UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________

Form 10-Q

__________________

xQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended June 30, 2007

Or

¨Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from ___________ to __________

Commission file number 0-15237

___________________

HARLEYSVILLE NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

___________________

Pennsylvania	23-2210237
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

483 Main Street

Harleysville, Pennsylvania  19438

(Address of principal executive office and zip code)

(215) 256-8851

(Registrant’s telephone number, including area code)

___________________

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 (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes  x   No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 

Large accelerated filer o      Accelerated filer x      Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨  No  x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 28,858,722 shares of Common Stock, $1.00 par value, outstanding on August 3, 2007.

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HARLEYSVILLE NATIONAL CORPORATION
INDEX TO FORM 10-Q REPORT
	PAGE
Part I.  Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at June 30, 2007 (unaudited) and December 31, 2006		3
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2007 and 2006 (unaudited)		4
Consolidated Statements of Shareholders’ Equity for the Six Months Ended June 30, 2007 and 2006 (unaudited)		5
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006 (unaudited)		6
Notes to Consolidated Financial Statements		7
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3. Quantitative and Qualitative Disclosures about Market Risk		30
Item 4. Controls and Procedures		31
Part II.  Other Information		32
Item 1.  Legal Proceedings		32
Item 1A.  Risk Factors		32
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 3.  Defaults Upon Senior Securities		32
Item 4. Submission of Matters to a Vote of Security Holders		32
Item 5. Other Information		33
Item 6.  Exhibits		33
Signatures		34

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PART 1. FINANCIAL INFORMATION
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)	June 30, 2007			December 31, 2006
	(Unaudited)
Assets
Cash and due from banks	$	62,915		$	61,895
Federal funds sold and securities purchased under agreements to resell		30,000			59,000
Interest-bearing deposits in banks		5,385			3,975
Total cash and cash equivalents		98,300			124,870
Residential mortgage loans held for sale		1,555			1,857
Investment securities available for sale		885,067			853,010
Investment securities held to maturity (market value $58,233 and $59,297, respectively)		58,857			58,879
Loans and leases		2,080,436			2,045,498
Less: Allowance for loan losses		(21,646	)		(21,154	)
Net loans		2,058,790			2,024,344
Premises and equipment, net		39,404			33,785
Accrued interest receivable		14,832			14,950
Goodwill		45,081			43,956
Intangible assets, net		7,359			7,282
Bank-owned life insurance		62,905			61,720
Other assets		31,094			25,175
Total assets	$	3,303,244		$	3,249,828
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing	$	339,618		$	327,973
Interest-bearing:
Checking accounts		516,600			539,974
Money market accounts		759,905			662,966
Savings		121,874			133,370
Time deposits		765,557			852,572
Total deposits		2,503,554			2,516,855
Federal funds purchased and short-term securities sold under agreements to   repurchase		123,275			96,840
Other short-term borrowings		1,106			1,357
Long-term borrowings		297,750			239,750
Accrued interest payable		22,166			31,358
Subordinated debt		51,548			51,548
Other liabilities		16,939			17,369
Total liabilities		3,016,338			2,955,077
Shareholders' Equity:
Series preferred stock,  par value $1 per share;
Authorized 8,000,000 shares, none issued		—			—
Common stock, par value $1 per share; authorized 75,000,000
shares; issued 29,074,250 shares at June 30, 2007 and December 31, 2006		29,074			29,074
Additional paid in capital		194,870			194,713
Retained earnings		80,969			79,339
Accumulated other comprehensive loss		(14,713	)		(6,103	)
Treasury stock, at cost: 178,117 shares at June 30, 2007 and
109,767 shares at December 31, 2006		(3,294	)		(2,272	)
Total shareholders' equity		286,906			294,751
Total liabilities and shareholders' equity	$	3,303,244		$	3,249,828

See accompanying notes to consolidated financial statements.

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HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
	Three Months Ended				Six Months Ended
	June 30,				June 30
(Dollars in thousands, except per share information)	2007		2006		2007		2006
Interest Income:
Loans and leases, including fees	$	35,452	$	33,170	$	70,088	$	64,966
Investment securities:
Taxable		8,488		7,552		17,052		14,874
Exempt from federal taxes		2,685		2,646		5,374		5,199
Federal funds sold and securities purchased under agreements to resell		1,017		807		1,768		1,181
Deposits in banks		69		48		124		99
Total interest income		47,711		44,223		94,406		86,319
Interest Expense:
Savings and money market deposits		12,830		8,918		24,936		16,431
Time deposits		9,302		8,965		19,018		16,609
Short-term borrowings		1,297		1,084		2,553		2,504
Long-term borrowings		4,127		3,980		7,907		8,028
Total interest expense		27,556		22,947		54,414		43,572
Net interest income		20,155		21,276		39,992		42,747
Provision for loan losses		1,125		900		3,550		2,100
Net interest income after provision for loan losses		19,030		20,376		36,442		40,647
Noninterest Income:
Service charges		2,442		2,026		4,360		3,916
Gain on sales of investment securities, net		2		—		533		—
Gain on sale of credit card portfolio		—		1,444		—		1,444
Wealth management		4,831		3,378		9,098		7,942
Bank-owned life insurance		603		601		1,185		1,201
Other income		2,377		2,474		4,226		4,353
Total noninterest income		10,255		9,923		19,402		18,856
Net interest income after provision for loan losses and
noninterest income		29,285		30,299		55,844		59,503
Noninterest Expense:
Salaries, wages and employee benefits		12,450		10,854		24,047		21,373
Occupancy		1,688		1,401		3,234		2,899
Furniture and equipment		1,076		900		1,993		1,791
Marketing		409		523		816		929
Other expense		4,518		4,000		8,830		7,811
Total noninterest expense		20,141		17,678		38,920		34,803
Income before income tax expense		9,144		12,621		16,924		24,700
Income tax expense		2,065		3,336		3,711		6,464
Net income	$	7,079	$	9,285	$	13,213	$	18,236
Net income per share information:
Basic	$	0.25	$	0.32	$	0.46	$	0.63
Diluted	$	0.24	$	0.32	$	0.45	$	0.62
Cash dividends per share	$	0.20	$	0.18	$	0.40	$	0.36
Weighted average number of common shares:
Basic		28,944,643		28,933,741		28,955,014		28,903,632
Diluted		29,190,602		29,351,584		29,222,626		29,368,854

See accompanying notes to consolidated financial statements.

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HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars and share information in thousands)

Six Months Ended June 30, 2007
	Common Stock		Treasury Stock					Additional						Accumulated Other
	Number of		Number of			Par		Paid			Retained			Comprehensive			Treasury						Comprehensive
	Shares		Shares			Value		In Capital			Earnings			Loss			Stock			Total			Income (Loss)
Balance, January 1, 2007		29,074		(109	)	$	29,074	$	194,713		$	79,339		$	(6,103	)	$	(2,272	)	$	294,751
Issuance of stock for stock options, net of tax and excess tax benefits		-		17			-		25			-			-			355			380
Issuance   of stock awards		-		-			-		(1	)		-			-			5			4
Stock based   compensation   expense		-		-			-		133			-			-			-			133
Net income		-		-			-		-			13,213			-			-			13,213		$	13,213
Other comprehensive loss, net of reclassifications and tax		-		-			-		-			-			(8,610	)		-			(8,610	)		(8,610	)
Purchase of    treasury stock		-		(86	)		-		-			-			-			(1,382	)		(1,382	)
Cash dividends		-		-			-		-			(11,583	)		-			-			(11,583	)
Comprehensive    income																							$	4,603
Balance, June 30, 2007		29,074		(178	)	$	29,074	$	194,870		$	80,969		$	(14,713	)	$	(3,294	)	$	286,906

Six Months Ended June 30, 2006
	Common Stock		Treasury Stock					Additional					Accumulated Other
	Number of		Number of			Par		Paid		Retained			Comprehensive			Treasury						Comprehensive
	Shares		Shares			Value		In Capital		Earnings			Income (Loss)			Stock			Total			Income (Loss)
Balance, January 1, 2006		27,500		(64	)	$	27,500	$	167,418	$	88,285		$	(8,618	)	$	(1,353	)	$	273,232
Issuance of   stock for stock   options, net of   excess tax   benefits		146		130			146		1,835		-			-			2,743			4,724
Issuance of   stock awards		-		-			-		5		-			-			-			5
Stock based   compensation   expense		-		-			-		249		-			-			-			249
Net income		--		-			-		-		18,236			-			-			18,236		$	18,236
Other comprehensive loss, net of reclassifications and tax		-		-			-		-		-			(6,336	)		-			(6,336	)		(6,336	)
Purchases of   treasury stock		-		(91	)		-		-		-			-			(1,916	)		(1,916	)
Cash dividends		-		-			-		-		(10,457	)		-			-			(10,457	)
Comprehensive    income																						$	11,900
Balance, June 30, 2006		27,646		(25	)	$	27,646	$	169,507	$	96,064		$	(14,954	)	$	(526	)	$	277,737
See accompanying notes to consolidated financial statements.

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HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
	Six Months Ended
(Dollars in thousands)	June 30,
	2007			2006
Operating Activities:
Net income	$	13,213		$	18,236
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		3,550			2,100
Depreciation and amortization		2,498			2,156
Net amortization of investment securities discounts/premiums		971			1,876
Deferred income tax benefit		(179	)		(2,163	)
Gain on sales of investment securities, net		(533	)		—
Gain on sale of credit card portfolio		—			(1,444	)
Bank-owned life insurance income		(1,185	)		(1,201	)
Stock based compensation expense		133			249
Net decrease (increase) in accrued interest receivable		118			(844	)
Net (decrease) increase in accrued interest payable		(9,192	)		1,922
Net (increase) decrease in other assets		(1,529	)		1,410
Net increase (decrease) in other liabilities		698			(5,368	)
Other, net		4			(2	)
Net cash provided by operating activities		8,567			16,927
Investing Activities:
Proceeds from sales of investment securities available for sale		67,116			—
Proceeds from maturity or calls of investment securities available for sale		81,279			81,754
Purchases of investment securities available for sale		(193,966	)		(118,189	)
Net increase in loans		(37,812	)		(63,808	)
Net cash paid due to acquisitions, net of cash acquired		(2,500	)		(14,525	)
Net proceeds from sale of credit card portfolio		—			16,705
Purchases of premises and equipment		(7,560	)		(5,512	)
Proceeds from sales of premises and equipment		2			16
Proceeds from sales of other real estate		6			32
Net cash used in investing activities		(93,435	)		(103,527	)
Financing Activities:
Net (decrease) increase in deposits		(13,301	)		114,201
Increase in federal funds purchased and short-term securities sold under agreements to repurchase		26,435			18,667
(Decrease) increase  in other short-term borrowings		(251	)		263
Advances of long-term borrowings		105,000			10,000
Repayments of long-term borrowings		(47,000	)		(50,000	)
Cash dividends		(11,583	)		(10,457	)
Repurchase of common stock		(1,382	)		(1,916	)
Proceeds from the exercise of stock options		380			4,121
Excess tax benefits from stock based compensation		—			603
Net cash provided by financing activities		58,298			85,482
Net (decrease) increase in cash and cash equivalents		(26,570	)		(1,118	)
Cash and cash equivalents at beginning of period		124,870			95,211
Cash and cash equivalents at end of the period	$	98,300		$	94,093
Cash paid during the period for:
Interest	$	63,625		$	41,697
Income taxes	$	1,980		$	8,421
Supplemental disclosure of noncash investing and financing activities:
Transfer of assets from loans to net assets in foreclosure	$	51		$	91
See accompanying notes to consolidated financial statements.

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HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1– Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position of Harleysville National Corporation (the Corporation) and its wholly owned subsidiaries-Harleysville National Bank (the Bank), HNC Financial Company and HNC Reinsurance Company, as of June 30, 2007, the results of its operations for the three and six month periods ended June 30, 2007 and 2006 and the cash flows for the six month periods ended June 30, 2007 and 2006. Certain prior period amounts have been reclassified to conform to current year presentation. All significant intercompany accounts and transactions have been eliminated in consolidation. We recommend that you read these unaudited consolidated financial statements in conjunction with the audited consolidated financial statements of the Corporation and the accompanying notes in the Corporation's 2006 Annual Report on Form 10-K. The results of operations for the three and six month periods ended June 30, 2007 and 2006 are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. Actual results could differ from those estimates.

For additional information on other significant accounting policies, see Note 1 of the Consolidated Financial Statements of the Corporation’s 2006 Annual Report on Form 10-K.

