oxley Act of 2002                                           Filed herewith
-----------------
</TABLE>

*    Denotes management compensation plan or arrangement

(1)  Incorporated  herein by reference to the Company's  Current  Report on Form
     8-K filed with the Securities and Exchange  Commission  ("SEC") on February
     25, 2000.

(2)  Incorporated   herein  by  reference   to   Harleysville   Savings   Bank's
     Registration  Statement  on Form 10 filed with the  Federal  Home Loan Bank
     Board, the predecessor to the Office of Thrift Supervision ("OTS"), on July
     1, 1987.

(3)  Incorporated herein by reference to Harleysville  Savings Bank's definitive
     proxy  statement  dated  December  19, 1995 filed with the Federal  Deposit
     Insurance Corporation.

(4)  Incorporated by reference to the Company's definitive proxy statement dated
     December 19, 2000 filed with the SEC.

(5)  Incorporated  herein by reference to  Harleysville  Savings  Bank's  Annual
     Report on Form 10-K for the fiscal year ended September 30, 1989 filed with
     the OTS.

                                       34


<PAGE>



                                   SIGNATURES

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

                                         HARLEYSVILLE SAVINGS
                                         FINANCIAL CORPORATION


December 18, 2002                        By: /s/ Edward J. Molnar
                                             -----------------------------------
                                             Edward J. Molnar
                                             President, Chief Executive Officer
                                             and Director

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



/s/ Edward J. Molnar                                          December 18, 2002
----------------------------------
Edward J. Molnar
President, Chief Executive
 Officer and Director


/s/ Brendan J. McGill                                         December 18, 2002
----------------------------------
Brendan J. McGill
Senior Vice President, Treasurer
 and Chief Financial Officer


/s/ Sandford L. Alderfer                                      December 18, 2002
----------------------------------
Sanford L. Alderfer
Director


/s/ Paul W. Barndt                                            December 18, 2002
----------------------------------
Paul W. Barndt
Director


                                       35


<PAGE>




/s/ Philip A. Clemens                                         December 18, 2002
----------------------------------
Philip A. Clemens
Director


/s/ Mark R. Cummins                                           December 18, 2002
----------------------------------
Mark R. Cummins
Director


/s/ David J. Friesen                                          December 18, 2002
----------------------------------
David  J. Friesen
Director


/s/ George W. Meschter                                        December 18, 2002
----------------------------------
George W. Meschter
Director


/s/ Ronald B. Geib                                            December 18, 2002
----------------------------------
Ronald B. Geib
Director, Executive Vice President
  and Chief Operating Officer

                                       36

<PAGE>



                                  CERTIFICATION

     I, Edward J. Molnar,  President and Chief Executive Officer of Harleysville
Savings Financial Corporation, certify that:

1.   I have  reviewed this annual  report on Form 10-K of  Harleysville  Savings
     Financial Corporation;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based  on my  knowledge,  the  financial  statements  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent functions):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

                                       37

<PAGE>


     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and


6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual  report  whether or not there were  significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.


Date: December 18, 2002                   /s/ Edward J. Molnar
                                          --------------------------------------
                                          Edward J. Molnar
                                          President and Chief Executive Officer


                                       38

<PAGE>



                                  CERTIFICATION

     I, Brendan J. McGill,  Senior Vice President and Chief Financial Officer of
Harleysville Savings Financial Corporation, certify that:

1.   I have  reviewed this annual  report on Form 10-K of  Harleysville  Savings
     Financial Corporation;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based  on my  knowledge,  the  financial  statements  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent functions):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

                                       39
<PAGE>


     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual  report  whether or not there were  significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date: December 18, 2002                               /s/ Brendan J. McGill
                                                      --------------------------
                                                      Brendan J. McGill
                                                      Senior Vice President and
                                                      Chief Financial Officer

                                       40