Note 2 – Acquisitions/Disposition

On May 15, 2007, the Corporation entered into a definitive agreement to acquire East Penn Financial Corporation and its wholly owned subsidiary, East Penn Bank, a $451 million state chartered, FDIC insured bank, offering deposit and lending services throughout the Lehigh Valley, PA. Headquartered and founded in Emmaus, PA in 1990, East Penn has nine banking offices located in Lehigh, Northampton and Berks Counties. The total value of the transaction at the agreement date, if it closed, was estimated at $92.7 million or approximately $14.50 per share of East Penn Financial stock, although actual value will depend on several factors, including the price of Harleysville National Corporation (“HNC”) stock, but will not be less than $13.52 per share ($86.3 million) or greater than $15.48 per share ($99.1 million). Under terms of the Merger Agreement, each shareholder of East Penn Financial Corporation may elect to receive either cash only or HNC shares only for each share of East Penn Financial Corporation stock, but may receive a combination of both in the aggregate for all East Penn Financial Corporation shares the shareholder owns. The amount of final per share consideration is based on a formula that is determined by the average per share value of HNC stock during the twenty day period ending eleven days prior to closing. The consideration is subject to election and allocation procedures designed to provide that the cash portion is $50.3 million but in any event not greater than 60% of the dollar value of the merger consideration. The parties have agreed that the allocation of HNC common stock and cash will be such that the East Penn Financial shareholders will not recognize gain or loss for Federal income tax purposes on those East Penn Financial shares that are exchanged for HNC common stock in the merger. It is currently anticipated that the acquisition, which is subject to state and federal regulatory approval, approval by the shareholders of East Penn Financial and other customary conditions to closing, will most likely be completed in the fall of 2007.

On March 1, 2007, the Cornerstone Companies, a subsidiary of the Bank, completed a selected asset purchase of McPherson Enterprises and related entities (McPherson), registered investment advisors specializing in estate and succession planning and life insurance for high-net-worth construction and aggregate business owners and families throughout the United States. Located in Towson, Maryland, McPherson became a part of the Cornerstone Companies, a component of the Bank’s Millennium Wealth Management division. The Bank paid $1.5 million in cash. Estimated goodwill and identifiable intangibles of approximately $1.5 million was recorded in connection with the asset purchase. Management is in the process of evaluating and finalizing the identifiable intangible assets and purchase accounting adjustments.

On April 14, 2006, the Bank sold its existing credit card portfolio to Elan Financial Services, a national credit card issuer and established an agent issuing relationship with Elan Financial Services. Under the agreement, credit cards for the Bank are issued under the Harleysville National Bank name. The Bank sold $15.3 million in credit card receivables resulting in a gain in the second quarter of 2006 from the sale of these credit cards, net of federal income taxes, of approximately $939,000 or $.03 per diluted share. The Bank continues to earn certain fees from ongoing portfolio activity. The sale agreement stipulates that any credit card accounts delinquent over 30 days, overlimit accounts and petitioned bankruptcies will be guaranteed by the Bank for a period of one year. Of the $15.3 million in credit card receivables sold, $529,000 was sold with full recourse which was the total potential recourse exposure at the time of the sale. During the second quarter of 2006, the Bank recorded a recourse liability of $371,000 which was the entire recourse liability recorded. This estimate was based on our historic losses as experienced on similar credit card receivables. The Bank was subject to the full recourse obligations for a period of one year. At June 30, 2007, the total potential recourse exposure was reduced to $0 with the expiration of the one-

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Note 2 – Acquisitions/Disposition– Continued

year recourse period. The Corporation’s actual loss experience approximated the initial reserve.

Note 3 – Goodwill and Other Intangibles

Goodwill and identifiable intangibles were $45.1 million and $4.7 million, respectively at June 30, 2007, and $44.0 million and $4.7 million, respectively at December 31, 2006. The carrying amounts of goodwill by business segment at June 30, 2007 and December 31, 2006 for Community Banking was $31.6 million and for Wealth Management was $13.5 million and $12.4 million, respectively. Effective March 1, 2007, the Bank completed the selected asset purchase of McPherson Enterprises and related entities including estimated goodwill of approximately $1.1 million and customer relationship intangibles of approximately $375,000 (with an estimated weighted average amortization period of 10 years) allocated to the Wealth Management segment.

Management performed its annual review of goodwill at June 30, 2007 in accordance with SFAS No. 142 and determined there was no impairment of goodwill and other identifiable intangible assets.

The gross carrying value and accumulated amortization related to core deposit intangibles and other identifiable intangibles at June 30, 2007 and December 31, 2006 are presented below:

	June 30,						December 31,
	2007								2006
	Gross Carrying Amount			Accumulated Amortization			Gross Carrying Amount			Accumulated Amortization
	(Dollars in thousands)
Core deposit intangibles		$	1,929		$	852	$	1,929		$	733
Other identifiable intangibles			4,288			685		3,913			448
Total		$	6,217		$	1,537	$	5,842		$	1,181

The remaining weighted average amortization period of core deposit and other identifiable intangibles is approximately seven years. The amortization of core deposit intangibles allocated to the Community Banking segment were $57,000 and $62,000 for the second quarter of 2007 and 2006, respectively and $119,000 and $123,000 for the six months ended June 30, 2007 and 2006, respectively. Amortization of identifiable intangibles related to the Wealth Management segment totaled $122,000 and $128,000 for the second quarter of 2007 and 2006, respectively and $237,000 and $222,000 for the six months ended June 30, 2007 and 2006, respectively. The Corporation estimates that aggregate amortization expense for core deposit and other identifiable intangibles will be $710,000, $709,000, $709,000, $709,000 and $596,000 for 2007, 2008, 2009, 2010 and 2011, respectively.

Mortgage servicing rights of $2.7 million and $2.6 million at June 30, 2007 and December 31, 2006, respectively, are included on the Corporation’s balance sheet in other intangible assets.

Note 4 - Pension Plan

The Corporation has a non-contributory defined benefit pension plan covering substantially all employees.  The plan’s benefits are based on years of service and the employee’s average compensation during any five consecutive years within the ten-year period preceding retirement.

The Corporation has not made any contributions to its pension plan during the first six months of 2007. The components of net periodic defined benefit pension expense and other amounts recognized in other comprehensive income for the six months ended June 30, 2007 and 2006 are as follows:

(Dollars in thousands)	Six Months Ended June 30,
	2007			2006
Net periodic benefit cost
Service cost	$	583		$	521
Interest cost		342			327
Expected return on plan assets		(300	)		(276	)
Amortization of net actuarial loss		38			59
Net periodic benefit expense	$	663		$	631

At December 31, 2006, the Corporation adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” and recognized as a component of accumulated other comprehensive income (OCI), net of tax, the net loss and transition asset that had not been included in the net periodic benefit cost of its pension plan for $1.5 million.  However, the $1.5 million transition amount was included in OCI for 2006 rather than as an adjustment of the December 31, 2006 balance of accumulated OCI. Therefore, OCI, net of tax for 2006 reported as $2.5 million in the Corporation’s 2006 Form 10-K should be increased by $1.5 million to $4.0 million with total comprehensive income of $43.4 million. The Corporation has determined that the error is not material and will provide the corrected tabular disclosures of comprehensive income upon filing of the 2007 Form 10-K.

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Note 5 - Stock Dividend/Split

On September 15, 2006, the Corporation paid a five percent stock dividend to shareholders of record as of September 1, 2006.  All prior period amounts were restated to reflect these stock dividends.

Note 6 – Stock-Based Compensation

The Corporation has four shareholder approved fixed stock option plans that allow the Corporation to grant options up to an aggregate of 3,797,861 shares of common stock to key employees and directors. At June 30, 2007, 2,510,697 stock options had been granted under the stock option plans. The options have a term of ten years when issued and typically vest over a five-year period. The exercise price of each option is the market price of the Corporation’s stock on the date of grant. Additionally, at June 30, 2007, the Corporation has an additional 328,327 granted stock options as a result of the Millennium Bank acquisition. The options have a term of ten years and are exercisable at prices ranging from $9.25 to $13.81.

The Corporation recognizes compensation expense for stock options in accordance with SFAS 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)) adopted at January 1, 2006 under the modified prospective application method of transition. Prior to January 1, 2006, the Corporation followed SFAS 123 and APB 25 with pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS 123 had been applied. The Corporation recognizes compensation expense for the portion of outstanding awards at January 1, 2006 for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS 123 for pro forma disclosures. For new grants awarded on or after January 1, 2006, the Corporation utilizes the Black-Scholes option-pricing model (as used under SFAS 123) to estimate the fair value of each option on the date of grant.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions based on historical data used for grants for the six months ended June 30, 2006 (no options were granted during the six month period ending June 30, 2007): weighted-average dividend yield of 3.46%; weighted-average expected volatility of 31.78%; weighted average risk-free interest rate of 4.42% and a weighted-average expected life of 7.34 years. Expected volatility is based on the historical volatility of the Corporation’s stock over the expected life of the grant. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury strip rate in effect at the time of the grant. The life of the option is based on historical factors which include the contractual term, vesting period, exercise behavior and employee terminations. In accordance with SFAS 123(R), stock-based compensation expense for the six months ended June 30, 2007 and 2006 is based on awards that are ultimately expected to vest and therefore has been reduced for estimated forfeitures. The Corporation estimates forfeitures using historical data based upon the groups identified by management. Stock-based compensation expense was $66,000 and $63,000, net of tax for the second quarter of 2007 and $121,000 and $108,000, net of tax for the second quarter of 2006. Stock-based compensation expense was $133,000 and $127,000, net of tax for the six-month period ending June 30, 2007 and $249,000 and $222,000, net of tax for the six months ended June 30, 2006.

A summary of option activity under the Corporation’s stock option plans as of June 30, 2007, and changes during the six months ended June 30, 2007 is presented in the following table. The number of shares and weighted-average share information have been adjusted to reflect stock dividends.

Options	Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term  (in years)		Aggregate  Intrinsic Value (in thousands)
Outstanding at January 1, 2007		1,157,484		$	15.60
Granted		-			-
Exercised		(17,431	)		9.44
Forfeited (unvested)		(1,680	)		20.10
Cancelled (vested)		(4,505	)		18.61
Outstanding at June 30, 2007		1,133,868		$	15.67		4.92	$	4,107
Exercisable at June 30, 2007		1,007,136		$	14.85		4.55	$	4,107

There were no options granted during the six-month period ending June 30, 2007. The weighted-average grant-date fair value of options granted during the six months ended June 30, 2006 was $5.04. The total intrinsic value of options exercised during the six months ended June 30, 2007 and 2006 was $129,000 and $3.1 million, respectively.Intrinsic value is measured using the fair market value price of the Corporation’s common stock less the applicable exercise price.

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Note 6 – Stock-Based Compensation – Continued

A summary of the status of the Corporation’s nonvested shares as of June 30, 2007 is presented below:

Nonvested Shares	Shares			Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2007		131,610		$	6.15
Granted		-			-
Vested		(3,197	)		5.10
Forfeited		(1,680	)		5.61
Nonvested at June 30, 2007		126,733		$	6.15

As of June 30, 2007, there was a total of $601,000 of unrecognized compensation cost related to nonvested awards under stock option plans. This cost is expected to be recognized over a weighted-average period of 1.5 years. The total fair value of shares vested during the six months ended June 30, 2007 and 2006 was $20,000 and $28,000, respectively.

Note 7 - Earnings Per Share

Basic earnings per share exclude dilution and are computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share take into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. All weighted average, actual shares and per share information in these financial statements have been adjusted retroactively for the effect of stock dividends.

The calculations of basic earnings per share and diluted earnings per share are as follows:

	Three Months Ended						Six Months Ended
	June 30,				June 30,
(Dollars in thousands, except per share data)	2007		2006			2007		2006
Basic earnings per share
Net income available to common shareholders	$	7,079	$	9,285		$	13,213	$	18,236
Weighted average common shares outstanding		28,944,643		28,933,741			28,955,014		28,903,632
Basic earnings per share	$	.25	$	.32		$	.46	$	.63
Diluted earnings per share
Net income available to common shareholders     and assumed conversions	$	7,079	$	9,285		$	13,213	$	18,236
Weighted average common shares outstanding		28,944,643		28,933,741			28,955,014		28,903,632
Dilutive potential common shares (1), (2)		245,959		417,843			267,612		465,222
Total diluted weighted average common shares outstanding		29,190,602		29,351,584			29,222,626		29,368,854
Diluted earnings per share	$	.24	$	.32		$	.45	$	.62

(1)   Includes incremental shares from assumed conversions of stock options.

(2)   Antidilutive options have been excluded in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common stock. For the three months ended June 30, 2007 and 2006, there were 490,114 antidilutive options at an average price of $23.47 and 488,338 antidilutive options at an average price of $24.31, respectively. For the six months ended June 30, 2007 and 2006, there were 475,643 antidilutive options at an average price of $23.67 and 486,133 antidilutive options at an average price of $24.34, respectively.

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Note 8 – Comprehensive Income

The components of other comprehensive income are as follows:

Comprehensive Income
(Dollars in thousands)	Before tax			Tax Benefit			Net of tax
Six months ended June 30, 2007	Amount			(Expense)			amount
Net unrealized gains on available for sale securities:
Net unrealized holding gains arising during period	$	(12,565	)	$	4,398		$	(8,167	)
Less reclassification adjustment for net gains realized in net income		533			(187	)		346
Net unrealized gains		(13,098	)		4,585			(8,513	)
Change in fair value of derivatives used for cash flow hedges		(206	)		72			(134	)
Other		57			(20	)		37
Other comprehensive loss, net	$	(13,247	)	$	4,637		$	(8,610	)
(Dollars in thousands)	Before tax			Tax Benefit			Net of tax
Six months ended June 30, 2006	Amount			(Expense)			Amount
Net unrealized losses on available for sale securities:
Net unrealized holding losses arising during period	$	(10,223	)	$	3,578		$	(6,645	)
Less reclassification adjustment for net gains realized in net income		–			–			–
Net unrealized losses		(10,223	)		3,578			(6,645	)
Change in fair value of derivatives used for cash flow hedges		384			(134	)		250
Amortization of unrealized loss on termination of cash flow hedge		91			(32	)		59
Other comprehensive loss, net	$	(9,748	)	$	3,412		$	(6,336	)

Note 9 – Segment Information

The Corporation operates two main lines of business along with several other operating segments. SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for public business enterprises to report information about operating segments. Operating segments are components of an enterprise, which are evaluated regularly by the chief operating decision-maker in deciding how to allocate and assess resources and performance. The Corporation’s chief operating decision-maker is the President and Chief Executive Officer. The Corporation has applied the aggregation criteria set forth in SFAS No. 131 for operating segments establishing two reportable segments: Community Banking and Wealth Management.

The Community Banking segment provides financial services to consumers, businesses and governmental units primarily in southeastern Pennsylvania. These services include full-service banking, comprised of accepting time and demand deposits, making secured and unsecured commercial loans, mortgages, consumer loans, and other banking services. The treasury function income is included in the Community Banking segment, as the majority of effort of this function is related to this segment. Primary sources of income include net interest income and service fees on deposit accounts. Expenses include costs to manage credit and interest rate risk, personnel, and branch operational and technical support.

The Wealth Management segment includes: trust and investment management services, providing investment management, trust and fiduciary services, estate settlement and executor services, financial planning, and retirement plan and institutional investment services; and the Cornerstone Companies, registered investment advisors for high net worth, privately held business owners, wealthy families and institutional clients. Major revenue components sources include investment management and advisory fees, trust fees, estate and tax planning fees, brokerage fees, and insurance related fees. Expenses primarily consist of personnel and support charges.  Additionally, the Wealth Management segment includes an inter-segment credit related to trust deposits which are maintained within the Community Banking segment using a transfer pricing methodology.

The Corporation has also identified several other operating segments. These operating segments within the Corporation’s operations do not have similar characteristics to the Community Banking or Wealth Management segments and do not meet the quantitative thresholds requiring separate disclosure. These non-reportable segments include HNC Reinsurance Company, HNC Financial Company, and the parent holding company and are included in the “Other” category.

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Note 9 – Segment Information – Continued

Information about reportable segments and reconciliation of the information to the consolidated financial statements follows:

(Dollars in thousands)	Community Banking		Wealth Management		All Other			Consolidated Totals
Three Months Ended June 30, 2007
Net interest income (expense)	$	20,584	$	105	$	(534	)	$	20,155
Provision for loan losses		1,125		-		-			1,125
Noninterest income		5,247		4,834		174			10,255
Noninterest expense		15,960		3,867		314			20,141
Income (loss) before income taxes (benefit)		8,746		1,072		(674	)		9,144
Income taxes (benefit)		1,908		426		(269	)		2,065
Net income (loss)	$	6,838	$	646	$	(405	)	$	7,079
Three Months Ended June 30, 2006
Net interest income	$	21,666	$	125	$	(515	)	$	21,276
Provision for loan losses		900		-		-			900
Noninterest income		6,299		3,410		214			9,923
Noninterest expense		14,217		3,079		382			17,678
Income (loss) before income taxes (benefit)		12,848		456		(683	)		12,621
Income taxes (benefit)		3,365		194		(223	)		3,336
Net income (loss)	$	9,483	$	262	$	(460	)	$	9,285

(Dollars in thousands)	Community Banking		Wealth Management		All Other			Consolidated Totals
Six Months Ended June 30, 2007
Net interest income (expense)	$	40,840	$	217	$	(1,065	)	$	39,992
Provision for loan losses		3,550		-		-			3,550
Noninterest income		9,910		9,101		391			19,402
Noninterest expense		31,045		7,254		621			38,920
Income (loss) before income taxes (benefit)		16,155		2,064		(1,295	)		16,924
Income taxes (benefit)		3,435		822		(546	)		3,711
Net income (loss)	$	12,720	$	1,242	$	(749	)	$	13,213
Assets	$	3,245,654	$	22,325	$	35,265		$	3,303,244
Six Months Ended June 30, 2006
Net interest income	$	43,435	$	265	$	(953	)	$	42,747
Provision for loan losses		2,100		-		-			2,100
Noninterest income		10,470		7,997		389			18,856
Noninterest expense		27,897		6,328		578			34,803
Income (loss) before income taxes (benefit)		23,908		1,934		(1,142	)		24,700
Income taxes (benefit)		6,123		810		(469	)		6,464
Net income (loss)	$	17,785	$	1,124	$	(673	)	$	18,236
Assets	$	3,180,459	$	3,143	$	33,416		$	3,217,018

The accounting policies of the segments are the same as those described in the summary of significant accounting policies disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006. Consolidating adjustments reflecting certain eliminations of inter-segment revenues, cash and investment in subsidiaries are included in the “All Other” segment.

Note 10 – Financial Instruments with Off-Balance Sheet Risk

The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.

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Note 10 – Financial Instruments with Off-Balance Sheet Risk – Continued

The Bank’s maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amounts of those instruments. The Bank uses the same stringent credit policies in extending these commitments as they do for recorded financial instruments and controls exposure to loss through credit approval and monitoring procedures. These commitments often expire without being drawn upon and often are secured with appropriate collateral; therefore, the total commitment amount does not necessarily represent the actual risk of loss or future cash requirements.

The approximate contract amounts are as follows:

Commitments	June 30, 2007	December 31, 2006
(Dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$728,101	$753,825
Standby letters of credit and financial guarantees written	20,981	25,960
Financial instruments whose notional or contract amounts exceed the amount of credit risk:
Interest rate swap agreements	59,530	59,750
Interest rate cap agreements	200,000	—

At June 30, 2007, the Corporation had cash flow hedges in the form of interest rate swaps with a notional amount of $45.0 million that have the effect of converting the rates on money market deposit accounts to a fixed-rate cost of funds. This strategy will cause the Bank to recognize, in a rising rate environment, a larger interest rate spread than it otherwise would have without the swaps in effect. In addition, the Corporation had cash flow hedges with a notional amount of $10.0 million that have the effect of converting variable debt to a fixed rate. For these swaps, the Corporation recognized net interest income of $114,000 and $99,000 for the three months ended June 30, 2007 and 2006, respectively and $252,000 and $177,000 of net interest income for the six months ended June 30, 2007 and 2006, respectively. During the first quarter of 2005, the Corporation terminated a cash flow hedge with a notional value of $25.0 million. The gross loss related to the termination of this swap was $310,000 which was amortized through October 2006 in accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities.” The Corporation amortized into net interest income $45,000 for the second quarter of 2006 and $90,000 for the six months ended June 30, 2006 related to this swap. Periodically, the Corporation may enter into fair value hedges to limit the exposure to changes in the fair value of loan assets. At June 30, 2007, the Corporation had fair value hedges in the form of interest rate swaps with a notional amount of $4.5 million. For these swaps the Corporation recognized net interest income of $41,000 and $46,000 for the three and six months ended June 30, 2007, respectively (which includes $38,000 related to a swap with a notional amount of $2.1 million that was terminated during the second quarter of 2007) and no impact to earnings for the first six months of 2006. At June 30, 2007, the Corporation had swap agreements with a positive fair value of $413,000 and with a negative fair value of $4,000. At December 31, 2006, the Corporation had swap agreements with a positive fair value of $545,000 and with a negative fair value of $21,000. There was no hedge ineffectiveness recognized during the first six months of 2007 and 2006.

During March 2007, the Corporation purchased one and three month Treasury bill interest rate cap agreements with notional amounts totaling $200 million to limit its exposure on variable rate now deposit accounts. The initial premium related to these caps was $73,000 which will be amortized to interest expense over the life of the cap based on the cap market value. At June 30, 2007, these caps, designated as cash flow hedges, had a positive fair value of $54,000 with no impact to earnings for the first six months of 2007. The caps mature in March 2009.

The Bank also had commitments with customers to extend mortgage loans at a specified rate at June 30, 2007 and December 31, 2006 of $1.8 million and $2.3 million, respectively and commitments to sell mortgage loans at a specified rate at June 30, 2007 and December 31, 2006 of $421,000 and $792,000, respectively. The commitments are accounted for as a derivative and recorded at fair value. The Bank estimates the fair value of these commitments by comparing the secondary market price at the reporting date to the price specified in the contract to extend or sell the loan initiated at the time of the loan commitment. At June 30, 2007, the Corporation had commitments with a positive fair value of $13,000 and a negative fair value of $6,000, the net amount which was recorded as other income. At December 31, 2006, the Corporation had commitments with a positive fair value of $15,000 and a negative fair value of $3,000.

During April 2006, the Bank sold its existing credit card portfolio of $15.3 million. The sale agreement stipulates that any credit card accounts delinquent over 30 days, overlimit accounts and petitioned bankruptcies will be guaranteed by the Bank for a period of one year. Of the $15.3 million in credit card receivables sold, $529,000 was sold with full recourse which was the total potential recourse exposure at the time of the sale. During the second quarter of 2006, the Bank recorded a recourse liability of $371,000 which was the entire recourse liability recorded. This estimate was based on our historic losses as experienced on similar credit card receivables. The Bank will be subject to the full recourse obligations for a period of one year. At June 30, 2007, the total potential recourse exposure was reduced to $0 with the expiration of the one-year recourse period. The Corporation’s actual loss experience approximated the initial reserve.

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Note 10 – Financial Instruments with Off-Balance Sheet Risk – Continued

During December 2004 and January 2005, the Bank sold lease financing receivables of $10.5 million. Of these leases, $1.2 million were sold with full recourse and the remaining leases were sold subject to recourse with a maximum exposure of ten percent of the outstanding receivable. The total recourse exposure at the time of the sale of the leases was $2.0 million. During the first quarter of 2005, the Bank recorded a recourse liability of $216,000 which was the entire recourse liability recorded. This estimate was based on our historic losses as experienced on similar lease financing receivables. After the first anniversary of the sale agreement, and on a quarterly basis thereafter, upon written request by the Bank, the purchaser will review the portfolio performance and may reduce the total exposure to an amount equal to ten percent of the outstanding net book value. The Bank will be subject to the full and partial recourse obligations until all the lease financing receivables have been paid or otherwise been terminated and all equipment has been sold or disposed of. The final lease payment is due in 2010 with approximately 85% of the lease financing receivables estimated to be paid down by December 31, 2007. The outstanding balance of these sold leases at June 30, 2007 was $1.9 million with a total recourse exposure of $419,000 and a current recourse liability of $37,000.

Note 11 – Contingent Liabilities

During the second quarter of 2007, the Corporation, as a result of a recent internal audit, reported a defalcation in the amount of approximately $578,000 at one of its branches. The Corporation maintains insurance coverage for this type of risk with a deductible of $100,000 and notified its insurer of the claim. Management expects that this claim will constitute a covered loss and as such the total estimated loss should not exceed $100,000 pre-tax or $65,000, net of income taxes. The Corporation recorded as an expense the deductible on the insurance coverage of $100,000 and a receivable for the claim of approximately $478,000 during the second quarter of 2007.

Note 12 – Recent Accounting Pronouncements

In April 2007, the Financial Accounting Standards Board (FASB) issued FSP No. FIN 39-1, Amendment of FASB Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts.” FIN 39-1 permits a reporting entity that is party to a master netting arrangement to offset the receivable or payable recognized upon payment or receipt of cash collateral against the fair value amounts recognized against derivative instruments that had been offset under the same master netting arrangement. This FSP also replaces the terms “conditional contracts” and “exchange contracts” with the broader term “derivative instruments.” FIN 39-1 applies to fiscal years beginning after November 15, 2007. A reporting entity also must recognize the effects of initial adoption as a change in accounting principle through retrospective application for all periods presented, unless it is impracticable to do so. The Corporation is in the process of assessing the impact of the adoption of this statement on the Corporation’s financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities¾Including an amendment of FASB Statement No. 115.” SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value.  SFAS 159 provides entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The statement also establishes presentation and disclosure requirements. The entity shall report the effect of the first re-measurement to fair value as a cumulative-effective adjustment to the opening balance of retained earnings. At each subsequent reporting date, unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The fair value option may be applied instrument by instrument, with a few exceptions, is irrevocable and is applied only to entire instruments. Most of the provisions of SFAS 159 apply only to entities that elect the fair value option. However, the amendment to SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” applies to all entities with available-for-sale and trading securities. If the fair value option is elected for any available-for-sale or held-to-maturity securities at the effective date, the cumulative unrealized gains and losses at that date shall be included in the cumulative-effect adjustment. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided that the entity also elects to apply the provisions of SFAS 157, “Fair Value Measurements.” The Corporation is in the process of assessing the impact of the adoption of this statement on the Corporation’s financial statements.

In June, 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the tax law may be uncertain. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 applies to fiscal years beginning after December 15, 2006. The Corporation adopted the provisions of FIN 48 on January 1, 2007. As required by Interpretation 48, which clarifies Statement 109, “Accounting for Income Taxes,” the Corporation recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-notthreshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement with the relevant tax authority. At the adoption date, the Corporation applied FIN 48 to all tax positions for which the statute of limitations remained open. The Corporation has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions.

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Note 12 – Recent Accounting Pronouncements– Continued

As of January 1, 2007, the Corporation has $158,000 of unrecognized tax benefits, which if recognized, would favorably affect the Corporation’s effective tax rate. The Corporation did not record a cumulative effect adjustment related to the adoption of FIN 48. There have been no material changes in unrecognized tax benefits since January 1, 2007.

The Corporation’s policy for recording interest and penalties associated with audits is to record such items as a component of income before income taxes. Penalties are recorded in other expenses, net, and interest paid or received is recorded in interest expense or interest income, respectively, in the statement of income. As of June 30, 2007, interest accrued was $26,000 and no penalties have been accrued.

The Corporation is subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Corporation is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before 2004.

In May 2007, the FASB issued FIN 48-1, “Definition of Settlement in FIN 48” to provide guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have any impact on the Corporation’s consolidated financial position or results of operations.

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Item 2.                                                                                                      MANAGEMENT'S DISCUSSION AND ANALYSIS OF

RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The following is management’s discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in its accompanying consolidated financial statements for Harleysville National Corporation (the Corporation) and its wholly owned subsidiaries-Harleysville National Bank (the Bank), HNC Financial Company and HNC Reinsurance Company. The Corporation’s consolidated financial condition and results of operations consist almost entirely of the Bank’s financial condition and results of operations. Current performance does not guarantee, and may not be indicative, of similar performance in the future. These are unaudited financial statements and, as such, are subject to year-end audit review.

In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We have made forward-looking statements in this report, and in documents that we incorporate by reference, that are subject to risks and uncertainties. Forward-looking statements include the information concerning possible or assumed future results of operations of the Corporation and its subsidiaries. When we use words such as “believes,” “expects,” “anticipates,” “may,” “estimates,” or “intends” or similar expressions, we are making forward-looking statements. Forward-looking statements are representative only as of the date they are made, and the Corporation undertakes no obligation to update any forward-looking statement.

Shareholders should note that many factors, some of which are discussed elsewhere in this report and in the documents that we incorporate by reference, could affect the future financial results of the Corporation and its subsidiaries and could cause those results to differ materially from those expressed or implied in our forward-looking statements contained or incorporated by reference in this document. These factors include but are not limited to those described in Item 1A, “Risk Factors” in the Corporation’s 2006 Annual Report on Form 10-K and in this Form 10-Q.

Critical Accounting Estimates

The accounting and reporting policies of the Corporation and its subsidiaries conform to accounting principles generally accepted in the United States and general practices with the financial services industry. The Corporation’s significant accounting policies are described in Note 1 of the consolidated financial statements in this Form 10-Q and in the Corporation’s 2006 Annual Report on Form 10-K and are essential in understanding Management’s Discussion and Analysis of Results of Operations and Financial Condition. In applying accounting policies and preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. Therefore, actual results could differ significantly from those estimates. Judgments and assumptions required by management, which have, or could have a material impact on the Corporation’s financial condition or results of operations are considered critical accounting estimates. The following is a summary of the policies the Corporation recognizes as involving critical accounting estimates: Allowance for Loan Loss, Goodwill and Other Intangible Asset Impairment, Stock-Based Compensation, Unrealized Gains and Losses on Debt Securities Available for Sale, and Deferred Taxes.

Allowance for Loan Losses: The Corporation maintains an allowance for loan losses at a level management believes is sufficient to absorb estimated probable credit losses. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires significant estimates by management. Consideration is given to a variety of factors in establishing these estimates including historical losses, current and anticipated economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers’ perceived financial and management strengths, the adequacy of underlying collateral, the dependence on collateral, or the strength of the present value of future cash flows and other relevant factors. These factors may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required which may adversely affect the Corporation’s results of operations in the future.

Goodwill and Other Intangible Asset Impairment: Goodwill and other intangible assets are reviewed for potential impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Goodwill is tested for impairment at the reporting unit level and an impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Corporation employs general industry practices in evaluating the fair value of its goodwill and other intangible assets. The Corporation calculates the fair value using a combination of the following valuation methods: dividend discount analysis under the income approach, which calculates the present value of all excess cash flows plus the present value of a terminal value and price/earnings multiple under the market approach. Management performed its annual review of goodwill and other identifiable intangibles at June 30, 2007 and determined there was no impairment of goodwill or other identifiable intangibles.No assurance can be given that future impairment tests will not result in a charge to earnings.

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Stock-based Compensation: The Corporation recognizes compensation expense for stock options in accordance with SFAS 123 (revised 2004), “Share-Based Payment” (SFAS 123R)) adopted at January 1, 2006 under the modified prospective application method of transition. The expense of the option is generally measured at fair value at the grant date with compensation expense recognized over the service period, which is usually the vesting period. The Corporation utilizes the Black-Scholes option-pricing model (as used under SFAS 123) to estimate the fair value of each option on the date of grant. The Black-Scholes model takes into consideration the exercise price and expected life of the options, the current price of the underlying stock and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the expected life of the option. The Corporation’s estimate of the fair value of a stock option is based on expectations derived from historical experience and may not necessarily equate to its market value when fully vested. In accordance with SFAS 123(R), the Corporation estimates the number of options for which the requisite service is expected to be rendered.

Unrealized Gains and Losses on Securities Available for Sale: The Corporation receives estimated fair values of debt securities from independent valuation services and brokers. In developing these fair values, the valuation services and brokers use estimates of cash flows based on historical performance of similar instruments in similar rate environments. Debt securities available for sale are mostly comprised of mortgage-backed securities as well as tax-exempt municipal bonds and U.S. government agency securities. The Corporation uses various indicators in determining whether a security is other-than-temporarily impaired, including for equity securities, if the market value is below its cost for an extended period of time with low expectation of recovery or for debt securities, when it is probable that the contractual interest and principal will not be collected. The debt securities are monitored for changes in credit ratings. Adverse changes in credit ratings would affect the estimated cash flows of the underlying collateral or issuer. The unrealized losses associated with the securities portfolio, that management has the ability and intent to hold, are not considered to be other-than temporary as of June 30, 2007 because the unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.

Deferred Taxes: The Corporation recognizes deferred tax assets and liabilities for the future effects of temporary differences, net operating loss carryforwards, and tax credits. Deferred tax assets are subject to management’s judgment based upon available evidence that future realizations are likely. If management determines that the Corporation may not be able to realize some or all of the net deferred tax asset in the future, a charge to income tax expense may be required to reduce the value of the net deferred tax asset to the expected realizable value.

The Corporation has not substantively changed its application of the foregoing policies, and there have been no material changes in assumptions or estimation techniques used as compared to prior periods.

Financial Overview

For the second quarter of 2007, the Corporation’s diluted and basic earnings per share were $.24 and $.25, respectively compared to $.32 for the second quarter of 2006. Net income was $7.1 million for the second quarter of 2007 compared to $9.3 million during the same period in 2006.

For the six months ended June 30, 2007, diluted and basic earnings per share were $.45 and $.46, respectively, as compared to $.62 and $.63, respectively in the comparable period of 2006. Net income for the six-month period ended June 30, 2007, was $13.2 million compared to $18.2 million during the first six months of 2006. The reduction in earnings for the first six months of 2007 as compared to the same period in 2006 was reflective of the lower net interest income due to the net interest margin compression and higher salaries and benefits expense as well as an increase in the provision for loan losses.

Despite earnings growth being challenging in the difficult environment, the Corporation experienced progress in noninterest revenue with wealth management growth of 43% and bank service charges increasing 21% during the second quarter of 2007 over the comparable period in 2006. Additionally, the Corporation reported loan growth of 2.4% and core deposit growth of 7.6% from June 30, 2006 as well as a reduction in nonperforming assets of $817,000 since March 31, 2007.

The financial results for 2007 reflect the issuance of 1,382,000 shares of the Corporation’s common stock for a 5% stock dividend payable September 15, 2006. All share and per share information has been restated to reflect this stock dividend.

The Corporation’s consolidated total assets were $3.3 billion at June 30, 2007, an increase of 2.7% or $86.2 million over $3.2 billion in total assets reported at June 30, 2006. This rise was primarily attributable to loan growth of $49.4 million and an increase in cash and investments of $22.6 million. The growth in loans took place mainly in the Bank’s real estate and commercial loan portfolios. Total deposits increased $23.9 million or 1.0% to $2.50 billion at June 30, 2007 from $2.48 billion at June 30, 2006 principally attributable to growth in interest-bearing checking and money market accounts partially offset by declines in savings and time deposit accounts. Total assets at June 30, 2007 were $53.4 million higher compared to December 31, 2006 with loan growth of $34.6 million, an increase in cash and investments of $5.5 million and an increase in premises and equipment of $5.6 million mainly from several new office locations including the new operations center building in Harleysville and two branch openings.

For the three months ended June 30, 2007, the annualized return on average shareholders’ equity and the annualized return on average assets were 9.69% and .86%, respectively. For the same period in 2006, the annualized return on average shareholders’ equity was 13.44% and the annualized return on average assets was 1.16%. The decrease in these ratios during 2007 was primarily the result of lower net income.

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Nonperforming assets (including nonaccrual loans, loans 90 days or more past due and net assets in foreclosure) were .57% of total assets at June 30, 2007, compared to .54% at December 31, 2006, and .36% at June 30, 2006. The increase in nonperforming assets at June 30, 2007, in relation to December 31, 2006, of $1.1 million was mainly due to a construction loan for one borrower and real estate loans for two other borrowers placed on nonaccrual of interest, partially offset by the payoff of nonaccrual real estate loans for another borrower as well as a lower level of commercial mortgage loans 90 days past due. The increase of nonperforming assets in relation to June 30, 2006 was largely due to a higher level of real estate loans on non-accrual of interest.The loan loss provision increased $225,000 during the second quarter of 2007 over the comparable period in 2006. The loan loss provision increased $1.5 million for the six-month period ending June 30, 2007, as compared to the same period in 2006, primarily as a result of inherent risk related to loan growth and the increases in nonperforming loans and charge-offs which occurred during the first quarter of 2007. Management recognizes the increased level of nonperforming assets and charge-offs and has dedicated more resources to resolve troubled credits including an increased focus on earlier identification of potential problem loans and a more active approach to managing the level of criticized loans that have not reached nonaccrual status.

On March 1, 2007, the Cornerstone Companies, a subsidiary of the Bank, completed a selected asset purchase of McPherson Enterprises and related entities (McPherson), registered investment advisors specializing in estate and succession planning and life insurance for high-net-worth construction and aggregate business owners and families throughout the United States. McPherson became a part of the Cornerstone Companies, a component of the Bank’s Millennium Wealth Management division. The acquisition is part of the Corporation’s plan to continue to build its fee-based services businesses.

On May 15, 2007, the Corporation entered into a definitive agreement to acquire East Penn Financial Corporation and its wholly owned subsidiary, East Penn Bank, a $451 million state chartered, FDIC insured bank, offering deposit and lending services throughout the Lehigh Valley, PA. Headquartered and founded in Emmaus, PA in 1990, East Penn has nine banking offices located in Lehigh, Northampton and Berks Counties. The total value of the transaction at the agreement date, if it closed, was estimated at $92.7 million or approximately $14.50 per share of East Penn Financial stock, although actual value will depend on several factors, including the price of Harleysville National Corporation (“HNC”) stock, but will not be less than $13.52 per share ($86.3 million) or greater than $15.48 per share ($99.1 million). It is currently anticipated that the acquisition, which is subject to state and federal regulatory approval, approval by the shareholders of East Penn Financial and other customary conditions to closing, will most likely be completed in the fall of 2007. The transaction is expected to be accretive to the Corporation’s earnings per share in the first full calendar year following the consummation. As part of the agreement, East Penn Bank will continue to operate under the East Penn name and logo, and will become a division of Harleysville National Bank, the Corporation’s banking subsidiary. Nine of Harleysville National Bank’s existing branches will also be transferred to the East Penn division including those in Lehigh, Carbon, Monroe, and Northampton Counties.

Results of Operations

Net income is affected by five major elements: (1) net interest income, or the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowed funds; (2) the provision for loan losses, or the amount added to the allowance for loan losses to provide reserves for inherent losses on loans; (3) noninterest income, which is made up primarily of certain fees, wealth management income and gains and losses from sales of securities or other transactions; (4) noninterest expense, which consists primarily of salaries, employee benefits and other operating expenses; and (5) income taxes. Each of these major elements will be reviewed in more detail in the following discussion.

Net Interest Income

Net interest income on a tax equivalent basis in the second quarter of 2007 decreased $1.2 million or 5.1% from the same period in 2006 and decreased $2.8 million or 6.1% from the six-month period ending June 30, 2006. The decreases during 2007 were mainly attributable to higher deposit costs offset in part by increased loan and investment rates.Due to the market conditions, deposit rates increased more quickly than the loan rates.

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The rate volume variance analysis in the table below, which is computed on a tax-equivalent basis (tax rate of 35%), analyzes changes in net interest income for the three months ended June 30, 2007 compared to June 30, 2006 by their volume and rate components. The change attributable to both volume and rate has been allocated proportionately.

Table 1—Analysis of Changes in Net Interest Income—Fully Taxable-Equivalent Basis

	Three Months Ended June 30, 2007 compared to June 30, 2006									Six Month Ended June 30, 2007 compared to June 30, 2006
(Dollars in thousands)
	Total			Due to change in:						Total			Due to change in:
	Change			Volume			Rate			Change			Volume			Rate
Increase in interest income:
Investment securities *	$	940		$	94		$	846			2,342			187			2,155
Federal funds sold and deposits in banks		231			154			77			612			469			143
Loans *		2,283			927			1,356			5,104			2,097			3,007
Total		3,454			1,175			2,279			8,058			2,753			5,305
Increase in interest expense:
Savings and money market deposits		3,912			1,205			2,707			8,505			2,188			6,317
Time deposits		337			(783	)		1,120			2,409			(267	)		2,676
Borrowed funds		360			138			222			(72	)		(636	)		564
Total		4,609			560			4,049			10,842			1,285			9,557
Net (decrease) increase in net interest income	$	(1,155	)	$	615		$	(1,770	)	$	(2,784	)	$	1,468		$	(4,252	)
*Tax equivalent basis using a tax rate of 35%, net

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The following table presents the major asset and liability categories on an average basis for the periods presented, along with interest income and expense, and key rates and yields.

Table 2—Average Balance Sheets and Interest Rates¾Fully Taxable-Equivalent Basis

(Dollars in thousands)	Three Months Ended June 30,							Three Months Ended June 30,
	2007							2006
	Average				Average			Average				Average
Assets	Balance		Interest		Rate			Balance		Interest		Rate
Earning assets:
Investment securities:
Taxable investments	$	676,830	$	8,488		5.03	%	$	673,545	$	7,552		4.50	%
Nontaxable investments (1)		259,696		3,908		6.04			255,457		3,904		6.13
Total investment securities		936,526		12,396		5.31			929,002		11,456		4.95
Federal funds sold and deposits in banks		82,021		1,086		5.31			70,163		855		4.89
Loans (1) (2)		2,062,144		35,709		6.95			2,006,723		33,426		6.68
Total earning assets		3,080,691		49,191		6.40			3,005,888		45,737		6.10
Noninterest-earning assets		222,329							212,593
Total assets	$	3,303,020						$	3,218,481
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and money market	$	1,415,657		12,830		3.64		$	1,257,838		8,918		2.84
Time		787,419		9,302		4.74			858,961		8,965		4.19
Total interest-bearing deposits		2,203,076		22,132		4.03			2,116,799		17,883		3.39
Borrowed funds		450,529		5,424		4.83			438,745		5,064		4.63
Total interest bearing liabilities		2,653,605		27,556		4.17			2,555,544		22,947		3.60
Noninterest-bearing liabilities:
Demand deposits		314,215							342,654
Other liabilities		42,168							43,219
Total noninterest-bearing liabilities		356,383							385,873
Total liabilities		3,009,988							2,941,417
Shareholders' equity		293,032							277,064
Total liabilities and shareholders' equity	$	3,303,020						$	3,218,481
Net interest spread						2.23							2.50
Effect of noninterest-bearing sources						0.59							.54
Net interest income/margin on earning assets			$	21,635		2.82	%			$	22,790		3.04	%
Less tax equivalent adjustment				1,480							1,514
Net interest income			$	20,155						$	21,276

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(Dollars in thousands)	Six Months Ended June 30,							Six Months Ended June 30,
	2007							2006
	Average				Average			Average				Average
Assets	Balance		Interest		Rate			Balance		Interest		Rate
Earning assets:
Investment securities:
Taxable investments	$	680,719	$	17,052		5.05	%	$	681,829	$	14,874		4.40	%
Nontaxable investments (1)		259,851		7,845		6.09			251,084		7,681		6.17
Total investment securities		940,570		24,897		5.34			932,913		22,555		4.88
Federal funds sold and deposits in banks		72,482		1,892		5.26			54,119		1,280		4.77
Loans (1) (2)		2,061,014		70,614		6.91			1,997,801		65,510		6.61
Total earning assets		3,074,066		97,403		6.39			2,984,833		89,345		6.04
Noninterest-earning assets		217,922							206,561
Total assets	$	3,291,988						$	3,191,394
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and money market	$	1,395,976		24,936		3.60		$	1,243,715		16,431		2.66
Time		809,334		19,018		4.74			822,309		16,609		4.07
Total interest-bearing deposits		2,205,310		43,954		4.02			2,066,024		33,040		3.22
Borrowed funds		436,550		10,460		4.83			464,039		10,532		4.58
Total interest bearing liabilities		2,641,860		54,414		4.15			2,530,063		43,572		3.47
Noninterest-bearing liabilities:
Demand deposits		311,169							340,672
Other liabilities		45,558							43,183
Total noninterest-bearing liabilities		356,727							383,855
Total liabilities		2,998,587							2,913,918
Shareholders' equity		293,401							277,476
Total liabilities and shareholders' equity	$	3,291,988						$	3,191,394
Net interest spread						2.24							2.57
Effect of noninterest-bearing sources						0.58							.52
Net interest income/margin on earning assets			$	42,989		2.82	%			$	45,773		3.09	%
Less tax equivalent adjustment				2,997							3,026
Net interest income			$	39,992						$	42,747

(1)   The interest earned on nontaxable investment securities and loans is shown on a tax equivalent basis, net of deductions (tax rate of 35%).

(2)   Nonaccrual loans have been included in the appropriate average loan balance category, but interest on nonaccrual loans has not been included for purposes of determining interest income.

Interest income on a tax equivalent basis in the second quarter of 2007 increased $3.5 million, or 7.6% over the same period in 2006. This increase was primarily due to higher average rates earned on loans and investment securities of 27 basis points and 36 basis points, respectively, as well as increases in average loans of $55.4 million, or 2.8%. The growth in average loans during 2007 was mainly attributable to higher levels of new commercial and industrial and commercial real estate loan originations partially offset by a lower level of real estate refinancing loans due to the higher interest rate environment. Interest expense increased $4.6 million during the second quarter of 2007 versus the comparable period in 2006 mainly attributed to higher deposit rates as well as an increase in average interest-bearing deposits of $86.3 million, or 4.1%. The average rate paid on deposits during the second quarter of 2007 of 4.03% was 64 basis points higher compared to the same period in 2006 due to higher rates on most deposit products. The growth in average interest-bearing deposits took place mostly in interest-bearing checking accounts partially offset by a lower level of time deposits. The Corporation has placed more emphasis on lower rate deposit products in an effort to improve the net interest margin. Average borrowings increased $11.8 million or 2.7% with a higher level of long-term securities sold under agreement to repurchase offset in part by long-term Federal Home Loan Bank maturities as well as a reduced level of overnight funding replaced by deposit growth.

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Net Interest Margin

The net interest margin for the second and first quarters of 2007 was 2.82%, compared to 3.04% for the second quarter of 2006. Due to market conditions, deposit rates increased faster than loan rates, resulting in a lower net interest margin compared to the second quarter of 2006.

Interest Rate Sensitivity Analysis

In the normal course of conducting business activities, the Corporation is exposed to market risk, principally interest rate risk through the operations of its banking subsidiary. Interest rate risk arises from market driven fluctuations in interest rates that affect cash flows, income, expense and value of financial instruments.

The Corporation actively manages its interest rate sensitivity positions. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve consistent growth in net interest income. The Asset/Liability Committee, using policies and procedures approved by the Corporation’s Board of Directors, is responsible for managing the rate sensitivity position. The Corporation manages interest rate sensitivity by changing the mix and repricing characteristics of its assets and liabilities through the management of its investment securities portfolio, its offering of loan and deposit terms and through borrowings from the Federal Home Loan Bank of Pittsburgh (the FHLB). The nature of the Corporation’s current operations is such that it is not subject to foreign currency exchange or commodity price risk.

The Corporation only utilizes derivative instruments for asset/liability management. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations and payments are based. The notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Interest rate swaps are contracts in which a series of interest-rate flows (fixed and floating) are exchanged over a prescribed period.  The notional amounts on which the interest payments are based are not exchanged. Interest rate caps are purchased contracts that limit the exposure from the repricing of liabilities in a rising rate environment.

At June 30, 2007, the Corporation had cash flow hedges in the form of interest rate swaps with a notional amount of $45.0 million that have the effect of converting the rates on money market deposit accounts to a fixed-rate cost of funds. This strategy will cause the Bank to recognize, in a rising rate environment, a larger interest rate spread than it otherwise would have without the swaps in effect. In addition, the Corporation had cash flow hedges with a notional amount of $10.0 million that have the effect of converting variable debt to a fixed rate. For these swaps, the Corporation recognized net interest income of $114,000 and $99,000 for the three months ended June 30, 2007 and 2006, respectively and $252,000 and $177,000 of net interest income for the six months ended June 30, 2007 and 2006, respectively. During the first quarter of 2005, the Corporation terminated a cash flow hedge with a notional value of $25.0 million. The gross loss related to the termination of this swap was $310,000 which was amortized through October 2006 in accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities.” The Corporation amortized into net interest income $45,000 for the second quarter of 2006 and $90,000 for the six months ended June 30, 2006 related to this swap. Periodically, the Corporation may enter into fair value hedges to limit the exposure to changes in the fair value of loan assets. At June 30, 2007, the Corporation had fair value hedges in the form of interest rate swaps with a notional amount of $4.5 million. For these swaps the Corporation recognized net interest income of $41,000 and $46,000 for the three and six months ended June 30, 2007, respectively (which includes $38,000 related to a swap with a notional amount of $2.1 million that was terminated during the second quarter of 2007) and no impact to earnings for the first six months of 2006. At June 30, 2007, the Corporation had swap agreements with a positive fair value of $413,000 and with a negative fair value of $4,000. At December 31, 2006, the Corporation had swap agreements with a positive fair value of $545,000 and with a negative fair value of $21,000. There was no hedge ineffectiveness recognized during the first six months of 2007 and 2006.

During March 2007, the Corporation purchased one and three month Treasury bill interest rate cap agreements with notional amounts totaling $200 million to limit its exposure on variable rate now deposit accounts. The initial premium related to these caps was $73,000 which will be amortized to interest expense over the life of the cap based on the cap market value. At June 30, 2007, these caps, designated as cash flow hedges, had a positive fair value of $54,000 with no impact to earnings for the first six months of 2007. The caps mature in March 2009.

The Corporation uses three principal reports to measure interest rate risk: (1) asset/liability simulation reports; (2) gap analysis reports; and (3) net interest margin reports. Management also simulates possible economic conditions and interest rate scenarios in order to quantify the impact on net interest income. The effect that changing interest rates have on the Corporation’s net interest income is simulated by increasing and decreasing interest rates. This simulation is known as rate shocking. The results of the June 30, 2007 net interest income rate shock simulations show that the Corporation is within guidelines set by the Corporation’s Asset/Liability Policy when rates increase or decrease 100 or 200 basis points.

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The report below forecasts changes in the Corporation’s market value of equity under alternative interest rate environments as of June 30, 2007. The market value of equity is defined as the net present value of the Corporation’s existing assets and liabilities. The Corporation is within guidelines set by the Corporation’s Asset/Liability Policy for the percentage change in the market value of equity.

Table 3—Market Value of Equity

			Change in						Asset/Liability
	Market Value		Market Value			Percentage			Approved
(Dollars in thousands)	of Equity		Of Equity			Change			Percent Change
+300 Basis Points	$	346,650	$	(120,107	)		-25.73	%		+/-35	%
+200 Basis Points		387,175		(79,582	)		-17.05	%		+/- 25
+100 Basis Points		426,874		(39,883	)		-8.54	%		+/- 15
Flat Rate		466,757		-			0.00	%
-100 Basis Points		484,150		17,393			3.73	%		+/- 15
-200 Basis Points		479,398		12,641			2.71	%		+/- 25
-300 Basis Points		471,003		4,246			.91	%		+/- 35

In the event the Corporation should experience a mismatch in its desired gap ranges or an excessive decline in their market value of equity resulting from changes in interest rates, it has a number of options that it could use to remedy the mismatch. The Corporation could restructure its investment portfolio through the sale or purchase of securities with more favorable repricing attributes. It could also emphasize growth in loan products with appropriate maturities or repricing attributes, or attract deposits or obtain borrowings with desired maturities.

Provision for Loan Losses

The Corporation uses the reserve method of accounting for loan losses. The balance in the allowance for loan and lease losses is determined based on management’s review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including management’s assumptions as to future delinquencies, recoveries and losses. Increases to the allowance for loan and lease losses are made by charges to the provision for loan losses. Credit exposures deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses.

While management considers the allowance for loan losses to be adequate based on information currently available, future additions to the allowance may be necessary due to changes in economic conditions or management’s assumptions as to future delinquencies, recoveries and losses and management’s intent with regard to the disposition of loans. In addition, the Office of the Comptroller of the Currency (the OCC), as an integral part of their examination process, periodically reviews the Corporation’s allowance for loan losses. The OCC may require the Corporation to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

The Corporation performs periodic evaluations of the allowance for loan losses that include both historical, internal and external factors. The actual allocation of reserve is a function of the application of these factors to arrive at a reserve for each portfolio type. Management assigns credit ratings and individual factors to individual groups of loans. Changes in concentrations and quality are captured in the analytical metrics used in the calculation of the reserve. The components of the allowance for credit losses consist of both historical losses and estimates. Management bases its recognition and estimation of each allowance component on certain observable data that it believes is the most reflective of the underlying loan losses being estimated. The observable data and accompanying analysis is directionally consistent, based upon trends, with the resulting component amount for the allowance for loan losses. The Corporation’s allowance for loan losses components includes the following: historical loss estimation by loan product type and by risk rating within each product type, payment (past due) status, industry concentrations, internal and external variables such as economic conditions, credit policy and underwriting changes and results of the loan review process. The Corporation’s historical loss component is the most significant component of the allowance for loan losses, and all other allowance components are based on the inherent loss attributes that management believes exist within the total portfolio that are not captured in the historical loss component.

The historical loss components of the allowance represent the results of analyses of historical charge-offs and recoveries within pools of homogeneous loans, within each risk rating and broken down further by segment, within the portfolio. Criticized assets are further assessed based on trends, expressed as percentages, relative to delinquency, risk rating and nonaccrual, by credit product.

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The historical loss components of the allowance for commercial and industrial loans and commercial real estate loans (collectively “commercial loans”) are based principally on current risk ratings, historical loss rates adjusted, by adjusting the risk window, to reflect current events and conditions, as well as analyses of other factors that may have affected the collectibility of loans. All commercial loans with an outstanding balance over $500,000 are subject to review on an annual basis. Samples of commercial loans with a “pass” rating are individually reviewed annually. Commercial loans that management determines to be potential problem loans are individually reviewed at a minimum annually. The review is accomplished via Watchlist Memorandum, and is designed to determine whether such loans are individually impaired, with impairment measured by reference to the collateral coverage and/or debt service coverage. Consumer credit and residential real estate reviews are limited to those loans reflecting delinquent payment status. Homogeneous loan pools, including consumer and 1-4 family residential mortgages are not subject to individual review but are evaluated utilizing risk factors such as concentration of one borrower group. The historical loss component of the allowance for these loans is based principally on loan payment status, retail classification and historical loss rates, adjusted by altering the risk window, to reflect current events and conditions.

The industry concentration component is recognized as a possible factor in the estimation of loan losses. Two industries represent possible concentrations: commercial real estate and consumer loans relying on residential home equity. No specific loss-related observable data is recognized by management currently, therefore no specific factor is calculated in the reserve solely for the impact of these concentrations, although management continues to carefully consider relevant data for possible future sources of observable data.

The historic loss model includes a judgmental component (environmental factors) that reflects management’s belief that there are additional inherent credit losses based on loss attributes not adequately captured in the lagging indicators. The environmental factors are based upon management’s review of trends in the Corporation’s primary market area as well as regional and national economic trends. Management utilizes various economic factors that could impact borrowers’ future ability to make loan payments such as changes in the interest rate environment, product supply shortages, negative industry specific events. Management utilizes relevant articles from newspapers and other publications that describe the economic events affecting specific geographic areas and other published economic reports and data. Furthermore, given that past-performance indicators may not adequately capture current risk levels, allowing for a real-time adjustment enhances the validity of the loss recognition process. There are many credit risk management reports that are synthesized by credit risk management staff to assess the direction of credit risk and its instant effect on losses. It is important to continue to use experiential data to confirm risk as measurable losses will continue to manifest themselves at higher than normal levels even after the economic cycle has begun an upward swing and lagging indicators begin to show improvement. The judgmental component is allocated to the specific segments of the portfolio based on the historic loss component.

For the second quarter of 2007, the provision for loan losses was $1.1 million, an increase of $225,000 compared to the second quarter of 2006. For the six months ended June 30, 2007, the provision for loan losses was $3.6 million, an increase of $1.5 million compared to $2.1 million for the same period in 2006. The increase in the provision for the six-month period was primarily as a result of inherent risk related to loan growth and the increases in nonperforming loans and charge-offs which occurred during the first quarter of 2007. Net loans charged-off increased $1.7 million for the first six months of 2007 compared to the same period in 2006 principally from charge-offs related to real estate construction loans for one borrower during the first quarter of 2007.

Our customer base has remained relatively constant and we believe that the current deterioration in credit quality has been caused by the economic pressures being felt by our borrowers. We have experienced a similar decline in the past and expect that we could experience a similar decline in future economic cycles.

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A summary of the activity in the allowance for loan losses is as follows:

Table 4—Allowance for Loans Losses

	Six Months Ended
	June 30,
(Dollars in thousands)	2007			2006
Average loans	$	2,061,014		$	1,997,801
Allowance, beginning of period		21,154			19,865
Loans charged off:
Real estate		1,809			482
Commercial and industrial		803			451
Consumer		649			920
Lease financing		35			18
Total loans charged off		3,296			1,871
Recoveries:
Real estate		25			82
Commercial and industrial		69			46
Consumer		127			314
Lease financing		17			81
Total recoveries		238			523
Net loans charged off		3,058			1,348
Provision for loan losses		3,550			2,100
Allowance, end of period	$	21,646		$	20,617
Ratio of net charge offs to average
loans outstanding (annualized)		0.30	%		0.14	%

The following table sets forth an allocation of the allowance for loan losses by loan category. The specific allocations in any particular category may be reallocated in the future to reflect then current conditions. Accordingly, management considers the entire allowance to be available to absorb losses in any category.

Table 5—Allocation of the Allowance for Loan Losses by Loan Type

The factors affecting the allocation of the allowance during the six-month period ended June 30, 2007 were changes in credit quality resulting from increases in nonperforming assets. The allocation of the allowance for real estate loans at June 30, 2007 increased $1.1 million from December 31, 2006 primarily due to an increase in nonperforming and other criticized real estate loans as well as growth in this category. The allocation for commercial and industrial loans decreased $503,000 mainly due to a decrease in the level of criticized loans partially offset by growth in this category. There were no material changes in the allocation of the allowance for consumer loans and lease financing at June 30, 2007 compared to December 31, 2006. There were no significant changes in the estimation methods and assumptions including environmental factors, loan concentrations or terms that impacted the allowance during the first six months of 2007. The interest rate environment as well as weakening in the commercial real estate market has moderately increased our allowance allocation in concert with the historical trends. It is expected that the negative trends in the real estate industry will continue to affect credit quality for at least the next six months of 2007. The growth in the loan portfolio and the change in the mix will result in an adjustment to the amount of the allowance allocated to each category based upon historical loss trends and other factors.

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The following table sets forth an allocation of the allowance for loan losses by category. The specific allocations in any particular category may be reallocated in the future to reflect then current conditions. Accordingly, management considers the entire allowance to be available to absorb losses in any category.

	June 30, 2007					December 31, 2006
			Percent of					Percent of
(Dollars in thousands)	Amount		Allowance			Amount		Allowance
Real estate	$	8,982		41	%	$	7,918		38	%
Commercial
and industrial		8,616		40	%		9,119		43	%
Consumer		4,024		19	%		4,041		19	%
Lease financing		24		-	%		76		-	%
Total	$	21,646		100	%	$	21,154		100	%

Nonperforming Assets

Nonperforming assets (including nonaccruing loans, net assets in foreclosure and loans past due 90 days or more past due) were .57% of total assets at June 30, 2007, compared to .54% at December 31, 2006, and .36% at June 30, 2006. The increase in nonperforming assets at June 30, 2007, in relation to December 31, 2006, of $1.1 million was mainly due to a construction loan for one borrower and real estate loans for two other borrowers placed on nonaccrual of interest, partially offset by the payoff of nonaccrual real estate loans for another borrower as well as a lower level of commercial mortgage loans 90 days past due. The increase in relation to June 30, 2006 was largely due to a higher level of real estate loans on non-accrual of interest. Management recognizes the increased level of nonperforming assets and charge-offs. The expectation of continued economic pressures resulting in deterioration of credit quality has caused us to provide more resources to resolve troubled credits including an increased focus on earlier identification of potential problem loans and a more active approach to managing the level of criticized loans that have not reached nonaccrual status. The Corporation has experienced a reduction in nonperforming assets at June 30, 2007 of $817,000 since March 31, 2007.

Foreclosed assets are carried at the lower of cost (lesser of carrying value of asset or fair value at date of acquisition) or estimated fair value. Efforts to liquidate assets acquired in foreclosure proceed as quickly as potential buyers can be located and legal constraints permit. Loans past due 90 days or more and still accruing interest are loans that are generally well secured and are in the process of collection.

The following table presents information concerning nonperforming assets. Nonperforming assets include loans that are in nonaccrual status or 90 days or more past due and loans that are in the process of foreclosure.

Table 6—Nonperforming Assets

(Dollars in thousands)	June 30, 2007			December 31, 2006			June 30, 2006
Nonaccrual loans	$	17,389		$	15,201		$	10,164
Loans 90 days or more past due		1,283			2,444			1,279
Total nonperforming loans		18,672			17,645			11,443
Net assets in foreclosure		41			–			64
Total nonperforming assets	$	18,713		$	17,645		$	11,507
Allowance for loan losses to nonperforming loans		115.9	%		119.9	%		180.2	%
Nonperforming loans to total net loans		0.91	%		0.87	%		0.57	%
Allowance for loan and lease losses to total loans		1.04	%		1.03	%		1.02	%
Nonperforming assets to total assets		0.57	%		0.54	%		0.36	%

Locally located real estate, most with acceptable loan to value ratios, secures many of the nonperforming loans.

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The following table presents information concerning impaired loans. Impaired loans are loans for which it is probable that all principal and interest will not be collected according to the contractual terms of the loan agreement. Impaired loans are included in the nonaccrual loan total. Impaired loans increased $4.3 million at June 30, 2007 from December 31, 2006 primarily due to the previously aforementioned construction loan for one borrower in the amount of $3.0 million as well as real estate loans for another borrower totaling $900,000.

Table 7—Impaired Loans

(Dollars in thousands)	June 30, 2007		December 31, 2006		June 30, 2006
Impaired Loans	$	8,199	$	3,946	$	2,907
Average year-to-date impaired loans	$	7,169	$	3,222	$	3,112
Impaired loans with specific loss allowances	$	8,199	$	3,946	$	2,907
Loss allowances reserved on impaired loans	$	1,409	$	678	$	335
Year-to-date income recognized on impaired loans	$	8	$	60	$	27

The Bank’s policy for interest income recognition on impaired loans is to recognize income under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Bank. The Bank will not recognize income if these factors do not exist.

Noninterest Income

Noninterest income of $10.3 million for the second quarter of 2007 reflects an increase of $332,000 from the second quarter of 2006. Wealth management income rose $1.5 million during the second quarter of 2007 over the comparable quarter in 2006, primarily driven by a higher level of life insurance business at Cornerstone and the McPherson Enterprises acquisition on March 1, 2007. Major revenue component sources of wealth management income include investment management and advisory fees, trust fees, estate and tax planning fees, brokerage fees, and insurance related fees. The Bank experienced an increase in deposit service charges of $416,000 during the second quarter of 2007 as compared to the second quarter of 2006 mainly from return check and overdraft fees. Partially offsetting these increases in noninterest income was the pre-tax gain of $1.4 million on the sale of the Bank’s $15.3 million credit card portfolio during the second quarter of 2006. For the six-month period ended June 30, 2007, noninterest income was $19.4 million, an increase of $546,000 from the same period in 2006, primarily due to the previously aforementioned increases in wealth management income and service charges on deposits partially offset by the gain on the sale of the credit card portfolio during 2006. In addition, gains on sales of investment securities for the six months ended June 30, 2007 were $533,000. The net security gains were primarily the result of the sale of mortgage-backed securities and municipal bonds. During the comparable period in 2006, there were no investment securities gains recognized.

Noninterest Expense

Noninterest expense of $20.1 million for the second quarter of 2007 increased $2.5 million from the second quarter of 2006 and increased $4.1 million for the six months ended June 30, 2007, over the comparable period in 2006. Salaries and benefits expense rose $1.6 million during the second quarter of 2007 and $2.7 million during the first six months of 2007 from the comparable periods in 2006, primarily due to higher staffing levels resulting from branch openings, increased commissions and incentives associated with higher wealth management revenue, higher cost of medical benefits and non-recurring compensation and severance charges related to a former executive which totaled approximately $300,000. Occupancy expense increased $287,000 and furniture and equipment expense increased $176,000 during the second quarter of 2007 over the same period in 2006 mostly due to several new office locations including the new operations center building in Harleysville and two branch openings as well as additional increases in rent. During the second quarter of 2007, the Corporation placed the newly constructed operations building located in Harleysville into service. Depreciation expense for the second quarter of 2007 related to the operations building was approximately $82,000 and total depreciation expense for 2007 is estimated at approximately $245,000. The remaining estimated contract billings and allocation among asset categories may alter this projected number. Other expense increased $518,000 and $1.0 million for the three and six months ended June 30, 2007, respectively over the comparable periods in 2006, mainly as a result of increased computer software costs and professional and consulting expenses.

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Income Taxes

The effective income tax rates for the three and six months ended June 30, 2007 were 21.6% and 20.9%, respectively, versus the applicable federal statutory rate of 35%. The effective income tax rates for the three and six months ended June 30, 2006 were 25.4% and 25.0%, respectively. The Corporation’s effective rates during 2007 and 2006 were lower than the statutory tax rate primarily as a result of tax-exempt income earned from state and municipal securities and loans and bank-owned life insurance. The effective rate for the first six months of 2007 was lower than the same period in 2006 primarily due to the lower level of net income during the first six months of 2007.

Balance Sheet Analysis

Total assets at June 30, 2007 of $3.3 billion increased $53.4 million compared to December 31, 2006 with loan growth of $34.6 million, an increase in cash and investments of $5.5 million and an increase in premises and equipment of $5.6 million. The growth in loans took place primarily in the real estate and commercial loan portfolios. The increase in premises and equipment resulted mainly from several new office locations including the new operations center building in Harleysville and two branch openings.

Federal funds sold to correspondent banks decreased $29.0 million as a result of loan and investment balances increases compared to December 31, 2006. The balance of investment securities available for sale at June 30, 2007 of $885.1 million increased $32.1 million compared to December 31, 2006 primarily as a result of net additional purchases of mortgage-backed securities. The increases in goodwill and intangible assets of $1.2 million were related to the selected asset purchase of McPherson during the first quarter of 2007 and allocated to the Wealth Management segment.

Total deposits of $2.50 billion at June 30, 2007 decreased $13.3 million from $2.52 billion at December 31, 2006. Money market accounts increased $96.9 million partially offset by reductions in time deposits of $87.0 million and interest-bearing checking accounts of $23.4 million. Core deposits (total deposits less time deposits) increased $73.7 million or 4.4% to $1.74 billion for the same periods.

Total borrowings increased $84.2 million to $473.7 million at June 30, 2007 from $389.5 million at December 31, 2006. The increase was the result of advances of $105.0 million in long-term securities sold under agreements to repurchase at attractive market yields to help fund the loan and investment portfolio growth partially offset by $47.0 million in maturities of long-term Federal Home Loan Bank borrowings.

Capital

Capital formation is important to the Corporation's well being and future growth. Capital for the period ending June 30, 2007 was $286.9 million, a decrease of $7.8 million over the end of 2006 primarily the result of the increase in the accumulated other comprehensive loss related to investment securities and cash dividends paid to shareholders partially offset by the retention of the Corporation’s earnings. Management believes that the Corporation's current capital and liquidity positions are adequate to support its operations. Management is not aware of any recommendations by any regulatory authority, which, if it were to be implemented, would have a material effect on the Corporation's capital.

Table 8—Regulatory Capital

(Dollars in thousands)						For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Program
As of June 30, 2007	Actual Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets):
Corporation	$	323,339		12.15	%	$	212,219		8.00	%	$	266,149		-
Harleysville National Bank		281,241		10.63	%		211,683		8.00	%		264,604		10	%
Tier 1 Capital (to risk weighted assets):
Corporation		301,593		11.33	%		106,460		4.00	%		159,690		-
Harleysville National Bank		259,495		9.81	%		105,842		4.00	%		158,763		6	%
Tier 1 Capital (to average assets):
Corporation		301,593		9.27	%		130,145		4.00	%		162,682		-
Harleysville National Bank		259,495		8.06	%		128,731		4.00	%		160,913		5	%

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(Dollars in thousands)						For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Program
As of December 31, 2006	Actual Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets):
Corporation	$	323,622		12.58	%	$	205,814		8.00	%	$	257,268		-
Harleysville National Bank		279,513		10.93	%		204,529		8.00	%		255,661		10	%
Tier 1 Capital (to risk weighted assets):
Corporation		302,368		11.75	%		102,907		4.00	%		154,361		-
Harleysville National Bank		258,259		10.10	%		102,264		4.00	%		153,397		6	%
Tier 1 Capital (to average assets):
Corporation		302,368		9.36	%		129,242		4.00	%		161,553		-
Harleysville National Bank		258,259		8.08	%		127,877		4.00	%		159,846		5	%

Pursuant to the federal regulators’ risk-based capital adequacy guidelines, the components of capital are called Tier 1 and Tier 2 capital. For the Corporation, Tier 1 capital is generally common stockholder’s equity and retained earnings adjusted to exclude disallowed goodwill and identifiable intangibles as well as the inclusion of qualifying trust preferred securities. Tier 2 capital is the allowance for loan losses. The minimum for the Tier 1 ratio is 4.0% and the total capital ratio (Tier 1 plus Tier 2 capital divided by risk-adjusted assets) minimum is 8.0%. At June 30, 2007, the Corporation’s Tier 1 risk-adjusted capital ratio was 11.33%, and the total risk-adjusted capital ratio was 12.15%, both well above the regulatory requirements. The risk-based capital ratios of the Bank also exceeded regulatory requirements at June 30, 2007.

The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding goodwill and identifiable intangibles. Banking organizations are expected to have ratios from 4% to 5%, depending upon their particular condition and growth plans. Higher leverage ratios could be required by the particular circumstances or risk profile of a given banking organization. The Corporation’s leverage ratios were 9.27% at June 30, 2007 and 9.36% at December 31, 2006.

The year-to-date June 30, 2007 cash dividend per share of $.40 was 11.1% higher than the cash dividend for the same period in 2006 of $.36. The proportion of net income paid out in dividends for the first six months of 2007 was 87.7%, compared to 57.3% for the same period in 2006, the increase mainly resulting from lower net income during the first six months of 2007. Activity in both the Corporation’s dividend reinvestment and stock purchase plan did not have a material impact on capital during the first six months of 2007.

Liquidity

Liquidity is a measure of the ability of the Corporation to meet its current cash needs and obligations on a timely basis. For a bank, liquidity provides the means to meet the day-to-day demands of deposit customers and the needs of borrowing customers. Generally, the Bank arranges its mix of cash, money market investments, investment securities and loans in order to match the volatility, seasonality, interest sensitivity and growth trends of its deposit funds. The Corporation’s decisions with regard to liquidity are based on projections of potential sources and uses of funds for the next 120 days under the Corporation’s asset/liability model.

The resulting projections as of June 30, 2007 show the potential sources of funds exceeding the potential uses of funds. The accuracy of this prediction can be affected by limitations inherent in the model and by the occurrence of future events not anticipated when the projections were made. The Corporation has external sources of funds which can be drawn upon when funds are required. The A source of external liquidity is an available line of credit with the FHLB. As of June 30, 2007, the Bank had borrowings outstanding with the FHLB of $192.8 million, all of which were long-term and pledged investment securities available for sale of $662.5 million and held to maturity of $58.9 million. At June 30, 2007, the Bank had unused lines of credit at the FHLB of $250.4 million and unused federal funds lines of credit of $186.5 million. In addition, the Corporation’s funding sources include investment and loan portfolio cash flows, fed funds sold and short-term investments, as well as access to the brokered certificate of deposit market and repurchase agreement borrowings. The Corporation could also increase its liquidity through its pricing on certificates of deposit products. The Corporation believes it has adequate funding sources to maintain sufficient liquidity under varying business conditions.

There are no known trends or any known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in liquidity increasing or decreasing in any material way, although a significant portion of the Corporation’s time deposits mature in the last six months of 2007. In the event that additional funds are required, the Corporation believes its short-term liquidity is adequate as outlined above.

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Other Information

Pending Legislation

Management is not aware of any other current specific recommendations by regulatory authorities or proposed legislation which, if they were implemented, would have a material adverse effect upon the liquidity, capital resources, or results of operations, although the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, a negative impact on the Corporation’s results of operations.

Effects of Inflation

Inflation has some impact on the Corporation and the Bank’s operating costs. Unlike many industrial companies, however, substantially all of the Bank’s assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Corporation’s and the Bank’s performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services.

Effect of Government Monetary Policies

The earnings of the Corporation are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. An important function of the Federal Reserve is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect rates charged on loans or paid for deposits.

The Bank is a member of the Federal Reserve and, therefore, the policies and regulations of the Federal Reserve have a significant effect on its deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Bank’s operations in the future. The effect of such policies and regulations upon the future business and earnings of the Corporation and the Bank cannot be predicted.

Environmental Regulations

There are several federal and state statutes, which regulate the obligations and liabilities of financial institutions pertaining to environmental issues. In addition to the potential for attachment of liability resulting from its own actions, a bank may be held liable under certain circumstances for the actions of its borrowers, or third parties, when such actions result in environmental problems on properties that collateralize loans held by the bank. Further, the liability has the potential to far exceed the original amount of a loan issued by the bank. Currently, neither the Corporation nor the Bank are a party to any pending legal proceeding pursuant to any environmental statute, nor are the Corporation and the Bank aware of any circumstances that may give rise to liability under any such statute.

Branching

During the second quarter of 2007, the Corporation opened new branches in Warminster, Bucks County and East Norriton, Montgomery County. The Corporation is relocating its Blue Bell office in Montgomery County during July 2007. In addition, the Bank plans to add retail branches in Warrington, Bucks County and Conshohocken and Flourtown, Montgomery County in 2008. These plans are subject to change as management continues to evaluate its market and its business needs. The Corporation continues to evaluate potential new branch sites that are contiguous to our current service area and will expand the Bank’s market area and market share of loans and deposits.

Item 3– Qualitative and Quantitative Disclosures About Market Risk

In the normal course of conducting business activities, the Corporation is exposed to market risk, principally interest risk, through the operations of its banking subsidiary. Interest rate risk arises from market driven fluctuations in interest rates that affect cash flows, income, expense and values of financial instruments. The Asset/Liability Committee of the Corporation, using policies and procedures approved by the Corporation’s Board of Directors, is responsible for managing the rate sensitivity position.

No material changes in market risk strategy occurred during the second quarter of 2007. The Corporation continues to experience a challenging interest rate environment which has impacted our interest rate sensitivity exposure. A detailed discussion of market risk is provided on pages 22 and 23 of this Form 10-Q.

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Item 4– Controls and Procedures

(i)  Management’s Report on Disclosure Controls

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15(d)-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules, regulations and forms and are operating in an effective manner and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(ii)  Changes in Internal Controls

In connection with the ongoing review of the Corporation’s internal controls over financial reporting as defined in rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, the Corporation regularly assesses the adequacy of its internal control over financial reporting and enhances its controls in response to internal control assessments and internal and external audit and regulatory recommendations. There have been no changes in the Corporation’s internal control over financial reporting during the second quarter of 2007 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.                 Legal Proceedings

Management, based upon discussions with the Corporation's legal counsel, is not aware of any litigation that would have a material adverse effect on the consolidated financial position of the Corporation. There are no proceedings pending other than the ordinary routine litigation incident to the business of the Corporation and its subsidiaries - the Bank, HNC Financial Company and HNC Reinsurance Company. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation and its subsidiaries by government authorities.

Item 1A.                 Risk Factors

There have been no material changes in risk factors from those disclosed under Item 1A, “Risk Factors.” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006.

Item 2.                      Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents the repurchase activity of the Corporation’s stock repurchase programs during the second quarter of 2007 (all share information has been restated retroactively for the effect of stock dividends and splits).  The repurchased shares will be used for general corporate purposes.

	Total Number of Common Shares Purchased	Weighted Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans(1)	Maximum Number of Shares that may yet be Purchased under the Plans(1)
April 1-30, 2007	-	$     -	-	872,761
May 1-31, 2007	57,500	16.09	57,500	815,261
June 1-30, 2007	28,500	16.04	28,500	786,761
Total	86,000	$16.07	86,000

(1)   On May 12, 2005, the Board of Directors authorized a plan to purchase up to 1,416,712 shares (restated for five percent stock dividend paid on September 15, 2006 and September 15, 2005) or 4.9%, of its outstanding common stock.

Item 3.                 Defaults Upon Senior Securities

Not applicable

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

(a)   The 2007 Annual Meeting of Shareholders was held at 9:30 a.m., on Tuesday, April 24, 2007 at Presidential Caterers, 2910 DeKalb Pike, Norristown, Pennsylvania 19401.

(b),(c) One matter was voted upon as follows:

1.   Two directors were elected, as below:

Elected                                                                           Term Expires

Harold A. Herr                                                                       2011

Stephanie S. Mitchell                                                            2011

The results of the voting for the directors were as follows:

Harold A. Herr                                                                     For               22,417,342

                                                                                               Withheld         419,589

Stephanie S. Mitchell                                                          For               22,424,208

                                                                                                Withheld         412,723

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Directors whose term continued after the meeting:                    Term Expires

Demetra M. Takes                                                                                    2008

Walter R. Bateman, II                                                                               2008

Lee Ann B. Bergey                                                                                   2008

James A. Wimmer                                                                                     2009

Walter E. Daller, Jr.                                                                                   2010

Thomas C. Leamer                                                                                    2010

A. Ross Myers                                                                                          2010

Item 5.                 Other Information

(a)   None to report.

(b)   There were no changes in the manner shareholders may recommend nominees to the Registrant’s Board of Directors.

Item 6.                 Exhibits

The exhibits listed on the Exhibit Index at the end of this Report are filed with or incorporated as part of this Report (as indicated in connection with each Exhibit).

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SIGNATURES

Pursuant to the requirements 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 NATIONAL CORPORATION

Date:  August 8, 2007  /s/ Demetra M. Takes      

 Demetra M. Takes, Interim President, Chief Executive Officer and

Director

(Principal executive officer)

Date:  August 8, 2007                                                    /s/ George S. Rapp       

                                                                                                George S. Rapp, Executive Vice President and Chief Financial Officer

                   (Principal financial and accounting officer)

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EXHIBIT INDEX

Exhibit No                      Description of Exhibits

(2.1)	Purchase Agreement, dated as of November 15, 2005, by and among Harleysville National Bank and Trust Company, Cornerstone Financial Consultants, Ltd., Cornerstone Advisors Asset Management, Inc., Cornerstone Institutional Investors, Inc., Cornerstone Management Resources, Inc., John R. Yaissle, Malcolm L. Cowen, II, and Thomas J. Scalici. (Incorporated by reference to Exhibit 2.1 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Commission on March 15, 2006.  The schedules and exhibits to the Purchase Agreement are listed at the end of the Purchase Agreement but have been omitted from the exhibit to Form 10-K. The Registrant agrees to supplementally furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.)
(2.2)	Branch Purchase Agreement and Deposit Assumption Agreement, dated as of July 26, 2006, by and among First National Community Bank as Buyer and Harleysville National Bank and Trust Company as Seller. (Incorporated by reference to Exhibit 2.1 to the Registrant’s Quarterly Report filed on Form 10-Q, filed with the Commission on November 8, 2006. The attachments, schedules and exhibits to the Branch Purchase and Deposit Assumption Agreement are listed at the end of the Branch Purchase and Deposit Assumption Agreement but have been omitted from the exhibit to Form 10-Q. The Registrant agrees to supplementally furnish a copy of any omitted attachment, schedule or exhibit to the Securities and Exchange Commission upon request.)
(2.3)	Merger Agreement, dated as of May 15, 2007, by and among Harleysville National Corporation, East Penn Financial Corporation and East Penn Bank. (Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on May 21, 2007. The schedules and exhibits to the Merger Agreement are listed at the end of the Merger Agreement but have been omitted from the exhibit to Form 8-K. The Registrant agrees to supplementally furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.)
(3.1)	Harleysville National Corporation Amended and Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to the Corporation’s Registration Statement No. 333-111709 on Form S-4, as filed on January 5, 2004.)
(3.2)	Harleysville National Corporation Amended and Restated By-laws.  (Incorporated by reference to Exhibit 3.1 to the Corporation’s Current Report on Form 8-K, filed with the Commission on February 14, 2005.)
(10.1)	Harleysville National Corporation 1993 Stock Incentive Plan.** (Incorporated by reference to Exhibit 4.3 of Registrant’s Registration Statement No. 33-69784 on Form S-8, filed with the Commission on October 1, 1993.)
(10.2)	Harleysville National Corporation Stock Bonus Plan.*** (Incorporated by reference to Exhibit 99A of Registrant’s Registration Statement No. 333-17813 on Form S-8, filed with the Commission on December 13, 1996.)
(10.3)	Supplemental Executive Retirement Plan.* (Incorporated by reference to Exhibit 10.3 of Registrant’s Annual Report in Form 10-K for the year ended December 31, 1997, filed with the Commission on March 27, 1998.)
(10.4)	Walter E. Daller, Jr., Chairman and former President and Chief Executive Officer’s Employment Agreement dated October 26, 1998.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March 25, 1999.)
(10.5)	Consulting Agreement and General Release dated November 12, 2004 between Walter E. Daller, Jr., Harleysville National Corporation and Harleysville National Bank and Trust Company.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on November 16, 2004.)
(10.6)	Amendment to Supplemental Executive Retirement Benefit Agreement dated March 14, 2005 by and among Harleysville Management Services, LLC and Walter E. Daller, Jr.*  (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March 14, 2005.)
(10.7)	Employment Agreement dated October 26, 1998 by and among Harleysville National Corporation, Harleysville National Bank and Trust Company and Demetra M. Takes, President and Chief Executive Officer of Harleysville National Bank and Trust Company.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March 25, 1999.)
(10.8)	Amendment to Supplemental Executive Retirement Benefit Agreement dated March 14, 2005 by and among Harleysville Management Services, LLC and Demetra M. Takes, President and Chief Executive Officer of Harleysville National Bank and Trust Company.*  (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March 14, 2005.)
(10.9)	Harleysville National Corporation 1998 Stock Incentive Plan.** (Incorporated by reference to Registrant’s Registration Statement No. 333-79971 on Form S-8, filed with the Commission on June 4, 1999.)
(10.10)	Harleysville National Corporation 1998 Independent Directors Stock Option Plan, as amended and restated effective February 8, 2001.** (Incorporated by reference to Appendix “A” of Registrant’s Definitive Proxy Statement, filed with the Commission on March 9, 2001.)
(10.11)	Supplemental Executive Retirement Benefit Agreement dated February 23, 2004 between Michael B. High, Executive Vice President and former Chief Financial Officer, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on May 10, 2004.)

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(10.12)	Employment Agreement effective April 1, 2005 between Michael B. High, Executive Vice President and Chief Operating Officer of the Corporation, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on November 16, 2004.)
(10.13)	Amendment to Supplemental Executive Retirement Benefit Agreement dated March 14, 2005 by and among Harleysville Management Services, LLC and Michael B. High, Executive Vice President and Chief Operating Officer of the Corporation.*  (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March 14, 2005.)
(10.14)	Employment Agreement dated March 9, 2004 between Mikkalya Murray, former Executive Vice President and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on May 10, 2004.)
(10.15)	Amendment to Supplemental Executive Retirement Benefit Agreement dated March 14, 2005 by and among Harleysville Management Services, LLC and Mikkalya Murray, former Executive Vice President.*  (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March 14, 2005.)
(10.16)	Harleysville National Corporation 2004 Omnibus Stock Incentive Plan, as amended and restated effective November 9, 2006.** (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on November 15, 2006).
(10.17)	Employment Agreement dated August 23, 2004 between James F. McGowan, Jr., Executive Vice President & Chief Credit Officer and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on August 25, 2004.)
(10.18)	Supplemental Executive Retirement Benefit Agreement dated August 23, 2004 between James F. McGowan, Jr., Executive Vice President & Chief Credit Officer, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on August 25, 2004.)
(10.19)	Amendment to Supplemental Executive Retirement Benefit Agreement dated March 14, 2005 by and among Harleysville Management Services, LLC and James F. McGowan, Jr., Executive Vice President & Chief Credit Officer.*  (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March 14, 2005.)
(10.20)	Employment Agreement dated September 27, 2004 between John Eisele, former Executive Vice President & President of Millennium Wealth Management and Private Banking, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on September 29, 2004.)
(10.21)	Supplemental Executive Retirement Benefit Agreement dated September 27, 2004 between John Eisele, former Executive Vice President & President of Millennium Wealth Management and Private Banking, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on September 29, 2004.)
(10.22)	Separation Agreement and Mutual Release dated June 15, 2007 and effective July 19, 2007 between John Eisele, former Executive Vice President & President of Millennium Wealth Management and Private Banking, Harleysville Management Services, LLC., Harleysville National Bank and Trust Company and Harleysville National Corporation.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on July 19, 2007.)
(10.23)	Amendment to Supplemental Executive Retirement Benefit Agreement dated March 14, 2005 by and among Harleysville Management Services, LLC and John Eisele, former Executive Vice President & President of Millennium Wealth Management and Private Banking.*  (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March 14, 2005.)
(10.24)	Employment Agreement effective January 1, 2005 between Gregg J. Wagner, the former President and Chief Executive Officer of the Corporation, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on November 16, 2004.)
(10.25)	Amendment to Supplemental Executive Retirement Benefit Agreement dated March 14, 2005 by and among Harleysville Management Services, LLC and Gregg J. Wagner, the former President and Chief Executive Officer of the Corporation.*  (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March 14, 2005.)
(10.26)	Complete Settlement Agreement and General Release dated November 29, 2006 and effective December 8, 2006 between Gregg J. Wagner and Harleysville National Corporation, Harleysville National Bank and Trust Company and Harleysville Management Services, LLC .* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on December 13, 2006.
(10.27)	Employment Agreement dated May 18, 2005, between George S. Rapp, Senior Vice President and Chief Financial Officer, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on May 20, 2005.)
(10.28)	Amended and Restated Declaration of Trust for HNC Statutory Trust III by and among Wilmington Trust Company, as Institutional Trustee and Delaware Trustee, Harleysville National Corporation, as Sponsor, and the Administrators named therein, dated as of September 28, 2005. (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q/A, filed with the Commission on November, 9, 2005.)
(10.29)	Indenture between Harleysville National Corporation, as Issuer, and Wilmington Trust Company, as Trustee, for Fixed/Floating Rate Junior Subordinated Debt Securities, dated as of September 28, 2005. (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q/A, filed with the Commission on November, 9, 2005.)

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(10.30)	Guarantee Agreement between Harleysville National Corporation and Wilmington Trust Company, dated as of September 28, 2005. (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q/A, filed with the Commission on November, 9, 2005.)
(10.31)	Employment Agreement effective July 12, 2006 between Lewis C. Cyr, Chief Lending Officer of the Corporation, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on July 12, 2006.)
(11)	Computation of Earnings per Common Share, incorporated by reference to Note 7 of the Consolidated Financial Statements of this  Report on Form 10-Q.
(31.1)	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
(31.2)	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
(32.1)	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.
(32.2)	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.

*       Management contract or compensatory plan arrangement.

**     Shareholder approved compensatory plan pursuant to which the Registrant’s Common Stock may be issued to employees of the Corporation.

***   Non-shareholder approved compensatory plan pursuant to which the Registrant’s Common Stock may be issued to employees of the Corporation.

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